SOUTHERN ENERGY INC, S-1/A, 2000-08-18

SOUTHERN ENERGY INC
S-1/A, 2000-08-18
ELECTRIC SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2000.

REGISTRATION NO. 333-35390
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------

SOUTHERN ENERGY, INC.
(Exact name of registrant as specified in its charter)
-------------------------

<TABLE>
<S> <C> <C>
DELAWARE 4911 58-2056305
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>

900 ASHWOOD PARKWAY, SUITE 500
ATLANTA, GEORGIA 30338
(770) 821-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------------
RAYMOND D. HILL
CHIEF FINANCIAL OFFICER
SOUTHERN ENERGY, INC.
900 ASHWOOD PARKWAY, SUITE 500
ATLANTA, GEORGIA 30338
(770) 821-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------
WITH A COPY TO:

<TABLE>
<S> <C>
JOHN T. W. MERCER, ESQ. JOHN A. MILLARD, ESQ.
TROUTMAN SANDERS LLP SHEARMAN & STERLING
BANK OF AMERICA PLAZA, SUITE 5200 599 LEXINGTON AVENUE
600 PEACHTREE STREET, N.E. NEW YORK, NEW YORK 10022
ATLANTA, GEORGIA 30308 (212) 848-4000
(404) 885-3000
</TABLE>

-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) OFFERING PRICE FEE(3)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par 66,700,000
value per share(4)....... Shares $17.00 $1,133,900,000 $299,349.60
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 8,700,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee and
calculated in accordance with Rule 457(o) under the Securities Act.

(3) The registration fee for the securities to be registered has previously
been calculated in accordance with Section 6(b) of the Securities Act.
An aggregate registration fee of $272,949.60 was paid on July 18, 2000
and $26,400 was paid on April 21, 2000.

(4) This registration statement also pertains to rights to purchase Series A
junior preferred stock. Such rights initially will trade together with
our common stock.

-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED [ ], 2000

PROSPECTUS
58,000,000 Shares

Southern Energy, Inc.

Common Stock
-------------------------

This is an initial public offering of shares of common stock of Southern
Energy, Inc. All of the 58,000,000 shares of common stock are being sold by
Southern Energy. At the request of Southern Energy, the underwriters have
reserved at the initial public offering price up to 2,900,000 shares of common
stock for sale to employees and other business associates of Southern Energy.

Prior to this offering, there has been no public market for the common
stock. We estimate that the initial public offering price will be between $15.00
and $17.00 per share. We have applied for the listing of our common stock on the
New York Stock Exchange under the trading symbol "SOE."

OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 10.

Concurrently with this offering, a Delaware business trust that we own is
offering up to 6,000,000 [ ]% Convertible Trust Preferred Securities, Series
A by means of a separate prospectus.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to us.............................................. $ $
</TABLE>

The underwriters may also purchase up to an additional 8,700,000 shares of
common stock, at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus to cover
over-allotments.

The underwriters expect to deliver the shares in New York, New York on
, 2000.
-------------------------
JOINT BOOK-RUNNING MANAGERS
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
-------------------------

BANC OF AMERICA SECURITIES LLC

CREDIT SUISSE FIRST BOSTON

J.P. MORGAN & CO.

LEHMAN BROTHERS

SALOMON SMITH BARNEY

Prospectus dated [ ], 2000
<PAGE> 3

YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS. WE
HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............. 1
Special Note Regarding
Forward-Looking Statements.... 10
Risk Factors.................... 11
Our Separation from Southern
Company....................... 27
Use of Proceeds................. 30
Dividend Policy................. 30
Capitalization.................. 31
Dilution........................ 33
Selected Financial
Information................... 34
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 37
Business........................ 58
Management...................... 118
Relationship with Southern
Company and Related
Transactions.................. 133
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Agreements Between Us and
Southern Company.............. 134
Federal Tax Matters Related to
Our Separation from Southern
Company....................... 142
Principal Stockholder........... 143
Description of Capital Stock.... 144
Description of Convertible Trust
Preferred Securities.......... 153
U.S. Federal Tax Considerations
for Non-U.S. Holders.......... 156
Shares Eligible for Future
Sale.......................... 159
Underwriting.................... 160
Legal Matters................... 163
Experts......................... 163
Where You Can Find More
Information................... 163
Index to Financial Statements... F-1
</TABLE>

Through and including [ ], 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.

i
<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus, including the "Risk Factors" section.

SOUTHERN ENERGY, INC.

We are a competitive provider of electricity and energy-related products
and services. We have regionally based businesses in the Americas, Europe and
the Asia-Pacific region. We have built and acquired a portfolio of power plants
in which we have net ownership interests totaling 13,212 megawatts (MW) of
generation capacity. In addition, we have projects under development or pending
acquisition totaling 11,109 MW. We also market energy and energy-linked
commodities and manage the risk associated with market price fluctuations of
these commodities. By linking our electricity generation capabilities and our
access to natural gas supplies with our energy marketing and risk management
expertise, our strategy is to meet a wide range of customer requirements as well
as optimize the value of our electricity generating and gas assets.

In North America, we own and operate power plants with a total generation
capacity of 7,389 MW. We control an additional 1,738 MW of generation capacity
through management contracts. We also have projects under development or pending
acquisition totaling 11,101 MW, including 5,154 MW of generation capacity that
we have recently agreed to acquire from Potomac Electric Power Company. Through
Southern Company Energy Marketing, L.P., our 60% owned affiliate, we market and
trade energy and energy-linked commodities, including electricity, gas, oil,
coal and emission allowances.

In Europe, we own a 26% interest in Bewag AG, an electric utility serving
2.1 million customers in Berlin, Germany. We also have a 49% economic interest
in, and operating control of, Western Power Distribution, which distributes
electricity to approximately 1.4 million end-users in southwest England. Our
European marketing and risk management business began trading power in the
Nordic energy market in 1999. We expect to begin marketing power in the Dutch,
German, Swiss and Italian energy markets in 2000.

In the Asia-Pacific region, we have interests in 3,159 MW of generation
capacity in the Philippines and China. Most of our revenues in the Asia-Pacific
region are derived from contracts with government entities or regional power
boards and are predominantly linked to the U.S. dollar to mitigate foreign
currency exchange risks.

In the Caribbean and South America, we have ownership interests in electric
utilities, power plants and transmission facilities. These assets are located in
the Bahamas, Trinidad and Tobago, Brazil, Argentina and Chile. We are pursuing
the sale of our Argentine and Chilean subsidiaries.

THE POWER INDUSTRY

In the United States, the power industry had an estimated end-user market
of over $215 billion of electricity sales in 1999 produced by an aggregate base
of power generation facilities with a capacity of approximately 734,000 MW.
Historically, the power generation industry has been characterized by electric
utility monopolies selling to a franchise customer base. In response to
increasing customer demand for access to low-cost electricity and enhanced
services, new regulatory initiatives have been and are continuing to be adopted
to increase competition in the power industry.

1
<PAGE> 5

We believe that increasing demand for electricity and the need to replace
older power plants will create a need for additional power generating capacity
throughout the United States. We believe that these market trends will create
opportunities for efficient, low-cost power producers that are able to produce
and sell energy to customers at competitive rates.

Outside of the United States, we expect many governments in developed
economies to privatize their utilities, having realized that their energy assets
can be sold to raise capital without impairing system reliability. We expect
these countries to develop regulatory structures to encourage competition in the
electricity sector. In developing countries, the demand for electricity is
expected to grow rapidly. In order to satisfy this anticipated increase in
demand, some developing countries have adopted government programs designed to
encourage private investment in power plants. We believe that these market
trends will continue to create opportunities to acquire and develop power
generation plants outside the United States.

Industry trends and regulatory initiatives are transforming existing
franchise customer markets, which are characterized by vertically integrated,
price-regulated utilities, into markets in which generators compete with each
other for their principal customers (wholesale power suppliers and major
end-users) on the basis of price, service quality and other factors. This
transformation requires that generators and their principal customers manage the
risks associated with producing and delivering energy commodities, thereby
creating opportunities to profitably market energy commodities and provide
services to manage the risks associated with market price fluctuations of these
commodities.

STRATEGY

Our strategy is to be a leading competitive provider of electricity and
energy-related products and services in our target markets of North America,
Europe and the Asia-Pacific region. We intend to acquire, develop and operate
power plants and gas transportation and storage assets primarily in our target
markets. We also intend to integrate power plants and gas assets with the
marketing of energy commodities and the management of market risk associated
with those commodities.

We plan to implement our growth strategy by:

- Maximizing the financial and operational performance of our current
investments,

- Capitalizing on opportunities generated by our regional presence,

- Developing new power plants and expanding our existing plants,

- Acquiring power plants and gas assets in our target markets,

- Entering into contractual arrangements for the management and control of
generation capacity and gas transportation and storage assets,
- Integrating energy marketing and risk management with ownership and
control of energy assets, and

- Exploring energy information and e-commerce applications.

We may suffer from some competitive disadvantages which impede our ability
to implement this strategy. The need to develop the management infrastructure
required for an independent company may affect our ability to compete against
companies with longer histories as independent companies. We also expect that,
at least initially, we will not be able to raise equity capital to fund our
growth on terms as attractive as those available to our competitors.

2
<PAGE> 6

OUR RELATIONSHIP WITH SOUTHERN COMPANY

We are currently a wholly owned subsidiary of Southern Company. Upon the
completion of this offering, Southern Company will own over 80% of the
outstanding shares of our common stock. Southern Company has announced that it
currently plans to complete a spin-off of us within 12 months after the
completion of this offering by distributing the remaining shares of our common
stock to the holders of Southern Company's common stock.

Prior to the completion of this offering, we will enter into agreements
with Southern Company related to the separation of our business from Southern
Company. These separation agreements will provide for, among other things, the
assumption by us of liabilities relating to our business. In addition, after
this offering but prior to the distribution of our stock by Southern Company, we
will transfer the operations and obligations of our leasing and capital funding
subsidiaries to Southern Company.

The separation agreements between us and Southern Company will also govern
our various interim and ongoing relationships. In particular, we have entered
into agreements under which Southern Company will continue to provide various
interim services to us, including financial, accounting, engineering and other
services. All of these agreements were negotiated in the overall context of our
separation from Southern Company and the requirements of federal and state
regulations.

We believe that we will realize certain benefits from our complete
separation from Southern Company, including the following: reduced governmental
regulation, increased capital financing flexibility, a more targeted investment
for stockholders, increased strategic focus, access to additional markets,
increased speed and responsiveness and targeted incentives for management and
employees.

We were incorporated in Delaware on April 20, 1993 as a wholly owned
subsidiary of Southern Company. Our executive offices are located at 900 Ashwood
Parkway, Suite 500, Atlanta, Georgia 30338-4780, and our telephone number is
(770) 821-7000.

CONCURRENT OFFERING OF CONVERTIBLE TRUST PREFERRED SECURITIES

Concurrently with this offering of common stock, SEI Trust I, a Delaware
business trust that we own, will sell up to 6,000,000 (6,900,000 if the
underwriters exercise their over-allotment option) [ ]% Convertible Trust
Preferred Securities, Series A at a purchase price of $50 per preferred security
by means of a separate prospectus. The gross proceeds from the offering of
preferred securities are expected to be $300,000,000 ($345,000,000 if the
underwriters exercise their over-allotment option). The trust will issue all of
its common securities to us. The trust will use the proceeds from the sale of
preferred securities and the common securities to purchase from us [ ]%
Junior Convertible Subordinated Debentures, Series A due 2030. The debentures
will have the same financial terms as the preferred securities, including
conversion rights. Our obligations to pay the debentures are junior to our
payment obligations under our senior debt.

Holders of preferred securities will be entitled to receive cash
distributions at an annual rate of [ ]% of the $50 liquidation preference
per share of preferred securities. Holders of preferred securities generally
will not have any voting rights.

Holders of preferred securities will have the right to convert their
preferred securities into shares of our common stock at any time after
[ ], 2001 and prior to [ ], 2030, subject to our
option to make cash settlements from [ ] 2001 until the next business
day following the date of the distribution of our common stock held by Southern
Company. The preferred securities will convert into our common stock at an
initial conversion rate of [ ] shares
3
<PAGE> 7

of common stock for each preferred security. This conversion rate is equivalent
to a conversion price of $[ ] per share of our common stock. The
conversion rate may be subject to adjustment.

We will guarantee the trust's payment obligations, but only to the extent
that the trust has sufficient funds to make payments on the preferred
securities. Generally, our obligations under the guarantee are junior to our
obligations to make payments on all of our other liabilities.

We intend to complete the offering of our common stock regardless of
whether the offering of our preferred securities is completed.

THE OFFERING

COMMON STOCK OFFERED:

Common stock offered................ 58,000,000 shares(1)

Common stock to be outstanding
immediately after the offering.... 330,000,000 shares(1)

Common stock to be held by Southern
Company immediately after the
offering.......................... 272,000,000 shares

Use of Proceeds..................... We intend to use a portion of the net
proceeds of this offering and the
concurrent offering of Convertible
Trust Preferred Securities, Series A to
repay short-term debt of approximately
$840 million. The remaining proceeds
from these offerings will be used for
general corporate purposes.

Proposed NYSE symbol................ "SOE"

Rights.............................. One right will be issued and attached
to each outstanding share of our
capital stock. Under circumstances
described under "Description of Capital
Stock -- Stockholder Rights Plan" in
this prospectus, each right will
entitle the holder to purchase one
one-hundredth of a share of our Series
A preferred stock. These rights would
cause substantial dilution to any
person or group that attempts to
acquire a significant interest in us
without approval of our board of
directors, and thus could make
acquisition of control of us difficult.

-------------------------

(1) Assumes the underwriters' over-allotment option to purchase 8,700,000 shares
is not exercised.

4
<PAGE> 8

SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

You should read the following summary historical financial and operating
data together with our consolidated financial statements and the related notes
and with "Selected Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.

In addition, you should read the following summary historical financial and
operating data in light of the following:

- Our operating revenues declined in 1998 due to our contribution on
January 1, 1998 of our power marketing and risk management activities to
Southern Company Energy Marketing, L.P., our marketing and risk
management joint venture with Vastar formed in September 1997. When the
joint venture was formed in September 1997, we contributed only our gas
marketing and risk management assets to the venture. Prior to the
formation of the joint venture, our marketing and risk management
activities were wholly-owned and consolidated. Currently, we account for
this joint venture under the equity method of accounting. For 1997,
operating revenues would have been $1,768 million if we had not
consolidated our marketing and risk management operations.

- The write-down for 1998 includes write-downs of our investments in our
Argentine subsidiary, Hidroelectrica Alicura S.A. (Alicura), and our
Chilean subsidiary, Empresa Electrica del Norte Grande S.A. (EDELNOR), to
adjust for the difference between the carrying value of the assets and
their fair market value. The write-down for 1999 and the six months ended
June 30, 2000 includes further write-downs of our investments in Alicura
and EDELNOR to maintain the carrying value at the fair market value as
well as our interest in a $31 million write-down at Western Power
Distribution relating to impaired metering assets.

Pro forma balance sheet amounts give effect to the following actions as
though these actions had been taken as of June 30, 2000:

- the transfer of the operations of our capital funding subsidiary,
Southern Company Capital Funding, Inc. (Capital Funding), to Southern
Company;

- the transfer of our leasing subsidiary, SE Finance Capital Corporation
(SE Finance), to Southern Company. As a result of our decision on April
17, 2000 to transfer SE Finance to Southern Company, we have included the
historical results of operations of the related subsidiaries as a
discontinued operation; and

- the payment by us on July 7, 2000 of cash dividends to Southern Company
in the aggregate amount of $53 million, and short-term borrowings to fund
those dividends.

Pro forma, as adjusted balance sheet amounts give effect to our sale of
58,000,000 shares of common stock in this offering at an assumed initial public
offering price of $16.00 per share and the application of the proceeds from this
offering.
5
<PAGE> 9

Pro forma, as further adjusted balance sheet amounts give effect to our
sale of 6,000,000 preferred securities at an assumed public offering price of
$50 per preferred security in a public offering concurrent with this offering
and the application of the proceeds from both offerings.

6
<PAGE> 10

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------ ------- ------- ------- ------- ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE INFORMATION:
BASIC:
From continuing operations................ $ 0.05 $ 0.27 $ (0.09) $ (0.04) $ 1.33 $ 0. 52 $ 0.67
From discontinued operations.............. -- -- 0.03 0.04 0.04 0.03 0.04
From extraordinary gain................... 0.02 0.03 -- -- -- -- --
------- ------ ------- ------- ------- ------- ------
Net income.............................. $ 0.07 $ 0.30 $ (0.06) $ -- $ 1.37 $ 0.55 $ 0.71
======= ====== ======= ======= ======= ======= ======
PRO FORMA BASIC(2):
From continuing operations................ $ 1.19 $ 0.60
From discontinued operations.............. 0.04 0.04
------- ------
Net income.............................. $ 1.23 $ 0.64
======= ======
PRO FORMA DILUTED(2):
From continuing operations.................. $ 1.19 $ 0.60
From discontinued operations................ 0.03 0.04
------- ------
Net income.............................. $ 1.22 $ 0.64
======= ======
STATEMENT OF CASH FLOWS DATA:
Cash flow from operating activities......... $ 158 $ (226) $ 264 $ 402 $ 515 $ 153 $ 217
Cash flow from investing activities......... (1,244) (136) (4,203) (1,741) (2,263) (1,668) (261)
Cash flow from financing activities......... 1,653 (193) 4,177 1,502 1,516 1,329 418
OTHER OPERATING DATA:
EBITDA(3)................................... $ 122 $ 258 $ 512 $ 351 $ 825 $ 432 $ 529
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------------------
PRO
FORMA,
PRO FORMA, AS FURTHER
ACTUAL PRO FORMA AS ADJUSTED ADJUSTED
------- --------- ----------- ----------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 691 $ 661 $ 661 $ 953
Property, plant and equipment, net.......................... 5,912 5,912 5,912 5,912
Investments................................................. 1,550 1,482 1,482 1,482
Investment in leveraged leases.............................. 566 -- -- --
Total assets.............................................. 14,308 12,551 12,551 12,843
Non-recourse debt(4)........................................ 6,063 5,637 5,637 5,637
Total debt................................................ 7,834 7,461 6,577 6,569
Subsidiary obligated mandatorily redeemable preferred
securities(5)............................................. 1,026 76 76 76
Minority Interest
Company obligated mandatorily redeemable securities of a
subsidiary holding solely parent company debentures..... -- -- -- 300
Stockholder's equity........................................ 2,775 2,517 3,401 3,401
</TABLE>

(1) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.

(2) Pro forma basic earnings per share information gives effect to the dividends
we paid to Southern Company in 2000 as though they had been paid during the
periods presented, in accordance with SEC Staff Accounting Bulletin Topic
1:B:3. Pro forma diluted earnings per share information gives effect to the
conversion of the Southern Energy value creation plan standard units
outstanding at December 31, 1999 and June 30, 2000, respectively, into
options to purchase our common stock.

7
<PAGE> 11

intended to represent cash flows for the period, nor is it presented as an
alternative to operating income or as an indicator of operating performance.
It should not be considered in isolation or as a substitute for a measure of
performance prepared in accordance with generally accepted accounting
principles (GAAP) in the United States and is not indicative of operating
income or cash flow from operations as determined under GAAP. Our method of
computation may or may not be comparable to other similarly titled measures
by other companies.

(4) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.

(5) As of June 30, 2000, this total included $950 million of preferred
securities and capital securities issued by special purpose financing
subsidiaries held by Capital Funding, the proceeds of which were loaned to
Southern Company. Southern Company pays interest on subordinated notes
issued in favor of the financing subsidiaries, which payments are used to
pay dividends on those preferred or capital securities. In addition,
Southern Company has guaranteed payments due under the terms of those
securities. These securities are non-recourse to us. In connection with our
separation from Southern Company, Capital Funding will be transferred to
Southern Company. The remaining $76 million of these securities were issued
by a special purpose finance subsidiary of Southern Investments UK plc
(SIUK). They are also non-recourse to us but they are not guaranteed by
Southern Company and they will remain outstanding after the offerings.

8
<PAGE> 12

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks and
relate to future events, our future financial performance or our projected
business results. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology.

Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors. These factors include:

- legislative and regulatory initiatives regarding deregulation and
restructuring of the electric utility industry;

- the extent and timing of the entry of additional competition in the
markets of our subsidiaries and affiliates;

- our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;

- state, federal and other rate regulations in the United States and in
foreign countries in which our subsidiaries and affiliates operate;

- changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;

- political, legal and economic conditions and developments in the United
States and in foreign countries in which our subsidiaries and affiliates
operate;

- financial market conditions and the results of our financing efforts;
changes in commodity prices and interest rates; weather and other natural
phenomena;

- our performance of projects undertaken and the success of our efforts to
invest in and develop new opportunities; and

- other factors, including the risks outlined under "Risk Factors."

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We do not assume responsibility for the
accuracy or completeness of forward-looking statements. We do not undertake a
duty to update any of the forward-looking statements after the date of this
prospectus.

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RISK FACTORS

You should carefully consider the risks described below as well as other
information contained in this prospectus before buying shares in this offering.
The risks described in this section are those that we consider to be the most
significant to our offering. There are other risks that we also consider to be
material to our offering that are described elsewhere in this prospectus. There
may be risks that you view in a different way than we do, and we may omit a risk
that we consider immaterial but that you would consider important. In addition,
there may be risks and uncertainties that we currently consider immaterial, but
that may in fact impair our business operations. If any of the following risks
occur, our business, financial condition or results of operations could be
materially harmed. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

CHANGES IN COMMODITY PRICES MAY INCREASE THE COST OF PRODUCING POWER AND
DECREASE THE AMOUNT WE RECEIVE FROM SELLING POWER, RESULTING IN FINANCIAL
PERFORMANCE BELOW OUR EXPECTATIONS.

Our generation and distribution businesses are subject to changes in power
prices and fuel costs which may impact our financial results and financial
position by increasing the cost of producing power and decreasing the amount we
receive from the sale of power. In addition, actual power prices and fuel costs
may differ from those assumed in our financial models. As a result, our
financial results may not meet our expectations.

OUR PROFITABILITY MAY DECLINE IF WE ARE NOT ABLE TO FULLY HEDGE AGAINST
CHANGES IN COMMODITY PRICES OR IF OUR HEDGING PROCEDURES DO NOT WORK AS
PLANNED.

To lower our financial exposure related to commodity price fluctuations,
our energy marketing and risk management business routinely enters into
contracts to hedge purchase and sale commitments, weather conditions, fuel
requirements and inventories of natural gas, coal, electricity, crude oil and
other commodities. As part of this strategy, we routinely utilize fixed-price
forward physical purchase and sales contracts, futures, financial swaps and
option contracts traded in the over-the-counter markets or exchanges. However,
we do not expect to cover the entire exposure from market price volatility of
our assets and the coverage will vary over time. In addition, as a result of
marketplace illiquidity and other factors, our marketing and risk management
operations may, at times, be unable to fully hedge their portfolios for market
risks. Failure to hedge against changes in commodity prices may cause our
profitability to decline.

We may, at times, have an open position in the market, within established
guidelines, resulting from the management of our portfolio. To the extent open
positions exist, fluctuating commodity prices can impact financial results and
financial position, either favorably or unfavorably.

Commodity price variability results from many factors, including:

- weather,
- illiquid markets,
- transmission or transportation inefficiencies,
- availability of competitively priced alternative energy sources,
- demand for energy commodities,
- natural gas, crude oil and coal production,
- natural disasters, wars, embargoes and other catastrophic events, and
- federal, state and foreign energy and environmental regulation and
legislation.

Furthermore, the risk management procedures we have in place may not always
be followed or may not always work as planned. As a result of these and other
factors, we cannot predict with precision the impact that our risk management
decisions may have on our businesses, operating

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results or financial position. Although we devote a considerable amount of
management efforts to these issues, their outcome is uncertain.

OUR PROJECTS LOCATED OUTSIDE OF THE UNITED STATES EXPOSE US TO RISKS RELATED
TO LAWS OF OTHER COUNTRIES, TAXES, ECONOMIC CONDITIONS, FLUCTUATIONS IN
CURRENCY RATES, LABOR SUPPLY AND RELATIONS, POLITICAL CONDITIONS AND POLICIES
OF FOREIGN GOVERNMENTS. THESE RISKS MAY DELAY OR REDUCE OUR REALIZATION OF
VALUE FROM OUR INTERNATIONAL PROJECTS.

We have substantial operations outside the United States. In 1999, we
derived approximately 78% of our net income from our foreign operations. The
acquisition, financing, development and operation of projects outside the United
States entail significant political and financial risks, which vary by country,
including:

- changes in laws or regulations,
- changes in foreign tax laws and regulations, including unexpected tax
liabilities,
- changes in United States laws, including tax laws, related to foreign
operations,
- compliance with United States foreign corrupt practices laws,
- changes in government policies or personnel,
- changes in general economic conditions affecting each country,
- difficulty in converting our earnings to U.S. dollars or moving funds out
of the country in which the funds were earned,
- fluctuations in currency exchange rates,
- changes in labor relations in operations outside the United States,
- political instability and civil unrest, and
- expropriation and confiscation of assets and facilities.

Despite contractual protections we have against many of these risks for our
operations in the Philippines, China and other countries in which we operate or
may invest in the future, our actual results may be affected by the occurrence
of any of these events. The occurrence of any of these events could
substantially delay or reduce the value of the project concerned.

Risk from fluctuations in currency exchange rates can arise when our
foreign subsidiaries borrow funds in one type of currency but receive revenue in
another. In such cases, an adverse change in exchange rates can reduce our
ability to meet debt service obligations. Foreign currency risk can also arise
when the revenues received by our foreign subsidiaries are not in U.S. dollars.
In such cases, a strengthening of the U.S. dollar could reduce the amount of
cash and income we receive from these foreign subsidiaries.

While we believe we have hedges and contracts in place to mitigate our most
significant foreign currency exchange risks, we have some exposure that is not
hedged. For example, while we use long-term cross-currency agreements to hedge a
significant portion of our net investments in both Western Power Distribution
(WPD) and Bewag AG, we have a portion that is not hedged. In addition, we do not
have a hedge in place in either Argentina or the Bahamas. However, the Argentine
and Bahamas currencies are pegged to the U.S. dollar, and, as a result, we will
only be exposed to foreign currency risk if these currencies become unpegged and
devalued. We also have currency risks with our investment in Companhia
Energetica de Minas Gerais (CEMIG) in Brazil. We believe that these risks are
material but we have decided not to hedge them due to the high cost and the
uncertain effectiveness of implementing such a hedge.

Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations of some
countries may limit our ability to hold a majority interest in some of the
projects that we may develop or acquire, thus limiting our ability to control
the development, construction and operation of those projects. In addition, the
legal

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<PAGE> 15

environment in foreign countries in which we currently own assets or projects or
may develop projects in the future could make it more difficult for us to
enforce our rights under agreements relating to such projects. Our international
projects may also be subject to risks of being delayed, suspended or terminated
by the applicable foreign governments or may be subject to risks of contract
invalidation by commercial or governmental entities. For example, in the
Philippines pending electricity reform laws and implementing regulations are
intended to break-up and privatize most of the Philippines National Power
Corporation (NPC), our main customer. We do not believe that these regulations
will have a material adverse effect on our operations in the Philippines but we
cannot assure you that this will be the case.

SOME OF OUR FACILITIES DEPEND ON ONLY ONE OR A FEW CUSTOMERS OR SUPPLIERS.
THESE PARTIES, AS WELL AS OTHER PARTIES WITH WHOM WE HAVE CONTRACTS, MAY FAIL
TO PERFORM THEIR OBLIGATIONS, WHICH MAY RESULT IN A DEFAULT OF PROJECT DEBT
AND MAY REQUIRE US TO INSTITUTE LEGAL PROCEEDINGS TO ENFORCE OUR AGREEMENTS.

Several of our power production facilities rely on a single customer or a
few customers to purchase all of the facility's output or on a single supplier
or a few suppliers to provide fuel, water and other services required for the
operation of the facility. Our sale and procurement agreements for these
facilities are long-term agreements that provide support for any project debt
used to finance the related facilities. The financial performance of these
facilities is dependent on the continued performance by customers and suppliers
of their obligations under their long-term agreements and, in particular, on the
credit quality of the facilities' customers. A facility's financial results
could be materially adversely affected if any one customer or supplier fails to
fulfill its contractual obligations and we are unable to find other customers or
suppliers to produce the same level of profitability. As a result of the failure
of a major customer or supplier to meet its contractual obligations, we may be
unable to repay obligations under our project or corporate debt.

Most significantly, for the year ended December 31, 1999, approximately 14%
and 35% of our revenues and net income, respectively, were attributable to sales
made by our Philippine operations under power sales agreements with NPC. NPC is
contractually committed to purchase a significant amount of power, which we
anticipate will generate significant revenues and net income in the future. We
cannot assure you that NPC will make the payments it has contracted to make or
that the Philippine government will promptly honor its guarantee of the
contracts.

In addition, our marketing and risk management operations are exposed to
the risk that counterparties which owe us money or energy as a result of market
transactions will not perform their obligations. We have had to sue some
counterparties in the past because of their failure to perform, and one
counterparty filed for bankruptcy protection as a result.

WE MAY BE UNABLE TO OBTAIN THE FINANCING WE NEED TO PURSUE OUR GROWTH
STRATEGY, AND ANY FUTURE FINANCING WE RECEIVE MAY BE LESS FAVORABLE TO US THAN
OUR CURRENT ARRANGEMENTS. ANY DIFFICULTY WE EXPERIENCE IN OBTAINING FAVORABLE
FINANCING ARRANGEMENTS MAY ADVERSELY AFFECT OUR ABILITY TO EXPAND OUR
OPERATIONS AND, AS A RESULT, MAY ADVERSELY AFFECT THE VALUE OF OUR STOCK.

Each of our projects under development and those projects and businesses we
may seek to acquire or construct will require substantial capital investment.
Our continued access to capital with acceptable terms is necessary for the
success of our growth strategy. Our attempts to consummate future financings may
not be successful or on favorable terms.

We have generally been able to arrange for a majority of the financing of
each project or business on a basis that is substantially non-recourse to us. We
may attempt to continue this practice where and when we determine it to be in
our best interest, but we cannot assure you that market conditions and other
factors will permit future project and acquisition financings on terms similar
to

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those our subsidiaries have previously received. Our ability to arrange for
financing on a substantially non-recourse basis and the costs of such capital
are dependent on numerous factors, including general economic and capital market
conditions, credit availability from banks, investor confidence, the continued
success of current projects and the continued existence of tax and securities
laws which are conducive to raising capital in this manner. If we are not able
to obtain financing for our projects on a substantially non-recourse basis, we
may have to finance them using recourse capital which could take one of the
following forms:

- issue additional debt at the corporate level,
- issue additional equity securities,
- make larger equity investments in our projects, or
- provide more financial support for our projects.

We may decide not to build new plants or acquire facilities. Any of these
alternatives could have a material adverse effect on our growth prospects and
the market price of our common stock.

In addition, we may not be able to complete the offering of preferred
securities being conducted concurrently with this offering, or that offering may
not raise the amount of proceeds that we expect. Either of these events would
increase our need for financing by the amount of expected net proceeds of the
preferred securities offering, less any amount actually raised. We may not be
able to obtain alternative financing. Even if we are able to obtain alternative
financing, it may cost us more to service than if we completely sell the
preferred securities and it may include greater restrictions on the conduct of
our business than the proposed terms of the preferred securities.

In the past, a significant amount of our debt and equity capital needs have
been provided by Southern Company. Southern Company has also periodically
provided credit support to us. In addition, we believe that we have obtained
third party financing on relatively favorable terms based in part on Southern
Company's ownership interest in us. Following this offering, Southern Company
will no longer provide financing or credit support except for specified
transactions or for a limited period of time. As a result, we may not be able to
obtain third party financing on favorable terms or at all. We may require or
choose to obtain additional debt or equity financing in the future. Future
equity financings could be dilutive to existing holders of our common stock, and
future debt financings could involve restrictive covenants.

OUR ACTIVITIES ARE RESTRICTED BY SUBSTANTIAL INDEBTEDNESS. THIS INDEBTEDNESS
MAY BE ACCELERATED AND WE MAY BE FORCED TO DEFAULT ON OUR DEBT OBLIGATIONS IF
WE ARE UNABLE TO SERVICE IT. ACCELERATION OF SOME OF OUR DEBT MAY CAUSE OTHER
LENDERS TO ACCELERATE OTHER DEBT OBLIGATIONS.

We have incurred substantial indebtedness on a consolidated basis to
finance our business. As of June 30, 2000, our total consolidated indebtedness
was $8.9 billion, our total consolidated assets were $14.3 billion and our
stockholders' equity was $2.8 billion. Our ability to meet our debt service
obligations and to repay our outstanding indebtedness will depend primarily upon
cash flow produced by our business.

This indebtedness has important consequences, including:

- limiting our ability to borrow additional amounts for working capital,
capital expenditures, debt service requirements, execution of our growth
strategy or other purposes,
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
service our debt,
- increasing our vulnerability to general adverse economic and industry
conditions, and
- limiting our ability to capitalize on business opportunities and to react
to competitive pressures and adverse changes in government regulation.

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<PAGE> 17

In addition, some of our existing debt agreements contain restrictive
covenants which, among other things, can limit or prohibit the ability of us or
our subsidiaries to:

- incur indebtedness,
- make prepayments of indebtedness in whole or in part,
- pay dividends,
- make investments,
- engage in transactions with affiliates,
- create liens,
- sell assets, and
- acquire facilities or other businesses.

If we are unable to comply with the terms of our debt agreements, we may be
required to refinance all or a portion of our debt or to obtain additional
financing. We may be unable to refinance or obtain additional financing because
of our high levels of debt and the debt incurrence restrictions under our debt
agreements. We may be forced to default on our debt obligations if cash flow is
insufficient and refinancing or additional financing is unavailable. If we
default under the terms of our indebtedness, the relevant debt holders may
accelerate the maturity of our obligations, which could cause cross-defaults or
cross-acceleration under our other obligations.

OUR COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT AND THE COST
OF COMPLIANCE WITH NEW ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT OUR
PROFITABILITY.

Our operations are subject to extensive federal, state, local and foreign
statutes, rules and regulations relating to environmental protection. To comply
with these legal requirements, we must spend significant sums on environmental
monitoring, pollution control equipment and emission fees. We may be exposed to
compliance risks from new projects, as well as from plants we have acquired. For
example, the State of New York has issued a notice of violation to the previous
owners of Plant Lovett, which we have acquired, alleging violations in the
operation of the plant prior to our acquisition. Although we have not received a
notice of violation and we dispute the allegations, we may incur costs
installing pollution control equipment on the plant.

Our failure to comply with environmental laws may result in the assessment
of penalties and fines against us by regulatory authorities. With the trend
toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the number and types of assets operated by us
subject to environmental regulation, we expect our environmental expenditures to
be substantial in the future. As is true in many countries of the world, the
governments of the United States, China, the Philippines, various European
nations and Trinidad and Tobago recently have proposed increased environmental
regulation of many industrial activities, including increased regulation of air
quality, water quality and solid waste management. For example, the U.S.
Environmental Protection Agency (EPA) has recently promulgated more stringent
air quality standards for particulate matter emitted from power plants. The
scope and extent of new environmental regulations, including their effect on our
operations, is unclear.

Unless our contracts with customers expressly permit us to pass through
increased costs attributable to new statutes, rules and regulations, we may not
be able to recover capital costs of complying with new environmental
regulations, which may adversely affect our profitability. Most of our contracts
with customers do not permit us to recover capital costs incurred by us to
comply with new environmental regulations. However, our contracts for our State
Line facility and the Power Generation Company of Trinidad and Tobago have
provisions that allow us to recover a portion of our capital costs. In addition,
the contracts for our Philippine operations have provisions that allow us to
negotiate with the Philippine government for the recovery of costs associated
with changes in environmental laws, although there is no guarantee that we can
recover any of those costs. Finally,

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there are provisions in the tariffs imposed by the California Independent System
Operator that potentially would allow us to recover costs of capital additions,
including environmental upgrades, for our California operations.

PRIOR TO OUR COMPLETE SEPARATION FROM SOUTHERN COMPANY, OUR BUSINESS WILL
CONTINUE TO BE SUBJECT TO REGULATION UNDER THE PUBLIC UTILITY HOLDING COMPANY
ACT. THAT ACT LIMITS OUR BUSINESS OPERATIONS, OUR ABILITY TO PAY DIVIDENDS,
OUR ABILITY TO RECEIVE DIVIDENDS FROM OUR SUBSIDIARIES AND OUR ABILITY TO
AFFILIATE WITH PUBLIC UTILITIES.

Until the distribution of our stock held by Southern Company, we will
continue to be subject to regulation under the Public Utility Holding Company
Act (PUHCA) as a subsidiary company of a public utility holding company
registered under PUHCA. As a result, we are subject to limitations under PUHCA
related to our acquisition, ownership and operation of energy assets outside of
our current business plan and payments of dividends by us and our subsidiaries
from unearned surplus. Additionally, as long as we are an affiliate of Southern
Company, we must obtain approval under PUHCA prior to acquiring the voting
securities of any public utility or taking any other actions that would result
in affiliation with another public utility. Following the distribution, we do
not expect to be subject to the provisions of PUHCA either as a subsidiary or an
affiliate of Southern Company. Further, we believe that as long as our domestic
power plants qualify as either exempt wholesale generators (EWGs) or qualifying
facilities (QFs) under the Public Utility Regulatory Policies Act of 1978, as
amended (PURPA), and we do not otherwise acquire public utility assets or
securities of public utility companies, we will not be subject to PUHCA. We do
not currently intend to take actions that would cause us to become subject to
regulation under PUHCA.

Currently, we are authorized under orders issued by the Securities and
Exchange Commission (SEC) under PUHCA to acquire, own and operate energy
facilities or businesses such as EWGs, foreign utility companies (FUCOs) and
QFs, to engage in other energy-related activities in the United States and to
engage in energy marketing apart from investments in EWGs and FUCOs in the
United States and Canada. The SEC order expires on December 31, 2000. We intend
to file an application to extend the expiration date of this order so that the
order will not expire until after the distribution. If the SEC does not extend
the order and we are still an affiliate of Southern Company, our operations may
be adversely affected and we may not be able to pursue our business strategies.
Further, we and our subsidiaries are authorized under an order issued by the SEC
to pay dividends out of unearned surplus. This order is necessary to exempt us
and our subsidiaries from restrictions on the payment of dividends contained in
PUHCA. The order expires June 30, 2001. If Southern Company has not completed
the distribution of our common stock by June 30, 2001, and if the SEC does not
extend the order beyond that date, cash may be trapped in some of our
subsidiaries, reducing our cash management flexibility and increasing our need
for working capital and external financing.

Our energy marketing business units are authorized under orders issued by
the SEC to conduct electricity and natural gas marketing in the United States
and Canada and, through December 31, 2000, to invest up to $300 million to
acquire assets related to energy marketing in the United States and Canada.
Prior to the distribution, this restriction will limit our ability to make a
major acquisition of an energy asset (which is not a FUCO, EWG or a United
States energy-related company) without further PUHCA approvals.

OUR BUSINESS IN THE UNITED STATES IS SUBJECT TO COMPLEX GOVERNMENT REGULATIONS
AND MAY BE ADVERSELY AFFECTED BY CHANGES IN THESE REGULATIONS OR IN THEIR
IMPLEMENTATION.

The majority of our generation operations in the United States are EWGs
which sell electricity exclusively into the wholesale market. Generally, our
EWGs are subject to regulation by the Federal

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Energy Regulatory Commission (FERC) regarding rate matters and state public
utility commissions regarding non-rate matters. The majority of our generation
from EWGs is sold at market prices under market rate authority exercised by
FERC, although FERC has the authority to impose "cost of service" rate
regulation if it determines that market pricing is not in the public interest.
Any reduction by FERC of the rates we may receive for our generation activities
may adversely affect our results of operations. For more information regarding
relevant U.S. public utility regulation, see "Business -- Regulation -- U.S.
Public Utility Regulation."

For example, on June 7, 2000, an administrative law judge presiding over a
FERC proceeding involving our California operations issued an initial decision
allocating the responsibility for payment of a settled $158.8 million amount to
be paid under the reliability-must-run contracts between our California
subsidiaries and the California Independent System Operator (CAISO). The
administrative law judge allocated 3% of the responsibility to the CAISO and the
remainder to our California subsidiaries. Our California subsidiaries had
proposed to allocate 75%, $120 million, of the responsibility to the CAISO. On
July 7, 2000, we filed an appeal of this decision with the FERC; however we
cannot assure you that our appeal will be successful. A final FERC order in this
proceeding may be appealed to the United States Circuit Court of Appeals. If we
are not successful in this appeal, our results of operations would be adversely
affected. For more information regarding this proceeding, see "Business -- Legal
Proceedings."

To conduct our business, we must obtain licenses, permits and approvals for
our plants. We cannot assure you that we will be able to obtain and comply with
all necessary licenses, permits and approvals for our plants. If we cannot
comply with all applicable regulations, our business, results of operations and
financial condition could be adversely affected.

THE ENERGY INDUSTRY IS RAPIDLY CHANGING TO INCREASED COMPETITION AND WE MIGHT
NOT BE SUCCESSFUL IN RESPONDING TO THESE CHANGES.

We may not be able to respond in a timely or effective manner to the many
changes intended to increase competition in the energy industry in both domestic
and international markets. These changes may include deregulation of the
electric utility industry in some markets, privatization of the electric utility
industry in other markets and increasing competition in all markets. To the
extent competitive pressures increase and the pricing and sale of electricity
assumes more characteristics of a commodity business, the economics of our
business may come under increasing pressure. Industry deregulation and
privatization may not only continue to fuel the current trend toward
consolidation in the utility industry but may also encourage the disaggregation
of vertically integrated utilities into separate generation, transmission and
distribution businesses. As a result, additional significant competitors could
become active in our industry and we may not be able to maintain our revenues
and earnings in this competitive marketplace or to acquire or develop new assets
to pursue our growth strategy.

Many states are implementing or considering regulatory initiatives designed
to increase competition in the domestic power generation industry and increase
access for independent power producers and electricity consumers to electric
utilities' transmission and distribution systems. Industry restructuring in
regions where we have substantial operations could affect our operations in a
manner which is difficult to predict, since the effects will depend on the form
and timing of the restructuring. Access to transmission and distribution systems
is essential to permit entry into markets by us and our competitors. In
addition, effective entry involves substantial investment in fixed assets, such
as building power plants. If a region's power transmission infrastructure is
inadequate, our recovery of costs and profits may be limited, and the imposition
of restrictive price regulation may reduce incentive to invest in expansion of
transmission infrastructures. In addition, regulations to which we are subject
may change in other ways which we cannot predict. The structure of these energy
regulations has been in the past, and may be in the future, the subject of
various challenges

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and restructuring proposals by utilities and other industry participants.
Regulatory initiatives in foreign countries where we have or will have
operations involve the same types of risks.

The United States Congress is considering legislation which would repeal
PURPA entirely, or at least eliminate the obligation of utilities to purchase
power from QFs. Various bills have also proposed repeal of PUHCA. In the event
of a PUHCA repeal, competition from independent power generators and from
utilities with generation, transmission and distribution would likely increase.
Repeal of PURPA or PUHCA may or may not be part of comprehensive legislation to
restructure the electric utility industry, allow retail competition and
deregulate most electric rates. We cannot predict the effect of this type of
legislation, although we anticipate that any legislation would result in
increased competition. If we were unable to compete in an increasingly
competitive environment, our business and results of operation may suffer.

FERC has issued power and gas transmission initiatives that require
electric and gas transmission services be offered on a common carrier basis
unbundled from commodity sales. Although these initiatives are designed to
encourage wholesale market transactions for electricity and gas, there is the
potential that fair and equal access to transmissions systems will not be
available and we cannot predict the timing of industry changes as a result of
these initiatives or the adequacy of transmission additions in specific markets.
In Canada, national and provincial governments have instituted natural gas
regulations also designed to encourage the development of competitive markets.
However, we cannot predict the timing and scope of the development of a
competitive market in Canada or the effect of these or future regulations on
these markets.

We cannot predict whether the federal government, state legislatures or
foreign governments will adopt legislation relating to the deregulation of the
energy industry. We cannot assure you that the introduction of new laws or other
future regulatory developments will not have a material adverse effect on our
business, results of operations or financial condition.

CHANGES IN TECHNOLOGY MAY SIGNIFICANTLY IMPACT OUR BUSINESS BY MAKING OUR
POWER PLANTS LESS COMPETITIVE.

A basic premise of our business is that generating power at central power
plants achieves economies of scale and produces electricity at a low price.
There are other technologies that can produce electricity, most notably fuel
cells, microturbines, windmills and photovoltaic (solar) cells. The average cost
for new central station generated electricity is approximately 3c per kilowatt
hour (kWh) while costs for current alternate electricity generation methods
range from approximately 5c per kWh to 20c per kWh. Research and development
activities are ongoing to seek improvements in the alternate technologies. It is
possible that advances will reduce the cost of alternate methods of electric
production to a level that is equal to or below that of most central station
electric production. If this were to happen, the value of our power plants may
be significantly impaired.

OUR FACILITIES MAY NOT OPERATE AS PLANNED, WHICH MAY LEAD TO POOR FINANCIAL
PERFORMANCE AND THE ACCELERATION OF OUR PROJECT DEBT.

Our operation of power plants involves many risks, including the breakdown
or failure of generation equipment or other equipment or processes, labor
disputes, fuel interruption and operating performance below expected levels. For
example, in 1998 an explosion and fire occurred at our State Line facility in
Indiana, which caused personal injuries and damage to equipment. In addition,
weather related incidents and other natural disasters can disrupt both
generation and transmission delivery systems. Operation of our power plants
below expected capacity levels may result in lost revenues or increased
expenses, including higher maintenance costs and penalties. In addition, we may
not be able to repay the project debt for an under-performing facility, which
could trigger default provisions in a project subsidiary's or project
affiliate's financing agreements and might allow the affected lenders to
accelerate that debt.

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OUR OPERATIONS DEPEND SUBSTANTIALLY ON THE PERFORMANCE OF OUR SUBSIDIARIES AND
AFFILIATES, SOME OF WHICH WE DO NOT CONTROL AND SOME OF WHICH ARE SUBJECT TO
RESTRICTIONS AND TAXATION ON DIVIDENDS AND DISTRIBUTIONS.

Almost all of our operations are conducted through our subsidiaries and
affiliates. As a result, we depend almost entirely upon their earnings and cash
flow.

Seven of our major affiliates, listed below, are not subject to our control
of management and policies to the same extent as our consolidated subsidiaries:

- Southern Company Energy Marketing, L.P. (SCEM),

- Birchwood Power Partners, L.P. (Birchwood), which owns the Birchwood
power plant in Fredericksburg, Virginia,

- Bewag AG, the Berlin electric utility,

- Guangdong Guonghope Power Co., Ltd., which controls the Shajiao C plant
in China,

- CEMIG,

- the Power Generation Company of Trinidad and Tobago (PowerGen), and

- Shandong International Power Development Company (SIPD).

However, we do exercise significant influence over the operations of these
affiliates and we account for these investments using the equity method of
accounting. These affiliates contributed approximately 31% of our income from
continuing operations in 1999.

In addition, the debt agreements of some of our subsidiaries and affiliates
restrict their ability to pay dividends, make distributions or otherwise
transfer funds to us prior to the payment of other obligations, including
operating expenses, debt service and reserves. Further, if we elect to receive
distributions of earnings from our foreign operations, we may incur United
States taxes, net of any available foreign tax credits, on such amounts.
Dividend payments from our international projects to us are, in some countries,
also subject to withholding taxes.

OUR BUSINESS DEVELOPMENT ACTIVITIES MAY NOT BE SUCCESSFUL AND OUR PROJECTS
UNDER CONSTRUCTION MAY NOT COMMENCE OPERATION AS SCHEDULED DESPITE THE
EXPENDITURE OF SIGNIFICANT AMOUNTS OF CAPITAL.

Our business involves numerous risks relating to the acquisition,
development and construction of large power plants. Our success in developing a
particular project is contingent upon, among other things, negotiation of
satisfactory engineering, construction, fuel supply and power sales contracts,
receipt of required governmental permits and timely implementation and
satisfactory completion of construction. We may be unsuccessful in accomplishing
any of these matters or in doing so on a timely basis. Although we may attempt
to minimize the financial risks in the development of a project by securing a
favorable power sales agreement, obtaining all required governmental permits and
approvals and arranging adequate financing prior to the commencement of
construction, the development of a power project may require us to expend
significant sums for preliminary engineering, permitting and legal and other
expenses before we can determine whether a project is feasible, economically
attractive or capable of being financed.

Currently, we have power plants under development or construction and we
intend to pursue the expansion of existing plants and the development of other
new plants. Our completion of these facilities without delays or cost overruns
is subject to substantial risks, including:

- changes in market prices,
- shortages and inconsistent qualities of equipment, material and labor,
- work stoppages,

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- permitting and other regulatory matters,
- adverse weather conditions,
- unforeseen engineering problems,
- environmental and geological conditions,
- unanticipated cost increases, and
- our attention to other projects,

any of which could give rise to delays, cost overruns or the termination of the
plant expansion, construction or development.

If we were unable to complete the development of a facility, we would
generally not be able to recover our investment in the project. The process for
obtaining initial environmental, siting and other governmental permits and
approvals is complicated, expensive and lengthy, often taking more than one
year, and is subject to significant uncertainties. In addition, construction
delays and contractor performance shortfalls can result in the loss of revenues
and may, in turn, adversely affect our results of operations. The failure to
complete construction according to specifications can result in liabilities,
reduced plant efficiency, higher operating costs and reduced earnings. We cannot
assure you that we will be successful in the development or construction of
power production facilities in the future.

WE HAVE TAKEN INCOME TAX REPORTING POSITIONS THAT HAVE NOT BEEN AUDITED BY THE
INTERNAL REVENUE SERVICE AND COULD BE DISALLOWED. ANY DISALLOWANCE WOULD
ADVERSELY AFFECT US.

In connection with the acquisition of our international operations we have
taken federal income tax reporting positions that have not been audited by the
Internal Revenue Service (IRS) for any tax years after 1995. We believe that we
have substantial authority for the positions we have taken, and we have
disclosed on Southern Company's consolidated income tax returns that we have
taken these reporting positions. However, we cannot assure you that these or
other reporting positions will be sustained. The disallowance of one or more of
these reporting positions could have a material adverse effect on our cash flows
and net income (approximately $350 million if all reporting positions are
disallowed), which could impair, at least temporarily, our ability to finance
new investments. However, we do not expect any disallowance of tax reporting
positions that we have taken to prevent us from achieving our growth strategy.

RISKS RELATED TO OUR SEPARATION FROM SOUTHERN COMPANY

OUR CREDIT RATING WILL LIKELY DECLINE AS A RESULT OF OUR SEPARATION FROM
SOUTHERN COMPANY AND AS A RESULT WE MAY FACE INCREASED BORROWING COSTS, MORE
RESTRICTIVE COVENANTS AND REDUCED AMOUNTS OF CREDIT, WHICH MAY MAKE IT MORE
DIFFICULT AND EXPENSIVE TO PURSUE OUR GROWTH STRATEGY.

Our operation as a separate entity from Southern Company will likely have a
negative impact on our credit rating and may also affect the credit ratings of
our subsidiaries. In fact, rating agencies have recently announced that they
will re-assess our credit ratings and the credit ratings of our subsidiaries in
light of our separation from Southern Company. These announcements indicate that
our credit rating and the credit ratings of our subsidiaries will likely decline
upon completion of their re-assessment. Historically, Southern Company has
provided financing and credit support to us and our project financing
activities. Following this offering, Southern Company will no longer provide
financing or credit support for our operations except for specified transactions
and for a limited period of time. In addition, we may increase the proportion of
debt in our overall capital structure as part of our growth plan. These events
will likely negatively affect our credit rating. If our corporate credit rating
declines below an investment grade credit rating and we are unable to
restructure our indebtedness or obtain waivers, we may be in default under
several of our financing agreements unless we are able to cure those defaults.

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<PAGE> 23

In addition, we have performance guarantees related to SCEM's business that
require us to maintain an investment grade credit rating. If our credit rating
declines below investment grade, we will be obligated to provide credit
enhancement to the guaranteed party in the form of a pledge of cash collateral,
a letter of credit or other similar credit enhancement. Furthermore, if the
credit ratings of our energy marketing and risk management subsidiaries decline
below an investment grade credit rating, our trading partners may refuse to
trade with us or trade only on terms unfavorable to us.

Any of these events would likely result in increased borrowing costs, more
restrictive covenants and reduced lines of credit from lenders, suppliers and
counterparties, all of which would adversely affect our business and results of
operations and our ability to raise capital to pursue our growth strategy. We
cannot assure you that our credit ratings will not be negatively affected after
our separation from Southern Company.

OUR CREDIT AGREEMENTS HAVE CHANGE OF CONTROL PROVISIONS THAT MUST BE WAIVED,
OR THE AGREEMENTS MUST BE REPLACED, PRIOR TO THE DISTRIBUTION OF OUR COMMON
STOCK BY SOUTHERN COMPANY. WE MAY INCUR MATERIAL COSTS IF WE ARE UNABLE TO
OBTAIN WAIVERS AND MUST REPAY OR REFINANCE THESE CREDIT AGREEMENTS. IN
ADDITION, OBTAINING WAIVERS AND REPLACING AGREEMENTS MAY RESULT IN SUBSTANTIAL
COSTS AND LESS FAVORABLE TERMS THAN WE CURRENTLY ENJOY.

The distribution of our common stock by Southern Company, if it occurs,
will constitute a change of control under provisions in all of our corporate
credit agreements and many of our subsidiary credit agreements. Without the
consent of or a waiver from the lenders under these agreements, the spin-off
will result in an event of default. In addition, an event of default under one
of these credit agreements may trigger an event of default under all other
credit agreements. Upon an event of default under these credit agreements, the
lenders may terminate any obligation to make further advances and declare all
outstanding indebtedness immediately due and payable. We will seek consents or
waivers of these provisions prior to the distribution of our common stock by
Southern Company. We may incur additional costs to obtain these consents and
waivers. In addition, we may be required to renegotiate the terms of these
agreements or replace them on terms less favorable than we currently enjoy. We
cannot assure you that we will be successful in obtaining consents or waivers on
favorable terms or at all. If we cannot obtain consents or waivers, we may incur
material costs to repay or refinance these agreements. We cannot assure you that
we will be able to repay or refinance these agreements. Any of these events may
have an adverse effect on our business and our results of operations. Our
inability to obtain consents or waivers or to refinance project-level loans with
principal amounts totaling approximately $2.7 billion may require us to borrow
at the corporate level which could constrain our ability to raise sufficient
additional capital to achieve our strategic growth objectives.

OUR SEPARATION FROM SOUTHERN COMPANY WILL RESULT IN A LOSS OF INTANGIBLE
BENEFITS AND THE QUALIFIED EMPLOYMENT POOL CURRENTLY PROVIDED BY OUR
ASSOCIATION WITH SOUTHERN COMPANY.

In the past we have enjoyed "brand" identification, goodwill and other
intangible benefits as a result of being one of Southern Company's subsidiaries.
We have also had access to the pool of Southern Company employees in filling our
management, administrative and technical positions. We will no longer have
access to or be able to rely on these benefits, which may adversely affect our
business.

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OUR BUSINESS AND YOUR INVESTMENT IN OUR STOCK MAY BE ADVERSELY AFFECTED IF
SOUTHERN COMPANY DOES NOT COMPLETE THE DISTRIBUTION OF OUR COMMON STOCK
BECAUSE WE WOULD REMAIN SUBJECT TO REGULATORY RESTRICTIONS AS A SUBSIDIARY OF
A PUBLIC UTILITY HOLDING COMPANY AND BECAUSE WE WOULD REMAIN SUBJECT TO
CONTROL BY SOUTHERN COMPANY.

Although Southern Company has advised us that it currently intends to
complete the distribution of our common stock within 12 months after this
offering, we cannot assure you whether or when it will occur. Southern Company
is not obligated to complete the distribution of our common stock. Southern
Company currently intends that it will distribute to its stockholders all of our
common stock that it owns, although it is not obligated to do so.

Our separation from Southern Company and the distribution of our stock by
Southern Company requires PUHCA authorization, and we cannot assure you that
such authorization will be received. Southern Company is requesting an extension
of its general authority to continue to own us, required under PUHCA to
accomplish the distribution in calendar year 2001. The SEC also has general
authority over transactions among Southern Company affiliates under PUHCA.
Southern Company and we will file a request with the SEC to allow the
distribution to proceed as contemplated by the separation agreements. The SEC
may impose conditions on or disapprove of the proposed separation and any of the
separation agreements.

If Southern Company fails to complete the distribution of our common stock,
or fails to complete it substantially within the time contemplated, our business
would be adversely affected. We would remain subject to regulatory restrictions
as a subsidiary of a regulated public utility holding company, we would not be
able to raise equity capital without compliance with regulatory requirements and
we would likely not realize the benefits we anticipate resulting from our
separation from Southern Company. We cannot assure you that we will obtain the
expected benefits or as to the timing of any benefits.

In addition, until this distribution occurs, the risks discussed below
relating to Southern Company's control of us and the potential business
conflicts of interest between Southern Company and us will continue to be
relevant to you. If the distribution is delayed or not completed at all, the
liquidity of our shares in the market may be constrained unless and until
Southern Company elects to sell some of its significant ownership. There are no
limits on these sales and the sale or potential sale by Southern Company could
adversely affect market prices. In addition, because of the limited liquidity
until the distribution occurs, relatively small trades of our stock may have a
disproportionate effect on our stock price.

WE WILL BE CONTROLLED BY SOUTHERN COMPANY AS LONG AS IT OWNS A MAJORITY OF OUR
COMMON STOCK, AND OUR NEW MINORITY STOCKHOLDERS WILL BE UNABLE TO AFFECT THE
OUTCOME OF STOCKHOLDER VOTING DURING THAT TIME.

After the completion of this offering, Southern Company will own over 80%
of our outstanding common stock. As long as Southern Company owns a majority of
our outstanding common stock, Southern Company will continue to be able to elect
our entire board of directors without calling a special meeting. Investors in
this offering, by themselves, will not be able to affect the outcome of any
stockholder vote prior to the planned distribution of our stock to Southern
Company stockholders. As a result, Southern Company, subject to any fiduciary
duty owed to our minority stockholders under Delaware law, will be able to
control all matters affecting us, including:

- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers,
- determination of incentive compensation which may affect our ability to
retain key employees,
- the allocation of business opportunities that may be suitable for
Southern Company and us,

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- any determinations with respect to mergers or other business
combinations,
- our acquisition or disposition of assets,
- our financing decisions and our capital raising activities,
- changes to the agreements providing for our separation from Southern
Company,
- the payment of dividends on our common stock, and
- determinations with respect to our tax returns.

OUR HISTORICAL FINANCIAL RESULTS AS A SUBSIDIARY OF SOUTHERN COMPANY MAY NOT
BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY.

The historical financial information we have included in this prospectus
does not necessarily reflect what our financial position, results of operations
and cash flows would have been had we been a separate, stand-alone entity during
the periods presented. Our costs and expenses reflect charges from Southern
Company for centralized corporate services and infrastructure costs, including:

- engineering,
- legal,
- accounting,
- information technology,
- investor relations and stockholder services,
- insurance and risk management,
- tax,
- environmental,
- human resources and payroll, and
- external affairs, including marketing and public relations.

These allocations have been determined based on regulatory limitations and
other bases that we and Southern Company considered to be reasonable reflections
of the utilization of services provided to us or for the benefits received by
us. This historical financial information is not necessarily indicative of what
our results of operations, financial position and cash flows will be in the
future. We may experience significant changes in our cost structure, funding and
operations as a result of our separation from Southern Company, including
increased costs associated with reduced economies of scale, increased marketing
expenses related to building a company brand identity separate from Southern
Company and increased costs associated with being a publicly traded, stand-alone
company.

IF THE DISTRIBUTION OF OUR STOCK BY SOUTHERN COMPANY TO ITS STOCKHOLDERS FAILS
TO QUALIFY AS A TAX-FREE TRANSACTION, WE MAY BE REQUIRED TO INDEMNIFY SOUTHERN
COMPANY FOR ANY RESULTING TAXES. THIS POTENTIAL OBLIGATION TO INDEMNIFY
SOUTHERN COMPANY MAY PREVENT OR DELAY A CHANGE OF CONTROL OF US AFTER SOUTHERN
COMPANY DISTRIBUTES OUR STOCK TO ITS SHAREHOLDERS.

Within 12 months after the completion of this offering, Southern Company
intends to distribute the shares of our stock it owns to Southern Company
stockholders. On August 1, 2000, we and Southern Company received a ruling from
the IRS that the distribution will be tax-free to Southern Company and its
stockholders for United States federal income tax purposes. However, under an
agreement between us and Southern Company, if we breach any representations in
connection with the ruling, take any action which causes our representations to
be untrue or engage in a transaction after the distribution that causes the
distribution to be taxable to Southern Company, we will be required to indemnify
Southern Company for any resulting taxes. The amount of any indemnification
payments would likely be approximately $1 billion, and we likely would not have
sufficient financial resources to achieve our growth strategy.

Current tax law provides for a presumption that the distribution of our
stock by Southern Company, if it occurs, may be taxable to Southern Company if
our company undergoes a 50% or

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greater change in stock ownership within two years after the distribution. Under
agreements between Southern Company and us, Southern Company may require us to
reimburse any taxation costs incurred by Southern Company and its stockholders
as a result of a transaction resulting in a change in control of our company.
These costs may be so great that they delay or prevent a strategic acquisition
or change in control of our company.

OUR DECONSOLIDATION FROM THE SOUTHERN COMPANY CONSOLIDATED TAX GROUP MAY
RESULT IN ADVERSE TAX CONSEQUENCES TO US.

Subsequent to the distribution of our stock by Southern Company, we will
cease to be a member of the Southern Company consolidated tax group. Our
separation from the Southern Company consolidated tax group will change our
overall future income tax posture. Based on our current structure and net
income, we could be limited in our future ability to effectively use tax
attributes such as foreign tax credits associated with overseas operations. The
inability to use these attributes could result in material tax liabilities. We
intend to undertake appropriate measures after deconsolidation in order to
mitigate any adverse tax effect of no longer being a part of the Southern
Company consolidated tax group. We cannot assure you that these efforts will be
successful; however, we do not expect any such tax liabilities to affect our
ability to pursue our growth strategy.

WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH SOUTHERN COMPANY
WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF SOUTHERN
COMPANY'S CONTROLLING OWNERSHIP PRIOR TO THE DISTRIBUTION, WE MAY NOT BE ABLE
TO RESOLVE THESE CONFLICTS ON TERMS COMMENSURATE WITH THOSE POSSIBLE IN ARMS'
LENGTH TRANSACTIONS.

Conflicts of interest may arise between Southern Company and us in a number
of areas relating to our past and ongoing relationships. Conflicts of interest
with Southern Company may arise under many circumstances, including the
following:

- solicitation and hiring of employees from each other,
- the timing and manner of any sales or distributions by Southern Company
of all or any portion of its ownership interest in us,
- the nature and quality of transitional services Southern Company has
agreed to provide us,
- our business operations within Southern Company's service territory or
other business opportunities that would compete with Southern Company,
- actions and decisions of legislative bodies and administrative agencies,
and
- our dividend policy.

Following this offering, the agreements we have entered into with Southern
Company may be amended upon agreement of the parties. While we are controlled by
Southern Company, Southern Company may be able to require us to agree to
amendments to these agreements. We may not be able to resolve any potential
conflicts with Southern Company, and even if we do, the resolution may be less
favorable than if we were dealing with an unaffiliated party.

OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF SOUTHERN COMPANY COMMON STOCK.

Many of our directors and executive officers own a substantial amount of
Southern Company common stock and options to purchase Southern Company common
stock. Ownership of Southern Company common stock by our directors and officers
after our separation from Southern Company could create, or appear to create,
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for Southern Company than they
do for us.

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OUR ABILITY TO OPERATE OUR BUSINESS MAY SUFFER IF WE DO NOT DEVELOP OUR OWN
INFRASTRUCTURE QUICKLY AND COST-EFFECTIVELY, AND WE CANNOT ASSURE YOU THAT THE
TRANSITIONAL SERVICES THAT SOUTHERN COMPANY HAS AGREED TO PROVIDE US WILL BE
SUFFICIENT FOR OUR NEEDS.

We currently use Southern Company systems to support some of our
operations, including human resources, payroll and wide-area computer networks.
We are in the process of creating our own systems to replace Southern Company's
systems. These systems are very complex and we may not be successful in
implementing these systems or transitioning data from Southern Company's systems
to our own. Any failure or significant downtime in Southern Company's or our own
information systems could prevent us from paying payroll or performing other
administrative services and could harm our business. In addition, the
transitional services generally have a term of two years or less following the
effective date of the applicable agreement. After the expiration of these
various arrangements, we may not be able to replace the transitional services
with a comparable quality of service or on terms and conditions as favorable as
those we will receive from Southern Company.

Following the offering, Southern Company has agreed to provide transitional
services to us, including, but not limited to, services related to:

- engineering and technical consulting,
- human resources, administration and payroll,
- accounting and treasury,
- procurement,
- auditing,
- legal,
- governmental affairs,
- information technology infrastructure, and
- insurance.

Under the separation agreements, Southern Company is only obligated to
provide services to us after it has satisfied its obligations to its other
subsidiaries and operating companies. In addition, Southern Company has wide
discretion on what employees it will utilize to provide services to us.
Consequently, the quality and quantity of the services we receive from Southern
Company may not be as good as the services we received prior to the
effectiveness of the separation agreements.

RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK

SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

Southern Company currently intends to distribute all of the 272,000,000
shares of our common stock it owns to Southern Company stockholders within 12
months after this offering. Substantially all of these shares will be eligible
for immediate resale in the public market. We are unable to predict whether
significant amounts of common stock will be sold in the open market in
anticipation of, or following, the distribution, or by Southern Company if the
distribution does not occur. We are also unable to predict whether a sufficient
number of buyers will be in the market at that time. Any sales of substantial
amounts of common stock in the public market, or the perception that these sales
might occur, whether as a result of this distribution or otherwise, could lower
the market price of our common stock. In addition, we have entered into a
registration rights agreement which provides that if Southern Company does not
distribute to the holders of its common stock all of the shares of our common
stock that its owns, Southern Company and its transferees will have the right to
require us to register these shares of our common stock under the United States
securities laws for sale into the public market.

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THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF
THE MARKET PRICE OF OUR STOCK AFTER THE OFFERING. IN ADDITION, OUR STOCK PRICE
MAY BE VOLATILE.

The initial public offering price of our common stock will be determined by
negotiations among us and the representatives of the underwriters. This price
will be based on numerous factors (discussed in the section of this prospectus
entitled "Underwriters") and may not be indicative of the market price for our
common stock after the initial public offering. The market price of our common
stock could be subject to significant fluctuations after the offering, and may
decline below the initial public offering price. We cannot assure you that you
will be able to resell your shares at or above the initial public offering
price. Among the factors that could affect our stock price are:

- quarterly variations in the rate of growth of our financial indicators,
such as earnings per share, net income and revenues,
- changes in revenue or earnings estimates or publication of research
reports by analysts,
- speculation in the press or investment community,
- strategic actions by us or our competitors, such as acquisitions or
restructurings,
- actions by institutional investors or by Southern Company prior to its
distribution of our stock,
- general market conditions, including fluctuations in commodity prices,
and
- domestic and international economic, legal and regulatory factors
unrelated to our performance.

The stock markets in general have experienced extreme volatility that has
often been unrelated to the operating performance of particular companies. These
broad market fluctuations may adversely affect the trading price of our common
stock.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT
ACQUISITION OF US, WHICH COULD ADVERSELY AFFECT THE VALUE OF YOUR SHARES.

Our restated certificate of incorporation and our bylaws contain provisions
that could make it harder for a third party to acquire us after the full
distribution by Southern Company without the consent of our board of directors.
These provisions disallow actions by our stockholders by written consent once
Southern Company ceases to own a majority of our common stock. In addition,
these provisions include procedural requirements relating to stockholder
meetings and stockholder proposals that could make stockholder actions more
difficult. Beginning at the time Southern Company ceases to own 33 1/3% of our
common stock, our board of directors will be classified into three classes of
directors serving staggered, three-year terms and may be removed only for cause.
Any vacancy on the board of directors may be filled only by the vote of the
majority of directors then in office. Our board of directors has the right to
issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer. Delaware law also
imposes some restrictions on mergers and other business combinations between us
and any holder of 15% or more of our outstanding common stock. Although we
believe these provisions provide for an opportunity to receive a higher bid by
requiring potential acquirers to negotiate with our board of directors, these
provisions apply even if the offer may be considered beneficial by some
stockholders.

PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE DILUTION IN NET TANGIBLE
BOOK VALUE PER SHARE.

Dilution per share represents the difference between the initial public
offering price and the net consolidated book value per share immediately after
the offerings of our common stock and the preferred securities. Purchasers of
our common stock in this offering will experience immediate dilution of $14.14
in net tangible book value per share. In addition, it is anticipated that
investors who purchase shares of our common stock in this offering will
contribute an aggregate of 24.4% of all cash paid for our common stock, but own
approximately 17.6% of our common stock. See the section of the prospectus
entitled "Dilution" for more information.

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OUR SEPARATION FROM SOUTHERN COMPANY

OVERVIEW

On April 17, 2000, Southern Company announced its plan to make Southern
Energy, currently a wholly owned subsidiary, an independent, publicly traded
company focused on the worldwide competitive energy markets. Unless Southern
Company completes the distribution of our stock to its stockholders, we will
continue as a subsidiary of Southern Company.

BENEFITS OF THE SEPARATION

We believe that we will realize certain benefits from our complete
separation from Southern Company, which includes the distribution by Southern
Company of our common stock, including the following:

- ELIMINATE GOVERNMENTAL REGULATION UNDER PUHCA. Following the
distribution by Southern Company of our common stock, we will not be
affiliated with any public utility company within the meaning of PUHCA.
As a result, we anticipate that we will not be subject to regulation
under PUHCA. For example, we will not need to obtain PUHCA approval to
acquire interests in businesses other than public utility companies even
though acquisition of those businesses would not qualify as exempt from
PUHCA approval requirements if purchased by a holding company registered
under PUHCA. In addition, we will not need PUHCA approval for the
acquisition of assets or securities which results in affiliation with a
single public utility. After the distribution of our common stock by
Southern Company, we expect to conduct our business so that we remain
outside of PUHCA regulation.

- INCREASED CAPITAL FINANCING FLEXIBILITY. As a separate entity we expect
to be able to raise equity on more attractive terms because we expect our
earnings to grow faster than the regulated utility businesses of Southern
Company. Therefore, we expect our common stock to be valued at a higher
multiple of earnings than Southern Company's common stock. We will also
have the ability to use our equity securities as a form of consideration
for possible future acquisitions and to fund development projects. In
addition, Southern Company is limited in the amount of additional debt
that it can add to its consolidated balance sheet without affecting its
credit rating and its ability to recover the cost of its debt service
through rate increases. After the distribution, we will be able to raise
debt without this potential constraint related to the consolidated
Southern Company.

- PROVIDE A TARGETED INVESTMENT FOR OUR STOCKHOLDERS. The nature of
Southern Company's regulated utility business is substantially different
from our electricity and gas asset management and marketing and risk
management businesses. As a result of our complete separation from
Southern Company, we believe that we will offer an investment opportunity
that provides higher growth than that of the regulated utility business.
Our complete separation will allow investors to better align their
investment objectives through ownership of either Southern Company stock
or our stock.

- INCREASED STRATEGIC FOCUS. As a subsidiary of Southern Company we are
both capital constrained and limited in the businesses in which we can
enter by government regulations. We also have to compete with Southern
Company's other subsidiaries for investment opportunities and have a
longer review and approval process for new investments than many of our
competitors. As a separate entity, we will be able to develop our
strategy without regard to its effect on Southern Company and will thus
have greater independence in establishing and implementing our strategy
than we do now.

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- ACCESS TO ADDITIONAL MARKETS. We currently do not compete in Southern
Company's service territory in the southeastern United States. After the
distribution, we will be able to compete for wholesale and retail
customers and develop power plants in Southern Company's service
territory, thus giving us an additional opportunity to grow our business.

- INCREASED SPEED AND RESPONSIVENESS. After the distribution, we expect to
be able to make decisions more quickly and efficiently because we will no
longer have to review these decisions with Southern Company's management
and board of directors. As a result, we expect to be able to respond to,
approve and act on new development and acquisition opportunities more
quickly. This will allow us to compete better with companies that do not
have to obtain multiple levels of reviews and approvals.

- TARGETED INCENTIVES FOR MANAGEMENT AND EMPLOYEES. As a subsidiary of a
much larger company, it has been difficult for us to create employee
compensation programs that directly compensate our employees for the
performance of our company. As a separate public company we will be able
to offer our employees compensation directly linked to the performance of
our business, which we expect to enhance our ability to attract and
retain qualified personnel. We also expect that incentive compensation
programs tied to the market performance of our common stock will
strengthen the focus of our management and the motivation of our
employees and align their interests with those of our stockholders.

SEPARATION AND TRANSITIONAL AGREEMENTS

We have entered into agreements with Southern Company providing for the
separation of our business from Southern Company, including a master separation
and distribution agreement. These agreements generally provide for, among other
things, the transfer from Southern Company to us of assets and the assumption by
us of liabilities relating to our business. We have also entered into agreements
governing various interim and ongoing relationships between us and Southern
Company including transitional services Southern Company will provide to us. For
a summary description of these agreements, see "Agreements Between Us and
Southern Company."

In connection with our separation from Southern Company, we will transfer
two of our subsidiaries, SE Finance and Capital Funding, to Southern Company. In
order to facilitate the transfer to Southern Company, prior to this offering we
will issue one share of our redeemable preferred stock to Southern Company.
After this offering and prior to the distribution of our stock by Southern
Company, we will form a corporation with Southern Company Energy Solutions, Inc.
(SCES), a wholly-owned subsidiary of Southern Company. We will contribute the
stock of SE Finance and Capital Funding to the corporation in exchange for an
80% or greater interest. SCES will contribute its energy services assets to a
limited liability company owned by the corporation in exchange for a 20% or
lesser interest. We will then redeem the one share of redeemable preferred stock
issued by us to Southern Company in exchange for our entire interest in the
corporation. We currently have credit support obligations related to SE Finance.
Following the transfer, Southern Company will assume responsibility for these
obligations.

THE DISTRIBUTION BY SOUTHERN COMPANY OF OUR COMMON STOCK

After completion of this offering, Southern Company will own over 80% of
the outstanding shares of our common stock. Southern Company has announced that
it currently plans to complete its divestiture of our company within 12 months
after the completion of this offering by distributing all of its shares of our
common stock to the holders of Southern Company common stock. However, Southern
Company is not obligated to complete the distribution, and we cannot assure you
as to whether or when it will occur. For a description of some of the
consequences that may result if

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Southern Company does not complete the distribution, see "Risk Factors -- Risks
Related to Our Separation from Southern Company -- Our business may be adversely
affected if Southern Company does not complete the distribution of our common
stock."

Southern Company has advised us that it would not complete the distribution
if its board of directors determines that the distribution is no longer in the
best interest of Southern Company and its stockholders. Southern Company has
further advised us that it currently expects that the principal factors that it
will consider in determining whether and when to complete the distribution
include:

- general market conditions and the relative market prices of our common
stock and of Southern Company's common stock,
- the receipt of a ruling from the IRS that the transaction will be
tax-free to Southern Company and its stockholders and that the
transaction will qualify as a tax-free distribution for United States
federal income tax purposes,
- receipt of necessary regulatory orders with terms and conditions
acceptable to Southern Company,
- the absence of any court orders, regulations, adverse regulatory action
or contractual restrictions prohibiting or restricting the completion of
the distribution,
- other conditions affecting our business or Southern Company's business,
and
- our ability to obtain waivers or consents from lenders or other parties
under our material financing agreements and other material contracts.

On August 1, 2000, we and Southern Company received a ruling from the IRS
that the distribution will be tax-free to Southern Company and its stockholders
for United States federal income tax purposes. However, under a tax
indemnification agreement between us and Southern Company, if we breach any
representations in connection with the ruling, take any action which causes our
representations to be untrue or engage in a transaction after the distribution
that causes the distribution to be taxable to Southern Company or its
stockholders, we will be required to indemnify Southern Company for any
resulting taxes. The amount of any indemnification payments would be substantial
and we likely would not have sufficient financial resources to achieve our
growth strategy.

28
<PAGE> 32

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 58,000,000 shares of
common stock in this offering will be approximately $884 million (approximately
$1.017 billion if the underwriters' over-allotment option is exercised in full),
based on an assumed initial public offering price of $16.00 per share and after
deducting underwriting discounts and commissions. We estimate that our proceeds
from the concurrent sale of 6,000,000 of Convertible Trust Preferred Securities
will be approximately $300 million (approximately $345 million if the
underwriters' over-allotment option is exercised in full), based on an assumed
initial public offering price of $50 per preferred security.

We intend to use a portion of the net proceeds from these offerings to
repay commercial paper balances, which were approximately $389 million with a
weighted average interest rate of approximately 7.0% at June 30, 2000. In
addition, we intend to use a portion of the net proceeds to repay a short-term
loan of $450 million as of June 30, 2000 drawn against a 364-day Bank of America
credit facility with an interest rate of approximately 7.3%. We will use any
remaining proceeds from these offerings for general corporate purposes.

The borrowings from the Bank of America credit facility were used to pay
$450 million of the $503 million dividend to Southern Company. The commercial
paper borrowings were used to pay $53 million of the $503 million dividend to
Southern Company, with the balance used for working capital.

No proceeds of these offerings will be distributed to Southern Company.

DIVIDEND POLICY

We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for a discussion of the
limitations of our subsidiaries to pay dividends to us.

In 1999, we paid cash dividends totalling $165 million to Southern Company.
On May 26, 2000, we paid a cash dividend to Southern Company in the amount of
$450 million, funded by short-term borrowings. On July 7, 2000, we paid an
additional cash dividend to Southern Company in the amount of $53 million,
funded by additional commercial paper borrowings. These dividends were
authorized under an order issued by the SEC which allows us to pay dividends out
of unearned surplus.

29
<PAGE> 33

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000. Our
capitalization is presented:

- on an actual basis;

- on a pro forma basis to reflect:

- the transfer of our SE Finance and Capital Funding businesses to
Southern Company including reducing cash and cash equivalents by $30
million, current portion of non-recourse long-term debt by $24 million,
non-recourse long-term debt by $402 million, subsidiary obligated
mandatorily redeemable preferred securities by $950 million, and
stockholder's equity by $258 million, and

- the borrowing of $53 million to finance the cash dividends to Southern
Company that were paid on July 7, 2000;

- on a pro forma, as adjusted basis to reflect the receipt and application
of the estimated net proceeds from the sale of 58,000,000 shares of
common stock in this offering, at an assumed initial public offering
price of $16.00 per share; and
- on a pro forma, as further adjusted basis to reflect the receipt and
application of the estimated net proceeds from the concurrent sale of
6,000,000 preferred securities, at an assumed public offering price of
$50 per preferred security.

You should read the information in this table together with our
consolidated financial statements and the related notes and with "Selected
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------
PRO FORMA,
PRO FORMA, AS FURTHER
ACTUAL PRO FORMA AS ADJUSTED ADJUSTED
------- --------- ----------- ----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 691 $ 661 $ 661 $ 953
======= ======= ======= =======
Non-recourse short-term debt(1)............................. $ 1,639 $ 1,639 $ 1,639 $ 1,639
Current portion of non-recourse long-term debt(1)........... 234 210 210 210
Current portion of long-term debt........................... 32 32 32 32
Short-term debt............................................. 939 992 108 100
------- ------- ------- -------
Total short-term debt..................................... 2,844 2,873 1,989 1,981
------- ------- ------- -------
Non-recourse long-term debt(1).............................. 4,190 3,788 3,788 3,788
Senior notes and other long-term debt....................... 800 800 800 800
------- ------- ------- -------
Total long-term debt...................................... 4,990 4,588 4,588 4,588
------- ------- ------- -------
Subsidiary obligated mandatorily redeemable preferred
securities(2)............................................. 1,026 76 76 76
Minority Interest
Company obligated mandatorily redeemable securities of a
subsidiary holding solely parent company debentures..... 300
Stockholder's equity........................................
Common stock, $.01 par value.............................. 3 3 4 4
Additional paid-in capital.................................. 2,872 2,625 3,508 3,508
Accumulated other comprehensive loss........................ (111) (111) (111) (111)
Retained earnings........................................... 11 -- -- --
------- ------- ------- -------
Total capitalization...................................... $11,635 $10,054 $10,054 $10,346
======= ======= ======= =======
</TABLE>

-------------------------

(1) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.

(2) Includes $950 million of preferred securities and capital securities issued
by special purpose financing subsidiaries held by Capital Funding, the
proceeds of which were loaned to Southern Company. Southern Company pays
interest on subordinated notes issued in favor of the financing
subsidiaries, which payments are used to pay dividends on those preferred or
capital securities. Southern Company also has guaranteed payments due under
the terms of those securities. These securities are non-recourse to us.
Capital Funding will be transferred to Southern Company prior to the
completion of this offering. The remaining $76 million of these securities
were issued by a special purpose finance subsidiary of SIUK. They are also
non-recourse to us but they are not guaranteed by Southern Company and will
remain outstanding after this offering.

30
<PAGE> 34

DILUTION

Our pro forma net tangible book value at June 30, 2000 was approximately
$(274) million, or $(1.00) per share. After giving effect to our sale of
58,000,000 shares of common stock in this offering at an assumed initial public
offering price of $16.00 per share and after deducting an assumed underwriting
discount, our pro forma as adjusted net tangible book value at June 30, 2000
would have been approximately $613 million, or $1.86 per share. This represents
an immediate increase in pro forma net tangible book value of $2.86 per share to
our existing stockholder and an immediate dilution in pro forma net tangible
book value of $14.14 per share to new investors purchasing shares of common
stock in this offering. The following table illustrates this dilution per share:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 16.00
Pro forma net tangible book value per share
as of June 30, 2000.................................... $(1.00)
Increase in pro forma book value per share
attributable to new investors.......................... 2.86
------
Pro forma net tangible book value
per share after this offering.......................... 1.86
-------
Dilution in pro forma net tangible book value
per share to new investors............................. $ 14.14
=======
</TABLE>

The discussion and table above assume no exercise of options granted
pursuant to the conversion of units awarded under our value creation plan. It
also assumes no issuance of shares reserved for future issuance under our
employee stock purchase plan. See the sections of this prospectus entitled
"Management -- Value Creation Plan Conversion" and "-- Southern Energy Employee
Stock Purchase Plan." To the extent that any options are granted and exercised,
there will likely be further dilution to new investors.

The following table sets forth, as of June 30, 2000 on the pro forma as
adjusted basis described above, the differences between the number of shares of
common stock purchased from us, the total price paid and average price per share
paid by Southern Company, our existing stockholder, and by the new investors in
this offering at an assumed initial public offering price of $16.00 per share,
before deducting the estimated underwriting discounts and commissions and
offering expenses payable by us.

<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED (DOLLARS IN MILLIONS)
------------------------ --------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder................ 272,000,000 82.4% $2,875 75.6% $10.57
New investors....................... 58,000,000 17.6 928 24.4 16.00
----------- ----- ------ ----- ------
Total.......................... 330,000,000 100.0% $3,803 100.0% $11.52
=========== ===== ====== ===== ======
</TABLE>

If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:

- the number of shares of common stock held by our existing stockholder
will decrease to approximately 80.3% of the total number of shares of
common stock outstanding; and

- the number of shares held by new investors will increase to 66,700,000
shares or approximately 19.7% of the total number of shares of our common
stock outstanding after this offering.

31
<PAGE> 35

SELECTED FINANCIAL INFORMATION

The following tables present our selected consolidated financial
information. The information set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
to those statements included in this prospectus. Our consolidated income
statement data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999
and the selected balance sheet data as of December 31, 1995, 1996, 1997, 1998
and 1999 are derived from our audited consolidated financial statements, which
were audited by Arthur Andersen LLP, independent public accountants. The
historical financial information may not be indicative of our future performance
and does not reflect what our financial position and results of operations would
have been had we operated as a separate, stand-alone entity during the periods
presented.

The following selected financial information should also be read in light
of the following:

- The write-down for 1998 includes write-downs of our investments in our
Argentine subsidiary, Alicura, and our Chilean subsidiary, EDELNOR, to
adjust for the difference between the carrying value of the assets and
the fair market value. The write-down for 1999 and the six months ended
June 30, 2000 includes further write-downs of our investments in Alicura
and EDELNOR to maintain the carrying value at the fair market value as
well as our interest in a $31 million write-down at Western Power
Distribution relating to impaired metering assets.

- On April 17, 2000, we decided to transfer to Southern Company our leasing
business, SE Finance. As a result, we have included the historical
results of operations of the related subsidiaries as a discontinued
operation.

- The consolidated income statement data for the six months ended June 30,
1999 and 2000 and the balance sheet data as of June 30, 2000 have been
derived from our unaudited financial statements, which were prepared on a
basis consistent with our audited consolidated statements.

32
<PAGE> 36

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------ ------ ------- ------- ------- ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues....................................... $ 584 $1,600 $3,750 $ 1,819 $ 2,268 $ 1,025 $1,194
------- ------ ------ ------- ------- ------- ------
Operating expenses:
Fuel................................................... 17 75 74 47 392 109 344
Purchased power........................................ 258 873 2,813 844 545 387 54
Maintenance............................................ 19 71 74 80 116 49 68
Depreciation and amortization.......................... 46 95 182 221 270 111 155
Selling, general and administrative.................... 108 174 188 160 253 109 146
Write down of assets................................... -- -- -- 308 60 5 14
Other.................................................. 70 162 147 164 188 81 102
------- ------ ------ ------- ------- ------- ------
Operating income......................................... 66 150 272 (5) 444 174 311
------- ------ ------ ------- ------- ------- ------
Other income (expense):
Interest income........................................ 13 16 138 146 172 80 81
Interest expense....................................... (64) (133) (345) (430) (502) (231) (300)
Gain on sales of assets................................ 11 66 24 41 313 9 --
Equity in income of affiliates......................... 10 13 58 135 111 147 63
Receivables recovery................................... -- -- -- 29 64 12 --
Other, net............................................. (1) 28 33 29 72 21 40
------- ------ ------ ------- ------- ------- ------
Total other income (expense)......................... (31) (10) (92) (50) 230 38 (116)
------- ------ ------ ------- ------- ------- ------
Income (loss) from continuing operations before income
taxes and minority interest............................ 35 140 180 (55) 674 212 195
Provision (benefit) for income taxes:
Continuing operations.................................. 8 54 27 (123) 129 34 (29)
Windfall profits tax(1)................................ -- -- 148 -- -- -- --
Minority interest........................................ 13 13 29 80 183 36 43
------- ------ ------ ------- ------- ------- ------
Income (loss) from continuing operations................. $ 14 $ 73 $ (24) $ (12) $ 362 142 181
Income from discontinued operations, net of income tax
benefit of $10 in 1997, $22 in 1998, $15 in 1999, and
$7 and $9 for the six months ended June 30, 1999 and
2000, respectively..................................... -- -- 8 12 10 7 13
Income (loss) before extraordinary item.................. 14 73 (16) -- 372 149 194
------- ------ ------ ------- ------- ------- ------
Extraordinary gain on early extinguishment of debt, net
of income tax of $2 in 1995 and $5 in 1996............. 4 8 -- -- -- -- --
------- ------ ------ ------- ------- ------- ------
Net income (loss)........................................ $ 18 $ 81 $ (16) $ -- $ 372 $ 149 $ 194
======= ====== ====== ======= ======= ======= ======
EARNINGS PER SHARE INFORMATION:
BASIC:
From continuing operations............................. $ 0.05 $ 0.27 $(0.09) $ (0.04) $ 1.33 $ 0.52 $ 0.67
From discontinued operations........................... -- -- 0.03 0.04 0.04 0.03 0.04
From extraordinary gain................................ 0.02 0.03 -- -- -- --
------- ------ ------ ------- ------- ------- ------
Net income........................................... $ 0.07 $ 0.30 $(0.06) $ -- $ 1.37 $ 0.55 $ 0.71
======= ====== ====== ======= ======= ======= ======
PRO FORMA BASIC(2):
From continuing operations............................. $ 1.19 $ 0.60
From discontinued operations........................... 0.04 0.04
------- ------
Net income........................................... $ 1.23 $ 0.64
======= ======
PRO FORMA DILUTED(2):
From continuing operations............................. $ 1.19 $ 0.60
From discontinued operations........................... 0.03 0.04
------- ------
Net income........................................... $ 1.22 $ 0.64
======= ======
</TABLE>

33
<PAGE> 37

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------ ------ ------- ------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 664 $ 161 $ 398 $ 561 $ 323 $ 691
Property, plant and equipment, net.......................... 2,312 2,627 4,255 4,691 6,025 5,912
Investments................................................. 431 219 1,159 1,540 1,490 1,550
Total assets............................................ 4,511 4,564 10,630 12,054 13,863 14,308
Non-recourse debt(4)........................................ 1,702 1,753 4,615 5,101 6,202 6,063
Notes payable to Southern Company........................... 422 -- 830 926 -- --
Total debt.............................................. 2,124 1,753 5,445 6,027 7,152 7,834
Subsidiary obligated mandatorily redeemable preferred
securities(5)............................................. -- -- 682 1,033 1,031 1,026
Stockholder's equity........................................ 778 988 2,132 2,642 3,102 2,775
</TABLE>

(1) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.

(2) Pro forma basic earnings per share information gives effect to the dividends
we paid to Southern Company in 2000 as though they had been paid during the
periods presented, in accordance with SEC Staff Accounting Bulletin Topic
1:B:3. Pro forma diluted earnings per share information gives effect to the
conversion of the Southern Energy value creation plan units outstanding at
December 31, 1999 and June 30, 2000, respectively into options to purchase
our standard common stock.

(3) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it is
a widely accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA,
as defined, is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with GAAP in
the United States and is not indicative of operating income or cash flow
from operations as determined under GAAP. Our method of computation may or
may not be comparable to other similarly titled measures by other companies.

(4) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.

(5) As of June 30, 2000, this total included $950 million of preferred
securities and capital securities issued by special purpose financing
subsidiaries held by Capital Funding, the proceeds of which were loaned to
Southern Company. Southern Company pays interest on subordinated notes
issued in favor of the financing subsidiaries, which payments are used to
pay dividends on those preferred securities. In addition, Southern Company
has guaranteed payments due under the terms of those securities. These
securities are non-recourse to us. In connection with our separation from
Southern Company, Capital Funding will be transferred to Southern Company.
The remaining $76 million of these securities were issued by a special
purpose finance subsidiary of SIUK. They are also non-recourse to us but
they are not guaranteed by Southern Company and they will remain outstanding
after this offering.

34
<PAGE> 38

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

You should read the following discussion in conjunction with "Risk
Factors," "Summary Historical Financial and Operating Data," "Selected Financial
Data" and our consolidated financial statements and the related notes included
elsewhere in this prospectus.

OVERVIEW

We are one of the world's largest independent power providers with
regionally based businesses in the Americas, Europe and the Asia-Pacific region.
Through our 60% interest in SCEM, we are a leading energy marketer in the United
States. We meet our customers' specific requirements by integrating electricity
generation, management of gas assets, fuel procurement and marketing of energy
and energy-linked commodities. We also provide services to manage risk
associated with market price fluctuations in energy and energy-linked
commodities.

To support our businesses we have built and acquired a portfolio of power
plants, an electric distribution company and electric utilities. Through these
businesses, we have a net ownership interest in 13,212 MW of generation
capacity, 12,775 MW of which we operate. We have ownership interests in
electricity distribution companies and integrated utilities which sell or
distribute electricity to over eight million customers.

Our current operations in North America include six major power generation
subsidiaries and SCEM. We own or control generation capacity totaling 7,389 MW,
which represents approximately 60% of our worldwide total.

In Europe, we have a 49% economic interest in WPD, an electric distribution
company in southwestern England, and we own 26% of Bewag, the electric utility
that serves Berlin. Together, these companies own 3,118 MW of generation
capacity and provide electricity to approximately 3.5 million customers. Our net
ownership interest in WPD and Bewag's generation capacity is 848 MW.

In the Asia-Pacific region, we have a subsidiary that develops and owns
independent power projects in the Philippines and China with net ownership
interests in 3,159 MW of generation capacity, 2,308 MW of which we operate.

See Note 16 to our consolidated financial statements for information
regarding segment disclosure.

EFFECTS OF CERTAIN ORGANIZATIONAL CHANGES

The following discussion and analysis of financial condition and results of
operations should be read in light of the organizational changes related to our
marketing and risk management operations and the resulting impacts on operating
revenues and expenses. On September 1, 1997, we formed SCEM, a joint venture
with Vastar, and both parties contributed substantially all of their North
American gas marketing and risk management assets to the venture. On January 1,
1998, we and Vastar contributed our North American electric marketing and risk
management operations into the SCEM joint venture. We currently account for our
investment in this joint venture under the equity method of accounting as Vastar
has significant participation rights in SCEM. As a result, our share of SCEM's
earnings is reported in other income in 1998 and 1999. Prior to the formation of
the joint

35
<PAGE> 39

venture, our marketing and risk management operations were consolidated and,
during 1997, contributed approximately $1,982 million in operating revenues and
$2,016 million in operating expenses to our consolidated results of operations.
For this period, power sales were the primary component of marketing and risk
management revenues, and purchased power expenses were the primary component of
operating expenses.

In September 1999, our U.K. subsidiary sold its supply business to London
Electricity plc for L160 million ($264 million) and the assumption of certain
liabilities. The supply business retained the name SWEB and we renamed the
remaining distribution business Western Power Distribution, which we refer to in
this prospectus as "WPD." As a result of the sale, we recorded a gain of $286
million prior to related expenses, minority interest and income taxes and a gain
of $78 million after these items.

Our operating revenues and expenses are primarily driven by the operations
of our controlled subsidiaries, which are consolidated for accounting purposes.
Significant consolidated subsidiaries include Southern Energy California, L.L.C.
(SE California), our wholly owned subsidiaries in New York (SE New York) and New
England (SE New England), State Line Energy, L.L.C. (State Line Energy), WPD,
Southern Energy Asia-Pacific Limited (SE Asia-Pacific), Alicura, EDELNOR and
Freeport Power Company Limited (Freeport Power). Investments in companies over
which we exercise significant influence but do not control are accounted for
using the equity method of accounting and, accordingly, the operating results of
these entities impact other income in the form of equity in income of
affiliates. Major affiliates accounted for using the equity method include SCEM,
Birchwood, Bewag, SE Asia-Pacific's investment in the Shajiao C facility, CEMIG,
PowerGen and SIPD.

SEPARATION FROM SOUTHERN COMPANY

On April 17, 2000, Southern Company announced a plan to make us, its wholly
owned subsidiary, into an independent, publicly traded company focused on
competing in the global energy markets. After the completion of this offering,
Southern Company will own over 80% of our outstanding common stock. Southern
Company has also announced its intention to distribute to its stockholders all
of its remaining interest in us within 12 months after the completion of this
offering, although we cannot assure you whether or when this distribution will
occur. We have entered into various agreements with Southern Company related to
interim and ongoing relationships between the two companies. For a description
of these agreements, see "Agreements Between Us and Southern Company."

BASIS OF PRESENTATION

Our consolidated financial statements include allocations to us of certain
Southern Company corporate assets, including pension assets; liabilities,
including profit sharing, pension and non-qualified deferred compensation
obligations; and expenses, including centralized engineering services, legal,
accounting and human resources, insurance services, information technology
services and other Southern Company corporate and infrastructure costs. The
expense allocations, which we believe meet the requirements of PUHCA, have been
determined on bases that Southern Company and we considered to be a reasonable
reflection of the utilization of the services provided to us or the benefit
received by us. The expense allocation methods include relative sales,
investment, headcount, square footage, transaction processing costs, adjusted
operating expenses and others.

On April 17, 2000, our board of directors authorized the transfer of our
leasing business, SE Finance, to Southern Company. As a result, we have included
the historical results of operations of the related subsidiaries as a
discontinued operation in the consolidated statements of income. Additionally,
because we intend to transfer our Capital Funding subsidiary to Southern Company
and

36
<PAGE> 40

dispose of our investments in Alicura and EDELNOR, future results of operations
may not be comparable to the historical amounts presented after we sell these
investments.

The financial information presented in this prospectus is not indicative of
our future financial position, results of operations or cash flows nor is it
necessarily indicative of what our financial position, results of operations or
cash flows would have been had we been a separate, stand-alone entity for the
periods presented. The financial information presented in this prospectus does
not reflect the many significant changes that will occur in our funding and
operations as a result of our becoming a stand-alone entity, the offerings and
the distribution.

RESULTS OF OPERATIONS

The following table sets forth financial data as a percentage of operating
revenues for the years ended December 31, 1997, 1998 and 1999 and the quarters
ended June 30, 1999 and 2000.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating revenues........................... 100% 100% 100% 100% 100%
OPERATING EXPENSES:
Fuel......................................... 2.0 2.6 17.3 10.6 28.8
Purchased power.............................. 75.0 46.4 24.0 37.8 4.5
Maintenance.................................. 2.0 4.4 5.1 4.8 5.7
Depreciation and amortization................ 4.8 12.2 11.9 10.8 13.0
Selling, general and administrative.......... 5.0 8.8 11.2 10.6 12.2
Write-down of assets......................... 0.0 16.9 2.6 0.5 1.2
Other........................................ 3.9 9.0 8.3 7.9 8.5
---- ----- ----- ----- -----
Total operating expenses................... 92.7 100.3 80.4 83.0 73.9
Operating income (loss)...................... 7.3 (0.3) 19.6 17.0 26.1
---- ----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest income.............................. 3.7 8.0 7.5 7.8 6.8
Interest expense............................. (9.2) (23.6) (22.1) (22.5) (25.1)
Gain on sales of assets...................... 0.6 2.2 13.8 0.9 0.0
Equity in income of affiliates............... 1.5 7.4 4.9 14.3 5.3
Receivables recovery......................... 0.0 1.6 2.8 1.2 0.0
Other, net................................... 0.9 1.6 3.2 2.0 3.4
---- ----- ----- ----- -----
Total other income (expense)............... (2.5) (2.8) 10.1 3.7 (9.6)
---- ----- ----- ----- -----
Income (loss) from continuing operations
before income taxes and minority
interest................................... 4.8 (3.1) 29.7 20.7 16.5
</TABLE>

37
<PAGE> 41

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PROVISION (BENEFIT) FOR INCOME TAXES:
Continuing operations........................ 0.7 (6.8) 5.7 3.3 (2.4)
Windfall profits tax......................... 3.9 0.0 0.0 0.0 0.0
Minority interest............................ 0.8 4.4 8.0 3.5 3.6
---- ----- ----- ----- -----
(Loss) income from continuing operations..... (0.6) (0.7) 16.0 13.9 15.3
Income from discontinued operations, net of
income tax benefit of $10 million in 1997,
$22 million in 1998, $15 million in 1999,
and $7 million and $9 million for the six
months ended June 30, 1999 and 2000,
respectively............................... 0.2 0.7 0.4 0.7 1.1
---- ----- ----- ----- -----
Net (loss) income.......................... (0.4)% 0.0% 16.4% 14.6% 16.4%
==== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1999

OPERATING REVENUES. Our operating revenues were $1,194 million for the
first six months of 2000, an increase of $169 million, or 16.5%, from the same
period in 1999. This increase was primarily attributable to a $470 million
increase in operating revenues in the Americas region, the majority of which
resulted from our North American acquisitions in California and New York. In
addition, the commencement of operations of our Sual plant in the Philippines
contributed revenues of $119 million during the first six months of 2000. Those
increases were primarily offset by a reduction of $422 million in revenues at
WPD, primarily as a result of the 1999 sale of the SWEB supply business.

OPERATING EXPENSES. Operating expenses for the first six months of 2000
were $883 million, an increase of $32 million, or 4%, from the same period in
1999. This increase is primarily due to the acquisitions of generating assets in
New York and California and the commencement of commercial operations of our
Sual plant in the Philippines in 1999, and offset by the decrease in operating
expenses for WPD, primarily because of the sale of the SWEB supply business.

OTHER INCOME (EXPENSE). Other expense was $116 million for the first six
months of 2000 compared to other income of $38 million for the first six months
of 1999. The following factors were responsible for this $154 million increase
in other expense:

- Interest expense for the first six months of 2000 was $300 million, an
increase of $69 million, or 30%, from the same period in 1999 due to
higher borrowings to finance acquisitions.

- Equity in income of affiliates for the first six months of 2000 was $63
million, a decrease of $84 million, or 57%, from the same period in 1999
primarily due to a decrease in our income from China, reduced earnings
from our energy trading and marketing joint venture and continued price
competition in Germany.

- Income from recovery of receivables during the first six months of 1999
was $12 million. This amount represents successful resolution of
negotiations with Hopewell Holdings Ltd. related to a warranty claim
settlement.

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- Other, net for the first six months of 2000 was $40 million, an increase
of $19 million, or 90%, from the same period in 1999. This increase is
primarily the result of the settlement of a commercial dispute with an
outside advisor.

INCOME TAXES. The tax benefit for the first six months of 2000 was $29
million compared to tax expense of $34 million for the same period in 1999, a
decrease of $63 million. This decrease is primarily due to a tax provision of
$28 million at SE Asia-Pacific in 1999 related to operations in China. In
addition, in February 2000 we reached an agreement with the United Kingdom
Inland Revenue relating to prior year tax computations at WPD. This agreement
resulted in a $20 million reduction in taxes. In addition, we recognized
increased tax benefits during the first six months of 2000 as a result of
additional debt borrowings to finance acquisitions.

MINORITY INTEREST. Minority interest in income for the first six months of
2000 was $43 million, an increase of $7 million, or 19.4%, from the same period
in 1999. The increase is primarily the result of the minority share of the tax
settlement at WPD.

NET INCOME. Net income for the first six months of 2000 was $194 million,
an increase of $45 million, or 30.2%, from the same period in 1999. The increase
in net income is attributable to our business segments as follows:

AMERICAS

Net income from our Americas operations totaled $28 million for the
first six months of 2000, and $22 million for the same period in 1999. This
change was primarily due to the devaluation of the Real in 1999 and an
increase in the tariff granted by the government from our investment in
Brazil in 2000. This was offset by a small decrease in earnings from our
North American operations.

EUROPE

Net income from our European operations totaled $43 million for the
first six months of 2000, a decrease of $24 million from the same period in
1999. The decrease is primarily the result of lower margins at Bewag and
start-up costs incurred by our European marketing and risk management
activities. WPD's net income for the first six months of 2000 improved
slightly as compared to the same period in 1999. This was primarily the
result of a favorable U.K. tax settlement. This was offset by the sale of
the supply business in 1999.

ASIA-PACIFIC

Our net income in Asia-Pacific for the first six months of 2000
totaled $147 million, representing an increase of $62 million from the same
period in 1999. The significant increase is primarily related to the
commencement of operations of the Sual plant in October 1999 and increased
contributions from our operations in China.

CORPORATE

After tax corporate costs produced a net loss of $37 million for the
first six months of 2000 compared to a $32 million net loss for the same
period in 1999. The increased loss primarily reflects additional interest
expense from corporate debt borrowed in 1999 to finance acquisitions.

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SE FINANCE

Net income for the first six months of 2000 was $13 million, an
increase of $6 million from the same period in 1999. This increase is due
to additional income from leases that were not established in 1999.

YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998

OPERATING REVENUES. Our operating revenues were $2,268 million in 1999, an
increase of $449 million, or 25%, from 1998. This increase was primarily
attributable to a $678 million increase in the Americas region, the majority of
which resulted from our North American acquisitions in New England, California
and New York. In addition, the commencement of commercial operations of our Sual
plant in the Philippines contributed revenues of $48 million in 1999. Those
increases were partially offset by a reduction of $297 million, or 23%, in
revenues at WPD, primarily as a result of the 1999 sale of the SWEB supply
business. WPD estimates that its annual revenues will decrease by approximately
$60 million as the result of the distribution price review, which is discussed
in the section of this prospectus entitled "Business -- Europe -- Western Power
Distribution." As a result, WPD has attempted to maximize efficiency, in part by
reducing staffing levels.

OPERATING EXPENSES. Excluding the write-down of assets, our operating
expenses for 1999 were $1,764 million, an increase of $248 million, or 16%, from
1998. This increase was primarily attributable to a $574 million increase in the
Americas region, the majority of which resulted from our newly-acquired North
American business units. WPD's operating expenses decreased by $343 million, or
32%, primarily because of the sale of the SWEB supply business and cost
reduction efforts in 1999.

WRITE-DOWN OF ASSETS. The $308 million pre-tax write-down of assets in
1998 resulted from our decision to sell our investments in Alicura and EDELNOR.
This charge reduced the carrying value of these assets to their estimated fair
market value. The $60 million write-down of assets in 1999 consisted of two
principal components. First, as Alicura and EDELNOR continued to produce income
pending their sale, additional write-downs totaling $28 million were recorded to
avoid increasing the carrying value of these assets above their estimated fair
values. Second, we recorded a $32 million write-down primarily related to WPD's
metering assets to reflect their reduced value as the United Kingdom metering
business becomes competitive. Based on the proposed changes in regulation, we
determined that the assets were impaired by comparing associated undiscounted
cash flows to the carrying value of metering assets. As a result, we recorded an
impairment loss to reflect the amount by which the carrying value of metering
assets exceeds their fair market value. The fair market value was determined by
computing the present value of estimated future cash flows to be generated by
the assets.

OTHER INCOME (EXPENSE). Other income was $230 million in 1999, an increase
of $280 million, reflecting a large increase in income from an overall expense
in 1998. The following factors were responsible for this increase:

- Interest expense for 1999 was $502 million, an increase of $72 million,
or 17%, from 1998 due to higher borrowing to finance acquisitions.

- The increase in gain on sales of assets reflects a gain of $286 million
relating to the 1999 sale of the SWEB supply business, before related
expenses, minority interest and taxes. This is further explained in Note
12 to our consolidated financial statements included in this prospectus.

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<PAGE> 44

- Equity in income of affiliates for 1999 was $111 million, a decrease of
$24 million, or 18%, from 1998. This decline is primarily due to a $50
million reduction in income from Bewag as a result of provisions recorded
there for employee severance and early retirement, partially offset by
increases from our operations in China.

- Income from recovery of receivables in 1999 was $64 million, an increase
of $35 million, or 121%, from 1998. These amounts represent successful
resolution of negotiations that allowed us to recover certain receivables
previously determined uncollectible, as further explained in Note 1 to
our consolidated financial statements included in this prospectus.

- Other, net for 1999 was $72 million, an increase of $43 million, or 148%,
from 1998. This increase resulted from several factors. We recognized an
insurance gain of $23 million in 1999 resulting from the receipt of
insurance proceeds in excess of book value of assets destroyed in an
explosion at the State Line plant in Indiana. Additionally, we recognized
higher equipment rental income at WPD and business interruption insurance
proceeds related to an equipment failure at EDELNOR.

INCOME TAXES. The provision for income taxes for 1999 was $129 million, an
increase of $252 million from the $123 million tax benefit recorded for 1998.
This increase is due in part to higher income from operations and the SWEB
supply business sale. In addition, the 1998 benefit reflects the tax effect of
the write-down of South American investments.

MINORITY INTEREST. Minority interest in income for 1999 was $183 million,
an increase of $103 million from 1998. This increase primarily relates to the
gain on the sale of the SWEB supply business.

NET INCOME. Net income for 1999 was $372 million, as compared to $0 for
1998. The increase in net income is attributable to our business segments as
follows:

AMERICAS

We recorded net income of $96 million in 1999 as compared to a net
loss of $180 million in 1998. This increase primarily resulted from the
1998 write down of $200 million, after tax, related to Alicura and EDELNOR
compared with write downs of $18 million, after tax, in 1999 to maintain
those investments for sale at fair value. The remaining increase resulted
from earnings attributable to our North American acquisitions in New
England, California and New York, the commencement of operations of
Southern Producer Services in 1999 and a gain from insurance proceeds
related to the 1998 fire and explosion at the State Line facility.

EUROPE

Net income from our European operations totaled $170 million for 1999,
an increase of $29 million over the prior year. The increase in 1999
earnings reflects a $78 million gain on the sale of the SWEB supply
business in the third quarter, offset by a total of $50 million in charges
at Bewag associated with personnel who accepted voluntary severance and
early retirement packages and the write down of WPD's metering assets
partially offset by cost reduction efforts at WPD.

ASIA-PACIFIC

Our net income in Asia-Pacific for 1999 totaled $175 million,
representing an increase of $107 million over the prior year. The
significant increase primarily related to the commencement

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of operations of the Sual plant in October 1999, increased contributions
from our operations in China and successful resolution of negotiations that
allowed us to recover certain receivables previously determined to be
uncollectible.

CORPORATE

After tax corporate costs produced a net loss of $69 million in 1999
versus a $29 million net loss for 1998. The increased loss primarily
reflects additional interest expense from corporate debt incurred during
1999 to finance acquisitions.

YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997

OPERATING REVENUES. Our operating revenues were $1,819 million in 1998,
representing a decrease of $1,931 million, or 51%, from $3,750 million in 1997.
This decline is primarily explained by a change to the equity method of
accounting for our energy marketing and risk management activities upon the
formation of SCEM. Excluding revenues associated with marketing and risk
management activities, operating revenues for 1998 increased approximately $51
million, or 3%, from comparable operating revenues of $1,768 million in 1997.
This increase included a $40 million increase in operating revenues related to
our acquisition of the State Line generating facility in December 1997 and a $26
million increase in our Asia-Pacific operations primarily due to an additional
month of ownership in 1998, offset by a $16 million decrease in operating
revenues at Alicura due to low water inflow to the reservoir which serves this
hydroelectric facility.

OPERATING EXPENSES. Our operating expenses were $1,824 million in 1998,
representing a decrease of $1,654 million, or 48%, from $3,478 million in 1997.
This decrease resulted primarily from a $1,969 million, or 70%, decrease in
purchased power expenses from $2,813 million in 1997 to $844 million in 1998, as
a result of the change to the equity method of accounting for our energy
marketing and risk management activities. Excluding the operating expenses
associated with marketing and risk management activities, operating expenses for
1998 increased $358 million, or 25%, from comparable operating expenses of
$1,462 million in 1997. The increase in expenses net of purchased power is
primarily due to a $308 million write-down of South American assets and
increased expenses associated with State Line Energy which was acquired in
December 1997.

OTHER INCOME (EXPENSE). Other expense was $50 million in 1998,
representing a $42 million, or 46%, decrease from $92 million in 1997. The
decrease in other expense was primarily from a $77 million increase in equity in
income of affiliates from 1997 to 1998. This increase included $47 million
resulting from a full year of ownership of Bewag, a $26 million increase at
Shajiao C resulting from improved operations and an additional month of
ownership in 1998 and $7 million associated with the ownership of CEMIG. The
decrease in other expense is also related to the recovery of certain receivables
in 1998 previously deemed to be uncollectible. At the time of the acquisition of
SE Asia-Pacific, we had fully reserved for the value of these receivables due to
significant uncertainties as to their collectibility. Also contributing to the
decrease in other expense was an approximately $20 million gain on the sale of a
minority interest in WPD and increased interest income of $8 million.

Offsetting these items, our interest expense increased $85 million, or 25%,
from $345 million in 1997 to $430 million in 1998. This increase primarily
reflects the growth in long-term debt due to financing requirements for new
investments, including our investments in SE Asia-Pacific and Bewag, and
additional funding required by existing projects to finance construction
activities.

INCOME TAXES. We recorded a benefit related to income taxes in 1998 of
$123 million compared to a provision for income taxes of $175 million in 1997.
The 1998 benefit is primarily attributable to

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<PAGE> 46

the income tax impact of the write down of our Argentine and Chilean assets
discussed above. The 1997 provision for income taxes was impacted significantly
by the windfall profits tax assessed in the United Kingdom (See
"Business -- Europe -- Western Power Distribution").

MINORITY INTEREST. Our minority interest was $80 million in 1998,
representing a $51 million, or 176%, increase from $29 million in 1997. The
increase was attributable to improved operating performance at WPD, the impact
of the windfall profits tax on minority interest in 1997 and our divestiture of
an additional economic interest in WPD during June 1998. The increase is also
related to the improved performance of our other majority owned consolidated
affiliates.

NET INCOME. Net income for 1998 was $0, as compared to a net loss of $16
million in 1997. The increase in net income is attributable to our business
segments as follows:

AMERICAS

We recorded a net loss of $180 million in 1998 as compared to net
income of $2 million in 1997 in the Americas region. This decrease was
primarily related to a $200 million, after tax, write down of our
investments in Alicura and EDELNOR as a result of our decision to sell
those assets. In addition, in 1997 final construction profits of $20
million ($10 million, or 50%, of which was eliminated in consolidation)
were recorded related to construction of a coal-fired facility in King
George County, Virginia (Birchwood), which we built under a fixed price
contract for a 50 percent owned and unconsolidated partnership. These
decreases to net income were partially offset by increases in net income
related to the December 1997 acquisition of State Line and the January 1998
investment in CEMIG.

EUROPE

Net income from Europe was $141 million for 1998, an increase of $189
million from the net loss of $48 million for 1997. This improvement was
primarily due to the 1997 recognition of $111 million, net of minority
interest, in windfall profits tax imposed on WPD by the new Labor
government of Great Britain. Other factors contributing to the 1998
earnings improvement included a gain on the sale of a 26% minority interest
in WPD, improved operating income at WPD due to higher margins in the
supply business and ongoing cost control efforts and a full year's income
from our investment in Bewag.

ASIA-PACIFIC

Net income from Asia-Pacific was $68 million for 1998, an increase of
$29 million from net income of $39 million in 1997. This increase was
partially due to a full year's ownership of our Asia-Pacific operations in
1998, versus just six months at 80% ownership and five months at 100%
ownership in 1997. Improved operating performance in the Philippines and
successful resolution of negotiations with our supplier and partners in
China that allowed us to recover certain receivables previously determined
to be uncollectible also contributed to increased income for 1998.

CORPORATE

After tax corporate costs produced a net loss of $29 million in 1998
compared to a $9 million net loss in 1997. This change is primarily related
to increased interest expense from corporate debt.

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LIQUIDITY AND CAPITAL RESOURCES

Historically, we have obtained cash from operations, borrowings under
credit facilities, issuances of commercial paper and senior notes, borrowings
and capital contributions from Southern Company and proceeds from non-recourse
project financing. These funds have been used to finance operations, service
debt obligations, fund the acquisition, development and/or construction of
generating facilities and distribution businesses, finance capital expenditures
and meet other cash and liquidity needs. Some of the cash receipts associated
with our businesses have been transferred to Southern Company from time to time,
and Southern Company has provided funds to cover our disbursements from time to
time. After this offering, we do not expect to receive any additional funds from
Southern Company or pay cash dividends to Southern Company.

The projects that we develop typically require substantial capital
investment. Some of the projects in which we have an interest have been financed
primarily with non-recourse debt that is repaid from the project's cash flows.
This debt is often secured by interests in the physical assets, major project
contracts and agreements, cash accounts and, in some cases, the ownership
interest in that project subsidiary. These financing structures are designed to
ensure that we are not contractually obligated to repay the project subsidiary's
debt, that is, they are "non-recourse" to us and to our subsidiaries not
involved in the project. However, we have agreed to undertake limited financial
support for some of our project subsidiaries in the form of limited obligations
and contingent liabilities such as guarantees of specified obligations. To the
extent we become liable under these guarantees or other agreements in respect of
a particular project, we may have to use distributions we receive from other
projects to satisfy these obligations.

We intend to use a portion of the net proceeds from this offering and the
concurrent offering of preferred securities to repay commercial paper balances,
which were approximately $390 million with a weighted average interest rate of
approximately 7.1% per annum at June 30, 2000. In addition, we intend to use a
portion of the net proceeds to repay a short-term loan of $450 million as of
June 30, 2000 drawn against a 364-day Bank of America credit facility with an
interest rate of approximately 7.3% per annum. We will use the remaining
proceeds from these offerings for general corporate purposes. The proceeds from
the Bank of America credit facility were used to pay $450 million of the $503
million dividend to Southern Company. The proceeds from the commercial paper
borrowings were used for working capital and payment of $53 million of the $503
million dividend to Southern Company.

Effects of Our Separation From Southern Company

In connection with our separation from Southern Company, Southern Company
will transfer to us most of the Southern Company-owned assets and liabilities
that relate to our business on or prior to the distribution. As part of the
separation, we will transfer to Southern Company our leasing subsidiary SE
Finance. SE Finance had net cash flows from operations of $50 million in the
first six months of 2000, $32 million in 1999, $(37) million in 1998, and $19
million in 1997. While there were no cash flows from investing activities for
the first six months of 2000, SE Finance used cash flows for investing
activities of $271 million in 1999, $185 million in 1998 and $97 million in
1997. It also used cash flows from financing activities of $32 million in the
first six months of 2000, $240 million in 1999, $227 million in 1998 and $82
million in 1997.

Operating Activities

For the first six months of 2000, we generated net cash from operations of
approximately $217 million compared to approximately $153 million for the same
period last year, an increase of

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approximately 42%. This increase is primarily due to an increase in net income
for the period of $45 million.

For the year ended December 31, 1999, we generated net cash from operations
of approximately $515 million compared to approximately $402 million for the
year ended December 31, 1998, an increase of approximately 28%. Cash provided by
operating activities in 1999 resulted primarily from net income adjusted for
non-cash charges for depreciation and amortization, deferred income taxes,
write-down of assets and changes in working capital. Cash flows provided by
operating activities are generally reinvested by our subsidiaries or used for
general corporate purposes, including business development activities.
Additionally, we have used a portion of these cash flows provided by operating
activities to fund investments in some of our subsidiary companies. As a result
of our proposed separation from Southern Company, we have reviewed our current
strategy of deferring distributions from Asia. On July 1, 2000, we adopted a
strategy under which only a portion of the future earnings will be deferred in
order to reinvest funds for further growth in Asia, fund construction efforts or
service debt obligations. The remaining earnings will be repatriated for
reinvestment elsewhere in the world or to service parent debt obligations.

Investing Activities

During the first six months of 2000, we used $261 million in net cash in
investing activities compared to $1,668 million for the same period in 1999, a
decrease of approximately 84%. The decrease is primarily attributable to the
acquisitions of SE California and SE New York as well as the commencement of
operations of our Sual plant in the Philippines, thus reducing the amount of
capital expenditures in the first six months of 2000. We have used cash flows
provided by financing activities primarily to finance investments in our
subsidiaries. From January 1, 1997 through June 30, 2000, excluding the
transactions related to the subsidiary obligated preferred securities, we have
used approximately $7,488 million of cash for our investing activities. During
this period, our domestic and foreign investments totaled $5,755 million,
including $2,106 million for the acquisition of SE Asia-Pacific, $820 million
for the acquisition of a 26% interest in Bewag, $840 million for the acquisition
of SE California, $536 million for the acquisition of SE New England, $476 for
the acquisition of SE New York, $136 million for the purchase of a 3.6% economic
interest in CEMIG, $107 million for our 9.99% interest in SIPD, $68 million for
the acquisition of the State Line generating facility, $57 million for the
purchase of an additional 15% interest in EDELNOR and $64 million for investment
in SCEM. In addition, we invested $2,339 million in capital expenditures. These
cash flows used in investing activities have been partially provided by $679
million of cash from the sale of a portion of our investments in subsidiaries
and dividends from affiliated companies.

Financing Activities

During the six months ended June 30, 2000, our financing activities
provided approximately $418 million in cash. Our financing activities during
this six months included $864 million of proceeds from the issuance of
short-term and long-term debt. These inflows were partially offset by $82
million in payments of long-term debt, $450 million of dividends paid to
Southern Company and $6 million in dividends to minority interests during this
six months.

Our financing activities provided approximately $1,516 million in cash
during 1999. Financing activities for 1999 included $1,730 million of proceeds
from the issuance of short-term and long-term debt and $360 million of capital
contributions from Southern Company. These inflows were partially offset by $503
million in payments of long-term debt, $165 million of dividends paid to
Southern Company and $66 million in dividends to paid minority interests.

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From January 1, 1997 through June 30, 2000, excluding the transactions
related to the subsidiary obligated preferred securities, our financing
activities provided cash totaling approximately $6,603 million. These financing
activities included a total of approximately $4,684 million of proceeds from the
issuance of short-term and long-term debt, net of repayments. During this period
we also received a total of $2,030 million in capital contributions from
Southern Company and paid $615 million of dividends to Southern Company.

During 1999, we received $385 million in funds from Southern Company in the
form of a $360 million capital contribution and $25 million in proceeds from the
issuance of notes payable. We paid $1,116 million to Southern Company during
1999 in the form of a $165 million dividend payment and total repayments of
outstanding notes payable of $951 million. In addition, we paid $108 million in
interest related to notes payable to Southern Company. During the first six
months of 2000 we received $1 million of capital contributions from Southern
Company. However, we received no loans from and made no interest payments to
Southern Company during this period.

During 1997 and 1998, $950 million of preferred securities and capital
securities were issued by special purpose financing subsidiaries held by Capital
Funding, the proceeds of which were loaned to Southern Company. Southern Company
pays interest on subordinated notes issued in favor of the financing
subsidiaries, which payments are used to pay dividends on those preferred or
capital securities. The payment terms and interest rates on the notes receivable
from Southern Company are identical to the related preferred securities. The
notes are due between 2027 and 2037 with fixed interest rates between 6.875% and
8.19%. Southern Company also has guaranteed payments due under the terms of
those securities. These securities are non-recourse to us. Capital Funding will
be transferred to Southern Company prior to the distribution of our shares by
Southern Company. The remaining $76 million of these securities were issued by a
special purpose finance subsidiary of SIUK. They are also non-recourse to us but
they are not guaranteed by Southern Company and they will remain outstanding
after this offering.

During 1999, we entered into three significant financing transactions in
order to refinance loans made to us by Southern Company related to our North
American acquisitions.

In April 1999, we entered into three revolving credit agreements with a
group of lending banks and Citibank, as agent, for commitments totaling $1.3
billion. Each of the corporate credit facilities is available for general
corporate purposes including the support of our commercial paper program.
Facility A, with total commitments of $500 million, was intended to be a
temporary facility until we completed subsequent financings. Accordingly, we
canceled this facility in October 1999. Facility B, a $350 million 364-day
revolving line of credit, was originally scheduled to mature in March 2000. We
extended the maturity date of this facility until March 2001. We may, at our
option, extend the maturity date of Facility B to March 2003. In addition,
Facility B has an extension and commitment increase option up to an additional
$500 million, subject to the lenders' approval. Facility C, totaling $450
million, also has letter of credit options and matures in April 2004. The
interest rate applicable to Facility B is LIBOR plus 60 basis points and an
additional 12.5 basis points if 33 1/3% of the aggregate commitments under both
Facility B and Facility C are outstanding at any time. The interest rate for
Facility C is LIBOR plus 57.5 basis points and an additional 12.5 basis points
if 33 1/3% of the aggregate commitments under both facilities are outstanding at
any time. The commitment fee for Facility B is 15 basis points and for Facility
C is 17.5 basis points. In April 1999, we also instituted a commercial paper
program, which we use in conjunction with the corporate credit facilities as an
alternate funding source.

In July 1999, we issued two series of senior unsecured notes totaling $700
million. The two series consist of $200 million of 7.40% Senior Notes due 2004
and $500 million of 7.90% Senior Notes due

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2009. The proceeds from these senior unsecured notes were used to repay debt
owed to Southern Company and short-term borrowings as well as for general
corporate purposes.

Also in 1999, we created Southern Energy North America Generating, Inc.
(SENAG) comprising substantially all of our power plants in North America. In
October 1999, SENAG completed a $1.45 billion bank financing consisting of three
credit facilities. Facility A is a $1,150 million, 364-day term loan with a
two-year term-out option. Facility B is a $250 million, five-year revolver to be
used for capital expenditures and Facility C is a $50 million, five-year
revolver for working capital needs. The interest rate applicable to Facility A
is LIBOR plus 87.5 basis points. For both Facility B and C, the interest rate is
LIBOR plus 72.5 basis points and an additional 12.5 basis points if 33 1/3% of
the particular facility is drawn at any time. The majority of the proceeds from
these facilities were used by SENAG to repay intercompany debt to us relating to
the acquisitions of SE New England, SE California and SE New York. We used these
proceeds to pay down short-term borrowings under our commercial paper program
and repay intercompany borrowings to Southern Company.

In May 2000, we entered into a $550 million, 364-day credit facility with
Bank of America. In June 2000, the facility was amended to provide up to $1
billion, with Bank of America acting as agent for additional lenders. We may
extend the maturity date an additional 364 days at our option. The applicable
interest rate for this facility is LIBOR plus 87.5 basis points.

In May 2000, we entered into a $375 million credit facility with Citibank
which expires on September 29, 2000. The fees associated with it are LIBOR plus
a margin of 60 basis points on the available amount. This margin increases to
72.5 basis points if more than 33 1/3% of the total commitment of $375 million
is used. As of June 30, 2000, we had cancelled $224 million of this facility and
the available amount was $151 million. We also pay commitment fees of 15 basis
points on the total commitments. All fees are paid quarterly in arrears and on
the termination date.

The credit agreements discussed above contain various business and
financial covenants including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the incurrence
of indebtedness and liens, (iii) limitations on the ratio of recourse debt to
recourse capital and (iv) maintenance of minimum ratios of corporate debt
service to corporate interest. We are in compliance with all of the covenants in
these agreements. In addition, these agreements generally provide for increases
to the applicable interest rate as a borrower's credit rating declines.

On Friday, August 11, 2000, WPD Limited, one of our subsidiaries, submitted
an offer of 365 pence per share for the entire ordinary share capital of Hyder
plc, which owns and runs the electricity network in South Wales and the water
distribution and waste water treatment business for all of Wales. This
represents a total purchase price of L565 million. August 11, 2000 was the last
day for submission of revised offers, no other revised offers were submitted,
and WPD Limited was informed by the Takeover Panel in the United Kingdom that it
was the higher bidder. WPD Limited's increased bid had not yet been formally
announced pending the outcome of an appeal by the other party competing to
acquire Hyder against a ruling of the Panel Executive allowing the WPD Limited
bid to proceed. On Wednesday, August 16, 2000, the Takeover Panel announced that
the parties' appeal was rejected. If WPD Limited's bid for Hyder plc is
successful, WPD intends to become involved in the management of the electricity
network in South Wales. Our portion of the bid is supported by letters of credit
issued in favor of WPD Limited under dedicated credit facilities of ours which
are recourse to us.

At June 30, 2000, we had $1,150, $232 and $16 million outstanding under the
SENAG facilities A, B and C respectively, $450 million outstanding under the
Bank of America facility, and $389

47
<PAGE> 51

million of outstanding commercial paper obligations. No amounts were borrowed
under the Citibank facilities B or C. However, we had letters of credit
outstanding under facility C in the amount of $450 million. On June 30, 2000
there were no amounts borrowed under the May 2000 Citibank facility. However, we
had letters of credit outstanding in the amount of $150 million.

Some of our credit facilities, including credit facilities of our
subsidiaries, provide that it will be an event of default if Southern Company
ceases to own more than 50% of our stock. Consequently, prior to Southern
Company's distribution of our stock, we expect to seek waivers of these
provisions or refinance these credit agreements. These corporate-level credit
agreements include the April 1999 credit agreements with Citibank and the May
2000 credit agreement with Bank of America. In addition, we have project-level
credit agreements under which it will be an event of default if Southern Company
ceases to own more than 50% of our stock. Our inability to obtain consents or
waivers or to refinance these project-level loans, which have principal amounts
outstanding totaling approximately $2.7 billion, may require us to borrow at the
corporate level which could constrain our ability to raise sufficient additional
capital to achieve our strategic growth objectives.

In June 2000, we agreed with Potomac Electric Power Company ("PEPCO") that
we will:

- purchase four power plants and related assets in Maryland and Virginia,

- assume PEPCO's entitlements under various power purchase agreements,

- operate two power stations in Washington, D.C. retained by PEPCO, and

- supply PEPCO with power required to meet its retail obligations for up to
four years pursuant to transition power agreements.

The purchase price of the transaction to be paid at closing is $2.65
billion plus amounts to be determined for working capital and reimbursement of
capital expenditures estimated to be $97 million, and approximately $260 million
in the event certain power purchase agreements are not transferred to us. To
fund this amount we plan to:

- enter into lease financing arrangements for a significant portion of the
PEPCO assets. We expect these lease transactions to provide $1.5 billion
of the purchase price at closing. The leases will be treated as operating
leases for book purposes whereby one of our subsidiaries will record
periodic lease rental expenses,

- issue $1.02 billion of debt at SENAG, of which approximately $938 million
will be drawn at closing, and

- provide the balance from committed credit lines.

We have received commitments from Credit Suisse First Boston, New York
Branch, an affiliate of Credit Suisse First Boston Corporation, for interim loan
facilities to ensure sufficient liquidity at closing. These commitments provide
a $1.5 billion credit facility with recourse to our indirectly wholly-owned
subsidiary Southern Energy Mid-Atlantic, L.L.C. (to be used in the event the
lease is not in place at closing), two facilities to SENAG totaling $1.02
billion with recourse to SENAG and one facility of $650 million to us with
recourse to us. The applicable interest rate on these commitments is LIBOR plus
87.5 basis points subject to adjustment if the credit ratings of any of the
respective borrowers is downgraded. We anticipate that the interim loan
facilities will be available for a one-year period from the signing of the
credit agreements and that we will be able to extend the loans for a further
term of one year at our option.

One of the largest power purchase agreements to be transferred to us will
require us to assume PEPCO's rights and obligations with respect to contracts
with Ohio Edison. In addition, a power purchase contract that may be transferred
to us would require us to assume PEPCO's rights and

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<PAGE> 52

obligations with respect to Panda-Brandywine L.P., a Delaware partnership. The
Ohio Edison contract expires in 2005 and provides 450 MW of capacity and energy,
while the Panda-Brandywine contract expires in 2021 and would provide capacity
and energy from a 230 MW combined-cycle generation facility designed to be a QF
under PURPA. Both contracts require the purchaser to pay prices above current
market prices. The transition power agreements entered into with PEPCO provide
that we supply PEPCO with power required to meet PEPCO's retail obligations at
prices below current market prices. These obligations will be retained by us.
The cash shortfalls for the power purchase agreements and transition power
agreements will depend on future market conditions, and we currently estimate
that these shortfalls will be in the range of $850 to $950 million over the next
four years. We currently are considering plans to segregate specific funds to
meet a substantial portion of these expected obligations.

Concurrently with this offering of our common stock, SEI Trust I, a
Delaware business trust that we own, will sell up to 6,000,000 (6,900,000 if the
underwriters exercise their overallotment option) [ ]% Convertible Trust
Preferred Securities, Series A at a purchase price of $50 per preferred
security. The trust will issue all of its common securities to us. The proceeds
from the sale of the preferred securities and the common securities will be used
by the trust to purchase from us [ ]% Junior Convertible Subordinated
Debentures, Series A due 2030. We will use the proceeds from the sale of the
debentures, together with the proceeds from this common stock offering, to repay
short-term debt with outstanding balances of approximately $840 million at June
30, 2000 and for general corporate purposes.

Holders of preferred securities will be entitled to receive cash
distributions, payable quarterly in arrears, at an annual rate of [ ]% of
the $50 liquidation preference per preferred security. The debentures will have
the same financial terms as the preferred securities, including conversion
rights.

Holders of the preferred securities will have the right to convert their
preferred securities into shares of our common stock at any time after
[ ], 2001 and prior to [ ], 2030. From [ ], 2001
until the next business day following the date of the distribution of our common
stock by Southern Company, we will have the option to make cash settlements in
lieu of converting the preferred securities into our common stock. The preferred
securities will convert into our common stock at an initial conversion rate of
[ ] shares of common stock for each preferred security. This
conversion rate is equivalent to a conversion price of $[ ] per share of
our common stock. The conversion rate may be subject to adjustment pursuant to
anti-dilution provisions.

We will guarantee the trust's payment obligations, but only to the extent
that the trust has sufficient funds to make these payments. If we do not make
payments on the debentures, the trust will not have sufficient funds to pay
distributions to holders of preferred securities, in which case holders of
preferred securities will be unable to rely upon the guarantee for payment.
However, when taken together, the terms of the preferred securities, the
debentures, the trust agreement related to the preferred securities and the
guarantee provide a full, irrevocable and unconditional guarantee by us of the
payments due on the preferred securities.

Commitments and Capital Expenditures

We have commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $13 million, $25 million and $17 million during the years ended
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999,

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<PAGE> 53

estimated minimum rental commitments for noncancellable operating leases were as
follows (in millions):

<TABLE>
<S> <C>
FISCAL YEAR ENDED:
2000........................................................ $ 16
2001........................................................ 16
2002........................................................ 15
2003........................................................ 14
2004........................................................ 14
Thereafter.................................................. 103
----
Total minimum payments $178
====
</TABLE>

We have made firm commitments to buy materials and services in connection
with our ongoing operations and planned expansion and have made financial
guarantees relative to some of our investments. The material commitments are as
follows:

<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1999 2000
--------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Financial guarantees related to SCEM
Trade credit support (at fair value)...................... $ 146 $ 278
Vastar gas purchase contract.............................. 90 128
Brazos contract performance guarantee..................... 70 70
Minimum distributions to Vastar........................... 85 85
Contingent commitment to buy an additional interest in
SCEM from Vastar....................................... 210 210
Turbine purchases for new and expanded generating plants.... 31 174
Other material construction-related commitments............. 93 122
Long-term service agreements for new turbines............... 40 68
Operating lease payments.................................... 178 261
------ --------
Total.................................................. $ 943 $ 1,396
====== ========
</TABLE>

The commitments for the turbine purchases and related long-term service
agreements reflect minimum required payments under termination clauses, where
applicable. If all the turbines are purchased as planned, the total payments
under these contracts will amount to $1,749 million and $1,036 million,
respectively at June 30, 2000. Since June 30, 2000 we have contracted to buy
additional turbines valued at approximately $561 million.

We expect our cash and financing needs over the next several years to be
met through a combination of cash flows from operations and debt and equity
financings. We have generally financed the operations of our project
subsidiaries primarily under financing arrangements requiring extensions of
credit to be repaid solely from each subsidiary's cash flows. In addition,
subsidiaries financed in this manner are often restricted in their ability to
pay dividends and management fees periodically to us by their respective project
credit documents. These limitations usually require that debt service payments
be current, debt service coverage ratios be met and there be no default or event
of default under the relevant credit documents. There are also additional
limitations that are adapted to the particular characteristics of each project
affiliate.

As of June 30, 2000 sources of liquidity included the April 1999 $800
million Citibank credit facility (facilities B and C), the May 2000 $1 billion
Bank of America credit facility and the

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<PAGE> 54

Citibank dedicated facility for the purchase of shares of Hyder. These three
existing facilities, along with financing commitments related to the acquisition
of assets from PEPCO and credit facilities at our subsidiaries, are expected to
provide sufficient liquidity through the first half of 2001.

We expect to reassess our short-term financing requirements in the first
quarter of 2001. This coincides with the maturity of facility B of the Citibank
credit facility. Additionally, at this time, we anticipate the need to obtain
waivers for the requirement that exists in our credit agreements that Southern
Company control us.

We plan to seek proposals in the first quarter of 2001 for credit
facilities that will replace existing Southern Energy level bank facilities.
These credit facilities will be designed to provide liquidity and letters of
credit. A portion of these credit facilities are expected to be replaced by a
capital markets issue later in 2001. The size of the new facilities will depend
primarily on the amount of new investment we expect to make in 2001 and the
amount of distributable cash our businesses generate.

These facilities are expected to provide sufficient liquidity for new
investments, working capital and capital expenditure needs, including letters of
credit, for the 12 months following their execution.

Any projects we develop in the future and those assets we may seek to
acquire, including the transactions discussed above, are likely to require
substantial capital investment. Our ability to arrange financing on a
substantially non-recourse basis is dependent on numerous factors and to satisfy
the capital needs of our projects in the future, we may have to provide more
financial support for the project entity.

The table below describes expansions, our planned acquisitions and capital
expenditures for construction projects. These transactions will be funded
through a combination of equity and debt issuances.

<TABLE>
<CAPTION>
PLANNED
ACQUISITION EXPENDITURES EXPENDITURES
OR AS OF FOR THE SIX
CONSTRUCTION DECEMBER 31, MONTHS ENDED
COSTS 1999 JUNE 30, 2000
------------ ------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(I.) PENDING ACQUISITIONS
PEPCO....................................................... $2,650
(II.) PROJECTS UNDER CONSTRUCTION
SE California............................................... $ 650 $ 2 $ 3
Apex........................................................ 300 -- 4
SE New York................................................. 360 1 3
SE New England.............................................. 500 4 3
State Line Energy........................................... 223 -- --
SEI Wisconsin............................................... 100 90 15
SEI Michigan................................................ 352 1 6
SEI Texas................................................... 215 81 59
Wrightsville Project........................................ 154 -- 12
Perryville Project.......................................... 174 -- --
Freeport Power.............................................. 33 3 3
EDELNOR..................................................... 176 136 9
</TABLE>

On July 28, 1998, an explosion and fire occurred at our State Line facility
in Hammond, Indiana causing substantial damage. Thus far, seven personal injury
lawsuits have been filed against us and our affiliates. The plaintiffs in all of
these cases are seeking money damages for personal injuries and related costs
and expenses. The total special damages being sought are approximately $8.3
million.

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<PAGE> 55

The plaintiffs are also seeking unspecified amounts for pain and suffering.
Because this litigation has not yet reached discovery, the outcome of these
proceedings cannot not be determined and an estimated range of loss cannot be
made. See "Business -- Legal Proceedings."

As discussed in greater detail in the "Legal Proceedings" section of this
prospectus, SE California and its subsidiaries SE Delta and SE Potrero acquired
generation assets from PG&E in April 1999 subject to reliability-must-run
agreements. SE California assumed these agreements from PG&E subject to the
outcome of a FERC proceeding initiated in October 1997 that will determine the
percentage of a $158.8 million annual fixed revenue requirement to be paid to
the SE California parties by the CAISO under the reliability-must-run
agreements. On June 7, 2000, the administrative law judge (ALJ) presiding over
the allocation of the rate settlement issued an initial decision in which the
ALJ allocated responsibility for payment of approximately 3% of the revenue
requirement to the CAISO. On July 7, 2000, SE California appealed the ALJ's
decision to the FERC. A final FERC order in this proceeding may be appealed to
the U.S. Court of Appeals. The outcome of this appeal cannot now be determined.

If SE California is unsuccessful in its appeal of the ALJ's decision, SE
California will be required to refund certain amounts of the revenue requirement
billed to the CAISO for the period from June 1, 1999 until the final disposition
of the appeal. The amount of this refund as of June 30, 2000 would have been
approximately $94 million and would have reduced net income by approximately $33
million. These amounts do not include interest that would be payable in the
event of a refund. If SE California is unsuccessful in its appeal, it plans to
pursue other options available under the reliability-must-run agreements to
mitigate the impact of the ALJ's decision upon its future operations. The
outcome of this appeal is very uncertain, and we cannot assure you that we will
be successful.

In September 1999, the State of Minas Gerais, Brazil filed a lawsuit in a
state court seeking temporary relief against SEB exercising voting and
appointment rights under the shareholders agreement between the state and SEB
regarding SEB's interest in CEMIG, as well as a permanent rescission of the
agreement. On March 23, 2000, a state court in Minas Gerais ruled that the
shareholders agreement was invalid. SEB has appealed this decision. We believe
that this is a temporary situation and we expect that the shareholder's
agreement will be fully restored, however, we cannot assure you that we will be
successful in appealing this ruling or in defending the constitutionality of the
provisions of the shareholders agreement. Our failure in this matter would limit
our influence over the daily operations of CEMIG, however, we and our investing
partners would still have 33% of the voting shares of CEMIG and hold four of 11
seats on CEMIG's board of directors. Our economic interest in the company would
not be affected. The most significant rights we would lose relate to
supermajority rights and the right to participate in the daily operations of the
company.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, including changes in interest rates and
currency exchange rates. Through various hedging mechanisms, we attempt to
mitigate some of the impact of changes in energy prices, fuel costs, interest
rates and exchange rates on our results of operations. To manage the volatility
inherent in these market risks, we net the exposures to take advantage of
natural offsets and we may enter into hedging transactions for the remaining
exposures as part of our risk management program.

We use interest rate swaps to hedge underlying debt obligations. These
swaps hedge specific debt issuances and currently qualify for hedge accounting.
Consequently, the interest rate differential associated with a swap is reflected
as an adjustment to interest expense over the life of the

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<PAGE> 56

instruments. Additionally, some of our subsidiaries have entered into interest
rate swaps in foreign currencies. These swaps are designated as hedges of those
subsidiaries' related debt issuances in the same currency. If we sustained a 100
basis point change in interest rates for all variable rate debt in all
currencies, the change would affect net income by approximately $16 million,
based on variable rate debt and derivatives and other interest rate sensitive
instruments outstanding at December 31, 1999.

We use long-term cross-currency agreements to hedge a significant portion
of our net investments in both WPD and Bewag. These cross-currency agreements
hedge our exposure to fluctuations in the British Pound Sterling and Deutsche
Mark exchange rates with the U.S. dollar. We also have investments in various
emerging market countries where the net investments are not hedged, including
Argentina, Chile, Trinidad and Tobago, the Bahamas, the Philippines and China.
We rely on either contractual or regulatory links to the U.S. dollar to mitigate
currency risks attributable to these investments. As a result of these links to
the U.S. dollar, we do not believe we have a material exposure to changes in
exchange rates between the U.S. dollar and the currencies of these countries.

In addition, we have currency exposure which we are unable to hedge related
to our investment in CEMIG. Revenues at CEMIG and dividends from CEMIG are
denominated in Brazilian reals and a significant portion of debt incurred to
finance CEMIG is required to be repaid in other currencies. CEMIG's agreements
with the Brazilian government provide for rate increases in the event of a
devaluation of the real and indexes power purchases to the U.S. dollar. These
agreements provide us some protection against a devaluation of the real;
however, it does not completely cover our exposure. For example, the devaluation
of the real in January 1999 resulted in a write down of $83 million, net of
income tax effects, in the currency translation account category included in our
equity accounts.

We utilize currency swaps and forward agreements to hedge U.S.
dollar-denominated debt issued by our SIUK subsidiary. These swaps offset the
dollar cash flows, thereby effectively converting debt to the respective
subsidiary's functional currency. Gains and losses related to qualified hedges
of foreign currency firm commitments are deferred and included in the basis of
the underlying transactions. To the extent that a qualifying hedge is terminated
or ceases to be effective as a hedge, any deferred gains and losses to that
point continue to be deferred and are included in the basis of the underlying
transaction.

We have hedge transactions that may not continue to qualify for hedge
accounting under the Financial Accounting Standards Board (FASB) proposed
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138).

We measure currency earnings risk related to our international holdings
based on changes in foreign currency rates using a sensitivity analysis. The
sensitivity analysis measures the potential loss in earnings based on a
hypothetical 10% change in currency exchange rates. We used exchange rates and
currency positions as of December 31, 1999 to perform the sensitivity analysis.
Such analysis indicates that a hypothetical 10% change in foreign currency
exchange rates would have decreased net income by approximately $10 million had
the U.S. dollar exchange rate increased relative to the currencies with which we
had exposure.

For all derivative financial instruments, we are exposed to losses in the
event of nonperformance by counterparties to these derivative financial
instruments. We have established controls to determine

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<PAGE> 57

and monitor the creditworthiness of counterparties to mitigate our exposure to
counterparty credit risk.

In addition to markets risks associated with our power plants, the business
and operations of our energy marketing and risk management subsidiaries
frequently involve market risks associated with managing energy commodities and
establishing open positions in the energy markets on a short-term basis. These
risks fall into three general categories: price and volume volatility, credit
risk of trading counterparties and adequacy of the control environment for
trading. We routinely enter into contracts to hedge purchase and sale
commitments, fuel requirements and inventories of natural gas, coal,
electricity, oil, emission allowances, weather derivatives and other commodities
to minimize the risk of market fluctuations on our marketing and risk management
operations. We measure our risk using the value at risk (VAR) methodology
described below for each aspect of our energy marketing and trading activities
in order to maintain our total exposure within management-prescribed limits. We
maintain clear policies for undertaking risk-mitigating actions which may become
necessary when measured risks temporarily exceed limits as a result of market
conditions. To the extent an open position exists, fluctuating commodity prices
can impact financial results and financial position, either favorably or
unfavorably. As a result, we cannot predict with precision the impact that our
risk management decisions may have on our businesses, operating results or
financial position.

Our marketing and risk management subsidiaries manage market risk through
formal oversight groups, which include senior management, mechanisms that
independently verify transactions and measure risk, and the use of a VAR
methodology on a daily basis. VAR is used to describe a probabilistic approach
to measuring the exposure to market risk. VAR models are relatively
sophisticated. However, the quantitative risk information is limited by the
parameters established in creating the model. The instruments being evaluated
may have features that may trigger a potential loss in excess of calculated
amounts if the changes in commodity prices exceed the confidence level of the
model used. The VAR methodology employs a seasonally adjusted volatility-based
approach with the following critical parameters: volatility estimates,
appropriate market-oriented holding periods and seasonally adjusted correlation
estimates. The holding periods account for the lengths of time that will be
needed to liquidate different portions of the portfolio of positions. Our
holding periods typically range from five days to three months, depending upon
the type of commodity, the term of the instrument, the liquidity of the
underlying market, and other factors. The volatility and correlation estimates
measure the impact of adverse price moves both at an individual position level
as well as at the total portfolio level. The confidence level established for
our purposes is 95%. For example, if VAR is calculated at $10 million, we can
state with a 95% confidence level that if prices moved against our positions,
our pre-tax loss in liquidating the portfolio would not exceed $10 million.
Based on VAR analysis of the overall commodity price risk exposure of the
trading businesses on June 30, 2000, we did not anticipate a materially adverse
effect on our consolidated financial statements as a result of market
fluctuations. However, we cannot assure you that market volatility, failure of
counterparties to meet their contractual obligations, transactions entered into
after that date or a failure of risk controls will not lead to significant
losses from our marketing and risk management activities. See "Risk
Factors -- We face risks attendant to changes in commodity prices."

We are also exposed to market risk through performance guarantees we and
Vastar have made to cover obligations of SCEM. We and Vastar have agreed to
indemnify each other against losses under those performance guarantees in
proportion to our respective ownership shares of the joint venture. At June 30,
2000, our exposure under these guarantees was approximately $278 million based
on the estimated fair value of SCEM's net contractual commitments.

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<PAGE> 58

ACCOUNTING PRONOUNCEMENTS

We continue to analyze the effects of adoption of the rules promulgated by
SFAS No. 133 and its amendment by SFAS No. 138. These statements establish
accounting and reporting standards for derivative instruments, including
derivative instruments imbedded in other contracts, and for hedging activities.
The FASB recently deferred implementation of the provisions of SFAS No. 133 to
fiscal periods beginning after June 15, 2000. We intend to adopt the provisions
of SFAS No. 133 and No. 138 within this time frame and in accordance with the
requirements provided by those statements. We are currently assessing the
financial statement impact of both statements, but we have not yet determined
the impact at this time. Adoption of SFAS No. 133 and No. 138 could increase the
volatility of our net income and other comprehensive income.

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<PAGE> 59

BUSINESS

INTRODUCTION

We are a leading power provider with regionally based businesses in the
Americas, Europe and the Asia-Pacific region. We meet our customers' specific
requirements by integrating electricity generation and distribution, management
of gas assets, fuel procurement and marketing of energy and energy-linked
commodities. To support our business we have built and acquired a portfolio of
power plants that make us one of the world's largest independent power
producers.

According to the McGraw-Hill publication 205 Independent Power Companies:
Profiles of Industry Players and Projects, we were ranked as the sixth and third
largest independent power producer in July 1998 and July 1999, respectively.
These rankings were based on total megawatts of electric generating capacity
acquired or built through debt or equity financing. Currently, we own or control
13,212 MW of generation capacity and have 11,109 MW under development or pending
acquisition. We consider a project under development when we have contracted to
purchase machinery for the project, we own or control the project site and we
are in the permitting process. These projects may or may not have received all
of the necessary permits and approvals to begin construction. We cannot assure
you that these projects or pending acquisitions will be completed.

Our business also includes managing risk associated with market price
fluctuations of energy and energy-linked commodities for ourselves and our
customers. This provides us the opportunity to control the economic management
of additional power projects. We use these risk management capabilities to
optimize the value of our generating and gas assets and we also offer these risk
management services to others. We also own electric utilities with generation
transmission and distribution capabilities and an electricity distribution
company. We will seek to expand our business through control or ownership of
additional natural gas and electricity assets. Our strategy is to continue our
rapid growth by capitalizing on opportunities in markets where our unique
combination of strengths in physical asset management, electricity generation,
management of gas assets and power marketing and risk management services allows
us to position our company as a leading power provider.

Our regional operations reflect the prevailing political, regulatory and
market conditions where we operate. In North America, we own, operate and
control, through contractual arrangements, power plants and gas assets which are
supported by our power marketing and risk management activities. In Europe, the
pace of deregulation is accelerating and we expect to take advantage of
increasing opportunities to expand our asset operations and marketing and risk
management business. In the Asia-Pacific region, our revenues are primarily
derived from contracts with government entities or regional power boards.

In North America, we are an established leader in our industry. Excluding
international independent power producers, we were ranked as the fourth largest
independent power producer in North America in July 1998 and the second largest
independent power producer in North America in July 1999 by 205 Independent
Power Companies: Profiles of Industry Players and Projects. We operate power
plants in North America with a total generation capacity of 7,491 MW, of which
our net ownership interests represent 7,389 MW. We control an additional 1,738
MW in North America through management contracts. Additionally, we have
projects, which we will own and operate, under development or pending
acquisition in North America totaling 11,101 MW. We have integrated our
generating and natural gas assets with our marketing and risk management
capabilities to help optimize those assets, manage risk and enhance the value of
both our physical assets and our marketing and risk management business.

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<PAGE> 60

Through our 60% interest in SCEM, we are a leading energy marketer in North
America. In May 2000, Gas Daily ranked SCEM as the eighth largest North American
gas marketer for the first quarter of 2000 based on billions of cubic feet per
day of natural gas sold. In June 2000, Power Markets Week ranked SCEM as the
third largest North American power marketer for the first quarter of 2000 based
on the total MWh of electricity sold. SCEM markets and trades energy and
energy-linked commodities, including electricity, natural gas, oil, coal and
emission allowances. According to Power Markets Week, in 1999 SCEM was the
number four-ranked physical marketer of electricity in the United States by
volume. Through SCEM, we also controlled 1.6 billion cubic feet per day of
natural gas production, 0.5 billion cubic feet per day of natural gas
transportation and 25.8 billion cubic feet of natural gas storage as of December
31, 1999. Most of our power plants in the United States have entered into
various fuel supply, power purchase and other ancillary agreements with SCEM.

In March 2000, SCEM and Utility.com, an Internet utility company, announced
an agreement under which SCEM will provide wholesale electricity to
Utility.com's customers. SCEM also recently announced that it co-founded a new
independent energy trading consortium, with 5 of the largest gas and electricity
marketers in the United States. In July 2000, this consortium joined the
Atlanta-based Intercontinental Exchange, an internet exchange which plans to
begin trading energy commodities this fall.

In Europe, as the markets deregulate, we intend to follow a strategy
similar to our North American strategy by integrating power plants with
marketing and risk management. We have developed an energy marketing and risk
management business in Europe, based in Amsterdam, The Netherlands. Our European
marketing and risk management business, which is operated separately from SCEM,
began trading power in the Nordic market in 1999. We also expect to begin
marketing power in the Dutch, German, Swiss and Italian energy markets in 2000.
We currently own a 26% interest in Bewag AG, the electric utility with
generation, transmission and distribution assets serving 2.1 million customers
in Berlin, Germany, and a 49% economic interest in, and operating control of,
WPD, which distributes electricity to approximately 1.4 million end users in
southwest England. We have opened three business development offices in our
target markets in Europe to continue our asset development activities.

In the Asia-Pacific region, SE Asia-Pacific owns power plants in the
Philippines and China with interests in 3,159 MW. Most of our current generation
in the Asia-Pacific region is under long-term power sale contracts, which are
predominantly linked to the U.S. dollar. We have experienced a growing revenue
base and strong operating performance during our three years in the region.

We also have operations in the Caribbean and South America. We currently
own a 63% interest in an electric utility in the Bahamas and a 39% interest in a
generation company in Trinidad and Tobago. In South America we have a 3.6%
economic interest in an electric utility with generation, transmission and
distribution assets in Brazil which has a generation capacity of 5,514 MW and
serves 4.9 million customers. We also hold an 82% interest in an electric
generation and transmission company in Chile and a 55% interest in a
hydroelectric generation facility in Argentina. We are pursuing the sale of our
Argentine and Chilean subsidiaries.

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<PAGE> 61

Our business has grown significantly between 1995 and 1999 as shown in the
table below. This table reflects one-time events, including changing to the
equity method of accounting for our power marketing and risk management business
in 1998, the 1998 write-down of our Argentine and Chilean investments, and the
1997 United Kingdom windfall profits tax. Please review this table in
conjunction with the Summary Historical Financial and Operating Data provided
earlier in this prospectus, which discusses these one-time events.

<TABLE>
<CAPTION>
COMPOUND ANNUAL
1995 1996 1997 1998 1999 GROWTH RATE
------ ------ ------- ------- ------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 584 $1,600 $ 3,750 $ 1,819 $ 2,268 40%
EBITDA(1)...................... 122 258 512 351 825 61
Net Income (Loss).............. 18 81 (16) -- 372 113
Total Assets................... 4,511 4,564 10,630 12,054 13,863 32
Cash Flows From Operating
Activities................... 158 (226) 264 402 515 34
</TABLE>

(1) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it is
a widely accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA,
as defined, is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting standards (GAAP) in the United States and is
not indicative of operating income or cash flow from operations as
determined under GAAP. Our method of computation may or may not be
comparable to other similarly titled measures by other companies.

INDUSTRY OVERVIEW

Power generation and delivery historically have been controlled by either
state-owned enterprises or state-regulated private businesses. In the last
decade, many governments and regulatory bodies have taken steps to transform
their energy sectors to encourage competition, to raise capital for other
purposes and, in some cases, to improve the operational performance of strategic
energy assets. We believe that the emerging model of the industry is the
disaggregation of the traditional utility functions of generation, transmission,
distribution and marketing of electricity into competitive or partially
regulated businesses. To varying degrees, countries in the Americas, Europe and
the Asia-Pacific region are opening their energy sectors to competition. As
governments deregulate and privatize state-owned utilities, the energy sector
will offer significant opportunities for investment worldwide. These
opportunities will also include a significant need for additional power
generating capacity both to satisfy increasing demand and to replace old and
inefficient generating facilities. In addition, investment opportunities will be
created by utilities, independent power producers and industrial companies
disposing of their power generation facilities as they adjust strategies for the
new markets.

In the United States, in response to increasing customer demand for access
to low cost electricity and enhanced services, significant aspects of the
industry are currently being restructured. As of early 1999, new regulatory
initiatives to increase competition in the domestic power generation industry
had been adopted or were being considered at the federal level and by many
states.

FERC issued Order 636 in 1992 and Order 888 in 1996 to increase competition
by easing entry into natural gas and electricity markets. These orders require
owners and operators of natural gas and power transmission systems,
respectively, to make transmission service available on a nondiscriminatory
basis to energy suppliers such as us. In order to better assure competitive
access to the transmission network on a nondiscriminatory basis, FERC issued
Order 2000 in December 1999,

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which encourages electric utilities with power transmission assets to
voluntarily form regional transmission organizations to provide regional
management and control of transmission assets independent of control by firms
that sell electricity. These regional organizations will have the exclusive
authority to initiate rate changes for the transmission system under its
control, exclusive operational control over a broad transmission region,
exclusive control over security and short-term reliability, responsibility to
assure the availability of generation needed to support transmission services,
ultimate responsibility for transmission planning and expansion and
responsibility to assure that an adequate method of monitoring the
competitiveness of the regional electricity market is in place. These regional
organizations are also expected to facilitate inter-regional coordination. In
the event the response of transmission-owning utilities to FERC Order 2000 is
deemed inadequate, FERC has announced that it will reexamine this voluntary
approach, but there is no assurance that such action will be taken. We expect
Order Nos. 636, 888 and 2000 to facilitate access for non-utility power
generators, such as us, who are not owners of transmission systems. However, the
impact of these orders on our business and operations depends on the effect of
these orders on the transmission operations in particular markets. Continued
uncertainty over transmission pricing may discourage utilities from investing in
needed transmission and a reduction in market opportunities, imposition of
wholesale price regulation, or both. For example, transmission constraints have
led to continued price regulation in California and New England, as discussed in
this prospectus under the headings "Business -- North America -- West
Region -- SE California," and "-- Northeast Region -- SE New England." We
believe there is a strong trend in the United States toward competitive electric
power and natural gas markets, but that our business will continue to be
affected by regional and local price regulation.

Outside the United States, many governments are privatizing their utilities
and their transmission and distribution networks and developing regulatory
structures that are expected to encourage competition in the sector. The growth
in both the number and reputation of energy companies which are operating
facilities globally has made many governments realize that their energy assets
can be sold to raise funds for other purposes while not hindering operating
performance or increasing costs to customers. As a result, many governments are
privatizing their existing energy and utility infrastructure facilities and
creating significant investment opportunities for industry participants. In
order to satisfy the anticipated increase in demand, many countries have adopted
active government programs designed to encourage private investment in power
generation facilities. We believe that these market trends will create
attractive opportunities to expand our business in those countries.

STRATEGY

Our strategy is to be a leading competitive power provider in our target
markets of North America, Europe and the Asia-Pacific region. We intend to
continue our growth through the acquisition, development and operation of power
plants and gas transportation and storage assets in our target markets. We also
intend to capitalize on our ability to integrate power plants and gas assets
with the marketing of energy products and the management of market risk
associated with these products. We plan to implement our strategy through the
development of new power plants (greenfield projects), the expansion of existing
power plants (brownfield projects), acquisitions of power and gas assets
competitively positioned in our targeted markets, contractual arrangements for
the control of generation capacity and gas management facilities, the expansion
of our marketing and risk management activities and the implementation of
information technology and e-commerce applications. To secure wholesale supply
agreements or to provide additional opportunities for growth, profitability or
revenue stability, we may enter into agreements to acquire, control or manage
distribution and supply businesses or other energy aggregators in selected
markets.

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<PAGE> 63

We will focus primarily on three regions of the world: North America,
Europe and the Asia-Pacific region.

North America

- We are focusing on competitive market opportunities in North America
created by the deregulation of regional energy markets. We believe that
the integration of our owned and managed power generation and gas assets
with our marketing and risk management businesses enhances our ability to
compete in the evolving energy supply business and, through improved
operating flexibility, enhances the value of our physical assets.
Accordingly, we have invested significant resources in developing SCEM's
marketing and risk management operations and in the acquisition of net
ownership of approximately 7,389 MW of generation assets in the United
States. To date, we have been successful in acquiring existing generation
sites with opportunities for expansion.

- Over the next several years, we intend to continue our growth by
investing in generating capacity in regions of North America that we
consider attractive and that will enable us to own or control a total of
approximately 25,000 to 30,000 MW of capacity. In addition, we plan to
expand our access to, and marketing of, natural gas through SCEM by
acquiring or managing additional gas assets in areas of North America
where these resources complement our power generation business. We are
focusing our generation development in our West, Northeast, East and Gulf
Coast regions. Our goal by 2004 is to own or control generation which
would be relatively balanced across these regions. We expect over 60% of
our planned growth in generation capacity to come from the development of
new power plants (greenfield projects) and the expansion of existing
plants (brownfield projects), primarily consisting of gas-fired projects.
We expect natural gas to comprise over 70% of the total fuel consumed for
generation by 2004. In each of these regions, we are pursuing strategies
specifically tailored to that particular region's customer mix, fuel mix,
asset infrastructure and regulatory environment. We believe that our
flexibility in combining physical assets with products that fit evolving
customer needs is fundamental in pursuing these strategies. In the
Caribbean, we will continue to review potential acquisitions and
developments on an opportunistic basis.

Europe

- We will focus on developing a leading generation and marketing position
in those western and central European power markets where we can
capitalize on our commercial skills and current position and
relationships. As in North America, we plan to integrate our generation
and marketing and risk management capabilities. We currently trade power
in the Nordic market. As additional European markets develop and become
more liquid, we intend to expand our generation and marketing and risk
management activities throughout the Nordic region, the Benelux
countries, Germany, Switzerland, Italy and the Central European region.
Over the next several years we intend to acquire additional generation
capacity in these regions. Our target is to own or control at least
10,000 MW of capacity in Europe. We also intend to review opportunities
to acquire additional distribution assets to gain access to
noncompetitive markets as well as build on our investment in WPD.

Asia-Pacific

- We plan to build on the base of over 3,100 MW of generation capacity we
have established in the Philippines and China and to expand into
countries with more developed economies that are opening their energy
sectors to competition, such as Australia and Singapore. In addition,

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<PAGE> 64

we will continue to explore opportunities in countries in the
Asia-Pacific region where we can build significant business and achieve
economies of scale, such as India. Over the next several years, we intend
to acquire additional generation capacity such that we will hold or
control a total of approximately 8,000 to 10,000 MW of capacity in the
Asia-Pacific region. We also intend to review opportunities to acquire
distribution assets as a means to obtain significant scale in the
competitive supply business.

In addition to our growth initiatives, we consistently seek to enhance the
financial and operational performance of our businesses through financial
management, cost controls and review and improvement of operations. We believe
that our strengths in design, engineering, finance, construction management,
fuel procurement, operations and marketing and risk management provide us with a
competitive advantage essential to achieving our strategy.

Although changes in industry structure and ownership are part of a global
trend, because of differences in current prices, the balance between supply and
demand within a single geographic area, fuel and transmission availability,
customer mix, political objectives and other factors, we believe that these
changes are essentially local in nature. We have experienced industry
restructuring and changes in regulations in the U.S., the United Kingdom,
Germany, Argentina, Chile, Brazil and the Nordic region. Our experience has
shown that each country, and in the case of the U.S., each state, has adopted
its own set of rules and regulations related to the restructuring of the
industry, each of which differs, sometimes significantly, based on local
interests and objectives. As a result, the parts of the energy sector open to
private ownership and the rules governing competition are expected to vary based
on local considerations. To compete successfully, we believe we must have the
flexibility to operate in a variety of environments and throughout the entire
energy value chain. Our strategy to achieve this goal is based on the following
key elements:

Maximize the Financial and Operational Performance of Current Investments

We place substantial emphasis on maximizing the operational and
financial performance of those assets we own or control. In many instances,
we have the opportunity to create value by operating assets more
effectively and efficiently than their traditional owners. Accordingly,
upon acquiring a business or as new assets are constructed, we generally
select senior managers familiar with our performance culture and industry
practices to manage those businesses. We also utilize a standard planning
process to establish annual financial and operational goals for each
business unit, and managers are compensated based on performance as
measured by these goals.

Capitalize on Opportunities Generated by Strong Regional Presence

We believe that we have begun to establish a strong regional presence,
both in terms of scale of operations and management, in each of our
targeted geographical markets. A strong presence in each market is
desirable because changes in energy markets are largely driven by regional
factors such as local economic growth, customer relationships and
preferences, infrastructure constraints (such as transmission grids and gas
pipelines) and local political choices. As a result, incumbent market
participants often have opportunities to expand or enhance their businesses
because of relationships with local partners and customers or information
specific to a geographical market. A significant presence within a region
is advantageous in order to achieve a scale of operations sufficient to
promote efficiency, increase operational flexibility and reliability and
make full use of the skills of management deployed to that region.

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<PAGE> 65

Integrate Energy Marketing and Risk Management with Ownership and Control of
Energy Assets

We expect that the deregulation of energy markets worldwide will lead
to the restructuring of energy markets. To be successful, we believe that a
company must be able to integrate asset ownership or control with the
ability to market energy products and the ability to manage market risk
associated with those products. Marketing and risk management enhances the
value of assets by assisting in optimizing capacity utilization, ensuring
physical delivery, providing a real-time market interface and managing
market price and fuel risks. Conversely, control of electric and gas assets
enhances the profitability of marketing and risk management by providing a
physical hedge and real-time information, increasing volumes and allowing
for a broader range of product offerings and improving our credibility as
an energy provider to customers.

Exploit Energy Information and E-commerce Applications

We believe that emerging information technologies and their increasing
use by businesses and our customers will present us with opportunities to:

- rapidly and efficiently extend our market reach to a broader base
and larger number of customers and suppliers,
- lower many of the basic transaction costs inherent in our high
volume business with geographically diverse customers, and
- improve the effectiveness of providing and obtaining information to
and from our customers.

We have e-commerce initiatives that target retail marketing,
aggregators, direct wholesale and large industrial customers and the
network of the related businesses and service providers with whom we
transact daily. For example, we have investments in Utility.com and a new
leading energy trading consortium and an option to invest in TenFold
Energy, Inc.

COMPETITION

As an integrated power provider in the energy supply business, we face
intense competition in all phases of the business in which we compete, both in
the United States and in international markets. We encounter competition from
companies of all sizes, having varying levels of experience, financial and human
resources and differing strategies. On the power generation side, we compete in
the development and operation of energy-producing projects, and our competitors
in this business include various utilities, industrial companies and independent
power producers (including affiliates of utilities). In our energy marketing and
risk management business, we compete with international, national and regional
full service energy providers, merchants, producers and pipelines in our ability
to aggregate competitively priced supplies from a variety of sources and
locations and to utilize efficient transmission or transportation.

The following summarizes our competitive position in several of our key
markets:

- North America: We were ranked the second and the fourth largest
independent power producer in July 1999 and July 1998 according to the
McGraw-Hill publication 205 Independent Power Companies: Profiles of
Industry Players and Projects. In addition, for the first quarter of 2000
our marketing and risk management operations ranked as the eighth largest
gas marketer in North America and the third largest power marketer in
North America.

- Europe: In the European market, in general, we were ranked as the
thirteenth largest private power company based on total dollars invested
in private power assets according to Cambridge

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Energy Research Associates (CERA). In addition, according to 1999 data,
Bewag was the ninth largest electricity producer in Germany based on
total electricity production (approximately 13 TWh). These rankings are
based on VDEW, a German electricity association.

- Asia-Pacific: In the Asian market, in general, we were ranked third among
the twenty largest private power companies based on total dollars
invested in private power assets according to CERA. Specifically, we have
an approximate 20% share of the total installed capacity in the
Philippines, and we are the largest private producer of electricity in
the country. In general, our coal-fired plants in the Philippines are
among the lowest operating cost plants in their market and have exceeded
their contractual availability requirements.

During the transition of the energy industry to competitive markets, it is
difficult for us to assess our position versus the position of existing power
providers and new entrants. This is due to the fact that each company may employ
widely differing strategies in their fuel supply and power sales contracts with
regard to pricing, terms and conditions. Further difficulties in making
competitive assessments of our company arise from the fact that many states and
countries are considering or implementing different types of regulatory and
privatization initiatives that are aimed at increasing competition in the power
industry. Increased competition that has resulted from some of these initiatives
has already contributed to a reduction in electricity prices and put pressure on
electric utilities to lower their costs, including the cost of purchased
electricity. Additionally, our business is rapidly becoming more competitive due
to technological advances in power generation, e-commerce enabling new ways of
conducting business, the increased role of full service providers and increased
efficiency of energy markets.

In general, however, we believe that our experience and expertise in
assessing and managing market and credit risk will allow us to remain
competitive during volatile or otherwise adverse market circumstances.

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DESCRIPTION OF GENERATION AND DISTRIBUTION OPERATIONS

The following table describes our significant generation and distribution
operations, expansions of existing projects, new projects under development and
pending acquisitions.

<TABLE>
<CAPTION>
OWNED AND OPERATED
-------------------------------
OUR % NET EQUITY
OWNERSHIP TOTAL INTEREST IN OPERATED
POWER GENERATION BUSINESS LOCATION PRIMARY FUEL INTEREST(1) MW TOTAL MW MW
------------------------- ------------------- -------------------- ----------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICA:
SE California.................. California Natural Gas 100% 3,065 3,065 3,065
Apex........................... Nevada Natural Gas 100 -- -- --
SE New York.................... New York Natural Gas/Hydro/ 100 1,794 1,794 1,794
Coal/Oil
SE New England(2).............. Massachusetts Natural Gas/Oil 100 1,245 1,245 1,236
State Line Energy.............. Indiana Coal/Natural Gas 100 490 490 490
Birchwood...................... Virginia Coal 50 222 111 222
SEI Wisconsin.................. Wisconsin Natural Gas 100 306 306 306
SEI Michigan................... Michigan Natural Gas 100 -- -- --
SE Mid-Atlantic (PEPCO)(3)..... Maryland/Virginia Coal/Oil/Gas 100 -- -- --
SE Wichita Falls............... Texas Natural Gas 100 80 80 80
SEI Texas...................... Texas Natural Gas 100 298 298 298
Wrightsville Project........... Arkansas Natural Gas 51 -- -- --
Perryville Project............. Louisiana Natural Gas 50 -- -- --
------ ------ ------
Subtotal..................... 7,500 7,389 7,491

CARIBBEAN:
Freeport Power................. Bahamas Oil 63 127 80 127
PowerGen....................... Trinidad & Tobago Natural Gas 39 1,154 450 1,154
------ ------ ------
Subtotal..................... 1,281 530 1,281

SOUTH AMERICA:
CEMIG.......................... Brazil Hydro 3.6 5,514 199 --
EDELNOR........................ Chile Coal/Natural Gas 82.3 653 537 681
Alicura(4)..................... Argentina Hydro 55 1,000 550 1,000
------ ------ ------
Subtotal..................... 7,167 1,286 1,681

EUROPE:
WPD(5)......................... England Natural Gas 49 163 80 14
Bewag(6)....................... Germany Natural Gas/Oil/Coal 26 2,955 768 --
------ ------ ------
Subtotal..................... 3,118 848 14
------ ------ ------
ASIA-PACIFIC:
SIPD........................... China Coal 9.99 4,158 415 --
Shajiao C...................... China Coal 32 2,038 652 --
Sual........................... Philippines Coal 91.9 1,258 1,156 1,258
Pagbilao....................... Philippines Coal 87.2 735 641 735
Navotas I and II............... Philippines Oil 93 300 280 300
Bulacan........................ Philippines Diesel 100 15 15 15
------ ------ ------
Subtotal..................... 8,504 3,159 2,308

TOTAL........................ 27,570 13,212 12,775
====== ====== ======

<CAPTION>
UNDER DEVELOPMENT
---------------------------
NET EQUITY EXPECTED DATE
INTEREST IN OF COMMERCIAL
POWER GENERATION BUSINESS TOTAL MW(1) OPERATION
------------------------- ----------- -------------
<S> <C> <C>
NORTH AMERICA:
SE California.................. 1,050 2003
Apex........................... 1,000 2003
SE New York.................... 785 2003
SE New England(2).............. 835 2004
State Line Energy.............. 550 2003
Birchwood...................... -- --
SEI Wisconsin.................. -- --
SEI Michigan................... 848 2002
SE Mid-Atlantic (PEPCO)(3)..... 5,154 2000
SE Wichita Falls............... -- --
SEI Texas...................... 248 2001
Wrightsville Project........... 281 2002
Perryville Project............. 350 2002
------
Subtotal..................... 11,101
CARIBBEAN:
Freeport Power................. 8 2001
PowerGen....................... -- --
------
Subtotal..................... 8
SOUTH AMERICA:
CEMIG.......................... -- --
EDELNOR........................ -- --
Alicura(4)..................... -- --
------
Subtotal..................... --
EUROPE:
WPD(5)......................... -- --
Bewag(6)....................... -- --
------
Subtotal.....................
------
ASIA-PACIFIC:
SIPD........................... -- --
Shajiao C...................... -- --
Sual........................... -- --
Pagbilao....................... -- --
Navotas I and II............... -- --
Bulacan........................ -- --
------ ----
Subtotal..................... --
TOTAL........................ 11,109
======
</TABLE>

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<PAGE> 68

<TABLE>
<CAPTION>
OWNERSHIP CUSTOMERS/
DISTRIBUTION BUSINESS INTEREST END USERS
--------------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Freeport Power.................................. Bahamas 63% 17
CEMIG........................................... Brazil 3.6 4,900
WPD............................................. England 49 1,400
Bewag........................................... Germany 26 2,100
-----
Total......................................... 8,417
=====
</TABLE>

-------------------------
(1) Amounts reflect our percent economic interest in the total MW.
(2) Total MW reflects a 1.4 percent interest in the 614 MW Wyman plant.
(3) Pending acquisition expected to close during 2000.
(4) We are pursuing the sale of our investment in Alicura. Please see the
section of this prospectus entitled "Business -- South America -- Alicura"
for further discussion.
(5) Total MW reflects a 7.7 percent interest (or 144 MW) in the 1,875 MW
Teesside plant.
(6) Total MW excludes 26 percent ownership of 5,740 MW of thermal capacity for
steam heating.

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<PAGE> 69

NORTH AMERICA

NORTH AMERICA -- WEST REGION

SE California

On April 16, 1999, our wholly owned subsidiary, Southern Energy California,
L.L.C. (SE California) through its wholly owned subsidiaries, Southern Energy
Delta, L.L.C. (SE Delta) and Southern Energy Potrero, L.L.C. (SE Potrero),
acquired various generating assets in California with a total capacity of 3,065
MW from Pacific Gas and Electric Company (PG&E) for $801 million plus $39
million for fuel inventory, capital expenditures and property taxes. These
assets consist of the Pittsburg Plant and the Contra Costa Plant (the Delta
Plants) owned by SE Delta and the Potrero Plant owned by SE Potrero.

The following table summarizes certain characteristics of SE California's
generating facilities in operation or under development:

<TABLE>
<CAPTION>
LOCATION TOTAL MW PRIMARY FUEL(1)
------------- -------- ---------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
DELTA PLANTS
Pittsburg Units 1-4(2).................................... Pittsburg 4 x 163 Natural Gas
Pittsburg Unit 5.......................................... Pittsburg 325 Natural Gas
Pittsburg Unit 6.......................................... Pittsburg 325 Natural Gas
Pittsburg Unit 7(3)....................................... Pittsburg 720 Natural Gas
Contra Costa Unit 6....................................... Antioch 340 Natural Gas
Contra Costa Unit 7....................................... Antioch 340 Natural Gas
-------
Subtotal................................................ 2,702
POTRERO PLANT
Potrero Unit 3............................................ San Francisco 207 Natural Gas
Potrero Units 4-6......................................... San Francisco 3 x 52 Distillate Fuel
-------
Subtotal................................................ 363
-------
Total................................................... 3,065
=======
PROJECTS UNDER DEVELOPMENT:
Contra Costa Expansion.................................... Antioch 530 Natural Gas
Potrero Expansion......................................... San Francisco 520 Natural Gas
-------
Total................................................... 1,050
=======
</TABLE>

-------------------------

(1) All of the Delta Plants and Potrero Unit 3 are also capable of using fuel
oil as a secondary fuel.

(2) These "total MW" figures reflect nameplate ratings; available capacity may
be less than those nameplate ratings. These units are scheduled to be
retired at the end of 2001 because they are not expected to meet nitrogen
oxide (NOx) emission requirements in 2002 and because the cost of modifying
these plants to meet these requirements would not be economical.

(3) Due to boiler capacity limitations, Pittsburg Unit 7 has a maximum capacity
of 682 MW.

These generating assets, which include facilities which operate at both
high (intermediate load) and very high (peak) demand levels, are located in
close proximity to or in San Francisco. The Delta Plants comprise nine natural
gas-fired steam generating units with approximately 2,702 MW of generating
capacity located approximately ten miles apart along the Sacramento/San Joaquin
River Delta. The Potrero Plant has one natural gas-fired conventional steam
generating unit and three distillate-fueled combustion turbines with a combined
capacity of 363 MW.

On September 23, 1996, the California General Assembly enacted Assembly
Bill 1890 in an effort to restructure the electric utility industry and
stimulate wholesale and retail competition in California. In addition to
reducing rates and allowing for retail customers to choose their energy
suppliers, this bill created two market entities. This law created the
California Independent System Operator (CAISO), which is designed to ensure
system reliability and provide scheduling

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coordinators with access to transmission services. CAISO also administers the
real-time markets for energy and ancillary services. CAISO is under the
jurisdiction of the FERC. The law also created a second market entity, the
California Power Exchange (PX). The PX is a wholesale electric market under the
jurisdiction of the FERC that provides a competitive auction for the
establishment of day-ahead and hour-ahead market prices, as well as forward
energy sales. The role of the PX is that of a scheduling coordinator that
matches unbalanced bids for the purchase and sale of power. It has no operating
role or authority and does not deal in real-time products, which is the
responsibility of CAISO.

The output from the Delta Plants and the Potrero Plant is sold into the
California market by means of daily energy sales to the PX, reliability-must-run
contracts with the CAISO, discussed below, sales of real-time energy and
ancillary services to CAISO and forward sales. While the distribution of sales
between these markets vary, currently approximately 42% of these sales are made
into the CAISO markets, 25% are made through the PX markets and 33% reflect
forward sales.

SE Potrero and SE Delta have entered into fuel supply, service and
marketing agreements with SCEM through which SCEM: (i) supplies fuel to the
plants; (ii) bids, schedules and dispatches the units in the market; (iii)
handles the settlement and billing process for CAISO and PX sales; (iv)
purchases energy available for sale to the PX; and (v) assists in the
administration of and compliance with SE California's obligations under its
contracts with the CAISO.

We are currently planning to expand our Contra Costa and Potrero plants by
530 MW and 520 MW, respectively. In January 2000, SE Delta filed an application
for certification with the California Energy Commission for the proposed
expansion of the Contra Costa plant. SE Potrero filed a similar application for
certification in May 2000. We expect to have both of these projects in
commercial operation during the first half of 2003.

The SE California subsidiaries that acquired generation assets from PG&E in
April 1999 acquired these facilities subject to reliability-must-run agreements.
These agreements authorize the CAISO to dispatch SE California's generation
units to provide energy and ancillary services when required by the CAISO to
ensure reliability of the transmission system. At the time the SE California
subsidiaries acquired these assets, the rates, terms and conditions of the
reliability-must-run agreements were the subject of a pending FERC proceeding.
SE California agreed to assume these agreements from PG&E subject to the outcome
of the FERC proceeding. See the section of this prospectus entitled
"Business -- Legal Proceedings."

On June 1, 2000, the CAISO implemented its pre-dispatch procedures,
pursuant to which the CAISO is permitted to call on units subject to
reliability-must-run agreements before the unit owner has had the opportunity to
bid the unit's output into the PX or CAISO-administered markets for energy or
ancillary services, thereby foreclosing the unit owner's access to subsequent,
and often more profitable, markets. In response to the implementation of
pre-dispatch, the SE California subsidiaries filed an amendment to their
reliability-must-run agreements that would authorize them to recover from the
CAISO, on an as-incurred basis, increased costs attributable to the pre-dispatch
of the units. On July 28, 2000, the FERC denied without prejudice the proposed
amendment to the reliability-must-run agreements. The SE California subsidiaries
intend to make a revised filing in August 2000. At this time, the costs
attributable to pre-dispatch cannot be determined.

On June 28, 2000, the CAISO's Governing Board convened an "emergency
meeting" at which they voted to reduce the price cap applicable to the
CAISO-administered energy and ancillary services markets from $750 per MWh to
$500 per MWh, effective July 1, 2000. At this meeting the CAISO board initially
considered a motion to lower the price cap to $250 per MWh, but the motion was
unsuccessful. On August 1, 2000, the CAISO board voted to reduce the price cap
to $250 per

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MWh, effective August 7, 2000. While reductions in the price caps applicable to
the CAISO-administered markets may adversely affect our results of operations,
these effects cannot be quantified at this time.

Apex

We are developing a 500 MW natural gas-fired combined cycle project fifteen
miles northeast of Las Vegas, Nevada in the Apex industrial park. The power
project, which is scheduled for commercial operation in the first quarter of
2003, will be organized in a limited liability company that will be owned by
Southern Energy Nevada, which is our indirect wholly owned subsidiary. The
project is expected to have a capital cost of approximately $300 million. Land
and water rights purchase agreements have been executed with the Apex Industrial
Park, Inc. We are also in the permitting process of an additional 500 MW natural
gas-fired combined cycle plant to be built on the Apex site. We expect to
complete the permitting process by June 2001 and to begin commercial operation
in the third quarter of 2003.

The Apex project will sell its capacity and electric power output in
southern Nevada, Desert Southwest or the California SP-15 markets. SCEM will
assist the project in marketing its output and securing its fuel.

The Apex project is being developed to supply electricity into the southern
Nevada and neighboring markets. These markets are experiencing very high demand
growth, and peak period reserve margins are low, with small amounts of
generation located in the load centers. In addition, the State of Nevada has
passed legislation for the deregulation of its electricity market beginning in
2000, while California has already opened its generation market to competition,
and the other states of the Desert Southwest are in the process of doing so.

At its current stage of development, the Apex project faces a number of
market uncertainties. Among these are the price, terms and conditions of the
anticipated bilateral agreements as well as the ultimate market structure of
Nevada and the other Desert Southwest states.

NORTH AMERICA -- NORTHEAST REGION

SE New York

On June 30, 1999, three of our wholly owned subsidiaries (collectively
referred to as SE New York) acquired various power plants and related assets in
the state of New York with a total generating capacity of 1,794 MW from Orange
and Rockland Utilities, Inc. (ORU) and Consolidated Edison Company of New York,
Inc. (ConEd). Our net purchase price for these acquisitions was approximately
$493 million, which included an amount to cover the market value of existing
fuel inventories. SE New York was selected as the winning bidder for the power
plants following a competitive bid process.

SE New York has three principal subsidiaries: (i) Southern Energy Bowline
L.L.C. (SE Bowline), which owns the Bowline Station, a 1,227 MW natural
gas-fired plant comprised of two units rated at a capacity of approximately 600
MW each, and an approximately 98-acre site adjacent to the Bowline Station; (ii)
Southern Energy Lovett L.L.C. (SE Lovett), which owns the Lovett Station, a 447
MW coal-fired plant consisting of three units; and (iii) Southern Energy NY-Gen,
L.L.C. (SE NY-Gen), which owns two units intended to operate during periods of
very high (peak) demand (the Hillburn Gas Turbine Station and the Shoemaker Gas
Turbine Station), three hydroelectric stations (Mongaup 1-4, Swinging Bridge 1-2
and Rio 1-2) and an operational interest in the Grahamsville Hydroelectric
Station. All generating units at Bowline and Lovett have the capability of
burning natural gas and oil.

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<PAGE> 72

The following table summarizes certain characteristics of SE New York's
generating facilities in operation and under development:

<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
--------------- -------- --------------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
BOWLINE PLANT
Bowline 1................................................. West Haverstraw 612 Natural Gas/Oil
Bowline 2................................................. West Haverstraw 615 Natural Gas/Oil
-----
Subtotal................................................ 1,227
LOVETT PLANT
Lovett 3.................................................. Tomkins Cove 70 Natural Gas/Oil
Lovett 4.................................................. Tomkins Cove 177 Coal/Natural Gas/Oil
Lovett 5.................................................. Tomkins Cove 200 Coal/Natural Gas/Oil
-----
Subtotal................................................ 447
SE NY-GEN PLANTS
Mongaup 1-4............................................... Mongaup River 4 Hydro
Swinging Bridge 1-2....................................... Mongaup River 13 Hydro
Rio 1-2................................................... Mongaup River 10 Hydro
Grahamsville.............................................. Grahamsville 17 Hydro
Hillburn GT............................................... Ramapo 40 Natural Gas/Oil
Shoemaker GT.............................................. Middletown 36 Natural Gas/Oil
-----
Subtotal................................................ 120
-----
Total................................................... 1,794
=====
PROJECT UNDER DEVELOPMENT:
Bowline Expansion......................................... West Haverstraw 785 Natural Gas
</TABLE>

In connection with the acquisition of these power plants, the project
companies entered into various agreements with ORU through July 1, 2004, under
which SE New York will operate the plants as called upon by ORU to ensure ORU's
system reliability. The project companies also entered into various transition
agreements with ORU and ConEd to provide energy and installed capacity to ORU
and ConEd for specified periods after the closing. The only remaining obligation
under these transition agreements is a transition power sales agreement with ORU
under which SCEM, under an assignment from SE New York, is obligated to sell
capacity through October 31, 2000.

SE Bowline, SE Lovett and SE NY-Gen have entered into fuel supply, energy
services and power marketing agreements with SCEM through which SCEM (i)
supplies fuel to the plants; (ii) will bid, schedule and dispatch the units
through the New York Independent System Operator (NYISO) into the
newly-deregulated (since November 18, 1999) New York market; (iii) handles the
settlement and billing process for NYISO sales and sales under power purchase
and installed capacity sales agreements; (iv) purchases excess energy and
installed capacity not purchased through power purchase agreements and installed
capacity sales agreements for sale in the NYISO; and (v) assists in the
administration of and compliance with the obligations of SE Bowline, SE Lovett
and SE NY-Gen under various fuel supply and transportation contracts and power
purchase agreements, installed capacity agreements and other contracts for the
sale and purchase of energy, installed capacity or other energy products sold in
the NYISO.

On March 27, 2000, the NYISO filed a petition with FERC seeking to suspend
the market-based 10-minute spinning and non-spinning reserve market, two types
of ancillary services markets in which SE New York currently participates. In
the 10-minute spinning reserve market, generators are compensated to operate
units below their full output level, so that the additional output may be
quickly brought into service if system reliability is threatened. In the 10
minute non-spinning reserve market, generators are compensated to stand by with
"quick start" units that are not currently operating, such as combustion
turbines or certain hydroelectric units. In addition, the NYISO sought

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<PAGE> 73

permission to make retroactive adjustments to market clearing prices for the
period from January 29, 2000 to March 28, 2000. In an order issued June 1, 2000,
the FERC rejected the proposed price cap on spinning reserves but allowed the
cap on non-spinning reserves through November 1, 2000, provided that suppliers
are able to recover their lost opportunity costs. Lost opportunity costs would
result when generators are withheld from energy market participation so that
they may stand by to meet unexpectedly high demand or other generators'
under-performance. The FERC also rejected the NYISO's proposals for retroactive
adjustment to market clearing prices in the reserve markets. As a result of the
FERC order, SE New York does not anticipate any adverse financial implications
due to the NYISO's reserve market filing.

On June 30, 2000, the NYISO sought rehearing of FERC's rejection of the
NYISO's proposal to retroactively adjust changes for 10-minute spinning reserves
for the January 29 to March 28, 2000 period. On July 31, 2000, the FERC granted
the NYISO a re-hearing for the purpose of further consideration. The NYISO also
requested a stay of the order's denial of authority to conduct an interim
rebilling for operating reserves for the month of March. The outcome of the
NYISO appeal is uncertain.

On June 30, 2000, the board of directors of the NYISO sought from the FERC
authority to impose $1,300 per MWh bid caps on the day-ahead and real-time
energy markets, for the July 6 to October 28, 2000 period. On July 26, 2000, the
FERC approved the imposition of a bid cap of $1,000 per MWh in the wholesale
electrics markets in New York State until October 28, 2000. This reduces the
current bid cap from $1,300 to $1,000 per MW. SE New York does not anticipate
any adverse financial implications due to this filing.

In March 2000, SE Bowline filed an application with the State of New York
Department of Public Service for authorization to construct a 785 MW combined
cycle facility (a facility that utilizes both combustion and steam turbines) on
a 98-acre site adjacent to the Bowline plant. In addition, SE Bowline has filed
an application with the New York Department of Public Service to construct a 4.2
mile 24-inch natural gas line to meet the current and future natural gas needs
of the Bowline plant. This line would connect directly to the existing Columbia
gas transmission system. We expect to start commercial operation of the new
power facility in 2003 and the new gas line in 2001.

In October 1999, the State of New York announced an initiative to reduce
air emissions in the state beyond the requirements under the 1990 Clean Air Act
Amendments. Under this proposal, the standards would become effective in 2003
and would be phased in through 2007. A draft of the regulation is expected to be
proposed by year-end 2000. The impact of this potential regulation is uncertain
at this point. Along with several other electric utilities, SE New York received
an information request from the State of New York concerning the air quality
control implications of various repairs and maintenance activities at the Lovett
facility. SE New York responded fully to this request and provided all of the
information requested by the state. For more information about this matter, see
"-- Legal Proceedings."

A study is being conducted of the impact of water intake structures on fish
species in the Hudson River. Bowline's water intake is part of this study. The
resolution of this study is uncertain but could result in additional limitations
on Bowline's water intake or new technology requirements for the intake.

SE New England

On December 30, 1998, subsidiaries of our wholly owned subsidiary, Southern
Energy New England, L.L.C., acquired various power plants, with a total capacity
of 1,245 MW, from subsidiaries of Commonwealth Energy System (Commonwealth) and
Eastern Utilities Associates (EUA) for

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<PAGE> 74

$536 million. The sales by Commonwealth and EUA were required as part of
deregulation plans adopted in Massachusetts and Rhode Island. The assets consist
of the Kendall Station (with five generating units) acquired by Southern Energy
Kendall, L.L.C. (SE Kendall) and the Canal Station (Canal Units 1 and 2), the
Martha's Vineyard Diesels and the Wyman Unit 4 Interest, all acquired by
Southern Energy Canal, L.L.C. (SE Canal). In conjunction with the formation of
Southern Energy North America Generating, Inc. (SENAG), as an indirect wholly
owned subsidiary of Southern Energy, Southern Energy New England, L.L.C.
transferred its ownership interests in SE Canal and SE Kendall to subsidiaries
of SENAG in August 1999. These entities are collectively referred to herein as
SE New England.

The following table summarizes certain characteristics of SE New England's
generating facilities in operation and under development:

<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
---------------------- -------- --------------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
CANAL PLANT
Canal Unit 1............................................ Sandwich, MA 563 Oil
Canal Unit 2............................................ Sandwich, MA 560 Natural Gas/Oil
-----
Subtotal.............................................. 1,123
Martha's Vineyard Diesels............................... Martha's Vineyard, MA 12 Oil
Wyman Unit 4 Interest................................... Yarmouth, ME 9 Oil
-----
Subtotal.............................................. 21
KENDALL PLANT
Kendall Steam, Units 1-2-3.............................. Cambridge, MA 63 Natural Gas/Oil
Kendall Jets, Units 1 & 2............................... Cambridge, MA 38 Oil
-----
Subtotal.............................................. 101
-----
Total................................................. 1,245
=====
PROJECTS UNDER DEVELOPMENT:
Canal and Kendall Expansion............................... Sandwich/Cambridge, MA 835 Natural Gas/Fuel Oil
</TABLE>

The Canal and Kendall plants, which are designed to operate during periods
of high (intermediate load) and very high (peak) demand, are located in close
proximity to Boston, a major center for electricity demand in New England. The
Martha's Vineyard Diesels supply electricity on the island of Martha's Vineyard
during periods of high demand or in the event of a transmission interruption.
The Wyman Unit 4 Interest is a 1.4325% ownership interest (equivalent to 9 MW)
in the 614.5 MW Wyman Unit 4 located on Cousin's Island, Yarmouth, Maine. It is
primarily owned and operated by FPL Group. SE New England is planning to add
approximately 835 MW total capacity to the Canal and Kendall plants and expects
to complete the permitting process in the third quarter of 2000. We expect to
commence commercial operation of these expansions in 2002 for Kendall and in
mid-2004 for Canal.

The regulatory environment in the wholesale electricity market in the New
England region has evolved into a competitive market for electrical generation.
As such, the wholesale electricity market has changed away from a cost-based
structure to a bid-based structure. We believe that SE New England has better
opportunities for revenue enhancement under a competitive bid based system
because the bid based approach offers low cost, flexible generators, such as SE
New England, better opportunities to compete. The New England Power Pool
(NEPOOL) was formed in 1971 and is a voluntary association of utilities, power
marketers, generators, end-users and municipal entities. ISO-New England, Inc.
(ISO-NE) was established as a not-for-profit private corporation on July 1, 1997
following its approval by the FERC. The ISO-NE has responsibility for managing
the New England region's electric bulk power generation and transmission systems
and administering the regions open

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<PAGE> 75

access transmission tariff. In addition, since inception of the new bid-based
markets on May 1, 1999, the ISO-NE has administered the restructured wholesale
electricity marketplace for the region.

Since the inception of the new markets, the ISO-NE has frequently taken
action to intervene in the market to change posted clearing prices that had been
set by the software used to dispatch the system and determine prices. The ISO-NE
stated that these interventions were necessary due to software errors and
operator errors associated with the implementation of the new system. The ISO-NE
has intervened most often during periods of high electrical demand and otherwise
high clearing prices. The ISO-NE's actions have sparked extensive discussions
and debate among participants in the generating sector in New England regarding
the propriety of these interventions.

The ISO-NE and NEPOOL have made numerous market rule changes since market
inception including changes in the manner that the energy and ancillary services
markets are settled. The transition period has been difficult for the ISO-NE and
NEPOOL participants; and there is a significant amount of additional work that
still needs to be completed to implement a well functioning wholesale market
system in New England.

In February 2000, the Massachusetts Secretary of Environmental Affairs
requested certain generation owners to submit a voluntary plan for achieving
prescribed emissions reductions. The requested plans were to achieve these
reductions by 2005, 2007 or 2010 depending on the nature of the emissions. SE
Canal was one of the generation owners asked to submit a plan. In March 2000, SE
Canal submitted a plan describing the expansion project proposed at the Canal
site, which results in significant emissions reductions and meets the
quantifiable targets prescribed by the Secretary. In June 2000, the
Massachusetts Department of Environmental Protection (MADEP) proposed new
regulations that include the Canal plant as an affected unit. These regulations
are currently in a draft form for public comment. The draft regulations call for
reductions in sulfur dioxide (SO2), nitrogen oxides (NOx), and carbon dioxide
(CO2) beginning in the year 2004 and possible future reductions in mercury,
particulate matter and carbon monoxide.

In conjunction with the acquisition of its generating facilities, SE New
England also entered into an energy supply agreement with the utility
subsidiaries of Commonwealth. Under the terms of this agreement, SE New England
supplies electricity at wholesale to meet a portion of Commonwealth's
obligations to provide standard offer service at guaranteed rates to eligible
retail customers in Massachusetts. The agreement expires in 2005. SE New England
has entered into an agreement with SCEM for SCEM to supply the electricity to
meet SE New England's obligations under its agreement with Commonwealth in
exchange for payments by SE New England.

Except for the output from Canal Unit 1, which is committed to SE New
England and three other power purchasers under contracts through October 2002,
the capacity, energy and ancillary services from the generating units are sold
into NEPOOL through SCEM. SE Canal and SE Kendall have entered into arrangements
with SCEM regarding the marketing of capacity, energy and ancillary services
from the generating units. The arrangements with SCEM became effective on the
date of implementation of the NEPOOL bid-based markets. Under these
arrangements, SCEM bids the output of the units into NEPOOL and is responsible
for the supply of fuel to the units. SCEM also entered into a tolling
arrangement with SE New England for Canal Unit 2, Kendall Jets and Martha's
Vineyard Diesels in which SCEM provides fuel to these facilities and receives
the energy and ancillary services output in return for payments to SE New
England. Under this arrangement, SE New England has guaranteed operational
performance parameters of the units.

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<PAGE> 76

NORTH AMERICA -- EAST REGION

State Line Energy

In December 1997, we acquired, through an indirect, wholly owned
subsidiary, State Line Energy, L.L.C. (State Line Energy), the 490 MW State Line
facility from a subsidiary of Commonwealth Edison Company (ComEd) for $68
million. The State Line facility is located near Chicago, a major center of
electricity demand in the Midwest. The plant is comprised of two coal-fired
generating units, Unit 3 and Unit 4. ComEd retained the ownership of the
switchyard and transmission facilities connecting the State Line station to the
ComEd transmission system, as well as the coal inventory and the emissions
allowances associated with the State Line facility.

State Line Energy supplies power to ComEd under a 15-year power purchase
agreement expiring in 2012. ComEd's territory consists of northern Illinois and
contains 70% of Illinois' population. In its regulated service area, ComEd
delivers power to 3.4 million customers. If State Line Energy builds new
capacity or increases the firm capacity of the plant above 490 MW, State Line
Energy may sell that additional capacity and associated energy to third parties,
after first offering ComEd the right to purchase that additional capacity and
energy. For short-term (non-firm) sales, State Line Energy has contracted with
SCEM to market additional energy not required under the ComEd power purchase
agreement. In addition, State Line Energy has contracted with ComEd to provide
an additional 25 MW capacity from the plant on a short-term arrangement.

The coal required to operate the facility is currently supplied by ComEd
under a coal supply agreement. Because ComEd divested of its fossil generation
business, it is transferring management of its coal supply obligations to a
third party. Under this agreement, all of ComEd's remaining coal and logistics
contracts will be managed by SCEM.

State Line Energy is in the early stages of developing additional capacity
at its site to meet the growing demand for power in the region. The expansion,
if approved by all of the regulatory authorities, would consist of one gas-fired
combined cycle unit with a total generating capacity of 550 MW and is expected
to be completed in 2003.

On July 28, 1998, an explosion and fire occurred in a coal handling area at
the State Line facility. A total of 17 people were injured. The coal conveyor
system, which supplies coal to both units, sustained significant damage. Unit 4
was forced offline by the explosion and ensuing fire; however, it returned to
service on January 31, 1999. Unit 3 was offline undergoing a major maintenance
outage at the time of the incident and sustained less damage. Unit 3 returned to
service on February 8, 1999. Both units have met their net capacity under the
power purchase agreement since returning to service and have passed annual
environmental testing.

The State Line facility is covered under Southern Company's umbrella
insurance policy, which provides up to $400 million of coverage for a
combination of property damage, liability, and business interruption with
liability limits of $210 million. State Line Energy expects that insurance
proceeds will cover costs of property damage during the fire and explosion.

The EPA and the Indiana Department of Environmental Management are
currently proposing stricter nitrogen oxide emission standards through one-hour
ozone regulations and NOx State Implementation Plan calls. The monthly capacity
charge (a fee charged to cover fixed costs based on the availability and
capacity of the plant) and a fee charged for the energy produced is adjusted by
a formula designed to pass through to ComEd the additional annual costs for
changes related to new NOx emission standards including an amortized portion of
the associated capital costs based on full amortization by the year 2022.
Accordingly, we do not expect stricter nitrogen oxide emission standards to have
a material adverse effect through the term of the power purchase agreement.

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<PAGE> 77

Unicom, the parent company of ComEd, announced a merger with PECO Energy
Services in September 1999. We do not expect any adverse effect on the power
purchase agreement as a result of this merger.

Birchwood

Birchwood Power Partners, L.P. is a limited partnership which owns the
nominal 222 MW Birchwood power facility. The facility is a coal-fired
cogeneration plant located approximately 12 miles southeast of Fredericksburg,
Virginia. We own a 50% interest in Birchwood, with the remaining 50% owned by a
subsidiary of Cogentrix Energy, Inc. The Birchwood facility was our first new
power plant (greenfield) project built in North America, and one of our
subsidiaries continues to operate and maintain the Birchwood facility. Power
generated at the plant is sold to Virginia Power, a utility that provides
electricity to two million customers in Virginia and North Carolina. In
addition, a subsidiary of ours and a subsidiary of Cogentrix jointly own a
greenhouse facility located adjacent to the Birchwood facility, which uses steam
generated by the Birchwood facility.

Birchwood sells electricity to Virginia Power under a 25-year power
purchase agreement. Under the power purchase agreement, Birchwood sells all
electricity generated by the facility to Virginia Power through 2021. Birchwood
earns a fee based on a contractually determined rate per kilowatt month for the
available capacity of the facility, which is determined by semiannual capacity
tests. Variable operating and maintenance charges are paid by Virginia Power on
a per kilowatt-hour basis and are included in Birchwood's electric revenues.
Fuel costs are reimbursed by Virginia Power under the power purchase agreement.
Fuel charges are computed on the amount of kilowatt-hours generated, as well as
on a fixed heat rate and a contractually determined fuel compensation price.
Birchwood has fixed, indexed future costs for coal, coal transportation, ash
disposal and lime. Virginia Power has the option to terminate the power purchase
agreement for convenience on one year's notice. If this option is exercised,
Virginia Power must pay Birchwood the greater of the net book value of the
facility or the amount of the original permanent financing, adjusted by an
inflation base index, plus the net present value of all pre-tax profits for the
life of the power purchase agreement, plus all expenses associated with the
termination. We have entered into a separate agreement with Virginia Power to
sell an additional 20 MW of capacity from the Birchwood facility.

The Virginia legislature recently passed legislation that will increase
competition in the power production industry in Virginia. Competition will be
phased in starting in 2002 with full retail competition in effect by 2004. We
have not yet determined what effect this legislation will have on the Birchwood
facility or the existing power purchase agreement. Virginia Power is in the
process of determining its strategy with respect to its current non-utility
contracts, such as the power purchase agreement with Birchwood. Virginia Power,
as stated, has a termination option that it may exercise that provides for
Birchwood to be fully compensated if the option is exercised.

On January 18, 2000, the EPA published a new regulation, known as the
"Section 126 Rule," which allocates nitrogen oxide emissions allowances to
electric generating facilities in Delaware, Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia,
West Virginia and the District of Columbia. This regulation becomes effective on
May 1, 2003. If a plant's emissions exceed its allocated allowances under the
Section 126 Rule, the plant must purchase additional allowances from other
regulated plants. We believe that the nitrogen oxide allowances allocated to the
Birchwood facility are incorrect due to the use of incorrect data by the EPA. On
March 17, 2000, Birchwood filed an appeal of the Section 126 Rule with the EPA
to challenge the nitrogen oxide emission allowances for the Birchwood facility.

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SEI Wisconsin

SEI Wisconsin, L.L.C. (SEI Wisconsin) is an indirect, wholly owned
subsidiary that was formed in 1998 to develop, construct, own, operate and
maintain the Neenah Power Plant. The Neenah plant is a 306 MW natural gas-fired
electric generating plant located in the Town of Neenah, Wisconsin. The plant
provides electricity during periods of very high (peak) demand. Construction of
the plant is complete and the final cost is expected to be approximately $100
million. The plant commenced operations on May 8, 2000.

SEI Wisconsin will initially sell all of its capacity and electric power
output to Wisconsin Electric Power Company (WEPCO) under an eight-year power
purchase agreement entered into in August 1998. WEPCO provides electric, gas and
steam service to more than two million customers in southeastern Wisconsin. The
power purchase agreement is structured as a tolling arrangement, whereby WEPCO
pays SEI Wisconsin a monthly charge designed to provide SEI Wisconsin a return
on capital and to cover debt service and fixed operating costs. WEPCO also pays
a charge for each start and for each running hour for each combustion turbine.
These start charges and running hour charges are designed to recover variable
costs associated with operating and maintaining the plant. Under this tolling
arrangement, WEPCO supplies natural gas as well as any backup No. 2 fuel oil
used to run the plant at no cost to SEI Wisconsin. The power purchase agreement
has bonus and penalty provisions regarding capacity, heat rate and availability.
WEPCO, prior to the end of the sixth contract year, has the option to renew the
power purchase agreement for another five years beyond the current eight year
term or purchase the Neenah plant from us for $150 million at the end of the
power purchase agreement term.

At the expiration of the power purchase agreement, SEI Wisconsin may
convert the Neenah plant from a facility primarily designed to provide power
during periods of very high (peak) demand to a facility with approximately 515
MW of capacity to be used during periods of average (base load) and higher
(intermediate load) demand. At that time, SEI Wisconsin plans to sell the plant
output to SCEM under a long-term marketing agreement which may be structured as
a tolling agreement. This conversion may occur earlier through agreement with
WEPCO, which would contract for the increased output of the plant.

The Neenah plant is located in the Mid-America Interconnected Network
(MAIN) region under the North America Electric Reliability Council that covers
predominantly Illinois and eastern Wisconsin. The MAIN market is nominally a 55
GW-sized market that is dominated by coal (54%) and nuclear (28%) generating
capacity. The MAIN region is currently in need of both capacity designed for
very high (peak) demand periods as well as additional transmission capacity.

Deregulation of the electricity market in Wisconsin has been slow. The
Public Service Commission of Wisconsin and the state legislature are currently
studying the deregulation of the electricity market and no material legislation
has been enacted to date.

SEI Michigan

We are currently developing an 848 MW natural gas-fired electric generating
plant at a previously undeveloped (greenfield) site in Zeeland, Michigan. In
1999, we formed an indirect, wholly owned subsidiary, SEI Michigan, L.L.C. (SEI
Michigan), to develop, construct, own, operate and maintain the Zeeland power
plant. We received all necessary permits in spring 2000 and construction began
in early summer 2000. SEI Michigan is being built in two phases.

Phase I is a 298 MW facility designed to provide electricity during very
high (peak) demand periods. We expect this phase to become operational June 2001
and cost approximately $110 million. SEI Michigan will initially sell all of the
Phase I capacity and electricity power output to SCEM

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under a five-year power purchase agreement. SCEM has in turn entered into an
agreement with Engage Energy to sell the output of this phase. At the expiration
of the tolling agreement, SEI Michigan may add heat recovery equipment and a
steam turbine (combined cycle unit), which would allow the plant to operate
during periods of average (base load) and higher (intermediate load) demand, and
expand the capacity of Phase I from 298 MW to 550 MW. SEI Michigan expects to
enter into a new marketing agreement with SCEM at that time.

Phase II is a 550 MW facility that uses both combustion and steam turbines
(a combined-cycle unit) which would allow the plant to operate during periods of
average (base load) and higher (intermediate load) demand. This phase is
expected to be operational by July 2002 and cost approximately $242 million. We
plan to sell the plant's capacity to customers in the East Central Area
Reliability Council (ECAR) market through marketing agreements with SCEM.

The ECAR market is nominally a 106 GW market that is dominated by coal
generating capacity (82%). The region is currently in need of capacity during
periods of very high (peak) demand after having experienced brown outs and
curtailments on peak days and having excess available capacity of less than 10%.
Furthermore, the market faces the risk of the reduced availability of base and
intermediate resources due to retirement of nuclear plants and the possibility
that the market's coal-fired plants will be unable to reach newly mandated
environmental standards.

SE Mid-Atlantic

On June 7, 2000, we executed an asset purchase and sale agreement with
Potomac Electric Power Company (PEPCO) which sets forth the terms of sale and
purchase of PEPCO's generation business in Maryland and Virginia. Our purchase
price for these acquisitions is approximately $2.65 billion plus amounts to be
determined for working capital and capital expenditures estimated to be $97
million, and approximately $260 million in the event certain power purchase
agreements are not transferred to us. We were selected as the winning bidder for
the generation business following a competitive bid process.

Based on the current structure of this transaction, our newly formed
limited liability company subsidiary, Southern Energy Mid-Atlantic, LLC, will
acquire, among other things:

- the 1,412 MW coal and oil-fired Morgantown station located in Charles
County, Maryland, approximately 50 miles south of Washington, D.C.,

- the 2,423 MW coal, oil and gas-fired Chalk Point station located in
Prince George's County, Maryland, approximately 45 miles from Washington,
D.C., including the assignment of PEPCO's rights and obligations to the
84 MW Southern Maryland Electric Cooperative, Inc. combustion turbine
located at the Chalk Point station site,

- the 837 MW coal, oil and gas-fired Dickerson station located in upper
Montgomery County, Maryland, approximately 30 miles from Washington,
D.C., and

- the 482 MW coal and oil-fired Potomac River station located in
Alexandria, Virginia, in close proximity to Washington, D.C.

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The following table summarizes certain characteristics of PEPCO's power
plants that we are in the process of acquiring:

<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
GENERATION OPERATIONS: ---------------------- --------- --------
<S> <C> <C> <C>
Morgantown
Morgantown 1.............................................. Charles County 582 Coal/Oil
Morgantown 2.............................................. Charles County 582 Coal/Oil
Morgantown CTs 1 and 2.................................... Charles County 2 x 16 Oil
Morgantown CTs 3-6........................................ Charles County 4 x 54 Oil
------
Subtotal................................................ 1,412
Chalk Point
Chalk Point 1............................................. Prince George's County 341 Coal/Gas
Chalk Point 2............................................. Prince George's County 342 Coal/Gas
Chalk Point 3............................................. Prince George's County 612 Oil/Gas
Chalk Point 4............................................. Prince George's County 612 Oil/Gas
Chalk Point CT 1.......................................... Prince George's County 18 Oil
Chalk Point CT 2.......................................... Prince George's County 30 Oil
Chalk Point CT 3.......................................... Prince George's County 85 Gas/Oil
Chalk Point CT 4.......................................... Prince George's County 85 Gas/Oil
Chalk Point CT 5.......................................... Prince George's County 107 Gas/Oil
Chalk Point CT 6.......................................... Prince George's County 107 Gas/Oil
SMECO CT.................................................. Prince George's County 84 Gas/Oil
------
Subtotal................................................ 2,423
Dickerson
Dickerson 1............................................... Montgomery County 182 Coal/Oil
Dickerson 2............................................... Montgomery County 182 Coal/Oil
Dickerson 3............................................... Montgomery County 182 Coal/Oil
Dickerson DCT1............................................ Montgomery County 13 Oil
Dickerson H1CT............................................ Montgomery County 139 Gas/Oil
Dickerson H2CT............................................ Montgomery County 139 Gas/Oil
------
Subtotal................................................ 837
Potomac River
Potomac River 1........................................... Alexandria 88 Coal/Oil
Potomac River 2........................................... Alexandria 88 Coal/Oil
Potomac River 3........................................... Alexandria 102 Coal/Oil
Potomac River 4........................................... Alexandria 102 Coal/Oil
Potomac River 5........................................... Alexandria 102 Coal/Oil
------
Subtotal................................................ 482
------
Total................................................. 5,154
======
</TABLE>

In addition to our generation capacity, we have power purchase agreements
to purchase approximately 735 MW of electricity. We are currently planning
expansion projects of 120 MW and 495 MW at the Dickerson plant in Montgomery
County.

The series of transactions contemplated in the asset purchase and sale
agreement includes the purchase of four electric generating stations in Maryland
and Virginia (as described above) totaling 5,154 MW; three separate coal ash
storage areas, a 51.5 mile oil pipeline serving the Chalk Point and Morgantown
stations, an engineering and maintenance service facility and related assets;
the lease of the land on which the Potomac River station is located; the sale of
power to PEPCO under two separate transition power agreements with terms of up
to four years; the sale of power to PEPCO under a local area support agreement
requiring the Potomac River station to operate for purposes of supporting a
local load pocket; the execution of a three-year operation and maintenance
agreement for PEPCO's two generating stations located in the District of
Columbia (Benning and Buzzard Point); the assumption of five of PEPCO's power
purchase agreements totaling 735 MW (Ohio Edison, Panda-Brandywine, Northeast
Maryland Waste Disposal Authority, Prince George's County

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Detention Center and Gude Landfill); and the execution of a parent guarantee to
support the obligations under any of the project agreements in the event these
obligations are assigned to one of our wholly owned subsidiaries. It is
estimated that approximately 1,000 PEPCO employees will become our employees
once the transaction is consummated. The closing date for this transaction is
targeted for November 2000, pending regulatory approvals.

The PEPCO assets are located in the PJM Interconnection (PJM), which
encompasses New Jersey, Maryland, Delaware, the District of Columbia and most of
Pennsylvania. The PJM market is the largest centrally-dispatched power pool in
the United States with 56,000 MW of generating capacity. PJM has facilitated a
bid-based energy market since April 1997 and initiated operation as an
Independent System Operator (ISO) on January 1, 1998. PJM enables participants
to buy and sell energy and ancillary services, schedule bilateral transactions
and reserve transmission service.

The PEPCO assets provide a range of capacity across the PJM dispatch curve.
There is approximately 2,699 MW of baseload capacity, 1,400 MW of cycling
capacity, and 1,055 MW of peaking capacity. Likewise, there is a wide range of
fuels consumed at the facilities, and approximately 94% of the total generating
capacity can burn multiple fuels.

Under the asset purchase and sale agreement, we will enter into two
separate transition power agreements with PEPCO to provide energy, capacity and
ancillary services to PEPCO's default retail customers. One of the transition
power agreements is for service to PEPCO's default customers in Maryland and has
a term through June 30, 2004. The other transition power agreement is for
service to PEPCO's default customers in the District of Columbia and expires 49
months from the closing of the transaction. Under both transition power
agreements, we are obligated to provide capacity and ancillary services for the
entire term. We are also obligated under both contracts to provide 100% of the
energy requirements for the first contract year and 75% of the energy
requirements for the second contract year. Beginning in the second contract
year, PEPCO has the option of purchasing additional energy requirements in 25%
increments up to the level purchased in the prior contract year. PEPCO's current
peak demand requirements for the existing retail customers are approximately
5,300 MW. With a total generation portfolio of 5,889 MW, including the power
purchase agreements, these transition power agreements provide a significant
portion of our revenues for the first two to four years and thereby mitigate the
market price volatility risk. The pricing for these services in each of the
agreements is below current market prices and this was reflected in the total
asset purchase price.

Under the asset purchase and sale agreement, we will assume the obligations
and benefits of five power purchase agreements with a total capacity of 735 MW.
On an aggregate basis, the pricing terms of these power purchase agreements is
below market and this was reflected in the total asset purchase price. Three of
the power purchase agreements (Ohio Edison, Panda-Brandywine and Northeast
Maryland Waste Disposal Authority) represent 730 MW. The Ohio Edison power
purchase agreement provides for the sale of 450 MW of capacity and the
associated energy from the Ohio Edison system to PEPCO. As an element of the
Ohio Edison power purchase agreement, PEPCO is a party to a "purchase and
resale" agreement with Allegheny Power System (APS) under which APS purchases
this supply from Ohio Edison and resells it to PEPCO at the points of
interconnection between the APS and PEPCO systems. PEPCO can also elect to forgo
the transmission across the APS system and sell the capacity and associated
energy to third parties from the Ohio Edison system. This allows PEPCO the
option of selling this capacity and energy into either the ECAR or PJM markets.
The term of the Ohio Edison power purchase agreement is through December 31,
2005.

PEPCO has an agreement with Panda-Brandywine to purchase the capacity and
energy output from a cogeneration facility owned by Panda-Brandywine. The
Panda-Brandywine facility was designed to be a QF under PURPA. Under this
agreement, PEPCO is committed to purchase the

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dependable capacity and a portion of the electrical output of the
Panda-Brandywine facility. Specifically, PEPCO is obligated to purchase
approximately 99 MW of energy for 60 hours of each week. The balance of the
capacity is dispatchable at PEPCO's discretion. This agreement has an expiration
date of October 2021.

PEPCO and the owner of the Panda-Brandywine facility are involved in
various legal proceedings. Panda-Brandywine has filed two separate actions, one
in a Texas court and the other before the Maryland Public Service Commission, in
an attempt to prohibit PEPCO from either assigning the Panda-Brandywine power
purchase agreement or entering into a back-to-back arrangement involving that
power purchase agreement. PEPCO has stated its belief that it will ultimately
prevail in both of these legal proceedings. If PEPCO is successful in these
proceedings, the Panda-Brandywine power purchase agreement will be assigned to
us at the closing, or PEPCO will enter into a back-to-back arrangement with us
at the closing, in either case as specifically contemplated by our asset
purchase and sale agreement with PEPCO. The asset purchase and sale agreement
does, however, also provide for the possibility that PEPCO will not be able to
either assign the Panda-Brandywine power purchase agreement or enter into a
back-to-back arrangement involving the power purchase agreement. In such event,
the asset purchase and sale agreement requires us to pay an additional amount of
approximately $260 million at closing into an escrow account, and PEPCO is
entitled to the proceeds from such account if the Panda-Brandywine power
purchase agreement is neither assigned to us or the subject of a back-to-back
arrangement with us within 12 months of the closing. The proceeds from such
account revert to us in the event the Panda-Brandywine power purchase agreement
is either assigned or is the subject of a back-to-back arrangement during such
12-month period.

PEPCO has an agreement to purchase the energy and capacity output from a
solid waste recovery facility owned by Northeast Maryland Waste Disposal
Authority. This facility is located adjacent to the Dickerson Generating
Facility and has been certified as a qualifying small power production facility
under PURPA. The generating capacity of this facility is 50 MW but the facility
typically operates at a peak capacity of 32 MW. PEPCO is required to purchase
all electricity generated by the facility in excess of the facility's own total
requirements for electricity and to sell to the facility on a partial
requirements basis any electricity required in excess of the amount generated by
the facility. The price of electricity purchased under this contract is subject
to the "Standard Rates for Purchases from QFs" as set out in PEPCO's Rate
Schedule CG-SPP on file with the Maryland Public Service Commission. This
contract terminates in October 2019.

NORTH AMERICA -- GULF COAST REGION

SE Wichita Falls

In October 1999, we purchased, through an indirect wholly owned subsidiary,
Southern Energy Wichita Falls, L.P. (SE Wichita Falls), an 80 MW gas-fired
electric generating plant from Wichita Falls Energy Co. Ltd. of Fort Worth,
Texas for approximately $19 million. The plant is a facility designed for
periods of average (base load) demand, consisting of three gas turbines and one
steam turbine, fueled by natural gas transported through TXU Gas Company's Lone
Star pipeline. The turbines use propane gas as a backup fuel. The facility is
operated by Vetrotex CertainTeed Corporation (Vetrotex) under an operations and
steam sales agreement. Under this agreement, Vetrotex also purchases steam from
the plant. In addition, we have entered into a four-year power purchase
agreement with SCEM for electricity generated by the plant.

SE Wichita Falls is in the early stages of evaluating the addition of
capacity at its site to meet the growing demand for power in the region. The
proposed plan involves an expansion consisting of one or more combustion
turbines operating during periods of very high (peak) demand, with a combined
capacity of approximately 150 MW. The expected completion date for this
expansion, if it

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proceeds, is mid-2002. Depending on the availability of equipment, the expansion
could be completed as early as mid-2001.

SEI Texas

SEI Texas, L.P. (SEI Texas) is an indirect, wholly owned subsidiary that
was formed to develop, construct and operate a 546 MW natural gas-fired electric
generating plant in the Dallas-Fort Worth metropolitan area. The plant will
operate a total of four units with two operating during periods of very high
(peak) demand and a third combustion turbine with a corresponding steam turbine
that can be operated during periods of average (base load) and higher
(intermediate load) demand (a combined-cycle unit). Construction of the facility
is expected to cost approximately $215 million. Units 1 and 2, representing 298
MW, became operational on June 1, 2000. Construction has begun on the remaining
248 MW, Units 3 and 4, which we expect to become operational in June 2001.

SEI Texas has agreed to sell all of the capacity and electric power output
from Units 1 and 2 to SCEM under a five-year power purchase agreement expiring
May 31, 2005. A separate agreement for Units 3 and 4 is currently being
negotiated with SCEM. Under the existing power purchase agreement, all fuel
required to run the facility will be provided and paid for by SCEM.

At the expiration of the power purchase agreement, SEI Texas may add heat
recovery equipment and a steam turbine to Units 1 and 2, which would allow these
units to operate during periods of average (base load) and higher (intermediate
load) demand, and expand the overall plant capacity to 750 MW. At that time, the
plant's capacity and energy will be sold to customers in the Electric
Reliability Council of Texas (ERCOT) market through marketing agreements with
SCEM.

Texas has passed legislation for the deregulation of its electricity
market. The pilot phase of the deregulated market is scheduled to begin in June
2001, with full deregulation in place by January 2002. The underlying wholesale
market is going through a restructuring to support this legislation. Part of the
restructuring will include setting up ERCOT such that all of the generation
capacity in that market is managed through a common transmission system. Another
part of the restructuring may require investor owned utilities to divest of
large blocks of their generating assets. Both of these actions will enhance SEI
Texas' position in the marketplace by increasing liquidity in the market and
mitigating the market power of the incumbent utilities.

Mobile Energy

We have a 1% interest in Mobile Energy Services Company, L.L.C. (Mobile
Energy) through our wholly owned subsidiary Southern Energy Resources, Inc.
(SERI). The remaining 99% is indirectly owned by Southern Company through its
wholly owned subsidiary Mobile Energy Services Holdings, Inc. (MESH). Mobile
Energy is the owner of a facility that generates electricity, produces steam and
processes black liquor as part of a pulp and paper complex in Mobile, Alabama.
On May 5, 1998, Mobile Energy received notice from Kimberly-Clark Tissue Company
of its intention to close its pulp mill, effective September 1, 1999. The pulp
mill had historically provided approximately 50% of Mobile Energy's revenues.

On January 14, 1999, Mobile Energy and MESH, which guaranteed debt
obligations of Mobile Energy, filed voluntary petitions in the United States
Bankruptcy Court for the Southern District of Alabama, seeking protection under
Chapter 11 of the United States Bankruptcy Code.

Mobile Energy, certain of its debt holders and Kimberly-Clark have reached
a tentative settlement related to disputes arising from the shutdown of
Kimberly-Clark's pulp mill in Mobile, Alabama and reconfiguration of energy
services at the site. As part of that settlement, Kimberly-

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Clark and Mobile Energy have agreed to a modified energy services agreement
under which Mobile Energy will provide electricity and steam processing services
to Kimberly-Clark's facility through August 31, 2019 at rates intended to
approximate market rates. The settlement is conditional and will not become
final unless a variety of conditions are satisfied, including having a plan of
reorganization become effective for Mobile Energy by January 31, 2001. If these
conditions are not satisfied, the settlement agreement terminates and the
parties' relationships will be governed by the contractual relationship that
existed prior to the settlement agreement. We and SERI have entered into a
separate agreement with Mobile Energy related to a 165 MW combined cycle,
gas-fired combustion turbine project. We have agreed to supply the combustion
turbine required for the project at our cost (approximately $28 million)
together with an associated long-term services agreement from the combustion
turbine vendor. The project is expected to reduce Mobile Energy's non-fuel
operating costs. Steam from the project will be used to meet on-site demands.
Power from the project is expected to be used to meet on-site demands and is
also expected to be sold into the wholesale power markets. Mobile Energy and
SERI are currently working to resolve transmission issues that may affect the
amount of the project's power output that can be sold into the wholesale power
markets during certain times. The project is expected to begin commercial
operation in 2002.

On August 4, 2000, Mobile Energy and MESH filed a joint proposal plan of
reorganization with the bankruptcy court. If the plan of reorganization is
approved as proposed, the ownership interests in MESH and Mobile Energy held by
Southern Company and SERI will terminate upon the plan of reorganization
becoming effective, which is not expected to occur until late 2000 or early
2001.

S. Marce Fuller, our President, Chief Executive Officer and Director,
Raymond D. Hill, one of our Executive Vice Presidents and our Chief Financial
Officer, and James A. Ward, our Senior Vice President of Finance and Accounting,
were executive officers of Mobile Energy at the time it filed for bankruptcy.
Ms. Fuller and Mr. Hill continue to be executive officers of Mobile Energy. In
addition, Ms. Fuller was an executive officer of MESH until January 1, 1999, Mr.
Hill was an executive officer of MESH until August 1997, and Mr. Ward was an
executive officer of MESH at the time it filed for bankruptcy and continued to
be an executive officer of MESH until June 1999.

Mobile Energy is also in the process of renegotiating its energy service
agreements with its other customer at the site -- Sappi Fine Paper (North
America) -- and is in discussion with a third party regarding the resumption of
a pulp mill operation at the site that would be about half of the size of the
previous pulp mill operation in terms of output. As part of the settlement with
Kimberly-Clark, Mobile Energy has an assignable option to purchase some of
Kimberly-Clark's pulp mill assets that it may exercise through August 30, 2000.

Wrightsville Project

We are currently constructing a 550 MW natural gas-fired combined cycle
project in Wrightsville, Arkansas. The power project, which is scheduled for
commercial operation in June 2002, is organized as a limited liability company
jointly owned by us and Kinder Morgan Power, a subsidiary of Kinder Morgan. We
hold a 51% interest in the Wrightsville project, with Kinder Morgan Power owning
the remaining 49%. Kinder Morgan Power has responsibility for the engineering,
procurement and construction of the power plant. The estimated cost of this
project is $154 million.

The project company will initially market and sell to SCEM all of its
capacity and electric power output under a multi-year power purchase agreement.
It is anticipated that the power purchase agreement will be structured as a
tolling agreement, whereby SCEM will pay the project company a monthly capacity
charge and other charges designed to cover debt service, defray operations and
maintenance expenses and provide a return on investment to the project. Under
the tolling

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arrangement, SCEM would be responsible for supplying and paying for all fuel
costs. Other essential plant services, such as water supply, will be provided by
contract with appropriate parties.

The Wrightsville project is being developed to supply electricity during
periods of average (base load), higher-than-average (intermediate load) and very
high (peak) demand for sale into the Entergy system and neighboring markets.
These markets are experiencing increasing demand growth, particularly in
intermediate and peak periods, and peak period reserve margins are constrained.
In addition, the State of Arkansas has passed legislation for the deregulation
of its electricity market beginning in 2002. Deregulation would be expected to
increase the number of potential customers for electricity sales within the
state.

Perryville Project

We are developing a 700 MW natural gas-fired power plant at a previously
undeveloped site near Perryville, Louisiana. The project has been organized as a
limited liability company named Perryville Energy Partners, LLC, jointly owned
by our subsidiary, Southern Energy Louisiana, Inc., and Perryville Energy
Holdings, a subsidiary of Cleco Corporation. Each of the owners holds a 50%
interest in the limited liability company. We are in the process of negotiating
definitive project agreements, including a credit facility, an operations and
maintenance agreement and an engineering, procurement and construction
agreement. We plan to make a bridge loan of up to $97.5 million to support the
project until it is able to obtain third party financing. We have applied for
all major regulatory approvals and permits required to construct and operate the
plant. The estimated cost of this project is $174 million.

The Perryville project will consist of units designed to operate at periods
of very high (peak) demand and combined cycle units. We expect the first phase
of the project, a 150 MW gas turbine peaking plant, to be in commercial
operation in the summer of 2001. This portion of the project will supply
electricity primarily during periods of very high demand. The second phase of
the project, which we expect to become commercial in mid-2002, is a 550 MW
combined cycle plant designed to supply electricity during periods of average
(base load) and higher-than-average (intermediate) demand. The project will
primarily serve the wholesale power market defined by Entergy's transmission
system, including portions of Louisiana, Arkansas, Mississippi and East Texas.
Texas and Arkansas have passed legislation expanding retail competition in their
electricity sectors, while Louisiana is considering similar deregulation
initiatives.

We expect to sell the output of the project into the wholesale power market
under one or more medium to long-term power purchase agreements with major power
marketers. It is anticipated that the power purchase agreements will be
structured with the power marketer supplying fuel, dispatching the units and
taking the capacity and energy of the project. We anticipate that the power
purchase agreements will be designed to provide a monthly capacity payment that
will cover project debt service, operations and maintenance expenses and return
on investment. Water supply for the project will be obtained primarily from a
source of surface water in proximity to the plant site. The plant will be
interconnected to a 500 kV transmission line owned by Entergy. We expect a
number of natural gas pipelines at or near the site to provide a gas supply for
the project.

NORTH AMERICA -- MARKETING AND RISK MANAGEMENT OPERATIONS

Southern Company Energy Marketing (SCEM)

In September 1997, we formed SCEM as a limited partnership between us and
Vastar, an 81.9%-owned subsidiary of Atlantic Richfield Company (ARCO), a
subsidiary of BP Amoco p.l.c. Vastar is a crude oil and natural gas exploration
and production company. We currently own 60% of

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SCEM while Vastar owns the remaining 40%. Under the terms of the partnership
agreement, our ownership will automatically increase to 75% on July 1, 2001 with
no additional consideration. Additionally, we have the option to purchase
another 5% of SCEM in 2002 for $80 million. During the period from December 1,
2002 through the first business day of 2003, Vastar has the right to sell its
remaining ownership interest in SCEM to us for $210 million (or $130 million if
we exercise our option to acquire an additional 5%).

We and Vastar have agreed in a transfer restriction agreement that in the
event of a change of control of Vastar or us, the party which has not caused the
change of control has the right to purchase the interest in SCEM owned by the
party which has caused the change of control at an agreed value determined
through an appraisal process. Vastar informed us by letter dated April 20, 2000
that the merger of BP Amoco p.l.c. and Atlantic Richfield Company was completed,
and as a result of the merger BP Amoco indirectly owned (through a subsidiary)
81.9% of Vastar's common stock.

Although we never reached agreement as to whether the merger of BP Amoco
and Atlantic Richfield Company constituted a change in control under the
transfer restriction agreement, we and Vastar have entered into a non-binding
letter agreement in which we have agreed to acquire Vastar's interest in SCEM
for $250 million. Contingent upon the negotiation of definitive agreements and
the receipt of applicable regulatory approvals, we expect to close the
transaction as early as August 30, 2000. Upon the closing of the transaction,
Vastar will transfer its interest in SCEM to us and SCEM will become our wholly
owned subsidiary.

As part of the proposed transaction, the remaining seven and one half years
of gas purchase and sale agreement between SCEM and Vastar will remain in
effect. Accordingly, SCEM will continue to purchase and market the natural gas
produced by Vastar. As part of the proposed transaction, we would be relieved of
any financial obligations to Vastar under the SCEM partnership agreement,
including any guaranteed minimum cash distributions and any outstanding
arbitration.

If the proposed transaction does not close, and in lieu of our payment of
$250 million, we will remain obligated (with some exceptions) to make guaranteed
minimum cash distributions from SCEM to Vastar of $25 million in 2000 and $30
million per year in 2001 and 2002. These minimum distributions are subject to
reduction for Vastar's portion of agreed upon categories of expenses, including
credit losses to a single counterparty in excess of $5 million. Additionally, in
connection with the establishment of the initial ownership structure, we paid
$40 million to Vastar on January 8, 1998.

If the transaction contemplated by the letter agreement closes, all
disputes between us and Vastar related to SCEM would be resolved. If the
transaction does not close, however, we would remain in dispute with Vastar
concerning the 1998 cash distribution. To date, we have only paid Vastar $5.8
million for the 1998 floor payment as a result of credit losses in 1998. Vastar
believes it is entitled to a higher payment and has requested arbitration of
this matter. We do not believe that the outcome of this dispute will have a
material effect on our financial position. The 1999 floor payment in the amount
of approximately $17 million, which reflected deductions for Vastar's portion of
expenses, has been agreed to by both parties and would only be made if the
transaction contemplated by the letter agreement does not close.

We formed SCEM for the purpose of marketing and risk-managing energy and
energy-linked commodities, including electricity, natural gas, oil, coal and
emissions credits in North America. In connection with the formation of SCEM, we
and Vastar entered into a non-competition agreement which prohibits either of us
from engaging in energy marketing and risk management activities in North
America other than through SCEM. Upon the closing of the proposed transaction
with Vastar,

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the non-competition agreement will terminate. In addition to its agreement with
Vastar for the marketing of natural gas, SCEM procures fuel for and markets
electricity generated by our North American facilities that are not committed
under long-term contracts. In addition, SCEM provides marketing of these and
other energy-linked commodities to third parties. As of December 31, 1999, SCEM
employed approximately 409 people, located primarily in Atlanta, with a staff
divided between marketing, asset optimization, trading, logistics, risk control,
information technology and other support functions. In 1999, SCEM marketed an
average of 5.4 billion cubic feet of natural gas per day and sold 220 million
megawatt hours of electricity. According to year-end 1999 statistics published
in industry journals, SCEM ranked as the number four physical power marketer and
number 13 physical gas marketer in the United States based on trading volume.
SCEM owns two seats on and is a member of the New York Mercantile Exchange.

SCEM's strategy is to be the marketer and risk manager of our North
American generating assets, Vastar's gas production and other third-party
assets. SCEM's primary responsibilities are to optimize assets, develop markets,
procure fuel, manage risk and coordinate the logistical flow of power, natural
gas and other energy commodities as they relate to fixed assets. We believe that
energy marketing and risk management expertise and risk controls will add value
to our assets. Over the next decade, we expect SCEM to take advantage of the
expected deregulation of the energy business to build upon its position as a
leading energy marketer in North America through its marketing and risk
management expertise, risk controls and information systems.

Vastar has contracted with SCEM to sell a significant portion of its
domestic natural gas production at market index prices to SCEM through the
10-year natural gas supply agreement (which began in September 1997). Currently,
SCEM purchases approximately 1.2 billion cubic feet per day of Vastar's
production. The volumes that SCEM purchases from Vastar will vary over time. The
closing of our acquisition of Vastar's interest in SCEM will not materially
affect Vastar's delivery obligations under the gas supply agreement.

In 1998, SCEM signed a five-year agreement with the Brazos Electric Power
Cooperative (Brazos) to become the total wholesale electricity supplier to the
Texas generation and transmission cooperative. Under the agreement, known as a
"full requirements agreement," SCEM is obligated to meet Brazos' full wholesale
requirements. SCEM can meet these requirements from any source available to
SCEM, including Brazos' existing asset base, supplemented by market purchases
and sales. In addition, we expect 600 MW of capacity from our SEI Texas facility
to satisfy projected Brazos load growth. In addition, SCEM has the ability to
market excess energy from Brazos' more than 1,650 MW of generating and
contractual capacity. SCEM manages Brazos' generation and fuel supplies. By
combining these fuel and power supplies with its current trading portfolio, SCEM
is able to increase its trading volume and efficiency. We have guaranteed SCEM's
obligations to Brazos up to an amount of $75 million.

SCEM entered into a three and a half year agreement, effective June 1,
2000, to manage the assets of Pan-Alberta Gas Ltd., the second-largest Canadian
exporter of natural gas. As part of the transaction, SCEM subleased
Pan-Alberta's office in Calgary, Alberta and will administer Pan-Alberta's
businesses with SCEM's Atlanta-based marketing and risk management operations.
Pan Alberta retains all obligations for current transportation and customer
agreements, and SCEM will be entitled to use the assets at its discretion. SCEM
can optimize the use of these assets which includes 8.3 billion cubic feet of
storage capacity as part of the transaction. SCEM generates revenues when there
is a difference between the price of gas supplied by Pan-Alberta and the gas
prices in other locations to which SCEM has access. When Pan-Alberta gas prices
exceed the gas prices in other locations, SCEM may fulfill Pan-Alberta's
customer agreement by buying the cheaper, non-Pan Alberta gas and selling
Pan-Alberta gas in local markets and at local prices. Recently, Pan-Alberta was
marketing approximately 1.2 billion cubic feet of gas per day. We have
guaranteed SCEM's and

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a subsidiary of SCEM's obligations to Pan-Alberta up to an amount of $97 million
(plus specified fees and expenses).

In addition to the agreements related to Pan-Alberta, SCEM announced on
July 10, 2000 a similar relationship with Canadian West Gas Supply, Inc.
(CanWest). CanWest is the largest natural gas aggregator in British Columbia,
marketing the gas supply of more than 100 Canadian producers. The Pan-Alberta
infrastructure will be used to manage the additional 500 million cubic feet per
day previously marketed by CanWest.

In March 2000, SCEM signed an agreement to supply wholesale electricity to
Utility.com's customers. Through this agreement, SCEM becomes the preferred
wholesale electricity provider to Utility.com, an Internet utility company. SCEM
has also purchased an equity stake in Utility.com.

SCEM has announced the formation of a new independent energy trading
consortium with five of the largest gas and electricity marketers in the United
States. In July 2000, the consortium joined the Intercontinental Exchange, an
internet commodity marketplace based in Atlanta. The platform plans to begin
trading energy commodities this fall. The platform will provide increased
trading liquidity and market efficiency as well as cost savings.

SCEM has invested in systems to increase the efficiency and reliability of
its risk management and control processes. SCEM and TenFold Corporation are
jointly developing a suite of energy risk management applications known as
EnergyNow! We expect EnergyNow! to be a multi-commodity, multi-currency,
multi-unit industry application designed to provide end-to-end business process
support including pre-deal analytics, transaction processing, risk management,
commodity logistics and settlement/billing.

We control the management of SCEM through our representation on its board
of governors. The board has several working committees, including the audit
committee, the risk management and control committee (RMCC) and the credit
committee. The audit committee focuses on both procedures and compliance, and
approves all changes to the internal audit process. The RMCC is responsible for
establishing and modifying SCEM's risk management policy. The credit committee
has responsibility for SCEM's credit risk management policy. In addition, an
independent risk control officer who is not compensated based on SCEM's
profitability oversees mid-office operations and front office compliance with
RMCC policies.

SCEM's energy marketing and risk management business requires efficient
management of three types of risks: market price risk, credit risk and
operational risk. Market price risk is created by the volatility of energy
prices. Credit risk is characterized by risk of counterparty nonperformance or
default. Operational risk arises from a lack of clearly defined policies and
procedures and a lack of clear separation of duties and responsibilities. SCEM
has created a controls and risk management organization to manage and mitigate
these risks. Key processes executed by this organization include order entry and
transaction verification, control of structured transactions, internal and
external counterparty credit evaluation, VAR limits, stress tests, close
monitoring of all positions and VAR and an independent daily marked-to-market
portfolio valuation.

We, Southern Company, Vastar and ARCO have jointly agreed to provide up to
$700 million of contingent performance guarantees on behalf of SCEM. We have
agreed with Vastar to indemnify each other (subject to limitations of liability)
against loss in proportion to our respective ownership shares of SCEM with
respect to any amounts paid by any of us or our affiliates; although we would
pay more (up to 100%) of the losses incurred on these guarantees if necessary
for Vastar to receive the minimum cash distributions from SCEM (which are
guaranteed by us) in the years 1998 through 2002. If necessary to support SCEM's
ongoing business, the amount of the contingent performance guarantees can exceed
$700 million, and to the extent that the actual aggregate liability on all of

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these guarantees were to exceed $700 million, we have agreed to provide (at a
market-based price) any amount in excess of $700 million. We may provide
additional guarantees for structured transactions and those guarantees may not
be subject to any right of indemnity or contribution between SCEM's parent
companies. Contingent performance guarantees are an industry standard used to
support the physical and financial delivery of products. These guarantees
support contractual obligations such as commodity delivery or payment. The gross
amount represents total counterparty authority, but our actual exposure under
these guarantees is limited by the amount of business conducted under each
guarantee. For example, we may provide a $20 million guarantee to a counterparty
of SCEM; however, we are only exposed for the dollar amount of business that
SCEM currently has outstanding with the counterparty. We will be obligated to
make payments under these guarantees only if SCEM's liquidity is exhausted. Upon
the closing of the proposed transaction with Vastar, we will be required to
replace many of the contingent performance guarantees of Vastar and Atlantic
Richfield Company with Southern Energy guarantees.

We have performance guarantees related to SCEM's business which require us
to maintain an investment grade rating, which means the higher of a Moody's Baa3
rating or a S&P BBB- rating. These guarantees relate to the floor and put
payments, the guarantee to Vastar of the gas purchased under our gas supply
agreement and the guarantee to Brazos covering the Brazos full requirements
transaction. Upon the closing of the proposed transaction with Vastar, we will
no longer be required to guarantee the floor and put payments to Vastar.
However, we will continue all guarantees in favor of Vastar related to the gas
purchase and sale agreement. If we lose our investment grade rating, we are
obligated to provide credit enhancement to the guaranteed party in the form of a
pledge of cash collateral, a letter of credit or other similar credit
enhancement.

Southern Company has agreed to maintain credit support arrangements related
to SCEM obligations which are outstanding on the separation date. See
"Agreements Between Us and Southern Company -- Master Separation and
Distribution Agreement -- Credit Support Obligations."

Capital resources required by SCEM have been furnished through the initial
capital contributions of Vastar and us, a $150 million credit facility (which is
recourse to SCEM only) and committed capital from Vastar and us in the amounts
of $20 million and $30 million, respectively. Upon the closing of the proposed
transaction with Vastar, we will assume Vastar's portion of the committed
capital increasing our share to $50 million. In addition, SCEM received capital
contributions during 2000 from us of approximately $31 million and utilizes
commercial paper to reduce funding costs. SCEM currently has approximately $200
million of capital employed in its business, with a maximum availability of
approximately $270 million.

Southern Producer Services

In February 1999, we formed Southern Producer Services, L.P. (SPS) to
engage in the business of providing secured financing to independent oil and gas
producers for the purpose of developing, acquiring or refinancing proved or
producing oil and gas properties in North America as a way of obtaining rights
to marketable oil and natural gas. We believe that SPS also enables SCEM to
aggregate gas commodities for its marketing efforts. Typically, SPS provides
financing in exchange for the rights to market those commodities, which rights
would be exercised by SCEM. SPS plans to utilize various structures for its
investments, including senior secured debt, volumetric production payments,
prepayment purchases and mezzanine financings. We expect all of SPS's
investments to be secured by the underlying commodity available for extraction
based on an independent appraisal of the value of the assets and for repayment
to be made from production proceeds.

All of SPS's loans are secured with collateral in excess of the loan
amounts. In connection with its investments, SPS intends to realize returns from
interest on debt instruments, marketing rights,

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royalty income and warrants. In addition, SPS intends to market price risk
management services to its customers. SPS has entered into a marketing agreement
with SCEM under which SCEM has a right of first offer with respect to energy
commodities obtained by SPS.

SPS obtains its capital from us and from a credit facility that provides
capital for SPS assets on an unsecured basis. SPS has a $50 million facility
with Bank One with $22 million outstanding as of May 31, 2000. The interest rate
is LIBOR plus 200 basis points. As of May 31, 2000, SPS has provided $65 million
in financing, and has obtained marketing rights for approximately 100 million
cubic feet per day of natural gas and 10,000 barrels per day of crude oil. In
connection with the credit facility, we agreed to provide indemnities related to
title and environmental defects to the bank, the amounts of which are capped at
the borrowings under the credit facility related to the particular production
facility.

THE CARIBBEAN

FREEPORT POWER COMPANY LIMITED

Freeport Power Company Limited (Freeport Power) is an integrated utility
that generates, transmits, distributes and sells electricity on Grand Bahama
Island. It operates oil-fired generation facilities with a total capacity of 127
MW and provides electricity to approximately 16,500 residential, commercial and
industrial customers on the island.

We acquired a 50% interest in Freeport Power from the Grand Bahama
Development Company Limited (GBDC) for $35.5 million in 1993. At the same time,
GBDC assigned its remaining 50% interest in Freeport Power to ICD Utilities
Limited (ICDU). In 1996, we increased our effective ownership to 62.5% by
purchasing a 25% interest in ICDU for $15 million bringing our total investment
in Freeport Power to $50.5 million. Private investors own 50% of ICDU with the
remaining 25% held by the Bahamian public and the employees of Freeport Power.
We plan to sell up to 60% of our 25% interest in ICDU which would make our
effective ownership in Freeport Power 55%. To date, we have sold approximately
53% of our interest in ICDU. We expect to sell an additional 7% of our interest
in ICDU by September 30, 2000.

Freeport Power has the exclusive right and obligation to supply electric
power to Grand Bahama Island. Freeport Power's power plants include three No. 6
oil-fired steam turbine generators, two simple cycle distillate-fired gas
turbines, two No. 2 oil-fired diesel engine generators and one 13.5 MW No. 6
oil-fired diesel engine generator. A second 13.5 MW No. 6 oil-fired diesel
engine generator is under construction and is scheduled to be operational in
2001. Freeport Power's distribution assets include three 69 kV transmission
lines, six substations and 25 distribution feeders. Freeport Power's rates are
approved by the Grand Bahama Port Authority. Rates have remained stable since
1995. A rate increase that averages 2.8% has been approved by the regulatory
board and went into effect on June 1, 2000 for May power consumption.

POWER GENERATION COMPANY OF TRINIDAD AND TOBAGO

The Power Generation Company of Trinidad and Tobago Limited (PowerGen) is a
1,154 MW power generation company that owns and operates three gas-fired plants
located on the Island of Trinidad in the Caribbean. The electricity produced by
PowerGen is provided to the Trinidad and Tobago Electricity Commission (T&TEC),
the state-owned transmission and distribution monopoly, which serves nearly
300,000 customers on the islands of Trinidad and Tobago and which holds a 51%
interest in PowerGen.

In 1994, we acquired a 39% interest in PowerGen through a competitive bid
process conducted by the government of Trinidad and Tobago. PowerGen initially
entered into a 15-year power purchase

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agreement (Trinidad power purchase agreement) with T&TEC, which expires in 2009.
T&TEC's obligations under the Trinidad power purchase agreement are
unconditionally guaranteed by the government of Trinidad and Tobago.

Our interest in PowerGen is held through one of our wholly owned
subsidiaries, Southern Electric International-Trinidad (SEI-Trinidad). Amoco
Trinidad Power Resources Corporation owns 10% of PowerGen and T&TEC owns the
remaining 51%. SEI-Trinidad and Amoco own "B" shares in PowerGen, and T&TEC owns
"A" shares. As "B" shareholders, we and Amoco collectively select four members
of the nine member board of directors and three members of the six member
management committee. We and Amoco have effective control of the management
committee as a result of our ability to appoint its chairman, who has the right
to cast the deciding vote in the event of a tied issue. Amoco may appoint one
member to each of the board and the management committee, while SEI-Trinidad may
appoint three members to the board and two members to the management committee.

The Trinidad power purchase agreement entitles PowerGen to receive monthly
capacity and energy payments from T&TEC, as well as a heat rate bonus if
operating conditions are met. The capacity payment is based on a level of
contracted capacity and is payable regardless of whether energy is actually
taken by T&TEC. The energy payment is based upon the energy actually produced
and delivered and varies from month to month. Substantially all of the revenues
are payments received from T&TEC and are supported by an unsecured payment
guarantee issued by the government. T&TEC is obligated to provide gas and fuel
oil to PowerGen. The facilities of PowerGen are connected to T&TEC's
transmission and distribution system. PowerGen competes for additional load with
InnCoGen, which has an installed capacity of 225 MW and is Trinidad's only other
generator.

Since the acquisition of the facilities in 1994, PowerGen has substantially
improved the operations of the power plants. During the four years prior to the
acquisition, the plants were available for operation approximately 69% of the
time. Since the acquisition, the operating availability of these facilities has
risen to approximately 82%.

In addition, PowerGen has completed a restructuring program that reduced
the number of jobs and job classifications, resulting in a more flexible and
productive workforce. PowerGen is conducting skill development training as part
of this process and has substantially completed an organizational transformation
program designed to create a team-driven business culture.

SOUTH AMERICA

CEMIG

Companhia Energetica de Minas Gerais (CEMIG) is a fully integrated utility
that generates, transmits, distributes and sells electricity in the southeast
region of Brazil. On June 18, 1997, one of our wholly owned subsidiaries,
Southern Electric Brasil Participacoes, Ltda. (SEB), acquired approximately 33%
of the voting shares of CEMIG for $1.052 billion through a public auction. SEB
paid for the shares in two equal installments, on June 18, 1997 and June 13,
1998.

SEB obtained financing from Banco Nacional de Desenvolvimento Economico e
Social (BNDES) for approximately 50% of the total purchase price. The loan was
taken in two tranches. The first tranche of $125.6 million was drawn in June
1997 and is financed at 9.775% for a 12 year period. The second tranche of
$402.5 million was drawn in June 1998 and is financed at 8.823%, also for a 12
year period. The loan is secured by a pledge of SEB's shares in CEMIG. A portion
of a principal payment that was originally due May 15, 2000, in an amount of
$9.2 million, has been deferred. SEB paid $2.2 million of this principal payment
on May 15, 2000 and expects to pay the

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remaining $7.0 million on September 15, 2000. An interest payment of $107.8
million, also due on May 15, 2000, has been deferred until May 15, 2001.

On June 18, 1997, 524 Participacoes S/A, a group of Brazilian institutional
investors, acquired 9.4% of the equity interest in SEB for $38.2 million. On
June 19, 1997, we transferred the remaining 90.6% equity interest in SEB to
Cayman Energy Traders (CET) for $369.0 million. CET is jointly owned by us and
AES CEMIG Empreendimentos, Inc., and we own 51% of the voting shares.

In January 1998 we decided not to exercise our option to withdraw as a
shareholder of CET and, as a result, we were required to transfer $114 million
to CET. We transferred an additional $21 million in May 1998. We have made total
equity contributions of $135 million, which corresponds to a 27.59% economic
interest in CET. Although we own less than a 50% economic interest in CET, we
have always maintained a majority of CET's voting shares. The following table
shows the ownership percentages in voting and economic interests of each
company.

<TABLE>
<CAPTION>
COMPANY SHAREHOLDERS % VOTING SHARES % ECONOMIC INTEREST
------- --------------------- --------------- -------------------
<S> <C> <C> <C>
CEMIG State of Minas Gerais 50.96% 23.44%
SEB 32.96 14.41
Others 16.08 62.15
TOTAL 100.00% 100.00%
SEB CET 90.60 90.60
524 Participacoes 9.40 9.40
TOTAL 100.00% 100.00%
CET Southern Energy 51.0 27.59
AES 49.0 72.41
TOTAL 100.00% 100.00%
</TABLE>

As a result of our interest in CET, we have an indirect economic interest
of 3.6% in CEMIG (27.59% of CET, which owns 90.6% of SEB, which owns 14.41% of
CEMIG). We continue to hold the majority of voting capital at CET and
indirectly, SEB.

Upon its acquisition of shares of CEMIG, SEB entered into a shareholders
agreement with the State of Minas Gerais (which retained a majority of the CEMIG
voting shares). The agreement establishes, among other things, SEB's vote in the
management of CEMIG. It grants SEB the right to elect four of the 11 members of
the board of directors of CEMIG and grants SEB veto rights over key operating
issues such as significant changes in the budget. In addition, SEB may elect
three members of the eight-member management council.

SEB's rights under the shareholders agreement are currently the subject of
pending litigation brought by the state of Minas Gerais. In this litigation, the
state is seeking rescission of the shareholders agreement based upon the
assertion that SEB's veto rights are an unconstitutional transfer of control of
CEMIG from the state to SEB. On March 23, 2000, a state court in Minas Gerais
ruled that the shareholder agreement was invalid. SEB has appealed this
decision. The status of this litigation is more fully described under the
heading "Legal Proceedings" in this section of the prospectus.

CEMIG is the second largest Brazilian electric company, as measured by
gigawatt-hours (GWh) of energy sold, providing approximately 97% of the
electricity consumed in Minas Gerais. Minas Gerais is the second most populous
state in Brazil with approximately 17 million residents. Minas Gerais is the
most mineral-rich state in the southeast region of Brazil and has the region's
most extensive watershed. Minas Gerais is also a principal place of business for
companies that are among

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the most energy-intensive in the region -- including companies in the aluminum,
cement, steel and mining industries.

CEMIG has a distribution concession in Minas Gerais, covering an area of
approximately 216,300 square miles that expires on February 18, 2016. CEMIG may
apply for a 20 year extension of the concession. CEMIG has approximately 200,000
miles of transmission and distribution lines. CEMIG supplies electricity to
approximately 4.9 million customers and has added an average of approximately
200,000 new customers annually.

Virtually all of CEMIG's generation capacity is hydroelectric. As of
December 31, 1999, CEMIG operated 34 hydroelectric power plants, two thermal
plants and one wind farm. Seven hydroelectric plants account for approximately
92% of CEMIG's total capacity of 5,514 MW.

Through a treaty between Paraguay and Brazil, CEMIG is obligated to
purchase electricity from ITAIPU, a hydroelectric plant jointly owned by Brazil
and Paraguay. CEMIG is allocated approximately 1,730 MW, or 17%, of Brazil's
ITAIPU capacity. In 1999, CEMIG purchased 13,909 GWh of electricity from ITAIPU,
which represented approximately 34% of CEMIG's sales. The rate for energy
purchased from ITAIPU is U.S. dollar denominated and is set independently from
the rate set for CEMIG and other energy producers but is a direct pass through
to customers' tariffs.

CEMIG's customers are classified into five principal categories: industrial
(mining, manufacturing and processing activities), residential, commercial
(service oriented businesses, universities and hospitals), rural and others.
From 1993 to 1999, the compounded annual growth rate in the volume of electric
power sold to industrial customers was 0.2%. The growth rate for residential and
commercial customers during the same period was 7.6% and 9.0%, respectively. For
the year ended December 31, 1999, large industrial customers accounted for
approximately 53% of the volume of CEMIG energy sold and approximately 38% of
CEMIG revenues. The five largest industrial customers accounted for
approximately 11.9% of the energy consumed. CEMIG's total sales in 1999 were
40,413 GWh. CEMIG is also engaged in gas distribution through its subsidiary,
Companhia de Gas de Minas Gerais -- Gasmig (GASMIG). GASMIG currently supplies
approximately 800,000 cubic meters of gas per day to 55 industrial customers in
Minas Gerais.

CEMIG management has been able to implement several key operating
initiatives, including a downsizing program that has reduced staff from over
15,000 employees in June 1996 to less than 12,000 in 1999.

Regulatory Environment

In 1993, significant changes occurred in the regulation of electricity
rates in Brazil. Federal Law 8,631 abolished the concept of guaranteed returns
in favor of an individual rate structure for each utility. Under the new
structure, each utility proposes a rate structure based on its particular
circumstances -- including its rate of investment -- for approval by the federal
regulatory authorities. However, the Brazilian government, through the 1994
Federal Government Economic Stabilization Plan, suspended the rate setting
processes and froze rates in reals as of July 1, 1994. Since that date, rates
have been fixed on an annual basis by the federal government.

At the time of the share sale in 1997, CEMIG entered into a new 20-year
concession agreement with the Brazilian government. The new agreement superceded
any restrictions under the 1994 Federal Government Economic Stabilization Plan
and established an annual inflation-based formula for fixing rates which
provides CEMIG with more rate stability. The Brazilian government may grant more
frequent requests for rate increases at its discretion. In November 1995, CEMIG
was authorized to raise rates 11.8% and 59.5% to non-residential and other
concessionaires, respectively.

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The regulator also granted a reduction in discounts for residential customers.
Other annual increases were as follows:

- April 1997: 9.8% to final customers, 13.6% to wholesale supply and 9.9%
on average

- April 1998: 4.54% to both final customers and wholesale supply

- April 1999: 16.25% to both final customers and wholesale supply

- June 1999: 3.85% to both final customers and wholesale supply

- May 2000: 12.23% to both final customers greater than 90 kWh/month
average and wholesale 6% to customers with between 90 and 180 average
monthly kWh usage; no increase to customers with less than 90 kWh average
monthly usage.

Revenues are denominated in the Brazilian real but a significant portion of
expenses, including power purchase expenses and some interest expense, are
denominated in U.S. dollars and other foreign currencies. Pursuant to the
concession agreement, power purchase expenses as well as taxes are a
pass-through item. We do not expect CEMIG to bear increased purchased power
costs attributable to currency moves.

In January 1999, Brazil's central bank removed trading bands which allowed
the real to float versus other currencies. Over the ensuing three days, the real
devalued by more than 45% versus the U.S. dollar and by the end of February 1999
had reached R$2.065 per U.S. dollar (a 70% devaluation). As a result we incurred
a reduction of $83 million, net of income tax effects, in the recorded amount of
our investment in CEMIG. The exchange rate has appeared to stabilize in recent
months at approximately R$1.8 per U.S. dollar. CEMIG continues to evaluate the
impact of the devaluation on overall earnings and may be able to achieve
additional rate relief to reduce the impact of devaluation on items not
specifically recoverable under the concession agreement (such as the cost of
foreign currency-denominated debt).

EDELNOR

Empresa Electrica del Norte Grande S.A. (EDELNOR) is a partially integrated
electric utility engaged in the generation, transmission and marketing of
electric power in the Sistema Interconectado del Norte Grande (SING), an
interconnected power grid in northern Chile. The major purchasers of electricity
in the SING are industrial mining companies that produce copper, Chile's largest
export, and five electric distribution companies that provide power to the
region's 740,000 inhabitants and to some small industrial and commercial
customers.

In 1993, our subsidiary SEI Chile, S.A. (SEI Chile) purchased approximately
35% of the shares of EDELNOR from Corporacion de Fomento de la Produccion and an
additional 3.5% interest from other sources to bring our total ownership at the
time to 38.5%. SEI Chile increased its ownership in EDELNOR to 65% in 1994 and
purchased an additional 2% in 1997 for a total ownership stake of 67%. In July
1998, SEI Chile invested $57 million to purchase additional shares of EDELNOR
via a rights offering. This investment increased our interest in EDELNOR to
82.3%.

In December 1998, we announced our intention to sell our interest in
EDELNOR. We are continuing to evaluate whether our investment in EDELNOR can be
recovered through a sale. We are uncertain whether we will be able to recover
the value of our investment.

EDELNOR owns generating facilities with a total capacity of approximately
653 MW, and operates 681 MW, including 28 MW which it leases. EDELNOR also owns
and operates approximately 1,060 km (657 miles) of high voltage transmission
lines, 15 substations and other ancillary transmission facilities.

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EDELNOR currently owns an approximate 21% interest in Gasoducto Nor Andino
(Nor Andino), a 1,066 km (661 miles) natural gas pipeline project which
transports natural gas from gas fields in northern Argentina to northern Chile.
EDELNOR has invested approximately $91 million in the project. Electroandina, a
subsidiary of Tractebel, has signed U.S. dollar-indexed, substantially
"take-or-pay" gas transportation agreements with Nor Andino to supply two 412 MW
gas-fired plants. These contracts began during the last quarter of 1999. EDELNOR
has signed a similar agreement sufficient to supply its Mejillones III
combined-cycle unit.

EDELNOR's principal generating assets are two coal-fired units and one
combined cycle gas turbine located just north of Antofagasta in Mejillones. The
first coal unit, Mejillones I, has a generating capacity of 154 MW and began
operation in December 1995. Mejillones II, also a coal unit, has a generating
capacity of 164 MW and began operating at the end of March 1998. The gas unit,
Mejillones III, began commercial operation on June 17, 2000 and has a generating
capacity of 243 MW.

The Mejillones I and II generating units have used a blend of petroleum
coke and coal as an alternative fuel to pure coal. Petroleum coke, or pet coke,
is a by product from the petroleum refinery process. The use of pet coke allows
these units to produce electric energy with a significant reduction of
production costs compared to running on pure coal, making these units more
economical. Competitors of EDELNOR filed complaints with the applicable local
environmental agency, the COREMA Region II agency (COREMA), alleging that
EDELNOR does not have approval to burn pet coke as an alternative fuel. In
February 1999, COREMA requested that EDELNOR refrain from using pet coke as a
fuel for the Units. As a result of this request and several resulting
administrative penalties from the COREMA, EDELNOR ceased burning pet coke and
completed an environmental impact study on the use of pet coke as an alternative
fuel. EDELNOR submitted the environmental impact study to COREMA. On March 2,
2000, COREMA ruled against EDELNOR's application to use pet coke as an
alternative fuel. EDELNOR filed an appeal of this decision to the national
environmental agency, Comision Nacional del Medio Ambiente (CONAMA) on April 4,
2000. We believe that EDELNOR has demonstrated its ability to comply with all
applicable regulations; however, we cannot assure you that we will be successful
in our appeal. If we are unsuccessful in our appeal to the CONAMA, we will
attempt to reach an agreement with the authorities on an acceptable mixture of
pet coke and coal which would allow EDELNOR's generating units to maintain a
competitive position in the dispatch order of the SING. If EDELNOR is prohibited
from using any pet coke, the units will be required to rely on coal as the
primary fuel, which is not as economical as natural gas. If this occurs, there
may be a significant reduction in EDELNOR's energy and capacity revenues.

EDELNOR pursues a sales strategy comprising both contract and spot sales.
EDELNOR has contracts to supply the five distribution companies in the SING.
However, three of the five contracts, (representing approximately 167 MW) are
with the Chilean distributor EMEL S.A. and will expire on December 31, 2001. The
impact of the lost sales will begin in 2002 and is expected to be partially
mitigated by revenues EDELNOR believes it will derive from sales to the SING and
from charges to the new supplier for use of EDELNOR'S transmission facilities.
Further, EDELNOR has requested an investigation by the Antimonopoly Commission
into the contracting of EMEL S.A. with its new supplier. An investigation could
result in the nullification of these contracts and opening the contracts to bid.
If that occurs, EDELNOR may bid on the contracts again in an open process.

EDELNOR also supplies 11 other customers under long-term contracts
representing approximately 166 MW. These contracts have expiration dates ranging
from 2000 to 2017. One of these contracts, representing approximately 2 MW,
expires in 2000. Energy sales to industrial customers increased 149% from 1993
to 1999. These contracts are denominated in U.S. dollars and payable in Chilean
pesos. Most of the economic activity in the SING is attributable, directly or
indirectly, to the

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copper mining industry which uses large amounts of electricity. In 1999, the
copper mining industry accounted for approximately 87% of the energy sold in the
SING. During this time, EDELNOR derived 52% of its revenues from copper mining
and copper mining related customers. Any significant decline in the production
of copper in northern Chile could lower the demand for electricity used in the
copper production process and might also result in lower demand for electricity
due to any resulting economic slowdown in the area.

ALICURA

In 1993 we acquired a 55% indirect interest in Hidroelectrica Alicura S.A.
(Alicura), an Argentine company. Alicura's principal asset is the remaining
years of a 30-year concession agreement, ending in August 2023, that allows
Alicura to operate a 1,000 MW hydroelectric plant in Neuquen Province, 1,545 km
(958 miles) southwest of Buenos Aires, Argentina. We acquired our interest in
Alicura through SEI y Asociados de Argentina S.A. (Asociados), which is the
majority shareholder. We currently own approximately 93% of Asociados, which in
turn owns 59% of Alicura, giving us a 55% interest overall. Asociados acquired
its interest in Alicura for $178 million, plus additional payments totaling $40
million. In addition, we provided credit support for $200 million of Alicura's
bank financing. Other shareholders of Alicura include the government of
Argentina (19.5%), the government of the province of Neuquen (19.5%) and the
employees (2%).

On February 21, 2000, we executed a stock purchase agreement with The AES
Corporation to sell our interest in Alicura for total consideration of $205
million including the assumption of debt. The closing was expected to occur on
June 28, 2000; however, it has not yet occurred. We cannot assure you that this
transaction will be consummated.

EUROPE

We currently have three businesses in Europe: WPD, which distributes
electricity in southwest England; a 26% interest in Bewag AG, the integrated
utility serving Berlin; and our business of marketing and managing market risk
associated with energy and energy-linked commodities. Our strategy in Europe is
to create a business unit that integrates our generation and distribution with
our marketing and risk management capabilities. We intend to build upon our
existing businesses by expanding our marketing and risk management operations in
several countries where electricity markets have been most significantly
liberalized, to seek acquisitions and contractual arrangements for the control
of generation and distribution and to develop new projects to meet our strategic
goals.

WESTERN POWER DISTRIBUTION

South Western Electricity plc, trading as Western Power Distribution (WPD),
is one of the privatized regional electricity companies in England and Wales
licensed to distribute, supply and, to a limited extent, generate electricity.
WPD's primary business is distribution of electricity.

WPD previously operated a supply business known as "SWEB" that purchased,
marketed and sold electricity to customers within its service territory and to
competitive customers throughout the United Kingdom. WPD sold that business,
together with the name SWEB, to London Electricity plc for L160 million ($264
million) and the assumption of certain liabilities. The sale was effective
September 30, 1999.

We acquired WPD, which included the SWEB supply business, in September 1995
for a total acquisition price of $1.8 billion. The acquisition price was
originally financed by Southern Investments UK plc (SIUK), our holding company
for WPD. SIUK is a wholly owned subsidiary of WPD Holdings Limited, which in
turn has been wholly owned by WPD Holdings UK (WPD Holdings)

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since June 1998. In July 1996, we sold a 25% interest in WPD Holdings Limited to
PPL Global, a subsidiary of PPL Corporation, a utility holding company based in
Allentown, Pennsylvania. In June 1998, we sold an additional 26% economic
interest in WPD Holdings Limited to PPL Global for $170 million, and on the same
day both parties agreed to exchange their interests in WPD Holdings Limited for
interests in WPD Holdings that carried substantially the same rights. We
currently have a 49% economic interest in WPD Holdings, yet retain operational
and management control of WPD Holdings with 50.5% of the voting control.

Distribution Business

WPD's distribution business is the ownership, management and operation of
the electricity distribution network within WPD's authorized area in southwest
England. 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 WPD's power lines. These end
users are customers of licensed supply businesses, which in turn are the WPD
distribution business customers. There are approximately 1.4 million end users
connected to WPD's network. Virtually all electricity supplied to end users in
WPD's area is transported through its distribution network, thus providing WPD
with distribution volume that is stable from year to year. WPD is the only
distributor of electricity in its authorized area, and we believe that economic,
environmental and regulatory factors are likely to prevent competitors from
entering the distribution business in WPD's authorized area.

WPD's authorized area extends from Bristol and Bath in the northeast to
Lands End and the Isles of Scilly in the southwest. The largest cities and towns
in this area are Bath, Bristol, Exeter, Plymouth and Taunton and the principal
industrial end users, in terms of electricity usage, are involved in china clay
extraction, ship repair, fertilizer production, aerospace, defense engineering,
cement and paper manufacturing and water supply. WPD's fastest growing
categories of distribution customers are large commercial and small industrial
customers. Commercial customers in the authorized area are largely financial and
technical service-based businesses.

Since our acquisition, WPD has reviewed and refined its distribution
strategy and has established key goals of cost reduction, improved customer
service and network performance. Staff reductions have played a key role in cost
savings. Since our acquisition, WPD has implemented a plan of voluntary and
other staff reductions, mainly in its distribution business. By December 31,
1999, staff numbers had been reduced by 752 persons (excluding staff transferred
to London Electricity as a result of the sale of the SWEB supply business). Part
of these reductions were made possible due to new work practices which WPD has
developed with the cooperation of WPD's unions. Team restructuring in the
engineering division and the establishment of multi-skilled independent field
teams has also contributed to improved cost efficiency. In addition, management
restructuring has produced a flatter organizational structure by reducing
management levels from seven to three. In

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September 1999, WPD transferred 833 employees to London Electricity in
connection with the sale by WPD of the SWEB supply business discussed above.
Since December 1999, WPD has implemented further staff reductions as a
consequence of a regulatory price reduction as discussed below.

Improvements in customer service in the distribution business are a
significant part of WPD's strategy. WPD aims to meet or exceed all the
performance criteria established by the regulator who is responsible for setting
the performance standards and targets. WPD 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.

Ancillary Businesses

WPD also has ancillary business activities that support its main
electricity distribution business. These include electricity generation, real
estate and telecommunications. WPD owns generating assets with 12 MW of capacity
used to back up the distribution network. In addition, WPD owns minority
interests in windfarms and a 7.7% interest in Teesside Power Limited, owner of a
1,875 MW natural gas-fired, combined-cycle plant. WPD markets and develops real
estate no longer used in the distribution business and is developing an income
stream from the rental of fiber optic cables primarily attached to WPD's
overhead distribution network.

Regulatory Environment

The political and regulatory climate in the United Kingdom has changed
significantly since our acquisition of WPD in 1995. There are currently a number
of issues affecting the electricity industry, including separation of
distribution and supply businesses, market dominance and new generation
build-up. We have proactively taken steps to adjust to these future changes, and
we do not expect any of these changes to have a material adverse impact on us.

Virtually all distribution customers in England and Wales are connected to
the distribution system of the regional electricity companies and cannot choose
their electricity distributor. The Office of Gas and Electricity Markets
controls the revenues earned by WPD in its distribution business and former
supply business by applying a price control formula. Distribution revenues are
regulated by a formula (DPCF) that sets the maximum average price per unit of
electricity distributed. The elements used in the formula are generally
established for a five-year period and are subject to review by the regulator.
In December 1999, the regulator published final price proposals following his
review of the DPCF for distribution businesses. For WPD, these proposals
represent a 20% reduction to distribution prices from April 1, 2000, followed by
a reduction in real terms of 3% each year after April 1, 2001. This price
control is scheduled to operate until March 2005. In response, WPD plans to
maximize efficiency and customer service as a focused distribution company. In
order to achieve these objectives, WPD is implementing a plan to reduce staffing
levels by approximately 10%. The reductions primarily affect administrative and
corporate functions, with minimal impact on field staff, in order to assure that
customer service is not affected. WPD is currently evaluating further
opportunities to reduce ongoing operating costs.

The U.K. electricity Regulator is introducing competition in metering
activities, namely meter fixing (providing, installing, certifying and repairing
meters) and meter reading. Meter fixing must be undertaken by authorized
providers, of which WPD is one. Based on the anticipated regulation, the
original carrying value of metering assets was impaired. As a result, WPD
recorded an impairment loss of $31 million in the fourth quarter of 1999 to
reflect the amount by which the carrying value of

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metering assets exceeded their fair value. The fair value was determined by
computing the present value of estimated future cash flows attributable to the
assets.

WPD also faces regulatory issues related to its use of a pension surplus
which was primarily utilized to offset the cost of providing early pensions to
terminated employees. An independent pension arbitrator has issued a ruling
directing that another industry employer should refund such amounts with
interest to the Electricity Supply Pension Scheme (ESPS). The ESPS provides
pension and other related defined benefits, based on final pensionable pay, to
substantially all employees throughout the electricity supply industry in the
United Kingdom. This ruling is currently being appealed to the House of Lords.
The majority of WPD's employees are ESPS members. We cannot assure you that this
appeal will succeed or that WPD will not be required to refund to the ESPS any
amounts previously used to fund early retirement costs, which management
estimates to be approximately L24 million (approximately $36 million). Under
FASB 87 "Employers' Accounting for Pensions," we do not anticipate any immediate
impact to our net income.

BEWAG

In September 1997, we were part of a consortium that purchased 51% of Bewag
AG, the integrated utility serving Berlin, Germany. The consortium included
PreussenElektra AG (Preussen), a subsidiary of Veba AG, and Bayernwerk AG
(Bayernwerk), a subsidiary of VIAG AG. Including shares already held by Preussen
and Bayernwerk, the consortium controls 75% of Bewag. We hold a 26% economic
interest in Bewag, which we purchased for approximately $820 million, including
approximately $478 million of non-recourse debt. Although we own 26% of the
outstanding "A" shares and "B" shares of Bewag, we own 28.68% of the voting
rights of Bewag as the A shares carry single voting rights and the B shares
carry double voting rights.

Bewag's entire customer base is open to competition in accordance with
German electricity laws. Bewag serves approximately 2.1 million customers in the
city-state of Berlin. We believe Berlin and the surrounding region have
favorable prospects for long-term growth, in particular because Berlin has
resumed its position as the seat of the national government of Germany. In
addition, Bewag has direct access to Germany's high-voltage transmission lines,
which enhances its ability to purchase competitively priced power.

We entered into a 30-year shareholders agreement with Preussen, Bayernwerk
and VIAG. This agreement specifies governance issues and key financial elements.
Under the shareholders agreement, decisions on major business items (e.g., major
capital investments and divestments, establishment of new business lines, amount
of the dividend and ratification of Bewag's annually revised five-year business
plan) require approval by us and Bayernwerk, effectively giving both members
veto rights over major decisions made by the utility.

In June 2000, the European Union Commission approved a merger between Veba
AG and VIAG. The companies have stated their intention to merge Preussen and
Bayernwerk, creating a core energy division of the combined entity known as E.on
Energie AG (E.on). E.on made concessions to the European Union to obtain
approval for their merger. Among these concessions is the sell-down of several
holdings, including its 49% share of Bewag, as well as its shares in Vereinigte
Energiewerke Aktiengesellschaft (VEAG), the East German generation and
high-voltage transmission company. We have publicly stated our interest in
acquiring a controlling position in Bewag and supporting Bewag to acquire a
controlling position in VEAG to strengthen our position in the market. On August
10, 2000, E.on announced that it had reached an agreement with Hamburgische
Electricitaets-Werke AG (HEW) to sell its 49% share of Bewag effective January
1, 2001. Southern Energy had been in contact with E.on, and had recently made an
offer to purchase E.on's 49% share of Bewag. On August 14, 2000, at the request
of the City of Berlin, the Berlin district court issued a

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preliminary injunction preventing E.on from selling part of its stake in Bewag,
as E.on had not obtained the approval of the State of Berlin. On August 15,
2000, the Berlin district court issued a separate preliminary injunction, at our
request, to prevent the sale of the shares to HEW. We hope to resolve this
matter consistent with our contractual rights.

Bewag is a vertically integrated utility with 29 power and steam units
generating 2,955 MW of electricity and 5,740 MW of thermal energy sold for
heating. Bewag's generating assets are shown in the following table:

<TABLE>
<CAPTION>
PLANT ELECTRIC CAPACITY(MW) THERMAL CAPACITY(MW) FUEL
----- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Reuter West.................................. 600 780 Coal
Lichterfelde................................. 450 720 Natural Gas
Charlottenburg............................... 330 610 Coal, Oil
Mitte........................................ 380 620 Natural Gas
Wilmersdorf.................................. 280 330 Oil
Reuter....................................... 202 240 Coal
Oberhavel.................................... 200 0 Coal
Klingenberg.................................. 140 320 Coal, Oil, Natural Gas
Rudow........................................ 175 130 Coal
Moabit....................................... 151 200 Oil, Natural Gas
Lichtenberg.................................. 36 1,100 Oil, Natural Gas
Kopenick..................................... 10 50 Oil, Natural Gas
Buch......................................... 1 130 Oil, Natural Gas
Heating plants............................... 0 510 Coal, Oil, Natural Gas
----- -----
Total...................................... 2,955 5,740
===== =====
</TABLE>

Electric power is transmitted to Bewag's approximately 2.1 million electric
customers over 39,000 kilometers of cable, most of which is underground.
Construction is underway to interconnect both sides of Berlin with a 380
kilovolt (kV) line that is expected to be connected to the supra regional German
380 kV grid in late 2000 or early 2001. At the end of June 1999, Bewag began
trial operations of a new centralized distribution control system. We expect
that the new system will enhance the reliability and operational cost
effectiveness of Berlin's distribution system. Bewag earns approximately 75% of
its revenues from electricity sales.

All households and a portion of the low voltage-special contract customers
are considered tariff customers by the Berlin regulator. Tariff customers
purchased approximately 48% of the electricity sold in 1999, while approximately
3,000 industrial and commercial customers purchased the remaining 52%. Special
contract customers typically purchase power from Bewag through a standard
agreement, which is renewable annually. Future growth in demand is expected to
come from growth in single households, growth in the number of appliances and
growth due to the relocation of the German government in 1999 from Bonn to
Berlin.

In addition to electricity, Bewag provides district heating for
approximately 500,000 residential and commercial customers. Bewag has an
approximate market share of 30% of the heating market in Berlin through its
district heating system. Heat sales comprised 22% of Bewag's revenue in the
fiscal year ended June 1999.

Bewag has also acquired additional market share as a result of its
purchase, along with Gaz de France, of a controlling interest in GASAG Berliner
Gaswerke Aktiengesellschaft (GASAG). Bewag believes GASAG has substantial
opportunity to grow its market share. GASAG provides service to approximately
744,000 customers, which is the largest customer base of any German natural gas
supplier, utilizing over 4,000 miles of pipeline network. In the first quarter
of 1998, Bewag, which then owned approximately 12% of GASAG, increased its
direct interest in GASAG to 24.9%. In July 1999, Bewag increased its share of
GASAG to 31.57% by purchasing shares from Gaz de France for

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the equivalent of $100 million. With Gaz de France also owning 31.57%, the two
companies have effective control of GASAG and have made two key appointments to
the management board.

In July 1999, Bewag concluded a collective agreement with the trade unions
to implement a workface reduction plan to reduce the number of full-time
employees from about 8,500 to between 4,500 and 4,700 by the year 2002. As of
July 1, 2000, the number of full-time employees was reduced to approximately
6,300 and another 1,100 employees have agreed to leave over the next two years.
The costs associated with these departures were recorded in 1999.

On July 17, 2000, Bewag concluded a new collective agreement with the trade
unions to implement a further workforce reduction plan. Bewag expects to record
additional employee cost reduction charges in the future related to this new
agreement. Bewag remains committed to reevaluating the competitive position of
its cost structure in the market.

Regulatory Environment

In September 1999, the Federal Cartel Authority announced that Bewag would
have to allow access by other suppliers of approximately 20% of the 400 MW
access line into Berlin. When the new 380 kV line is completed, it will
interconnect both sides of Berlin. Once the line is completed, there will be few
restrictions on other suppliers wishing to supply power in Berlin. It is
expected that the line will be completed by the end of 2000.

The European Union has endorsed a directive which broadly aims to open
electricity markets to customer choice and competition known as the Directive
Concerning Common Rules for the Internal Market in Electricity. In response to
this directive a new German Energy Industry Act was introduced in April 1998.
The energy act provides for customer choice for all consumers of electricity,
and Bewag's customers may now choose their electricity supplier on a competitive
basis. In accordance with the requirements of the energy act, the eight
integrated generation companies which own the high voltage grid entered into a
voluntary agreement providing for third-party access to the transmission system,
subject to the exceptions permitted under the energy act. The voluntary
agreement has led to published pricing for transmission and distribution charges
in several areas of Germany and competition for customers. Further changes to
this agreement are expected to considerably simplify third-party access and lead
to a drop in fees. We believe that Bewag will need to continue to reduce its
costs and increase its supply pricing competitiveness as a result of the
deregulation of the German electricity market.

SE-EUROPE

We formed Southern Energy -- Europe B.V. (SE-Europe) in Amsterdam, in the
first quarter of 1999 to support our asset and business development activities,
acquisition efforts and future generation facilities in Europe through market
research and analysis, financial structuring consultation and joint marketing
efforts. SE Europe's services may include fuel procurement, market analysis,
risk management and control and physical and financial energy trading services
such as spot market price bidding and commercial dispatch, among others. We
intend to coordinate, where possible, SE-Europe's infrastructure development,
risk policies and procedures and overall corporate activities with SCEM to
ensure that knowledge, experiences, systems and governance philosophies are
appropriately leveraged.

During the second quarter of 1999, SE-Europe began trading electricity in
the Nordic power market, the most liquid and liberalized power market in Europe
at the time. By December 31, 1999, SE-Europe had traded approximately 77 TWh in
the Nordic market, primarily on the Nord Pool power exchange. SE-Europe's
volumes represented approximately 12% of the total volumes transacted in the
Nordic market over that period.

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In addition to trading on the Nord Pool power exchange, SE-Europe has met
all requirements necessary for physical spot trading on the recently established
Amsterdam Power Exchange. Levels of activity will depend on market development
and liquidity of those markets. We are also in the process of obtaining
necessary legal and regulatory approvals to actively participate in physical and
financially settled trading throughout our target market extending through the
North-South corridor from the Nordic region through Central Europe to Northern
Italy. We expect to commence significant activity in these regions during 2000,
where market development permits.

Through coordinated efforts with our European asset development team,
SE-Europe intends to seek opportunities to position our European energy business
as a significant industry participant in the wholesale fuels, electric
generation and energy commodity trading segments of the European energy market.
We have identified the liberalizing markets of Western and Central Europe as the
focus of our growth strategy in Europe. In conjunction with our trading
operations in Amsterdam, we have integrated our marketing and business
development functions in these markets. We are seeking to apply our risk
management and fundamental market analysis skills to our European operations and
business development efforts. In addition to our operations in Amsterdam, we
have opened regional marketing and business development offices in Germany,
Italy and Switzerland. We expect to open an additional regional office in the
Nordic region during early 2001. Each office is charged with developing
opportunities ranging from structured and origination transactions to
acquisition of assets or control of assets through contractual arrangements. We
intend to support existing participants in the market and to forge alliances
that will prove mutually beneficial with local partners.

ASIA-PACIFIC

In January 1997, one of our wholly owned subsidiaries, Southern
Energy-Asia, Inc. (SE Asia), acquired 80% of Consolidated Electric Power Asia
Limited (CEPA), since renamed Southern Energy Asia-Pacific Limited (SE
Asia-Pacific), from Hopewell Holdings Limited (Hopewell) for approximately $2
billion. This acquisition was partially financed by SE Asia with a $792 million
bank loan. In August 1997, we purchased the remaining 20% of CEPA from Hopewell
for $150 million and the transfer to Hopewell of CEPA's interest in Tanjung Jati
B, a 1,320 MW power project then under development in Indonesia. Today, SE Asia
and one of its direct subsidiaries own 100% of SE Asia-Pacific.

SE Asia-Pacific is one of Asia's largest independent power producers and
has substantial experience in developing, constructing, holding an interest in
and operating electric power generation facilities in Asia. The majority of SE
Asia-Pacific's assets are located in the Philippines, with additional assets
located in China and Australia. By acquiring 100% of SE Asia-Pacific, we
acquired a net ownership interest in 3,388 MW of generating capacity operating
or under construction, a coal mining company in Australia and a development team
and corporate staff based in Hong Kong and the Philippines. We currently have a
net ownership interest in 3,159 MW of generating capacity. SE Asia-Pacific is
currently conducting business development activities in five countries:
Australia, China, India, the Philippines and Singapore. Specifically, SE
Asia-Pacific has a project in an advanced stage of development as one of SE
Asia-Pacific's Philippine subsidiaries has agreed to construct a sub-station and
two transmission lines in the Philippines to supply an industrial facility
partially from one of SE Asia-Pacific's other projects.

SE Asia-Pacific has been most successful in developing businesses in the
Philippines where it has a net ownership interest in five plants totaling 2,092
MW of capacity. SE Asia-Pacific has long-term energy conversion agreements with
National Power Corporation (NPC), under which SE Asia-Pacific accepts fuel from
NPC and converts that fuel to energy. NPC is the national electric

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company and its obligations to SE Asia-Pacific's project companies are supported
by Republic of the Philippines' guarantees.

SE Asia-Pacific also owns a 32% interest in a 2,038 MW coal-fired power
plant in Guandong Province (Shajiao C) in China. We own, through our subsidiary
SE China Investments, Inc. (SE China), a 9.99% interest in Shandong
International Power Development Company Limited (SIPD). SIPD holds 18 units in
Shandong province in China totaling 4,158 MW.

SE Asia-Pacific also holds a 100% interest in Allied Queensland Coal Pty.
Ltd. (AQC), a coal mining company located in Queensland, Australia. AQC has the
mining rights to approximately 1.3 billion tons of low-sulfur, low-cost coal.
Small amounts of coal are currently being mined for sale in the domestic and
overseas markets.

The following table depicts our investments in the Asia-Pacific region
currently in operation:

<TABLE>
<CAPTION>
NET
OWNERSHIP
INTEREST IN OPERATED
TOTAL MW OWNERSHIP % TOTAL MW MW
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
GENERATION OPERATIONS:
Philippines
Sual...................................................... 1,258 91.9% 1,156 1,258
Pagbilao.................................................. 735 87.2 641 735
Navotas I................................................. 200 90 180 200
Navotas II................................................ 100 100 100 100
Bulacan................................................... 15 100 15 15
China
Shajiao C................................................. 2,038 32 652 --
SIPD...................................................... 4,158 9.99 415 --
----- ----- -----
Total................................................... 8,504 3,159 2,308
===== ===== =====
</TABLE>

THE PHILIPPINES

SE Asia-Pacific's subsidiaries have entered into four separate energy
conversion agreements with NPC, one each for the Sual, Pagbilao, Navotas I and
Navotas II projects. The energy conversion agreements are build-operate-transfer
agreements. At the end of the term of each energy conversion agreements, the
associated plant is required to be transferred to NPC, free from any lien or
payment of compensation. NPC acts as both the fuel supplier and the energy
off-taker under the energy conversion agreements. NPC procures all of the fuel
necessary for each plant, at no cost to SE Asia-Pacific's subsidiary, and has
accepted substantially all fuel risks and fuel related obligations other than
each plant's actual fuel burning efficiency.

The SE Asia-Pacific subsidiaries receive compensation under the energy
conversion agreements for fixed capacity fees, variable energy fees and other
incidental fees. Over 90% of the revenues are expected to come from fixed
capacity charges that are paid without regard to dispatch level of the plant.
Capital recovery fees, infrastructure fees, and service fees, which comprise
most of the fixed capacity charges, are denominated in U.S. dollars. The fixed
operating fees, energy fees and other incidental fees have both U.S. dollar and
Philippine peso components that are both indexed to inflation rates.

The ECA contains a provision under which NPC bears the financial risks for
both political force majeure and change of law. NPC's obligations under the
energy conversion agreements are guaranteed by the full faith and credit of the
Philippine government. The following table summarizes

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the energy conversion agreement terms, NPC transfer date and capacity
information for each asset in the Philippines:

<TABLE>
<CAPTION>
CAPACITY
ENERGY CONVERSION PORTION OF 1999 COMMITTED
AGREEMENT TERM TRANSFER REVENUES AS TO NPC
PROJECT (YEARS) TO NPC CAPACITY FEES (MW)
------- ----------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Sual 25 Oct 2024 94% 1,000
Pagbilao 29 Aug 2025 95% 735
Navotas I 12 Mar 2003 98% 200
Navotas II 12 July 2005 98% 100
</TABLE>

SE Asia-Pacific, through its operating companies, is responsible for
management, operations and maintenance of the plants. The operating companies
earn fees including potential bonus fees for providing those services. The
Navotas I, Navotas II and Bulacan project companies operate and maintain their
respective plants. The following table presents generation sold and availability
data for each asset in the Philippines:

<TABLE>
<CAPTION>
1999
----------
GENERATION 1999
SOLD ------------
PROJECT (GWH) AVAILABILITY
------- ---------- ------------
<S> <C> <C>
Sual(1) 1,231 92%
Pagbilao 3,996 83%
Navotas I 10.3 95%
Navotas II 8.4 83%
</TABLE>

(1) Began operation in late 1999

All of the projects in the Philippines have been granted preferred or
pioneer status which, among other things, has qualified them for income tax
abatements of three to six years. The expiration dates of the abatements for
Pagbilao and Sual are 2002 and 2005, respectively.

Most of our investments in the Philippines are owned through a subsidiary
holding company, Southern Energy Philippines Holdings (SEPH). Part of our
strategy is to increase the size of SEPH through new projects in the Philippines
while simultaneously decreasing the percentage of SEPH owned by us. In order to
implement this strategy, we have been in discussions with parties who could
purchase part of SEPH. Most recently we have had discussions with a party with
whom we would possibly form a joint venture and contribute 20% of SEPH in
exchange for 50% of the joint venture. It is our intention to pursue these types
of opportunities only in circumstances where the proceeds would be used to fund
additional investment outside the Philippines.

SUAL

SE Asia-Pacific holds a 91.91% interest in the Sual plant, a 1,258 MW
coal-fired plant at Sual, Pangasinan, located approximately 216 km (130 miles)
north of Manila in the Philippines. The Sual plant consists of two 629 MW units
that commenced commercial operation in October 1999. The International Finance
Corporation (IFC) and Commonwealth Development Corporation (CDC) are the other
shareholders. Most revenues are paid in U.S. dollars into an offshore account
administered by a loan trustee.

When we acquired SE Asia-Pacific in 1997, the Sual plant was still under
construction. The construction was completed in October 1999. The total
construction cost, including inventories, was $1,282 million at June 30, 2000
and is expected to be approximately $1,300 million. The construction

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was funded by third party non-recourse project loans of $942 million and equity
financing by SEAP and two minority shareholders in the amounts of $312 million
and $28 million, respectively.

An SE Asia-Pacific subsidiary, Southern Energy Asia-Pacific Pangasinan
Limited (SEPI), formerly known as CEPA Pangasinan Electric Limited, has acceded
to the energy conversion agreement with NPC. The energy conversion agreement
obligates NPC to purchase 1,000 MW of the total plant capacity of 1,258 MW. The
remaining net available capacity of 218 MW is not currently under contract;
however, SE Asia-Pacific expects this capacity to be sold to NPC, large
industrial or commercial users or distribution customers.

A consortium of banks and various other lenders have committed non-recourse
project debt with an expected average life of approximately five years and a
final maturity in the beginning of 2012. As of June 30, 2000, the balance of the
project debt was approximately $942 million. The distribution of our shares by
Southern Company would constitute a change in control under the loan agreement
and we cannot assure you that we will be able to obtain the required lender
consents. Most revenues are paid in U.S. dollars into an offshore account
administrated by a loan trustee.

The Sual project was not completed by the date specified in the
construction contract. As a result, SEPI currently has a claim against the
contractors for liquidated damages. SEPI is currently in discussions with the
contractors to resolve disputes regarding the amounts to be paid.

NPC has informed SE Asia-Pacific that, in NPC's opinion, the Sual plant was
not completed by the dates, as adjusted, contemplated in the energy conversion
agreement. However, no formal claim for liquidated damages has been made by NPC.
SEPI believes that the plant was completed before the deadlines in the energy
conversion agreement and that its exposure to potential claims is not material.

Under shareholder agreement, the minority shareholders of SEPI can exercise
a put option requiring SEPI to purchase the minority shareholders' interests in
the project. The put option can be exercised between the third and sixth
anniversaries of the completion of the project construction or, in the event of
any change in control, a change in SEPI's charter documents or the transfer of
sponsor in violation of the sponsor support agreement, the put option may be
exercised on the earlier of the date of such changes or the twelfth anniversary
of the completion of the project construction. The distribution of our shares by
Southern Company will not constitute a change in control under the shareholder
agreement. If a minority shareholder exercises its put option, SEPI must
purchase the shareholder's interest at a price to be determined based on the
present value of the remaining years of cash flow less the liabilities
outstanding plus the current assets.

PAGBILAO

SE Asia-Pacific holds an 87.2% interest in the Pagbilao plant, a 735 MW
coal-fired plant located 100 km (62 miles) southeast of Manila. The Pagbilao
plant consists of two 367.5 MW units that commenced commercial operation in June
1996 and August 1996, respectively. The International Finance Corporation (IFC),
Commonwealth Development Corporation and the Asia Development Bank (ADB) are the
other shareholders. Most revenues are paid in U.S. dollars into an offshore
account administered by a loan trustee.

The Pagbilao plant originally had non-recourse project debt totaling $698
million from banks and various other lenders. The balance of this debt as of
June 30, 2000 was $477 million, with the majority of the principal having a
final maturity in the beginning of 2007. This financing requires the project
company to maintain a debt service reserve equal to the amount due within the
next succeeding 12 months. Southern Company currently provides a $60 million
letter of credit, and we provide a $50 million letter of credit, for the benefit
of the lenders to satisfy this reserve requirement.

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At the time of the full distribution of our stock by Southern Company, we expect
to have to provide letters of credit for the entire amount required by the
financing. The distribution of our shares by Southern Company would constitute a
change in control under the loan agreement and we cannot assure you that we will
be able to obtain the required lender consents.

Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Pagbilao project (SEQI) can exercise a
put option requiring SEQI to purchase the minority shareholders' interests in
the project. The put option can be exercised between the sixth and twelfth
anniversaries of the completion of the project construction or, in the event of
any change in control, a change in SEQI's charter documents or the transfer of
sponsor in violation of the sponsor completion support agreement the put option
may be exercised on the earlier of the changes or the twelfth anniversary of the
completion of the project construction. The distribution of our shares by
Southern Company will not constitute a change in control under the shareholders
agreement. If a minority shareholder exercises its put option, SEQI must
purchase the shareholder's interest at a price to be determined based on the
present value of the remaining years of cash flow less the liabilities
outstanding plus the current assets.

NAVOTAS I AND II

SE Asia-Pacific holds a 90% interest in the Navotas I plant, a 200 MW fuel
oil-fired plant located at the Navotas Fishport Complex north of Manila. The
Asian Development Bank is the other shareholder. SE Asia-Pacific also holds a
100% interest in the Navotas II plant, a 100 MW fuel oil-fired plant located at
the Navotas Fishport Complex.

BULACAN

SE Asia-Pacific owns a 100% interest in the Bulacan plant, a 15 MW plant
comprising four 3.75 MW diesel units located at the Navotas site. A SE
Asia-Pacific subsidiary has entered into a 15-year energy generation agreement
with Solid Development Corporation, a yarn manufacturing company. The agreement
term runs through 2012. Navotas staffing is used to operate the units.

BATAAN

A SE Asia-Pacific subsidiary has entered into an agreement with Bataan
Polyethylene Corporation (BPC) to supply the power requirements of BPC in
Bataan, the Philippines. BPC is expected to produce polyethylene products for
the Philippine market and the Asian region and is being financed by the IFC. BPC
is owned by BP Chemicals (a subsidiary of British Petroleum), Petronas
(Malaysian state oil company), Sumitomo Corporation and local Philippine
shareholders. Under this contract, the SE Asia-Pacific subsidiary is required to
construct a sub-station and two transmission lines to provide up to 40 MW of
power to the BPC plant. The construction of this sub-station and these
transmission lines is currently underway and we expect to complete the
construction during the third or fourth quarter of 2000. SE Asia-Pacific intends
to supply electricity to BPC sourced jointly from Sual and NPC.

MINDORO

SE Asia-Pacific has entered into a 20 year power sales agreement with the
Oriental Mindoro Electric Cooperative (ORMECO) pursuant to which SE Asia-Pacific
would install 7.5 MW of diesel generators on the Island of Mindoro to supply
ORMECO. SE Asia-Pacific intends to meet its obligations to ORMECO by moving two
units from its Bulacan station to Mindoro. SE Asia-Pacific would then meet its
obligations at Bulacan by utilizing the excess capacity at the Sual plant.

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ILIJAN

We are currently pursuing the acquisition of a minority interest in a 1,251
MW gas-fired combined cycle power plant under construction at Batangas,
Philippines. In March 2000, one of SE Asia-Pacific's subsidiaries entered into a
memorandum of agreement with the Korea Electric Power Corporation (KEPCO) and
Mitsubishi Corporation to negotiate a joint development role and an equity stake
in the Ilijan project. Upon the closing of the transaction, the shareholders
will be KEPCO (51%), Mitsubishi (21%), SE Asia-Pacific (20%), and Kyushu
Electric Corporation (8%). The Ilijan project has entered into a 20-year energy
conversion agreement for 1,200 MW with NPC and will be able to offer a tariff
rate of approximately 4.5 U.S. cents per kWh. We expect to have the exclusive
right to market excess capacity and energy (the difference between 1,200 MW sold
to NPC and the plant's capacity of 1,251 MW) during the life of the project.

We have entered into an agreement with KEPCO and Mitsubishi under which
Mitsubishi has advanced funds to the project company. Pursuant to this
agreement, we have agreed to credit Mitsubishi for such advances if we
eventually participate in this project. However, SE Asia-Pacific has not yet
entered into any agreement obligating it to make an investment. We are able to
defer the decision to invest until financial closing. Until financial closing,
KEPCO or Mitsubishi is also able to exclude SE Asia-Pacific from the project,
subject to signing definitive investment agreements, our initial base equity
investment is expected to be approximately $35 million invested over the period
2000-2001, together with a pro rata contingent equity obligation under the
lending arrangements of approximately $5 million. In addition, we will retain an
option to purchase an additional 8.6% equity interest from Mitsubishi which, if
exercised, would bring our total equity investment to $50 million. The closing
of the transaction is expected to occur in September 2000.

We anticipate taking an active role in the management of the project
through our right to designate a finance director, a general manager and one
senior plant manager.

NPC is responsible for constructing a new 500 kV transmission line and has
awarded the contract to Sumitomo with construction commencing in June. The
source of the natural gas is the Malampaya gas field in Palawan, which is being
developed by a consortium of Shell, Texaco and the Philippine National Oil
Company. The off-shore and on-shore pipelines are reportedly on schedule for
completion by October 2001, consistent with the schedule for the Ilijan power
plant.

The project is currently being constructed by a consortium of United
Engineers International, Inc., Raytheon-Ebasco Overseas Ltd, and Mitsubishi
Heavy Industries. We expect the construction to be completed in January 2002.
KEPCO is providing balance sheet financing pending the arrangement of project
finance debt in the second half of 2000.

DEREGULATION AND PRIVATIZATION

In April 2000, the Philippine House of Representatives passed the
Electricity Industry Reform Act (EIRA) substantially in the form of the
government legislative bill which had proposed comprehensive restructuring in
order to deregulate the market for electricity. The Senate has passed a series
of bills which also propose deregulation but along different lines from those
passed by the House of Representatives. The EIRA seeks to deregulate and
privatize NPC to promote a competitive industry structure and broaden the
ownership base of various sectors of the electric power industry. The EIRA is
now awaiting the Bicameral Conference Committee of the House and the Senate in
order to agree on a joint version of the law.

The EIRA seeks to establish, within three years from its effectiveness,
competition in the retail supply of electricity and open access to the
transmission and distribution systems. Prior thereto, concerned government
agencies are mandated to establish a wholesale electricity spot market, ensure

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the unbundling of transmission and distribution wheeling rates and remove
existing cross-subsidies provided by industrial and commercial users to
residential customers.

Moreover, within three years from the effectiveness of the EIRA, at least
70% of the NPC's generating assets and contracts are mandated to be privatized.
Thereafter, any undisposed assets of the NPC would be transferred to the
so-called NPC Residual, a government-owned and controlled corporation, which
would perform the remaining functions of NPC, such as administering the ECAs and
other contracts with independent power producers.

The EIRA, as it stands at the moment, presents no material impact on the
existing assets and operations of SE Asia-Pacific. Consistent with the announced
policy of the government, the EIRA contemplates continued payments of NPC's
obligations under its energy conversion agreement contracts such as those with
SE Asia-Pacific subsidiaries. The energy conversion agreements of SE
Asia-Pacific are not assignable and will, therefore, remain with NPC following
privatization. The NPC may sell its beneficial interest in the energy conversion
agreements as part of the privatization. These energy conversion agreements are
in any event supported by a sovereign guarantee of the Republic of the
Philippines.

CLEAN AIR ACT

In July 1999, the Philippines enacted legislation, the Clean Air Act, which
applies to stationary emission sources and other operating plants. The
Department of Environment and Natural Resources (DENR) will promulgate the Clean
Air Act's Implementing Rules and Regulations (IRR), probably by September 2000.
Pending promulgation of the IRR, the DENR has issued an administrative order
temporarily adopting the requirements of the Clean Air Act. Provisions of the
Clean Air Act affect the compliance of operating plants and their ability to
serve as base load capacity for the grid.

The provisions of the Clean Air Act and past practice of the DENR suggest
potentially increasingly stringent standards in emissions from all sources to
maintain and/or improve the air quality. This may require additional controls or
equipment on some of SE Asia-Pacific's plants in order to comply with the
emission reduction goals and targets set forth in the Clean Air Act.

We believe the Clean Air Act will not significantly affect the Sual plant,
which can comply with the current requirements of the Clean Air Act. Some
additional pollution control or other expenditures may be required for the
Pagbilao plant and Bulacan plant to comply with the new requirements. We do not
expect these expenditures to be material. We believe that the Navotas I and II
will not be affected significantly by the Clean Air Act. SE Asia-Pacific has
been closely following the development of the IRR and is making contingency
plans which are capable of meeting the standards and deadlines once finalized.

The DENR is permitted to allow a grace period of 18 months (with the
potential for up to a further 12 months) for the establishment of environmental
management systems and the installation of appropriate air pollution control
devices. In recent years, and for other air pollution legislation, the DENR has
allowed long grace periods for existing sources to comply with new environmental
standards.

CHINA

SHAJIAO C

SE Asia-Pacific holds a 32% interest in the Shajiao C plant, a 2,038 MW
coal-fired power plant located close to Hong Kong at Shajiao, Guangdong
Province, China. Shajiao C is the largest coal-fired power plant in Guangdong
Province. The plant is made up of three 679.4 MW units that began

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commercial operation in June 1996. The operation and off-take agreement has an
initial term of 20 years and expires in June 2016.

SE Asia-Pacific indirectly owns 80% of Southern Energy (Shajiao C) Limited
(SESCL). The other 20% of SESCL is owned by a number of minority shareholders,
including Bank of China and Kanematsu. Guangdong Province Shajiao (Plant C)
Power Generation Corporation (Guangdong Generation Corporation) and SESCL have
60% and 40% interests, respectively, in Guangdong Guanghope Power Co., Ltd.
(Guangdong Power), which is the joint venture company that controls the plant.
The majority partner, Guangdong Generation Corporation, is a Chinese corporation
directly owned by the Guangdong Electric Power Holding Company (GEPC).

All power produced at the plant is sold to Guangdong Generation Corporation
and GEPC. These two entities are responsible for operating and maintaining the
plant and are also responsible for coal supply. Each of them receives an
operations fee, calculated on the basis of electricity generated and a minimum
take-or-pay requirement. Guangdong Generation Corporation and GEPC bear demand
risk through a contractual take-or-pay requirement, which imposes a minimum
annual offtake quantity of approximately 62% of total generation capability,
subject to risks such as force majeure and construction defects. The minimum
offtake was not achieved during the years 1996-1999. The capacity payment
associated with the shortfall in each year has been paid in the respective
following year. Guangdong Generation Corporation and GEPC also bear fuel risks.
Force majeure affecting fuel delivery does not relieve them of their take-or-pay
obligation.

While Guangdong Generation Corporation operates the plant pursuant to a
contractual agreement between the parties, a subsidiary of SE Asia-Pacific, in
its capacity as a partner in the Guangdong Power joint venture, provides
significant management and operational support for the facilities on a day to
day basis.

Payments to Guangdong Power are made in Renminbi. However, payments to
cover foreign currency expenses, debt service and an equity return are indexed
to U.S. dollars. For the first 10 years of operation (through June 2006),
Guangdong Generation Corporation receives the first 30% of distributable
after-tax profit. The remaining profits are split 60/40 between Guangdong
Generation Corporation (42% overall) and SESCL (28% overall). For years 11
through 20, Guangdong Generation Corporation receives the first 60% of
distributable after-tax profit. The remaining profits are split 60/40 between
Guangdong Generation Corporation (24% overall) and SESCL (16% overall). The
shareholders of Guangdong Power provided funding to that company through a
series of loans and capital contributions. It is expected that Guangdong Power
will begin repaying these loans in 2000. Shareholder loans and invested capital
are to be returned prior to the payment of dividends.

The loans and capital contributions made to Guangdong Power as of June 30,
2000 are summarized as follows:

<TABLE>
<CAPTION>
GUANGDONG
GENERATION SEAP AND ITS
CORPORATION SUBSIDIARIES
----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Registered Capital...................................... $225.0 $150.0
Shareholder Loans....................................... 264.1 190.0
Shortfall Loans......................................... 137.9 40.5
Early Generation Profit (EGP) Loans..................... 23.8 99.9
------ ------
Total................................................. $650.8 $480.4
====== ======
</TABLE>

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All shortfall finance, EGP and shareholder loans bear a coupon interest
rate of 10% and are to be repaid once Guangdong Power's external debt is paid in
full. Guangdong Power retired its external debt in March 2000. We expect that
all available cash will be used to repay loans prior to being applied to
dividend payments. We expect that substantially all of the loans we have
provided will be repaid by the end of 2003. Shortfall finance loans represent
loans made to fund construction costs not financed by equity or other debt.
Similarly, shareholder loans are loans made by shareholders to provide
additional financing for the construction of the plant. EGP loans relate to
early generation profit earned by Guangdong Power. EGP includes income from the
sale of electricity and other payments attributable to the time prior to
commercial operation. Such income, by agreement, is distributed to Guangdong
Power joint venture partners and then lent back to the joint venture company in
the form of an EGP loan.

SHANDONG INTERNATIONAL POWER DEVELOPMENT COMPANY (SIPD)

On June 30, 1999, we acquired a 9.99% interest in SIPD for $107 million
through our subsidiary, SE China. SE China initially purchased 509.5 million, or
40%, of the 1.28 billion shares offered in SIPD's $261 million initial public
offering on the Hong Kong Stock Exchange.

SIPD is the largest independent power producer in China's Shandong
province. Shandong Electric Power (Group) Company (SEPCO), the sole purchaser of
electricity as well as the grid operator in Shandong province, is the largest
shareholder of SIPD. SIPD sells power to SEPCO under an offtake contract,
pursuant to which SEPCO agrees to purchase power in an amount based on average
generation of all Shandong Province plants under its jurisdiction. The power is
purchased by SEPCO at a price pursuant to a tariff intended to allow SIPD to
recover costs plus a specified return on its average net book value of fixed
assets. In addition, SEPCO has granted to SIPD the right of first refusal to
acquire any plant SEPCO chooses to sell. SEPCO has also granted to SIPD an
option to acquire, develop and operate future power projects within Shandong
province for which SEPCO has development rights.

At December 31, 1999, SIPD held interests in 18 coal-fired power generating
units including two 600 MW units, five 125 MW units and eleven 330 MW units for
a total installed capacity of 5,125 MW, of which its net ownership interest
represents 4,158 MW.

Shandong province, with a population of 88 million people and an installed
electricity generating capacity of more than 18,000 MW, has China's
second-largest independent provincial power grid. Shandong is also one of six
provinces and municipalities that the Chinese central government has designated
as pilot sites for the deregulation of the power industry. We believe that SIPD
is well positioned for deregulation by being a low-cost provider with tariffs
below the average in the Shandong province and by being more focused on creating
shareholder value and having access to international capital markets for fund
raising as a publicly traded company.

AUSTRALIA

Kogan Creek

SE Asia-Pacific has entered into a shareholders agreement with CS Energy
Limited (CS Energy) to develop the Kogan Creek Power Station in Queensland and
has also formed an alliance with CS Energy to develop other energy projects in
Australia. The agreements stipulate the joint development of the Kogan Creek
station, which is expected to be a 750MW coal-fired power station located 280 km
west of Brisbane. CS Energy has acquired 40% of the project while SEAP has
retained 60%. SEAP has also obtained an exclusive right to acquire up to 40% of
CS Energy's proposed 385 MW natural gas fired station at Swanbank Power Station
near Ipswich which recently commenced construction. The Kogan Creek station has
received all of its government approvals,

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including Environment Australia sign-off as well as the Foreign Investment
Review Board approval in early June 2000.

Based on evaluations of the supply and demand balance in Queensland, we and
CS Energy are aware of a current surplus of generating capacity, and
consequently, plan to proceed with the Kogan Creek project at an undetermined
future date based on market demand. Financial close of Kogan Creek is unlikely
prior to 2003.

INDIA

BALAGARH

We are currently pursuing development of a 500 MW coal-fired power project
north of Calcutta, India. We have entered into a shareholders agreement with the
Calcutta Electricity Supply Company Limited (CESC), a private sector company
which is the local public utility supplying power exclusively to major parts of
Calcutta. CESC is the main sponsor of the project and we are the co-sponsor.
International Finance Corporation and Asian Development Bank are jointly
planning to take a 13% equity stake and to provide approximately $215 million in
credit facilities. Korean Exim Bank has agreed in principle to finance $153
million by way of export credit. The project has received all major permits and
clearances, however, the project has not fixed a target date for financial
close. We expect to invest approximately $50 million of equity in this project.

HIRMA

We are in initial development of a 3,960 MW mine-mouth project in the state
of Orissa, in eastern India. This plant would provide power to the Power Trading
Corporation of India Limited, a Government of India (GoI) controlled corporation
set up in 1999. The project has been qualified by GoI as a Mega Project under
the GoI's recently revised Mega Power Project Policy and would therefore receive
a waiver from import taxes and duties. In January 1999 a Joint Development
Agreement was signed with Reliance Industries Limited to be an equal co-sponsor.
It has proved quite difficult to obtain approval of the proposed tariff and the
key project agreements are at a preliminary stage of negotiation. At the present
time, we have not fixed a target date for financial close.

REGULATION

INTERNATIONAL REGULATION

Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations that apply to
each of our international projects are more fully discussed under the
description of the particular project found elsewhere in this prospectus.

U.S. PUBLIC UTILITY REGULATION

The U.S. electric industry is subject to comprehensive regulation at the
federal and state levels. Currently, most of our U.S. facilities are EWGs under
PUHCA. Our EWGs are subject to regulation by FERC under the Federal Power Act
regarding rate matters and by state public utility commissions regarding
non-rate matters. The majority of our generation from EWGs is sold at market
prices under market rate authority granted by FERC, although FERC has the
authority to impose cost of service rate regulation if it determines that market
pricing is not in the public interest. Our EWGs are also subject to FERC
regulation relating to accounting and reporting requirements, as well as
oversight of mergers and acquisitions, securities issuances and dispositions of
facilities.

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State or local authorities have historically regulated the distribution and
retail sale of electricity, as well as the need for siting and the construction
of generating facilities. In addition, our EWGs may be subject to a variety of
state and local regulations regarding maintenance and expansion of their
facilities and financing capital additions if the financing is subject to state
public service commission regulation. Outside of ERCOT, the wholesale power
sales of our EWGs are subject exclusively to FERC regulation under the FPA and
to market regulation institutions, such as regional transmission group and
independent system operator market monitoring initiatives authorized by FERC.

We are currently subject to regulation under PUHCA, as a wholly owned
subsidiary of a public utility holding company. Prior to the distribution of our
common stock by Southern Company, we must continue to conduct our business in
accordance with SEC orders authorizing Southern Company and us to engage in the
business of developing energy projects and owning and operating EWGs, FUCOs,
QFs, domestic and Canadian marketing of natural gas and electricity and other
energy-related activities. Prior to the distribution, we may not acquire public
utility assets or the securities of public utility companies, unless these
assets or companies qualify as EWGs, FUCOs or QFs, without SEC approval under
PUHCA.

In addition, Southern Company is limited in the amount of the aggregate
investment it may make in us through the proceeds of its security sales or
guarantees to an amount not to exceed 100% of Southern Company's consolidated
retained earnings. We and Southern Company have requests pending before the SEC
to increase Southern Company's authority to invest in us up to 175% of its
consolidated retained earnings and to increase its guarantee authority to a
similar extent. Following this offering, Southern Company will no longer provide
financing or credit support except for specified transactions or for a limited
period of time.

Southern Company's plan to distribute our common stock to its stockholders
requires regulatory approval from both the FERC under the FPA and the SEC under
PUHCA. We cannot assure you that the requisite approvals from FERC and the SEC
can be obtained on a timely basis or on conditions acceptable to Southern
Company and us. Southern Company may determine not to complete the distribution
based upon the lack of requisite regulatory approval or an assessment that
timely approval cannot be obtained or can be obtained only on conditions
unacceptable to Southern Company.

The SEC monitors the consolidated capitalization of companies subject to
PUHCA, and will monitor the impact of the distribution on the financial
integrity of Southern Company. We believe that the distribution of our stock by
Southern Company will not cause the equity components of Southern Company's
consolidated capitalization to fall below levels required by the SEC, and that
the distribution will have no effect on the capitalization ratios of Southern
Company's operating subsidiaries. In addition, Southern Company has committed to
the SEC that it will not undertake the distribution if it reduces the equity
component of Southern Company's consolidated capitalization below levels
required by the SEC.

If any state public service commission becomes concerned that the plan for
the distribution of our common stock by Southern Company may adversely affect
the consumers in its jurisdiction, the state commission may undertake to review
the plan of distribution. Even though the state commission may have no
jurisdiction over the distribution, Southern Company or us, any review may delay
or prevent Southern Company from completing the distribution.

It is possible that one or more regulatory authorizations for Southern
Company and us to conduct our operations may expire. The authorization under
PUHCA which allows us and our subsidiaries to pay dividends from unearned
surplus, in accordance with applicable corporate law and applicable covenants to
security holders has been extended and will expire June 30, 2001. If Southern

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Company has not completed the distribution of our common stock by June 30, 2001,
and if the SEC does not extend the order beyond that date, cash may be trapped
in some of our subsidiaries, reducing our cash management flexibility and
increasing our need for working capital and external financing.

In addition, the SEC order providing the general authorization for Southern
Company to acquire our securities and authorizing us to undertake our business
of developing and owning and operating FUCOs, EWGs and energy-related
subsidiaries is scheduled to expire on December 31, 2000. Southern Company and
we intend to seek an extension of this general authority. Other authorizations
under PUHCA pertaining to our business extend until the year 2003. Even though
rules exempting certain acquisitions and transactions from SEC approval may
alleviate the effect of an expiration of the SEC order, the effect of the
expiration may be adverse to our business operations.

Following the distribution we do not expect to be subject to PUHCA unless
or until we acquire the securities of a public utility company or public utility
assets that are not exempt as an EWG, FUCO or QF. PUHCA, the FPA and applicable
state laws may limit Southern Company and its remaining subsidiaries' ability to
contract with or provide services to us.

Following the distribution of our stock by Southern Company, we will
compete with Southern Company. As a result of market information restrictions
imposed by the FERC Code of Conduct, we have not had access to market
intelligence concerning the Southeast region that is possessed by Southern
Company and other energy marketers that have been active in the Southeast region
for a number of years.

Our energy marketing business units are authorized under orders issued by
the SEC to conduct electricity and natural gas marketing in the United States
and Canada and, through December 31, 2000, to invest up to $300 million to
acquire assets related to energy marketing in the United States and Canada. In
the event we were to undertake a major acquisition of energy assets in excess of
the authority currently authorized which is not a FUCO, EWG or a United States
energy-related company, we would be required to seek further PUHCA approvals.

Congress is considering legislation to modify federal laws affecting the
electric industry. Bills have been introduced in the Senate and the House of
Representatives that would, among other things, provide retail electric
customers with the right to choose their power suppliers. Modifications to PURPA
and PUHCA have also been proposed. In addition, various states have either
enacted or are considering legislation designed to deregulate the production and
sale of electricity. Deregulation is expected to result in a shift from
cost-based rates to market-based rates for electric energy and related services.
Although the legislation and regulatory initiatives vary, common themes include
the availability of market pricing, retail customer choice, recovery of stranded
costs and separation of generation assets from transmission, distribution and
other assets. It is unclear whether or when all power customers will obtain open
access to power supplies. Decisions by regulatory agencies may have a
significant impact on the future economics of the power marketing business.

FERC has issued power and gas transmission initiatives that require
electric and gas transmission services be offered on an open-access basis
unbundled from commodity sales. Although these initiatives are designed to
encourage wholesale market transactions for electricity and gas, we cannot
predict the timing of industry changes as a result of these initiatives or the
adequacy of transmission additions in specific markets.

In Canada, Canadian national and provincial governments have instituted
natural gas regulations also designed to encourage the development of
competitive markets. However, we cannot predict the timing and scope of the
development of a competitive market in Canada or the effect of these or future
regulations on these markets.

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Our Birchwood facility is subject to regulation as a QF under PURPA. As a
QF, Birchwood is exempted from most provisions of the FPA and state laws
relating to securities, rate and financial regulation. PURPA requires electric
utilities (i) to purchase electricity generated by QFs at a price based on the
utility's avoided cost of purchasing electricity or generating electricity
itself, and (ii) to sell supplementary, back-up, maintenance and interruptible
power to QFs on a just, reasonable and non-discriminatory basis. To qualify for
QF status, the Birchwood facility must satisfy requirements regarding the
production of useful thermal energy as well as limitations on the extent of
ownership by utilities or utilities affiliates.

ENVIRONMENTAL REGULATION

Our operations are subject to extensive federal, state, local and foreign
laws and regulations relating to air quality, water quality, waste management,
natural resources and health and safety. Our projects and facilities in foreign
markets create exposures and obligations to the national, provincial and local
laws of each host country, including environmental standards and other
requirements imposed by these governments. Our compliance with these
environmental requirements necessitates significant capital and operating
expenditures related to monitoring, pollution control equipment, emission fees
and permitting at various operating facilities. Our expenditures, while not
prohibitive in the past, are anticipated to increase in the future along with
the increase in stricter standards, greater regulation, more extensive
permitting requirements and an increase in the number and types of assets we
operate that are subject to environmental regulation. We cannot assure you that
future compliance with these environmental requirements will not adversely
affect our operations or financial condition.

Our operations in Europe are subject to comprehensive environmental
regulation similar to that in the United States, and these regulations are
expected to become more stringent in the future. Additionally, like many
countries of the world, the governments of China, the Philippines, Trinidad and
Tobago and several other countries recently have proposed increased
environmental regulation of many industrial activities, including increased
regulation of air quality, water quality and solid waste management. The scope
and extent of these newly proposed environmental regulations is unclear.

Over the past several years, the utility industry, state, federal and
foreign governments and international organizations have been concerned about
global climate change. Because our fossil fuel-fired plants emit carbon dioxide,
the costs of any "greenhouse gas" restrictions could adversely affect our
operations. The impact of the Kyoto Treaty on our domestic and foreign
facilities and operations remains uncertain.

The environmental laws and regulations in the United States illustrate the
comprehensive environmental regulations which govern our operations. Our most
significant environmental requirements in the U.S. result from the Clean Air Act
and the 1990 Clean Air Act Amendments. Under the Clean Air Act, we are required
to comply with a broad range of restrictions concerning air emissions, operating
practices and pollution control equipment. Several of our facilities are located
in metropolitan areas such as New York City, Boston, Chicago or San Francisco,
classified by EPA as not achieving the ambient air quality standards which
trigger the most stringent air regulation requirements.

In the future, we anticipate increased regulation of our facilities under
the Clean Air Act and applicable state laws and regulations concerning air
quality. EPA, several states and several foreign countries are in the process of
enacting more stringent air quality regulatory requirements. For example, EPA
recently promulgated a new regulation, known as the "Section 126 Rule," which
allocates nitrogen oxide (NOx) emissions allowances to various electric
generating facilities in Delaware, Indiana, Kentucky, Maryland, Michigan, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia, West Virginia
and the District of Columbia. We expect to incur additional

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compliance costs as a result of these developments. The Section 126 Rule becomes
effective on May 1, 2003. If a plant exceeds its allocated allowances under this
rule, the plant must purchase additional, unused allowances from other regulated
plants. EPA also has established NOx emission caps for several eastern states
which must be implemented by these states beginning May 1, 2003. The State of
New York is also developing regulations to further reduce NOx and sulfur dioxide
emissions.

Several other environmental laws in the United States also affect our
operations. For example, we are required under the Clean Water Act to comply
with effluent and intake requirements, technological controls and operating
practices. Our wastewater discharges are permitted under the Clean Water Act,
and our permits under the Clean Water Act are subject to review every five
years. As with air quality, the requirements applicable to water quality are
expected to increase in the future. We expect to incur additional compliance
costs as a result of the increased regulation of water quality.

Our facilities are also subject to several waste management laws and
regulations in the United States. The Resource Conservation and Recycling Act
(RCRA) sets forth very comprehensive requirements for handling of solid and
hazardous wastes. The generation of electricity produces non-hazardous and
hazardous materials, and we incur substantial costs to store and dispose of
waste materials from our facilities. Recently, EPA indicated that it may begin
to regulate fossil fuel combustion materials, including types of coal ash, as
hazardous waste under RCRA. If EPA implements its initial proposals on this
issue, we may be required to change our current waste management practices and
expend significant resources on the increased waste management requirements
caused by EPA's change in policy.

From time to time, the federal Comprehensive Environmental Response,
Compensation and Liability Act, known as the Superfund or CERCLA, applies to our
facilities or other sites in the United States. CERCLA establishes a framework
for dealing with the cleanup of contaminated sites. Many states, like
Massachusetts, New Jersey and Georgia, have enacted state superfund statutes.
Under these laws, we are required to undertake, from time to time, corrective
action for soil and groundwater conditions identified at our facilities. We are
currently undertaking corrective action at some of our recently acquired
facilities for conditions that were identified during our due diligence related
to the acquisition. We have purchased environmental insurance to cover some of
these conditions, as well as other unknown environmental conditions, when we
initially acquired some of our facilities. We do not expect these corrective
actions to require significant expenditures.

In connection with asset acquisitions and other transactions, we also may
obtain or be required to provide indemnification against environmental
liabilities and responsibilities. Typically, indemnification we receive is
limited in scope and time period. In some transactions, we did not receive an
environmental indemnity. To minimize our exposure for such liabilities, we
conduct environmental assessments of the assets we wish to acquire or operate.
Thus far, we have not incurred any material environmental liabilities arising
from our acquisition or divestiture activities.

We have not incurred material costs for environmental remediation in the
past three years. We currently plan to spend approximately $50 million during
the remainder of 2000 and in 2001 to retrofit pollution control equipment on its
existing assets. We spent approximately $37 million during 1999 and the first
half of 2000 to retrofit pollution control equipment.

We believe we are in compliance in all material respects with applicable
environmental laws. However, while we believe our procedures and facilities
comply with applicable environmental laws and regulations, we cannot provide
assurances that additional costs will not be incurred as a result of more
stringent requirements.

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EMPLOYEES

At December 31, 1999, our corporate offices and majority owned or
controlled subsidiaries employed approximately 6,400 persons. This number
includes approximately 700 in the corporate headquarters in Atlanta and at SCEM
and approximately 5,700 at operating facilities. Approximately 440 of our
domestic employees are subject to collective bargaining agreements with one of
the following unions: International Brotherhood of Electrical Workers (IBEW),
Utilities Workers of America or United Steel Workers. About 2,200 of our
employees in international business units belong to unions. These unions include
IBEW and Grand Bahamas Port Authority Workers in the Bahamas; Oilfield Workers
Trade Union and Senior Staff Association in Trinidad and Tobago; UNISON,
Amalgamated Engineering and Electrical Union, General Municipal Boilermakers
Union, Engineers and Managers Association and Transport and General Workers
Union in England; Sindicato de Luz y Fuerza in Argentina; and Sindicato
Arica-Parincota, Sindicato Trabajadores Edelnor Iquique, Sindicato Trabajadores
Segunda Region, Sindicato Edelnor S.A. and Sindicato Ingenieros de Ejecucion in
Chile. We believe we have satisfactory relations with both union and non-union
employees.

FACILITIES/PROPERTIES

Our corporate offices currently occupy approximately 242,000 square feet of
leased office space in Atlanta, Georgia. We are in the process of relocating our
corporate offices into a new two-building facility occupying approximately
357,000 square feet, currently under construction in Atlanta, Georgia. SCEM
began occupying the first completed phase of this building, a 67,000 square feet
state-of-the-art marketing and risk management facility, in December 1999. We
anticipate moving the remainder of our corporate offices to the second building,
a 290,000 square foot office building, between September and December 2000. We
have signed long-term leases for these facilities.

In addition to our corporate office space, we lease or own various real
property and facilities relating to our projects and our development activities.
Our project facilities are generally described under the project descriptions
contained elsewhere in this prospectus. We believe that we have satisfactory
title to our project facilities in accordance with standards generally accepted
in the energy industry, subject to exceptions which, in our opinion, would not
have a material adverse effect on the use or value of the facilities.

We believe that all of our existing office and generating facilities,
including the facilities under construction, are adequate for our needs through
calendar year 2000. If we require additional space, we believe that we will be
able to secure space on commercially reasonable terms without undue disruption
to our operations.

LEGAL PROCEEDINGS

In September 1999, the State of Minas Gerais, Brazil filed a lawsuit in a
state court seeking temporary relief against SEB exercising voting and
appointment rights under the shareholders agreement between the state and SEB
regarding their interest in CEMIG, as well as a permanent rescission of the
agreement. The core issue in the dispute is whether the shareholders agreement
unconstitutionally transfers control of CEMIG from the state to SEB, which
transfer would have required specific legislative authorization. A lower court
judge denied the state's request, but one member of a three-judge State
Appellate Court granted a temporary injunction pending the outcome of the
litigation regarding rescission of the shareholders agreement. This injunction,
however, does not affect the status of the CEMIG directors appointed by SEB, as
SEB's right to appoint these directors is not derived from the agreement. On
March 23, 2000, the lower court judge in Minas Gerais ruled that the
shareholders agreement was invalid. SEB has appealed this decision. We cannot
assure you

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<PAGE> 117

that we will be successful in appealing this ruling or in defending the
constitutionality of the provisions of the shareholders agreement. Our failure
to prevail on this matter would limit our influence over the daily operations of
CEMIG.

SE California and its subsidiaries SE Delta and SE Potrero acquired
generation assets from PG&E in April 1999 subject to reliability-must-run
agreements. SE California assumed these agreements from PG&E subject to the
outcome of a FERC proceeding initiated in October 1997 that will determine the
percentage of a $158.8 million annual fixed revenue requirement to be paid to
the SE California parties by the CAISO under the reliability-must-run
agreements. The percentage of the revenue requirement not paid by the CAISO must
be recovered through market sales. This revenue requirement was negotiated as
part of a prior settlement of a FERC rate proceeding. SE California contends
that the amount paid by the ISO should reflect an allocation based on the ISO's
right to call on the units (as defined by the reliability-must-run agreements)
and the ISO's actual calls. This approach would result in annual payments by the
ISO of approximately $120 million, or 75% of the settled fixed revenue
requirement. The decision in this case will affect the amount CAISO will pay to
SE Delta and SE Potrero for the period from June 1, 1999 through December 31,
2001. On June 7, 2000, the administrative law judge (ALJ) presiding over the
proceeding issued an initial decision in which the ALJ allocated responsibility
for payment of approximately 3% of the revenue requirement to the CAISO. On July
7, 2000, SE California appealed the ALJ's decision to the FERC. A final FERC
order in this proceeding may be appealed to the U.S. Court of Appeals. The
outcome of this appeal cannot now be determined.

If SE California is unsuccessful in its appeal of the ALJ's decision, SE
California will be required to refund certain amounts of the revenue requirement
billed to the CAISO for the period from June 1, 1999 until the final disposition
of the appeal. The amount of this refund as of June 30, 2000 would have been
approximately $94 million and would have reduced net income by approximately $33
million. These amounts do not include interest that would be payable in the
event of a refund. If SE California is unsuccessful in its appeal, it plans to
pursue other options available under the reliability must-run agreements to
mitigate the impact of the ALJ's decision upon its future operations. The
outcome of this appeal is very uncertain, and we cannot assure you that we will
be successful.

On January 18, 2000, EPA published a new regulation, known as the "Section
126 Rule," which allocates nitrogen oxide emissions allowances to various
electric generating facilities in Delaware, Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia,
West Virginia and the District of Columbia. This regulation becomes effective on
May 1, 2003. We believe that the NOx allowances allocated to Birchwood are
incorrect due to EPA's use of incorrect data. On March 17, 2000, Birchwood filed
an appeal of the Section 126 Rule with EPA to challenge the NOx emission
allowances for the Birchwood facility. A brief in support of the appeal was
filed on June 14, 2000. EPA's response is expected in August 2000. We are
continuing with efforts to settle this dispute with EPA.

Along with several other electric generators which own facilities in New
York, in October 1999 we received an information request from the State of New
York concerning the air quality control implications of various repairs and
maintenance activities of SE New York at its Lovett facility. SE New York
responded fully to this request and provided all of the information requested by
the State. The State of New York issued notices of violation (NOV) to some of
the utilities being investigated. The state issued a NOV to the previous owner
of Plant Lovett, ORU, alleging violations associated with the operation of Plant
Lovett prior to the acquisition of the plant by SE New York. To date, SE New
York has not received a NOV. We disagree with the allegations of violations in
the NOV. The NOV does not specify corrective actions which the State of New York
may require. Under the sales agreement with ORU for Plant Lovett, ORU is
responsible for fines and penalties arising from

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<PAGE> 118

historical operations, but SE New York may be responsible for the cost of
purchasing and installing emission control equipment, the cost of which may be
material.

We acquired the State Line station in Hammond, Indiana from Commonwealth
Edison on December 31, 1997. On July 28, 1998, an explosion occurred causing a
fire and substantial damage to the plant. The precise cause and origin of the
explosion and fire are still under investigation. Thus far, seven personal
injury lawsuits have been filed against us and our affiliates. Five of these
lawsuits were filed in the Circuit Court in Cook County, Illinois in August and
September, 1998. We filed a motion to dismiss all five of these cases in 1998
for lack of "in personam" jurisdiction. The motion was denied in August 1999. In
October 1999, the Appellate Court of Illinois granted our petition for leave to
appeal. Briefs and reply briefs have been filed on the jurisdiction issue and
the parties presently await the setting of a date for oral argument, which is
anticipated to occur before the end of September. Given the posture of the
motion, no discovery has been allowed to date. The outcome of this motion cannot
now be determined. The two remaining cases were filed in Lake County Circuit
Court, Crown Point, Indiana, one in July 1998 and the other in April 2000. One
of the plaintiffs who originally filed in Indiana also recently filed his case
in Illinois. This plaintiff, however, will be forced to proceed in only one
forum.

The plaintiffs in all of these cases are seeking money damages for personal
injuries and related costs and expenses. The total special damages being sought
are approximately $8.3 million. The plaintiffs are also seeking unspecified
amounts for pain and suffering. The outcome of these proceedings cannot now be
determined and an estimated range of loss cannot be made.

Except for the CEMIG litigation, the SE California proceedings, the
Birchwood Section 126 issue, the SE New York information request, the State Line
litigation and the NOV issued to the previous owners of Plant Lovett, we are not
a party to any material legal proceedings. We experience routine litigation from
time to time in the normal course of our business, none of which is expected to
have a material adverse effect on our financial condition or results of
operations.

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<PAGE> 119

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information with respect to our directors,
executive officers and key employees as of the date of this prospectus.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
A. W. Dahlberg.................... 60 Director and Chairman of the Board
S. Marce Fuller................... 40 President, Chief Executive Officer and Director
Raymond D. Hill................... 53 Executive Vice President and Chief Financial Officer
Richard J. Pershing............... 53 Executive Vice President and Chief Executive Officer,
Americas
Frederick D. Kuester.............. 49 Senior Vice President and Chief Executive Officer,
Asia-Pacific
Barney S. Rush.................... 48 Senior Vice President and Chief Executive Officer,
Europe
Vance N. Booker................... 46 Senior Vice President, Administration and External
Affairs
Andrew J. Dearman, III............ 46 Senior Vice President and Chief Technical Officer
Douglas L. Miller................. 49 Senior Vice President and General Counsel
Gary J. Morsches.................. 40 President of Southern Company Energy Marketing, L.P.
James A. Ward..................... 47 Senior Vice President, Finance and Accounting
Edgardo A. Bautista............... 65 President, Southern Energy Holdings Philippines, Inc.
H. Allen Franklin................. 56 Director
Elmer B. Harris................... 61 Director
W. L. Westbrook................... 61 Director
A. D. Correll..................... 58 Proposed Director
William M. Hjerpe................. 46 Proposed Director
David J. Lesar.................... 46 Proposed Director
</TABLE>

A. W. DAHLBERG is expected to be named our Chairman in August 2000 and has
served as one of our directors since April 1996. He also serves as Chairman of
the Board and Chief Executive Officer of Southern Company, a position he has
held since March 1995. Mr. Dahlberg previously served as President of Southern
Company from 1994 until June 1999. He is a director of Equifax, Inc., Protective
Life Corporation and SunTrust Banks, Inc. Mr. Dahlberg joined Southern Company
in 1960.

S. MARCE FULLER has been our President and Chief Executive Officer and one
of our Directors since July 1999. From September 1997 to July 1999, she was
President and Chief Executive Officer of SCEM and one of our Executive Vice
Presidents from October 1998 to July 1999. From May 1996 to September 1997, Ms.
Fuller was Senior Vice President of our North America division, in charge of our
North American operations and business development. Prior to that, from February
1994 to May 1996, she was our Vice President for domestic business development.
Ms. Fuller is also a director of Curtiss-Wright Corporation. Ms. Fuller joined
Southern Company in 1985 and joined us in 1992.

RAYMOND D. HILL has been our Chief Financial Officer since 1999 and one of
our Executive Vice Presidents since October 1998. He has responsibility for
overall financial management of our company. Mr. Hill is also the Chairman of
our subsidiary SE Asia-Pacific, having previously served as its Managing
Director from July 1997 to December 1998. From 1993 to July 1997, he served as
Chief Financial Officer and Senior Vice President. Prior to joining us in 1993,
Mr. Hill served as a Managing Director at Lehman Brothers, an investment banking
firm.

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<PAGE> 120

RICHARD J. PERSHING has been Chief Executive Officer, Americas group, since
August 1999 and one of our Executive Vice Presidents since October 1998. He is
responsible for our North American, South American and the Caribbean operations.
Mr. Pershing is also responsible for the development, acquisition, ownership and
operation of energy generation investments and marketing and risk management
through SCEM. From November 1997 to October 1998, he was one of our Senior Vice
Presidents. Prior to joining us in 1992, Mr. Pershing previously held various
executive and management positions at Georgia Power. He joined Southern Company
in 1971.

FREDERICK D. KUESTER has been Chief Executive Officer, Asia-Pacific group,
since August 1999 and one of our Senior Vice Presidents since August 1999. He
oversees asset management and project development in the Asia-Pacific region. He
is also on the board of directors of SIPD, a power company in which we hold a
9.99% interest. In addition, since November 1998, he has served as Chief
Executive Officer of SE Asia-Pacific, one of the largest independent power
producers in Asia. From January 1997 to November 1998 Mr. Kuester served as
director of the commercial group at SE Asia-Pacific. Prior to that, Mr. Kuester
served as vice president of power generation for Mississippi Power Company, a
subsidiary of Southern Company. Mr. Kuester started his career at Southern
Company in 1971.

BARNEY S. RUSH has been Chief Executive Officer, Europe group and one of
our Senior Vice Presidents since August 1999. He is responsible for asset
management, business development and marketing and risk management operations
for the region. Mr. Rush is also chairman of the supervisory board of Bewag, the
German utility in which we have a 26% ownership interest. Until August 1999, he
served as vice president responsible for acquisitions and as managing director
of Southern Energy Development -- Europe, since May 1996 and September 1997,
respectively. Prior to joining us in May 1996, Mr. Rush was executive vice
president for business development and finance at Oxbow Power Corporation. He
has also held various positions at Lehman Brothers, including senior vice
president, in project finance and the utility and telecommunications group.

VANCE N. BOOKER has been our Senior Vice President, Administration and
External Affairs since August 1999. He is responsible for administration and
external affairs, which includes human resources, information resources,
corporate communications, economic development and corporate services. Mr.
Booker was previously our Vice President, Administration. Prior to joining us in
July 1996 he held various positions at Southern Company in strategic planning,
human resources, accounting and finance. Mr. Booker joined Southern Company in
1975.

ANDREW J. DEARMAN, III has been our Senior Vice President and Chief
Technical Officer since September 1999. He is responsible for our construction,
environmental, operations and maintenance technical support and safety programs.
Previously, from April 1997 until September 1999, Mr. Dearman was vice president
of power generation and delivery at Mississippi Power Company, a subsidiary of
Southern Company. From January 1995 to April 1997, he was division vice
president for Alabama Power Company, a subsidiary of Southern Company. Mr.
Dearman joined Southern Company in 1975.

DOUGLAS L. MILLER has been our Senior Vice President and General Counsel
since he joined us in October 1999. He directs outside counsel and oversees
company programs to comply with the laws and regulations of states and countries
where we conduct our business. From 1997 until he joined us in 1999, Mr. Miller
was managing partner of the Troutman Sanders LLP Hong Kong office where he
oversaw the Project Development and Finance Practice Group. Mr. Miller joined
Troutman Sanders in 1975.

GARY J. MORSCHES has been President of SCEM since October 1999. He oversees
marketing, asset and risk management, market development, legal, financial,
research and human resources

117
<PAGE> 121

functions of SCEM, our energy marketing and risk management partnership with
Vastar. From October 1998 to October 1999, Mr. Morsches served as senior vice
president and chief operating officer of SCEM. Mr. Morsches joined us in 1997 as
vice president of trading, a position he held until October 1998. Prior to
joining us he served in various commercial roles with Sostram Corporation,
Enron, Access Energy and Diamond Shamrock Refinery & Marketing Company.

JAMES A. WARD has been our Senior Vice President, Finance and Accounting
and Controller since August 1999. He is responsible for overseeing our business
planning and financial and management reporting functions including SEC
reporting, tax planning, structuring and compliance. From June 1994 to August
1999, Mr. Ward served as our Vice President, Controller and Assistant Treasurer.
He joined Southern Company in 1978.

EDGARDO A. BAUTISTA has been President of Southern Energy Holdings
Philippines, Inc., a wholly-owned subsidiary of SE Asia-Pacific, since shortly
after our acquisition of SE Asia-Pacific in January 1997. Since December 1997,
he has also been a member of the SE Asia-Pacific board of directors. In his
current role, Mr. Bautista provides the overall leadership for our business in
the Philippines. From 1995 to 1997 he was President and Director of Hopewell
Energy Philippines Corporation, a predecessor company to Southern Energy
Holdings Philippines, Inc. Mr. Bautista joined us in 1997.

H. ALLEN FRANKLIN has been one of our directors since May 1993. He also
serves as President and Chief Operating Officer of Southern Company, a position
he has held since June 1999. Mr. Franklin previously served as President and
Chief Executive Officer of Georgia Power, and executive vice president of
Southern Company from 1994 until June 1999. He is a director of SouthTrust
Corporation and Southern Company subsidiaries Alabama Power Company, Georgia
Power Company and Gulf Power Company. Mr. Franklin joined Southern Company in
1970.

ELMER B. HARRIS has been one of our directors since April 1997. He also
serves as Executive Vice President of Southern Company and is President and
Chief Executive Officer of Alabama Power, a subsidiary of Southern Company,
positions he has held since March 1989. Mr. Harris joined Southern Company in
1958. He is a director of Southern Company, Alabama Power Company and AmSouth
Bancorporation.

W. L. WESTBROOK has been one of our directors since May 1993. He also
serves as Financial Vice President, Chief Financial Officer and Treasurer of
Southern Company and Executive Vice President of Southern Company Services, a
subsidiary of Southern Company, positions he has held since April 1995. Mr.
Westbrook is responsible for accounting, finance, tax, investor relations,
treasury and risk management functions at Southern Company. Mr. Westbrook joined
Southern Company in 1964.

A. D. CORRELL will be appointed as an independent director of our board
upon the completion of this offering. Since May 1993, Mr. Correll has been chief
executive officer and president of Georgia-Pacific Corporation, a manufacturer
and distributor of building products, pulp and paper. He has been chairman of
the board of Georgia-Pacific since December 1993 and a director since 1992. In
addition, he has served as a director of Southern Company since 1994 and
SunTrust Banks, Inc. since 1997. Upon becoming a member of our board of
directors, Mr. Correll will resign from Southern Company's board.

WILLIAM M. HJERPE will be appointed as an independent director of our board
upon the completion of this offering. Currently, Mr. Hjerpe is a private
investor. From March 1997 until October 1999, he served as president of
Honeywell Europe, Middle East and Africa, a subsidiary of Honeywell Inc. From
September 1994 until March 1997, Mr. Hjerpe was vice president and chief
financial officer of Honeywell. Mr. Hjerpe joined Honeywell in 1975 and served
in various financial and accounting positions, including executive level
positions since 1987.

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<PAGE> 122

DAVID J. LESAR will be appointed as an independent director of our board
upon the completion of this offering. On August 16, 2000, Mr. Lesar was named
chairman of the board, president and chief executive officer of Halliburton
Company, a diversified energy services company. Prior to that, he served as
president and chief executive officer of Halliburton, a position he held since
1997. From September 1996 until June 1997 Mr. Lesar served as chief executive
officer and president of Brown & Root, Inc., a subsidiary of Halliburton. From
June 1995 until June 1997, he served as executive vice president and chief
financial officer of Halliburton. In addition, Mr. Lesar has served as a
director of Southern Company since 1998. Upon becoming a member of our board of
directors, Mr. Lesar will resign from Southern Company's board.

BOARD STRUCTURE AND COMPENSATION

Beginning the day that Southern Company (or a majority-owned subsidiary of
Southern Company) ceases to own at least 33 1/3% of our common stock, our board
of directors will be divided into three classes serving staggered three-year
terms.

Directors who are also our employees or employees of Southern Company will
receive no remuneration for serving as directors or committee members. Our
non-employee directors will receive an annual retainer of $60,000 in our stock
and meeting fees of $2,500 for each board meeting and $1,250 for each committee
meeting. Directors may defer payment of their compensation. Directors do not
receive retirement, health or life insurance.

BOARD COMMITTEES

Our board will have three standing committees: an audit committee, a
compensation committee and a nominating committee. Messrs. Correll, Hjerpe and
Lesar will be appointed as the initial members of the audit committee. Messrs.
Correll, Hjerpe and Lesar will be appointed as the initial members of the
compensation committee. Messrs. Correll, Dahlberg and Hjerpe will be appointed
as the initial members of the nominating committee.

As additional persons join the board in connection with and following this
offering, we expect that membership on some of these committees will be modified
and that we will complete the appointment of other members to some of these
committees. Upon the distribution of our common stock by Southern Company, all
of our directors who are directors or officers of Southern Company will resign
from their positions at either Southern Company or our company.

The nominating committee is charged with the nomination of new directors.
The nominating committee will also make recommendations, regarding the
compensation of directors. The audit committee will recommend the independent
public accountants to audit our annual financial statements and will establish
the scope and oversee the annual audit. The audit committee will also be
responsible for risk management and control and credit policies. The audit
committee will also be responsible for acting on our behalf in connection with
transactions in which Southern Company has an interest adverse to us. The
compensation committee will approve and administer compensation and employee
benefit plans and determine the compensation of the chief executive officer and
other senior officers. Our board may establish other committees from time to
time to facilitate the management of our business and affairs.

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<PAGE> 123

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

All of our stock is currently owned by Southern Company and thus none of
our officers, directors and director nominees own any of our common stock.

The following table sets forth information as of December 31, 1999 with
respect to the beneficial ownership of the Southern Company common stock by each
director, each proposed director, the named executive officers, and all of our
directors, proposed directors and executive officers as a group. Except as
otherwise indicated in the footnotes, each individual has sole voting and
investment power with respect to the shares set forth in the following table.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED INCLUDE
----------------------------------
SHARES
INDIVIDUALS HAVE
SHARES PERCENT RIGHTS TO ACQUIRE SHARES HELD BY
BENEFICIALLY OF WITHIN FAMILY
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(2) 60 DAYS(3) MEMBERS(4)
------------------------ ------------ -------- ----------------- --------------
<S> <C> <C> <C> <C>
A. W. Dahlberg......................... 522,928 * 452,027 0
S. Marce Fuller........................ 23,842 * 19,650 0
Raymond D. Hill........................ 21,918 * 19,650 0
Richard J. Pershing.................... 44,685 * 19,650 0
Frederick D. Kuester................... 25,468 * 17,871 3,596
Barney S. Rush......................... 8,183 * 6,426 0
H. Allen Franklin...................... 220,337 * 191,114 0
Elmer B. Harris........................ 260,741 * 219,394 310
W. L. Westbrook........................ 116,450 * 48,959 76
A.D. Correll........................... 22,407 * 0 0
William M. Hjerpe...................... 0 * 0 0
David J. Lesar......................... 1,580 * 0 0
Thomas G. Boren........................ 92,737 * 89,097 10
All executive officers, directors and
proposed directors as a group (14
persons)............................. 1,415,037 * 1,119,334 3,992
</TABLE>

-------------------------

* Less than 1% of outstanding shares.

(1) Beneficial ownership means the sole or shared power to vote, or to direct
the voting of, a security, or investment power with respect to a security,
or any combination thereof.

(2) Based on 648,694,000 shares of Southern Company common stock outstanding on
March 27, 2000.

(3) Indicates shares of the Company's common stock that executive officers have
the right to acquire within 60 days. Shares indicated are included in the
Shares Beneficially Owned column.

(4) Each director and officer disclaims any interest in the shares held by
family members. Shares indicated are included in the Shares Beneficially
Owned column.

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COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth compensation information for the chief
executive officer and the four other executive officers who, based on salary and
bonus compensation, were the most highly compensated for the year ended December
31, 1999. All information set forth in this table reflects compensation earned
by these individuals for services with us and our subsidiaries for the year
ended December 31, 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ---------------------------------------
RESTRICTED NUMBER OF
OTHER ANNUAL STOCK SECURITIES
SALARY BONUS COMPENSATION AWARDS UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(3) ($)(4) OPTIONS(5) PAYOUTS(6) COMPENSATION(7)
--------------------------- ---- -------- -------- ------------ ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S. Marce Fuller............ 1999 $341,462 $465,231 $ 8,872 $400,000 17,988(SO) -- $17,274
Chief Executive
Officer(1) 88,851(SEI)
Raymond D. Hill............ 1999 297,616 300,000 24,529 300,000 12,988(SO) -- 16,078
EVP and CFO 88,851(SEI)
Richard J. Pershing........ 1999 297,616 300,000 43,801 300,000 12,988(SO) -- 16,462
EVP, Americas Group 88,851(SEI)
Frederick D. Kuester....... 1999 240,635 300,000 -- 100,000 10,391(SO) 39,737 13,299
SVP, Asia Group 52,375(SEI)
Barney S. Rush............. 1999 219,097 199,750 -- 100,000 7,689(SO) -- 11,874
SVP, Europe Group 46,919(SEI)
Thomas G. Boren............ 1999 235,577 256,667 56,143 -- 0(SO) -- 765,607
Chief Executive
Officer(2) 137,173(SEI)
</TABLE>

-------------------------

(1) S. Marce Fuller was named our president and chief executive officer on July
20, 1999.

(2) Thomas G. Boren served as our chief executive officer and executive vice
president of Southern Company until July 20, 1999. He retired on July 31,
1999. Upon his retirement, he was paid a severance amount of $750,000 and it
was agreed he would receive a pro-rata bonus through July 31, 1999 from the
Southern Energy Resources, Inc. Short-Term Incentive Plan for the 1999 plan
year. This has been paid and the amount ($256,667) is included in the above
table. Mr. Boren is also entitled to receive future payouts for awards under
the Southern Energy Resources, Inc. Deferred Incentive Compensation Plan and
the Southern Energy Resources, Inc. Value Creation Plan.

(3) No executive listed above received perquisites or personal benefits that
exceeded 25% of the total perquisites and other personal benefits reported.
This column includes the following earnings on Deferred Incentive
Compensation Plan balances that were deferred at the election of the
corresponding executive for 1999: Ms. Fuller, $7,726; Mr. Hill, $24,454; Mr.
Pershing, $25,149; and Mr. Boren, $49,561. The remaining amounts in this
column represent reimbursements during the fiscal year for the payment of
taxes.

(4) The amounts in the column reflect grants of phantom restricted stock in
1999. On December 31, 1999, the following named executive officers held
phantom restricted Southern Company stock, with a value at such date as
follows: Ms. Fuller, 15,570.31 shares, $365,902; Mr. Hill, 11,677.74 shares,
$274,427; and Mr. Pershing, 11,677.74 shares, $274,427. The following named
executive officers held our phantom stock, with a value at such date as
follows: Mr. Kuester, 8,613.26

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<PAGE> 125

shares, $120,500; and Mr. Rush, 8,613.26 shares, $120,500. Each of these
grants is more fully described in the "-- Employment Contracts" section.

(5) (SO) indicates options to acquire Southern Company common stock.
(SEI) indicates units granted under the Southern Energy, Inc. Value
Creation Plan.

(6) Represents a payout to Mr. Kuester under the Southern Company Performance
Incentive Plan for the 4-year period ending December 31, 1999. The following
named executive officers deferred receipt of Deferred Incentive Compensation
Plan payouts due in 1999: Ms. Fuller, $56,587, Mr. Hill, $70,663, Mr.
Pershing, $70,663, and Mr. Boren, $141,324.

(7) Our contributions in 1999 to the Employee Savings Plan, Employee Stock
Ownership Plan, and non-pension related accruals under the Supplemental
Benefit Plan, as well as the separation payment to Mr. Boren described in
footnote (2) are provided in the following table:

<TABLE>
<CAPTION>
TOTAL ALL
SEPARATION OTHER
NAME PAYMENT ESP($) ESOP($) SBP($) COMPENSATION
---- ---------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
S. Marce Fuller............................. -- 5,691 897 10,686 17,274
Raymond D. Hill............................. -- 7,200 897 7,981 16,078
Richard J. Pershing......................... -- 7,401 897 8,164 16,462
Frederick D. Kuester........................ -- 6,578 897 5,824 13,299
Barney S. Rush.............................. -- 6,891 897 4,086 11,874
Thomas G. Boren............................. 750,000 4,500 897 10,210 765,607
</TABLE>

SOUTHERN COMPANY STOCK OPTIONS

The following table shows all grants of options to acquire shares of
Southern Company common stock to the executive officers named in the summary
compensation table in the "-- Executive Compensation" section above in the year
ended December 31, 1999.

Unless exercised prior thereto, the options to purchase Southern Company
common stock reflected below will be replaced with options to purchase our
common stock in connection with the completion of the distribution. See
"Agreements Between Us and Southern Company -- Employee Matters Agreement."

SOUTHERN COMPANY OPTION GRANTS DURING FISCAL YEAR 1999

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH) DATE PRESENT VALUE(3)
---- -------------- ---------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
S. Marce Fuller............... 17,988 0.85% $26.5625 07/19/2009 $113,145
Raymond D. Hill............... 12,988 0.62 26.5625 07/19/2009 81,695
Richard J. Pershing........... 12,988 0.62 26.5625 07/19/2009 81,695
Frederick D. Kuester.......... 10,391 0.49 26.5625 07/19/2009 65,360
Barney S. Rush................ 7,689 0.36 26.5625 07/19/2009 48,364
Thomas G. Boren............... 0 0.00 -- -- --
</TABLE>

-------------------------

(1) Stock option grants in Southern Company common stock were made from Southern
Company's Performance Stock Plan on July 19, 1999 and vest annually at a
rate of 33% on the anniversary date of the grant. Grants fully vest upon
termination because of death, total disability or

122
<PAGE> 126

retirement. Exercise price is the average of the high and low fair market
value of Southern Company's common stock on the date granted.

(2) A total of 2,108,818 stock options were granted in 1999.

(3) Value was calculated using the Black-Scholes option valuation model. The
actual value, if any, ultimately realized depends on the market value of
Southern Company's common stock at a future date. Significant assumptions
are shown below.

<TABLE>
<CAPTION>
DISCOUNT FOR
FORFEITURE RISK:
RISK-FREE --------------------
RATE OF DIVIDEND BEFORE BEFORE
VOLATILITY RETURN OPPORTUNITY TERM VESTING EXPIRATION
---------- ----------------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
20.74% 5.79% 50% 10 years 7.79% 13.40%
</TABLE>

AGGREGATED SOUTHERN COMPANY OPTIONS EXERCISED IN 1999 AND YEAR-END OPTION VALUES

The following table shows aggregate exercises of options to purchase
Southern Company common stock in the year ended December 31, 1999 by the
executive officers named in the summary compensation table in the "-- Executive
Compensation" section above.

1999 SOUTHERN COMPANY OPTION EXERCISES AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller.................... 0 $0 19,650 32,660 $ 23,623 $11,258
Raymond D. Hill.................... 0 0 19,650 27,660 23,623 11,258
Richard J. Pershing................ 0 0 19,650 27,660 23,623 11,258
Frederick D. Kuester............... 0 0 17,871 20,217 25,403 7,884
Barney S. Rush..................... 0 0 6,426 14,240 9,450 4,725
Thomas G. Boren(2)................. 0 0 89,097 0 160,360 0
</TABLE>

-------------------------

(1) Represents the excess of the fair market value of Southern Company's common
stock of $23.50 per share, as of December 31, 1999, above the exercise price
of the options.

(2) Following the distribution, Mr. Boren's stock options will remain
exercisable for shares of Southern Company stock.

SOUTHERN ENERGY, INC. VALUE CREATION PLAN

In 1997, we initiated a long-term incentive plan, the value creation plan,
which grants units to eligible employees to receive appreciation over a base
value. The value creation plan was designed to mimic a stock option/stock
appreciation rights plan in almost all manners except that the valuation of
units is done internally and participants do not have a right to actual
ownership in our company.

Employees have been granted two types of units: standard units, which, when
exercised, pay the employee any appreciation over a fixed base value, and
indexed units which, when exercised, pay the eligible employee for any
appreciation over a base value which increases each year by 13%. Standard units
vest 25% per year for four years, and indexed units vest 100% after four years.

123
<PAGE> 127

The base value of a unit is set at the plan value on the date of grant. The
base value is the exercise price of the unit and does not fluctuate over the
term of the unit (except as stated in the paragraph above).

The plan value is determined once per year and is based on our discounted
future cash flows ("DCF"). The DCF calculation is computed by us and verified by
our independent auditors. The gain to an employee is equal to the amount (if
any) by which the plan value exceeds a unit's base value.

For each unit, we record compensation expense for the amount by which the
plan value is in excess of the base price, taking vesting into account. As of
December 31, 1999, we had 3.1 million standard units outstanding at an average
base price of $10.67 per unit and 3.0 million indexed units outstanding at an
average base price of $12.77 per unit.

For further discussion on how the outstanding units currently awarded under
the value creation plan will be treated following this transaction, see the
section below entitled "-- Value Creation Plan Conversion."

The table below describes the units awarded by the compensation committee
under the value creation plan to the executive officers named in the summary
compensation table in the "-- Executive Compensation" section above.

VALUE CREATION PLAN UNITS GRANTED DURING FISCAL YEAR 1999

<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF BASE OF BASE VALUE
TOTAL UNITS PRICE APPRECIATION FOR UNIT
GRANTED TO (EXERCISE TERM
NUMBER OF EMPLOYEES IN PRICE) EXPIRATION -------------------------
NAME UNITS GRANTED (1) FISCAL YEAR (2) ($/SH) DATE 5% 10%
---- ----------------- --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller.......... 88,851 5.0% $11.61 6/30/2009 649,882 1,640,189
Raymond D. Hill.......... 88,851 5.0 11.61 6/30/2009 649,882 1,640,189
Richard J. Pershing...... 88,851 5.0 11.61 6/30/2009 649,882 1,640,189
Frederick D. Kuester..... 52,375 2.9 11.61 6/30/2009 383,085 966,842
Barney S. Rush........... 46,919 2.6 11.61 6/30/2009 343,180 866,124
Thomas G. Boren.......... 137,173 7.7 11.61 6/30/2009 1,003,324 2,532,213
</TABLE>

-------------------------

(1) The above value creation plan units were granted on March 15, 1999 with a
base price set at $11.61 (the current plan value). These units vest annually
at a rate of 25% on each anniversary of their grant.

(2) Percentages based on a total of 1,781,803 units granted in 1999, consisting
of 1,456,665 standard units and 325,138 indexed units. No indexed units were
granted to the named executive officers.

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<PAGE> 128

The following table shows aggregate exercises of units in the year ended
December 31, 1999 by the executive officers named in the summary compensation
table in the "-- Executive Compensation" section above.

AGGREGATED UNITS EXERCISED IN 1999 AND YEAR END UNIT VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY UNITS AT
NUMBER OF UNITS AT DECEMBER 31,
NUMBER OF DECEMBER 31, 1999 (1) 1999 (2)
UNITS VALUE --------------------------- ----------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller............. 0 $0 40,128(S) 163,836(S) $164,817(S) $524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Raymond D. Hill............. 0 0 40,128(S) 163,836(S) 164,817(S) 524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Richard J. Pershing......... 0 0 40,128(S) 163,836(S) 164,817(S) 524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Frederick D. Kuester........ 0 0 26,675(S) 103,059(S) 109,675(S) 336,605(S)
0(I) 58,685(I) 0(I) 0(I)
Barney S. Rush.............. 0 0 26,597(S) 113,031(S) 111,452(S) 391,458(S)
0(I) 27,357(I) 0(I) 0(I)
Thomas G. Boren............. 0 0 69,812(S) 270,343(S) 287,102(S) 883,479(S)
0(I) 762,712(I) 0(I) 0(I)
</TABLE>

-------------------------

(1) (S) = Standard Units. (I) = Indexed Units.

(2) Valued at the December 31, 1999 plan value of $13.99.

EMPLOYMENT CONTRACTS

The only compensation provided for in each of the employment agreements
discussed below is awards of phantom stock. In addition, the agreements with
Messrs. Hill and Pershing provide that additional years of service may be
included in pensions and supplemental executive retirement plan calculations.
The agreements do not provide for any payments of salary, bonus, other
compensation or severance payments. These agreements terminate when the employee
terminates his or her employment with us, or when the phantom stock is paid,
whichever occurs first. All of the awards granted under the following agreements
are forfeited upon termination for cause or resignation. Awards are paid
immediately if the employee dies, becomes disabled, or is terminated without
cause. It is anticipated that awards of Southern Company phantom stock granted
under the following agreements will convert to awards of our phantom stock upon
the distribution of our stock by Southern Company.

S. MARCE FULLER. On October 5, 1999, Southern Company, Southern Energy
Resources, Inc. and Ms. Fuller entered into an employment agreement. The
agreement provides for the award of $400,000 in phantom Southern Company stock,
valued as of the date of the agreement and paid out on July 1, 2003 if Ms.
Fuller is still employed by us. Should Ms. Fuller meet this criterion, she will
receive a payment of the phantom stock in cash, valued as of July 1, 2003,
including the reinvestment of any dividends paid during the period of the
agreement. In addition, the taxes due by Ms. Fuller for this payment will be
grossed up if certain goals are met. The goals for this agreement are to meet
and exceed net income and return on equity targets for the next three fiscal
years (2000, 2001, 2002). The targets for each of these goals will be determined
prior to the beginning of each year and will be the same as the goals for our
short-term incentive plan. Our board of directors, in conjunction with

125
<PAGE> 129

Southern Company's board of directors, will determine whether or not these
targets have been achieved. This agreement will terminate at the earlier of (1)
when Ms. Fuller terminates her employment with us or (2) when the phantom stock
is paid.

MESSRS. HILL AND PERSHING. In October 1999, we entered into compensation
agreements with Raymond D. Hill and Richard J. Pershing. Each of these
agreements provides for an award of $300,000 in phantom Southern Company stock,
valued as of the date of the agreement. Mr. Hill will receive the phantom stock
payment on March 1, 2003 if he is still employed by us on that date, and Mr.
Pershing will receive the phantom stock payment on May 1, 2003 if he is still
employed by us on that date. In addition, if Mr. Hill is still employed by us on
March 1, 2003, his retirement payments are calculated as if 10 years of
additional service are included in the pension and supplemental executive
retirement plan calculations. If Mr. Pershing is still employed by us on
November 1, 2002, his retirement payments are calculated as if three years of
additional service are included in the pension and supplemental executive
retirement plan calculations. These agreements terminate at the earlier of (1)
when Mr. Hill or Mr. Pershing terminates his employment with us or (2) when the
phantom stock is paid.

MESSRS. KUESTER AND RUSH. Effective December 9, 1999, we also entered into
compensation agreements with Frederick D. Kuester and Barney Rush. The
agreements provide for the award of $100,000 in our phantom stock, at the
December 31, 1998 base value under the value creation plan. Under the terms of
these agreements, if the executives are still employed by us on January 1, 2003,
this award will be paid at the then current base value under the value creation
plan. In addition, Mr. Kuester has an agreement in place that would immediately
vest all of his outstanding value creation plan units upon his return from his
current assignment at SE Asia-Pacific. It is anticipated that awards based on
the base value under our value creation plan will be converted to awards of our
phantom stock upon the initial public offering.

CHANGE IN CONTROL ARRANGEMENTS

Our executive officers named in the summary compensation table in the
"-- Executive Compensation" section above have change in control agreements that
are effective upon a change in control of either Southern Company or us. Neither
this offering nor the distribution of our shares by Southern Company will
constitute a change in control under those agreements.

Within two years following a change in control of us, if an executive is
involuntarily terminated, other than for cause, or voluntarily terminated for
good reason, which is defined as a material diminution of duties, a significant
reduction in compensation or benefits or relocation, the agreements provide for:

- a lump sum payment of three times annual compensation for Ms. Fuller and
Messrs. Hill and Pershing and two times annual compensation for Messrs.
Kuester and Rush,

- up to five years' coverage under group health and life insurance plans,

- immediate vesting of all stock options and stock appreciation rights
previously granted,

- payment of any accrued long-term and short-term bonuses and dividend
equivalents, and

- payment of any excise tax liability incurred as a result of payments made
under the agreement for Ms. Fuller and Messrs. Hill and Pershing.
Payments of any excise tax liability incurred as a result of payments
made under this agreement are capped at IRS limits for Messrs. Kuester
and Rush.

The Southern Company and Southern Energy plans also provide for pro-rata
payments at not less than target-level performance for some incentive plans if a
change in control occurs and the plans are not continued or replaced with
comparable plans.

126
<PAGE> 130

At such time as Southern Company owns less than 50% of our stock, we intend
to replace the existing agreements with similar arrangements for our executive
officers and other employees. We intend to maintain the current definition of
"change in control," which includes the following events:

- acquisition by a person of at least 20% of our stock,
- a defined change in the majority of the members of our board of
directors,
- a merger or other business combination that results in our stockholders
immediately before the merger owning less than 65% of the voting power
after the merger, or
- a sale of substantially all of our assets.

INCENTIVE PLANS

Following the offering, we plan to grant, within the provisions of the
omnibus plan (discussed further below) annual short-term incentive opportunities
and annual awards of stock options. We intend for these targeted incentive
opportunities to be such that total compensation approximates the median for
similarly situated executives at similar companies.

The short-term incentive plan will measure, for each executive officer
named in the summary compensation table, primarily our net income and return on
equity. A smaller portion of the incentive opportunities will be based on
individual performance and Southern Company's earnings per share through full
distribution.

SOUTHERN ENERGY OMNIBUS INCENTIVE COMPENSATION PLAN

We have adopted, with the approval of Southern Company as our sole
stockholder, the Southern Energy Omnibus Incentive Plan. The omnibus plan will
be administered by our board of directors or the compensation committee of our
board. The following is a description of the material provisions of the omnibus
plan.

The objectives of the omnibus plan are to:

- optimize our profitability and growth through annual and long-term
incentives that are consistent with our goals, are market based and link
the personal interests of participants to those of our stockholders,
- provide participants with an incentive for excellence in individual
performance, and
- promote teamwork among participants.

The omnibus plan is further intended to provide flexibility to us in our
ability to attract, motivate and retain the services of participants who make
significant contributions to our success and allow participants to share in our
success.

Our board will determine eligibility for awards under the omnibus plan for
all of our employees, officers and directors. The omnibus plan permits grants of
stock options, restricted stock, stock appreciation rights (SARs), performance
units (PUs), performance shares (PSs) and/or cash-based awards to eligible
participants in amounts and upon terms, and at any time and from time to time,
as determined by our board.

A total of 32,000,000 shares are reserved for issuance under the omnibus
plan. Shares received upon exercise of a stock option may be newly issued
shares, treasury shares or shares obtained by us through purchases on the open
market. It is anticipated that approximately 450 employees initially will
participate in the omnibus plan.

Options granted under the omnibus plan may be either incentive stock
options (ISOs) or non-qualified stock options, as determined by the board. ISOs
are options intended to qualify as "incentive

127
<PAGE> 131

stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (Internal Revenue Code).

The terms of any option will be determined by the board, but no ISO may be
exercised later than 10 years after the date of grant. Options shall be
exercisable only in accordance with the terms and conditions established by the
board at the time of the grant.

Our board may grant SARs, PUs, PSs or cash-based awards to individuals,
from time to time, in amounts as it may determine. Each SAR or PS relates to one
share of our common stock, subject to adjustments described in the omnibus plan.
The value of a PU will be at the discretion of the board. SARs, PUs, PSs and
cash-based awards will be awarded without consideration other than the rendering
of services, unless the board decides otherwise. SARs, PUs, PSs and cash-based
awards shall vest, subject to the satisfaction of various conditions, at the
time or times determined by the board. In addition, the board may establish
performance vesting criteria with respect to all or any portion of a grant of
SARs, PUs, PSs and cash-based awards based on business criteria set forth in the
omnibus plan.

Awards which are subject to Section 162(m) of the Internal Revenue Code are
intended to qualify as performance based under that section and the provisions
of these awards will be interpreted in a manner consistent with that intent to
the extent appropriate.

Our board generally has the power and authority to amend, modify, suspend
or terminate the omnibus plan at any time without the approval of our
stockholders, subject to applicable federal securities and tax law limitations
and NYSE regulations.

SOUTHERN ENERGY EMPLOYEE STOCK PURCHASE PLAN

In order to encourage our employees to become stockholders, we have
established the Southern Energy Stock Purchase Plan. This plan is intended to
comply with Section 423 of the Internal Revenue Code and has been approved by
our current shareholder, Southern Company.

This plan will permit eligible employees to purchase our common stock
through payroll deductions at a price per share which is equal to the lesser of
85% of the fair market value of the common stock on the first or last day of an
offering period. Each offering period will be up to, but not longer than 2
years.

Under this plan, participants will be permitted to purchase shares of
common stock with an aggregate fair market value of no more than $25,000 in any
one calendar year.

There are a total of 4,000,000 shares reserved for issuance under this
plan. The compensation committee of our board will administer this plan.

VALUE CREATION PLAN CONVERSION

Upon this offering, all outstanding value creation plan standard units will
be converted into options to purchase our stock and all indexed units will be
converted into stock appreciation rights. The conversion will be made at the
plan's final base value, maintaining the same face value. When converted, each
option will maintain its in-the-money value and other material terms (such as
the length of a unit's term and vesting). The plan's base value will be
determined by Southern Company's Compensation Committee based on our most recent
discounted cash flow analysis.

128
<PAGE> 132

Approximately 250 employees participate in this plan and will become stock
option holders as a result of the conversion. These grants will be made pursuant
to the Southern Energy Omnibus Incentive Compensation Plan.

INITIAL EQUITY GRANTS

In connection with the offering, and in order to provide incentive and
retention for employees going forward, we will make grants of performance
restricted stock, stock units or stock options to approximately 350 employees
prior to this offering. These grants will be made pursuant to the Southern
Energy Omnibus Incentive Compensation Plan. Options will have an exercise price
equal to the initial public offering price, and will vest 33% on each of the
first three anniversaries of the date of grant. We anticipate that the grants of
performance restricted stock and/or units will vest 20% each time our stock
price increases 20% over our initial public offering price. We intend to make
initial equity grants with a face value of approximately $60,000,000. Of this,
approximately $6,500,000 will be made in the form of performance-restricted
stock and/or performance-restricted stock units. The remaining, $53,500,000 will
be made in stock options.

DEFERRED COMPENSATION PLAN

We have, through Southern Company, a voluntary deferred compensation plan
which allows executives to forgo current compensation (base salary and annual
incentives) and invest it on a phantom basis in Southern Company stock or a
prime rate fund. As required, any amounts deferred in 1999 are also included in
the appropriate columns of the summary compensation table. The balances under
the Southern Company deferred compensation plan for named officers as of
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
S. Marce Fuller............................................. $ 237,206
Raymond D. Hill............................................. 1,478,798
Richard J. Pershing......................................... 52,741
Frederick D. Kuester........................................ 465,428
Barney S. Rush.............................................. 0
Thomas G. Boren............................................. 0
</TABLE>

After the offering, we intend to establish a similar plan and these amounts
will be transferred into the plan we establish.

DEFERRED INCENTIVE COMPENSATION PLAN

We maintain a Deferred Incentive Compensation Plan in which incentive
awards paid to participants may be deferred. No new awards paid to participants
can be deferred in the plan. Balances grow at the rate of our value increase
determined under our value creation plan. The plan has approximately 20
participants but no new participants are anticipated to become eligible. We will
continue this plan according to its terms with our public stock values replacing
phantom values.

129
<PAGE> 133

The balances under the Southern Energy deferred incentive compensation plan
for named officers as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
S. Marce Fuller............................................. $ 358,425
Raymond D. Hill............................................. 555,244
Richard J. Pershing......................................... 559,331
Frederick D. Kuester........................................ 0
Barney S. Rush.............................................. 61,471
Thomas G. Boren............................................. 928,590
</TABLE>

PENSION PLANS

Our employees participate in the tax-qualified Southern Company Pension
Plan. Our benefit liabilities and pension assets are separately accounted for as
if our employees were in a separate pension plan. This separate accounting will
be continued until no later than the full distribution of our stock by Southern
Company. At that time, Southern Company will transfer from its pension plan our
employees' benefit liabilities and related assets (in an amount not less than
that required by the relevant legal requirements) to a tax-qualified pension
plan sponsored by us. Our pension plan will provide employees benefits that are
substantially the same as the benefits provided to them under the Southern
Company plan.

In addition, our executive officers are eligible for supplemental executive
retirement plan benefits. This plan primarily provides pension benefits related
to executives' pay in excess of what is counted towards tax-qualified pension
benefits (including a portion of executives' short-term incentives).

The following table shows the approximate total monthly pension benefits
that our executive officers are expected to receive based on their pay and years
of accredited service classifications. These amounts are shown prior to
reduction for an offset related to Social Security benefits.

<TABLE>
<CAPTION>
YEARS OF ACCREDITED SERVICE
PENSIONABLE ------------------------------------------------------------------
COMPENSATION 10 15 20 25 30 35 40
-------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $4,300 $ 6,400 $ 8,500 $10,600 $12,800 $14,900 $17,000
350,000 5,000 7,400 9,900 12,400 14,900 17,400 19,800
400,000 5,700 8,500 11,300 14,200 17,000 19,800 22,700
450,000 6,400 9,600 12,800 15,900 19,100 22,300 25,500
500,000 7,100 10,600 14,200 17,700 21,300 24,800 28,300
550,000 7,800 11,700 15,600 19,500 23,400 27,300 31,200
600,000 8,500 12,800 17,000 21,300 25,500 29,800 34,000
</TABLE>

The benefits in the above table are amounts payable monthly as single life
annuities starting at age 65, the pension plan's normal retirement age. Pension
benefits will be based on the average of executives' highest three years of
pensionable compensation out of their final 10 years of pensionable
compensation. Pensionable compensation includes base salary and short term bonus
in excess of 15% of base salary.

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<PAGE> 134

Pensionable compensation and accredited service for pension determination
purposes as of December 31, 1999 is shown below for each of the executive
officers named in the summary compensation table in the "-- Executive
Compensation" section above:

<TABLE>
<CAPTION>
YEARS OF PENSIONABLE
NAME SERVICE COMPENSATION
---- -------- ------------
<S> <C> <C>
S. Marce Fuller............................................. 14.3 $577,822
Raymond D. Hill............................................. 6.0 494,472
Richard J. Pershing......................................... 27.8 494,472
Frederick D. Kuester........................................ 26.9 392,406
Barney S. Rush.............................................. 2.8 333,936
</TABLE>

RELATIONSHIP WITH SOUTHERN COMPANY AND RELATED TRANSACTIONS

We have agreements with Southern Company Services, Inc. (a wholly owned
subsidiary of Southern Company) and each of the operating companies owned by
Southern Company under which those companies provide the following services to
us at cost: general engineering, design engineering, accounting and statistical
budgeting, business promotion and public relations, systems and procedures,
training, and administrative and financial services. In addition to these
services, facilities of Southern Company subsidiaries are made available to us
and our customers. We reimburse Southern Company subsidiaries at cost for these
services. Such costs amounted to approximately $20 million during 1999. As of
June 30, 2000, such costs have totalled $11.4 million during the current fiscal
year.

During 1999, we incurred interest expense on a note payable to Southern
Company of $37 million. We repaid the principal and interest on the note in
1999.

Our special purpose financing subsidiaries have issued subsidiary obligated
mandatorily redeemable preferred securities. Substantially all of the assets of
these special financing entities are junior subordinated notes issued by us. We
have loaned $950 million of the proceeds from the issuance of these subsidiary
obligated mandatorily redeemable preferred securities and an additional $30
million related to equity to Southern Company. Payment terms and interest rates
on the notes receivable from Southern Company are identical to the related
preferred securities. The notes are due between 2027 and 2037 with fixed
interest rates between 6.875% and 8.19%.

Periodically, we borrow funds from Southern Company to finance acquisitions
or working capital needs. We pay interest to Southern Company based on Southern
Company's short-term borrowing rate. No amounts were outstanding at December 31,
1999.

We and the other subsidiaries of Southern Company file a consolidated
federal income tax return. Under a joint income tax agreement, each company's
current and deferred tax expense is computed on a stand alone basis. Under this
agreement, we received tax allocation payments from Southern Company of
approximately $99 million during 1999.

For purposes of governing on-going relationships between us and Southern
Company, we will enter into, or continue in effect, various agreements and
relationships, including those described in this prospectus. The agreements
described below were negotiated in the context of our separation from Southern
Company and therefore are not the result of arm's-length negotiations between
independent parties.

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<PAGE> 135

AGREEMENTS BETWEEN US AND SOUTHERN COMPANY

We have provided below a summary description of the master separation and
distribution agreement (referred to as the separation agreement) that we have
entered into with Southern Company, as well as key related agreements. Until the
distribution of our shares by Southern Company, these agreements, including the
pricing of services to be provided to us by Southern Company, will be subject to
the jurisdiction of the SEC under PUHCA. We and Southern Company have filed a
declaration with the SEC seeking affirmative authorization of these agreements
to the extent the SEC deems necessary. Southern Company has stated that it does
not intend to effect the distribution until the SEC issues an order making the
declaration effective.

This summary describes the material terms of these agreements, but may omit
a term or provision that you would consider important. We encourage you to read
the full text of these agreements, which have been filed with the SEC as
exhibits to the registration statement of which this prospectus is a part.

MASTER SEPARATION AND DISTRIBUTION AGREEMENT

The master separation and distribution agreement contains the key
provisions relating to the separation, this offering and the distribution.

THE SEPARATION. The separation agreement became effective, and we began
operating independently from Southern Company, as of September 1, 2000. This
date is referred to as the separation date. Southern Company will deliver
additional agreements governing various interim and ongoing relationships
between Southern Company and us following the separation date. The ancillary
agreements include:

- a transitional services agreement,
- an indemnification and insurance matters agreement,
- a technology and intellectual property ownership and license agreement,
- a confidential disclosure agreement,
- an employee matters agreement,

- a tax indemnification agreement,

- a registration rights agreement, and

- agreements providing for the transfer of SE Finance and Capital Funding to
Southern Company.

To the extent that the terms of any of these ancillary agreements conflict
with the separation agreement, the terms of these ancillary agreements govern.
These agreements are described more fully below.

THE INITIAL PUBLIC OFFERING. Under the separation agreement, we are
obligated to use our reasonable commercial efforts to satisfy the following
conditions prior to the consummation of this offering (any of which may be
waived by Southern Company):

- the registration statement containing this prospectus must be effective,
- applicable state and foreign securities laws must be satisfied,
- our common stock must be approved for listing on the New York Stock
Exchange,
- all conditions to the obligations of the parties under the underwriting
agreement must have been met or waived,
- Southern Company must be satisfied that it will own more than 80% of our
stock after this offering and must be satisfied that the distribution
will be tax free to it and to its U.S. stockholders,
- all required government approvals must be in effect,

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- no legal restraints must exist preventing the separation or this offering
or any other transactions contemplated by the separation agreement,
- the separation must have occurred, and
- the separation agreement must not have been terminated.

THE DISTRIBUTION. Within 12 months after this offering, Southern Company
intends to distribute the remaining shares of our common stock to its
stockholders on a pro rata basis. We will prepare an information statement with
Southern Company and send it to Southern Company's stockholders before the
distribution becomes effective. The information statement will inform the
stockholders of the distribution and its specifics. Southern Company may, in its
sole discretion, change the terms of the distribution, including the
distribution date, or decide not to complete the distribution. Southern Company
intends to consummate the distribution only if the following conditions are met
(any of which may be waived by Southern Company):

- the IRS must have issued a favorable tax ruling on the tax-free status of
the transaction to Southern Company and its U.S. stockholders and that
the transaction qualifies as a tax-free distribution under Section 355 of
the Internal Revenue Code,

- all required government approvals must be in effect,

- no legal restraints must exist preventing the distribution, and
- nothing must have happened in the intervening time between the initial
public offering and the distribution that makes the distribution harmful
to Southern Company or its stockholders.

COVENANTS BETWEEN SOUTHERN COMPANY AND US. The separation agreement
includes covenants obligating us and Southern Company to cooperate in the
exchange of information, in auditing practices, to resolve disputes in
particular ways and other matters.

INFORMATION EXCHANGE. Both we and Southern Company have agreed to share
information with each other, at no cost to the requesting party, for the
following purposes, and to avoid doing so in a manner that would be commercially
detrimental:

- each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements,

- each party will retain records that may be beneficial to the other party
for a specified period of time. If the records are going to be destroyed,
the destroying party will give the other party an opportunity to retrieve
all relevant information from the records, and

- each party will do its best to provide the other party with personnel,
directors, officers or agents for use as witnesses in legal proceedings.

AUDITING PRACTICES. For any financial reporting period in which we are a
subsidiary of Southern Company, we have agreed to:

- not change independent accounting firms without Southern Company's prior
consent,
- use reasonable commercial efforts to cause our auditors to date their
opinion on our audited annual financial statements on the same date as
Southern Company's auditors' date their opinion on Southern Company's
consolidated financial statements,
- provide Southern Company with all relevant information to enable Southern
Company to prepare their consolidated financial statements (and Southern
Company has agreed to provide us all relevant information to enable us to
prepare our financial statements),
- grant each other's internal auditors access to our records, and

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- notify each other of any change in our accounting principles.

DISPUTE RESOLUTION. If problems arise between us and Southern Company,
both parties have agreed to the following procedures:

- the parties will make a good faith effort to first resolve the dispute
through negotiation,

- if negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation, and

- if mediation fails, the parties can resort to litigation. In addition,
nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would substantially
disadvantage that party.

REGULATORY MATTERS. We and Southern Company have agreed to cooperate in
various respects to obtain any required governmental approvals and to achieve
the intended regulatory effect of the distribution. We also have agreed that,
until 18 months after the date on which Southern Company no longer holds at
least 33 1/3% of our outstanding common stock, we will not initiate, intervene
in or participate in specified proceedings or matters before the FERC or any
agency or legislature of the states of Alabama, Florida, Georgia or Mississippi
which involve Southern Company or any of its subsidiaries.

SOUTHERN ENERGY BOARD REPRESENTATION. Although Southern Company intends to
distribute the remaining shares of our common stock that it holds to its
stockholders, we cannot be certain of whether or when the distribution will
occur. Consequently, we have agreed that if Southern Company should own in the
future more than 25% but less than 50% of our outstanding common shares,
Southern Company will be entitled to designate up to two persons to be nominated
for election to our board of directors. This right will only be available if and
to the extent Southern Company is not otherwise already represented on our board
of directors in a class of directors that is not up for election at that time.

CREDIT SUPPORT OBLIGATIONS. Southern Company has agreed to continue credit
support arrangements with respect to our existing business and to provide
limited additional credit support for certain of our subsidiaries until we are
no longer a subsidiary of Southern Company. We will pay Southern Company a fee
based on the amount of the credit support obligations then outstanding, for the
maintenance of these credit support obligations after we are no longer a
subsidiary of Southern Company.

EXPENSES. We will pay 4.75% of underwriting fees, discounts and
commissions incurred for this offering. Southern Company will pay the remaining
underwriting fees, discounts and commissions, as well as all of our other
out-of-pocket costs and expenses related to this offering, the distribution and
the preparation of the agreements providing for the separation, the distribution
and related transactions.

TERMINATION OF THE AGREEMENT. Southern Company in its sole discretion can
terminate the separation agreement and all ancillary agreements and abandon the
distribution at any time prior to the closing of this offering. The separation
agreement and all ancillary agreements may be terminated at any time after the
closing of this offering only with the consent of Southern Company and us. As
long as we are controlled by Southern Company, Southern Company will be able to
require us to terminate or amend these agreements.

TRANSITIONAL SERVICES AGREEMENT

Southern Company will provide various interim services to us, including
financial, accounting, engineering, information technology, legal and other
services, in a manner similar to the manner in

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which such services were provided to us prior to the separation. The
transitional services generally will be provided for a fee equal to the greater
of the cost, including the actual direct and indirect costs, of providing the
services or the market value for such services.

These transitional services will generally have a term of two years or less
from the date of separation. However, some transitional services, including
those for engineering services and payroll and information technology services,
may be extended beyond the initial two-year period.

INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT

GENERAL RELEASE OF PRE-SEPARATION CLAIMS. Effective as of the separation
date, except for contractual agreements between us and Southern Company, we will
release Southern Company and its affiliates, agents, successors and assigns, and
Southern Company will release us and our affiliates, agents, successors and
assigns, from any liabilities arising from events occurring on or before the
separation date, including events occurring on or before the separation date in
connection with the activities to implement the separation, the initial public
offering and the distribution. This provision will not impair a party from
enforcing any intercompany agreement, the separation agreement, any ancillary
agreement or any arrangement specified in any of these agreements.

INDEMNIFICATION. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify Southern Company and its affiliates, agents, successors and assigns
from all liabilities to any third party to the extent those liabilities arise
from:

- our acts or omissions or alleged acts or omissions in the conduct of our
business or in connection with this offering or the distribution,

- any breach by us of the separation agreement or any ancillary agreement,
and

- any of our liabilities or any liabilities related to credit support
provided by Southern Company on our behalf.

Southern Company has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities to any third party to the extent
those liabilities arise from:

- acts or omissions or alleged acts or omissions of Southern Company in the
conduct of Southern Company's business or in connection with this
offering,

- any breach by Southern Company of the separation agreement or any
ancillary agreement, and

- any liabilities of Southern Company other than the credit support
arrangements provided by Southern Company on our behalf.

The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.

INSURANCE MATTERS. The agreement also contains provisions governing our
insurance coverage from the separation date until the first date on which
Southern Company owns less than 50% of outstanding common stock. In general, we
agree to reimburse Southern Company for premium expenses related to insurance
coverage during this period. Prior to the distribution, Southern Company will
maintain insurance policies on our behalf that are generally comparable to those
currently maintained for our benefit at Southern Company.

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ASSIGNMENT. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent.

TECHNOLOGY AND INTELLECTUAL PROPERTY OWNERSHIP AND LICENSE AGREEMENT

We have entered into an agreement with Southern Company to govern the
division, transfer and license of technology used in our business. Pursuant to
this agreement, Southern Company has licensed to us technology owned by Southern
Company.

Also, Southern Company has agreed to license to us various Southern
Company-owned trademarks, including "Southern Energy," "Southern Company,"
"Southern Company Energy Marketing," "Energy to Serve Your World" and the
"Triangle Logo." The license to use these marks expires as of the change of
control date and thereafter we may use these marks only if Southern Company
grants us an extension of the license. Southern Company may not use the
"Southern Energy" or "Southern Company Energy Marketing" marks for 18 months
from the date we cease use of those marks.

Southern Company also has transferred and/or agreed to license to us other
technology (which includes copyrights, database rights, computer software,
domain names and other intellectual property rights, with the exception of
trademarks and patents) owned by Southern Company and currently used by us.
Southern Company will also use reasonable efforts to have us made a party to or
sublicense other agreements wherein Southern Company is a licensee for
technology we currently use.

CONFIDENTIAL DISCLOSURE AGREEMENT

The confidential disclosure agreement provides that both parties agree not
to disclose confidential information of the other party except in specific
circumstances.

EMPLOYEE MATTERS AGREEMENT

We have entered into an employee matters agreement with Southern Company to
allocate assets, liabilities and responsibilities relating to our current and
former employees and to address their participation in the benefit plans,
including stock plans, that Southern Company currently sponsors and maintains.

All of our eligible employees not subject to a collective bargaining
agreement will continue to participate in the Southern Company benefit plans. We
will establish comparable benefit plans for our current and former employees not
later than the earlier to occur of the distribution or the first date on which
Southern Company owns less than 80% of our outstanding common stock (the "group
change date"). Certain of our plans, such as the Southern Energy short-term
incentive plan, will be terminated but replaced with other plans to provide a
more cohesive design. However, our goal is to provide a total compensation
package that is comparable to that currently provided.

Our employees who participate in Southern Company plans and who retire
before the group change date will remain the responsibility of Southern Company
and will continue to participate in plans after the distribution. We and
Southern Company have established a mutually acceptable method to allocate the
liabilities and the assets attributable to this assumption of responsibility by
Southern Company.

All of our eligible employees who are subject to a collective bargaining
agreement and currently participate in our plans will continue to participate in
the same benefits plans currently maintained on their behalf subject to
collective bargaining agreements.

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Once we establish our own corresponding or new benefit plans, we may modify
or terminate any plan we maintain in accordance with its terms and our policies.
None of our benefit plans will provide benefits that duplicate benefits provided
under any corresponding Southern Company benefit plan at the time of the group
change date. Each of our benefit plans will provide that all service,
compensation and other benefits criteria that, as of the group change date, were
recognized under the corresponding Southern Company benefit plan will be taken
into account under our benefit plans.

We will assume a spun-off portion of the Southern Company pension plan for
the benefit of eligible employees not subject to a collective bargaining
agreement. Southern Company will transfer appropriate assets held in its master
trust under this plan to a master trust to be established by us. We will also
receive assets attributable to pension plans maintained for our employees
covered under collective bargaining agreements.

Prior to the group change date, our employees and employees of Southern
Company may not freely transfer employment. In order to transfer, a notice of
transfer request must be given and approved by each employing company.

In connection with the group change date, or such later date as we may
agree on with Southern Company, we will issue substitute options for our common
stock to our employees in exchange for their Southern Company options. The
conversion process will follow FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which dictates the
following:

- The aggregate intrinsic value of the options immediately after the
conversion will be equal to the aggregate intrinsic value prior to the
conversion.

- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.

In addition, because we will not establish a plan comparable to the
Southern Performance Dividend Plan (a bonus plan paying dividend equivalents),
we may grant additional options to our employees to make-up for this lost
compensation opportunity.

After the group change date, eligible management employees will participate
in non-qualified deferred compensation plans.

We have agreed to indemnify Southern Company for employment liabilities
arising from any acts of our employees, from claims by our officers against
Southern Company and from any breach of any of the separation agreements.
Southern Company has agreed to indemnify us for employment liabilities related
to Southern Company or employees of Southern Company, from claims by Southern
Company officers against us or from any breach by Southern Company of any of the
separation agreements.

TAX INDEMNIFICATION AGREEMENT

We have entered into a tax indemnification agreement with Southern Company
to govern the allocation of U.S. income tax liabilities and to set forth
agreements with respect to other tax matters. Under the Internal Revenue Code of
1986, as amended, we will cease to be a member of the Southern Company
consolidated group upon completion of the distribution or if at any time
Southern Company owns less than 80% of our outstanding capital stock.

Southern Company generally will be responsible for filing any returns
required to be filed on a consolidated basis through the first date on which we
are no longer consolidated with Southern Company for tax purposes in accordance
with the existing income tax allocation agreement. For taxable periods ending on
or before the tax deconsolidation, payments to Southern Company or us, as

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the case may be, will continue to be made in accordance with past practices.
There may be U.S. state and local jurisdictions in which we file separate income
tax returns, not combined or consolidated with Southern Company, for tax periods
prior to tax deconsolidation. Each party will, at all times, be responsible for
filing and paying taxes related to these separate returns. However, Southern
Company will be responsible for filing any tax returns related to the
newly-formed subsidiary to be used for the transfer of SE Finance and Capital
Funding to Southern Company.

Southern Company will determine all tax elections for tax periods during
which we are a member of the Southern Company consolidated group unless we
request Southern Company to make a particular election with respect to us, in
which case Southern Company will not unreasonably withhold consent to such
request. We will prepare and file all tax returns required to be filed by us for
all tax periods after we cease to be a member of the Southern Company
consolidated group.

If there are tax adjustments related to us arising after the distribution
date, which relate to a tax return filed for a pre-distribution period, we will
be responsible for any increased taxes and receive the benefit of any tax
refunds (except with respect to the new SE Finance/Capital Funding subsidiary
described below). In addition, we and Southern Company have agreed to cooperate
in any tax audits, litigation or appeals that involve, directly or indirectly,
tax returns filed for pre-distribution periods and to provide information
related to such periods. We and Southern Company have agreed to indemnify each
other for any tax liabilities resulting from the failure to pay any amounts due
under the terms of the agreement or for costs resulting from either party's
negligence in providing accurate or complete information in the preparation of
any tax return.

We and Southern Company have agreed that any taxes associated with the
transfer and operation of the new SE Finance/Capital Funding subsidiary will be
the responsibility of Southern Company. We and Southern Company have agreed that
any and all taxes arising from the deconsolidation of us from the Southern
Company consolidated group will be the responsibility of the entity that is
liable for such taxes under applicable law.

We and Southern Company are required to comply with representations made to
the Internal Revenue Service in connection with the private letter ruling that
we expect to be issued to Southern Company regarding the tax-free nature of the
distribution of our stock by Southern Company to Southern Company stockholders.
In addition, we and Southern Company have agreed not to enter into transactions
after the tax deconsolidation that would result in a change of control of either
party pursuant to a plan unless a ruling is obtained from the IRS that the
transaction will not affect the tax-free nature of the distribution. In the
event either party takes any action which results in the distribution becoming a
taxable transaction, such party will indemnify the other party for any and all
taxes, on an after-tax basis, resulting from such actions. Moreover, the party
who would be subject to the additional tax may be entitled to injunctive relief
unless we or Southern Company, as the case may be, provides an opinion that such
proposed transaction will not result in adverse tax consequences to the other
party, or if such transaction will result in additional taxes to the other
party, such party agrees to provide adequate assurances to the other party of
its ability to satisfy the indemnity obligation under the agreement.

REGISTRATION RIGHTS AGREEMENT

As noted above, Southern Company intends to distribute the remaining shares
of our common stock to its stockholders on a pro rata basis. We cannot, however,
assure you as to whether or when this distribution will occur. See "Risk
Factors -- Risks Related to our Separation from Southern Company -- Our business
and your investment in our stock may be adversely affected if Southern Company
does not complete the distribution of our common stock because we would remain
subject to regulatory restrictions as a subsidiary of a public utility holding
company and because we would

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remain subject to control by Southern Company." In the event that Southern
Company does not divest itself of all of its shares of our common stock in the
distribution, Southern Company could not freely sell all of those shares without
registration under the Securities Act. Accordingly, we have entered into a
registration rights agreement with Southern Company to provide it with
registration rights relating to the shares of our common stock which it holds.
These registration rights generally become effective at such time as Southern
Company informs us that it no longer intends to proceed with or complete the
distribution.

Under the registration rights agreement, in the event that Southern Company
provides us with written notice that it no longer intends to proceed with the
distribution of our common stock, and at the request of Southern Company, we
will use our best efforts to register shares of our common stock that are held
by Southern Company upon the completion of this offering, and any additional
shares issued in respect of those shares, for public sale under the Securities
Act. Southern Company also will have the right to include the shares of our
common stock it holds upon the completion of this offering, and any additional
shares issued in respect of those shares, in future registrations of our
securities under the Securities Act. We have agreed to cooperate in these
registrations and any related offering. If the registration is at Southern
Company's request, Southern Company will pay 80% of our out-of-pocket costs and
expenses related to our registration of Southern Company's shares.

ARRANGEMENTS RELATING TO THE TRANSFER OF SE FINANCE AND CAPITAL FUNDING

In connection with our separation from Southern Company, we will transfer
two of our subsidiaries, SE Finance and Capital Funding, to Southern Company. In
order to facilitate the transfer to Southern Company, prior to this offering we
will issue one share of our redeemable preferred stock to Southern Company.
After this offering and prior to the distribution of our stock by Southern
Company, we will form a corporation with Southern Company Energy Solutions, Inc.
(SCES), a wholly owned subsidiary of Southern Company. We will contribute the
stock of SE Finance and Capital Funding to the corporation in exchange for an
80% or greater interest. SCES will contribute its energy services assets to a
limited liability company owned by the corporation in exchange for a 20% or
lesser interest. We will then redeem the one share of redeemable preferred stock
issued by us to Southern Company in exchange for our entire interest in the
corporation. Following the transfer, Southern Company will assume responsibility
for these obligations.

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FEDERAL TAX MATTERS RELATED TO OUR SEPARATION FROM SOUTHERN COMPANY

Southern Company currently owns 100% of our common stock. Thus, we are
currently affiliated and are members of the same consolidated group. As members
of the same consolidated group, we file a consolidated federal income tax return
with Southern Company. This allows Southern Company to offset its federal
taxable income with our tax losses. After this offering, we and Southern Company
will continue to be affiliated and will continue to file a consolidated federal
income tax return.

Within 12 months after this offering, Southern Company intends to
distribute its remaining ownership interest in us to all Southern Company
stockholders in direct proportion to their holdings of Southern Company stock.

SE Finance and Capital Funding are currently subsidiaries of ours. Southern
Company desires to retain the business and operations of these subsidiaries
following the separation. Accordingly, we will contribute the stock of SE
Finance and Capital Funding to a newly formed holding company, which stock will
subsequently be distributed to Southern Company prior to the distribution
transaction. We intend to receive a ruling from the IRS that such a distribution
is a tax-free distribution, but we will make the distribution even if a ruling
is not obtained. If tax-free distribution treatment is not obtained, we will be
treated as having sold the stock of the holding company to Southern Company in a
taxable transaction. However, Southern Company has agreed to indemnify us for
any and all taxes related to such transaction.

Subsequent to the distribution, we will cease to be a member of the
Southern Company consolidated group. As such, there will then exist two separate
groups, the Southern Company group and our group. Each group will file separate
consolidated federal income tax returns, and Southern Company will not be able
to use our tax losses unless we request Southern Company to carry back losses
arising after the date of the distribution to a pre-distribution tax return to
the extent permitted by applicable law.

Under the current tax sharing agreement between Southern Company and us,
Southern Company is obligated to pay us for the utilization of net operating
losses generated by us to offset Southern Company's consolidated federal income
tax liability. After the distribution Southern Company will no longer have the
ability to use these net operating losses. Consequently, we will no longer
receive these payments from the Southern Company. Furthermore, under the tax
indemnification agreement with Southern Company, we may be required to make
other payments to Southern Company for tax liabilities.

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PRINCIPAL STOCKHOLDER

Prior to this offering, all of the outstanding shares of our common stock
have been owned by Southern Company. After this offering, Southern Company will
own approximately 82.4% of our common stock, or approximately 80.3% if the
underwriters fully exercise their option to purchase additional shares of our
common stock. Under Delaware corporate law and our charter documents, prior to
the distribution by Southern Company of its ownership of our common stock,
Southern Company will be able, acting alone, to elect our entire board of
directors and to approve any action requiring the approval of our stockholders.
Except for Southern Company, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following this offering. None of our executive officers, directors or director
nominees currently owns any shares of our common stock, but those who own shares
of Southern Company common stock will be treated on the same terms as other
holders of Southern Company stock in any distribution by Southern Company. See
"Stock Ownership of Directors and Executive Officers" for a description of the
ownership of Southern Company stock by our directors and executive officers.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

Under our restated certificate of incorporation, our authorized capital
stock consists of 2,125,000,000 shares, of which 2,000,000,000 shares are common
stock, par value $0.01 per share, and 125,000,000 shares are preferred stock,
par value $0.10 per share. Immediately following the offering, 330,000,000
shares of common stock, or 338,700,000 shares if the U.S. underwriters exercise
their over-allotment option in full, will be outstanding.

The following descriptions are summaries of material terms of our restated
certificate of incorporation and bylaws. This summary is qualified by our
certificate of incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part, and
by the provisions of applicable law.

COMMON STOCK

Each share of common stock entitles the holder to one vote on all matters
on which holders are permitted to vote. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to dividends when, as and if declared by the board of directors out of
funds legally available for that purpose. Upon liquidation, subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to a pro rata share in any distribution to
shareholders. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable.

PREFERRED STOCK

Our board of directors is authorized, without approval of Southern Company,
our sole stockholder, to cause shares of preferred stock to be issued from time
to time in one or more series, and our board of directors may fix the
designation, powers, privileges, preferences and rights and the qualifications,
limitations and restrictions of the shares of each series.

The specific matters that our board of directors may determine include the
following:

- the designation of each series,

- the number of shares of each series,

- the rate of any dividends,

- whether any dividends shall be cumulative or non-cumulative,

- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of our company,

- the terms of any redemption,

- rights and terms of any conversion or exchange, and

- any voting rights.

The Series A junior preferred stock described below under "Stockholder
Rights Plan" is a series of preferred stock that has been authorized by our
board.

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The issuance of shares of preferred stock, or the issuance of rights to
purchase shares of preferred stock, could be used to discourage an unsolicited
acquisition proposal. For example, a business combination could be impeded by
issuing a series of preferred stock containing class voting rights that would
enable the holder or holders of this series to block that transaction.
Alternatively, a business combination could be facilitated by issuing a series
of preferred stock having sufficient voting rights to provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power and
other rights of the holders of the common stock. Although our board is required
to make any determination to issue any preferred stock based on its judgment as
to the best interests of our stockholders, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of our stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices of the stock. Our board does not at present intend to seek stockholder
approval prior to any issuance of currently authorized stock unless otherwise
required by law or applicable stock exchange requirements.

SERIES B REDEEMABLE PREFERRED STOCK

Prior to this offering, we will issue one share of Series B redeemable
preferred stock to Southern Company to facilitate the transfer of our SE Finance
and Capital Funding subsidiaries to Southern Company in connection with our
separation from Southern Company. In order to transfer SE Finance and Capital
Funding to Southern Company, after this offering and prior to the distribution
of our stock by Southern Company, we will form a joint venture with Southern
Company Energy Solutions, Inc. (SCES), a wholly owned subsidiary of Southern
Company. We will contribute the stock of SE Finance and Capital Funding to the
joint venture in exchange for an 80% interest. SCES will contribute its assets
to a subsidiary of the joint venture in exchange for a 20% interest. We will
then redeem the one share of redeemable preferred stock issued by us to Southern
Company in exchange for our entire interest in the joint venture.

The shares of Series B preferred stock ranks senior to all classes of
common stock and on par with each other class of stock issued by us as to
liquidation, winding-up and dissolution. Except as provided by Delaware law,
ownership of the share of Series B preferred stock does not give Southern
Company any voting rights, nor does it grant Southern Company any entitlement to
receive dividends. The share of Series B preferred stock may be redeemed, at our
option. Upon redemption, the share of the Series B preferred stock shall be
retired, canceled and restored to the status of an authorized but unissued share
of preferred stock without designation as to series.

ANTI-TAKEOVER EFFECTS OF DELAWARE LAWS AND OUR CERTIFICATE AND BY-LAW PROVISIONS

Some provisions of Delaware law and our restated certificate of
incorporation and bylaws could make the following more difficult:

- acquisition of us by means of a tender offer,

- acquisition of us by means of a proxy contest or otherwise, or

- removal of our incumbent officers and directors.

These provisions, as well as our ability to issue preferred stock, are
designed to discourage coercive takeover practices and inadequate takeover bids.
These provisions are also designed to encourage persons seeking to acquire
control of us to first negotiate with our board of directors. We believe that
the benefits of increased protection give us the potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us, and that the benefits

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of this increased protection outweigh the disadvantages of discouraging those
proposals, because negotiation of those proposals could result in an improvement
of their terms.

ELECTION AND REMOVAL OF DIRECTORS

Our board of directors will be comprised of between two and 21 directors,
the exact number to be fixed from time to time by resolution of our board of
directors. Beginning at the time Southern Company (or a majority-owned
subsidiary of Southern Company) owns less than 33 1/3% of our stock, our board
of directors will be divided into three classes. The directors in each class
will serve for a three-year term, one class being elected each year by our
stockholders. See "Management -- Directors and Executive Officers." This system
of electing and removing directors may discourage a third party from making a
tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors. In addition, beginning at the time Southern Company (or a
majority-owned subsidiary of Southern Company) owns less than 33 1/3% of our
stock, no director may be removed except for cause, and directors may be removed
for cause by a majority of the shares then entitled to vote at an election of
directors. Any vacancy occurring on the board of directors, and any newly
created directorship, may only be filled by a majority of the remaining
directors in office. The provisions described in this paragraph may not be
amended or repealed except by the vote of the holders of at least 66 2/3% of the
voting power of all outstanding shares of stock entitled to vote in the election
of directors.

STOCKHOLDER MEETINGS AND ADVANCED NOTICE REQUIREMENTS FOR STOCKHOLDER
NOMINATIONS AND PROPOSALS

Our restated certificate of incorporation and our bylaws provide that
special meetings of holders of common stock may be called only by the chairman
of our board of directors, our president and chief executive officer, or a
majority of the board of directors and may not be called by the holders of
common stock. In addition, as of the day that Southern Company (or a
majority-owned subsidiary of Southern Company) ceases to own at least a majority
of our common stock, our restated certificate of incorporation specifically
denies any power of the stockholders to call a special meeting. These provisions
may not be amended or repealed except by the vote of the holders of at least
66 2/3% of the voting power of all outstanding shares of stock entitled to vote
in the election of directors.

Our bylaws require that advance notice be delivered to us of any business
to be brought by a stockholder before an annual or special meeting of
stockholders and provide for procedures to be followed by stockholders in
nominating persons for election to our board of directors. In the case of an
annual meeting, stockholders generally must give written notice of a nomination
or proposal to the secretary of our company not later than 90 days nor earlier
than 120 days prior to the first anniversary of the preceding year's annual
meeting.

For special meetings, only business set forth in the notice of that special
meeting may be conducted. Nominations for the election of directors at special
meetings may be made only by the board of directors or, if the board of
directors has determined that directors shall be elected at a special meeting,
then by a stockholder who is a stockholder at the time notice was given and at
the time of that special meeting. If we call a special meeting of stockholders
to elect directors, a stockholder must give notice of a nomination to the
secretary of our company not earlier than 120 days prior to the special meeting
and not later than 90 days prior to the special meeting or the 10th day after
notice of the meeting.

With regard to either an annual or a special stockholder meeting, a
stockholder's notice must set forth specific information regarding the
stockholder giving the notice, the director nominee or other business proposed
by the stockholder, as applicable, as provided in our bylaws.

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ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT

Our restated certificate of incorporation and our bylaws provide that,
beginning the day that Southern Company (or a majority-owned subsidiary of
Southern Company) ceases to own at least a majority of our common stock, holders
of our common stock will not be able to act by written consent without a
meeting. Prior to the distribution of our common stock, Southern Company will be
able to take any action requiring approval of our stockholders by written
consent and without the affirmative vote of our other stockholders. This
provision may not be amended or repealed except by the vote of the holders of at
least 66 2/3% of the voting power of all outstanding shares of stock entitled to
vote in the election of directors.

NO CUMULATIVE VOTING

Our restated certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors.

LIMITATION ON LIABILITY OF DIRECTORS

Our restated certificate of incorporation provides that no director shall
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except as required by law, as in effect from
time to time. Currently, Delaware law requires that liability be imposed for the
following:

- any breach of the director's duty of loyalty to our company or our
stockholders,

- any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law,

- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporate Law, and

- any transaction from which the director derived an improper personal
benefit.

Our bylaws provide that, to the fullest extent permitted by law, we will
indemnify any person made or threatened to be made a party to any action by
reason of the fact that the person is or was our director or officer, or served
any other enterprise at our request as a director or officer. We will reimburse
the expenses, including attorneys' fees, incurred by a person indemnified by
this provision when we receive an undertaking to repay such amounts if it is
ultimately determined that the person is not entitled to be indemnified by us.
Amending this provision will not reduce our indemnification obligations relating
to actions taken before an amendment.

TRANSACTIONS AND CORPORATE OPPORTUNITIES

Our restated certificate of incorporation includes provisions which
regulate and define the conduct of certain business and affairs of our company
from the time of the completion of this offering until the time Southern Company
ceases to be a significant stockholder of our company. These provisions serve to
determine and delineate the respective rights and duties of our company,
Southern Company and some of our directors and officers in anticipation of the
following:

- directors, officers and/or employees of Southern Company continuing
to serve as directors;

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- Southern Company engaging in lines of business that are the same as,
similar or related to, or overlap or compete with our lines of
business; and

- we and Southern Company engaging in material business transactions,
including transactions pursuant to the various agreements related to
our separation from Southern Company described elsewhere in this
prospectus.

We may, from time to time, enter into and perform agreements with Southern
Company to engage in any transaction, and to agree to compete or not to compete
with each other, including to allocate, or to cause our and their respective
directors, officers and employees to allocate, corporate opportunities between
Southern Company and us. Our restated certificate of incorporation provides that
no such agreement, or its performance, shall be considered contrary to any
fiduciary duty of Southern Company, as the controlling stockholder of our
company, or of any such director or officer, if any of the following conditions
are satisfied:

- the agreement was entered into before our company ceased to be a
wholly-owned subsidiary of Southern Company and is continued in
effect after this time;

- the agreement or transaction was approved, after being made aware of
the material facts as to the agreement or transaction, by:

- our board, by affirmative vote of a majority of directors who are
not interested persons,

- a committee of our board consisting of members who are not
interested persons, by affirmative vote of a majority of those
members, or

- one or more of our officers or employees who is not an interested
person and who was authorized by our board or a board committee
as specified above or, in the case of an employee, to whom
authority has been delegated by an officer to whom the authority
to approve such an action has been so delegated;

- the agreement or transaction was fair to us as of the time it was
entered into; or

- the agreement or transaction was approved by the affirmative vote of
a majority of the shares of capital stock entitled to vote and which
do vote on the agreement or transaction, excluding Southern Company
and any interested person in respect of such agreement or
transaction.

Under our restricted certificate of incorporation, Southern Company has no
duty to refrain from engaging in similar activities or lines of business as us
and except as discussed below, neither Southern Company nor any of its officers,
directors or employees will be liable to us or our stockholders for breach of
any fiduciary duty by reason of any of these activities. In addition, if
Southern Company becomes aware of a potential transaction which may be a
corporate opportunity for both Southern Company and us, Southern Company shall
have no duty to communicate or offer this corporate opportunity to us and shall
not be liable to us or our stockholders for breach of any fiduciary duty as a
stockholder by reason of the fact that Southern Company pursues or acquires the
corporate opportunity for itself, directs the corporate opportunity to another
person or does not communicate information regarding such corporate opportunity
to us.

In the event that one of our directors or officers, who is also a director
or officer of Southern Company, acquires knowledge of a potential transaction
which may be a corporate opportunity for both us and Southern Company, the
director or officer shall have satisfied his or her fiduciary duty to us and our
stockholders with respect to the corporate opportunity, and shall not be liable
to us and

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our stockholders for breach of any fiduciary duty by reason of the fact that
Southern Company pursues or acquires the corporate opportunity for itself or
directs the corporate opportunity to another person or does not communicate
information about the corporate opportunity to us, if the director or officer
acts consistently with the following: a corporate opportunity offered to any
person who is our director or officer, and who is also a director or officer of
Southern Company shall belong to us if the opportunity is expressly offered to
him or her solely in his or her capacity as our director or officer. If an
opportunity is not expressly offered to one of our directors or officers solely
in this capacity, the opportunity shall belong solely to Southern Company.

For purposes of these provisions, an interested person is generally an
individual who has a financial interest in the relevant transaction.

The provisions of our restated certificate of incorporation with regard to
such transactions and/or corporate opportunities shall terminate when Southern
Company, together with its affiliates, ceases to be the owner of voting stock
representing 20% or more of the votes entitled to be cast by the holders of all
the then outstanding voting stock; provided, however, that the termination shall
not terminate the effect of these provisions with respect to any agreement
between us and Southern Company that was entered into before the time of
termination or any transaction entered into in the performance of such
agreement, whether entered into before or after such time, or any transaction
entered into between us and Southern Company or the allocation of any
opportunity between us and Southern Company before such time. These provisions
do not alter the fiduciary duty of loyalty of our directors under applicable
Delaware law. By becoming a stockholder in our company, you will be deemed to
have notice of and consented to these provisions of our restated certificate of
incorporation.

DELAWARE BUSINESS COMBINATION STATUTE

We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders. Because Southern Company will own more than 15% of our voting
stock before we become a public company and upon completion of the offering,
Section 203 by its terms is currently not applicable to business combinations
with Southern Company even though Southern Company owns more than 15% of our
outstanding stock. If any other person acquires 15% or more of our outstanding
stock, that person will be subject to the provisions of Section 203.

STOCKHOLDER RIGHTS PLAN

Our board has adopted a stockholder rights plan. Pursuant to the rights
plan, one right will be issued and attached to each outstanding share of capital
stock. Each right will entitle the holder, in circumstances described below, to
purchase from our company a unit consisting of one one-thousandth of a share of
Series A junior preferred stock, par value $1.00 per share, at an exercise price
of $250 per right, subject to adjustment in certain events.

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Initially, the rights will be attached to all certificates representing
outstanding shares of common stock and will be transferred with and only with
these certificates. The rights will become exercisable and separately
certificated only upon the distribution date, which will occur upon the earlier
of the following:

- any person or group of affiliated persons acquiring 15% or more of the
shares of common stock then outstanding, (unless the offer to acquire
such shares is approved by a majority of the board of directors who are
not affiliates of the acquiring person); or

- ten days following the commencement of or announcement of an intention to
make a tender offer or exchange offer the consummation of which would
result in a person or group causing the rights to become exercisable.

As soon as practicable after the distribution date, certificates will be
mailed to holders of record of common stock as of the close of business on the
distribution date. From and after the distribution date, the separate
certificates alone will represent the rights. Prior to the distribution date,
all shares of common stock issued will be issued with rights. Shares of common
stock issued after the distribution date will not be issued with rights.

The final expiration date of the rights will be at the close of business on
August 22, 2010, unless earlier redeemed or exchanged by us as described below.

In the event that a person acquires 15% or more of the shares of common
stock then outstanding, except pursuant to any action or transaction approved by
our board before the person acquires 15% or more of the shares of common stock
then outstanding, each holder of a right other than that person and certain
related parties, whose rights will automatically become null and void, will
thereafter be entitled to receive, upon exercise of the right, a number of
shares of common stock, or, in certain circumstances, other securities of our
company, having a current market price averaged over the previous 30 consecutive
trading days equal to two times the exercise price of the right.

In the event that, at any time on or after a person acquires 15% or more of
the shares of common stock then outstanding, our company effects a merger or
other business combination in which the holders of all of our outstanding common
stock prior to such transaction are not the holders of the surviving
corporation's voting power or 50% or more of its assets or earning power is sold
or transferred, then each holder of a right, except rights owned by any person
who has acquired 15% or more of the shares of common stock then outstanding or
certain related parties, which will have become void as set forth above, shall
thereafter have the right to receive, upon exercise, a number of shares of
common stock of the acquiring company having a value equal to two times the
exercise price of the right.

The purchase price payable, and the number of Series A preferred stock,
common shares or other securities issuable, upon exercise of the rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A preferred stock, (ii) upon the grant to holders of the Series A
preferred stock of certain rights or warrants to subscribe for or purchase
Series A preferred stock at a price, or securities convertible into Series A
preferred shares with a conversion price, less than the then current market
price of the Series A preferred shares or (iii) upon the distribution to holders
of the Series A preferred stock of evidences of indebtedness or assets or of
subscription rights or warrants.

The number of outstanding rights and the number of one one-thousandths of a
Series A preferred share issuable upon exercise of each right are also subject
to adjustment in the event of a stock split of the common shares or a stock
dividend on the common shares payable in common

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shares or certain other adjustments to the common shares which occur prior to
the date on which the rights become exercisable.

With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
such purchase price. No fractional Series A preferred shares will be issued
(other than fractions which are one one-thousandth or integral multiples of one
one-thousandth of a Series A preferred share, which may, at our election, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made.

Series A preferred stock purchasable upon exercise of the rights will not
be redeemable. Each share of Series A preferred stock will be entitled to a
minimum preferential quarterly dividend payment of $10.00 per share but, if
greater, will be entitled to an aggregate dividend per share of 1,000 times the
dividend declared per common share. In the event of liquidation, the holders of
Series A preferred stock will be entitled to a minimum preferential liquidation
payment of $10.00 per share; thereafter, and after the holders of the common
stock receive a liquidation payment of $0.01 per share, the holders of the
Series A preferred stock and the holders of the common stock will share the
remaining assets in the ratio of 1,000 to 1 (as adjusted) for each share of
Series A preferred stock and common share so held, respectively. Each share of
Series A preferred stock will have a vote multiple of 1,000 votes per share,
subject to adjustment and will generally vote together with holders of common
stock as a single class. Finally, in the event of any merger, consolidation or
other transaction in which common stock is exchanged, each Series A preferred
share will be entitled to receive 1,000 times the amount received per common
share. These rights are protected by antidilution provisions. In the event that
the amount of accrued and unpaid dividends on the Series A preferred stock is
equivalent to six full quarterly dividends or more, the holders of the Series A
preferred stock shall have the right, voting as a class, to elect two directors
in addition to the directors elected by the holders of the common stock until
all cumulative dividends on the Series A preferred stock have been paid through
the last quarterly dividend payment date or until non-cumulative dividends have
been paid regularly for at least one year.

Our board may generally redeem the rights for nominal consideration at any
time prior to the earlier to occur of (i) a person acquiring 15% or more of the
shares of outstanding common stock, except pursuant to a board approved
transaction or (ii) the expiration of the rights, and under certain other
circumstances, we may redeem the rights in whole, but not in part, at a price of
$.01 per right which redemption shall be effective on an action of board of
directors. Additionally, we may redeem outstanding rights in connection with a
merger or other business combination transaction or series of transactions in
which all holders of common shares are treated alike but not involving a person
acquiring 15% or more of the shares of outstanding common stock, except pursuant
to a board approved transaction or its affiliates or associates.

All of the provisions of the rights agreement may be amended by our board
of directors prior to the date the rights become exercisable. After the date the
rights become exercisable, the provisions of the rights agreement may be amended
by our board in order to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of rights, or,
subject to certain limitations, to shorten or lengthen any time period under the
rights agreement. Until a right is exercised, the holder will have no rights as
a stockholder, including, without limitation, the right to vote or to receive
dividends.

The rights will have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire our company
without the approval of our board. As a result, the overall effect of the rights
may be to render more difficult or discourage any attempt to acquire our
company, even if such acquisition may be in the interest of our stockholders.
Because our board

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can redeem the rights or approve a permitted offer, the rights will not
interfere with a merger or other business combination approved by our board.

Following the initial public offering and prior to the distribution of our
shares by Southern Company, Southern Company's ownership of our stock will not
trigger these provisions of the rights agreement.

LISTING OF COMMON STOCK

We have applied for the listing of our common stock on the New York Stock
Exchange under the symbol "SOE."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of our common stock is [ ].

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DESCRIPTION OF CONVERTIBLE TRUST PREFERRED SECURITIES

Concurrently with the offering of our commons stock, we and SEI Trust I
will offer 6,000,000 shares of % Convertible Trust Preferred Securities at
an initial public offering price of $50.00 per preferred security. In addition,
the trust has granted the underwriters an option, exercisable for 30 days, to
purchase up to an additional 900,000 preferred securities at the initial public
offering price. Each preferred security represents a preferred undivided
beneficial interest in the assets of the trust, which will consist of debentures
that we will sell to the trust.

The trust will use the proceeds from the sale of the preferred securities
and common securities to purchase from us [ ]% Junior Convertible
Subordinated Debentures, Series A due 2030. The debentures will have the same
financial terms as the preferred securities, including conversion rights.

The trust will also issue common securities to us. The common securities
represent common undivided beneficial interests in the assets of the trust. We
will own all of the common securities.

SEI Trust I is a Delaware business trust and a subsidiary of us. The
address of its principal office is 1403 Foulk Road, Suite 102, Wilmington,
Delaware 19803, and its telephone number is (302) 427-1935.

DISTRIBUTIONS

Holders of the preferred securities will be entitled to receive cash
distributions at an annual rate of [ ]% of the $50 liquidation preference
per preferred security. Distributions are cumulative and will begin to
accumulate on the date of original issuance of the preferred securities, which
we expect to be [ ], 2000. Distributions will be payable quarterly
in arrears on [ ], [ ] , [ ] and
[ ] of each year beginning [ ], 2000, unless we defer
interest payments on the debentures.

DISTRIBUTION DEFERRAL

We can, on one or more occasions, defer interest payments on the debentures
for up to 20 consecutive quarterly periods unless an event of default on the
debentures has occurred and is continuing. Interest payments will not be due and
payable on the debentures during a deferral period. We cannot, however, defer
interest payments beyond the maturity date of the debentures, which is
[ ] , 2030. If we defer interest payments on the debentures, the
trust will defer distribution payments on the preferred securities and the
common securities. During a deferral period, distributions will continue to
accumulate on the preferred securities. Additional cash distributions will
accumulate on any deferred distributions.

Compounded interest will accrue on any deferred interest payments. While
interest payments on the debentures are deferred, we will generally not be
permitted to pay cash dividends on our common stock or pay on debt that is pari
passu with or junior to the debentures.

CONVERSION INTO COMMON STOCK

Unless we have redeemed the debentures, and subject to our right to elect a
cash settlement as discussed below, holders of preferred securities will have
the right to convert their preferred securities into shares of our common stock
at any time after [ ], 2001 and prior to [ ], 2030.
Preferred securities that have been called for redemption may only be converted
on or before the business day prior to the close of business on the applicable
redemption date. The preferred securities will convert into our common stock at
an initial conversion rate of [ ] shares

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of common stock for each preferred security. This conversion rate is equivalent
to the conversion price of $[ ] per share of our common stock. The initial
conversion rate may be subject to adjustment.

From [ ], 2001 and until the next business day following the
date of the distribution of our common stock held by Southern Company to its
stockholders, as discussed in this prospectus, we may elect to make a cash
settlement in respect of any preferred securities surrendered for conversion.
The amount of cash that holders of the preferred securities will receive if we
elect a cash settlement will be equal to the value of the underlying shares of
common stock.

RANKING

The preferred securities and common securities of the trust will generally
rank on par with each other and will generally have equivalent terms. Our
obligations to pay the debentures are junior to our payment obligations under
our senior debt.

REDEMPTION BY THE TRUST

The trust will redeem all of its outstanding preferred securities and
common securities when the debentures are paid at maturity on [ ],
2030. In addition, we can make the trust redeem all or some of the preferred
securities at any time on or after [ ], 2003 by redeeming the
debentures at the applicable redemption price, plus any accrued and unpaid
distributions. If that happens, the trust will use the cash it receives from our
redemption of the debentures to redeem, on a pro rata basis, preferred
securities and common securities of an aggregate liquidation amount equal to the
aggregate principal amount of the debentures redeemed.

SPECIAL EVENT REDEMPTION OR DISTRIBUTION

We may redeem all outstanding debentures at the special event redemption
price upon the occurrence of a tax event described below or a change in law that
could require the trust to register as an investment company under the
Investment Company Act of 1940 (and thus cause the redemption of the preferred
securities at that price). Upon the occurrence of a tax event, we may elect to
pay additional interest to the trust so that the distributions to holders of the
preferred securities are not reduced because of the tax event. In addition, we
have the right to dissolve the trust at any time; if a tax event or a change in
law that could require the trust to register as an investment company under the
Investment Company Act occurs, we may elect to redeem the preferred securities
by distributing the debentures to holders of preferred securities.

A tax event generally means specified tax changes that could result in:

- the trust being subject to United States federal income taxes or more
than a de minimis amount of other governmental charges, or

- the non-deductibility of interest payments on the debentures.

CONDITIONAL RIGHT TO SHORTEN STATED MATURITY OF THE DEBENTURES

We can shorten the stated maturity of the debentures to as early as
[ ], 2015 if there are specified tax changes that could result in
the non-deductibility of interest payments on the debentures. If we exercise
this option, the trust will redeem all of the outstanding preferred securities
when the debentures are paid on their new maturity date.

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LIQUIDATION PREFERENCE

If the trust is liquidated and the debentures are not distributed to
holders of preferred securities, the holders of preferred securities will
generally be entitled to receive $50 per preferred security plus any accumulated
and unpaid distributions on each preferred security held.

THE GUARANTEE

We will guarantee the trust's payment obligations, but only to the extent
the trust has sufficient funds to make payments on the preferred securities. If
we do not make payments on the debentures, the trust will not have sufficient
funds to make payments on the preferred securities, in which case holders of
preferred securities will be unable to rely on the guarantee for payment.
Generally, our obligations under the guarantee are junior to our obligations to
make payments on all of our other liabilities.

DISSOLUTION OF THE TRUST AND DISTRIBUTION OF THE DEBENTURES

We have the right to dissolve the trust at any time. If we exercise this
right, the trust will redeem the preferred securities by distributing the
debentures to holders of preferred securities and to us, as the holder of the
common securities, on a pro rata basis. If the trust distributes the debentures,
we will use our best efforts to have the debentures listed on the New York Stock
Exchange or on any national exchange or automated quotation system on which the
preferred securities are listed.

FORM OF PREFERRED SECURITIES

The preferred securities will initially be represented by a global
certificate registered in the name of Cede & Co., as nominee for The Depository
Trust Company.

VOTING RIGHTS

Generally, holders of the preferred securities will not have any voting
rights as a holder of preferred securities.

LISTING

We will apply to have the preferred securities listed on the New York Stock
Exchange. We expect trading of the preferred securities to begin within 30 days
after they are first issued. We expect the preferred securities to trade under
the symbol "SOE PrA."

OFFERING OF COMMON STOCK NOT CONDITIONED ON OFFERING OF PREFERRED SECURITIES

We intend to complete the offering of our common stock regardless of
whether the offering of our preferred securities is successfully completed.

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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

GENERAL

This is a general discussion of United States federal tax consequences of
the acquisition, ownership, and disposition of our common stock by a holder
that, for U.S. federal income tax purposes, is not a U.S. person as we define
that term below. A holder of our common stock who is not a U.S. person is a
non-U.S. holder. We assume in this discussion that you will hold our common
stock issued pursuant to the offering as a capital asset (generally, property
held for investment). We do not discuss all aspects of U.S. federal taxation
that may be important to you in light of your individual investment
circumstances, such as special tax rules that would apply to you, for example,
if you are a dealer in securities, financial institution, bank, insurance
company, tax-exempt organization, partnership or owner of more than 5% of our
common stock. Our discussion is based on current provisions of the Internal
Revenue Code, Treasury regulations, judicial opinions, published positions of
the IRS and other applicable authorities, all as in effect on the date of this
prospectus and all of which are subject to differing interpretations or change,
possibly with retroactive effect. We have not sought, and will not seek, any
ruling from the IRS with respect to the tax consequences to non-U.S. persons
discussed in this prospectus, and there can be no assurance that the IRS will
not take a position contrary to the tax consequences discussed below or that any
position taken by the IRS would not be sustained. We urge you to consult your
tax advisor about the U.S. federal tax consequences of acquiring, holding and
disposing of our common stock, as well as any tax consequences that may arise
under the laws of any foreign, state, local or other taxing jurisdiction.

For purposes of this discussion, a U.S. person means any one of the
following:

- a citizen or resident of the U.S.;

- a corporation, partnership or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.;

- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or

- a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust.

DIVIDENDS

Dividends paid to a non-U.S. holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30% or such lower rate as
may be provided by an income tax treaty for which a holder may be eligible.
Non-U.S. holders should consult their tax advisors regarding their entitlement
to benefits under a relevant income tax treaty. Dividends that are effectively
connected with a non-U.S. holder's conduct of a trade or business in the United
States are generally subject to U.S. federal income tax on a net basis at
regular graduated rates, but are not generally subject to the 30% withholding
tax if the non-U.S. holder complies with applicable certification and disclosure
requirements. Any such U.S. trade or business income received by a non-U.S.
holder that is a corporation may also be subject to an additional "branch
profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.

Under current applicable U.S. tax regulations, dividends paid to an address
in a foreign country are presumed, absent actual knowledge to the contrary, to
be paid to a resident of that country for the purposes of determining whether
amounts are required to be withheld and for the purposes of

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determining the applicability of a tax treaty rate. Under U.S. tax regulations,
which are generally effective for payments made after December 31, 2000,
however, a non-U.S. holder of our common stock who wishes to claim the benefit
of an applicable treaty rate generally will be required to satisfy applicable
certification and other requirements.

The U.S. tax regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are treated
as fiscally transparent for U.S. federal income tax purposes, and entities that
are disregarded for U.S. federal income tax purposes, the applicable income tax
treaty jurisdiction, or both. In addition, income tax treaty benefits may be
denied to foreigners receiving income derived through a partnership, or
otherwise fiscally transparent entity. Prospective investors should consult
their own tax advisors concerning the effect, if any, of these new tax
regulations on an investment in our common stock.

GAIN ON DISPOSITIONS

A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless:

- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder, (in which case the branch profits tax
may also apply);

- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and other
requirements are met;

- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to U.S. expatriates; or

- we are or have been at any time during the shorter of the five-years
preceding the disposition or the period the non-U.S. holder held our
common shares a "United States real property holding corporation" (a
"USRPHC") for U.S. federal income tax purposes.

If we are or have been a USRPHC, a non-U.S. holder will generally not be
subject to U.S. federal income tax on gain recognized on a sale or other
disposition of our common stock provided that:

- the non-U.S. holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of our outstanding common
stock; and

- our common stock is and continues to be regularly traded on an
established securities market.

We believe that our common stock will be regularly traded on an established
securities market for this purpose in any quarter during which it is listed on
the NYSE.

If we are or have been a USRPHC for the period described above and the
exception for less than 5% shareholders of securities regularly traded on an
established securities market does not apply, a non-U.S. holder will be subject
to U.S. federal income tax with respect to the gain realized on any sale or
other disposition of our common stock. The gain may be subject to a withholding
tax of 10% if our common stock ceases to be regularly traded on an established
securities market. To the extent the 10% withheld exceeds a non-U.S. holder's
maximum tax liability, as determined by the Secretary, such holder may obtain a
refund of amounts withheld. If the non-U.S. holder is subject to tax on the gain
as a result of a our being or having been a USRPHC, the holder will generally be
subject to tax at the graduated U.S. tax rates. If the non-U.S. holder is a
corporation, this gain may also be subject to the 30% branch profits tax unless
reduced by an applicable treaty.

155
<PAGE> 159

UNITED STATES FEDERAL ESTATE TAXES

Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.

Under U.S. tax regulations, backup withholding, which generally requires a
withholding tax of 31% on payments to persons that do not provide specified
information under the U.S. information reporting requirements, will not
generally apply to (i) dividends paid to a non-U.S. holder that is subject to
the 30% withholding or is not subject to the 30% withholding (or is subject to a
lower rate) as a result of an applicable tax treaty or (ii) prior to January 1,
2001, to dividends paid to a non-U.S. holder at an address outside the United
States unless the payor has actual knowledge that the payee is a U.S. person.
Payments of the proceeds of a sale or other taxable disposition of our common
stock by a U.S. office of a broker are subject to both backup withholding at a
rate of 31% and information reporting, unless the holder certifies as to its
non-U.S. holder status under penalties of perjury or otherwise establishes an
exemption. Information reporting requirements, but not backup withholding tax,
will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S., unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
other conditions are met or the holder otherwise established an exemption.

The U.S. Treasury Department has issued final regulations effective for
payments made after December 31, 2000 that may change the rules related to
backup withholding and information reporting. Non-U.S. holders should consult
their own tax advisors as to the application of the new tax regulations to
payments made after December 31, 2000 and the procedures for establishing an
exemption from backup withholding.

Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if the required information
is furnished to the IRS.

156
<PAGE> 160

SHARES ELIGIBLE FOR FUTURE SALE

After this offering, we will have 330,000,000 shares of our common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have a total of 338,700,000 shares of common stock outstanding. All of
the shares of our common stock sold in this offering will be freely tradable
without restriction under the Securities Act, except for any shares which may be
acquired by an affiliate of ours, as that term is defined in Rule 144 under the
Securities Act. Persons who may be deemed to be affiliates generally include
individuals or entities that control, are controlled by, or are under common
control with, us and may include our directors and officers as well as our
significant stockholders, if any. Southern Company and we have agreed not to
offer or sell any shares of our common stock for a period of 180 days after the
date of this prospectus, without the prior written consent of the underwriters,
except for issuances under employee or director compensation plans. We can give
no assurance concerning how long these parties will continue to hold their
common stock after this offering.

Southern Company currently plans to complete the distribution of our common
stock within 12 months following this offering. Shares of our common stock
distributed to Southern Company stockholders in the distribution generally will
be freely transferable, except for shares of common stock received by persons
who may be deemed to be affiliates. Persons who are affiliates will be permitted
to sell the shares of common stock that are issued in this offering or that they
receive in the distribution only through registration under the Securities Act,
or under an exemption from registration, such as the one provided by Rule 144.

The 272,000,000 shares of our common stock held by Southern Company before
distribution are deemed "restricted securities" as defined in Rule 144, and may
not be sold other than through registration under the Securities Act or under an
exemption from registration, such as the one provided by Rule 144.

In general, a stockholder subject to Rule 144 who has owned common stock of
an issuer for at least one year may, within any three-month period, sell up to
the greater of:

- 1% of the total number of shares of common stock then outstanding; and

- the average weekly trading volume of the common stock during the four
weeks preceding the stockholder's required notice of sale.

Rule 144 requires stockholders to aggregate their sales with other
affiliated stockholders for purposes of complying with this volume limitation. A
stockholder who has owned common stock for at least two years, and who has not
been an affiliate of the issuer for at least 90 days, may sell common stock free
from the volume limitation and notice requirements of Rule 144.

In connection with this offering, we are granting options to purchase
approximately 7,550,000 shares of our outstanding common stock. Immediately
after this offering, we intend to file a registration statement on Form S-8
covering all options granted under the Southern Energy Omnibus Incentive
Compensation Plan. Shares of our common stock registered under this registration
statement will be available for sale in the open market, subject to vesting
restrictions. Any sales of these shares by an affiliate will be subject to the
volume limitations of Rule 144 described above.

We have granted Southern Company registration rights with respect to our
shares it will hold after this offering. These registration rights generally
become effective at such time as Southern Company informs us that it no longer
intends to complete the distribution of these shares to its stockholders. See
"Agreements Between Us and Southern Company -- Registration Rights Agreement."

157
<PAGE> 161

UNDERWRITING

We and the underwriters for the offering named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated are the joint book-running managers and the
representatives of the underwriters. As joint book-running managers on behalf of
the underwriting syndicate, Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated will record a list of potential investors that have expressed an
interest in purchasing shares as part of the offering.

<TABLE>
<CAPTION>
UNDERWRITERS Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
Banc of America Securities LLC..............................
Credit Suisse First Boston Corporation......................
J.P. Morgan Securities Inc..................................
Lehman Brothers Inc.........................................
Salomon Smith Barney Inc....................................
-------
Total.............................................
=======
</TABLE>

Under the terms of the underwriting agreement, the underwriters are
committed to take and pay for all of the shares being offered, if any are taken,
other than the shares covered by the over-allotment option unless and until this
option is exercised. If the underwriters sell more than the total number of
shares set forth in the table above, the underwriters have an option to buy up
to an additional 8,700,000 shares from us to cover such sales. They may exercise
the option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above. If the underwriters' option is exercised in
full, the total underwriting discounts and commissions payable to the
underwriters by us would be $[ ]. If the underwriters' option is not
exercised, the total underwriting discounts and commissions payable to the
underwriters by us would be $[ ].

Shares sold by the underwriters to the public will initially be sold at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $[ ] per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
certain other brokers and dealers at a discount of up to $[ ] per share
from the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering price
and the other selling terms.

A prospectus in electronic format will be made available on the web sites
maintained by one or more of the joint book-running managers of this offering
and may also be made available on web sites maintained by other underwriters.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the joint book-running managers to underwriters that may make
Internet distributions on the same basis as other allocations.

We and Southern Company have agreed with the underwriters not to dispose of
or hedge any of our common stock or securities convertible into or exchangeable
for shares of our common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. and
Morgan

158
<PAGE> 162

Stanley & Co. Incorporated. This agreement does not apply to issuances under our
employee or director compensation plans.

At our request, the underwriters have reserved for sale at the initial
public offering price up to 2,900,000 shares of common stock for sale to our
employees and other business associates. Any shares purchased by these
individuals will be subject to a lock-up agreement containing terms identical to
those described in the preceding paragraph.

Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among us and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, an assessment of our management
and the consideration of the above factors in relation to the market valuation
of companies in related businesses.

We have applied for the listing of our common stock on the New York Stock
Exchange under the symbol "SOE." The underwriters intend to sell shares of
common stock to a minimum of 2,000 beneficial owners in lots of 100 or more
shares so as to meet the NYSE distribution requirements for trading.

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of the
offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of our
stock, and, together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.

We will pay [ ]% of underwriting fees, discounts and commissions
incurred for this offering. Southern Company will pay the remaining underwriting
fees, discounts and commissions, as well as all of our other out-of-pocket costs
and expenses related to this offering, the distribution and the preparation of
the agreements providing for the separation, the distribution and related

159
<PAGE> 163

transactions. These out-of-pocket costs and expenses are estimated to be
approximately $[ ] million. In addition, Southern Company has agreed to
pay Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated a fee of up to
$4.5 million for certain financial advisory services performed pursuant to a
separate agreement among these parties.

We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.

160
<PAGE> 164

LEGAL MATTERS

The validity of the common stock offered hereby will be passed on for us by
Troutman Sanders LLP, Atlanta, Georgia and for the underwriters by Shearman &
Sterling, New York, New York.

EXPERTS

The financial statements of Southern Energy, Inc. as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

The financial statements of Berliner Kraft-und Licht
(Bewag)-Aktiengesellschaft (currently Bewag AG) as of June 30, 1998 and for the
year ended June 30, 1998 included in this prospectus have been audited by KPMG
Deutsche Treuhand-Gesellschaft, independent accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC, Washington, D.C., a registration statement on
Form S-1 under the Securities Act with respect to the common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the SEC. For further
information about us and our common stock, refer to the registration statement
and the exhibits and any schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each statement
being qualified in all respects by such reference. A copy of the registration
statement, including the exhibits and schedules thereto, may be read and copied
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site at http://www.sec.gov, from which interested persons can electronically
access the registration statement, including the exhibits and any schedules
thereto, as well as reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.

As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.

161
<PAGE> 165

SOUTHERN ENERGY, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Consolidated Balance Sheet as of June 30, 2000.... F-2
Unaudited Consolidated Statements of Income for the Six
Months Ended June 30, 1999 and 2000....................... F-3
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 2000....................... F-4
Notes to Unaudited Consolidated Financial Statements........ F-5
Report of Independent Public Accountants.................... F-14
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-15
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998, and 1999......................... F-16
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1997, 1998, and 1999............. F-17
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999......................... F-18
Notes to Consolidated Financial Statements.................. F-19
</TABLE>

BERLINER KRAFT-UND LICHT (BEWAG)-AKTIENGESELLSCHAFT

<TABLE>
<S> <C>
Report of Independent Auditors'............................. F-62
Balance Sheet as of June 30, 1997 and 1998.................. F-63
Statement of Profit and Loss for the Years Ended June 30,
1997 and 1998............................................. F-64
Statement of Cash Flow for the Years Ended June 30, 1997 and
1998...................................................... F-65
Notes to Financial Statements............................... F-66
Supplementary Information................................... F-79
Supervisory Board........................................... F-84
Bewag Notes................................................. F-86
Unaudited Balance Sheet as of June 30, 1998 and 1999........ F-92
Unaudited Statement of Profit and Loss for the Years Ended
June 30, 1998 and 1999.................................... F-93
Unaudited Statement of Cash Flow for the Years Ended
June 30, 1998 and 1999.................................... F-94
Notes to Unaudited Financial Statements..................... F-95
Unaudited Supervisory Board................................. F-119
</TABLE>

F-1
<PAGE> 166

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEET

JUNE 30, 2000

(IN MILLIONS)

<TABLE>
<CAPTION>
PRO FORMA
(NOTE K)
---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 691 $ 691
Restricted deposits......................................... 20 20
Receivables:
Customer accounts, less provision for uncollectibles of
$24..................................................... 213 213
Other, less provision for uncollectibles of $14........... 642 642
Other....................................................... 178 178
------- -------
Total current assets.................................... 1,744 1,744
------- -------
PROPERTY, PLANT, AND EQUIPMENT.............................. 4,406 4,406
Less accumulated provision for depreciation................. (474) (474)
------- -------
3,932 3,932
Leasehold interests, net of accumulated amortization of
$181...................................................... 1,833 1,833
Construction work in progress............................... 147 147
------- -------
Total property, plant, and equipment, net............... 5,912 5,912
------- -------
NONCURRENT ASSETS:
Concession agreement, net of accumulated amortization of
$92....................................................... 266 266
Investments................................................. 1,550 1,550
Notes and other receivables, less provision for
uncollectibles of $30..................................... 1,297 1,297
Goodwill, net of accumulated amortization of $188........... 2,014 2,014
Other intangible assets, net of accumulated amortization of
$23....................................................... 511 511
Investment in leveraged leases.............................. 566 566
Miscellaneous deferred charges.............................. 448 448
------- -------
Total noncurrent assets................................. 6,652 6,652
------- -------
Total assets............................................ $14,308 $14,308
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt............................................. 2,578 2,631
Current portion of long-term debt........................... 266 266
Accounts payable............................................ 631 631
Taxes accrued............................................... 242 242
Other....................................................... 164 111
------- -------
Total current liabilities............................... 3,881 3,881
------- -------
NONCURRENT LIABILITIES:
Subsidiary obligated mandatorily redeemable preferred
securities................................................ 1,026 1,026
Notes payable............................................... 4,596 4,596
Other long-term debt........................................ 394 394
Deferred income taxes....................................... 694 694
Miscellaneous deferred credits.............................. 193 193
------- -------
Total noncurrent liabilities............................ 6,903 6,903
------- -------
MINORITY INTEREST IN SUBSIDIARY COMPANIES................... 749 749
------- -------
COMMITMENTS AND CONTINGENT MATTERS
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 272,000,000 shares issued and outstanding..... 3 3
Additional paid-in capital.................................. 2,872 2,872
Accumulated other comprehensive loss........................ (111) (111)
Retained earnings........................................... 11 11
------- -------
Total stockholder's equity.............................. 2,775 2,775
------- -------
Total liabilities and stockholder's equity.............. $14,308 $14,308
======= =======
</TABLE>

The accompanying notes are an integral part of this consolidated balance sheet.

F-2
<PAGE> 167

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000

(IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
OPERATING REVENUES.......................................... $ 1,025 $ 1,194
OPERATING EXPENSES:
Fuel........................................................ 109 344
Purchased power............................................. 387 54
Maintenance................................................. 49 68
Depreciation and amortization............................... 111 155
Selling, general, and administrative........................ 109 146
Write-down of assets........................................ 5 14
Other....................................................... 81 102
------- -------
Total operating expenses.................................. 851 883
------- -------
OPERATING INCOME............................................ 174 311
OTHER INCOME (EXPENSE):
Interest income............................................. 80 81
Interest expense............................................ (231) (300)
Gain on sales of assets..................................... 9 --
Equity in income of affiliates.............................. 147 63
Receivables recovery........................................ 12 --
Other, net.................................................. 21 40
------- -------
Total other income (expense).............................. 38 (116)
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST......................................... 212 195
Provision (Benefit) for Income Taxes........................ 34 (29)
MINORITY INTEREST........................................... 36 43
------- -------
INCOME FROM CONTINUING OPERATIONS........................... 142 181
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF
$7 AND $9 IN 1999 AND 2000, RESPECTIVELY.................. 7 13
------- -------
NET INCOME.................................................. $ 149 $ 194
======= =======
EARNINGS PER SHARE:
Basic
From continuing operations................................ $ 0.52 $ 0.67
From discontinued operations.............................. 0.03 0.04
------- -------
Net income................................................ $ 0.55 $ 0.71
======= =======
Pro forma basic (Note C)
From continuing operations................................ $ 0.60
From discontinued operations.............................. 0.04
-------
Net income................................................ $ 0.64
=======
Pro forma diluted (Note C)
From continuing operations................................ $ 0.60
-------
From discontinued operations.............................. 0.04
-------
Net income................................................ $ 0.64
=======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-3
<PAGE> 168

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000

(IN MILLIONS)

<TABLE>
<CAPTION>
1999 2000
------- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 149 $ 194
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of affiliates...................... (143) (51)
Depreciation and amortization........................... 118 175
Write-down of assets.................................... -- --
Deferred income taxes................................... 56 59
Gain on sales of assets................................. (9) --
Minority interest....................................... 36 43
Other, net.............................................. (22) (59)
Changes in certain assets and liabilities:
Receivables, net..................................... (36) (205)
Other current assets................................. 24 17
Accounts payable..................................... (111) 57
Taxes accrued........................................ (2) 24
Other current liabilities............................ 93 (37)
------- -----
Total adjustments.................................. 2 17
------- -----
Net cash provided by operating activities.......... 153 217
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (252) (225)
Property insurance proceeds............................... -- 14
Proceeds received from the sale of investments............ 10 --
Dividends received from equity investments................ 15 11
Cash paid for acquisitions................................ (1,441) (61)
------- -----
Net cash used in investing activities.............. (1,668) (261)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Southern Company............... 355 1
Capital contributions from minority interest.............. 18 --
Issuance of notes receivable.............................. (65) (12)
Repayments on notes receivable............................ 195 109
Payment of dividends to Southern Company.................. -- (450)
Payment of dividends to minority interests................ (39) (6)
Proceeds from issuance of short-term debt, net............ 928 651
Proceeds from issuance of long-term debt.................. 282 213
Repayment of long-term debt............................... (345) (82)
Other..................................................... -- (6)
------- -----
Net cash provided by financing activities.......... 1,329 418
------- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (2) (6)
------- -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (188) 368
CASH AND CASH EQUIVALENTS, beginning of period.............. 561 323
------- -----
CASH AND CASH EQUIVALENTS, end of period.................... $ 373 $ 691
======= =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized........ $ 189 $ 317
======= =====
Cash paid (refunds received) for income taxes............. $ (57) $ (53)
======= =====
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE> 169

SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2000

A. ACCOUNTING AND REPORTING POLICIES

BASIS OF ACCOUNTING. The Company's accounting and reporting policies are
summarized in the Notes to the Consolidated Financial Statements ("Notes")
elsewhere in this prospectus. These interim financial statements should be read
in conjunction with the consolidated financial statements and the accompanying
footnotes. Management believes that the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting of normal recurring
items, necessary for a fair statement of results for the interim periods
presented.

CONCENTRATION OF REVENUES. Revenues earned under the Company's long-term
power sales agreements with the Philippines' National Power Corporation ("NPC")
approximated 20% and 54% of the Company's total revenues and net income,
respectively, for the six months ended June 30, 2000, and 12% and 35% for the
same period in 1999, respectively. NPC has long-term contractual agreements to
purchase future power production. These agreements are supported by a sovereign
guarantee by the Philippines' government. If this agreement were terminated, it
could have a material adverse effect on the future operating results and
liquidity of the Company.

RECEIVABLES RECOVERY. During the six months ended June 30, 1999, the
Company recorded amounts totaling approximately $12 million, plus related
interest, in successful resolution of negotiations by the Company which allowed
it to record receivables that were assumed in conjunction with the SE
Asia-Pacific business acquisition. The Company has rights to an additional $40
million, plus related interest, as of June 30, 2000, which it has fully reserved
due to the risk of collection.

B. COMPREHENSIVE INCOME

The Company's comprehensive (loss) income consists of net income and
foreign currency translation adjustments. Total comprehensive (loss) income for
the six months ended June 30, 1999 and 2000 was $34 million and $175 million,
respectively.

C. EARNINGS PER SHARE

We calculate basic earnings per share by dividing the income available to
common shareowners by the weighted average number of common shares outstanding.
The following table shows our computation of basic earnings per share for the
six month periods ended June 30, 1999 and 2000 (in millions, except per share
data) after giving effect to the stock split that will be effected in
conjunction with the offering of common stock (Note J). Pro forma basic earnings
per share information below gives effect to the dividend paid to Southern in
2000 as though it had occurred during 1999. Pro forma diluted earnings per share
information below gives effect to the conversion of the Company's value creation
plan ("VCP") standard units outstanding at June 30, 2000 into options to
purchase the Company's common stock. See Note 17 of the Notes.

F-5
<PAGE> 170
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FROM FROM
CONTINUING DISCONTINUED NET
OPERATIONS OPERATIONS INCOME
---------- ------------ ------
<S> <C> <C> <C>
Basic, 1999:
Income.................................................... $ 142 $ 7 $ 149
Shares.................................................... 272 272 272
----- ----- -----
Earnings per share........................................ $0.52 $0.03 $0.55
===== ===== =====
Basic, 2000:
Income.................................................... $ 181 $ 13 $ 194
Shares.................................................... 272 272 272
----- ----- -----
Earnings per share........................................ $0.67 $0.04 $0.71
===== ===== =====
Pro forma basic, 2000:
Income.................................................... $ 181 $ 13 $ 194
Shares.................................................... 272 272 272
Shares assumed due to dividend to Southern................ 31 31 31
----- ----- -----
Earnings per share........................................ $0.60 $0.04 $0.64
===== ===== =====
Pro forma diluted, 2000:
Income.................................................... $ 181 $ 13 $ 194
Add: effect of converting VCP units into options.......... 1 -- 1
----- ----- -----
Adjusted income........................................... $ 182 $ 13 $ 195
Shares.................................................... 272 272 272
Shares assumed due to dividend to Southern................ 31 31 31
Shares assumed due to conversion of VCP standard units.... 2 2 2
----- ----- -----
Adjusted shares........................................... 305 305 305
Earnings per share........................................ $0.60 $0.04 $0.64
===== ===== =====
</TABLE>

D. DEBT

Facility B, a $350 million 364-day revolving line of credit, was extended
to March 2001 during March 2000. See Note 7 of the Notes.

F-6
<PAGE> 171
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

E. FINANCIAL INSTRUMENTS

Southern Energy engages in commodity related marketing and price risk
management activities. At June 30, 2000, the status of outstanding non-trading
related derivative contracts was as follows (in millions). The interest rate
notes in the following table represent the range of fixed interests rates that
Southern Energy pays on the related interest rate swaps. On virtually all of
these interest rate swaps, the company receives floating interest rate payment
at LIBOR.

<TABLE>
<CAPTION>
YEAR OF
MATURITY OR INTEREST NUMBER OF NOTIONAL UNRECOGNIZED
TYPE TERMINATION RATES COUNTERPARTIES AMOUNT GAIN (LOSS)
---- ----------- ---------- -------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swaps... 2000-2012 6.55%-7.12% 4 $710 $ 7
2001-2012 6.56%-8.17% 6 L600 (46)
2002-2007 4.98%-5.78% 2 DM691 1
Cross currency
swaps............... 2001-2007 -- 7 L394 27
Cross currency
swaption............ 2003 -- 1 DM435 28
</TABLE>

L -- Denotes British pounds sterling. DM -- Denotes Deutsche Mark.

F. INVESTMENTS IN AFFILIATES

The following table sets forth certain summarized income statement
information of the Company's investments in 50% or less-owned investments
accounted for under the equity method for the six months ended June 30, 1999 and
2000 (in millions):

<TABLE>
<CAPTION>
JUNE 30,
---------------
1999 2000
------ ------
<S> <C> <C>
COMBINED INVESTMENTS, excluding Bewag
INCOME STATEMENT:
Revenues.................................................... $1,387 $2,196
Operating income............................................ 893 1,382
Net income from continuing operations....................... 68 335
BEWAG
</TABLE>

BEWAG financial information had not been released and is not available at
the time of this filing.

G. SEGMENT REPORTING

Southern Energy's principal business segments primarily consist of the
geographic areas in which the Company conducts business -- Americas,
Asia-Pacific, and Europe. The other reportable business segments are the
Company's financing segment ("SE Finance") and the Company's business

F-7
<PAGE> 172
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development and general corporate activities segment ("Corporate"). Intersegment
revenues are not material. Financial data for the Company's business segments is
as follows (in millions):

BUSINESS SEGMENTS

<TABLE>
<CAPTION>
CONSOLIDATED AMERICAS EUROPE ASIA-PACIFIC SE FINANCE CORPORATE TOTAL
------------ -------- ------ ------------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000:
Operating revenues............. $745 $192 $252 $ 0 $ 5 $1,194
Segment net (loss) income...... 28 43 147 13 (37) 194
Six Months Ended June 30, 1999:
Operating revenues............. $275 $614 $133 $ 0 $ 3 $1,025
Segment net (loss) income...... 22 67 85 7 (32) 149
</TABLE>

H. ACQUISITIONS AND DIVESTITURES

SE NEW YORK

The Company has finalized its purchase price allocation for the SE New York
acquisition. The final allocation is as follows (in millions):

<TABLE>
<S> <C>
Current assets.............................................. $ 60
Property plant and equipment................................ 433
Acquired intangibles........................................ 47
Liabilities assumed and other............................... (47)
----
Purchase price.............................................. $493
====
</TABLE>

SALE OF HIDROELECTRICA ALICURA

On February 22, 2000, Southern Energy agreed to sell its interest in
Hidroelectrica Alicura, a 1,000 megawatt hydroelectric plan in Argentina, for
$205 million. The selling price releases the Company from its debt obligations
and allows it to buy out minority partners. The sale is subject to the approval
of Argentine regulatory authorities. There will be no impact on the Company's
results of operations due to the fact that the investment is carried at fair
value which is equal to the sales price. See Note J.

I. COMMITMENTS AND CONTINGENT MATTERS

COMPANHIA ENERGETICA DE MINAS GERAIS ("CEMIG"). In September 1999, the
state of Minas Gerais filed a lawsuit in a state court seeking temporary relief
against Southern Electric Brasil Participacoes, Ltda. ("SEB") exercising voting
rights under the shareholders agreement, between the state and SEB regarding
SEB's interest in CEMIG, as well as a permanent recision of the agreement. On
March 23, 2000, a state court in Minas Gerias, Brazil, ruled that the
shareholder agreement was invalid. SEB has appealed this decision.

The Company believes that this is a temporary situation and expects that
the shareholder's agreement will be fully restored. Failure to prevail in this
matter would limit the Company's influence on the daily operations of CEMIG,
however SEB would still have 33% of the voting shares of CEMIG and hold 4 of 11
seats on CEMIG's board of directors. SEB's economic interest in CEMIG

F-8
<PAGE> 173
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

would not be affected. The significant rights SEB would lose relate to
supermajority rights and the right to participate in the daily operations of
CEMIG.

SEB obtained financing from Banco Nacional de Desenvolvimento Economico e
Social (BNDES) for approximately 50% of the total purchase price of the CEMIG
shares which is secured by a pledge of SEB's shares in CEMIG. SEB is currently
in discussions with BNDES to defer a $117 million principal and interest payment
due on May 15, 2000. Based on our ownership of SEB, our portion of this amount
is $29 million. See Note J.

ENERGY MARKETING AND RISK MANAGEMENT ACTIVITIES. The Company and Vastar
Resources, Inc. ("VRI") have jointly agreed to provide up to $700 million of
contingent performance guarantees and trade credits on behalf of Southern
Company Energy Marketing ("SCEM"). At June 30, 2000, outstanding guarantees
related to the estimated fair value of SCEM's net contractual commitments were
approximately $278 million.

LONG TERM SERVICE AGREEMENTS. The Company has entered into additional long
term service agreements for the maintenance and repair of its combustion turbine
or combined cycle generating plants. These agreements may be terminated in the
event a planned construction project is cancelled. At June 30, 2000, the amount
committed for construction projects in process is $68 million. The total amount
committed if all turbines are purchased as planned is $1,036 million.

TURBINE PURCHASES. The Company has entered into agreements to purchase
additional turbines to support ongoing and planned construction efforts. Minimum
termination amounts under all purchase contracts were $174 million at June 30,
2000. Total amounts to be paid under the agreements if all turbines are
purchased as planned are estimated to be $1,749 million at June 30, 2000.

UNCERTAINTIES RELATED TO CONTRACT SALES. Several of the Company's
significant power generation facilities rely on either PPAs or energy conversion
agreements ("ECAs" and collectively with the PPAs the "Power Contracts") with
one or a limited number of entities for the majority of, and in some cases all
of, the relevant facility's output over the life of the Power Contract.

The Power Contracts related to the Company's facilities are generally
long-term agreements covering the sale of power for 20 or more years. However,
the operation of such facilities is dependent on the continued performance by
customers and suppliers of their obligations under the relevant Power Contract,
and, in particular, on the credit quality of the purchasers. If a substantial
portion of the Company's long-term Power Contracts were modified or terminated,
the Company would be adversely affected to the extent that it was unable to find
other customers at the same level of profitability. Some of the Company's
long-term Power Contracts are for prices above current spot market prices. The
loss of one or more significant Power Contracts or the failure by any of the
parties to a Power Contract to fulfill its obligations thereunder could have a
material adverse effect on the Company's business, results of operations and
financial condition.

SE CALIFORNIA. Southern Energy California LLC ("SE California"), a wholly
owned subsidiary of the Company, and its subsidiaries are parties to a Federal
Energy Regulatory Commission ("FERC") proceeding that will determine the
percentage of a settled $158.8 million revenue requirement to be paid to the SE
California parties under the reliability must-run ("RMR") agreements between the
SE California parties and the California Independent System Operator ("CAISO").
Hearings were conducted before a FERC administrative law judge in March 2000.
The

F-9
<PAGE> 174
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SE California parties have proposed to allocate approximately 75% of the
responsibility for payment of the revenue requirement to the CAISO, while CAISO
and other aligned parties argue that CAISO should pay no more than approximately
7%. The decision in this case will affect the amount CAISO will pay to SE
California and its subsidiaries for the period commencing June 1, 1999 through
December 31, 2001. See Note J.

J. OTHER EVENTS

PROPOSED PUBLIC OFFERINGS AND SEPARATION FROM SOUTHERN COMPANY

On April 17, 2000 the Company and Southern Company approved plans to
execute a 272,000 to 1 stock split and register with the Securities and Exchange
Commission 66,700,000 new shares of Southern Energy common stock with an
anticipated offering price of $16.00 (the "Stock Offering"). The Stock Offering
is expected to reduce Southern's ownership to approximately 80%. There can be no
assurance that this Stock Offering will be completed.

In conjunction with the Stock Offering, the Company will convert the
indexed units outstanding under the Value Creation Plan (Note 6 of the Notes)
into stock appreciation rights and will convert the standard units outstanding
under the Value Creation Plan (Note 6 of the Notes) into options to purchase
shares of the Company's common stock. The intrinsic value of the options will
equal the final value of standard units being converted. The standard units have
been treated under variable plan accounting as prescribed by APB Opinion No. 25.
Upon conversion to stock options, fixed plan accounting, as prescribed by APB
Opinion No. 25, will be followed. Under fixed plan accounting, the difference
between the fair value of the options at the date of the initial public offering
and their value at the date of grant that has not been previously expensed under
variable plan accounting will be recorded as compensation expense over the
remaining vesting period of the options.

The options will have a vesting period and life consistent with the
standard units under the value creation plan. These vesting periods and lives
will not begin anew upon conversion; rather, they will continue from their
original inception dates. The graded vesting period of standard units granted
prior to 2000 was four years; the 2000 grant has a graded vesting period of
three years. The Company recorded approximately $1.7 million during 1999 as
compensation expense for the standard units, approximately $500,000 for the six
months to June 2000, and expects to record an additional $21 million as
compensation expense over the remaining weighted average vesting period of 2.33
years (from June 30, 2000), based on the anticipated offering price of $16.00.

In conjunction with the Stock Offering, employees will be granted
approximately 2,050,000 options to purchase our stock at the IPO price. The
options will have a 10 year term and vest ratably over 3 years. Certain of our
senior executives will be granted an aggregate of approximately 400,000
restricted stock units. Vesting of the Restricted Stock units will be based on
increases in our stock price. Each time our stock price increases 20% over the
offering price, 20% of the Restricted Stock units will vest.

Within twelve months following the completion of the Stock Offering,
Southern Company plans to distribute all of the remaining shares of the Company
owned by Southern Company to the holders of Southern common stock. There can be
no assurance that this distribution will be completed.

In connection with the completion of the distribution, substitute options
for the Company's common stock will be issued to our employees in exchange for
their Southern Company options. The

F-10
<PAGE> 175
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

conversion process will follow FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation," which dictates the
following:

- The aggregate face value of the options immediately after the conversion
will be equal to the aggregate face value prior to the conversion.

- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.

See Note 6 of the Notes where Southern options held by the Company's
officers and employees are further discussed.

The Company has negotiated service agreements with Southern to provide
transition services following the initial public offering of the Company's
shares in the areas of finance, accounting, human resources, auditing, legal,
information technology and engineering services. These services will be provided
at cost or at fair market value, whichever is greater. The Company has the
option to decline or terminate service with reasonable advance notice. Under
arrangements for similar services currently in effect with Southern and its
operating companies, under which services are provided at cost, the Company paid
$20 million in 1999. See Note 5 of the Notes.

Also on April 17, 2000, the Company's and Southern's respective boards of
directors voted to transfer Southern Energy's leveraged lease and capital
funding subsidiaries to Southern. These transfers are contingent upon the
successful completion of the Stock Offering. The Company's interest in its SE
Finance leveraged leasing subsidiary has been treated as a discontinued
operation in the accompanying financial statements. The Company and Southern are
currently in the process of determining the most appropriate structure for the
transaction by which Southern Energy will transfer its ownership interest in SE
Finance and its capital funding subsidiary to Southern.

In addition to the proposed common stock offering, the Company has filed a
registration statement with the Securities and Exchange Commission for an
underwritten public offering of convertible trust preferred securities. The
securities would be issued by a limited purpose Delaware trust which would use
the proceeds to purchase from the Company the same principal amount of the
Company's convertible junior subordinated debt securities. The net proceeds
would be used by the Company to repay short-term debt and for general corporate
purposes. There can be no assurance that the issuance of convertible trust
preferred securities will be completed.

DIVIDEND TO SOUTHERN. A short-term credit facility was obtained by the
Company to fund the remaining cash dividend payments to Southern in the
aggregate amount of $53 million. Pro forma balance sheet and basic earnings per
share data for 1999 gives effect to such dividend in accordance with Staff
Accounting Bulletin Topic 1:B:3.

POTOMAC ELECTRIC POWER COMPANY ("PEPCO"). On June 8, 2000, the Company
announced it had entered into an agreement to purchase the bulk of PEPCO's
electric generation business for $2.65 billion plus amounts to be determined for
working capital and approximately $260 million in the event certain purchase
power agreements are not transferred to the Company. The transaction is expected
to be completed in late 2000 and will be accounted for by the Company as a
purchase.

SE CALIFORNIA. On June 7, 2000, the administrative law judge ("ALJ")
presiding over the proceeding between SE California and the CAISO (See Note 1
and Note 11 of the Notes) issued an initial decision in which the ALJ allocated
responsibility for payment of approximately 3% of the

F-11
<PAGE> 176
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revenue requirement to the CAISO. On July 7, 2000, SE California filed an appeal
of the ALJ's decision with the FERC. The outcome of this appeal is uncertain. A
final FERC order in this proceeding may be appealed to the U.S. Court of
Appeals. If SE California is ultimately unsuccessful in its appeal of the ALJ's
decision, SE California will be required to refund certain amounts of the
revenue requirement billed to the CAISO for the period from June 1, 1999 until
the final disposition of the appeal. The amount of this refund as of June 30,
2000 would have been approximately $94 million and would have reduced net income
by approximately $33 million. These amounts do not include interest that would
be payable in the event of a refund. The Company's failure to prevail in this
matter would adversely affect its results of operations.

CEMIG. SEB obtained financing from Banco Nacional De Desenvolvimento
Economico e Social (BNDES) for approximately 50% of the total purchase price of
the CEMIG shares which is secured by a pledge of SEB's shares in CEMIG. A
portion of a principal payment that was originally due May 15, 2000, in an
amount of $9.2 million, has been deferred. SEB paid $2.2 million of this
principal payment on May 15, 2000 and expects to pay the remaining $7.0 million
on September 15, 2000. An interest payment of $107.8 million, also due on May
15, 2000, has been deferred until May 15, 2001.

ALICURA. On February 21, 2000, we executed a stock purchase agreement with
The AES Corporation to sell our interest in Alicura. The Closing was expected to
occur on June 28, 2000; however, it has not yet occurred. We cannot assure you
that this transaction will be consummated.

K. SUBSEQUENT EVENTS

The pro forma balance sheet and earnings per share data included herein
gives effect to the payment of the remaining $53 million of the $503 million
dividend to Southern (Note J). As of June 30, 2000, the remaining of the
dividend of $53 million had been declared but not paid. Subsequent to the
balance sheet date, the $53 million payment was made.

TURBINE PURCHASES. The Company has entered into agreements to purchase
additional turbines to support planned expansion efforts. Total amounts to be
paid under the new agreements if all turbines are purchased as planned are
estimated to be $561 million.

SCEM. On August 10, 2000, we and Vastar entered into a non-binding letter
agreement in which we agreed to acquire Vastar's 40% interest in SCEM for $250
million. Contingent upon the negotiation of definitive agreements and the
receipt of applicable regulatory approvals, we expect to close this transaction
as early as August 30, 2000. Upon the closing of the transaction, Vastar will
transfer its interest in SCEM to us and SCEM will become our wholly owned
subsidiary.

As part of the proposed transaction, the remaining seven and one half years
of the gas purchase and sale agreement between SCEM and Vastar will remain in
effect. Accordingly, SCEM will continue to purchase and market the natural gas
produced by Vastar. As part of the proposed transaction, we would be relieved of
any financial obligations to Vastar under the SCEM partnership agreement,
including any guaranteed minimum cash distributions and any outstanding
arbitration.

F-12
<PAGE> 177
SOUTHERN ENERGY, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

August 17, 2000 was the last day for submission of revised offers, no other
revised offers were submitted, and WPD Limited was informed by the Takeover
Panel in the United Kingdom that it was the higher bidder. WPD Limited's
increased bid had not yet been formally announced pending the outcome of an
appeal by the other party competing to acquire Hyder against a ruling of the
Panel Executive allowing the WPD Limited bid to proceed. On Wednesday, August
16, 2000, the Takeover Panel announced that the parties' appeal was rejected. If
WPD Limited's bid for Hyder plc is successful, WPD intends to become involved in
the management of the electricity network in South Wales.

F-13
<PAGE> 178

After the stock split discussed in Note 17 to Southern Energy, Inc.'s
consolidated financial statements is effected, we expect to be in a position to
render the following audit report.

/s/Arthur Andersen LLP

February 16, 2000

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Southern Energy, Inc.:

We have audited the accompanying consolidated balance sheets of SOUTHERN
ENERGY, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1998
and 1999, and the related consolidated statements of income, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Energy, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

Atlanta, Georgia
February 16, 2000 (except with respect to
the matters discussed in Notes 15 and 17,
as to which the date is _________ )

F-14
<PAGE> 179

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN MILLIONS)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 561 $ 323
Restricted deposits (Note 1)................................ 59 50
Receivables:
Customer accounts, less provision for uncollectibles of
$34 and $23 for 1998 and 1999, respectively............. 212 236
Other, less provision for uncollectibles of $67 and $21
for 1998 and 1999, respectively......................... 521 481
Other....................................................... 113 195
------- -------
Total current assets.................................... 1,466 1,285
------- -------
PROPERTY, PLANT, AND EQUIPMENT (NOTES 2 AND 4):............. 3,108 4,147
Less accumulated provision for depreciation................. (312) (421)
------- -------
2,796 3,726
Leasehold interests, net of accumulated amortization of $85
and $137 for 1998 and 1999, respectively (Note 1)......... 927 1,934
Construction work in progress............................... 968 365
------- -------
Total property, plant, and equipment, net............... 4,691 6,025
------- -------
NONCURRENT ASSETS:
Concession agreement, net of accumulated amortization of $84
and $90 for 1998 and 1999, respectively (Notes 1 and 2)... 258 268
Investments (Notes 1, 3, 12 and 13)......................... 1,540 1,490
Notes and other receivables, less provision for
uncollectibles of $40 and $61 for 1998 and 1999,
respectively.............................................. 1,216 1,276
Goodwill, net of accumulated amortization of $106 and $164
for 1998 and 1999, respectively (Notes 1 and 12).......... 2,125 2,106
Other intangible assets, net of accumulated amortization of
$0 and $13 for 1998 and 1999, respectively (Notes 1 and
12)....................................................... 154 447
Investment in leveraged leases (Note 14).................... 264 556
Miscellaneous deferred charges.............................. 340 410
------- -------
Total noncurrent assets................................. 5,897 6,553
------- -------
Total assets............................................ $12,054 $13,863
======= =======

LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt (Note 7).................................... $ 702 $ 1,961
Note payable to Southern Company (Notes 5 and 7)............ 926 0
Current portion of long-term debt (Note 7).................. 480 237
Accounts payable............................................ 564 626
Taxes accrued............................................... 196 218
Other....................................................... 184 173
------- -------
Total current liabilities............................... 3,052 3,215
------- -------
NONCURRENT LIABILITIES:
Subsidiary obligated mandatorily redeemable preferred
securities (Note 7)....................................... 1,033 1,031
Notes payable (Note 7)...................................... 3,499 4,557
Other long-term debt (Note 7)............................... 420 397
Deferred income taxes (Note 8).............................. 573 680
Miscellaneous deferred credits.............................. 300 156
------- -------
Total noncurrent liabilities............................ 5,825 6,821
------- -------
MINORITY INTEREST IN SUBSIDIARY COMPANIES................... 535 725
------- -------
COMMITMENTS AND CONTINGENT MATTERS (NOTES 3, 7, 10, AND 11)

STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 272,000,000 shares issued and outstanding
(Note 17)................................................. 3 3
Additional paid-in capital.................................. 2,624 2,984
Accumulated other comprehensive income (loss)............... 15 (92)
Retained earnings........................................... 0 207
------- -------
Total stockholder's equity.............................. 2,642 3,102
------- -------
Total liabilities and stockholder's equity.............. $12,054 $13,863
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-15
<PAGE> 180

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
OPERATING REVENUES.......................................... $3,750 $1,819 $2,268
------ ------ ------
OPERATING EXPENSES:
Fuel........................................................ 74 47 392
Purchased power............................................. 2,813 844 545
Maintenance................................................. 74 80 116
Depreciation and amortization............................... 182 221 270
Selling, general, and administrative........................ 188 160 253
Write-down of assets (Note 2)............................... 0 308 60
Other....................................................... 147 164 188
------ ------ ------
Total operating expenses.................................. 3,478 1,824 1,824
------ ------ ------
OPERATING INCOME (LOSS)..................................... 272 (5) 444
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income............................................. 138 146 172
Interest expense............................................ (345) (430) (502)
Gain on sales of assets (Note 12)........................... 24 41 313
Equity in income of affiliates (Notes 1, 3, and 13)......... 58 135 111
Receivables recovery (Note 1)............................... 0 29 64
Other, net.................................................. 33 29 72
------ ------ ------
Total other (expense) income.............................. (92) (50) 230
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST..................................... 180 (55) 674
PROVISION (BENEFIT) FOR INCOME TAXES:
Continuing operations....................................... 27 (123) 129
Windfall profits tax........................................ 148 0 0
------ ------ ------
Total Provision (Benefit) for Income Taxes................ 175 (123) 129
MINORITY INTEREST........................................... 29 80 183
------ ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (24) (12) 362
------ ------ ------
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF
$10, $22, AND $15 IN 1997, 1998, AND 1999, RESPECTIVELY... 8 12 10
------ ------ ------
(LOSS) NET INCOME........................................... $ (16) $ 0 $ 372
====== ====== ======
(LOSS) EARNINGS PER SHARE:
Basic
From continuing operations................................ $(0.09) $(0.04) $ 1.33
From discontinued operations.............................. 0.03 0.04 0.04
------ ------ ------
Net income................................................ $(0.06) $ -- $ 1.37
====== ====== ======
Pro forma basic -- unaudited (Note 17)
From continuing operations................................ $ 1.19
From discontinued operations.............................. 0.04
------
Net income................................................ $ 1.23
======
Pro forma diluted -- unaudited (Note 17)
From continuing operations................................ $ 1.19
From discontinued operations.............................. 0.03
------
Net income................................................ $ 1.22
======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-16
<PAGE> 181

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) (LOSS) INCOME
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. 3 $ 955 $ 16 $ 14
Net loss.............................. 0 0 (16) 0 $ (16)
Cumulative translation adjustment, net
of tax............................. 0 0 0 (7) (7)
-----
Comprehensive loss.................... $ (23)
=====
Capital contributions................. 0 1,167 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1997.............. 3 2,122 0 7
Net income............................ 0 0 0 0 $ 0
Cumulative translation adjustment, net
of tax............................. 0 0 0 8 8
-----
Comprehensive income.................. $ 8
=====
Capital contributions................. 0 502 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1998.............. 3 2,624 0 15
Net income............................ 0 0 372 0 $ 372
Cumulative translation adjustment, net
of tax............................. 0 0 0 (107) (107)
-----
Comprehensive income.................. $ 265
=====
Dividends............................. 0 0 (165) 0
Capital contributions................. 0 360 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1999.............. 3 $2,984 $ 207 $ (92)
==== ====== ===== =====
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-17
<PAGE> 182

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (16) $ 0 $ 372
------- ------- -------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in income of affiliates............................ (53) (121) (95)
Depreciation and amortization............................. 203 229 286
Write-down of assets...................................... 0 308 60
Deferred income taxes..................................... 15 (40) 166
Gain on sales of assets................................... (24) (41) (313)
Minority interest......................................... 29 80 183
Other, net................................................ 15 (27) (93)
Changes in certain assets and liabilities, excluding
effects from acquisitions:
Receivables, net........................................ (214) 133 (133)
Other current assets.................................... 38 (47) (15)
Accounts payable........................................ 137 (141) (81)
Taxes accrued........................................... 114 (12) 22
Other current liabilities............................... 20 81 156
------- ------- -------
Total adjustments..................................... 280 402 143
------- ------- -------
Net cash provided by operating activities............. 264 402 515
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (720) (647) (747)
Cash paid for acquisitions.................................. (2,925) (998) (1,771)
Funds loaned to Southern Company............................ (619) (361) 0
Purchase of preferred shares................................ 0 0 (121)
Property insurance proceeds................................. 0 0 34
Proceeds received from the sale of investments (Note 12).... 32 198 284
Dividends received from equity investments.................. 29 67 58
------- ------- -------
Net cash used in investing activities................. (4,203) (1,741) (2,263)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Southern Company................. 1,167 502 360
Capital contributions from minority interests............... 0 0 18
Issuance of notes receivable................................ (84) (191) (199)
Repayments on notes receivable.............................. 231 398 341
Payment of dividends to Southern Company.................... 0 0 (165)
Payment of dividends to minority interests.................. (7) (22) (66)
Proceeds from issuance of short-term debt, net.............. 749 122 358
Proceeds from issuance of long-term debt.................... 1,847 730 1,372
Proceeds from issuance of subsidiary obligated mandatorily
redeemable preferred securities........................... 672 338 0
Repayment of long-term debt................................. (398) (375) (503)
------- ------- -------
Net cash provided by financing activities............. 4,177 1,502 1,516
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (1) -- (6)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 237 163 (238)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 161 398 561
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 398 $ 561 $ 323
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized.......... $ 269 $ 349 $ 419
======= ======= =======
Cash paid (refunds received) for income taxes............... $ 66 $ (33) $ (114)
======= ======= =======
BUSINESS ACQUISITIONS:
Fair value of assets acquired............................... $ 4,768 $ 1,072 $ 1,803
Less cash paid.............................................. 2,925 998 1,771
------- ------- -------
Liabilities assumed....................................... $ 1,843 $ 74 $ 32
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-18
<PAGE> 183

SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Southern Energy, Inc. is a wholly owned subsidiary of Southern Company
("Southern" or the "Parent") and was incorporated in Delaware in 1993. Southern
Energy, Inc. and its subsidiaries (collectively, "Southern Energy" or the
"Company") acquire, develop, build, own, and operate power production and
delivery facilities and provide a broad range of energy-related services to
utilities and industrial companies around the world. The Company's business
includes independent power projects, integrated utilities, a distribution
company, and energy marketing and trading operations. Southern Energy has
operations and development offices in North America and the Caribbean, Asia,
Europe, and South America. Additionally, the Company operates a business
development and management entity. Operating entities, of which the Company has
less than 100% ownership, are as follows:

<TABLE>
<CAPTION>
ECONOMIC VOTING
OWNERSHIP INTEREST
PERCENTAGE AT PERCENTAGE
COUNTRY OF YEAR OF DECEMBER 31, DECEMBER 31,
OPERATIONS INVESTMENT 1999 1999
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ENTITIES CONSOLIDATED:
Western Power Distribution ("WPD"),
formerly "SWEB" (Note 2)............ United Kingdom 1995 49.0% 50.5%
Hidroelectrica Alicura S.A.
("Alicura") (Note 2)................ Argentina 1993 55.1 55.1
EDELNOR S.A. (Note 2)................. Chile 1993 82.3 82.3
Freeport Power Company................ Bahamas 1993 62.5 62.5
ENTITIES NOT CONSOLIDATED, ACCOUNTED
FOR UNDER EQUITY METHOD:
Southern Company Energy Marketing LP
("SCEM")............................ United States 1997 60.0 60.0
Birchwood Power Partners L.P.
("Birchwood")....................... United States 1994 50.0 50.0
BEWAG AG ("BEWAG").................... Germany 1997 26.0 28.7
Guangdong Guanghope Power Company
Limited ("Shajiao C")............... China 1997 32.0 44.44
Companhia Energetica de Minas Gerais
("CEMIG")........................... Brazil 1998 3.6 8.24
The Power Generation Company of
Trinidad and Tobago ("PowerGen").... Trinidad 1994 39.0 39.0
Shandong International Power
Development Company Limited
("SIPD")............................ China 1999 9.9 9.9 to 38
Carbontronics Synfuels Investors LP... United States 1998 25.0 25.0
Clairton 1314B LLC.................... United States 1997 27.0 27.0
</TABLE>

F-19
<PAGE> 184
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
ECONOMIC VOTING
OWNERSHIP INTEREST
PERCENTAGE AT PERCENTAGE
COUNTRY OF YEAR OF DECEMBER 31, DECEMBER 31,
OPERATIONS INVESTMENT 1999 1999
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ENTITY NOT CONSOLIDATED, ACCOUNTED FOR
UNDER COST METHOD:
Mobile Energy Services Company, LLC
("Mobile Energy")................... United States 1994 1.0 1.0
</TABLE>

Mobile Energy's remaining 99% ownership interest is held by Southern. Southern
Energy currently has a 49% economic interest in WPD Holdings UK, the UK parent
of WPD, yet retains operational and management control with 50.5% of the voting
rights and the right to appoint a majority of the board of directors. The
Company's economic interest in Shajiao C is stated after a preferential
distribution to Guangdong Generation Corporation, the joint venture partner in
China. The Company's voting interest in SIPD can increase to 38% when certain
shareholders become ineligible to vote on matters when there is a conflict of
interest, according to rules governing the listing of securities on the Stock
Exchange of Hong Kong Ltd.

BASIS OF PRESENTATION

The consolidated financial statements of the Company are presented in U.S.
dollars in conformity with accounting principles generally accepted in the
United States ("U.S. GAAP"). The accompanying financial statements have not been
prepared in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
pronouncement, under which most rate regulated U.S. electric utilities report
financial statements, applies to entities that are subject to cost-based rate
regulation. By contrast, the Company's operating investments generally are not
subject to cost-based rate regulation, and therefore, the provisions of SFAS No.
71 do not apply. Financial statements presented in accordance with SFAS No. 71
contain deferred items which have not yet been included in rates charged to
customers in compliance with the respective regulatory authorities, but which
would have been included in the income statement of enterprises in general under
U.S. GAAP. The accompanying financial statements of the Company do not contain
such deferrals.

The financial statements include the accounts of the Company and its wholly
owned and its controlled majority-owned subsidiaries and have been prepared from
records maintained by the Company and its subsidiaries in their respective
countries of operation. Certain prior year amounts have been reclassified to
conform with the current year financial statement presentation.

All significant intercompany accounts and transactions have been eliminated
in consolidation. Investments in companies in which the Company exercises
significant influence over operating and financial policies are accounted for
using the equity method. In addition, majority or jointly owned affiliates where
control does not exist are accounted for using the equity method of accounting.
Mobile Energy is the only investment accounted for using the cost method.

F-20
<PAGE> 185
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

REVENUE RECOGNITION

Revenues derived from power generation are recognized upon output, product
delivery, or satisfaction of specific targets, all as specified by contractual
terms. To the extent that power generation billings exceed the cumulative
average price per unit delivered, cumulative average revenues are recorded.
Substantially all of the Company's energy trading and marketing operations are
accounted for under a mark-to-market accounting methodology.

CONCENTRATION OF REVENUES AND NET INCOME

For the year ended December 31, 1999 approximately 14% and 35% of our
revenues and net income, respectively, were attributable to sales made by our
Philippine operations under power sales agreements with National Power
Corporation (NPC). NPC has long-term contractual agreements to purchase future
power production. These agreements are supported by a sovereign guarantee by the
Philippines' government. If this agreement were terminated, it could have a
material adverse effect on the future operating results and liquidity of the
Company.

CASH AND CASH EQUIVALENTS

The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.

LONG-LIVED ASSETS AND INTANGIBLES

The Company records goodwill for the difference between the excess of the
fair value of investments over the purchase price. Goodwill is amortized on a
straight-line basis over a period between 30 and 40 years. The Company
recognizes specifically identifiable intangibles when specific rights and
contracts are acquired. These intangibles are amortized on a straight-line basis
over the lesser of their contractual or estimated useful lives between 20 and 30
years. The Company evaluates long-lived assets, such as property, plant and
equipment, goodwill, and specifically identifiable intangibles, when events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. The determination of whether an impairment has occurred is based
on an estimate of undiscounted cash flows attributable to the assets, as
compared to the carrying value of the assets. If an impairment has occurred, the
amount of the impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying value is
greater than fair value. For assets identified as held for sale, the carrying
value is compared to the estimated fair value less cost to sell to determine if
an impairment provision is required. Until the assets are disposed of, their
estimated fair value is reevaluated when circumstances or events change.

F-21
<PAGE> 186
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTRICTED DEPOSITS

The Company has restricted deposits for self-insurance reserves,
contractual, legal, or other corporate purposes.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are recorded at cost to the Company, which
includes materials, labor, appropriate administrative and general costs, and the
estimated cost of debt funds used during construction. The cost of maintenance,
repairs, and replacement of minor items of property is charged to maintenance
expense as incurred.

Depreciation of the recorded cost of depreciable property, plant, and
equipment is provided by using primarily composite straight-line rates (Note 4).
Leasehold improvements are amortized over the shorter of the respective lease
terms or the useful lives of the improvements. The Company's capitalization
policy expenses the cost of certain immaterial assets when purchased.

Upon the retirement or sale of assets, the cost of such assets and the
related accumulated depreciation are removed from the balance sheet and the gain
or loss, if any, is credited or charged to income.

LEASEHOLD INTERESTS

Certain of SE Asia Pacific Limited's ("SE Asia-Pacific") (formerly
Consolidated Electric Power Asia Limited) power generation facilities are
developed under "build, operate, and transfer agreements" ("BOT") with the
respective local country government. Under these agreements, SE Asia-Pacific
builds power generation facilities, operates them for a period of several years
(a "cooperation period"), and transfers ownership to the local country
government at the end of the cooperation period. Additionally, the land subject
to the BOT agreements is not controlled by SE Asia-Pacific. During construction,
the cost of these facilities is recorded as construction work in progress. Upon
completion of a facility, its entire cost is reclassified to leasehold interests
where the balance is amortized over the length of the respective cooperation
period.

CONCESSION AGREEMENT

The amount recorded as a concession agreement in the accompanying balance
sheets corresponds with the total value, net of amortization, assigned by the
Argentine government to the assets delivered to Alicura for operating purposes
pursuant to the concession contract for the Alicura hydroelectric complex. This
value was originally determined, without allocating any specific value to each
of the assets involved in the concession, based on the amount paid by the
Company to acquire 59% of the share capital of the company which holds the
concession, plus the proportion of the capital retained by the Argentine
government (41%), plus the liabilities undertaken by the concessionaire upon
signing the concession contract and the disbursements incurred by the Company
and subsequently transferred to Alicura to effect the acquisition.

This intangible asset is being amortized using the straight-line method
over 30 years (the concession period) from August 1993, which was the takeover
date of the hydroelectric complex.

F-22
<PAGE> 187
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During December 1998, Southern Energy, having received the appropriate
approval from executive management and the board of directors, committed itself
to a formal plan to dispose of its investment in Alicura. See Notes 2 and 17 for
further discussion.

LEVERAGED LEASES

The Company's net investment in leveraged leases consist of rentals
receivable, net of principal and interest on the related nonrecourse debt, the
estimated residual value of the leased facilities, and unearned income. The
earned income is included in the consolidated statements of income. Initial
direct costs incurred in consummating a leveraged lease transaction are
accounted for as part of the investment in the lease and are amortized over the
term of the lease.

INCOME TAXES

SFAS No. 109, "Accounting for Income Taxes," requires the asset and
liability approach for financial accounting and reporting for deferred income
taxes. The Company uses the liability method of accounting for deferred income
taxes and provides deferred income taxes for all significant income tax
temporary differences.

RECEIVABLES RECOVERY

In 1998 and 1999, the Company received amounts totaling approximately $29
million and $64 million, respectively, plus related interest in successful
resolution of negotiations by the Company with its supplier and partners in
China which allowed it to collect receivables that were assumed in conjunction
with the SE Asia-Pacific business acquisition. At the time of the purchase, the
Company did not place value on the receivables due to the uncertain credit
standing of the parties with whom the receivables were secured. The Company has
rights to an additional $40 million, plus related interest, as of December 31,
1999, which it has fully reserved due to the risk of collection.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of international operations where the local currency
is the functional currency have been translated at year-end exchange rates, and
revenues and expenses have been translated using average exchange rates
prevailing during the year. Adjustments resulting from translation have been
recorded in other comprehensive income. The financial statements of
international operations where the U.S. dollar is the functional currency
reflect certain transactions denominated in a local currency that have been
remeasured in U.S. dollars. The remeasuring of local currencies into U.S.
dollars creates gains and losses from foreign currency transactions that are
included in net income in the amount of $(2), $4 and $2 million for 1997, 1998,
and 1999, respectively. The effect of the translation adjustment on other
comprehensive income is disclosed in the statements of stockholder's equity.

COMPREHENSIVE INCOME

The Company's comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the financial statements.
The objective of the statement is to report a

F-23
<PAGE> 188
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

measure of all changes in common stock equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners.

FINANCIAL INSTRUMENTS

Southern Energy engages in price risk management activities for both
nontrading and trading purposes. Nontrading financial instruments are used to
hedge exposures to fluctuations in interest rates, foreign currency exchange
rates, and certain commodity prices. Gains and losses on qualifying hedges are
deferred and recognized either in income or as an adjustment to the carrying
amount when the hedged transaction occurs.

Financial instruments used for trading purposes are recorded at either
quoted market value or, when market prices are not readily available for
specific contracts, at fair value, which is determined under an alternative
approach, such as model pricing. The determination of market or fair value
considers various factors, including closing exchange or over-the-counter
("OTC") market price quotations, time value and volatility factors underlying
options and contractual commitments, price activity for equivalent or synthetic
instruments in markets located in different time zones, counterparty credit
quality, and the potential impact on market prices of liquidating the Company's
positions in an orderly manner over a reasonable period of time under present
market conditions. All trading transactions and related expenses are recorded on
a trade-date basis. See Note 9 where financial instruments are discussed
further.

NEW ACCOUNTING STANDARDS

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued a new Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement requires capitalization of certain costs of internal-use software.
Southern Energy adopted this statement in December 1998 without a material
impact on the financial statements.

The American Institute of Certified Public Accountants' SOP 98-5,
"Reporting on the Costs of Start-Up Activities," was implemented in the fourth
quarter of 1998. This statement requires that costs of start-up activities and
organizational costs be expensed as incurred. The new accounting requirement did
not have a significant effect on net income.

In December 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." The EITF
requires that energy trading contracts be marked to market through the income
statement, with gains or losses reflected rather than revenues and purchased
power. Energy trading contracts are defined as energy contracts entered into
with the objective of generating profits on or from exposure to shifts or
changes in market prices. The adoption of this accounting in January 1999 did
not have a material impact on the financial statements.

The Company continues to analyze the effects of adoption of the rules
promulgated by SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts, and for hedging activities. The FASB recently deferred
implementation of the provisions of SFAS No. 133 to fiscal periods beginning
after June 15, 2000. The Company

F-24
<PAGE> 189
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

intends to adopt the provisions of SFAS No. 133 within this time frame and in
accordance with the requirements provided by this statement. Management is
currently assessing the financial statement impact of the statement, but we have
not determined the impact at this time. Adoption of SFAS No. 133 could increase
the volatility of earnings and other comprehensive income.

2. WRITE-DOWN OF ASSETS

In December 1998, Southern Energy designed and implemented a plan to
dispose of its Argentine and Chilean investments. As a result, Southern Energy
recorded a write-down of approximately $308 million in 1998 to reflect the
difference between the carrying value of these assets and the estimated fair
value of the businesses. The Company recorded an additional write-down of $28
million in 1999 to eliminate the impact of net earnings from the investments, in
order to prevent increasing the carrying value of these assets above their
estimated fair market value. Depreciation expense was suspended at the time of
the initial write-down. Southern Energy estimated the fair value of the
businesses held for sale based on bids received from prospective buyers, if
available, or the discounted expected future cash flows to be generated by the
assets. The adjusted carrying value of the Argentine and Chilean assets held for
disposal at December 31, 1999 was $92 million. See Note 17 for further
discussion. These assets impacted the financial statements of income as follows
(in millions):

<TABLE>
<CAPTION>
OPERATING OPERATING CONSOLIDATED
REVENUES INCOME NET INCOME
--------- --------- ------------
<S> <C> <C> <C>
Year:
1997..................................................... $180 $37 $5
1998..................................................... 180 37 5
1999..................................................... 171 23 2
</TABLE>

Additionally during 1999, Southern Energy recorded a write-down of
approximately $14 million, which primarily related to its interest in the
write-down of $31 million of WPD metering assets. These assets are to be held
and used by WPD. Future cash flows will be derived from competitive markets
being introduced in the UK for metering activities. An estimate of these
undiscounted future cash flows was compared to the carrying value of the assets
and it was determined that the assets were impaired. The fair value of the
assets was then determined by discounting the future cash flows. The amount of
the write-down was then computed by comparing the carrying value to the fair
value of the assets.

3. JOINT VENTURE INFORMATION

On September 1, 1997, Southern Energy and Vastar Resources, Inc. ("VRI")
entered into a 99-year partnership agreement designed to further develop both
parties' energy marketing and risk management operations and formed SCEM. Also
on such date, Southern Energy contributed $24.1 million, which includes
substantially all of its gas marketing and risk management assets and a working
capital contribution to the venture. As part of this transaction, VRI
contributed substantially all of the operating assets of Vastar Gas Marketing,
Inc. (a wholly owned subsidiary of VRI) to SCEM on September 1, 1997.

F-25
<PAGE> 190
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 1, 1998, VRI contributed substantially all operating assets of
Vastar Power Marketing, Inc. (a wholly owned subsidiary of VRI) to SCEM;
concurrently, certain long-term natural gas supply contracts were contributed by
Vastar Gas Marketing, Inc. Additionally, on January 1, 1998, Southern Energy
paid VRI $40 million and contributed $14.1 million, or substantially all of the
remaining energy marketing and trading assets of Southern Energy Trading and
Marketing, Inc., to SCEM.

Historical cost was used, as Southern Energy and VRI accounted for their
respective initial investments in SCEM as a joint venture. However, due to the
fact that both entities were marketing and energy trading operations,
substantially all of the contributed assets and liabilities were accounted for
using mark-to-market accounting. The partnership agreement provides both
Southern Energy and VRI with significant participatory rights with respect to
the operations of SCEM. Accordingly, Southern Energy accounts for its interest
in the joint venture under the equity method of accounting.

The general and limited partnership interest is 60% owned, indirectly, by
Southern Energy and 40% owned, indirectly, by VRI. Income and partnership
distributions will be made according to the ownership percentage, subject to
certain minimum distributions, provided for by the partnership agreement, to VRI
for the first five years of the partnership. These minimum distributions can be
reduced in the event that certain extraordinary items are experienced by SCEM.
To date, the Company has only paid VRI $5.8 million for the 1998 minimum
distribution as a result of credit losses in 1998. VRI believes it is entitled
to a higher payment and has requested arbitration in the matter. The Company
does not believe that the outcome of this matter will have a material effect on
its financial statements.

Under the partnership agreement, Southern Energy's ownership interest
automatically increases to 75% of SCEM on July 1, 2001. During calendar year
2002, Southern Energy may exercise a call provision to purchase an additional 5%
interest for $80 million. Beginning December 1, 2002 and ending January 2, 2003,
VRI may put its remaining ownership interest to Southern Energy for an amount of
either $130 million or $210 million depending on the interest owned by VRI at
that time, plus certain other contractual considerations. Both of these put and
call provisions provide for cash payments equal to the pro rata portion of
certain unamortized capital expenditures and the pro rata portion of the market
or fair values of financial instruments owned by the partnership on the date of
the option exercise. The partnership agreement also provides that in the event
of a change of control of VRI or the Company, the other party has a right to
purchase the interest in SCEM owned by the party affected by the change of
control. The purchase price would be determined by an appraisal.

4. PROPERTY, PLANT, AND EQUIPMENT

The Company records depreciation expense on a straight-line basis, using
the following estimated useful lives (in years):

<TABLE>
<S> <C>
Production.................................................. 15 to 40
Transmission and distribution............................... 35 to 40
Other....................................................... 3 to 30
</TABLE>

F-26
<PAGE> 191
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property, plant, and equipment consisted of the following at December 31,
1998 and 1999 (in millions):

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Production.................................................. $ 551 $1,615
Transmission and distribution............................... 2,463 2,417
Other....................................................... 94 115
------ ------
$3,108 $4,147
====== ======
</TABLE>

5. RELATED-PARTY TRANSACTIONS

The Company has agreements with Southern Company Services, Inc. (a wholly
owned subsidiary of Southern) and each of the system operating companies owned
by Southern under which those companies provide the following services to the
Company at cost: general engineering, design engineering, accounting and
statistical budgeting, business promotion and public relations, systems and
procedures, training, and administrative and financial services. In addition to
these services, certain facilities of the system companies are made available to
the Company and its customers. The Company reimburses the service company and
the various system operating companies at cost for these services. Such costs
amounted to approximately $28 million, $17 million, and $20 million, during
1997, 1998, and 1999, respectively.

The Company incurred interest expense on a note payable to Southern Company
of $17 million $53 million, and $37 million during 1997, 1998, and 1999,
respectively. See Note 7 for discussion of related-party debt transactions.

The Company has various agreements with SCEM in which SCEM has agreed to
develop and manage its bidding strategy, manage fuel requirements, sell the
energy and provide accounting and settlement services for several generating
plants of the Company. These agreements apply to the Company's California, New
York, and New England operating entities and generally cover a term of 1 to 2.5
years. The first of these agreements was in place in December 1998 and the most
recent in July 1999 as amended in January 2000. Total fees paid to SCEM under
the marketing agreements totaled $16.8 million in 1999, and payments made for
fuel to SCEM totaled $257.9 million.

In January 1999, the Company contracted with SCEM to operate and maintain
the generating assets of Brazos Electric Power Cooperative in Texas for a period
of five years ending 2003.

For all agreements, the Company has obligated itself to meet certain
operating factors.

The Company's revenues and expenses related to its agreements with SCEM
during 1999 were $445.1 million and $274.7 million, respectively. Intercompany
profits and losses recognized by SCEM on a market to market accounting basis are
appropriately eliminated in consolidation. Activity with SCEM during 1998 was
not material to the Company.

F-27
<PAGE> 192
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. EMPLOYEE BENEFIT PLANS

PENSION PLANS

The Company offers pension benefits to its WPD, Freeport Power Company and
North American employees, through various pension plans.

WPD participates in the Electricity Supply Pension Scheme ("ESPS"), which
provides pension and other related defined benefits based on final pensionable
pay to substantially all employees throughout the electricity supply industry in
the United Kingdom. The measurement date for WPD is December 31 for each year
presented. See Note 11 for further discussion.

As a result of WPD's sale to London Electricity of its supply business
(Note 12) during 1999, a curtailment and settlement of a portion of WPD's
pension plan occurred for the pension assets and obligations that transferred to
the buyer. In accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", a curtailment gain of $5 million and a settlement loss of
$14 million were recorded during 1999 in conjunction with this event.

Southern Energy participates in the Southern Company Pension Plan, a
defined benefit, trusteed, noncontributory plan covering substantially all
regular employees. The measurement date for the Domestic Benefit Plans is
September 30 for each year presented.

Freeport Power Company participates in a defined benefit, trusteed,
contributory pension plan that covers substantially all union employees. Plan
benefits are based on the employees' years of service and employment grades.
Plan assets are primarily invested in equity and debt securities. The
measurement date for Freeport Power is December 31 for each year presented.

All employees of Freeport Power Company not under the union are covered
under a defined benefit, noncontributory pension plan. Benefits earned under
this plan reflect the employee's years of service, age at retirement, and
average compensation for the highest five years out of the ten years immediately
preceding retirement. Plan assets are primarily invested in equity and debt
securities.

The Company also has noncontributory, defined benefit plans covering
substantially all union employees at recently acquired facilities. These plan
benefits are based on final average pay, age at retirement, and service at the
Company and the former employer. These Plans are funded according to Internal
Revenue Code requirements and are accounted for pursuant to SFAS No. 87,
"Accounting for Pensions."

The rates assumed in the actuarial calculations for the WPD pension plan as
of December 31, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Discount rate............................................... 5.75% 6.50%
Rate of compensation increase............................... 4.00 4.00
Expected return on plan assets.............................. 8.75 8.75
</TABLE>

F-28
<PAGE> 193
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables show the actuarial results for the WPD defined benefit
pension plan as of December 31 for the respective years (in millions):

<TABLE>
<CAPTION>
PENSION PLAN
---------------
1998 1999
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 890 $1,063
Service cost.............................................. 12 13
Interest cost............................................. 67 59
Benefits paid............................................. (61) (70)
Actuarial loss (gain)..................................... 143 (91)
Amendments................................................ 0 41
Curtailment............................................... 0 (7)
Settlement................................................ 0 (41)
Foreign currency exchange rate change..................... 12 (30)
------ ------
Benefit obligation, end of year........................ $1,063 $ 937
====== ======
CHANGES IN PLAN ASSETS:
Fair value of plan assets, beginning of year................ $1,152 $1,308
Return on plan assets..................................... 195 233
Employer contributions.................................... 1 0
Participants contributions................................ 6 4
Benefits paid............................................. (61) (70)
Settlement................................................ 0 (59)
Foreign currency exchange rate change..................... 15 (37)
------ ------
Fair value of plan assets, end of year................. $1,308 $1,379
====== ======
FUNDED STATUS:
Funded status at the end of year............................ $ 245 $ 442
Unrecognized prior service cost............................. 4 42
Unrecognized net gain....................................... (27) (251)
------ ------
Net amount recognized on the consolidated balance
sheets................................................ $ 222 $ 233
====== ======
</TABLE>

The rates assumed in the actuarial calculations for the pension plans
(excluding WPD) of the Company summarized below, as of their respective
measurement dates, were as follows:

<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Discount rate............................................... 6.25% 7.00%
Rate of compensation increase............................... 4.75 5.50
Expected return on plan assets.............................. 8.00 8.00
</TABLE>

F-29
<PAGE> 194
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables show the collective actuarial results for the defined
benefit pension plans (excluding WPD) of the Company (in millions):

<TABLE>
<CAPTION>
PENSION PLAN
-------------
1998 1999
----- -----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 27 $ 32
Service cost.............................................. 1 3
Interest cost............................................. 2 3
Actuarial loss............................................ 1 2
Amendments................................................ 1 0
Acquisitions.............................................. 0 17
---- ----
Benefit obligation, end of year...................... $ 32 $ 57
==== ====
CHANGES IN PLAN ASSETS:
Fair value of plan assets, beginning of year................ $ 26 $ 30
Return on plan assets..................................... 1 4
Employer contributions.................................... 1 1
Receivables due to transfers.............................. 2 9
---- ----
Fair value of plan assets, end of year............... $ 30 $ 44
==== ====
FUNDED STATUS:
Funded status at end of year................................ $ (2) $(13)
Unrecognized prior service cost........................... 3 2
Unrecognized net loss..................................... (6) (14)
Accruals for acquisitions................................. (12) 0
---- ----
Net amount recognized on the consolidated balance
sheets.............................................. $(17) $(25)
==== ====
</TABLE>

The components of the Company's pension plans' net pension income (a
portion of which is capitalized) during the years ended December 31 are shown
below (in millions):

<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Service cost................................................ $ 13 $ 13 $ 16
Interest cost............................................... 73 71 62
Expected return on plan assets.............................. (98) (107) (104)
Employee contributions...................................... (6) (6) (4)
Curtailment................................................. 0 0 (5)
Settlement.................................................. 0 0 14
Net amortization............................................ 0 0 2
----- ----- -----
Net pension income.......................................... $ (18) $ (29) $ (19)
===== ===== =====
</TABLE>

F-30
<PAGE> 195
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER POSTRETIREMENT BENEFITS

Southern Energy also provides certain medical care and life insurance
benefits for its retired employees, substantially all of whom may become
eligible for these benefits when they retire.

Under SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," medical care and life insurance benefits for retired
employees are accounted for on an accrual basis using a specified actuarial
method based on benefits and years of service.

An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of 7.74%
for 1999, decreasing gradually to 5.5% through the year 2005 and remaining at
that level thereafter. An annual increase or decrease in the assumed medical
care cost trend rate of 1% would correspondingly increase or decrease the
accumulated benefit obligation at December 31, 1999 by $2 million. All other
components would not be affected materially by a 1% change in the medical care
cost trend rate.

The weighted average rates assumed in the actuarial calculations for the
other postretirement benefits of the Company summarized below, as of their
respective measurement dates were as follows:

<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Discount rate............................................... 6.75% 7.50%
Rate of compensation increase............................... 4.25 5.00
Expected return on plan assets.............................. 8.50 8.50
</TABLE>

<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
BENEFITS
---------------
1998 1999
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 5 $ 8
Service cost.............................................. 0 1
Interest cost............................................. 1 1
Actuarial gain............................................ 0 (1)
Amendments................................................ 1 0
Acquisitions.............................................. 1 10
---- ----
Benefit obligation, end of year............................. $ 8 $ 19
==== ====
FUNDED STATUS:
Funded status at end of year................................ $ (8) $(19)
Unrecognized net loss..................................... 2 1
Accruals for acquisitions................................. (8) 0
---- ----
Net amount recognized....................................... $(14) $(18)
==== ====
</TABLE>

The postretirement benefits were unfunded at December 31, 1998 and 1999.
The actuarially based costs of Southern Energy's postretirement benefits during
1997, 1998, and 1999 were not material.

F-31
<PAGE> 196
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

Value Creation Plan

In 1997, the Company initiated a long-term incentive plan, the value
creation plan, which grants appreciation rights to eligible employees to receive
unit appreciation over a preestablished value on a stated number of units per
employee. Base values and subsequent annual valuations are calculated using a
discounted cash flow methodology, the key assumptions of which include cash flow
forecasts of each the Company's investments for the future five to seven years,
a terminal value assumption equal to 103%, and a discount rate of 13% for all
periods presented. Employees are granted two types of appreciation rights:
standard appreciation rights which pay each eligible employee for any
appreciation over a fixed base value and indexed appreciation rights which pay
each eligible employee for any appreciation over a base value which increases
each year by a predetermined interest rate. Standard appreciation rights vest
25% per year for four years, and indexed appreciation rights vest 100% after
four years. The Company records compensation expense ratably during the vesting
period for any appreciation of the units over a fixed base value in accordance
with APB Opinion 25. This expense amounted to $1.7 million in 1999 and was not
material in 1997 and 1998.

Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock-based compensation plan under APB
Opinion 25 "Accounting for Stock Issued to Employees" and adopt the
disclosure-only provisions of SFAS No. 123. Accounting for cash-settled awards
under SFAS No. 123 is consistent with the accounting for such awards under APB
Opinion No. 25.

Transactions are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STANDARD EXERCISE INDEXED EXERCISE
RIGHTS PRICE RIGHTS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996................. 0 0 0 0
Granted.......................................... 559,579 $10.00 2,729,011 $10.00
Exercised........................................ 0 0 0 0
Forfeited........................................ 0 0 0 0
--------- ------ --------- ------
Outstanding at December 31, 1997................. 559,579 10.00 2,729,011 10.00
Granted.......................................... 1,093,849 9.73 54,582 11.30
Exercised........................................ 0 0 0 0
Forfeited........................................ 0 0 0 0
--------- ------ --------- ------
Outstanding at December 31, 1998................. 1,653,428 9.82 2,783,593 11.30
Granted.......................................... 1,456,665 $11.61 325,138 $12.77
Exercised........................................ (14,411) 9.90 0 0
Forfeited........................................ (24,995) 9.83 (91,216) 12.77
--------- ------ --------- ------
Outstanding at December 31, 1999................. 3,070,687 $10.67 3,017,515 $12.77
========= ====== ========= ======
Units exercisable at December 31, 1997........... 0 $ 0.00 0 $ 0.00
========= ====== ========= ======
Units exercisable at December 31, 1998........... 139,883 $10.00 0 $ 0.00
========= ====== ========= ======
Units exercisable at December 31, 1999........... 538,816 $ 9.87 0 $ 0.00
========= ====== ========= ======
</TABLE>

F-32
<PAGE> 197
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Exercise prices for standard rights outstanding as of December 31, 1999
ranged from $9.73 to $11.61. The following table provides certain information
with respect to standard rights outstanding at December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RIGHTS WEIGHTED AVERAGE REMAINING
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS)
--------------- ----------- ---------------- ------------------------
<S> <C> <C> <C>
Under $11.00............................. 1,614,022 $ 9.82 8.2
Over $11.00.............................. 1,456,665 11.61 9.5
--------- ------ ---
Total.................................. 3,070,687 $10.67 8.8
========= ====== ===
</TABLE>

The exercise price for indexed rights outstanding as of December 31, 1999
was $12.77, and such rights had a weighted average remaining contractual life of
7.7 years.

The following table provides certain information with respect to rights
exercisable at December 31, 1999:

<TABLE>
<CAPTION>
STANDARD
UNITS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------------
<S> <C> <C>
Under $11.00................................................ 538,816 $ 9.87
Over $11.00................................................. 0 0.00
------- ------
Total..................................................... 538,816 $ 9.87
======= ======
</TABLE>

In the event that the Company becomes publicly traded, the compensation
committee of the Southern Company has the right to convert the appreciation
rights into stock options or other appreciation rights of the Company. See Note
15.

F-33
<PAGE> 198
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Southern Company Options

Stock option grants in Southern common stock have been made from Southern
Company's Performance Stock Plan periodically and vest annually at a rate of 33%
on the anniversary date of the grant. Grants fully vest upon termination because
of death, total disability or retirement. Exercise price is the average of the
high and low fair market value of Southern Company's common stock on the date
granted.

Transactions are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SOUTHERN EXERCISE
OPTIONS PRICE
--------- ----------
<S> <C> <C>
Outstanding at December 31, 1996 255,844 $ 22.41
Granted 273,940 21.25
Exercised 0 0.00
Forfeited (12,413) 21.97
--------- ----------
Outstanding at December 31, 1997 517,371 $ 21.81
Granted 283,864 27.03
Exercised (4,071) 21.87
Forfeited (1,693) 23.00
--------- ----------
Outstanding at December 31, 1998 795,471 $ 23.67
Granted 516,967 26.56
Exercised (6,001) 22.46
Forfeited (21,845) 25.31
--------- ----------
Outstanding at December 31, 1999 1,284,592 $ 24.81
========= ==========
Units exercisable at December 31, 1997 116,760 $ 21.92
========= ==========
Units exercisable at December 31, 1998 277,788 $ 21.91
========= ==========
Units exercisable at December 31, 1999 502,276 $ 22.83
========= ==========
</TABLE>

Exercise prices for Southern stock options outstanding as of December 31,
1999 ranged from $18.09 to $27.03. The following table provides certain
information with respect to Southern stock options outstanding at December 31,
1999:

<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
OPTIONS EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE
------------------------ ----------- -------- ----------------
<S> <C> <C> <C>
$18.00 - $21.00.................................. 14,684 $18.77 4.2
$21.01 - $24.00.................................. 484,004 21.89 6.9
$24.01 - $28.00.................................. 785,904 26.72 9.2
---------
Total....................................... 1,284,592 $24.81 8.3
=========
</TABLE>

F-34
<PAGE> 199
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides certain information with respect to rights
exercisable at December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
------------------------ ----------- --------
<S> <C> <C>
$18.00 - $21.00............................................. 14,684 $18.77
$21.01 - $24.00............................................. 397,946 22.03
$24.01 - $28.00............................................. 89,646 27.03
-------
Total.................................................. 502,276 $22.83
======= ======
</TABLE>

The weighted average fair values at date of grant for options granted
during 1997, 1998 and 1999 were $4.26, $5.69 and $6.29, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expected life in years...................................... 10 10 10
Interest rate............................................... 6.49% 5.46% 5.79%
Volatility.................................................. 17.47% 19.16% 20.74%
Dividend yield.............................................. 6.1% 5.0% 5.0%
</TABLE>

Pro forma earnings and earnings per share information for the years ended
December 31, 1997, 1998 and 1999 is provided below, to take into account the
amortization of stock-based compensation to expense on a straight-line basis
over the vesting period. Had compensation costs been determined as prescribed by
SFAS No. 123, the Company's net income would have been reduced by less than $1
million in each of 1997 and 1998, and by less than $2 million in 1999. Earnings
per share would have been reduced by less than one cent in each period
presented.

Phantom Stock

During 1999, the Company made awards of approximately 39,000 phantom
Southern stock shares and approximately 130,000 phantom Company stock shares to
certain employees and officers. The aggregate amount awarded was approximately
$2.7 million with cliff vesting during 2003. The Company records compensation
expense ratably during the vesting period, taking into account the fluctuations
in market value of the underlying stock during each period. Compensation expense
during 1999 was approximately $500,000.

F-35
<PAGE> 200
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT

At December 31, 1998 and 1999, the Company's long-term debt (including
current maturities) was as follows (in millions):

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Senior notes:
Dollar-denominated:
7.40% notes, due 2004.................................. $ 0 $ 200
7.90% notes, due 2009.................................. 0 500
Variable rate (7.19% to 7.32% at December 31, 1999),
due 2004.............................................. 0 140
Sterling-denominated:
6.38% notes, due 2001.................................. 168 163
6.80% notes, due 2006.................................. 332 321
7.75% and 10.5% senior loan participation certificate, due
2005 and 2006............................................. 340 340
Debt supported by long-term banking arrangements:
Dollar-denominated:
6.07% to 11.00% note, due 2000......................... 289 71
7.10% to 7.34% note, due 2001.......................... 6 6
6.58% note, due 2002................................... 792 792
9.75% note, due 2003................................... 27 21
6.44% to 9.50% notes, due 2004......................... 119 89
5.43% note, due 2004, guaranteed by Company............ 0 100
7.75% to 10% notes, due 2005........................... 166 417
6.93% to 9.70% notes, due 2006......................... 47 51
7.16% to 10.25% notes, due 2007........................ 566 495
5.95% to 10.56% notes, due 2011........................ 630 742
8.12% notes, due 2018.................................. 153 153
Deutsche mark-denominated:
3.81% to 3.96% note, due 2004.......................... 515 522
Other long-term debt:
Dollar-denominated:
6.13% to 8.38% loans, due 1999......................... 162 0
5.76% to 11% loans, due 2000 to 2007................... 16 24
Sterling-denominated:
0% to 7.64% loans, due 2000 and 2002................... 11 13
Deutsche mark-denominated:
3.07% to 5.50% loan, due 2008.......................... 60 31
------ ------
Total long-term debt................................. 4,399 5,191
Less current maturities..................................... 480 237
------ ------
Total................................................ $3,919 $4,954
====== ======
</TABLE>

F-36
<PAGE> 201
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1999, the annual scheduled maturities of long-term debt
during the next five years were as follows (in millions):

BANK ARRANGEMENTS

The Company has bank credit arrangements with various lending institutions
totaling approximately $3.021 billion. At December 31, 1999, unused credit
arrangements with banks totaled $1.256 billion, of which $574 million expires
during 2000 and $682 million during 2001 and beyond. The credit arrangements
generally require payment of commitment fees based on the unused portion of the
commitments or the maintenance of compensating balances with the banks. These
balances are not legally restricted from withdrawal.

In April 1999, Southern Energy entered into three revolving credit
agreements with a group of lending banks, as agent, with commitments totaling
$1.3 billion. Each of the corporate credit facilities is available for general
corporate purposes, including commercial paper backstop. Facility A with total
commitments of $500 million was intended to be a temporary facility until the
Company completed subsequent financings. Accordingly, this facility was
cancelled in October 1999. Facility B, a $350 million, 364-day revolving line of
credit with an annual commitment fee of $2.1 million, matures in March 2000;
however, it has extension and commitment increase options subject to the
lenders' approval. Facility C, totaling $450 million with an annual commitment
fee of $3.15 million, also has a letter of credit option and matures in April
2004. No amounts were drawn under this credit arrangement at December 31, 1999.
However, the Company had letters of credit outstanding under Facility C in the
amount of $250 million at December 31, 1999. In April 1999, the Company also
instituted a commercial paper program which is used in conjunction with the
corporate credit facilities as an alternate funding source. $50 million was
outstanding at December 31, 1999 under this program.

The April 1999 Credit Agreements contain various business and financial
covenants including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the incurrence
of indebtedness and liens, (iii) limitations on capital expenditures, (iv)
limitations on ratio of recourse debt to recourse capital (v) maintenance of
minimum ratios of Corporate Debt Service to Corporate Interest. The Company is
in compliance with all of the covenants in the agreements governing this
indebtedness.

In October 1999, Southern Energy North America Generating, Inc. ("SENAG")
completed a $1.45 billion corporate-style bank financing consisting of three
credit facilities. Facility A is a $1.15 billion 364-day term loan with a
two-year term-out option and no commitment fee. Facility B is a $250 million
five-year revolver, with an annual commitment fee of $1.5 million, to be used
for capital expenditures, and Facility C is a $50 million five-year revolver,
with an annual commitment fee of $300,000, for working capital needs. The draws
under Facilities B and C, in the amount of $140 million, are included in
long-term debt in the accompanying financial statements. The SENAG facilities
contain covenants substantially equivalent to those discussed above for the
April 1999 Credit

F-37
<PAGE> 202
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement. SENAG is in compliance with all of the covenants in the agreements
governing this indebtedness.

In addition, Southern Energy, from time-to-time, borrows under uncommitted
lines of credit with banks and through commercial paper programs that have the
liquidity support of committed bank credit arrangements.

PREFERRED SECURITIES

In a series of transactions during 1997 and 1998, subsidiaries of the
Company borrowed $682 million and $350 million respectively, dollar denominated
income preferred securities. The securities are due between 2027 and 2037 with
fixed interest rates between 6.875% and 8.235%. The Company entered into a swap
agreement to effectively convert the $82 million security borrowed in 1997, to
British pound sterling at the time of issuance. Based on year end exchange
rates, $1,033 million and $1,031 million was outstanding on the securities at
December 31, 1998 and 1999 respectively. See Note 9 for further discussion of
the Company's liability management program.

Subsidiary obligated mandatorily redeemable preferred securities have been
issued by special purpose financing entities of Southern Energy. Substantially
all of the assets of these special financing entities are junior subordinated
notes issued by the Company. The Company has loaned $950 million of the proceeds
from the issuance of these subsidiary obligated mandatorily redeemable preferred
securities and an additional $30 million related to equity to Southern. Payment
terms and interest rates on the notes receivable from Southern Company are
identical to the related preferred securities. The notes are due between 2027
and 2037 with fixed interest rates between 6.875% and 8.19%. These receivables
from Southern are included in notes receivable in the accompanying balance
sheets.

NOTE PAYABLE TO SOUTHERN COMPANY

Periodically, the Company borrows funds from Southern to finance
acquisitions or working capital needs. The Company pays interest to Southern
based on Southern Company's short-term borrowing rate. At December 31, 1998 this
interest rate was 5.47%. No amounts were outstanding at December 31, 1999.

F-38
<PAGE> 203
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

Details of the income tax provision for the years ended December 31, 1997,
1998, and 1999 are as follows (in millions):

<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ----
<S> <C> <C> <C>
INCOME TAX PROVISION:
Income tax from continuing operations:
United States:
Current benefit........................................ $(24) $ (87) $(16)
Deferred provision (benefit)........................... 35 (44) 36
International:
Current provision...................................... 45 15 18
Windfall profits tax assessed in the United Kingdom.... 148 0 0
Deferred (benefit) provision........................... (29) (7) 91
---- ----- ----
Total provision (benefit) from continuing
operations.......................................... $175 $(123) $129
==== ===== ====
Income tax from discontinued operations:
Current benefit........................................ (19) (33) (54)
Deferred provision..................................... 9 11 39
---- ----- ----
Total benefit from discontinued operations........... $(10) $ (22) $(15)
==== ===== ====
</TABLE>

In July 1997, the new Labor government in the United Kingdom introduced its
first budget, which became effective July 31, 1997. This budget included a
one-time windfall profit tax on privatized utilities in the United Kingdom,
which included the Company's subsidiary, WPD. As reflected in the accompanying
statements of income, the effect of this tax was recorded during fiscal year
1997. The Company paid the first installment of this tax on December 1, 1997 and
made the second and final installment on December 1, 1998.

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases which give rise to deferred tax assets and liabilities are as follows (in
millions):

<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Property, plant, and equipment basis differences............ $626 $699
Pensions.................................................... 65 64
Taxes accrued on undistributed earnings..................... 27 0
Other....................................................... 23 49
---- ----
Total..................................................... $741 $812
==== ====
DEFERRED TAX ASSETS:
Impairment loss............................................. $ 67 $ 85
Deferred costs.............................................. 11 20
Accrued expenses............................................ 71 20
Other....................................................... 19 7
---- ----
Total..................................................... 168 132
---- ----
Net deferred tax liabilities.............................. $573 $680
==== ====
</TABLE>

A reconciliation of the Company's federal statutory income tax rate to the
effective income tax rate for continuing operations for the years ended December
31, 1997, 1998, and 1999 is as follows:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate................................... 35% (35)% 35%
State income tax, net of federal benefit.................... 0 3 1
Windfall profits tax........................................ 82 0 0
Non-U.S. taxes.............................................. (19) (192) (17)
Other....................................................... (1) 0 0
--- ---- ---
Effective income tax rate................................. 97% (224)% 19%
=== ==== ===
</TABLE>

The difference between the statutory rate and the effective income tax rate
for discontinued operations for 1997, 1998, and 1999 is primarily due to the
utilization of domestic tax credits.

The Company and the other subsidiaries of Southern file a consolidated
federal income tax return. Under a joint income tax agreement, each company's
current and deferred tax expense is computed on a stand-alone basis. Under this
agreement, the Company received tax refunds from Southern of approximately $118
million and $99 million during 1998 and 1999, respectively. Approximately $65
million and $100 million of the other current receivables balance at December
31, 1998 and 1999, respectively, are comprised of tax refunds under the
consolidated income tax agreement or from various tax authorities. Approximately
$83 million and $152 million of the other current payables balance at December
31, 1998 and 1999, respectively, are comprised of income taxes currently payable
to various tax authorities.

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The undistributed earnings of certain foreign subsidiaries aggregated $435
million as of December 31, 1999, which, under existing tax law, will not be
subject to U.S. income tax until distributed. Of the total undistributed
earnings, provisions for U.S. taxes have not been accrued on $210 million
related to earnings that have been, or are intended to be, indefinitely
reinvested.

9. FINANCIAL INSTRUMENTS

COMMODITY-RELATED TRADING ACTIVITIES

During 1999, Southern Energy created an energy trading company in
Amsterdam, which provides risk management services associated with the energy
industry to its customers in the European market. These services are provided
primarily through a variety of exchange-traded energy contracts including
forward contracts, futures contracts, option contracts, and financial swap
agreements. These contractual commitments, which represent risk management
assets and liabilities, are accounted for using the mark-to-market method of
accounting. Accordingly, they are reflected at fair value, net of future
delivery costs, in the consolidated balance sheets.

The Amsterdam trading operations engage in risk management activities. All
such transactions and related expenses are recorded on a trade-date basis.
Financial instruments and contractual commitments utilized in connection with
these activities are accounted for using the mark-to-market method of
accounting. Under the mark-to-market method of accounting, financial instruments
and contractual commitments, including derivatives used for these purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter (OTC) market price
quotations, time value and volatility factors underlying options and contractual
commitments, price activity for equivalent or synthetic instruments in markets
located in different regions, and counterparty credit quality.

Net unrealized gains from risk management services related to the Amsterdam
trading operation are immaterial at December 31, 1999. The volumetric weighted
average maturity of the contractual commitments was 1.35 years. The net notional
amount of the risk management assets and liabilities at December 31, 1999 was
5.3 billion kilowatt-hours. The notional amount is indicative only of the volume
of activity and not of the amount exchanged by the parties to the financial
instruments. Consequently, these amounts are not a measure of market risk. The
fair value of these risk management assets and liabilities averaged $0.2 million
and $4 million, respectively. The averages for 1999 were based on month-end
balances. The fair value of these assets and liabilities at December 31, 1999
was $1 million and $5 million, respectively.

The Amsterdam trading operations involve elements of credit risk. Credit
risk relates to the risk of loss that the company would incur as a result of
nonperformance by counterparties pursuant to the terms of their contractual
obligations. The trading operation has attempted to mitigate this risk by
establishing controls to determine and monitor the creditworthiness of
counterparties. The Company monitors credit risk on both an individual and group
counterparty basis. Accordingly, Southern Energy does not anticipate any
material impact to its financial position or results of operations as a result
of counterparty nonperformance.

Effective in January 1998, Southern Energy and VRI combined their energy
trading and marketing activities to form a North American joint venture, SCEM
(Note 3). Southern Energy's investment in the joint venture is accounted for
under the equity method of accounting.

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ASSET AND LIABILITY MANAGEMENT

The Company is exposed to market risk, including changes in interest rates,
currency exchange rates, and certain commodity prices. To manage the volatility
relating to these exposures, the Company enters into various derivative
transactions pursuant to the Company's policies in such areas such as
counterparty exposure and hedging practices.

The Company's policy is to manage interest expense using a combination of
fixed and variable rate debt. To manage this mix in a cost-efficient manner, the
Company enters into interest rate swaps in which the Company agrees to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
These swaps are designated to hedge underlying debt obligations. For qualifying
hedges, the interest rate differential is reflected as an adjustment to interest
expense over the life of the swaps. Gains and losses resulting from the
termination of qualified hedges prior to their stated maturities are recognized
ratably over the remaining life of the instrument being hedged.

Currency swaps are used by the Company to hedge its net investment in
certain foreign subsidiaries. Gains or losses on these currency swaps designated
as hedges of net investments are offset against the translation effects
reflected in other comprehensive income, net of tax.

The company utilizes currency swaps and forward agreements to hedge U.S.
dollar-denominated debt issued by our Southern Investments UK plc subsidiary.
These swaps offset the dollar cash flows, thereby effectively converting debt to
the respective subsidiary's functional currency. Gains and losses related to
qualified hedges of foreign currency firm commitments are deferred and included
in the basis of the underlying transactions.

Off-balance sheet derivative financial instruments at December 31, 1998 and
1999 held for purposes other than trading were as follows (in millions). The
interest rates noted in the following table represent the range of fixed
interest rates that Southern Energy pays on the related interest rate swaps. On
virtually all of these interest rate swaps, the Company receives floating
interest rate payment at LIBOR.

<TABLE>
<CAPTION>
YEAR OF
MATURITY OR 1998 1998 1999 1999
UNRECOGNIZED INTEREST NUMBER OF NOTIONAL UNRECOGNIZED NOTIONAL UNRECOGNIZED
TERMINATION RATES COUNTERPARTIES AMOUNT GAIN (LOSS) AMOUNT GAIN (LOSS)
------------ ------------ -------------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TYPE:
Interest rate
swaps............ 2000-2016 6.074%-7.12% 9 $ 928 $ (69) $ -- $ --
2000-2012 6.55%-7.12% 4 -- -- 1,910 (3)
2001-2012 6.56%-8.17% 6 L600 (130) L600 (49)
2002-2007 4.98%-5.78% 2 DM691 (30) DM691 (5)
CROSS CURRENCY:
Swaps.............. 2001-2007 -- 7 L429 11 L414 (11)
Swaption........... 2003 -- 1 DM555 (18) DM435 11
</TABLE>

-------------------------

L --denotes British Pound Sterling.
DM --denotes Deutsche Mark.

F-42
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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The unrecognized gain/loss for interest rate swaps is determined based on
the estimated amount that the Company would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates. As indicated in the previous table, if
the existing asset and liability management derivative financial instruments at
December 31, 1998 and 1999 had been discontinued or our counterparties defaulted
on those dates, the Company would have recognized gains of approximately $236
million and $57 million, respectively. However, the Company believes that its
exposure to credit risk due to nonperformance by the counterparties to its
asset and liability management financial derivatives is insignificant,
based on the investment grade rating of the counterparties.

Prior to the sale of its supply business, the Company's subsidiary, WPD,
utilized contracts to mitigate its exposure to volatility in the prices of
electricity purchased through the wholesale electricity market. Such contracts
allowed WPD to effectively convert the majority of its anticipated wholesale
electricity purchases from market prices to fixed prices. Due to the immaturity
of the electricity trading market in the United Kingdom and the complexity of
WPD's existing contracts, it was not practicable to estimate the fair value of
these contracts. Such contracts were sold in connection with the electricity
supply business sale.

MARKET RISK

Market risk is the potential loss the Company may incur as a result of
changes in the market or fair value of a particular instrument or commodity. All
financial and commodities-related instruments, including derivatives, are
subject to market risk. The Company's exposure to market risk is determined by a
number of factors, including the size, duration, composition, and
diversification of positions held, the absolute and relative levels of interest
rates, as well as market volatility and illiquidity. The most significant factor
influencing the overall level of market risk to which the Company is exposed is
its use of hedging techniques to mitigate such risk. The Company manages market
risk by actively monitoring compliance with stated risk management policies as
well as monitoring the effectiveness of its hedging policies and strategies. The
Company's risk management policies limit the amount of total net exposure and
rolling net exposure during stated periods. These policies, including related
risk limits, are regularly assessed to ensure their appropriateness given the
Company's objectives.

CREDIT RISK

The Company is exposed to losses in the event of nonperformance by
counterparties to its derivative financial instruments. Credit risk is measured
by the loss the Company would record if its counterparties failed to perform
pursuant to terms of their contractual obligations and the value of collateral
held, if any, was not adequate to cover such losses. The Company has established
controls to determine and monitor the creditworthiness of counterparties, as
well as the quality of pledged collateral, and uses master netting agreements
whenever possible to mitigate the Company's exposure to counterparty credit
risk. Additionally, the Company may require counterparties to pledge additional
collateral when deemed necessary.

Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely
F-43
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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

affected, in a similar manner, by changes in the economy or other market
conditions. The Company monitors credit risk on both an individual and group
counterparty basis.

FAIR VALUES

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments.
Financial instruments recorded at market or fair value include cash and
interest-bearing equivalents, financial instruments used for trading purposes,
commodities, and related instruments used for trading purposes, including
options and contractual commitments. The following methods were used by the
Company to estimate its fair value disclosures for financial instruments not
carried at fair value on the accompanying balance sheets:

NOTES RECEIVABLE. The fair value of the Company's note receivables is
estimated using interest rates the Company would receive based on similar
types of arrangements.

NOTES PAYABLE AND OTHER LONG- AND SHORT-TERM DEBT. The fair value of
the Company's notes payable and long- and short-term debt is estimated
using discounted cash flow analysis based on current market interest rates
for similar types of borrowing arrangements and market quotes, when
available.

SUBSIDIARY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. The
fair value of the Company's preferred securities is calculated based on
current market price.

The carrying or notional amounts and fair values of the Company's financial
instruments at December 31, 1998 and 1999 were as follows (in millions):

<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Notes receivable, including current portion............. $1,517 $1,564 $1,368 $1,277
Notes payable and long- and short-term debt............. 6,027 5,722 7,152 6,779
Subsidiary obligated mandatorily redeemable preferred
securities............................................ 1,033 1,098 1,031 907
</TABLE>

10. REGULATORY MATTERS

The Office of Gas & Electricity Markets controls the revenues earned by WPD
in its distribution business and former supply business by applying a price
control formula. Distribution revenues are regulated by a formula ("DPCF") that
sets the maximum average price per unit of electricity distributed. The elements
used in the formula are generally established for a five-year period and are
subject to review by the regulator. In December 1999, the regulator published
final price proposals following his review of the DPCF for distribution
businesses. For WPD, these proposals represent a 20% reduction to distribution
prices from April 1, 2000, followed by a reduction in real terms of 3% each year
after April 1, 2001. This price control is scheduled to operate until March
2005.

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. COMMITMENTS AND CONTINGENT MATTERS

STATE LINE

On July 28, 1998, an explosion occurred at State Line causing a fire and
substantial damage to the plant. The precise cause of the explosion and fire has
not been determined. Thus far, seven personal injury lawsuits have been filed
against the Company, five of which were filed in Cook County, Illinois. The
Company filed a motion to dismiss these five cases in 1998 for lack of "in
personam" jurisdiction. The motion was denied in August 1999. In October 1999,
the Appellate Court of Illinois granted our petition for leave to appeal. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made.

COMPANHIA ENERGETICA DE MINAS GERAIS

In September 1999, the state of Minas Gerais filed a lawsuit in a state
court seeking temporary relief against Southern Electric do Brazil
Participacoes, S.A. ("SEB") exercising voting rights under the shareholders
agreement, between the state and SEB regarding SEB's interest in Companhia
Energetica de Minas Gerais ("CEMIG"), as well as a permanent recision of the
agreement. A lower court judge denied the state's request, but one member of a
three-judge State Appellate Court granted a temporary injunction pending the
outcome of the litigation regarding recision of the shareholders agreement.

SE CALIFORNIA

Southern Energy California LLC ("SE California"), a wholly owned subsidiary
of the Company, and its subsidiaries are parties to a Federal Energy Regulatory
Commission ("FERC") proceeding that will determine the percentage of a settled
$158.8 million revenue requirement to be paid to the SE California parties under
the reliability must-run ("RMR") agreements between the SE California parties
and the California Independent System Operator ("CAISO"). Hearings were
conducted before a FERC administrative law judge in March 2000. The SE
California parties have proposed to allocate approximately 75% of the
responsibility for payment of the revenue requirement to the CAISO, while CAISO
and other aligned parties argue that CAISO should pay no more than approximately
7%. The decision in this case will affect the amount CAISO will pay to SE
California and its subsidiaries for the period commencing June 1, 1999 through
December 31, 2001. The outcome of this proceeding is uncertain, and the parties
have recently commenced settlement

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

discussions. The Company's failure to prevail in this matter would adversely
effect our results of operations.

WPD PENSION SCHEME

WPD participates in the ESPS in the United Kingdom, which includes members
from the Regional Electricity Companies as well as other industry members. WPD
used a portion of its pension surplus to fund early pension payments to
terminated employees. An independent pension arbitrator has issued a ruling
directing that another industry employer refund similar amounts paid, with
interest to ESPS. This ruling is currently being appealed to the House of Lords.
The majority of WPD's employees are ESPS members. Based on the Company's
assessment of the current legal position, it anticipates that a payment by WPD
into the ESPS of L24 million ($36 million) will ultimately be required, should
the other industry employer's appeal fail and WPD then be named in a similar
action. Management does not believe such payment would have a material adverse
impact on the Company's financial position, liquidity or results of operations.
Under SFAS No. 87, "Employers' Accounting for Pensions," there would be no
immediate impact to the Company's results of operations.

In addition to the matters discussed above, the Company is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the results of operations or financial position of the Company.

ENERGY MARKETING AND RISK MANAGEMENT COMMITMENTS

The following table provides a summary of the Company's commitments (in
millions) related to its energy marketing and risk management activities as of
December 31, 1998 and 1999.

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Trade credit support (at fair value)........................ $ 152 $ 146
Vastar gas purchase contract................................ 70 90
Brazos contract performance guarantee....................... -- 70
Minimum distributions to Vastar............................. 105 85
Contingent commitment to buy an additional interest in SCEM
from Vastar (Note 3)...................................... 210 210
------ ------
Total....................................................... $ 537 $ 601
====== ======
</TABLE>

The company and VRI have jointly agreed to provide up to $700 million of
contingent performance guarantees and trade credits on behalf of SCEM. Southern
Company, Southern Energy, Vastar, and ARCO provide the actual guarantees.
Southern Energy and Vastar have agreed to indemnify each other (subject to
certain limitations of liability) against loss in proportion to their respective
ownership shares of the SCEM (Note 3) entities with respect to any amounts paid
by Southern Company, Southern Energy, Vastar or their affiliates; although
Southern Energy would pay more (up to 100%) of the losses incurred on such
guarantees if necessary for Vastar to receive the minimum cash distributions
from SCEM (which are guaranteed by Southern Energy) in the years 1998 through
2002. If necessary to support SCEM's ongoing business, the amount of the
contingent performance guarantees and trade credits can exceed $700 million, and
to the extent that the actual aggregate liability on all such parent guarantees
were to exceed $700 million, Southern Energy has agreed to provide (at a
market-based price) for the amount in excess of $700 million. Additional

F-46
<PAGE> 211
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

guarantees may be provided for structured transactions with certain approvals
and those guarantees may not be subject to any right of indemnity or
contribution between SCEM's parent companies. Contingent performance guarantees
are an industry standard used to backstop the physical and financial delivery of
product. The gross amount represents total counterparty authority, but actual
exposure under these guarantees is limited by the amount of business conducted
under each guarantee. Notional amounts of trade credit support are $672 million
and $657 million at December 31, 1998 and 1999, respectively. Payments will be
made under these guarantees only if SCEM's liquidity is exhausted.

Southern Energy has also guaranteed the performance of SCEM's obligations
under a multiyear agreement entered into by SCEM with Brazos Electric Power
Cooperative ("Brazos"). Under the agreement, effective January 1999, SCEM
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Also, SCEM is entitled to the output of Brazos'
generation facilities and its rights to electricity under power purchase
agreements Brazos has entered into with third parties. Southern Energy's
guarantee is $75 million for the first year of the agreement and declines by $5
million per year to $55 million in the fifth year of the agreement.

To the extent that the Company does not maintain an investment grade
rating, it would be forced to provide alternative collateral to Brazos and VRI
only. Such collateral might be in the form of letters of credit. As mentioned
above, performance guarantees assure a subsidiary's performance of contractual
obligations whether it is commodity delivery or payment.

VRI has contracted with SCEM to sell most of its domestic natural gas
production at market index prices to the joint venture through a 10-year natural
gas supply agreement. VRI has guaranteed minimum daily quantities equal to the
greater of 875 million cubic feet per day or 80% of VRI's annual equity volumes.
The Company has guaranteed SCEM's obligations under the gas supply agreement.
The guarantee generally covers fifty-five days of gas purchases and the amount
varies due to seasonal variability in gas prices and demand.

Southern Energy has guaranteed certain minimum annual cash distributions
owed by SCEM to VRI. These guaranteed cash distributions can be reduced by
certain extraordinary items. For 1999, this distribution, after adjustments, was
$17 million. Scheduled minimum cash distributions to VRI are $25 million in 2000
and $30 million in each of 2001 and 2002. See Note 3 where arbitration related
to the 1998 minimum cash distribution is discussed.

TURBINE PURCHASES

The Company has entered into agreements to purchase 24 General Electric 7
FA combustion turbines and four General Electric D-11 steam turbines scheduled
to be completed and delivered during the period December 1999 through August
2002. Minimum termination amounts under the contracts were $4 million and $31
million at December 31, 1998 and 1999, respectively. Total amounts to be paid
under the agreements if all turbines are purchased as planned were approximately
$673 million at December 31, 1999.

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<PAGE> 212
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER CONSTRUCTION-RELATED COMMITMENTS

The Company has entered into firm commitments to meet ongoing construction
obligations at its projects, including contracts for materials purchases and
engineering, procurement and construction-related services. These commitments at
December 31, 1999 totaled $93 million.

LONG-TERM SERVICE AGREEMENTS

The Company has entered into long-term service agreements for the
maintenance and repair of its combustion turbine or combined cycle generating
plants. These agreements may be terminated in the event a planned construction
project is cancelled. At December 31, 1999, the amount committed for
construction projects in process is $40 million. Annual amounts committed if all
turbines are purchased as planned are as follows (in millions):

<TABLE>
<S> <C>
FISCAL YEAR ENDED:
2000........................................................ $ 3
2001........................................................ 8
2002........................................................ 28
2003........................................................ 51
2004........................................................ 62
Thereafter.................................................. 592
----
Total minimum payments $744
====
</TABLE>

POWER PURCHASE AGREEMENTS

The Company recognized a liability at the WPD acquisition date for the
excess power purchase costs over an estimate equivalent pool costs. The balance
of the recorded liability was $116 million at December 31, 1998 and was sold as
part of the electricity supply business of WPD. See Note 12.

OPERATING LEASES

The Company has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $13 million, $25 million, and $17 million during the years ended
December 31, 1997, 1998, and 1999, respectively. At December 31, 1999, estimated
minimum rental commitments for noncancellable operating leases were as follows
(in millions):

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS

Substantially all of WPD's employees are subject to one of five collective
bargaining agreements. Such agreements are ongoing in nature, and WPD's employee
participation level is consistent with that of the electric utility industry in
Great Britain.

At its State Line facility in Hammond, Indiana, Southern Energy has a labor
contract with the United Steel Workers that extends to January 1, 2004.

Southern Energy Canal LLC and Southern Energy Kendall LLC, both
subsidiaries of Southern Energy, have contracts with the Utilities Workers'
Union of America which expire on June 1, 2001 and March 1, 2001, respectively.

UNCERTAINTIES RELATED TO CONTRACT SALES

Several of the Company's significant power generation facilities rely on
either PPAs or energy conversion agreements ("ECAs" and collectively with the
PPAs the "Power Contracts") with one or a limited number of entities for the
majority of, and in some cases all of, the relevant facility's output over the
life of the Power Contract. For example, for the year ended December 31, 1999,
approximately 14% of the Company's revenues were attributable to revenue
received by its the Philippines facilities pursuant to agreements with NPC. See
Note 1 where concentration of revenues is discussed.

The Company has entered into two significant power contracts. These two
contracts are Energy Conversion Agreements between subsidiaries of SE
Asia-Pacific and the National Power Corporation ("NPC") of the Philippines. The
contract for the Pagbilao plant is for 29 years and terminates in August 2025.
The contract for the Sual plant is for 25 years and terminates in June 2025. The
contracted capacity is 735 MW and 1,000 MW for Pagbilao and Sual, respectively.
The capacity fees are payable as compensation for capacity available for power
generation. These fees consist of capital recovery fees, fixed operating fees,
infrastructure fees and the components of service fees. Over 90% of the revenues
are expected to come from fixed capacity charges that are paid without regard to
dispatch level of the plant. The energy fees are based on energy sold and are
designed to cover variable operating and maintenance costs. In accordance with
the contracts, NPC assumes all fuel risks, including price and delivery.

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SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MINORITY SHAREHOLDER PUT OPTIONS

Sual

Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Sual project (SEPI) can exercise a put
option requiring SEPI to purchase the minority shareholders' interest in the
project. The put option can be exercised between the third and sixth
anniversaries of the completion of the project construction or, in the event of
any change in control (including control of the Company by Southern Company), a
change in SEPI's charter documents or the transfer of sponsor in violation of
the sponsor support agreement, the put option may be exercised on the earlier of
the date of such changes or the twelfth anniversary of the completion of the
project construction. The price would be determined by a formula including the
present value of the remaining years of cash flow less the liabilities
outstanding plus the current assets.

Pagbilao

Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Pagbilao project (SEQI) can exercise a
put option requiring SEQI to purchase the minority shareholders' interests in
the project. The put option can be exercised between the sixth and twelfth
anniversaries of the completion of the project construction or, in the event of
any change in control (including control of the Company by Southern Company), a
change in SEQI's charter documents or the transfer of sponsor in violation of
the sponsor completion support agreement the put option may be exercised on the
earlier of the date of such changes or the twelfth anniversary of the completion
of the project construction. The price would be determined by a formula
including the present value of the remaining years of cash flow less the
liabilities outstanding plus the current assets.

12. ACQUISITIONS AND DIVESTITURES

SE CALIFORNIA

On April 16, 1999, the Company, through SE California, acquired various
generating assets in California with a total capacity of 3,065 MW from Pacific
Gas & Electric Company for $801 million plus $39 million for fuel inventory,
capital expenditures and property taxes.

SE NEW YORK

On June 30, 1999, the Company, through certain of its wholly owned
subsidiaries (collectively referred to as SE New York), acquired the generating
asset business in the state of New York with a total capacity of 1,794 MW, from
Orange and Rockland Utilities, Inc. and Consolidated Edison Company of New York
for a net purchase price of approximately $476 million, plus an additional $17
million to cover the market value of existing inventories. The acquisition was
recorded under the purchase method of accounting. A portion of the purchase
price has been allocated to assets acquired and liabilities assumed based on the
estimated fair market value at the date of acquisition while the balance of $48
million was recorded as goodwill. The purchase price allocation for this
acquisition is preliminary and further refinements will be made based on the
completion of the final valuation

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<PAGE> 215
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

studies. The pro forma operating results of this acquisition for the years
presented was not materially different from actual results. The initial
allocation of the purchase price is as follows (in millions):

<TABLE>
<S> <C>
Current assets.............................................. $ 28
Property, plant and equipment............................... 417
Acquired intangibles........................................ 15
Goodwill.................................................... 48
Liabilities assumed and other............................... (15)
----
Purchase price......................................... $493
====
</TABLE>

SIPD

On June 30, 1999, the Company, through a wholly owned subsidiary, acquired
a 9.99% interest in SIPD for $107 million. As of December 31, 1999, SIPD had an
ownership interest in 18 coal-fired power generating units with a total
installed capacity of 5,125 MW in China's Shandong province. The Company
accounts for its investment in SIPD under the equity method of accounting due to
the preferential board representation and significant operating influence.

WPD (FORMERLY SWEB)

In September 1999, SWEB sold its electricity supply business to London
Electricity for the British Pound Sterling equivalent of $264 million and the
assumption of certain liabilities resulting in a gain of $286 million prior to
expenses, minority interest, and income taxes, and a gain of $78 million after
these items. The Company retained its 49% interest in the distribution business,
the trading name of which has been changed to Western Power Distribution. The
Company continues to own 49% economic interest (50.5% voting interest) of WPD.

LOUISIANA GENERATING LLC

During September 1999, the Company sold its 50% investment in Louisiana
Generating LLC to its partner for $17 million. The Company recognized
approximately $10 million as an after-tax gain on the sale which is included in
the accompanying statements of income.

CEMIG

In January 1998, Southern Energy, as a shareholder in Cayman Energy Traders
("CET"), did not exercise its option to withdraw as a shareholder of CET and,
therefore, transferred approximately $114 million to CET to continue to
participate in the CEMIG project. In May 1998, this transaction was completed
when Southern Energy transferred an additional $21 million to CET. The Company
accounts for this investment under the equity method due to significant
influence evidenced by 33% voting shares held by the Company and its investing
partner.

EDELNOR

During 1998, the Company purchased an additional 15% interest in its
Chilean investment in Empresa Electrica del Norte Grande S.A. for approximately
$57 million. The purchase price resulted

F-51
<PAGE> 216
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in $32 million of negative goodwill which was recorded as a reduction in the
basis of the Company's long-lived assets.

WPD (FORMERLY SWEB)

On June 18, 1998, Southern Energy sold a 26% interest in its subsidiary,
SWEB Holdings Limited ("Holdings") to PP&L for approximately $170 million. The
Company recorded a pretax gain of approximately $20 million on the sale, which
is included in the accompanying statements of income. This sale increased PP&L's
economic interest in Holdings to 51% and, conversely, reduced Southern Energy's
economic interest to 49%. Subsequently, on June 18, 1998, shares of Holdings
held by Southern Company and PP&L were exchanged for equivalent shares in SWEB
Holdings U.K. ("Holdings U.K."). Under the terms of the agreement, Southern
Energy retains operational and management control of Holdings U.K. and its
subsidiaries. Southern Energy continues to hold 50.5% of the voting shares in
Holdings U.K. and retains a majority of the seats on the board of directors.

SE NEW ENGLAND

On December 30, 1998, the Company, through a wholly owned subsidiary,
Southern Energy New England, LLC ("SE New England"), acquired the generating
asset business, with a total capacity of 1,245 MW, from subsidiaries of
Commonwealth Energy Systems and Eastern Utilities Associates for $536 million.
The acquisition was recorded under the purchase method of accounting. A portion
of the purchase price has been allocated to assets acquired and liabilities
assumed based on the estimated fair market value at the date of acquisition
while the balance of $261 million was recorded as goodwill. The pro forma
operating results of this acquisition for 1997 and 1998 was not materially
different from actual results. The purchase price was allocated as follows (in
millions):

<TABLE>
<S> <C>
Current assets.............................................. $ 13
Property, plant, and equipment.............................. 188
Acquired intangibles........................................ 143
Goodwill.................................................... 261
Liabilities assumed and other............................... (69)
----
Purchase price............................................ $536
====
</TABLE>

SE ASIA-PACIFIC

On January 29, 1997, the Company completed its acquisition of 80% of SE
Asia-Pacific, the largest independent power producer in Asia, for a total net
investment of approximately $2 billion (Note 2). Subsequently, in August 1997,
Southern Energy acquired the remaining 20% minority interest in SE Asia-Pacific
in exchange for approximately $150 million in cash and SE Asia-Pacific's
interest in the Tanjung Jati B project in Indonesia. The acquisition was
financed with a combination of long-term borrowings and a capital contribution
from Parent. The acquisition of SE Asia-Pacific was accounted for using the
purchase method of accounting in accordance with APB No. 16, "Accounting for
Business Combinations." The purchase price of SE Asia-Pacific was allocated to
the underlying assets and liabilities based on the estimated fair values at the
date of acquisition. The acquisition cost exceeded the estimated fair market
value of net assets acquired by $1.6 billion and is considered goodwill (Note
1).

F-52
<PAGE> 217
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net purchase price of $2.1 billion was allocated as follows (in
millions):

<TABLE>
<S> <C>
Leasehold interest.......................................... $ 1,003
Construction work in progress............................... 45
Current assets.............................................. 635
Other assets................................................ 711
Investments................................................. 70
Goodwill.................................................... 1,649
Current liabilities......................................... (809)
Other liabilities........................................... (1,198)
-------
Purchase price.............................................. $ 2,106
=======
</TABLE>

SE Asia-Pacific's operations have been included in the financial statements
since January 29, 1997. The following unaudited pro forma results of operations
for 1997 have been prepared assuming the acquisition of SE Asia-Pacific occurred
on January 1, 1997 and was financed with a combination of long-term debt,
short-term debt and a capital contribution. The pro forma results are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date, nor are they necessarily
indicative of future results. Pro forma operating results for 1997 are for
information purposes only and are as follows (in millions):

<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- ------
<S> <C> <C>
Operating revenues.......................................... $3,750 $3,771
Income before extraordinary item............................ (16) (11)
Net income.................................................. (16) (11)
</TABLE>

BEWAG

During September 1997, the Company completed the acquisition of a 26%
interest in the Berlin, Germany, electric utility Bewag for approximately $820
million. The entire acquisition was funded through a combination of short-term
and long-term borrowings. The Company is part of a consortium with two German
utilities which, together with the Company, own a 75% total interest in Bewag.
Bewag is an integrated electric utility located in Berlin, Germany. The
Company's investment in Bewag is being accounted for under the equity method of
accounting.

STATE LINE

In December 1997, the Company acquired the assets of the State Line
Generating Station from Commonwealth Edison Company for approximately $68
million.

13. INVESTMENTS IN AFFILIATES

The Company has investments in various international and domestic energy
projects. The equity method of accounting is applied to such investments in
affiliated entities, which include corporations, joint ventures and
partnerships, because the ownership structure prevents the Company from
exercising a controlling influence over operating and financial policies. Under
this method, equity in income or losses of these entities is reflected as equity
in earnings of unconsolidated affiliates in the accompanying consolidated
statements of income.

F-53
<PAGE> 218
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth summarized financial information of the
Company's investments in 50% or less-owned investments accounted for under the
equity method (Note 1) as of December 31, 1998 and 1999 and for the years ended
December 31, 1997, 1998 and 1999 or periods from the respective affiliates'
acquisition date, if shorter:

<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
COMBINED INVESTMENTS, EXCLUDING BEWAG
INCOME STATEMENT:
Revenues.................................................... $723 $2,685 $3,441
Operating income............................................ 383 728 831
Net income from continuing operations....................... 50 324 184
BALANCE SHEET:
Current assets.............................................. 629 1,189
Noncurrent assets........................................... 3,413 5,569
Current liabilities......................................... 1,056 1,611
Noncurrent liabilities...................................... 2,569 3,604
BEWAG
INCOME STATEMENT:
Revenues.................................................... $589 $2,366 $2,167
Operating income............................................ 82 419 (128)
Net income from continuing operations....................... 41 216 (84)
BALANCE SHEET:
Current assets.............................................. 677 605
Noncurrent assets........................................... 7,037 6,073
Current liabilities......................................... 1,464 1,582
Noncurrent liabilities...................................... 2,424 1,930
</TABLE>

As of December 31, 1999 the Company had accumulated $23 million in
undistributed earnings of entities accounted for by the equity method of
accounting.

14. SE-FINANCE

The company has investments in leveraged leases through it's leasing
subsidiary SE-Finance. The company entered into leveraged leases in December of
1996, 1998 and 1999. The Company's net investment in leveraged leases consists
of the following at December 31, 1998 and 1999 (in millions):

<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
Net rentals receivable...................................... $ 583 $ 1,339
Unearned income............................................. (319) (783)
--------- ----------
Investment in leveraged leases.............................. 264 556
Deferred taxes arising from leveraged leases................ (22) (58)
--------- ----------
Net investment in leveraged leases.......................... $ 242 $ 498
========= ==========
</TABLE>

F-54
<PAGE> 219
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of the components of the income from leveraged
leases for the years ended December 31, 1998 and 1999 (in millions):

<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Pretax leveraged lease income............................... $ 5 $ 28
Income tax expense.......................................... 2 10
------ -------
Income from leveraged leases................................ $ 3 $ 18
====== =======
</TABLE>

15. EARNINGS PER SHARE

We calculate basic earnings per share by dividing net income available to
common shareholders by the weighted average number of common shares outstanding.
The following table shows our computation of earnings per share (in millions,
except per share data) after giving effect to the stock split that was effected
in conjunction with the offering of common stock (Note 17). Pro forma basic
earnings per share information below gives effect to the dividend paid to
Southern in 2000 as though it had occurred during 1999. Pro forma diluted
earnings per share information below gives effect to the conversion of the
Company's value creation plan ("VCP") standard units outstanding at December 31,
1999 into options to purchase the Company's common stock using the treasury
stock method. See Note 17.

<TABLE>
<CAPTION>
FROM FROM
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS NET
---------- ------------ -------
<S> <C> <C> <C>
Basic, 1997:
(Loss) income............................................. $ (24) $ 8 $ (16)
Shares.................................................... 272 272 272
------- ----- -------
(Loss) earnings per share................................. $ (0.09) $0.03 $ (0.06)
======= ===== =======
Basic, 1998:
(Loss) income............................................. $ (12) $ 12 $ --
Shares.................................................... 272 272 272
------- ----- -------
(Loss) earnings per share................................. $ (0.04) $0.04 $ --
======= ===== =======
Basic, 1999:
Income.................................................... $ 362 $ 10 $ 372
Shares.................................................... 272 272 272
------- ----- -------
Earnings per share........................................ $ 1.33 $0.04 $ 1.37
======= ===== =======
Pro forma basic, 1999:
Income.................................................... $ 362 $ 10 $ 372
Shares.................................................... 272 272 272
Shares assumed due to dividend to Southern................ 31 31 31
------- ----- -------
Earnings per share........................................ $ 1.19 $0.04 $ 1.23
======= ===== =======
</TABLE>

F-55
<PAGE> 220
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FROM FROM
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS NET
---------- ------------ -------
<S> <C> <C> <C>
Pro forma diluted, 2000:
Income.................................................... $ 362 $ 10 $ 372
Add: effect of converting VCP units into options.......... 1 -- 1
------- ----- -------
Adjusted income........................................... $ 363 $ 10 $ 373
Shares.................................................... 272 272 272
Shares assumed due to dividend to Southern................ 31 31 31
Shares assumed due to conversion of VCP standard units.... 2 2 2
------- ----- -------
Adjusted shares........................................... 305 305 305
Earnings per share........................................ $ 1.19 $0.03 $ 1.22
======= ===== =======
</TABLE>

16. SEGMENT REPORTING

Effective December 31, 1997, Southern Energy adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." Southern
Energy's principal business segments consist of the geographic areas in which
the Company conducts business -- Americas, Asia-Pacific, and Europe. The other
reportable business segments are the Company's financing segment ("Southern
Energy Finance") and its business development and general corporate activities
segment ("Corporate"). Intersegment revenues are not material. Financial data
for business segments, products and services, and geographic areas is as follows
(in millions):

BUSINESS SEGMENTS

F-56
<PAGE> 221
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
SOUTHERN
ENERGY
AMERICAS EUROPE ASIA-PACIFIC FINANCE CORPORATE CONSOLIDATED
-------- ------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998:
Operating revenues............ $ 261 $1,273 $ 273 $ 0 $ 12 $1,819
Depreciation and
amortization................ 44 79 96 0 2 221
Interest income............... 10 0 74 0 62 146
Interest expense.............. 59 123 141 0 107 430
Income taxes from
operations.................. (113) 22 (12) 0 (20) (123)
Write-down of generating
assets...................... 308 0 0 0 0 308
Net income from equity method
subsidiaries................ 27 64 44 0 0 135
Segment net income (loss)..... (180) 141 68 12 (41) 0
Total assets.................. 2,166 3,890 4,520 428 1,050 12,054
Investments in equity method
subsidiaries................ 373 923 131 84 0 1,511
Gross property additions...... 101 120 426 0 0 647
Increase in goodwill.......... 261 0 0 0 0 261
1999:
Operating revenues............ $ 939 $ 976 $ 342 $ 0 $ 11 $2,268
Depreciation and
amortization................ 73 90 104 0 3 270
Interest income............... 18 6 72 0 76 172
Interest expense.............. 90 121 125 0 166 502
Income taxes from
operations.................. 34 96 25 0 (26) 129
Write-down of generating
assets...................... 29 31 0 0 0 60
Net income from equity method
subsidiaries................ 16 10 83 0 2 111
Segment net income (loss)..... 96 170 175 10 (79) 372
Total assets.................. 4,071 3,810 4,430 722 830 13,863
Investments in equity method
subsidiaries................ 248 762 254 76 0 1,340
Gross property additions...... 419 115 194 0 19 747
Increase in goodwill.......... 48 0 0 0 0 48
</TABLE>

PRODUCTS AND SERVICES

<TABLE>
<CAPTION>
GENERATION DISTRIBUTION MARKETING FINANCE OTHER TOTAL
---------- ------------ --------- ------- ----- ------
(REVENUE IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997............................... $ 427 $1,283 $1,982 $ 0 $58 $3,750
1998............................... 494 1,273 1 0 51 1,819
1999............................... 1,222 977 0 0 69 2,268
</TABLE>

F-57
<PAGE> 222
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GEOGRAPHIC AREAS

<TABLE>
<CAPTION>
INTERNATIONAL
-----------------------------
UNITED THE UNITED ALL
STATES PHILIPPINES KINGDOM OTHER CONSOLIDATED
------ ----------- ------- ----- ------------
(REVENUE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1997....................................... $2,003 $247 $1,282 $218 $3,750
1998....................................... 53 273 1,273 220 1,819
1999....................................... 736 342 976 214 2,268
</TABLE>

<TABLE>
<CAPTION>
INTERNATIONAL
-----------------------------
UNITED THE UNITED ALL
STATES CHINA PHILIPPINES KINGDOM OTHER CONSOLIDATED
------ ----- ----------- ------- ------ ------------
(LONG-LIVED ASSETS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997................................ $ 913 $546 $1,493 $2,428 $3,477 $ 8,857
1998................................ 2,156 368 1,834 2,463 3,427 10,248
1999................................ 3,989 534 1,966 2,449 3,254 12,192
</TABLE>

17. SUBSEQUENT EVENTS

PROPOSED PUBLIC OFFERINGS AND SEPARATION FROM SOUTHERN COMPANY

In conjunction with the Stock Offering, the Company will convert the
indexed units outstanding under the Value Creation Plan (Note 6) into stock
appreciation rights and will convert the standard units outstanding under the
Value Creation Plan (Note 6) into options to purchase shares of the Company's
common stock. The intrinsic value of the options will equal the final value of
standard units being converted. The standard units have been treated under
variable plan accounting as prescribed by APB Opinion No. 25. Upon conversion to
stock options, fixed plan accounting, as prescribed by APB Opinion No. 25, will
be followed. Under fixed plan accounting, the difference between the fair value
of the options at the date of the initial public offering and their value at the
date of grant that has not been previously expensed under variable plan
accounting will be recorded as compensation expense over the remaining vesting
period of the options.

F-58
<PAGE> 223
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the completion of the distribution, substitute options
for the Company's common stock will be issued to our employees in exchange for
their Southern Company options. The conversion process will follow FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," which dictates the following:

- The aggregate face value of the options immediately after the conversion
will be equal to the aggregate face value prior to the conversion.

- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.

See Note 6 where Southern options held by the Company's officers and
employees are further discussed.

F-59
<PAGE> 224
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DIVIDEND TO SOUTHERN (UNAUDITED). A short-term credit facility was
obtained by the Company to fund the remaining cash dividend payments to Southern
in the aggregate amount of $53 million. Pro forma basic earnings per share data
for 1999 gives effect to such dividend in accordance with Staff Accounting
Bulletin Topic 1:B:3.

TURBINE PURCHASES (UNAUDITED). The Company has entered into agreements to
purchase additional turbines to support ongoing construction and planned
expansion efforts. Total amounts to be paid under the new agreements if all
turbines are purchased as planned are estimated to be $1,693 million.

POTOMAC ELECTRIC POWER COMPANY ("PEPCO") (UNAUDITED). On June 8, 2000, the
Company announced it had entered into an agreement to purchase the bulk of
PEPCO's electric generation business for $2.65 billion plus amounts to be
determined for working capital and approximately $260 million in the event
certain purchase power agreements are not transferred to the Company. The
transaction is expected to be completed in late 2000 and will be accounted for
by the Company as a purchase.

SE CALIFORNIA (UNAUDITED). On June 7, 2000, the administrative law judge
("ALJ") presiding over the proceeding between SE California and the CAISO (See
Note 1 and Note 11 of the Notes) issued an initial decision in which the ALJ
allocated responsibility for payment of approximately 3% of the revenue
requirement to the CAISO. On July 7, 2000, SE California filed an appeal of the
ALJ's decision with the FERC. The outcome of this appeal is uncertain. A final
FERC order in this proceeding may be appealed to the U.S. Court of Appeals. If
SE California is ultimately unsuccessful in its appeal of the ALJ's decision, SE
California will be required to refund certain amounts of the revenue requirement
billed to the CAISO for the period from June 1, 1999 until the final disposition
of the appeal. The amount of this refund as of June 30, 2000 would have been
approximately $94 million and would have reduced net income by approximately $33
million. These amounts do not include interest that would be payable in the
event of a refund. The Company's failure to prevail in this matter would
adversely affect its results of operations.

CEMIG (UNAUDITED). SEB obtained financing from Banco Nacional De
Desenvolvimento Economico e Social (BNDES) for approximately 50% of the total
purchase price of the CEMIG shares which is secured by a pledge of SEB's shares
in CEMIG. A portion of a principal payment that was originally due May 15, 2000,
in an amount of $9.2 million, has been deferred. SEB paid $2.2 million of this
principal payment on May 15, 2000 and expects to pay the remaining $7.0 million
on September 15, 2000. An interest payment of $107.8 million, also due on May
15, 2000, has been deferred until May 15, 2001.

ALICURA (UNAUDITED). On February 21, 2000, we executed a stock purchase
agreement with The AES Corporation to sell our interest in Alicura. The Closing
was expected to occur on June 28, 2000; however, it has not yet occurred. We
cannot assure you that this transaction will be consummated.

SCEM (UNAUDITED). On August 10, 2000, we and Vastar entered into a
non-binding letter agreement in which we agreed to acquire Vastar's 40% interest
in SCEM for $250 million. Contingent upon the negotiation of definitive
agreements and the receipt of applicable regulatory approvals, we expect to
close this transaction as early as August 30, 2000. Upon the closing of the
transaction, Vastar will transfer its interest in SCEM to us and SCEM will
become our wholly owned subsidiary.

F-60
<PAGE> 225
SOUTHERN ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HYDER. On Friday, August 11, 2000, WPD Limited, one of our subsidiaries,
submitted an offer of 365 pence per share for the entire ordinary share capital
of Hyder plc, which owns and runs the electricity network in South Wales and the
water distribution and waste water treatment business for all of Wales. This
represents a total purchase price of L565 million (approximately $849 million).
August 11, 2000 was the last day for submission of revised offers, no other
revised offers were submitted, and WPD Limited was informed by the Takeover
Panel in the United Kingdom that it was the higher bidder. WPD Limited's
increased bid had not yet been formally announced pending the outcome of an
appeal by the other party competing to acquire Hyder against a ruling of the
Panel Executive allowing the WPD Limited bid to proceed. On Wednesday, August
16, 2000, the Takeover Panel announced that the parties' appeal was rejected. If
WPD Limited's bid for Hyder plc is successful, WPD intends to become involved in
the management of the electricity network in South Wales.

F-61
<PAGE> 226

INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Berliner Kraft- und Licht (Bewag)-Aktiengesellschaft
Berlin, Germany

We have audited the accompanying balance sheet of Berliner Kraft- und Licht
(Bewag)-Aktiengesellschaft as of June 30, 1998, and the related statements of
profit and loss and cash flows for the year ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards in Germany and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bewag Aktiengesellschaft as
of June 30, 1998, and the results of its operations and cash flows for the year
ended June 30,1998, in conformity with accounting principles generally accepted
in Germany.

Generally accepted accounting principles in Germany vary in certain
significant respects from generally accepted accounting principles in the United
States of America. Application of generally accepted accounting principles in
the United States of America would have affected the result of operations for
the year ended June 30, 1998 and shareholders' equity as of June 30, 1998 to the
extent summarized in Appendix II to the financial statements.

KPMG Deutsche Treuhand-Gesellschaft AG (hand written)
Wirtschaftsprufungsgesellschaft

Berlin, Germany
September 8, 1998

F-62
<PAGE> 227

BALANCE SHEET

<TABLE>
<CAPTION>
NOTES 30 JUNI 1998 30 JUNI 1997
NO. DM THOUSAND DM THOUSAND
(UNAUDITED)
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
ASSETS
FIXED ASSETS: (1)
-------------------------------------------------------------------------------------------------
Intangible assets........................................... (2) 330,978 330,410
Tangible assets............................................. (3) 6,997,728 6,951,993(1)
Financial assets............................................ (4) 854,553 513,865
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
8,183,259 7,796,268
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CURRENT ASSETS:
-------------------------------------------------------------------------------------------------
Inventories................................................. (5) 168,851 190,040
Accounts receivable and other assets:
Receivables for goods and services........................ (6) 546,744 480,187
Receivables from affiliated companies..................... (7) 3,265 1,047
Receivables from companies in which participations are
held.................................................... (8) 4,607 16,160
Other assets.............................................. (9) 127,679 135,497
Securities.................................................. (10) 203,529 262,154
Checks, cash on hand, on deposit with Deutsche Bundesbank
and Postbank, cash in other bank accounts................. (11) 226,830 367,461
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,281,505 1,452,546
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PREPAID EXPENSES............................................ (12) 134,192 146,439
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL LOSS ACCOUNT........................................ (13) 384,795 392,431(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,983,751 9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
EQUITY:
-------------------------------------------------------------------------------------------------
Subscribed capital.......................................... (14) 560,000 560,000
Capital reserve............................................. (15) 56,800 56,800
Revenue reserves............................................ (16)
Statutory reserve......................................... 848,257 848,257(1)
Special reserve according to Section 17 Sub-section 4
DMBiLG.................................................. 384,795 392,431(1)
Other revenue reserves.................................... 1,532,535 1,469,899
-------------------------------------------------------------------------------------------------
2,765,587 2,710,587(1)
Net profit for the year................................. (17) 224,000 112,000
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
3,606,387 3,439,387
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER................ (18) 1,844,528 1,780,264
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEM FOR INVESTMENT BONUSES......................... (19) 410,711 451,354
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CONSTRUCTION COST SUBSIDIES................................. (20) 683,564 645,126
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PROVISIONS
-------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations............. 407,804 391,415
Provisions for taxes........................................ 103,452 49,766
Other provisions............................................ (21) 1,421,576 1,394,837(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,932,832 1,836,018
-------------------------------------------------------------------------------------------------
LIABILITIES................................................. (22)
-------------------------------------------------------------------------------------------------
Liabilities to banks........................................ (23) 858,713 1,047,640
Advance payments received................................... (24) 127,816 108,827
Liabilities for goods and services.......................... 305,481 269,097
Liabilities to affiliated companies......................... 786 845
Liabilities to companies in which participations are held... (25) 12,016 14,290
Other liabilities........................................... (26) 200,673 194,797
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,505,485 1,635,496
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
DEFERRED INCOME............................................. 244 39
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,983,751 9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>

(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBiLG)

The accompanying notes are an integral part of these statements.

F-63
<PAGE> 228

PROFIT AND LOSS ACCOUNT

<TABLE>
<CAPTION>
1996/97
NOTES 1997/98 DM THOUSAND
NO. DM THOUSAND (UNAUDITED)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES REVENUE.................................... (27) 3,959,727 4,092,864
--------------------------------------------------------------------------------------
Stock movements and other internally produced and
capitalised assets............................. (28) 49,477 65,548
Other operating income........................... (29) 299,006 419,199
Cost of materials................................ (30) -1,227,481 -1,427,178(1)
Personnel expenses............................... (31) -1,159,845 -1,142,730(2)
Depreciation..................................... (32) -617,995 -625,880
Other operating expenses......................... (33) -779,942 -1,016,906(1)(2)
Income from financial assets..................... (34) -16,181 31
Net interest income.............................. (35) -51,557 -58,835
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
RESULT OF ORDINARY ACTIVITIES.................... 455,209 306,113
--------------------------------------------------------------------------------------
Taxes............................................ (36) -176,209 -121,613
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
NET INCOME FOR THE YEAR........................ 279,000 184,500
--------------------------------------------------------------------------------------
Allocations to other revenue reserves............ -55,000 -72,500
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
NET PROFIT FOR THE YEAR........................ 224,000 112,000
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>

-------------------------

(1) After the reclassification of DM 104,592 thousand from other operating
expenses to cost of materials

(2) After the reclassification of DM 2,500 thousand from other operating
expenses to personnel expenses

The accompanying notes are an integral part of these statements.

F-64
<PAGE> 229

CASH-FLOW STATEMENT

<TABLE>
<CAPTION>
1996/97
1997/98 DM MILLION
DM MILLION (UNAUDITED)
-----------------------------------------------------------------------------------------
<S> <C> <C>
Net income for the year..................................... 279 185
Depreciation of fixed assets................................ 634 619
Changes in long-term provisions............................. -64 -45
Allocation to special item.................................. 162 429
Release of special item..................................... -136 -136
Other expenses and income without effect on payments........ -23 -55
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
DVFA/SG CASH-FLOW........................................... 852 997
Result from disposals of fixed assets....................... 3 -9
Increase/Decrease in inventories, receivables for goods and
services and other assets................................. -7 607
Increase/Decrease in liabilities for goods and services and
other liabilities......................................... 262 105
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
INFLOW OF FUNDS FROM OPERATING ACTIVITIES................... 1,110 1,700
-----------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets..................... 18 32
Disbursements for capital investments in fixed assets....... -1,030 -921
(including increase of participation in GASAG)............ (-354) (--)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR INVESTMENT ACTIVITIES.................. -1,012 -889
-----------------------------------------------------------------------------------------
Payments to shareholders (dividend)......................... -112 -90
Receipts from taking up loans............................... -- 54
Payments for redemption of loans............................ -185 -278
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR FINANCING ACTIVITIES................... -297 -314
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
CHANGES IN FINANCING RESOURCES WITH EFFECT ON PAYMENT....... -199 497
-----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM MILLION CHANGE
MOVEMENTS OF FINANCIAL FUNDS DM MILLION (UNAUDITED) DM MILLION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid funds..................................... 227 368 -141
Securities in current assets..................... 204 262 -58
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
FINANCIAL FUNDS.................................. 431 630 -199
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-65
<PAGE> 230

NOTES TO THE FINANCIAL STATEMENTS

PRELIMINARY REMARKS

On 1 July 1993, Bewag was merged with the energy supply company
Energieversorgung Berlin AG (EBAG), which was located in the former East Berlin.

As a result of the merger under stock corporation law, legislation which,
according to the unification treaty applied only to companies in the former GDR,
now applies to Bewag as a whole. This is particularly relevant with regard to
the provisions of the DM-Balance Sheet Act (DMBilG) covering the special loss
account, the special reserves under Section 17 Sub-section 4 of the Act and
capital reorganisation under Section 27 of the Act. In certain circumstances
Section 36 DMBilG also stipulates changes in EBAG's DM opening balance sheet,
which then retroactively entail corrections in certain balance sheet item
valuations for each previous year.

As of 30 June 1998 CHANGES IN THE OPENING BALANCE SHEET were either
necessary or possible for the following items:

- Tangible assets increased by DM 0.2 million, because the total value
shown for land had increased pursuant to official notices of allocation
or adjustment.

- Provisions for compensation obligations were reduced by DM 4.9 million as
certain restitution claims had become more precise or due to court
decisions that had become legally effective.

- As a consequence of new investigations regarding the expenditure
necessary to rehabilitate contaminated properties, provisions for
contamination were reduced by DM 74.9 million. The special loss account
and the special reserve were also reduced by the same amount.

As a result of these changes, the statutory reserve was increased by DM
80.0 million.

Bewag must also take into account the stipulations of the LAND REGISTRY
ADJUSTMENT ACT (GBBerG). This act applies only to the territory which joined the
Federal Republic under the unification treaty, and especially covers easements
of utility supply companies in non-public land and compensation payments due to
the owners of such properties. Provisions were established for this purpose as
of 30 June 1995, the date of the initial application of the Act. At the time,
this provision did not affect operating results in the profit and loss account;
it had merely served to record such liabilities and related assets on the
balance sheet.

Since the obligations will become due in two equal installments, on 1
January 2001 and 2011, the easements were assessed at present value. The
difference between the value of the easements and the obligation was recorded as
prepaid expense.

In the year under review, detailed studies of the location and quality of
the properties showed that the provision should be increased by DM 49.6 million.
Under the accounting methodology used, this adjustment, rather than being
reported as an expense, merely increases the recorded assets and liabilities.
The only consequence is a DM 3.8 million increase in depreciation expense and an
adjustment of prepaid expenses.

Because of the insignificance of Bewag's shareholdings as a whole in
relationship to its financial and income position, the company took advantage of
the option in Section 296 Sub-section 2 of the Commercial Code (HGB) and chose
not to prepare a CONSOLIDATED ANNUAL STATEMENT.

ACCOUNTING AND VALUATION METHODS

In the balance sheet and the profit and loss account, certain items have
been combined for the sake of greater clarity; they are then shown in greater
detail in the notes. Furthermore, in an effort to provide more insight into the
company's financial position, a number of items have been added to the balance
sheet. The profit and loss account has been drawn up according to the
cost-summary method. DM figures shown in the annual statement represent
thousands.

F-66
<PAGE> 231
NOTES TO THE FINANCIAL STATEMENTS

PRELIMINARY REMARKS -- (CONTINUED)

Specifically, accounting and valuation are based on the following
principles:

ASSETS

Purchased INTANGIBLE ASSETS are valued at their acquisition costs less
regular straight-line depreciation.

TANGIBLE ASSETS are assessed at acquisition or production costs. The
following change was made in the year under review: With regard to the costs of
self constructed assets, Bewag does not use a lump-sum overhead cost factor, but
rather capitalizes only directly allocable costs. Interest paid on outside
capital has been excluded from this item since 1 January 1991. When new tangible
assets are added, investment subsidies are deducted from the costs of
acquisition or production. Regular depreciation for tangible assets is carried
out on a straight-line basis for buildings, and otherwise always at the highest
degression rate permissible under taxation law; straight-line depreciation is
favoured as soon as this leads to higher annual amounts. Plant for which special
depreciation can be claimed under Section 4 of the Development Area Act (FordG)
is also depreciated by the straight-line method, as stipulated by law.
Depreciation is based on the Federal Minister of Finance's depreciation table
for the energy and water supply sector.

In the in-service year of purchase or production, new plant is depreciated
at 75.0 per cent of the normal annual rate.

According to one of the options of Section 6 Sub-section 2 of the Income
Tax Act (EStG), minor assets are depreciated fully in the year of purchase or
production.

FINANCIAL ASSETS are valued at acquisition cost. Interest free loans are
discounted to their present value.

If the book value of an asset calculated according to the above principles
is greater than its quoted or market value at balance-sheet date, the excess
over the market value is written off.

INVENTORIES are valued at average acquisition costs, taking into account
the lower-of-cost-or-market rule. Deductions are made for inventories subject to
long storage and thus potentially less suitable for use. The amounts deducted
depend on the rate of turnover for the goods concerned.

With regard to RECEIVABLES AND OTHER ASSETS, an appropriate amount is
deducted for identifiable single risks. Other risks are taken into account in a
general allowance for bad debts and doubtful accounts. Advance payments on
receivables for goods and services are offset against electricity supplied but
not yet invoiced. Receivables for electricity supplied but not yet invoiced are
assessed on the basis of electricity consumption and revenue projections; a
differentiated group assessment procedure is applied. Interest-free receivables
are discounted according to their terms.

SECURITIES are valued at acquisition cost or at their market price if it is
lower.

No use is made of the option right to capitalize debt discount expenses:
such expenses are immediately recorded in the profit and loss account.

Provisions for which a SPECIAL LOSS ACCOUNT had been created in the opening
balance sheet of EBAG as of 1 July 1990 and which have been used up are not
reported as an expenditure in the relevant items of the profit and loss account;
instead, the special loss account is depreciated by the amount of the used
provisions.

F-67
<PAGE> 232
NOTES TO THE FINANCIAL STATEMENTS

PRELIMINARY REMARKS -- (CONTINUED)

SHAREHOLDERS' EQUITY AND LIABILITIES

As they become freely disposable, funds of the SPECIAL RESERVE UNDER
SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET ACT (DMBilG) are transferred to
other revenue reserves in accordance with the current version of the Act, which
has been in force since 25 July 1994.

The amount by which the regular depreciation of tangible assets differs
from the increased deduction for depreciation under Section 14 of the Berlin
Promotion Act (BerlinFG) and the special depreciation under Section 4 of the
Development Area Act (FordG) are disclosed as SPECIAL ITEMS WITH PARTIAL RESERVE
CHARACTER, together with the reserve under Section 6b of the Income Tax Act
(EStG). The difference between regular depreciation and increased deduction is
always released in accordance with established depreciation procedures, but the
release of the special depreciation begins at the end of the preferential
period.

Tax-free investment bonuses are shown under liabilities as SPECIAL ITEM FOR
INVESTMENT GRANTS. The release of this item into income is carried out on a
straight-line basis in accordance with the period of use of the subsidised
assets.

CONSTRUCTION COST SUBSIDIES are released into income at an annual rate of
5.0 per cent unless a shorter term has been agreed upon.

The PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS are formed according to
actuarial principles. Fractional values are determined on the basis of an
interest rate of 6.0 per cent.

OTHER PROVISIONS reflect all risks and uncertain obligations which are
identifiable according to the principles of the most probable estimate. For the
first time in the year under review, no discounting was used to calculate the
provisions for early retirement. In addition, a provision for future
expenditures for repairs under Section 249 Sub-section 2 of the Commercial Code
(HGB) was created on 30 June 1995.

LIABILITIES are reported at their repayment value.

FOREIGN CURRENCY CONVERSION

Receivables and liabilities in foreign currency are converted at the
exchange rate applicable on the date of origin of the claim or liability, unless
a fall or rise in the exchange rate makes a devaluation of the claim or an
upvaluation of the liability necessary.

CASH-FLOW STATEMENT

In accordance with the bulletin of the main specialist committee of the
Institute of Auditors (IDW) and with international accounting standards (IAS 7),
the cash-flow statement shows payments broken down into cash flow from
operations, from investment and from financing activities. Within the flow of
funds resulting from operations, cash flow is shown according to DVFA/SG. The
balance represents the total change in resources in the course of the business
year.

F-68
<PAGE> 233

NOTES TO THE BALANCE SHEET

1. FIXED ASSETS

Changes in individual items of fixed assets in the 1997/98 business year,
including depreciation, are shown in the "Movements in fixed assets" section.

2. INTANGIBLE ASSETS

The two main intangible assets are DM 159.8 million for easements under
Section 9 of the Land Registry Adjustment Act (GBBerG) and the right of usage
for the connection to the Western European grid network, valued at DM 145.8
million.

3. TANGIBLE ASSETS

Additions and transfers to tangible assets involving completed and fully
charged installations amount to DM 809.2 million. The most significant additions
were investments made for power transmission and distribution equipment as well
as for district heating installations -- including DM 326.8 million for cable
and overhead line networks and DM 77.0 million for the Friedrichshain
substation.

The value of advance payments made and installations under construction
fell by DM 165.9 million to DM 709.0 million. This amount covers the 380-kV
underground link between Mitte and Friedrichshain substations as well as various
electricity and heat distribution installations.

4. FINANCIAL ASSETS

The decrease in our shares in affiliated companies is largely due to the
write off of EAB Fernwarme GmbH, Berlin to its assessed value. Lendings to
affiliated companies were exclusively to IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin.

The increase in our participations results mainly from the fact that we
extended our 11.95 per cent participation in GASAG Berlin Gaswerke AG, Berlin by
a further 13.04 per cent to 24.99 per cent. Lendings to companies in which we
hold participations were to the IT company BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, as well as to EUS
Energie und Umwelt Service GmbH, Berlin.

5. INVENTORIES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Raw materials and supplies........................ 155,681 172,111 -16,430
Work in progress for public lighting.............. 13,170 17,929 -4,759
------- ------- -------
Total........................................... 168,851 190,040 -21,189
======= ======= =======
---------------------------------------------------------------------------------------------
</TABLE>

The reduction in raw materials and supplies is mainly due to reduced
amounts of fuel oil and operating materials. Deductions were made for
inventories that have been in storage for a long time with little turnover as
the value of such material had decreased.

F-69
<PAGE> 234
NOTES TO THE BALANCE SHEET -- (CONTINUED)

6. RECEIVABLES FOR GOODS AND SERVICES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Electricity supplied.............................. 412,814 396,406 16,408
Heating supplied.................................. 116,748 77,594 39,154
Other goods and services supplied................. 17,182 6,187 10,995
------- ------- ------
Total........................................... 546,744 480,187 66,557
======= ======= ======
---------------------------------------------------------------------------------------------
</TABLE>

The increase in receivables is due largely to this year's new billing
procedure for heat supplied and, in the electricity sector, to the one-time
effects of the pricing and contract reform for special-contract customers
introduced on 1 October 1997.

Receivables for electricity and heating supplied include DM 769.0 million
in payments on account received for electricity and heating consumed but not yet
billed (previous year: DM 764.8 million).

Of the receivables shown here, DM 16,198 thousand (previous year: DM 15,398
thousand) have terms of more than one year.

7. RECEIVABLES FROM AFFILIATED COMPANIES

The receivables shown are mainly due from the district heating company EAB
Fernwarme GmbH and from IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin.

8. RECEIVABLES FROM COMPANIES IN WHICH PARTICIPATIONS ARE HELD

The receivables shown are largely due from the gas supply company GASAG
Berliner Gaswerke AG, Berlin, as well as from the IT company BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.

9. OTHER ASSETS

The other assets shown mainly contain DM 50.0 million in receivables from
orders and services not yet invoiced, DM 29.5 million in advance payments made
and DM 26.4 million in receivables from ancillary business and insurance
payments.

Of the other assets, DM 4,191 thousand (previous year: DM 3,977 thousand)
have terms of more than one year.

10. SECURITIES

This item covers mortgage bonds, one federal treasury note and one state
government treasury note.

F-70
<PAGE> 235
NOTES TO THE BALANCE SHEET -- (CONTINUED)

11. CHEQUES, CASH ON HAND AND ON DEPOSIT WITH DEUTSCHE BUNDESBANK, POSTBANK,
CASH IN OTHER BANK ACCOUNTS

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Cheques and cash on hand.......................... 528 524 4
Deposits with Deutsche Bundesbank and Postbank.... 21,103 60,509 -39,406
Cash in other bank accounts....................... 205,199 306,428 -101,229
------- ------- --------
Total........................................... 226,830 367,461 -140,631
======= ======= ========
</TABLE>

--------------------------------------------------------------------------------

12. PREPAID EXPENSES

Prepaid expenses contain the difference between the nominal value and the
present value of the compensation payments under Section 9 of the Land Registry
Adjustment Act (GBBerG) -- DM 130,8 million -- as well as prepayments for
pensions and other prepayments.

13. SPECIAL LOSS ACCOUNT UNDER SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET
ACT (DMBILG)

DM 7.6 million in provisions related to the special loss account were used
during the course of the year under review, and the special loss account was
reduced by this amount to a value of DM 384.8 million.

14. SUBSCRIBED CAPITAL

The subscribed capital at the balance-sheet date amounts to DM 560.0
million. Bayernwerk Aktiengesellschaft, Munich, and Southern Energy Holding
Beteiligungsgesellschaft mbH, Berlin, each hold 26.0 per cent. 23.0 per cent are
held by PreussenElektra Aktiengesellschaft, Hanover, and 25.0 per cent are in
scattered ownership.

The capital stock is distributed in:

GROUP A SHARES (bearer shares with single voting right)

75,333,400 shares with a face value of DM 5 each; 75,333,400 votes

GROUP B SHARES (registered shares with double voting right)

36,666,600 shares with a face value of DM 5 each; 73,333,200 votes

15. CAPITAL RESERVE

The capital reserve contains allocations from share premiums and the
reserves arising from the Bewag opening balance sheet of 1 April 1949.

F-71
<PAGE> 236
NOTES TO THE BALANCE SHEET -- (CONTINUED)

16. REVENUE RESERVES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Statutory reserve............................... 848,257 848,257(1) 0
Special reserve under Section 17
Sub-section 4 DMBilG.......................... 384,795 392,431(1) -7,636
Other revenue reserves.......................... 1,532,535 1,469,899 62,636
--------- --------- ------
Total......................................... 2,765,587 2,710,587(1) 55,000
========= ========= ======
</TABLE>

(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
--------------------------------------------------------------------------------

The statutory reserve contains DM 824.1 million from the earlier
realignment of the capital position of EBAG effected under Section 27
Sub-section 2 of the DM-Balance Sheet Act (DMBilG).

DM 55.0 million of this year's net income were allocated to the other
revenue reserves. In addition, a freely disposable amount of DM 7.6 million was
transferred from the special reserve under Section 17 Sub-section 4 of the
DM-Balance Sheet Act (DMBilG) to the other revenue reserves.

17. NET PROFIT FOR THE YEAR

After the allocation of DM 55.0 million of this year's net income of DM
279.0 million to the other revenue reserves, the net profit for the year is DM
224.0 million.

18. SPECIAL ITEM WITH PARTIAL RESERVE CHARACTER

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Increased deduction for depreciation under Section
14 of the Berlin Promotion Act (BerlinFG)....... 511,861 571,826 -59,965
Special depreciations under Section 4 of the
Development Area Act (FordG).................... 1,324,150 1,191,768 132,382
Reserve under Section 6b of the Income Tax Act
(EStG).......................................... 8,517 16,670 -8,153
--------- --------- -------
Total........................................... 1,844,528 1,780,264 64,264
========= ========= =======
---------------------------------------------------------------------------------------------
</TABLE>

In the year under review, the DM 16.7 million of last year's reserve under
Section 6b of the Income Tax Act was transferred to purchased land.

19. SPECIAL ITEM FOR INVESTMENT GRANTS

While DM 14.4 million was allocated to the special item for investment
grants, the overall reduction in this item results from the release into income
of an amount of DM 55.0 million.

F-72
<PAGE> 237
NOTES TO THE BALANCE SHEET -- (CONTINUED)

20. CONSTRUCTION COST SUBSIDIES

DM 62.5 million of construction cost subsidies relate to construction in
progress. Of the remainder, DM 389.1 million apply to electricity supply, DM
231.3 million to heating supply and DM 0.7 million to public lighting.

21. OTHER PROVISIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
30 JUNE 1998 30 JUNE 1997 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Contamination removal............................ 407,765 437,588(1) -29,823
Personnel........................................ 442,002 441,744 258
Easements under Section 9 of the Land Registry
Adjustment Act (GBBerG)........................ 384,575 334,996 49,579
Uncertain liabilities for supplies and
services....................................... 59,254 57,046 2,208
Compensation obligations for property............ 33,743 34,443(1) -700
Demolition and dismantling....................... 7,999 13,033 -5,034
Interest on old loans of the former EBAG......... -- 16,284 -16,284
Sundry........................................... 86,238 59,703 26,535
--------- --------- -------
Total.......................................... 1,421,576 1,394,837(1) 26,739
========= ========= =======
</TABLE>

(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
--------------------------------------------------------------------------------

The provisions for contamination removal take into account the costs
anticipated in the eastern districts of Berlin for the replacement of soil on
contaminated properties, the removal and disposal of oil-insulated cables, and
soil rehabilitation measures required as a result of leakages of oil-insulated
cables on properties owned by third parties. In addition, a deduction of DM
110.3 million has been made with regard to the value of contaminated properties
in the area formerly supplied by EBAG.

The provisions for personnel expenses mainly contain provisions for early
retirement arrangements, profit-sharing measures, anniversary payments, annual
bonus payments, residual holiday entitlement, and for our new arrangements for
part-time work of older employees.

The provisions for uncertain liabilities arising from supplies and services
also contain provisions for contingent losses for future expenditures.

The sundry provisions mainly contain DM 38.4 million for expected
expenditure to repair the facade of the former main administration building,
which is classified as a historical monument, as well as DM 23.7 million for
outside services which have not yet been invoiced.

F-73
<PAGE> 238
NOTES TO THE BALANCE SHEET -- (CONTINUED)

22. LIABILITIES

The composition and terms of our liabilities can be seen in the following
table:
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
TERMS
-----------------------------------------------------
UP TO 1 1 - 5 OVER 5
YEAR YEARS YEARS TOTAL
DM DM DM DM
TYPE OF LIABILITY THOUSAND THOUSAND THOUSAND THOUSAND
----------------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Liabilities to banks.......................... 454,817 170,316 233,580 858,713
previous year (unaudited)................... 197,929 350,165 499,546 1,047,640
Advanced payments received.................... 127,816 -- -- 127,816
previous year (unaudited)................... 108,827 -- -- 108,827
Liabilities for goods and services............ 305,481 -- -- 305,481
previous year (unaudited)................... 269,097 -- -- 269,097
Liabilities to affiliated companies........... 786 -- -- 786
previous year (unaudited)................... 845 -- -- 845
Liabilities to companies in which
participations are held..................... 12,016 -- -- 12,016
previous year (unaudited)................... 14,290 -- -- 14,290
Other liabilities............................. 96,801 61,472 42,400 200,673
previous year (unaudited)................... 91,230 46,767 56,800 194,797
including -- tax liabilities................ (23,445) (--) (--) (23,445)
previous year (unaudited)................... (34,041) (--) (--) (34,041)
social security............................. (25,341) (--) (--) (25,341)
previous year (unaudited)................... (24,393) (--) (--) (24,393)
------- ------- ------- ---------
Total liabilities........................ 997,717 231,788 275,980 1,505,485
------- ------- ------- ---------
previous year (unaudited).............. 682,218 396,932 556,346 1,635,496
======= ======= ======= =========
</TABLE>

--------------------------------------------------------------------------------

23. LIABILITIES TO BANKS

The reduction of DM 188.9 million largely represents repayments of DM 185.2
million, DM 13.2 million of which were made in advance of due date. Liabilities
to banks also involve DM 126.7 million in loans under Section 16 of the Berlin
Promotion Act (BerlinFG) and DM 454.6 million in loans under Section 17 of the
same Act.

24. ADVANCE PAYMENTS RECEIVED

The increase in advance payments is largely attributable to electricity
operations.

25. LIABILITIES TO COMPANIES IN WHICH PARTICIPATIONS ARE HELD

These liabilities are almost entirely to the energy and environmental
service company EUS Energie und Umwelt Service GmbH, to the gas supply company
GASAG Gaswerke AG, Berlin, and to the IT company BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin.

26. OTHER LIABILITIES

Other liabilities of DM 200.7 million include a loan from an insurance
company of DM 100.0 million.

F-74
<PAGE> 239

NOTES TO THE PROFIT AND LOSS ACCOUNT

27. SALES REVENUES

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
BREAKDOWN BY AREA OF ACTIVITY DM THOUSAND (UNAUDITED) DM THOUSAND
----------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Electricity supplies.............................. 3,081,755 3,167,907 -86,152
Heating supplies.................................. 822,837 883,113 -60,276
Public lighting................................... 55,135 41,844 13,291
--------- --------- --------
Total........................................... 3,959,727 4,092,864 -133,137
========= ========= ========
</TABLE>

There was a decrease of 2.7 per cent in sales revenues from the supplies of
electricity. The discrepancy between this figure and the 0.4 per cent decrease
in the quantity of electricity sold is mainly due to the price reductions for
high and medium-voltage customers which went into force on 1 January 1997 as
well as at the time of the pricing and contract reform of 1 October 1997.

The reduction in sales revenues from heating supplies is mainly due to the
strong decrease in the amount of heat supplied as a result of the weather
conditions -- in spite of a slight increase in the thermal output capacity sold.

The rise in revenue in the area of public lighting is the result of an
increased release of funds by the state of Berlin for the operation and
maintenance of street and traffic lighting.

28. CHANGES IN INVENTORIES AND OTHER INTERNALLY PRODUCED AND CAPITALIZED ASSETS

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Changes in amount of work in progress for public
lighting........................................ (4,759) (10,265) 5,506
Other internally produced and capitalized
assets.......................................... 54,236 75,813 -21,577
------ ------- -------
Total........................................... 49,477 65,548 -16,071
====== ======= =======
</TABLE>

29. OTHER OPERATING INCOME

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Income from the release of special items:
with partial reserve character.................. 80,778 81,280 -502
for investment bonuses.......................... 55,032 54,588 444
Sundry operating income........................... 163,196 283,331 -120,135
------- ------- --------
Total........................................... 299,006 419,199 -120,193
======= ======= ========
</TABLE>

The income from the release of special items with partial reserve character
is attributable to the release of DM 60.0 million due to additional tax
depreciations made in earlier years under Section 14 of the Berlin Promotion Act
(BerlinFG) and of DM 20.8 million due to special depreciations made in previous
years under Section 4 of the Development Area Act (FordG).

F-75
<PAGE> 240
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

The sundry operating income includes DM 33.1 million in refunds for changes
made to our distribution installations at the request of third parties, DM 28.0
million from repairs and other services, DM 27.7 million in income from the
release of provisions, DM 13.9 million from claim adjustments, DM 10.4 million
from rentals and leases, DM 9.2 million in credit notes from fuel deliveries for
previous years as well as DM 8.5 million in revenue from the sale of properties.

30. COST OF MATERIALS

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Expenditure for raw materials and supplies and for
purchased goods................................. 949,864 1,031,977 -82,113
including -- fuel................................. (524,184) (560,431) (-36,247)
-- power................................ (315,443) (358,419) (-42,976)
Expenditure for purchased services................ 277,617 395,201 -117,584
--------- --------- ---------
Total........................................... 1,227,481 1,427,178 -199,697
========= ========= =========
</TABLE>

The reduction in expenditure for fuel is due mainly to a decrease in
demand. In addition, structural shifts in our use of fuel from relatively
expensive fuel oil to less costly lignite have contributed to lower expenditure
levels.

We achieved considerable savings in our expenditure for power by buying
more of our purchased electricity in the spot market, where prices are more
favourable.

The decrease in expenditure for purchased services is mainly due to savings
in maintenance.

1996/97 expenditure for purchased services is now reported as being DM
104.6 million higher; this is because all maintenance expenditure is now shown
under this item, and no longer under other sundry operating expenses.
Correspondingly, the latter item has been reduced by DM 104.6 million. This
reclassification gives a better idea of the company's expenses.

31. PERSONNEL EXPENSES

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Wages and salaries................................ 896,403 879,130 17,273
Social security contributions and expenditure for
pensions and benefits........................... 263,442 263,600 -158
including payments for pensions................. (93,900) (95,680) (-1,780)
--------- --------- -------
Total........................................ 1,159,845 1,142,730 17,115
========= ========= =======
</TABLE>

The increase in personnel expenditure -- in spite of lower average numbers
of staff -- is mainly the result of the new provisions to cover arrangements on
part-time work for older employees and of the increased need for provisions for
early retirement arrangements. In addition, wage adjustments resulting from
collective bargaining, which were retroactive to the previous year, increased
expenditure by DM 17.3 million.

F-76
<PAGE> 241
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

The 1996/97 figure is now reported as being DM 2.5 million higher, because
expenditures resulting from provisioning for residual holiday is now shown under
wages and salaries and no longer under sundry operating expenses.
Correspondingly, the previous year's figure for the latter item has been reduced
by DM 2.5 million. There has also been an increase of DM 1.4 million in the
previous year's payments for pensions, because this item now includes amounts
paid to the Mutual Benefit Association for Pension Security. These
reclassifications also give a better idea of our expenses.

32. DEPRECIATION

Depreciation of tangible and intangible assets can be seen in the
"Movements in fixed assets" overview. It includes extraordinary depreciation of
DM 10.2 million on advance payments for intangible assets as well as DM 12.6
million for tangible assets. In addition, the special loss account was
depreciated by DM 7.6 million.

33. OTHER OPERATING EXPENSES

<TABLE>
<CAPTION>
CHANGE
1997/98 1996/97 DM THOUSAND
DM THOUSAND DM THOUSAND (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Allocation to special items with partial reserve
character....................................... 161,711 428,723 -267,012
Franchise fee..................................... 204,366 193,710 10,656
Sundry operating expenses......................... 413,865 394,473 19,392
------- --------- --------
Total........................................... 779,942 1,016,906 -236,964
======= ========= ========
</TABLE>

Allocations to special items with partial reserve character consist of
special depreciations of DM 153.2 million under Section 4 of the Development
Area Act (FordG) and a reserve of DM 8.5 million under Section 6b of the Income
Tax Act (EStG).

The higher franchise fee is based on the increase stipulated in the
franchise contract with the state of Berlin, which came into effect on 1 January
1997 and now affected the entire business year.

Sundry operating expenses especially include DM 77.1 million in outside
services for the administration and marketing departments, DM 43.7 million for
data centre services rendered by BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, DM 36.9 million in rent
and lease payments, DM 27.6 million in allowances on receivables and other
assets, DM 23.2 million for the purchase of materials for the administration and
marketing departments as well as DM 19.7 million in insurance premiums. The main
components of the item which are unrelated to this accounting period are DM 17.6
million on retroactive rate adjustments for heating, DM 12.0 million in costs
for dismantling and losses of DM 11.7 million from the retirement of assets.

34. INCOME FROM FINANCIAL ASSETS

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Income from companies in which participations are
held............................................ 5,720 3,014 2,706
including from affiliated companies............. (-2,993) (-2,671) (-322)
Income from other securities and from lending of
financial assets................................ 1,693 891 802
including from affiliated companies............. (716) (141) (-575)
Depreciation on financial assets and securities... -23,541 -1,556 -21,985
Expenses for losses transferred................... -53 -2,318 2,265
-------- ------- -------
Total............................................. -16,181 31 -16,212
======== ======= =======
</TABLE>

F-77
<PAGE> 242
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)

Income from companies in which participations are held consists largely of
the 1997 dividends and corporation tax credits received for the district heating
company Fernheizwerk Neukolln AG, Berlin, and for the IT company BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.

Depreciation on financial assets and securities covers mainly write off to
their assessed values of EAB Fernwarme GmbH, Berlin (DM 19.5 million), ARGE
Modellprojekt Berliner Energiesparpartnerschaft Bewag/Landis & Gyr, Berlin (DM
1.7 million), EAB Energie-Anlagen Berlin GmbH, Berlin (DM 1.3 million), EUS
Energie und Umwelt Service GmbH, Berlin (DM 0.6 million), EFR Europaische
Funk-Rundsteuerung GmbH, Berlin (DM 0.2 million) and Berliner Energieagentur
GmbH, Berlin (DM 0.2 million).

The expenses for losses transferred result entirely from the losses
incurred in the 1997 business year by "DEPOGAS-Gesellschaft zur Gewinnung und
Verwertung von Deponiegasen mbH", a Berlin company for the exploitation of gas
from waste tips.

35. NET INTEREST INCOME

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Other interest and similar income................. 27,180 37,412 -10,232
Interest and similar expense...................... -78,737 -96,247 17,510
------- ------- -------
Total........................................... -51,557 -58,835 7,278
======= ======= =======
</TABLE>

The reduction in other interest and similar income is mainly due to the
lower total average of financial investments.

The decline in interest and similar expense is largely the result of
reduced average holdings in long-term loans.

36. TAXES

<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Taxes on revenue and income....................... 169,496 98,710 70,786
Other taxes....................................... 6,713 22,903 -16,190
------- ------- -------
Total........................................... 176,209 121,613 54,596
======= ======= =======
</TABLE>

The increase in taxes on revenue and income is attributable to a rise in
taxable income.

The reduction in other taxes is due almost exclusively to the abolition of
the trading capital tax as of 1 January 1998 and the abolition of the net worth
tax as of 1 January 1997. This item now includes only real property tax and
motor vehicles tax.

F-78
<PAGE> 243

SUPPLEMENTARY INFORMATION

EFFECTS OF VALUATION CHANGES AND TAX REGULATIONS ON THE REPORTED NET INCOME

Accounting changes (Section 284 Sub-section 2 no. 3 of the Commercial Code)
with regard to provisions for early retirement arrangements have resulted in
approximately DM 20 million in increased expenditure. However, because of the
reduction by the same amount in otherwise permissible special depreciation under
Section 4 of the Development Area Act (FordG), this measure has no effect on the
net income for the year.

On the basis of the balance of allocations and releases of special items
with partial reserve character, and the associated effect this has on the tax
expenditure and on other expenditure dependent on profits and dividends, the net
income declared for the year is approximately DM 39 million lower than the
amount which would otherwise have been declarable.

The future revenue tax burden arising from the release of special items
with partial reserve character will depend on the tax rates applicable at the
time.

OTHER FINANCIAL OBLIGATIONS

Future capital expenditure already approved by the Supervisory Board and
maintenance work needing to be done in the coming years represent purchase
commitments of approximately DM 650 million (previous year: DM 472 million).
This amount includes mainly capital expenditure for repairs and for the
extension of our electricity and heat generating and distribution installations.

The cash value of payment obligations arising from long-term rental and
leasing agreements is approximately DM 358 million (previous year: DM 366
million).

There are approximately DM 149 million (previous year: DM 209 million) in
other discounted purchase commitments, including approximately DM 112 million
(previous year: DM 147 million) relating to affiliated companies.

Fuel and power supplies are secured by long-term contracts in line with the
customs of the trade.

F-79
<PAGE> 244

SHARE OWNERSHIP UNDER SECTION 285 NO. 11 OF THE COMMERCIAL CODE (HGB)

<TABLE>
<CAPTION>
SHARE IN EQUITY ON
CAPITAL DECEMBER 31, 1997 1997 RESULT
NAME AND LOCATION OF THE COMPANY % DM THOUSAND DM THOUSAND
-------------------------------- -------- ----------------- -----------
(DM THOUSAND)
<S> <C> <C> <C>
DEPOGAS-Gesellschaft zur Gewinnung und Verwertung
von Deponiegasen mbH, Berlin(1).................. 100.00 0 0
EAB Fernwarme GmbH, Berlin......................... 100.00 16,677 -6,307
Bewag Immobilienmanagement GmbH, Berlin............ 100.00 1,203 177
IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin............... 100.00 16,759 -2,931
Bewag Energiemanagement GmbH, Berlin............... 100.00 493 -7
FHW Fernheizwerk Neukolln Aktiengesellschaft,
Berlin........................................... 75.22 24,941 3,178
EAVV Energie Assekuranz Versicherungs Vermittlungs
GmbH, Berlin..................................... 60.00 420 320
ARGE Energiesparpartnerschaft Bewag/Landis & Gyr
GbR, Berlin...................................... 50.00 1,859 -3
BerlinDat Gesellschaft fur Informationsverarbeitung
und Systemtechnik mbH, Berlin(2)................. 50.00 4,527 2,527
EAB Energie-Anlagen Berlin GmbH, Berlin(3)......... 50.00 0 -3,234
Berliner Energieagentur GmbH, Berlin............... 33.33 3,372 -568
EFR Europaische Funk-Rundsteuerung GmbH, Berlin.... 30.00 0 -1,104
EBH Energie-Beteiligungsholding GmbH, Dortmund..... 25.00 550,260 2,254
EUS Energie und Umwelt Service GmbH, Berlin........ 25.00 68 -1,028
GASAG Berliner Gaswerke AG, Berlin................. 24.99 939,265 -98,161
</TABLE>

-------------------------

(1) There is a profit and loss transfer contract with the company.

(2) The business year ended on 30 September 1997.

(3) The shares were sold on 28 July 1998.

LIABILITY

Of the liabilities for sureties, which total DM 22.1 million (previous
year: DM 22.8 million), DM 19.6 million represent sureties for loans of the
district heating company EAB Fernwarme GmbH, Berlin, and DM 2.5 million for
loans of the waste tip gas exploitation company DEPOGAS-Gesellschaft zur
Gewinnung und Verwertung von Deponiegasen mbH, Berlin.

There are also guarantees of DM 17.2 million (previous year: DM 20.9
million). DM 15.9 million of this amount represent guarantees for affiliated
companies (previous year: also DM 15.9 million).

NOTIFICATIONS OF PARTICIPATION

In accordance with the stipulations of Section 20 Sub-section 5 in
connection with Sub-section 1 of the German Stock Corporation Act (AktG), the
state of Berlin notified Bewag in a letter dated 29 September 1997 that it no
longer holds a participation of more than 25 per cent in Bewag's capital stock.

F-80
<PAGE> 245

In accordance with Section 20 Sub-section 1 of the German Stock Corporation
Act, Bewag was also notified by the Southern Company, Atlanta, on behalf of
Southern Energy Holding Beteiligungsgesellschaft mbH, Berlin, in a letter of 6
October 1997, and by Bayernwerk AG, Munich, in a letter of 13 January 1998, that
they own more than 25 per cent of Bewag stock.

AVERAGE PERSONNEL LEVEL IN THE BUSINESS YEAR

Employees (excluding apprentices)

<TABLE>
<CAPTION>
1997/98 1996/97 CHANGE
------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Craftsmen................................................... 3,563 3,927 -364
Technical staff............................................. 3,224 3,312 -88
Commercial staff............................................ 2,241 2,348 -107
----- ----- ----
Total..................................................... 9,028 9,587 -559
===== ===== ====
</TABLE>

DETAILS OF THE COMPANY'S CORPORATE GOVERNANCE

Members of Bewag's Supervisory Board and Board of Management are listed in
Appendix I to these notes.

For the 1997/98 business year, the total remuneration of the Board of
Management was DM 5,248,310 (previous year: DM 3,432,591) and the remuneration
for the Supervisory Board was DM 957,250 (previous year: DM 473,000).

A total of DM 2,519,819 (previous year: DM 2,296,560) was paid to former
members of the Board of Management and their surviving family; a total of DM
23,608 thousand (previous year: DM 20,297 thousand) is allocated as provision
for pension obligations to this group of persons.

DISTRIBUTION OF THE NET PROFIT FOR THE YEAR

We propose that the net profit for the year of DM 224,000,000 be used to
pay a dividend on the current capital stock of DM 560 million as well as on the
coming capital increase of a further DM 560 million from corporate funds.

Berlin, 8 September 1998

BERLINER KRAFT- UND LICHT (BEWAG)-AKTIENGESELLSCHAFT
The Board of Management

F-81
<PAGE> 246

BEWAG AG
BUSINESS YEAR 1997/1998

MOVEMENTS IN FIXED ASSETS

<TABLE>
<CAPTION>
ACQUISITION OR PRODUCTION COSTS
-------------------------------------------------------------------------------------------------
STATUS STATUS
1 JULI 1997 ADDITIONS TRANSFERS DISPOSALS 30 JUNI 1998
DM DM DM DM DM
THOUSAND THOUSAND THOUSAND THOUSAND THOUSAND
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
Industrial property rights and
similar rights and assets...... 427,535 25,937 1,517 3,774 451,215
Advance payments................. 22,277 6,258 -1,481 10,059 16,995
=================================================================================================
449,812 32,195 36 13,833 468,210
=================================================================================================
TANGIBLE ASSETS
=================================================================================================
Real estate, rights equivalent to
real estate and buildings,
including buildings on third
party land property............ 2,987,334(5) 11,347 62,082 12,596 3,048,167
Power plant installations........ 5,851,717 21,254 36,702 48,856 5,860,817
Electricity transmission and
distribution installations..... 5,000,839 150,818(1) 372,194 23,904(1) 5,499,947
District heating distribution
installations.................. 2,159,598 31,227 94,061 15,161 2,269,725
Other installations, operating
and business equipment......... 423,266 13,586(2) 15,903 25,215(2) 427,540
Advance payments and
installations under
construction................... 874,926 451,259 -580,978 36,234 708,973
=================================================================================================
17,297,680 679,491 -36 161,966 17,815,169
=================================================================================================
FINANCIAL ASSETS
=================================================================================================
Shares in affiliated companies... 88,126 500 -- -- 88,626
Loans to affiliated companies.... 6,400 8,000 -- -- 14,400
Participations................... 414,574 355,750 -- 1,954 768,370
Loans to companies in which
participations are held........ 18,993 500 -- -- 19,493
Other loans...................... 2,950 717 -- 596 3,071
=================================================================================================
531,043 365,467 -- 2,550 893,960
=================================================================================================
FIXED ASSETS..................... 18,278,535 1,077,153 -- 178,349 19,177,339
=================================================================================================
</TABLE>

(1) Including minor assets: DM 10,682 thousands

(2) Including minor assets: DM 3,189 thousands

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)

The accompanying notes are an integral part of these statements.

F-82
<PAGE> 247

BEWAG AG
BUSINESS YEAR 1997/1998

MOVEMENT IN FIXED ASSETS

<TABLE>
<CAPTION>
NET BOOK VALUES
ACCUMULATED DEPRECIATION IN DM THOUSAND IN DM THOUSAND
----------------------------------------------------------------- ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
STATUS
STATUS STATUS STATUS 30 JUNI 1997
1 JULI 1997 ADDITIONS TRANSFERS DISPOSALS 30 JUNI 1998 30 JUNI 1998 (UNAUDITED)
----------- --------- --------- --------- ------------ ------------ ------------
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
Industrial property rights
and similar rights and
assets.................... 119,402 21,120 -- 3,290 137,232 313,983 308,133
Advance payments............ -- 10,189 -- 10,189 -- 16,995 22,277
=============================================================================================================================
119,402 31,309 -- 13,479 137,232 330,978 330,410
=============================================================================================================================
TANGIBLE ASSETS
=============================================================================================================================
Real estate, rights
equivalent to real estate
and buildings, including
buildings on third party
land property............. 903,848 87,664 355 5,181 986,686 2,061,481 2,083,486(5)
Power plant installations... 4,616,845 195,731 634 43,666 4,769,544 1,091,273 1,234,872
Electricity transmission and
distribution
installations............. 3,194,257 169,849(1) -722 22,804(1) 3,340,580 2,159,367 1,806,582
District heating
distribution
installations............. 1,303,872 87,165 87 11,664 1,379,460 890,265 855,726
Other installations,
operating and business
equipment................. 326,865 38,641(2) -354 23,981(2) 341,171 86,369 96,401
Advance payments and
installations under
construction.............. -- -- -- -- -- 708,973 874,926
=============================================================================================================================
10,345,687 579,050 -- 107,296 10,817,441 6,997,728 6,951,993
=============================================================================================================================
FINANCIAL ASSETS
=============================================================================================================================
Shares in affiliated
companies................. 11,000 19,506 -- -- 30,506 58,120 77,126
Loans to affiliated
companies................. -- -- -- -- -- 14,400 6,400
Participations.............. 6,082 4,019 -- 1,278 8,823 759,547 408,492
Loans to companies in which
participations are held... -- -- -- -- -- 14,493 18,993
Other loans................. 96(3) -- -- 18(4) 78 2,993 2,854
=============================================================================================================================
17,178 23,525 -- 1,296 39,407 854,553 513,865
=============================================================================================================================
FIXED ASSETS................ 10,482,267 633,884 -- 122,071 10,994,080 8,183,259 7,796,268
=============================================================================================================================
</TABLE>

(1) Including minor assets: DM 10,682 thousands

(2) Including minor assets: DM 3,189 thousands

(3) Discount of interest

(4) Accumulation of interest because of retirements disposal

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)

The accompanying notes are an integral part of these statements.

F-83
<PAGE> 248

APPENDIX I

SUPERVISORY BOARD

BARNEY S. RUSH
(from 26 September 1997)
Chairman from 15 December 1997
President of Southern Energy Development
Europe Ltd., London

ERNST-OTTO KOCK
Deputy chairman from 15 December 1997
Deputy Chairman of the Public Services and
Transport Trade Union, Berlin regional
administration, Berlin

SVEN BERGELIN
(From 15 December 1997)
Department head for industry of the
DAG-Union, Berlin-Brandenburg Land
Administration, Berlin

HANS-JURGEN CRAMER
(from 15 December 1997)
Head of a main department of Bewag, Berlin

RAINER FRANK ELSASSER
(from 15 December 1997)
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

KLAUS FORSTER
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

DR. MANFRED GENTZ
(from 15 December 1997)
Member of the Board of Management of
Daimler Benz Aktiengesellschaft, Stuttgart

DR. HANS-DIETER HARIG
(Chairman until 15 December 1997)
Chairman of the Board of Management of
PreussenElektra Aktiengesellschaft, Hanover

BERND HELMS
(from 15 December 1997)
Head craftsmen of Bewag, Berlin

RITA KUHNER-PRZEWOSNIK
(from 15 December 1997)
Section head of Bewag, Berlin

CARL-FRIEDRICH MEISSNER
(from 15 December 1997)
Former Member of the Board of Management
of the Deutsche Telekom Aktiengesellschaft,
Calw

DR. GEORG OBERMEIER
(From 26 September 1997)
Member of the Board of Management of
VIAG Aktiengesellschaft, Munich

REINHOLD OFFERMANN
(from 15 December 1997)
Member of the Board of Management of
PreussenElektra Aktiengesellschaft, Springe

RICHARD J. PERSHING
(From 26 September 1997)
Senior Vice President of
Southern Energy Inc., Rosewell

KARL-HEINZ DIETER REGEL
(from 15 December 1997)
Project engineer of Bewag, Berlin

MARTIN SATTLER
(from 15 December 1997)
Meter fitter with special responsibilities of
Bewag, Berlin

UWE SCHARF
(from 15 December 1997)
Deputy Chairman of the Public Services
and Transport Trade Union, Berlin regional
administration, Berlin

MARIO SCHONIAN
(from 15 December 1997)
1st car mechanic of Bewag, Berlin

HERBERT STROBEL
1st senior clerk of Bewag, Berlin

DR. GIUSEPPE VITA
Chairman of the Board of Management
of Schering Aktiengesellschaft, Berlin

RESIGNED FROM THE SUPERVISORY BOARD

STEPHAN BOEHNKE
(until 15 December 1997)
Technician with special responsibilities of
Bewag, Berlin

DR. ALFRED DWORAK
(until 15 December 1997)
Chief executive of VEBA Aktiengesellschaft,
Berlin

DR. ANNETTE FUGMANN-HEESING
(until 2 September 1997)
Senator for Finance, Berlin

F-84
<PAGE> 249

REGINA GEISS
(until 15 December 1997)
Section head of Bewag, Berlin

JAMES R. HARRIS
(from 26 September 1997 until
15 December 1997)
Vice President of
Southern Energy Inc., Marietta

HARALD JOOS
(until 28 August 1997)
Chairman of the management of Schindler
Aufzugefabrik GmbH, Berlin

JORG KLOSE
(until 15 December 1997)
Contract clerk of Bewag, Berlin

DR. KURT LANGE

(until 15 December 1997)
Chairman of the Public Services and Transport
Trade Union, Berlin regional administration,
Berlin

DR. OTTO MAJEWSKI
(until 15 December 1997)
Chairman of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich

ELMAR PIEROTH
(until 2 September 1997)
Senator for Economic Affairs and Public Utility
Companies, Berlin

KLAUS POMMERANIG
(until 15 December 1997)
Former departmental head of the energy sector
in the Public Services and Transport Trade
Union, Berlin regional administration, Berlin

OLAF ROCH
(until 15 December 1997)
Shop supervisor of Bewag, Berlin

DR. JOACHIM SCHMELZER
(until 15 December 1997)
Head of a main department/Staff member with
special responsibilities of Bewag, Berlin

DR. LORENZ SCHOMERUS
(until 1 September 1997)
State secretary in the Federal Ministry of
Economics, Bonn

MANFRED SCHWARZE
(until 15 December 1997)
Chairman of the Works Council of
Bewag, Berlin

WOLFGANG STEINRIEDE
(until 23 September 1997)
Former spokesman of the Board of
Management of Bankgesellschaft Berlin
Aktiengesellschaft, Berlin

JAMES A. WARD
(from 26 September 1997 until
15 December 1997)
Vice President of Southern Energy Inc.,
Fayetteville

BOARD OF MANAGEMENT

PROF. DR. DIETMAR WINJE
Chairman
Energy business and corporate development,
Berlin

DR. BERND BALZEREIT
Finance and legal affairs, Berlin

DR. KLAUS BECHTOLD
Generation and heating, Berlin

J. BRUCE JONES
(from 1 February 1998)
Electricity grid and sales, Berlin

DR. KURT LANGE
(from 1 February 1998)
Human resources and employee services, Berlin

RESIGNED FROM THE BOARD OF MANAGEMENT

MICHAEL PAGELS
(until 31 October 1997)
Personnel and organisation, Teltow

F-85
<PAGE> 250

APPENDIX II

BEWAG NOTES

SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

The Bewag financial statements comply with accounting principles generally
accepted in Germany ("German GAAP"), which differs in certain significant
respects from accounting principles generally accepted in the United States
("U.S. GAAP"). The significant differences that affect the net income and
shareholders' equity of Bewag as of and for the year ended June 30, 1998 are
described below:

(A) INVESTMENT IN SUBSIDIARIES

In accordance with German GAAP, investments in controlled subsidiaries are
not required to be consolidated if certain materiality tests are met, and can be
recorded under the cost method (and, if applicable, the lower of cost or market
method). As Bewag meets these materiality tests for all controlled subsidiaries,
it accounts for these entities under the cost method. Under the cost method of
accounting, dividends declared are the basis for recognizing earnings from an
investment.

A controlled subsidiary is generally defined under U.S. GAAP as all
majority-owned subsidiaries unless control is temporary or does not rest with
the majority owner. Under U.S. GAAP, controlled subsidiaries are consolidated,
with a minority interest shown as an adjustment to net income or loss and as a
separate item on the balance sheet.

Certain of Bewag's controlled subsidiaries were acquired in a purchase
requiring purchase accounting treatment under U.S. GAAP. The purchase method
requires that assets acquired and liabilities assumed be accounted for at fair
value. The excess of purchase price over the fair value of net assets acquired
is recorded as goodwill. Under U.S. GAAP, goodwill must be capitalized and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.

In accordance with German GAAP, Bewag has written down its investment in
EAB Fernwarme to its estimated value. The consolidation of EAB Fernwarme as
required under US GAAP resulted in the reversal of the amounts previously
written down, including the current year amount of DM 19.5 million. The attached
reconciliation also reflects the other entries necessary to completely
consolidate Bewag's controlled subsidiaries.

(B) MINORITY INTEREST

Under German GAAP, minority interest is included as a separate component of
shareholders' equity and included in net income. Bewag has not recorded minority
interest as subsidiaries have not been consolidated as allowed under German
GAAP. Under U.S. GAAP, minority interest is eliminated from income and is shown
as a liability to the minority owners on the balance sheet.

In accordance with German GAAP, investments in affiliated companies
(affiliated companies generally are entities which are 20-50% owned by Bewag)
are not required to be accounted for under

F-86
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the equity method, if certain materiality tests are met, and can be recorded
under the cost method (and, if applicable, the lower of cost or market method).
As Bewag meets these materiality tests for all affiliated companies, it accounts
for these entities under the cost method. Under the cost method of accounting,
dividends declared are the basis for recognizing earnings from an investment.

Under U.S. GAAP, investments in affiliated companies are recorded using the
equity method of accounting if an investment enables the investor to influence
the operating or financial decisions of the investee, with the balance of each
investment being increased or decreased, as appropriate, to account for the
investor's proportionate share of the investee earnings. Upon disposal, the
above differences would also result in differing gains and losses on
disposition.

Certain of Bewag's affiliated companies were acquired in a purchase
requiring purchase accounting treatment under U.S. GAAP. The purchase method
requires that assets acquired and liabilities assumed be accounted for at fair
value. The excess of purchase price over the fair value of net assets acquired
is recorded as goodwill. Under U.S. GAAP, goodwill must be capitalized and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.

In accordance with German GAAP, Bewag has written down its investment in
several affiliated companies to the estimated value of these investments. The
application of the equity method of accounting as required under U.S. GAAP
resulted in the reversal of the amounts previously written off, prior to booking
the appropriate entries to record Bewag's equity in the earnings of the
affiliated companies.

(D) DEPRECIATION

Under German GAAP, certain fixed and intangible assets are depreciated
based on accelerated depreciation methods permitted by German law. German GAAP
allows disclosure of the effect of accelerated depreciation in a special balance
sheet position known as "Sonderposten", or deduction from the cost basis of the
assets. The "Sonderposten" recorded under German GAAP includes depreciation in
accordance with section 4 FordG and section 14 BerlinFG. Further, depreciable
lives differ from those allowed under U.S. GAAP and 75% of the annual
depreciation amount is allowed in the year an asset is placed in-service. German
GAAP allows, under certain circumstances for the cost basis of assets to be
adjusted (e.g. assets sales gains being transferred to newly acquired fixed
assets). Such adjustments are not allowed under U.S. GAAP. Under U.S. GAAP,
fixed and intangible assets are recorded at cost and depreciated over their
useful life. For purposes of the reconciliation to U.S. GAAP, fixed and
intangible assets have been depreciated on a straight-line basis. Depreciation
in the in-service year is taken from the date the asset is placed in-service.

(E) AMORTIZATION OF INVESTMENT GRANTS AND CONSTRUCTION COST SUBSIDIES

The amortization of certain deferred revenue, comprised of customer and
government payments in support of investments, which is being amortized over the
depreciable lives of the related assets for German GAAP purposes, has been
adjusted to reflect the useful lives used for U.S. GAAP purposes.

(F) INTEREST CAPITALIZATION

German GAAP permits, but does not require, the capitalization of interest
as part of the historical cost of the acquisition of assets that are constructed
or otherwise produced for an enterprise's own use. Bewag has elected to expense
these interest costs as incurred. U.S. GAAP requires the capitalization of such
interest costs. The additional cost is depreciated over the expected useful life
of the related asset.

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(G) DEBT DISCOUNT

German GAAP permits, but does not require, discount associated with the
issuance of debt to be expensed as incurred. U.S. GAAP require that such
discount be capitalized and amortized to income over the life of the related
debt.

(H) PENSIONS AND OTHER EMPLOYEE BENEFITS

Under German GAAP, the Company provided for pension costs in accordance
with article 6a of the German Income Tax Act. Pension accounting under U.S. GAAP
is prescribed by Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions" ("SFAS 87"). SFAS 87 requires actuarial computation of the pension
costs for defined benefit plans using the Projected Unit Credit Method and
includes current service cost, interest cost, return on plan assets and
amortization of actuarial gains/losses and prior service cost. Prior service
cost is amortized over the future service period of active employees.
Unrecognized gains and losses exceeding 10% of the greater of the projected
obligation or the market-related value of the plan assets are amortized over the
average service period of active employees. Differences between U.S. GAAP and
German GAAP relate primarily to future service costs, which are required to
measured under SFAS 87 and interest costs, which are fixed under German GAAP.

SFAS 87 requires that companies located outside the United States adopt the
provisions of SFAS 87 for fiscal years beginning after December 15, 1988. Due to
the significant period of time which elapsed between the date when SFAS 87 would
have been required to be adopted and the time when Bewag first determined to
prepare U.S. GAAP financial information, adoption of the provisions of SFAS 87
as of July 1, 1989 was not feasible. Accordingly, SFAS 87 has been adopted from
July 1, 1997. As of the date of adoption, a transition obligation was calculated
under requirements of SFAS 87 and is being amortized over a 15 year period
beginning on the assumed implementation date of July 1, 1989.

(I) PROVISIONS AND ACCRUALS

German GAAP permits the recognition of accruals and provisions for
uncertain liabilities and loss contingencies. The amount of such accruals or
provision represents the anticipated expenses of the company. Specific examples
include the establishment of a provision in the amount of DM 38.4 million to
repair the facade of the old corporate headquarters as well as a DM 34 million
provision for future lease payments for the current corporate headquarters.
Under U.S. GAAP, an accrual for a loss contingency is recorded by a charge to
income if it is probable that an asset has been impaired or a liability has been
incurred and at the same time the minimum amount of the loss can be reasonably
estimated. Less precisely determinable reserves for future losses, costs, or
risks do not meet the condition for accrual under U.S. GAAP and have been
eliminated.

(J) SPECIAL ITEM "RESERVE UNDER SECTION 6B ESTG"

Under German GAAP, gains on disposal of land can be transferred to new
acquisition of land by offsetting against acquisition costs within a period of
four years after the disposal became effective. Gains not yet transferred are
recorded as a special item (Reserve under section 6b EStG) in accordance with
German GAAP.

Under U.S. GAAP this treatment is not allowed. The special item for gains
on disposal of land therefore is eliminated. Gains of prior years increased
equity and the current gains added to the special item are taken to income under
U.S. GAAP.

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(K) SPECIAL PROVISION IN ACCORDANCE WITH D-MARKBILANZGESETZ ("SPECIAL LOSS
ACCOUNT")

As allowed under German GAAP, Bewag has recorded a special provision in
accordance with D-Markbilanzgesetz ("special loss account") as an asset on the
balance sheet and a corresponding account shown as a component of equity. This
special provision relates to the opening balance sheet prepared under the
regulations of the D-Markbilanzgesetz (DMBilG) of the former East German
electric utility Energieversorgung Berlin AG ("EBAG") as of July 1, 1990, the
date when all East German companies converted their accounting systems. The
special provision relates to liabilities (primarily environmental related
liabilities and restitution claims) assumed by Bewag after merging with EBAG.
Adjustments made to these offsetting accounts do not impact earnings under
German GAAP. Under U.S. GAAP, the special provisions have been eliminated. The
associated liabilities are included on the balance sheet as appropriate for U.S.
GAAP with adjustments to the liabilities being treated as changes of estimates
and included in the U.S. GAAP operating results in the period the change in
estimate occurs.

(L) DEFERRED TAXES

Under German GAAP, deferred tax assets and liabilities are not generally
recognized for all differences between the book carrying values and the tax
bases of assets and liabilities.

Under U.S. GAAP, deferred tax assets and liabilities for temporary
differences using enacted tax rates in effect at year-end are recognized in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, net operating loss
carryforwards that are available to reduce future taxes are recognized as
deferred tax assets. Such amounts are reduced by a valuation allowance to the
extent that it is "more likely than not" that the deferred tax assets will not
be realized.

The deferred tax liability on U.S. GAAP adjustments covers the future tax
burden related to the additional depreciation recorded for in the special item
with partial reserve character that is disclosed in the notes under German GAAP.

(M) OTHER

Several other differences from German GAAP to U.S. GAAP are considered
insignificant for the reconciliation of financial statements as of June 30,
1998.

Under German GAAP, securities and other investments are valued at the lower
of acquisition costs or market value at the balance sheet date. Adjustments to
record investments below cost are included in the income statement. Under U.S.
GAAP marketable equity and debt securities are classified into three categories:
held-to-maturity securities, available-for-sale securities or trading
securities. For U.S. GAAP purposes, Bewag's securities are considered to be held
to maturity and therefore carried at the adjusted cost at the balance sheet
date.

Other but insignificant differences in accounting principles include
unrealized gains from foreign currency translations and other costs and income
amounts in the German financial statements that are capitalized or deferred for
U.S. GAAP purposes, respectively.

(N) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", (SFAS No. 133), which is effective for fiscal years
beginning after June 15, 2000 (July 1, 2000 in

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<PAGE> 254

the case of Bewag). This statement requires that all derivative financial
instruments be reflected on the balance sheet at fair value, with changes in
fair value recognized periodically in earnings or as a component of other
comprehensive income, depending on the nature of the underlying item, changes in
the fair value of the derivative will be recognized currently in the statements
of profit and loss. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133", that amends SFAS No. 133 to be effective for all
fiscal quarters or all fiscal years beginning after June 15, 2000. Additionally,
on June 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133", that addresses a limited number of issues causing
implementation difficulties for a large number of entities preparing to apply
Statement 133.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition In Financial Statements. This
bulletin summarizes the views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
staff believes that the change must be reported, by all registrants, no later
than the fourth fiscal quarter of the fiscal year beginning after December 15,
1999.

RECONCILIATION TO U.S. GAAP

The following is a summary of the significant adjustments to net income for
the year ended June 30, 1998 and to shareholders' equity at June 30, 1998 which
would be required if U.S. GAAP had been applied instead of German GAAP.

<TABLE>
<CAPTION>
YEAR ENDED
NOTE JUNE 30, 1998
---- -------------
TDM
<S> <C> <C>
Net income as reported in the statement of operations under
German GAAP............................................... 279,000
Adjustments required to conform to U.S. GAAP:
Investment in subsidiaries................................ (a) -17,117
Minority interest......................................... (b) -895
Investment in affiliated companies........................ (c) 1,283
Depreciation.............................................. (d) 41,439
Amortization of investment grants and construction cost
subsidies.............................................. (e) -22,472
Interest capitalization................................... (f) 2,918
Debt discount............................................. (g) -2,034
Pension and other employee benefits....................... (h) -45,896
Provisions and accruals................................... (i) 2,005
Special item "Reserve under section 6b EStG".............. (j) 8,517
Special provision in accordance with DMBilG............... (k) 87,703
Deferred taxes............................................ (l) -16,555
Deferred tax effect of U.S. GAAP adjustments.............. (l) 23,957
--------
Net income in accordance with U.S. GAAP................ 341,853
========
</TABLE>

F-90
<PAGE> 255

<TABLE>
<CAPTION>
AS OF
NOTE JUNE 30, 1998
---- -------------
TDM
<S> <C> <C>
Shareholders' equity as reported in the balance sheet under
German GAAP............................................... 3,606,387
Adjustments required to conform to U.S. GAAP:
Investment in subsidiaries................................ (a) -42,067
Minority interest......................................... (b) -12,022
Investment in affiliated companies........................ (c) 80,977
Depreciation.............................................. (d) 5,429,538
Amortization of investment grants and construction cost
subsidies.............................................. (e) -291,520
Interest capitalized...................................... (f) 28,560
Debt discount............................................. (g) 6,983
Pension and other employee benefits....................... (h) -220,162
Provisions and accruals................................... (i) 103,440
Special item "Reserve under section 6b EStG".............. (j) 25,187
Special provision in accordance with DMBilG............... (k) -384,564
Deferred taxes............................................ (l) 90,410
Deferred tax effect of U.S. GAAP adjustments.............. (l) -2,646,565
-----------
Shareholders' equity in accordance with U.S. GAAP........... 5,774,582
===========
</TABLE>

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<PAGE> 256

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

BALANCE SHEET

<TABLE>
<CAPTION>
NOTES 30 JUNE 1999 30 JUNE 1998
NO. DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
FIXED ASSETS................................................ (1)
-------------------------------------------------------------------------------------------------
Intangible assets........................................... (2) 396,160 330,978
Tangible assets............................................. (3) 6,733,824 7,021,011(1)
=================================================================================================
Financial assets............................................ (4) 848,312 854,553
=================================================================================================
7,978,296 8,206,542
-------------------------------------------------------------------------------------------------
CURRENT ASSETS
-------------------------------------------------------------------------------------------------
Inventories................................................. (5) 167,872 168,851
Accounts receivable and other assets
Receivables for goods and services........................ (6) 522,116 546,744
Receivables from affiliated companies..................... (7) 2,053 3,265
Receivables from companies in which participations are
held.................................................... (8) 5,577 4,607
Other assets.............................................. (9) 91,036 127,679
-------------------------------------------------------------------------------------------------
Securities.................................................. (10) 184,295 203,529
Cheques, cash on hand, on deposit with Deutsche Bundesbank
and Postbank, cash in other bank accounts................. (11) 277,980 226,830
=================================================================================================
1,250,929 1,281,505
=================================================================================================
PREPAID EXPENSES............................................ (12) 185,215 134,192
=================================================================================================
SPECIAL LOSS ACCOUNT........................................ (13) 358,821 365,238(1)
=================================================================================================
9,773,261 9,987,477
=================================================================================================
EQUITY
-------------------------------------------------------------------------------------------------
Subscribed capital.......................................... (14) 1,120,000 560,000
Capital reserve............................................. (15) 56,800 56,800
Revenue reserves............................................ (16)
Statutory reserve......................................... 899,691 899,691(1)
Special reserve according to Section 17 Sub-Section 4
DMBilG.................................................. 358,821 365,238(1)
Other revenue reserves.................................... 1,029,551 1,532,535
2,288,063 2,797,464(1)
=================================================================================================
Net profit for the year................................. (17) 246,400 224,000
=================================================================================================
3,711,263 3,638,264
=================================================================================================
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER................ (18) 1,884,341 1,844,528
=================================================================================================
SPECIAL ITEM FOR INVESTMENT BONUSES......................... (19) 386,546 410,711
=================================================================================================
CONSTRUCTION COST SUBSIDIES................................. (20) 697,711 683,564
=================================================================================================
PROVISIONS
-------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations............. (21) 464,209 407,804
-------------------------------------------------------------------------------------------------
Provisions for taxes........................................ 189,882 103,452
-------------------------------------------------------------------------------------------------
Other provisions............................................ (22) 1,534,302 1,393,425(1)
-------------------------------------------------------------------------------------------------
2,188,393 1,904,681
-------------------------------------------------------------------------------------------------
LIABILITIES (23)
-------------------------------------------------------------------------------------------------
Liabilities to banks........................................ (24) 381,160 858,713
Advance payments received................................... (25) 78,177 127,816
Liabilities for goods and services.......................... 226,746 305,481
Liabilities to affiliated companies......................... 953 786
Liabilities to companies in which participations are held... (26) 5,709 12,016
Other liabilities........................................... (27) 200,666 200,673
=================================================================================================
893,411 1,505,485
=================================================================================================
DEFERRED INCOME............................................. (28) 11,596 244
=================================================================================================
9,773,261 9,987,477
=================================================================================================
</TABLE>

(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBiLG)

The accompanying notes are an integral part of these statements.

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<PAGE> 257

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

PROFIT AND LOSS ACCOUNT

<TABLE>
<CAPTION>
NOTES 1998/99 1997/98
NO. DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES REVENUES........................................... (29) 3,901,578 3,959,727
--------------------------------------------------------------------------------------------
Stock movements and other internally produced and
capitalised assets..................................... (30) 46,078 49,477
Other operating income................................... (31) 361,896 299,006
Cost of materials........................................ (32) -1,078,035 -1,227,614(1)
Personnel expenses....................................... (33) -1,196,754 -1,159,845
Depreciation............................................. (34) -671,446 -617,995
Other operating expenses................................. (35) -835,793 -786,522(1)(2)
Income from financial assets............................. (36) -13,242 -16,181
Net interest income...................................... (37) -29,204 -51,557
============================================================================================
RESULTS OF ORDINARY ACTIVITIES........................... 485,078 448,496
--------------------------------------------------------------------------------------------
Taxes on income and revenue.............................. (38) -188,078 -169,496
============================================================================================
NET INCOME FOR THE YEAR................................ 297,000 279,000
--------------------------------------------------------------------------------------------
Allocations to other revenue reserves.................... -50,600 -55,000
============================================================================================
NET PROFIT FOR THE YEAR................................ 246,400 224,000
============================================================================================
</TABLE>

(1) After the reclassification of DM 133 thousand from other operating expenses
to cost of materials

(2) After the reclassification of other (taxes) (DM 6,713 thousand) to other
operating expenses

The accompanying notes are an integral part of these statements.

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<PAGE> 258

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

CASH-FLOW STATEMENT

<TABLE>
<CAPTION>
1998/99 1997/98
DM MILLION DM MILLION
---------- ----------
-------------------------------------------------------------------------------------
<S> <C> <C>
Net income for the year..................................... 297 279
Depreciation of fixed assets................................ 689 634
Changes in long-term provisions............................. 51 -64
Allocation to special item.................................. 150 162
Release of special item..................................... -161 -136
Other expenses and income without effect on payments........ -10 -23
=====================================================================================
CASH FLOW (DVFA/SG)......................................... 1,016 852
Result from disposals of fixed assets....................... -22 3
Increase/decrease in inventories, receivables for goods and
services and other assets................................. 51 -7
Increase/decrease in liabilities for goods and services and
other liabilities......................................... 69 262
=====================================================================================
INFLOW OF FUNDS FROM OPERATING ACTIVITIES................... 1,114 1,110
-------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets..................... 56 18
Disbursements from capital investments in fixed assets...... -446 -1,030
including increase of participation in GASAG................ (--) (354)
=====================================================================================
OUTFLOW OF FUNDS FOR INVESTMENT ACTIVITIES.................. -390 -1,012
-------------------------------------------------------------------------------------
Payments to shareholders (dividend)......................... -224 -112
Receipts from taking up loans............................... -- --
Payments for redemption of loans............................ -469 -185
=====================================================================================
OUTFLOW OF FUNDS FOR FINANCING ACTIVITIES................... -693 -297
=====================================================================================
CHANGES IN FINANCING RESOURCES WITH EFFECT ON PAYMENT....... 31 -199
-------------------------------------------------------------------------------------
</TABLE>

MOVEMENTS OF FINANCIAL FUNDS

<TABLE>
<CAPTION>
30 JUNE 1999
DM MILLION 30 JUNE 1998 CHANGE
(UNAUDITED) DM MILLION DM MILLION
------------ ------------ ----------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid funds......................................... 278 227 51
Securities in current assets......................... 184 204 -20
===============================================================================================
FINANCIAL FUNDS...................................... 462 431 31
===============================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

F-94
<PAGE> 259

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

NOTES

PRELIMINARY REMARKS

On 1 July 1993, Bewag was merged with the former East Berlin energy supply
company Energieversorgung Berlin AG (EBAG), which was located in the former East
Berlin.

As a result of the merger under stock corporation law, legislation which,
according to the unification treaty applied only to companies in the former GDR,
now applies to Bewag as a whole. This is particularly relevant with regard to
the provisions of the DM-Balance Sheet Act (DMBiLG) covering the special-loss
account, the special reserve under Section 17 Sub-section 4 of the Act and
capital reorganisation under Section 27 of the Act. In certain circumstances,
Section 36 DMBiLG also stipulates changes in EBAG's DM opening balance sheet,
which then entail retroactive corrections in certain balance sheet item
valuations for each previous year.

As of 30 June 1999 such CHANGES IN THE OPENING BALANCE SHEET were either
necessary or possible for the following items:

- Tangible assets increased DM 23.3 million, because the total value shown
for the land has increased. This was primarily because the result of new
investigations allowed us to reduce capitalised deductions for future
expenditure to rehabilitate contaminated properties.

- Provisions for residual contamination were, for the same reason, also cut
back by DM 19.5 million. At the same time, the special-loss account and
the special reserve had to be reduced by the same amount.

- Provisions for compensation obligations were reduced by DM 8.6 million,
as certain restitution claims became more precise and court decisions had
become legally effective.

As a result of these changes, the statutory reserve had to be increased by
DM 51.4 million.

Bewag must also take into account the stipulations of the LAND REGISTRY
ADJUSTMENT ACT (GBBerG). This act applies only to the territory which joined the
Federal Republic under the unification treaty, and covers easements of utility
supply companies in non-public land as well as compensation payments due to the
owners of such properties. Provisions were established for this purpose as of 30
June 1995, date of the initial application of the Act. This provisioning did not
affect operating results in the profit and loss account; it had merely served to
record such liabilities and related assets on the balance sheet.

Since the obligations will become due in two equal installments on 1
January 2001 and 2011, the easements were assessed at present value. The
difference between the value of the easements and the obligation was recorded as
prepaid expense.

In the year under review, detailed studies of the location and quality of
the properties showed that the provision should be increased by DM 130.1
million. Under the accounting methodology used, this adjustment, rather than
being reported as an expense, merely increases the recorded assets and
liabilities. The only consequence is a DM 11.1 million increase in total expense
for depreciation and an adjustment of prepaid expenses.

F-95
<PAGE> 260
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

NOTES -- (CONTINUED)

Because of the insignificance of Bewag's shareholdings as a whole in
relationship to its financial and income position, the company took advantage of
the option in Section 296 Sub-section 2 of the commercial Code (HGB) and chose
not to prepare a CONSOLIDATED ANNUAL STATEMENT.

ACCOUNTING AND VALUATION METHODS

In the balance sheet and the profit and loss account certain items have
been combined for the sake of greater clarity; they are shown in greater detail
in the notes. Furthermore, in an effort to provide more insight into the
company's financial position, a number of items have been added to the balance
sheet. The profit and loss account has been drawn up according to the
cost-summary method. DM figures shown in the annual statement represent
thousands.

Specifically, accounting and valuation are based on the following
principles:

ASSETS

Purchased INTANGIBLE ASSETS are valued at their acquisition costs less
regular straight-line depreciation.

TANGIBLE ASSETS are assessed at acquisition or production costs. With
regard to the cost of self constructed assets, Bewag capitalizes only directly
allocable costs. Interest paid on outside capital has been excluded from this
item since 1 January 1991. When new tangible assets are added, investment
subsidies are deducted from the costs of acquisition or production. Regular
depreciation for tangible assets is carried out on a straight-line basis for
buildings, and otherwise always at the highest degression rate permissible under
taxation law; straight-line depreciation is favoured as soon as this leads to
higher annual amounts. Plant for which special depreciation can be claimed under
Section 4 of the Development Area Act (FordG) is also depreciated by the
straight-line method, as stipulated by law. Depreciation is based on the Federal
Minister of Finance's depreciation table for the energy and water supply sector.

In the year of purchase or production, new plant is depreciated at 75.0 per
cent of the normal annual rate.

According to one of the options of Section 6 Sub-section 2 of the Income
Tax Act (EStG), minor assets are depreciated fully in the year of purchase or
production.

FINANCIAL ASSETS are valued at acquisition costs. Interest-free loans
included in the lendings are discounted to their present value.

If the book value of an asset calculated according to the above principles
is greater than its quoted or market value at balance sheet date, the excess
over the market value is written off.

INVENTORIES are valued at average acquisition costs, taking into account
the lower-of-cost-or-market rule. Deductions are made for inventories subject to
long-term storage and thus potentially less suitable for use from an economic
point of view. The amounts deducted depend on the rate of turnover for the goods
concerned. The procedure was slightly altered in the 1998/99 business year, as

F-96
<PAGE> 261
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

NOTES -- (CONTINUED)

amounts deducted have now been limited to a fixed minimum. This has resulted in
additions to inventory assets.

With regard to ACCOUNTS RECEIVABLES AND OTHER ASSETS, an appropriate amount
is deducted for identifiable single risks. Other risks are taken into account in
a general allowance for bad debts and doubtful accounts. Advance payments on
receivables for goods and services are offset against electricity supplied but
not yet invoiced. Receivables for electricity supplied but not yet invoiced are
assessed on the basis of electricity consumption and revenue projections; a
differentiated group assessment procedure is applied. Interest-free receivables
are discounted according to their terms.

SECURITIES are valued at acquisition cost or at their market price if it is
lower.

No use is made of the option right to capitalise debt discount expenses:
such expenses are immediately recorded in the profit and loss account.

Provisions for which is a SPECIAL-LOSS ACCOUNT has been created in the DM
opening balance sheet of EBAG as at 1 July 1990 and which have been used up are
not reported as expenditure in the relevant items of the profit and loss
account; instead, the special-loss account is depreciated by the amount of the
used provisions.

SHAREHOLDERS' EQUITY AND LIABILITIES

As they become freely disposable, funds of the SPECIAL RESERVE UNDER
SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET ACT (DMBiLG) are transferred to
other revenue reserves. This transfer serves to comply with the current version
of the Act, which has been in force since 25 July 1994.

The amounts by which the regular depreciation of tangible assets differs
from the increased depreciation under Section 14 of the Berlin Subsidy Act
(BerlinFG) and the special depreciation under Section 4 of the Development Area
Act (FordG) are disclosed as SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER,
together with the reserve under Section 6b of the Income Tax Act (EStG). While
the difference between regular and increased depreciation is always released in
accordance with established depreciation procedures, the release of the special
depreciation begins at the end of the preferential period.

Tax-free investment bonuses are shown under liabilities as SPECIAL ITEM FOR
INVESTMENT BONUSES. The release of this item into income is carried out on a
straight-line basis in accordance with the period of use of the subsidised
assets.

Unless a shorter term has been agreed upon, CONSTRUCTION COST SUBSIDIES are
released into income at an annual rate of 5.0 per cent.

The PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS are formed according to
actuarial principles. Fractional values are determined on the basis of an
interest rate of 6.0 per cent. One third of the amount to be allocated to these
provisions as a result of the application of the new guidelines (1998 Heubeck
guidelines), which show increased life expectancy, was set aside in the year
under review.

OTHER PROVISIONS reflect all risks and uncertain obligations identifiable
according to the principles of most probable estimate. No discounting is used
with regard to provisions for early retirement.

F-97
<PAGE> 262
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

NOTES -- (CONTINUED)

In addition, a provision for repairs under Section 249 Sub-section 2 of the
Commercial Code (HGB) was created on 30 June 1995.

LIABILITIES are reported at their repayment value.

FOREIGN CURRENCY CONVERSION

CASH-FLOW STATEMENT

In accordance with the 1/1995 statement of the main specialist committee of
the Institute of Auditors (IDW) and in compliance with international accounting
standards (IAS 7), the flow-of-funds analysis shows payments broken down into
cash flow from operations, from investment and from financing activities. Within
the flow of funds resulting from operations, cash flow is shown according to
DVFA/SG. The balance represents the total change in resources in the course of
the business year.

F-98
<PAGE> 263
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

NOTES -- (CONTINUED)

1. FIXED ASSETS

Changes in individual items of fixed assets in the 1998/99 business year,
including depreciation, are shown in the "Movements in fixed assets" section.

2. INTANGIBLE ASSETS

The two main intangible assets are DM 213.2 million for easements under
Section 9 of the Land Registry Adjustment Act (GBBerG) and the right of usage
for the connection to the Western European grid network, which is valued at DM
142.7 million.

3. TANGIBLE ASSETS

Additions and transfers to tangible assets involving completed and fully
charged installations amount to DM 588.8 million. The most significant additions
were investments made for power transmission and distribution equipment as well
as for power plants. As a result of reduced investment activity, the value of
advance payments made and installations under construction fell by DM 216.4
million to DM 492.6 million.

4. FINANCIAL ASSETS

The decrease in our shares in affiliated companies is due to the
depreciation of Bewag Immobilienmanagement GmbH, Berlin to its assessed value.
The loan to EAB Fernwarme GmbH, Berlin, which was effected as an
equity-replacing loan, has been fully written off.

Our participations have remained virtually at the previous year's level.
Lendings to companies in which we hold participations were to BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin, to EFR
Europaische Funk-Rundsteuerung GmbH, Berlin, as well as to EUS Energie und
Umwelt Service GmbH, Berlin.

5. INVENTORIES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and supplies....................... 154,920 155,681 -761
--------------------------------------------------------------------------------------------
Work in progress for public lighting............. 12,952 13,170 -218
--------------------------------------------------------------------------------------------
Total.......................................... 167,872 168,851 -979
--------------------------------------------------------------------------------------------
</TABLE>

The reduction in raw materials and supplies is mainly due to reduced
amounts of fuel oil and operating materials as well as to lower prices for coal.
On the other hand, changes in assessment procedures led to value deductions on
stocks of DM 13.0 million.

F-99
<PAGE> 264

6. RECEIVABLES FOR GOODS AND SERVICES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electricity supplied............................. 412,476 412,814 -338
--------------------------------------------------------------------------------------------
Heat supplied.................................... 107,642 116,748 -9,106
--------------------------------------------------------------------------------------------
Other goods and services supplied................ 1,998 17,182 -15,184
--------------------------------------------------------------------------------------------
Total.......................................... 522,116 546,744 -24,628
--------------------------------------------------------------------------------------------
</TABLE>

The decrease in receivables is due largely to changes in the terms of the
contract with the state of Berlin regarding construction and maintenance of
public street and traffic lighting. The effects of last year's new invoicing
procedure for heat supplied also led to a drop in the receivables amount.

Receivables for electricity and heat supplied include DM 980.4 million in
payments on account received for electricity and heat consumed but not yet
invoiced (previous year: DM 769.0 million).

Of the receivables shown here, DM 20,265 thousand (previous year: DM 16,198
thousand) have residual terms of more than one year.

7. RECEIVABLES FROM AFFILIATED COMPANIES

Receivables shown here are mainly due from EAB Fernwarme GmbH and from IPH
Institut "Pruffeld fur elektrische Hochleistungstechnik" GmbH, Berlin.

8. RECEIVABLES FROM COMPANIES IN WHICH PARTICIPATIONS ARE HELD

Receivables shown here are largely due from BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin and from the gas supply
company GASAG Berliner Gaswerke AG, Berlin.

9. OTHER ASSETS

The other assets shown mainly contain DM 36.2 million in receivables for
orders and services not yet invoiced, DM 23.8 million in receivables from
subsidiary transactions and claims for compensation, DM 8.8 million in advance
payments and DM 6.8 million in reimbursements of mineral oil tax.

Of the other assets, DM 10,819 thousand (previous year: DM 4,191 thousand)
have residual terms of more than one year.

10. SECURITIES

This item covers mortgage bonds and units.

F-100
<PAGE> 265

11. CHEQUES, CASH ON HAND, ON DEPOSIT WITH DEUTSCHE BUNDESBANK AND POSTBANK,
CASH IN OTHER BANK ACCOUNTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
30 JUNE 1999 30 JUNE 1998 CHANGE
DM DM DM
THOUSAND THOUSAND THOUSAND
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cheques and cash on hand............................... 454 528 -74
-----------------------------------------------------------------------------------------------
Deposits with Deutsche Bundesbank and Postbank......... 323 21,103 -20,780
Cash in other bank accounts............................ 277,203 205,199 72,004
-----------------------------------------------------------------------------------------------
Total................................................ 277,980 226,830 51,150
-----------------------------------------------------------------------------------------------
</TABLE>

12. PREPAID EXPENSES

Prepaid expenses contain the difference between the nominal value and the
present value of the compensation payments under Section 9 of the Land Registry
Adjustment Act (GBBerG) -- DM 170.6 million -- as well as prepayments for taxes,
pensions and other prepayments.

13. SPECIAL-LOSS ACCOUNT UNDER SECTION 17 SUB-SECTION 4 TO THE DM-BALANCE SHEET
ACT (DMBILG)

DM 6.4 million in provisions related to the special loss account were used
in the course of the year under review, and the special loss account was reduced
by this amount to a value of DM 358.8 million.

14. SUBSCRIBED CAPITAL

The shareholders' meeting held on 14 December 1998 passed the following
resolutions with regard to subscribed capital:

- doubling the subscribed capital to DM 1,120.0 million from corporate
funds,

- changing over from par-value shares to no-par shares,

- stating the subscribed capital in euro rather than in DM.

As a result, the subscribed capital at balance sheet date amounts to euro
572,646,906.94. (DM 1,120,000,000). Bayernwerk AG, Munich, and Southern
Energy Holding Beteiligungsgesellschaft mbH, Berlin, each hold 26.0 per
cent. 23.0 per cent are held by PreussenElektra AG, Hanover, and 25.0 per
cent are in scattered ownership. The subscribed capital is distributed in:

GROUP A SHARES (bearer shares with single voting right) 150,666,800
no-par shares with 150,666,800 votes,

GROUP B SHARES (registered shares with double voting right) 73,333,200
no-par shares with 146,666,400 votes.

15. CAPITAL RESERVE

The capital reserve contains allocations from share premiums and the
reserves arising from the Bewag opening balance sheet of 1 April 1949.

F-101
<PAGE> 266

16. REVENUE RESERVES

<TABLE>
<CAPTION>
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory reserve............................ 899,691 899,691(1) 0
-------------------------------------------------------------------------------------------
Special reserve under Section 17 Sub-section
4 DMBIIG................................... 358,821 365,238(1) -6,417
-------------------------------------------------------------------------------------------
Other revenue reserves....................... 1,029,551 1,532,535 -502,984
-------------------------------------------------------------------------------------------
Total...................................... 2,288,063 2,797,464(1) -509,401
</TABLE>

(1) After adjustment according to Section 26 DMBiIG
--------------------------------------------------------------------------------

The statutory reserve contains DM 875.5 million from an earlier realignment
of the capital position of EBAG effected under Section 27 Sub-section 2 of the
DM-Balance Sheet Act (DMBiLG).

Within the scope of the capital increase, an amount of DM 560.0 million in
other revenue reserves was transferred into subscribed capital. Furthermore, DM
50.6 million of this year's net income were allocated to the other revenue
reserves. In addition, a freely disposable amount of DM 6.4 million was
transferred from the special reserve under Section 17 Sub-section 4 of the DM-
Balance Sheet Act (DMBiLG) to the other revenue reserves.

NOTES

17. NET PROFIT FOR THE YEAR

After the allocation of DM 50.6 million of this year's net income of DM
297.0 million to the other revenue reserves, the net profit for the year is DM
246.4 million.

18. SPECIAL ITEM WITH PARTIAL RESERVE CHARACTER

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increased depreciation under Section 14 of the
Berlin Promotion Act (BerlinFG)................ 439,956 511,861 -71,905
Special depreciation under Section 4 of the
Development Area Act (FordG)................... 1,421,727 1,324,150 97,577
Reserve under Section 6b of the Income Tax Act
(EstG)......................................... 22,658 8,517 14,141
--------------------------------------------------------------------------------------------
Total.......................................... 1,884,341 1,844,528 39,813
--------------------------------------------------------------------------------------------
</TABLE>

In the year under review, the DM 8.5 million of last year's reserve under
Section 6b of the Income Tax act as well as an additional amount of DM 10.8
million were for the most part transferred to finished buildings.

19. SPECIAL ITEM FOR INVESTMENT BONUSES

While DM 26.4 million was allocated to the special item for investment
bonuses, the overall reduction in this item results from the release into income
of an amount of DM 50.6 million.

F-102
<PAGE> 267

20. CONSTRUCTION COST SUBSIDIES

DM 46.2 million of construction cost subsidies relate to construction in
progress. Of the remainder, DM 421.8 million apply to electricity supply, DM
229.4 million to heat supply and DM 0.3 million to public lighting.

21. PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS

The DM 56.4 million increase in these provisions is, among other causes,
due to first-time application of the new 1998 Heubeck guidelines and to the
indexation of pensions for former staff members.

22. OTHER PROVISIONS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Easements under Section 9 of the Land Registry
Adjustment Act (GBBerG)....................... 514,691 384,575 130,116
Personnel....................................... 487,296 442,002 45,294
Contamination removal........................... 383,010 388,206(1) -5,196
Uncertain liabilities for supplies and
services...................................... 47,569 59,254 -11,685
Compensation obligations for property........... 25,151 25,151(1) 0
Demolition and dismantling...................... 5,724 7,999 -2,275
Sundry.......................................... 70,861 86,238 -15,377
-------------------------------------------------------------------------------------------
Total......................................... 1,534,302 1,393,425(1) 140,877
</TABLE>

(1) After adjustment according to Section 36 DMBiLG
--------------------------------------------------------------------------------

The provisions for personnel expenses mainly contain provisions for early
retirement arrangements, profit-sharing measures, anniversary payments, annual
bonus payments, residual holiday entitlement, and, for the first time, for the
working time accounts which were introduced along with our new flexible working
hours.

The provisions for contamination removal take into account the costs
anticipated in the eastern districts of Berlin for the replacement of soil on
contaminated properties, the removal and disposal of oil-insulated cables, and
soil rehabilitation measures required as a result of leakages of oil-insulated
cables on properties owned by third parties. In addition, a deduction of DM 87.1
million has been made with regard to the value of contaminated properties in the
area formerly supplied by EBAG.

The provisions for uncertain liabilities arising from supplies and services
also contain provisions for contingent losses for future contingent
expenditures.

The sundry provisions mainly contain DM 32.3 million for the expected cost
of repairs to one of the former main administration buildings, which is
classified as a historical monument, as well as obligations arising from
discounts and credits.

F-103
<PAGE> 268

23. LIABILITIES

The composition and residual terms of our liabilities can be seen in the
following table:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
RESIDUAL TERMS
---------------------------------------------------------------------------------------------
UP TO 1 YEAR 1-5 YEARS OVER 5 YEARS TOTAL
TYPE OF LIABILITY DM THOUSAND DM THOUSAND DM THOUSAND DM THOUSAND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities to banks................ 116,502 111,997 152,661 381,160
Previous year....................... 454,817 170,316 233,580 858,713
---------------------------------------------------------------------------------------------
Advanced payments received.......... 78,177 -- -- 78,177
Previous year....................... 127,816 -- -- 127,816
---------------------------------------------------------------------------------------------
Liabilities for goods and
services.......................... 226,746 -- -- 226,746
Previous year....................... 305,481 -- -- 305,481
---------------------------------------------------------------------------------------------
Liabilities to affiliated
companies......................... 953 -- -- 953
Previous year....................... 786 -- -- 786
Liabilities to companies in which
participations are held........... 5,709 -- -- 5,709
Previous year....................... 12,016 -- -- 12,016
---------------------------------------------------------------------------------------------
Other liabilities................... 111,313 61,353 28,000 200,666
Previous year..................... 96,801 61,472 42,400 200,673
---------------------------------------------------------------------------------------------
of which-tax liabilities.......... (46,353) (--) (--) (46,353)
previous year..................... (23,445) (--) (--) (23,445)
-social security liabilities...... (21,810) (--) (--) (21,810)
previous year..................... (25,341) (--) (--) (25,341)
---------------------------------------------------------------------------------------------
Total liabilities.............. 539,400 173,350 180,661 893,411
Previous year................ 997,717 231,788 275,980 1,505,485
---------------------------------------------------------------------------------------------
</TABLE>

24. LIABILITIES TO BANKS

The reduction of DM 477.6 million largely represents repayments of DM 468.7
million, DM 333.3 million of which were made in advance of due date. Liabilities
to banks also involve DM 31.8 million in loans under Section 16 of the Berlin
Promotion Act (BerlinFG) and DM 236.1 million in loans under Section 17 of the
same Act. In addition we took out a short-term money-market loan of DM 13.1
million.

25. ADVANCE PAYMENTS RECEIVED

The decrease in advance payments is largely attributable to electricity
operations and to ancillary operations.

26. LIABILITIES TO COMPANIES IN WHICH PARTICIPATIONS ARE HELD

These liabilities are almost entirely to the gas supply company GASAG
Berliner Gaswerke AG, Berlin and to the energy and environmental service company
EUS Energie and Umwelt Service GmbH, Berlin.

F-104
<PAGE> 269

27. OTHER LIABILITIES

The DM 200.7 million of this item include in addition to liabilities
arising from taxes and social security commitments an investment loan of DM
100.0 million from an insurance company.

28. DEFERRED INCOME

This amount represents almost exclusively an amount paid at the beginning
of a refrigeration supply contract; it is being amortised according to schedule.

NOTES ON THE PROFIT AND LOSS ACCOUNT

29. SALES REVENUE

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
BREAKDOWN BY AREA OF ACTIVITY DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electricity supply............................... 2,972,231 3,081,755 -109,524
------------------------------------------------------------------------------------------
Electricity tax.................................. 46,948 -- 46,948
------------------------------------------------------------------------------------------
3,019,179 3,081,755 -62,576
------------------------------------------------------------------------------------------
Heat supply...................................... 850,638 822,837 27,801
------------------------------------------------------------------------------------------
Public lighting.................................. 31,761 55,135 -23,374
------------------------------------------------------------------------------------------
Total.......................................... 3,901,578 3,959,727 -58,149
------------------------------------------------------------------------------------------
</TABLE>

There was a decrease of 3.6 per cent in sales revenue from the supply of
electricity (excluding electricity tax). The discrepancy between this figure and
the 0.3 per cent increase in the quantity of electricity sold is mainly due to
price reductions for key-account and special-contract customers, to contract
changes among high and medium-voltage customers in connection with the general
pricing and contract reform of 1 October 1997, and to the decline in our
commercial customer rates as of 1 April 1999.

The electricity tax was introduced on 1 April 1999 as part of the first
stage of the ecological tax reform. Electricity suppliers are obligated to
collect this tax from their customers and transfer it to the taxation
authorities. This item therefore shows sales revenue which is offset by an equal
amount of expenditure.

The rise in sales revenue from the supply of heat is mainly due to the
strong increase in the amount of heat supplied as a result of the weather
conditions and of a slight increase in the thermal output capacity sold.

The drop in revenue in the area of public lighting is the result of price
reductions granted to the state of Berlin for the operation and maintenance of
street and traffic lighting.

30. INVENTORY CHANGES AND OTHER INTERNALLY PRODUCED AND CAPITALISED ASSETS

F-105
<PAGE> 270

31. OTHER OPERATING INCOME

The income from the release of special items with partial reserve character
is attributable to the release of DM 71.9 million due to additional tax
depreciation made in earlier years under Section 14 of the Berlin Promotion Act
(BerlinFG) of DM 18.9 million due to special depreciation made in previous years
under Section 4 of the Development Area Act (FordG), and of DM 19.3 million from
the transfer of the reserve under Section 6b of the Income Tax Act (EStG).

The sundry operating income includes DM 33.4 million in income from the
sale of properties and buildings, DM 27.9 million in refunds for changes made to
our distribution installations at the request of third parties, DM 26.3 million
from repairs and other services, DM 24.4 million from claim adjustments, DM 10.5
million from rentals and leases as well as DM 10.3 million in income from the
release of provisions.

32. COST OF MATERIALS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenditure for raw materials and suppliers and
for purchased goods............................ 864,368 938,987 -74,619
of which -- fuel................................. (483,469) (524,184) (-40,715)
-- power............................... (289,956) (304,566) (-14,610)
------------------------------------------------------------------------------------------
Expenditure for purchased services............... 213,667 288,627 -74,960
------------------------------------------------------------------------------------------
Total.......................................... 1,078,035 1,227,614 -149,579
------------------------------------------------------------------------------------------
</TABLE>

The reduction in expenditure for fuel is due mainly to a structural shift
in our use of fuel from relatively expensive fuel oil to less costly hard coal.
In addition, lower prices for natural gas and coal have also helped us cut
expenditure.

We were able to reduce expenditure for purchases of electricity by
increasing our own production.

The decrease in expenditure for purchased services is mainly due to savings
in maintenance. In the business year 1998/99, all amounts paid for the use of
third-party electricity lines are, for the first time, reported under
expenditure for purchased services. In order to adjust previous-year figures
accordingly, DM 10.9 million and DM 0.1 million have been shifted from the
figure for purchased power and from sundry operating expenses respectively. This
reclassification is intended to give a better idea of the company's expenses.

F-106
<PAGE> 271

33. PERSONNEL EXPENSES

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Wages and salaries............................... 902,414 896,403 6,011
------------------------------------------------------------------------------------------
Social security contributions and expenditure for
pensions and benefits.......................... 294,340 263,442 30,898
of which payments for pensions................. (131,592) (93,900) (37,692)
------------------------------------------------------------------------------------------
Total.......................................... 1,196,754 1,159,845 36,909
------------------------------------------------------------------------------------------
</TABLE>

The increase in wages and salaries -- with lower average numbers of
staff -- is mainly the result of the new provisions created to cover employee
working time accounts and working time credit balances resulting from the new
working time accounts and working time credit balances resulting from the new
working time model, and of the increased need for provisioning for early
retirement arrangements and part-time arrangements for older employees.

Expenditure for pensions increased mainly due to the application of the
amended 1998 Heubeck guidelines, and because of the indexation of pension
payments for retired staff members.

34. DEPRECIATION

Depreciation of tangible and intangible assets can be seen in the
"Movements in fixed assets" overview. It includes extraordinary depreciation of
DM 8.7 million for deposits on tangible assets and DM 2.8 million for intangible
assets, as well as DM 53.4 million in extraordinary depreciation on tangible
assets. This item also includes DM 6.4 million in depreciation on the
special-loss account and DM 19.3 million in depreciation from the transfer of
the reserve under Section 6b of the Income Tax Act (EStG).

35. OTHER OPERATING EXPENSES

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allocation to special items with partial reserve
character...................................... 149,869 161,711 -11,842
------------------------------------------------------------------------------------------
Franchise fee.................................... 210,311 204,366 5,945
------------------------------------------------------------------------------------------
Electricity tax.................................. 47,290 -- 47,290
------------------------------------------------------------------------------------------
Other taxes...................................... 9,597 6,713 2,884
------------------------------------------------------------------------------------------
Sundry operating expenses........................ 418,726 413,732 4,994
------------------------------------------------------------------------------------------
Total.......................................... 835,793 786,522 49,271
------------------------------------------------------------------------------------------
</TABLE>

Allocations to special items with partial reserve character consist of DM
116.5 million in special depreciation under Section 4 of the Development Area
Act (FordG) and a reserve of DM 33.4 million under Section 6b of the Income Tax
Act (EStG).

The higher franchise fee is based on the increase stipulated in the
franchise contract with the state of Berlin, which came into effect on 1 January
1999.

Sundry operating expenses especially include DM 92.9 million in outside
services for the administration and marketing departments, DM 41.4 million for
data center services rendered by BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, DM 35.4 million in rent
and lease payments, DM 21.2 million in insurance premiums, DM 19.3 million in

F-107
<PAGE> 272

depreciation on receivables and other assets as well as DM 17.0 million for the
purchase of materials for the administration and marketing departments. The main
components of the item which are unrelated to this accounting period are DM 11.8
million in losses from the retirement of assets and DM 10.3 million in
retroactive rate adjustments for heat.

The electricity tax reported here contains -- in addition to the amounts
collected from customers -- DM 0.3 million in tax arising from our own
consumption.

To give a better idea of the company's expenses, all other taxes are now
being reported in this item. The previous-year figure has been adjusted
accordingly.

36. INCOME FROM FINANCIAL ASSETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from companies in which participations are
held of which.................................. 9.604 5.720 3.884
from affiliated companies........................ (3.489) (2.993) (496)
------------------------------------------------------------------------------------------
Income from other securities and from lending of
financial assets of which...................... 2.405 1.693 712
from affiliated companies........................ (1.535) (716) (819)
------------------------------------------------------------------------------------------
Depreciation on financial assets and
securities..................................... -24.572 -23.541 -1.031
------------------------------------------------------------------------------------------
Expenses for losses transferred.................. -679 -53 -626
------------------------------------------------------------------------------------------
Total.......................................... -13.242 -16.181 2.939
------------------------------------------------------------------------------------------
</TABLE>

Income from companies in which participations are held consists largely of
the 1998 dividends and corporation tax credits received for BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin, and for
Fernheizwerk Neukolln AG, Berlin.

Depreciation on financial assets and securities covers mainly write off of
loans to EAB Fernwarme GmbH, Berlin (DM 22.0 million) and to EUS Energie und
Umwelt Service GmbH, Berlin (DM 0.5 million). The item also includes write off
to their assessed value of Bewag Immobilienmanagement GmbH, Berlin (DM 1.2
million) and Berliner Energieagentur GmbH, Berlin (DM 0.1 million).

The expenses for losses transferred result entirely from the losses
incurred in the 1998 business year by DEPOGAS-Gesellschaft zur Gewinnung und
Verwertung von Deponiegasen mbH, Berlin.

37. NET INTEREST INCOME
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other interest and similar income................ 18,912 27,180 -8,268
of which from affiliated companies............... (449) (--) (449)
------------------------------------------------------------------------------------------
Interest and similar expenditure................. -48,116 -78,737 30,621
------------------------------------------------------------------------------------------
Total.......................................... -29,204 -51,557 22,353
------------------------------------------------------------------------------------------
</TABLE>

The reduction in other interest and similar income is mainly due to the
lower total average of financial investments.

F-108
<PAGE> 273

The decline in interest and similar expenditure is largely the result of
reduced average holdings in long-term loans.

38. TAXES ON INCOME AND REVENUE

The increase in taxes on income and revenue is attributable to a rise in
taxable income and on the increase in the trade tax coefficient.

All other taxes are now being reported under other operating expenses.

UNBUNDLING

The new Energy Industry Act (EnWG) implementing the European Electricity
Guideline in Germany came into force on 29 April 1998. One of the stipulations
of section 9 of the act is the so-called "unbundling" of accounting processes in
integrated electricity supply companies. This means that for accounting purposes
the activities of the company must be separated into generation, transmission
and distribution, and non-electricity activities.

From a bookkeeping point of view, Bewag has based its unbundling process on
a profit-center concept with the following structure:

- Our operative business has been regrouped into centers for marketing and
electricity trading, customer service, networks, generation, and heating.
There are also super-ordinate central divisions, which are responsible
for tasks in the service area and in the area of corporate management and
control. Internally rendered services are assessed on the basis of
market-related prices.

- The centers for generation, marketing and electricity trading and
customer service constitute generation and other electricity activities.

- The electricity networks activity consists of the transmission and
distribution activities of the networks center, which is essentially
responsible for transport functions. The distinction between transmission
and distribution is made at 110 Kilovolt. On the basis of the so-called
"forwarder model," the networks center fulfills only a forwarding service
and is not the buyer of the power produced by the generation center.

- Non-electricity activities are the central areas and the heating center.
Management functions such as controlling, finance planning and accounting
are based on the concept of a national holding company.

F-109
<PAGE> 274

BEWAG AG BUSINESS YEAR 1998/1999 (UNAUDITED)

<TABLE>
<CAPTION>
GENERATION AND
OTHER
ELECTRICITY- ELECTRICITY NON-ELECTRICITY TOTAL
RELATED ACTIVITIES NETWORKS ACTIVITIES DM THOUSAND
BALANCE SHEET AS AT 30 JUNE 1999 (UNAUDITED) DM THOUSAND DM THOUSAND DM THOUSAND -----------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
FIXED ASSETS
------------------------------------------------------------------------------------------------------------------------
Intangible assets..................................... 5,928 248,501 141,731 396,160
Tangible assets....................................... 2,356,465 2,865,626 1,511,733 6,733,824
Financial assets...................................... -- -- 848,312 848,312
========================================================================================================================
2,362,393 3,114,127(1) 2,501,776 7,978,296
========================================================================================================================
CURRENT ASSETS
------------------------------------------------------------------------------------------------------------------------
Inventories........................................... 137,644 23,514 6,714 167,872
Accounts receivable and other assets Receivables for
goods and services.................................. 412,476 1,997 107,643 522,116
Receivables from affiliated companies and from
companies in which participations are held........ 2,101 6 5,523 7,630
Other assets........................................ 25,937 27,759 37,340 91,036
Securities............................................ -- -- 184,295 184,295
Cheques, cash on hand, on deposit with Deutsche
Bundesbank and Postbank, cash in other bank
accounts............................................ -- -- 277,980 277,980
========================================================================================================================
578,158 53,276 619,495 1,250,929
========================================================================================================================
========================================================================================================================
PREPAID EXPENSES...................................... 5,112 84,982 95,121 185,215
========================================================================================================================
SPECIAL-LOSS ACCOUNT.................................. 24,769 133,335 200,717 358,821
========================================================================================================================
2,970,432 3,385,720 3,417,109 9,773,261
========================================================================================================================
SHAREHOLDERS' EQUITY AND LIABILITIES EQUITY
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Subscribed capital and reserves....................... 1,053,092 1,200,322 1,211,449 3,464,863
Balance of capital netting............................ 150,250 196,897 (347,147) --
Net profit for the year........................... 129,365 63,717 53,318 246,400
========================================================================================================================
1,332,707 1,460,936 917,620 3,711,263
========================================================================================================================
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER.......... 633,327 769,472(2) 481,542 1,884,341
========================================================================================================================
SPECIAL ITEM FOR INVESTMENT BONUSES................... 237,304 54,677 94,565 386,546
========================================================================================================================
CONSTRUCTION COST SUBSIDIES........................... -- 465,486 232,225 697,711
========================================================================================================================
PROVISIONS
------------------------------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations....... 190,956 99,694 173,559 464,209
Provisions for taxes.................................. -- -- 189,882 189,882
Other provisions...................................... 295,722 489,117 749,463 1,534,302
========================================================================================================================
486,678 588,811 1,112,904 2,188,393
========================================================================================================================
LIABILITIES
------------------------------------------------------------------------------------------------------------------------
Liabilities to banks.................................. -- -- 381,160 381,160
Advance payments received............................. 49,070 27,125 1,982 78,177
Liabilities for goods and services.................... 192,388 12,645 21,713 226,746
Liabilities to affiliated companies and to companies
in which participations are held.................... 5,317 375 970 6,662
Other liabilities..................................... 33,550 6,187 160,929 200,666
========================================================================================================================
280,325 46,332 566,754 893,411
========================================================================================================================
DEFERRED INCOME....................................... 91 6 11,499 11,596
========================================================================================================================
2,970,432 3,385,720 3,417,109 9,773,261
========================================================================================================================
</TABLE>

(1) Including a transfer of DM 853,534 thousand.

(2) Including a transfer of DM 220,078 thousand.

The accompanying notes are an integral part of these statements.

F-110
<PAGE> 275

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

PROFIT AND LOSS ACCOUNT FOR 1998/99

<TABLE>
<CAPTION>
GENERATION AND
OTHER ELECTRICITY-
RELATED ELECTRICITY NON-ELECTRICITY
ACTIVITIES NETWORKS ACTIVITIES TOTAL
DM THOUSAND DM THOUSAND DM THOUSAND DM THOUSAND
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES REVENUE..................... 2,980,300(1) 70,640(2) 850,638 3,901,578
----------------------------------------------------------------------------------------------------
Inventory changes and other
internally produced and
capitalised assets.............. 2,903 29,902 13,273 46,078
Other operating income............ 143,113 88,970 129,813 361,896
Income resulting from netting with
other activities................ 585,967 1,160,979(3) 549,185 2,296,131
Cost of materials................. -914,724 -85,132 -78,179 -1,078,035
Personnel expenses................ -490,116 -260,191 -446,447 -1,196,754
Depreciation...................... -314,687 -197,640(4) -159,119 -671,446
Other operating expenses.......... -156,686 -371,396 -307,711 -835,793
Expenditure resulting from netting
with other activities........... -1,577,506 -313,333 -405,292 -2,296,131
Income from financial assets...... -- -- -13,242 -13,242
Net interest income............... 914 -11 -30,107 -29,204
====================================================================================================
Result of ordinary activities..... 259,478 122,788 102,812 485,078
----------------------------------------------------------------------------------------------------
Taxes on income and revenue....... -100,607 -47,608 -39,863 -188,078
====================================================================================================
Net income for the year......... 158,871 75,180 62,949 297,000
----------------------------------------------------------------------------------------------------
Allocations to other revenue
reserves........................ -29,506 -11,463 -9,631 -50,600
====================================================================================================
Net profit for the year......... 129,365 63,717 53,318 246,400
====================================================================================================
</TABLE>

(1) Reclassification to sales revenue for electricity operations

DM 2,980,300 thousand in sales revenue for generation and other
electricity-related activities

-DM 46,948 thousand in electricity tax

+DM 38,879 thousand for construction cost subsidies (included under sales
revenue, electricity networks)
--------------------------------------------------------------------------------

DM 2,972,231 thousand sales revenue for electricity operations

<TABLE>
<S> <C>
(2) Of which: for public lighting DM 31,761 thousand
(3) Of which: third-party access fees from
internal offsetting DM 1,015,504 thousand
(4) Of which: transfer DM 20,811 thousand
</TABLE>

The accompanying notes are an integral part of these statements.

F-111
<PAGE> 276

BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)

EXPLANATIONS

Balance sheet and profit and loss account items are normally directly
linked to individual activities. However, in cases where there is only an
indirect connection or where a further splitting of accounts would be overly
complicated, assignment to a particular item has been based on classification
according to appropriate sectors. The results of the notional holding, which for
the most part involve expenditure, have been fully spread over the various
operative divisions.

The starting balance sheet equity has been distributed among the activities
in a ratio proportional to the balance sheet total. This ensures that all areas
have the same capital ratio.

We have not shown the development of fixed assets for individual
activities. Asset movements with regard to technical installations correspond
largely to the asset movements of the overall company.

Because of this year's first-time compliance with unbundling requirements,
we have dispensed with previous-year figures.

MAJOR TRANSACTIONS

Under Section 9 Sub-section 4 of the Energy Industry Act (EnWG), major
transactions with affiliated or associated companies as well as with companies
belonging to the same shareholders must be reported. In the course of the
1998/99 business year, Bewag conducted major transactions in the sense covered
by the act on the basis of the following contracts with its business partners:

- contract dated 23 May 1986 and 25 November 1988 with GASAG Berliner
Gaswerke AG, Berlin and Ruhrgas Aktiengesellschaft, Essen, covering the
purchase of natural gas for the Lichterfelde combined heat and power
plant;

- contract dated 1 October 1991 with PreussenElektra AG, Hanover and VEAG
Vereinigte Energiewerke AG, Berlin, covering the operation, maintenance
and use of the Helmstedt-Wolmirstedt-Berlin 380-kilovolt double line. The
contract covers a period of 50 years from the date of completion of the
double line (7 December 1994);

- contract dated 1 October 1991 with PreussenElektra AG, Hanover, covering
the exchange of electricity begun on 7 December 1994. This contract has
an initial term of 20 years;

- contract dated 30 March 1995 with VEAG Vereinigte Energiewerke AG,
Berlin, covering cooperation in the field of electricity operations and
including provisions regarding cooperation in the operation of their
high-voltage networks. This contract, which became effective on 1 April
1995, has an initial expiry date of 31 March 2015;

- contract dated 23 June 1995 with GASAG Berliner Gaswerke AG, Berlin,
Verbundnetz Gas AG, Leipzig, Ruhrgas AG, Essen, and Brigitta Erdgas und
Erdol GmbH, Hanover, covering the delivery of natural gas for the
Lichtenberg, Mitte and Klingenberg combined heat and power plants and,
under certain conditions, for the Buch plant. Deliveries under this
contract began on 1 October 1995 and are initially due to continue until
30 September 2009;

F-112
<PAGE> 277

- contract dated 14 July/4 September 1998 with GASAG Berliner Gaswerke AG,
Berlin, and Ruhrgas AG, Essen, covering deliveries of gas for the
Lichterfelde combined heat and power plant from 1 January 1999 to 31
December 2000;

- contract dated 1 February/5 March 1999 with GASAG Berliner Gaswerke AG,
Berlin, covering deliveries of gas for small-sized power plants between 1
January 1999 and 1 January 2004.

PreussenElektra AG, Hanover, -- because of the interest it has in Bewag
together with Bayernwerk AG, Munich, and Southern Energy Holding
Beteiligungsgesellschaft mbH, Berlin -- is an affiliated company.

GASAG Berliner Gaswerke AG, Berlin, is one of Bewag's associated companies:
at balance sheet date, Bewag held 24.99 per cent of the capital stock of this
company.

And finally, both PreussenElektra AG, Hanover, and Bayernwerk AG, Munich,
own more than 20 per cent of the capital stock of VEAG Vereinigte Energiewerke
AG, Berlin. This means that the same shareholders hold significant amounts of
stock in both this company and Bewag.

In an analogue application of Section 286 Sub-section 3 of the Commercial
Code (HGB), we have not shown details of other existing business relationships.

F-113
<PAGE> 278

BEVAG AG
BUSINESS YEAR 1998
(UNAUDITED)

SUPPLEMENTARY INFORMATION

EFFECTS OF VALUATION CHANGES AND TAX REGULATIONS ON THE REPORTED NET INCOME

Changes in the assessment of inventories and the first-time application of
the new 1998 Heubeck guidelines in the calculation of provisions for pension
have resulted in a revenue balance of DM 0.4 million. However, these measures
have no effect on the net income for the year, as they are compensated by an
equal amount in special depreciation.

On the basis of the balance of allocations and releases of special items
with partial reserve character, and the associated effect this has on tax
expenditure and on other expenditure dependent on profits and dividends, the net
income declared for the year is approximately DM 28 million lower than the
amount which would otherwise have been declarable.

The future revenue tax burden arising from the release of special items
with partial reserve character will depend on the tax rates applicable at the
time.

OTHER FINANCIAL OBLIGATIONS

Future capital expenditure already approved by the Supervisory Board and
maintenance work needing to be done in the coming years represent purchase
commitments of approximately DM 515 million (previous year: DM 650 million).
This amount consists mainly of capital expenditure for repairs and for the
extension of our electricity and heat generating and distribution installations.

The cash value of payment obligations arising from long-term rental and
leasing agreements is approximately DM 351 million (previous year: DM 358
million).

There are approximately DM 303 million (previous year: DM 149 million) in
other discounted financial obligations, including approximately DM 76 million
(previous year: DM 112) relating to affiliated companies. This also includes the
amount for the 6.58 per cent increase in our participation in GASAG Berliner
Gaswerke AG, Berlin, which took place on 2 July 1999.

Fuel and power supplies are secured by long-term contracts.

F-114
<PAGE> 279

SHARE OWNERSHIP UNDER SECTION 285 NO. 11 OF THE COMMERCIAL CODE (HGB)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
SHARE IN EQUITY ON 1998
CAPITAL 31 DEC. 1998 RESULT
NAME AND LOCATION OF THE COMPANY % DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEPOGAS-Gesellschaft zur (Gewinnung und Verwertung
von Deponiegasen mbH, Berlin 1).................... 100.00 0 0
--------------------------------------------------------------------------------------------
EAB Fernwarme GmbH, Berlin(2)........................ 100.00 0 -39,490
--------------------------------------------------------------------------------------------
Bewag Immobilienmanagement GmbH, Berlin.............. 100.00 348 -855
--------------------------------------------------------------------------------------------
IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin................. 100.00 15,105 -1,654
--------------------------------------------------------------------------------------------
Bewag Energiemanagement GmbH, Berlin................. 100.00 672 179
--------------------------------------------------------------------------------------------
FHW Fernheizwerk Neukolln Aktiengesellschaft,
Berlin............................................. 75.22 26,106 3,695
--------------------------------------------------------------------------------------------
EAVV Energie Assekuranz Versicherungs Vermittlungs
GmbH, Berlin....................................... 60.00 423 323
--------------------------------------------------------------------------------------------
ARGE Energiesparpartnerschaft Bewag/Landis & Gyr GbR,
Berlin............................................. 50.00 895 -1,212
--------------------------------------------------------------------------------------------
BerlinDat Gesellschaft fur Informationsverarbeitung
und Systemtechnik mbH, Berlin(3)................... 50.00 8,115 6,115
--------------------------------------------------------------------------------------------
BEG, Berliner Energieagentur GmbH, Berlin............ 33.33 3,024 -348
--------------------------------------------------------------------------------------------
EFR Europaische Funk-Rundsteuerung GmbH, Berlin...... 30.00 0 -946
--------------------------------------------------------------------------------------------
EBH Energie-Beteiligungsholding GmbH, Dortmund....... 25.00 549,682 -578
--------------------------------------------------------------------------------------------
EUS Energie und Umwelt Service GmbH, Berlin.......... 25.00 712 644
--------------------------------------------------------------------------------------------
GASAG Berliner Gaswerke AG, Berlin................... 24.99 849,840 -89,425
</TABLE>

(1) There is a profit and loss transfer contract with the company.

(2) The company was granted an equity-replacing loan in December 1998.

(3) The business year ended on 30 September 1998.
--------------------------------------------------------------------------------

LIABILITY

Of the liabilities for sureties, which total DM 24.8 million (previous
year: DM 22.1 million), DM 19.6 million represent sureties for loans of EAB
Fernwarme GmbH, Berlin, DM 2.1 million for loans of IPH Institut "Pruffeld fur
elektrische Hochleistungstechnik" GmbH, Berlin, DM 1.7 million for loans of
DEPOGAS-Gesellschaft zur Gewinnung und Verwertung von Deponiegasen mbH, Berlin,
and DM 1.4 million for loans of Berliner Energiemanagement GmbH, Berlin.

There are also guarantees worth DM 30.2 million for affiliated companies
(previous year: DM 17.2 million, of which DM 15.9 million for affiliated
companies). In view of current court decisions, all guarantees which are subject
to reporting have been reassessed vis-a-vis the previous business year.

NOTIFICATION OF PARTICIPATION

In accordance with Section 20 Sub-section 1 of the German Stock Corporation
Act, Bewag was notified by the Southern Company, Atlanta, on behalf of Southern
Energy Holding Beteiligunggesellschaft mbH, Berlin, in a letter of 6 October
1997, and by Bayernwerk AG, Munich in a letter of 13 January 1998, that each of
these two companies owns more than 25 per cent of Bewag stock.

F-115
<PAGE> 280

AVERAGE PERSONNEL LEVEL IN THE BUSINESS YEAR EMPLOYEES (EXCLUDING APPRENTICES)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Craftsmen................................................... 3,306 3,563 -257
----------------------------------------------------------------------------------------
Technical staff............................................. 3,196 3,224 -28
----------------------------------------------------------------------------------------
Commercial staff............................................ 2,185 2,241 -56
----------------------------------------------------------------------------------------
Total..................................................... 8,687 9,028 -341
----------------------------------------------------------------------------------------
</TABLE>

DETAILS OF THE COMPANY'S CORPORATE GOVERNANCE

Members of Bewag's Supervisory Board and Board of Management are listed on
Appendix I to these notes.

For the 1998/99 business year, the total remuneration of the Board of
Management was DM 4,268,748 (previous year: DM 5,248,310) and the remuneration
for members of the Supervisory Board totalled DM 514,000 (previous year: DM
957,250).

A total of DM 2,638,693 (previous year: DM 2,519,819) was paid to former
members of the Board of Management and their surviving families; a total of DM
31,310 thousand (previous year: DM 23,608 thousand) was allocated as provision
for pension obligations to this group of persons.

DISTRIBUTION OF THE BALANCE SHEET PROFIT

We propose that the balance sheet profit of DM 246,400,000 be used to pay a
dividend on the capital stock of euro 572,646,906.94, or DM 1,120,000,000.

Berlin, 1 September 1999

BEWAG AKTIENGESELLSCHAFT
The Board of Management

F-116
<PAGE> 281

MOVEMENTS IN FIXED ASSETS

<TABLE>
<CAPTION>
ACQUISITION OR PRODUCTION COSTS
IN DM THOUSAND
--------------------------------------------------------------------------------------------------
STATUS STATUS
1 JULY 1998 ADDITIONS TRANSFERS DISPOSALS 30 JUNE 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
--------------------------------------------------------------------------------------------------
Industrial property rights and
similar rights and assets....... 451,215 71,012 13,557 3,923 531,861
--------------------------------------------------------------------------------------------------
Advance payments.................. 16,995 15,028 -6,887 4,401 20,735
--------------------------------------------------------------------------------------------------
468,210 86,040 6,670 8,324 552,596
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
--------------------------------------------------------------------------------------------------
Real estate, rights equivalent to
real estate and buildings,
including buildings on third
party land property............. 3,071,450(5) 16,178 43,927 27,042 3,104,513
--------------------------------------------------------------------------------------------------
Power plant installations......... 5,860,817 28,306 74,252 13,973 5,949,402
--------------------------------------------------------------------------------------------------
Electricity transmission and
distribution installations...... 5,499,947 85,266(1) 243,621 44,369(1) 5,784,465
--------------------------------------------------------------------------------------------------
District heating distribution
installations................... 2,269,725 14,049 41,856 4,268 2,321,362
--------------------------------------------------------------------------------------------------
Other installations, operating and
business equipment.............. 427,540 17,028(2) 24,321 61,057(2) 407,832
--------------------------------------------------------------------------------------------------
Advance payments and installations
under construction.............. 708,973 258,886 -434,647 40,651 492,561
--------------------------------------------------------------------------------------------------
17,838,452 419,713 -6,670 191,360 18,060,135
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
--------------------------------------------------------------------------------------------------
Shares in affiliated companies.... 88,626 -- -- -- 88,626
--------------------------------------------------------------------------------------------------
Loans to affiliated companies..... 14,400 24,600 -- 1,000 38,000
--------------------------------------------------------------------------------------------------
Participations.................... 768,370 1 -- 1,500 766,871
--------------------------------------------------------------------------------------------------
Loans to companies in which
participations are held......... 19,493 590 -- 7,000 13,083
--------------------------------------------------------------------------------------------------
Other loans....................... 3,071 188 -- 45 3,214
--------------------------------------------------------------------------------------------------
893,960 25,379 -- 9,545 909,794
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
FIXED ASSETS...................... 19,200,622 531,132 -- 209,229 19,522,525
--------------------------------------------------------------------------------------------------
</TABLE>

(1) Including minor assets DM 13,753 thousand

(2) Including minor assets DM 4,557 thousand

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act

The accompanying notes are an integral part of these statements.

F-117
<PAGE> 282

<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION NET BOOK VALUES
(IN DM THOUSANDS) (IN DM THOUSANDS)
---------------------------------------------------------------------------------------------------------------------
STATUS REINSTATED STATUS STATUS STATUS
1 JULY 1998 ADDITIONS TRANSFERS DISPOSALS DEPRECIATIONS 30 JUNE 1999 30 JUNE 1999 30 JUNE 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
137,232 22,305 711 3,812 -- 156,436 375,425 313,983
---------------------------------------------------------------------------------------------------------------------
-- 2,807 -- 2,807 -- -- 20,735 16,995
---------------------------------------------------------------------------------------------------------------------
137,232 25,112 711 6,619 -- 156,436 396,160 330,978
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
986,686 133,480 500 7,768 -- 1,112,898 1,991,615 2,084,764(5)
---------------------------------------------------------------------------------------------------------------------
4,769,544 196,135 2,135 10,182 -- 4,957,632 991,770 1,091,273
---------------------------------------------------------------------------------------------------------------------
3,340,580 178,764(1) 6,254 42,406(1) -- 3,483,192 2,301,273 2,159,367
---------------------------------------------------------------------------------------------------------------------
1,379,460 83,236 501 2,960 -- 1,460,237 861,125 890,265
---------------------------------------------------------------------------------------------------------------------
341,171 39,549(2) -10,101 58,267(2) -- 312,352 95,480 86,369
---------------------------------------------------------------------------------------------------------------------
-- 8,754 -- 8,754 -- -- 492,561 708,973
---------------------------------------------------------------------------------------------------------------------
10,817,441 639,918 -711 130,337 -- 11,326,311 6,733,824 7,021,011
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
30,506 1,153 -- -- -- 31,659 56,967 58,120
---------------------------------------------------------------------------------------------------------------------
-- 22,000 -- -- -- 22,000 16,000 14,400
---------------------------------------------------------------------------------------------------------------------
8,823 89 -- 1,501 150 7,261 759,610 759,547
---------------------------------------------------------------------------------------------------------------------
-- 500 -- -- -- 500 12,583 19,493
---------------------------------------------------------------------------------------------------------------------
78(3) -- -- 16(4) -- 62 3,152 2,993
---------------------------------------------------------------------------------------------------------------------
39,407 23,742 -- 1,517 150 61,482 848,312 854,553
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
10,994,080 688,772 -- 138,473 150 11,544,229 7,978,296 8,206,542
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Including minor assets DM 13,753 thousand

(2) Including minor assets DM 4,557 thousand

(3) Discount of interest

(4) Accumulation of interest because of retirement disposal

(5) After adjustment according to Section 36 of the DM-Balance Sheet Act

The accompanying notes are an integral part of these statements.

F-118
<PAGE> 283

CORPORATE GOVERNANCE
BUSINESS YEAR 1998/1999
(UNAUDITED)
APPENDIX I

SUPERVISORY BOARD
AS OF 30 JUNE 1999

BARNEY S. RUSH
Chairman
President of Southern Energy Development Europe Ltd., London

ERNST OTTO KOCK
Deputy Chairman
Deputy Chairman of Public Services
and Transport Trade Union,
Berlin regional administration,
Berlin

SVEN BERGELIN
Head of the industrial development of the Berlin-Brandenburg administration of
the German Employees' Trade Union, Berlin

HANG-JURGEN CRAMER
Head of corporation development,
Bewag, Berlin

PROF. RAINER FRANK ELSASSER
Member of the Board of Management of Bayernwerk Aktiengesellschaft, Munich

KLAUS FORSTER
Member of the Board of Management of Aktiengesellschaft,
Munich

DR. MANFRED GENTZ
Member of the Board of Management of DaimlerChrysler Aktiengesellschaft,
Esslingen and Berlin

DR. HANS-DIETER HARIG
Chairman of the Board of Management of PreussenElektra Aktiengeselischaft,
Hanover

BERND HELMS
Foreman, Bewag, Berlin

RITA KUHNER-PRZEWOSNIK
Head of employee communications
Bewag, Berlin

DR. OTTO MAJEWSKI
Chairman of the Board of Management of Bayernwerk Aktiengesellschaft, Munich

CARL-FRIEDRICH MEIBNER
Former Member of the Board of Management of Deutsche Telekom Aktiengesellschaft,
Calw

REINHOLD OFFERMANN
Member of the Board of Management of PreussenElektra Aktiengesellschaft, Hanover

RICHARD J. PERSHING
Executive Vice President of Southern Energy, Inc., Roswell, Georgia, USA

KARL-HEINZ DIETER REGEL
Project engineer, Bewag, Berlin

MARTIN SATTLER
Meter fitter with special responsibilities, Bewag, Berlin

UWE SCHARF
Deputy chairman of the Public Services and Transport Trade Union, Berlin

MARIO SCHONIAN
1st car mechanic, Bewag, Berlin

HERBERT STROBEL
Member of the operating committee, Bewag, Berlin

DR. GIUSEPPE VITA
Chairman of the Board of Management of Schering Aktiengesellschaft, Berlin

BOARD OF MANAGEMENT

PROF. DR. DIETMAR WINJE
Chairman
Marketing and Corporate Development,
Berlin

DR. BERND BALZEREIT
Finance and Legal Affairs,
Berlin

DR. KLAUS BECHTOLD
Generation and Heating,
Berlin

J. BRUCE JONES
Networks and Customer Service,
Berlin

DR. KURT LANGE
Human Resources and Services
Berlin

F-119
<PAGE> 284

APPENDIX II

SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (UNAUDITED)

Differences in German and United States generally accepted accounting
principles for net income and stockholders' equity for the business year ended
June 30, 1999 would be similar in nature to those described in Appendix II of
the financial statements for the business year ended June 30, 1998.

F-120
<PAGE> 285

[LOGO]
<PAGE> 286

PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses to be paid in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are as follows:

<TABLE>
<S> <C>
SEC registration fee........................................ $299,349.60
NASD filing fee............................................. 30,500
NYSE listing fee............................................ *
Printing and engraving costs................................ *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Blue sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
-----------
Total..................................................... $ *
===========
</TABLE>

---------------

* To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Southern Energy, Inc. is incorporated under the laws of the State of
Delaware. Section 145 ("Section 145") of Title 8 of the Delaware Code gives a
corporation power to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Section 145 also gives a corporation power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Also, Section
145 states that, to the extent that a present or former director or officer of a
corporation has been
II-1
<PAGE> 287

successful on the merits or otherwise in defense of any such action, suit or
proceeding, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.

Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.

Southern Energy's Bylaws provide for the indemnification of officers and
directors to the fullest extent permitted by the General Corporation Law.

All of Southern Energy's directors and officers will be covered by
insurance policies maintained by Southern Energy against certain liabilities for
actions taken in their capacities as such, including liabilities under the
Securities Act of 1933, as amended.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On July 26, 1999, we sold $200,000,000 7.4% senior notes due 2004 and
$500,000,000 7.9% senior notes due 2009. The purchase price of these notes was
paid in cash by the certain institutional investors. All of these notes were
offered and sold only to qualified institutional buyers in transactions not
involving a public offering in reliance upon the exemption provided by Section
4(2) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS

(a) The following exhibits are filed as part of this Registration
Statement:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1** -- Form of Underwriting Agreement.
3.1** -- Form of Restated Certificate of Incorporation.
3.2** -- Bylaws.
4.1 -- Specimen Stock Certificate.
4.2* -- Certificate of Trust (Designated in Registration No.
333-41680 as Exhibit 4.2).
4.3* -- Trust Agreement (Designated in Registration No. 333-41680 as
Exhibit 4.3).
4.4** -- Form of Amended and Restated Trust Agreement.
4.5** -- Form of Preferred Security (included in Exhibit 4.4).
4.6** -- Form of Junior Convertible Subordinated Note Indenture.
4.7** -- Form of First Supplemental Indenture.
4.8** -- Form of Junior Convertible Subordinated Note (included in
Exhibit 4.7).
4.9** -- Form of Guarantee.
4.10** -- Form of Agreement as to Expenses and Liabilities (included
in Exhibit 4.4).
5.1** -- Opinion of Troutman Sanders LLP.
10.1* -- Form of Master Separation and Distribution Agreement.
</TABLE>

II-2
<PAGE> 288

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.2* -- Form of Transitional Services Agreement.
10.3* -- Form of Indemnification and Insurance Matters Agreement.
10.4* -- Form of Technology and Intellectual Property Ownership and
Licenses Agreement.
10.5* -- Form of Confidential Disclosure Agreement.
10.6* -- Form of Employee Matters Agreement.
10.7* -- Form of Tax Indemnification Agreement.
10.8* -- Form of Registration Rights Agreement.
10.9* -- Form of Southern Energy Employee Stock Purchase Plan.
10.10* -- Form of Southern Energy Omnibus Incentive Compensation Plan.
10.11* -- Deferred Compensation Agreement with S. Marce Fuller.
10.12* -- Deferred Compensation Agreement with Raymond D. Hill.
10.13* -- Deferred Compensation Agreement with Richard J. Pershing.
10.14* -- Amended and Restated Employment Retention Agreement with
Frederick D. Kuester.
10.15* -- Employment Retention Agreement with Barney S. Rush.
10.16** -- Form of Change in Control Agreement.
10.17* -- Formation Agreement by and between SEI Holdings, Inc. and
Vastar Resources, Inc. dated August 8, 1997.
10.18* -- Energy Conversion Agreement for a Coal Fired Thermal Power
Station at Sual Pangasinan, Philippines between National
Power Corporation and CEPA Pangasinan Electric Limited dated
May 20, 1994.
10.19* -- Build, Operate and Transfer Project Agreement for a Gas
Turbine Power Station in Navotas, Manila between National
Power Corporation and Hopewell Project Management Company
Limited dated 16th November, 1988.
10.20* -- Navotas II, Build, Operate and Transfer Project Agreement
for a Gas Turbine Power Station in Navotas, Manila between
National Power Corporation and Hopewell Energy International
Limited, dated 29 June, 1992.
10.21* -- Energy Conversion Agreement for a Coal Fired Thermal Power
station at Barangay Ibabang Pulo, Pagbilao, Quezon,
Philippines between National Power Corporation and Hopewell
Energy International Limited, dated 9th November, 1991.
10.22* -- Amendment Agreement, dated the 30th day of March 1993, to an
Energy Conversion Agreement between Hopewell Energy
International Limited, National Power Corporation and
Hopewell Power (Philippines) Corp. dated 9th November 1991.
10.23 -- Asset Purchase and Sale Agreement for Generating Plants and
Related Assets by and between Potomac Electric Power Company
and Southern Energy, Inc., dated June 7, 2000, and exhibits
thereto.
21.1* -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of KPMG Deutsche Treuhand-Gesellschaft.
23.3** -- Consent of Troutman Sanders LLP (included in Exhibit 5.1).
24.1* -- Power of Attorney (included on signature page).
</TABLE>

II-3
<PAGE> 289

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
27.1 -- Financial Data Schedule (for SEC use only).
99.1 -- Consent of A. D. Correll.
99.2 -- Consent of David J. Lesar.
99.3 -- Consent of William M. Hjerpe.
</TABLE>

Exhibits listed above that have been filed with the Commission and that
were designated as noted above are hereby incorporated herein by reference and
made a part hereof with the same effect as if filed herewith.
-------------------------

* Previously filed.
** To be filed by amendment.

(b) The following financial statement schedule is filed as part of this
Registration Statement:

SCHEDULE II -- Valuation and Qualifying Accounts and Reserves of Southern
Energy, Inc. and Subsidiary Companies for the years ended December 31, 1997,
1998 and 1999.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.

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<PAGE> 290

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on August 18, 2000.

SOUTHERN ENERGY, INC.

By: *
------------------------------------
S. Marce Fuller
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below and as of the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive Officer and *
------------------------------------------ Director (Principal Executive Officer)
S. Marce Fuller

* Executive Vice President and Chief *
------------------------------------------ Financial Officer (Principal Financial
Raymond D. Hill Officer)

* Senior Vice President, Finance and *
------------------------------------------ Accounting (Principal Accounting
James A. Ward Officer)

* Director *
------------------------------------------
A. W. Dahlberg

* Director *
------------------------------------------
H. Allen Franklin

* Director *
------------------------------------------
Elmer B. Harris

* Director *
------------------------------------------
W. L. Westbrook

*By: /s/ ELIZABETH B. CHANDLER August 18, 2000
-----------------------------------
Elizabeth B. Chandler
Attorney-in-Fact
</TABLE>

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<PAGE> 291

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Southern Energy, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Southern Energy, Inc. included in this
registration statement and have issued our report thereon dated February 16,
2000. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the Company's management, 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 audits 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 consolidated financial
statements taken as a whole.

/s/ Arthur Andersen LLP

Atlanta, Georgia
February 16, 2000
<PAGE> 292

SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Stated in Thousands of Dollars)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT BEGINNING CHARGED TO CHARGED TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD
----------- -------------------- ---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Provision for
uncollectible
accounts (current)
1999................. $101,243 $ 19,566 $(11,805) $65,418(Note1) $ 43,586
1998................. 67,443 33,082 6,153 5,435(Note1) 101,243
1997................. 23,806 14,522 36,220 7,105(Note1) 67,443
Provision for
uncollectible
accounts (long-term)
1999................. $ 40,000 $ 30,543 $(10,000) $ 0 $ 60,543
1998................. 0 40,000 0 0 40,000
1997................. 0 0 0 0 0
</TABLE>

---------------

Note 1: Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.