<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 2000.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
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
MAXIMUM AMOUNT OF
TITLE OF SHARES AGGREGATE REGISTRATION
TO BE REGISTERED OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $0.01 par value per share........... $100,000,000 $26,400
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee and
calculated in accordance with Rule 457(o) under the Securities Act.
-------------------------
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.
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- --------------------------------------------------------------------------------
<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
[ ] Shares
[LOGO]
Southern Energy, Inc.
Common Stock
-------------------------
This is an initial public offering of shares of common stock of Southern
Energy, Inc. All of the [ ] 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 [ ] 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
[ ] and [ ] 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 6.
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, before expenses, to [ ].................. $ $
</TABLE>
The underwriters may also purchase up to an additional [ ] 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
-------------------------
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
Risk Factors.................... 6
Our Separation from Southern
Company....................... 21
Use of Proceeds................. 23
Dividend Policy................. 23
Capitalization.................. 24
Dilution........................ 25
Selected Financial
Information................... 26
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 28
Business........................ 41
Management...................... 89
Relationship with Southern
Company and Certain
Transactions.................. 102
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Agreements Between Us and
Southern Company.............. 103
Certain Federal Tax Matters
Related to Our Separation from
Southern Company.............. 111
Principal Stockholder........... 112
Description of Capital Stock.... 113
Tax Consequences to Non-U.S.
Investors..................... 117
Shares Eligible for Future
Sale.......................... 120
Underwriting.................... 121
Legal Matters................... 123
Experts......................... 123
Where You Can Find More
Information................... 123
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
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE COMMON STOCK IN THE OPEN MARKET.
IN CONNECTION WITH THIS OFFERING CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK IN ACCORDANCE WITH RULE 103 OF
REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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 development 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 undertake no duty to
update any of the forward-looking statements after the date of this prospectus.
ii
<PAGE> 5
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.
SOUTHERN ENERGY, INC.
We are a leading integrated power provider with regionally based businesses
in North America, Europe and the Asia-Pacific region. We provide our customers
with energy products designed to meet their specific requirements by integrating
electricity generation and distribution, management of gas assets, marketing and
risk management services and fuel procurement. To support our business we have
built and acquired a portfolio of power generating assets that make us one of
the world's largest independent power producers. Our business also includes
providing risk management services in liquid markets where energy products are
sold on a competitive basis. We use our risk management capabilities to optimize
the value of our generating and gas assets and we also offer risk management
services to others. We also own integrated utility operations and an electricity
distribution company.
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, generation 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 integrated asset operations and
marketing and risk management businesses. 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. We own and
operate generating facilities with a total generation capacity of 6,887
megawatts (MW), of which our net ownership interests represent 6,785 MW. We
control an additional 1,738 MW through management contracts. Additionally, we
have projects, which we will own and operate, under construction or development
in North America totaling 5,699 MW. Through our 60% interest in Southern Company
Energy Marketing, L.P. (SCEM), we are a leading energy marketer in North
America. SCEM markets and trades energy and energy-linked commodities, including
electricity, gas, oil, coal and emission allowances. 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 five of the largest gas and electricity marketers in the United
States.
In Europe, we intend to follow a strategy similar to our North American
strategy by integrating power generation assets with marketing and risk
management. We have developed an energy marketing and risk management business
in Europe, which began trading power in the Nordic and Dutch markets in 1999. We
also expect to begin trading power in the German and Swiss energy markets
sometime in 2000 and in the Italian energy market in early 2001. We currently
own a 26% interest in Bewag AG, the integrated utility serving 2.4 million
customers in Berlin, Germany, and a 49% interest in Western Power Distribution
(WPD), which distributes electricity to approximately 1.4 million end users in
southwest England.
In the Asia-Pacific region, we own generating facilities in the Philippines
and China with total net ownership interests of 3,141 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.
In the Caribbean and South America, we have operations in the Bahamas,
Trinidad and Tobago, Brazil, Argentina and Chile, and we are acquiring an
interest in operations in the U.S. Virgin Islands. We have entered into an
agreement to sell our investment in Argentina and we are pursuing the sale of
our Chilean subsidiary, as those investments have not met our return
requirements.
1
<PAGE> 6
Our business has grown significantly between 1995 and 1999 in terms of
EBITDA and assets as shown in the table below.
<TABLE>
<CAPTION>
COMPOUND ANNUAL
1995 1996 1997 1998 1999 GROWTH RATE
------ ------ ------- ------- ------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
EBITDA......................... $ 122 $ 258 $ 512 $ 351 $ 825 61%
Total assets................... 4,511 4,564 10,630 12,054 13,863 32
</TABLE>
We believe that we will realize certain benefits from our complete
separation from Southern Company, including the following: reduced governmental
regulation, capital financing flexibility, providing a targeted investment for
stockholders, increased strategic focus, access to additional markets, increased
speed and responsiveness and targeted incentives for management and employees.
STRATEGY
Our strategy is to be a leading integrated power provider with a balanced
global business. We intend to continue our growth by capitalizing on
opportunities to use our management and technical skills in the acquisition,
development, financing and operation of power generation facilities and gas
transportation and storage assets. We also intend to capitalize on our ability
to integrate asset ownership with energy marketing and risk management services.
We plan to implement our strategy by:
- developing greenfield and brownfield generation projects,
- acquiring power and gas assets competitively positioned in our targeted
markets,
- entering into contractual arrangements for the control of generation
capacity and gas management facilities,
- expanding our marketing and risk-management activities, and
- expanding the implementation of our information technology and e-commerce
applications.
We will focus the implementation of our strategy on North America, Europe
and the Asia-Pacific region.
North America
In North America, our plan is to:
- invest in generating capacity in regions of North America that we
consider attractive and that will enable us to own or control a total of
25,000 to 30,000 MW of generation capacity, and
- 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 business.
Europe
In Europe, our plan is to:
- integrate our generation and distribution with our marketing and risk
management capabilities throughout the Nordic region, the Benelux
countries, Germany, Switzerland, Italy and parts of Central Europe,
- own or control a total of 10,000 to 12,000 MW of generation capacity in
these regions, and
- pursue opportunities to enhance the value of our distribution business in
England.
2
<PAGE> 7
Asia-Pacific
In the Asia-Pacific region, our plan is to:
- own or control a total of 8,000 to 10,000 MW of generation capacity,
- build on the successful base we have established in the Philippines and
China,
- expand into countries with more developed economies that are opening
their energy sectors to competition, such as Australia and Singapore, and
- explore opportunities in the region where we believe we can capture both
market size and economies of scale.
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 agreements will provide for, among other things, the transfer
from Southern Company to us of certain assets and the assumption by us of
certain liabilities relating to our business. In addition we will transfer the
operations and obligations of our leasing and capital funding subsidiaries to
Southern Company. The agreements between Southern Company and us will also
govern our various interim and ongoing relationships. All of these agreements
will be made in the context of a parent-subsidiary relationship and will be
negotiated in the overall context of our separation from Southern Company and
the requirements of federal and state regulations.
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.
THE OFFERING
COMMON STOCK OFFERED:
In the United States and Canada..... [ ] shares(1)
Outside the United States and
Canada.............................. [ ] shares(1)
Total............................. [ ] shares(1)
Common stock to be outstanding
immediately after the offering...... [ ] shares(1)
Common stock to be held by Southern
Company immediately after the
offering.......................... [ ] shares
Use of Proceeds..................... For general corporate purposes
including the repayment of short-term
indebtedness.
Proposed NYSE symbol................ "SOE"
- -------------------------
(1) Assumes the underwriters' over-allotment option to purchase
[ ] shares is not exercised.
3
<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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------ ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues(1)....................................... $ 584 $1,600 $ 3,750 $ 1,819 $ 2,268
Write down of assets(2)..................................... -- -- -- 308 60
Operating income (loss)..................................... 66 150 272 (5) 444
Other income (expense):
Interest income........................................... 13 16 138 146 172
Interest expense.......................................... (64) (133) (345) (430) (502)
Gain on sales of assets................................... 11 66 24 41 313
Equity in income of affiliates............................ 10 13 58 135 111
Receivables recovery...................................... -- -- -- 29 64
Other, net................................................ (1) 28 33 29 72
------- ------ ------- ------- -------
Total other (expense) income............................ (31) (10) (92) (50) 230
------- ------ ------- ------- -------
Income (loss) from continuing operations before income taxes
and minority interest..................................... 35 140 180 (55) 674
Provision (benefit) for income taxes:
Continuing operations..................................... 8 54 27 (123) 129
Windfall profits tax(3)................................... -- -- 148 -- --
Minority interest........................................... 13 13 29 80 183
------- ------ ------- ------- -------
Income (loss) from continuing operations.................... 14 73 (24) (12) 362
Income from discontinued operations, net of income tax of
$10 in 1997, $22 in 1998 and $15 in 1999(4)............... -- -- 8 12 10
------- ------ ------- ------- -------
Income (loss) before extraordinary item..................... 14 73 (16) -- 372
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
======= ====== ======= ======= =======
STATEMENT OF CASH FLOWS DATA:
Cash flow from operating activities......................... $ 158 $ (226) $ 263 $ 402 $ 509
Cash flow from investing activities......................... (1,244) (136) (4,203) (1,741) (2,263)
Cash flow from financing activities......................... 1,653 (193) 4,177 1,502 1,516
OTHER OPERATING DATA:
EBITDA(5)................................................... $ 122 $ 258 $ 512 $ 351 $ 825
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(6) AS ADJUSTED(7)
------- ------------ --------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 323 $ 313
Property, plant and equipment, net.......................... 6,025 6,025
Investments................................................. 1,490 1,414
Investment in leveraged leases.............................. 556 0
Total assets.............................................. 13,863 12,125
Non-recourse debt(8)........................................ 6,202 5,753
Total debt................................................ 7,152 7,241
Subsidiary obligated mandatorily redeemable preferred
securities(9)............................................. 1,031 81
Stockholder's equity........................................ 3,102 2,310
</TABLE>
4
<PAGE> 9
(1) The decline in operating revenues in 1998 is due to the transfer of our
energy marketing and risk management activities to a newly formed marketing
and risk management joint venture with Vastar on January 1, 1998, called
SCEM. Currently, we account for this joint venture under the equity method
of accounting. Prior to the formation of the joint venture, our marketing
and risk management activities were consolidated. For 1997, operating
revenues would have been $1,768 million and operating expenses would have
been $1,462 million if we had not consolidated our marketing and risk
management operations.
(2) 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 includes further write-downs of our
investments in Alicura and EDELNOR, to offset net income and maintain the
carrying value at the fair market value as well as a write-down at WPD
relating to impaired metering assets.
(3) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.
(4) On April 17, 2000, we decided to transfer to Southern Company our leasing
business, SE Finance Capital Corporation (SE Finance). As a result, we have
included the historical results of operations of the related subsidiaries as
a discontinued operation.
(5) 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.
(6) Pro forma amounts give effect to the following actions as though these
actions had been taken as of December 31, 1999:
- the transfer to Southern Company of the operations of our capital funding
subsidiary, Southern Company Capital Funding, Inc. (Capital Funding);
- the transfer to Southern Company of our leasing subsidiary, SE Finance;
and
- the payment by us of a cash dividend to Southern Company in the amount of
$538 million, and short-term borrowings to fund that dividend.
(7) Pro forma as adjusted amounts give effect to our sale of [ ]
shares of common stock in this offering at an assumed initial public
offering price of $[ ].
(8) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
(9) As of December 31, 1999, 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. 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 $81
million of these securities were issued by 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 this offering.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. The risks and uncertainties described below are not the
only ones we face. These risks are the ones we consider to be significant to
your decision whether to invest in our common stock at this time. There may be
risks that you in particular view differently than we do, and there are other
risks and uncertainties that are not presently known to us or 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
WE FACE RISKS ATTENDANT TO CHANGES IN COMMODITY PRICES.
Our generation and distribution businesses are subject to changes in power
prices and fuel costs which may impact our financial results and financial
position. In addition, actual power prices and fuel costs may differ from those
assumed in our financial models. As a result, our returns may not meet our
expectations.
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 certain types
of 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 certain market risks.
We may, at times, have a bias or 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 multiple 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.
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. Failures to perform by
counterparties in the past have required us to institute legal proceedings,
which caused one counterparty to file bankruptcy. 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 results or financial position. Although we devote a
considerable amount of management efforts to these issues, their outcome is
uncertain.
6
<PAGE> 11
WE FACE RISKS RELATED TO DOING BUSINESS OUTSIDE THE UNITED STATES.
We have a number of operating subsidiaries doing business outside the
United States. In 1999, we derived approximately 78% of our net income from the
operations of 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 law or regulation,
- 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 policy or personnel,
- changes in general economic conditions affecting each country,
- difficulty converting our earnings to U.S. dollars or moving funds
offshore,
- fluctuations in currency exchange rates,
- changes in labor relations for non-union 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 any 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.
Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations of certain
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 environment in certain 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.
OUR BUSINESS IS SUBJECT TO UNCERTAINTIES RELATED TO CONTRACT SALES.
Several of our power production facilities rely on a single customer or a
few customers to purchase all of the facility's output and on a single supplier
for each of fuel, water and other services required for operation of the
facility. Our sale and procurement agreements for these facilities are long-term
agreements that provide the 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.
Most significantly, for the year ended December 31, 1999, approximately 35%
of our net income was attributable to revenue generated by our Philippine
facilities under power sales agreements with
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NPC. NPC is contractually committed to purchase a significant amount of power,
which we anticipate will generate significant revenues in the future. We cannot
assure you that NPC will make the payments it has contracted to make. However,
NPC's commitment is supported by a sovereign guarantee by the Philippines
government.
WE MIGHT NOT HAVE ACCESS TO FINANCING TO DEVELOP OR GROW OUR BUSINESS.
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 future projects and acquisitions. 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 those our subsidiaries
have previously received. In addition, constraints on our ability to obtain
financing at the corporate level could restrict our ability to invest in new
projects. Our attempts to consummate future financings may not be successful or
on favorable terms.
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 issue additional debt at the
corporate level or make larger equity investments in or provide more financial
support for our projects, or we may decide not to build new plants or acquire
facilities. This could have a material adverse effect on our growth prospects
and the market price of our common stock.
Our marketing and risk management business currently has an investment
grade credit rating. If this business were to be downgraded to a non-investment
grade credit rating, we could have difficulty sustaining or growing the
marketing and risk management business because potential customers may be less
likely to do business with us.
In the past, a significant amount of our debt and equity capital needs have
been satisfied 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 certain
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.
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT WE MAY BE UNABLE TO SERVICE AND THAT
RESTRICTS OUR ACTIVITIES.
We have incurred substantial indebtedness on a consolidated basis to
finance our business. As of December 31, 1999, our total consolidated
indebtedness was $7.2 billion, our total consolidated assets were $13.9 billion
and our stockholders' equity was $3.1 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.
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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.
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. If cash flow is insufficient and refinancing or additional financing
is unavailable, we may be forced to default on our debt obligations. 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.
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. Our failure to comply
with these legal requirements may result in the assessment of penalties and
fines against us. 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. The scope and extent of these new environmental regulations,
including their effect on our operations, is unclear. Although the tariff
systems which are applicable to us and our contracts with our customers often
entitle us to pass through to our customers increased operating costs
attributable to new statutes, rules and regulations, we may not always be able
to recover costs of complying with new environmental laws by adjustments to
contracted tariff rates or market prices. We cannot assure you that future
compliance with these environmental statutes, rules and regulations will not
have a material adverse effect on our operations or financial condition.
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OUR CURRENT BUSINESS IS SUBJECT TO REGULATION UNDER PUHCA.
Until the distribution of our stock held by Southern Company, we will
continue to be subject to regulation under 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 facilities 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 on June 30, 2000, and we have filed an application to
extend it until after the distribution by Southern Company. In the event that
the SEC does not extend this order, our ability to manage our cash flows will be
limited by these restrictions until the full distribution by Southern Company.
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.
Our power generation and energy operations in the United States are subject
to complex energy related laws and regulations and we may be adversely affected
by changes in these laws and regulations.
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 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 change by FERC in the rates we
may receive for our generation activities may adversely affect our results of
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operations. For more information regarding relevant U.S. public utility
regulation, see "Business -- Regulation -- U.S. Public Utility Regulation."
From time to time we may acquire and hold interests in QFs. Currently, we
own a QF interest in the Birchwood facility. The contracts to sell the output of
the Birchwood facility are conditioned upon maintaining QF status or obtaining
all regulatory approvals to operate on a non-QF basis. QF status is conditioned
on meeting certain criteria, and would be jeopardized, for example, by the loss
of a significant customer.
The United States Congress is considering legislation which would repeal
PURPA entirely, or at least eliminate prospectively the obligation of utilities
to purchase from QFs. Various bills have also proposed repeal of PUHCA. In the
event of a PUHCA repeal, competition for independent power generators and from
vertically integrated utilities would likely increase. Repeal of PURPA and/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.
THE ENERGY INDUSTRY IS RAPIDLY CHANGING 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 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 some 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 to electric utilities' transmission and distribution systems for
independent power producers and electricity consumers. Industry restructuring
efforts by states in the 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. The structure
of these energy regulations has in the past, and may in the future, be the
subject of various challenges 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.
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, 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.
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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, nor can we 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.
WE WILL CONTINUE TO FACE STRONG COMPETITION.
We will face strong competition relating to all aspects of the energy
industry in the development of new electric generating plants in the United
States and abroad, in the acquisition of existing electric generating plants and
in the distribution and marketing and risk management of electricity and other
energy-related commodities. Many of the regions in which we operate have
implemented or are considering implementing regulatory initiatives designed to
increase competition. Any resulting competition in these regions may result in a
reduction of energy prices and may adversely affect our results of operations.
In addition, we must compete with a substantial number of other energy companies
or power generating companies, many of which have greater resources than we do
and are more specialized than we are. We may not be able to compete effectively
with these or other companies operating in our businesses.
CHANGES IN TECHNOLOGY MAY SIGNIFICANTLY IMPACT OUR BUSINESS.
A basic premise of our business is that central station power generation
achieves economies of scale and produces electricity at a low price, and
therefore is in demand. There are numerous other technologies which can produce
electricity, though all of them currently have higher costs and only provide
viable alternatives in limited markets. Research and development activities are
ongoing to seek improvements in many of these technologies and it is possible
that some advancement would provide the stimulus to make central station
generation obsolete. If this were to happen, the value of our power generation
assets would be significantly impaired.
We use technology in the normal course of conducting our business. Advances
in this field are occurring at a rapid pace and frequent upgrades are often
necessary to support our applications. The cost of the required upgrades may not
be accurately reflected in our financial statements as we do not currently know
the next obsolete product or its replacement cost.
Emerging technologies such as e-business applications could change the
dimensions of our current markets. Our failure to adapt to these changes might
be detrimental to the growth of our business.
OUR FACILITIES MAY NOT OPERATE AS PLANNED.
Our operation of power production facilities 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
certain equipment. In addition, weather related incidents and other natural
disasters can disrupt both generation and transmission delivery systems.
Operation of our power production facilities below expected capacity levels may
result in lost revenues or increased expenses, including higher maintenance
costs and penalties. This could trigger default provisions in a project
subsidiary's or project affiliate's financing agreements, which might allow the
affected lenders to accelerate that debt.
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OUR OPERATIONS DEPEND SUBSTANTIALLY ON THE PERFORMANCE OF OUR SUBSIDIARIES,
SOME OF WHICH WE DON'T CONTROL AND SOME OF WHICH ARE SUBJECT TO RESTRICTIONS
ON DIVIDENDS AND DISTRIBUTIONS.
Almost all of our operations are conducted through our subsidiaries and
other affiliates. As a result, we depend almost entirely upon their earnings and
cash flow. Certain of our subsidiaries are not subject to our control of
management and policies. In addition, the debt agreements of certain of our
subsidiaries 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.
Our business involves numerous risks relating to the acquisition,
development and construction of large power generation facilities. Our success
in developing a particular project is contingent upon, among other things,
negotiation of satisfactory engineering, construction, fuel supply and power
sales contracts with other project participants, receipt of required
governmental permits and consents 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, to obtain all required governmental permits and approvals
and to arrange 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 generation facilities under development or
construction and we intend to pursue the expansion of existing facilities 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,
- permitting and other regulatory matters,
- adverse weather conditions,
- unforeseen engineering problems,
- environmental and geological conditions,
- unanticipated cost increases, and
- competing 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,
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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 CERTAIN INCOME TAX REPORTING POSITIONS THAT COULD BE DISALLOWED.
ANY DISALLOWANCE WOULD ADVERSELY AFFECT US.
We have disclosed our federal income tax reporting position on a number of
issues in Southern Company's consolidated income tax returns. These returns have
not been audited by the Internal Revenue Service for any tax years after 1995.
We believe that we have substantial authority for the reporting positions we
have taken, but there can be no assurance that these or other reporting
positions will be sustained. Disallowance of any one or more of these reporting
positions would adversely affect us.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
HIRE AND RETAIN SUFFICIENT QUALIFIED PERSONNEL.
Our future success depends partly on the continued contribution of our key
executives and our financial, information technology, technical, engineering and
administrative personnel. It also depends on our ability to expand and retain
our management team after the distribution by Southern Company. Recruiting and
retaining skilled personnel is highly competitive. If we fail to retain and hire
qualified employees, we will not be able to maintain and expand our business.
RISKS RELATED TO OUR SEPARATION FROM SOUTHERN COMPANY
OUR CREDIT RATING WILL LIKELY DECLINE AS A RESULT OF OUR SEPARATION FROM
SOUTHERN COMPANY.
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
certain of our subsidiaries. In fact, rating agencies have recently announced
that they will re-assess our credit ratings and the credit ratings of certain of
our subsidiaries in light of our separation from Southern Company. These
announcements indicate that our credit rating and the credit ratings of certain
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
certain 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. 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.
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CERTAIN OF OUR FINANCING AGREEMENTS AND MATERIAL CONTRACTS 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.
The distribution of our common stock by Southern Company, if it occurs, may
constitute a change of control under certain provisions in our financing
agreements and material contracts. A change of control under these agreements
may constitute an event of default or may otherwise trigger rights of
counterparties to seek certain remedies. 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. Any of these events may have an adverse effect on our business
and our results of operations.
OTHER ASPECTS OF OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR SEPARATION FROM
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.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF SOUTHERN COMPANY DOES NOT COMPLETE
THE DISTRIBUTION OF OUR COMMON STOCK.
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, subject to obtaining a ruling from the Internal
Revenue Service, the distribution will be tax-free to Southern Company and its
stockholders and that the distribution qualifies as a reorganization, it will
distribute to its stockholders all of our common stock that it owns, although it
is not obligated to do so. At the time of this offering, we will not have a
ruling from the IRS regarding the tax treatment of the separation and the
distribution. If Southern Company does not receive a favorable tax ruling, it is
not likely to make the distribution in the expected time frame or at all.
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.
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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 the Southern
Company stockholders. As a result, Southern Company, subject to its fiduciary
duty of care to our minority stockholders, 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,
- 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.
SOUTHERN COMPANY MAY PREVENT US FROM COMPLETING STRATEGIC ACQUISITIONS OR
DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY OR PREVENT US FROM RAISING
THE CAPITAL NECESSARY TO ACHIEVE OUR STRATEGIC OBJECTIVES.
For a period ending two years after the time that Southern Company
completes its distribution of our common stock, if a distribution occurs, we
will be subject to certain restrictions which may limit our ability to make
acquisitions or delay or prevent a change in control of our company.
Specifically, we and Southern Company intend that the distribution of our stock
to Southern Company stockholders will be tax-free to Southern Company and its
stockholders. However, current tax law provides for a presumption that this
distribution, if it occurs, may be taxable to Southern Company if our company
undergoes a change in control 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 of 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 HISTORICAL FINANCIAL INFORMATION 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,
16
<PAGE> 21
- 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 RESULTING TAXES. IN ADDITION, THE DISTRIBUTION OF OUR STOCK
BY SOUTHERN COMPANY MAY RESULT IN ADVERSE TAX CONSEQUENCES TO US.
Within 12 months after the completion of this offering, Southern Company
intends to distribute the shares of our stock that it owns to Southern Company
stockholders. Prior to the distribution, Southern Company intends to receive a
ruling from the IRS that the distribution will be tax-free. 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 be material.
Subsequent to the distribution of our stock by Southern Company, we will
cease to be a member of the Southern Company consolidated tax group. This may
result in material adverse tax consequences including recapture of tax losses or
trigger of certain deferred gains. While we intend to undertake planning and
restructuring to mitigate any adverse tax consequences, our mitigation efforts
may not be successful.
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, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Southern Company,
- relationships with third party suppliers and customers,
- employee recruiting,
- sales or distributions by Southern Company of all or any portion of its
ownership interest in us,
- the nature, quality and pricing of transitional services Southern Company
has agreed to provide us,
- competition with Southern Company for business opportunities that may be
attractive to both Southern Company and us,
- transacting business within Southern Company's service territory, and
17
<PAGE> 22
- actions and decisions of legislative bodies and administrative agencies.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we have entered into with Southern Company
may be amended upon agreement between the parties. While we are controlled by
Southern Company, Southern Company may be able to require us to agree to
amendments to these agreements that may be less favorable to us than the current
terms of the agreements.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF SOUTHERN COMPANY COMMON STOCK.
Many of our directors and certain of our 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.
OUR ABILITY TO OPERATE OUR BUSINESS MAY SUFFER IF WE DO NOT DEVELOP OUR OWN
INFRASTRUCTURE QUICKLY AND COST-EFFECTIVELY.
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.
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.
Although Southern Company is contractually obligated to provide us with
these services, these services may not be provided at the same level as when we
were part of Southern Company, and we may not be able to obtain the same
benefits. These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Southern Company. These 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 in a timely manner or on terms and conditions, including
cost, as favorable as those we will receive from Southern Company.
18
<PAGE> 23
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
[ ] 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.
OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET, AND WE CANNOT ASSURE YOU THAT ANY
PUBLIC MARKET WILL DEVELOP AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. If no public market develops, you may have
difficulty selling your stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock could be subject to significant
fluctuations after this offering. Among the factors that could affect our stock
price are:
- quarterly variations in the rate of growth of certain 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 stockholders 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.
CERTAIN 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
19
<PAGE> 24
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. Our board of directors is classified into three classes
of directors serving staggered, three-year terms. In addition, our directors 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.
Purchasers of our common stock in this offering will experience immediate
dilution of [ ] in net tangible book value per share.
20
<PAGE> 25
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 stock, including the following:
- REDUCED GOVERNMENTAL REGULATION. We expect to conduct our business so
that we will no longer be subject to regulation under PUHCA. For example,
we will not need to obtain PUHCA approval for certain acquisitions. In
addition, our complete separation from Southern Company will result in
fewer regulatory constraints on and less regulatory influence over our
operations.
- CAPITAL FINANCING FLEXIBILITY. As a separate entity, we expect to be
able to raise equity on more attractive terms and our equity securities
will provide a form of consideration for possible future acquisitions and
development. We also expect to be able to raise debt without potential
constraints 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 integrated electricity generation, 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. 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.
- ACCESS TO ADDITIONAL MARKETS. We will be able to compete for wholesale
and retail customers and develop generation assets in Southern Company's
service territory in the southeastern United States.
- INCREASED SPEED AND RESPONSIVENESS. As a separate company, we expect to
be able to make decisions more quickly and efficiently and to respond
faster to changing market conditions than we are able to now as a
subsidiary of Southern Company.
- TARGETED INCENTIVES FOR MANAGEMENT AND EMPLOYEES. We 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. The complete separation will enable us 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.
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<PAGE> 26
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.
These subsidiaries will first be transferred to a new wholly-owned subsidiary of
ours, which will then be merged with a wholly-owned subsidiary of Southern
Company. The surviving company of that merger will be transferred to Southern
Company. We currently have certain credit support obligations related to SE
Finance. Following the transfer, Southern Company will assume these obligations.
Immediately prior to the distribution of our common stock by Southern
Company, we expect to acquire Plant Dahlberg from Georgia Power Company (Georgia
Power), a subsidiary of Southern Company. The purchase price we will pay for
Plant Dahlberg will be equal to Georgia Power's net book value of the plant as
of the date of transfer. The purchase price is estimated to be $262 million. If
the distribution does not take place, it is unlikely that we will acquire Plant
Dahlberg.
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 six to 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 certain
consequences that may result if 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:
- 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 distribution will be
tax-free to Southern Company and its stockholders and that the
transaction will qualify as a tax-free distribution of assets for United
States federal income tax purposes,
- the absence of any court orders, regulations 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.
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<PAGE> 27
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the [ ]
shares of common stock in this offering will be approximately $[ ]
million (approximately $[ ] million if the underwriters'
over-allotment option is exercised in full), based on an assumed initial public
offering price of $[ ] per share and after deducting underwriting
discounts and commissions and our estimated offering expenses.
We expect to use the net proceeds of the offering primarily for general
corporate purposes and for the repayment of short-term indebtedness.
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 [ ], 2000, we paid a cash dividend to Southern Company in the amount
of $538 million, funded by short-term borrowings. In addition, prior to the
distribution, we will transfer to Southern Company our SE Finance and Capital
Funding businesses through a dividend to Southern Company of the stock of a
newly formed affiliated corporation. This transfer is intended to be tax-free to
Southern Company, its stockholders and us.
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<PAGE> 28
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
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, the borrowing of $538
million to finance the payment of a cash dividend to Southern Company;
and
- on a pro forma, as adjusted basis to reflect the receipt and application
of the estimated net proceeds from the sale of [ ] shares
of common stock in this offering, at an assumed initial public offering
price of $[ ]. See "Use of Proceeds."
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>
DECEMBER 31, 1999
------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------- --------- --------------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 323 $ 313 $
======= ======= ========
Non-recourse short-term debt(1)............................ $ 1,811 $ 1,811 $
Current portion of non-recourse long-term debt(1).......... 237 202
Short-term debt............................................ 150 688
------- ------- --------
Total short-term debt.................................... 2,198 2,701
------- ------- --------
Non-recourse long-term debt(1)............................. 4,154 3,740
Senior notes............................................... 700 700
Other long-term debt....................................... 100 100
------- ------- --------
Total long-term debt..................................... 4,954 4,540
------- ------- --------
Subsidiary obligated mandatorily redeemable preferred
securities(2)............................................ 1,031 81
Stockholder's equity....................................... 3,102 2,310
------- ------- --------
Total capitalization..................................... $11,285 $ 9,632 $
======= ======= ========
</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 $81 million of these securities
were issued by SIUK. They are also non-recourse to us but they are not
guaranteed by Southern Company and will remain outstanding after this
offering.
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<PAGE> 29
DILUTION
Our net tangible book value at December 31, 1999 was approximately
$[ ] million, or $[ ] per share. After giving effect to our
sale of [ ] shares of common stock in this offering at an assumed
initial public offering price of $[ ] per share and after deducting an
assumed underwriting discount and estimated offering expenses payable by us, our
pro forma as adjusted net tangible book value at December 31, 1999 would have
been approximately $[ ] million, or $[ ] per share. This
represents an immediate increase in pro forma net tangible book value of
$[ ] per share to our existing stockholder and an immediate dilution in
pro forma net tangible book value of $[ ] per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution per share:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share
as of December 31, 1999................................
Increase in pro forma book value per share
attributable to new investors..........................
-------
Pro forma, as adjusted, net tangible book value
per share after this offering..........................
-------
Dilution in pro forma net tangible book value
per share to new investors............................. $
=======
</TABLE>
25
<PAGE> 30
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues(1)....................................... $ 584 $1,600 $3,750 $ 1,819 $ 2,268
------- ------ ------ ------- -------
Operating expenses(1):
Fuel...................................................... 17 75 74 47 392
Purchased power........................................... 258 873 2,813 844 545
Maintenance............................................... 19 71 74 80 116
Depreciation and amortization............................. 46 95 182 221 270
Selling, general and administrative....................... 108 174 188 160 253
Write down of assets(2)................................... -- -- -- 308 60
Other..................................................... 70 162 147 164 188
------- ------ ------ ------- -------
Operating income............................................ 66 150 272 (5) 444
------- ------ ------ ------- -------
Other income (expense):
Interest income........................................... 13 16 138 146 172
Interest expense.......................................... (64) (133) (345) (430) (502)
Gain on sales of assets................................... 11 66 24 41 313
Equity in income of affiliates............................ 10 13 58 135 111
Receivables recovery...................................... -- -- -- 29 64
Other, net................................................ (1) 28 33 29 72
------- ------ ------ ------- -------
Total other (expense) income............................ (31) (10) (92) (50) 230
------- ------ ------ ------- -------
Income (loss) from continuing operations before income taxes
and minority interest..................................... 35 140 180 (55) 674
Provision (benefit) for income taxes:
Continuing operations..................................... 8 54 27 (123) 129
Windfall profits tax(3)................................... -- -- 148 -- --
Minority interest........................................... 13 13 29 80 183
------- ------ ------ ------- -------
Income (loss) from continuing operations.................... $ 14 $ 73 $ (24) $ (12) $ 362
Income from discontinued operations, net of income tax of
$10 in 1997, $22 in 1998 and $15 in 1999(4)............... -- -- 8 12 10
Income (loss) before extraordinary item..................... 14 73 (16) -- 372
------- ------ ------ ------- -------
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
======= ====== ====== ======= =======
STATEMENT OF CASH FLOWS DATA:
Cash flow from operating activities......................... $ 158 $ (226) $ 263 $ 402 $ 509
Cash flow from investing activities......................... (1,244) (136) (4,203) (1,741) (2,263)
Cash flow from financing activities......................... 1,653 (193) 4,177 1,502 1,516
OTHER OPERATING DATA:
EBITDA(5)................................................... $ 122 $ 258 $ 512 $ 351 $ 825
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 664 $ 161 $ 398 $ 561 $ 323
Property, plant and equipment, net.......................... 2,312 2,627 4,255 4,691 6,025
Investments................................................. 431 219 1,159 1,540 1,490
Total assets............................................ 4,511 4,564 10,630 12,054 13,863
Non-recourse debt(6)........................................ 1,702 1,753 4,615 5,101 6,202
Notes payable to Southern Company........................... 422 -- 830 926 --
Total debt.............................................. 2,124 1,753 5,445 6,027 7,152
Subsidiary obligated mandatorily redeemable preferred
securities(7)............................................. -- -- 682 1,033 1,031
Stockholder's equity........................................ 778 988 2,132 2,642 3,102
</TABLE>
26
<PAGE> 31
(1) The decline in operating revenues and operating expenses in 1998 is due to
the transfer of our energy marketing and risk management activities to a
marketing and risk management joint venture with Vastar on January 1, 1998,
called SCEM. Currently, we account for this joint venture under the equity
method of accounting. Prior to the formation of the joint venture, our
marketing and risk management activities were consolidated. For 1997,
operating revenues would have been $1,768 million and operating expenses
would have been $1,462 million if we had not consolidated our marketing and
risk management operations.
(2) The write-down for 1998 includes write-downs of our investments in Alicura
and EDELNOR to adjust for the difference between the carrying value of the
assets and the fair market value. The write-down for 1999 includes further
write-downs of our investments in Alicura and EDELNOR to maintain the
carrying value at the fair market value as well as a write-down at WPD
relating to impaired metering assets.
(3) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.
(4) 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.
(5) 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.
(6) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
(7) As of December 31, 1999, 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. 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 $81
million of these securities were issued by SIUK. They are also non-recourse
to us but they are not guaranteed by Southern Company and they will remain
outstanding after this offering.
27
<PAGE> 32
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 a leading integrated power provider with regionally-based businesses
in North America, Europe, the Asia-Pacific region, the Caribbean and South
America. Through our 60% interest in SCEM, we are a leading energy marketer in
the United States. We provide our customers with energy products designed to
meet their specific requirements by integrating electricity generation,
management of gas assets, marketing, risk management services and fuel
procurement.
To support our businesses we have built and acquired a portfolio of power
generating assets, an electric distribution company and integrated utility
operations. Through these businesses, we have a net ownership interest in 12,422
MW of generation capacity, 11,950 MW of which we operate. We have ownership
interests in electric distribution 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 8,523 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 integrated utility
that serves Berlin. Together, these companies own 3,118 MW of generation
capacity and provide electricity to approximately 3.8 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. Currently, we have a
net ownership interest in 3,141 MW of generation capacity, 2,278 MW of which we
operate directly.
We also own an integrated utility and a generating facility in the
Caribbean, specifically in the Bahamas and in Trinidad and Tobago.
We also own a 3.6% economic interest in CEMIG, a fully integrated utility
that generates, transmits, distributes and sells electricity to 4.9 million
customers in Brazil. We also have investments in Argentina and Chile which we
intend to divest because they have not met our return requirements. On February
22, 2000, we entered into a stock purchase agreement with The AES Corporation
for the sale of our investment in our Argentine project, Alicura. The sale is
expected to close sometime in 2000. We are continuing to pursue the sale of our
Chilean subsidiary, EDELNOR, as we announced in December 1998.
See Note 15 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 January 1, 1998, we deconsolidated
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our North American marketing and risk management operations when we entered into
the joint venture with Vastar. 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
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 (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), certain wholly owned subsidiaries which have acquired assets 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 project 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 subsidiaries accounted for using
the equity method include SCEM, Birchwood, Bewag, SE Asia-Pacific's investment
in the Shajiao C facility, CEMIG, the Power Generation Company of Trinidad and
Tobago (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
certain 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.
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On April 17, 2000, we decided to transfer 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 acquire
Plant Dahlberg from Georgia Power, transfer our Capital Funding subsidiary to
Southern Company and 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 offering and
the distribution.
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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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Operating revenues.......................................... 100% 100% 100%
OPERATING EXPENSES:
Fuel........................................................ 2.0 2.6 17.3
Purchased power............................................. 75.0 46.4 24.0
Maintenance................................................. 2.0 4.4 5.1
Depreciation and amortization............................... 4.8 12.2 11.9
Selling, general and administrative......................... 5.0 8.8 11.2
Write-down of assets........................................ 0.0 16.9 2.6
Other....................................................... 3.9 9.0 8.3
---- ----- -----
Operating income............................................ 7.3 (0.3) 19.6
---- ----- -----
OTHER INCOME (EXPENSE):
Interest income............................................. 3.7 8.0 7.5
Interest expense............................................ (9.2) (23.6) (22.1)
Gain on sales of assets..................................... 0.6 2.2 13.8
Equity in income of affiliates.............................. 1.5 7.4 4.9
Receivables recovery........................................ 0.0 1.6 2.8
Other, net.................................................. 0.9 1.6 3.2
---- ----- -----
Total other income (expense).............................. (2.5) (2.8) 10.1
---- ----- -----
Income (loss) from continuing operations before income taxes
and minority interest..................................... 4.8 (3.1) 29.7
PROVISION (BENEFIT) FOR INCOME TAXES:
Continuing operations....................................... 0.7 (6.8) 5.7
Windfall profits tax........................................ 3.9 0.0 0.0
Minority Interest........................................... 0.8 4.4 8.1
---- ----- -----
Income (loss) from continuing operations.................... (0.6) (0.7) 15.9
Income from discontinued operations, net of income tax of
$10 million in 1997, $22 million in 1998 and $15 million
in 1999................................................... 0.2 (0.7) 0.5
---- ----- -----
Net income (loss)......................................... (0.4)% 0.0% 16.4%
==== ===== =====
</TABLE>
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.
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
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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, the release of an unneeded employee severance
provision 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
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.
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 the 1999 sale of the
SWEB supply business, before related expenses, minority interest and
taxes.
- 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 with our supplier and partners in China 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.
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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
offset by the release of an unneeded employee severance provision.
Excluding these items, net income was $142 million in 1999 compared to $141
million in 1998.
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 of operations of
the Sual plant in October 1999, increased contributions from our operations
in China and successful resolution of negotiations with our supplier and
partners in China that allowed us to recover certain receivables previously
determined to be uncollectible.
CORPORATE
After tax corporate costs excluding discontinued operations 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.
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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 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 net income of $10 million was recorded
related to final construction profits earned from the Birchwood facility
and additional project development costs expensed in 1998 as compared to
1997. 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.
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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 excluding discontinued operations 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.
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 certain 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 certain of our project subsidiaries in the form of certain limited
obligations and contingent liabilities such as guarantees of certain 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.
In accordance with the separation agreements with Southern Company,
Southern Company will transfer to us most of the Southern Company owned assets
and liabilities that relate to our business
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on or prior to the distribution. We will receive the net proceeds of this
offering and use them for general corporate purposes including the repayment of
short-term debt. We expect to obtain a short-term credit facility to fund the
cash dividend of $538 million to be paid to Southern Company in May 2000.
Also in accordance with our separation agreement, we will transfer to
Southern Company our leasing subsidiary SE Finance. SE Finance had net cash
flows from operations of $32 million in 1999, $(37) million in 1998, and $19
million in 1997. In those same years it used cash flows for investing activities
of $(271) million in 1999, $(185) million in 1998 and $(97) million in 1997. It
also obtained cash flows from financing activities of $240 million in 1999, $227
million in 1998 and $82 million in 1997.
For the year ended December 31, 1999, we generated net cash from operations
of approximately $509 million compared to approximately $402 million for the
year ended December 31, 1998, an increase of approximately 27%. 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. Our
subsidiary dividend policy is to pay maximum dividends to us while optimizing
United States and foreign tax efficiency and investment opportunities within a
particular region. Our current strategy is to defer distributions from the
Philippines and the Bahamas in order to reinvest funds for further growth, fund
construction efforts or service debt obligations.
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 minority interests.
From January 1, 1997 through December 31, 1999, excluding the transactions
related to the subsidiary obligated preferred securities, our financing
activities provided cash totaling approximately $6,185 million. These financing
activities included a total of approximately $3,902 million of proceeds from the
issuance of short-term and long-term debt, net of repayments. During this three
year period, we also received a total of $2,029 million in capital contributions
from Southern Company and paid $165 million of dividends to Southern Company.
During 1999, we received $385 million in funds from Southern Company
relating to a $360 million capital contribution and $25 million in proceeds from
the issuance of notes payable. We repaid $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.
We have used cash flows provided by financing activities primarily to
finance investments in our subsidiaries. From January 1, 1997 through December
31, 1999, excluding the transactions related to the subsidiary obligated
preferred securities, we have used approximately $7,227 million of cash for our
investing activities. During this period, our domestic and foreign investments
totaled $5,694 million, including $2,106 million for the acquisition of SE
Asia-Pacific, $820 million for the acquisition of a 26% interest in Bewag, $801
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
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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 $2,114 million in capital
expenditures. These cash flows used in investing activities have been partially
provided by $668 million of cash from the sale of a portion of our investments
in subsidiaries and dividends from affiliated companies.
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.
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.
During 1999 we entered into three significant financing transactions in
order to refinance Southern Company debt 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 commercial paper backstop. 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 extension and
commitment increase option subject to the lenders' approval. Facility C,
totaling $450 million, also has a letter of credit option and matures in April
2004. No amounts were borrowed under these credit facilities at December 31,
1999. 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 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 generating facilities in North
America. In October 1999, SENAG completed a $1.45 billion corporate-style 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 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.
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At December 31, 1999 we had total corporate level debt of approximately
$750 million outstanding, comprised of $700 million of senior unsecured notes
and approximately $50 million of commercial paper. In addition, we had letters
of credit outstanding under Facility C in the amount of approximately $250
million and SENAG had approximately $1,290 million of outstanding borrowings
under its credit facilities.
Some of our credit facilities, including certain credit facilities of our
subsidiaries, provide that it will be an event of default if either Southern
Company ceases to own more than 50% of our stock or our credit rating declines
below investment grade. Consequently, prior to Southern Company's distribution
of our stock, we expect to seek waivers or refinance these credit agreements.
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 instruments.
Additionally, certain 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. As a result of these swaps, a 10%
decline of the British Pound Sterling and Deutsche Mark versus the U.S. dollar
would not materially affect the U.S. dollar value of the dividends we receive
from WPD and Bewag.
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 reais 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
38
<PAGE> 43
$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 Southern Investments UK plc subsidiary.
These swaps offset the dollar cash flows, thereby effectively converting debt to
the respective subsidiary's reporting 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).
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 and monitor the
creditworthiness of counterparties to mitigate our exposure to counterparty
credit risk.
In addition to markets risks associated with our generation assets, 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
39
<PAGE> 44
on VAR analysis of the overall commodity price risk exposure of the trading
businesses on December 31, 1999, 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 certain 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 December
31, 1999, our exposure under these guarantees was approximately $146 million
based on the estimated fair value of SCEM's net contractual commitments.
ACCOUNTING PRONOUNCEMENTS
We continue to analyze the effects of adoption of the rules promulgated by
SFAS No. 133. 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. We intend to adopt the provisions of SFAS No. 133 within
this time frame and in accordance with the requirements provided by that
statement. In addition, the FASB has issued an exposure draft that would, if
adopted, narrow the applicability of the pronouncement to certain purchase and
sales contracts and would allow hedge accounting for certain other specific
hedging relationships. We are currently assessing the financial statement impact
of both the statement and the exposure draft, but we have not yet determined the
impact at this time. Adoption of SFAS No. 133 could increase the volatility of
our net income and other comprehensive income.
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<PAGE> 45
BUSINESS
INTRODUCTION
We are a leading integrated power provider with regionally-based businesses
in North America, Europe, the Asia-Pacific region, the Caribbean and South
America. We provide our customers with energy products designed to meet their
specific requirements by integrating electricity generation and distribution,
management of gas assets, marketing and risk management services and fuel
procurement. To support our business we have built and acquired a portfolio of
power generating assets that make us one of the world's largest independent
power producers.
Currently, we own or control 14,160 MW of generation capacity. In addition,
we have 6,852 MW under construction or development. 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 will be
completed.
Our business also includes providing risk management services in liquid
markets where energy products are sold on a competitive basis. This provides us
the opportunity to control the economic management of additional generating
assets. We use our risk management capabilities to optimize the value of our
generating and gas assets and we also offer risk management services to others.
We also own integrated utility operations 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 customer-focused marketing and risk management
services allows us to position our company as a leading integrated 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, generation 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 integrated 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. We operate
generating facilities with a total generation capacity of 6,887 MW, of which our
net ownership interests represent 6,785 MW. We control an additional 1,738 MW
through management contracts. Additionally, we have projects, which we will own
and operate, under construction or development in North America totaling 5,699
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.
Through our 60% interest in SCEM, we are a leading energy marketer in North
America. SCEM markets and trades energy and energy-linked commodities, including
electricity, natural gas, oil, coal and emission allowances. According to
published industry statistics, in 1999 SCEM was the number four-ranked physical
marketer of electricity in the United States by volume and the number 13-ranked
physical marketer of gas by volume. Through SCEM, we also controlled 1.6 billion
cubic feet per day (Bcf/d) of natural gas production, 0.5 Bcf/d of natural gas
transportation and 25.8 billion cubic feet of natural gas storage as of December
31, 1999. Most of our generating facilities in
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<PAGE> 46
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 five of the largest gas and
electricity marketers in the United States. The consortium will own and operate
an Internet-based, business-to-business, over-the-counter energy trading
platform which is expected to be in operation by the end of 2000.
In Europe, as the markets deregulate, we intend to follow a strategy
similar to our North American strategy by integrating power generation assets
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 and Netherlands markets in 1999. We
also expect to begin trading power in the German and Swiss energy markets
sometime in 2000 and in the Italian energy market in 2001. We currently own a
26% interest in Bewag AG, the integrated utility serving 2.4 million customers
in Berlin, Germany, and a 49% interest in Western Power Distribution (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 generating facilities in
the Philippines and China with total net ownership interests of 2,698 MW. We
have a net ownership interest in an additional 443 MW of generating capacity in
China through our 9.99% interest in SIPD. 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 integrated utility in the Bahamas and a 39% interest in
a generation company in Trinidad and Tobago. We are in the process of acquiring
an 80% interest in the Water and Power Authority of the U.S. Virgin Islands'
generation capacity and water desalination assets. In South America we have a
3.6% economic interest in an integrated utility in Brazil which has a generation
capacity of 5,514 MW and serves 4.9 million customers. We also own an 82%
interest in a partially integrated utility in Chile and a 55% interest in a
hydroelectric generation facility in Argentina. We have entered into an
agreement to sell our investment in Argentina and we are pursuing the sale of
our Chilean subsidiary, as those investments have not met our return
requirements.
Our business grew significantly between 1995 and 1999 in terms of EBITDA
and assets as shown in the table below.
<TABLE>
<CAPTION>
COMPOUND ANNUAL
1995 1996 1997 1998 1999 GROWTH RATE
------ ------ ------- ------- ------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
EBITDA......................... $ 122 $ 258 $ 512 $ 351 $ 825 61%
Total assets................... 4,511 4,564 10,630 12,054 13,863 32
</TABLE>
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
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<PAGE> 47
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
North America, the Asia-Pacific region, Europe, South America and the Caribbean
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. In April 1996, FERC adopted Order No. 888, providing for
nondiscriminatory open-access electric transmission services by public
utilities, separate from wholesale sales of electricity. This development has
opened wholesale power sales to more competition. In December 1999, FERC issued
Order 2000 which provides for a system of regional transmission organizations,
each of which will control the transmission facilities within its region. These
developments followed on FERC's 1992 Order No. 636, which provides for natural
gas transportation services to be offered on an open-access basis. The impact of
Order Nos. 888, 2000 and 636 on our business and operations depends on the
effect of these orders on transmission operations in particular markets. 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 integrated power provider with a balanced
global business. We intend to continue our growth by capitalizing on
opportunities to use our management and technical skills in the acquisition,
development, financing and operation of power generation facilities and gas
transportation and storage assets. We also intend to capitalize on our ability
to integrate asset ownership with energy marketing and risk management services.
We plan to implement our strategy through the development of greenfield and
brownfield generation 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,
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<PAGE> 48
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.
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 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 and in the acquisition of net ownership
of approximately 6,785 MW of generation assets in the United States. 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 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 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 the growth in
generation capacity to come from greenfield and brownfield development,
primarily consisting of gas-fired projects. We expect 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 and Dutch markets. 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
a total of 10,000 to 12,000 MW of capacity in Europe. We also intend to review
opportunities to extract value from our distribution business in England.
Asia-Pacific
We plan to build on the successful base we have established in the
Philippines and China, and expand into countries with more developed economies
that are opening their energy sectors to competition, such as Australia and
Singapore. In addition, we will explore opportunities in the Asia-Pacific region
where we can capture market size and economies of scale. Over the next several
years
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<PAGE> 49
we intend to acquire additional generation capacity such that we will own or
control a total of 8,000 to 10,000 MW of capacity in the Asia-Pacific region.
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, we believe that these changes are essentially local in nature. 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 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.
FULLY 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, a company must be
able to integrate asset ownership or control with marketing and risk
management expertise. 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
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<PAGE> 50
allowing for a broader range of product offerings and improving our
credibility as an energy provider to customers.
FULLY 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.
Over the past years, obtaining a power sales contract with a utility has
become progressively more difficult, expensive and competitive. Many power sales
contracts are now awarded by competitive bidding, which both increases the
associated costs and decreases the chances of obtaining such contracts. Many
power sales contracts are now awarded for a term significantly shorter than in
the past. In addition, many states and countries are considering or implementing
regulatory and privatization initiatives designed to increase competition in the
power industry. This competition has contributed to a reduction in electricity
prices and put pressure on electric utilities to lower their costs, including
the cost of purchased electricity. Additionally, the competitive arena in our
business is rapidly changing with 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.
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<PAGE> 51
DESCRIPTION OF GENERATION AND DISTRIBUTION OPERATIONS
The table that follows describes our significant generation operations and
greenfield or brownfield projects under construction or development.
<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
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.................... Indiana Coal/Natural Gas 100 490 490 490
Birchwood..................... Virginia Coal 50 222 111 222
SEI Wisconsin................. Wisconsin Natural Gas 100 -- -- --
SEI Michigan.................. Michigan Natural Gas 100 -- -- --
SE Wichita Falls.............. Texas Natural Gas 100 80 80 80
SEI Texas..................... Texas Natural Gas 100 -- -- --
Plant Dahlberg(3)............. Georgia Natural Gas 100 -- -- --
------ ------ ------
Subtotal.................... 6,896 6,785 6,887
CARIBBEAN:
Freeport Power................ Bahamas Oil 63 127 80 127
PowerGen...................... Trinidad & Tobago Natural Gas 39 1,178 459 1,178
WAPA(4)....................... U.S. Virgin Islands Oil 80 -- -- --
------ ------ ------
Subtotal.................... 1,305 539 1,305
SOUTH AMERICA:
CEMIG......................... Brazil Hydro 3.6 5,514 199 --
EDELNOR....................... Chile Coal/Natural Gas 82.3 437 360 466
Alicura(5).................... Argentina Hydro 55 1,000 550 1,000
------ ------ ------
Subtotal.................... 6,951 1,109 1,466
EUROPE:
WPD(6)........................ England Natural Gas 49 163 80 14
Bewag(7)...................... Germany Natural Gas/Oil/Coal 26 2,955 768 --
------ ------ ------
Subtotal.................... 3,118 848 14
------ ------ ------
ASIA-PACIFIC:
SIPD.......................... China Coal 9.99 4,435 443 --
Shajiao C..................... China Coal 32 1,980 634 --
Sual.......................... Philippines Coal 91.9 1,218 1,119 1,218
Pagbilao...................... Philippines Coal 87.2 735 641 735
Navotas I and II.............. Philippines Oil 93 310 289 310
Bulacan....................... Philippines Diesel 100 15 15 15
Kogan Creek................... Australia Coal 100 -- -- --
------ ------ ------
Subtotal.................... 8,693 3,141 2,278
TOTAL....................... 26,963 12,422 11,950
====== ====== ======
<CAPTION>
UNDER DEVELOPMENT
-------------------------------
MW UNDER EXPECTED DATE
CONSTRUCTION OR OF COMMERCIAL
POWER GENERATION BUSINESS DEVELOPMENT(1) OPERATION
- ------------------------- --------------- -------------
<S> <C> <C>
NORTH AMERICA:
SE California................. 1,050 2003
SE New York................... 785 2003
SE New England(2)............. 835 2003
State Line.................... 525 2003
Birchwood..................... -- --
SEI Wisconsin................. 306 2000
SEI Michigan.................. 848 2002
SE Wichita Falls.............. -- --
SEI Texas..................... 550 2001
Plant Dahlberg(3)............. 800 2001
-----
Subtotal.................... 5,699
CARIBBEAN:
Freeport Power................ 8 2001
PowerGen...................... -- --
WAPA(4)....................... 189 2000
-----
Subtotal.................... 197
SOUTH AMERICA:
CEMIG......................... -- --
EDELNOR....................... 206 2000
Alicura(5).................... -- --
-----
Subtotal.................... 206
EUROPE:
WPD(6)........................ -- --
Bewag(7)...................... -- --
-----
Subtotal....................
-----
ASIA-PACIFIC:
SIPD.......................... -- --
Shajiao C..................... -- --
Sual.......................... -- --
Pagbilao...................... -- --
Navotas I and II.............. -- --
Bulacan....................... -- --
Kogan Creek................... 750 2003
-----
Subtotal.................... 750
TOTAL....................... 6,852
=====
</TABLE>
47
<PAGE> 52
<TABLE>
<CAPTION>
OWNERSHIP CUSTOMERS/
DISTRIBUTION BUSINESS INTEREST END USERS
- --------------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Freeport Power.................................. Bahamas 63% 17
WAPA(4)......................................... U.S. Virgin Islands 80 49
CEMIG........................................... Brazil 3.6 4,900
WPD............................................. England 49 1,400
Bewag........................................... Germany 26 2,400
-----
Total......................................... 8,766
=====
</TABLE>
- -------------------------
(1) Amounts reflect our percent interest in the total MW.
(2) Total MW reflects a 1.4 percent interest in the 614 MW Wyman plant.
(3) Pending acquisition. We expect to acquire Plant Dahlberg immediately prior
to the distribution.
(4) Pending acquisition expected to close during 2000.
(5) On February 22, 2000, we entered into an agreement with The AES Corporation
to sell our investment in Alicura.
(6) Total MW reflects a 7.7 percent interest (or 144 MW) in the 1,875 MW
Teesside plant.
(7) Total MW excludes 26 percent ownership of 5,740 MW of thermal capacity for
steam heating.
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<PAGE> 53
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 additional
consideration 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, Pittsburgh Unit 7 has a maximum capacity
of 682 MW.
These generating assets, which include both peaking and intermediate load
facilities, 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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<PAGE> 54
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 certain
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, sales of real-time energy and ancillary services to
CAISO and 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 at the California Energy Commission for the proposed expansion
of the Contra Costa plant. Currently, SE Potrero is preparing a similar
application for certification for the Potrero plant, which we expect to file in
the second quarter of 2000. We expect to have both of these projects in
commercial operation during the first half of 2003.
NORTH AMERICA -- NORTHEAST REGION
SE New York
On June 30, 1999, certain 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 peaking units (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> 55
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 transition agreements with ORU and ConEd to
provide energy and installed capacity to ORU and ConEd for certain 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 energy to ORU through April
30, 2000 and 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 addition, the NYISO is seeking permission to make retroactive adjustments to
market clearing prices for the period from January 29, 2000 to March 28, 2000.
We have filed a protest with FERC in order to contest the NYISO petition. We are
currently awaiting FERC's reply to determine the potential impact of the NYISO
petition on SE New York.
In March 2000, SE Bowline filed an application with the State of New York
Department of Public Service for the authorization to construct a 785 MW
combined cycle facility on a 98-acre site adjacent to the Bowline plant. In
addition, SE Bowline has filed an application with the New York
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<PAGE> 56
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 of 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 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 certain 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. The outcome of this information request is
uncertain. 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 generating assets, with a total
capacity of 1,245 MW, from subsidiaries of Commonwealth Energy System
(Commonwealth) and Eastern Utilities Associates (EUA) for $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 organization of Southern Energy North
America Generating, Inc. (SENAG), 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
-----
1,123
Martha's Vineyard Diesels................................. Martha's Vineyard, MA 12 Oil
Wyman Unit 4 Interest..................................... Yarmouth, ME 9 Oil
-----
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
</TABLE>
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<PAGE> 57
The Canal and Kendall plants, which include both peaking and intermediate
load facilities, are both 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-2003 for Canal.
The regulatory environment in Massachusetts and the New England region has
evolved into a competitive market for electrical generation. Changes in the New
England Power Pool (NEPOOL), which dictates the operation of transmission
systems and the operation and settlement of the wholesale electric energy,
capacity and ancillary services markets for most of the New England region, and
the establishment of ISO New England, Inc. (ISO), whose primary objective is the
reliable operation of the New England power grid and programs allowing for
retail access to electricity providers, have been implemented and the wholesale
market was opened to competitively-bid hourly clearing markets on May 1, 1999.
Since the inception of the new markets, the ISO has taken action to
intervene in the market on numerous occasions to change posted clearing prices
that had been set via the software used to dispatch the system and determine
prices. The ISO stated that these interventions were necessary due to software
errors and operator errors associated with the implementation of the new system.
The ISO has intervened most often during periods of high electrical demand and
otherwise high clearing prices. The ISO's actions have sparked extensive
discussions and debate among participants in the generating sector in New
England regarding the propriety of these interventions.
In February 2000, the Massachusetts Secretary of Environmental Affairs
requested from certain generation owners 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 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 certain 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 our marketing and risk management subsidiary, 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
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<PAGE> 58
payments to SE New England. Under this arrangement, SE New England has
guaranteed certain operational performance parameters of the units.
NORTH AMERICA -- EAST REGION
State Line
In December 1997, we acquired, through an indirect, wholly owned
subsidiary, State Line Energy, L.L.C., 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 (PPA) 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
PPA.
The coal required to operate the facility is currently supplied by ComEd
under a coal supply agreement. Because ComEd has discontinued its fossil
generation business, it is considering transferring its coal supply and
transportation obligations to a third party or to State Line Energy. We are in
discussions with ComEd to structure an agreement on equivalent terms with the
existing ComEd obligations. If our negotiations are successful, State Line
Energy could undertake responsibility for coal supply and transportation in the
third quarter of 2000. One-third of the plant's required supply of Powder River
Basin coal would be procured for State Line Energy by SCEM. The remaining coal
would be obtained through an agreement transferred from ComEd.
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 525 MW and is expected
to be completed in 2003.
On July 28, 1998, an explosion and fire occurred at the State Line
facility. The explosion and fire occurred in a coal handling area of the plant.
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 PPA 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. State Line
Energy expects that after paying deductibles, insurance proceeds cover the
remaining costs associated with the fire and explosion during the outage period.
The EPA and Indiana Department of Environmental Management are currently
proposing stricter nitrogen oxide emission standards through one-hour ozone
regulations and NOx State
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<PAGE> 59
Implementation Plan calls. The monthly capacity charge and/or energy charged 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 PPA.
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 PPA 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
greenfield project developed 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. The greenhouse is operated by a third party pursuant to a separate
agreement.
Birchwood sells electricity to Virginia Power under a 25-year PPA. Under
the PPA, Birchwood sells all electricity generated by the facility to Virginia
Power through 2021. Birchwood earns capacity charges based on a contractually
determined rate per kilowatt month for the dependable 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 PPA. 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 PPA 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 PPA, plus all expenses associated with the
termination.
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 PPA. Virginia Power is in the process of determining
its strategy with respect to its current non-utility contracts, such as the PPA
with Birchwood. In the interim, we are negotiating a separate agreement with
Virginia Power to sell an additional 20 MW of peaking capacity from our
Birchwood facility.
On January 18, 2000, the EPA published a new regulation, known as the
"Section 126 Rule," which allocates nitrogen oxide emissions allowances to
certain 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
55
<PAGE> 60
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.
SEI Wisconsin
SEI Wisconsin, L.L.C. 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 planned 306 MW natural gas-fired electric
generating plant to be located at a greenfield site in the Town of Neenah,
Wisconsin. The plant is being constructed to provide electricity during peak
demand periods. Construction of the plant is nearing completion and the final
cost is expected to be approximately $100 million. We expect the plant to
commence operations in May 2000.
SEI Wisconsin will initially sell all of its capacity and electric power
output to Wisconsin Electric Power Company (WEPCO) under an eight-year PPA
entered into in August 1998. WEPCO provides electric, gas and steam service to
more than two million customers in southeastern Wisconsin. The PPA is structured
as a tolling arrangement, whereby WEPCO pays SEI Wisconsin a monthly capacity
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 PPA 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 PPA 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 PPA term.
At the expiration of the PPA, SEI Wisconsin may convert the Neenah plant
from a primarily peaking facility to a combined cycle facility that will become
either a base-load or an intermediate-load facility with approximately 515 MW of
capacity. 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.
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 major utilities in MAIN
include: Alliant Energy, Ameren, CILCORP, Commonwealth Edison, Illinova, Madison
Gas & Electric, WEPCO and WPS Resources. 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 peaking capacity and
transmission augmentation.
Illinois has enacted legislation for the deregulation of the electricity
market in Illinois. This has resulted in the divestiture of fossil assets by a
number of public utilities to independent power generators. Deregulation of the
electricity market in Wisconsin, however, has been considerably slower. 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 a 298 MW natural gas-fired electric generating
plant at a greenfield site in Zeeland, Michigan. In 1999, we formed an indirect,
wholly owned subsidiary, SEI Michigan, L.L.C., to develop, construct, own,
operate and maintain the Zeeland power plant. We expect the plant to receive all
necessary permits in spring 2000 and for construction to begin in early summer
56
<PAGE> 61
2000. We further expect the plant to become operational in June 2001 and to cost
approximately $110 million.
SEI Michigan will initially sell all of its capacity and electric power
output to SCEM under a five-year power purchase agreement. The PPA is structured
as a tolling arrangement, whereby SCEM pays SEI Michigan a monthly capacity
charge designed to provide SEI Michigan a return on capital in addition to
covering debt service and operating costs. SCEM would also pay for operation and
maintenance of the plant based on the number of starts and run hours. We are in
the early stages of development in adding a 550 MW combined cycle unit at the
site. If we are successful in getting appropriate regulatory and board
approvals, the plant is expected to be in commercial operation sometime in 2002.
We plan to sell the plant's capacity to customers in the East Central Area
Reliability Council (ECAR) market through marketing agreements with SCEM.
Additionally, at the expiration of the tolling agreement, SEI Michigan may add
heat recovery equipment and a steam turbine, which would allow the plant to
operate as an intermediate to base load facility, and expand the capacity from
298 MW to 550 MW. SEI Michigan expects to enter into a new marketing agreement
with SCEM at that time.
The Zeeland plant is being constructed to provide electricity during peak
demand periods for the growing demand in the ECAR market. The ECAR market is
nominally a 106 GW market that is dominated by coal (82%) generating capacity.
The region is currently in need of peaking capacity after having experienced
brown outs and curtailments on peak days and having reserve margins of less than
10%.
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 an intermediate load facility,
which consists 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 PPA 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 combustion turbine
operating in a peaking mode with generating capacity of 150 MW which could be
completed by 2001.
SEI Texas
SEI Texas, L.P. is an indirect, wholly owned subsidiary that was formed to
develop, construct and operate a 550 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 in peaking mode and a third combustion turbine in
combined cycle mode with a corresponding steam turbine. Construction of Units 1
and 2 is nearly complete and construction has commenced on Units 3 and 4.
Construction of the facility is expected to cost approximately $215 million. We
expect the first 300 MW to become operational in July 2000 and the remaining 250
MW to become operational in June 2001.
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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 PPA expiring May 31, 2005. A
separate agreement for Units 3 and 4 is currently being negotiated with SCEM.
Under the existing PPA, all fuel required to run the facility will be provided
and paid for by SCEM.
The PPA is structured as a tolling agreement whereby SCEM pays SEI Texas a
monthly capacity charge designed to provide SEI Texas a return on capital in
addition to covering debt service and operating costs. SCEM also pays for
operation and maintenance of the plant based on the number of starts and run
hours. The PPA also has bonus and penalty provisions related to capacity, heat
rate and availability. At the expiration of the tolling agreement, SEI Texas may
add heat recovery equipment and a steam turbine to Units 1 and 2, which would
allow these units to operate as an intermediate to base load facility, 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 as a single control area. Another
part of the restructuring will force 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.
Plant Dahlberg
Georgia Power Company, a subsidiary of Southern Company, is currently
developing the Plant Dahlberg facility, an 800 MW simple-cycle natural gas
peaking facility located north of Athens, Georgia. The facility will consist of
10 combustion turbines in the initial construction phases. Units 1-8 are nearing
completion and are expected to be in commercial operation in June and July 2000.
Units 9 and 10 are in the final design phase with a targeted commercial
operation date of June 2001. Primary fuel for the units will be natural gas,
with No. 2 fuel oil backup. The site is connected to a gas pipeline and will be
served by interruptible gas. The facility is connected to the Georgia Integrated
Transmission System via a 230 kV radial line. The site has been permitted and
prepared to accommodate up to 16 combustion turbines (1,280 MW of simple-cycle
peaking capacity).
We plan to purchase the Dahlberg plant from Georgia Power immediately prior
to the distribution of our stock by Southern Company. The purchase price will be
the net book value of the plant at the time of transfer. The purchase price is
estimated to be approximately $262 million. We will initially sell all of the
plant's capacity and electric power output to Georgia Power, under a 10-year
capacity purchase agreement commencing immediately after the completion of the
distribution. We will also enter into a construction, operation and maintenance
agreement with Georgia Power, pursuant to which Georgia Power will be
responsible for all costs of operating and maintaining the plant, including
fuel. Upon expiration of the capacity purchase agreement, we expect that this
facility will provide peaking capacity for us to sell in the wholesale market.
Mobile Energy
We have a 1% interest in Mobile Energy Services Company, L.L.C. (Mobile
Energy). The remaining 99% is indirectly owned by Southern Company. As part of
our separation from Southern Company, we and Southern Company have agreed to
examine and discuss the future ownership and operating arrangements for Mobile
Energy. 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,
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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 Mobile Energy Services Holdings,
Inc., the subsidiary of Southern Company that holds Southern Company's 99%
interest in Mobile Energy and guaranteed certain 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-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 October 30, 2000. 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. One of our subsidiaries, Southern
Energy Resources, Inc. (SERI), has entered into a separate agreement with Mobile
Energy to develop and operate a 165 MW combined cycle, gas-fired combustion
turbine project. We have agreed to supply the combustion turbines required for
the project at our cost, 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.
Mobile Energy is also in the process of renegotiating its energy service
agreements with its remaining customers at the site -- Sappi Fine Paper (North
America) and Kimberly-Clark -- 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 certain of Kimberly-Clark's pulp mill assets that it may exercise
through August 30, 2000 and expects that these customers will remain in
operation at present levels for the foreseeable future.
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 82%-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 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%).
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The partnership agreement provides that in the event of a change of control
of Vastar or us, 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 will be
determined by an appraisal. After we become a publicly-held company, if 20% or
more of the interest in our stock is transferred to or acquired by a single
party other than Southern Company, the change of control provisions will be
triggered, thereby giving Vastar the right to purchase our interest in SCEM for
an appraised value.
In connection with the establishment of the initial ownership structure, we
paid $40 million to Vastar on September 1, 1997. We have also guaranteed minimum
cash distributions from SCEM to Vastar of $20 million per year in 1998 and 1999,
$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 certain business
risks.
We are currently involved in a dispute with Vastar concerning the 1998 cash
distribution. Our agreement with Vastar requires the floor amounts to be reduced
by a number of items, including losses the partnership suffers as the result of
a credit loss. 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
profile. The 1999 floors have been agreed to by both parties and have been paid.
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 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 ranks 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 most of its domestic natural gas
production at market index prices to the joint venture through a 10-year natural
gas supply agreement (beginning in September 1997). Currently, SCEM markets
approximately 1.2 bcf per day of Vastar's controlled production.
In 1998, SCEM signed a five-year agreement with the Brazos Electric Power
Cooperative to become the total wholesale electricity supplier to the Texas
generation and transmission cooperative. The agreement, known as a "full
requirements agreement," provides SCEM with the ability to market excess energy
from more than 1,650 MW of generating and contractual capacity. SCEM
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manages Brazos Electric's generation and fuel supplies. SCEM also provides up to
600 MW of capacity from our SEI Texas facility to satisfy projected Brazos
Electric load growth. SCEM is obligated to meet Brazos full wholesale
requirements by using Brazos's existing asset base, supplemented by market
purchases and sales. This includes optimizing the requirements of any existing
power purchase agreements and providing fuel requirements for the assets. By
combining these fuel and power supplies into the current trading portfolio, SCEM
is able to increase its trading volume and efficiency.
SCEM has a pending transaction to manage the assets of Pan-Alberta Gas
Ltd., the second-largest Canadian exporter of natural gas. As part of the
transaction, SCEM will assume Pan-Alberta's office in Calgary, Alberta, and
integrate Pan-Alberta's businesses with its Atlanta-based marketing and risk
management operations. Recently, Pan-Alberta was marketing approximately 1.2
billion cubic feet of gas per day. The agreement is scheduled to close in the
second quarter of 2000 subject to regulatory approval.
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. The consortium will own and operate an Internet-based,
business-to-business, over-the-counter energy trading platform which is expected
to be in operation by the end of the year. 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 and Vastar participate in the management of SCEM through 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
SCEM 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 and trade credits on behalf of
SCEM. We have agreed with
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Vastar to indemnify each other (subject to certain 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 and trade
credits can exceed $700 million, and to the extent that the actual aggregate
liability on all of 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 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 support the physical and financial delivery of
products. 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. We will be obligated to make payments under
these guarantees only if SCEM's liquidity is exhausted.
We have certain 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. 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. In addition, SCEM utilizes
commercial paper to reduce funding cash. 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. The majority of SPS's investments
are expected to be secured; however, repayment of funds advanced is expected to
be subject to the success of the drilling programs and future acquisitions of
reserves proposed by the production companies.
A majority 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, royalty income and warrants. In
addition, SPS intends to market price risk
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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. Currently, there is approximately
$25 million outstanding under that credit facility. In connection with the
credit facility, we agreed to provide certain 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 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.
Freeport Power has the exclusive right and obligation to supply electric
power to Grand Bahama Island. Freeport Power's generating assets 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 4.7% across all customer classes has been
approved by the regulatory board and will go into effect 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
1,178 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 a into 15-year power purchase agreement (Trinidad PPA) with T&TEC, which
expires in 2009. T&TEC's obligations under the Trinidad PPA 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
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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 PPA entitles PowerGen to receive monthly capacity and energy
payments from T&TEC, as well as a heat rate bonus if certain 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 generation assets. During the four years
prior to the acquisition, plant operating availability averaged approximately
69%. Since the acquisition, the operating availability 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.
WATER AND POWER AUTHORITY OF THE U.S. VIRGIN ISLANDS
We are currently pursuing the acquisition of a portion of the Water and
Power Authority of the U.S. Virgin Islands (WAPA). WAPA is a vertically
integrated utility supplying both electricity and desalinated water to residents
and business entities on the islands of St. Thomas, St. Croix, St. John, Water
Island and Hassel Island and is regulated by the Virgin Islands Public Service
Commission (VIPSC). WAPA supplies 49,000 electricity customers and 8,400 water
customers, which consist of residential, commercial and industrial customers.
Electricity and water production plants are located on St. Thomas and St. Croix,
and the other islands are served via undersea cables and back up production
facilities. Seawater is desalinated using low level steam from the electricity
production process. Installed electricity generation capacity is 236 MW
consisting of combustion turbines and boiler/generators. Fuel oil, provided by
an oil refinery on St. Croix, is used for all generation. Water production
capacity is eight million gallons per day.
Under the proposed acquisition agreements, the government of the U. S.
Virgin Islands will transfer the electric generation, water production and water
distribution assets of WAPA to Virgin Islands Electricity and Water, LLC (VIEW),
a new U.S. Virgin Islands limited liability company. One of our subsidiaries,
Southern Energy Virgin Islands, LLC (SEVI), will purchase an 80% interest in
VIEW, while the government will hold 20%. VIEW will lease from WAPA the electric
transmission and distribution assets owned by WAPA, thereby maintaining
government ownership, which we anticipate will maintain eligibility for disaster
relief from the Federal Emergency Management Agency of the United States (FEMA).
The lease will be a pre-paid, 25-year lease that is co-terminus with the
franchise agreement described below.
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VIEW will have responsibility for all operations and maintenance of all
power and water assets, including the transmission and distribution system. This
new company will operate with an exclusive franchise with an initial term of 25
years for the generation of electric power for retail sales in the geographic
territory of the U.S. Virgin Islands and water purification for retail and
wholesale sales within the same territory. Exceptions to this exclusive right
include self-generators of electricity and sales of potable water via means
other than a pipeline.
The VIPSC will regulate performance and rates of the new company. Base
non-fuel electricity rates will remain fixed for the first two years, changing
with a formula based on consumer price index and performance thereafter. At each
five-year interval thereafter, a full rate case will be presented to the VIPSC.
Water rates will remain fixed for the first two years and will increase 10% in
the third year, then stay constant for the term of the franchise. Cost of fuel
is passed through to customers.
SEVI and the government will manage their respective interests in the new
company through a seven-member managers' committee. SEVI will have the right to
appoint four and the government will have the right to appoint three members.
Decisions of the managers' committee will be taken by majority vote, except that
certain decisions fundamentally affecting the business of the company will be
subject to supermajority or unanimous voting. The day-to-day management of VIEW
will be delegated to a four-member executive committee comprised of the general
manager, another officer of the company, together with one manager appointed by
SEVI and one manager appointed by the government. We will appoint the general
manager, the chief financial officer and the director of production.
In March 2000, the governor of the U.S. Virgin Islands signed the
participation agreement for the transaction with WAPA. Several steps remain
before the agreement is final, including approval from the U.S. Virgin Islands
legislature. Additionally, FEMA must determine that the new structure will allow
WAPA to continue to provide disaster recovery assistance. We expect the closing
to occur in the summer of 2000.
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 May 28, 1997, one of our wholly owned subsidiaries,
Southern Electric Brasil Participacoes, Ltda. (SEB), acquired approximately 33%
of the voting shares of CEMIG through a public auction. Subsequently, we
transferred 90.6% of the shares of SEB to Cayman Energy Traders (CET) and 9.4%
of the shares to 524 Participacoes S/A, a group of institutional investors. The
voting shares of CET are owned 49% by AES CEMIG Emprecendimentos (AES) and 51%
by Southern Energy International, Inc., one of our wholly owned subsidiaries.
CEMIG has outstanding shares of ordinary (voting) stock and preferred stock. As
a result of our ownership of CET, we indirectly own 8.24% of the voting shares
of CEMIG, which equals a 3.6% economic interest.
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 recision of the
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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 ruled that the shareholder agreement was
invalid. SEB is planning to appeal this decision. The status of this litigation
is more fully described under the heading "Legal Proceedings" in this section of
the prospectus.
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. We cannot assure you that BNDES will agree to defer this payment
or that, if we decide to make this payment, the co-owners of SEB will contribute
their pro-rata share of the amount due.
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 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.
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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 concession
agreement with the Brazilian government. The new agreement 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. 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
In April 2000, federal regulators granted CEMIG a 12.23% rate increase
effective April 8, 2000. However, the governor has announced that CEMIG cannot
implement the increase until the social implications have been reviewed. Since
the state controls the CEMIG Board, the outcome and its timing are uncertain at
this time.
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 are a pass-through item and CEMIG
should not 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
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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. 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
437 MW, and operates 466 MW, including 29 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.
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 located just
north of Antofagasta in Mejillones. The first, Mejillones I, has a generating
capacity of 166 MW and began operation in December 1995. The second unit,
Mejillones II, has a generating capacity of 175 MW and began operating at the
end of March 1998. The plants gave EDELNOR relatively low cost generation to
complement its existing 125 MW of diesel, fuel oil and hydro capacity in
Antofagasta, Arica, Chapiquina, Iquique, and at the Mantos Blancos mine. The low
cost power from the Mejillones units also allowed EDELNOR to reduce its cost of
sales by enabling it to generate, rather than purchase, substantially all of the
392 MW of electric energy it supplies under contract to its regulated and
unregulated customers.
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 byproduct 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. Certain 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.
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Under Chilean environmental law, the CONAMA, which is comprised of all the
ministers of the Chilean government, has 60 business days to rule on the appeal.
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 is constructing the Mejillones III generating unit, a 250 MW
combined-cycle unit under a turnkey contract with Ansaldo Energy S.p.a. This
unit is currently in the testing phase, which we expect to complete early May,
and is expected to begin commercial operation in May 2000. We expect that the
Mejillones III unit will operate as one of the lowest marginal cost units of its
kind in the SING and that the unit will run at a high capacity factor.
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 165 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 the distribution companies with their 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 12 other customers under long-term contracts
representing approximately 224 MW. These contracts have expiration dates ranging
from 2000 to 2017. Two of these contracts, representing approximately 60 MW,
expire in 2000. Energy sales to these 12 customers increased 149% from 1993 to
1999. These contracts are denominated in U.S. dollars and payable in Chilean
pesos. 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.
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 22, 2000, we executed a stock purchase agreement with The AES
Corporation to sell our interest in Alicura. As part of this agreement, we have
agreed to indemnify AES against certain liabilities, including tax liabilities,
attributable to our ownership of Alicura. Also as part of this
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agreement, we will be relieved from our obligations to provide credit support
for Alicura's bank financing. We expect to complete the transaction during the
second quarter of 2000.
EUROPE
We currently have three businesses in Europe: Western Power Distribution,
which distributes electricity in southwest England; a 26% interest in Bewag AG,
the integrated utility serving Berlin; and our marketing and risk management
business. Our strategy in Europe is to create an integrated business unit that
combines 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 greenfield 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 (Pound)160 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) 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.
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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 was 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 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. 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-
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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.
Through March 2000, a regional electricity company had the exclusive right
to provide meter operations, data collection and data aggregation services to
non-half-hourly metered customers (generally residential and small businesses)
in its authorized area. From April 2000, competitive market pricing has been
introduced and suppliers, on behalf of non-half-hourly metered customers, are
able to contract these services from any company holding an appropriate license.
Competitive market pricing has existed for operations related to the metering of
network connections to half-hourly metered customers since April 1994.
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). 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. 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% interest in
Bewag, which we purchased for approximately $820 million, including
approximately $478 million of non-recourse debt.
Bewag's entire customer base is open to competition in accordance with
German electricity laws. Bewag serves approximately 2.4 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 shareholder's agreement with Preussen and
Bayernwerk prior to purchasing our interest in Bewag. This agreement specifies
governance issues and key financial elements. Under the shareholder's 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 September 1999, Veba AG and VIAG announced plans to merge. The companies
have stated their intention to merge Preussen and Bayernwerk, creating a core
energy division of the combined
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entity. The Veba-VIAG merged entity is expected to have approximately 34% of the
German electricity market. The merger is currently under European Union
Commission review to determine the conditions for the merger. The EU may require
the Veba-VIAG merged entity to sell down its holding, including its interest in
Bewag and in Vereinigte Energiewerke Aktiengesellschaft (VEAG), the East German
generation company. The EU is expected to reach a decision on the merger by June
2000. We have publicly stated our interest in acquiring a controlling position
in Bewag if the EU requires Preussen and Bayernwerk to sell down their shares in
Bewag, and supporting Bewag to acquire a position of significant influence in
VEAG in order to strengthen our position in the market.
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 2.4 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. 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). Heat sales comprised 22% of
Bewag's revenue in the fiscal year ended June 1999.
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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 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 workforce 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
January 1, 2000, the number of full-time employees was reduced to approximately
6,500, which represents about one-half of the planned reductions. Another 1,300
employees have agreed to leave over the next two years. The costs associated
with these departures were recorded in 1999. Bewag expects to record additional
employee cost reduction charges in the future. 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 and integrate, 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.
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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.
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, and we began trading in the Dutch OTC market in the
fourth quarter of 1999. 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 in the fourth
quarter of 2000 and into early 2001, 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. 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 2000. 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, after a $600 million one-time special cash distribution to CEPA's
shareholders. 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, owning 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 3,329 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 3,891 MW of generating capacity either operating or under
development. SE Asia-Pacific is currently conducting significant business
development activities in three countries: Australia, the Philippines and China.
Specifically, SE Asia-Pacific has two projects in advanced stages of
development. SE Asia-Pacific is developing a 750 MW project at its Allied
Queensland Coalfields (AQC) site in Australia. Additionally, one of SE
Asia-Pacific's Philippine
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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 is known as a pioneer in the independent power business in
Asia. SE Asia-Pacific has been most successful in developing businesses in the
Philippines where it has a net ownership interest in five plants totaling 2,064
MW of capacity. Substantially all electrical output generated by SE Asia-Pacific
in the Philippines is sold to National Power Corporation (NPC) under long-term
contracts. NPC is the national electric 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 1,980 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 owns 18 units in
Shandong province in China totaling 4,435 MW.
SE Asia-Pacific also owns a 100% interest in AQC, a coal mining company
located in Queensland, Australia. AQC has the mining rights to approximately 1.3
billion tons of low-sulfur, high-quality coal. Small amounts of coal are
currently being mined for sale in the domestic and overseas markets. SE
Asia-Pacific is developing a 750 MW mine mouth, coal-fired plant at the AQC
site.
The following table depicts our investments in the Asia-Pacific region
currently in operation or under development:
<TABLE>
<CAPTION>
NET
OWNERSHIP
INTEREST IN OPERATED
TOTAL MW OWNERSHIP % TOTAL MW MW
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
GENERATION OPERATIONS:
Philippines
Sual...................................................... 1,218 91.9% 1,119 1,218
Pagbilao.................................................. 735 87.2 641 735
Navotas I................................................. 210 90 189 210
Navotas II................................................ 100 100 100 100
Bulacan................................................... 15 100 15 15
China
Shajiao C................................................. 1,980 32 634 --
SIPD...................................................... 4,435 9.99 443 --
----- ----- -----
Total................................................... 8,693 3,141 2,278
===== ===== =====
PROJECT UNDER DEVELOPMENT:
Australia
Kogan Creek............................................... 750 100 750 750
----- ----- -----
Total:.............................................. 9,443 3,891 3,028
===== ===== =====
</TABLE>
THE PHILIPPINES
SE Asia-Pacific's subsidiaries have entered into four separate energy
conversion agreements (ECAs) with NPC, one each for the Sual, Pagbilao, Navotas
I and Navotas II projects. The ECAs are build-operate-transfer agreements. At
the end of the term of each ECA, 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 ECAs. NPC procures all
of the fuel necessary for the plant, at no cost to SE Asia-Pacific's subsidiary,
and pays that subsidiary a fee to convert the fuel into energy. NPC has accepted
substantially all fuel risks and fuel related obligations other than achieved
heat rate.
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The SE Asia-Pacific subsidiaries receive compensation under the ECAs for
fixed capacity fees, variable energy fees and, in the case of the Navotas
projects, start-up fees. The capacity fees consist variously of capital recovery
fees, fixed operating fees, infrastructure fees, service fees and start-up 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 are denominated in U.S. dollars. The fixed
operating fees and energy fees have both U.S. dollar and Philippine peso
components that are indexed to inflation rates. Start-up fees are denominated in
Philippine pesos and are indexed to inflation.
The ECA contains provision under which NPC bears the financial risks for
both political force majeure and change of law, including environmental
regulation. NPC's obligations under the ECAs are guaranteed by the full faith
and credit of the Philippine government.
<TABLE>
<CAPTION>
CAPACITY
PORTION OF 1999 COMMITTED
ECA LIFE TRANSFER REVENUES AS TO NPC
PROJECT (YEARS) TO NPC CAPACITY FEES (MW)
------- -------- -------- --------------- ---------
<S> <C> <C> <C> <C>
Sual 25 Aug 2025 95% 1,000
Pagbilao 29 Aug 2025 97% 735
Navotas I 12 Mar 2003 93% 210
Navotas II 12 Mar 2005 96% 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.
<TABLE>
<CAPTION>
1999
---------- 1999
GENERATION ------------
PROJECT (GWH) AVAILABILITY
------- ---------- ------------
<S> <C> <C>
Sual(1) 477 91%
Pagbilao 4,200 85%
Navotas I 10.6 95%
Navotas II 8.4 99%
</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
Sual, Pagbilao and Bulacan range from 2002 to 2005.
SUAL
SE Asia-Pacific owns a 91.91% interest in the Sual plant, a 1,218 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 609 MW units
that commenced commercial operation in October 1999. The International Finance
Corporation (IFC) and Commonwealth Development Corporation (CDC) are the other
shareholders.
As a SE Asia-Pacific subsidiary, Southern Energy Pangasinan, Inc. (SEPI),
formerly known as Pangasinan Electric Corporation, has acceded to the ECA with
NPC. The ECA obligates NPC to purchase 1,000 MW of the total plant capacity of
1,218 MW. Most of the remaining 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.
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A consortium of banks and various other lenders have committed non-recourse
project debt for the Sual plant totaling approximately $1 billion with an
expected average life of approximately five years and a final maturity in 2011.
As of December 31, 1999, the balance of the project debt was approximately $899
million. 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 ECA. However, no
formal claim for liquidated damages has been made by NPC. SEPI believes that the
plant was completed before the deadlines in the ECA and that its exposure to
potential claims is not material.
Under shareholder agreements, the minority shareholders of SEPI can
exercise a put option requiring the SEPI to purchase the minority shareholders'
interests in the project. The put option can be exercised between the third and
12th 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
SE Asia-Pacific owns 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 IFC, CDC 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
December 31, 1999 was $512 million, with the majority of the principal having a
final maturity in 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. 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.
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 12th
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.
NAVOTAS I AND II
SE Asia-Pacific owns a 90% interest in the Navotas I plant, a 210 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 owns a
100% interest in the Navotas II plant, a 100 MW fuel oil-fired plant located at
the Navotas Fishport Complex.
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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
(Malaysia's 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 transmission
line 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 is currently negotiating a 20 year power sales agreement
with the Oriental Mindoro Electric Cooperative (OMEC) pursuant to which SE
Asia-Pacific would install 7.5 MW of diesel generators on the Island of Mindoro
to supply OMEC. SE Asia-Pacific intends to meet its obligations to OMEC 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.
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 of the Philippines 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 Conference Committee of the House and 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 shall implement a wholesale electricity spot market and ensure the
unbundling of transmission and distribution wheeling rates.
At least 70% of the NPC's generating assets and contracts would be
privatized within three years from the effectiveness of the EIRA. Thereafter,
any undisposed assets would be transferred to the so-called NPC Residual, which
would be a government-owned and controlled corporation. NPC Residual would
perform the remaining functions of NPC, such as administering the ECAs.
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 under ECA
contracts such as those with SE Asia-Pacific
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subsidiaries. The ECAs of SE Asia-Pacific are not assignable and will,
therefore, remain with NPC following privatization. NPC may sell its beneficial
interest in the ECAs as part of the privatization. These ECAs are in any event
supported by a sovereign guarantee of the Republic of the Philippines. NPC
Residual will administer the ECAs and other independent power contracts of NPC
after its privatization.
CLEAN AIR ACT
In July 1999, the Philippines enacted legislation (Clean Air Act) which
applies to stationary emission sources and certain 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 July 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 certain 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. However,
the Pagbilao plant has provisions in its agreements that provide for pricing
changes to compensate for the cost of compliance. 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 owns a 32% interest in the Shajiao C plant, a 1,980 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 660 MW units that began 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).
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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 plant
availability. SE Asia-Pacific does not operate this plant directly. Rather, SE
Asia-Pacific has personnel at the plant to monitor operations and to provide
assistance.
Payments to Guangdong Power are made in both Renminbi and U.S. dollars,
with the U.S. dollar component structured to cover foreign currency expenses,
debt service and an equity return. 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.
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 certain
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.
The Shajiao C plant retired its external debt in March 2000.
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 Power Group Company (SEPCO), the sole purchaser of
electricity as well as the grid operator in Shandong province, is the largest
shareholder of SIPD. SEPCO has granted to SIPD the right of first refusal to
acquire any plant SEPCO chooses to sell. It also has granted SIPD the right to
develop, construct and operate any additional power plants acquired by SEPCO
within Shandong province.
SIPD currently owns interests in 18 coal-fired power generating units
including two 600 MW units, five 125 MW units and eleven 300 MW units for a
total installed capacity of 5,125 MW, of which its net ownership interest
represents 4,435 MW.
Shandong province, with a population of 87 million people and an installed
electricity generating capacity of more than 17,000 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.
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AUSTRALIA
KOGAN CREEK PROJECT
SE Asia-Pacific, through its wholly-owned subsidiary CEPA (Kogan Creek)
Holding Pty. Ltd., is developing a 750 MW coal-fired power plant adjacent to its
coal reserves at Kogan Creek, 280 km west of Brisbane in Queensland, Australia.
The project includes the power station, a 2.5 million ton per annum coal mine
and a 28 km, 275 kV transmission line to connect the plant to the national
electricity transmission system. CEPA (Kogan Creek) has been granted a
generation license by the Queensland government and has selected contractors for
the engineering, procurement and construction contract and the coal mining
contract. We are currently soliciting proposals from other investors to take up
to a 40% stake in this project by early June 2000. The project received its
generation license from the Queensland state government in March. We expect to
have all external approvals by the 2nd quarter of 2000 and to begin construction
when market conditions are satisfactory.
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
the Federal Power Act (FPA). Our EWGs are subject to regulation by FERC
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.
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,
domestic and Canadian marketing of natural gas and electricity, QFs and other
energy-related activities within the United States. 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.
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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 certain 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 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.
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.
The Energy Policy Act prohibits public utility companies from entering into
contracts to purchase electricity from affiliated EWGs without the approval of
the affected state public service commissions. If the sale of electricity from
Plant Dahlberg to an affiliate of the public utility subsidiaries of Southern
Company for eventual delivery to those public utility subsidiaries is deemed to
be subject to this provision, state approval will be required.
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, is scheduled to expire on June 30, 2000. Although we have
filed an application for an extension, we cannot assure you that we will obtain
the extension. In the absence of an extension, cash may be trapped in various 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. Certain 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
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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.
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 certain 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 certain 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
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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 the 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 certain 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 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
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materials from our facilities. Recently, EPA indicated that it may begin to
regulate fossil fuel combustion materials, including certain 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 certain 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 certain 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 certain 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 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.
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 Sindicata
Arica-Parincota, Sindicate Trabajadores Edelnor Iquique, Sindicata Trabajadores
Segunda Region, Sindicata Edelnor S.A. and Sindicata 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
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<PAGE> 91
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 recision 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 recision 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 shareholder
agreement was invalid. SEB is planning to appeal this decision. 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
to prevail on this matter would limit our control of the operations of CEMIG,
which may have an adverse effect on our investment in CEMIG.
SE California and its subsidiaries SE Delta and SE Potrero are parties to a
FERC proceeding initiated in October 1997 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 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 Delta and SE Potrero for the period from June 1,
1999 through December 31, 2001. The outcome of this proceeding is very
uncertain, and we cannot assure you that we will be successful. Our results of
operations would be adversely affected if CAISO's position is upheld by FERC.
On January 18, 2000, EPA published a new regulation, known as the "Section
126 Rule," which allocates nitrogen oxide emissions allowances to certain
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
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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.
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 certain 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 outcome of this information request is uncertain.
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 of the explosion and
fire has not been determined. Thus far, six personal injury lawsuits have been
filed against us and our affiliates, five of which were filed in Cook County,
Illinois. We filed a motion to dismiss 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 the second quarter. The outcome of this proceeding cannot now
be determined.
Except for the CEMIG litigation, the SE California proceedings, the
Birchwood Section 126 issue, the SE New York information request and the State
Line litigation we are not a party to any other 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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
directors, executive officers and key employees as of July 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
A.W. Dahlberg..................... 60 Chairman of the Board and Director
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................. 55 Director
Elmer B. Harris................... 61 Director
W.L. Westbrook.................... 61 Director
</TABLE>
A.W. DAHLBERG has been our Chairman of the Board since June 30, 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.
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
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<PAGE> 94
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 own 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 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
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until October 1998. Prior to joining us he served in various commercial roles
with 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, 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.
BOARD STRUCTURE AND COMPENSATION
Upon the completion of this offering 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 executive committee, an
audit committee, and a compensation committee. Mr. Dahlberg, Ms. Fuller and
[ ] will be appointed as the initial members of the Executive
Committee. Messrs. [ ], [ ] and [ ] will be appointed as the
initial members of the Audit Committee. Messrs. [ ],
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<PAGE> 96
[ ] and [ ] have been appointed as the initial
members of the Compensation 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. We expect that, so long as Southern Company owns a majority of our
outstanding common stock, the majority of the members of the executive committee
and the compensation committee will be directors who are also directors and/or
officers of Southern Company. 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 executive committee is charged with the nomination of new directors and
is authorized to exercise, between meetings of our board, certain powers and
authorities, which the board shall specify by resolution, except as prohibited
by applicable law or our certificate of incorporation. The audit committee will
select 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 compensation committee will approve and administer compensation
and employee benefit plans. Our board may establish other committees from time
to time to facilitate the management of our business and affairs.
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<PAGE> 97
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 certain information as of December 31, 1999
with respect to the beneficial ownership of the Southern Company common stock by
the each director, director nominee, certain of the named executive officers,
and all of our 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>
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
A. W. Dahlberg......................... 522,928 * 452,027 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
Thomas G. Boren........................ 92,737 * 89,097 10
All executive officers and directors as
a group (14 persons)................. 1,391,050 * 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 certain 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 the 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>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- -------------------------
NUMBER OF
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING LTIP ALL OTHER
POSITION YEAR ($) ($) ($) OPTIONS(3) PAYOUTS(4) COMPENSATION(5)
- ------------------ ---- -------- -------- ---------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Marce Fuller(1)........... 1999 $341,462 $465,231 $ 1,146 17,988 -- $17,274
President and Chief
Executive Officer
Raymond D. Hill.............. 1999 297,616 300,000 75 12,988 -- 16,078
Executive Vice President
and Chief Financial
Officer
Richard J. Pershing.......... 1999 297,616 300,000 18,652 12,988 -- 16,462
Executive Vice
President,
Americas Group
Frederick D. Kuester......... 1999 240,635 300,000 -- 10,391 39,737 13,297
Senior Vice
President,
Asia Group
Barney S. Rush............... 1999 219,097 199,750 -- 7,689 -- 11,873
Senior Vice President,
Europe Group
Thomas G. Boren.............. 1999 235,577 256,667 6,582 -- -- 765,607
Former Chief Executive
Officer(2)
</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 $750,000 and it
was agreed he would receive a pro-rata bonus through July 31, 1999 from the
Southern Energy Resources, Inc. Short-Term Incentive Plan for the 1999 plan
year. Mr. Boren is also entitled to receive future payouts for awards under
the Southern Energy Resources, Inc. Deferred Incentive Compensation Plan and
the Southern Energy Resources, Inc. Value Creation Plan.
(3) Indicates options to acquire Southern Company common stock.
(4) Represents a payout to Mr. Kuester under the Southern Company Performance
Incentive Plan for the 4-year period ending December 31, 1999.
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(5) Our contributions in 1999 to the Employee Savings Plan, Employee Stock
Ownership plan, and non-pension related accruals under the Supplemental
Benefit Plan, as well as the separation payment to Mr. Boren described in
footnote (2) are provided in the following table:
<TABLE>
<CAPTION>
SEPARATION
NAME PAYMENT ESP($) ESOP($) SBP($)
- ---- ---------- ------ ------- -------
<S> <C> <C> <C> <C>
S. Marce Fuller......................................... -- 5,691 897 10,686
Raymond D. Hill......................................... -- 7,200 897 7,981
Richard J. Pershing..................................... -- 7,401 897 8,164
Frederick D. Kuester.................................... -- 6,578 897 5,824
Barney S. Rush.......................................... -- 6,891 897 4,086
Thomas G. Boren......................................... 750,000 4,500 897 10,210
</TABLE>
GRANTS OF 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 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.
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(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 OPTION 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.
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."
DECEMBER 31, 1999 SOUTHERN COMPANY 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(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) 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(3).............. 0 0 89,097 0 160,360 0
</TABLE>
- -------------------------
(1) The value realized is ordinary income, before taxes, and represents the
amount equal to the excess of the fair market value of the shares at the
time of exercise above the exercise price.
(2) 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. The amounts in the Exercisable column report the "value" of
options that are vested and therefore could be exercised. The Unexercisable
column reports the "value" of options that are not vested and therefore
could not be exercised as of December 31, 1999.
(3) Following the distribution, Mr. Boren's stock options will remain
exercisable for shares of Southern Company stock.
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VALUE CREATION PLAN
In 1997, we initiated a long-term bonus incentive plan, the value creation
plan, which grants units to eligible employees to receive appreciation over a
preestablished price on a stated number of units per employee. Employees have
been granted two types of units: standard units which pay each eligible employee
from time to time for any appreciation over a fixed base value and indexed units
which pay each eligible employee for any appreciation over a base value which
increases each year by a predetermined rate. Standard units vest 25% per year
for four years, and indexed units vest 100% after four years. The Company
records compensation expense for any unit value in excess of the base price for
any vested or earned units. As of December 31, 1999, the company had 3.1 million
standard units outstanding at an average base price of $10.64 per unit and 3.1
million indexed units outstanding at a base price of $12.77 per unit.
The compensation committee awarded to the executive officers named in the
summary compensation table in the "-- Executive Compensation" section above
units which have a term of 10 years from March 15, 1999 under the Southern
Energy Value Creation Plan. Each unit had an initial value and exercise price of
$11.61. Units granted in 1999 vest annually at a rate of 25% on the anniversary
date of the grant. See the discussion of the termination and conversion of the
value creation plan below in "-- Value Creation Plan Conversion."
SOUTHERN ENERGY VALUE CREATION PLAN
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER ESTIMATED VALUE OF
PERIOD UNTIL FUTURE PAYOUTS
NUMBER OF MATURATION OR ------------------
NAME UNITS PAYOUT(1) (1)
- ---- --------- -------------------- ------------------
<S> <C> <C> <C>
S. Marce Fuller...................................... 88,851 4 to 10 Years $211,465
Raymond D. Hill...................................... 88,851 4 to 10 Years $211,465
Richard J. Pershing.................................. 88,851 4 to 10 Years $211,465
Frederick D. Kuester................................. 52,375 4 to 10 Years $124,653
Barney S. Rush....................................... 46,919 4 to 10 Years $111,667
Thomas G. Boren...................................... 137,173 4 to 10 Years $326,472
</TABLE>
- -------------------------
(1) The ultimate value of a unit under the Southern Energy Value Creation Plan
depends on our value at a future date. This column represents the value of
units granted in 1999 as of December 31, 1999.
EMPLOYMENT CONTRACTS
S. MARCE FULLER. During 1999, an employment agreement was in effect for
Ms. Fuller. 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. Payout will be at the stock's value
at the time, counting reinvestment of dividends. Taxes will be grossed up if our
profitability goals are met. Goals are the achievement of a corporate factor in
our short term plan of an average of 1.5 for the three year period (2000, 2001,
2002), with no year falling below 1.0.
MESSRS. HILL AND PERSHING. We have entered into compensation agreements
with Raymond D. Hill and Richard J. Pershing. They are similar to Ms. Fuller's
agreement except that the phantom Southern Company stock has an original value
of $300,000. In addition, if Mr. Hill is still employed by us on a specific date
in 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
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<PAGE> 102
Mr. Pershing is still employed by us on a specific date in 2003, his retirement
payments are calculated as if three years of additional service are included in
the pension and supplemental executive retirement plan calculations. We may, at
our discretion, enhance the retirement benefit by providing one additional year
of credit for each year worked, up to three additional years.
MESSRS. KUESTER AND RUSH. Agreements also exist for Frederick D. Kuester
and Barney Rush. The agreements provide for the award of $100,000 in our phantom
stock, valued as December 31, 1998 and vested on January 1, 2003 if the
executives are still employed by us. 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.
Awards are forfeited upon termination for cause or resignation. Awards are
paid immediately if the employee dies, becomes disabled, or is terminated
without cause.
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. This
offering does not 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 voluntary 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 certain incentive plans
if a change in control occurs and the plans are not continued or replaced with
comparable plans.
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 the 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
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<PAGE> 103
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,
- to provide participants with an incentive for excellence in individual
performance, and
- to 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 [ ] shares equal to 8% of all authorized shares of
common stock, not just publicly traded shares are reserved for issuance under
the omnibus plan. 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 stock options" within the meaning
of Section 422 of the 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 certain adjustments as 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 certain
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 certain business
criteria set forth in the omnibus plan.
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<PAGE> 104
Awards which are subject to Section 162(m) of the Internal Revenue Code are
intended to qualify 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 [ ] shares reserved for issuance under this
plan. The compensation committee of our board will administer this plan.
VALUE CREATION PLAN CONVERSION
Upon this offering, the value creation plan will be terminated and its
units will be converted to options at the plan's final price to purchase our
stock maintaining the same intrinsic value and material terms. Approximately 250
employees participate in this plan and will be stock option holders as a result
of the conversion. These grants will be made pursuant to the Southern Energy
Omnibus Incentive Compensation Plan. Options will have exercise prices ranging
from $[ ] to $[ ], and unvested units will vest over
the next one to three years. This conversion results in options to purchase a
total of [ ] shares of our common stock.
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 or stock units and stock options to approximately 300 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 over three years after
the grant date. We anticipate that the grants of performance restricted stock
will vest over a period of time based on stock price performance.
OPTIONS AND PERFORMANCE RESTRICTED STOCK OWNERSHIP AS OF THIS OFFERING
As the result of the value creation plan's conversion to stock options and
the initial equity grants, approximately 300 of our employees will hold options
and/or performance restricted stock. All of these grants will be made under the
Southern Energy Omnibus Incentive Plan, which has been approved by our current
shareholder, Southern Company.
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DEFERRED COMPENSATION PLAN
We have, through Southern Company, a voluntary deferred compensation plan
which allows executives to forgo current compensation and invest it on a phantom
basis in Southern Company stock or a prime rate fund. After the offering, we
intend to establish a similar plan.
DEFERRED INCENTIVE COMPENSATION PLAN
We maintain a Deferred Incentive Compensation Plan in which certain
incentive awards paid to participants were 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.
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> 106
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 CERTAIN TRANSACTIONS
In 1999 and prior years, there have been significant transactions between
us and Southern Company involving funds 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. Southern Company has also provided
administrative and other services to us. See Notes 5 and 7 to the notes to our
consolidated financial statements. For purposes of governing certain 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> 107
AGREEMENTS BETWEEN US AND SOUTHERN COMPANY
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. This
description, which summarizes the material terms of these agreements, is not
complete. You should read the full text of these agreements, which have been
filed with the Securities and Exchange Commission 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 is scheduled to occur on or around July 1,
2000. Southern Company will agree to transfer to us ownership of specified
assets, the actual transfer of which may be delayed until on or about the
distribution date, and we will agree to transfer to Southern Company ownership
of specified subsidiaries. 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, and
- agreements providing for our purchase of Plant Dahlberg and 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 NYSE,
- 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,
- 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.
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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 Internal Revenue Service must issue 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.
- 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. So long as we remain 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
- 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.
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<PAGE> 109
- 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,
for 18 months after the distribution, we will not initiate, intervene in or
participate in certain 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
certain credit support arrangements with respect to our existing business and to
provide additional credit support for certain of our subsidiaries up to a limit
prior to the distribution. 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 the distribution occurs.
EXPENSES. We will pay all underwriting fees (other than incentive fees)
discounts and commissions incurred for this offering. Southern Company will pay
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.
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 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 certain 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 certain 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
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<PAGE> 110
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 distribution date. 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.
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 certain 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 distribution
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
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"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
certain 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 time of the distribution. Certain of our plans 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.
Certain of our employees who participate in Southern Company plans and who
retire before the distribution of our stock by Southern Company 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 participating in our plans will continue to participate
in the same benefits plans currently maintained on their behalf subject to
collective bargaining agreements.
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
distribution. Each of our benefit plans will provide that all service,
compensation and other benefits criteria that, as of the distribution, 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.
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Prior to the distribution, our employees and employees of Southern Company
may not freely transfer employment. In order to transfer, notice of a transfer
request must be given and approved by each employing company.
In connection with the completion of the distribution, substitute options
relating to our common stock will be issued to our employees in exchange for
their Southern Company options based on a conversion formula and on the same
terms and conditions. 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 distribution, 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 certain 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 date of distribution in
accordance with the existing income tax allocation agreement. For taxable
periods ending on or before the date of distribution, payments to Southern
Company or Southern Energy, as the case may be, will continue to be made in
accordance with past practices. There may be certain 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 Corporate 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 HoldCo, 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
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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 HoldCo will be the responsibility of Southern Company.
We and Southern Company have also agreed that the restructuring taxes related to
the purchase of Plant Dahlberg shall be the responsibility of Southern Company;
provided, however, we shall be responsible for any increase in taxes as a result
of any adjustment to the purchase price by any taxing authority. 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 certain
transactions after the date of the distribution 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
may be adversely affected if Southern Company does not complete the distribution
of our common stock." 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 certain 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, 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. These registration rights are subject
to various customary limitations and other terms and conditions that are set
forth in the registration rights agreement. 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
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80% of our out-of-pocket costs and expenses related to our registration of
Southern Company's shares.
ARRANGEMENTS RELATING TO THE TRANSFER OF ASSETS AND THE ASSIGNMENT AND
ASSUMPTION OF LIABILITIES
TRANSFER OF PLANT DAHLBERG
The Plant Dahlberg term sheet provides for us or one of our subsidiaries to
enter into an asset sale agreement with Georgia Power under which we will
purchase Plant Dahlberg from Georgia Power. We expect the purchase and transfer
of Plant Dahlberg to occur immediately prior to the distribution. The purchase
price for Plant Dahlberg will be Georgia Power's net book value of the plant as
of the date of the transfer, which is estimated to be $262 million. Because
installation of two units at Plant Dahlberg may still be in progress at the time
of the transfer to us, we will reimburse Georgia Power on a monthly basis for
the construction costs of completing these units.
In addition, the term sheet provides for us to enter into a capacity
purchase agreement with Georgia Power to become effective immediately after the
distribution, under which Georgia Power or an affiliate of Georgia Power will
purchase power from the plant. This capacity purchase agreement will have a term
of ten years. Under a separate construction, operation and maintenance
agreement, Georgia Power will supply fuel, dispatch and operate the plant for
the term of the capacity purchase agreement.
TRANSFER OF SE FINANCE AND CAPITAL FUNDING
Under a plan of reorganization and merger agreement with Southern Company,
we will transfer two of our subsidiaries, SE Finance and Capital Funding, to
Southern Company. These subsidiaries will be transferred to HoldCo, a new
wholly-owned subsidiary of ours, which will then be merged with a wholly-owned
subsidiary of Southern Company. HoldCo will be the surviving corporation in the
merger. In addition, Southern Company will assume certain of our credit support
obligations related to SE Finance and Capital Funding. Although we will own 80%
of HoldCo's stock after the merger and Southern Company will own 20%, we will
distribute our 80% ownership interest to Southern Company as our sole
stockholder.
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CERTAIN 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.
Southern Company intends to receive a ruling from the IRS that the distribution
is tax-free under Section 355 of the Internal Revenue Code. However, if we
breach any representations with respect to the ruling or take any action which
causes such representations to be untrue or we engage in certain transactions
after the distribution that cause the spin-off to be taxable, we will be
required to indemnify Southern Company for any and all taxes resulting from the
failure of the spin-off to qualify as a tax-free transaction as provided in the
tax indemnification agreement. Any indemnification payments by us would be
material.
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
Capital 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
certain other payments to Southern Company for tax liabilities.
As a result of the deconsolidation, we will recapture certain tax losses or
trigger certain deferred gains. These may include, but are not limited to,
excess loss accounts, deferred intercompany transactions and dual consolidated
losses. These amounts may be material. Because of the deconsolidation, and in
the absence of additional planning, we will be severely limited in our ability
to utilize foreign tax credits upon any distribution to us of earnings from our
foreign subsidiaries, and we may be limited in our ability to use any net
operating losses. We intend to undertake planning and restructuring to mitigate
the adverse tax implications of the deconsolidation. However, we cannot assure
you that our mitigation efforts will be successful.
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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 [ ]% of our common stock, or approximately
[ ]% 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 [ ] shares, of which [ ] shares are common
stock, par value $0.01 per share, and [ ] shares are preferred stock,
par value $0.10 per share. Immediately following the offering, [ ]
shares of common stock, or [ ] 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 our stockholders,
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.
Although no shares of preferred stock are currently outstanding and we have
no current plans to issue preferred stock, 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
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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.
ANTI-TAKEOVER EFFECTS OF CERTAIN DELAWARE LAWS AND CERTAIN 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 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 15 directors,
the exact number to be fixed from time to time by resolution of our board of
directors. Our board of directors is 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. 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 80% 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 or 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
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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 80% 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 certain 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.
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 80% 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,
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- 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
at our request any other enterprise 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.
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.
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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TAX CONSEQUENCES TO NON-U.S. INVESTORS
GENERAL
This is a general discussion of certain 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, as
described below. If, however, the dividend is effectively connected with the
conduct of a trade or business in the U.S. by the non-U.S. holder, and, if a
treaty applies, attributable to a U.S. permanent establishment, the dividend
will be subject to U.S. federal income tax imposed on net income on the same
basis that applies to U.S. persons generally, and, for corporate holders under
certain circumstances, the branch profits tax. Non-U.S. holders should consult
any applicable income tax treaties that may provide for a reduction of, or
exemption from, withholding taxes. For purposes of determining whether tax is to
be withheld at a reduced rate as specified by a treaty, we generally will
presume that dividends we pay on or before December 31, 2000, to an address in a
foreign country are paid to a resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a non-U.S. holder
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generally will be required to provide certification as to that non-U.S. holder's
entitlement to treaty benefits. These regulations also provide special rules to
determine whether, for purposes of applying a treaty, dividends that we pay to a
non-U.S. holder that is an entity should be treated as paid to holders of
interests in that entity.
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 any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder;
- 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 certain
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 certain U.S. expatriates; or
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes.
If we are or have been a United States real property holding corporation, 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 traded on an established
securities market for U.S. federal income tax purposes.
We believe that our common stock will be 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 during certain periods a U.S. real property holding
corporation and the above exception does not apply, a non-U.S. holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax, generally
at a rate of 10% of the proceeds. Any amount withheld pursuant to a withholding
tax will be creditable against a non-U.S. holder's U.S. federal income tax
liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax, but will generally not be subject to withholding. Non-U.S. holders
should consult any applicable income tax treaties that may provide for different
rules.
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.
118
<PAGE> 123
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 current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a non-U.S. holder at an address outside the
U.S. 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
certain other conditions are met or the holder otherwise established an
exemption.
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 certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
119
<PAGE> 124
SHARES ELIGIBLE FOR FUTURE SALE
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 be may 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 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 [ ] 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. 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." Southern Company, our directors and officers and we have
agreed not to offer or sell any shares of our common stock, subject to
exceptions, for a period of 180 days after the date of this prospectus, without
the prior written consent of the underwriters.
120
<PAGE> 125
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 representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
-------
Total.............................................
=======
</TABLE>
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
[ ] 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.
At our request, the underwriters have reserved for sale at the initial
public offering price up to [ ] shares of common stock for sale to our
employees and other business associates.
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 our common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions to create
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. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our stock while the
offering is in progress.
The underwriters also may 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
121
<PAGE> 126
representatives have repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our stock. As a result, the price of our stock may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
Southern Company has agreed to pay all of the expenses of this offering,
excluding underwriting discounts and commissions. These expenses are estimated
to be approximately $[ ] million.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
122
<PAGE> 127
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 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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, 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. We also maintain an Internet
site at http://www.[ ].com. Our website and the information
contained therein or connected thereto shall not be deemed to be incorporated
into this prospectus or the registration statement of which it forms a part.
123
<PAGE> 128
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998, and 1999......................... F-4
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1997, 1998, and 1999............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 129
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.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000 (except with respect to
the matters discussed in Note 16,
as to which the dates are February 22,
2000, March 23, 2000 and April 17, 2000)
F-2
<PAGE> 130
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
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 3 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, 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.............................. 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 7, 10, AND 11)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 1,000 shares authorized, issued,
and outstanding........................................... 0 0
Additional paid-in capital.................................. 2,627 2,987
Accumulated other comprehensive (loss) income............... 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-3
<PAGE> 131
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)
<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 income (expense).............................. (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
------ ------ ------
INCOME (LOSS) 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
------ ------ ------
NET INCOME (LOSS)........................................... $ (16) $ 0 $ 372
====== ====== ======
EARNINGS (LOSS) PER SHARE:
Basic (Thousands)........................................... $ (16) $ -- $ 372
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 132
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) INCOME (LOSS)
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. 0 $ 958 $ 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.............. 0 2,125 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.............. 0 2,627 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.............. 0 $2,987 $ 207 $ (92)
==== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 133
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................................................ 14 (27) (99)
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..................................... 279 402 137
------- ------- -------
Net cash provided by operating activities............. 263 402 509
------- ------- -------
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
------- ------- -------
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-6
<PAGE> 134
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
OWNERSHIP
PERCENTAGE AT
COUNTRY OF YEAR OF DECEMBER 31,
OPERATIONS INVESTMENT 1999
---------- ---------- -------------
<S> <C> <C> <C>
ENTITIES CONSOLIDATED:
Western Power Distribution ("WPD"), formerly
"SWEB" (Note 2)................................ United Kingdom 1995 49.0%
Hidroelectrica Alicura S.A. (Note 2)............. Argentina 1993 55.1
EDELNOR S.A. (Note 2)............................ Chile 1993 82.3
Freeport Power Company........................... Bahamas 1993 62.5
OTHER ENTITIES NOT CONSOLIDATED:
Southern Company Energy Marketing LP ("SCEM").... United States 1997 60.0
Birchwood Power Partners L.P. ("Birchwood")...... United States 1994 50.0
BEWAG AG ("BEWAG")............................... Germany 1997 26.0
Guangdong Guanghope Power Company Limited
("Shajiao C").................................. China 1997 32.0
Companhia Energetica de Minas Gerais ("CEMIG")... Brazil 1998 3.6
The Power Generation Company of Trinidad and
Tobago ("PowerGen")............................ Trinidad 1994 39.0
Shandong International Power Development Company
Limited ("SIPD")............................... China 1999 9.9
Carbontronics Synfuels Investors LP.............. United States 1998 25.0
Clairton 1314B LLC............................... United States 1997 27.0
Mobile Energy Services Company, LLC ("Mobile
Energy")....................................... United States 1994 1.0
</TABLE>
Mobile Energy's remaining 99% ownership interest is held by Southern.
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
F-7
<PAGE> 135
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 is the only investment accounted for using the cost method.
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
Revenues earned under the Company's long-term power sales agreements with
the Philippines' National Power Corporation ("NPC") approximated 14% of the
Company's total revenues. 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 affect on the future operating results and liquidity of the
Company.
F-8
<PAGE> 136
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-9
<PAGE> 137
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Hidroelectrica Alicura S.A. 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 Hidroelectrica Alicura
S.A. 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.
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 Hidroelectrica Alicura. See
Notes 3 and 15 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.
EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of common shares outstanding during the periods presented. Diluted earnings per
share is computed based upon the weighted average number of common shares plus
the assumed issuance of common shares for all potentially dilutive securities.
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.
F-10
<PAGE> 138
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECEIVABLES RECOVERY
In 1998 and 1999, the Company received amounts totaling approximately $64
million and $29 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 not collected and not recorded as an asset.
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. 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 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 10 where financial instruments are discussed
further.
F-11
<PAGE> 139
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 intends to adopt the provisions of SFAS No. 133
within this time frame and in accordance with the requirements provided by that
statement. In addition, the FASB has issued an exposure draft that would, if
adopted, narrow the applicability of the pronouncement to certain purchase and
sales contracts and would allow hedge accounting for certain other specific
hedging relationships. Management is currently assessing the financial statement
impact; however, such impact is not determinable 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. Additionally during 1999, Southern Energy recorded a
write-down of approximately $32 million, primarily related to certain metering
assets of WPD. 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
F-12
<PAGE> 140
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disposal at December 31, 1999 was $92 million. See Note 15 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>
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 substantially all of its gas marketing
and risk management assets 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.
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.
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
contributed 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. This accounting acknowledges the substantial
control features which Vastar maintains as long as it holds a stake in the joint
venture.
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
F-13
<PAGE> 141
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Vastar 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.
The partnership agreement provides both Southern Energy and VRI with
significant participatory rights over the operations of the partnership.
Accordingly, Southern Energy accounts for its interest in the joint venture
under the equity method of accounting.
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>
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 8 for discussion of related-party debt transactions.
F-14
<PAGE> 142
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.
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-15
<PAGE> 143
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 (gain) loss..................................... 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-16
<PAGE> 144
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 (gain) 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>
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.
F-17
<PAGE> 145
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) loss..................................... 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-18
<PAGE> 146
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
share appreciation over a preestablished price on a stated number of shares per
employee. 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 for any share value in excess of the base
price for any vested or earned rights. As of December 31, 1999, the Company has
3.1 million standard appreciation rights outstanding at an average base price of
$10.64 per right and 3.1 million indexed appreciation rights outstanding at a
base price of $12.77 per right. The amount of compensation expense recorded in
1999 was $1.7 million and was not material in 1997 and 1998. 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.
F-19
<PAGE> 147
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-20
<PAGE> 148
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):
<TABLE>
<S> <C>
2000........................................................ $ 237
2001........................................................ 373
2002........................................................ 1,027
2003........................................................ 239
2004........................................................ 1,153
</TABLE>
BANK ARRANGEMENTS
The Company currently has bank credit arrangements with various lending
institutions totaling approximately $3,021 million. At December 31, 1999, unused
credit arrangements with banks totaled $1,256 million, of which $574 million
expires during 2000 and $682 million during 2001 and beyond. All of the credit
arrangements 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 and Citibank, 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, matures in March 2000; however, it has extension and
commitment increase options subject to the lenders' approval. Facility C,
totaling $450 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.
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 $1,150 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 draws under Facilities B and C, in the
amount of $140 million, are included in long-term debt on the accompanying
financial statements.
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, a subsidiary 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 to British
F-21
<PAGE> 149
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This
receivable from Southern is 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.
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) $(17)
Deferred provision (benefit)........................... 35 (44) 36
International:
Current provision...................................... 45 15 18
Windfall profits tax assessed in the United Kingdom.... 148 0 0
Deferred provision (benefit)........................... (29) (7) 91
---- ----- ----
Total provision (benefit) from continuing
operations.......................................... $175 $(123) $129
==== ===== ====
Income tax from discontinued operations:
Current benefit........................................ (19) (33) (53)
Deferred provision..................................... 9 11 39
---- ----- ----
Total benefit from discontinued operations........... $(10) $ (22) $(14)
==== ===== ====
</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.
F-22
<PAGE> 150
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.
F-23
<PAGE> 151
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.
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 $.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.
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
F-24
<PAGE> 152
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, which has the effect of converting foreign
currency cash inflows into U.S. dollars at fixed exchange rates.
Currency swaps reduce the Company's exposure to the risk that the eventual
net cash inflows from subsidiaries with a functional currency other than the
U.S. dollar will be adversely affected by changes in exchange rates. 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.
Off-balance sheet derivative financial instruments at December 31, 1999
held for purposes other than trading were as follows (in millions):
<TABLE>
<CAPTION>
YEAR OF
MATURITY OR NOTIONAL UNRECOGNIZED
TERMINATION AMOUNT GAIN (LOSS)
----------- ---------- -----------
<S> <C> <C> <C>
TYPE:
Interest rate swaps..................................... 2000-2012 $1,910 $ (3)
2001-2012 pound 600 (49)
2002-2007 DM691 (5)
CROSS CURRENCY:
Swaps................................................... 2001-2007 pound 414 (11)
Swaption................................................ 2003 DM435 11
</TABLE>
- -------------------------
L --denotes British Pound Sterling.
DM --denotes Deutsche Mark.
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.
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.
F-25
<PAGE> 153
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-26
<PAGE> 154
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,221
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.
11. COMMITMENTS AND CONTINGENT MATTERS
LEGAL
The Company is routinely 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.
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
Parficipacoes, 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. 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 recision of the shareholders agreement. This injunction,
however, does not affect the status of the CEMIG directors appointed by SEB,
which rights are not derived from the agreement.
F-27
<PAGE> 155
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SOUTHERN ENERGY 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 discussions. The Company's failure to prevail
in this matter would adversely effect our results of operations.
ENERGY MARKETING AND RISK MANAGEMENT COMMITMENTS
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 4) 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
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. Payments will be made under these guarantees only if
SCEM's liquidity is exhausted. At December 31, 1999, outstanding guarantees
related to the estimated fair value of SCEM's net contractual commitments were
approximately $146 million.
F-28
<PAGE> 156
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the Company's analysis, Southern's potential exposure under these
contractual commitments would not materially differ from the estimated fair
value. SCEM's gross revenues and cost of trading for 1999 were $11,859 million
and $11,755 million, respectively.
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, $30 million in 2001 and in 2002.
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.
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.
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):
<TABLE>
<S> <C>
FISCAL YEAR ENDED:
2000........................................................ $ 16
2001........................................................ 16
2002........................................................ 15
2003........................................................ 14
2004........................................................ 14
Thereafter.................................................. 103
----
Total minimum payments $178
====
</TABLE>
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.
F-29
<PAGE> 157
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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 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 ESPS. This ruling is currently being appealed to the House of Lords.
The majority of WPD's employees are ESPS members. The Company may be required to
refund to the ESPS any amounts previously used to fund early retirement costs if
it is not successful in this appeal. Under FASB 87 "Employers' Accounting for
Pensions", there will be no immediate impact to net income.
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 additional consideration for fuel
inventory, capital expenditures and property taxes.
F-30
<PAGE> 158
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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)
----
$493
====
</TABLE>
SIPD
On June 30, 1999, the Company, through a wholly owned subsidiary, acquired
a 9.99% interest in SIPD for $107 million. SIPD currently owns 18 coal-fired
power generating units with a total installed capacity of 4,435 MW 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 name of which has been changed to Western Power Distribution plc. 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.
F-31
<PAGE> 159
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CEMIG
In January 1998, Southern Energy, participating in a consortium, exercised
its option to acquire 8.3% (3.6% economic interest) of the voting shares of
CEMIG, an integrated electric utility located in southern Brazil. On this date,
Southern Company transferred approximately $114 million to the consortium and in
May 1998, completed this transaction by transferring an additional $21 million.
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 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)
----
$536
====
</TABLE>
F-32
<PAGE> 160
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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).
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 has 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.
F-33
<PAGE> 161
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 following table sets forth certain summarized financial information of
the Company's investments in 50% or less-owned investments accounted for under
the equity method as of December 31, 1998 and 1999 and for the years then ended
or periods from the respective affiliates' acquisition date through December 31,
1997, 1998, and 1999, if shorter:
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
COMBINED INVESTMENTS
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 AG
INCOME STATEMENT:
Revenues.................................................... $589 $2,366 $2,167
Operating income............................................ 41 216 (84)
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>
F-34
<PAGE> 162
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
See Note 16 to the financial statements where discussed further.
F-35
<PAGE> 163
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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 segment is the Company's 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
<TABLE>
<CAPTION>
AMERICAS EUROPE ASIA-PACIFIC CORPORATE CONSOLIDATED
-------- ------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
1997:
Operating revenues...................... $2,201 $1,282 $ 247 $ 20 $3,750
Depreciation and amortization........... 40 63 76 3 182
Interest income......................... 9 4 84 41 138
Net interest charges.................... 43 95 151 56 345
Income taxes from operations............ (12) 50 (7) (4) 27
Windfall profit tax..................... 0 148 0 0 148
Net income from equity method
subsidiaries.......................... 20 18 20 0 58
Segment net income (loss)............... 2 (48) 39 (9) (16)
Total assets............................ 1,783 3,701 4,304 842 10,630
Investments in equity method
subsidiaries.......................... 127 822 85 94 1,128
Gross property additions................ 115 130 475 0 720
Increase in goodwill.................... 0 0 1,649 0 1,649
1998:
Operating revenues...................... 261 1,273 273 12 1,819
Depreciation and amortization........... 44 79 96 2 221
Interest income......................... 10 0 74 62 146
Net interest charges.................... 59 123 141 107 430
Income taxes from operations............ (113) 22 (12) (20) (123)
Write-down of generating assets......... 308 0 0 0 308
Net income from equity method
subsidiaries.......................... 27 64 44 0 135
Segment net income (loss)............... (180) 141 68 (29) 0
Total assets............................ 2,166 3,890 4,520 1,478 12,054
Investments in equity method
subsidiaries.......................... 373 923 131 84 1,511
Gross property additions................ 101 120 426 0 647
Increase in goodwill.................... 261 0 0 0 261
</TABLE>
F-36
<PAGE> 164
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMERICAS EUROPE ASIA-PACIFIC CORPORATE CONSOLIDATED
-------- ------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
1999:
Operating revenues...................... $ 939 $ 976 $ 342 $ 11 $2,268
Depreciation and amortization........... 73 90 104 3 270
Interest income......................... 18 6 72 76 172
Net interest charges.................... 90 121 125 166 502
Income taxes from operations............ 34 96 25 (26) 129
Write-down of generating assets......... 29 31 0 0 60
Net income from equity method
subsidiaries.......................... 16 10 83 2 111
Segment net income (loss)............... 96 170 175 (69) 372
Total assets............................ 4,071 3,810 4,430 1,552 13,863
Investments in equity method
subsidiaries.......................... 248 762 254 76 1,340
Gross property additions................ 419 115 194 19 747
Increase in goodwill.................... 48 0 0 0 48
</TABLE>
PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
NON-TRADITIONAL ENERGY SERVICES
------------------------------------------------------
GENERATION DISTRIBUTION MARKETING OTHER TOTAL
---------- ------------ --------- ----- ------
(REVENUE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1997....................................... 427 1,283 1,982 58 3,750
1998....................................... 494 1,273 1 51 1,819
1999....................................... $1,222 $ 977 $ 0 $69 $2,268
</TABLE>
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>
F-37
<PAGE> 165
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
ALICURA
On February 22, 2000, Southern Energy agreed to sell its interest in
Hidroelectrica Alicura, a 1,000 megawatt hydroelectric plant in Argentina, for
$205 million. The selling price releases Southern Energy from its debt
obligations and allows it to buy out minority partners. The sale is subject to
the approval of Argentine regulatory authorities.
CEMIG
On March 23, 2000, a state court in Minas Gerais, Brazil, ruled that the
shareholder agreement was invalid. SEB is planning to appeal this decision.
ASSET TRANSFERS
On April 17, 2000, the Company's and Southern Company's respective boards
of directors voted to transfer Southern Energy's leveraged lease and capital
funding subsidiaries to Southern Company in the form of a dividend payment.
These transfers are contingent upon the successful completion of the proposed
initial public offering. The Company's interest in its SE Finance leasing
subsidiary has been treated as a discontinued operation in the accompanying
financial statements.
PROPOSED INITIAL PUBLIC OFFERING
On April 17, 2000 the Company and Southern Company approved plans to
register with the Securities and Exchange Commission shares of Southern Energy
common stock. There can be no assurance that this offering will be completed.
VALUE CREATION PLAN CONVERSION (UNAUDITED)
At or prior to the completion of the offering, the Company's value creation
plan will be terminated and its units will be converted to options at the plan's
final price to purchase Southern Energy common stock maintaining the same
intrinsic value and material terms. Approximately 250 employees participate in
this plan and will be stock option holders as a result of the conversion. These
grants will be made pursuant to the Southern Energy Omnibus Incentive
Compensation Plan. The exercise prices of such options has not been determined.
Unvested units will vest over the next one to three years.
F-38
<PAGE> 166
[LOGO]
<PAGE> 167
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........................................ $26,400
NASD filing fee............................................. 10,500
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> 168
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 Restated Certificate of Incorporation and 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 Rule 144A
under the Securities Act of 1933.
ITEM 16. EXHIBITS
<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.
5.1* -- Opinion of Troutman Sanders LLP.
10.1 -- Form of Master Separation and Distribution Agreement.
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.
</TABLE>
II-2
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
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.
11.1* -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Troutman Sanders LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule (for SEC use only).
99.1* -- Financial Statements of Bewag Aktiengesellschaft.
</TABLE>
- -------------------------
* To be filed by amendment.
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
II-3
<PAGE> 170
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.
II-4
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act, 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 April 21, 2000.
Southern Energy, Inc.
By: /s/ S. Marce Fuller
------------------------------------
S. Marce Fuller
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Southern Energy, Inc., hereby
severally constitute and appoint Douglas L. Miller, Senior Vice President and
General Counsel, and Elizabeth B. Chandler, Vice President and Secretary, and
each of them singly, our true and lawful attorneys with full power to them, and
each of them singly, to sign for us and in our names in the capacities indicated
below, the registration statement on Form S-1 filed herewith and any and all
pre-effective and post-effective amendments to said registration statement, and
generally to do all such things in our names and on our behalf in our capacities
as officers and directors to enable Southern Energy, Inc. to comply with the
provisions of the Securities Act, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys or any of them, to said registration statement
and any and all amendments thereto.
Pursuant to the requirements of the Securities Act, 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>
/s/ S. Marce Fuller President, Chief Executive April 21, 2000
- ----------------------------------------------------- Officer and Director
S. Marce Fuller (Principal Executive Officer)
/s/ Raymond D. Hill Executive Vice President and April 21, 2000
- ----------------------------------------------------- Chief Financial Officer
Raymond D. Hill (Principal Financial Officer)
/s/ James A. Ward Senior Vice President, Finance April 21, 2000
- ----------------------------------------------------- and Accounting (Principal
James A. Ward Accounting Officer)
/s/ A. W. Dahlberg Director April 21, 2000
- -----------------------------------------------------
A. W. Dahlberg
/s/ H. Allen Franklin Director April 21, 2000
- -----------------------------------------------------
H. Allen Franklin
/s/ Elmer B. Harris Director April 21, 2000
- -----------------------------------------------------
Elmer B. Harris
/s/ W. L. Westbrook Director April 21, 2000
- -----------------------------------------------------
W. L. Westbrook
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.1
FORM OF
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS..........................................................................................................1
ARTICLE I SEPARATION.............................................................................................2
Section 1.1 Separation Date...................................................................................2
Section 1.2 Closing of Transactions...........................................................................2
Section 1.3 Exchange of Secretary's Certificates..............................................................2
ARTICLE II DOCUMENTS AND ITEMS TO BE DELIVERED ON THE SEPARATION DATE............................................2
Section 2.1 Documents to Be Delivered By Southern.............................................................2
Section 2.2 Documents to Be Delivered By Southern Energy......................................................3
ARTICLE III THE IPO AND ACTIONS PENDING THE IPO..................................................................3
Section 3.1 Transactions Prior to the IPO.....................................................................3
Section 3.2 Use of Proceeds...................................................................................4
Section 3.3 Cooperation.......................................................................................4
Section 3.4 Conditions Precedent to Consummation of the IPO...................................................4
ARTICLE IV THE DISTRIBUTION......................................................................................5
Section 4.1 The Distribution..................................................................................5
Section 4.2 Actions Prior To The Distribution.................................................................6
Section 4.3 Sole Discretion of Southern.......................................................................6
Section 4.4 Conditions To Distribution........................................................................7
Section 4.5 Fractional Shares.................................................................................7
ARTICLE V COVENANTS AND OTHER MATTERS............................................................................8
Section 5.1 Other Agreements..................................................................................8
Section 5.2 Further Instruments...............................................................................8
Section 5.3 Agreement For Exchange of Information.............................................................8
Section 5.4 Auditors and Audits; Annual and Quarterly Statements and Accounting..............................10
Section 5.5 Consistency with Past Practices..................................................................12
Section 5.6 Payment of Expenses..............................................................................12
Section 5.7 Dispute Resolution...............................................................................12
Section 5.8 Governmental Approvals...........................................................................13
Section 5.9 Regulatory Proceedings...........................................................................13
Section 5.10 Regulatory Effect of Distribution................................................................13
Section 5.11 HoldCo Transaction...............................................................................14
Section 5.12 Plant Dahlberg Transaction.......................................................................14
Section 5.13 Continuance of Southern Credit Support...........................................................14
Section 5.14 Mobile Facility..................................................................................15
Section 5.15 Assignment of Agreements.........................................................................15
Section 5.16 Southern Energy Board Representation.............................................................15
ARTICLE VI MISCELLANEOUS........................................................................................16
Section 6.1 LIMITATION OF LIABILITY..........................................................................16
Section 6.2 Entire Agreement.................................................................................16
Section 6.3 Governing Law....................................................................................16
Section 6.4 Termination......................................................................................16
</TABLE>
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<TABLE>
<S> <C>
Section 6.5 Notices..........................................................................................16
Section 6.6 Counterparts.....................................................................................17
Section 6.7 Binding Effect; Assignment.......................................................................17
Section 6.8 Severability.....................................................................................17
Section 6.9 Failure or Indulgence Not Waiver; Remedies Cumulative............................................17
Section 6.10 Amendment.......................................................................................17
Section 6.11 Authority.......................................................................................17
Section 6.12 Interpretation..................................................................................17
Section 6.13 Conflicting Agreements..........................................................................18
ARTICLE VII DEFINITIONS.........................................................................................18
Section 7.1 Affiliated Company...............................................................................18
Section 7.2 Ancillary Agreements.............................................................................18
Section 7.3 Business Day.....................................................................................18
Section 7.4 Code.............................................................................................18
Section 7.5 Commission.......................................................................................18
Section 7.6 Disputes.........................................................................................18
Section 7.7 Distribution.....................................................................................18
Section 7.8 Distribution Agent...............................................................................18
Section 7.9 Distribution Date................................................................................18
Section 7.10 Exchange Act....................................................................................18
Section 7.11 Governmental Approvals..........................................................................19
Section 7.12 Governmental Authority..........................................................................19
Section 7.13 HoldCo Transaction..............................................................................19
Section 7.14 Information.....................................................................................19
Section 7.15 IPO.............................................................................................19
Section 7.16 IPO Closing Date................................................................................19
Section 7.17 IPO Registration Statement......................................................................19
Section 7.18 NYSE............................................................................................19
Section 7.19 Person..........................................................................................19
Section 7.20 Plant Dahlberg..................................................................................19
Section 7.21 Plant Dahlberg Transaction......................................................................19
Section 7.22 Record Date.....................................................................................20
Section 7.23 SE Finance......................................................................................20
Section 7.24 SE Capital Funding..............................................................................20
Section 7.25 Separation......................................................................................20
Section 7.26 Separation Date.................................................................................20
Section 7.27 Southern Business...............................................................................20
Section 7.28 Southern Energy Business........................................................................20
Section 7.29 Southern Energy Group...........................................................................20
Section 7.30 Southern Energy Auditors........................................................................20
Section 7.31 Southern Group..................................................................................20
Section 7.32 Southern's Auditors.............................................................................20
Section 7.33 Subsidiary......................................................................................20
Section 7.34 Troutman Sanders................................................................................21
</TABLE>
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<TABLE>
<S> <C>
Section 7.35 Underwriters...................................................................................21
Section 7.36 Underwriting Agreement.........................................................................21
Schedule 5.11 HoldCoTransaction..............................................................................23
Schedule 5.12 Plant Dahlberg Transaction.....................................................................25
Schedule 5.15 Transferred Agreements.........................................................................26
Schedule 7.1 Southern Energy Affiliated Companies...........................................................27
</TABLE>
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MASTER SEPARATION AND DISTRIBUTION AGREEMENT
THIS MASTER SEPARATION AND DISTRIBUTION AGREEMENT (this "Agreement") is
entered into on [____________, 2000], between The Southern Company ("Southern"),
a Delaware corporation, and Southern Energy, Inc. ("Southern Energy"), a
Delaware corporation. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in Article VII hereof.
RECITALS
WHEREAS, the Boards of Directors of Southern and Southern Energy have
each determined that it would be appropriate and desirable for Southern to
separate the Southern Energy Group from the Southern Group (the "Separation"),
and, in connection with the Separation, for Southern to acquire certain entities
currently associated with the Southern Energy Business from Southern Energy, and
for Southern Energy to acquire certain assets from Southern; and
WHEREAS, Southern and Southern Energy currently contemplate that, in
connection with the Separation, Southern Energy will make an initial public
offering ("IPO") of an amount of its common stock pursuant to a registration
statement on Form S-1 pursuant to the Securities Act of 1933, as amended (the
"IPO Registration Statement"), that will reduce Southern's ownership of Southern
Energy by less than 20%; and
WHEREAS, Southern and Southern Energy further currently contemplate
that, in connection with the Separation, (a) Southern Energy will transfer two
of its wholly-owned Subsidiaries, SE Finance and SE Capital Funding, to Southern
(the "HoldCo Transaction"), and Southern will assume certain liabilities in
connection therewith, and (b) Southern will transfer that certain electric
generating facility and related assets known between the parties hereto as Plant
Dahlberg and located in Jackson County, Georgia ("Plant Dahlberg") to Southern
Energy for a purchase price equal to the book value of such assets on the date
of transfer (the "Plant Dahlberg Transaction"); and
WHEREAS, Southern currently contemplates that, within twelve months
following the IPO, Southern will distribute to the holders of its common stock,
by means of a pro rata distribution, all of the shares of Southern Energy common
stock then owned by Southern (the "Distribution"); and
WHEREAS, Southern and Southern Energy intend that the Distribution will
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code"), and that this Agreement is intended to
be, and is hereby adopted as, a plan of reorganization under Section 368 of the
Code; and
WHEREAS, the parties intend in this Agreement, including the Exhibits
and Schedules hereto, to set forth the principal arrangements between them
regarding the Separation.
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NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I
SEPARATION
Section 1.1. Separation Date. Unless otherwise provided in this
Agreement, or in any agreement to be executed in connection with this Agreement,
the effective time and date of each undertaking or agreement in connection with
the Separation shall be [12:01 a.m., Eastern Time, July 1, 2000] or such other
date as may be fixed by Southern (the "Separation Date").
Section 1.2. Closing of Transactions. Unless otherwise provided herein,
the closing of the transactions contemplated in Article II shall occur by the
lodging of each of the executed agreements, instruments or other documents to be
executed pursuant to this Agreement with Troutman Sanders LLP, 600 Peachtree
Street, Suite 5200, Atlanta, Georgia 30308, to be held in escrow for delivery as
provided in Section 1.3 of this Agreement.
Section 1.3. Exchange of Secretary's Certificates. Upon receipt of a
certificate of the Secretary or an Assistant Secretary of Southern in the form
attached to this Agreement as Exhibit A, Troutman Sanders shall deliver to
Southern Energy on behalf of Southern all of the items required to be delivered
by Southern hereunder pursuant to Section 2.1 of this Agreement and each such
item shall be deemed to be delivered to Southern Energy as of the Separation
Date upon delivery of such certificate. Upon receipt of a certificate of the
Secretary or an Assistant Secretary of Southern Energy in the form attached to
this Agreement as Exhibit B, Troutman Sanders shall deliver to Southern on
behalf of Southern Energy all of the items required to be delivered by Southern
Energy hereunder and each such item shall be deemed to be delivered to Southern
as of the Separation Date upon receipt of such certificate.
ARTICLE II
DOCUMENTS TO BE DELIVERED ON THE SEPARATION DATE
Section 2.1. Documents to Be Delivered By Southern. On the Separation
Date, Southern will deliver, or will cause its appropriate Subsidiaries to
deliver, to Southern Energy all of the following items and agreements
(collectively, together with all agreements and documents contemplated by this
Agreement and such other agreements, including any agreements or documents to be
delivered in connection with the Plant Dahlberg Transaction, the "Ancillary
Agreements"):
(a) A duly executed Technology and Intellectual Property
Ownership and License Agreement substantially in the form attached
hereto as Exhibit C;
(b) A duly executed Employee Matters Agreement substantially
in the form attached hereto as Exhibit D;
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(c) A duly executed Tax Indemnification Agreement
substantially in the form attached hereto as Exhibit E;
(d) A duly executed Transitional Services Agreement
substantially in the form attached hereto as Exhibit F;
(e) A duly executed Confidential Disclosure Agreement
substantially in the form attached hereto as Exhibit G;
(f) A duly executed Indemnification and Insurance Matters
Agreement substantially in the form attached hereto as Exhibit H;
(g) Such other agreements, documents or instruments as the
parties may agree are necessary or desirable in order to achieve the
purposes hereof.
Section 2.2 Documents to Be Delivered by Southern Energy. As of the
Separation Date, in each case where Southern Energy or any of its Subsidiaries
is a party to any agreement or instrument referred to in Section 2.1, Southern
Energy will or will cause its appropriate Subsidiaries to deliver to Southern a
duly executed counterpart of such agreement or instrument.
ARTICLE III
THE IPO AND ACTIONS PENDING THE IPO
Section 3.1 Transactions Prior to the IPO. Subject to the conditions
specified in Section 3.4, Southern and Southern Energy shall use their
reasonable commercial efforts to consummate the IPO. Such efforts shall include,
but not necessarily be limited to, those specified in this Section 3.1:
(a) Registration Statement. Southern Energy shall file the IPO
Registration Statement, and such amendments or supplements thereto, as
may be necessary in order to cause the same to become and remain
effective as required by law or by the managing underwriters for the
IPO (the "Underwriters"), including, but not limited to, filing such
amendments to the IPO Registration Statement as may be required by the
underwriting agreement to be entered into among Southern Energy and the
Underwriters (the "Underwriting Agreement"), the Securities and
Exchange Commission (the "Commission") or federal, state or foreign
securities laws. Southern and Southern Energy shall also cooperate in
preparing, filing with the Commission and causing to become effective a
registration statement registering the common stock of Southern Energy
under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), and any registration statements or amendments thereof
which are required to reflect the establishment of, or amendments to,
any employee benefit and other plans necessary or appropriate in
connection with the IPO, the Separation, the Distribution or the other
transactions contemplated by this Agreement.
(b) Underwriting Agreement. Southern Energy shall enter into
the Underwriting Agreement, in form and substance reasonably
satisfactory to Southern Energy, and shall comply with its obligations
thereunder.
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(c) Other Matters. Southern and Southern Energy shall consult
with each other and the Underwriters regarding the timing, pricing and
other material matters with respect to the IPO.
(d) Blue Sky. Southern Energy shall use its reasonable
commercial efforts to take all such action as may be necessary or
appropriate under state securities and blue sky laws of the United
States (and any comparable laws under any foreign jurisdictions) in
connection with the IPO.
(e) NYSE Listing. Southern Energy shall prepare, file and use
reasonable commercial efforts to seek to make effective, an application
for listing of the common stock of Southern Energy issued in the IPO on
the New York Stock Exchange (the "NYSE"), subject to official notice of
issuance.
Section 3.2. Use of Proceeds. The proceeds of the IPO will be retained
by Southern Energy to be used for general corporate purposes.
Section 3.3 Cooperation. Southern Energy shall consult with, and
cooperate in all respects with, Southern in connection with the pricing of the
common stock of Southern Energy to be offered in the IPO and shall, at
Southern's direction, promptly take any and all actions necessary or desirable
to consummate the IPO as contemplated by the IPO Registration Statement and the
Underwriting Agreement.
Section 3.4 Conditions Precedent to Consummation of the IPO. As soon as
practicable after the Separation Date, the parties hereto shall use their
reasonable commercial efforts to satisfy the conditions listed below to the
consummation of the IPO. The obligations of the parties to use their reasonable
commercial efforts to consummate the IPO shall be conditioned on the
satisfaction, or waiver by Southern, of the following conditions:
(a) Registration Statement. The IPO Registration Statement
shall have been filed and declared effective by the Commission, and
there shall be no stop-order in effect with respect thereto.
(b) Blue Sky. The actions and filings with regard to state
securities and blue sky laws of the United States (and any comparable
laws under any foreign jurisdictions) described in Section 3.1(d) shall
have been taken and, where applicable, have become effective or been
accepted.
(c) NYSE Listing. The common stock of Southern Energy to be
issued in the IPO shall have been accepted for listing on the NYSE, on
official notice of issuance.
(d) Underwriting Agreement. Southern Energy shall have entered
into the Underwriting Agreement and all conditions to the obligations
of Southern Energy and the Underwriters shall have been satisfied or
waived.
(e) Common Stock Ownership. Southern shall be satisfied in its
sole discretion that it will own more than 80% of the outstanding
common stock of Southern Energy following the IPO. All other conditions
to permit the Distribution to qualify as a tax-free
(f) Governmental Approvals. Any material Governmental Approvals
necessary to consummate the IPO shall have been obtained and be in
full force and effect.
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distribution to Southern, Southern Energy and Southern's stockholders
shall, to the extent applicable as of the time of the IPO, be
satisfied, and there shall be no event or condition that is likely to
cause any of such conditions not to be satisfied as of the time of the
Distribution or thereafter.
(g) No Legal Restraints. No order, injunction or decree issued
by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Separation
or the IPO or any of the other transactions contemplated by this
Agreement shall be in effect.
(h) Separation. The Separation shall have become effective.
(i) Other Actions. Such other actions as the parties hereto
may, based upon the advice of counsel, reasonably request to be taken
prior to the IPO in order to assure the successful completion of the
IPO shall have been taken.
(j) No Termination. This Agreement shall not have been
terminated.
ARTICLE IV
THE DISTRIBUTION
Section 4.1 The Distribution.
(a) Delivery of Shares for Distribution. Subject to Section
4.4 hereof, on or prior to the date the Distribution is effective (the
"Distribution Date"), Southern will deliver to the distribution agent
to be appointed by Southern, or if no distribution agent is appointed,
then Southern (the "Distribution Agent"), to distribute to the
stockholders of Southern the shares of common stock of Southern Energy
held by Southern pursuant to the Distribution for the benefit of
holders of record of common stock of Southern on the Record Date, a
single stock certificate, endorsed by Southern in blank, representing
all of the outstanding shares of common stock of Southern Energy then
owned by Southern, and shall cause the transfer agent for the shares of
common stock of Southern to instruct the Distribution Agent to
distribute on the Distribution Date the appropriate number of such
shares of common stock of Southern Energy to each such holder or
designated transferee or transferees of such holder.
(b) Shares Received. Subject to Sections 4.4 and 4.5, each
holder of common stock of Southern on the Record Date (or such holder's
designated transferee or transferees) will be entitled to receive in
the Distribution a number of shares of common stock of Southern Energy
equal to the number of shares of common stock of Southern held by such
holder on the Record Date multiplied by a fraction the numerator of
which is the number of shares of common stock of Southern Energy
beneficially owned by Southern on the Record Date and the denominator
of which is the number of shares of common stock of Southern
outstanding on the Record Date.
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(c) Obligation to Provide Information. Southern Energy and
Southern, as the case may be, will provide to the Distribution Agent
all share certificates and any information required in order to
complete the Distribution on the basis specified above.
Section 4.2 Actions Prior To The Distribution.
(a) Information Statement. Southern and Southern Energy shall
prepare and mail, prior to the Distribution Date, to the holders of
common stock of Southern such information concerning Southern Energy
and the Distribution and such other matters as Southern shall
reasonably determine are necessary and as may be required by law.
Southern and Southern Energy will prepare, and Southern Energy will, to
the extent required under applicable law, file with the Commission any
such documentation which Southern and Southern Energy determines is
necessary or desirable to effectuate the Distribution, and Southern and
Southern Energy shall each use its reasonable commercial efforts to
obtain all necessary approvals from the Commission with respect thereto
as soon as practicable.
(b) Blue Sky. Southern and Southern Energy shall take all such
actions as may be necessary or appropriate under the securities or blue
sky laws of the United States (and any comparable laws under any
foreign jurisdiction) in connection with the Distribution.
(c) NYSE Listing. Southern Energy shall prepare and file, and
shall use its reasonable commercial efforts to have approved, an
application for the listing of the common stock of Southern Energy to
be distributed in the Distribution on the NYSE, subject to official
notice of distribution.
(d) Resignation of Directors and Officers. Immediately prior
to the Distribution, (i) each person who is an officer, director or
employee of any member of the Southern Group and an officer, director
or employee of any member of the Southern Energy Group immediately
prior to the Distribution (each a "Joint Employee") and who is to
continue as an officer, director or employee of any member of the
Southern Group after the Distribution shall resign from each of such
person's positions with each member of the Southern Energy Group, and
(ii) each such Joint Employee who is to continue as an officer,
director or employee of any member of the Southern Energy Group, after
the Distribution, shall resign from each of such person's positions
with each member of the Southern Group.
(e) Conditions. Southern and Southern Energy shall take all
reasonable steps necessary and appropriate to cause the conditions set
forth in Section 4.4 to be satisfied and to effect the Distribution on
the Distribution Date.
Section 4.3 Sole Discretion of Southern. Southern currently intends,
following the consummation of the IPO, to complete the Distribution within
twelve (12) months of the IPO Closing Date. Southern shall, in its sole and
absolute discretion, determine the date of the consummation of the Distribution
and all terms of the Distribution, including, without limitation, the form,
structure and terms of any transaction(s) and/or offering(s) to effect the
Distribution and the timing of and conditions to the consummation of the
Distribution. In addition, Southern may at any time and from time to time until
the completion of the Distribution decide to abandon the Distribution or modify
or change the terms of the Distribution, including, without limitation, by
accelerating or delaying the timing of the consummation of all or part of the
Distribution. Southern Energy shall cooperate with Southern in all respects to
accomplish the Distribution and shall, at Southern's direction, promptly take
any and all actions necessary or desirable to effect the Distribution,
including, without limitation, the registration under the Securities Act of the
common stock of Southern Energy on an appropriate registration form or forms to
be designated
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by Southern. Southern shall select any investment banker(s) and manager(s) in
connection with the Distribution, as well as any financial printer, solicitation
and/or exchange agent and outside counsel for Southern; provided, however, that
nothing herein shall prohibit Southern Energy from engaging (at its own expense)
its own financial, legal, accounting and other advisors in connection with the
Distribution.
Section 4.4 Conditions To Distribution. The following are conditions to
the consummation of the Distribution. The conditions are for the sole benefit of
Southern and shall not give rise to or create any duty on the part of Southern
or the Southern Board of Directors to waive or not waive any such condition.
(a) IRS Ruling. Southern shall have obtained a private letter
ruling from the Internal Revenue Service in form and substance
satisfactory to Southern (in its sole discretion), and such ruling
shall remain in effect as of the Distribution Date, to the effect that
(i) the distribution by Southern of all of its Southern Energy stock to
the stockholders of Southern will qualify as a reorganization under
Section 355 of the Code; and (ii) no gain or loss will be recognized by
(and no amount will otherwise be included in the income of) the
stockholders of Southern upon their receipt of Southern Energy common
stock pursuant to the Distribution.
(b) Governmental Approvals. Any material Governmental
Approvals necessary to consummate the Distribution, the HoldCo
Transaction and the Plant Dahlberg Transaction shall have been obtained
and be in full force and effect;
(c) No Legal Restraints. No order, injunction or decree issued
by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the
Distribution shall be in effect and no other event outside the control
of Southern shall have occurred or failed to occur that prevents the
consummation of the Distribution; and
(d) No Material Adverse Effect. No other events or
developments shall have occurred subsequent to the IPO Closing Date
that, in the judgment of the Board of Directors of Southern, would
result in the Distribution having a material adverse effect on Southern
or on the stockholders of Southern.
Section 4.5 Fractional Shares. As soon as practicable after the
Distribution Date, Southern shall direct the Distribution Agent to determine the
number of whole shares and fractional shares of common stock of Southern Energy
allocable to each holder of record or beneficial owner of common stock of
Southern as of the Record Date, to aggregate all such fractional shares and sell
the whole shares obtained thereby at the direction of Southern, in open market
transactions, at then prevailing trading prices, and to cause to be distributed
to each such holder or for the benefit of each such beneficial owner to which a
fractional share shall be allocable such holder's or owner's ratable share of
the proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. Southern and the Distribution Agent shall use their reasonable
commercial efforts to aggregate the shares of common stock of Southern that may
be held by any
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beneficial owner thereof through more than one account in determining the
fractional share allocable to such beneficial owner.
ARTICLE V
COVENANTS AND OTHER MATTERS
Section 5.1 Other Agreements. In addition to the specific agreements,
documents and instruments annexed to this Agreement, Southern and Southern
Energy agree to execute or cause to be executed by the appropriate parties and
deliver, as appropriate, such other agreements, instruments and other documents
as may be necessary or desirable in order to effect the purposes of this
Agreement and the Ancillary Agreements.
Section 5.2 Further Instruments. At the request of Southern Energy and
without further consideration, Southern will execute and deliver, and will cause
its applicable Subsidiaries to execute and deliver, to Southern Energy and its
Subsidiaries such other instruments of transfer, conveyance, assignment,
substitution and confirmation and take such action as Southern Energy may
reasonably deem necessary or desirable in order more effectively to transfer,
convey and assign to Southern Energy and its Subsidiaries and confirm Southern
Energy's and its Subsidiaries' title to all of the assets, rights and other
things of value contemplated to be transferred to Southern Energy and its
Subsidiaries pursuant to this Agreement, the Ancillary Agreements, and any
documents referred to therein, to put Southern Energy and its Subsidiaries in
actual possession and operating control thereof and to permit Southern Energy
and its Subsidiaries to exercise all rights with respect thereto (including,
without limitation, rights under contracts and other arrangements as to which
the consent of any third party to the transfer thereof shall not have previously
been obtained). At the request of Southern and without further consideration,
Southern Energy will execute and deliver, and will cause its applicable
Subsidiaries to execute and deliver, to Southern and its Subsidiaries all
instruments, assumptions, novations, undertakings, substitutions or other
documents and take such other action as Southern may reasonably deem necessary
or desirable in order to have Southern Energy fully and unconditionally assume
and discharge the liabilities contemplated to be assumed by Southern Energy
under this Agreement or any document in connection herewith and to relieve the
Southern Group of any liability or obligation with respect thereto and evidence
the same to third parties. Neither Southern nor Southern Energy shall be
obligated, in connection with the foregoing, to expend money other than
reasonable out-of-pocket expenses, attorneys' fees and recording or similar
fees. Furthermore, each party, at the request of another party hereto, shall
execute and deliver such other instruments and do and perform such other acts
and things as may be necessary or desirable for effecting completely the
consummation of the transactions contemplated hereby.
Section 5.3 Agreement For Exchange of Information. Each of Southern and
Southern Energy agrees to provide, or cause to be provided, to each other, at
any time before or after the Distribution Date, as soon as reasonably
practicable after written request therefor, any Information in the possession or
under the control of such party that the requesting party reasonably needs (i)
to comply with reporting, disclosure, filing or other requirements imposed
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on the requesting party (including under applicable securities laws) by a
Governmental Authority having jurisdiction over the requesting party, (ii) for
use in any other judicial, regulatory, administrative or other proceeding or in
order to satisfy audit, accounting, claims, regulatory, litigation or other
similar requirements, (iii) to comply with its obligations under this Agreement
or any Ancillary Agreement or (iv) in connection with the ongoing businesses of
Southern or Southern Energy as it relates to the conduct of such businesses
prior to the Distribution Date, as the case may be; provided, however, that in
the event that any party determines that any such provision of Information could
be commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.
(a) Internal Accounting Controls; Financial Information. After the
Separation Date, (i) each party shall maintain in effect at its own cost and
expense adequate systems and controls for its business to the extent necessary
to enable the other party to satisfy its reporting, accounting, audit and other
obligations, and (ii) each party shall provide, or cause to be provided, to the
other party and its Subsidiaries in such form as such requesting party shall
request, at no charge to the requesting party, all financial and other data and
information as the requesting party determines necessary or advisable in order
to prepare its financial statements and reports or filings with any Governmental
Authority.
(b) Ownership of Information. Any Information owned by a party that is
provided to a requesting party pursuant to this Section 5.3 shall be deemed to
remain the property of the providing party. Unless specifically set forth
herein, nothing contained in this Agreement shall be construed as granting or
conferring rights of license or otherwise in any such Information.
(c) Record Retention. To facilitate the possible exchange of
Information pursuant to this Section 5.3 and other provisions of this Agreement
after the Distribution Date, each party agrees to use its reasonable commercial
efforts to retain all Information in its respective possession or control on the
Distribution Date substantially in accordance with its policies as in effect on
the Separation Date. However, except as set forth in the Tax Indemnification
Agreement, at any time after the Distribution Date, each party may amend their
respective record retention policies at such party's discretion; provided,
however, that if a party desires to effect the amendment within three (3) years
after the Distribution Date, the amending party must give thirty (30) days prior
written notice of such change in the policy to the other party to this
Agreement. No party will destroy, or permit any of its Subsidiaries to destroy,
any Information that exists on the Separation Date (other than Information that
is permitted to be destroyed under the current record retention policy of such
party) without first using its reasonable commercial efforts to notify the other
party of the proposed destruction and giving the other party the opportunity to
take possession of such Information prior to such destruction.
(d) Limitation of Liability. No party shall have any liability to any
other party in the event that any Information exchanged or provided pursuant to
this Section is found to be inaccurate, in the absence of willful misconduct by
the party providing such Information. No party shall have any liability to any
other party if any Information is destroyed or lost after reasonable commercial
efforts by such party to comply with the provisions of Section 5.4(c).
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(e) Other Agreements Providing For Exchange of Information. The rights
and obligations granted under this Section 5.3 are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in this Agreement and any
Ancillary Agreement.
(f) Production of Witnesses; Records; Cooperation. After the
Distribution Date, except in the case of a legal or other proceeding by one
party against another party (which shall be governed by such discovery rules as
may be applicable under Section 5.7 or otherwise), each party hereto shall use
its reasonable commercial efforts to make available to each other party, upon
written request, the former, current and future directors, officers, employees,
other personnel and agents of such party as witnesses and any books, records or
other documents within its control or which it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any legal, regulatory, administrative or other proceeding in which the
requesting party may from time to time be involved, regardless of whether such
legal, regulatory, administrative or other proceeding is a matter with respect
to which indemnification may be sought hereunder. The requesting party shall
bear all costs and expenses in connection therewith.
Section 5.4 Auditors and Audits; Annual and Quarterly Statements and
Accounting. Each party agrees that, for so long as Southern Energy remains a
Subsidiary of Southern, and with respect to any financial reporting period
during which Southern Energy was a Subsidiary of Southern:
(a) Selection of Auditors. Southern Energy shall not select a
different accounting firm than the firm selected by Southern to audit
its financial statements to serve as its independent certified public
accountants (the "Southern Energy Auditors") for purposes of providing
an opinion on its consolidated financial statements without Southern's
prior written consent (which shall not be unreasonably withheld).
(b) Date of Auditors' Opinion and Quarterly Reviews. Southern
Energy shall use its reasonable commercial efforts to enable the
Southern Energy Auditors to complete their audit such that they will
date their opinion on Southern Energy's audited annual financial
statements on the same date that Southern's independent certified
public accountants ("Southern's Auditors") date their opinion on
Southern's audited annual financial statements, and to enable Southern
to meet its timetable for the printing, filing and public dissemination
of Southern's annual financial statements. Southern Energy shall use
its reasonable commercial efforts to enable the Southern Energy
Auditors to complete their quarterly review procedures such that they
will provide clearance on Southern Energy's quarterly financial
statements on the same date that Southern's Auditors provide clearance
on Southern's quarterly financial statements.
(c) Annual and Quarterly Financial Statements. Southern Energy
shall provide to Southern on a timely basis all Information that
Southern reasonably requires to meet its schedule for the preparation,
printing, filing, and public dissemination of Southern's annual and
quarterly financial statements. Without limiting the generality of the
foregoing, Southern Energy will provide all required financial
Information with respect to
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Southern Energy and its Subsidiaries to the Southern Energy Auditors in
a sufficient and reasonable time and in sufficient detail to permit the
Southern Energy Auditors to take all steps and perform all reviews
necessary to provide sufficient assistance to Southern's Auditors with
respect to Information to be included or contained in Southern's annual
and quarterly financial statements. Similarly, Southern shall provide
to Southern Energy on a timely basis all Information that Southern
Energy reasonably requires to meet its schedule for the preparation,
printing, filing, and public dissemination of Southern Energy's annual
and quarterly financial statements. Without limiting the generality of
the foregoing, Southern will provide all required financial Information
with respect to Southern and its Subsidiaries to Southern's Auditors in
a sufficient and reasonable time and in sufficient detail to permit
Southern's Auditors to take all steps and perform all reviews necessary
to provide sufficient assistance to the Southern Energy Auditors with
respect to Information to be included or contained in Southern Energy's
annual and quarterly financial statements.
(d) Identity of Personnel Performing the Annual Audit and
Quarterly Reviews. Southern Energy shall authorize the Southern Energy
Auditors to make available to Southern's Auditors both the personnel
who performed or are performing the annual audits and quarterly reviews
of Southern Energy and work papers related to the annual audits and
quarterly reviews of Southern Energy, in all cases within a reasonable
time prior to the Southern Energy Auditors' opinion date, so that
Southern's Auditors are able to perform the procedures they consider
necessary to take responsibility for the work of the Southern Energy
Auditors as it relates to Southern's Auditors' report on Southern's
financial statements, all within sufficient time to enable Southern to
meet its timetable for the printing, filing and public dissemination of
Southern's annual and quarterly statements. Similarly, Southern shall
authorize Southern's Auditors to make available to the Southern Energy
Auditors both the personnel who performed or are performing the annual
audits and quarterly reviews of Southern and work papers related to the
annual audits and quarterly reviews of Southern, in all cases within a
reasonable time prior to Southern's Auditors' opinion date, so that the
Southern Energy Auditors are able to perform the procedures they
consider necessary to take responsibility for the work of Southern's
Auditors as it relates to the Southern Energy Auditors' report on
Southern Energy's statements, all within sufficient time to enable
Southern Energy to meet its timetable for the printing, filing and
public dissemination of Southern Energy's annual and quarterly
financial statements.
(e) Notice of Change in Accounting Principles. Southern Energy
shall give Southern as much prior notice as reasonably practical of any
proposed determination of, or any significant changes in, its
accounting estimates or accounting principles from those in effect on
the Separation Date. Southern Energy will consult with Southern and, if
requested by Southern, Southern Energy will consult with Southern's
Auditors with respect thereto. Southern shall give Southern Energy as
much prior notice as reasonably practical of any proposed determination
of, or any significant changes in, its accounting estimates or
accounting principles from those in effect on the Separation Date.
(f) Conflict with Third-Party Agreements. Nothing in Sections
5.3 and 5.4 shall require Southern Energy to violate any agreement with
any third parties regarding the
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confidentiality of confidential and proprietary information relating to
that third party or its business; provided, however, that in the event
that Southern Energy is required under Sections 5.3 and 5.4 to disclose
any such information, Southern Energy shall use all commercially
reasonable efforts to seek to obtain such customer's consent to the
disclosure of such information.
Section 5.5 Consistency with Past Practices. At all times Southern will
cause Southern Energy before the Separation Date to continue to conduct business
in the ordinary course, including but not limited to acquisitions, divestitures
and project financings, consistent with past practices.
Section 5.6 Payment of Expenses. Southern Energy shall pay all
underwriting fees (other than incentive fees), discounts and commissions
incurred in connection with the IPO. Except as otherwise provided in this
Agreement, the Ancillary Agreements or any other agreement between the parties
relating to the Separation, the IPO or the Distribution, all other out-of-pocket
costs and expenses of the parties hereto in connection with the preparation of
this Agreement and the Ancillary Agreements, the IPO (including underwriting
incentive fees) and the Distribution shall be paid by Southern. Notwithstanding
the foregoing, Southern Energy shall pay any internal fees, costs and expenses
incurred by Southern Energy in connection with the Separation, the IPO and the
Distribution.
Section 5.7 Dispute Resolution. Except as otherwise set forth in any
Ancillary Agreement, resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract, tort, or otherwise
(collectively, "Disputes"), shall be exclusively governed by and settled in
accordance with the provisions of this Section 5.7.
(a) Negotiation. The parties shall make a good faith attempt
to resolve any Dispute arising out of or relating to this Agreement
through negotiation. Within thirty (30) days after notice of a Dispute
is given by either party to the other party, each party shall select
one or more representatives who are vice presidents, senior vice
presidents or executive vice presidents of such party, which
representatives shall meet and make a good faith attempt to resolve
such Dispute and shall continue to negotiate in good faith in an effort
to resolve the Dispute or renegotiate the applicable section or
provision without the necessity of any formal proceedings. If such
representatives fail to resolve a Dispute within thirty (30) days after
the first meeting of the representatives, such Dispute shall be
referred to the chief executive officers of each of the parties for
resolution. During the course of negotiations under this Section
5.7(a), all reasonable requests made by one party to the other for
information, including requests for copies of relevant documents, will
be honored. The specific format for such negotiations will be left to
the discretion of the designated representatives but may include the
preparation of agreed upon statements of fact or written statements of
position furnished to the other party.
(b) Non-Binding Mediation. In the event that any Dispute
arising out of or related to this Agreement is not settled by the
parties within thirty (30) days after the referral of such Dispute to
the chief executive officers of the parties under Section 5.7(a), the
parties will attempt in good faith to resolve such Dispute by
non-binding mediation in accordance with the American Arbitration
Association Commercial Mediation Rules. The
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mediation shall be held within thirty (30) days of the end of such
thirty (30) day negotiation period of the chief executive officers.
Except as provided below in Section 5.7(c), no litigation for the
resolution of such dispute may be commenced until the parties try in
good faith to settle the dispute by such mediation in accordance with
such rules and either party has concluded in good faith that amicable
resolution through continued mediation of the matter does not appear
likely. The costs of mediation shall be shared equally by the parties
to the mediation. Any settlement reached by mediation shall be recorded
in writing, signed by the parties, and shall be binding on them.
(c) Proceedings. Nothing herein, however, shall prohibit
either party from initiating litigation or other judicial or
administrative proceedings if such party would be substantially harmed
by a failure to act during the time that such good faith efforts are
being made to resolve the Dispute through negotiation or mediation. In
the event that litigation is commenced under this Section 5.7(c), the
parties agree to continue to attempt to resolve any Dispute according
to the terms of Sections 5.7(a) and 5.7(b) during the course of such
litigation proceedings under this Section 5.7(c).
Section 5.8 Governmental Approvals. The parties acknowledge that
certain of the transactions contemplated by this Agreement and the Ancillary
Agreements are subject to certain conditions established by applicable
government regulations, orders, and approvals ("Existing Authority"). The
parties intend to implement this Agreement, the Ancillary Agreements and the
transactions contemplated thereby consistent with and to the extent permitted by
Existing Authority and to cooperate toward obtaining and maintaining in effect
such Governmental Approvals as may be required in order to implement this
Agreement and each of the Ancillary Agreements as fully as possible in
accordance with their respective terms. To the extent that any of the
transactions contemplated by this Agreement or any Ancillary Agreement require
any Governmental Approvals, the parties will use their reasonable commercial
efforts to obtain any such Governmental Approvals.
Section 5.9 Regulatory Proceedings. For a period of eighteen (18)
months after the Distribution Date, neither Southern Energy nor any Subsidiary
of Southern Energy will initiate, intervene in, or participate in any
proceedings or matter before the Federal Energy Regulatory Commission or any
agency or legislature of the States of Alabama, Florida, Georgia or Mississippi
which directly involves (1) corporate transactions or (2) the generation,
transmission, distribution, purchase or sale of electric power by Southern or
any of its Subsidiaries unless prior written consent is given by Southern,
except to the extent that any such proceedings or matters involve obligations
arising under this Agreement or any of the Ancillary Agreements, or to the
extent any such proceeding or matter directly involves a contract or agreement
for the purchase or sale of electricity or gas by Southern Energy or any
Subsidiary of Southern Energy, or to the extent any such proceeding before the
Federal Energy Regulatory Commission involves the transmission of electricity,
except for a proceeding to establish a regional transmission organization in
which Southern or any of its Subsidiaries is a participant.
Section 5.10 Regulatory Effect of Distribution. Southern and Southern
Energy intend that the Distribution will result in Southern Energy and its
Subsidiaries losing their status under the Public Utility Holding Company Act of
1935 ("PUHCA") as "affiliates" or "subsidiaries" of Southern or its
Subsidiaries. To the extent a doubt arises as to that legal effect, at the
request of either, Southern and Southern Energy shall cooperate in resolving
such doubt to achieve that mutual goal through reasonable changes in business
practices, cooperating towards regulatory or judicial filings or proceedings or
obtaining no-action letter relief. Without limiting the foregoing, in the event
Southern owns less than 20% of the outstanding common stock of Southern Energy
at any time while PUHCA continues to be in effect, Southern shall, at Southern's
Energy request, enter into voting trust agreements or voting covenants designed
to eliminate attribution of voting securities control to Southern to the extent
necessary to cause Southern Energy and its Subsidiaries to lose their status
under PUHCA as "affiliates" or "subsidiaries" of Southern or its Subsidiaries.
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Section 5.11 HoldCo Transaction. Prior to the Distribution Date and as
promptly as practicable following the receipt of all required Governmental
Approvals and any required consents or approvals of any lender to Southern or
Southern Energy or its Subsidiaries, (a) Southern Energy and Southern shall
cause SE Finance and SE Capital Funding to be transferred to Southern, in
substantially the manner set forth on Schedule 5.11(a) or in such other manner
as Southern and Southern Energy may agree, and each of Southern and Southern
Energy shall execute and deliver any and all instruments of transfer, stock
transfer powers or other agreements or documents and take such actions as may be
necessary to effectively transfer SE Finance and SE Capital Funding to Southern
in such manner, and to permit Southern and its Subsidiaries to exercise all
rights with respect thereto, and (b) Southern and Southern Energy shall execute
and deliver any and all such instruments of substitution and such other
instruments or agreements as shall be necessary for the obligations of Southern
Energy under the each of the agreements set forth on Schedule 5.11(b) (the
"Keepwell Agreements") to be substituted by Southern and for Southern Energy to
be unconditionally released therefrom, provided that Southern shall not be
required to grant or provide any cash or other consideration in connection with
any such assumption or substitution or assume or otherwise become liable for any
liabilities or obligations which exceed the liabilities or obligations of
Southern Energy under the Keepwell Agreements immediately prior to such
assumption.
Section 5.12. Plant Dahlberg Transaction. Southern and Southern Energy
shall each execute and deliver such documents, agreements and instruments and
take such actions as may be necessary to effect the transactions contemplated in
connection with the Plant Dahlberg Transaction, on substantially the terms
set forth in Schedule 5.12 attached hereto.
Section 5.13. Continuance of Southern Credit Support. Notwithstanding
any other provision of this Agreement or the provisions of any Ancillary
Agreement to the contrary, the parties hereby agree that (i) Southern shall
maintain in full force and effect each guarantee, letter of credit, keepwell or
support agreement or other credit support document, instrument or other similar
arrangement issued for the benefit of any Person in the Southern Energy Group by
or on behalf of Southern (the "Credit Support Arrangements") which is
outstanding as of the Separation Date, until such time as such Credit Support
Arrangement terminates in accordance with its terms or is otherwise released at
the request of Southern Energy; provided, that Southern Energy shall use
commercially reasonable efforts, at the request of Southern, to attempt to
release or replace any Credit Support Arrangement for which such replacement or
release is reasonable available; and (ii) after the IPO Closing Date and until
the Distribution Date, upon the request of Southern Energy, Southern shall issue
additional Credit Support Arrangements for the benefit of Southern Company
Energy Marketing L.P. ("SCEM"); provided, that Southern shall not be obligated
to issue any such additional Credit Support Arrangements to the extent that the
aggregate amount of all outstanding Credit Support Arrangements for the benefit
of SCEM would exceed $425,000,000; provided further, that Southern shall not be
required to provide any such additional Credit Support Arrangements on
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terms that are materially more burdensome to Southern than the terms of the
Credit Support Arrangements outstanding on the date of this Agreement; and
provided, further, that Southern may condition such additional Credit Support
Arrangements such that they may expire approximately six (6) months following
the Distribution. In consideration of Southern's provision of the Credit Support
Arrangements, Southern Energy shall pay to Southern, beginning on the
Distribution Date, a monthly fee in an amount equal to 1% per annum, payable in
arrears on the first day of each month on the average aggregate maximum
principal amount of all Credit Support Arrangements outstanding during such
month.
Section 5.14. Mobile Facility. Southern and Southern Energy shall
continue discussions following the Separation Date regarding the appropriate
ownership and operation of the Mobile, Alabama cogeneration facility, including
the possibility of an incentive-based operating agreement with a Southern Energy
Subsidiary.
Section 5.15 Assignment of Agreements. Effective as of the Separation
Date, Southern shall assign, transfer, convey and deliver to Southern Energy,
and agrees to cause its applicable Subsidiaries to assign, transfer, convey and
deliver to Southern Energy's applicable Subsidiaries, and Southern Energy hereby
accepts from Southern, and agrees to cause its applicable Subsidiaries to accept
from Southern's applicable Subsidiaries, all of Southern's and its applicable
Subsidiaries' respective right, title and interest in and to the documents and
agreements listed on Schedule 5.15 attached hereto (each an "Assigned
Agreement"). To the extent that Southern's or its applicable Subsidiaries'
respective right, title and interest in and to any Assigned Agreement may not be
assigned without the consent of another Person which consent has not been
obtained, this provision shall not constitute an agreement to assign the same if
an attempted assignment would constitute a breach thereof or be unlawful, and
Southern shall use its commercially reasonable efforts to obtain any such
required consent(s) by the Distribution Date. The parties agree that if any
consent to an assignment of any Assigned Agreement shall not be obtained or if
any attempted assignment would be ineffective or would impair Southern Energy's
or its applicable Subsidiaries' rights and obligations under such Assigned
Agreement, such that Southern Energy would not in effect acquire the benefit of
all such rights and obligations, Southern, to the maximum extent permitted by
law and such Assigned Agreement, shall enter into such reasonable arrangements
with Southern Energy as are necessary to provide Southern Energy or its
applicable Subsidiary with the benefits and obligations of such Assigned
Agreement from the Separation Date. The parties shall cooperate and shall each
use their commercially reasonable efforts after the Separation Date to obtain an
assignment of such Assigned Agreement to Southern Energy.
Section 5.16 Southern Energy Board Representation. At any time after
the Separation Date, if and for so long as Southern shall beneficially own
(within the meaning of Rule 13d-3 under the Exchange Act) shares of Southern
Energy common stock which at such time represent more than 25% of the
outstanding shares of Southern Energy common stock and less than 50% of such
outstanding shares, Southern shall be entitled to designate two of the nominees
of the Board of Directors of Southern Energy for election to such Board at each
annual meeting of Southern Energy's shareholders, provided that such number of
designees shall be reduced by the number of persons then serving on the Southern
Energy Board
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in any class of directors that is not up for election at such annual meeting who
are then also serving as officers or directors of Southern.
ARTICLE VI
MISCELLANEOUS
Section 6.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL ANY MEMBER OF
THE SOUTHERN GROUP OR SOUTHERN ENERGY GROUP BE LIABLE TO ANY OTHER MEMBER OF THE
SOUTHERN GROUP OR SOUTHERN ENERGY GROUP FOR ANY SPECIAL, CONSEQUENTIAL,
INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON
ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS
AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH
PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO THIRD PARTIES AS SET
FORTH IN THE INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT.
Section 6.2 Entire Agreement. This Agreement, the other Ancillary
Agreements and the Exhibits and Schedules referenced or attached hereto and
thereto, constitutes the entire agreement between the parties with respect to
the subject matter hereof and shall supersede all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the subject
matter hereof.
Section 6.3 Governing Law. This Agreement shall be governed and
construed and enforced in accordance with the laws of the State of Delaware as
to all matters regardless of the laws that might otherwise govern under the
principles of conflicts of laws applicable thereto.
Section 6.4 Termination. This Agreement and all Ancillary Agreements
may be terminated and the Distribution abandoned at any time prior to the IPO
Closing Date by and in the sole discretion of Southern without the approval of
Southern Energy. This Agreement may be terminated at any time after the IPO
Closing Date and before the Distribution Date by mutual consent of Southern and
Southern Energy. In the event of termination pursuant to this Section, no party
shall have any liability of any kind to the other party.
Section 6.5 Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and addressed to the attention of
the party's General Counsel at the address of its principal executive office or
such other address as a party may request by notifying the other in writing.
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Section 6.6 Counterparts. This Agreement, including the Schedules and
Exhibits hereto and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
Section 6.7 Binding Effect; Assignment. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective legal
representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. This Agreement may
not be assigned by any party hereto.
Section 6.8 Severability. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to either party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the fullest
extent possible.
Section 6.9 Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement or the Schedules or Exhibits attached hereto are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
Section 6.10 Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to such agreement.
Section 6.11 Authority. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other actions, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
Section 6.12 Interpretation. The headings contained in this Agreement,
in any Exhibit or Schedule hereto and in the table of contents to this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
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Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
Section 6.13 Conflicting Agreements. In the event of conflict between
this Agreement and any Ancillary Agreement or other agreement executed in
connection herewith, the provisions of such other agreement shall prevail.
ARTICLE VII
DEFINITIONS
Section 7.1 Affiliated Company. "Affiliated Company" means, with
respect to Southern, any entity in which Southern holds a 50% or less ownership
interest and, with respect to Southern Energy, any entity in which Southern
Energy holds a 50% or less ownership interest and that is listed on Schedule 7.1
hereto. Schedule 7.1 may be amended from time to time after the date hereof upon
mutual written consent of the parties.
Section 7.2 Ancillary Agreements. "Ancillary Agreements" has the
meaning set forth in Section 2.1 hereof.
Section 7.3 Business Day. "Business Day" means a day other than a
Saturday, a Sunday or a day on which banking institutions located in the State
of Georgia are authorized or obligated by law or executive order to close.
Section 7.4 Code. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
Section 7.5 Commission. "Commission" means the Securities and Exchange
Commission.
Section 7.6 Disputes. "Disputes" has the meaning set forth in Section
5.9 hereof.
Section 7.7 Distribution. "Distribution" has the meaning set forth in
the Recitals hereof.
Section 7.8 Distribution Agent. "Distribution Agent" has the meaning
set forth in Section 4.1 hereof.
Section 7.9 Distribution Date. "Distribution Date" has the meaning set
forth in Section 4.1 hereof.
Section 7.10 Exchange Act. "Exchange Act" means the Securities and
Exchange Act of 1934, as amended.
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Section 7.11 Governmental Approvals. "Governmental Approvals" means any
notices, reports or other filings to be made, or any consents, registrations,
approvals, permits or authorizations to be obtained from, any Governmental
Authority.
Section 7.12 Governmental Authority. "Governmental Authority" shall
mean any federal, state, local, foreign or international court, government,
department, commission, board, bureau, agency, official or other regulatory,
administrative or governmental authority.
Section 7.13 HoldCo Transaction. "HoldCo Transaction" has the meaning
set forth in the Recitals hereof.
Section 7.14 Information. "Information" means information, whether or
not patentable or copyrightable, in written, oral, electronic or other tangible
or intangible forms, stored in any medium, including studies, reports, records,
books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
Section 7.15 IPO. "IPO" has the meaning set forth in the Recitals
hereof.
Section 7.16 IPO Closing Date. "IPO Closing Date" means the date of the
closing of the IPO upon satisfaction of the conditions of Article II hereof,
which is currently scheduled to occur on or prior to [_________, 2000].
Section 7.17 IPO Registration Statement. "IPO Registration Statement"
means the registration statement on Form S-1 pursuant to the Securities Act of
1933, as amended, to be filed with the Commission registering the shares of
common stock of Southern Energy to be issued in the IPO, together with all
amendments thereto.
Section 7.18 NYSE. "NYSE" means the New York Stock Exchange.
Section 7.19 Person. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
Section 7.20 Plant Dahlberg. "Plant Dahlberg" has the meaning set forth
in the Recitals hereof.
Section 7.21 Plant Dahlberg Transaction. "Plant Dahlberg Transaction"
has the meaning set forth in the Recitals hereof.
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Section 7.22 Record Date. "Record Date" means the close of business on
the date to be determined by the Board of Directors of Southern as the record
date for determining the stockholders of Southern entitled to receive shares of
common stock of Southern Energy in the Distribution.
Section 7.23 SE Finance. "SE Finance" means SE Finance Capital
Corporation and its Subsidiaries and Affiliated Companies.
Section 7.24 SE Capital Funding. "SE Capital Funding" means Southern
Energy Capital Funding, Inc. and its Subsidiaries and Affiliated Companies.
Section 7.25 Separation. "Separation" has the meaning set forth in the
Recitals hereof.
Section 7.26 Separation Date. "Separation Date" has the meaning set
forth in Section 1.1 hereof.
Section 7.27 Southern Business. "Southern Business" means any business
of Southern and its Subsidiaries and Affiliated Companies other than (i) the
Southern Energy Business and, (ii) at any time after the Plant Dahlberg
Transaction, Plant Dahlberg.
Section 7.28 Southern Energy Business. "Southern Energy Business" means
(a) the business and operations of Southern Energy, Inc. and its Subsidiaries
and Affiliated Companies, and (b) except as otherwise expressly provided herein,
any terminated, divested or discontinued businesses or operations that at the
time of termination, divestiture or discontinuation primarily related to the
Southern Energy Business as then conducted; provided, that the Southern Energy
Business shall not include the business or operations of HoldCo, SE Finance, SE
Capital Funding or Southern Company Energy Solutions, Inc.
Section 7.29 Southern Energy Group. "Southern Energy Group" means
Southern Energy, each Subsidiary and Affiliated Company of Southern Energy
immediately after the Separation Date and each Person that becomes a Subsidiary
or Affiliate Company of Southern Energy after the Separation Date; provided that
the Southern Energy Group shall not include HoldCo, SE Finance, SE Capital
Funding or Southern Company Energy Solutions, Inc.
Section 7.30 Southern Energy Auditors. "Southern Energy Auditors" means
Southern Energy's independent certified public accountants.
Section 7.31 Southern Group. "Southern Group" means Southern, each
Subsidiary and Affiliated Company of Southern (other than any member of the
Southern Energy Group) immediately after the Separation Date and each Person
that becomes a Subsidiary or an Affiliated Company of Southern after the
Separation Date.
Section 7.32 Southern's Auditors. "Southern's Auditors" means
Southern's independent certified public accountants.
Section 7.33 Subsidiary. "Subsidiary" means with respect to any
specified Person, any corporation, any limited liability company, any
partnership or other legal entity of which such Person or its Subsidiaries owns,
directly or indirectly, more than 50% of the stock or other equity
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interest entitled to vote on the election of the members of the board of
directors or similar governing body. Unless context otherwise requires,
reference to Southern Energy and its Subsidiaries at any time following the
HoldCo Transaction shall not include the subsidiaries of Southern Energy that
will be transferred to Southern in connection with the HoldCo Transaction.
Section 7.34 Troutman Sanders. "Troutman Sanders" means Troutman
Sanders LLP.
Section 7.35 Underwriters. "Underwriters" means the underwriters of the
IPO.
Section 7.36 Underwriting Agreement. "Underwriting Agreement" has the
meaning set forth in Section 3.1(a) hereof.
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WHEREFORE, the parties have signed this Master Separation and Distribution
Agreement effective as of the date first set forth above.
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
By: By:
---------------------------- -----------------------------
Name: Name:
Title: Title:
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Schedule 5.11
HoldCo Transaction
(a) Description of HoldCo Transaction. SE Finance and SE Capital
Funding shall be transferred from Southern Energy to Southern in a manner and
in an order substantially similar to the following:
1. Southern Energy shall create a new wholly-owned subsidiary ("HoldCo").
2. Southern Energy then makes contribution to capital of HoldCo; such
contribution consists of 100% of the common stock of SE Finance and SE
Capital Funding.
3. Southern Company Energy Solutions, Inc. (wholly-owned subsidiary of
Southern) merges with and into HoldCo, with HoldCo as the surviving
corporation. After merger, Southern Energy owns 80% of the stock of
HoldCo and Southern owns 20% of the stock of HoldCo.
4. On or prior to the IPO Closing Date, subject to the receipt of
applicable regulatory and lender approvals and consents, Southern
Energy dividends its 80% interest in HoldCo up to Southern, such that
HoldCo thereby becomes a wholly-owned subsidiary of Southern. In the
event that the dividend occurs after the IPO Closing Date, a preferred
class of Southern Energy stock will be issued to Southern, with right
to receive the dividend of HoldCo shares.
(b) Credit Support to be Substituted for and Released. In connection
with the HoldCo Transaction, the following instruments will be substituted for
by Southern, and Southern Energy will be released from any liability
thereunder:
1. Keep Well Agreement dated December 17, 1998, from Southern Energy to
Southern Energy Finance Company, Inc. and Credit Suisse First Boston,
as agent for the lenders under the Term Loan Agreement and various Note
Purchase Agreements dated of even date therewith.
2. Keep Well Agreement dated November 17, 1999, as amended and restated as
of December 16, 1999, from Southern Energy to SE Finance Capital
Corporation and ING (U.S.) Capital L.L.C., as agent for the lenders
under the Amended and Restated Term Loan Agreement.
<PAGE> 28
Schedule 5.12
Plant Dahlberg Transaction
PLANT DAHLBERG TRANSACTION
PLANT DAHLBERG
TERM SHEET
This Plant Dahlberg Transaction Term Sheet ("Term Sheet") sets forth
key terms and conditions that are proposed to be incorporated into an Asset Sale
Agreement, a Construction, Operation and Maintenance Agreement, a Capacity
Purchase Agreement, and an Interconnection and Site Agreement (collectively the
"Agreements") to be entered into by and between Georgia Power Company ("Georgia
Power") and Southern Energy, Inc. ("Southern Energy" and collectively with
Georgia Power, the "Parties") related to the proposed transfer by Georgia Power
of its Plant Dahlberg generating facility to Southern Energy or a subsidiary of
Southern Energy. This Term Sheet sets out key terms and conditions that the
Parties agree are to be included in any final, mutually executed agreements on
the subject transaction. This Term Sheet is not intended by the Parties to
itself create any binding contractual obligations on either party. Certain
additional material terms would have to be negotiated and agreed upon, and
final, written agreements executed by the parties, before Georgia Power or
Southern Energy would incur any contractual obligations to the other under the
terms of this Term Sheet.
ASSET SALE AGREEMENT.
- Transfer and Payment of Purchase Price. A day before
Southern's final separation and distribution of
Southern Energy stock, Georgia Power Company will
transfer Plant Dahlberg to an LLC to be formed by
Southern Energy for net book value (assumed to be
about $262 million at April 1, 2001).
- Conditions. The transfer will be conditioned upon
obtaining all regulatory approvals necessary to
effectuate the transactions to be implemented under
the Asset Sale Agreement.
- Construction. Prior to the transfer, Georgia Power
will be required to finish construction and testing
of the first eight units in accordance with the
procurement contracts and Prudent Utility Practices.
If the transfer predates commercial operation of the
final two units (Nos. 9 and 10), Georgia Power will
complete construction and testing, and LLC will pay
actual construction costs on a monthly basis.
- Covenants. The ASA will contain standard affirmative
and negative covenants applicable to the period
prior to closing that will require Georgia Power to
operate and maintain the plant in the ordinary
course of business according to Prudent Utility
Practices and will prohibit Georgia Power from
making any adverse distinction between the plant and
other facilities it continues to own.
- First Offer. In the event the LLC desires to sell
the plant (or the owner of the LLC desires to sell
the LLC) to a third party that is not an affiliate
of Southern Energy, the LLC (or such parent company)
will offer Georgia Power the right to purchase the
plant (or LLC) with such offer setting out the key
terms and conditions proposed by the LLC for the
sale. If Georgia Power does not accept such offer
within 60 days, the LLC (or parent company) may
enter into an agreement to sell the plant (or LLC)
to a third party on terms no less favorable (from
the seller's perspective) than the terms offered to
Georgia Power at any time within the 12-month period
following the expiration of such 60-day period. In
the event the plant or LLC is being sold as part of
a portfolio, this provision will apply solely to the
plant or LLC and not to other assets or companies
included in such portfolio.
- Taxes. The LLC will be responsible for property
taxes associated with the ownership of the plant
after the closing.
- Environmental. Provisions reflecting the allocation
of environmental risks described below will be
included.
<PAGE> 29
CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT.
- Construction. If the transfer predates commercial
operation of the final two units (Nos. 9 and 10),
Georgia Power will complete construction, and the
LLC will pay actual construction costs. Georgia
Power will consult and coordinate construction with
the LLC.
- Term. This agreement will become effective upon the
transfer of the facility to the LLC and will
terminate upon the expiration or termination of the
Capacity Purchase Agreement.
- Responsibility for Operations and Maintenance.
Georgia Power will operate and maintain the original
ten units for its own account pursuant to the
Capacity Purchase Agreement, as well as any other
units built at the facility after the closing (the
site is permitted for an additional six combustion
turbines, and common facilities have been sized
accordingly).
- Long Term Service Agreement. The Parties expect that
Georgia Power will enter into a long term service
agreement (the "LTSA") with the manufacturer of the
combustion turbines or other appropriate party to
provide for significant maintenance and spare parts
for the term of this agreement.
- New Units. This agreement will provide for the
proper allocation of O&M expenses and capital
additions to the original ten units and any new
units built by the LLC. The LLC will bear the costs
allocated to operating the new units.
- Access. The LLC will provide Georgia Power access to
the plant for the purpose of performing its
obligations under the O&M agreement. The LLC will
have free and unrestricted access to the plant.
- Operating Standard. Georgia Power will be required
to operate the plant in accordance with Prudent
Utility Practices, the Interconnection and Site
Agreement and the Capacity Purchase Agreement.
Georgia Power will operate the plant in a manner
consistent with its operation of its own units of
the same design.
- Employees. Georgia Power will provide and be solely
responsible for all personnel required to operate
and maintain the plant. All personnel will be
adequately trained by Georgia Power for their
respective positions.
- Environmental. Provisions reflecting the allocation
of environmental risks described below will be
included.
- Assignment. The LLC will be allowed to assign the O&M
Agreement without Georgia Power's consent to (i) a
purchaser, transferee or lessee of substantially all
of its rights and title to the plant, provided that
Southern Energy will remain responsible for providing
the credit support required under the Capacity
Purchase Agreement unless such purchaser, transferee
or lessee provides similar credit support, (ii) an
affiliate of Southern Energy, provided that Southern
Energy will remain responsible for providing the
credit support required under the Capacity Purchase
Agreement unless such affiliate provides similar
credit support, or (iii) a lender or trustee in
connection with financing or refinancing the plant
(including in connection with any remedies under
such financing or refinancing). An assignment made
under clause (i) or (ii) of the preceding sentence
will relieve the LLC of any further obligations to
Georgia Power arising after the date of the
assignment. Georgia Power will be allowed to assign
the O&M Agreement to any affiliate to which it
transfers it rights under the Capacity Purchase
Agreement. If such affiliate provides credit support
for its obligations to the LLC comparable in form and
amount to that required from the LLC, then such an
assignment by Georgia Power will relieve it of any
further obligations to the LLC arising after the date
of the assignment. No other assignment of this
agreement may be made without the other party's
written consent, which may be withheld in its sole
discretion.
<PAGE> 30
- Condition of Plant at Termination. Upon termination
of the O&M Agreement, Georgia Power will be required
to return the plant to the LLC in good operating
condition, usual wear and tear excepted.
CAPACITY PURCHASE AGREEMENT.
- Term. The term of this agreement will be 10 years.
The term will commence following the divestiture by
Southern Company of its ownership of Southern
Energy's common stock.
- Power Purchases and Fuel Supply. Georgia Power (or
the new sixth operating company) will dispatch and
be entitled to the entire output of the initial ten
units and will supply all fuel required by those
units during the term of the Capacity Purchase
Agreement at no cost to the LLC.
- Capacity Payments. Capacity payments will be made by
Georgia Power to the LLC on a monthly basis
beginning with the date on which the Capacity
Purchase Agreement becomes effective. If the
transfer predates completion of Units 9 or 10,
capacity payments for each of those units will
commence upon the later of (i) when that unit is
available for dispatch by Georgia Power or (ii) June
1, 2001.
- Operating Cost Responsibility. Georgia Power will
bear all costs associated with the operation or
maintenance of the plant. The LLC will reimburse
Georgia Power for any such costs that are
capitalized in accordance with generally accepted
accounting principles and consistent with Georgia
Power's standard accounting practices applicable to
like facilities, provided that Georgia Power will
not be reimbursed for costs that were characterized
by Georgia Power as items to be expensed in
preparing the recurring capital table projecting
capital costs for the plant through 2011 that
Georgia Power has provided to Southern Energy.
- Non-Routine Capital Expenses. Georgia Power may
incur capital expenses for the purpose of enhancing
the output of the plant or other non-routine capital
expenses only with the prior approval of the LLC.
Any such capital expense approved by the LLC will
cause the capacity charges for the affected units to
be increased by an amount necessary to recover that
capital and related expenses plus a return on
capital that reflects the LLC's cost of capital
based on a return on equity of 13.5% over the life
of the improvement through a levelized fixed rate
charge.
- Annual Budget. A capital budget for the first
calendar year during which the Capacity Purchase
Agreement will be in effect will be attached to the
agreement. At least 90 days prior to each subsequent
calendar year, Georgia Power will provide the LLC a
proposed capital budget for that contract year for
the review and approval of the LLC. Georgia Power
shall be permitted to include in the annual capital
budget routine capital expenses that are consistent
with Georgia Power's practices on the plants it owns
of similar design. If the parties cannot agree on a
capital budget for that calendar year at least 60
days prior to the start of such year, Georgia Power
shall make only those capital expenditures agreed to
by the LLC until the dispute has been resolved by
binding arbitration by a third party expert, which
will be done on an expedited basis in accordance
with specific procedures to be set forth in this
agreement.
- Force Majeure. During the suspension of performance
due to a Force Majeure event, Georgia Power will be
excused from making monthly capacity payments on a
daily pro-rated and a unit pro-rated basis. Force
Majeure events will not include (i) strikes by
employees of Georgia Power, of its affiliates or of
its onsite subcontractors; (ii) unavailability of
fuel, except where the unavailability is due to a
failure of the LLC's gas transportation facilities
for reasons beyond the control of Georgia Power as
operator; (iii) changes in market conditions that
affect the cost or price of energy or fuel; (iv)
loss of load or disruption of electricity markets;
or (v) difficulty or inability to make payments.
<PAGE> 31
- Forced Outages. For each year through 2004, if
Georgia Power has to pay replacement power costs to
its customers under its currently existing agreements
that reference the plant or specific units of the
plant (the "Georgia Power PPAs") as a result of
forced outages at any of the initial ten units, the
LLC will pay 75% of those costs. For each year after
2004, if Georgia Power has to pay replacement power
costs to its customers under either the Georgia Power
PPAs or any new agreements that reference the plant
or specific units of the plant as a result of forced
outages at any of the initial ten units, the LLC will
with respect to such year pay Georgia Power the
lesser of (i) 75% of the replacement power costs that
Georgia Power actually paid for such year under such
agreements, (ii) 75% of the replacement power costs
that Georgia Power would have paid for such year
under such agreements had the terms of those
agreements (including any new agreements) been the
same as the terms of the Georgia Power PPAs, or (iii)
75% of the average of the annual capacity payments to
be made by Georgia Power under the Capacity Purchase
Agreement for the years after 2004. Georgia Power
will not amend the provisions of the Georgia Power
PPAs addressing availability or liability for
replacement power costs or waive its rights with
respect thereto without the consent of the LLC.
Forced outages shall not include outages caused by
the unavailability of fuel, the quality of fuel, or
gross negligence or willful misconduct by the
operator. If Georgia Power is denied access to or
possession of the ten units for reasons other than
its breach (such as, for example, by order of a
bankruptcy court), the LLC will pay 100% of any such
replacement costs. Georgia Power will provide power
to its customers under the Georgia Power PPAs and
operate its system as if it owned 100% of the plant
and was itself responsible for 100% of such
replacement power costs.
- Credit Support. The LLC's payment obligations under
this agreement will be secured by a guarantee from
Southern Energy, a letter of credit or other
collateral acceptable to Georgia Power capped at
$52.5 million. In the event Southern Energy provides
a guarantee and Southern Energy's debt securities (i)
are rated below "Ba2" by Moody's, (ii) while rated
"Ba2" by Moody's are placed on review for possible
downgrade, (iii) are rated below "BB" by S&P, or (iv)
while rated "BB" by S&P are placed on creditwatch
with negative implications, then Southern Energy
will, upon Georgia Power's request, provide credit
support in the form of a letter of credit or other
collateral acceptable to Georgia Power capped at
$52.5 million in substitution for the Southern Energy
guarantee. If Southern Energy subsequently obtains at
least a "Ba2" rating from Moody's (without being on
review for negative downgrade) and at least a "BB"
rating from S&P (without being on creditwatch with
negative implications), then the alternative credit
support may be replaced by a guarantee from Southern
Energy (capped at $52.5 million). In the event the
plant or the LLC is sold to a third party, Southern
Energy will remain responsible for providing such
credit support unless the third party provides
similar credit support reasonably acceptable to
Georgia Power. If Georgia Power assigns this
agreement to an affiliate and such affiliate provides
credit support to the LLC comparable in form and
amount to that provided by the LLC as described
above, then Georgia Power will be relieved of its
obligations to the LLC from the date of such
assignment.
<PAGE> 32
- Environmental. Georgia Power will be required to
make O&M and capital expenditures to comply with
changes in environmental laws or regulations and use
commercially reasonable efforts to recover such
costs from purchasers under provisions in the
Georgia Power PPAs. The LLC will be responsible for
such O&M and capital expenditures to the extent such
expenses cannot be recovered from Georgia Power's
customers. Georgia Power may not amend any
pass-through provisions or waive its rights to pass
through such costs to its customers without the
LLC's prior consent.
- Assignment. This agreement will have the same
assignment provisions as are described under the O&M
Agreement above.
INTERCONNECTION AND SITE AGREEMENT.
- Interconnection Point. This agreement will specify
the point of physical interconnection between the
230KV line from the plant and the Center substation.
- Interconnection Service. Under this agreement,
Georgia Power and any successor will agree to
provide interconnection service to its transmission
system for all units at the plant for the life of
the plant.
- Construction. Georgia Power will be required to
finish construction and testing of the
interconnection facilities.
- Ownership and O&M. The interconnection facilities
will be owned, operated and maintained by the LLC.
- Assignment. This agreement will have the same
assignment provisions as are described under the O&M
Agreement above.
PLANT DAHLBERG ENVIRONMENTAL PROVISIONS. These environmental liability
assumption and indemnification provisions may appear in a separate Plant
Dahlberg agreement (as described above) or in a separate environmental matters
agreement.
- The LLC will be responsible for any incident
occurring prior to Georgia Power's acquisition of
the plant site.
- Georgia Power will be responsible for any incident
occurring during the period commencing on its
acquisition of the plant site through the date it
transfers the plant to the LLC.
- Georgia Power will indemnify the LLC for any costs
or liability related to environmental conditions
created by Georgia Power while it is operating the
plant. The LLC will indemnify Georgia Power for any
costs or liabilities related to environmental
conditions at the plant that do not arise out of
Georgia Power's actions as operator.
- Upon return of possession of the plant following the
ten-year O&M agreement, Southern Energy will be
responsible for any subsequent incidents.
- As set out above, the Capacity Purchase Agreement
will require Georgia Power to make O&M and capital
expenditures to comply with changes in environmental
laws or regulations and use reasonable commercial
efforts to recover such costs from purchasers under
provisions in the Georgia Power PPAs. The LLC will be
responsible for such O&M and capital expenditures to
the extent such expenses cannot be recovered from
Georgia Power's customers.
<PAGE> 33
Schedule 5.15
Transferred Agreements
<PAGE> 34
Schedule 7.1
Southern Energy Affiliated Companies
Each Affiliated Company listed on Exhibit 21.1 to the in the final
prospectus filed by Southern Energy with the SEC pursuant to Rule 424(b) under
the Securities Act of 1933, as amended, in connection with the IPO; other than
SE Finance and SE Capital Funding.
<PAGE> 1
EXHIBIT 10.2
FORM OF
TRANSITIONAL SERVICES AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 DEFINITIONS.............................................................................................1
1.1 Additional Services.......................................................................................1
1.2 Ancillary Agreements......................................................................................1
1.3 Claims....................................................................................................1
1.4 Confidential Disclosure Agreement.........................................................................1
1.5 Distribution Date.........................................................................................1
1.6 Engineering and Technical Services........................................................................1
1.7 Impracticable.............................................................................................1
1.8 Master Separation And Distribution Agreement..............................................................1
1.9 Separation Date...........................................................................................1
1.10 Service(s)...............................................................................................2
1.11 Subsidiary...............................................................................................2
1.12 Warranty.................................................................................................2
ARTICLE 2 TRANSITION SERVICE SCHEDULES............................................................................2
ARTICLE 3 SERVICES................................................................................................2
3.1 Services Generally........................................................................................2
3.2 Service Parameters........................................................................................3
3.3 Impracticability..........................................................................................3
3.4 Additional Resources......................................................................................3
3.5 Additional Services.......................................................................................3
3.6 Further Obligations As To Services........................................................................3
3.7 Service Representatives...................................................................................3
ARTICLE 4 TERM....................................................................................................4
ARTICLE 5 COMPENSATION............................................................................................4
5.1 Charges For Services......................................................................................4
5.2 Payment Terms.............................................................................................5
5.3 Performance Under Ancillary Agreements....................................................................5
5.4 Error Correction; True-Ups; Accounting....................................................................5
5.5 Pricing Adjustments.......................................................................................5
ARTICLE 6 GENERAL OBLIGATIONS; STANDARD OF CARE...................................................................5
6.1 Performance Metrics.......................................................................................5
6.2 DISCLAIMER OF WARRANTIES..................................................................................5
6.3 Performance Metrics: Southern Energy......................................................................6
6.4 Transitional Nature Of Services; Changes..................................................................6
6.5 Responsibility For Errors; Delays.........................................................................6
6.6 Good Faith Cooperation; Consents..........................................................................6
ARTICLE 7 TERMINATION.............................................................................................7
7.1 Early Termination.........................................................................................7
7.2 Survival..................................................................................................7
ARTICLE 8 RELATIONSHIP BETWEEN THE PARTIES........................................................................7
ARTICLE 9 SUBCONTRACTORS..........................................................................................7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 10 INTELLECTUAL PROPERTY..................................................................................8
ARTICLE 11 ENGINEERING AND TECHNICAL SERVICES.....................................................................8
11.1 Engineering and Technical Services.......................................................................8
11.2 Professional Responsibility Regarding Engineering and Technical Services.................................8
11.3 Applicable Laws and Regulations..........................................................................9
11.4 Insurance................................................................................................9
11.5 Reuse of Documents.......................................................................................9
11.6 Non-Restrictive Relationship.............................................................................9
ARTICLE 12 CONFIDENTIALITY........................................................................................9
ARTICLE 13 LIMITATION OF LIABILITY...............................................................................10
ARTICLE 14 FORCE MAJEURE.........................................................................................10
ARTICLE 15 DISPUTE RESOLUTION....................................................................................10
15.1 Mediation...............................................................................................10
15.2 Arbitration.............................................................................................11
15.3 Court Action............................................................................................11
15.4 Continuity Of Service And Performance...................................................................11
ARTICLE 16 MISCELLANEOUS.........................................................................................11
16.1 Entire Agreement........................................................................................11
16.2 Existing Services Agreements............................................................................11
16.3 Governing Law...........................................................................................11
16.4 Descriptive Headings....................................................................................12
16.5 Notices.................................................................................................12
16.6 Nonassignability; Third-Party Beneficiaries.............................................................12
16.7 Severability............................................................................................13
16.8 Failure Or Indulgence Not Waiver; Remedies Cumulative...................................................13
16.9 Amendment...............................................................................................13
</TABLE>
<PAGE> 4
TRANSITIONAL SERVICES AGREEMENT
THIS TRANSITIONAL SERVICES AGREEMENT (the "Agreement") dated [________,
2000], between The Southern Company, a Delaware corporation ("Southern"),
having an office at 270 Peachtree Street, Atlanta, Georgia 30303 and Southern
Energy, Inc., a Delaware corporation ("Southern Energy"; Southern Energy and
Southern each being referenced herein individually as a "Party," and
collectively as the "Parties"), having an office at 900 Ashwood Parkway, Suite
500, Atlanta, Georgia 30338.
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, the following capitalized terms shall
have the following meanings:
1.1 Additional Services. "Additional Services" shall have the meaning set
forth in Section 3.5.
1.2 Ancillary Agreements. "Ancillary Agreements" shall have the meaning set
forth in the Master Separation and Distribution Agreement.
1.3 Claims. "Claims" shall have the meaning set forth in Section 11.6.2.
1.4 Confidential Disclosure Agreement. "Master Confidential Disclosure
Agreement" shall mean that certain Master Confidential Disclosure Agreement
between Southern and Southern Energy.
1.5 Distribution Date. "Distribution Date" shall have the meaning set forth
in the Master Separation and Distribution Agreement.
1.6 Engineering and Technical Services. "Engineering and Technical
Services" shall have the meaning set forth in Section 11.1.
1.7 Impracticable. "Impracticable" shall have the meaning set forth in
Section 3.3.
1.8 Master Separation And Distribution Agreement. "Master Separation and
Distribution Agreement" shall mean that certain Master Separation and
Distribution Agreement between Southern and Southern Energy.
1.9 Separation Date. Unless otherwise provided in this Agreement, or in any
agreement to be executed in connection with this Agreement, the effective time
and date of each action or agreement in connection with the Separation shall be
[12:01 a.m., Eastern Time, July 1, 2000] or such other date as may be fixed by
the Board of Directors of Southern (the "Separation Date").
1
<PAGE> 5
1.10 Service(s). "Service(s)" shall have the meaning set forth in Section
3.1 and includes the Engineering and Technical Services.
1.11 Subsidiary. "Subsidiary" of any Party means a corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Party or by any one or more
of its Subsidiaries, or by such Party and one or more of its Subsidiaries;
provided, however, that no Party that is not directly or indirectly wholly-owned
by any other Party shall be a Subsidiary of such other Party unless such other
Party controls, or has the right, power or ability to control, that Party. For
purposes of this Agreement, Southern Energy shall be deemed not to be a
subsidiary of Southern.
1.12 Warranty. "Warranty" shall have the meaning set forth in Section
11.2.1.
ARTICLE 2
TRANSITION SERVICE SCHEDULES
This Agreement will govern individual transitional services as requested by
Southern Energy and its Subsidiaries and provided by Southern and its
Subsidiaries, the details of which shall be set forth in the Transition Service
Schedules attached to this Agreement. Each Service shall be covered by this
Agreement upon execution of a transition service schedule in the form attached
hereto (each transition service schedule, a "Transition Service Schedule").
The Parties shall set forth the terms for each Service on the applicable
Transitional Service Schedule, which may include, but are not limited to, the
time period during which the Service will be provided if different from the term
of this Agreement determined pursuant to Article 4 hereof, a summary of the
Service to be provided; a description of the Service; and the estimated
charge(s), if applicable, for the Service and any other terms applicable thereto
on the Transition Service Schedule. Obligations under each Transition Service
Schedule shall be effective upon the later of the execution of this Agreement or
the execution of the respective Transition Services Schedule. This Agreement
shall be deemed to include all the Transition Service Schedules wherever
reference to it is made.
ARTICLE 3
SERVICES
3.1 Services Generally. Except as otherwise provided herein, for the term
determined pursuant to Article 4 hereof, Southern shall provide or cause to be
provided to Southern Energy the service(s) described in the Transition Service
Schedule(s) attached hereto, beginning on the Separation Date (the "Effective
Date"). The service(s) described on a single Transition Service Schedule shall
be referred to herein as a "Service." Collectively, the services described
on all the Transition Service Schedules (including Additional Services and
Engineering and Technical Services) shall be referred to herein as "Services."
2
<PAGE> 6
3.2 Service Parameters. (i) Southern shall provide the Services only to the
extent and under the personnel availability conditions such Services are being
provided by Southern for Southern Energy immediately prior to the Effective
Date; and (ii) the Services will be available only for purposes of conducting
the business of Southern Energy substantially in the manner it was conducted
prior to the Effective Date.
3.3 Impracticability. Southern shall not be required to provide any Service
to the extent the performance of such Service becomes "Impracticable" as a
result of a cause or causes outside the reasonable control of Southern, or to
the extent the performance of such Services would require Southern to violate
any applicable laws, rules or regulations or would result in the breach of any
agreement or other applicable contract.
3.4 Additional Resources. In providing the Services, Southern
shall not be obligated to: (i) hire any additional employees; (ii) maintain the
employment of any specific employee; (iii) purchase, lease or license any
additional equipment or materials; or (iv) pay any costs related to the transfer
or conversion of Southern Energy's data to Southern Energy or any alternate
supplier of Services.
3.5 Additional Services. From time to time after the Effective Date, the
Parties may agree to identify additional Services that Southern will provide to
Southern Energy in accordance with the terms of this Agreement (the "Additional
Services"). In such event, the Parties shall execute additional Transition
Service Schedules for such Additional Services pursuant to Article 2. Except as
set forth in Section 3.6, the Parties may agree in writing on Additional
Services during the term of this Agreement.
3.6 Further Obligations As To Services. Subject to the provisions of
Sections 3.2, 3.3 and 3.4 and otherwise except as set forth in the next
sentence, Southern shall perform, at a charge determined using the principles
for determining fees under Section 5.1, any Service that: (a) was provided by
Southern immediately prior to the Separation Date and which was inadvertently or
unintentionally omitted from the list of Services included in Transition Service
Schedules executed at the time of execution of this Agreement, or (b) is
essential to effectuate an orderly transition under the Master Separation and
Distribution Agreement unless such performance would significantly disrupt
Southern's operations or materially increase the scope of its responsibility
under this Agreement. If Southern reasonably believes the performance of
Services requested under subparagraphs (a) or (b) would significantly disrupt
its operations or materially increase the scope of its responsibility under this
Agreement, Southern and Southern Energy shall negotiate in good faith to
establish terms under which Southern can provide such Services, but Southern
shall not be obligated to provide such Services if, following good faith
negotiation, it is unable to reach agreement on such terms.
3.7 Service Representatives. The Parties shall each appoint a
representative with respect to each Service (each a "Service Representative"),
which Service Representative shall coordinate the requesting, coordination,
scheduling and delivery of such Service. Unless
3
<PAGE> 7
otherwise indicated on the Transition Service Schedule for a Service, the
Party's respective Service Representatives for such Service shall be the persons
set forth on Schedule 3.7 as being responsible for such Service and certain
other related Services (each such person being a "Senior Representative"). Each
Senior Representative shall additionally be responsible for the replacement or
substitution, as necessary, of any Service Representatives for such Senior
Representative's assigned Services, and shall coordinate any requests for
changes in the scope of such Services, or for the provision of any additional
related Services, with such Senior Representative's counterpart with the other
Party. Either Party may nominate a substitute Service Representative for itself
with respect to a Service at any time upon reasonable notice to the other Party.
Any request for a Service made by Southern Energy through any person other than
Southern Energy's Senior Representative or Service Representative with respect
to such Service shall not be binding upon Southern.
ARTICLE 4
TERM
The term of this Agreement shall commence on the Effective Date and shall
remain in effect until two (2) years after the Effective Date (the "Expiration
Date"), unless earlier terminated under Article 7. This Agreement may be
extended by the Parties in writing, either in whole or with respect to one or
more of the Services; provided, however, that such extension shall only apply to
the Services for which the Agreement was extended. At least six (6) months prior
to the Expiration Date, Southern Energy shall give Southern written notice, in
accordance with the provisions of Section 16.4, of Southern Energy's request to
extend the term of the Agreement in respect of any Services. In addition, the
Parties shall be deemed to have extended this Agreement with respect to a
specific Service if the Transition Service Schedule for such Service specifies a
completion or termination date beyond the aforementioned Expiration Date. The
Parties may agree on an earlier expiration date respecting a specific Service by
specifying such date on the Transition Service Schedule for that Service.
Services shall be provided up to and including the date set forth in the
applicable Transition Service Schedule, subject to earlier termination as
provided herein.
ARTICLE 5
COMPENSATION
5.1 Charges For Services. Charges for Services shall be based upon the
greater of (a) the full cost of providing the Services, including direct costs
and indirect costs, or (b) the market value of such Services. Southern Energy
shall pay Southern the charges, if any, set forth on the Transition Service
Schedules for each of the Services listed therein as adjusted, from time to
time, in accordance with the processes and procedures established under Section
5.4 and Section 5.5 hereof. The Parties shall use good faith efforts to discuss
any situation in which the actual charge for a Service is reasonably expected to
exceed the estimated charge, if any, set forth on a Transition Service Schedule
for a particular Service; provided, however, that the incurrence of charges in
excess of any such estimate on such Transition Service Schedule shall not
justify stopping the provision of, or payment for, Services under this
Agreement.
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<PAGE> 8
5.2 Payment Terms. Southern shall bill Southern Energy monthly for all
charges pursuant to this Agreement. Such bills shall be accompanied by
reasonable documentation or other reasonable explanation supporting such
charges. Southern Energy shall pay Southern for all Services provided hereunder
within thirty (30) days after receipt of an invoice therefor. Late payments
shall bear interest at the lesser of 18% per annum or the maximum rate allowed
by law.
5.3 Performance Under Ancillary Agreements. Notwithstanding anything to the
contrary contained herein, Southern Energy shall not be charged under this
Agreement for any obligations that are specifically required to be performed
under the Master Separation and Distribution Agreement or any other Ancillary
Agreement and any such other obligations shall be performed and charged for (if
applicable) in accordance with the terms of the Master Separation and
Distribution Agreement or such other Ancillary Agreement.
5.4 Error Correction; True-Ups; Accounting. The Parties shall reasonably
agree on a process and procedure for conducting internal audits and making
adjustments to charges as a result of the movement of employees and functions
between Parties, the discovery of errors or omissions in charges, as well as a
true-up of amounts owed. In no event shall such processes and procedures extend
beyond two (2) years after completion of a Service.
5.5 Pricing Adjustments. In the event of a tax or regulatory audit
adjustment relating to the pricing of any or all Services provided pursuant to
this Agreement in which it is determined by a taxing or regulatory authority
that any of the charges, individually or in combination, did not result in an
arm's-length payment, as determined under internationally accepted arm's-length
standards, then the Parties, including any Southern subcontractor providing
Services hereunder, may agree to make corresponding adjustments to the charges
in question for such period to the extent necessary to achieve arm's-length
pricing. Any adjustment made pursuant to this Section 5.5 at any time during the
term of this Agreement or after termination of this Agreement shall be reflected
in the Parties' legal books and records, and the resulting underpayment or
overpayment shall create, respectively, an obligation to be paid in the manner
specified in Section 5.2, or shall create a credit against amounts owed under
this Agreement.
ARTICLE 6
GENERAL OBLIGATIONS; STANDARD OF CARE
6.1 Performance Metrics: Southern. Subject to Sections 3.2, 3.3, 3.4 and
any other terms and conditions of this Agreement, Southern shall perform its
obligations hereunder in a commercially reasonable manner. Specific performance
metrics for Southern for a specific Service may be set forth in the
corresponding Transition Service Schedule. Where none is set forth, Southern
shall use reasonable efforts to provide Services in accordance with its
policies, procedures and practices in effect before the Effective Date and shall
exercise the same care and skill as it exercises in performing similar services
for itself.
6.2 DISCLAIMER OF WARRANTIES. EXCEPT AS OTHERWISE SET FORTH HEREIN SOUTHERN
MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF
5
<PAGE> 9
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
SERVICES OR OTHER DELIVERABLES PROVIDED BY IT HEREUNDER.
6.3 Performance Metrics: Southern Energy. Specific performance metrics for
Southern Energy for a specific Service may be set forth in the corresponding
Transition Service Schedule. Where none is set forth, Southern Energy shall use
reasonable efforts, in connection with receiving Services, to follow the
policies, procedures and practices in effect before the Effective Date including
providing information and documentation sufficient for Southern to perform the
Services as they were performed before the Effective Date and making available,
as reasonably requested by Southern, sufficient resources and timely decisions,
approvals and acceptances in order that Southern may accomplish its obligations
hereunder in a timely manner.
6.4 Transitional Nature Of Services; Changes. The Parties acknowledge the
transitional nature of the Services and agree that Southern may make changes
from time to time in the manner of performing the Services if Southern is making
similar changes in performing similar services for itself and its subsidiaries
and if Southern furnishes to Southern Energy thirty (30) days written notice
regarding such changes.
6.5 Responsibility For Errors; Delays. Southern's sole responsibility to
Southern Energy:
(a) for errors or omissions in Services (except for Engineering and
Technical Services provided for in Article 11), shall be to furnish correct
information, payment and/or adjustment in the Services, at no additional cost or
expense to Southern Energy; provided, Southern Energy must promptly advise
Southern of any such error or omission of which it becomes aware after having
used reasonable efforts to detect any such errors or omissions in accordance
with the standard of care set forth in Section 6.3; and
(b) for failure to deliver any Service because of Impracticability,
shall be to use reasonable efforts, subject to Section 3.2, 3.3 and Section 3.4,
to make the Services available and/or to resume performing the Services as
promptly as reasonably practicable.
6.6 Good Faith Cooperation; Consents. The Parties will use good faith
efforts to cooperate with each other in all matters relating to the provision
and receipt of Services. Such cooperation shall include exchanging information,
performing true-ups and adjustments, and obtaining all third party consents,
licenses, sublicenses or approvals necessary to permit each Party to perform its
obligations hereunder (including by way of example, not by way of limitation,
rights to use third party software needed for the performance of Services). The
costs of obtaining such third party consents, licenses, sublicenses or approvals
shall be borne by Southern Energy. Each Party will maintain, in accordance with
its standard document retention procedures, documentation supporting the
information relevant to cost calculations and cooperate with each other in
making such information available as needed in the event of a tax audit, whether
in the United States or any other country.
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<PAGE> 10
ARTICLE 7
EARLY TERMINATION
7.1 Early Termination. Southern Energy may terminate this Agreement, either
with respect to all or with respect to any one or more of the Services provided
to Southern Energy hereunder, for any reason or for no reason, at any time upon
one hundred eighty (180) days prior written notice to Southern. Southern may
terminate this Agreement if Southern Energy fails to pay any amount which is due
and payable in respect of any Service in accordance with the provisions of
Section 5.2 hereof, and Southern Energy does not cure such breach within ten
(10) days after being given notice of such breach. In addition, subject to the
provisions of Article 15 below, either Party may terminate this Agreement with
respect to a specific Service if the other Party materially breaches a material
provision with regard to that particular Service (other than for nonpayment) and
does not cure such breach (or does not take reasonable steps required under the
circumstances to cure such breach going forward) within sixty (60) days after
being given notice of the breach; provided, however, that the non-terminating
Party may request that the Parties engage in a dispute resolution negotiation as
specified in Article 15 below prior to termination for breach.
7.2 Survival. Those Sections of this Agreement that, by their nature, are
intended to survive termination will survive in accordance with their terms.
Notwithstanding the foregoing, in the event of any termination with respect to
one or more, but less than all Services, this Agreement shall continue in full
force and effect with respect to any Services not terminated hereby.
ARTICLE 8
RELATIONSHIP BETWEEN THE PARTIES
The relationship between the Parties established under this Agreement is
that of independent contractors and neither Party is an employee, agent,
partner, or joint venturer of or with the other. Southern will be solely
responsible for the payment of any employment-related taxes, insurance premiums
or other employment benefits in respect of the performance of Services by
Southern personnel under this Agreement. Southern Energy agrees to grant
Southern personnel access to sites, systems and information (subject to the
provisions of confidentiality in Article 12 below) as necessary for Southern to
perform its obligations hereunder. Southern Energy shall inform Southern
personnel of, and Southern personnel agree to obey, any and all security
regulations and other published policies of Southern Energy.
ARTICLE 9
SUBCONTRACTORS
Southern may engage a "Subcontractor" to perform all or any portion of
Southern's duties under this Agreement, provided that any such Subcontractor
agrees in writing to be bound by confidentiality obligations at least as
protective as the terms of Article 13 regarding confidentiality below, and
provided further that Southern remains responsible for the performance of such
Subcontractor. As used in this Agreement, "Subcontractor" will mean any
individual, partnership, corporation, firm, association, unincorporated
organization, joint venture, trust or other entity engaged to perform hereunder,
other than Southern and its Subsidiaries.
7
<PAGE> 11
ARTICLE 10
INTELLECTUAL PROPERTY
Except as otherwise set forth herein, the terms of the Technology and
Intellectual Property Ownership and License Agreement between the Parties, a
copy of which is attached as an exhibit to the Master Separation and
Distribution Agreement, shall govern the use and ownership of any Technology (as
defined therein) and any patents, trademarks, or other intellectual property
transferred, licensed used or created in connection with the Services or
otherwise under this Agreement.
ARTICLE 11
ENGINEERING AND TECHNICAL SERVICES
11.1 Engineering and Technical Services. Pursuant to the terms of this
Agreement, Southern shall provide certain engineering, technical and consulting
Services to Southern Energy from time to time in connection with the
development, construction, ownership, maintenance and operation of electric
generating, transmission and distribution facilities, including, but not limited
to, technical and field services, engineering and generation technical services,
fuel procurement and related services and environmental services (the
"Engineering and Technical Services"); provided, however, that Southern shall
not be required to provide any Engineering and Technical Service if the
provision of such Engineering and Technical Service, in Southern's reasonable
discretion, would be in violation of Southern's fiduciary duties to its
shareholders or customers.
11.2 Professional Responsibility Regarding Engineering and Technical
Services.
11.2.1 Standard of Care/Warranty. In the performance of Engineering
and Technical Services under this Agreement, Southern shall exercise due
care to assure that the Services are provided in a workmanlike manner, and
that such Services meet the standards and specifications set forth in the
applicable Transitional Service Schedule. Southern hereby warrants that all
Engineering and Technical Services provided hereunder will comply with the
foregoing standard of care (the "Warranty").
11.2.2 Warranty Cure. If Southern Energy discovers that any part of
the Engineering and Technical Services fail to meet the Warranty, Southern
Energy will notify Southern of such failure. Southern's sole obligation for
failing to meet the Warranty shall be to reperform the Engineering and
Technical Services thereunder at cost (direct cost plus indirect costs)
such that it fully complies with the Transitional Service Schedule and
applicable laws and regulations. Southern Energy will bear all costs and
expenses incurred by Southern in association with curing any Warranted
Engineering and Technical Services, except where the failure to meet the
Warranty with respect to any Engineering and Technical Services is due to
any willful misconduct on the part of Southern or its employees, agents,
contractors or subcontractors, in which case such costs and expenses shall
be borne by Southern. Southern makes no other
8
<PAGE> 12
warranties with respect to its performance of the Services, and Southern
Energy agrees to accept such services without further warranties of any
nature.
11.3 Applicable Laws and Regulations. Southern shall comply with all
national, federal, provincial, state and local laws, decrees, regulations and
ordinances (including without limitation those of any local jurisdiction in
which Engineering and Technical Services are performed) including, without
limitation, those pertaining to the environment, health, safety, sanitary
facilities, waste disposal and other matters applicable to or affecting the
performance of Engineering and Technical Services that are published and in
effect at the time particular Engineering and Technical Services are rendered.
Southern Energy shall inform Southern of, and Southern shall ensure that its
employees, agents and subcontractors comply with, site rules and regulations
while on the premises of any Southern Energy property or project.
11.4 Insurance. During the course of performance of any Engineering and
Technical Services following the Distribution Date, Southern will obtain and
maintain in full force and effect insurance substantially in accordance with,
and meeting the requirements set forth in, Schedule 11.4 attached hereto.
Promptly after the execution hereof Southern shall furnish Southern Energy with
a written certificate from its insurers, addressed to Southern Energy,
indicating the existence of Southern's insurance coverage, the amount and nature
of such coverage, and the expiration date(s) of each policy. The certificate
also shall include a provision requiring Southern's insurers to give Southern
Energy at least thirty (30) days' written notice prior to the cancellation,
nonrenewal or material alteration of any policy.
11.5 Reuse of Documents. All documents, including drawings and
specifications, prepared and furnished by Southern to Southern Energy pursuant
to this Agreement shall be the property of Southern Energy; provided, however,
that such documents are not intended or represented to be suitable for reuse by
Southern Energy or others on any other project. Southern Energy may not reuse or
adapt such documents on or for other projects without the written consent of
Southern; provided, further, that any such reuse or adaption by Southern Energy,
with the consent of Southern, will be at Southern Energy's sole risk and without
liability or legal exposure to Southern.
11.6 Non-Restrictive Relationship. Nothing in this Agreement will be
construed to preclude Southern Energy from independently developing, acquiring
or obtaining Engineering and Technical Services or related documents which may
perform the same or similar functions as the Engineering and Technical Services
or related documents provided by Southern.
ARTICLE 12
CONFIDENTIALITY
The terms of the Confidential Disclosure Agreement between the Parties
shall apply to any Confidential Information (as defined therein) which is the
subject matter of this Agreement.
9
<PAGE> 13
ARTICLE 13
LIMITATION OF LIABILITY
NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, LOSS OF
DATA, LOSS OF USE, COST OF COVER, BUSINESS INTERRUPTION OR OTHER SPECIAL,
INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, UNDER
ANY THEORY OF LIABILITY, ARISING FROM THE PERFORMANCE OF, OR RELATING TO, THIS
AGREEMENT.
ARTICLE 14
FORCE MAJEURE
Each Party will be excused for any failure or delay in performing any of
its obligations under this Agreement, other than the obligations of Southern
Energy to make payments to Southern pursuant to Article 5 hereof for services
rendered, if such failure or delay is caused solely by Force Majeure. "Force
Majeure" includes, without limitation, any act of God or the public enemy; any
accident, explosion, fire, ice, earthquake, lightning, tornado, hurricane, or
other severe weather condition or calamity; any civil disturbance, labor
dispute, or labor or material shortage; any sabotage or acts of terrorism; any
acts of a public enemy, uprising, insurrection, civil unrest, war or rebellion;
any action or restraint by court order or public or governmental authority or
lawfully established civilian authorities, or any other circumstance or event
beyond the reasonable control of the Party relying upon such circumstance or
event.
ARTICLE 15
DISPUTE RESOLUTION
15.1 Mediation. If a dispute, controversy or claim ("Dispute") arises
between the Parties relating to the interpretation or performance of this
Agreement or the Ancillary Agreements, or the grounds for the termination
hereof, appropriate senior executives (e.g. director or vice president level) of
each Party who shall have the authority to resolve the matter shall meet or
confer (in person or by telephone) to attempt in good faith to negotiate a
resolution of the Dispute prior to pursuing other available remedies. The
initial meeting or conference between the appropriate senior executives shall be
referred to herein as the "Dispute Resolution Commencement Date." Discussions
and correspondence relating to trying to resolve such Dispute shall be treated
as confidential information developed for the purpose of settlement and shall be
exempt from discovery or production and shall not be admissible in any
proceeding relating to the subject matter of the Dispute. If the senior
executives are unable to resolve the Dispute within thirty (30) days from the
Dispute Resolution Commencement Date, and either Party wishes to pursue its
rights relating to such Dispute, then the Dispute will be mediated by a mutually
acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute
within thirty (30) days after written notice by one Party to the other demanding
non-binding mediation. Neither Party may unreasonably withhold consent to the
selection of a mediator or the location of the mediation. Both Parties will
share the costs of the mediation equally, except that each Party shall bear its
own costs and expenses, including attorney's fees, witness fees, travel
expenses, and preparation costs. The Parties may also agree to replace mediation
with some other form of non-binding or binding alternative dispute resolution
("ADR").
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<PAGE> 14
15.2 Arbitration. Any Dispute which the Parties cannot resolve through
mediation within ninety (90) days of the Dispute Resolution Commencement Date,
unless otherwise mutually agreed, shall be submitted to final and binding
arbitration under the then current Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), by three (3) arbitrators in Dekalb County,
Georgia. Such arbitrators shall be selected by the mutual agreement of the
Parties or, failing such agreement, shall be selected according to the aforesaid
AAA rules. The arbitrators will be instructed to prepare and deliver a written,
reasoned opinion stating their decision within thirty (30) days of the
completion of the arbitration. The prevailing Party in such arbitration shall be
entitled to expenses, including costs and reasonable attorneys' and other
professional fees, incurred in connection with the arbitration (but excluding
any costs and fees associated with prior negotiation or mediation). The decision
of the arbitrator shall be final and non-appealable and may be enforced in any
court of competent jurisdiction. The use of any ADR procedures will not be
construed under the doctrine of laches, waiver or estoppel to adversely affect
the rights of either Party.
15.3 Court Action. Any Dispute regarding the following is not required to
be negotiated, mediated or arbitrated prior to seeking material relief from a
court of competent jurisdiction: breach of any obligation of confidentiality;
infringement, misappropriation, or misuse of any intellectual property right;
any other claim where interim relief from the court is sought to prevent serious
and irreparable injury to one of the Parties or to others. However, the Parties
to the Dispute shall make a good faith effort to negotiate and mediate such
Dispute, according to the above procedures, while such court action is pending.
15.4 Continuity Of Service And Performance. Unless otherwise agreed in
writing, the Parties will continue to provide service and honor all other
commitments under this Agreement and each Ancillary Agreement during the course
of dispute resolution pursuant to the provisions of this Article 15 with respect
to all matters not subject to such dispute, controversy or claim.
ARTICLE 16
MISCELLANEOUS
16.1 Entire Agreement. This Agreement, the Master Separation and
Distribution Agreement and the other Ancillary Agreements and the Exhibits and
Schedules referenced or attached hereto and thereto constitute the entire
agreement between the Parties with respect to the subject matter hereof and
thereof and shall supersede all prior written and oral and all contemporaneous
oral agreements and understandings with respect to the subject matter hereof and
thereof.
16.2 Existing Services Agreement. The Parties acknowledge that Subsidiaries
of Southern are currently authorized to provide the services contracted for
herein to Southern Energy and its subsidiaries and, more specifically, that
Southern Company Services, Inc., a Subsidiary of Southern, is authorized to
provide the services identified herein directly, and, indirectly, to Southern
Energy and its Subsidiaries to Southern Energy Resources, Inc. (formerly known
as Southern Electric International, Inc.) pursuant to an Agreement dated July
17, 1981 (the "Existing Service Agreement"), all subject to certain conditions
established by applicable government regulations, orders, and approvals
("Existing Authority"). The Parties intend to implement this Agreement
consistent with and to the extent permitted by Existing Authority and to
cooperate toward obtaining and maintaining in effect such governmental agency
consents, orders or approvals as may be required in order to implement this
Agreement as fully as possible in accordance with its terms for the stated term.
After the Effective Date and upon receipt of and applicable regulatory
approvals and consents, the Existing Services Agreement shall be terminated and
superseded by this Agreement to the extent permitted under the Existing
Authority.
16.3 Governing Law. This Agreement shall be construed in accordance with
and all Disputes hereunder shall be governed by the laws of the State of
Georgia. Any state court sitting in Dekalb County, Georgia and/or the United
States District Court for the Northern District of Georgia shall have
jurisdiction and venue over all Disputes between the Parties that are permitted
to be brought in a court of law pursuant to Article 15 above.
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<PAGE> 15
16.4 Descriptive Headings. The headings contained in this Agreement, in any
Exhibit or Schedule hereto and in the table of contents to this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Exhibit or
Schedule but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
16.5 Notices. Notices, offers, requests, or other communications required
or permitted to be given by either Party pursuant to the terms of this Agreement
shall be given in writing to the respective Parties to the following addresses:
if to Southern :
The Southern Company
270 Peachtree Street
Atlanta, Georgia 30303
Attention: General Counsel
Fax: (404) 506-0544
if to Southern Energy:
Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
Attention: General Counsel
Fax: (770) 821-7001
or to such other address as the Party to whom notice is given may have
previously furnished to the other in writing as provided herein. Any notice
involving non-performance, termination, or renewal shall be sent by hand
delivery, recognized overnight courier or, within the United States, may also be
sent via certified mail, return receipt requested. All other notices may also be
sent by fax, confirmed by first class mail. All notices shall be deemed to have
been given and received on the earlier of actual delivery or three (3) days from
the date of postmark.
16.6 Nonassignability; Third-Party Beneficiaries. Except as specifically
permitted under Article 9 above, neither Party may, directly or indirectly, in
whole or in part, whether by operation of law or otherwise, assign or transfer
this Agreement, without the other Party's prior written consent, and any
attempted assignment, transfer or delegation without such prior written consent
shall be voidable at the sole option of such other Party. Without limiting the
foregoing, this Agreement will be binding upon and inure to the benefit of the
Parties and their permitted successors and assigns. This Agreement, including
the Transition Services Schedules and the other documents referred to herein,
shall be binding upon and inure solely to the benefit of each party hereto and
their legal representatives and successors, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
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<PAGE> 16
16.7 Severability. If any term or other provision of this Agreement is
determined by a court, administrative agency or arbitrator to be invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement will nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated is not affected in any manner materially adverse to
any Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the fullest extent possible.
16.8 Failure Or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of either Party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
16.9 Amendment. No change or amendment will be made to this Agreement
except by an instrument in writing signed on behalf of each of the Parties to
such agreement.
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<PAGE> 17
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed in duplicate originals by its duly authorized representatives.
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
By: By:
-------------------------------- ---------------------------------
Title: Title:
----------------------------- ------------------------------
<PAGE> 18
FORM OF TRANSITION SERVICE SCHEDULE TO TRANSITIONAL SERVICES AGREEMENT
1. Transition Service Schedule #:____________ (To be inserted by
representative)
2. Functional Area:_______________
3. Start/End Date: The Services start on the Effective Date of the
Transitional Services Agreement between The Southern Company ("Southern")
and Southern Energy, Inc. ("Southern Energy") to which this Transition
Service Schedule is attached and end on [__________] unless otherwise
indicated below.
Indicate below if other start/end date:
Start Date:
----------------------------
End Date:
------------------------------
If Start and End dates vary by service and/or location, please indicate in
Section 5 below.
4. Summary of Services (Describe the service to be provided in appropriate
detail.
Service Name Description
5. List of services to be provided per location and site: (List all the
services to be provided at each site. Enter Start Date and End Date if
different from Section 3 above.)
Location Site Service(s) Start Date End Date
6. Performance parameters/Service level: (State minimum performance expected
from each service, if applicable.):
7. Estimated Total Compensation
8. Describe cost methodology and cost drivers affecting Estimated Total
Compensation (Describe on an individual service basis if necessary):
<PAGE> 19
9. Describe the process by which the cost of services will be adjusted in the
instance of an increase/reduction in the services provided: (Describe on an
individual service basis if necessary.)
10. Software: Will software be used or included with the Services to be
provided under this Transition Service Schedule: ____ Yes ____ No
List software/licenses to be provided, if any:
11. Contract Administrators. List Service Representatives from Southern and
Southern Energy:
Upon execution of this Transition Service Schedule by both Parties, this
Transition Service Schedule is hereby deemed incorporated into and made part of
that certain Transitional Services Agreement between The Southern Company and
Southern Energy, Inc.
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
By: By:
-------------------------------- ---------------------------------
(Authorized Signature) (Authorized Signature)
Date: Date:
------------------------------ -------------------------------
Name: Name:
------------------------------ -------------------------------
Title: Title:
----------------------------- ------------------------------
<PAGE> 20
Schedule 3.7
Senior Service Representatives
Southern Energy
<TABLE>
<CAPTION>
Service Senior Representative (Title)
- ------- -----------------------------
<S> <C>
Engineering and Technical Services Chief Technical Officer
Intellectual Property/
Information Technology Chief Information Officer
All other Services Senior Vice President of Administration
and External Affairs
</TABLE>
Southern
<TABLE>
<CAPTION>
Service Senior Representative (Title)
- ------- -----------------------------
<S> <C>
Engineering and Technical Services;
Procurement President of Southern Company Generation
Intellectual Property/
Information Technology Chief Information Officer
Human Resources Senior Vice President of Human Resources,
Legal General Counsel
External Affairs Vice President of External Affairs
Finance and Risk Management Chief Financial Officer
Accounting Senior Vice President - Chief Accounting
Officer
Internal Auditing Director of Internal Auditing
System Aircraft Vice President, System Aircraft
</TABLE>
<PAGE> 21
Schedule 16.2
Existing Engineering Services Agreements
<PAGE> 1
EXHIBIT 10.3
FORM OF
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I MUTUAL RELEASES; INDEMNIFICATION...................................................................................1
Section 1.1. Release of Pre-Closing Claims................................................................................1
Section 1.2. Indemnification by Southern Energy...........................................................................2
Section 1.3. Indemnification by Southern..................................................................................3
Section 1.4. Procedures for Defense, Settlement and Indemnification of Third Party Claims.................................3
Section 1.5. Additional Matters...........................................................................................5
Section 1.6. Survival of Indemnities......................................................................................6
ARTICLE II INSURANCE MATTERS.................................................................................................6
Section 2.1. Southern Energy Insurance Coverage During the Transition Period..............................................6
Section 2.2. Cooperation and Agreement Not to Release Carriers............................................................6
Section 2.3. Southern Energy Insurance Coverage After the Insurance Transition Period.....................................7
Section 2.4. Responsibilities for Self-insured Obligations................................................................7
Section 2.5. Procedures With Respect to Insured Southern Energy Liabilities...............................................7
Section 2.6. Insufficient Limits of Liability for Southern Liabilities and Southern Energy Liabilities....................8
Section 2.7. Cooperation..................................................................................................8
Section 2.8. No Assignment or Waiver......................................................................................8
Section 2.9. No Liability.................................................................................................9
Section 2.10. No Restrictions.............................................................................................9
Section 2.11. Further Agreements..........................................................................................9
Section 2.12. Agreement Regarding Insurance Covering Environmental Claims.................................................9
Section 2.13. Matters Governed by Employee Matters Agreement..............................................................9
ARTICLE III MISCELLANEOUS....................................................................................................9
Section 3.1. Entire Agreement.............................................................................................9
Section 3.2. Governing Law...............................................................................................10
Section 3.3. Notices.....................................................................................................10
Section 3.4. Parties in Interest.........................................................................................10
Section 3.5. Other Agreements Evidencing Indemnification Obligations.....................................................10
Section 3.6. Counterparts................................................................................................10
Section 3.7. Assignment..................................................................................................10
Section 3.8. Severability................................................................................................11
Section 3.9. Failure or Indulgence Not Waiver............................................................................11
Section 3.10. Amendment..................................................................................................11
Section 3.11. Authority..................................................................................................11
Section 3.12. Interpretation.............................................................................................11
Section 3.13. Government Approvals.......................................................................................11
ARTICLE IV DEFINITIONS......................................................................................................11
Section 4.1. Action......................................................................................................11
Section 4.2. Affiliated Company..........................................................................................11
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 4.4. Claims Committee............................................................................................12
Section 4.5. Commingled Claims...........................................................................................12
Section 4.6. Coverage Amount.............................................................................................12
Section 4.7. Credit Support Arrangements.................................................................................12
Section 4.8. Employee Matters Agreement..................................................................................12
Section 4.9. HoldCo Transaction..........................................................................................13
Section 4.10. Employment Liabilities.....................................................................................12
Section 4.11 Environmental Claims.......................................................................................
Section 4.12. Indemnitee.................................................................................................12
Section 4.13. Insurance Policies.........................................................................................12
Section 4.14. Insurance Transition Period................................................................................13
Section 4.15. Insured Southern Energy Liability..........................................................................13
Section 4.16. Intercompany Agreements....................................................................................13
Section 4.17. IPO Registration Statement.................................................................................13
Section 4.18. Liabilities................................................................................................13
Section 4.19. Person.....................................................................................................13
Section 4.20. Separation.................................................................................................13
Section 4.21. Separation Agreement.......................................................................................14
Section 4.22. Separation Date............................................................................................14
Section 4.23. Southern Business..........................................................................................14
Section 4.24. Southern Energy Business...................................................................................14
Section 4.25. Southern Energy Covered Parties............................................................................14
Section 4.26. Southern Energy Group......................................................................................14
Section 4.27. Southern Energy Indemnitees................................................................................14
Section 4.28. Southern Energy Liabilities................................................................................14
Section 4.29. Southern Group.............................................................................................15
Section 4.30. Southern Indemnitees.......................................................................................15
Section 4.31. Subsidiary.................................................................................................15
Section 4.32. Tax Indemnification Agreement..............................................................................15
Section 4.33. Taxes......................................................................................................15
Section 4.34. Third Party Claim..........................................................................................15
</TABLE>
<PAGE> 4
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
THIS INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT (this
"Agreement") is entered into on [___________, 2000] between The Southern
Company, a Delaware corporation ("Southern"), and Southern Energy, Inc., a
Delaware corporation ("Southern Energy"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Article IV below.
RECITALS
WHEREAS, the Board of Directors of Southern has determined that it
is in the best interest of Southern and its stockholders to separate Southern's
existing businesses into two independent businesses;
WHEREAS, as part of the foregoing, Southern and Southern Energy have
agreed, pursuant to the Master Separation and Distribution Agreement dated
[___________, 2000] (the "Separation Agreement"), which provides, among
other things, the initial public offering of Southern Energy stock, the
distribution of such stock and the execution and delivery of certain other
agreements in order to facilitate and provide for the foregoing; and
WHEREAS, the parties desire to set forth certain agreements
regarding indemnification and insurance.
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements set forth below, the parties hereto agree as follows:
ARTICLE I
MUTUAL RELEASES; INDEMNIFICATION
Section 1.1. Release of Pre-Closing Claims.
(a) Southern Energy Release. Except as provided in Section 1.1(c),
effective as of the Separation Date, Southern Energy does hereby, for itself and
as agent for each member of the Southern Energy Group, remise, release and
forever discharge the Southern Indemnitees from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Separation Date, including
any such acts, events or conditions on or before the Separation Date in
connection with the transactions and all other activities to implement any of
the Separation, the IPO and the Distribution.
(b) Southern Release. Except as provided in Section 1.1(c),
effective as of the Separation Date, Southern does hereby, for itself and as
agent for each member of the Southern Group, remise, release and forever
discharge the Southern Energy Indemnitees from any and all
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Liabilities whatsoever, whether at law or in equity (including any right of
contribution), whether arising under any contract or agreement, by operation of
law or otherwise, existing or arising from any acts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any
conditions existing or alleged to have existed on or before the Separation Date,
including any such acts, events or conditions on or before the Separation Date
in connection with the transactions and all other activities to implement any of
the Separation, the IPO and the Distribution.
(c) Excluded Liabilities; No Impairment. Nothing contained in
Section 1.1(a) or (b) shall release any claims under, or impair any right of any
Person to enforce, the Separation Agreement, any Ancillary Agreement (including
this Agreement), or any Intercompany Agreement, in each case in accordance with
its terms.
(d) No Actions as to Released Claims. Southern Energy agrees, for
itself and as agent for each member of the Southern Energy Group, not to make
any claim or demand, or commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against Southern or
any member of the Southern Group, or any other Person released pursuant to
Section 1.1(a), with respect to any Liabilities released pursuant to Section
1.1(a). Southern agrees, for itself and as agent for each member of the Southern
Group, not to make any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against Southern Energy or any member of the Southern Energy Group, or any other
Person released pursuant to Section 1.1(b), with respect to any Liabilities
released pursuant to Section 1.1(b).
(e) Further Instruments. At any time, at the request of any other
party, each party shall cause each member of its respective Group to execute and
deliver releases reflecting the provisions hereof.
Section 1.2. Indemnification by Southern Energy. Except as otherwise
provided in this Agreement, Southern Energy shall, for itself and as agent for
each member of the Southern Energy Group, indemnify, defend (or, where
applicable, pay the defense costs for) and hold harmless the Southern
Indemnitees from and against any and all Liabilities that any third party seeks
to impose upon the Southern Indemnitees, or which are imposed upon the Southern
Indemnitees, if and to the extent such Liabilities relate to, arise out of or
result from any of the following items (without duplication):
(i) any acts or omission or alleged acts or omissions by
or on behalf of any member of the Southern Energy Group in the
conduct of the Southern Energy Business or in connection with the
IPO or the Distribution;
(ii) any breach by Southern Energy or any member of the
Southern Energy Group of the Separation Agreement or any of the
Ancillary Agreements (including this Agreement); and
(iii) any Southern Energy Liability.
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In the event that any member of the Southern Energy Group makes a
payment to the Southern Indemnitees hereunder, and any of the Southern
Indemnitees subsequently diminishes the Liabilities on account of which such
payment was made, either directly or through a third-party recovery, Southern
will promptly repay (or will procure a Southern Indemnitee to promptly repay)
such member of the Southern Energy Group the amount by which the payment made by
such member of the Southern Energy Group exceeds the actual cost of the
associated indemnified Liability.
Section 1.3. Indemnification by Southern. Except as otherwise
provided in this Agreement, Southern shall, for itself and as agent for each
member of the Southern Group, indemnify, defend (or, where applicable, pay the
defense costs for) and hold harmless the Southern Energy Indemnitees from and
against any and all Liabilities that any third party seeks to impose upon the
Southern Energy Indemnitees, or which are imposed upon the Southern Energy
Indemnitees, if and to the extent such Liabilities relate to, arise out of or
result from any of the following items (without duplication):
(i) any acts or omissions or alleged acts or omissions
by or on behalf of any member of the Southern Group in the conduct
of the Southern Business or in connection with the IPO or the
Distribution;
(ii) any breach by Southern or any member of the
Southern Group of the Separation Agreement or any of the Ancillary
Agreements (including this Agreement); and
(iii) any Liabilities of the Southern Group other than
the Credit Support Arrangements.
In the event that any member of the Southern Group makes a payment
to the Southern Energy Indemnitees hereunder, and any of the Southern Energy
Indemnitees subsequently diminishes the Liabilities on account of which such
payment was made, either directly or through a third-party recovery, Southern
Energy will promptly repay (or will procure a Southern Energy Indemnitee to
promptly repay) such member of the Southern Group the amount by which the
payment made by such member of the Southern Group exceeds the actual cost of the
indemnified Liabilities.
Section 1.4. Procedures for Defense, Settlement and Indemnification
of Third Party Claims.
(a) Notice of Claims. If a Southern Indemnitee or a Southern Energy
Indemnitee (as applicable) (an "Indemnitee") shall receive notice or otherwise
learn of the assertion by a Person (including any Governmental Authority) who is
not a member of the Southern Group or the Southern Energy Group of any claim or
of the commencement by any such Person of any Action (collectively, a "Third
Party Claim") with respect to which a party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 1.2
or 1.3,
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or any other section of the Separation Agreement or any Ancillary Agreement
(including this Agreement), Southern and Southern Energy (as applicable) will
ensure that such Indemnitee shall give such Indemnifying Party written notice
thereof within thirty (30) days after becoming aware of such Third Party Claim.
Any such notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the delay or failure of any Indemnitee or other
Person to give notice as provided in this Section 1.4(a) shall not relieve the
related Indemnifying Party of its obligations under this Article I, except to
the extent that such Indemnifying Party is actually and substantially prejudiced
by such delay or failure to give notice.
(b) Claims Committee. Any of the parties may refer any dispute
regarding the provisions of this Article I to the Claims Committee for
resolution. All determinations of the Claims Committee, if unanimous, shall be
binding on all of the parties and their respective successors and assigns. The
Claims Committee shall reach a resolution that minimizes expenses for all
parties and seeks to avoid hiring multiple counsel. In the event a Liability
arises from both an event, act or omission relating primarily to the Southern
Energy Business and an event, act or omission relating primarily to the Southern
Business, the Claims Committee shall apportion the Liability in accordance with
comparative fault, and it may re-apportion the Liability as it learns of
additional facts bearing on that assessment. In the event that the Claims
Committee cannot reach a unanimous determination as to the nature, status or
handling of any such claims within thirty (30) days after such referral (unless
the Claims Committee unanimously agrees to a longer time period), the issue will
be submitted for resolution pursuant to the procedures set forth in the dispute
resolution provisions contained in Section 5.7 of the Separation Agreement;
provided, that the provisions of this Section 1.4(b) shall supercede the
requirements of the second sentence of Section 5.7(a) of the Separation
Agreement.
(c) Defense of Commingled Claims. With respect to any Commingled
Claim, the Claims Committee shall determine which party shall manage the defense
of, and may seek to settle or compromise, such Commingled Claim based upon the
specific facts of such claim.
(d) Defense By Indemnifying Party. Other than in the case of a
Commingled Claim, an Indemnifying Party will manage the defense of and (unless
the Indemnifying Party has specified any reservations or exceptions to the
obligation to manage the defense or to indemnify that have been referred to, but
not resolved by, the Claims Committee) may settle or compromise any Third Party
Claim. Within thirty (30) days after the receipt of notice from an Indemnitee in
accordance with Section 1.4(a) (or sooner, if the nature of such Third Party
Claim so requires), the Indemnifying Party shall notify the Indemnitee that the
Indemnifying Party will assume responsibility for managing the defense of such
Third Party Claim, which notice shall specify any reservations or exceptions.
(e) Defense By Indemnitee. If an Indemnifying Party fails to assume
responsibility for managing the defense of a Third Party Claim, or fails to
notify an Indemnitee that it will assume responsibility as provided in Section
1.4(d), such Indemnitee may manage the defense of such Third Party Claim.
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(f) No Settlement By Indemnitee Without Consent. Unless the
Indemnifying Party has failed to manage the defense of the Third Party Claim in
accordance with the terms of this Agreement, no Indemnitee may settle or
compromise any Third Party Claim without the consent of the Indemnifying Party.
(g) No Consent to Certain Judgments or Settlements Without Consent.
Notwithstanding Section 1.4(d) above, no party shall consent to entry of any
judgment or enter into any settlement of a Third Party Claim without the consent
of the other party (such consent not to be unreasonably withheld) if the effect
of such judgment or settlement is to (A) permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against the other party or (B) materially affect the other party due
to the allocation of Liabilities and related indemnities set forth in the
Separation Agreement, this Agreement or any other Ancillary Agreement.
Section 1.5. Additional Matters.
(a) Cooperation in Defense and Settlement. With respect to any Third
Party Claim that implicates both Southern Energy and Southern in a material
fashion due to the allocation of Liabilities, responsibilities for management of
defense and related indemnities set forth in the Separation Agreement, this
Agreement or any of the Ancillary Agreements, the parties agree to cooperate
fully and maintain a joint defense (in a manner that will preserve the
attorney-client privilege with respect thereto) so as to minimize such
Liabilities and defense costs associated therewith. The party that is not
responsible for managing the defense of such Third Party Claims shall, upon
reasonable request, be consulted with respect to significant matters relating
thereto and may, if necessary or helpful, associate counsel to assist in the
defense of such claims.
(b) Substitution. In the event of an Action in which the
Indemnifying Party is not a named defendant, if either the Indemnitee or the
Indemnifying Party shall so request, the parties shall endeavor to substitute
the Indemnifying Party for the named defendant. If such substitution or addition
cannot be achieved for any reason or is not requested, the rights and
obligations of the parties regarding indemnification and the management of the
defense of claims as set forth in this Article I shall not be altered.
(c) Subrogation. In the event of payment by or on behalf of any
Indemnifying Party to or on behalf of any Indemnitee in connection with any
Third Party Claim, such Indemnifying Party shall be subrogated to and shall
stand in the place of such Indemnitee, in whole or in part based upon whether
the Indemnifying Party has paid all or only part of the Indemnitee's Liability,
as to any events or circumstances in respect of which such Indemnitee may have
any right, defense or claim relating to such Third Party Claim against any
claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense of such Indemnifying Party, in
prosecuting any subrogated right, defense or claim.
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(d) Not Applicable to Taxes or Employment Liabilities. This
Agreement shall not apply to Taxes (which are covered by the Tax Indemnification
Agreement) or Employment Liabilities (which are covered by the Employee Matters
Agreement).
Section 1.6. Survival of Indemnities. Subject to Section 3.7, the
rights and obligations of the members of the Southern Group and the Southern
Energy Group under this Article I shall survive the sale or other transfer by
any party of any assets or businesses or the assignment by it of any Liabilities
or the sale by any member of the Southern Group or the Southern Energy Group of
the capital stock or other equity interests of any Subsidiary to any Person.
ARTICLE II
INSURANCE MATTERS
Section 2.1. Southern Energy Insurance Coverage During the
Transition Period.
(a) Maintain Comparable Insurance. Throughout the period beginning
on the Separation Date and ending on the Distribution Date (i.e., the "Insurance
Transition Period"), Southern shall, subject to insurance market conditions and
other factors beyond its control, maintain policies of insurance, including for
the benefit of Southern Energy or any of its Subsidiaries, directors, officers,
employees or other covered parties (collectively, the "Southern Energy Covered
Parties") which are comparable to those maintained generally by Southern;
provided, however, that if Southern determines that (i) the amount or scope of
such coverage will be reduced to a level materially inferior to the level of
coverage in existence immediately prior to the Insurance Transition Period or
(ii) the retention or deductible level applicable to such coverage, if any, will
be increased to a level materially greater than the levels in existence
immediately prior to the Insurance Transition Period, Southern shall give
Southern Energy notice of such determination as promptly as practicable. Upon
notice of such determination, Southern Energy shall be entitled to no less than
sixty (60) days to evaluate its options regarding continuance of coverage
hereunder and may cancel its interest in all or any portion of such coverage as
of any day within such sixty (60) day period. Except as provided below, during
the Insurance Transition Period, such policies of insurance shall cover Southern
Energy Covered Parties for liabilities and losses insured prior to the
Distribution Date.
(b) Reimbursement for Premiums. Southern Energy shall promptly pay
or reimburse Southern, as the case may be, for premium expenses, and Southern
Energy Covered Parties shall promptly pay or reimburse Southern for any costs
and expenses which Southern may incur in connection with the insurance coverages
maintained pursuant to this Section 2.1, including but not limited to any
subsequent premium adjustments. All payments and reimbursements by Southern
Energy and Southern Energy Covered Parties to Southern shall be made within
fifteen (15) days after Southern Energy's receipt of an invoice from Southern.
Section 2.2. Cooperation and Agreement Not to Release Carriers. Each
of Southern and Southern Energy will share such information as is reasonably
necessary in order to permit the other to manage and conduct its insurance
matters in an orderly fashion. Each of Southern
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and Southern Energy, at the request of the other, shall cooperate with and use
commercially reasonable efforts to assist the other in recoveries for claims
made under any insurance policy for the benefit of any insured party, and
neither Southern nor Southern Energy, nor any of their Subsidiaries, shall take
any action which would intentionally jeopardize or otherwise interfere with
either party's ability to collect any proceeds payable pursuant to any insurance
policy. Except as otherwise contemplated by the Separation Agreement, this
Agreement or any Ancillary Agreement, after the Separation Date, neither
Southern nor Southern Energy shall (and shall ensure that no member of their
respective Groups shall), without the consent of the other, provide any
insurance carrier with a release, or amend, modify or waive any rights under any
such policy or agreement, if such release, amendment, modification or waiver
would adversely affect any rights or potential rights of any member of the other
Group thereunder. However, nothing in this Section 2.2 shall (A) preclude any
member of any Group from presenting any claim or from exhausting any policy
limit, (B) require any member of any Group to pay any premium or other amount or
to incur any Liability, (C) require any member of any Group to renew, extend or
continue any policy in force or (D) except as otherwise provided in Section
2.12, apply to Southern in connection with rights to coverage for Environmental
Actions under Insurance Policies in effect prior to the Separation Date.
Section 2.3. Southern Energy Insurance Coverage After the Insurance
Transition Period. From and after expiration of the Insurance Transition Period,
Southern Energy, and Southern Energy alone, shall be responsible for obtaining
and maintaining insurance programs for its risk of loss and such insurance
arrangements shall be separate and apart from Southern's insurance programs.
Notwithstanding the foregoing, Southern, upon the request of Southern Energy,
shall use all commercially reasonable efforts to assist Southern Energy in the
transition to its own separate insurance programs from and after the Insurance
Transition Period, and shall provide Southern Energy with any information that
is in the possession of Southern and is reasonably available and necessary to
either obtain insurance coverages for Southern Energy or to assist Southern
Energy in preventing unintended self-insurance, in whatever form.
Section 2.4. Responsibilities for Self-insured Obligations. Southern
Energy will reimburse Southern for all amounts necessary to exhaust or otherwise
satisfy all applicable self-insured retentions, amounts for fronted policies,
deductibles and retrospective premium adjustments and similar amounts not
covered by Insurance Policies in connection with Southern Energy Liabilities and
Insured Southern Energy Liabilities.
Section 2.5. Procedures With Respect to Insured Southern Energy
Liabilities.
(a) Reimbursement. Southern Energy will reimburse Southern for all
amounts incurred to pursue insurance recoveries from Insurance Policies for
Insured Southern Energy Liabilities.
(b) Management of Claims. The defense of claims, suits or actions
giving rise to potential or actual Insured Southern Energy Liabilities will be
managed (in conjunction with Southern's insurers, as appropriate) by the party
that would have had responsibility for managing such claims, suits or actions
had such Insured Southern Energy Liabilities been Southern Energy Liabilities.
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Section 2.6. Insufficient Limits of Liability for Southern
Liabilities and Southern Energy Liabilities. In the event that there are
insufficient limits of liability available under Southern's Insurance Policies
in effect prior to the Distribution Date to cover the Liabilities of Southern
and/or Southern Energy that would otherwise be covered by such Insurance
Policies, then to the extent that other insurance is not available to Southern
and/or Southern Energy for such Liabilities an adjustment will be made in
accordance with the following procedures:
(i) Each party will be allocated an amount equal to
their proportional share of any excess Liabilities (net of any
deductible) of the lesser of (A) the available limits of liability
available under Southern's Insurance Policies in effect prior to the
Distribution Date net of uncollectible amounts attributable to
insurer insolvencies, and (B) the proceeds received from Southern's
Insurance Policies if the Liabilities are the subject of disputed
coverage claims and, following consultation with each other,
Southern and/or Southern Energy agree to accept less than full
policy limits from Southern's and Southern Energy's insurers (the
"Coverage Amount").
(ii) A party who receives more than its share of the
Coverage Amount (the "Overallocated Party") agrees to reimburse the
other party (the "Underallocated Party") to the extent that the
Liabilities of the Underallocated Party that would have been covered
under such Insurance Policies (subject to the limitations of Section
2.12) is less than the Underallocated Party's share of the Coverage
Amount.
(iii) This Section 2.6 shall terminate three years
following the Distribution Date; provided, however, that either
party may extend the three year period applicable to these
provisions by up to five additional two-year periods, or as
otherwise shall be agreed to in order to accomplish the allocation
objective set forth above and in order to have access to any
available coverage under the Insurance Policies.
Section 2.7. Cooperation. Southern and Southern Energy will
cooperate with each other in all respects, and they shall execute any additional
documents which are reasonably necessary, to effectuate the provisions of this
Article II.
Section 2.8. No Assignment or Waiver. This Agreement shall not be
considered as an attempted assignment of any policy of insurance or as a
contract of insurance and shall not be construed to waive any right or remedy of
any member of the Southern Group in respect of any Insurance Policy or any other
contract or policy of insurance.
Section 2.9. No Liability. Southern Energy does hereby, for itself
and as agent for each other member of the Southern Energy Group, agree that no
member of the Southern Group or any Southern Indemnitee shall have any Liability
whatsoever as a result of the insurance policies and practices of Southern and
its Subsidiaries as in effect at any time prior to the Distribution Date,
including as a result of the level or scope of any such insurance, the
creditworthiness of any insurance carrier, the terms and conditions of any
policy, the adequacy or timeliness of any notice to any insurance carrier with
respect to any claim or potential claim or otherwise.
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Section 2.10. No Restrictions. Nothing in this Agreement shall be
deemed to restrict any member of the Southern Energy Group from acquiring at its
own expense any other insurance policy in respect of any Liabilities or covering
any period.
Section 2.11. Further Agreements. The Parties acknowledge that they
intend to allocate financial obligations without violating any laws regarding
insurance, self-insurance or other financial responsibility. If it is determined
that any action undertake pursuant to the Separation Agreement, this Agreement
or any Ancillary Agreement is violative of any insurance, self-insurance or
related financial responsibility law or regulation, the parties agree to work
together to do whatever is necessary to comply with such law or regulation while
trying to accomplish, as much as possible, the allocation of financial
obligations as intended in the Separation Agreement, this Agreement and any
Ancillary Agreement.
Section 2.12. Agreement Regarding Insurance Covering Environmental
Claims. Notwithstanding anything to the contrary in this Agreement (including
Article II hereof), the Separation Agreement or any Ancillary Agreement:
(a) Except as set forth in Section 2.12(b), Southern Energy shall
not make any claim against, or be entitled to any proceeds from, any primary,
umbrella or excess general liability policy in effect prior to the Separation
Date for any Environmental Claims;
(b) In the event that an Environmental Claim could be covered under
any primary, umbrella or excess general liability policy in effect prior to the
Separation Date, and provided that at the time the claim is made Southern has
not fully and finally released or agreed to release (at Southern's sole
discretion) the insurance carrier with respect to coverage applicable to that
claim under such policy, Southern Energy shall be permitted to submit the
Environmental Claim to Southern for submission to the relevant insurance
carrier. Southern shall control all negotiations on the claim and the policy
with the insurance carrier, and Southern Energy shall be entitled to an
equitable apportionment of any proceeds received by Southern from the policy.
Section 2.13. Matters Governed by Employee Matters Agreement. This
Article II shall not apply to any insurance policies that are the subject of the
Employee Matters Agreement.
ARTICLE III
MISCELLANEOUS
Section 3.1. Entire Agreement. This Agreement, the Master Separation
Agreement, the other Ancillary Agreements and the Exhibits and Schedules
attached hereto and thereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall supersede all prior
written and oral and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof.
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Section 3.2. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia as to all matters
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.
Section 3.3. Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and addressed to the attention of
the party's General Counsel at the address of its principal executive office or
such other address as a party may request by notifying the other in writing.
Section 3.4. Parties in Interest. This Agreement, including the
Schedules and Exhibits hereto, and the other documents referred to herein, shall
be binding upon Southern, Southern's Subsidiaries, Southern Energy and Southern
Energy's Subsidiaries and inure solely to the benefit of the Southern Energy
Indemnitees and the Southern Indemnitees and their respective permitted assigns,
and nothing in this Agreement, express or implied, is intended to confer upon
any other Person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
Section 3.5. Other Agreements Evidencing Indemnification
Obligations. Southern hereby agrees to execute, for the benefit of any Southern
Energy Indemnitee, such documents as may be reasonably requested by such
Southern Energy Indemnitee, evidencing Southern's agreement that the
indemnification obligations of Southern set forth in this Agreement inure to the
benefit of and are enforceable by such Southern Energy Indemnitee. Southern
Energy hereby agrees to execute, for the benefit of any Southern Indemnitee,
such documents as may be reasonably requested by such Southern Indemnitee,
evidencing Southern Energy's agreement that the indemnification obligations of
Southern Energy set forth in this Agreement inure to the benefit of and are
enforceable by such Southern Indemnitee.
Section 3.6. Counterparts. This Agreement, including the Schedules
and Exhibits hereto, and the other documents referred to herein, may be executed
in counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement.
Section 3.7. Assignment. The rights and obligations in this
Agreement may not be assigned or delegated by any party hereto, in whole or in
part, without the express prior written consent of the other party hereto.
Section 3.8. Severability. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
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Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the fullest extent possible.
Section 3.9. Failure or Indulgence Not Waiver. No failure or delay
on the part of either party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any single
or partial exercise of any such right preclude other or further exercise thereof
or of any other right.
Section 3.10. Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to this Agreement.
Section 3.11. Authority. Each of the parties hereto represents to
the other that (a) it has the corporate or other requisite power and authority
to execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
Section 3.12. Interpretation. The headings contained in this
Agreement, in any Exhibit or Schedule hereto and in the table or contents to
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Any capitalized term used in
any Schedule or Exhibit but not otherwise defined therein, shall have the
meaning assigned to such term in this Agreement. When a reference is made in
this Agreement to an Article or a Section, Exhibit or Schedule, such reference
shall be to an Article or Section of, or an Exhibit or Schedule to, this
Agreement unless otherwise indicated.
Section 3.13. Governmental Approvals. The parties acknowledge that
certain of the provisions of this Agreement may be subject to certain conditions
established by applicable government regulations, orders, and approvals
("Existing Authority"). The parties intend to implement this Agreement
consistent with and to the extent permitted by Existing Authority and to
cooperate toward obtaining and maintaining in effect such governmental agency
consents, orders or approvals as may be required in order to implement this
Agreement as fully as possible in accordance with its terms.
ARTICLE IV
DEFINITIONS
Section 4.1. Action. "Action" means any demand, action, suit,
countersuit, arbitration, inquiry, proceeding or investigation by or before any
federal, state, local, foreign or international governmental authority or any
arbitration or mediation tribunal.
Section 4.2. Affiliated Company. "Affiliated Company" has the
meaning set forth in the Separation Agreement.
11
<PAGE> 15
Section 4.3. Claims Committee. "Claims Committee" means a committee
composed of (i) either the General Counsel or an Associate General Counsel of
Southern and (ii) either the General Counsel or an Associate General Counsel of
Southern Energy.
Section 4.4. Commingled Claims. "Commingled Claims" means,
collectively, any Third Party Claims (i) which involve an employee, consultant
or contractor that was employed by both the Southern Energy Business and the
Southern Business, (ii) in which both Southern and Southern Energy are named, or
(iii) involving both the Southern Energy Business and the Southern Business.
Section 4.5. Coverage Amount. "Coverage Amount" has the meaning set
forth in Section 2.6(a) of this Agreement.
Section 4.6. Credit Support Arrangements. "Credit Support
Arrangements" has the meaning set forth in Section 5.13 of the Separation
Agreement.
Section 4.7. Employee Matters Agreement. "Employee Matters
Agreement" means the Employee Matters Agreement attached as an exhibit to the
Separation Agreement.
Section 4.8. Employment Liabilities. "Employment Liabilities" has
the meaning set forth in Schedule 2.01 to the Employee Matters Agreement.
Section 4.9. Environmental Claim. "Environmental Claim" means any
and all administrative or judicial actions, suits, orders, claims, liens,
notices of violation, investigations, complaints, requests for information,
proceedings or other written communication, whether criminal or civil, by any
Person based upon, alleging, asserting, or claiming any (a) violation of, or
liability under any environmental law, (b) violation of any permit, or (c)
liability for investigatory costs, cleanup costs, removal costs, remedial costs,
response costs, natural resource damages, property damage, personal injury,
fines, or penalties arising out of, based upon, resulting from or related to,
the presence, release, or threatened release into the environment of any
hazardous materials or any other environmental condition.
Section 4.10. HoldCo Transaction. "HoldCo Transaction" has the
meaning set forth in the Separation Agreement.
Section 4.11. Indemnitee. "Indemnitee" has the meaning set forth in
Section 1.4(a) hereof.
Section 4.12. Insurance Policies. "Insurance Policies" means
insurance policies pursuant to which a Person makes a true risk transfer to an
insurer.
12
<PAGE> 16
Section 4.13. Insurance Transition Period. "Insurance Transition
Period" has the meaning set forth in Section 2.1 of this Agreement.
Section 4.14. Insured Southern Energy Liability. "Insured Southern
Energy Liability" means any Southern Energy Liability to the extent that (i) it
is covered under the terms of Southern's Insurance Policies in effect prior to
the Distribution Date and (ii) Southern Energy is not a named insured under, or
otherwise entitled to the benefits of, such Insurance Policies.
Section 4.15. Intercompany Agreements. "Intercompany Agreements"
means any written agreement between Southern or any of its Subsidiaries or
Affiliated Companies and Southern Energy or any of its Subsidiaries or
Affiliated Companies which is in effect prior to the Separation Date.
Section 4.16. IPO Registration Statement. "IPO Registration
Statement" means the registration statement on Form S-1 pursuant to the
Securities Act to be filed with the SEC registering the shares of common stock
of Southern Energy to be issued in the IPO, together with all amendments
thereto.
Section 4.17. Liabilities. "Liabilities" means all debts,
liabilities, guarantees, assurances, commitments and obligations, whether fixed,
contingent or absolute, asserted or unasserted, matured or unmatured, liquidated
or unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising (including, without limitation, whether arising out
of any contract or tort based on negligence or strict liability) and whether or
not the same would be required by generally accepted principles and accounting
policies to be reflected in financial statements or disclosed in the notes
thereto. For purposes of any indemnification hereunder, "Liabilities" shall be
deemed also to include any and all damages, claims, suits, judgments, fines,
penalties, costs and expenses of any kind or character, including attorney's
fees.
Section 4.18. Person. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
Section 4.19. Separation. "Separation" has the meaning set forth in
the Separation Agreement.
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<PAGE> 17
Section 4.20. Separation Agreement. "Separation Agreement" means the
Master Separation and Distribution Agreement dated [ _______, 2000], of which
this is an exhibit thereto.
Section 4.21. Separation Date. "Separation Date" means [12:01 a.m.,
Eastern Standard Time, July 1, 2000], or such date as may be fixed by the Board
of Directors of Southern.
Section 4.22. Southern Business. "Southern Business" has the
meaning set forth in the Separation Agreement.
Section 4.23. Southern Energy Business. "Southern Energy Business"
has the meaning set forth in the Separation Agreement.
Section 4.24. Southern Energy Covered Parties. "Southern Energy
Covered Parties" shall have the meaning set forth in Section 2.1(a) of this
Agreement.
Section 4.25. Southern Energy Group. "Southern Energy Group" has the
meaning set forth in the Separation Agreement.
Section 4.26. Southern Energy Indemnitees. "Southern Energy
Indemnitees" means Southern Energy, each member of the Southern Energy Group and
each of their respective directors, officers and employees.
Section 4.27. Southern Energy Liabilities. "Southern Energy
Liabilities" means i) all Liabilities of the Southern Energy Group, and (ii) the
Credit Support Arrangements.
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<PAGE> 18
Section 4.28. Southern Group. "Southern Group" has the meaning set
forth in the Separation Agreement.
Section 4.29. Southern Indemnitees. "Southern Indemnitees" means
Southern, each member of the Southern Group and each of their respective
directors, officers and employees.
Section 4.30. Subsidiary. "Subsidiary" has the meaning set forth in
the Separation Agreement.
Section 4.31. Tax Indemnification Agreement. "Tax Indemnification
Agreement" means the Tax Indemnification Agreement attached as an exhibit to the
Separation Agreement.
Section 4.32. Taxes. "Taxes" has the meaning set forth in the Tax
Indemnification Agreement.
Section 4.33. Third Party Claim. "Third Party Claim" has the meaning
set forth in Section 1.4(a) of this Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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<PAGE> 19
IN WITNESS WHEREOF, each of the parties has caused this
Indemnification and Insurance Matters Agreement to be executed on its behalf by
its officers thereunto duly authorized on the day and year first above written.
THE SOUTHERN COMPANY
By:
--------------------
Name:
------------------
Title:
-----------------
SOUTHERN ENERGY, INC.
By:
--------------------
Name:
------------------
Title:
-----------------
<PAGE> 1
EXHIBIT 10.4
FORM OF
TECHNOLOGY AND INTELLECTUAL PROPERTY OWNERSHIP
AND
LICENSE AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
TECHNOLOGY AND INTELLECTUAL PROPERTY OWNERSHIP AND
LICENSE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS..............................................................1
1.1 AFFILIATED COMPANY.............................................................1
1.2 ALLOCATED PATENT ASSETS DATABASE...............................................1
1.3 ASSIGNED PATENTS...............................................................1
1.4 COPYRIGHTS.....................................................................2
1.5 CORPORATE IDENTITY MATERIALS...................................................2
1.6 DATABASE RIGHTS................................................................2
1.7 DISTRIBUTION DATE..............................................................2
1.8 FIRST EFFECTIVE FILING DATE....................................................2
1.9 IMPROVEMENTS...................................................................3
1.10 INVENTION DISCLOSURE..........................................................3
1.11 LICENSED MARKS................................................................3
1.12 LICENSED SOUTHERN ENERGY TECHNOLOGY...........................................3
1.13 LICENSED Southern TECHNOLOGY..................................................3
1.14 MARK..........................................................................4
1.15 MASTER SEPARATION AGREEMENT...................................................4
1.16 PATENTS.......................................................................4
1.17 PERSON........................................................................4
1.18 SELL..........................................................................4
1.19 SEPARATION DATE...............................................................4
1.20 SOUTHERN ENERGY SERVICES......................................................4
1.21 SOUTHERN ENERGY OWNED TECHNOLOGY..............................................4
1.22 SOUTHERN PATENTS.............................................................5
1.23 SOUTHERN SERVICES.............................................................5
1.24 SUBLICENSED SOUTHERN ENERGY TECHNOLOGY........................................5
1.25 SUBLICENSED SOUTHERN TECHNOLOGY...............................................5
1.26 SUBSIDIARY....................................................................5
1.27 TECHNOLOGY....................................................................5
1.28 THIRD PARTY...................................................................6
1.29 TRADEMARK USAGE GUIDELINES....................................................6
ARTICLE II TECHNOLOGY..............................................................6
2.1 ASSIGNMENT.....................................................................6
2.2 PRIOR GRANTS...................................................................6
2.3 ASSIGNMENT DISCLAIMER..........................................................6
2.4 LICENSE TO Southern............................................................7
2.5 LICENSE TO SOUTHERN ENERGY.....................................................8
2.6 IDENTIFICATION OF LICENSED TECHNOLOGY..........................................9
2.7 IMPROVEMENTS...................................................................9
2.8 DURATION OF SUBLICENSES TO SUBSIDIARIES AND AFFILIATED COMPANIES...............9
2.9 NO PATENT LICENSES............................................................10
2.10 THIRD PARTY TECHNOLOGY.......................................................10
2.11 TERMINATION..................................................................10
2.11.1 VOLUNTARY TERMINATION...................................................10
2.11.2 SURVIVAL................................................................10
2.11.3 NO OTHER TERMINATION....................................................10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE III TRADEMARKS............................................................10
3.1 ASSIGNMENT OF SOUTHERN ENERGY BUSINESS MARKS..................................10
3.2 LICENSE GRANT.................................................................11
3.3 LICENSE RESTRICTIONS..........................................................11
3.4 LICENSEE UNDERTAKINGS.........................................................11
3.5 NON-TRADEMARK USE.............................................................12
3.6 RESERVATION OF RIGHTS.........................................................12
3.7 SUBLICENSES...................................................................12
3.8 ENFORCEMENT OF AGREEMENTS.....................................................12
3.9 ROYALTIES.....................................................................13
3.10 TRADEMARK USAGE GUIDELINES...................................................13
3.11 OWNERSHIP AND RIGHTS.........................................................13
3.12 PROTECTION OF MARKS..........................................................13
3.13 SIMILAR MARKS................................................................13
3.14 INFRINGEMENT PROCEEDINGS....................................................14
3.15 TERMINATION..................................................................14
ARTICLE IV PATENTS................................................................14
4.1 ASSIGNED PATENTS..............................................................14
4.2 LICENSE GRANTS TO SOUTHERN....................................................14
4.3 LICENSE GRANTS TO SOUTHERN ENERGY.............................................14
4.4 IDENTIFICATION OF LICENSED PATENTS............................................15
4.5 SUBLICENSE RIGHTS.............................................................15
4.6 DURATION......................................................................15
4.7 ROYALTIES.....................................................................15
4.8 PATENT APPLICATIONS AND INVENTION DISCLOSURES.................................15
4.9 ADDITIONAL OBLIGATIONS WITH REGARD TO SOUTHERN PATENTS.......................15
4.10 DEFENSIVE PROTECTION MEASURES................................................16
4.11 STANDARDS BODIES.............................................................16
4.12 ASSIGNMENT OF PATENTS........................................................16
4.13 RESPONSE TO REQUESTS.........................................................16
4.14 RECORDATION OF LICENSES......................................................16
ARTICLE V CONFIDENTIALITY.........................................................17
ARTICLE VI DISPUTE RESOLUTION.....................................................17
ARTICLE VII LIMITATION OF LIABILITY...............................................18
ARTICLE VIII MISCELLANEOUS PROVISIONS.............................................18
8.1 DISCLAIMER....................................................................18
8.2 NO IMPLIED LICENSES...........................................................19
8.3 INFRINGEMENT SUITS............................................................19
8.4 NO OTHER OBLIGATIONS..........................................................19
8.5 ENTIRE AGREEMENT..............................................................19
8.6 GOVERNING LAW.................................................................19
8.7 DESCRIPTIVE HEADINGS..........................................................19
8.8 NOTICES.......................................................................19
8.9 NONASSIGNABILITY..............................................................20
8.10 SEVERABILITY.................................................................20
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
8.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.........................21
8.12 AMENDMENT.....................................................................21
8.13 COUNTERPARTS..................................................................21
8.14 GOVERNMENTAL APPROVAL.........................................................21
</TABLE>
iii
<PAGE> 5
TECHNOLOGY AND INTELLECTUAL PROPERTY OWNERSHIP AND LICENSE
AGREEMENT
This Technology and Intellectual Property Ownership and License
Agreement (the "Agreement") dated [JULY 1, 2000] (the "Effective Date"), between
The Southern Company, a Delaware corporation ("Southern"), having an office at
270 Peachtree Street, N.W., Atlanta, Georgia 30303, and Southern Energy, Inc., a
Delaware corporation ("Southern Energy"), having an office at 900 Ashwood
Parkway, Suite 500, Atlanta, Georgia 30338-4780.
WHEREAS, the Board of Directors of Southern has determined that it is
in the best interest of Southern and its stockholders to separate Southern's
existing businesses into two independent businesses;
WHEREAS, as part of the foregoing, Southern and Southern Energy have
entered into a Master Separation Agreement (as defined below), which provides,
among other things, the initial public offering of Southern Energy stock, the
distribution of such stock and the execution and delivery of certain other
agreements in order to facilitate and provide for the foregoing; and
WHEREAS, also as part of the foregoing, Southern and Southern Energy
desire to resolve and assign ownership of certain technology and intellectual
property and each party desires to license to the other party certain of its
technology and intellectual property.
NOW, THEREFORE, in consideration of the mutual promises of the parties,
and of good and valuable consideration, it is agreed by and between the parties
as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following capitalized terms are defined in
this Article I and shall have the meaning specified herein:
1.1 AFFILIATED COMPANY. "Affiliated Company" shall have the same
meaning as defined in the Master Separation Agreement.
1.2 ALLOCATED PATENT ASSETS DATABASE. "Allocated Patent Assets
Database" means the Allocated Patent Assets Database as set forth on the
attached Exhibit A, as it may be updated by the parties upon mutual agreement
from time to time to add Patents, patent applications and Invention Disclosures.
1.3 ASSIGNED PATENTS. "Assigned Patents" means only those;
(a) Patents, patent applications and Invention Disclosures
allocated to Southern Energy in the Allocated Patent Assets Database;
(a) Patent applications filed on the foregoing Invention
Disclosures described in Section (a);
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<PAGE> 6
(b) continuations, continuations-in-part, divisions and
substitutions of any of the foregoing Patent applications described in Sections
(a) and (b);
(c) Patents which may issue on any of the foregoing Patent
applications described in Sections (a)-(c);
(d) renewals, reissues, reexaminations and extensions of
the foregoing Patents described in Sections (a) and (d); and
(e) foreign Patent applications and Patents that are
counterparts of any of the foregoing Patent applications or Patents described in
Sections (a)-(e), including any Patent application or Patent to the extent that
it claims priority from any of the foregoing Patent applications or Patents
described in Sections (a)-(e); but
(f) excluding from any Patent or Patent application
described in Sections (c)-(f) any claim (i) directed to subject matter that
does not appear in any Patent application having a First Effective Filing Date
prior to the Separation Date and (ii) of which neither Southern Energy nor any
person having a legal duty to assign his/her interest therein to Southern Energy
is entitled to be named as an inventor.
1.4 COPYRIGHTS. "Copyrights" mean collectively (i) any copyright
in any original works of authorship fixed in any tangible medium of expression
as set forth in 17 U.S.C. Section 101 et seq., whether registered or
unregistered, including any applications for registration thereof, (ii) any
corresponding foreign copyrights under the laws of any jurisdiction, in each
case, whether registered or unregistered, and any applications for registration
thereof, and (iii) moral, common law or other rights in creative works however
vested under the laws of any jurisdiction.
1.5 CORPORATE IDENTITY MATERIALS. "Corporate Identity Materials"
means materials that are not products or product-related and that Southern
Energy may now or hereafter use to communicate its identity, including, by way
of example and without limitation, business cards, letterhead, stationery, paper
stock and other supplies, signage on real property, buildings, fleet and
uniforms.
1.6 DATABASE RIGHTS. "Database Rights" means any rights in
databases under the laws of the United States or any other jurisdiction, whether
registered or unregistered, and any applications for registration thereof. As
used in this Agreement, Database Rights shall not include any databases needed
to provide the Services provided for in the Master Services Agreement, and the
Ancillary Agreements as provided therein.
1.7 DISTRIBUTION DATE. "Distribution Date" shall have the meaning
set forth in the Master Separation and Distribution Agreement.
1.8 FIRST EFFECTIVE FILING DATE. "First Effective Filing Date"
means the earliest effective filing date in the particular country for any
Patent or any application for any Patent. By way of example, it is understood
that the First Effective Filing Date for a United
2
<PAGE> 7
States Patent is the earlier of (i) the actual filing date of the United States
Patent application which issued into such Patent, (ii) the priority date under
35 U.S.C. Section 119 for such Patent, or (iii) the priority date under 35
U.S.C. Section 120 for such Patent.
1.9 IMPROVEMENTS. "Improvements" to Technology means (i) with
respect to Copyrights, any modifications, derivative works, and translations of
works of authorship, (ii) with respect to Database Rights, any database that is
created by extraction or re-utilization of another database, and (iii) with
respect to trade secrets and other intellectual property rights included within
the definition of Technology and not covered by Sections (i) - (ii) herein, any
improvements of Technology. For the purposes of clarification, an item of
Technology will be deemed to be an Improvement of another item of Technology
only if it is actually derived from such other item of Technology and not merely
because it may have the same or similar functionality or use as such other item
of Technology.
1.10 INVENTION DISCLOSURE. "Invention Disclosure" means a
disclosure of an invention (i) written for the purpose of allowing legal and
business people to determine whether to file a Patent application with respect
to such invention and (ii) recorded with a control number in the owning party's
records.
1.11 LICENSED MARKS. "Licensed Marks" means the Marks set forth on
Exhibit B hereto as mutually amended by the parties hereto from time to time.
1.12 LICENSED SOUTHERN ENERGY TECHNOLOGY. "Licensed Southern Energy
Technology" means, specifically including without limitation as listed on
Exhibit C as mutually amended by the parties hereto from time to time pursuant
to the procedure set forth in Article II herein, any Technology:
(a) which, as of the Separation Date, Southern Energy or
any Subsidiary or Affiliated Company of Southern Energy (i) owns or controls or
(ii) otherwise has the right to grant any licenses of the type and on the terms
herein granted to Southern without the obligation to pay royalties or other
consideration to Third Parties;
(b) which is in the possession of Southern or its
Subsidiaries or Affiliated Companies as of the Separation Date and necessary to
the ongoing business operation of Southern; and
(c) the competitive harm to Southern Energy resulting from
the license granted in Article II herein does not greatly outweigh the benefit
to Southern resulting from the license.
1.13 LICENSED SOUTHERN TECHNOLOGY. "Licensed Southern Technology"
means, specifically including without limitation as listed on Exhibit D as
mutually amended by the parties from time to time pursuant to the procedure set
forth in Article II herein, any Technology:
(a) which, as of the Separation Date, Southern or any
Subsidiary or Affiliated Company of Southern (i) owns or controls or (ii)
otherwise has the right to grant any licenses of
3
<PAGE> 8
the type and on the terms herein granted to Southern Energy without the
obligation to pay royalties or other consideration to Third Parties;
(b) which is in the possession of Southern Energy, its
Subsidiaries or Affiliated Companies as of the Separation Date and necessary
to the ongoing business operation of Southern Energy; and
(c) the competitive harm to Southern resulting from the
license to Southern Energy granted in Article II herein, does not greatly
outweigh the benefit to Southern Energy resulting from the license.
1.14 MARK. "Mark" means any trademark, service mark, trade name,
and the like, or other word, name, symbol or device, or any combination thereof,
used or intended to be used by a Person to identify and distinguish the products
or services of that Person from the products or services of others and to
indicate the source of such goods or services, including without limitation all
registrations and applications therefor throughout the world and all common law
and other rights therein throughout the world.
1.15 MASTER SEPARATION AGREEMENT. "Master Separation Agreement"
means the Master Separation and Distribution Agreement between the parties
executed simultaneously herewith.
1.16 PATENTS. "Patents" means patents, utility models, design
patents, design registrations, certificates of invention and other governmental
grants for the protection of inventions or industrial designs anywhere in the
world and all reissues, renewals, re-examinations and extensions of any of the
foregoing.
1.17 PERSON. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization, and a governmental
entity or any department, agency or political subdivision thereof.
1.18 SELL. To "Sell" a product means to sell, transfer, lease or
otherwise dispose of a product. "Sale" and "Sold" have the corollary meanings
ascribed thereto.
1.19 SEPARATION DATE. "Separation Date" shall have the same meaning
as used in the Master Separation Agreement.
1.20 SOUTHERN ENERGY SERVICES. "Southern Energy Services" means any
and all services which Southern Energy or any of its Subsidiaries or Affiliated
Companies provide as of the Separation Date.
1.21 SOUTHERN ENERGY OWNED TECHNOLOGY. "Southern Energy Owned
Technology" means as listed on Exhibit E (i) all Technology developed solely by
Southern Energy, its Subsidiaries or its subcontractors for Southern Energy or
its Subsidiaries, (ii) all Technology for which the direct costs were solely
paid by Southern Energy.
4
<PAGE> 9
1.22 SOUTHERN PATENTS. "Southern Patents" mean the Patents:
(a) identified on the Allocated Patent Assets Database as
owned by Southern and licensed to Southern Energy; and
(b) which are in the possession of Southern Energy, its
Subsidiaries or Affiliated Companies as of the Separation Date and necessary to
the ongoing business operation of Southern Energy; and
(c) the competitive harm to Southern resulting from the
license to Southern Energy granted in Article IV herein, does not greatly
outweigh the benefit to Southern Energy resulting from the license.
1.23 SOUTHERN SERVICES. "Southern Services" means any and all
services and products which Southern or any of its Subsidiaries or Affiliated
Companies provide as of the Separation Date.
1.24 SUBLICENSED SOUTHERN ENERGY TECHNOLOGY. "Sublicensed Southern
Energy Technology" means, specifically including, without limitation, the
Technology set forth on Exhibit F as mutually amended from time to time, any
Technology:
(a) which as of the Separation Date, Southern Energy or any
Subsidiary or Affiliated Company of Southern Energy (i) is licensed to use
pursuant to a license agreement from any Third Party Person; and
(b) which is in the possession of Southern, its
Subsidiaries or Affiliated Companies as of the Separation Date.
1.25 SUBLICENSED SOUTHERN TECHNOLOGY. "Sublicensed Southern
Technology" means, specifically including without limitation, the Technology set
forth on Exhibit G as mutually amended from time to time, any Technology:
(a) which as of the Separation Date, Southern or any
Subsidiary or Affiliated Company of Southern: (i) is licensed to use pursuant to
a license agreement from any Third Party; and
(b) which is in the possession of Southern Energy, its
Subsidiaries or Affiliated Companies as of the Separation Date.
1.26 SUBSIDIARY. "Subsidiary" means the same as defined in the
Master Separation Agreement.
1.27 TECHNOLOGY. "Technology" means Copyrights, Database Rights,
trade secrets and any other intellectual property right, but expressly does not
include (i) any Mark, trademark, trade name, trade dress or service mark, or
applications for registration thereof, or (ii)
5
<PAGE> 10
any Patents or applications therefor but does include trade secret rights in and
to inventions disclosed in such Patent applications and Invention Disclosures.
1.28 THIRD PARTY. "Third Party" means a Person other than Southern
and its Subsidiaries and Affiliated Companies and Southern Energy and its
Subsidiaries and Affiliated Companies.
1.29 TRADEMARK USAGE GUIDELINES. "Trademark Usage Guidelines" means
the guidelines for proper usage of the Licensed Marks, as in use immediately
prior to the Separation Date, as such guidelines may be revised and updated in
writing by Southern from time to time.
ARTICLE II -- TECHNOLOGY
ALLOCATION OF OWNERSHIP AND
LICENSE GRANTS
2.1 ASSIGNMENT. Subject to Sections 2.2 and 2.3 below, Southern
hereby grants, conveys and assigns (and agrees to cause its appropriate
Subsidiaries to grant, convey and assign) to Southern Energy, by execution
hereof (or, where appropriate or required, by execution of separate instruments
of assignment), all its (and their) right, title and interest in and to the
Southern Energy Owned Technology, to be held and enjoyed by Southern Energy, its
successors and assigns. Southern further grants, conveys and assigns (and agrees
to cause its appropriate Subsidiaries to grant, convey and assign) to Southern
Energy all its (and their) right, title and interest in and to any and all
causes of action and rights of recovery for past infringement of Copyrights and
Database Rights in and to the Southern Energy Owned Technology, and for past
misappropriation of trade secrets in and to the Southern Energy Owned
Technology. Southern further covenants that Southern will, without demanding any
further consideration therefor, at the request and expense of Southern Energy
(except for the value of the time of Southern employees), do (and cause its
Subsidiaries to do) all lawful and just acts that may be or become necessary for
evidencing, maintaining, recording and perfecting Southern Energy's rights to
such Southern Energy Owned Technology consistent with Southern's general
business practice as of the Separation Date, including but not limited to,
execution and acknowledgment of (and causing its Subsidiaries to execute and
acknowledge) assignments and other instruments in a form reasonably required by
Southern Energy for each Copyright or Database Right jurisdiction. Southern
Energy hereby waives any and all claims of any right, title and interest in and
to any Technology not within the definition of Southern Energy Owned Technology
subject to the licensees granted in this Article.
2.2 PRIOR GRANTS. Southern Energy acknowledges and agrees that the
foregoing assignment is subject to any and all licenses or other rights that may
have been granted by Southern or its Subsidiaries with respect to the Southern
Energy Owned Technology prior to the Separation Date. Southern shall respond to
reasonable inquiries from Southern Energy regarding any such prior grants.
2.3 ASSIGNMENT DISCLAIMER. SOUTHERN ENERGY ACKNOWLEDGES AND AGREES
THAT THE FOREGOING ASSIGNMENTS ARE MADE ON AN "AS IS,"
6
<PAGE> 11
QUITCLAIM BASIS AND THAT NEITHER Southern NOR ANY SUBSIDIARY OR AFFILIATED
COMPANY OF SOUTHERN HAS MADE OR WILL MAKE ANY WARRANTY WHATSOEVER, EXPRESS,
IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ENFORCEABILITY OR
NON-INFRINGEMENT.
2.4 LICENSE TO SOUTHERN.
(a) Southern Energy grants (and agrees to cause its
appropriate Subsidiaries or Affiliated Companies to grant) to Southern and its
Subsidiaries and Affiliated Companies, the following personal, nonexclusive,
worldwide, fully paid up, royalty-free and non-transferable (except as specified
in Section 8.9 below) licenses:
(i) under its and their Copyrights in and to the Licensed
Southern Energy Technology, (A) to reproduce and have reproduced the
works of authorship included in the Licensed Southern Energy Technology
and Improvements thereof prepared by or for Southern, in whole or in
part, as part of Southern Services, (B) to prepare Improvements or have
Improvements prepared for it based upon the works of authorship
included in the Licensed Southern Energy Technology in order to provide
Southern Services, (C) to distribute (by any means and using any
technology, whether now known or unknown, including without limitation
electronic transmission) copies of the works of authorship included in
the Licensed Southern Energy Technology and Improvements thereof
prepared by or for Southern to the public by sale or other transfer of
ownership or by rental, lease or lending, as part of Southern Services,
and (D) to perform (by any means and using any technology, whether now
known or unknown, including without limitation electronic transmission)
and display the works of authorship included in the Licensed Southern
Energy Technology and Improvements thereof prepared by or for Southern,
as part of Southern Services;
(ii) under its and their Database Rights in and to the
Licensed Southern Energy Technology, to extract data from the databases
included in the Licensed Southern Energy Technology and to re-utilize
such data to design, develop, Sell and offer for sale Southern Services
and to Sell such Southern Services that incorporate such data,
databases and Improvements thereof prepared by or for Southern; and
(iii) under its and their trade secrets and other intellectual
property rights in and to the Licensed Southern Energy Technology
(except the intellectual property rights excluded from the definition
of Technology), to use the Licensed Southern Energy Technology and
Improvements thereof prepared by or for Southern to design, develop,
Southern Services.
(b) Without limiting the generality of the foregoing
licenses granted in Section 2.4 (a) above, with respect to software included
within the Licensed Southern Energy Technology, such licenses include the right
to use, modify, and reproduce such software and Improvements thereof made by or
for Southern as part of the Southern Services, in source code and object code
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form, and to Sell such software and Improvements thereof made by or for
Southern, in source code and object code form, solely as part of the Southern
Services.
(c) Southern, its Subsidiaries and Affiliated Companies may
not grant sublicenses under Sections (a) and (b) above.
(d) The license granted in this Section may be assigned to
a Person that succeeds to all or substantially all of the assets of Southern or
its Subsidiaries or Affiliated Companies, but may not be sublicensed by such
future assigns.
2.5 LICENSE TO SOUTHERN ENERGY.
(a) Southern grants (and agrees to cause its appropriate
Subsidiaries or Affiliated Companies to grant) to Southern Energy and its
Subsidiaries and Affiliated Companies the following personal, nonexclusive,
worldwide, fully paid up, royalty-free and non-transferable (except as specified
in Section 8.9 below) licenses:
(i) under its and their Copyrights in and to the Licensed
Southern Technology, (A) to reproduce and have reproduced the works of
authorship included in the Licensed Southern Technology and
Improvements thereof prepared by or for Southern Energy, in whole or in
part, as part of Southern Energy Services, (B) to prepare Improvements
or have Improvements prepared for it based upon the works of authorship
included in the Licensed Southern Technology in order to create
Southern Energy Services, (C) to distribute (by any means and using any
technology, whether now known or unknown, including without limitation
electronic transmission) copies of the works of authorship included in
the Licensed Southern Technology and Improvements thereof prepared by
or for Southern Energy to the public by sale or other transfer of
ownership or by rental, lease or lending, as part of Southern Energy
Services, and (D) to perform (by any means and using any technology,
whether now known or unknown, including without limitation electronic
transmission) and display the works of authorship included in the
Licensed Southern Technology and Improvements thereof prepared by or
for Southern Energy, as part of Southern Energy Services;
(ii) under its and their Database Rights in and to the
Licensed Southern Technology, to extract data from the databases
included in the Licensed Southern Technology and to re-utilize such
data to design, develop, manufacture and have manufactured Southern
Energy Services and to Sell such Southern Energy Services that
incorporate such data, databases and Improvements thereof prepared by
or for Southern Energy; and
(iii) under its and their trade secrets and other intellectual
property rights in and to the Licensed Southern Technology (except the
intellectual property rights excluded from the definition of
Technology), to use the Licensed Southern Technology and Improvements
thereof prepared by or for Southern Energy to Sell such Southern Energy
Services.
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(b) Without limiting the generality of the foregoing
licenses granted in Section 2.5(a) above, with respect to software included
within the Licensed Southern Technology, such licenses include the right to use,
modify, and reproduce such software and Improvements thereof made by or for
Southern Energy as part of the Southern Energy Services, in source code and
object code form, and to Sell such software and Improvements thereof made by or
for Southern Energy, in source code and object code form, solely as part of the
Southern Energy Services.
(c) Southern Energy, its Subsidiaries and Affiliated
Companies may not grant sublicenses under Sections (a) and (b) above.
(d) The license granted in this Section may be assigned to
a Person that succeeds to all or substantially all of the assets of Southern
Energy or its Subsidiaries or Affiliated Companies, but may not be sublicensed
by such future assigns.
2.6 IDENTIFICATION OF LICENSED TECHNOLOGY. Prior to the Separation
Date, and thereafter from time to time as the parties identify applicable
Technology, Southern Energy shall use reasonable best efforts to identify to
Southern the Licensed Southern Technology, and Southern shall use reasonable
best efforts to identify to Southern Energy the Licensed Southern Energy
Technology. The parties shall also identify to each other the Technology each
believes should be specifically excluded from Licensed Southern Technology and
Licensed Southern Energy Technology. As thereafter mutually agreed upon by the
parties, the Licensed Southern Energy Technology and Licensed Southern
Technology shall be set forth on Exhibit C and Exhibit D, respectively, as
amended from time to time. The tangible copies of all documents or other
materials embodying excluded Technology shall either be returned to its owner or
destroyed, as directed by its owner. In the absence of an express exclusion,
Technology within the definition of Southern Licensed Technology and Southern
Energy Licensed Technology shall be licensed pursuant to Sections 2.4 and 2.5
herein, even if not listed in Exhibit C or Exhibit D. The parties' senior
executives responsible for intellectual property, or their designees, shall
mutually agree upon such procedures as necessary or helpful to comply with the
requirements of this Section. Disputes between the parties regarding this
Section which cannot be resolved by such procedures shall follow the procedures
for disputes as set forth in the Master Separation Agreement.
2.7 IMPROVEMENTS. As between the parties, after the Separation
Date, Southern Energy hereby retains all right, title and interest, including
all intellectual property rights, in and to any Improvements to Licensed
Southern Technology made by or for Southern Energy in the exercise of the
licenses granted to it hereunder, subject only to the ownership of Southern in
the underlying Licensed Southern Technology, and Southern hereby retains all
right, title and interest, including all intellectual property rights, in and to
any Improvements to Licensed Southern Energy Technology made by or for Southern
in the exercise of the licenses granted to it hereunder, subject only to the
ownership of Southern Energy in the underlying Licensed Southern Energy
Technology. Upon the request of the licensing party, the licensee shall grant
the licensing party a license in and to any such Improvements pursuant to the
terms of Section 2.4 or 2.5 herein as applicable.
2.8 DURATION OF LICENSE. The licenses granted above to the
Licensed Southern Technology and Licensed Southern Energy Technology shall
continue in perpetuity (or, in the case of Copyrights and Database Rights, until
the expiration of the term thereof).
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2.9 NO PATENT LICENSES. Nothing contained in this Agreement shall
be construed as conferring to either party by implication, estoppel or otherwise
any license or right under any Patent or applications therefor, whether or not
the exercise of any right herein granted necessarily employs an invention of any
existing or later issued Patent. The applicable licenses granted between
Southern and Southern Energy with respect to Patents are set forth in Article IV
herein.
2.10 THIRD PARTY TECHNOLOGY.
(a) Southern hereby agrees to sublicense or to use
reasonable commercial efforts to obtain, or to cause to be obtained any consent,
approval or amendment required to convey a license or sublicense in the
Sublicensed Southern Technology to Southern Energy pursuant to the same or
substantially the same terms as Southern's license.
(b) Southern Energy hereby agrees to sublicense or to use
commercially reasonable efforts to obtain or cause to be obtained any consent,
approval or amendment required to obtain a license or sublicense in the
Sublicensed Southern Energy Technology to Southern pursuant to the same or
substantially the same terms as Southern Energy's license.
2.11 TERMINATION.
2.11.1 VOLUNTARY TERMINATION. By written notice to the other
party, each party may voluntarily terminate all or a specified portion of the
licenses and rights granted to it hereunder by such other party. Such notice
shall specify the effective date of such termination and shall clearly specify
any affected Technology, product or service.
2.11.2 SURVIVAL. Any voluntary termination of licenses and
rights of a party under Section (a) herein shall not affect such party's
licenses and rights with respect to any licensed product made or service
furnished prior to such termination, and shall not affect the licenses and
rights granted to the other party hereunder.
2.11.3 NO OTHER TERMINATION. Each party acknowledges and
agrees that its remedy for breach by the other party of the licenses granted to
it hereunder or of any other provision hereof shall be, subject to the
requirements of Article VI, to bring a claim to recover damages subject to the
limits set forth in this Agreement and to seek any other appropriate equitable
relief, other than termination of the licenses granted by it in this Agreement.
ARTICLE III - TRADEMARKS
ALLOCATION OF OWNERSHIP AND
LICENSE GRANTS
3.1 ASSIGNMENT. Southern Energy hereby grants, conveys and assigns
(and agrees to cause its appropriate Subsidiaries to grant, convey and assign)
to Southern, by execution hereof (or, where appropriate or required, by
execution of separate instruments of assignment), all its (and their) right,
title and interest in and to the mark "Southern Energy" and any and all variants
incorporating the mark "Southern Energy," including all applications and
registrations
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therefor, and goodwill associated therewith, to be held and enjoyed by Southern,
its successors and assigns and waives any and all claims to such Mark, subject
to the license granted herein.
3.2 LICENSE GRANT. Southern grants (and agrees to cause its
appropriate Subsidiaries to grant) to Southern Energy a personal, nonexclusive,
worldwide, fully-paid up and non-transferable (except as set forth in Section
8.9) license to use the Licensed Marks solely in connection with the
advertisement, promotion and Sale of the Southern Energy Services.
3.3 LICENSE RESTRICTIONS.
(a) Once Southern Energy abandons the use of a Licensed
Mark for the Southern Energy Services, then Southern Energy agrees that its
license granted hereunder with respect to that Licensed Mark shall thereupon
terminate.
(b) Southern Energy may not use any Licensed Mark in direct
association with another non-Licensed Mark such that the two Marks appear to be
a single Mark or in any other composite manner with any Marks of Southern Energy
or any Third Party (other than the Southern Energy Business Marks as permitted
herein).
(c) In all respects, Southern Energy's usage of the
Licensed Marks pursuant to the license granted hereunder shall be in a manner
consistent with the high standards, reputation and prestige represented by the
Licensed Marks, and any usage by Southern Energy that is inconsistent with the
foregoing shall be deemed to be outside the scope of the license granted
hereunder. As a condition to the license granted hereunder, Southern Energy
shall at all times present, position and promote the Southern Energy Business
when using one or more of the Licensed Marks in a manner consistent with the
high standards and prestige represented by the Licensed Marks.
3.4 LICENSEE UNDERTAKINGS. As a condition to the licenses granted
hereunder, Southern Energy undertakes to Southern that:
(a) Southern Energy shall not use the Licensed Marks (or any other
Mark of Southern) in any manner contrary to public morals, in any manner which
is deceptive or misleading, which ridicules or is derogatory to the Licensed
Marks, or which compromises or reflects unfavorably upon the goodwill, good
name, reputation or image of Southern or the Licensed Marks, or which might
jeopardize or limit Southern's proprietary interest therein.
(b) Southern Energy shall not use the Licensed Marks in connection
with any products or services other than in connection with the Southern Energy
Services.
(c) Southern Energy shall not (i) misrepresent to any Person the
scope of its authority under this Agreement, (ii) incur or authorize any
expenses or liabilities chargeable to Southern, or (iii) take any actions that
would impose upon Southern any obligation or liability to a Third Party other
than obligations under this Agreement, or other obligations which Southern
expressly approves in writing for Southern Energy to incur on its behalf.
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(d) All press releases and corporate advertising and promotions that
embody the Licensed Marks and messages conveyed thereby shall be consistent with
the high standards and prestige represented by the Licensed Marks.
3.5 NON-TRADEMARK USE. Each party may make appropriate and
truthful references to the other party, the party's services and affiliation
between the parties.
3.6 RESERVATION OF RIGHTS. Except as otherwise expressly provided
in this Agreement, Southern shall retain all rights in and to the Licensed
Marks, including without limitation:
(a) All rights of ownership in and to the Licensed Marks;
(b) The right to use (including the right of Southern's
Subsidiaries and Affiliated Companies to use) the Licensed Marks, either alone
or in combination with other Marks, in connection with the marketing, offer or
provision of any product or service, including any product or service which
competes with Southern Energy Business products or services; and
(c) The right to license Third Parties to use the Licensed
Marks.
3.7 SUBLICENSES.
Subject to the terms and conditions of this Agreement, including all
applicable Trademark Usage Guidelines and other restrictions in this Agreement,
Southern Energy may grant sublicenses to its Subsidiaries and Affiliated
Companies to use the Licensed Marks in accordance with the license grant above;
provided, that (i) Southern Energy enters into a written sublicense agreement
with each such Subsidiary or Affiliated Company sublicensee, and (ii) such
agreement does not include the right to grant further sublicenses other than, in
the case of a sublicensed Subsidiary or Affiliated Company of Southern Energy,
to another Subsidiary or Affiliated Company of Southern Energy. Southern Energy
shall provide copies of such written sublicense agreements to Southern upon
request. If Southern Energy grants any sublicense rights pursuant to this
Section (a) and any such sublicensed Subsidiary or Affiliated Company ceases to
be a Subsidiary or Affiliated Company, then the sublicense granted to such
Subsidiary pursuant to this Section shall terminate one hundred eighty (180)
days from the date of such cessation.
3.8 ENFORCEMENT OF AGREEMENTS. Southern Energy shall take all
appropriate measures at Southern Energy's expense promptly and diligently to
enforce the terms of any sublicense agreement or other agreement with any
Subsidiary or Affiliated Company, and shall restrain any such Subsidiary or
Affiliated Company from violating such terms, including without limitation (i)
monitoring the Subsidiaries' and Affiliated Companies' compliance with the
relevant Trademark Usage Guidelines and causing any noncomplying Subsidiary or
Affiliated Company promptly to remedy any failure, (ii) terminating such
agreement and/or (iii) commencing legal action, in each case, using a standard
of care consistent with Southern's practices as of the Separation Date. In the
event that Southern determines that Southern Energy has failed promptly and
diligently to enforce the terms of any such agreement using such standard of
care, Southern reserves the right to enforce such terms, and Southern Energy
shall reimburse Southern for its fully allocated direct costs and expenses
incurred in enforcing such
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agreement, plus all out-of-pocket costs and expenses, plus five percent (5%)
(or, if such costs and expenses are incurred more than two (2) years after the
Separation Date, ten percent (10%)).
3.9 ROYALTIES. The license granted in this Article III shall be
royalty-free.
3.10 TRADEMARK USAGE GUIDELINES. Southern Energy and its
Subsidiaries and Affiliated Companies shall use the Licensed Marks only in a
manner that is consistent with the Trademark Usage Guidelines.
3.11 OWNERSHIP AND RIGHTS. Southern Energy agrees not to challenge
the ownership or validity of the Licensed Marks. Southern Energy shall not
disparage, dilute or adversely affect the validity of the Licensed Marks.
Southern Energy's use of the Licensed Marks shall inure exclusively to the
benefit of Southern, and Southern Energy shall not acquire or assert any rights
therein. Southern Energy recognizes the value of the goodwill associated with
the Licensed Marks, and that the Licensed Marks may have acquired secondary
meaning in the minds of the public.
3.12 PROTECTION OF MARKS. Southern Energy shall assist Southern, at
Southern's request and expense, in the procurement and maintenance of Southern's
intellectual property rights in the Licensed Marks. Southern Energy will not
grant or attempt to grant a security interest in the Licensed Marks, or to
record any such security interest in the United States Patent and Trademark
Office or elsewhere, against any trademark application or registration belonging
to Southern. Southern Energy agrees to, and to cause its Subsidiaries and
Affiliated Companies to, execute all documents reasonably requested by Southern
to effect further registration of, maintenance and renewal of the Licensed
Marks, recordation of the license relationship between Southern and Southern
Energy, and recordation of Southern Energy as a registered user. Southern makes
no warranty or representation that trademark registrations have been or will be
applied for, secured or maintained in the Licensed Marks throughout, or anywhere
within, the world. Southern Energy shall cause to appear on all documents,
instruments or other materials bearing the Licensed Marks, such legends,
markings and notices as may be required by applicable law or reasonably
requested by Southern.
3.13 SIMILAR MARKS. Southern Energy agrees not to use or register
in any country any Mark that infringes Southern's rights in the Licensed Marks,
or any element thereof. If any application for registration is, or has been,
filed in any country by Southern Energy which relates to any Mark that infringes
Southern's rights in the Licensed Marks, Southern Energy shall immediately
abandon any such application or registration or assign it to Southern. Southern
Energy shall not challenge Southern's ownership of or the validity of the
Licensed Marks or any application for registration thereof throughout the world.
Southern Energy shall not use or register in any country any copyright, domain
name, telephone number or any other intellectual property right, whether
recognized currently or in the future, or other designation which would create a
likelihood of confusion or otherwise affects the ownership or rights of Southern
in and to the Licensed Marks, or otherwise to take any action which would
adversely affect any of such ownership rights, or assist anyone else in doing
so. Southern Energy shall cause its Subsidiaries, Affiliated Companies and
Authorized Dealers to comply with the provisions of this Section.
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3.14 INFRINGEMENT PROCEEDINGS. In the event that Southern Energy
learns of any infringement or threatened infringement of the Licensed Marks, or
any unfair competition, passing-off or dilution with respect to the Licensed
Marks, Southern Energy shall notify Southern or its authorized representative
giving particulars thereof, and Southern Energy shall provide necessary
information and assistance to Southern or its authorized representatives at
Southern's expense in the event that Southern decides that proceedings should be
commenced. Notwithstanding the foregoing, Southern Energy is not obligated to
monitor or police use of the Licensed Marks by Third Parties other than any
sublicenses granted by it. Southern shall have exclusive control of any
litigation, opposition, cancellation or related legal proceedings. The decision
whether to bring, maintain or settle any such proceedings shall be at the
exclusive option and expense of Southern, and all recoveries shall belong
exclusively to Southern. Southern Energy shall not and shall have no right to
initiate any such litigation, opposition, cancellation or related legal
proceedings in its own name, but, at Southern's request, agrees to be joined as
a party in any action taken by Southern to enforce its rights in the Licensed
Marks. Southern shall incur no liability to Southern Energy or any other Person
under any legal theory by reason of Southern's failure or refusal to prosecute
or by Southern's refusal to permit Southern Energy to prosecute, any alleged
infringement by Third Parties, nor by reason of any settlement to which Southern
may agree.
3.15 TERMINATION.
(a) By written notice to Southern, Southern Energy may
voluntarily terminate all or a specified portion of the licenses and rights
granted to it hereunder by Southern. Such notice shall specify the effective
date of such termination and shall clearly specify any affected Licensed Marks.
(b) The licenses, sublicenses and rights granted to
Southern Energy hereunder shall terminate on the Distribution Date unless
extended in Southern's sole discretion and confirmed in writing.
3.16 USE OF MARKS FOLLOWING TERMINATION. Southern shall not use
the marks "Southern Energy," "Southern Company Energy Marketing" or any mark
incorporating "Southern Energy" for eighteen (18) months from the date Southern
Energy ceases use of such marks, unless shortened in Southern Energy's sole
discretion and confirmed in writing.
ARTICLE IV - PATENTS
ALLOCATION OF OWNERSHIP
AND LICENSE GRANTS
4.1 PATENT OWNERSHIP. Southern Energy hereby waives any and all
claims of any right, title and interest in and to any Patents not within the
definition of Assigned Patents, subject to the licenses granted in this Article.
4.2 LICENSE GRANTS TO SOUTHERN. Southern Energy grants (and agrees
to cause its appropriate Subsidiaries or Affiliated Companies to grant) to
Southern, under the Southern Energy Patents, a personal, irrevocable,
nonexclusive, worldwide and non-transferable (except as set forth in Section
8.9) license solely to Sell and offer for sale Southern Services.
4.3 LICENSE GRANTS TO SOUTHERN ENERGY. Southern grants (and agrees
to cause its appropriate Subsidiaries or Affiliated Companies to grant) to
Southern Energy, under the Southern Patents, a personal, irrevocable,
nonexclusive, worldwide, and non-transferable (except as set forth in Section
8.9) license solely to Sell and offer for sale Southern Energy Services.
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4.4 IDENTIFICATION OF LICENSED PATENTS. Prior to the Separation
Date, and thereafter from time to time upon additions to the Allocated Patent
Assets Database, (a) Southern Energy shall use reasonable best efforts to
identify to Southern the Southern Patents, and (b) Southern shall use reasonable
best efforts to identify to Southern Energy the Southern Energy Patents. The
parties shall also identify to each other the Patents specifically excluded from
Southern Patents and Southern Energy Patents. As thereafter mutually agreed upon
by the parties, the Southern Patents and Southern Energy Patents shall be
identified on Exhibit A, as amended from time to time. In the absence of an
express exclusion, the Patents within the definition of Southern Patents and
Southern Energy Patents shall be licensed pursuant to Article IV herein. The
parties' senior executives responsible for intellectual property shall mutually
agree upon such procedures as necessary or helpful to comply with the
requirements of this Section. Disputes between the parties regarding this
Section which cannot be resolved by such procedures shall follow the procedures
for disputes as set forth in the Master Separation Agreement.
4.5 SUBLICENSE RIGHTS.
(a) Southern Energy may grant sublicenses to its
Subsidiaries and Affiliated Companies within the scope of its license hereunder
(with no right to grant further sublicenses other than, in the case of a
sublicensed Subsidiary or Affiliated Companies, to another Subsidiary or
Affiliated Company of such party).
(b) the license granted in this Section may be assigned to
a Person that succeeds to all or substantially all of the assets of Southern
Energy or its Subsidiaries or Affiliated Companies, but may not be sublicensed
by such future assigns.
4.6 DURATION. All licenses granted herein with respect to each
Patent shall expire upon the expiration of the term of such Patent.
4.7 ROYALTIES. The licenses granted in this Article shall be
subject to the same royalties (if any) as paid by Southern for the subject
Patent.
4.8 PATENT APPLICATIONS AND INVENTION DISCLOSURES. Each party
agrees, at its own expense, to provide to the other party copies of any Patents,
Patent applications and Invention Disclosures that are listed in the Allocated
Patent Assets Database in the form that such Patents, Patent applications and
Invention Disclosures exist as of the Separation Date. Neither party has any
obligation to disclose or provide copies to the other party any other Patents,
Patent applications or Invention Disclosures. The licenses granted under this
Agreement cover only statutory rights under Patents and statutory rights (if
any) under Patent applications. Trade secret and other non-Patent licenses with
respect to inventions described in Invention Disclosures and Patent applications
shall be solely as set forth in Article IV herein.
4.9 ADDITIONAL OBLIGATIONS WITH REGARD TO SOUTHERN PATENTS.
Southern Energy acknowledges that its employees and contractors who are former
Southern employees and contractors have a continuing duty to assist Southern
with the prosecution of Southern Patent applications and, accordingly, Southern
Energy agrees to make available, to
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Southern or its counsel, inventors and other persons employed by Southern Energy
for interviews and/or testimony to assist in good faith in further prosecution,
maintenance or litigation of the Southern Patents, including the signing of
documents related thereto. Any actual and reasonable out-of-pocket expenses
associated with such assistance shall be borne by Southern, expressly excluding
the value of the time of such Southern Energy personnel; provided, however, that
in the case of assistance with litigation, the parties shall agree on a case by
case basis on compensation, if any, of Southern Energy for the value of the time
of Southern Energy's employees as reasonably required in connection with such
litigation.
4.10 DEFENSIVE PROTECTION MEASURES. The parties shall cooperate
reasonably and in good faith to the extent consistent with each party's own
business objectives in the event that either party is involved in Patent
litigation or controversies in which it would be helped in some way by the other
party's Patents or relevant knowledge. Such cooperation may include, by way of
example, (i) cooperation with respect to knowledge of prior art (whether the
other party's or a Third Party's), (ii) consent to the granting of licenses to
such other party's Patents, and (iii) assignment to such party of such other
party's Patents for the purpose of bringing a counterclaim against a Third
Party. The party requesting such cooperation shall bear the actual and
reasonable out-of-pocket expenses of the cooperating party (except for the value
of the time of the cooperating party's employees).
4.11 STANDARDS BODIES. The parties agree to cooperate reasonably
and in good faith with each other with respect to the licensing of each party's
Patents in the context of standards bodies, to the extent consistent with each
party's own business objectives.
4.12 ASSIGNMENT OF PATENTS. Southern shall not assign or grant any
rights under any of the Southern Patents unless such assignment or grant is made
subject to the licenses granted in this Agreement. Southern Energy shall not
assign or grant any rights under any of the Southern Energy Patents unless such
assignment or grant is made subject to the licenses granted in this Agreement.
4.13 RESPONSE TO REQUESTS. Each party shall, upon a request from
the other party sufficiently identifying any Patent or Patent application,
inform the other party as to the extent to which said Patent or Patent
application is subject to the licenses and other rights granted hereunder. If
such licenses or other rights under said Patent or Patent application are
restricted in scope, copies of all pertinent provisions of any contract or other
arrangement creating such restrictions shall, upon request, be furnished to the
party making such request, unless such disclosure is prevented by such contract
or other arrangement, and in such event, a statement of the nature of such
restriction shall be provided.
4.14 RECORDATION OF LICENSES.
(a) For any country, now or in the future, that requires
the express consent of all inventors or their assignees to the grant of licenses
or rights under Patents issued in such countries for joint inventions:
(i) each party shall give such consent, or shall
obtain such consent from its employees, its Subsidiaries or
employees of any of its Subsidiaries, as required
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to make full and effective any such licenses and rights
respecting any joint invention granted to a grantee hereunder
by such party; and
(ii) each party shall take steps that are reasonable
under the circumstances to obtain from Third Parties whatever
other consents are necessary to make full and effective such
licenses and rights respecting any joint invention purported
to be granted by it hereunder. If, in spite of such reasonable
steps, such party is unable to obtain the requisite consents
from such Third Parties, the resulting inability of such party
to make full and effective its purported grant of such
licenses and rights shall not be considered to be a breach of
this Agreement.
(b) Each party agrees, without demanding any further
consideration, to execute (and to cause its Subsidiaries or Affiliated Companies
to execute) all documents reasonably requested by the other party to effect
recordation of the license relationship between the parties created by this
Agreement.
ARTICLE V
CONFIDENTIALITY
The terms of the Master Confidential Disclosure Agreement between the parties
shall apply to any Confidential Information (as defined therein) which is the
subject matter of this Agreement.
ARTICLE VI
DISPUTE RESOLUTION
The parties shall make a good faith attempt to resolve any dispute or claim
arising out of or related to this Agreement through negotiation. Within thirty
(30) days after notice of a dispute or claim is given by either party to the
other party, the parties' senior executive responsible for intellectual
property (or his or her delegate) shall meet to attempt to resolve the matter.
Such meeting shall constitute the vice president meeting required in Section
5.7(c) of the Master Separation Agreement. If the parties' representatives are
unable to resolve the dispute, the dispute resolution procedures set forth in
the Master Separation Agreement shall be followed.
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ARTICLE VII
LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY OR ITS SUBSIDIARIES OR AFFILIATED COMPANIES BE
LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES OR AFFILIATED COMPANIES FOR ANY
SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST
PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE)
ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE
FOREGOING LIMITATIONS SHALL NOT LIMIT DAMAGES FOR INFRINGEMENT AVAILABLE TO
EITHER PARTY UNDER APPLICABLE LAW IN THE EVENT OF BREACH BY THE OTHER PARTY OF
THE LICENSES GRANTED HEREIN AND SHALL NOT LIMIT EACH PARTY'S OBLIGATIONS
EXPRESSLY ASSUMED IN THE MASTER SEPARATION AGREEMENT; PROVIDED FURTHER THAT THE
EXCLUSION OF PUNITIVE DAMAGES SHALL APPLY IN ANY EVENT.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 DISCLAIMER. EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL
TECHNOLOGY, INTELLECTUAL PROPERTY AND ANY OTHER INFORMATION OR MATERIALS
LICENSED OR PROVIDED HEREUNDER IS LICENSED OR PROVIDED ON AN "AS IS" BASIS, AND
THAT NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES OR AFFILIATED COMPANIES MAKES ANY
REPRESENTATIONS OR EXTENDS ANY WARRANTIES WHATSOEVER, EXPRESS, IMPLIED OR
STATUTORY, WITH RESPECT THERETO, INCLUDING WITHOUT LIMITATION ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE,
ENFORCEABILITY OR NON-INFRINGEMENT. Without limiting the generality of the
foregoing, neither party nor any of its Subsidiaries or Affiliated Companies
makes any warranty
18
<PAGE> 23
or representation that any manufacture, use, importation, offer for sale or sale
of any product or service will be free from infringement of any intellectual
property right of any Third Party.
8.2 NO IMPLIED LICENSES. Nothing contained in this Agreement shall
be construed as conferring any rights by implication, estoppel or otherwise,
under any intellectual property right, other than the rights expressly granted
in this Agreement. Neither party is required hereunder to furnish or disclose to
the other any technical or other information (including copies of the Licensed
Southern Energy Technology and the Licensed Southern Technology), except as
specifically provided herein.
8.3 INFRINGEMENT SUITS. Neither party shall have any obligation
hereunder to institute any action or suit against Third Parties for infringement
of any technology or intellectual property licensed to the other party
hereunder, or to defend any action or suit brought by a Third Party which
challenges or concerns the validity of any of such rights or which claims that
any technology or intellectual property assigned or licensed to the other party
hereunder infringes any technology or other intellectual property right of any
Third Party or constitutes a misappropriated trade secret of any Third Party.
Southern shall not have any right to institute any action or suit against Third
Parties for infringement of any technology or intellectual property of Southern
Energy and Southern Energy shall not have any right to institute any action or
suit against Third Parties for infringement of any of the technology or
intellectual property of Southern.
8.4 NO OTHER OBLIGATIONS. NEITHER PARTY ASSUMES ANY
RESPONSIBILITIES OR OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND
OBLIGATIONS EXPRESSLY SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN
AGREEMENT BETWEEN THE PARTIES. Without limiting the generality of the foregoing,
neither party, nor any of its Subsidiaries or Affiliated Companies, is obligated
to provide any technical assistance.
8.5 ENTIRE AGREEMENT. This Agreement, the Master Separation
Agreement and the other Ancillary Agreements (as defined in the Master
Separation Agreement) constitute the entire agreement between the parties with
respect to the subject matter hereof and shall supersede all prior written and
oral and all contemporaneous oral agreements and understandings with respect to
the subject matter hereof. To the extent there is a conflict between this
Agreement and the Master Separation Agreement between the parties, the terms of
this Agreement shall govern.
8.6 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Georgia as to
all matters regardless of the laws that might otherwise govern under principles
of conflicts of laws applicable thereto.
8.7 DESCRIPTIVE HEADINGS. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
8.8 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given when delivered in
person, by telecopy with answer back, by express or overnight mail delivered by
a nationally recognized air courier (delivery
19
<PAGE> 24
charges prepaid), by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties as follows:
if to Southern:
The Southern Company
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
Attention: General Counsel
Telecopy: (404) 506-0564
if to Southern Energy:
Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338-4780
Attention: General Counsel
Telecopy: (770) 821-6767
or to such other address as the party to whom notice is given may have
previously furnished to the other in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy or by air courier
shall be deemed effective on the first Business Day following the day on which
such notice or communication was sent. Any notice or communication sent by
registered or certified mail shall be deemed effective on the third Business Day
following the day on which such notice or communication was mailed. As used in
this Section 8.8, "Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions located in the State of Georgia are
authorized or obligated by law or executive order to close.
8.9 NONASSIGNABILITY. Neither party may, directly or indirectly,
in whole or in part, whether by operation of law or otherwise, assign or
transfer this Agreement, without the other party's prior written consent, and
any attempted assignment, transfer or delegation without such prior written
consent shall be voidable at the sole option of such other party.
Notwithstanding the foregoing, each party (or its permitted successive assignees
or transferees hereunder) may assign or transfer this Agreement as a whole
without consent to a Person that succeeds to all or substantially all of the
business or assets of such party. Without limiting the foregoing, this Agreement
will be binding upon and inure to the benefit of the parties and their permitted
successors and assigns.
8.10 SEVERABILITY. If any term or other provision of this Agreement
is determined by a nonappealable decision of a court, administrative agency or
arbitrator to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the fullest extent possible.
20
<PAGE> 25
8.11 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
8.12 AMENDMENT. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to such agreement.
8.13 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which, taken together, shall be considered to be one and
the same instrument.
8.14 GOVERNMENTAL APPROVAL. The parties acknowledge that in the
past they have licensed Technology to each other in accordance with certain
existing regulatory authority. The parties intend to implement this Agreement
to the fullest extent permissible under such existing regulatory authority and
to cooperate toward obtaining and maintaining in effect such governmental
agency approvals as may be required in order to implement this Agreement as
fully as possible in accordance with its terms, and to cooperate so as to
revise and mutually agree on such revisions as become necessary in the event
regulatory approval is withheld.
WHEREFORE, the parties have signed this Technology and Intellectual Property
Ownership and License Agreement effective as of the date first set forth above.
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
By: By:
-------------------------------- --------------------------------
Name: Name:
Title: Title:
21
<PAGE> 26
EXHIBIT A
"ALLOCATED PATENT ASSETS DATABASE"
(SECTION 1.2)
A. Southern Energy, Inc.
None.
B. Southern Company
1. 5,968,254, Oct. 19, 1999, Concrete mix containing coal ash and
organic plant ash, Dodgen, Harold Dean, Hiram, Georgia Larrimore,
Charles Lamar, Birmingham, Alabama, Southern Company Services,
Birmingham, Alabama. (LICENSED)
2. 5,951,200, Sep. 14, 1999, Enclosement to shield structure which
secures entrance-deterring cap to manhole opening from water and dirt
containments, Barton, David L., Avondale Estates, Georgia, Barton
Southern Company, Inc., Conyers, Georgia.
3. 5,912,916, Jun. 15, 1999, Electric furnace with insulated
electrodes and process for producing molten metals, Hendrix, Charles
F., Pell City, Alabama, Alabama Power Company, Birmingham, Alabama.
4. 5,882,374, Mar. 16, 1999, Process for producing foundry iron with
an insulated electrode, Hendrix, Charles F., Pell City, Alabama,
Alabama Power Company, Birmingham, Alabama.
5. 5,834,686, Nov. 10, 1998, Insulated electrical equipment,
Barrett, Donald Christopher, Swindon, England Cook, Michael Robert,
Swindon, England Spalding, Matthew, Newark, Delaware, Raychem Limited,
Swindon, United Kingdom (03), Date Transaction Recorded: May 17, 1999
ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS). GEORGIA
POWER COMPANY 333 PIEDMONT AVENUE ATLANTA, GEORGIA 30308 Reel & Frame
Number: 009974/0524. (LICENSED)
6. 5,821,656, Oct. 13, 1998, Magnetic bearing with reduced
control-flux-induced rotor loss, Colby, Roy S., Tariffville,
Connecticut Piech, Zbigniew, E. Hampton, Connecticut, United
Technologies Corporation, Hartford, Connecticut (02), Date Transaction
Recorded: Mar. 31, 1999 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE
DOCUMENT FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241
RALPH MCGILL BOULEVARD ATLANTA, GEORGIA 30308 Reel & Frame Number:
009857/0726. (LICENSED)
7. 5,747,907, May 5, 1998, Backup bearings for positive re-centering
of magnetic bearings, Miller, Robin M., Ellington, Connecticut, United
Technologies Automotive,
<PAGE> 27
Inc., Dearborn, Michigan (02), Date Transaction Recorded: Jul. 09,
1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS).
SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL BOULEVARD
ATLANTA, GEORGIA 30308 Reel & Frame Number: 9297/0204. (LICENSED)
8. 5,682,015, Oct. 28, 1997, Squirrel shield device, Harben,
Michael, Acworth, Georgia, Georgia Power Company, Atlanta, Georgia.
(LICENSED)
9. 5,679,922, Oct. 21, 1997, Squirrel shield device, Harben,
Michael, Woodstock, Georgia, Georgia Power Company, Atlanta, Georgia.
(LICENSED)
10. 5,654,976, Aug. 5, 1997, Method for melting ferrous scrap metal
and chromite in a submerged arc furnace to produce a chromium
containing iron, Cowx, Peter, Oslo, Norway Rognsaa, Hjalte, Oslo,
Norway, Elkem Technology a/s, Norway (03), Date Transaction Recorded:
Jun. 16, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR
DETAILS). ALABAMA POWER COMPANY, AN ALABAMA CORPORATION BIRMINGHAM,
ALABAMA Reel & Frame Number: 009289/0025 Date Transaction Recorded:
Feb. 12, 1999 FREE FORM TEXT GRANT-BACK LICENSE ELKEM ASA HOFFSVEIEN 65
B OSLO, NORWAY N-0303 Reel & Frame Number: 009746/0756.
11. 5,640,472, Jun. 17, 1997, Fiber optic sensor for magnetic
bearings, Meinzer, Richard A., Glastonbury, Connecticut Grudkowski,
Thomas W., Glastonbury, Connecticut Polley, Evan C., Hartford,
Connecticut, United Technologies Corporation, Hartford, Connecticut
(02), Date Transaction Recorded: Mar. 31, 1999 ASSIGNMENT OF ASSIGNOR'S
INTEREST (SEE DOCUMENT FOR DETAILS). SOUTHERN COMPANY ENERGY
SOLUTIONS, INC. 241 RALPH MCGILL BOULEVARD ATLANTA, GEORGIA 30308 Reel
& Frame Number: 009857/0726. (LICENSED)
12. 5,634,960, Jun. 3, 1997, Scrap melting in a submerged arc
furnace, Cowx, Peter, Oslo, Norway, Elkem A/S, Norway (03), Date
Transaction Recorded: Jun. 16, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST
(SEE DOCUMENT FOR DETAILS). ALABAMA POWER COMPANY, AN ALABAMA
CORPORATION, BIRMINGHAM, ALABAMA Reel & Frame Number: .009289/0025
Date Transaction Recorded: Feb. 12, 1999 FREE FORM TEXT GRANT-BACK
LICENSE ELKEM ASA HOFFSVEIEN 65 B OSLO, NORWAY N-0303 Reel & Frame
Number: 009748/0756.
13. 5,590,569, Jan. 7, 1997, Energy storage flywheel device, Nardone,
Vincent C., South Windsor, Connecticut Thompson, Mark S., Vernon,
Connecticut Meyer, Thomas G., Lebanon, Connecticut, United
Technologies Corporation, Hartford, Connecticut, Date Transaction
Recorded: Mar. 13, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE
DOCUMENT FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241
RALPH MCGILL BLVD.
<PAGE> 28
ATLANTA, GEORGIA 30308 Reel & Frame Number: 9027/0701 Date Transaction
Recorded: Apr. 29, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT
FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL
BLVD. ATLANTA, GEORGIA 30308 Reel & Frame Number: 9138/0243 Date
Transaction Recorded: Aug. 26, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST
(SEE DOCUMENT FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241
RALPH MCGILL BLVD. ATLANTA, GEORGIA 30308 Reel & Frame Number:
9405/0733. (LICENSED)
14. 5,588,982, Dec. 31, 1996, Process for producing foundry iron,
Hendrix, Charles F., Pell City, Alabama, Alabama Power Company,
Birmingham, Alabama, Date Transaction Recorded: Jun. 16, 1998
ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS). ALABAMA
POWER COMPANY, AN ALABAMA CORPORATION BIRMINGHAM, ALABAMA Reel & Frame
Number: 009289/0025 Date Transaction Recorded: Feb. 12, 1999 FREE FORM
TEXT GRANT-BACK LICENSE ELKEM ASA HOFFSVEIEN 65 B OSLO, NORWAY 1-0303
Reel & Frame Number: 009748/0756.
15. 5,588,754, Dec. 31, 1996, Backup bearings for extreme speed touch
down Applications, Miller, Robin M., Ellington, Connecticut, United
Technologies Automotive, Inc., Dearborn, Michigan, Date Transaction
Recorded: Jul. 9, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT
FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL
BOULEVARD ATLANTA, GEORGIA 30308 Reel & Frame Number: 9297/0204.
(LICENSED)
16. 5,586,471, Dec. 24, 1996, Energy storage flywheel device,
Nardone, Vincent C., South Windsor, Connecticut Thompson, Mark S.,
Vernon, Connecticut Meyer, Thomas G., Lebanon, Connecticut, United
Technologies Corporation, Hartford, Connecticut, Date Transaction
Recorded: Mar. 13, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT
FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL
BLVD. ATLANTA, GEORGIA 30308 Reel & Frame Number: 9027/0701 Date
Transaction Recorded: Apr. 29, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST
(SEE DOCUMENT FOR DETAILS). SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241
RALPH MCGILL BLVD. ATLANTA, GEORGIA 30308 Reel & Frame Number:
9138/0243 Date Transaction Recorded: Aug. 26, 1998 ASSIGNMENT OF
ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS) . SOUTHERN COMPANY
ENERGY SOLUTIONS, INC., 241 RALPH MCGILL BLVD. ATLANTA, GEORGIA 30308
Reel & Frame Number: 9405/0733. (LICENSED)
17. 5,481,198, Jan. 2, 1996, Method and device for measuring
corrosion on a portion of a metallic path carrying an undetermined
load current, Patel, Shashikant G., Atlanta, Georgia, The Georgia
Power Company, Atlanta, Georgia.
<PAGE> 29
18. 5,479,059, Dec. 26, 1995, Thin film superconductor magnetic
bearings, Weinberger, Bernard R., Avon, Connecticut, United
Technologies Corporation, Hartford, Connecticut (02), Date Transaction
Recorded: Apr. 29, 1996 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE
DOCUMENT FOR DETAILS). UNITED TECHNOLOGIES AUTOMOTIVE INC. DEARBORN,
MICHIGAN Reel & Frame Number: 7921/0516 Date Transaction Recorded:
Jun. 22, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR
DETAILS) - SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL
BOULEVARD ATLANTA, GEORGIA 30308 Reel & Frame Number: 9257/0724.
(LICENSED)
19. 5,460,240, Oct. 24, 1995, Stabilized ladder and platform, Jones,
Cecil G., Gulfport, Mississippi, Mississippi Power Company, Gulfport,
Mississippi. (LICENSED)
20. 5,452,625, Sep. 26, 1995, Energy storage flywheel device,
Nardone, Vincent C., South Windsor, Connecticut Thompson, Mark S.,
Vernon, Connecticut Meyer, Thomas G., Lebanon, Connecticut, United
Technologies Corporation, Hartford, Connecticut, Date Transaction
Recorded: Apr. 29, 1996 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE
DOCUMENT FOR DETAILS). UNITED TECHNOLOGIES AUTOMOTIVE, INC. DEARBORN,
MICHIGAN Reel & Frame Number: 7921/0524 Date Transaction recorded:
Oct. 22, 1996 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR
DETAILS). THE SOUTHERN COMPANY, ATLANTA, GEORGIA Reel & Frame Number:
8194/0658 Date Transaction Recorded: Nov. 18, 1997 ASSIGNMENT OF
ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS). SOUTHERN DEVELOPMENT
AND INVESTMENT GROUP, INC., THE 333 PIEDMONT AVENUE ATLANTA, GEORGIA
30308 Reel & Frame Number: 8800/0972 Date Transaction Recorded: Apr.
29, 1998 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS).
SOUTHERN COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL BLVD.
ATLANTA, GEORGIA 30308 Reel & Frame Number: 9138/0243. (LICENSED)
21. 5,387,451, Feb. 7, 1995, Flywheel containment device, Miller,
Robin M., Ellington, Connecticut, United Technologies Corporation,
Hartford, Connecticut, Date Transaction Recorded: Sep. 18, 1995
ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS) - UNITED
TECHNOLOGIES AUTOMOTIVE, INC. DEARBORN, MICHIGAN Reel & Frame Number:
7658/0048 Date Transaction Recorded: Oct. 22, 1996 ASSIGNMENT OF
ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS). THE SOUTHERN COMPANY,
ATLANTA, GEORGIA Reel & Frame Number: 8186/0791 Date Transaction
Recorded: Nov. 18, 1997 ASSIGNMENT OF ASSIGNOR'S INTEREST (SEE
DOCUMENT FOR DETAILS) SOUTHERN DEVELOPMENT AND INVESTMENT GROUP, INC.,
THE 333 PIEDMONT AVENUE ATLANTA, GEORGIA 30308 Reel & Frame Number:
8800/0972 Date Transaction Recorded: Apr. 29, 1998 ASSIGNMENT OF
ASSIGNOR'S INTEREST (SEE DOCUMENT FOR DETAILS). SOUTHERN
<PAGE> 30
COMPANY ENERGY SOLUTIONS, INC. 241 RALPH MCGILL BLVD. ATLANTA, GEORGIA
30308 Reel & Frame Number: 9138/0243. (LICENSED)
22. 5,058,272, Oct. 22, 1991, Tool apparatus for applying large
forces, Steube, Gary J., Pass Christian, Mississippi, Mississippi
Power Company, Gulfport, Mississippi.
23. 4,868,547, Sep. 19, 1989, Transformer alarm annunciator, Thomas,
Clifford .1 Hephzibah, Georgia Johnson, John P., Evans, Georgia,
Georgia Power Company, Atlanta, Georgia. (LICENSED)
24. 4,833,917, May 30, 1989, Three-component velocity probe for large
scale application, Wilson, Steve M., Birmingham, Alabama, Southern
Company Services, Inc., Birmingham, Alabama. (LICENSED)
25. 4,828,943, May 9, 1989, Battery having indicia for correcting
specific gravity determination at varying electrolyte levels,
Pritchard, Sue P., Birmingham, Alabama, Southern Company Services,
Inc., Atlanta, Georgia. (LICENSED)
26. 4,776,180, Oct. 11, 1988, Updraft integrated heat pump, Patton,
Sr., James M., Gulfport, Mississippi Blackshaw, Andrew L., Dunwoody,
Georgia Reid, Matthew S., Atlanta, Georgia Channell, Ray E., Decatur,
Georgia Hogan, James T., Roswell, Georgia McGuffey, Jerry O., Stone
Mountain, Georgia, Mississippi Power Company, Gulfport, Mississippi.
27. 4,647,296, Mar. 3, 1987, Spacers for straightening warped
precipitator curtains, Tuck, Morris B., Pascagoula, Mississippi,
Mississippi Power Company, Gulfport, Mississippi. (LICENSED)
28. 4,598,557, Jul. 8, 1986, Integrated heat pump water heater,
Robinson, Glen P., Atlanta, Georgia Blackshaw, Andrew L., Dunwoody,
Georgia, Southern Company Services, Inc., Atlanta, Georgia.
29. 4,497,630, Feb. 5, 1985, Kit for teaching characteristics and use
of Electrical devices, Oliver, Roland A. G., Tuscaloosa, Alabama,
Alabama Power Company, Birmingham, Alabama.
30. 4,252,398, Feb. 24, 1981, Electric power meter, Avara, Teddy W.,
Clinton, Michigan Dixon, James A., Clinton, Michigan, Mississippi
Power and Light Company, Jackson, Michigan a part interest.
C. Joint Patents
None.
<PAGE> 31
EXHIBIT B
"LICENSED MARKS"
(SECTION 1.12)
SOUTHERN ENERGY
All marks incorporating "SOUTHERN ENERGY"
TRIANGLE LOGO
ENERGY TO SERVE YOUR WORLD
SOUTHERN COMPANY ENERGY MARKETING
SOUTHERN COMPANY
<PAGE> 32
EXHIBIT C
"LICENSED SOUTHERN ENERGY TECHNOLOGY"
(SECTION 1.13)
<PAGE> 33
EXHIBIT D
"LICENSED SOUTHERN TECHNOLOGY"
(SECTION 1.14)
<PAGE> 34
EXHIBIT E
"SOUTHERN ENERGY OWNED TECHNOLOGY"
(SECTION 1.23)
1. Southern Company Energy Marketing Technology
<PAGE> 35
EXHIBIT F
"SUBLICENSED SOUTHERN ENERGY TECHNOLOGY"
(SECTION 1.26)
<PAGE> 36
EXHIBIT G
"SUBLICENSED SOUTHERN TECHNOLOGY"
(SECTION 1.27)
<PAGE> 1
EXHIBIT 10.5
FORM OF
CONFIDENTIAL DISCLOSURE AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
CONFIDENTIAL DISCLOSURE AGREEMENT
This Confidential Disclosure Agreement (the "Agreement") is effective
___________, 2000 (the "Effective Date"), between The Southern Company, a
Delaware corporation ("Southern"), having an office at 270 Peachtree Street,
N.W., Atlanta, Georgia 30303 and Southern Energy, Inc., a Delaware corporation
("Southern Energy"), having an office at 900 Ashwood Parkway, Atlanta, Georgia
30338.
WHEREAS, the Board of Directors of Southern has determined that it is
in the best interest of Southern and its stockholders to separate Southern's
existing businesses into two independent businesses;
WHEREAS, as part of the foregoing, Southern and Southern Energy have
entered into a Master Separation Agreement (as defined below), which provides,
among other things, for the separation of Southern and Southern Energy, the
transfer between Southern and Southern Energy of certain assets and liabilities,
the initial public offering of Southern Energy stock, the distribution of such
stock and the execution and delivery of certain other agreements in order to
facilitate and provide for the foregoing; and
WHEREAS, also as part of the foregoing, the parties further desire to
enter into this Agreement to provide for the protection of their Confidential
Information (as defined below).
NOW, THEREFORE, in consideration of the mutual promises of the parties,
and of good and valuable consideration, it is agreed by and between the parties
as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement the following capitalized terms are
defined in this Article I and shall have the meanings specified herein.
Capitalized terms used herein and not otherwise defined shall have the meanings
for such terms set forth in the Master Separation Agreement.
1.1 Ancillary Agreements. "Ancillary Agreements" means the items and
agreements listed in Section 2.1 of the Master Separation Agreement and all
agreements and documents contemplated by such agreements.
1.2 Confidential Information.
(a) "Confidential Information" means any and all documents, materials,
data, and other information (whether oral, written, electronic or otherwise)
relating to a Disclosing Party that a Receiving Party knows of as of the
Separation Date, that is directly or indirectly disclosed to the Receiving Party
by or on behalf of such Disclosing Party in connection with any Transaction
Agreement, or that the Receiving Party otherwise comes to know pursuant to its
parent/subsidiary relationship with the Disclosing Party.
<PAGE> 3
(b) Confidential Information of Third Parties that is known to, in the
possession of or acquired by a Receiving Party pursuant to a relationship with
the Disclosing Party shall be deemed the Disclosing Party's Confidential
Information for purposes herein.
(c) Notwithstanding the foregoing provisions of this Section 1.2,
Confidential Information shall exclude information that: (i) was in the
Receiving Party's possession before receipt from the Disclosing Party and
obtained from a source other than the Disclosing Party and other than through
the prior relationship of the Disclosing Party and the Receiving Party before
the Separation Date; (ii) is or becomes a matter of public knowledge through no
fault of the Receiving Party or its Representatives; (iii) is rightfully
received by the Receiving Party from a Third Party without a duty of
confidentiality; (iv) is independently developed by the Receiving Party; or (v)
is disclosed by the Receiving Party with the Disclosing Party's prior written
approval.
1.3 Confidentiality Period. "Confidentiality Period" means, with
respect to Confidential Information, three (3) years after either (A) the
Separation Date with respect to Confidential Information of the Disclosing Party
that is known to or in the possession of the Receiving Party as of the
Separation Date or (B) the date of disclosure with respect to Confidential
Information that is disclosed by the Disclosing Party to the Receiving Party
after the Separation Date.
1.4 Disclosing Party. "Disclosing Party" means the party owning or
disclosing the relevant Confidential Information, being either (a) a member of
the Southern Group, or (b) a member of the Southern Energy Group, as applicable.
1.5 Distribution Date. "Distribution Date" has the meaning set forth in
the Master Separation Agreement.
1.6 Master Separation Agreement. "Master Separation Agreement" means
the Master Separation and Distribution Agreement between the parties.
1.7 Receiving Party. "Receiving Party" means the non-owning party or
recipient of the relevant Confidential Information, being either (a) a member
of the Southern Group, or (b) a member of the Southern Energy Group, as
applicable.
1.8 Representative. "Representative" has the meaning set forth in
Section 2.2.
1.9 Separation Date. "Separation Date" means [12:01 a.m., Eastern
Standard Time, July 1, 2000] or such other date as may be determined by
Southern.
2
<PAGE> 4
1.10 Third Party. "Third Party" means a Person other than Southern and
its Subsidiaries and Affiliated Companies and Southern Energy and its
Subsidiaries and Affiliated Companies.
1.11 Transaction Agreements. "Transaction Agreements" means the Master
Separation Agreement and the Ancillary Agreements.
ARTICLE II
CONFIDENTIALITY
2.1 Confidentiality Obligations. During the Confidentiality Period, the
Receiving Party shall (i) protect the Confidential Information of the Disclosing
Party by using the same degree of care, but no less than a reasonable degree of
care, to prevent the unauthorized use, dissemination, or publication of the
Confidential Information as Receiving Party uses to protect its own confidential
information of a like nature, and (ii) not disclose such Confidential
Information to any Third Party, except as expressly permitted under this
Agreement, in the Transaction Agreements or in any other agreements entered into
between the parties in writing, without prior written consent of the Disclosing
Party.
2.2 Disclosure To Representatives; Sublicensees. Notwithstanding the
provisions of Section 2.1, the Receiving Party may disclose the Confidential
Information to its Subsidiaries and Affiliated Companies, and its and their
directors, officers, employees, partners, affiliates, agents, financing sources,
rating agencies, advisors and representatives ("Representatives"), to the extent
such Representatives need to know such Confidential Information, and may
disclose to its sublicensees permitted under a Transaction Agreement portions of
Confidential Information as reasonably necessary in the exercise of the
Receiving Party's sublicense rights under such Transaction Agreement; provided,
however, that the Receiving Party shall inform each such Representative or
sublicensee of the confidential nature of the Confidential Information, shall
require such Representative or sublicensee to be bound to the terms of this
Agreement to the same extent as if such Representative or sublicensee was a
party hereto, and that the Receiving Party shall be responsible for any breach
of this Agreement by its Representatives and sublicensees.
2.3 Compelled Disclosure. Notwithstanding anything to the contrary set
forth herein, it is understood that the Receiving Party may be legally compelled
or otherwise legally obligated to disclose Confidential Information (or portions
thereof) (i) pursuant to subpoena or other court process; (ii) at the express
direction of any other authorized government agency with jurisdiction over
Receiving Party, or (iii) as otherwise required by law. If Receiving Party
becomes so compelled or obligated to disclose any of the Confidential
Information, Receiving Party will provide the Disclosing Party with prompt
written notice so that the Disclosing Party may seek a protective order or other
appropriate remedy. If such protective order or other remedy is not obtained,
Receiving Party will furnish only that portion of the Confidential Information
which, in the opinion of Receiving Party's legal counsel, is legally required,
and Receiving Party will reasonably cooperate, at the Disclosing Party's expense
and request, with the Disclosing Party's counsel to enable the Disclosing Party
to obtain a
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protective order or other reliable assurance that confidential treatment will be
accorded the Confidential Information.
2.4 No Restriction On Disclosing Party. Nothing in this Agreement shall
restrict the Disclosing Party from using, disclosing, or disseminating its own
Confidential Information in any way.
2.5 No Restriction On Reassignment. This Agreement shall not restrict
reassignment of the Receiving Party's employees.
2.6 Third Party Restrictions. Nothing in the Agreement supersedes any
restriction imposed by Third Parties on their Confidential Information, and
there is no obligation on the Disclosing Party to conform Third Party agreements
to the terms of this Agreement.
ARTICLE III
WARRANTY DISCLAIMER
EACH PARTY ACKNOWLEDGES AND AGREES THAT ALL CONFIDENTIAL INFORMATION IS
PROVIDED ON AN "AS IS, WHERE IS" BASIS AND THAT NEITHER PARTY NOR ANY OF ITS
SUBSIDIARIES OR AFFILIATED COMPANIES HAS MADE OR WILL MAKE ANY WARRANTY
WHATSOEVER, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE,
ENFORCEABILITY OR NON-INFRINGEMENT.
ARTICLE IV
DISPUTE RESOLUTION
4.1 Dispute Resolution. Any dispute or claim arising out of or related
to this Agreement shall be resolved in accordance with the dispute resolutions
procedures set forth in Section 5.7 of the Master Separation Agreement.
4.2 Proceedings. Notwithstanding the provisions of Section 4.1, the
parties hereto each acknowledge that any violation of this Agreement in respect
of any Confidential Information will cause the Disclosing Party and its
affiliates immediate and irreparable harm that monetary damages cannot
adequately remedy, and parties agree that, upon any actual or impending
violation of this Agreement, the Disclosing Party or any one or more of its
Affiliated Companies shall be entitled to equitable relief, including injunctive
relief and specific performance (and the Receiving Party shall not plead in
defense thereto that there would be an adequate remedy at law), without bond or
proof of damages, and in addition to any other remedies that the Disclosing
Party may have under applicable law. In the event of litigation relating to this
Agreement, if a court of competent jurisdiction determines that Receiving Party
or any of its Representatives has breached this Agreement, Receiving Party shall
be liable and pay to the
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Disclosing Party the reasonable legal fees and costs incurred with such
litigation, including any appeal therefrom.
ARTICLE V
LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY OR ITS SUBSIDIARIES OR AFFILIATED
COMPANIES BE LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES OR AFFILIATED
COMPANIES FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE
DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY
(INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 Suits. Neither party shall have any obligation hereunder to
institute any action or suit against Third Parties for misappropriation of any
of its Confidential Information or to defend any action or suit brought by a
Third Party that alleges infringement of any intellectual property rights by the
Receiving Party's authorized use of the Disclosing Party's Confidential
Information.
6.2 Entire Agreement. This Agreement, the Master Separation Agreement
and the other Ancillary Agreements constitute the entire agreement between the
parties with respect to the subject matter hereof and shall supersede all prior
written and oral and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof. Notwithstanding the foregoing, the parties
agree that any agreements entered into between them on or after the Separation
Date for the protection of specific Confidential Information shall supersede the
terms of this Agreement with respect to such Confidential Information.
6.3 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Georgia as to all
matters regardless of the laws that might otherwise govern under principles of
conflicts of laws applicable thereto.
6.4 Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
6.5 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
telecopy with answer back, by express or overnight mail delivered by a
nationally recognized air courier (delivery charges prepaid), or by registered
or certified mail (postage prepaid, return receipt requested) as follows:
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if to Southern:
c/o The Southern Company
270 Peachtree Street
Atlanta, Georgia 30303
Attention: General Counsel
Telecopy: (404) 506-0564
if to Southern Energy:
c/o Southern Energy, Inc.
900 Ashwood Parkway, Suite 500
Atlanta, Georgia 30338
Attention: General Counsel
Telecopy: (770) 821-6767
or to such other address as the party to whom notice is given may have
previously furnished to the other in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy or by air courier shall
be deemed effective on the first Business Day following the day on which such
notice or communication was sent. Any notice or communication sent by registered
or certified mail shall be deemed effective on the third Business Day following
the day on which such notice or communication was mailed. As used in this
Section 6.5, "Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions located in the State of Georgia are authorized
or obligated by law or executive order to close.
6.6 Nonassignability. Neither party may, directly or indirectly, in
whole or in part, whether by operation of law or otherwise, assign or transfer
this Agreement, without the other party's prior written consent, and any
attempted assignment, transfer or delegation without such prior written consent
shall be voidable at the sole option of such other party. Notwithstanding the
foregoing, each party (or its permitted successive assignees or transferees
hereunder) may assign or transfer this Agreement as a whole without consent to a
Person that succeeds to all or substantially all of the business or assets of
such party. Without limiting the foregoing, this Agreement will be binding upon
and inure to the benefit of the parties and their permitted successors and
assigns.
6.7 Severability. If any term or other provision of this Agreement is
determined by a nonappealable decision of a court, administrative agency or
binding arbitrator by any court or in any binding arbitration to be invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to either party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the fullest
extent possible.
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6.8 Failure Or Indulgence Not Waiver; Remedies Cumulative. No failure
or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
6.9 Amendment. No change or amendment will be made to this Agreement
except by an instrument in writing signed on behalf of each of the parties to
such agreement.
6.10 Counterparts. This Agreement may be executed in two or more
counterparts, all of which, taken together, shall be considered to be one and
the same instrument.
WHEREFORE, the parties have signed this Confidential Disclosure
Agreement effective as of the date first set forth above.
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
By: By:
--------------------------- ------------------------------
Name: Name:
Title: Title:
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EXHIBIT 10.6
FORM OF
EMPLOYEE MATTERS AGREEMENT
BETWEEN
THE SOUTHERN COMPANY
AND
SOUTHERN ENERGY, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS............................................................................................1
1.01 Affiliated Company........................................................................................1
1.02 Agreement.................................................................................................1
1.03 Ancillary Agreements......................................................................................2
1.04 ASO Contracts.............................................................................................2
1.05 Change in Control Programs................................................................................2
1.06 COBRA.....................................................................................................2
1.07 Code......................................................................................................2
1.08 Deferred Compensation Plan................................................................................2
1.09 Distribution..............................................................................................2
1.10 Distribution Date.........................................................................................2
1.11 DOL.......................................................................................................2
1.12 ERISA.....................................................................................................2
1.13 ESOP......................................................................................................2
1.14 ESP.......................................................................................................2
1.15 Flexible Benefits Plan....................................................................................3
1.16 FMLA......................................................................................................3
1.17 Foreign Plan..............................................................................................3
1.18 Fringe Benefits...........................................................................................3
1.19 [reserved]................................................................................................3
1.20 Group Insurance Policies..................................................................................3
1.21 HCFA......................................................................................................3
1.22 Health and Welfare Plans..................................................................................3
1.23 Health Plans..............................................................................................3
1.24 HMO.......................................................................................................3
1.25 HMO Agreements............................................................................................3
1.26 IPO.......................................................................................................4
1.27 IPO Closing Date..........................................................................................4
1.28 IPO Registration Statement................................................................................4
1.29 IRS.......................................................................................................4
1.30 Leave of Absence Programs.................................................................................4
1.31 Liabilities...............................................................................................4
1.32 Master Trust..............................................................................................4
1.33 Non-Qualified Plans.......................................................................................4
1.34 Omnibus Incentive Compensation Plan.......................................................................4
1.35 Option....................................................................................................4
1.36 Outsource.................................................................................................5
1.37 Participating Company.....................................................................................5
1.38 PBGC......................................................................................................5
1.39 Pension Plan..............................................................................................5
1.40 Performance Dividend Plan.................................................................................5
1.41 Person....................................................................................................5
</TABLE>
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<TABLE>
<S> <C>
1.42 Plan......................................................................................................5
1.43 Post-Employment Programs..................................................................................5
1.44 PSP.......................................................................................................5
1.45 QDRO......................................................................................................6
1.46 QMCSO.....................................................................................................6
1.47 Rabbi Trust...............................................................................................6
1.48 Ratio.....................................................................................................6
1.49 Record Date...............................................................................................6
1.50 Retirement Plans..........................................................................................6
1.51 SEC.......................................................................................................6
1.52 Separation Agreement......................................................................................6
1.53 SERP......................................................................................................6
1.54 Severance Plans...........................................................................................6
1.55 Short Term Incentive Plan.................................................................................6
1.56 Southern..................................................................................................7
1.57 Southern Employee.........................................................................................7
1.58 Southern Energy...........................................................................................7
1.59 Southern Energy Employee..................................................................................7
1.60 Southern Energy Group.....................................................................................7
1.61 Southern Energy Retired Employee..........................................................................7
1.62 Southern Energy Stock Value...............................................................................7
1.63 Southern Energy Terminated Employee.......................................................................7
1.64 Southern Energy WCP Claims................................................................................8
1.65 Southern Group............................................................................................8
1.66 Southern Stock Value......................................................................................8
1.67 Southern Terminated Employee..............................................................................8
1.68 Southern WCP..............................................................................................8
1.69 Stock Plan................................................................................................8
1.70 Stock Purchase Plan.......................................................................................8
1.71 Subsidiary................................................................................................8
1.72 Supplemental Benefit Plan,................................................................................8
1.73 Tax Indemnification Agreement.............................................................................8
1.74 Union Plans...............................................................................................8
1.75 Value Creation Plan.......................................................................................9
ARTICLE II GENERAL PRINCIPLES....................................................................................9
2.01 Assumption of Southern Energy Liabilities.................................................................9
2.02 Establishment of Southern Energy Plans...................................................................10
2.03 Southern Energy's Participation in Southern Plans........................................................10
2.04 Terms of Participation by Southern Energy Employees in Southern
Energy Plans..........................................................................................12
2.05 Foreign Plans............................................................................................12
2.06 Union Plans..............................................................................................12
</TABLE>
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<TABLE>
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ARTICLE III DEFINED BENEFIT PLAN................................................................................13
3.01 Establishment of Master Pension Plan Trust...............................................................13
3.02 Assumption of Pension Plan...............................................................................13
3.03 No Distributions to Southern Energy Employees............................................................14
ARTICLE IV DEFINED CONTRIBUTION PLANS...........................................................................14
4.01 ESP......................................................................................................14
4.02 ESOP.....................................................................................................14
4.03 PSP......................................................................................................14
4.04 Discretionary Plan Design................................................................................14
4.05 Southern Energy Retired Employees........................................................................14
ARTICLE V NON-QUALIFIED AND OTHER PLANS.........................................................................15
5.01 Supplemental Benefit Plan................................................................................15
5.02 Deferred Compensation Plan...............................................................................15
5.03 SERP.....................................................................................................15
5.04 Southern Energy Deferred Incentive Compensation Plan.....................................................16
5.05 Southern Energy Change in Control Programs...............................................................16
5.06 Southern Energy Rabbi Trust..............................................................................16
5.07 Severance Plan...........................................................................................16
ARTICLE VI HEALTH AND WELFARE PLANS..............................................................................17
6.01 Assumption of Health and Welfare Plan Liabilities.......................................................17
6.02 Claims for Health and Welfare Plans.....................................................................17
6.03 Post-Distribution Transitional Arrangements.............................................................18
6.04 Vendor and Insurance Arrangements.......................................................................19
6.05 COBRA...................................................................................................19
6.06 Leave of Absence Programs and FMLA......................................................................20
6.07 Southern Workers' Compensation Program..................................................................20
ARTICLE VII EQUITY AND OTHER COMPENSATION.......................................................................21
7.01 Southern Options........................................................................................21
7.02 Southern Performance Dividend Plan......................................................................22
7.03 Southern Energy Value Creation Plan.....................................................................22
7.04 Stock Purchase Plan.....................................................................................22
7.05 Southern Energy Omnibus Incentive Compensation Plan.....................................................22
7.06 Southern Energy Short Term Incentive Plan...............................................................22
7.07 Southern Performance Pay Plan...........................................................................22
7.08 Performance Improvement Ramp Down.......................................................................23
ARTICLE VIII FRINGE AND OTHER BENEFITS..........................................................................23
8.01 Employee Assistance Program.............................................................................23
8.02 Educational Assistance Program..........................................................................23
8.03 Credit Union............................................................................................23
8.04 Southern-Owned Cars.....................................................................................23
8.05 Executive Financial Planning............................................................................23
8.06 Relocation..............................................................................................24
8.07 Other Benefits..........................................................................................24
</TABLE>
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<TABLE>
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ARTICLE IX.......................................................................................................24
9.01 Additional Service Level Agreements.....................................................................24
9.02 Payment of Liabilities, Plan Expenses and Related Matters...............................................24
9.03 Sharing of Participant Information......................................................................25
9.04 Reporting and Disclosure Communications to Participants.................................................25
9.05 Audits Regarding Vendor Contracts.......................................................................25
9.06 Beneficiary Designations................................................................................26
9.07 Requests for IRS and DOL Opinions.......................................................................26
9.08 Fiduciary Matters.......................................................................................26
9.09 Consent of Third Parties................................................................................26
9.10 Southern Intranet.......................................................................................26
9.11 Tax Cooperation.........................................................................................26
9.12 Plan Returns............................................................................................26
ARTICLE X EMPLOYMENT-RELATED MATTERS.............................................................................27
10.01 Terms of Southern Energy Employment....................................................................27
10.02 HR Data Support Systems................................................................................27
10.03 Non-Solicitation of Employees..........................................................................27
10.04 Employment of Employees with U.S. Work Visas...........................................................27
10.05 Confidentiality and Proprietary Information............................................................27
10.06 Accrued Payroll, Bonuses, Profit Sharing and Commissions...............................................29
10.07 Payroll and Withholding................................................................................30
10.08 Personnel and Pay Records..............................................................................31
10.09 Non-Termination of Employment; No Third-Party Beneficiaries............................................31
10.10 Employment Litigation..................................................................................31
ARTICLE XI GENERAL PROVISIONS....................................................................................31
11.01 Effect if IPO and/or Distribution Does Not Occur.......................................................31
11.02 Relationship of Parties................................................................................32
11.03 Affiliated Companies...................................................................................32
11.04 Incorporation of Separation Agreement Provisions.......................................................32
11.05 Governing Law..........................................................................................32
11.06 Severability...........................................................................................32
11.07 Amendment..............................................................................................32
11.08 Termination............................................................................................33
11.09 Conflict...............................................................................................33
11.10 Counterparts...........................................................................................33
SCHEDULE 1.22 HEALTH AND WELFARE PLANS..........................................................................35
SCHEDULE 1.23 HEALTH PLANS......................................................................................36
SCHEDULE 1.43 POST-EMPLOYMENT PROGRAMS..........................................................................38
SECTION 2.01 EMPLOYMENT LIABILITIES INDEMNIFICATION.............................................................39
SCHEDULE 2.01(a) BENEFITS AND LIABILITIES FOR SOUTHERN
ENERGY RETIRED EMPLOYEES..............................................................................42
SCHEDULE 6.04(a) THIRD PARTY ASO CONTRACTS.......................................................................44
SCHEDULE 6.04(b) GROUP INSURANCE POLICIES........................................................................45
</TABLE>
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SCHEDULE 6.04(c) THIRD PARTY HMO CONTRACTS.......................................................................46
SCHEDULE 7.04 STOCK PURCHASE PLAN...............................................................................47
SCHEDULE 7.05 SOUTHERN ENERGY OMNIBUS INCENTIVE
COMPENSATION PLAN.....................................................................................48
SCHEDULE 8 FRINGE BENEFITS......................................................................................49
SCHEDULE 10.10(a) EMPLOYMENT LITIGATION TRANSFERRED
CLAIMS................................................................................................50
SCHEDULE 10.10(b) EMPLOYMENT LITIGATION JOINTLY DEFEND
CLAIMS................................................................................................51
</TABLE>
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EMPLOYEE MATTERS AGREEMENT
This EMPLOYEE MATTERS AGREEMENT (this "Agreement") is entered into on
__________, 2000, between The Southern Company ("Southern"), a Delaware
corporation and Southern Energy, Inc. ("Southern Energy"), a Delaware
corporation. Capitalized terms used herein (other than the formal names of
Southern Plans (as defined below) and related trusts of Southern) and not
otherwise defined, shall have the respective meanings assigned to them in
Article I hereof.
WHEREAS, the Board of Directors of Southern has determined that it is
in the best interests of Southern and its shareholders to separate the
businesses of Southern and Southern Energy and to cause Southern Energy to offer
its stock for public trading;
WHEREAS, Southern currently contemplates that, within 12 months
following such public offering, Southern will distribute to the holders of its
common stock, by means of a pro rata distribution, all of the shares of Southern
Energy common stock then owned by Southern;
WHEREAS, in furtherance of the foregoing, Southern and Southern Energy
have agreed to enter into this Agreement to allocate between them assets,
liabilities and responsibilities with respect to certain employee compensation,
benefit plans and programs, and certain employment matters; and
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Wherever used in this Agreement, the following terms shall have the
meanings indicated below, unless a different meaning is plainly required by the
context. The singular shall include the plural, unless the context indicates
otherwise. Headings of sections are used for convenience of reference only, and
in case of conflict, the text of this Agreement, rather than such headings,
shall control:
1.01 AFFILIATED COMPANY. "Affiliated Company" shall have the meaning
set forth in the Separation Agreement.
1.02 AGREEMENT. "Agreement" means this Employee Matters Agreement,
including all the Addenda, Schedules and Exhibits hereto, and all amendments
made hereto from time to time.
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1.03 ANCILLARY AGREEMENTS. "Ancillary Agreements" means all of the
underlying agreements, documents and instruments referred to, contemplated by,
or made a part of the Separation Agreement.
1.04 ASO CONTRACTS. "ASO Contracts" is defined in Subsection 6.04(a)
and the Schedule 6.04(a).
1.05 CHANGE IN CONTROL PROGRAMS. "Change in Control Programs," when
immediately preceded by "Southern," means the Southern Executive Change in
Control Plan, the Southern Change in Control Plan and the individual change in
control agreements entered into with executives of Southern. When immediately
preceded by "Southern Energy," "Change in Control Programs" means the Southern
Energy change in control plans to be established by Southern Energy pursuant to
Sections 2.02 and 5.05 that correspond to the respective Southern Change in
Control Programs.
1.06 COBRA. "COBRA" means the continuation coverage requirements
for "group health plans" under Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended from time to time, and as codified in
Code Section 4980B and ERISA Sections 601 through 608.
1.07 CODE. "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
1.08 DEFERRED COMPENSATION PLAN. "Deferred Compensation Plan," when
immediately preceded by "Southern," means the Southern Deferred Compensation
Plan. When immediately preceded by "Southern Energy," "Deferred Compensation
Plan" means the Southern Energy deferred compensation plan to be established by
Southern Energy pursuant to Sections 2.02 and 5.02 that corresponds to the
Southern Deferred Compensation Plan.
1.09 DISTRIBUTION. "Distribution" means a pro rata distribution by
Southern to the holders of its common stock of all the shares of Southern Energy
common stock owned by Southern, as the same is further described in the
Separation Agreement.
1.10 DISTRIBUTION DATE. "Distribution Date" means the date that the
Distribution is effective.
1.11 DOL. "DOL" means the United States Department of Labor.
1.12 ERISA. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended from time to time.
1.13 ESOP. "ESOP," when immediately preceded by "Southern," means the
Southern Employee Stock Ownership Plan, a defined contribution plan.
1.14 ESP. "ESP," when immediately preceded by "Southern," means the
Southern Employee Savings Plan, a defined contribution plan. When immediately
preceded by "Southern Energy," "ESP" means the employee savings plan to be
established by Southern Energy pursuant to Sections 2.02 and 4.01 that
corresponds to the Southern Employee Savings Plan.
2
<PAGE> 9
1.15 FLEXIBLE BENEFITS PLAN. "Flexible Benefits Plan," when immediately
preceded by "Southern," means the Southern Flexible Benefits Plan. When
immediately preceded by "Southern Energy," Flexible Benefits Plan means the
Southern Energy flexible benefits plan to be established by Southern Energy
pursuant to Sections 2.02 and Article VI that corresponds to the Southern
Flexible Benefits Plan.
1.16 FMLA. "FMLA" means the Family and Medical Leave Act of 1993, as
amended from time to time.
1.17 FOREIGN PLAN. "Foreign Plan" means those Southern Energy Plans
maintained by Southern Energy for the benefit of its non-expatriate employees
outside the U.S.
1.18 FRINGE BENEFITS. "Fringe Benefits," when immediately preceded by
"Southern," means the Southern employee assistance program and other fringe
benefits, plans, programs and arrangements sponsored and maintained by Southern
(as set forth in Article VIII and the Schedule attached thereto). When
immediately preceded by "Southern Energy," "Fringe Benefits" means the fringe
benefits, plans, programs and arrangements established or to be established by
Southern Energy pursuant to Section 2.02 and Article VIII that correspond to the
respective Southern Fringe Benefits.
1.19 [RESERVED].
1.20 GROUP INSURANCE POLICIES. "Group Insurance Policies" is defined in
Subsection 6.04(b) and the Schedule thereto.
1.21 HCFA. "HCFA" means the United States Health Care Financing
Administration.
1.22 HEALTH AND WELFARE PLANS. "Health and Welfare Plans," when
immediately preceded by "Southern," means the Southern Health Plans, the
Southern Flexible Benefits Plan, and the health and welfare plans listed on
Schedule 1.22 established and maintained by Southern for the benefit of
employees and retirees of the Southern Group, and such other welfare plans or
programs as may apply to such employees and retirees as of the Distribution
Date. When immediately preceded by "Southern Energy," "Health and Welfare Plans"
means the Southern Energy Health Plans, the Southern Energy Flexible Benefits
Plan, and the health and welfare plans to be established by Southern Energy
pursuant to Section 2.02 and Article VI that correspond to the respective
Southern Health and Welfare Plans.
1.23 HEALTH PLANS. "Health Plans," when immediately preceded by
"Southern," means the Plans set forth on Schedule 1.23, and any similar or
successor plans, programs or arrangements. When immediately preceded by
"Southern Energy," "Health Plans" means the health plans, programs and
arrangements to be established by Southern Energy pursuant to Section 2.02 and
Article VI that correspond to the respective Southern Health Plans.
1.24 HMO. "HMO" means a health maintenance organization that provides
benefits under the Southern Health Plans or the Southern Energy Health Plans.
1.25 HMO AGREEMENTS. "HMO Agreements" is defined in Subsection 6.04(c)
and Schedule 6.04(c).
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1.26 IPO. "IPO" means the initial public offering of Southern Energy
common stock pursuant to a registration statement on Form S-1 pursuant to the
Securities Act of 1933, as amended.
1.27 IPO CLOSING DATE. "IPO Closing Date" means the date of the closing
of the IPO, as further defined in the Separation Agreement.
1.28 IPO REGISTRATION STATEMENT. "IPO Registration Statement" means the
registration statement on Form S-1 pursuant to the Securities Act of 1933 as
amended, to be filed with the SEC registering the shares of common stock of
Southern Energy to be issued in the IPO, together with all amendments thereto.
1.29 IRS. "IRS" means the United States Internal Revenue Service.
1.30 LEAVE OF ABSENCE PROGRAMS. "Leave of Absence Programs," when
immediately preceded by "Southern," means the personal, medical, military and
FMLA leave offered from time to time under the personnel policies and practices
of Southern. When immediately preceded by "Southern Energy," "Leave of Absence
Programs" means the leave of absence programs established and maintained by
Southern Energy.
1.31 LIABILITIES. "Liabilities" means all debts, liabilities,
guarantees, assurances, commitments, and obligations, whether fixed, contingent
or absolute, asserted or unasserted, matured or unmatured, liquidated or
unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising (including, without limitation, whether arising out
of any Contract or tort based on negligence or strict liability) and whether or
not the same would be required by generally accepted principles and accounting
policies to be reflected in financial statements or disclosed in the notes
thereto. "Contract" means any contract, agreement, lease, license, sales order,
purchase order, instrument or other commitment that is binding on any Person or
any part of its property under applicable law.
1.32 MASTER TRUST. "Master Trust," when immediately preceded by
"Southern," means the Southern Master Trust. When immediately preceded by
"Southern Energy," "Master Trust" means the Southern Energy Master Trust
described in Section 3.01.
1.33 NON-QUALIFIED PLANS. "Non-Qualified Plans," when immediately
preceded by "Southern," means the Southern Supplemental Benefit Plan, the
Southern SERP and the Southern Deferred Compensation Plan. When immediately
preceded by "Southern Energy," "Non-Qualified Plans" means the deferred
compensation, supplemental executive retirement and supplemental benefit plans,
programs, or arrangements established or to be established by Southern Energy
pursuant to Section 2.02 and Article V.
1.34 OMNIBUS INCENTIVE COMPENSATION PLAN. "Omnibus Incentive
Compensation Plan" means the Southern Energy Omnibus Incentive Compensation Plan
as described in Section 7.05.
1.35 OPTION. "Option," when immediately preceded by "Southern," means
an option to purchase Southern common stock pursuant to a Stock Plan. When
immediately preceded by "Southern Energy," "Option" means an option to purchase
Southern Energy common stock
4
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pursuant to a plan providing such benefits to be established by Southern Energy
pursuant to Section 2.02 and Article VII.
1.36 OUTSOURCE. "Outsource" is defined in Subsection 6.02(b).
1.37 PARTICIPATING COMPANY. "Participating Company" means: (a)
Southern; (b) any Person (other than an individual) that Southern has approved
for participation in, has accepted participation in, and which is participating
in, a Plan sponsored by Southern; or (c) any Person (other than an individual)
which, by the terms of such Plan, participates in such Plan or any employees of
which, by the terms of such Plan, participate in or are covered by such Plan.
1.38 PBGC. "PBGC" means the Pension Benefit Guaranty Corporation.
1.39 PENSION PLAN. "Pension Plan," when immediately preceded by
"Southern," means the Southern Pension Plan, a defined benefit plan. When
immediately preceded by "Southern Energy," "Pension Plan" means the pension plan
to be established by Southern Energy pursuant to Section 2.02 and Article III
that corresponds to the Southern Pension Plan.
1.40 PERFORMANCE DIVIDEND PLAN. "Performance Dividend Plan," when
immediately preceded by "Southern," means the Southern Performance Dividend
Plan. When immediately preceded by "Southern Energy," "Performance Dividend
Plan" means the dividend plan, if any, established by Southern Energy pursuant
to Section 2.02 and Article VII that corresponds to the Southern Performance
Dividend Plan.
1.41 PERSON. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization, and a governmental
entity or any department, agency or political subdivision thereof.
1.42 PLAN. "Plan," means any plan, policy, program, payroll practice,
arrangement, contract, trust, insurance policy, or any agreement or funding
vehicle providing compensation or benefits to employees, former employees or
directors of Southern or Southern Energy.
1.43 POST-EMPLOYMENT PROGRAMS. "Post-Employment Programs," when
immediately preceded by "Southern," means the Plans set forth on Schedule 1.43
that permit certain retirees and former employees of the Southern Group and
their eligible spouses and dependents to continue to receive coverage and
benefits under certain Southern Health and Welfare Plans for a designated period
of time. When immediately preceded by "Southern Energy," "Post-Employment
Programs" means such continuation programs to be established by Southern Energy
pursuant to Sections 2.02 and Article VI that correspond to the Southern
Post-Employment Programs.
1.44 PSP. "PSP," when immediately preceded by "Southern," means the
Southern Performance Sharing Plan, a defined contribution plan. When immediately
preceded by "Southern Energy," "PSP" means the performance sharing plan, if any,
to be established by Southern Energy pursuant to Sections 2.02 and 4.03 that
corresponds to the Southern Performance Sharing Plan.
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1.45 QDRO. "QDRO" means a domestic relations order which qualifies
under Code Section 414(p) and ERISA Section 206(d) and which creates or
recognizes an alternate payee's right to, or assigns to an alternate payee, all
or a portion of the benefits payable to a participant under any of the Southern
Retirement Plans.
1.46 QMCSO. "QMCSO" means a medical child support order which qualifies
under ERISA Section 609(a) and which creates or recognizes the existence of an
alternate recipient's right to, or assigns to an alternate recipient the right
to, receive benefits for which a participant or beneficiary is eligible under
any of the Health Plans.
1.47 RABBI TRUST. "Rabbi Trust," when immediately preceded by
"Southern," means the rabbi trust established for purposes of holding assets
under the Southern Executive Deferred Compensation Trust. When immediately
preceded by "Southern Energy," "Rabbi Trust" means the rabbi trust to be
established by Southern Energy pursuant to Section 5.06 that corresponds to the
Southern Rabbi Trust.
1.48 RATIO. "Ratio" means the ratio determined by dividing the Southern
Energy Stock Value by the Southern Stock Value.
1.49 RECORD DATE. "Record Date" means the close of business on the date
to be determined by the Board of Directors of Southern as the record date for
determining the stockholders of Southern entitled to receive shares of common
stock of Southern Energy in the Distribution.
1.50 RETIREMENT PLANS. "Retirement Plans," when immediately preceded by
"Southern," means the Southern Pension Plan, the Southern ESP, the Southern ESOP
and the Southern PSP. When immediately preceded by "Southern Energy,"
"Retirement Plans" means all defined contribution and defined benefit plans
established or to be established by Southern Energy pursuant to Section 2.02,
and Articles III and IV that correspond to, or receive assets from, the
respective Southern Retirement Plans.
1.51 SEC. "SEC" means the United States Securities and Exchange
Commission.
1.52 SEPARATION AGREEMENT. "Separation Agreement" means the Master
Separation and Distribution Agreement dated as of [______________, 2000], of
which this Agreement is an Exhibit.
1.53 SERP. "SERP," when immediately preceded by "Southern," means the
Southern Supplemental Executive Retirement Plan. When immediately preceded by
"Southern Energy," "SERP" means the Southern Energy Supplemental Executive
Retirement Plan.
1.54 SEVERANCE PLANS. "Severance Plans," when immediately preceded by
"Southern," means the severance pay plans established and maintained by
Southern. When immediately preceded by "Southern Energy," "Severance Plans"
means the severance pay plans established and maintained by Southern Energy.
1.55 SHORT TERM INCENTIVE PLAN. "Short Term Incentive Plan" means the
Southern Energy Short Term Incentive Plan described in Section 7.06.
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1.56 SOUTHERN. "Southern" means The Southern Company, a Delaware
corporation. In all such instances in which Southern is referred to in this
Agreement, it shall also be deemed to include a reference to each member of the
Southern Group, unless it specifically provides otherwise; Southern shall be
solely responsible to Southern Energy for ensuring that each member of the
Southern Group complies with the applicable terms of this Agreement.
1.57 SOUTHERN EMPLOYEE. "Southern Employee" means an individual who, on
the Distribution Date, is or was employed within the Southern Group and is not a
Southern Energy Employee.
1.58 SOUTHERN ENERGY. "Southern Energy" means Southern Energy, Inc., a
Delaware corporation. In all such instances in which Southern Energy is referred
to in this Agreement, it shall also be deemed to include a reference to each
member of the Southern Energy Group, unless it specifically provides otherwise;
Southern Energy shall be solely responsible to Southern for ensuring that each
member of the Southern Energy Group complies with the applicable terms of this
Agreement.
1.59 SOUTHERN ENERGY EMPLOYEE. "Southern Energy Employee" means any
individual who, as of the Distribution Date, is: (a) either actively employed
by, or on a leave of absence from, the Southern Energy Group; (b) a Southern
Energy Terminated Employee; (c) an alternate payee under a QDRO, alternate
recipient under a QMCSO, beneficiary, covered dependent, or qualified
beneficiary (as such term is defined under COBRA), of an employee described in
Subsection (a) or (b) above; or (d) an employee or group of employees designated
by Southern and Southern Energy, by mutual agreement, as Southern Energy
Employees; but not (e) a Southern Energy Retired Employee. An employee may be a
Southern Energy Employee pursuant to this Section regardless of whether such
employee is, as of the Distribution Date, alive, actively employed, on a
temporary leave of absence from active employment, on layoff, terminated from
employment, retired or on any other type of employment or post-employment status
relative to a Southern Plan, and regardless of whether, as of the Distribution
Date, such employee is then receiving any benefits from a Southern Plan.
1.60 SOUTHERN ENERGY GROUP. "Southern Energy Group" shall have the
meaning set forth in the Separation Agreement.
1.61 SOUTHERN ENERGY RETIRED EMPLOYEE. "Southern Energy Retired
Employee" means any Southern Energy Employee who retired on or before the
Distribution Date and who is identified as a Southern Energy Retired Employee by
mutual agreement between Southern Energy and Southern on or before the
Distribution Date.
1.62 SOUTHERN ENERGY STOCK VALUE. "Southern Energy Stock Value" means
the opening per-share price of Southern Energy common stock as listed on the
NYSE or NASDAQ, as applicable, on the first trading day after the Distribution
Date.
1.63 SOUTHERN ENERGY TERMINATED EMPLOYEE. "Southern Energy Terminated
Employee" means any individual who is a former employee of the Southern Group
who was terminated from the Southern Energy Group on or before the Distribution.
Notwithstanding the foregoing, "Southern Energy Terminated Employee" shall not,
unless otherwise expressly
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provided to the contrary in this Agreement, include: (a) an individual who is a
Southern Employee at the Distribution Date; (b) an individual who is otherwise a
Southern Energy Terminated Employee, but who is subsequently employed by the
Southern Group on or prior to the Distribution Date; or (c) a Southern Energy
Retired Employee.
1.64 SOUTHERN ENERGY WCP CLAIMS. "Southern Energy WCP Claims" is
defined in Subsection 6.07(a)(i).
1.65 SOUTHERN GROUP. "Southern Group" shall have the meaning set forth
in the Separation Agreement.
1.66 SOUTHERN STOCK VALUE. "Southern Stock Value" means the closing
per-share price of Southern common stock as listed on the NYSE on the last
trading day before the Distribution Date.
1.67 SOUTHERN TERMINATED EMPLOYEE. "Southern Terminated Employee" means
any individual who is a former employee of the Southern Group and who, on the
Distribution Date, is not a Southern Energy Employee.
1.68 SOUTHERN WCP. "Southern WCP" means the Southern Workers'
Compensation Program, comprised of the various arrangements established by a
member of the Southern Group to comply with the workers' compensation
requirements of the states in which the Southern Group conducts business.
1.69 STOCK PLAN. "Stock Plan," when immediately preceded by "Southern,"
means the Southern Performance Stock Plan, pursuant to which employees and other
service providers hold Options.
1.70 STOCK PURCHASE PLAN. "Stock Purchase Plan" means the employee
stock purchase plan to be established by Southern Energy pursuant to Section
7.04.
1.71 SUBSIDIARY. "Subsidiary" shall have the meaning set forth in the
Separation Agreement.
1.72 SUPPLEMENTAL BENEFIT PLAN. "Supplemental Benefit Plan," when
immediately preceded by "Southern," means the Southern Supplemental Benefit
Plan. When immediately preceded by "Southern Energy," "Supplemental Benefit
Plan" means the Southern Energy supplemental benefit plan to be established
pursuant to Sections 2.02 and 5.01 that corresponds to the respective Southern
Supplemental Benefit Plan.
1.73 TAX INDEMNIFICATION AGREEMENT. "Tax Indemnification Agreement"
means the Ancillary Agreement which is attached as an exhibit to the Separation
Agreement.
1.74 UNION PLANS. "Union Plans," when immediately preceded by "Southern
Energy," means all Plans maintained by Southern Energy exclusively for the
benefit of certain of its bargaining unit employees.
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1.75 VALUE CREATION PLAN. "Value Creation Plan," when immediately
preceded by "Southern Energy," means the Southern Energy Value Creation Plan, as
maintained by Southern Energy as of the date of the Agreement.
ARTICLE II
GENERAL PRINCIPLES
2.01 ASSUMPTION OF SOUTHERN ENERGY LIABILITIES. Except as specified
otherwise in this Agreement, or as mutually agreed upon by Southern Energy and
Southern from time to time, Southern Energy hereby assumes and agrees to pay,
perform, fulfill and discharge, in accordance with their respective terms, all
of the following: (a) subject to Section 9.02 and to the indemnification
provisions of Schedule 2.01, all Liabilities to or relating to Southern Energy
Employees, in each case relating to, arising out of or resulting from employment
by the Southern Group before the Distribution Date, (including Liabilities
arising under or relating to Southern Plans and Southern Energy Plans); (b)
subject to Section 9.02 and to the indemnification provisions of Schedule 2.01,
all other Liabilities to or relating to Southern Energy Employees, to the extent
relating to, arising out of or resulting from future, present or former
employment with the Southern Energy Group (including Liabilities arising under
or relating to Southern Plans and Southern Energy Plans); (c) subject to Section
9.02 and to the indemnification provisions of Schedule 2.01, all Liabilities
relating to, arising out of or resulting from any other actual or alleged
employment relationship with the Southern Energy Group; and (d) subject to
Section 9.02 and to the indemnification provisions of Schedule 2.01, all other
Liabilities relating to, arising out of or resulting from obligations,
liabilities and responsibilities expressly assumed or retained by the Southern
Energy Group or a Southern Energy Plan, pursuant to this Agreement. Except as
specified otherwise in this Agreement or as otherwise mutually agreed upon by
Southern and Southern Energy from time to time, Southern shall transfer to
Southern Energy amounts equal to trust assets and other related assets as
consistent with the applicable Plan transition that arises out of or relates to
Southern Energy's interest in each Southern Plan. Except as specified otherwise
in this Agreement or as otherwise mutually agreed upon by Southern and Southern
Energy from time to time, Southern Energy, shall transfer to Southern, when
appropriate, amounts equal to trust assets and other assets, as consistent with
the applicable Southern Plans, that arise out of or relate to Southern Energy's
Liabilities for or relating to Southern Energy Retired Employees' interests in
Southern and/or Southern Energy Plans or with respect to Southern Employees who
previously accrued Liabilities under either Southern Energy Plans or Southern
Plans while an employee of Southern Energy. Notwithstanding the foregoing, the
Liabilities and/or assets attributable to Southern Energy Retired Employees
shall be determined as provided in Schedule 2.01(a).
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2.02 ESTABLISHMENT OF SOUTHERN ENERGY PLANS.
(a) Health and Welfare Plans. Except as specified otherwise in
this Agreement, effective as of the Distribution Date or such other
date(s) as Southern and Southern Energy may mutually agree, Southern
Energy shall adopt the Southern Energy Health and Welfare Plans and
Southern Energy Post-Employment Programs. The foregoing Southern Energy
Plans as in effect as of the Distribution Date shall be comparable to
the Southern Plans as in effect on the Distribution Date.
(b) Retirement Plans and Fringe Benefits. Except as specified
otherwise in this Agreement, effective as of the Distribution Date or
such other date(s) as Southern and Southern Energy may mutually agree,
Southern Energy shall adopt the Southern Energy Retirement Plans and
the Southern Energy Fringe Benefits. The foregoing Southern Energy
Plans as in effect as of the Distribution Date shall be comparable to
the Southern Plans as in effect on the Distribution Date.
(c) Equity and Other Compensation. Except as specified
otherwise in this Agreement, effective as of the IPO Closing Date or
such other date(s) as Southern and Southern Energy may mutually agree,
Southern Energy shall adopt such Plans as may be determined to be
appropriate, including, without limitation, the Southern Energy Omnibus
Incentive Compensation Plan and the Southern Energy Stock Purchase
Plan. Except as specified otherwise in this Agreement, effective as of
the Distribution Date or such other date(s) as Southern and Southern
Energy may mutually agree, Southern Energy shall adopt such Plans as
may be determined to be appropriate, including, without limitation, the
Southern Energy Deferred Compensation Plan, the Southern Energy
Supplemental Benefit Plan, the Southern Energy Change in Control
Programs and the Southern Energy Deferred Compensation Trust. The
foregoing Southern Energy Plans as in effect as of the Distribution
Date shall be comparable to the Southern Plans as in effect on the
Distribution Date.
(d) Southern Energy Under No Obligation to Maintain Plans.
Except as specified otherwise in this Agreement, nothing in this
Agreement shall preclude Southern Energy, at any time from amending,
merging, modifying, terminating, eliminating, reducing, or otherwise
altering in any respect any Southern Energy Plan, any benefit under any
Southern Energy Plan or any trust, insurance policy or funding vehicle
related to any Southern Energy Plan (to the extent permitted by law).
2.03 SOUTHERN ENERGY'S PARTICIPATION IN SOUTHERN PLANS.
(a) Participation in Southern Plans.
(i) Except as specified otherwise in this
Agreement, or as Southern and Southern
Energy may mutually agree, Southern Energy
shall continue as a Participating Company in
the Southern Plans in effect as of the IPO
Closing Date, to the extent that Southern
Energy has not yet established comparable
Plans. Effective as of any date on or after
the IPO Closing Date and before the
Distribution Date (or such other date
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as Southern or Southern Energy may mutually
agree upon), any member of the Southern
Energy Group not described in the preceding
sentence may, at its request and with the
consent of Southern and Southern Energy,
become a Participating Company in any or all
of the Southern Plans, to the extent that
Southern Energy has not yet established a
comparable Plan.
(ii) On and after the Distribution Date, Southern
Energy Retired Employees shall continue to
participate in the Southern Plans for which
they are eligible as of the Distribution
Date, including, but not limited to, the
Southern Post-Employment Programs, Southern
Pension Plan and any Southern Plan as
provided in Article V.
(b) Southern's General Obligations as Plan Sponsor.
(i) To the extent that Southern Energy is a
Participating Company in any Southern
Plan(s), Southern shall continue to
administer, or cause to be administered, in
accordance with their terms and applicable
law, such Southern Plan(s), and shall have
the sole and absolute discretion and
authority to interpret the Southern Plan(s),
as set forth therein. Southern shall not,
without first consulting with Southern
Energy, amend any material feature of any
Southern Plan in which Southern Energy is a
Participating Company, except to the extent
such amendment would not affect any benefits
of Southern Energy Employees under such Plan
or as may be necessary or appropriate to
comply with applicable law.
(ii) With regard to Southern Energy Retired
Employees participating in Southern Plans
after the Distribution Date, Southern shall
continue to administer, or cause to be
administered, in accordance with their terms
and applicable law, such Southern Plans, and
shall have sole and absolute discretion and
authority to interpret such Plans or amend
such plans, as set forth therein.
(c) Southern Energy's General Obligations as Participating
Company. Southern Energy shall perform with respect to its
participation in the Southern Plans, the duties of a Participating
Company as set forth in each such Plan or any procedures adopted
pursuant thereto, including (without limitation): (i) assisting in the
administration of claims, to the extent requested by the claims
administrator of the applicable Southern Plan; (ii) cooperating fully
with Southern Plan auditors, benefit personnel and benefit vendors;
(iii) preserving the confidentiality of all financial arrangements
Southern has or may have with any vendors, claims administrators,
trustees or any other entity or individual with whom Southern has
entered into an agreement relating to the Southern Plans; and (iv)
preserving the confidentiality of participant information (including,
without limitation, health information in relation to FMLA leaves) to
the extent not specified otherwise in this Agreement.
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(d) Termination of Participating Company Status. Except as
otherwise may be mutually agreed upon by Southern and Southern Energy,
effective as of the Distribution Date or such other date as Southern
Energy establishes a comparable Plan (as specified in Section 2.02 or
otherwise in this Agreement), Southern Energy shall automatically cease
to be a Participating Company in the corresponding Southern Plan.
2.04 TERMS OF PARTICIPATION BY SOUTHERN ENERGY EMPLOYEES IN SOUTHERN
ENERGY PLANS.
(a) Non-Duplication of Benefits. As of the Distribution Date
or such later date that applies to the particular Southern Energy Plan
established thereafter, the Southern Energy Plans shall be, with
respect to Southern Energy Employees, in all respects the successors in
interest to, and shall not provide benefits that duplicate benefits
provided by, the corresponding Southern Plans. Southern and Southern
Energy shall mutually agree, if necessary, on methods and procedures,
including amending the respective Plan documents, to prevent Southern
Energy Employees from receiving duplicate benefits from the Southern
Plans and the Southern Energy Plans.
(b) Service Credit. Except as specified otherwise in this
Agreement, with respect to Southern Energy Employees, each Southern
Energy Plan shall provide that all service, all compensation and all
other benefit-affecting determinations that, as of the Distribution
Date, were recognized under the corresponding Southern Plan shall, as
of the Distribution Date, receive full recognition and credit and be
taken into account under such Southern Energy Plan to the same extent
as if such items occurred under such Southern Energy Plan, except to
the extent that duplication of benefits would result. The service
crediting provisions shall be subject to any respectively applicable
"service bridging," "break in service," "employment date," or
"eligibility date" rules under the Southern Energy Plans and the
Southern Plans.
2.05 FOREIGN PLANS. Southern Energy intends to maintain all Foreign
Plans in existence as of the IPO Closing Date up to and through the Distribution
Date.
2.06 UNION PLANS. Southern and/or Southern Energy shall continue to
maintain all Union Plans in existence as of the IPO Closing Date up to and after
the Distribution Date in accordance with the terms of those plans and subject to
collective bargaining.
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ARTICLE III
DEFINED BENEFIT PLAN
3.01 ESTABLISHMENT OF MASTER PENSION PLAN TRUST. Southern Energy Master
Trust. Effective as of or before the Distribution Date, Southern Energy shall
establish, or cause to be established, a separate master trust which is intended
to be qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a)(1) (the "Southern Energy Master Trust"), to hold the assets of
the Southern Energy Pension Plan, the Southern Energy Resources, Inc. Pension
Plan for Bargaining Unit Employees and the Southern Energy Resources, Inc.
Hourly Operations Pension Plan.
3.02 ASSUMPTION OF PENSION PLAN.
(a) Assumption of Liabilities by Southern Energy Pension Plan.
Effective as of the Distribution Date, all accrued benefits of Southern
Energy Employees under the Southern Pension Plan will be transferred to
the Southern Energy Pension Plan. The Southern Energy Pension Plan
shall assume and be solely responsible for all Liabilities for or
relating to the accrued benefits of the Southern Energy Employees under
the Southern Pension Plan as of the Distribution Date.
(b) Asset Allocation and Transfers.
(i) As soon as reasonably practicable, but in any
case before the Distribution Date, Southern shall engage
actuaries and cause to be determined for the Southern Pension
Plan the amount of assets to be transferred from the Southern
Pension Plan to the Southern Energy Pension Plan. Such amount
shall be equal to the greater of (A) the amount required under
Code Section 414(l), or (B) the amount in the sub-account
within the Southern Master Trust that has been separately
maintained and accounted for on behalf of Southern Energy
Employees less the amount attributable to Southern Energy
Retired Employees. The actuarial assumptions that will be used
to value the benefit Liabilities described in the preceding
sentence shall be consistent with the actuarial assumptions
used by Southern in prior valuations and shall be mutually
agreed to by Southern and Southern Energy prior to the
Distribution Date.
(ii) The Southern Energy Pension Plan and the
Southern Energy Master Trust shall not receive a transfer of
any assets currently held in a Code Section 401(h) sub-account
within the Southern Master Trust.
(iii) As soon as reasonably practicable, the amount
determined in Subsection 3.02(b)(i) above of the assets of the
Southern Pension Plan valued as of the Distribution Date shall
be transferred to the Southern Energy Pension Plan.
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3.03 NO DISTRIBUTIONS TO SOUTHERN ENERGY EMPLOYEES. The Southern
Pension Plan and the Southern Energy Pension Plan shall provide that no
distribution of retirement benefits shall be made to any Southern Energy
Employee on account of the Southern Energy Group ceasing to be a Subsidiary of
the Southern Group as of the Distribution Date.
ARTICLE IV
DEFINED CONTRIBUTION PLANS
4.01 ESP. Effective as of the Distribution Date, Southern Energy shall
establish, or cause to be established, a trust, which is intended to be
qualified under Code Section 401(a), exempt from taxation under Code Section
501(a)(1), and forming the Southern Energy ESP. Such Southern Energy ESP shall
be comparable to the Southern ESP. Upon the mutual agreement of Southern and
Southern Energy, the Southern Energy ESP shall accept asset transfers from the
Southern ESP, PSP and/or ESOP. As soon as reasonably practicable after the
Distribution Date, Southern Energy shall use its commercially reasonable best
efforts to enter into agreements to accomplish such asset transfer(s), to engage
a trustee and recordkeeper and to transfer and maintain the necessary
participant records. Southern Energy and Southern each agree to use their
commercially reasonable best efforts to accomplish any transfer of assets.
4.02 ESOP. After the 1999 plan year contribution is made to the
Southern ESOP, no further contributions will be made to accounts for Southern
Energy Employees. After the Distribution Date, Southern Energy shall not
establish a Plan comparable to the Southern ESOP, but may, at its discretion,
allow transfers of assets in the Southern ESOP to another tax qualified Plan
maintained by Southern Energy.
4.03 PSP. Effective as of the Distribution Date, Southern Energy may,
at its discretion, establish, or cause to be established, a trust, which is
intended to be qualified under Code Section 401(a), exempt from taxation under
Code Section 501(a)(1), and forming the Southern Energy PSP. Such Southern
Energy PSP, if established, shall be comparable to the Southern PSP. Upon the
mutual agreement of Southern and Southern Energy, the Southern Energy PSP shall
accept asset transfers from the Southern PSP. Notwithstanding the foregoing, it
is Southern Energy's intent that no action will cause a Southern Energy employee
to lose his or her unvested right to an account balance in the Southern PSP.
4.04 DISCRETIONARY PLAN DESIGN. Notwithstanding the foregoing,
effective as of the Distribution Date or such other date as mutually agreed upon
by Southern and Southern Energy, Southern Energy shall have the discretion to
consolidate the aforementioned Southern Energy defined contribution plans
provided at least one such plan is established and that plan is tax qualified.
4.05 SOUTHERN ENERGY RETIRED EMPLOYEES. Notwithstanding the above,
account balances of Southern Energy Retired Employees, if any, shall remain in
the Southern ESP, ESOP and PSP after the Distribution Date.
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ARTICLE V
NON-QUALIFIED AND OTHER PLANS
5.01 SUPPLEMENTAL BENEFIT PLAN.
(a) Establishment of Southern Energy Supplemental Benefit
Plan. Effective as of the Distribution Date, Southern Energy shall
establish the Southern Energy Supplemental Benefit Plan which shall be
comparable to the Southern Supplemental Benefit Plan. As of the
Distribution Date, Southern Energy shall assume all Liabilities to or
relating to the Southern Energy Employees under the Southern
Supplemental Benefit Plan. As of the Distribution Date, Southern shall
assume all Liabilities to or relating to Southern Energy Retired
Employees under the Southern Supplemental Benefit Plan.
(b) Participation in Supplemental Benefit Plan. Effective as
of the Distribution Date, eligible Southern Energy Employees determined
in accordance with the requirements of ERISA shall only be eligible to
participate in the Southern Energy Supplemental Benefit Plan.
5.02 DEFERRED COMPENSATION PLAN.
(a) Establishment of Southern Energy Deferred Compensation
Plan. Effective as of the Distribution Date, Southern Energy shall
establish the Southern Energy Deferred Compensation Plan which shall be
comparable to the Southern Deferred Compensation Plan. As of the
Distribution Date, Southern Energy shall assume all Liabilities to or
relating to the Southern Energy Employees under the Southern Deferred
Compensation Plan. As of the Distribution Date, Southern shall assume
all Liabilities to or relating to Southern Energy Retired Employees
under the Southern Deferred Compensation Plan.
(b) Participation in Deferred Compensation Plans. Effective as
of the Distribution Date, eligible Southern Energy Employees determined
in accordance with the requirements of ERISA shall only be eligible to
participate in the Southern Energy Deferred Compensation Plan.
5.03 SERP
(a) Southern Energy SERP.
(i) Maintenance of the Southern Energy SERP.
After the Distribution Date, Southern Energy
shall continue to maintain the Southern
Energy SERP, but Southern Energy shall amend
the plan to eliminate the transitional
provisions between the Southern SERP and the
Southern Energy SERP. As of the Distribution
Date, Southern Energy shall assume all
Liabilities to or relating to the Southern
Energy Employees under the Southern SERP.
(ii) Participation in the Southern Energy SERP.
Effective as of the Distribution Date,
eligible Southern Energy Employees
determined in
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accordance with the requirements of ERISA
shall only be eligible to participate in the
Southern Energy SERP.
(b) Southern SERP. Effective as of the Distribution Date,
Southern shall assume all Liabilities to or relating
to Southern Energy Retired Employees under the
Southern Energy SERP and thereafter Southern Energy
Retired Employees shall participate in the Southern
SERP.
(i) Maintenance of the Southern SERP. After the
Distribution Date, Southern shall continue
to maintain the Southern SERP, but Southern
shall amend the plan to eliminate the
transitional provisions between the Southern
SERP and the Southern Energy SERP to address
participation in the Southern SERP by
Southern Energy Retired Employees.
5.04 SOUTHERN ENERGY DEFERRED INCENTIVE COMPENSATION PLAN. Maintenance
of the Southern Energy Deferred Incentive Compensation Plan. After the
Distribution Date, Southern Energy shall continue to maintain the Southern
Energy Deferred Incentive Compensation Plan with comparable features to the
current Southern Energy Deferred Incentive Compensation Plan. No new
participants will be added to this Plan. After the IPO Closing Date, deferred
amounts under the Southern Energy Deferred Incentive Compensation Plan shall be
deemed to be invested in Southern Energy common stock.
5.05 SOUTHERN ENERGY CHANGE IN CONTROL PROGRAMS. Establishment of the
Southern Energy Change in Control Programs. Effective as of the Distribution
Date, Southern Energy shall establish the Southern Energy Change in Control
Programs which shall be comparable to the Southern Change in Control Programs.
5.06 SOUTHERN ENERGY RABBI TRUST. Adoption of the Southern Energy Rabbi
Trust. Effective as of the Distribution Date, Southern Energy shall adopt the
Southern Energy Rabbi Trust which shall be spun off from the Southern Rabbi
Trust. Trust assets attributable to Southern Energy contributions shall be
transferred to the Southern Energy Rabbi Trust.
5.07 SEVERANCE PLAN. Southern Energy shall continue to maintain the
Southern Energy Severance Plan after the Distribution Date. The Southern Energy
Severance Plan shall provide that no Southern Energy Employee shall become
eligible for severance benefits on account of the Southern Energy Group ceasing
to be a subsidiary of the Southern Group as of the Distribution Date.
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ARTICLE VI
HEALTH AND WELFARE PLANS
6.01 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES.
(a) General - Health and Welfare Plans. Except as provided in
Subsection 6.01(b), each Southern Health and Welfare Plan shall retain
all Liabilities incurred through the Distribution Date under such
Southern Health and Welfare Plan, whether or not claims are filed
before the Distribution Date, by or on behalf of Southern Energy
Employees or their spouses or dependents. Southern Energy shall
indemnify such plan against the pre-Distribution Date Liabilities by
paying the current cost of coverage associated with such Southern
Energy Employee or his or her spouse or beneficiaries, to the extent
not already paid.
(b) Substantially Similar Self-Insured Plans. Unless the
affected Southern Energy Employee elects continued coverage under a
Southern Health and Welfare Plan pursuant to Subsection 6.03(a)(i), any
Health and Welfare Plan self-insured by Southern and substantially
similar to any Southern Energy Health and Welfare Plan established as
of the Distribution Date, or such later date as agreed upon by Southern
and Southern Energy, shall cease to be responsible for Liabilities to
or relating to Southern Energy Employees under the Southern Health and
Welfare Plans as of such date and the corresponding Southern Energy
Health and Welfare Plans shall assume such Liabilities as of that date.
(c) Pending Treatments. Notwithstanding Subsection 6.01(a)
above, all treatments which have been pre-certified for or are being
provided to a Southern Energy Employee or his or her spouse or
dependents as of the Distribution Date shall be provided without
interruption under the appropriate Southern Health and Welfare Plan
until such treatment is concluded or discontinued pursuant to
applicable Plan rules and limitations provided the affected Southern
Energy Employee (or his or her spouse or dependents) elect to continue
coverage after the Distribution Date as provided in Subsection
6.03(a)(i) below and timely pay the cost of coverage associated with
such election.
6.02 CLAIMS FOR HEALTH AND WELFARE PLANS.
(a) Administration of Southern Claims. Southern shall
administer claims incurred under the Southern Health and Welfare Plans
by Southern Energy Employees before the Distribution Date, but only to
the extent that Southern Energy has not, before the Distribution Date,
established and assumed administrative responsibility for a comparable
Plan. Southern also shall administer claims incurred under the Southern
Health and Welfare Plans by Southern Energy Employees who elect
continued coverage pursuant to Subsection 6.03(a)(i) below. Any
determination made or settlements entered into by Southern with respect
to such claims shall be final and binding.
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(b) Outsourcing of Claims by Southern. Southern shall have the
right to engage a third party administrator, vendor, or insurance
company to administer ("Outsource") claims incurred under the Southern
Health and Welfare Plans, including claims incurred by Southern Energy
Employees before the Distribution Date. Southern may determine the
manner and extent of such Outsourcing, including the selection of one
or more third party administrators, vendors, or insurance companies and
the ability to transfer the liability for such claims to one or more
independent insurance companies. Southern has Outsourced administration
of many Southern Health and Welfare Plans, as set forth in Section 6.04
and the Schedule thereto.
(c) Outsourcing of Claims by Southern Energy. Southern shall
use its commercially reasonable best efforts for and on behalf of
Southern Energy to negotiate for Outsourcing arrangements with its
third party administrators, vendors, or insurance companies with
comparable features to each of Southern's current Outsourcing
arrangements.
6.03 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS.
(a) Continuance of Elections, Co-Payments and Maximum
Benefits.
(i) As of the Distribution Date or such other date as
Southern and Southern Energy may mutually agree, Southern
Energy shall cause the Southern Energy Health and Welfare
Plans to maintain comparable coverage and contribution
elections made by Southern Energy Employees under the Southern
Health and Welfare Plans and apply such elections under the
Southern Energy Health and Welfare Plans for the remainder of
the period or periods for which such elections are by their
terms applicable. The transfer or other movement of employment
between Southern and Southern Energy at any time upon or
before the Distribution Date shall constitute neither a
"status change" under the Southern Health and Welfare Plans or
the Southern Energy Health and Welfare Plans nor a "qualifying
event," as defined under COBRA. To facilitate continuity of
coverage following the transfer or other movement of
employment between Southern and Southern Energy on the
Distribution Date, however, Southern Energy Employees, their
spouses and dependents shall be offered continued coverage
under the Southern Health Plans which shall be substantially
similar to the coverage that would be provided if the
Distribution was a "qualifying event" under COBRA. Southern
shall extend such continued coverage to Southern Energy
Employees, their spouses and/or dependents who elect coverage
provided the covered individual timely pays a premium equal to
the premium charged to qualified beneficiaries under COBRA for
such coverage (i.e., 102% of the cost of coverage). Southern
agrees that it will not consider coverage under the Southern
Energy Health Plans to be group health coverage that will
terminate continued coverage to a Southern Energy Employee
elected pursuant to this Subsection 6.03(a)(i). Moreover,
Southern agrees to amend its plan, or cause its plan to be
amended, to provide that such coverage shall be primary to any
coverage provided under the Southern Energy Health Plans.
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(ii) On and after the Distribution Date, Southern
Energy shall cause the Southern Energy Health Plans to
recognize and give credit for (A) all amounts applied to
deductibles, out-of-pocket maximums, co-payments and other
applicable benefit coverage limits with respect to which such
expenses have been incurred by Southern Energy Employees under
the Southern Health Plans for the remainder of the calendar
year in which the Distribution Date occurs, and (B) all
benefits paid to Southern Energy Employees under the Southern
Health Plans for purposes of determining when such persons
have reached their lifetime maximum benefits under the
Southern Energy Health Plans. Notwithstanding the above,
Southern Energy's obligations under this Subsection
6.03(a)(ii) shall be limited by the market availability of
health insurance products or other arrangements satisfying the
criteria described above. Southern Energy shall use its
commercially reasonable best efforts to locate and engage the
services of a vendor whose policies or other arrangements meet
the requirements above.
(b) HCFA Administration. As of the Distribution Date, Southern
Energy shall assume all Liabilities relating to, arising out of or
resulting from claims verified by Southern or Southern Energy under the
HCFA data match reports that relate to Southern Energy Employees.
6.04 VENDOR AND INSURANCE ARRANGEMENTS. Southern shall use its
commercially reasonable best efforts for and on behalf of Southern Energy to
negotiate for, effective as of the Distribution Date or such other date as
Southern and Southern Energy mutually agree upon: (a) third party ASO Contracts
with comparable features and costs to the ASO Contracts entered into by
Southern, as set forth in Schedule 6.04(a) (the "ASO Contracts"); (b) Group
Insurance Policies with comparable features and costs to the Group Insurance
Policies entered into by Southern, as set forth in Schedule 6.04(b) (the "Group
Insurance Policies"); (c) HMO Agreements with comparable features and costs to
the HMO Agreements entered into by Southern, as set forth in Schedule 6.04(c)
(the "HMO Agreements"), and (d) competitive premium rates for all Southern
Energy Health and Welfare Plans. In each case, Southern Energy shall, as of the
Distribution Date or such other date as Southern and Southern Energy mutually
agree upon, establish, adopt and/or implement acceptable contracts, agreements
or arrangements. In accordance with Section 9.03, Southern shall on or before
the Distribution Date provide upon the request of Southern Energy copies of such
contracts or successor arrangements thereto identified in Schedules 6.04(a), (b)
and (c).
6.05 COBRA. Southern shall be responsible through the Distribution
Date, for compliance with the health care continuation coverage requirements of
COBRA and the Southern Health and Welfare Plans with respect to Southern Energy
Employees and qualified beneficiaries (as such term is defined under COBRA).
Southern shall provide, or cause the notices to be provided, as soon as
administratively practical, but in no event later than required under COBRA.
Southern Energy shall be responsible for providing Southern or its agents with
all necessary employee change notices and related information for covered
dependents, spouses, qualified beneficiaries (as such term is defined under
COBRA), and alternate recipients pursuant to QMCSO, in accordance with
applicable Southern COBRA policies and procedures. As soon as administratively
practicable after the Distribution Date, Southern shall provide Southern Energy,
through hard copy, electronic format or such other mechanism as is appropriate
under
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the circumstances, with a list of all qualified beneficiaries (as such term is
defined under COBRA) that relate to the Southern Energy Group and the relevant
information pertaining to their coverage elections. Effective as of the
Distribution Date, Southern Energy shall be solely responsible for compliance
with the health care continuation coverage requirements of COBRA for the
Southern Energy Health and Welfare Plans for Southern Energy Employees and their
qualified beneficiaries (as such term is defined under COBRA).
6.06 LEAVE OF ABSENCE PROGRAMS AND FMLA.
(a) Allocation of Responsibilities After Distribution Date.
Effective as of the Distribution Date, Southern Energy shall continue
to maintain its Leave of Absence Programs and FMLA programs and shall
continue to be responsible for administering leaves of absence and
complying with FMLA with respect to Southern Energy Employees.
(b) Disclosure. As soon as administratively practicable after
the Distribution Date, Southern shall provide to Southern Energy copies
of all records pertaining to the leaves of absence and FMLA with
respect to all Southern Energy Employees to the extent such records
have not been previously provided.
6.07 SOUTHERN WORKERS' COMPENSATION PROGRAM.
(a) ADMINISTRATION OF CLAIMS.
(i) Through the Distribution Date or such other date
as Southern and Southern Energy may mutually agree, Southern
shall continue to be responsible for the administration of all
claims that (A) are, or have been, incurred under the Southern
WCP before the Distribution Date by Southern Energy Employees
("Southern Energy WCP Claims"), and (B) have been historically
administered by Southern or its third party administrator.
However, Southern will advise Southern Energy and secure
approval for any material changes to current policy or
practice with respect to the administration of Southern Energy
WCP claims.
(ii) Effective as of the Distribution Date or such
other date as Southern and Southern Energy may mutually agree,
Southern Energy shall be responsible for the administration of
all Southern Energy WCP Claims.
(iii) Each party shall fully cooperate with the other
with respect to the administration and reporting of Southern
Energy WCP Claims, the payment of Southern Energy WCP Claims
determined to be payable, and the transfer of the
administration of any Southern Energy WCP Claims to the other
party.
(b) SELF-INSURANCE STATUS.
Southern shall maintain and amend, as necessary, its
certificates of self-insurance or bonding arrangements with
respect to workers' compensation and any other applicable
policies to include Southern Energy until the Distribution
Date, and Southern Energy shall fully cooperate with Southern
in obtaining such
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amendments. Southern shall use its commercially reasonable
best efforts to obtain self-insurance status for workers'
compensation for Southern Energy effective as of the
Distribution Date in those jurisdictions in which Southern
Energy conducts business, in which Southern is self-insured,
and where Southern and Southern Energy mutually agree that
such status is beneficial to Southern Energy. Southern Energy
hereby authorizes Southern to take all actions necessary and
appropriate on its behalf in order to obtain such self-
insurance status. All costs incurred by Southern in amending
such certificates, including without limitation filing fees,
adjustments of security and excess loss policies and
amendments of safety programs, shall be shared pro rata by
Southern and Southern Energy.
(c) INSURANCE POLICY.
(i) Effective as of the Distribution Date, in all
states other than those states where Southern Energy is to be
self-insured pursuant to Subsection 6.07(b) above, Southern
shall use its commercially reasonable best efforts to
negotiate for workers' compensation insurance policies on
behalf of Southern Energy from the issuing insurance companies
(as set forth in the relevant portion of Schedule 6.04(b)) or
different insurance companies which are comparable to the
policies previously maintained by Southern; provided that the
retention under such Southern Energy policies shall be as
determined by Southern Energy.
(ii) Southern shall use its commercially reasonable
best efforts to maintain the premium rates for all workers'
compensation insurance policies for both Southern and Southern
Energy in effect for periods through the Distribution Date to
be based on the aggregate number of employees covered under
the workers' compensation insurance policies of both Southern
and Southern Energy. Any premiums due under the separate
workers' compensation insurance issued to Southern Energy
shall be payable by Southern Energy.
ARTICLE VII
EQUITY AND OTHER COMPENSATION
7.01 SOUTHERN OPTIONS.
(a) Option Assumption by Southern Energy.
(i) All options held by Southern Energy Employees
issued under the Southern Performance Stock Plan (the
"Southern PSP") will be canceled on the Distribution Date.
Those canceled options will be replaced ("Replacement
Options") by Southern Energy under the Southern Energy Omnibus
Incentive Compensation Plan. Such Replacement Options shall be
converted in a manner that will be compliant with EITF Issue
No. 90-9 in order to retain the same aggregate intrinsic
value.
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(ii) All options held by Southern Employees and
Southern Energy Retired Employees issued under the Southern
PSP shall be adjusted ("Adjusted Options") in a manner that
will be compliant with EITF Issue No. 90-9 in order to retain
the same aggregate intrinsic value.
(b) Certain Non-U.S. Optionees. Except as may otherwise be
agreed upon by Southern and Southern Energy, this Section 7.01 shall
govern the treatment of Southern Options held by non-U.S. Southern
Energy Employees. In the event it is determined that the local law of
any Non-U.S. Optionee requires a different treatment, Southern and
Southern Energy shall take such steps as is required to comply with
local law or may cash-out those Options that cannot reasonably be
conformed.
7.02 SOUTHERN PERFORMANCE DIVIDEND PLAN. On or before the Distribution
Date, Southern Energy Employees shall cease to participate in the Southern
Performance Dividend Plan, but Southern Energy Retired Employees shall continue
to participate after the Distribution Date. Accordingly, Southern Energy shall
not maintain a comparable plan after the Distribution Date. After such
termination of participation in the Southern Performance Dividend Plan, Southern
Energy may in its discretion grant awards under the Southern Energy Omnibus
Incentive Compensation Plan to eligible employees to take into account the lost
benefit opportunity under the Southern Performance Dividend Plan.
7.03 SOUTHERN ENERGY VALUE CREATION PLAN. On or before the IPO Closing
Date, Southern Energy shall terminate the Southern Energy Value Creation Plan
and make a final conversion of awards in accordance with the Southern Energy
Value Creation Plan's terms as determined by the Compensation Committee of the
Southern Board of Directors.
7.04 STOCK PURCHASE PLAN. Effective on or before the IPO Closing Date,
Southern Energy shall establish a Stock Purchase Plan for the benefit of
Southern Energy Employees which shall be comparable to the plan set forth in
Schedule 7.04.
7.05 SOUTHERN ENERGY OMNIBUS INCENTIVE COMPENSATION PLAN. Effective on
or before the IPO Closing Date, Southern and Southern Energy shall establish the
Southern Energy Omnibus Incentive Compensation Plan for the benefit of Southern
Energy Employees which shall be comparable to the plan set forth in Schedule
7.05. The Plan is intended to comply with Code Section 162(m).
7.06 SOUTHERN ENERGY SHORT TERM INCENTIVE PLAN. Effective on or before
the IPO Closing Date, Southern Energy shall terminate the Southern Energy Short
Term Incentive Plan in accordance with its terms such that no awards shall be
made on or after the IPO Closing Date. The final award shall be for the calendar
year 2000 and shall be paid out by no later than March 15, 2001. Future short
term incentive awards, if any, shall be provided through the Southern Energy
Omnibus Incentive Compensation Plan.
7.07 SOUTHERN PERFORMANCE PAY PLAN (SHAREHOLDER APPROVED). Effective
December 31, 2000, Southern Energy shall cease participation in the Southern
Performance Pay Plan (Shareholder Approved). The only Southern Energy employee
that participates in the Southern Performance Pay Plan (Shareholder Approved) is
the chief executive officer who does
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so rather than participate in the Southern Energy Short Term Incentive Plan for
the 2000 performance period. The final year 2000 award shall be paid out by no
later than March 15, 2001.
7.08 PERFORMANCE IMPROVEMENT PLAN RAMP DOWN. With respect to any
Southern Energy Employee who transferred from Southern on or after January 1,
1997, Southern and Southern Energy shall share equally (i.e., 50% each) in the
cost at target of the Performance Improvement Plan ("PIP") ramp down as
determined by the PIP Plan in effect December 31, 1999.
ARTICLE VIII
FRINGE AND OTHER BENEFITS
8.01 EMPLOYEE ASSISTANCE PROGRAM. Southern shall use its commercially
reasonable best efforts for and on behalf of Southern Energy to negotiate for,
effective as of the Distribution Date or such other date as Southern and
Southern Energy may mutually agree, contracts and/or arrangements with
Southern's vendors that contain comparable features to Southern's contracts
and/or arrangements providing for an employee assistance program. Southern
Energy shall enter into such acceptable contracts and/or arrangements as
negotiated by Southern.
8.02 EDUCATIONAL ASSISTANCE PROGRAM. Effective as of the Distribution
Date, Southern Energy shall continue to provide a Southern Energy educational
assistance program to Southern Energy Employees.
8.03 CREDIT UNION. Southern shall use its commercially reasonable best
efforts to make a credit union available to Southern Energy Employees on
substantially similar terms and conditions as are offered to employees of the
Southern Group, through such date as Southern Energy and Southern mutually
agree.
8.04 SOUTHERN-OWNED CARS. Southern and Southern Energy shall continue
any lease of Southern-owned cars in accordance with the terms of any lease in
effect as of the date of this Agreement up to the Distribution Date. Effective
for periods on and after the Distribution Date, Southern and Southern Energy
shall use their commercially reasonable best efforts to determine the terms and
conditions pursuant to which Southern Energy shall be entitled to lease
Southern-owned cars including those cars under lease as of the Distribution
Date.
8.05 EXECUTIVE FINANCIAL PLANNING. Effective as of the Distribution
Date or such other date as Southern Energy and Southern may mutually agree,
Southern Energy shall provide a Southern Energy executive financial planning
program to eligible Southern Energy Employees which is comparable to the
Southern executive financial planning program. Southern shall use its
commercially reasonable best efforts for and on behalf of Southern Energy to
negotiate for contracts or arrangements with Southern's vendors, effective as of
the Distribution Date or such other date as Southern and Southern Energy may
mutually agree, that contain comparable features to Southern's contracts and/or
arrangements providing for an executive financial planning program.
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8.06 RELOCATION. Effective as of the Distribution Date or such other
date as Southern Energy and Southern may mutually agree, Southern Energy shall
provide a Southern Energy relocation program to Southern Energy Employees which
is comparable to the Southern relocation program. Southern shall use its
commercially reasonable best efforts for and on behalf of Southern Energy to
negotiate for contracts or arrangements with Southern's vendors, effective as of
the Distribution Date or such other date as Southern and Southern Energy may
mutually agree, that contain comparable features to Southern's contracts and/or
arrangements providing for an employee relocation program.
8.07 OTHER BENEFITS. To the extent that Southern maintains, sponsors or
provides other fringe benefits for its employees not specifically identified on
a schedule to this Agreement, then Southern shall, to the extent permitted by
law, continue to make such benefits available to Southern Energy Employees on
substantially similar terms and conditions as are offered to the employees of
the Southern Group through the Distribution Date or such other date upon which
Southern Energy and Southern mutually agree. Southern Energy and Southern agree
to make commercially reasonable best efforts to mutually agree on whether, when,
and on what terms any member of the Southern Energy Group shall maintain,
sponsor or offer fringe benefits.
ARTICLE IX
9.01 TRANSITIONAL SERVICES AGREEMENT. On or about the date hereof,
Southern and Southern Energy shall enter into the Transitional Services
Agreement covering the provisions of various services to be provided by Southern
to Southern Energy. The provisions of this Agreement shall be subject to the
provisions of such Transitional Services Agreement.
9.02 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.
(a) Shared Costs. Southern Energy shall pay its share, as
determined by Southern in good faith, of any contributions made to any
trust maintained in connection with a Southern Plan while Southern
Energy is a Participating Company in that Southern Plan.
(b) Contributions to Trusts. With respect to Southern Plans to
which Southern Energy Employees make contributions, Southern shall use
reasonable procedures to determine Southern Energy Liabilities
associated with such Plans, taking into account such contributions,
settlements, refunds and similar payments.
(c) Administrative Expenses Not Chargeable to a Trust. To the
extent not charged pursuant to Section 9.01 (including, without
limitation, an interim service level agreement as contemplated by
Section 9.01 herein and the Separation Agreement), and to the extent
not otherwise agreed to by Southern and Southern Energy, and to the
extent not chargeable to a trust established in connection with a
Southern Plan, Southern Energy shall be responsible, through either
direct payment or reimbursement to Southern, for its allocable share of
expenses incurred by Southern in the administration of (i) the Southern
Plans while Southern Energy participates in such Plans, and (ii) the
Southern Energy Plans, to the extent Southern administers such Plans.
For this purpose, Southern
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Energy's allocable share of such expenses shall be calculated in
accordance with current practice in effect as of the date of this
Agreement.
9.03 SHARING OF PARTICIPANT INFORMATION. Southern and Southern Energy
shall share, or cause to be shared, all participant information that is
necessary or appropriate for the efficient and accurate administration of each
of the Southern Plans and the Southern Energy Plans during the respective
periods applicable to such Plans as Southern Energy and Southern may mutually
agree. Southern and Southern Energy and their respective authorized agents
shall, subject to applicable laws of confidentiality and data protection, be
given reasonable and timely access to, and may make copies of, all information
relating to the subjects of this Agreement in the custody of the other party or
its agents, to the extent necessary or appropriate for such administration.
9.04 REPORTING AND DISCLOSURE COMMUNICATIONS TO PARTICIPANTS. While
Southern Energy is a Participating Company in the Southern Plans, Southern shall
take, or cause to be taken, all actions necessary or appropriate to facilitate
the distribution of all Southern Plan-related communications and materials to
employees, participants and beneficiaries, including (without limitation)
summary plan descriptions and related summaries of material modification(s),
summary annual reports, investment information, prospectuses, notices and
enrollment material for the Southern Plans. Southern Energy shall provide all
information needed by Southern to facilitate such Southern Plan-related
communications. Southern Energy shall take, or cause to be taken, all actions
necessary or appropriate to facilitate the distribution of all Southern Energy
Plan-related communications and materials to employees, participants and
beneficiaries. Southern Energy shall assist, and Southern Energy shall cause
each other applicable member of the Southern Energy Group to assist, Southern in
complying with all reporting and disclosure requirements of ERISA, including the
preparation of Form Series 5500 annual reports, for the Southern Plans, where
applicable.
9.05 AUDITS REGARDING VENDOR CONTRACTS. From the period beginning as of
the Distribution Date and ending on such date as Southern and Southern Energy
may mutually agree, Southern and Southern Energy and their duly authorized
representatives shall have the right to conduct joint audits with respect to any
vendor contracts that relate to both the Southern Health and Welfare Plans and
the Southern Energy Health and Welfare Plans. The scope of such audits shall
remain consistent with the current practices and all documents and other
information currently made available for review shall continue to be made
available. Southern and Southern Energy shall agree on the performance
standards, audit methodology, auditing policy and quality measures, reporting
requirements, and the manner in which costs incurred in connection with such
audits will be shared.
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9.06 BENEFICIARY DESIGNATIONS. Subject to Section 9.09, all beneficiary
designations made by Southern Energy Employees for the Southern Plans shall be
transferred to and be in full force and effect under the corresponding Southern
Energy Plans until such beneficiary designations are replaced or revoked by the
Southern Energy Employees who made the beneficiary designations. All beneficiary
designations made by Southern Energy Retired Employees for the Southern Energy
Plans shall be transferred to and be in full force and effect under the
corresponding Southern Plans until such beneficiary designations are replaced or
revoked by the Southern Energy Retired Employees who made the beneficiary
designations.
9.07 REQUESTS FOR IRS AND DOL OPINIONS. Southern and Southern Energy
shall make such applications to regulatory agencies, including the IRS and DOL,
as may be necessary or appropriate. Southern Energy and Southern shall cooperate
fully with one another on any issue relating to the transactions contemplated by
this Agreement for which Southern and/or Southern Energy elects to seek a
determination letter or private letter ruling from the IRS or an advisory
opinion from the DOL.
9.08 FIDUCIARY MATTERS. Southern and Southern Energy each acknowledge
that actions contemplated to be taken pursuant to this Agreement may be subject
to fiduciary duties or standards of conduct under ERISA or other applicable law,
and no party shall be deemed to be in violation of this Agreement if such party
fails to comply with any provisions hereof based upon such party's good faith
determination that to do so would violate such a fiduciary duty or standard.
9.09 CONSENT OF THIRD PARTIES. If any provision of this Agreement is
dependent on the consent of any third party (such as a vendor) and such consent
is withheld, Southern and Southern Energy shall use their commercially
reasonable best efforts to implement the applicable provisions of this
Agreement. If any provision of this Agreement cannot be implemented due to the
failure of such third party to consent, Southern and Southern Energy shall
negotiate in good faith to implement the provision in a mutually satisfactory
manner.
9.10 SOUTHERN INTRANET. Through March 31, 2002 or such other date as
Southern Energy and Southern may mutually agree, Southern shall make its
intranet site available to Southern Energy Employees on substantially the same
terms as such intranet site is made available to Southern Employees. Southern
and Southern Energy shall use their commercially reasonable best efforts to
mutually agree on the appropriate methods for Southern Energy to establish its
own intranet site. Notwithstanding the foregoing, Southern Energy will cease to
have access to PeopleNet which is offered through the Southern intranet
effective as of the Distribution Date.
9.11 TAX COOPERATION. In connection with the interpretation and
administration of this Agreement, Southern and Southern Energy shall take into
account the agreements and policies established pursuant to the Separation
Agreement and the Tax indemnification Agreement.
9.12 PLAN RETURNS. Plan Returns shall be filed or caused to be filed by
Southern or Southern Energy as the case may be in accordance with the principles
established in Section 2 of the Tax Indemnification Agreement. For purposes of
this Section 9.12, "Plan Return" means any return, report, certificate, form or
similar statement or document required to be filed with a
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government agency with respect to an employee benefit plan governed by the
Employee Retirement Income Security Act of 1974 , as amended, or a program
governed by Section 6039D.
ARTICLE X
EMPLOYMENT-RELATED MATTERS
10.01 TERMS OF SOUTHERN ENERGY EMPLOYMENT. Southern Energy Employees
shall be required to execute a new agreement regarding confidential information
and proprietary developments in a form approved by Southern Energy. In addition,
nothing in the Separation Agreement, this Agreement, or any Ancillary Agreement
should be construed to change the at-will status of any of the employees of the
Southern Group or the Southern Energy Group.
10.02 HR DATA SUPPORT SYSTEMS. Southern shall provide human resources
data support for Southern Energy Employees through March 31, 2002 or such other
date as Southern and Southern Energy may mutually agree on substantially the
same terms as are in effect as of the date of this Agreement.
10.03 NON-SOLICITATION OF EMPLOYEES. Prior to the Distribution Date,
Southern and Southern Energy each agree to notify and obtain authorization from
the other before initiating contact with potential employment candidates from
the other company. Moreover, no employee shall transfer from Southern to
Southern Energy, or vice versa, without the approval of the employee's employer.
After notice of the proposed transfer is given respectively to the Vice
President, Human Resources (or the functional equivalent) at Southern and
Southern Energy, such approval shall be granted by the Southern Energy
Management Council or the Southern senior officer responsible for the area in
which the employee at issue works, as appropriate. If such Council or officer
refuses to permit contact with the potential employee, the requesting company
may appeal to the Vice President, Human Resources (or the functional equivalent)
of the employing company. Such Vice President, Human Resources shall review the
circumstances of denial and shall have discretionary authority to change the
decision.
10.04 EMPLOYMENT OF EMPLOYEES WITH U.S. WORK VISAS. Southern Energy
Employees who, on the Distribution Date, are employed in the U.S. pursuant to a
work or training visa which authorizes employment only by the Southern Group
shall remain employed by the Southern Group until the visa is amended or a new
visa is granted to authorize employment by the Southern Energy Group and, at
that time, shall become an employee of the Southern Energy Group with
substantially similar rights as all other Southern Energy Employees. During the
period from the Distribution Date until the amended or new visa is issued, such
employee shall continue to participate in Southern Plans.
10.05 CONFIDENTIALITY AND PROPRIETARY INFORMATION.
(a) No provision of the Separation Agreement or any Ancillary
Agreement shall be deemed to release any individual for any violation
of the Southern non-competition guideline or any agreement or policy
pertaining to confidential or proprietary
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information of any member of the Southern Group or Southern Energy
Group, or otherwise relieve any individual of his or her obligations
under such non-competition guideline, agreement, or policy.
(b) Employee Agreements. As used in this Section
10.05, "Employee Agreement" means the confidentiality agreement, and
corresponding agreements in foreign countries, executed by Southern or
Southern Energy employees in connection with their employment. Nothing
in this Agreement, the Separation Agreement or any other Ancillary
Agreement shall be deemed to supercede any provision regarding the
conduct of employees mandated by the Federal Energy Regulatory
Commission or any other applicable regulatory authority.
(i) Survival of Southern Employee Agreement Obligations
and Southern's Common Law Rights. The Southern Employee
Agreements of all Southern Energy Employees and all former
Southern employees transferred to Southern Energy on or before
the Distribution Date shall remain in full force and effect
according to their terms; provided, however, that none of the
following acts committed by former Southern or Southern Energy
employees within the scope of their Southern Energy employment
shall constitute a breach of such Southern Employee
Agreements: (i) the use or disclosure of Confidential
Information (as that term is defined in the Southern Employee
Agreement) for or on behalf of Southern Energy, if such
disclosure is consistent with the license rights granted to
Southern Energy and restrictions imposed on Southern Energy
under the Separation Agreement, any other Ancillary Agreement
or any other agreement between the parties, and (ii) the
rendering of any services, directly or indirectly, to Southern
Energy to the extent such services are consistent with the
assignment or license of rights granted to Southern Energy and
the restrictions imposed on Southern Energy under the
Separation Agreement, any other Ancillary Agreement or any
other agreement between the parties. Further, Southern retains
any rights it has under statute or common law with respect to
actions by its former employees to the extent such actions are
inconsistent with the rights granted to Southern Energy and
restrictions imposed on Southern Energy under the Separation
Agreement, any other Ancillary Agreement or any other
agreement between the parties.
(ii) Survival of Southern Energy's Employee Agreement
Obligations and Southern Energy's Common Law Rights. The
Southern Energy Employee Agreements of all Southern Employees
and all former Southern Energy employees transferred to
Southern on or before the Distribution Date shall remain in
full force and effect according to their terms; provided,
however, that none of the following acts committed by former
Southern Energy or Southern employees within the scope of
their Southern employment shall constitute a breach of such
Southern Energy Employee Agreements: (i) the use or disclosure
of Confidential Information (as that term is defined in the
Southern Employee Agreement) for or on behalf of Southern, if
such disclosure is consistent with the license rights granted
to Southern and restrictions imposed on Southern under the
Separation Agreement, any other Ancillary Agreement or any
other agreement between the parties, and (ii) the rendering of
any services, directly or indirectly, to Southern to the
extent such services are consistent with the assignment or
license of rights granted to Southern and the restrictions
imposed on Southern under the Separation Agreement, any other
Ancillary Agreement or any other agreement between the
parties. Further, Southern Energy retains any rights it has
under statute or common law with respect to actions by its
former employees to the extent such actions are inconsistent
with the rights granted to Southern and restrictions imposed
on Southern under the Separation Agreement, any other
Ancillary Agreement or any other agreement between the
parties.
(iii) Assignment, Cooperation for Compliance and
Enforcement.
(A)(1) Southern retains all rights under the
Southern Employee Agreements of all former Southern employees
necessary to permit Southern to protect the rights and
interests of Southern, but hereby transfers and assigns to
Southern Energy its rights under the Southern Employee
Agreements of all former Southern employees to the extent
required to permit Southern Energy to enjoin, restrain,
recover damages from or obtain specific performance of the
Southern Employee Agreements or obtain other remedies against
any employee who breaches his or her Southern Employee
Agreement, and to the extent necessary to permit Southern
Energy to protect its rights and interests.
(2) Southern and Southern Energy agree, at their
own respective cost and expense, to use their reasonable
efforts to cooperate as follows: (A) Southern Energy shall
advise Southern of: (1) any violation(s) of the Southern
Employee
28
<PAGE> 35
Agreement by Southern Energy or former Southern employees, and
(2) any violation(s) of the Southern Energy Employee Agreement
which affect Southern's rights; and (B) Southern shall advise
Southern Energy of any violations of the Southern Employee
Agreement by current or former Southern employees which affect
Southern Energy's rights; provided, however, that the
foregoing obligations shall only apply to violations which
become known to an attorney within the legal department of the
party obligated to provide notice thereof.
(3) Southern and Southern Energy each may
separately enforce the Southern Employee Agreements of
Southern Energy and former Southern employees to the extent
necessary to reasonably protect their respective interests,
provided, however, that (i) Southern Energy shall not commence
any litigation relating thereto without first consulting with
Southern's General Counsel or his or her designee and (ii)
Southern shall not commence any litigation relating thereto
against any former Southern employee who is at the time a
Southern Energy Employee without first consulting with
Southern Energy's General Counsel or his or her designee. If
either party, in seeking to enforce any Southern Employee
Agreement, notifies the other party that it requires, or
desires, the other party to join in such action, then the
other party shall do so. In addition, if either party
commences or becomes a party to any action to enforce a
Southern Employee Agreement of a Southern Energy Employee or
former Southern employee, the other party shall, whether or
not it becomes a party to the action, cooperate with the other
party by making available its files and employees who have
information or knowledge relevant to the dispute, subject to
appropriate measures to protect the confidentiality of any
proprietary or confidential information that may be disclosed
in the course of such cooperation or action and subject to any
relevant privacy laws and regulations. Any such action shall
be conducted at the expense of the party bringing the action
and the parties shall agree on a case by case basis on
compensation, if any, of the other party for the value of the
time of such other party's employees as reasonably required in
connection with the action.
(B)(1) Southern Energy retains all rights under the
Southern Energy Employee Agreements of all former Southern
Energy employees necessary to permit Southern Energy to
protect the rights and interests of Southern Energy, but
hereby transfers and assigns to Southern its rights under the
Southern Energy Employee Agreements of all former Southern
Energy employees to the extent required to permit Southern to
enjoin, restrain, recover damages from or obtain specific
performance of the Southern Energy Employee Agreements or
obtain other remedies against any employee who breaches his or
her Southern Energy Employee Agreement, and to the extent
necessary to permit Southern to protect its rights and
interests.
(2) Southern and Southern Energy agree, at their
own respective cost and expense, to use their reasonable
efforts to cooperate as follows: (A) Southern shall advise
Southern Energy of: (1) any violation(s) of the Southern
Energy Employee Agreement by Southern or former Southern
Energy employees, and (2) any violation(s) of the Southern
Employee Agreement which affect Southern Energy's rights; and
(B) Southern Energy shall advise Southern of any violations of
the Southern Energy Employee Agreement by current or former
Southern Energy employees which affect Southern's rights;
provided, however, that the foregoing obligations shall only
apply to violations which become known to an attorney within
the legal department of the party obligated to provide notice
thereof.
(3) Southern and Southern Energy each may
separately enforce the Southern Employee Agreements of
Southern and former Southern Energy employees to the extent
necessary to reasonably protect their respective interests,
provided, however, that (i) Southern shall not commence any
litigation relating thereto without first consulting with
Southern Energy's General Counsel or his or her designee and
(ii) Southern Energy shall not commence any litigation
relating thereto against any former Southern Energy employee
who is at the time a Southern Employee without first
consulting with Southern's General Counsel or his or her
designee. If either party, in seeking to enforce any Southern
Energy Employee Agreement, notifies the other party that it
requires, or desires, the other party to join in such action,
then the other party shall do so. In addition, if either party
commences or becomes a party to any action to enforce a
Southern Energy Employee Agreement of a Southern Employee or
former Southern Energy employee, the other party shall,
whether or not it becomes a party to the action, cooperate
with the other party by making available its files and
employees who have information or knowledge relevant to the
dispute, subject to appropriate measures to protect the
confidentiality of any proprietary or confidential information
that may be disclosed in the course of such cooperation or
action and subject to any relevant privacy laws and
regulations. Any such action shall be conducted at the expense
of the party bringing the action and the parties shall agree
on a case by case basis on compensation, if any, of the other
party for the value of the time of such other party's
employees as reasonably required in connection with the
action.
(C) Southern and Southern Energy understand and
acknowledge that matters relating to the making, performance,
enforcement, assignment and termination of employee agreements
are typically governed by the laws and regulations of the
national, federal, state or local governmental unit where an
employee resides, or where an employee's services are
rendered, and that such laws and regulations may supersede or
limit the applicability or enforceability of this Section
10.05. In such circumstances, Southern and Southern Energy
agree to take action with respect to the employee agreements
that best accomplishes the parties' objectives as set forth in
this Section 10.05 and that is consistent with applicable law.
10.06 ACCRUED PAYROLL, BONUSES, PROFIT SHARING AND COMMISSIONS.
Southern Energy shall be responsible for all Liabilities relating to, arising
out of, or attributable to payroll, bonuses, profit sharing and commissions
accrued by employees of Southern Energy through the Distribution Date. Southern
and Southern Energy shall agree on the manner and method of
29
<PAGE> 36
payment for all payroll, bonuses, profit sharing and commissions agreed to on
behalf of employees who have been employed by Southern Energy on or before the
Distribution Date. Notwithstanding the foregoing, Southern shall not be
responsible for providing payroll services for new employees of Southern Energy
acquired through a corporate transaction or for any pension payroll attributable
to the Southern Pension Plan. Effective as of the last day of the sixth month
after the Distribution Date, or such later date as Southern and Southern Energy
may mutually agree, Southern Energy shall establish its own payroll system for
Southern Energy Employees.
10.07 PAYROLL AND WITHHOLDING.
(a) Income Reporting, Withholding. Southern shall perform in
the same manner as in effect on the date of this Agreement the income reporting
and withholding function under Southern Energy's employer identification number
for Southern Energy Employees and other service providers, commencing with
service periods beginning on or after the Distribution Date and ending as of the
last day of the sixth month following the Distribution Date or such later date
as Southern and Southern Energy may mutually agree. Southern Energy shall hold
Southern harmless with respect to any Liabilities arising after the Distribution
Date as a result of the provisions of such income reporting and withholding
function as set forth in the Transitional Services Schedule concerning payroll
matters.
(b) Delivery of, and Access to, Documents and Other
Information. Concurrently with the Distribution Date, Southern shall cause to be
delivered to Southern Energy, the employee information set forth on all Forms
W-4 executed by Southern Employees designated as Southern Energy Employees as of
the Distribution Date. For the period ending on the Distribution Date (and for
such additional period as Southern and Southern Energy may mutually agree),
Southern shall make reasonably available to Southern Energy all forms, documents
or information, no matter in what format stored, relating to compensation or
payments made to any employee or service provider of Southern Energy. Such
information may include, but is not limited to, information concerning employee
payroll deductions, payroll adjustments, records of time worked, tax records
(e.g., Forms W-2, W-4, 940 and 941), and information concerning garnishment of
wages or other payments.
(c) Consistency of Tax Positions; Duplication. Southern and
Southern Energy shall individually and collectively make commercially reasonable
best efforts to avoid unnecessarily duplicated federal, state or local payroll
taxes, insurance or workers' compensation contributions, or unemployment
contributions arising on or after the Distribution Date. Southern and Southern
Energy shall take consistent reporting and withholding positions with respect to
any such taxes or contributions.
30
<PAGE> 37
10.08 PERSONNEL AND PAY RECORDS. For the period beginning on the
Agreement Date and ending on the Distribution Date (and for such additional
period as Southern and Southern Energy may mutually agree), Southern shall make
reasonably available to Southern Energy, subject to applicable laws on
confidentiality and data protection, all current and historic forms, documents
or information, no matter in what format stored, relating to pre-Distribution
Date personnel and medical records. Such forms, documents or information may
include, but is not limited to: (a) information regarding a Southern Energy
Employee's ranking or promotions; (b) the existence and nature of garnishment
orders or other judicial or administrative actions or orders affecting an
employee's or service provider's compensation; and (c) performance evaluations.
10.09 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No
provision of this Agreement, the Separation Agreement, or any Ancillary
Agreement shall be construed to create any right, or accelerate entitlement, to
any compensation or benefit whatsoever on the part of any Southern Energy
Employee or other future, present or former employee of Southern or Southern
Energy under any Southern Plan or Southern Energy Plan or otherwise. Without
limiting the generality of the foregoing: (a) neither the Distribution nor the
termination of the Participating Company status of Southern Energy or any member
of the Southern Energy Group shall cause any employee to be deemed to have
incurred a termination of employment; and (b) no transfer of employment between
Southern and Southern Energy before the Distribution Date shall be deemed a
termination of employment for any purpose hereunder.
10.10 EMPLOYMENT LITIGATION.
(a) Claims to be Transferred to Southern Energy. Southern
Energy shall continue to be legally responsible for and continue the defense of
claims identified in Schedule 10.10(a). Southern Energy hereby indemnifies,
defends and holds harmless Southern against these claims.
(b) Claims to be Jointly Defended by Southern and Southern
Energy. Southern and Southern Energy shall jointly defend the claims identified
in Schedule 10.10(b); provided, however, that Southern Energy or Southern shall
indemnify and hold harmless the other against any judgments in accordance with
Schedule 2.01.
(c) Unscheduled Claims. Southern Energy and Southern shall
have responsibility for all Employment liabilities in accordance with Schedule
2.01.
ARTICLE XI
GENERAL PROVISIONS
11.01 EFFECT IF IPO AND/OR DISTRIBUTION DOES NOT OCCUR. Subject to
Section 11.08, if the IPO and/or Distribution does not occur, then all actions
and events that are, under this Agreement, to be taken or occur effective as of
the IPO, and/or Distribution Date, or otherwise in connection with the IPO
and/or Distribution, shall not be taken or occur except to the extent
specifically agreed by Southern Energy and Southern.
31
<PAGE> 38
11.02 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be
deemed or construed by the parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
parties, the understanding and agreement being that no provision contained
herein, and no act of the parties, shall be deemed to create any relationship
between the parties other than the relationship set forth herein. This Agreement
shall be binding upon and inure solely to the benefit of and be enforceable by
each party and its respective successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
11.03 AFFILIATED COMPANIES. Each of Southern and Southern Energy shall
cause to be performed, and hereby guarantee the performance of, any and all
actions of the Southern Group or the Southern Energy Group, respectively.
11.04 INCORPORATION OF SEPARATION AGREEMENT PROVISIONS. The provisions
of Article V and Article VI (other than Section 6.03) of the Separation
Agreement are hereby incorporated herein by reference, and unless otherwise
expressly specified herein, such provisions shall apply as if fully set forth
herein (references in this Section to an "Article" or "Section" shall mean
Articles or Sections of the Separation Agreement, and, except as expressly set
forth herein, references in the material incorporated herein by reference shall
be references to the Separation Agreement).
11.05 GOVERNING LAW. To the extent not preempted by applicable federal
law, this Agreement shall be governed by, construed and interpreted in
accordance with the laws of the State of Delaware, irrespective of the choice of
law principles of the State of Delaware, as to all matters, including matters of
validity, construction, effect, performance and remedies.
11.06 SEVERABILITY. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible and in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the fullest possible extent.
11.07 AMENDMENT. The Boards of Directors of Southern Energy and
Southern may mutually agree to amend the provisions of this Agreement at any
time or times, either prospectively or retroactively, to such extent and in such
manner as the Boards mutually deem advisable. Each Board may delegate its
amendment power, in whole or in part, to one or more Persons or committees as it
deems advisable. Accordingly, each Board hereby gives its Vice President, Human
Resources, or such other officer having responsibility therefor, the full power
and authority to mutually adopt an amendment to this Agreement (subject to each
of their authority to amend Plans).
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<PAGE> 39
11.08 TERMINATION. This Agreement may be terminated and the
Distribution abandoned at any time prior to the IPO Closing Date by Southern in
its sole discretion. This Agreement may be terminated at any time after the IPO
Closing Date and before the Distribution Date by mutual consent of Southern and
Southern Energy. In the event of termination pursuant to this Section, no party
shall have any liability of any kind under this Agreement to the other party.
11.09 CONFLICT. In the event of any conflict between the provisions of
this Agreement and the Separation Agreement, any Ancillary Agreement, or Plan,
the provisions of this Agreement shall control. In the event of any conflict
between the provisions of this Agreement and any Local Agreement, the provisions
of the Local Agreement shall control.
11.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same Agreement.
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<PAGE> 40
IN WITNESS WHEREOF, each of the parties have caused this Employee
Matters Agreement to be executed on its behalf by its officers thereunto duly
authorized on the day and year first above written.
THE SOUTHERN COMPANY
By:
--------------------------------------
Name:
Title:
------------------------------
SOUTHERN ENERGY, INC.
By:
--------------------------------------
Name:
Title:
------------------------------
[SIGNATURE PAGE TO EMPLOYEE MATTERS AGREEMENT]
34
<PAGE> 41
SCHEDULE 1.22
HEALTH AND WELFARE PLANS
SEE SCHEDULE 1.23 FOR HEALTH PLANS
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------------------------- ------------------------------
NON-HEALTHCARE PLAN VENDOR INSURED STATUS
- ------------------------------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
Tax Saver AON Self (TPA)
(except Medical Reimbursement)
Group Life Insurance MetLife Fully Insured
Dependent Life Insurance MetLife Fully Insured
Retiree Life Insurance MetLife Fully Insured
Accident & Sickness Insurance Protective Fully Insured
Long Term Disability Insurance Provident Fully Insured
Total Income Protection Insurance Provident Fully Insured
[individual plans]
Business Travel Insurance Provident Fully Insured
Accidental Death & Dismemberment CNA Fully Insured
Legal Care Signature Legal Fully Insured
[individual plans]
Personal Lines MetPay Fully Insured
[individual plans]
Long Term Care John Hancock Fully Insured
[individual plans]
- ------------------------------------------------------- ------------------------------- ------------------------------
</TABLE>
35
<PAGE> 42
SCHEDULE 1.23
HEALTH PLANS
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
HEALTHCARE PLAN VENDOR INSURED STATUS
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Kaiser HMO [GA] Kaiser Self Insured
Aetna USHC HMO [GA] Aetna USHC Self Insured
Aetna USHC HMO (DC) Aetna USHC Self Insured
BCBS of GA. Catastrophic Blue Cross of Georgia Self Insured
Blue Choice PPO Blue Cross of Georgia Self Insured
Blue Choice HMO Blue Cross of Georgia Self Insured
Blue Choice POS Blue Cross of Georgia Self Insured
BCBS of AL PMD Blue Cross of Alabama Self Insured
BCBS of AL Catastrophic Blue Cross of Alabama Self Insured
BCBS of AL POS Blue Cross of Alabama Self Insured
Health Partners HMO Health Partners (Alabama) Fully Insured
United Healthcare HMO United Healthcare (Alabama) Fully Insured
BCBS of FL Catastrophic Blue Cross of Florida Self Insured
BCBS of FL PPC Blue Cross of Florida Self Insured
BCBS of FL Care Manager Blue Cross of Florida Self Insured
BCBS of FL Health Options Blue Cross of Florida Self Insured
BCBS of MS Comprehensive Blue Cross of Mississippi Self Insured
Blue Indemnity
BCBS of MS Primary Care Blue Cross of Mississippi Self Insured
Health
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
36
<PAGE> 43
SCHEDULE 1.23
HEALTH PLANS
(Continued)
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
HEALTHCARE PLAN VENDOR INSURED STATUS
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Vision Insurance Superior Vision Fully Insured
[individual plans]
CIGNA International CIGNA Full Insured
Dental [HMO] CIGNA Fully Insured
Dental [Indemnity] Protective Fully Insured
Dental [Preventive] Protective Fully Insured
Employee Assistance Program Value Options Self Insured
Retiree Group Health Various Self or Fully Insured
based on plan
Medical Reimbursement Aon Self-Insured (TPA)
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
37
<PAGE> 44
SCHEDULE 1.43
POST-EMPLOYMENT PROGRAMS
<TABLE>
<CAPTION>
- ------------------------------------------------------ ----------------------------------- ---------------------------
POST-EMPLOYMENT PROGRAMS VENDOR INSURED STATUS
- ------------------------------------------------------ ----------------------------------- ---------------------------
<S> <C> <C>
Retiree Group Medical Various Self or Fully insured
based on plan
Retiree Life Metlife Fully Insured
Accidental Death & Dismemberment CNA Fully Insured
Employee Assistance Program Value Options Self Insured
Discount Vision Superior individual plans
Legal Care Signature Legal individual plans
Long Term Care John Hancock individual plans
- ------------------------------------------------------ ----------------------------------- ---------------------------
</TABLE>
38
<PAGE> 45
SCHEDULE 2.01
EMPLOYMENT LIABILITIES INDEMNIFICATION
Section 1 Indemnification by Southern Energy. Except as otherwise
provided in this Agreement or Section 3 of this Schedule, Southern Energy shall,
for itself and as agent for each member of the Southern Energy Group, indemnify,
defend (or, where applicable, pay the defense costs for) and hold harmless the
Southern Indemnitees from and against any and all Employment Liabilities that
any third party seeks to impose upon the Southern Indemnitees, or which are
imposed upon the Southern Indemnitees, if and to the extent such Employment
Liabilities relate to, arise out of or result from any of the following items
(without duplication):
(i) any acts or omission or alleged acts or omissions by or on
behalf of any member or person employed by a member of the Southern
Energy Group in the conduct of the Southern Energy Business;
(ii) any claim by an officer of the Southern Energy Group (who
is an officer as of the IPO Closing Date) against any member or
employee of the Southern Group; and
(iii) any breach by Southern Energy or any member or person
employed by a member of the Southern Energy Group of this Agreement,
the Separation Agreement or any other Ancillary Agreement.
In the event that any member of the Southern Energy Group makes a
payment to the Southern Indemnitees hereunder, and any of the Southern
Indemnitees subsequently diminishes the Employment Liability on account of which
such payment was made, either directly or through a third-party recovery,
Southern will promptly repay (or will procure a Southern Indemnitee to promptly
repay) such member of the Southern Energy Group the amount by which the payment
made by such member of the Southern Energy Group exceeds the actual cost of the
associated indemnified Employment Liability.
Section 2. Indemnification by Southern. Except as otherwise provided in
this Agreement or Section 3 of this Schedule, Southern shall, for itself and as
agent for each member of the Southern Group, indemnify, defend (or, where
applicable, pay the defense costs for) and hold harmless the Southern Energy
Indemnitees from and against any and all Employment Liabilities that any third
party seeks to impose upon the Southern Energy Indemnitees, or which are imposed
upon the Southern Energy Indemnitees, if and to the extent such Employment
Liabilities relate to, arise out of or result from any of the following items
(without duplication):
(i) any acts or omissions or alleged acts or omissions by or
on behalf of any member or person employed by a member of the Southern
Group in the conduct of the Southern Business;
(ii) any claim by an officer of the Southern Group against any
member or employee of the Southern Energy Group (who is an officer as
of the IPO Closing Date); and
39
<PAGE> 46
(iii) any breach by Southern or any member or person employed
by a member of the Southern Group of this Agreement, the Separation
Agreement or any other Ancillary Agreement.
In the event that any member of the Southern Group makes a payment to
the Southern Energy Indemnitees hereunder, and any of the Southern Energy
Indemnitees subsequently diminishes the Employment Liability on account of which
such payment was made, either directly or through a third-party recovery,
Southern Energy will promptly repay (or will procure a Southern Energy
Indemnitee to promptly repay) such member of the Southern Group the amount by
which the payment made by such member of the Southern Group exceeds the actual
cost of the indemnified Employment Liability.
Section 3. Exceptions.
In accordance with the current practice in effect as of the execution
of the Agreement, with respect to claims for benefits or compensation, if an
underlying act or omission as contemplated in Section 1 or 2 of this Schedule
occurs and such act or omission constitutes the principal basis for such a
claim, then Section 1 or 2 shall apply, as applicable, to establish
indemnification obligations. If, however, no specific act or omission occurs
that is attributable to Southern or Southern Energy and the principal underlying
basis for a claim for benefits or compensation involves plan administration or
other similar systemic type activities related to maintenance of plans,
notwithstanding Sections 1 and 2, in accordance with the current practice in
effect as of the execution of the Agreement, Southern Energy and Southern shall
be responsible for their pro rata allocated share of costs to defend such claim.
Section 4 Relationship to Indemnification and Insurance Matters
Agreement.
(i) Unless expressly modified in this Schedule, all other
provisions of Article I of the Indemnification and Insurance Matters
Agreement will apply to an indemnifiable claim.
(ii) Any claim which is not an Employment Liability will only
be subject to the provisions of the Indemnification and Insurance
Matters Agreement.
Section 5. Definitions
(i) "Employment Liabilities" means all claims, causes of
action, demands, liabilities, debts or damages (known or unknown)
related to all employment matters addressed in this Agreement,
including but not limited to claims arising under the Employee
Retirement Income Security Act ("ERISA"), the Internal Revenue Code,
claims for breach of contract, breach of fiduciary duty, promissory
estoppel, equitable estoppel; claims for violation of any other federal
or state statute or regulation or local ordinance; claims for lost or
unpaid wages or other employee benefits; claims under the Americans
with Disabilities Act ("ADA"); claims under the Family and Medical
Leave Act ("FMLA"); claims under Title VII of the Civil Rights Act of
1964, as amended; and claims under state law for intentional infliction
of emotional distress, pain, suffering or anxiety, negligence,
outrageous conduct, invasion of privacy, harassment, assault, battery,
40
<PAGE> 47
defamation, slander, libel, wrongful or constructive discharge or any
other actions arising in tort or contract.
(ii) All other defined terms in this Schedule shall have the
meaning set forth in the Indemnification and Insurance Matters
Agreement.
41
<PAGE> 48
SCHEDULE 2.01(a)
BENEFITS AND LIABILITIES FOR
SOUTHERN ENERGY RETIRED EMPLOYEES
BENEFITS AND LIABILITIES FOR
SOUTHERN ENERGY RETIRED EMPLOYEES
At the final Distribution Date, the following will occur:
1. Retiree benefits for a designated list of Southern Energy Retired
Employees(1) determined as of the Distribution Date will become the
responsibility of Southern(2).
Retiree medical benefits
Retiree life benefits
Southern Pension Plan benefits
Southern Supplemental Benefit Plan benefits
Southern SERP benefits
Southern Energy SERP benefits
Southern Deferred Compensation Plan benefits
Specified benefits in individual contracts
2. Assets related to Southern Energy Retired Employees' Southern Pension
Plan benefits will be transferred from Southern Energy's account within
the Southern Pension Plan trust to another designated account as of the
Distribution Date.
The asset transfer amount will use the existing methodology for
transferring benefit obligations and assets between accounts within the
Southern Pension Plan trust. The asset transfer amount will be
determined using the following formula:
<TABLE>
<S> <C>
Market value of Southern Energy's Southern Pension Plan asset account
times: [(PBO for Southern Energy Retired Employees) / (PBO for all Southern
Energy participants)]
equals: Asset Transfer Amount
</TABLE>
PBO= Projected benefit obligations as determined for
Southern's FAS 87 accounting purposes as of the date of
transfer.
Benefits= PBO will be based on benefits payable by Southern Pension
Plan.
3. Southern Energy will become fully responsible for the Southern
Supplemental Benefit Plan and SERP benefits for all Southern Energy
Employees as of the Distribution Date. Specifically, the other Southern
Subsidiaries will be relieved of any responsibilities to provide a
portion of the transferred employees' ultimate Supplemental Benefit
Plan and/or SERP benefits due to periods of service the Southern Energy
Employees worked for those other Subsidiaries.
- --------
(1) Currently anticipated to be all non-union retirees, but may be limited to a
select list that will be agreed to by both sides prior to the Distribution
Date.
(2) For purposes of this document, Southern excludes Southern Energy.
42
<PAGE> 49
4. Southern will be fully responsible for the Southern Supplemental
Benefit Plan and SERP benefits for all Southern Employees and Southern
Energy Retired Employees as of the Distribution Date. Specifically,
Southern Energy will be relieved of any responsibilities to provide a
portion of the Southern Employees' and Southern Energy Retired
Employees' ultimate Supplemental Benefit Plan and SERP benefits due to
periods of service the employees worked for Southern Energy.
5. Southern Energy will remunerate Southern for the excess of (A) over (B)
below:
A. Actuarial present value of the benefit responsibilities shifted to
Southern pursuant to items 1 and 4 above, OVER
B. The sum of:
Assets to be transferred from Southern Energy's account within
the Southern Pension Plan account pursuant to item 2 above.
Actuarial present value of the benefit responsibilities shifted
to Southern Energy pursuant to item 3 above.
While not anticipated, if (B) is larger than (A), then Southern will
remunerate Southern Energy for the excess of (B) over (A).
BASIS FOR ACTUARIAL PRESENT VALUES
The actuarial present values referred to in item 5 above will be computed using
the following basis or some other basis that is mutually acceptable to Southern
Energy and Southern:
o Data as of the Distribution Date.
o For account-type benefits, the account balance as of the Distribution Date
will be deemed the actuarial present value.
o For all other benefits, the present values will be computed using standard
actuarial techniques and the ongoing plan actuarial assumptions(3). The
assumptions will be those used to determine pension and retiree medical/life
benefit obligations required by the Statement of Financial Accounting
Standards Number 132 ("FAS 132") for the prior year's financial statements.
If the assumptions used by Southern and Southern Energy for these purposes
differ, then present values will be the average of the results obtained by
independently computing the present values using each set of assumptions.
- ----------
(3) Using ongoing assumptions means that when determining the present values of
Southern Supplemental/SERP benefits as of the Distribution Date for active
employees the following will be anticipated by the actuarial
assumptions--continued service to retirement, termination, death, or
disability; pay increases; and unknown bonus payments at target levels.
43
<PAGE> 50
SCHEDULE 6.04(a)
THIRD PARTY ASO CONTRACTS
<TABLE>
<CAPTION>
- ---------------------------------------- ----------------------------------------------- --------------------------
PLAN VENDOR SERVICES
- ---------------------------------------- ----------------------------------------------- --------------------------
<S> <C> <C>
ESP Merrill Lynch Recordkeeping
ESOP Merrill Lynch Recordkeeping
PSP Merrill Lynch Recordkeeping
Supplemental Benefit Plan Merrill Lynch Recordkeeping
Deferred Compensation Merrill Lynch Recordkeeping
Health & Welfare Plans/ Hewitt Associates Recordkeeping/
Pension/SERP benefit delivery/
actuarial
Tax Saver Aon Recordkeeping
Pension Chase Manhattan Trustee
ESP Merrill Lynch Trustee
ESOP Merrill Lynch Trustee
PSP Merrill Lynch Trustee
- ---------------------------------------- ----------------------------------------------- --------------------------
</TABLE>
44
<PAGE> 51
SCHEDULE 6.04(b)
GROUP INSURANCE POLICIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ---------------------------------------------------------
PLAN INSURER
- ------------------------------------------------------------ ---------------------------------------------------------
<S> <C>
Health Partners HMO Health Partners (Alabama)
United Healthcare HMO United Healthcare (Alabama)
Group Life Metlife
Dependent Life Metlife
Retiree Life Metlife
Accident & Sickness Protective
Long Term Disability Provident
Total Income Protection Provident
Business Travel Provident
Dental (Indemnity) Protective
Dental (Preventive) Protective
Accidental Death & Dismemberment CNA
Legal Care Signature Legal
Vision Superior Vision
Personal Lines MetPay
Long Term Care John Hancock
Dental (HMO) CIGNA
CIGNA International CIGNA
- ------------------------------------------------------------ ---------------------------------------------------------
</TABLE>
45
<PAGE> 52
SCHEDULE 6.04(c)
THIRD PARTY HMO CONTRACTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------- --------------------------------------------------------
CONTRACT VENDOR
- ----------------------------------------------------------- --------------------------------------------------------
<S> <C>
Kaiser HMO [GA] Kaiser
Aetna USHC HMO [GA] Aetna USHC
Aetna USHC HMO (DC) Aetna USHC
Blue Choice HMO Blue Cross of Georgia
Health Partners HMO Health Partners (Alabama)
United Healthcare HMO United Healthcare (Alabama)
- ----------------------------------------------------------- --------------------------------------------------------
</TABLE>
46
<PAGE> 53
SCHEDULE 7.04
STOCK PURCHASE PLAN
47
<PAGE> 54
SCHEDULE 7.05
SOUTHERN ENERGY OMNIBUS INCENTIVE COMPENSATION PLAN
48
<PAGE> 55
SCHEDULE 8
FRINGE BENEFITS
Employee Assistance
Credit Union
Southern-owned Cars
Executive Financial Planning
Relocation
49
<PAGE> 56
SCHEDULE 10.10(a)
EMPLOYMENT LITIGATION
TRANSFERRED CLAIMS
None
50
<PAGE> 57
SCHEDULE 10.10(b)
EMPLOYMENT LITIGATION
JOINTLY DEFEND CLAIMS
None
51
<PAGE> 1
EXHIBIT 10.7
FORM OF
TAX INDEMNIFICATION AGREEMENT
BY AND AMONG
THE SOUTHERN COMPANY
AND ITS AFFILIATED COMPANIES
AND
SOUTHERN ENERGY, INC.
AND ITS AFFILIATED COMPANIES
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINITIONS.....................................................2
1.1 In General..........................................................2
1.2 Construction Principles.............................................6
SECTION 2. PREPARATION AND FILING OF TAX RETURNS...........................6
2.1 In General..........................................................6
2.2 Information and Cooperation.........................................6
2.3 Manner of Filing Tax Returns........................................7
2.4 Agent...............................................................8
SECTION 3. REPRESENTATIONS AND COVENANTS...................................8
3.1 Southern Energy Representations and Covenants.......................8
3.2 Southern Representations and Covenants..............................8
SECTION 4. TAX SHARING AND PAYMENTS........................................9
4.1 In General..........................................................9
4.2 Payments............................................................9
SECTION 5. ALLOCATION OF CERTAIN TAX ITEMS................................10
5.1 Liability for Restructuring Taxes and Deconsolidation..............10
5.2 Carryforwards and Carrybacks.......................................10
5.3 Refunds............................................................10
5.4 Allocation of Tax Items............................................11
5.5 Continuing Covenants...............................................11
SECTION 6. ADDITIONAL OBLIGATIONS.........................................11
6.1 General Indemnification............................................11
6.2 Spinoff Indemnification............................................12
6.3 Indemnified Liability..............................................13
6.4 Amount of Indemnified Liability for Income Taxes...................13
6.5 Indemnity Amount...................................................13
6.6 Alternate Remedy...................................................14
6.7 Payments...........................................................14
6.8 Prompt Performance.................................................14
6.9 Interest...........................................................15
6.10 Tax Records........................................................15
SECTION 7. AUDITS.........................................................15
7.1 In General.........................................................15
7.2 Notice.............................................................15
7.3 Contests...........................................................16
7.4 Limitations........................................................16
7.5 Failure to Notify, Etc.............................................18
7.6 Remedies...........................................................18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SECTION 8. STOCK OPTIONS AND RESTRICTED STOCK..............................18
8.1 In General.........................................................18
8.2 Notices, Withholding, Reporting....................................19
8.3 Adjustments........................................................19
SECTION 9. MISCELLANEOUS...................................................19
9.1 Effectiveness......................................................19
9.2 Notices............................................................19
9.3 Changes in Law.....................................................20
9.4 Confidentiality....................................................20
9.5 Successors.........................................................20
9.6 Affiliated Companies...............................................20
9.7 Authorization, Etc.................................................20
9.8 Entire Agreement...................................................20
9.9 Governing Law; Jurisdiction........................................21
9.10 Dispute Resolution.................................................21
9.11 Counterparts.......................................................21
9.12 Severability.......................................................21
9.13 No Third Party Beneficiaries.......................................21
9.14 Waivers, Etc.......................................................21
9.15 Setoff.............................................................22
</TABLE>
<PAGE> 4
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (this "Agreement"), dated [______,
2000], by and among The Southern Company ("Southern"), a Delaware corporation
and each Southern Affiliated Company, and Southern Energy, Inc. ("Southern
Energy"), a Delaware corporation and currently a direct, wholly owned subsidiary
of Southern, and each Southern Energy Affiliated Company is entered into in
connection with the Spinoff (as defined below).
RECITALS
WHEREAS, Southern is the common parent of an affiliated group of
corporations within the meaning of Section 1504(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), which currently files a consolidated federal
income tax return, and which, together with Southern Energy and other affiliated
corporations, is party to the Tax Allocation Agreement (as defined below);
WHEREAS, as set forth in the Master Separation and Distribution
Agreement dated [__________, 2000] (the "Separation Agreement"), and subject to
the terms and conditions thereof, Southern and Southern Energy have determined
it would be appropriate and desirable for Southern to separate the Southern
Energy Group from the Southern Group, and in connection with such separation (as
more fully discussed in the Separation Agreement), for Southern Energy to
purchase Plant Dahlberg and for Southern to acquire HoldCo (as defined below)
from Southern Energy (the "HoldCo Transaction");
WHEREAS, Southern and Southern Energy contemplate that in addition to
the HoldCo Transaction and purchase of Plant Dahlberg, Southern Energy will make
an initial public offering (the "IPO") of Southern Energy common stock that will
reduce Southern's ownership of Southern Energy on a fully-diluted basis to not
less than 80.1 percent;
WHEREAS, subsequent to the IPO, Southern intends to distribute all of
its shares of Southern Energy common stock, on a pro rata basis, to the holders
of the common stock of Southern, subject to the terms and conditions of the
Separation Agreement (the "Distribution");
WHEREAS, the Distribution is intended to qualify as a tax free
distribution under Section 355 of the Code;
WHEREAS, upon the Distribution, Southern Energy will cease to be a
member of the Southern Consolidated Group for federal income tax purposes; and
WHEREAS, in contemplation of the Distribution pursuant to which
Southern Energy and its domestic subsidiaries will cease to be members of the
Southern Group (as defined below), the parties hereto have determined to enter
into this Agreement, setting forth their agreement with respect to certain Tax
matters.
<PAGE> 5
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1 In General. As used in this Agreement, the following capitalized
terms shall have the following meanings:
"Adequate Assurances" means posting a bond or providing a letter of
credit reasonably acceptable to the Indemnitee; provided, however, if the
Indemnifying Party fails to post such bond or provide such letter of credit, the
Indemnifying Party shall provide cash equal to the Indemnity Amount to the
Indemnitee not less than thirty (30) days prior to the date on which such Tax
would become due and payable by the Indemnitee.
"Affiliated Company" means, for income tax purposes, any entity in
which a common parent holds 80% or more of the voting power and value of such
corporation. In the case of Southern, such term shall exclude Southern Energy
and any Southern Energy Affiliated Company.
"Audit" includes any audit, assessment of Taxes, other examination by
any Tax Authority, proceeding, or appeal of such a proceeding relating to Taxes,
whether administrative or judicial, including proceedings relating to competent
authority determinations.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Group" means a group of one or more corporations
connected through stock ownership with a common parent in which the common
parent owns at least 80% of the total voting power and value of such corporation
and that files a Consolidated Return.
"Consolidated Return" means any Tax Return with respect to Federal
Income Taxes filed on a consolidated basis wherein Southern Energy or any
Affiliated Company joins in the filing of such Tax Return (for any taxable
period) with Southern or one more Southern Affiliated Companies.
"Consolidated Return Year" means any taxable year for which a
Consolidated Return is filed.
"Control" means stock representing 50% or more of the total combined
voting power of all classes of stock entitled to vote or at least 50% of the
total value of shares of all classes of stock.
"Distribution" has the meaning set forth in the Recitals to this
Agreement.
"Distribution Date" means the date on which the Distribution is
effective.
"Federal Income Tax" means any Tax imposed under Subtitle A of the Code
(including the Taxes imposed by Sections 11, 55, and 1201(a) of the Code), and
any interest, additions to Tax or penalties applicable or related thereto, and
any other income-based U.S. federal Tax which is hereinafter imposed upon
corporations.
"Filing Party" has the meaning set forth in Section 2.3(b) of this
Agreement.
2
<PAGE> 6
"Final Determination" means with respect to any issue (i) a decision,
judgment, decree or other order by any court of competent jurisdiction, which
decision, judgment, decree or other order has become final and not subject to
further appeal, (ii) a closing agreement (whether or not entered into under
Section 7121 of the Code) or any other binding settlement agreement (whether or
not with the IRS) entered into in connection with or in contemplation of an
administrative or judicial proceeding, or (iii) the completion of the highest
level of administrative proceedings if a judicial contest is not or is no longer
available.
"HoldCo" means the entity created by Southern Energy that will own all
of the stock of SE Finance Capital Corporation and Southern Company Capital
Funding, Inc. and will be merged with Southern Company Energy Solutions, Inc.
"HoldCo Transaction" has the meaning set forth in the Recitals of this
Agreement.
"Income Taxes" means (1) any tax based upon, measured by, or calculated
with respect to (A) net income or profits (including any capital gains tax,
minimum tax and any tax on items of Tax preference, but not including sales,
use, real or personal property, gross or net receipts, transfer or similar
taxes) or (B) multiple bases if one or more of the bases upon which such tax may
be based, measured by, or calculated with respect to, is described in clause (A)
above, or (2) any U.S., state or local franchise tax.
"Indemnified Liability" has the meaning set forth in Section 6.3.
"Indemnifying Party" has the meaning set forth in Section 6.2(d) of
this Agreement.
"Indemnitee" has the meaning set forth in Section 6.2(d) of this
Agreement.
"Indemnity Amount" has the meaning set forth in Section 6.5.
"Initial Private Letter Ruling" means the first private letter ruling
issued by the Service to Southern in connection with the Spinoff.
"Non-Filing Party" has the meaning set forth in Section 2.3(c) of this
Agreement.
"Option" means an option to acquire common stock, or other equity-based
incentives the economic value of which is designed to mirror that of an option,
including non-qualified stock options, discounted non-qualified stock options,
cliff options to the extent stock is issued or issuable (as opposed to cash
compensation), and tandem stock options to the extent stock is issued or
issuable (as opposed to cash compensation).
"Post-Distribution Period" means any taxable period beginning after the
Distribution Date.
"Pre-Distribution Period" means any taxable period ending on or prior
to the Distribution Date.
3
<PAGE> 7
"Prohibited Act" has the meaning set forth in Section 6.2(c).
"Restricted Period" means the period beginning two years before the
date of the Distribution and ending two years after the Distribution Date.
"Restructuring" means the transactions undertaken by Southern and
Southern Energy (and their respective Affiliated Companies) designed to
accomplish the sale of Plant Dahlberg and the HoldCo Transaction.
"Restructuring Tax" means any Tax imposed as a result of the
transactions contemplated by the Restructuring.
"Ruling Documents" means (1) the request for a ruling under Section 355
and various other Sections of the Code, filed with the Service in connection
with the Spinoff, together with any supplemental filings or ruling requests or
other materials subsequently submitted on behalf of Southern, its subsidiaries
and shareholders to the Service, the appendices and exhibits thereto, and any
rulings issued by the Service to Southern in connection with the Spinoff or (2)
any similar filings submitted to, or rulings issued by, any other Tax Authority
in connection with the Spinoff.
"Separate Tax" means any Tax incurred by an entity that is not a
Federal Income Tax arising from the filing of the Consolidated Return.
"Separate Return" means any Tax Return filed by any entity that is not
part of the Consolidated Tax Return.
"Separation Agreement" has the meaning set forth in the Recitals to
this Agreement.
"Service" means the Internal Revenue Service.
"Southern Energy Group" means Southern Energy and any Southern Energy
Affiliated Company of which Southern Energy would be the common parent
corporation after the HoldCo Transaction.
"Southern Energy Historic Group" means Southern Energy or any Southern
Energy Affiliated Company, including SE Finance Capital Corporation, in
existence prior to the creation and transfer of HoldCo.
"Southern Group" means Southern, any Southern Affiliated Company or
other entity of which Southern is the common parent corporation, and any
corporation or other entity which may be, or may become a member of such group
from time to time after the HoldCo Transaction. Southern Company Energy
Solutions, Inc., shall at all times remain a member of the Southern Group
notwithstanding any merger into HoldCo.
4
<PAGE> 8
"Southern Historic Group" means Southern or any Southern Affiliated
Company (other than Southern Energy or any Southern Energy Affiliated Company)
that was part of Southern's Consolidated Group prior to the HoldCo Transaction,
including Southern Company Energy Solutions, Inc.
"Spinoff" means the separation of the Southern Energy Group from the
Southern Group through the Distribution.
"Tax" includes any charges, fees, levies, imposts, duties, or other
assessments of a similar nature, including income, alternative or add-on
minimum, gross receipts, profits, lease, service, service use, wage, wage
withholding, employment, workers compensation, business occupation, occupation,
premiums, environmental, estimated, excise, employment, sales, use, transfer,
license, payroll, franchise, severance, stamp, occupation, windfall profits,
withholding, social security, unemployment, disability, ad valorem, estimated,
highway use, commercial rent, capital stock, paid up capital, recording,
registration, property, real property gains, value added, business license,
custom duties, or other tax or governmental fee of any kind whatsoever, imposed
or required to be withheld by any Tax Authority including any interest,
additions to tax, or penalties applicable or related thereto.
"Tax Allocation Agreement" means the Income Tax Allocation Agreement
entered into by and among Southern and all the members of its Consolidated Group
dated December 29, 1981, as amended, pursuant to which the parties agreed upon
the allocation of Tax Items relating to the Consolidated Group and the
Consolidated Return.
"Tax Authority" means any governmental authority or any subdivision,
agency, commission or authority thereof or any quasi-governmental or private
body having jurisdiction over the assessment, determination, collection or
imposition of any Tax (including the Service).
"Tax Benefit" means a reduction in the Tax liability of a taxpayer (or
of the affiliated group of which it is a member) for any taxable period. Except
as otherwise provided in this Agreement, a Tax Benefit shall be deemed to have
been realized or received from a Tax Item in a taxable period only if and to the
extent that the Tax liability of the taxpayer (or of the affiliated group of
which it is a member) for such period, after taking into account the effect of
the Tax Item on the Tax liability of such taxpayer in the current period and all
prior periods, is less than it would have been if such Tax liability were
determined without regard to such Tax Item.
"Tax Detriment" means an increase in the Tax liability of a taxpayer
(or of the affiliated group of which it is a member) for any taxable period.
Except as otherwise provided in this Agreement, a Tax Detriment shall be deemed
to have been realized or received from a Tax Item in a taxable period only if
and to the extent that the Tax liability of the taxpayer (or of the affiliated
group of which it is a member) for such period, after taking into account the
effect of the Tax Item on the Tax liability of such taxpayer in the current
period and all prior periods, is more than it would have been if such Tax
liability were determined without regard to such Tax Item.
"Tax Item" means any item of income, gain, loss, deduction or credit,
or other attribute that may have the effect of increasing or decreasing any Tax.
5
<PAGE> 9
"Tax Law" means any federal, state, local or foreign law with respect
to Taxes, including the Code and Treasury Regulations.
"Tax Return" means any return, report, certificate, form or similar
statement or document (including, any related or supporting information or
schedule attached thereto and any information return, amended Tax return, claim
for refund or declaration of estimated Tax) required to be supplied to, or filed
with, a Tax Authority in connection with the determination, assessment or
collection of any Tax or the administration of any laws, regulations or
administrative requirements relating to any Tax.
"Treasury Regulations" means the final, temporary and proposed income
Tax regulations promulgated under the Code, as such regulations may be amended
from time to time (including corresponding provisions of succeeding
regulations).
1.2 Construction Principles. As used in this Agreement, the singular
shall be deemed to include the plural and vice versa, and the captions and
section headings are inserted for convenience of reference only and are not
intended to have any significance for the interpretation of, or construction of,
the provisions of this Agreement. It is intended that this Agreement shall
comply with the Public Utility Holding Company Act of 1935, Rule 45(c), to the
extent relevant, and all ambiguities shall be interpreted and resolved
accordingly.
SECTION 2. PREPARATION AND FILING OF TAX RETURNS.
2.1 In General.
(a) During the Pre-Distribution Period, Southern shall timely file or
cause to be filed all Tax Returns that are filed on a consolidated, combined or
unitary basis and include any member of the Southern Energy Group or Southern
Energy Historic Group as provided in the Tax Allocation Agreement. Each entity
required to file a Separate Return shall timely file or cause to be filed all
such Separate Returns for any Pre-Distribution Period. Notwithstanding the
foregoing, Southern shall timely file or cause to be filed all Tax Returns with
respect to HoldCo.
(b) Southern shall timely file or cause to be filed any Tax Return
related to the Southern Group for any Post-Distribution Period. Southern Energy
shall timely file or cause to be filed any Tax Return related to the Southern
Energy Group for any Post-Distribution Period.
2.2 Information and Cooperation.
(a) Southern and Southern Energy shall provide each other all documents
and information, and make available employees and officers of Southern and
Southern Energy, as reasonably requested by the other party, on a mutually
convenient basis during normal business hours, to aid the other party in
preparing any Tax Return described in Section 2.1 of this Agreement to the
extent that such Tax Return relates to any Pre-Distribution Period or to contest
any Audit of any such Tax Return.
6
<PAGE> 10
(b) In the case of any Tax Return for a Pre-Distribution Period
described in Section 2.1 of this Agreement, Southern will provide Southern
Energy with a copy of that portion of each such Tax Return to the extent it
relates to Southern Energy or any Southern Energy Affiliated Company, together
with all related tax accounting work papers, not later than five (5) days after
the receipt of a written request therefor. In addition, Southern will provide to
employees of Southern Energy responsible for preparing its Tax Returns with
access to any private letter rulings, together with any requests therefor and
related documents and any other relevant information, as it relates to Southern
Energy for any period prior to the Distribution Date, and will provide Southern
Energy with a copy of such rulings or documents to the extent that the issues
discussed therein are relevant to Southern Energy or a Southern Energy
Affiliated Company, not later than five (5) days after the receipt of a written
request therefor.
(c) Notwithstanding any other provision of this Agreement, neither
Southern nor any Southern Affiliated Company shall be required to provide
Southern Energy or any Southern Energy Affiliated Company access to or copies of
any information that relate to Southern or any Southern Affiliated Company
unless it also relates to Southern Energy, a Southern Energy Affiliated Company
or Plant Dahlberg. In addition, in the event that Southern determines that the
provision of any information to Southern Energy or any Southern Energy
Affiliated Company could be commercially detrimental, violate any law or
agreement or waive any privilege that may be asserted under applicable law
including, any privilege arising under or relating to the attorney-client
relationship (including the attorney-client and work product privileges), the
accountant-client privilege, and any privilege relating to internal evaluation
processes, the parties shall take all reasonable measures to permit the
compliance with such obligations in a manner that avoids any such harm or
consequence. In the event that Southern Energy determines that the provision of
any information to Southern or any Southern Affiliated Company could be
commercially detrimental, violate any law or agreement or waive any privilege
that may be asserted under applicable law including, any privilege arising under
or relating to the attorney-client relationship (including the attorney-client
and work product privileges), the accountant-client privilege, and any privilege
relating to internal evaluation processes, the parties shall take all reasonable
measures to permit the compliance with such obligations in a manner that avoids
any such harm or consequence.
2.3 Manner of Filing Tax Returns.
(a) Southern (for itself and the Southern Affiliated Companies) and
Southern Energy (for itself and the Southern Energy Affiliated Companies) agree
to file all Tax Returns for any Pre-Distribution Period, and to take all other
actions in a manner consistent with the position that Southern Energy and the
Southern Energy Affiliated Companies are part of the Southern Consolidated Group
for all periods through and including the Distribution Date.
(b) Except as otherwise provided in this Section 2.3 of this Agreement,
the party that is required to file a return under Section 2.1 of this Agreement
(the "Filing Party") shall have the exclusive right to determine (1) the manner
in which such Tax Return shall be prepared and filed, including the elections,
methods of accounting, positions, conventions and principles of taxation to be
used and the manner in which any Tax Item shall be reported, (2) whether any
extensions may be requested, (3) the elections that will be made in such Tax
Return, (4) whether any amended Tax Returns shall be filed, (5) whether any
claims for refund shall be made, (6) whether
7
<PAGE> 11
any refunds shall be paid by way of refund or credited against any liability for
the related Tax, and (7) whether to retain outside specialists to prepare such
Tax Return, whom to retain for such purpose and the scope of any such retainer.
Notwithstanding the foregoing, if Southern Energy requests Southern to make a
particular determination under this Section 2.3(b) with respect to a Tax Return
of Southern Energy or a Southern Energy Affiliated Company, Southern shall not
unreasonably withhold its consent to such request.
(c) Any Tax Return described in Section 2.1(a) of this Agreement (but
only with respect to Tax Items of Southern Energy or an Southern Energy
Affiliated Company), which Tax Return is filed after the date of this Agreement,
shall be prepared on a basis consistent with the elections, methods of
accounting, positions, conventions and principles of taxation and the manner in
which any Tax Item or other information is reported as reflected on the most
recently filed prior Tax Returns involving similar matters. The preceding
sentence shall not apply if the Filing Party obtains the prior written consent
(which consent shall not be unreasonably withheld) of the other party (the
"Non-Filing Party").
2.4 Agent. Southern Energy hereby irrevocably designates, and agrees to
cause each Southern Energy Affiliated Company to so designate, Southern as its
sole and exclusive agent and attorney-in-fact to take such action (including
execution of documents) as Southern, in its sole discretion, may deem
appropriate in any and all matters (including Audits) relating to any
Consolidated Return described in Section 2.1(a) of this Agreement; provided,
however, that Southern shall not exercise its rights as agent and
attorney-in-fact in any manner that is inconsistent with the rights granted to
Southern Energy under this Agreement, and nothing in this Section 2.4 shall
limit the rights granted to Southern Energy under this Agreement.
SECTION 3. REPRESENTATIONS AND COVENANTS.
3.1 Southern Energy Representations and Covenants. Southern Energy, for
itself and the Southern Energy Affiliated Companies, hereby represents, warrants
and covenants that:
(a) Southern Energy has reviewed the information and representations
made in the Ruling Documents submitted to the Service prior to the date of this
Agreement and, to Southern Energy's knowledge, all of such information or
representations that relate to Southern Energy or any Southern Energy Affiliated
Company, or the business or operations of either, are true, correct and
complete.
(b) Southern Energy will not, and will cause each Southern Energy
Affiliated Company not to, take any action, or fail or omit to take any action,
that would cause any of the information or representations made in the Ruling
Documents that relate to Southern Energy, the Southern Energy Historic Group, or
any Southern Energy Affiliated Company or the business or operations of each, to
be untrue, regardless of whether such information or representations were
included in the Initial Private Letter Ruling (or any supplemental ruling).
3.2 Southern Representations and Covenants. Southern, for itself and
the Southern Affiliated Companies, hereby represents, warrants and covenants
that:
8
<PAGE> 12
(a) Southern has reviewed the information and representations made in
the Ruling Documents submitted to the Service prior to the date of this
Agreement, and, to its knowledge, all of such information or representations
that relate to Southern or any Southern Affiliated Company or the business or
operations of either, are true, correct and complete.
(b) Southern will not, and will cause each Southern Affiliated Company
not to, take any action, or fail or omit to take any action, that would cause
any of the information or representations made in the Ruling Documents to be
untrue, regardless of whether such information or representations were included
in the Initial Private Letter Ruling.
SECTION 4. TAX SHARING AND PAYMENTS.
4.1 In General. Except to the extent specifically modified or
supplemented herein, the Tax Allocation Agreement shall continue in full force
and effect. Consequently, for example, for taxable periods ending on or before
the Distribution Date, payments to Southern or Southern Energy, as the case may
be, shall continue to be made in accordance with past practices. The provisions
of the Tax Allocation Agreement shall fix the rights and obligations of the
parties as to the matters covered thereby. Notwithstanding any other provision
of this Agreement, the Tax Allocation Agreement shall not apply to any
Post-Distribution Period of Southern Energy and the Southern Energy Group,
except as provided in Section 5.2(b) of this Agreement.
(a) Southern Energy shall be responsible for, and shall indemnify and
hold harmless Southern against, any and all Taxes incurred by Southern Energy,
the Southern Energy Group, or the Southern Energy Historic Group (except as
provided below) for any Pre-Distribution Period in accordance with past
practices and the principles set forth in the Tax Allocation Agreement other
than any Restructuring Taxes for which Southern or any Southern Affiliated
Company is liable under Section 5 of this Agreement. Southern shall be
responsible for, and shall indemnify and hold harmless Southern Energy against,
any and all Taxes incurred by Southern or any Southern Affiliated Company (other
than Taxes attributable to Southern Energy or any Southern Energy Affiliated
Company) for any Pre-Distribution Period (except as provided below) in
accordance with past practices and the principles set forth in the Tax
Allocation Agreement other than any Restructuring Taxes for which Southern
Energy or any Southern Energy Affiliated Company is liable under Section 5 of
this Agreement.
(b) Southern shall be responsible for, and shall indemnify and hold
harmless Southern Energy against, any and all Taxes incurred by HoldCo and its
Affiliated Companies for any tax period.
(c) Southern Energy shall be responsible for all Taxes that relate to
the Southern Energy Group with respect to any Post-Distribution Period. Southern
shall be responsible for all Taxes that relate to the Southern Group with
respect to any Post-Distribution Period.
4.2 Payments
(a) Federal Income Taxes. Southern shall pay (or cause to paid) to the
Service all Federal Income Taxes, if any, of any Consolidated Group due and
payable for all Pre-Distribution Periods.
9
<PAGE> 13
(b) Separate Taxes. Southern shall pay (or cause to be paid) to the
appropriate Tax Authorities all Separate Taxes, if any, that relate to Southern,
the Southern Historic Group, or the Southern Group. Southern Energy shall pay
(or cause to be paid) to the appropriate Tax Authorities all Separate Taxes, if
any, that relate to Southern Energy, the Southern Energy Historic Group or the
Southern Energy Group.
SECTION 5. ALLOCATION OF CERTAIN TAX ITEMS.
5.1 Liability for Restructuring Taxes and Deconsolidation
(a) Southern shall be responsible for any and all Restructuring Taxes
related to the sale of Plant Dahlberg; provided, however, Southern Energy shall
be responsible for, and shall indemnify and hold harmless Southern against any
increase in such Taxes resulting from an adjustment to the purchase price of
Plant Dahlberg by any applicable Taxing Authority. Southern shall be responsible
for, and shall indemnify and hold harmless Southern Energy against any and all
Restructuring Taxes relating to HoldCo Transaction.
(b) Except as otherwise provided by this Agreement, all Taxes arising
from the deconsolidation of the Southern Energy Group from the Southern Group
shall be the obligation of the entity that is liable for such Taxes under
applicable Tax Law.
5.2 Carryforwards and Carrybacks.
(a) Southern shall notify Southern Energy after the Distribution Date
of any consolidated carryover item which may be partially or totally attributed
to and carried over by a Southern Energy Affiliated Company and will notify
Southern Energy of subsequent adjustments which may affect such carryover item.
(b) Notwithstanding any other provision of this Agreement, Southern
Energy shall not be required to make any election under Section 172(b)(3) of the
Code and, to the extent feasible, any similar provision of any state or local
Tax Law, to relinquish any right to carryback net operating losses. Upon a
request by Southern Energy, Southern shall be required to include on an amended
Consolidated Return any net operating losses of Southern Energy arising in a
Post-Distribution Period to the extent allowed under the Code; provided, that if
Southern incurs a Tax Detriment related to the inclusion of such net operating
losses on the Consolidated Return, Southern Energy shall indemnify Southern for
the amount of such Tax Detriment.
5.3 Refunds. Any refund of Taxes received in a Pre-Distribution Period
will be allocated in a manner consistent with the existing Tax Allocation
Agreement. Any refund of Taxes received in a Post-Distribution Period resulting
from an adjustment made to a Tax Return filed for a Pre-Distribution Period will
be allocated to the party whose Return resulted in such refund, including any
refund relating to the carryback of a net operating loss pursuant to Section
5.2(b).
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5.4 Allocation of Tax Items.
(a) All Tax computations (1) ending on the Distribution Date and (2)
the immediate following Tax period of Southern Energy or any Southern Energy
Affiliated Company, shall be made pursuant to the principles of Section
1.1502-76(b) of the Treasury Regulations or of a corresponding provision under
the laws of other jurisdictions, as determined by Southern, taking into account
all reasonable suggestions made by Southern Energy with respect thereto.
(b) Earnings and Profits. Southern will advise Southern Energy in
writing of the decrease in Southern earnings and profits attributable to the
Distribution under Section 312(h) of the Code as a result of the Spin-Off not
later than [_______] with respect to transactions completed during fiscal year
2000; provided, however, that Southern shall provide Southern Energy with
estimates of such amounts (determined in accordance with past practice) as
reasonably requested by Southern Energy.
5.5 Continuing Covenants. Southern (for itself and each Southern
Affiliated Company) and Southern Energy (for itself and each Southern Energy
Affiliated Company) agree (1) not to take any action reasonably expected to
result in an increased Tax Detriment to the other party or a reduction in a Tax
Benefit of the other party under this Agreement, and (2) to take any action
reasonably requested by the other party that would reasonably be expected to
result in a Tax Benefit or avoid a Tax Detriment to the other party, provided
that such action does not result in any additional cost not fully compensated
for by the requesting party. The parties hereby acknowledge that the preceding
sentence is not intended to limit, and therefore shall not apply to, the rights
of the parties with respect to matters otherwise covered by this Agreement.
SECTION 6. INDEMNIFICATION AND CONTEST PROVISIONS.
6.1 General Indemnification.
(a) In General. Southern Energy and each Southern Energy Affiliated
Company shall jointly and severally indemnify Southern, each Southern Affiliated
Company and their respective directors, officers and employees, and hold them
harmless from and against any and all Taxes for which Southern Energy or any
Southern Energy Affiliated Company is liable under this Agreement and any loss,
cost, damage or expense, including reasonable attorneys' fees and costs, that is
attributable to, or results from, the failure of Southern Energy, any Southern
Energy Affiliated Company or any director, officer, or employee to make any
payment required to be made under this Agreement. Southern and each Southern
Affiliated Company shall jointly and severally indemnify Southern Energy, each
Southern Energy Affiliated Company and their respective directors, officers and
employees, and hold them harmless from and against any and all Taxes for which
Southern or any Southern Affiliated Company is liable under this Agreement and
any loss, cost, damage or expense, including reasonable attorneys' fees and
costs, that is attributable to, or results from the failure of Southern any
Southern Affiliated Company or any director, officer or employee to make any
payment required to be made under this Agreement.
(b) Inaccurate or Incomplete Information. Southern Energy and each
Southern Energy Affiliated Company shall jointly and severally indemnify
Southern, each Southern Affiliated Company and their respective directors,
officers and employees, and hold them harmless from and against any cost, fine,
penalty, or other expenses of any kind attributable to the negligence of
Southern Energy or
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any Southern Energy Affiliated Company in supplying Southern or any Southern
Affiliated Company with inaccurate or incomplete information, in connection with
the preparation of any Tax Return. Southern and each Southern Affiliated Company
shall jointly and severally indemnify Southern Energy, each Southern Energy
Affiliated Company and their respective directors, officers and employees, and
hold them harmless from and against any cost, fine, penalty, or other expense of
any kind attributable to the negligence of Southern or any Southern Affiliated
Company in supplying Southern Energy or any Southern Energy Affiliated Company
with inaccurate or incomplete information, in connection with the preparation of
any Tax Return.
6.2 Spinoff Indemnification
(a) In General. Notwithstanding anything herein or in the Tax
Allocation Agreement to the contrary, the provisions of this Section 6 shall
govern all matters among the parties hereto related to an Indemnified Liability
(as defined in Section 6.3 below) and an Indemnity Amount (as defined in Section
6.5 below).
(b) Continued Conduct of Business. During the Restricted Period, each
of Southern and Southern Energy agrees that it will not cease the active conduct
of its trade or business within the meaning of Section 355(b) of the Code nor
cause or permit to be caused a change in its Control.
(c) Ruling Requirement for Major Transactions Undertaken by Southern
Energy during the Restricted Period. During the Restricted Period, Southern and
Southern Energy will not enter into any of the following transactions, or enter
into any other transaction which, by itself or in the aggregate, may cause the
Distribution to be treated as part of a plan pursuant to which one or more
persons acquire directly or indirectly stock representing Control of Southern or
Southern Energy, as the case may be, within the meaning of Code Section 355(e):
(i) merge or consolidate with or into any other corporation;
(ii) liquidate or partially liquidate (within the meaning of such
terms as defined in Section 346 and Section 302, respectively,
of the Code);
(iii) sell or transfer all or substantially all its assets (within
the meaning of Rev. Proc. 77-37, 1977 - 2 C.B. 568) in a
single transaction or series of related transactions;
(iv) redeem or otherwise repurchase any of Southern or Southern
Energy's capital stock; or
(v) make any change in its equity structure (including stock
issuances, pursuant to the exercise of options or otherwise,
option grants, the adoption of, or authorization of shares
under a stock option plan, capital contributions or
acquisition but not including the Distribution),
(actions (i), (ii), (iii), (iv) and (v) are referred to as the "Prohibited
Acts"), unless Southern or Southern Energy first obtains, and permits the other
party to review, a supplemental ruling from
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the Service, that such transaction, and any transaction related thereto, will
not affect the qualification of the Spin-Off under Section 355 of the Code.
(d) Indemnification. If Southern or Southern Energy breaches any
representations set forth in Section 3 of this Agreement or takes any action or
enters into any agreement to take any action, including, without limitation, any
breach of Sections 6.2(b) and (c), and the Spin-Off shall fail to qualify under
Section 355 of the Code as a result of such action or actions, then such party
(the "Indemnifying Party") shall indemnify and hold harmless the other party
against any and all federal, state and local taxes, interest, penalties and
additions to Tax imposed upon or incurred by Southern, the Southern Group, any
shareholder of Southern, Southern Energy or the Southern Energy Group, as the
case may be, (each such party an "Indemnitee") as a result of the failure of the
Spin-Off to so qualify to the extent provided herein.
6.3 Indemnified Liability. For purposes of this Agreement, the term
"Indemnified Liability" means any liability imposed upon or incurred by (1)
Southern, any member of the Southern Group, or Southern shareholder for which
Southern, any other member of the Southern Group or Southern shareholder is
indemnified and held harmless under Section 6.4, or (2) Southern Energy or any
member of the Southern Energy Group, for which Southern Energy or any other
member of the Southern Energy Group is indemnified and held harmless under
Section 6.4, but shall not refer to the amount of such liability.
6.4 Amount of Indemnified Liability for Income Taxes. The amount of an
Indemnified Liability for a federal or state Tax incurred by an Indemnitee based
on or determined with reference to income shall be deemed to be the amount of
Tax computed by multiplying (i) the taxing jurisdiction's highest effective Tax
rate applicable to Indemnitee of the character subject to Tax as a result of the
failure of the Spin-Off to qualify under Section 355 of the Code for the taxable
period in which the Spin-Off occurs, times (ii) the gain or income of Indemnitee
which is subject to Tax in the taxing jurisdiction as a result of the failure of
the Spin-Off to qualify under Section 355 of the Code, and (iii) in the case of
a state, times the percentage representing the extent to which such gain or
income is apportioned or allocated to such state; provided, however, that in the
case of a state Tax determined as a percentage of Federal Income Tax liability,
the amount of Indemnified Liability shall be deemed to be the amount of Tax
computed by multiplying (i) that state's highest effective rate applicable to
Indemnitee of the character subject to Tax as a result of the failure of the
Spin-Off to qualify under Section 355 of the Code for taxable period in which
the Spin-Off occurs, times (ii) the amount of deemed Federal Income Tax (whether
or not incurred) imposed upon Indemnitee from the failure of the Spin-Off to
qualify under Section 355 of the Code computed in accordance with this Section
6.6, times (iii) the percentage representing the extent to which the gain or
income required to be recognized on the Spin-Off is apportioned to such state.
6.5 Indemnity Amount. With respect to any Indemnified Liability, the
amount which the Indemnifying Party shall pay to Indemnitee as indemnification
(the "Indemnity Amount") shall be the sum of (i) the amount of the Indemnified
Liability, as determined under Section 6.4, (ii) any penalties and interest
imposed with respect to the Indemnified Liability and (iii) an amount such that
when the sum of the amounts set forth in clauses (i), (ii) and this clause (iii)
of this Section 6.5 are reduced by all Taxes imposed as a result of the receipt
of such sum, (taking
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into account any related current credits or deductions payable by the
Indemnitee or any of its Affiliated Companies under any law or governmental
authority) the reduced amount is equal to the sum of the amounts set forth in
clauses (i) and (ii) of this Section 6.5 .
6.6 Alternate Remedy. Southern and Southern Energy, respectively,
recognize that any failure by it or any Affiliated Company to comply with their
obligations under this Section 6 may result in additional Taxes which could
cause irreparable harm to Southern and its shareholders, the Southern Affiliated
Companies, and/or Southern Energy and the Southern Energy Affiliated Companies,
and that such entities may be inadequately compensated by monetary damages for
such failure. Accordingly, if (A) (1) either party shall fail to comply with any
obligation under this Section 6 which would be reasonably foreseeable to result
in any additional Taxes, and (2) such party shall fail to provide the other
party with a written opinion of a nationally recognized tax attorney, or a tax
accountant that is a member of a nationally recognized law firm or accounting
firm that the failure to comply with such obligation will not result in any
increase in Taxes of Southern and its shareholders, any Southern Affiliated
Company, Southern Energy or any Southern Energy Affiliated Company, as the case
may be, and such opinion is provided to such party for its review and approval,
which approval will not be unreasonably withheld, or (B) if it is probable that
the failure by such party to comply with any such obligation under this Section
6 will result in an Indemnified Liability under this Agreement and the
Indemnifying Party fails to provide Adequate Assurances to the Indemnitee of its
ability to pay the Indemnity Amount under this Agreement, then Southern or
Southern Energy, as the case may be, shall be entitled to injunctive relief in
addition to all other remedies.
6.7 Payments.
(a) In General. Except as otherwise provided under this Agreement, to
the extent that the Indemnifying Party has an indemnification or payment
obligation to the Indemnitee pursuant to this Agreement, the Indemnitee shall
provide the Indemnifying Party with its calculation of the amount of such
indemnification payment. Such calculation shall provide sufficient detail to
permit the Indemnifying Party to reasonably understand the calculations. All
indemnification payments shall be made to the Indemnitee or to the appropriate
Tax Authority as specified by the Indemnitee within the time prescribed for
payment in this Agreement, or if no period is prescribed, within thirty (30)
days after delivery by the Indemnitee to the Indemnifying Party of written
notice of a payment or if such liability is contested pursuant to Section 7.3 of
this Agreement, within thirty (30) days of the incurrence of such an amount
based on a Final Determination, together with a computation of the amounts due.
Any disputes with respect to indemnification payments shall be resolved in
accordance with Section 9.10 below.
(b) Electronic Payments. Any payment required under this Agreement in
an amount in excess of one million dollars ($1,000,000.00) shall be made by
electronic funds transfer of immediately available funds.
6.8 Prompt Performance. All actions required to be taken by any party
under this Agreement shall be performed within the time prescribed for
performance in this Agreement, or if no period is prescribed, such actions shall
be performed promptly.
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6.9 Interest. Payments pursuant to this Agreement that are not made
within the period prescribed in this Section 6.7(a) shall bear interest for the
period from and including the date immediately following the last date of the
period through and including the date of payment at a per annum rate equal to
the prime rate as published in The Wall Street Journal on the date of
determination, plus two percent (2%). Such interest will be payable at the same
time as the payment to which it relates and shall be calculated on the basis of
a year of 365 days and the actual number of days for which due.
6.10 Tax Records. The parties to this Agreement hereby agree to retain
and provide on proper demand by any Taxing Authority (subject to any applicable
privileges) the books, records, documentation and other information relating to
any Tax Return until the later of (a) the expiration of the applicable statute
of limitations (giving effect to any extension, waiver or mitigation thereof)
and (b) in the event any claim is made under this Agreement for which such
information is relevant, until a Final Determination with respect to such claim.
SECTION 7. AUDITS AND CONTEST RIGHTS.
7.1 In General. Upon the termination of Southern Energy and the
Southern Energy Group as members of the Southern Consolidated Group, the Tax
Allocation Agreement shall apply with respect to any period in which the income
of the terminating member is included in the Consolidated Return. The
terminating member shall remain liable to Southern for payments required under
the Tax Allocation Agreement, including, but not limited to, payments of Tax and
estimated Tax for periods in which the member's income is included in the
Southern Consolidated Return. Subject to Section 2.2(c) of this Agreement, the
terminating member shall cooperate and provide reasonable access to books,
records and other information needed in connection with Audits, administrative
proceedings, litigation and other similar matters related to periods in which
the member was a member of the Southern Consolidated Group. Notwithstanding the
foregoing, Southern Energy and the Southern Energy Group will not be required
under the Tax Allocation Agreement to pay more on a combined or consolidated
basis than that which it would have been required to pay had Southern Energy or
a member of the Southern Energy Group filed a separate Federal Income Tax
Return.
(b) Except as otherwise provided in this Agreement, the respective
Filing Party shall have the right to control, contest, and represent the
interests of Southern, any Southern Affiliated Company, Southern Energy or any
Southern Energy Affiliated Company in any Audit relating to any Tax Return that
the Filing Party is responsible for filing under Section 2.1 of this Agreement
and to resolve, settle or agree to any deficiency, claim or adjustment proposed,
asserted or assessed in connection with or as a result of any such Audit. The
Filing Party's rights shall extend to any matter pertaining to the management
and control of an Audit, including execution of waivers, choice of forum,
scheduling of conferences and the resolution of any Tax Item.
7.2 Notice. If, after the date of this Agreement, Southern (or any
Southern Affiliated Company) or Southern Energy (or any Southern Energy
Affiliated Company) receives written notice of, or relating to, an Audit from a
Tax Authority that asserts, proposes or recommends a deficiency, claim or
adjustment that, if sustained, could result in Taxes for which the other party
is responsible under
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this Agreement, then the party receiving such notice shall provide a copy of
such notice to such other party within ten (10) days of receipt thereof.
7.3 Contests.
(a) If any Tax Authority asserts, proposes or recommends a deficiency,
claim or adjustment that, if sustained, could result in Taxes for which the
Non-Filing Party is responsible under this Agreement, then upon request by the
Non-Filing Party, the Filing Party shall contest, or continue to contest, any
deficiency, claim or adjustment and the Filing Party shall keep the Non-Filing
Party informed in a timely manner reasonably in advance of all actions taken or
proposed to be taken by the Filing Party in connection with such deficiency,
claim or adjustment.
(b) In the case of an Audit with respect to any Tax Item, the Filing
Party shall:
(1) in the case of any material correspondence or filing
submitted to the Tax Authority or any judicial authority that relates
to the merits of such deficiency, claim or adjustment (i) reasonably in
advance of such submission, but subject to applicable time constraints
imposed by such Tax Authority or judicial authority, provide the
Non-Filing Party with a draft copy of the portion of such
correspondence or filing that relates to such deficiency, claim or
adjustment, (ii) incorporate, subject to applicable time constraints
imposed by such Tax Authority or judicial authority, the Non-Filing
Party's comments and changes on such draft copy of such correspondence
or filing, and (iii) provide the Non-Filing Party with a final copy of
the portion of such correspondence or filing that relates to such
deficiency, claim or adjustment;
(2) provide the Non-Filing Party with notice reasonably in
advance of, and the Non-Filing Party shall have the right to attend,
any meetings with the Tax Authority (including meetings with examiners)
or hearings or proceedings before any judicial authority to the extent
they relate to such deficiency, claim or adjustment; and
(3) at the Filing Party's reasonable request (or upon the
Filing Party's consent to a request by the Non-Filing Party, which
consent shall not be unreasonably withheld), the Non-Filing Party shall
assume responsibility for (i) contesting and presenting the merits with
respect to any deficiency, claim or adjustment that, if sustained,
would result in Taxes for which the Non-Filing Party is responsible
under this Agreement, or (ii) resolving, settling or agreeing to any
such deficiency, claim or adjustment. Any such request (or consent) by
the Filing Party shall be subject to the Non-Filing Party's continued
compliance with the conditions of Section 7.4 of this Agreement and to
such other conditions as the Filing Party and Non-Filing Party
reasonably agree.
7.4 Limitations.
(a) In General. The Filing Party shall have no obligation to contest,
or to continue to contest, any deficiency, claim or adjustment in accordance
with Section 7.3, and the Non-Filing Party shall have no right to control or
participate under Section 7.3 of this Agreement unless:
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(1) within thirty (30) days of a reasonable request by the Filing
Party, the Non-Filing Party shall deliver to the Filing Party a written opinion
of a nationally recognized tax attorney or tax accountant that is a member of a
recognized law firm or accounting firm, to the effect that the Non-Filing
Party's position with respect to such deficiency, claim or adjustment is
supported by a reasonable basis (within the meaning of Treasury Regulations
Section 1.6662-3(b)(3));
(2) the Non-Filing Party shall have agreed to be bound by a Final
Determination of such deficiency, claim or adjustment;
(3) the Non-Filing Party shall have agreed to pay, and shall be
currently paying, all reasonable out of pocket costs and expenses incurred by
the Filing Party to contest such deficiency, claim or assessment including
reasonable outside attorneys', accountants' and investigatory fees and
disbursements;
(4) the Non-Filing Party shall have advanced to the Filing Party, on an
interest-free basis (and with no additional net after-tax cost to the Filing
Party), the amount of Tax in controversy (but not in excess of the lesser of (A)
the amount of Tax for which the Non-Filing Party could be liable under this
Agreement or (B) the amounts actually expended by the Filing Party for this
item) to the extent necessary for the contest to proceed in the forum selected
by the Filing Party;
(5) the Non-Filing Party shall have provided to the Filing Party all
documents and information, and shall have made available employees and officers
of the Non-Filing Party, as may be necessary, useful or reasonably required by
the Filing Party in contesting such deficiency, claim or adjustment; and
(6) the contest of such deficiency, claim or adjustment shall involve
no material danger of the sale, forfeiture or loss of, or the creation of any
lien on, any asset of the Filing Party (except if the Non-Filing Party shall
have adequately bonded such lien or otherwise made provision to protect the
interests of the Filing Party in a manner reasonably satisfactory to the Filing
Party).
(b) Settlement. Notwithstanding Section 7.4(a), the Filing Party may
resolve, settle or agree to any deficiency, claim or adjustment proposed,
asserted or assessed in connection with any Audit of any Tax Return that it is
responsible for filing under Section 2.1 of this Agreement if the Filing Party
has provided the Non-Filing Party with a reasonable opportunity to review a copy
of that portion of the settlement or compromise proposal which relates to the
claim for which the Filing Party is seeking indemnification hereunder; provided,
that if (a) the Filing Party fails to provide the Non-Filing Party such a
reasonable opportunity to review such portion of such proposal, or (b) after
such reasonable opportunity to review such proposal the Non-Filing Party in
writing reasonably withholds its consent to all or part of such settlement or
compromise proposal, then, unless the Filing Party was not required to continue
the applicable contest under the terms of Section 7.4(a), the Non-Filing Party
shall not be obligated to indemnify the Filing Party hereunder to the extent of
the amount attributable to the loss to which such settlement or compromise
relates as to which the Non-Filing Party has reasonably withheld its consent, or
with respect to any other loss for which a successful contest is foreclosed
because of such settlement or compromise as to
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which the Non-Filing Party has reasonably withheld its consent. If the Filing
Party effects a settlement or compromise of such contest, notwithstanding that
the Non-Filing Party has reasonably withheld its consent thereto, the Filing
Party shall repay to the Non-Filing Party such amounts that the Non-Filing Party
advanced pursuant to clause (a)(4) of this Section 7.4 hereof as relate to such
claim, to the extent that the Non-Filing Party has reasonably withheld its
consent to the settlement or compromise thereof (together with interest at the
prime rate as published in the Wall Street Journal on any such amount paid by
the Non-Filing Party from the date paid by Lessee to the date repaid by the
Filing Party).
(c) Waiver. Notwithstanding any other provision of this Section 7.4,
the Filing Party may resolve, settle, or agree to any deficiency, claim or
adjustment for any taxable period if the Filing Party waives it right to
indemnity with respect to such Tax Item. In such event, the Filing Party shall
promptly reimburse the Non-Filing Party for all amounts previously advanced by
the Non-Filing Party to the Filing Party in connection with such deficiency,
claim or adjustment under Section 7.4(a)(4) of this Agreement. In addition, the
Filing Party shall reimburse the Non-Filing Party for any Tax Detriment that
directly results from the settlement of such deficiency, claim or adjustment. No
waiver by the Filing Party under this Section 7.4(c) with respect to any
deficiency, claim or adjustment relating to any single Tax Item, position, issue
or transaction or relating to any single Tax for any one taxable period shall
operate as a waiver with respect to any other deficiency, claim or adjustment.
7.5 Failure to Notify, Etc. The failure of the Filing Party promptly to
notify the Non-Filing Party of any matter relating to a particular Tax for a
taxable period or to take any action specified in Section 7.3 of this Agreement
shall not relieve the Non-Filing Party of any liability and/or obligation which
it may have to the Filing Party under this Agreement with respect to such Tax
for such taxable period except to the extent that the Non-Filing Party's rights
hereunder are materially prejudiced by such failure and in no event shall such
failure relieve the Non-Filing Party of any other liability and/or obligation
which it may have to the Filing Party.
7.6 Remedies. Except as otherwise provided in this Agreement, the
parties hereby agree that the sole and exclusive remedy for a breach by the
Filing Party of the Filing Party's obligations to the Non-Filing Party with
respect to a deficiency, claim or adjustment relating to the redetermination of
a Tax Item of the Non-Filing Party for a taxable period shall first be a
reduction in the amount that would otherwise be payable by the Non-Filing Party
for such taxable period and then an increase in amount that would otherwise be
payable by the Filing Party for such taxable period, in either case because of
the breach. The parties further agree that no claim against the Filing Party and
no defense to the Non-Filing Party's liabilities to the Filing Party under this
Agreement shall arise from the resolution by the Filing Party of any deficiency,
claim or adjustment relating to the redetermination of any Tax Item of the
Filing Party.
SECTION 8. STOCK OPTIONS.
8.1 In General. The parties hereto agree that Southern shall be
entitled to any Tax Benefit arising by reason of exercises of Options to
purchase shares of Southern stock, and that Southern Energy shall be entitled to
any Tax Benefit arising by reason of exercises of Options to purchase shares of
Southern Energy stock. The parties hereto agree to report all Tax deductions
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with respect to stock options and other equity issued to their employees
consistently with this Section 8.1, to the extent permitted by the Tax Law.
8.2 Notices, Withholding, Reporting. Southern shall promptly notify
Southern Energy of any Post-Separation Date event giving rise to income to any
Southern Energy Group employees or former employees in connection with exercises
of options to purchase shares of Southern stock. If required by the Tax Law,
Southern Energy shall withhold applicable Taxes and satisfy applicable Tax
reporting obligations in connection therewith.
8.3 Adjustments. If Southern Energy or any Southern Energy Affiliated
Company receives any Tax Benefit to which Southern is entitled under Section 8.1
of this Agreement, Southern Energy shall pay the amount of such Tax Benefit to
Southern. If Southern or any Southern Affiliated Company receives any Tax
Benefit to which Southern Energy is entitled under Section 8.1 of this
Agreement, Southern shall pay the amount of such Tax Benefit to Southern Energy.
SECTION 9. MISCELLANEOUS
9.1 Effectiveness. This Agreement shall become effective upon execution
by the parties hereto.
9.2 Notices. Any notice, request, instruction or other document to be
given or delivered under this Agreement by any party to another party shall be
in writing and shall be deemed to have been duly given or delivered when (a)
delivered in person, (b) deposited in the United States mail, postage prepaid
and sent certified mail, return receipt requested or (c) delivered to Federal
Express or similar service for overnight delivery to the address of the party
set forth below:
If to Southern or any Southern Affiliated Company, to W. Dean Hudson,
with a copy to the General Counsel of Southern, at:
The Southern Company
270 Peachtree Street
Atlanta, Georgia 30303
If to Southern Energy or any Southern Energy Affiliated Company, to
James A. Ward, with a copy to the General Counsel of Southern Energy:
Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
Any party may, by written notice to the other parties, change the address or the
party to which any notice, request, instruction or other document is to be
delivered.
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9.3 Changes in Law.
(a) Any reference to a provision of the Code or a law of another
jurisdiction shall include a reference to any applicable successor provision or
law.
(b) If, due to any change in applicable law or regulations or their
interpretation by any court of law or other governing body having jurisdiction
subsequent to the date of this Agreement, performance of any provision of this
Agreement or any transaction contemplated thereby shall become impracticable or
impossible, the parties hereto shall use their commercially reasonable efforts
to find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such provision.
9.4 Confidentiality. For a period of three years, commencing on the
date of this Agreement, each party shall hold and cause its directors, officers,
employees, advisors and consultants to hold in strict confidence, unless
compelled to disclose by judicial or administrative process or, in the opinion
of its counsel, by other requirements of law, all information (other than any
such information relating solely to the business or affairs of such party)
concerning the other parties hereto furnished it by such other party or its
representatives pursuant to this Agreement (except to the extent that such
information can be shown to have been (a) in the public domain through no fault
of such party or (b) later lawfully acquired from other sources not under a duty
of confidentiality by the party to which it was furnished), and each party shall
not release or disclose such information to any other person, except its
directors, officers, employees, auditors, attorneys, financial advisors, bankers
and other consultants who shall be advised of and agree to be bound by the
provisions of this Section 9.4. Each party shall be deemed to have satisfied its
obligation to hold confidential information concerning or supplied by the other
party if it exercises the same care as it takes to preserve confidentiality for
its own similar information.
9.5 Successors. This Agreement shall be binding on and inure to the
benefit and detriment of any successor, by merger, acquisition of assets or
otherwise, to any of the parties hereto, to the same extent as if such successor
had been an original party.
9.6 Affiliated Companies. Southern shall cause to be performed, and
hereby guarantees the performance of, all actions, agreements and obligations
set forth herein to be performed by any Southern Affiliated Company, and
Southern Energy shall cause to be performed, and hereby guarantees the
performance of, all actions, agreements and obligations set forth herein to be
performed by any Southern Energy Affiliated Company.
9.7 Authorization, Etc. Each of the parties hereto hereby represents
and warrants that it has the power and authority to execute, deliver and perform
this Agreement, that this Agreement has been duly authorized by all necessary
corporate action on the part of such party, that this Agreement constitutes a
legal, valid and binding obligation of each such party and that the execution,
delivery and performance of this Agreement by such party does not contravene or
conflict with any provision of law or of its charter or bylaws or any agreement,
instrument or order binding on such party.
9.8 Entire Agreement. This Agreement and the Tax Allocation Agreement
contains the entire agreement among the parties hereto with respect to the
subject matter hereof.
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9.9 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Georgia
as to all matters regardless of the law that might otherwise govern under the
principles of conflicts of law applicable thereto.
9.10 Dispute Resolution. The resolution of any and all disputes arising
from or in connection with this Agreement shall be governed by and settled in
accordance with the provisions of Section 5.9 of the Separation Agreement;
provided, however, that at the request of Southern or Southern Energy, a
nationally recognized tax attorney or tax accountant that is a member of a
nationally recognized law firm or accounting firm, which firm is independent of
both parties, will be appointed for purposes of the non-binding mediation
procedures described in Section 5.9(b) of the Separation Agreement.
9.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
9.12 Severability. If any term, provision, covenant, or restriction of
this Agreement is held by a court of competent jurisdiction (or an arbitrator or
arbitration panel) to be invalid, void, or unenforceable, the remainder of the
terms, provisions, covenants, and restrictions set forth herein shall remain in
full force and effect, and shall in no way be affected, impaired, or
invalidated. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions,
covenants, and restrictions without including any of such which may be hereafter
declared invalid, void, or unenforceable. In the event that any such term,
provision, covenant or restriction is held to be invalid, void or unenforceable,
the parties hereto shall use their best efforts to find and employ an alternate
means to achieve the same or substantially the same result as that contemplated
by such terms, provisions, covenant, or restriction.
9.13 No Third Party Beneficiaries. This Agreement is solely for the
benefit of Southern, the Southern Affiliated Companies, Southern Energy and the
Southern Energy Affiliated Companies. This Agreement should not be deemed to
confer upon third parties any remedy, claim, liability, reimbursement, cause of
action or other rights in excess of those existing without this Agreement.
9.14 Waivers, Etc. No failure or delay on the part of the parties in
exercising any power or right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such right or power, preclude
any other or further exercise thereof or the exercise of any other right or
power. No modification or waiver of any provision of this Agreement nor consent
to any departure by the parties therefrom shall in any event be effective unless
the same shall be in writing.
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9.15 Setoff. All payments to be made by any party under this Agreement
may be netted against payments due to such party under this Agreement, but
otherwise shall be made without setoff, counterclaim or withholding, all of
which are hereby expressly waived.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by a duly authorized officer as of the date first above
written.
THE SOUTHERN COMPANY
on behalf of itself and the Southern Affiliated Companies
By:
----------------------------------------
Name:
Title:
SOUTHERN ENERGY, INC.
on behalf of itself and the Southern Energy
Affiliated Companies
By:
----------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.8
FORM OF
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and
entered into as of [________ __, 2000], between The Southern Company, a Delaware
corporation ("Southern"), and Southern Energy, Inc., a Delaware corporation and
a wholly owned subsidiary of Southern (the "Company").
WHEREAS, Southern and the Company have entered into a Master Separation
and Distribution Agreement and certain ancillary agreements, each effective
on [________ __ 2000], pursuant to which Southern and Southern Energy have
agreed to take certain actions to separate the Southern Energy Group from the
Southern Group (each as defined in the Master Separation and Distribution
Agreement), and, in connection with such separation, for Southern Energy to
acquire certain assets from Southern, and for Southern to acquire certain
entities currently associated with the Southern Energy Business from Southern
Energy;
WHEREAS, Southern currently owns all of the issued and outstanding
shares of the Company's common stock (the "Common Stock");
WHEREAS, the Company intends to offer and sell to the public (the
"IPO") by means of a Registration Statement (File No. __________) initially
filed with the Securities and Exchange Commission (the "SEC") on Form S-1 on
April [__], 2000 (the "Registration Statement") shares of its Common Stock;
WHEREAS, immediately following the consummation of the IPO, Southern is
expected to own in excess of 80% of the outstanding shares of Common Stock;
WHEREAS, Southern currently contemplates that, several months following
the IPO, Southern will distribute to the holders of its common stock, by means
of a pro rata distribution, all of the shares of Southern Energy common stock
then owned by Southern (the "Distribution"); and
WHEREAS, Southern and the Company intend that the Distribution will be
tax-free to Southern and its stockholders under Section 355 of the Code; and
WHEREAS, if Southern determines not to complete the Distribution, or
the Distribution is abandoned without Southern divesting itself of 100% of the
Common Stock it owns, Southern and the Company desire to make certain
arrangements to provide Southern with registration rights with respect to shares
of Common Stock it then holds;
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency
<PAGE> 2
of which is hereby acknowledged and intending to be legally bound hereby, the
parties hereby agree as follows:
Section 1. Effectiveness of Agreement; Term.
1.1 Effective Date. This Agreement shall become effective upon the date
that Southern provides to the Company written notice (the "Abandonment Notice")
that it no longer intends to proceed with or complete the Distribution (the
"Effective Date").
1.2 Shares Covered. This Agreement covers those shares of Common Stock
that are held by Southern immediately following the IPO and continue to be held
by Southern as of the date of the Abandonment Notice (subject to the provisions
of Section 7, the "Shares"). The "Shares" shall include any securities issued or
issuable with respect to the Shares by way of a stock dividend or a stock split
or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. Except as set forth in the immediately
preceding sentence, the "Shares" shall not include any shares of Common Stock
acquired by Southern after the completion of the IPO.
Southern and any Permitted Transferees (as defined in Section 2.5) are
each referred to herein as a "Holder" and collectively as the "Holders" and the
Holders of Shares proposed to be included in any registration under this
Agreement are each referred to herein as a "Selling Holder" and collectively as
the "Selling Holders."
Section 2. Demand Registration.
2.1 Notice. Upon the terms and subject to the conditions set forth
herein, upon written notice of any Holder requesting that the Company effect the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of any or all of the Shares held by it, which notice shall specify the
intended method or methods of disposition of such Shares (which methods may
include, without limitation, a Shelf Registration, a Convertible Registration or
an Exchange Registration (as such terms are defined in Section 2.6)), the
Company will promptly give written notice of the proposed registration to all
other Holders and will use its best efforts to effect (at the earliest
reasonable date) the registration under the Securities Act of such Shares (and
the Shares of any other Holders joining in such request as are specified in a
written notice received by the Company within 20 days after receipt of the
Company's written notice of the proposed registration) for disposition in
accordance with the intended method or methods of disposition stated in such
request (each registration request pursuant to this Section 2.1 is sometimes
referred to herein as a "Demand Registration"); provided, however, that:
(a) the Company shall not be obligated to effect registration with
respect to Shares pursuant to this Section 2 within 90 days after the effective
date of a previous registration, other than a Shelf Registration, effected with
respect to Shares pursuant to this Section 2;
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<PAGE> 3
(b) if, while a registration request is pending pursuant to this
Section 2, the Company determines in the good faith judgment of the general
counsel of the Company that such registration (i) would reasonably be expected
to have a material adverse effect on any existing proposal or plans by the
Company or any of its subsidiaries to engage in any material acquisition,
merger, consolidation, tender offer, other business combination, reorganization,
securities offering or other material transaction or, (ii) would require
disclosure of material information, the disclosure of which would have a
material adverse effect on the Company, the Company may postpone for up to 90
days the filing or effectiveness of such registration; provided, however, that
the Company may delay a Demand Registration hereunder only two times in any 12
month period, reduced by the number of times during such 12 month period that
notice of a Sales Blackout Period (as herein defined) has been given.
(c) except in the case of a Convertible Registration or an Exchange
Registration, any Demand Registration requested hereunder shall request the
registration of Shares representing at least __% of the then-outstanding shares
of Common Stock, based on the number of such shares outstanding as reported by
the Company in its most recent annual or quarterly report filed with the SEC
under the Securities Exchange Act of 1934, as amended; and
(d) if a Demand Registration is an underwritten offering and the
managing underwriters advise the Company in writing that in their opinion the
number of Shares requested to be included in such offering exceeds the number of
Shares which can be sold in an orderly manner in such offering within a price
range acceptable to the Holders of a majority of the Shares initially requesting
such registration or without materially adversely affecting the market for the
Common Stock, the Company shall include in such registration the number of
Shares requested to be included therein which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering and without materially adversely affecting the market for the Common
Stock, pro rata among the respective Holders thereof on the basis of the amount
of Shares owned by each Holder requesting inclusion of Shares in such
registration.
2.2 Registration Expenses. The Company shall pay 20% of all
Registration Expenses (as defined in Section 8) for any registration requested
pursuant to this Section 2 (including any registration that is delayed or
withdrawn), and the balance of such Registration Expenses shall be paid by the
Holders requesting such registration, pro rata on the basis of the amount of
Shares owned by each Holder and requested to be included in such registration.
2.3 Selection of Professionals. The Holders of a majority of the Shares
included in any Demand Registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering; provided,
however, that if such Holders select an investment banker or manager that was
not one of the lead managers of the IPO, such investment banker or manager shall
not administer such offering if the Company reasonably objects thereto. The
Holders of a majority of the Shares included in any Demand Registration shall
have the right to select the financial printer, the solicitation and/or exchange
agent (if any) and one counsel for the Selling Holders. The Company shall select
its own outside counsel and independent auditors. The Company also shall be
entitled to designate any broker or other agent through whom the Holders shall
sell into the public market any Shares pursuant to a Shelf Registration that is
not an underwritten offering.
2.4 Third Person Shares. The Company shall have the right to cause the
registration of securities for sale for the account of any Person (including the
Company) other than the Selling Holders (the "Third Person Shares") in any
registration of the
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<PAGE> 4
Shares requested pursuant to this Section 2 so long as the Third Person Shares
are disposed of in accordance with the intended method or methods of disposition
requested pursuant to this Section 2; provided, however, that the Company shall
not have the right to cause the registration of such securities of such other
Persons if the registration requested pursuant to this Section 2 is a
Convertible Registration or an Exchange Registration.
If a Demand Registration in which the Company proposes to include Third
Person Shares is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Shares and Third
Person Shares requested to be included in such offering exceeds the number of
Shares and Third Person Shares which can be sold in an orderly manner in such
offering within a price range acceptable to the Holders of a majority of the
Shares initially requesting such registration or without materially adversely
affecting the market for the Common Stock, the Company shall not include in such
registration any Third Person Shares unless all of the Shares initially
requested to be included therein are so included.
2.5 Permitted Transferees. As used in this Agreement, "Permitted
Transferees" shall mean any transferee, whether direct or indirect, of Shares so
designated by Southern (or a subsequent holder) in a written notice to the
Company as provided for in Section 9.7, provided that such transferee is, at the
time of such transfer, an affiliate of the transferor within the meaning of Rule
501 under the Securities Act or any successor provision. Any Permitted
Transferees of the Shares shall be subject to and bound by all of the terms and
conditions herein applicable to Holders. The notice required by this Section 2.5
shall be signed by both the transferring Holder and the Permitted Transferees so
designated and shall include an undertaking by the Permitted Transferees to
comply with the terms and conditions of this Agreement applicable to Holders. In
the event of a transfer of any of the Shares to a transferee that is not a
Permitted Transferee, the Shares so transferred shall no longer be subject to
this Agreement.
2.6 Shelf Registration; Convertible Registration; Exchange
Registration. With respect to any Demand Registration, the requesting Holders
may request the Company to effect a registration of the Shares (a) under a
registration statement pursuant to Rule 415 under the Securities Act (or any
successor rule) (a "Shelf Registration"); (b) in connection with such Holders'
registration under the Securities Act of securities (the "Convertible
Securities") convertible into, exercisable for or otherwise related to the
Shares (a "Convertible Registration"); or (c) in connection with such Holders'
offer to exchange the Shares for any debt or equity securities of such Holders,
a subsidiary or affiliate thereof or any other Person (an "Exchange
Registration").
2.7 SEC Form. The Company shall use its best efforts to cause Demand
Registrations to be registered on Form S-3 (or any successor form), and if the
Company is not then eligible under the Securities Act to use Form S-3, Demand
Registrations shall be registered on Form S-1 (or any successor form). If a
Demand Registration is a Convertible Registration or an Exchange Registration,
the Company shall effect such registration on the appropriate Form under the
Securities Act for such registrations. The
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<PAGE> 5
Company shall use its best efforts to become eligible to use Form S-3 and, after
becoming eligible to use Form S-3, shall use its best efforts to remain so
eligible.
2.8 Other Registration Rights. The Company shall not grant to any
Persons the right to request the Company to register any equity securities of
the Company, or any securities convertible or exchangeable into or exercisable
for such securities unless such rights are consistent with the rights granted
under this Agreement.
Section 3. Piggyback Registrations.
3.1 Notice and Registration. If the Company proposes to register any of
its securities for public sale under the Securities Act (whether proposed to be
offered for sale by the Company or any other Person), on a form and in a manner
which would permit registration of the Shares for sale to the public under the
Securities Act (a "Piggyback Registration"), it will give prompt written notice
to the Holders of its intention to do so, and upon the written request of any or
all of the Holders delivered to the Company within 20 days after the giving of
any such notice (which request shall specify the Shares intended to be disposed
of by such Holders), the Company will use its best efforts to effect, in
connection with the registration of such other securities, the registration
under the Securities Act of all of the Shares which the Company has been so
requested to register by such Holders (which shall then become Selling Holders),
to the extent required to permit the disposition (in accordance with the same
method of disposition as the Company proposes to use to dispose of the other
securities) of the Shares to be so registered; provided, however, that:
(a) if, at any time after giving such written notice of its intention
to register any of its other securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register such other securities, the
Company may, at its election, give written notice of such determination to the
Selling Holders (or, if prior to delivery of the Holders' written request
described above in this Section 3.1, the Holders) and thereupon the Company
shall be relieved of its obligation to register such Shares in connection with
the registration of such other securities (but not from its obligation to pay
Registration Expenses to the extent incurred in connection therewith as provided
in Section 3.3), without prejudice, however, to the rights (if any) of any
Selling Holders immediately to request (subject to the terms and conditions of
Section 2) that such registration be effected as a registration under Section 2;
(b) the Company shall not be required to effect any registration of the
Shares under this Section 3 incidental to the registration of any of its
securities in connection with mergers, acquisitions, exchange offers,
subscription offers, dividend reinvestment plans or stock option or other
employee benefit plans of the Company;
(c) if a Piggyback Registration is an underwritten primary registration
on behalf of the Company and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration
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<PAGE> 6
exceeds the number which can be sold in such offering without materially
adversely affecting the marketability of the offering or the market for the
Common Stock, the Company shall include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Shares requested to be
included in such registration, pro rata among the Holders of such Shares on the
basis of the number of Shares owned by each such Holder, and (iii) third, any
other securities requested to be included in such registration; and
(d) if a Piggyback Registration is an underwritten secondary
registration on behalf of holders of the Company's securities entitled to demand
registration thereof and the managing underwriters advise the Company in writing
that in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the marketability of the offering or the market
for the Common Stock, the Company shall include in such registration (i) first,
the securities requested to be included therein by the holders requesting such
registration and the Shares requested to be included in such registration, pro
rata among the holders of such securities on the basis of the number of
securities owned by each such holder, and (ii) second, any other securities
requested to be included in such registration. No registration of the Shares
effected under this Section 3 shall relieve the Company of its obligation to
effect a registration of Shares pursuant to Section 2.
3.2 Selection of Professionals. If any Piggyback Registration is an
underwritten offering and any of the investment banker(s) or manager(s) selected
to administer the offering was not one of the managers of the IPO, such
investment banker or manager shall not administer such offering if the Holders
of a majority of the Shares included in such Piggyback Registration reasonably
object thereto. The Holders of a majority of the Shares included in any
Piggyback Registration shall have the right to select one counsel for the
Selling Holders. The Company shall select its own outside counsel and
independent auditors.
3.3 Registration Expenses. The Company will pay all of the Registration
Expenses in connection with any registration pursuant to this Section 3 except
that the Holders of any Shares included in any such registration shall pay the
registration fee for such Shares.
Section 4. Registration Procedures.
4.1 Registration and Qualification. If and whenever the Company is
required to use its best efforts to effect the registration of any of the Shares
under the Securities Act as provided in Sections 2 and 3, including an
underwritten offering pursuant to a Shelf Registration, the Company will as
promptly as is practicable:
(a) prepare and file with the SEC a registration statement with respect
to such Shares and use its best efforts to cause such registration statement to
become effective (provided that before filing a registration statement or
prospectus or any amendments or supplement thereto, the Company shall furnish to
the counsel selected by the Holders of a majority of the Shares covered by such
registration statement copies of
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<PAGE> 7
all such documents proposed to be filed (which documents shall be subject to the
review and comment of such counsel);
(b) except in the case of a Shelf Registration, Convertible
Registration or Exchange Registration, prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all of the Shares until the earlier of (i) such
time as all of such Shares have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement or (ii) the
expiration of nine months after such registration statement becomes effective;
(c) in the case of a Shelf Registration (but not including any
Convertible Registration), prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Shares subject thereto for a period ending on the earlier of
(i) 18 months after the effective date of such registration statement and (ii)
the date on which all the Shares subject thereto have been sold pursuant to such
registration statement (the "Shelf Effective Period");
(d) in the case of a Convertible Registration or an Exchange
Registration, prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
of the Shares subject thereto until such time as the rules, regulations and
requirements of the Securities Act and the terms of the Convertible Securities
no longer require such Shares to be registered under the Securities Act (the
"Convertible Effective Period");
(e) furnish to the Selling Holders and to any underwriter of such
Shares such number of conformed copies of such registration statement and of
each such amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, such documents
incorporated by reference in such registration statement or prospectus, and such
other documents as the Selling Holders or such underwriter may reasonably
request;
(f) use its best efforts to register or qualify all of the Shares
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as the Selling Holders or any underwriter of such
Shares shall reasonably request, and do any and all other acts and things which
may be necessary or advisable to enable the Selling Holders or any underwriter
to consummate the disposition in such jurisdictions of the Shares covered by
such registration statement, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign corporation
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<PAGE> 8
in any jurisdiction where it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to consent to general service of process
in any such jurisdiction;
(g) (i) furnish to the Selling Holders, addressed to them, an opinion
of counsel for the Company and (ii) use its best efforts to furnish to the
Selling Holders, addressed to them, a "cold comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in such registration statement, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such other
matters as the Selling Holders may reasonably request, in each case, in form and
substance and as of the dates reasonably satisfactory to the Selling Holders;
(h) immediately notify the Selling Holders, at any time when a
prospectus relating to a registration pursuant to Section 2 or 3 is required to
be delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and at the request of the Selling Holders prepare and furnish to the
Selling Holders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(i) permit any Selling Holder which Selling Holder, in its sole and
exclusive judgment, might be deemed to be an underwriter or a controlling person
of the Company, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material, furnished
to the Company in writing, which in the reasonable judgment of such Holder and
its counsel should be included;
(j) to make available members of management of the Company, as selected
by the Holders of a majority of the Shares included in such registration, for
assistance in the selling effort relating to the Shares covered by such
registration, including, but not limited to, the participation of such members
of the Company's management in road show presentations.
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company shall use it best efforts promptly to obtain the
withdrawal of such order; and
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<PAGE> 9
(l) use its best efforts to cause Shares covered by such registration
statement to be registered with or approved by such other government agencies or
authorities as may be necessary to enable the sellers thereof to consummate the
disposition of such Shares.
The Company may require the Selling Holders to furnish the Company with
such information regarding the Selling Holders and the distribution of such
Shares as the Company may from time to time reasonably request in writing and as
shall be required by law, the SEC or any securities exchange on which any shares
of Common Stock are then listed for trading in connection with any registration.
4.2 Underwriting. If requested by the underwriters for any underwritten
offering in connection with a registration requested hereunder (including any
registration under Section 3 which involves, in whole or in part, an
underwritten offering), the Company will enter into an underwriting agreement
with such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnities to the
effect and to the extent provided in Section 6 and the provision of opinions of
counsel and accountants' letters to the effect and to the extent provided in
Section 4.1(g). The Company may require that the Shares requested to be
registered pursuant to Section 3 be included in such underwriting on the same
terms and conditions as shall be applicable to the Other Securities being sold
through underwriters under such registration; provided , however, that no
Selling Holder shall be required to make any representations or warranties to
the Company or the underwriters (other than representations and warranties
regarding such Holder and such Holder's intended method of distribution) or to
undertake any indemnification obligations to the Company or the underwriters
with respect thereto, except as otherwise provided in Section 6 hereof. The
Selling Holders shall be parties to any such underwriting agreement, and the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such Selling Holders.
4.3 Blackout Periods for Shelf Registrations.
(a) At any time when a Shelf Registration effected pursuant to Section
2 relating to the Shares is effective, upon written notice from the Company to
the Selling Holders that the Company determines in the good faith judgment of
the general counsel of the Company that the Selling Holders' sale of the Shares
pursuant to the Shelf Registration (i) would reasonably be expected to have a
material adverse effect on any existing proposal or plans by the Company or any
of its subsidiaries to engage in any material acquisition, merger,
consolidation, tender offer, other business combination, reorganization,
securities offering or other material transaction, or (ii) would require
disclosure of material information, the disclosure of which would have a
material adverse effect on the Company (an "Information Blackout"), the Selling
Holders shall suspend sales of the Shares pursuant to such Shelf Registration
until the earlier of (i) the date upon which such material information is
disclosed to the public or ceases to be material, (ii) 90 days after the general
counsel of the Company makes such good faith determination or (iii) such time as
the Company notifies the Selling Holders
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<PAGE> 10
that sales pursuant to such Shelf Registration may be resumed (the number of
days from such suspension of sales of the Selling Holders until the day when
such sales may be resumed hereunder is hereinafter called a "Sales Blackout
Period"); provided that the Company shall not be permitted to impose a Sales
Blackout Period for more than two times in any 12 month period, reduced by the
number of times during such 12 month period that the filing or effectiveness of
a registration has been postponed pursuant to Section 2.1(b) hereof.
(b) If there is an Information Blackout and the Selling Holders do not
notify the Company in writing of their desire to cancel such Shelf Registration,
the period set forth in Section 4.1(c)(i) shall be extended for a number of days
equal to the number of days in the Sales Blackout Period.
4.4 Listing. In connection with the registration of any offering of the
Shares pursuant to this Agreement, the Company agrees to use its best efforts to
effect the listing of such Shares on any securities exchange on which any shares
of the Common Stock are then listed or otherwise facilitate the public trading
of such Shares.
4.5 Holdback Agreements.
(a) The Company shall not effect any public sale or distribution of its
equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any registration statement in
connection with a Demand Registration (other than a Shelf Registration) or a
Piggyback Registration, except pursuant to registrations on Form S-8 or any
successor form or unless the underwriters managing any such public offering
otherwise agree.
(b) If the Holders of Shares notify the Company in writing that they
intend to effect an underwritten sale of Shares registered pursuant to a Shelf
Registration pursuant to Section 2 hereof, the Company shall not effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for its equity securities,
during the seven days prior to and during the 90-day period beginning on the
date such notice is received, except pursuant to registrations on Form S-8 or
any successor form or unless the underwriters managing any such public offering
otherwise agree.
(c) If the Company completes an underwritten registration with respect
to any of its securities (whether offered for sale by the Company or any other
Person) on a form and in a manner that would have permitted registration of the
Shares and no Holder requested the inclusion of any Shares in such registration,
the Holders shall not effect any public sales or distributions of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, until the termination of the holdback period
required from the Company by any underwriters in connection with such previous
registration, but in no event more than 90 days from the effective date of such
registration.
Section 5. Preparation; Reasonable Investigation. In connection with
the preparation and filing of each registration statement registering the Shares
under the Securities Act and each sale of the Shares thereunder, the Company
will give the Selling
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Holders and the underwriters, if any, and their respective counsel and
accountants, access to its financial and other records, pertinent corporate
documents and properties of the Company and such opportunities to discuss the
business of the Company with its officers and the independent public accountants
who have certified its financial statements as shall be necessary, in the
opinion of the Selling Holders and such underwriters or their respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.
Section 6. Indemnification.
(a) In the event of any registration of any of the Shares hereunder,
the Company will enter into customary indemnification arrangements to indemnify
and hold harmless each of the Selling Holders, each of their respective
directors and officers, each Person (as defined in (e) below) who participates
as an underwriter in the offering or sale of such securities, each officer and
director of each underwriter, and each Person, if any, who controls each such
Selling Holder or any such underwriter within the meaning of the Securities Act
(collectively, the "Covered Persons") against any losses, claims, damages,
liabilities and expenses, joint or several, to which such Person may be subject
under the Securities Act or otherwise insofar as such losses, claims, damages,
liabilities or expenses (or actions or proceedings in respect thereof) arise out
of are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any related registration statement filed under the
Securities Act, any preliminary prospectus or final prospectus included therein,
or any amendment or supplement thereto, or any document incorporated by
reference therein, or (ii) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse each such Covered Person,
as incurred, for any legal or any other expenses reasonably incurred by such
Covered Person in connection with investigating or defending any such loss,
claim, liability, action or proceeding; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus or final prospectus, amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by such
Selling Holder or such underwriter specifically for use in the preparation
thereof. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any such Covered Person and shall survive
the transfer of such securities by the Selling Holders.
(b) Each of the Selling Holders, by virtue of exercising its respective
registration rights hereunder, agree and undertake to enter into customary
indemnification arrangements to indemnify and hold harmless (in the same manner
and to the same extent as set forth in clause (a) of this Section 6) the
Company, its directors and officers, each Person who participates as an
underwriter in the offering or sale of such securities, each
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officer and director of each underwriter, and each Person, if any, who controls
the Company or any such underwriter within the meaning of the Securities Act,
with respect to any statement in or omission from such registration statement,
any preliminary prospectus or final prospectus included therein, or any
amendment or supplement thereto, if such statement or omission is contained in
written information furnished by such Selling Holder to the Company specifically
for inclusion in such registration statement or prospectus; provided, however,
that the obligation to indemnify shall be individual, not joint and several, for
each Selling Holder and shall be limited to the net amount of proceeds received
by such Selling Holder from the sale of Shares pursuant to such registration
statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of the Company or any such director,
officer or Person and shall survive the transfer of the registered securities by
the Selling Holders.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided, however, that the failure to give
prompt notice shall not impair any Person's rights to indemnification hereunder
to the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim shall not be obligated to
pay the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) Indemnification similar to that specified in the preceding
subdivisions of this Section 6 (with appropriate modifications) shall be given
by the Company and the Selling Holders with respect to any required registration
or other qualification of such Shares under any federal or state law or
regulation of governmental authority other than the Securities Act.
(e) "Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity, or any
department, agency or political subdivision thereof.
Section 7. Benefits and Termination of Registration Rights. The Holders
may exercise the registration rights granted hereunder in such manner and
proportions as they shall agree among themselves. The registration rights
hereunder shall cease to apply to any particular Shares and such securities
shall cease to be Shares when: (a) a registration statement with respect to the
sale of such Shares shall have become effective under the
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Securities Act and such Shares shall have been disposed of in accordance with
such registration statement; (b) such Shares shall have been sold to the public
pursuant to Rule 144 under the Securities Act (or any successor provision); (c)
such Shares shall have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent public distribution of them shall not require
registration or qualification of them under the Securities Act or any similar
state law then in force; (d) such Shares shall have ceased to be outstanding and
(e) in the case of Shares held by a Permitted Transferee, when such Shares
become eligible for sale pursuant to Rule 144(k) under the Securities Act (or
any successor provision).
Section 8. Registration Expenses. As used in this Agreement, the term
"Registration Expenses" means all expenses incident to the Company's performance
of or compliance with the registration requirements set forth in this Agreement
including, without limitation, the following: (a) all registration and filing
fees; (b) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares to be disposed of
under the Securities Act; (c) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering document and amendments and supplements
thereto and the mailing and delivering of copies thereof to the underwriters and
dealers and directly to securityholders in the case of an Exchange Registration;
(d) the cost of printing and producing any agreements among underwriters,
underwriting agreements, and blue sky or legal investment memoranda, any selling
agreements and any amendments thereto or other documents in connection with the
offering, sale or delivery of the Shares to be disposed of; (e) all expenses in
connection with the qualification of the Shares to be disposed of for offering
and sale under state securities laws, including the fees and disbursements of
counsel for the underwriters in connection with such qualification and in
connection with any blue sky and legal investment surveys; (f) the filing fees
incident to securing any required review by the New York Stock Exchange and any
other securities exchange on which the Common Stock is then traded or listed of
the terms of the sale of the Shares to be disposed of and the trading or listing
of all such Shares on each such exchange; (g) the costs of preparing stock
certificates; (h) the costs and charges of the Company's transfer agent and
registrar; and (i) the fees and disbursements of any custodians, solicitation
agents, information agents and/or exchange agents. Registration Expenses shall
not include underwriting discounts and underwriters' commissions attributable to
the Shares being registered for sale on behalf of the Selling Holders, which
shall be paid by the Selling Holders.
Section 9. Miscellaneous.
9.1 No Inconsistent Agreements. The Company shall not on or after the
date of this Agreement enter into any agreement with respect to its securities
that violates or subordinates the rights expressly granted to the Holders in
this Agreement. The Company shall not take any action, or permit any change to
occur, with respect to its securities
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<PAGE> 14
which would adversely affect the ability of the Holders of Shares to include
such Shares in a registration undertaken pursuant to this Agreement.
9.2 Complete Agreement. Except as otherwise set forth in this
Agreement, this Agreement shall constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and shall supersede all
prior agreements and understandings, whether written or oral, between the
parties with respect to such subject matter.
9.3 Authority. Each of the parties hereto represents to the other that
(i) it has the corporate power and authority to execute, deliver and perform
this Agreement, (ii) the execution, delivery and performance of this Agreement
by it has been duly authorized by all necessary corporate action, (iii) it has
duly and validly executed and delivered this Agreement, and (iv) this Agreement
is a legal, valid and binding obligation, enforceable against it in accordance
with its terms subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equity principles.
9.4 Assignment. This Agreement shall be binding on and inure to the
benefit of and be enforceable by the parties hereto and with respect to the
Company, its respective successors and assigns, and any Permitted Transferees.
9.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia (other than the laws regarding
conflicts of laws) as to all matters of validity, construction, effect,
performance and remedies, executed in and to be performed in that State.
9.6 Severability. In the event that any part of this Agreement is
declared by a court or other judicial or administrative body to be null, void or
unenforceable, said provision shall survive to the extent it is not so declared,
and all of the other provisions of this Agreement shall remain in full force and
effect.
9.7 Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given: (i) on the date of service if served personally on the party to whom
notice is to be given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, and telephonic confirmation of
receipt is obtained promptly after completion of transmission; (iii) on the day
after delivery to Federal Express or similar overnight courier or the Express
Mail service maintained by the United States Postal Service; or (iv) on the
fifth day after mailing, if mailed to the party to whom notice is to be given,
by first class mail, registered or certified, postage prepaid and properly
addressed, to the party as follows:
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If to Southern:
with a copy to:
If to any other Holder, the address indicated for such Holder in the
Company's stock transfer records
with a copy, so long as Southern owns any Shares, to:
If to the Company:
Any party may change its address for the purpose of this Section 9.7 by
giving the other party written notice of its new address in the manner set forth
above.
9.8 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
9.9 Remedies. Each of Southern and the Company shall be entitled to
enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys' fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. Each of Southern and the Company acknowledges and agrees that under
certain circumstances the breach by Southern or any of its affiliates or the
Company or any of its affiliates of a term or provision of this Agreement will
materially and irreparably harm the other party, that money damages will
accordingly not be an adequate remedy for such breach and that the
non-defaulting party, in its sole discretion and in addition to its rights under
this Agreement and any other remedies it may have at law or in equity, may apply
to any court of law or equity of
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<PAGE> 16
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
breach of the provisions of this Agreement.
9.10 Waivers. The observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively) by the party entitled to enforce such term, but such waiver shall
be effective only if it is in writing signed by the Company and the Holders of a
majority of the Shares. Unless otherwise expressly provided in this Agreement,
no delay or omission on the part of any party in exercising any right or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any right or privilege under this Agreement
operate as a waiver of any other right or privilege under this Agreement nor
shall any single or partial exercise of any right or privilege preclude any
other or further exercise thereof or the exercise of any other right or
privilege under this Agreement. No failure by either party to take any action or
assert any right or privilege hereunder shall be deemed to be a waiver of such
right or privilege in the event of the continuation or repetition of the
circumstances giving rise to such right unless expressly waived in writing by
the party against whom the existence of such waiver is asserted.
9.11 Amendment and Modification. This Agreement may not be amended or
modified in any respect except by a written agreement signed by the Company and
the Holders of a majority of the Shares.
9.12 Section and Paragraph Headings. The section and paragraph headings
in this Agreement are for reference purposes only, are not part of the agreement
of the parties hereto, and shall not affect the meaning or interpretation of
this Agreement. All references to days or months shall be deemed references to
calendar days or months. Unless the context otherwise requires, any reference to
a "Section" shall be deemed to refer to a section of this Agreement. The words
"hereof," "herein" and "hereunder" and words of similar import referring to this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, unless otherwise specifically provided, they shall be
deemed to be followed by the words "without limitation." This Agreement shall be
construed without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing the document to be drafted.
9.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may be
executed by facsimile signature.
* * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first written above.
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THE SOUTHERN COMPANY
By:
---------------------------------------
Name:
Title:
SOUTHERN ENERGY, INC.
By:
---------------------------------------
Name:
Title:
17
<PAGE> 1
EXHIBIT 10.9
FORM OF
SOUTHERN ENERGY, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
CONTENTS
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
Article 1. Purpose and Effective Date 1
Article 2. Definitions 1
Article 3. Administration 3
Article 4. Number of Shares 4
Article 5. Eligibility Requirements 4
Article 6. Enrollment 5
Article 7. Grant of Options on Enrollment 5
Article 8. Payment 5
Article 9. Purchase of Shares 6
Article 10. Withdrawal from the Plan, Termination of Employment,
and Leave of Absence 7
Article 11. Designation of Beneficiary 8
Article 12. Miscellaneous 8
</TABLE>
<PAGE> 3
SOUTHERN ENERGY, INC. EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1. PURPOSE AND EFFECTIVE DATE
1.1 The purpose of the Southern Energy, Inc. Employee Stock
Purchase Plan (the "Plan") is to provide an opportunity for employees of
Southern Energy, Inc. (the "Company") to purchase shares of common stock of the
Company in a way which is both convenient and on a basis more favorable than
would otherwise be available. The Company believes that employee participation
in ownership of the Company on this basis will be to the mutual benefit of both
the employee and the Company. It is the intent of the Company to have the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code. The provisions of the Plan shall be construed to extend and limit
participation in a manner consistent with the requirements of Section 423 of the
Internal Revenue Code.
1.2 It is intended that an initial Offering Period and Purchase
Period will begin on the IPO Date and exist for such period as designated by the
Committee prior to the IPO Date. Thereafter, it is intended that any future
Offering Periods and Purchase Periods will commence, if at all, at such times
designated by the Committee.
1.3 The Plan shall be effective on the IPO Date (the "Effective
Date"). The Plan shall remain in effect in accordance with Section 12.7 of the
Plan.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
2.1 "ACCOUNT" means a recordkeeping account maintained for a
Participant to which Participant contributions and payroll
deductions, if applicable, shall be credited.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended.
2.4 "COMPANY" means Southern Energy, Inc., a Delaware corporation.
2.5 "CUT-OFF DATE" means the date established by the Committee
from time to time by which enrollment forms must be received
prior to an Enrollment Date.
2.6 "EFFECTIVE DATE" shall have the meaning ascribed to it in
Section 1.3 hereof.
2.7 "ELIGIBLE EMPLOYEE" means an Employee eligible to participate
in the Plan in accordance with Section 5.
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2.8 "EMPLOYEE" means any active employee of the Company or any
active employee of any company in the Participating Company
Group.
2.9 "ENROLLMENT DATE" means the first Trading Day of an Offering
Period.
2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.11 "FAIR MARKET VALUE" means, as of any applicable date, the
opening sale price on the principal securities exchange on
which the Shares are traded or, if there is no such sale on
the relevant date, then on the last previous day on which a
sale was reported.
2.12 "GRANT DATE" means a date on which an Eligible Employee is
granted an option under the Plan pursuant to Section 7.
2.13 "GRANT PRICE" means the Fair Market Value of a Share on the
Grant Date for such option.
2.14 "IPO DATE" shall mean the first day on which Shares are
publicly traded on the New York Stock Exchange.
2.15 "OFFERING PERIOD" means the period beginning on the IPO Date
and ending on the date designated by the Committee and each
period, if any, thereafter designated by the Committee;
provided, that each period shall, in no event end later than:
(i) five (5) years from the date the option is exercised if
the Purchase Price is to be not less than eighty-five percent
(85%) of the Fair Market Value of the Shares on the Purchase
Date; or (ii) otherwise, twenty-seven (27) months from the
Grant Date. The Offering Period may but need not be the same
as the Purchase Period, as determined by the Committee.
2.16 "PARTICIPANT" means an Eligible Employee who has enrolled in
the Plan pursuant to Section 6.
2.17 "PARTICIPATING COMPANY GROUP" means a Subsidiary which has
been designated by the Committee in accordance with Section
3.2 of the Plan as covered by the Plan.
2.18 "PURCHASE DATE" with respect to a Purchase Period means the
last Trading Day in such Purchase Period.
2.19 "PURCHASE DATE PRICE" means the Fair Market Value of a Share
on the applicable Purchase Date.
2.20 "PURCHASE PERIOD" means the period beginning on the IPO Date
and ending on the date designated by the Committee and each
period, if any, thereafter designated by the Committee;
provided, that each period shall, in no event end later than:
(i) five (5) years from the date the option is exercised if
the Purchase Price is to be not less than eighty-five percent
(85%) of the Fair Market Value of the Shares on the Purchase
Date; or (ii) otherwise, twenty-seven (27) months from the
Grant Date.
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2.21 "PURCHASE PRICE" means the price designated by the Committee,
at which each Share may be purchased under any option, but in
no event less than eighty-five percent (85%) of the lesser of:
(a) The Grant Price, as defined in Section 2.13; and
(b) The Purchase Date Price, as defined in Section 2.19.
2.22 "RETIREMENT" or "RETIRE" means a termination of (or to
terminate) employment with the Company and its subsidiaries
after qualifying for retirement under any applicable
retirement plan of the Company or any company in the
Participating Company Group, as determined by the Committee.
2.23 "RULE 16B-3" means Rule 16b-3 under the Exchange Act.
2.24 "SHARES" means shares of the Company's common stock.
2.25 "SUBSIDIARY" means any corporation in an unbroken chain of
corporations beginning with the Company if, as of the
applicable Enrollment Date, each of the corporations other
than the last corporation in the chain owns stock possessing
fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in
the chain.
2.26 "TRADING DAY" means any day the New York Stock Exchange is
open for trading.
ARTICLE 3. ADMINISTRATION
3.1 The Plan shall be administered by a Committee appointed by the
Board (the "Committee"). The members of the Committee shall be appointed from
time to time by, and shall serve at the discretion of the Board. The Committee
shall have the authority to delegate administrative duties to officers,
directors or employees of the Company.
3.2 The Committee shall have the power, subject to and within the
limits of the express provisions of the Plan, to construe and interpret the Plan
and options granted under it; to establish, amend, and revoke rules and
regulations for administration of the Plan (including, without limitation, the
determination and change of Offering Periods, Purchase Periods and payment
procedures and the establishment of the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars); to determine all questions of
policy and expediency that may arise in the administration of the Plan to make
any changes to the Plan or its operations to reduce or eliminate any unfavorable
accounting consequences to the extent deemed appropriate by the Committee; and,
generally, to exercise such powers and perform such acts as the Committee deems
necessary or expedient to promote the best interests of the Company, including,
but not limited to, designating from time to time which Subsidiaries of the
Company shall be part of the Participating Company Group. The Committee's
determinations as to the interpretation and operation of this Plan shall be
final and conclusive.
3
<PAGE> 6
In exercising the powers described in the foregoing paragraph, the
Committee may adopt special or different rules for the operation of the Plan
including, but not limited to, rules which allow employees of any foreign
Subsidiary to participate in, and enjoy the tax benefits offered by, the Plan;
provided that such rules shall not result in any grantees of options having
different rights and/or privileges under the Plan in violation of Section 423 of
the Code nor otherwise cause the Plan to fail to satisfy the requirements of
Section 423 of the Code and the regulations thereunder.
3.3 The Plan provisions relating to the administration of the Plan
may be amended by the Committee from time to time as may be desirable to satisfy
any requirements of or under the federal securities and/or other applicable laws
of the United States, to obtain any exemption under such laws, or to reduce or
eliminate any unfavorable accounting consequences.
ARTICLE 4. NUMBER OF SHARES
4.1 _________ Shares are reserved for sale and authorized for
issuance pursuant to the Plan. If any option granted under the Plan shall for
any reason terminate without having been exercised, the Shares not purchased
under such option shall again become available for the Plan.
4.2 ADJUSTMENTS. In the event of any change in corporate
capitalization such as a stock split, or a corporate transaction such as any
merger, consolidation, separation, including a spin-off, or other distribution
of stock or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Code Section 368) or
any partial or complete liquidation of the Company, the Committee may make such
adjustment it deems appropriate to prevent dilution or enlargement of rights in
the number and class of Shares which may be delivered under Section 4.1, in the
number, class of and/or price of Shares available for purchase under the Plan
and in the number of Shares which an Employee is entitled to purchase and any
other adjustments it deems appropriate. Without limiting the Committee's
authority under this Plan, in the event of any transaction, the Committee may
elect to have the options hereunder assumed or such options substituted by a
successor entity, to terminate all outstanding options either prior to their
expiration or upon completion of the purchase of Shares on the next Purchase
Date, or to take such other action deemed appropriate by the Committee.
ARTICLE 5. ELIGIBILITY REQUIREMENTS
5.1 Except as provided in Section 5.2, each Employee shall become
eligible to participate in the Plan in accordance with Section 6 on the first
Enrollment Date on or following the later of (a) the date such individual
becomes an Employee; or (b) the Effective Date. Participation in the Plan is
entirely voluntary.
5.2 The following Employees are not eligible to participate in the
Plan:
(a) Employees who, immediately upon purchasing Shares
under the Plan, would own directly or indirectly, or
hold options or rights to acquire, an aggregate of
five percent (5%) or more of the total combined
voting power or value of all outstanding shares of
all classes of stock of the Company or any Subsidiary
(and for purposes of this paragraph, the rules of
Section 424(d) of the Code shall apply,
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<PAGE> 7
and stock which the Employee may purchase under
outstanding options shall be treated as stock owned
by the Employee);
(b) Employees whose customary employment is for not more
than five (5) months in any calendar year; and
(c) Employees whose customary employment is twenty (20)
hours or less per week.
ARTICLE 6. ENROLLMENT
All Eligible Employees as of the Effective Date shall be deemed
enrolled in the Plan with respect to the Offering Period beginning on the IPO
Date. Thereafter, any Eligible Employee may enroll in the Plan for any future
Offering Period by completing and signing an enrollment election form or by such
other means as the Committee shall prescribe and submitting such enrollment
election to the Company or a member of the Participating Company Group in
accordance with procedures established by the Committee on or before the Cut-Off
Date with respect to such Offering Period.
ARTICLE 7. GRANT OF OPTIONS ON ENROLLMENT
7.1 Enrollment by an Eligible Employee in the Plan as of an
Enrollment Date will constitute the grant by the Company to such Participant of
an option on such Enrollment Date to purchase Shares from the Company pursuant
to the Plan.
7.2 An option granted to a Participant pursuant to this Plan shall
expire, if not terminated for any reason first, on the earliest to occur of (a)
the end of the Offering Period in which such option was granted; (b) the
completion of the purchase of Shares under the option under Section 9; or (c)
the date on which participation of such Participant in the Plan terminates for
any reason.
7.3 An option granted to a Participant under the Plan shall give
the Participant a right to purchase on a Purchase Date the largest number of
whole or fractional Shares, as designated by the Committee, which the funds
accumulated in the Participant's Account as of such Purchase Date will purchase
at the applicable Purchase Price; provided, however, that the Committee may, in
its discretion, limit the number of Shares purchased by each Participant in any
Purchase Period.
Notwithstanding anything to the contrary herein, no Employee shall be
granted an option under the Plan (or any other plan of the Company or a
Subsidiary intended to qualify under Section 423 of the Code) which would permit
the Employee to purchase Shares under the Plan (and such other plan) in any
calendar year with a Fair Market Value (determined at the time such option is
granted) in excess of $25,000.
ARTICLE 8. PAYMENT
The Committee may designate the time and manner for payment of Shares
to be purchased during the Purchase Period, including, but not limited to,
payment by each Participant in cash or by certified check on a date designated
by the Committee prior to the Purchase Date, or through payroll deductions, the
terms and conditions of which are designated by the Committee. Payment amounts
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<PAGE> 8
shall be credited to a Participant's Account under this Plan. All payment
amounts may be used by the Company for any purpose and the Company shall have no
obligation to segregate such funds. No interest accrues on payments by
Participants.
ARTICLE 9. PURCHASE OF SHARES
9.1 Any option held by the Participant which was granted under
this Plan and which remains outstanding as of a Purchase Date shall be deemed to
have been exercised on such Purchase Date for the number of whole or fractional
Shares, as designated by the Committee, which the funds accumulated in the
Participant's Account as of the Purchase Date will purchase at the applicable
Purchase Price (but not in excess of the number of Shares for which options have
been granted to the Participant pursuant to Section 7.3). Options for other
Shares for which options have been granted which are not purchased on the last
Purchase Date during the Offering Period shall terminate.
9.2 If, after a Participant's exercise of an option under Section
9.1, an amount remains credited to the Participant's Account as of a Purchase
Date, then the remaining amount shall be (a) if no further Purchase Periods are
immediately contemplated by the Committee, distributed to the Participant as
soon as administratively feasible, or (b) if another Purchase Period is
contemplated by the Committee, carried forward in the Account for application to
the purchase of Shares on the next following Purchase Date. 9.3 If Shares are
purchased by a Participant pursuant to Section 9.1, then, within a reasonable
time after the Purchase Date, the Company shall deliver or cause to be delivered
to the Participant a certificate or certificates for the whole number of Shares
purchased by the Participant unless the Company has made arrangements to have
the Shares held at a bank or other appropriate institution in noncertificated
form. If any law or applicable regulation of the Securities and Exchange
Commission or other body having jurisdiction shall require that the Company or
the Participant take any action in connection with the Shares being purchased
under the option, delivery of the certificate or certificates for such Shares
shall be postponed until the necessary action shall have been completed, which
action shall be taken by the Company at its own expense, without unreasonable
delay. Certificates delivered pursuant to this Section 9.3 shall be registered
in the name of the Participant or, if the Participant so elects, in the names of
the Participant and his or her spouse, as joint tenants with rights of
survivorship, or as spousal community property, or in certain forms of trust
approved by the Committee, to the extent permitted by law.
9.4 In the case of Participants employed by a member of the
Participating Company Group, the Committee may provide for Shares to be sold
through the Subsidiary to such Participants, to the extent consistent with
Section 423 of the Code.
9.5 If the total number of Shares for which options are or could
be exercised on any Purchase Date in accordance with this Section 9, when
aggregated with all Shares for which options have been previously exercised
under this Plan, exceeds the maximum number of Shares reserved in Section 4.1,
the Company shall allocate the Shares available for delivery and distribution in
the ratio that the balance in each Participant's Account bears to the aggregate
balances of all Participants' Accounts, and the remaining balance of the amount
credited to the Account of each Participant under the Plan shall be returned to
him or her as promptly as possible.
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<PAGE> 9
9.6 If a Participant or former Participant sells, transfers, or
otherwise makes a disposition of Shares purchased pursuant to an option granted
under the Plan within two (2) years after the date such option is granted or
within one (1) year after the date such Shares were transferred to the
Participant, and if such Participant or former Participant is subject to United
States federal income tax, then such Participant or former Participant shall
notify the Company or a member of the Participating Company Group in writing of
such sale, transfer or other disposition within ten (10) days of the
consummation of such sale, transfer, or other disposition.
ARTICLE 10. WITHDRAWAL FROM THE PLAN, TERMINATION OF EMPLOYMENT, AND LEAVE OF
ABSENCE
10.1 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the
Plan in full (but not in part) during any Purchase Period by delivering a notice
of withdrawal to the Company or a member of the Participating Company Group (in
a manner prescribed by the Committee) at any time up to but not including the
fifteen (15) days prior to the Purchase Date next following the date such notice
of withdrawal is delivered, or at such shorter time in advance of such Purchase
Date as the Committee may permit. If notice of withdrawal is timely received,
all funds then accumulated in the Participant's Account shall not be used to
purchase Shares, but shall instead be distributed to the Participant as soon as
administratively feasible. An Employee who has withdrawn during a Purchase
Period may not return funds to the Company or a member of the Participating
Company Group during the same Purchase Period and require the Company or member
of the Participating Company Group to apply those funds to the purchase of
Shares. Any Eligible Employee who has withdrawn from the Plan may, however,
re-enroll in the Plan on the next subsequent Enrollment Date, if any.
10.2 TERMINATION OF EMPLOYMENT. Participation in the Plan
terminates immediately when a Participant ceases to be employed by the Company
or a member of the Participating Company Group for any reason whatsoever or
otherwise ceases to be an Eligible Employee, and such terminated Participant's
outstanding options shall thereupon terminate. As soon as administratively
feasible after termination of participation, the Company or a member of the
Participating Company Group shall pay to the Participant or his or her
beneficiary or legal representative any amounts accumulated in the Participant's
Account at the time of termination of participation. Notwithstanding anything to
the contrary herein, if a Participant ceases to be an Eligible Employee by
reason of Retirement, death, or any other reason contemplated in Section 5.2
hereof and the Purchase Date is within three (3) months of the date the
Participant ceases to be an Eligible Employee, the Participant (or his or her
designated beneficiary, as applicable) shall have the right, upon ceasing to be
an Eligible Employee and in accordance with procedures prescribed by the
Committee, to elect to continue to participate in the Plan in accordance with
Section 10.1 through the end of the Purchase Period.
10.3 LEAVE OF ABSENCE. If a Participant takes a leave of absence
without terminating employment, such Participant shall have the right, at the
commencement of the leave of absence and in accordance with procedures
prescribed by the Committee, to elect to withdraw from the Plan in accordance
with Section 10.1. To the extent determined by the Committee or required by
Section 423 of the Code, certain leaves of absence may be treated as cessations
of employment for purposes of the Plan.
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<PAGE> 10
ARTICLE 11. DESIGNATION OF BENEFICIARY
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom the amount in his or her Account is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during the Participant's lifetime. In
the absence of any such designation, any Account balance remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
ARTICLE 12. MISCELLANEOUS
12.1 RESTRICTIONS ON TRANSFER. Options granted under the Plan to a
Participant may not be exercised during the Participant's lifetime other than by
the Participant. Neither amounts credited to a Participant's Account nor any
rights with respect to the exercise of an option or to receive stock under the
Plan may be assigned, transferred, pledged, or otherwise disposed of in any way
by the Participant other than by will or the laws of descent and distribution.
Any such attempted assignment, transfer, pledge, or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw from the Plan in accordance with Section 10.1.
12.2 ADMINISTRATIVE ASSISTANCE. If the Committee in its discretion
so elects, it may retain a brokerage firm, bank, or other financial institution
to assist in the purchase of Shares, delivery of reports, or other
administrative aspects of the Plan. If the Committee so elects, each Participant
shall (unless prohibited by applicable law) be deemed upon enrollment in the
Plan to have authorized the establishment of an account on his or her behalf at
such institution. Shares purchased by a Participant under the Plan shall be held
in the Account in the Participant's name, or if the Participant so indicates in
the enrollment form, in the Participant's name together with the name of his or
her spouse in joint tenancy with right of survivorship or spousal community
property, or in certain forms of trust approved by the Committee.
12.3 COSTS. All costs and expenses incurred in administering the
Plan shall be paid by the Company, except that any stamp duties, transfer taxes,
and any brokerage fees applicable to participation in the Plan may be charged to
the Account of such Participant by the Company.
12.4 WITHHOLDING. The Company or any member of the Participating
Company Group shall have the power and the right to deduct or withhold, or
require a Participant to remit to the Company or any member of the Participating
Company Group, an amount sufficient to satisfy Federal, state and local taxes,
domestic or foreign, required by law or regulation to be withheld with respect
to any taxable event arising as a result of this Plan.
12.5 EQUAL RIGHTS AND PRIVILEGES. All Eligible Employees shall have
equal rights and privileges with respect to the Plan so that the Plan qualifies
as an "employee stock purchase plan" within the meaning of Section 423 or any
successor provision of the Code and the related regulations. Notwithstanding the
express terms of the Plan, any provision of the Plan which is inconsistent with
Section 423 or any successor provision of the Code shall without further act or
amendment by the Company or the Board be reformed to comply with the
requirements of Section 423 of the Code. This Section 12.5 shall take precedence
over all other provisions in the Plan.
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<PAGE> 11
12.6 APPLICABLE LAW. The Plan shall be governed by the substantive
laws (excluding the conflict of laws rules) of the State of Delaware.
12.7 AMENDMENT AND TERMINATION. The Board may amend, alter, or
terminate the Plan at any time; provided, however, that (1) the Plan may not be
amended in a way which will cause rights issued under the Plan to fail to meet
the requirements of Section 423 of the Code; and (2) no amendment which would
amend or modify the Plan in a manner requiring stockholder approval under
Section 423 of the Code or the requirements of any securities exchange on which
the Shares are traded shall be effective unless such stockholder approval is
obtained. In addition, the Committee may amend the Plan as provided in Section
3.3, subject to the conditions set forth therein and in this Section 12.7.
If the Plan is terminated, the Board or Committee may elect to
terminate all outstanding options either prior to their expiration or upon
completion of the purchase of Shares on the next Purchase Date, or may elect to
permit options to expire in accordance with their terms (and participation to
continue through such expiration dates). If the options are terminated prior to
expiration, all funds accumulated in Participants' Accounts as of the date the
options are terminated shall be returned to the Participants as soon as
administratively feasible.
12.8 NO RIGHT OF EMPLOYMENT. Neither the grant nor the exercise of
any rights to purchase Shares under this Plan nor anything in this Plan shall
impose upon the Company or a member of the Participating Company Group any
obligation to employ or continue to employ any Employee. The right of the
Company or a member of the Participating Company Group to terminate any Employee
shall not be diminished or affected because any rights to purchase Shares have
been granted to such Employee.
12.9 RIGHTS AS SHAREHOLDER. No Participant shall have any rights as
shareholder unless and until Shares of Common Stock have been issued to him or
her.
12.10 GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver Shares of the Company's common stock under this Plan is subject to the
approval of any governmental authority required in connection with the
authorization, issuance, or sale of such Shares.
12.11 GENDER. When used herein, masculine terms shall be deemed to
include the feminine, except when the context indicates to the contrary.
12.12 CONDITION FOR PARTICIPATION. As a condition to participation
in the Plan, Eligible Employees agree to be bound by the terms of the Plan
(including, without limitation, the notification requirements of Section 9.6)
and the determinations of the Committee.
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<PAGE> 12
Executed this __________ day of _____________, 2000.
SOUTHERN ENERGY, INC.
By:
-------------------------
Title:
----------------------
10
<PAGE> 1
EXHIBIT 10.10
FORM OF
SOUTHERN ENERGY, INC.
OMNIBUS INCENTIVE COMPENSATION PLAN
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Article 1. Establishment, Objectives, and Duration 1
Article 2. Definitions 1
Article 3. Administration 6
Article 4. Shares Subject to the Plan and Maximum Awards 6
Article 5. Eligibility and Participation 7
Article 6. Stock Options 8
Article 7. Stock Appreciation Rights 9
Article 8. Restricted Stock 11
Article 9. Performance Units, Performance Shares, and Cash-Based Awards 12
Article 10. Performance Measures 13
Article 11. Beneficiary Designation 14
Article 12. Deferrals 14
Article 13. Rights of Employees/Directors 14
Article 14. Change in Control and Termination Events 15
Article 15. Amendment, Modification, and Termination 17
Article 16. Withholding 18
Article 17. Indemnification 18
Article 18. Successors 18
Article 19. Legal Construction 19
</TABLE>
<PAGE> 3
SOUTHERN ENERGY, INC. OMNIBUS INCENTIVE COMPENSATION PLAN
ARTICLE 1. ESTABLISHMENT, OBJECTIVES, AND DURATION
1.1. ESTABLISHMENT OF THE PLAN. Southern Energy, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), hereby establishes an
incentive compensation plan to be known as the "Southern Energy, Inc. Omnibus
Incentive Compensation Plan" (hereinafter referred to as the "Plan"), as set
forth in this document. The Plan permits the grant of Nonqualified Stock
Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Shares, Performance Units, and Cash-Based Awards.
Subject to approval by the Company's stockholders, the Plan shall become
effective as of April 17, 2000 (the "Effective Date") and shall remain in effect
as provided in Section 1.3 hereof.
1.2. OBJECTIVES OF THE PLAN. The objectives of the Plan are to optimize
the profitability and growth of the Company through annual and long-term
incentives which are consistent with the Company's goals and which link the
personal interests of Participants to those of the Company's stockholders; to
provide Participants with an incentive for excellence in individual performance;
and to promote teamwork among Participants.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants to
share in the success of the Company.
1.3. DURATION OF THE PLAN. The Plan shall commence on the Effective Date,
as described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Board of Directors to amend or terminate the Plan at any time
pursuant to Article 15 hereof, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may an Award be granted under the Plan on or after April 17, 2010.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
2.1. "AFFILIATE" shall mean any Person affiliated with the Company
as determined by the Committee.
2.2. "AWARD" means, individually or collectively, a grant under
this Plan of Nonqualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock,
Performance Shares, Performance Units, or Cash-Based Awards.
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<PAGE> 4
2.3. "AWARD AGREEMENT" means an agreement entered into by the
Company and each Participant setting forth the terms and
provisions applicable to Awards granted under this Plan.
2.4. "BASE VALUE" shall mean the Fair Market Value of a Stock
Appreciation Right on the date of grant.
2.5. "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act.
2.6. "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors
of the Company.
2.7. "BUSINESS COMBINATION" shall mean a reorganization (except
spin-off or initial public offering), merger or consolidation
or sale of the Southern Company or sale of all or
substantially all of Southern Company's assets.
2.8. "CASH-BASED AWARD" means an Award granted to a Participant, as
described in Article 9 herein.
2.9. "CHANGE IN CONTROL" of the Company shall be deemed to have
occurred as determined by the Committee and unless specified
otherwise in the Award Agreement shall mean a SEI Change of
Control until such time that Change in Control is defined
differently by the Committee or Board for purposes of this
Plan, which change in definition is expected to occur after
the spin-off of the Company to holders of the Southern Company
shares.
2.10. "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
2.11. "COMMITTEE" means the Board or any committee or committees
appointed by the Board to administer Awards to Employees, as
specified in Article 3 herein. To the extent deemed
appropriate by the Board, any such committee may be comprised
of Directors who constitute "outside directors" under Code
Section 162(m) and "Non-Employee Directors" under Rule 16b-3
of the Exchange Act.
2.12. "COMMON STOCK" shall mean the common stock of the Company.
2.13. "COMPANY" means Southern Energy, Inc., a Delaware corporation,
including any and all Subsidiaries and Affiliates, and any
successor thereto as provided in Article 18 herein.
2.14. "CONSUMMATION" shall mean the completion of the final act
necessary to complete a transaction as a matter of law,
including, but not limited to, any required approvals by the
corporation's shareholders and board of directors, the
transfer of legal and beneficial title to securities or assets
and the final approval of the transaction by any applicable
domestic or foreign governments or agencies.
2.15. "CONTROL" shall mean, in the case of a corporation, Beneficial
Ownership of more than 50% of the combined voting power of the
corporation's Voting Securities, or in the case of any other
entity, Beneficial Ownership of more than 50% of such entity's
voting equity interests.
2.16. "COVERED EMPLOYEE" means a Participant who, as of the date of
vesting and/or payout of an Award, as applicable, is one of
the group of "covered employees," as defined in the
regulations promulgated under Code Section 162(m), or any
successor statute.
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<PAGE> 5
2.17. "DIRECTOR" means any individual who is a member of the Board
of Directors of the Company or any Subsidiary or Affiliate;
provided, however, that any Director who is employed by the
Company or any Subsidiary or Affiliate shall be considered an
Employee under the Plan.
2.18. "DISABILITY" shall have the meaning ascribed to such term in
the Participant's governing long-term disability plan, or if
no such plan exists, at the discretion of the Committee.
2.19. "EFFECTIVE DATE" shall have the meaning ascribed to such term
in Section 1.1 hereof.
2.20. "EMPLOYEE" means any employee of the Company or its
Subsidiaries or Affiliates. Directors who are employed by the
Company shall be considered Employees under this Plan.
2.21. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
2.22. "FAIR MARKET VALUE" shall be determined on the basis of the
opening sale price on the principal securities exchange on
which the Shares are traded or, if there is no such sale on
the relevant date, then on the last previous day on which a
sale was reported; if the Shares are not listed for trading on
a national securities exchange, the fair market value of the
Shares shall be determined by the Committee in good faith.
2.23. "FREESTANDING SAR" means an SAR that is granted independently
of any Options, as described in Article 7 herein.
2.24. "GROUP" shall have the meaning ascribed to such term in
Section 13(d)(3) or 14(d)(2) of the Exchange Act.
2.25. "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase
Shares granted under Article 6 herein and which is designated
as an Incentive Stock Option and which is intended to meet the
requirements of Code Section 422.
2.26. "INSIDER" shall mean an individual who is, on the relevant
date, an officer, director or ten percent (10%) beneficial
owner of any class of the Company's equity securities that is
registered pursuant to Section 12 of the Exchange Act, all as
defined under Section 16 of the Exchange Act.
2.27. "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to
purchase Shares granted under Article 6 herein and which is
not intended to meet the requirements of Code Section 422.
2.28. "NORMAL RETIREMENT AGE" means age sixty-five (65) or such
other age as the Committee shall determine.
2.29. "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option, as described in Article 6 herein.
3
<PAGE> 6
2.30. "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option.
2.31. "PARTICIPANT" means an Employee or Director who has been
selected to receive an Award or who has outstanding an Award
granted under the Plan.
2.32. "PERFORMANCE-BASED EXCEPTION" means the performance-based
exception from the tax deductibility limitations of Code
Section 162(m).
2.33. "PERFORMANCE SHARE" means an Award granted to a Participant,
as described in Article 9 herein.
2.34. "PERFORMANCE UNIT" means an Award granted to a Participant, as
described in Article 9 herein.
2.35. "PERIOD OF RESTRICTION" means the period during which the
transfer of Shares of Restricted Stock is limited in some way
(based on the passage of time, the achievement of performance
goals, or upon the occurrence of other events as determined by
the Committee, at its discretion), and the Shares are subject
to a substantial risk of forfeiture, as provided in Article 8
herein.
2.36. "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d)
and 14(d) thereof, including a "group" within the meaning of
Section 13(d)(3) or 14(d)(2) thereof.
2.37. "RESTRICTED STOCK" means an Award granted to a Participant
pursuant to Article 8 herein.
2.38. "RETIREMENT" means termination of employment on or after
Normal Retirement Age for reasons other than cause, as
determined by the Committee.
2.39. "SEI CHANGE IN CONTROL" shall mean the following:
(a) The Consummation of an acquisition by any Person of
Beneficial Ownership of 50% or more of the combined voting
power of the then outstanding Voting Securities of the
Company; provided, however, that for purposes of this
definition, any acquisition by an Employee, or Group
composed entirely of Employees, any qualified pension plan,
any publicly held mutual fund or any employee benefit plan
(or related trust) sponsored or maintained by Southern
Company or any corporation Controlled by Southern Company
shall not constitute an SEI Change in Control;
(b) Consummation of a reorganization (except a spin-off or
initial public offering), merger or consolidation of the
Company, in each case, unless, following such Business
Combination, Southern Company Controls the corporation
surviving or resulting from such Business Combination; or
4
<PAGE> 7
(c) Consummation of the sale or other disposition of all or
substantially all of the assets of the Company to an entity
which Southern Company does not Control.
2.40. "SHARES" means the shares of common stock of the Company.
2.41. "SOUTHERN BOARD" shall mean the board of directors of Southern
Company.
2.42. "SOUTHERN COMPANY" shall mean Southern Company, its successors
and assigns.
2.43. "SOUTHERN TERMINATION" shall mean the following:
(a) The Consummation of a reorganization (except a spin-off or
initial public offering), merger or consolidation of
Southern Company under circumstances where either (i)
Southern Company is not the surviving corporation or (ii)
Southern Company's Voting Securities are no longer publicly
traded;
(b) The sale or other disposition of all or substantially all
of Southern Company's assets; or
(c) The Consummation of an acquisition by any Person of
Beneficial Ownership of all of Southern Company's Voting
Securities such that Southern Company's Voting Securities
are no longer publicly traded.
2.44. "STOCK APPRECIATION RIGHT" or "SAR" means an Award, granted
alone or in connection with a related Option, designated as an
SAR, pursuant to the terms of Article 7 herein.
2.45. "SUBSIDIARY" means any corporation, partnership, joint
venture, or other entity in which the Company has a voting
interest.
2.46. "TANDEM SAR" means an SAR that is granted in connection with a
related Option pursuant to Article 7 herein, the exercise of
which shall require forfeiture of the right to purchase a
Share under the related Option (and when a Share is purchased
under the Option, the Tandem SAR shall similarly be canceled).
2.47. "TERMINATION EVENT" shall be deemed to have occurred as
determined by the Committee and unless specified otherwise in
the Award Agreement shall mean a Southern Termination until
such time that Termination Event is defined differently by the
Committee or Board for purposes of this Plan, which change in
definition is expected to occur after the spin-off of the
Company to holders of the Southern Company shares.
2.48. "VOTING SECURITIES" shall mean the outstanding voting
securities of a corporation entitling the holder thereof to
vote generally in the election of such corporation's
directors.
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<PAGE> 8
ARTICLE 3. ADMINISTRATION
3.1. GENERAL. The Plan shall be administered by the Board or the committee
appointed by the Board to administer the Plan. The members of the Committee
shall be appointed from time to time by, and shall serve at the discretion of,
the Board of Directors. The Board may delegate to the Committee any or all of
the administration of the Plan; provided, however, that the administration of
the Plan with respect to Awards granted to Directors may not be so delegated. To
the extent that the Board has delegated to the Committee any authority and
responsibility under the Plan, all applicable references to the Board in the
Plan shall be to the Committee. The Committee shall have the authority to
delegate administrative duties to officers, Directors, or Employees of the
Company.
3.2. AUTHORITY OF THE COMMITTEE. Except as limited by law or by the
Articles of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to select Employees and
Directors who shall participate in the Plan; determine the sizes and types of
Awards; determine the terms and conditions of Awards in a manner consistent with
the Plan; certify satisfaction of performance goals for purposes of satisfying
the requirements of Code Section 162(m); construe and interpret the Plan and any
agreement or instrument entered into under the Plan; establish, amend, or waive
rules and regulations for the Plan's administration; to authorize conversion or
substitution under the Plan of any or all outstanding option or other awards
held by service providers of an entity acquired by the Company on terms
determined by the Committee (without regard to limitations set forth in Section
6.3 and 7.6); and (subject to the provisions of Articles 14 and 15 herein) amend
the terms and conditions of any outstanding Award as provided in the Plan.
Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. To the extent
permitted by law and applicable rules of a stock exchange, the Committee may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it.
3.3. DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive and binding on all
persons, including the Company, its stockholders, Directors, Employees,
Participants, and their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1. NUMBER OF SHARES AVAILABLE FOR GRANTS. Subject to adjustment as
provided in Section 4.2 herein, the number of Shares hereby reserved for
issuance to Participants under the Plan shall be __________________
(____________), no more than _________________ (_____________) of which may be
granted in the form of Restricted Shares and no more than ___________ (_______)
of which may be granted in the form of Incentive Stock Options. The Committee
shall determine the appropriate methodology for calculating the number of shares
issued pursuant to the Plan. Unless and until the Committee determines that an
Award to a Covered Employee shall not be designed to comply with the
Performance-Based Exception, the following rules shall apply to grants of such
Awards under the Plan:
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<PAGE> 9
(a) STOCK OPTIONS: The maximum aggregate number of Shares that
may be granted in the form of Stock Options, pursuant to
any Award granted in any one fiscal year to any one single
Participant shall be ________________ (______________).
(b) SARS: The maximum aggregate number of Shares that may be
granted in the form of Stock Appreciation Rights, pursuant
to any Award granted in any one fiscal year to any one
single Participant shall be _________________
(_____________).
(c) RESTRICTED STOCK: The maximum aggregate grant with respect
to Awards of Restricted Stock granted in any one fiscal
year to any one Participant shall be _________________
(_______________).
(d) PERFORMANCE SHARES/PERFORMANCE UNITS AND CASH-BASED AWARDS:
The maximum aggregate payout (determined as of the end of
the applicable performance period) with respect to
Cash-Based Awards or Awards of Performance Shares or
Performance Units granted in any one fiscal year to any one
Participant shall be equal to the value of
__________________ (_______________) Shares.
4.2. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment may
be made in the number and class of Shares which may be delivered under Section
4.1, in the number and class of and/or price of Shares subject to outstanding
Awards granted under the Plan, and in the Award limits set forth in subsections
4.1(a) and 4.1(b), as may be determined to be appropriate by the Committee, in
its sole discretion; provided, however, that the number of Shares subject to any
Award shall always be a whole number, except as otherwise determined by the
Committee.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1. ELIGIBILITY. Persons eligible to participate in this Plan include all
Employees and Directors.
5.2. ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees and
Directors, those to whom Awards shall be granted and shall determine the nature
and amount of each Award.
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<PAGE> 10
ARTICLE 6. STOCK OPTIONS
6.1. GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Participants in such number, and upon such terms, and
at any time and from time to time as shall be determined by the Committee.
6.2. AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Award Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Code Section 422, or an
NQSO whose grant is intended not to fall under the provisions of Code Section
422.
6.3. OPTION PRICE. The Option Price for each grant of an Option under this
Plan shall be at least equal to one hundred percent (100%) of the Fair Market
Value of a Share on the date the Option is granted.
6.4. DURATION OF OPTIONS. Each Option granted to a Participant shall
expire at such time as the Board shall determine at the time of grant; provided,
however, that no Option shall be exercisable later than the tenth (10th)
anniversary date of its grant.
6.5. EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant.
6.6. PAYMENT. Options granted under this Article 6 shall be exercised by
the delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), or (c) by a combination of
(a) and (b).
The Board also may allow cashless exercise as permitted under Federal
Reserve Committee's Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee determines to be
consistent with the Plan's purpose and applicable law.
Subject to any governing rules or regulations, as soon as practicable
after receipt of a written notification of exercise and full payment, the
Company shall deliver to the Participant, in the Participant's name, Share
certificates in an appropriate amount based upon the number of Shares purchased
under the Option(s) or make arrangements to have the Shares held at a bank or
other appropriate institution in noncertificated form.
Unless otherwise determined by the Committee, all payments under all of
the methods indicated above shall be paid in United States dollars.
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6.7. RESTRICTIONS ON SHARE TRANSFERABILITY. The Board may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
6.8. TERMINATION OF EMPLOYMENT/DIRECTORSHIP. Each Participant's Option
Award Agreement shall set forth the extent to which the Participant shall have
the right to exercise the Option following termination of the Participant's
employment or directorship with the Company. Such provisions shall be determined
in the sole discretion of the Committee, shall be included in the Award
Agreement entered into with each Participant, need not be uniform among all
Options issued pursuant to this Article 6, and may reflect distinctions based on
the reasons for termination.
6.9. NONTRANSFERABILITY OF OPTIONS.
(a) INCENTIVE STOCK OPTIONS. No ISO granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all ISOs
granted to a Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant.
(b) NONQUALIFIED STOCK OPTIONS. Except as otherwise provided in a
Participant's Award Agreement, no NQSO granted under this Article 6 may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all NQSOs granted to a
Participant under this Article 6 shall be exercisable during his or her lifetime
only by such Participant.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1. GRANT OF SARS. Subject to the terms and conditions of the Plan, SARs
may be granted to Participants at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination of these forms of SAR.
The Committee shall have complete discretion in determining the number of
SARs granted to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and conditions
pertaining to such SARs.
The grant price of a Freestanding SAR shall equal the Fair Market Value of
a Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Option Price of the related Option.
7.2. EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
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Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
7.3. EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole discretion,
imposes upon them.
7.4. SAR AGREEMENT. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR, and such
other provisions as the Committee shall determine.
7.5. TERM OF SARS. The term of an SAR granted under the Plan shall be
determined by the Board, in its sole discretion; provided, however, that such
term shall not exceed ten (10) years.
7.6. PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall
be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on
the date of exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is
exercised.
At the discretion of the Committee, the payment upon SAR exercise may be
in cash, in Shares of equivalent value, or in some combination thereof. The
Committee's determination regarding the form of SAR payout shall be set forth in
the Award Agreement pertaining to the grant of the SAR.
7.7. TERMINATION OF EMPLOYMENT/DIRECTORSHIP. Each SAR Award Agreement
shall set forth the extent to which the Participant shall have the right to
exercise the SAR following termination of the Participant's employment or
directorship with the Company. Such provisions shall be determined in the sole
discretion of the Committee, shall be included in the Award Agreement entered
into with Participants, need not be uniform among all SARs issued pursuant to
the Plan, and may reflect distinctions based on the reasons for termination.
7.8. NONTRANSFERABILITY OF SARS. Except as otherwise provided in a
Participant's Award Agreement, no SAR granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all SARs granted to a
Participant under the Plan shall be exercisable during his or her lifetime only
by such Participant.
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ARTICLE 8. RESTRICTED STOCK
8.1. GRANT OF RESTRICTED STOCK. Subject to the terms and provisions
of the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to Participants in such amounts as the Board shall
determine.
8.2. RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall
be evidenced by a Restricted Stock Award Agreement that shall specify the
Period(s) of Restriction, the number of Shares of Restricted Stock granted, and
such other provisions as the Committee shall determine.
8.3. TRANSFERABILITY. Except as provided in this Article 8, the
Shares of Restricted Stock granted herein may not be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated until the end of the applicable
Period of Restriction established by the Committee and specified in the
Restricted Stock Award Agreement, or upon earlier satisfaction of any other
conditions, as specified by the Committee in its sole discretion and set forth
in the Restricted Stock Award Agreement. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime only to such Participant.
8.4. OTHER RESTRICTIONS. The Committee shall impose such other
conditions and/or restrictions on any Shares of Restricted Stock granted
pursuant to the Plan as it may deem advisable including, without limitation, a
requirement that Participants pay a stipulated purchase price for each Share of
Restricted Stock, restrictions based upon the achievement of specific
performance goals (Company-wide, divisional, and/or individual), time-based
restrictions on vesting following the attainment of the performance goals,
and/or restrictions under applicable federal or state securities laws.
To the extent deemed appropriate by the Committee, the Company may retain
the certificates representing Shares of Restricted Stock in the Company's
possession until such time as all conditions and/or restrictions applicable to
such Shares have been satisfied.
Except as otherwise provided in this Article 8, Shares of Restricted
Stock covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the Participant after the last day of the applicable
Period of Restriction.
8.5. VOTING RIGHTS. If the Committee so determines, Participants
holding Shares of Restricted Stock granted hereunder may be granted the right to
exercise full voting rights with respect to those Shares during the Period of
Restriction.
8.6. DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Participants holding Shares of Restricted Stock granted hereunder
may, if the Committee so determines, be credited with regular cash dividends
paid with respect to the underlying Shares while they are so held. The Committee
may apply any restrictions to the dividends that the Committee deems
appropriate. Without limiting the generality of the preceding sentence, if the
grant or vesting of Restricted Shares granted to a Covered Employee is designed
to comply with the requirements of the Performance-Based Exception, the Board
may apply any restrictions it deems appropriate to the
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payment of dividends declared with respect to such Restricted Shares, such that
the dividends and/or the Restricted Shares maintain eligibility for the
Performance-Based Exception.
8.7. TERMINATION OF EMPLOYMENT/DIRECTORSHIP. Each Restricted Stock
Award Agreement shall set forth the extent to which the Participant shall have
the right to receive unvested Restricted Shares following termination of the
Participant's employment or directorship with the Company. Such provisions shall
be determined in the sole discretion of the Committee, shall be included in the
Award Agreement entered into with each Participant, need not be uniform among
all Shares of Restricted Stock issued pursuant to the Plan, and may reflect
distinctions based on the reasons for termination; provided, however that,
except in the cases connected with a Change in Control or Termination Event and
terminations by reason of death or Disability, the vesting of Shares of
Restricted Stock which qualify for the Performance-Based Exception and which are
held by Covered Employees shall not be accelerated unless the Committee
determines otherwise.
ARTICLE 9. PERFORMANCE UNITS, PERFORMANCE SHARES, AND CASH-BASED AWARDS
9.1. GRANT OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS.
Subject to the terms of the Plan, Performance Units, Performance Shares, and/or
Cash-Based Awards may be granted to Participants in such amounts and upon such
terms, and at any time and from time to time, as shall be determined by the
Committee.
9.2. VALUE OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS. Each
Performance Unit shall have an initial value that is established by the
Committee at the time of grant. Each Performance Share shall have an initial
value equal to the Fair Market Value of a Share on the date of grant. Each
Cash-Based Award shall have a value as may be determined by the Committee. The
Board shall set performance goals in its discretion which, depending on the
extent to which they are met, will determine the number and/or value of
Performance Units/Shares and Cash-Based Awards that will be paid out to the
Participant. For purposes of this Article 9, the time period during which the
performance goals must be met shall be called a "Performance Period."
9.3. EARNING OF PERFORMANCE UNITS/SHARES AND CASH-BASED AWARDS.
Subject to the terms of this Plan, after the applicable Performance Period has
ended, the holder of Performance Units/Shares and Cash-Based Awards shall be
entitled to receive payout on the number and value of Performance Units/Shares
and Cash-Based Awards earned by the Participant over the Performance Period, to
be determined as a function of the extent to which the corresponding performance
goals have been achieved.
9.4. FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES AND
CASH-BASED AWARDS. Payment of earned Performance Units/Shares and Cash-Based
Awards shall be made in a single lump sum or such other form designated by the
Committee following the close of the applicable Performance Period. Subject to
the terms of this Plan, the Committee, in its sole discretion, may pay earned
Performance Units/Shares and Cash-Based Awards in the form of cash or in Shares
(or in a combination thereof) which have an aggregate Fair Market Value equal
to the value of the earned Performance Units/Shares and Cash-Based Awards at
the close of the applicable Performance Period. Such Shares may be granted
subject to any restrictions deemed appropriate by
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<PAGE> 15
the Board. The determination of the Committee with respect to the form of payout
of such Awards shall be set forth in the Award Agreement pertaining to the grant
of the Award.
At the discretion of the Board, Participants may be entitled to receive
any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Units and/or Performance Shares which
have been earned, but not yet distributed to Participants (such dividends may
be subject to the same accrual, forfeiture, and payout restrictions as apply to
dividends earned with respect to Shares of Restricted Stock, as set forth in
Section 8.6 herein as determined by the Committee). In addition, Participants
may, at the discretion of the Committee, be entitled to exercise voting rights
with respect to such Shares.
9.5. TERMINATION OF EMPLOYMENT/DIRECTORSHIP. In the event that a
Participant's employment or directorship terminates for any reason, including
by reason of death, Disability or Retirement, all Performance Units/Shares and
Cash-Based Awards shall be forfeited by the Participant to the Company unless
determined otherwise by the Committee, as set forth in the Participant's Award
Agreement.
9.6. NONTRANSFERABILITY. Except as otherwise provided in a
Participant's Award Agreement, Performance Units/Shares and Cash-Based Awards
may not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, except as otherwise provided in a Participant's Award Agreement, a
Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant or the Participant's legal
representative.
ARTICLE 10. PERFORMANCE MEASURES
Unless and until the Committee proposes for shareholder vote and
shareholders approve a change in the general performance measures set forth in
this Article 10, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Covered Employees which are designed
to qualify for the Performance-Based Exception, the performance measure(s) to
be used for purposes of such grants shall be chosen from among:
(a) Earnings per share;
(b) Net income (before or after taxes);
(c) Return measures (including, but not limited to, return on assets,
equity, or sales);
(d) Cash flow return on investments which equals net cash flows
divided by owners equity;
(e) Earnings before or after taxes;
(f) Gross revenues;
(g) Gross margins; and
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(h) Share price (including, but no limited to, growth measures and
total shareholder return).
The Committee in its sole discretion shall have the ability to set such
performance measures at the corporate level or the subsidiary/business unit
level or set such other performance measures as it deems appropriate with
respect to individuals who are not reasonably likely to be Covered Employees at
the time of payment and/or vesting.
The Committee shall have the discretion to adjust the determinations of
the degree of attainment of the preestablished performance goals; provided,
however, that Awards which are designed to qualify for the Performance-Based
Exception, and which are held by Covered Employee, may not be adjusted upward
(the Committee shall retain the discretion to adjust such Awards downward).
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval. In
addition, in the event that the Committee determines that it is advisable to
grant Awards which shall not qualify for the Performance-Based Exception, the
Committee may make such grants without satisfying the requirements of Code
Section 162(m).
ARTICLE 11. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
ARTICLE 12. DEFERRALS
The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock, or the satisfaction of any requirements or goals with respect to
Performance Units/Shares. If any such deferral election is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
ARTICLE 13. RIGHTS OF EMPLOYEES/DIRECTORS
13.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit
in any way the right of the Company to terminate any Participant's employment at
any time, nor confer upon any Participant any right to continue in the employ of
the Company.
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13.2. PARTICIPATION. No Employee or Director shall have the right to
be selected to receive an Award under this Plan, or, having been so selected, to
be selected to receive a future Award.
13.3 RIGHTS AS A STOCKHOLDER. A Participant shall have none of the
rights of a shareholder with respect to shares of Common Stock covered by any
Award until the Participant becomes the record holder of such shares.
ARTICLE 14. CHANGE IN CONTROL AND TERMINATION EVENT
14.1 TREATMENT OF OUTSTANDING AWARDS.
(a) Change in Control. Notwithstanding any other provision of the
Plan to the contrary, unless the Committee specifies otherwise in
the Award Agreement, in the event of a Change in Control:
(i) Any Options and Stock Appreciation Rights held by an
Employee which are outstanding as of the date such
SEI Change in Control is determined to have occurred,
and which are not then exercisable and vested, shall
become fully exercisable and vested to the full
extent of the original grant; provided, that in the
case of a Participant holding a Stock Appreciation
Right who is subject to Section 16(b) of the Exchange
Act, such Stock Appreciation Right shall not become
fully vested and exercisable at such time if such
actions would result in liability to the Participant
under Section 16(b), provided further, that any such
actions not taken as a result of the rules under
Section 16(b) shall be effected as of the first date
that such activity would no longer result in
liability under such section.
(ii) The restrictions and deferral limitations applicable
to any Restricted Stock held by an Employee shall
lapse, and such Restricted Stock shall become free
of all restrictions and limitations and become fully
vested and transferable to the full extent of the
original grant.
(iii) The restrictions and deferral limitations and other
conditions applicable to any other Awards held by
Employees shall lapse, and such other Awards shall
become free of all restrictions, limitations or
conditions and become fully vested and transferable
to the full extent of the original grant.
(b) Termination Event. Notwithstanding any other provision of
the Plan to the contrary, unless the Committee specifies
otherwise in the Award Agreement, in the event of a
Termination Event:
(i) Any Options and Stock Appreciation Rights which are
outstanding as of the date such Southern Termination
is determined to have occurred, and which
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are not then exercisable and vested, shall become
fully exercisable and vested to the full extent of
the original grant.
(ii) The restrictions and deferral limitations applicable
to any Restricted Stock shall lapse, and such
Restricted Stock shall become free of all
restrictions and limitations and become fully vested
and transferable to the full extent of the original
grant.
(iii) The restrictions and deferral limitations and other
conditions applicable to any other Awards under the
Plan shall lapse, and such other Awards shall become
free of all restrictions, limitations or conditions
and become fully vested and transferable to the full
extent of the original grant.
(iv) Any Options, Stock Appreciation Rights or Restricted
Stock which are outstanding as of the date such
Southern Termination is determined to have occurred,
shall be converted into or replaced by options, stock
appreciation rights or restricted stock, as the case
may be, in the surviving company, or the corporation
which has acquired all of Southern Company's Common
Stock or assets. In the event of such conversion or
replacement, the terms of the replacement options or
stock appreciation rights shall preserve with respect
to each Option and each SAR the spread between the
Fair Market Value of the shares subject to the
Options or SARs and the Option Price or Base Value,
as the case may be, as determined immediately prior
to the Southern Termination. Similarly, the terms of
replacement restricted stock shall preserve the Fair
Market Value of each share of Restricted Stock as
determined immediately prior to the Southern
Termination. No replacement option, stock
appreciation right or share of restricted stock
received shall be subject to any terms which are less
favorable than those which existed with respect to
the original Option, SAR or share of Restricted Stock
immediately prior to the Southern Termination.
(v) In the event that it is not possible to effect the
conversion set forth in Section 14.1(b)(iv) hereof,
any and all outstanding Options, Stock Appreciation
Rights and Restricted Stock as of the date of the
Southern Termination which are not so converted shall
be terminated and the affected Participants shall
receive within thirty (30) days of the Southern
Termination cash equal to the difference between the
Option Price and Fair Market Value, in the case of
Options, the Base Value and Fair Market Value, in the
case of SARs and equal to the Fair Market Value, in
the case of Restricted Stock. For purposes of this
Section 14.1(b)(v), Fair Market Value shall be
determined as of the day prior to the date of the
Southern Termination].
14.2. TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
PROVISIONS. Notwithstanding any other provision of this Plan (but subject to
the limitations of Section 15.3 hereof) or any Award Agreement provision, the
provisions of this Article 14 may not be terminated, amended, or modified on or
after the date of a Change in Control to affect adversely any Award theretofore
granted under the Plan without the prior written consent of the Participant
with respect to
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said Participant's outstanding Awards; provided, however, the Board may
terminate, amend, or modify this Article 14 at any time and from time to time
prior to the date of a Change in Control.
14.3. POOLING OF INTERESTS ACCOUNTING. Notwithstanding any other
provision of the Plan to the contrary, in the event that the consummation of a
Change in Control is contingent on using pooling of interests accounting
methodology, the Board or Committee may take any action necessary to preserve
the use of pooling of interests accounting.
ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION
15.1. AMENDMENT, MODIFICATION, AND TERMINATION. Subject to the terms
of the Plan, the Board may at any time and from time to time, alter, amend,
suspend or terminate the Plan in whole or in part.
15.2. ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual
or nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting
principles, whenever the Committee determines that such adjustments are
appropriate; provided that, unless the Committee determines otherwise at the
time such adjustment is considered, no such adjustment shall be authorized to
the extent that such authority would be inconsistent with the Plan's meeting
the requirements of Section 162(m) of the Code, as from time to time amended.
Without limiting the foregoing, the Committee shall have the right to
temporarily suspend the right to exercise any Award to facilitate a
transaction, to provide for the continuation of all or a portion of Awards and
to make such adjustments by such means as determined by the Committee in its
discretion, including, without limitation, for example, (a) cancellation of all
or a portion of any Award for a cash payment, (b) conversion of all or a
portion of Shares subject to an Award into other property or securities, (c)
removal of any or all restrictions and conditions on Award or (d) giving
written notice to any Participant that his or her Award will become immediately
exercisable, notwithstanding any waiting period otherwise prescribed and that
the Award will be cancelled if not exercised within a specified period of days
after such notice.
15.3. AWARDS PREVIOUSLY GRANTED. Subject to Sections 14.2 and 14.3
hereof and changes to the definition of Change in Control and Termination Event,
no termination, amendment, or modification of the Plan shall adversely affect in
any material way any Award previously granted under the Plan, without the
written consent of the Participant holding such Award.
15.4. COMPLIANCE WITH CODE SECTION 162(M). At all times when Code
Section 162(m) is applicable, all Awards granted under this Plan to Employees
who are or could reasonably become Covered Employees as determined by the
Committee shall comply with the requirements of Code Section 162(m); provided,
however, that in the event the Committee determines that such compliance is not
desired with respect to any Award or Awards available for grant under the Plan,
then compliance with Code Section 162(m) will not be required. In addition, in
the event that changes are made to Code Section 162(m) to permit greater
flexibility with respect to any Award or Awards
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available under the Plan, the Board may, subject to this Article 15, make any
adjustments it deems appropriate.
ARTICLE 16. WITHHOLDING
16.1. TAX WITHHOLDING. The Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy Federal, state, and local taxes, domestic or
foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of this Plan.
16.2. SHARE WITHHOLDING. With respect to withholding required upon
the exercise of Options or SARs, upon the lapse of restrictions on Restricted
Stock, or upon any other taxable event arising as a result of Awards granted
hereunder, Participants may elect, subject to the approval of the Committee, to
satisfy the withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date the tax is to be
determined equal to the minimum statutory total tax which could be imposed on
the transaction. All such elections shall be irrevocable, made in writing,
signed by the Participant, and shall be subject to any restrictions or
limitations that the Board, in its sole discretion, deems appropriate.
ARTICLE 17. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgement in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Articles of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
ARTICLE 18. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the
business and/or assets of the Company.
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ARTICLE 19. GENERAL PROVISIONS
19.1. GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
19.2. SEVERABILITY. In the event any provision of the Plan shall be
held illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
19.3. REQUIREMENTS OF LAW. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
19.4. DELIVER OF TITLE. The Company shall have no obligation to
issue or deliver evidence of title for shares of Shares under the Plan prior to:
(a) Obtaining any approvals from governmental agencies that the
Company determines are necessary or advisable; and
(b) Completion of any registration or other qualification of
the Shares under any applicable national or foreign law or
ruling of any governmental body that the Company determines to
be necessary or advisable.
19.5. SECURITIES LAW COMPLIANCE. With respect to Insiders,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act unless determined
otherwise by the Committee. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board.
19.6. NO ADDITIONAL RIGHTS. Nothing in the Plan shall interfere with
or limit in any way the right of the Company to terminate any Participant's
employment at any time, or confer upon any Participant any right to continue in
the employ of the Company.
No employee shall have the right to be selected to receive an Award under
this Plan or having been so selected, to be selected to receive a future Award.
Neither the Award nor any benefits arising under this Plan shall
constitute part of a Participant's employment contract with the Company or any
Affiliate, and accordingly, this Plan and the benefits hereunder may be
terminated at any time in the sole and exclusive discretion of the Committee
without giving rise to liability on the part of the Company or any Affiliate
for severance payments.
19.7. EMPLOYEES BASED OUTSIDE OF THE UNITED STATES. Notwithstanding
any provision of the Plan to the contrary, in order to comply with provisions of
laws in other countries in which the Company, its Affiliates, and its
Subsidiaries operate or have Employees, the Board or the Committee, in their
sole discretion, shall have the power and authority to:
19
<PAGE> 22
(a) Determine which Employees employed outside the United States are
eligible to participate in the Plan;
(b) Modify the terms and conditions of any Award granted to
Employees who are employed outside the United States; and
(a) Establish subplans, modified exercise procedures, and other terms and
procedures to the extent such actions may be necessary or advisable.
Any subplans and modifications to Plan terms and procedures established
under this Section 19.7 by the Board or the Committee shall be attached
to this Plan document as Appendices.
19.8. GOVERNING LAW. To the extent not preempted by federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the substantive laws (excluding the conflict of laws rules) of the
state of Delaware.
20
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SOUTHERN ENERGY, INC.
The voting stock of each company shown indented is owned by the company
immediately above which is not indented to the same degree.
<TABLE>
<CAPTION>
Name of Company Jurisdiction of Organization
--------------- ----------------------------
<S> <C>
Southern Energy, Inc...............................................................................................Delaware
Southern Energy Resources, Inc................................................................................Delaware
SEI Operadora de Argentina, S.A............................................................................Argentina
(99.99% - Southern Energy Resources, Inc.; .01% - Holdings)
Southern Electric International Asia, Inc...................................................................Delaware
Southern Electric International, GmbH........................................................................Austria
Asociados de Electricidad, S.A...............................................................................Argentina
Southern Electric International, Inc..........................................................................Delaware
Southern Electric, Inc........................................................................................Delaware
Southern Energy North America, Inc............................................................................Delaware
SEI Michigan Holdings, Inc..................................................................................Delaware
SEI Michigan, LLC.........................................................................................Delaware
Southern Energy North America Generating, Inc...............................................................Delaware
SEI State Line, Inc. ....................................................................................Delaware
State Line Holding Corporation..........................................................................Delaware
State Line Energy, L.L.C..............................................................................Indiana
(60% - SEI State Line, Inc.; 40% - State Line Holding Corporation)
Southern Energy New York, G.P., Inc.......................................................................Delaware
Southern Energy Hudson Valley Investments, Ltd............................................................Delaware
Southern Energy Bowline, L.L.C..........................................................................Delaware
(99% - Southern Energy Hudson Valley Investments, Inc.;
1% - Southern Energy New York, G.P., Inc.)
Southern Energy Lovett, L.L.C...........................................................................Delaware
(99% - Southern Energy Hudson Valley Investments, Inc.;
1% - Southern Energy New York, G.P., Inc.)
Southern Energy NY-Gen, L.L.C...........................................................................Delaware
(99% - Southern Energy Hudson Valley Investments, Inc.;
1% - Southern Energy New York, G.P., Inc.)
Southern Energy Bay Area Investments, Inc.................................................................Delaware
Southern Energy Golden State Holding Inc..................................................................Delaware
Southern Energy California, L.L.C.......................................................................Delaware
(50% - Southern Energy Bay Area Investments; 50% -
Southern Energy Golden State Holdings, Inc.)
Southern Energy Delta, L.L.C.........................................................................Delaware
Southern Energy Potrero, L.L.C.......................................................................Delaware
Southern Energy New England Investments, Inc..............................................................Delaware
Southern Energy New England (G.P.), Inc...................................................................Delaware
Southern Energy Canal, L.L.C............................................................................Delaware
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
(99% - Southern Energy New England Investments, Inc.; 1% -
Southern Energy New England (G.P.), Inc.)
Southern Energy Kendall, L.L.C..........................................................................Delaware
(99% - Southern Energy New England Investments, Inc.; 1% -
Southern Energy New England (G.P.), Inc.)
Southern Energy Canal III, L.L.C........................................................................Delaware
(99% - Southern Energy New England Investments, Inc.; 1% -
Southern Energy New England (G.P.), Inc.)
SEI Wisconsin Holdings, Inc...............................................................................Delaware
SEI Wisconsin, L.L.C....................................................................................Delaware
Southern Energy Texas (G.P.), Inc.........................................................................Delaware
Southern Energy Southwest Investments, Inc................................................................Delaware
Southern Energy Central Texas, L.P......................................................................Delaware
(99% - Southern Energy Southwest Investments, Inc.; 1% Southern
Energy Texas (G.P.), Inc.)
SEI Texas, L.P..........................................................................................Delaware
(99% - Southern Energy Southwest Investments, Inc.;
1% SouthernEnergy Texas (G.P.), Inc.)
Mobile Development Company..................................................................................Delaware
Southern Energy Ventures, Inc...............................................................................Delaware
Southern Energy Trading and Marketing, Inc................................................................Delaware
SC Energy Ventures, Inc..................................................................................Georgia
Southern Company Energy Marketing L.P................................................................Delaware
(59.4% - SC Energy Ventures, Inc.; 39.6% - Domestic Corporation;
1% - Southern Company Energy Marketing G.P., L.L.C.)
Southern Company Retail Energy Marketing L.P.......................................................Delaware
(99% - Southern Company Energy Marketing L.P.; 1% -
Southern Company Energy Marketing G.P., L.L.C.)
Southern Producer Services, LLP......................................................................Delaware
(99% - SC Energy Ventures, Inc.; 1% - SC Ashwood Holdings, Inc.)
Southern Energy Retail Trading and Marketing, Inc.......................................................Delaware
SC Ashwood Holdings, Inc...................................................................................Georgia
Southern Company Energy Marketing G.P., L.L.C...........................................................Delaware
(60% - SC Ashwood Holdings, Inc.; 40% - Domestic Corporation)
SEI Birchwood, Inc..........................................................................................Delaware
Birchwood Power Partners, LP..............................................................................Delaware
(50% - SEI Birchwood, Inc.; 50% - Domestic Corporation)
Greenhost, Inc............................................................................................Delaware
(50% - SEI Birchwood, Inc.; 50% - Domestic Corporation)
SEI Hawaiian Cogenerators, Inc..............................................................................Delaware
Southern Energy-Cajun, Inc..................................................................................Delaware
SEI New England Holding Corp................................................................................Delaware
SEI New England, Inc........................................................................................Delaware
Southern Energy New England, L.L.C........................................................................Delaware
(50% - SEI New England Holding Corp; 50% - SEI New England Inc.)
Southern Energy Wichita Falls Management G.P., Inc..........................................................Delaware
Southern Energy Wichita Falls Investment, Inc...............................................................Delaware
Southern Energy Wichita Falls, L.P........................................................................Delaware
(99% - Southern Energy Wichita Falls Investment, Inc.; 1% -
Southern Energy Wichita Falls Management G.P., Inc.)
Southern Energy International, Inc............................................................................Delaware
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Southern Energy do Brazil Ltda................................................................................Brazil
(99.99% - Southern Energy International, Inc.; .1% -
Southern Energy Resources, Inc.)
Southern Energy - Asia, Inc.................................................................................Delaware
Southern Energy Asia Ventures, Inc........................................................................Delaware
Southern Energy Asia-Pacific Limited.......................................................................Bermuda
(90.0% - Southern Energy - Asia, Inc.; 10%
Southern Energy Asia Ventures, Inc.) (NOTE 1)
CEPA Pagbilao Limited..................................................................................Hong Kong
Southern Energy Holdings Philippines, Inc.........................................................Philippines
(71.94% - CEPA Pagbilao Limited; 18.08% - CEPA Mobile
Power Systems (BVI) Corporation; 9.98% - Navotas II
Holdings (BVI) Corp.; 0.000022% - CEPA Navotas I Limited)
Southern Energy Quezon, Inc.....................................................................Philippines
(87.22% - Southern Energy Holdings Philippines, Inc;
12.78% Third parties)
Southern Energy Mobile, Inc.....................................................................Philippines
CEPA Services Corp............................................................................Philippines
Southern Energy Navotas II Power, Inc...........................................................Philippines
Southern Energy China, Ltd................................................................British Virgin Islands
CEPA Navotas I Limited.................................................................................Hong Kong
Southern Energy Project Holdings Philippines, Inc.................................................Philippines
Southern Energy Navotas, Inc......................................................................Philippines
(60.1%- CEPA Navotas I Limited; 29.9% Southern Energy
Holdings Philippines, Inc.; 10% -Third party)
Navotas II Holdings (BVI) Corp............................................................British Virgin Islands
CEPA Mobile Power Systems (BVI) Corporation...............................................British Virgin Islands
CEPA Guangxi Energy Limited............................................................................Hong Kong
CEPA Eastern Power Plant Limited..........................................................British Virgin Islands
CEPA Construction (Hong Kong) Limited..................................................................Hong Kong
Sual Construction Corporation.....................................................................Philippines
Southern Energy Resources and Development Corporation.............................................Philippines
(40% - CEPA Construction (Hong Kong) Limited; 60% -
Edgardo Bautista)
CEPA International Finance Corporation....................................................British Virgin Islands
Stenus Limited.........................................................................................Jersey
Mainbright Holdings Limited............................................................British Virgin Islands
CEPA Financial Services, Limited.......................................................British Virgin Islands
Southern Energy (Shajiao C) Limited.................................................................Hong Kong
(79.99% - CEPA International Finance Corporation; 0.01% -
Stenus Limited; 20% - Third parties)
Guangdong Guanghope Power Co., Ltd................................................Peoples Republic of China
(40% - Southern Energy (Shajiao C) Limited;
60% - Third party)
CEPA Pangasinan Electric Limited..........................................................British Virgin Islands
Southern Energy Pangasinan, Inc...................................................................Philippines
(91.91% - CEPA Pangasinan Electric Limited; 8.09% - Third parties)
Southern Energy Sual Holdings, Inc................................................................Philippines
CEPA Pakistan (BVI) Limited...............................................................British Virgin Islands
CEPA Energy Pakistan Limited (in liquidation)........................................................Pakistan
CEPA Nominee (BVI) Limited................................................................British Virgin Islands
Tranquil Star Corporation.................................................................British Virgin Islands
CEPA Thailand (BVI) Limited............................................................British Virgin Islands
Half Crown Holdings Limited...............................................................British Virgin Islands
CEPA Project Holding (Mauritius) Limited............................................................Mauritius
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
CEPA India (BVI) Limited..................................................................British Virgin Islands
CEPA Investment (Mauritius) Limited.................................................................Mauritius
CEPA Operations, (Hong Kong) Limited...................................................................Hong Kong
CEPA Operations (Philippines) Corp................................................................Philippines
CEPA Project Management and Engineering (BVI) Limited.....................................British Virgin Islands
CEPA Fuels Limited........................................................................British Virgin Islands
Marsford Investments Pte Ltd........................................................................Singapore
Allied Queensland Coalfields Pty Ltd.)..............................................................Australia
(95.17% - CEPA Fuels Limited; 4.83% - Marsford Investments Pte Ltd.)
Aberdare Collieries Pty Ltd.......................................................................Australia
New Whitwood Collieries Pty Ltd.................................................................Australia
Riverview Coal Terminal Pty Ltd.................................................................Australia
AQC (Kogan Creek) Pty Ltd.......................................................................Australia
AQC (Wilkie Creek) Pty Ltd......................................................................Australia
Baralaba Coal Pty Ltd.............................................................................Australia
Lemon Grove Investments Pty Ltd...................................................................Australia
Tiaro Coal Pty Ltd................................................................................Australia
CEPA Australia (BVI) Limited...........................................................................Australia
CEPA Holding Australia Pty Ltd......................................................................Australia
CEPA (Kogan Creek) Holding Pty Ltd................................................................Australia
CEPA (Kogan Creek) Leasing I Pty Ltd............................................................Australia
CEPA (Kogan Creek) Leasing II Pty Ltd...........................................................Australia
CEPA (Kogan Creek) Leasing III Pty Ltd..........................................................Australia
CEPA (Kogan Creek) Leasing IV Pty Ltd...........................................................Australia
Southern Electric International - Netherlands, BV........................................................Netherlands
Southern Electric International Finance, Inc................................................................Delaware
Southern Energy Europe, Inc.................................................................................Delaware
Southern Energy UK Generation Limited..............................................................England & Wales
Southern Energy Development - Europe Limited.......................................................England & Wales
Southern Energy Development Hungaria, L.L.C................................................................Hungary
The Southern Company - Europe, plc.................................................................England & Wales
(99% - Southern Energy Europe, Inc., 1% - Southern Energy Inc.)
Southern Energy Netherlands, Ltd..........................................................................Delaware
Southern Energy Netherlands, B.V..................................................................Netherlands
(50% - Southern Energy Netherlands, Ltd.; 50% - Southern
Energy Europe Investments Ltd.)
Southern Energy - Europe B.V....................................................................Netherlands
(45% - Southern Energy Netherlands, B.V.; 55% SEI Worldwide Holdings (Germany) GmbH
Southern Energy - Italia S.r.l. ...................................................................Italy
(95% Southern Energy - Europe B.V.; 5% SEI Worldwide Holdings (Germany) GmbH
Southern Energy - Italia B.V. ............................................................. Netherlands
Southern Energy Helvetica GmbH...............................................................Switzerland
Southern Energy Netherlands Management Company, Inc.....................................................Delaware
Southern Electric International - Europe, Inc.............................................................Delaware
Southern Energy Europe Investments, Ltd.................................................................Delaware
SEI Beteilligungs, GmbH..................................................................................Germany
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
P.T. Tarahan Power Company..........................................................................Indonesia
(55% - SEI Beteilligungs, GmbH; 2.5% - Domestic Corporation;
42.5% - Foreign Company)
Southern Energy Europe Investments, Ltd.................................................................Delaware
SEI Europe UK Limited.........................................................................England & Wales
(50% - Southern Energy Europe Investments, Ltd.; 50%-
Southern Electric International - Europe, Inc.)
WPD Holdings UK.............................................................................England & Wales
(49% - SEI Europe UK Limited; 51% - Domestic Corporation)
WPD Holdings Limited......................................................................England & Wales
SI UK Investments.......................................................................England & Wales
Luxembourg Energy Capital Management S.a.r.l...............................................Luxembourg
(93.9% SI UK Investments; 6.1% Southern Electric International Finance Inc.)
Southern Investment UK plc..............................................................England & Wales
Western Power Distribution Telecoms Limited ..........................................England & Wales
South Western Electricity plc (NOTE 1)................................................England & Wales
SWEB Investments Limited...........................................................England & Wales
South Western Helicopters Limited..................................................England & Wales
AZTEC Insurance Limited...................................................................Guernsey
WPD Insurance Limited.....................................................................Guernsey
WPD Investments Limited............................................................England & Wales
Croeso Systems Development Limited...............................................England & Wales
(50% - WPD Investments Limited)
ebusiness South West Limited.....................................................England & Wales
(90% - WPD Investments Limited)
WPD Property Investments Limited...................................................England & Wales
WPD Property Developments Limited..................................................England & Wales
Temple Back Developments Limited.................................................England & Wales
(49.0% - WPD Property Developments Limited)
Weston-Super-Mare Developments Limited.........................................England & Wales
Western Power Generation Limited...................................................England & Wales
Western Power Investments Limited................................................England & Wales
Teeside Power Limited..........................................................England & Wales
(7.7% - Western Power Investments Limited)
Wind Electric Limited..........................................................England & Wales
(11.7% - Western Power Investments Limited)
WindResources Limited..........................................................England & Wales
(45% - Western Power Investments Limited)
Carland Cross Limited........................................................England & Wales
Coal Clough Limited..........................................................England & Wales
Meter Reading Services Limited.....................................................England & Wales
Non-Fossil Purchasing Agency Limited...............................................England & Wales
ElectraLink Limited................................................................England & Wales
(6.19% - South Western Electricity plc)
Western Energy Limited.............................................................England & Wales
WPD Helicopter Unit Ltd............................................................England & Wales
Western Power Training Limited.....................................................England & Wales
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
WPD Energy Limited.................................................................England & Wales
REC Collect Limited................................................................England & Wales
(25% - South Western Electricity plc)
WPD Electricity Share Scheme Trustees Limited......................................England & Wales
Electricity Pensions Trustee Limited...............................................England & Wales
(5% - South Western Electricity plc)
St. Clements Services Limited......................................................England & Wales
(9.1% - South Western Electricity plc)
Electricity Pensions Limited.......................................................England & Wales
(Limited by Guarantee - South Western Electricity plc)
ESN Holdings Limited...............................................................England & Wales
(4.5% - South Western Electricity plc)
Electricity Association Limited....................................................England & Wales
(5.9% - South Western Electricity plc)
Northmere Limited..................................................................England & Wales
(Limited by Guarantee - South Western Electricity plc)
WPD Limited........................................................................England & Wales
@ebusiness Limited.................................................................England & Wales
Western Power Networks Limited.....................................................England & Wales
WPD Pension Trustee Limited........................................................England & Wales
Surf Telecom Limited...............................................................England & Wales
(8.33% - South Western Electricity plc)
WPD Telecoms Limited...............................................................England & Wales
SEI Brazil Holdings, Inc....................................................................................Delaware
SEI South America, Inc......................................................................................Delaware
Southern Energy Caribe, Ltd.................................................................................Delaware
Southern Energy Caribbean, Ltd......................................................................Virgin Islands
Southern Energy Virgin Islands, L.L.C.............................................................Virgin Islands
Southern Energy - HoldCo2, Inc...............................................................................Delaware
SEI Chile, SA................................................................................................Chile
(99.99% - Southern Energy - HoldCo2, Inc., .001% - Southern Energy, Inc.)
Energia del Pacifico Limitada..........................................................................Argentina
(99.9% - SEI Chile, SA, .1% - Southern Energy International, Inc.)
Gasoducto Nor Andino Argentina, S.A.....................................................................Chile
(33.33% - Energia del Limitada,; 66.67% - Tractebel)
Gasoducto Nor Andino S.A.............................................................................Chile
(33.33% - Energia del Limitada; 66.67% - Tractebel)
Empressa Electrica del Norte Grande, SA....................................................................Chile
(82.34034% - SEI Chile, SA; 8.81% - Foreign Government;
8.850% - Natural Persons)
Sitranor S.A............................................................................................Chile
(60% - Empressa Electrica del Norte Grande, SA; 20% - CODELCO;
20% ELECTROANDINA)
Southern Electric Bahamas Holdings, Limited................................................................Bahamas
Southern Electric Bahamas, Ltd ..........................................................................Bahamas
ICD Utilities Limited.................................................................................Bahamas
(25% - Southern Electric Bahamas, Ltd; 75% - Foreign Company)
Freeport Power Company Limited........................................................................Bahamas
(50% - Southern Electric Bahamas, Ltd; 50% - ICDU Utilities Limited)
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
Cayman Energy Traders.................................................................................Cayman Islands
(27.59% - Southern Energy International, Inc.; 72.41% -
Domestic Corporation)
Southern Electric do Brasil Participacoes, Limitada.........................................................Brazil
(90.6% - Cayman Energy Traders; 9.4% - Foreign Pension Fund)
Companhia Energetica de Minas Gerais (CEMIG)..............................................................Brazil
(14.41% - Southern Electric do Brasil Participacoes, Limitada; 24.3% - Foreign
Government; 20.99% - General Public; 40.30% - Foreign Companies)
Southern Energy E Associados Particpacoes, S.A................................................................Brazil
SEI Germany - BEWAG, Inc....................................................................................Delaware
SEI Worldwide Holdings, Inc.................................................................................Delaware
SEI Worldwide Holdings (Germany) GmbH......................................................................Germany
(50% - SEI Germany - BEWAG, Inc.; 50% - SEI Worldwide Holdings, Inc.)
Southern Energy Holding Beteiligungsgesellschaft GmbH....................................................Germany
BEWAG, AG.............................................................................................Germany
(26% - Southern Energy Holding Beteiligungsgesellschaft GmbH,
74% Other Foreign Persons)
Southern Energy Development-Europa GmbH..................................................................Germany
SEI y Asociados de Argentina, S.A......................................................................Argentina
(45.79% - SEI Worldwide Holdings GmbH; 7.14%- Asociados de
Electricidad, S.A.; 40.52% - Holdings: 5.55% - Foreign Corporation;
1% - Domestic Company)
Hidroelectrica Alicura, S.A.........................................................................Argentina
(59% - SEI y Asociados de Argentina, S.A.; 41% - Foreign Government)
Southern Electric International Trinidad, Inc...............................................................Delaware
The Power Generation Company of Trinidad & Tobago Limited........................................Trinidad & Tobago
(39% - Southern Electric International Trinidad, Inc.; 51% -
Foreign Government; 10% - Domestic Corporation)
SE China Investments........................................................................................Delaware
Southern Energy Mauritius Limited........................................................................Mauritius
SEMAR Limited............................................................................................Mauritius
Southern Energy HoldCo Limited............................................................................Mauritius
SE Finance Capital Corporation................................................................................Delaware
Southern Energy Finance Company, Inc........................................................................Delaware
EPZ Lease, Inc............................................................................................Delaware
EPZ Lease, LLC..........................................................................................Delaware
(99% EPZ Lease, Inc.; 1% Southern Energy Finance Company, Inc.)
EPZ Lease Holding A, LLC.............................................................................Delaware
(99% EPZ Lease, LLC; 1% EPZ Lease, Inc.)
EPZ Lease Trust A..................................................................................Delaware
EPZ Lease Holding B, LLC.............................................................................Delaware
(99% EPZ Lease, LLC; 1% EPZ Lease, Inc.)
EPZ Lease Trust B..................................................................................Delaware
EPZ Lease Holding C, LLC.............................................................................Delaware
(99% EPZ Lease, LLC; 1% EPZ Lease, Inc.)
EPZ Lease Trust C..................................................................................Delaware
Southern Energy Clairton, Inc.............................................................................Delaware
Southern Energy Clairton, L.L.C.........................................................................Delaware
(85% - Southern Energy Clairton, Inc.; 15% Southern Energy
Clairton2, Inc.)
Clairton 1314 B Partnership, L.P.....................................................................Delaware
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
(27% - Southern Energy Clairton, L.L.C.; 73% -
Domestic Corporations)
Southern Energy Clairton2, Inc............................................................................Delaware
Southern Energy Carbontronics, Inc........................................................................Delaware
Southern Energy Carbontronics, L.L.C....................................................................Delaware
(99% - Southern Energy Carbontronics,Inc.; 1% -
Southern Energy Finance Company)
Carbontronics Synfuels Investors, L.P................................................................Delaware
(24.75% - Southern Energy Clairton, L.L.C.; 75.25% -
Domestic Corporations)...............................................................................Delaware
Dutch Gas Lease, Inc......................................................................................Delaware
Dutch Gas Lease, L.L.C..................................................................................Delaware
Dutch Gas Lease Holding A, L.L.C.....................................................................Delaware
Dutch Gas Lease Trust A............................................................................Delaware
Dutch Gas Lease Holding B, L.L.C.....................................................................Delaware
(99% - Dutch Gas Lease, L.L.C; 1% - Dutch Gas Lease, Inc.)
Dutch Gas Lease Trust B............................................................................Delaware
Dutch Gas Lease Holding C, L.L.C.....................................................................Delaware
(99% - Dutch Gas Lease, L.L.C; 1% - Dutch Gas Lease, Inc.)
Dutch Gas Lease Trust C............................................................................Delaware
Gamog Lease, Inc. Delaware................................................................................Delaware
Gamog Lease Holding A, L.L.C............................................................................Delaware
Gamog Lease Trust A..................................................................................Delaware
Gamog Lease Holding B, LLC..............................................................................Delaware
Gamog Lease Trust B..................................................................................Delaware
Gamog Lease Holding C, LLC..............................................................................Delaware
Gamog Lease Trust C..................................................................................Delaware
Nuon Lease, Inc...........................................................................................Delaware
Nuon Lease Holding D, L.L.C.............................................................................Delaware
Nuon Lease Trust D...................................................................................Delaware
Nuon Lease Holding E, L.L.C.............................................................................Delaware
Nuon Lease Trust E...................................................................................Delaware
Nuon Lease Holding F, L.L.C.............................................................................Delaware
Nuon Lease Trust F...................................................................................Delaware
Southern Company Capital Funding, Inc.........................................................................Delaware
Southern Company Capital Trust I............................................................................Delaware
Southern Company Capital Trust II...........................................................................Delaware
Southern Company Capital Trust III..........................................................................Delaware
Southern Company Capital Trust IV...........................................................................Delaware
Southern Company Capital Trust V............................................................................Delaware
Southern Company Capital Trust VI...........................................................................Delaware
Southern Company Capital Trust VII..........................................................................Delaware
Southern Company Capital Trust VIII.........................................................................Delaware
Southern Company Capital Trust IX...........................................................................Delaware
</TABLE>
Footnotes:
NOTE 1 - Certain of CEPA's holdings in the Philippines were reorganized through
a series of agreements that were dated and executed on or before December 31,
1997. However, these agreements are awaiting the approval of certain
governmental authorities in the Philippines and are not yet effective.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
April 20, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHERN ENERGY, INC. FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 323
<SECURITIES> 0
<RECEIVABLES> 761
<ALLOWANCES> 44
<INVENTORY> 0
<CURRENT-ASSETS> 1,285
<PP&E> 6,025
<DEPRECIATION> 421
<TOTAL-ASSETS> 13,863
<CURRENT-LIABILITIES> 3,215
<BONDS> 5,191
1,031
0
<COMMON> 0
<OTHER-SE> 3,102
<TOTAL-LIABILITY-AND-EQUITY> 13,863
<SALES> 0
<TOTAL-REVENUES> 2,268
<CGS> 0
<TOTAL-COSTS> 1,824
<OTHER-EXPENSES> (230)
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 502
<INCOME-PRETAX> 674
<INCOME-TAX> 129
<INCOME-CONTINUING> 362
<DISCONTINUED> 10
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 372
<EPS-BASIC> 372
<EPS-DILUTED> 0
</TABLE>
