================================================================================
UNITED STATES
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter
Ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition
Period from _____to_____
Southern Energy, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 001-16107 58-2056305
--------------------------------------------------------------------------------
(State or other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
1155 Perimeter Center West, Suite 100, Atlanta, Georgia 30338
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(770) 821-7000
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _ No_X__
----------
The number of shares outstanding of the Registrant's Common Stock, par
value $0.01 per share, at October 31, 2000, was 338,700,000.
<PAGE>
Southern Energy, Inc.
INDEX
September 30, 2000
Page
DEFINITIONS..................................................... 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION...... 4
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Income..................... 5
Consolidated Balance Sheets........................... 6
Consolidated Statements of Cash Flows................. 8
Notes to the Consolidated Financial Statements........ 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................... 22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................... 31
Item 2. Changes in Securities and Use of Proceeds............... 32
Item 3. Defaults Upon Senior Securities......................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders..... Inapplicable
Item 5. Other Information....................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K........................ 32
Signatures ............................................. 33
<PAGE>
DEFINITIONS
TERM MEANING
Bewag............................ Bewag AG
BP Amoco......................... BP Amoco, plc
CEMIG............................ Companhia Energetica de Minas Gerais
Clean Air Act ................... Clean Air Act Amendments of 1990Energy Act
Energy Policy Act of 1992EPA..... U. S. Environmental Protection Agency
FASB............................. Financial Accounting Standards Board
FERC............................. Federal Energy Regulatory Commission
Hyder............................ Hyder plc
RMR.............................. Reliability-Must-Run
SEC.............................. Securities and Exchange Commission
SCEM............................. Southern Company Energy Marketing L. P.
Southern ........................ Southern Company
SWEB............................. South Western Electricity plc
the Company...................... Southern Energy, Inc. and its subsidiaries
WPD.............................. Western Power Distribution
WPD Holdings .................... WPD Holdings ULC
WPDL............................. WPD Limited
3
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements in
addition to historical information. These statements involve known and unknown
risks and relate to future events, the Company's future financial performance or
its 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 statements of intent, belief or expectations. 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 the Company's subsidiaries and affiliates; the Company's 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 its subsidiaries and affiliates
operate; changes in or application of environmental and other laws and
regulations to which the Company and its subsidiaries and affiliates are
subject; political, legal and economic conditions and developments in the United
States and in foreign countries in which the Company's subsidiaries and
affiliates operate; financial market conditions and the results of its financing
efforts; changes in commodity prices and interest rates; weather and other
natural phenomena; the Company's performance of projects undertaken and the
success of its efforts to invest in and develop new opportunities; and other
factors. Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
events, levels of activity, performance or achievements.
4
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(in millions) (in millions)
(except per share data)
<S> <C> <C> <C> <C>
Operating Revenues: $ 4,281 $ 686 $5,473 $ 1,711
Operating Expenses:
Cost of fuel, electricity and other products 3,569 309 3,965 805
Maintenance 36 32 104 81
Depreciation and amortization 89 67 244 178
Selling, general, and administrative 292 88 438 197
Other 78 61 194 147
------------- ------------- ---------- -------------
Total operating expenses 4,064 557 4,945 1,408
------------- ------------- ---------- -------------
Operating Income 217 129 528 303
Other Income (Expense):
Interest income 42 38 123 118
Interest expense (162) (118) (462) (349)
Net gain on sales of assets 18 284 18 293
Equity in income of affiliates 69 11 132 158
Receivables recovery - - - 12
Other, net 9 2 49 23
------------- ------------- ---------- -------------
Total other income (expense) (24) 217 (140) 255
------------- ------------- ---------- -------------
Income From Continuing Operations Before
Income Taxes and Minority Interest 193 346 388 558
Provision for income taxes 85 74 56 108
Minority interest 17 119 60 155
------------- ------------- ---------- -------------
Income From Continuing Operations 91 153 272 295
Income from Discontinued Operations After
Income Taxes and Minority Interest 7 3 20 10
------------- ------------- ---------- -------------
Net Income $98 $156 $292 $305
============= ============= ========== =============
Earnings Per Share - Basic and Diluted:
Average number of shares of common stock
outstanding as of September 30 272 272 272 272
Basic earnings per share
of common stock (Note C)
From continuing operations $ 0.33 $ 0.56 $ 1.00 $ 1.08
From discontinued operations
0.03 0.01 0.07 0.04
------------- ------------- ------------- -------------
Net Income $ 0.36 $ 0.57 $ 1.07 $ 1.12
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
----------------- -------------------
(in millions)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 710 $ 323
Restricted deposits 20 50
Deposits with brokers 46 -
Receivables:
Customer accounts, less provision for uncollectibles
of $28 and $23 1,869 236
Other, less provision for uncollectibles
of $12 and $21 301 481
Assets from risk management activities (Note A) 950 -
Inventories 217 129
Other 99 66
---------- ----------
Total current assets 4,212 1,285
---------- ----------
Property, Plant and Equipment:
4,436 4,147
Less accumulated provision for depreciation
(504) (421)
---------- ----------
3,932 3,726
Leasehold interest, net of accumulated amortization
of $202 and $137 1,846 1,934
Construction work in progress 191 365
---------- ----------
Total property, plant and equipment, net 5,969 6,025
---------- ----------
Noncurrent Assets:
Concession agreement, net of accumulated amortization
of $0 and $90 (Note G) - 268
Investments 1,386 1,490
Notes and other receivables, less provision for uncollectibles
of $30 and $61 1,814 1,276
Goodwill, net of accumulated amortization
of $202 and $164 2,256 2,106
Other intangible assets, net of accumulated amortization
of $28 and $13 516 447
Investment in leveraged leases 581 556
Assets from risk management activities (Note A) 535 -
Miscellaneous deferred charges 446 410
--------- -----------
Total noncurrent assets 7,534 6,553
--------- -----------
Total Assets $ 17,715 $ 13,863
========= ===========
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
----------------- ----------------
(in millions)
Current Liabilities:
<S> <C> <C>
Short-term debt $ 3,521 $ 1,961
Current portion of long-term debt 270 237
Accounts payable 1,978 626
Taxes accrued 295 218
Liabilities from risk management activities (Note A) 1,070 -
Other 88 173
---------- ----------
Total current liabilities 7,222 3,215
Noncurrent Liabilities:
Subsidiary obligated mandatorily redeemable preferred securities 1,024 1,031
Notes payable 4,102 4,557
Other long-term debt 389 397
Liabilities from risk management activities (Note A) 440 -
Deferred income taxes 741 680
Miscellaneous deferred credits 195 156
---------- ----------
Total noncurrent liabilities 6,891 6,821
Preferred Stock held by Southern Company (Note G) 235 -
Minority Interest in Subsidiary Companies 675 725
Commitments and Contingent Matters(Notes A, D, E, G & H) Stockholders' Equity:
Common stock, $.01 par value, per share (Note C) Authorized -- 2,000,000,000
shares Issued -- September 30, 2000: 272,000,000 shares;
-- December 31, 1999: 272,000,000 shares 3 3
Additional paid-in capital 2,687 2,984
Accumulated other comprehensive loss (107) (92)
Retained earnings 109 207
---------- ----------
Total stockholders' equity 2,692 3,102
---------- ----------
Total Liabilities and Stockholders' Equity $ 17,715 $ 13,863
========== ==========
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
--------------- ---------------
(in millions)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 292 $ 305
Adjustments to reconcile net income to net cash
provided by operating activities --
Equity in income of affiliates (115) (151)
Depreciation and amortization 254 188
Deferred income taxes 137 146
Gain on sale of assets (18) (293)
Minority interest 60 155
Other, net (50) (57)
Changes in certain assets and liabilities,
excluding effects from acquisitions
Receivables, net (534) (134)
Risk management activities, net 86 -
Other current assets (39) 58
Accounts payable 371 (155)
Taxes accrued 91 29
Other current liabilities (67) 90
-------- ---------
Total adjustments 176 (124)
-------- ---------
Net cash provided by operating activities 468 181
-------- ---------
Cash Flows from Investing Activities:
Capital expenditures (365) (415)
Cash paid for acquisitions (292) (1,434)
Proceeds received from the sale of investments 33 287
Dividends received from equity investments 15 24
-------- ---------
Net cash used in investing activities (609) (1,538)
-------- ---------
Cash Flows from Financing Activities:
Capital contributions from Southern Company 51 355
Capital contributions from minority interests 8 18
Issuance of notes receivable (511) (82)
Repayments on notes receivable 172 228
Payments of dividends to Southern Company (503) -
Payments of dividends to minority interests (5) (41)
Proceeds from issuance of short-term debt, net 1,560 435
Proceeds from issuance of long-term debt 289 917
Repayment of long-term debt (504) (387)
Other (16) (17)
-------- ---------
Net cash provided by financing activities 541 1,426
-------- ---------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (13) (2)
-------- ---------
Net Increase in Cash and Cash Equivalents 387 67
Cash and Cash Equivalents, beginning of period 323 561
-------- ---------
Cash and Cash Equivalents, end of period $ 710 $ 628
======== =========
Supplemental Cash Flow Disclosures:
Cash paid for interest, net of amount capitalized $ 559 $ 315
Cash paid (refunds received) for income taxes $ (109) $ (110)
Business Acquisitions:
Fair value of assets acquired $ 2,545 $ 1,467
Less cash paid 292 1,434
-------- ---------
Liabilities assumed $ 2,253 $ 33
======== ========
The accompanying notes are an integral part of these
consolidated statements.
</TABLE>
8
<PAGE>
SOUTHERN ENERGY, INC.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
Basis of Accounting. These interim financial statements should be read
in conjunction with the Company's audited 1999 consolidated financial statements
and the accompanying footnotes which are contained in the Company's prospectus
filed with the SEC on September 27, 2000 pursuant to Rule 424(b) under the
Securities act of 1933, with respect to Southern Energy's registration statement
on Form S-1 (Registration No. 333-35390). Management believes that the
accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring items, necessary for a fair
statement of results for the interim periods presented.
Concentration of Revenues. Revenues earned from Enron Corporation
through the energy marketing and risk management operation approximated 10% and
8% of the Company's total revenues for the three and nine months ended September
30, 2000, respectively. Revenues earned under the Company's long-term power
sales agreements with the Philippines' National Power Corporation approximated
11% and 12% of the Company's total revenues for the three and nine months ended
September 30, 1999, respectively.
Financial Instruments and Contractual Commitments. The Company engages
in risk management in connection with its energy marketing and trading
activities. All trading transactions and related expenses are recorded on a
trade-date basis. Financial instruments and contractual commitments utilized in
connection with energy marketing and trading activities are accounted for using
the mark-to-market method of accounting.
Under the mark-to-market method of accounting, financial instruments and
contractual commitments, including derivatives used for trading purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter ("OTC") market price
quotations, time value and volatility factors underlying options and contractual
commitments, price activity for equivalent or synthetic instruments in markets
located in different time zones, and counterparty credit quality.
The fair values of swap agreements, swap options, caps and floors, and forward
contracts in a net receivable position, as well as options held, are reported as
"assets from risk management activities" on the accompanying consolidated
balance sheets. Similarly, financial instruments and contractual commitments in
a net payable position, as well as options written, are reported as "liabilities
from risk management activities" on the accompanying consolidated balance
sheets. The assets and liabilities from risk management activities associated
with financial instruments and contractual commitments are reported net by
counterparty, provided a legally enforceable master netting agreement exists,
and are netted across products and against cash collateral when such provisions
are stated in the master netting agreement.
Revenue Recognition. Under the mark-to-market method of accounting,
financial instruments and contractual commitments are recorded at fair value
upon contract execution. The net changes in their market values are recognized
as energy marketing revenues in the period of change. The unrealized gains or
losses are recorded as assets and liabilities from risk management activities in
the consolidated balance sheets.
Inventory. Inventory consists primarily of natural gas and fuel oil.
The inventory maintained by the Company's energy marketing and risk management
operation is reflected at fair value. The inventory maintained by the Company's
subsidiaries for their use is reflected at the lower of cost or market.
9
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables Recovery. During the nine months ended September 30, 1999,
the Company recorded amounts totaling approximately $12 million in successful
resolution of negotiations by the Company which allowed it to collect
receivables that were assumed in conjunction with the Southern Energy
Asia-Pacific Limited 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 party with whom the receivables were secured. The Company has
rights to an additional $40 million, plus related interest, as of September 30,
2000, which it has fully reserved due to the risk of non-collection.
B. Comprehensive Income
The Company's comprehensive income consists of net income and foreign currency
translation adjustments. Total comprehensive income for the nine months ended
September 30, 2000 and 1999 was $277 million and $203 million, respectively.
C. Earnings Per Share
The Company calculates basic earnings per share by dividing the income available
to common shareholders by the weighted average number of common shares
outstanding. The following table shows the computation of basic earnings per
share for the three and nine months ended September 30, 2000 and 1999 (in
millions, except per share data) after giving effect to the stock split that
occurred prior to the offering of common stock (Note G). Diluted earnings per
share gives effect to the conversion of the Company's value creation plan
("VCP") standard units into stock options and the grant of new stock options on
September 27, 2000. The impact of the conversion of VCP standard units and grant
of new stock options had less than a one-cent impact on the Company's basic
earnings per share because they added less than 100,000 shares to the
denominator of the earnings per share calculation for the three months and nine
months ended September 30, 2000, respectively. The Company had no dilutive
securities outstanding during 1999.
Pro forma earnings per share information below gives effect to the Company's
public offering of shares as though it had occurred for all periods, as well as
the conversion of the Company's standard VCP units, the grant of new stock
options and issuance of convertible trust preferred securities (Note G) as
though potentially dilutive for all periods. Net income has been increased by
approximately $4.6 million and $6.0 million to take into account the standard
SAR conversion for the three and nine month periods ended September 30, 2000,
respectively. The increase for each of the three and nine month periods ended
September 30, 1999 was less than $1 million.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Income from continuing operations $ 91 $153 $272 $295
Discontinued operations 7 3 20 10
---- ---- ---- ----
Net Income $ 98 $156 $292 $305
==== ==== ==== ====
10
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Basic and Diluted
Weighted Average Shares Outstanding 272.0 272.0 272.0 272.0
Earnings per share from:
Continuing operations $0.33 $0.56 $1.00 $1.08
Discontinued operations 0.03 0.01 0.07 0.04
----- ----- ----- -----
Net Income $0.36 $0.57 $1.07 $1.12
===== ===== ===== =====
Pro Forma Basic
Shares outstanding after
initial public offering 338.7 338.7 338.7 338.7
Earnings per share from:
Continuing operations $0.27 $0.45 $0.80 $0.87
Discontinued operations 0.02 0.01 0.06 0.03
----- ----- ----- -----
Net Income $0.29 $0.46 $0.86 $0.90
===== ===== ===== =====
Pro Forma Diluted
Shares outstanding after
initial public offering 338.7 338.7 338.7 338.7
Shares assumed due to conversion
of stock options and equivalents 1.2 1.2 1.2 1.2
Shares assumed due to conversion
of trust preferred securities 12.7 12.7 12.7 12.7
----- ----- ----- -----
Adjusted Shares 352.6 352.6 352.6 352.6
----- ----- ----- -----
Earnings per share from:
Continuing operations $0.27 $0.43 $0.79 $0.84
Discontinued operations 0.02 0.01 0.06 0.03
----- ----- ----- -----
Net Income $0.29 $0.44 $0.85 $0.87
===== ===== ===== =====
D. Debt
In September 2000 WPD Holdings, an indirect 49% owned subsidiary of the Company,
closed a (pound)210 million ($310 million) 364-day term loan facility (the
"Facility") to finance part of the purchase price paid by WPDL for the Hyder
shares. The Facility's initial margin is 90 basis points per annum above LIBOR,
and once WPDL obtains a rating for its senior unsecured debt from Standard &
Poor's and/or Moody's, the margin will be based on a ratings grid. The
Facility's proceeds were loaned to WPDL at closing. Further, the shareholders of
WPDH made a subordinated loan to WPD Holdings of (pound)150 million ($222
million) which was loaned to WPDL, and the shareholders of WPDL made a
(pound)140 million ($207 million) loan to WPDL, in each case to fund the Hyder
share purchase. Both shareholder loans were made in proportion to the ownership
interest. In addition, WPD has loaned WPDL (pound)85 million ($126 million)to
fund the Hyder share purchase.
A $375 million Letter of Credit Facility with Citibank, N.A., which was used to
support our bid for Hyder, was terminated on September 29, 2000.
11
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2000, SCEM renewed its existing line-of-credit facility with a group
of lenders for an additional 364-day term, and increased its borrowing capacity
by $30 million, to $180 million. The facility bears interest based on the London
Interbank Offering Rate plus a variable spread based on SCEM's credit rating at
the date of the borrowing, payable monthly. The Company had no outstanding
borrowings under this line-of-credit facility at September 30, 2000.
In July 1999, SCEM entered into a commercial paper agreement with certain
financial institutions. Each note has a maturity of 366 days or less. As of
September 30, 2000, SCEM had $150,000,000 of commercial paper outstanding. The
interest rates on the short-term notes outstanding as of September 30, 2000
range from 7.05% to 7.12%, and the maturity dates on the notes range from 16 to
32 days.
E. Financial Instruments
The Company engages in commodity-related marketing and price risk management
activities. At September 30, 2000, the status of outstanding non-trading related
derivative contracts are described below. The interest rates noted in the
following table represent the range of fixed interest rates that the Company
pays on the related interest rate swaps. On virtually all of these interest rate
swaps, the Company receives floating interest rate payments at LIBOR. The
currency derivatives manage the Company's exposure arising on certain foreign
currency transactions.
<TABLE>
<CAPTION>
Year of Maturity Interest Number of Notional Unrecognized
Type or Termination Rates Counterparties Amount (Loss) Gain
---- -------------- ----- -------------- ------ ------------
(in millions)
<S> <C> <C> <C> <C> <C>
Interest rate swaps 2002-2012 6.55%-7.12% 9 $2,150 $ (13)
2001-2012 6.56%-8.17% 5 (pound)600 (52)
2002-2007 4.98%-5.79% 2 DM691 -
Cross currency swaps 2001-2007 - 7 (pound)394 65
Cross currency swaption 2003 - 2 DM435 44
Currency forwards 2000-2003 - 1 CAD20 -
Currency forwards 2000 - 3 (pound)91 (3)
</TABLE>
(pound) - Denotes British pounds sterling.
DM - Denotes Deutschemarks.
CAD - Denotes Canadian dollars.
The Company uses a systematic approach to the evaluation and management of risk
associated with its marketing and risk management-related commodity contracts,
including value-at-risk ("VAR"). VAR is defined as the maximum loss that is not
expected to be exceeded with a given degree of confidence and within a specified
holding period.
The Company uses a 95% confidence interval and holding periods that vary by
commodity and tenor to evaluate its risks with respect to VAR. Based on a 95%
confidence interval and employing a one-day holding period, the Company's
portfolio of positions had a VAR of $13 million at September 30, 2000. During
the three-month period ended September 30, 2000, the actual daily change in fair
value never exceeded this daily VAR calculation. The Company also utilizes
additional risk control mechanisms such as commodity position limits and stress
testing.
12
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
F. Investments in Affiliates
The following table sets forth certain summarized income statement information
of the Company's investments in 50% or less-owned investments accounted for
under the equity method for the three and nine months ended September 30, 2000
and 1999 (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues $1,595 $1,581 $4,678 $4,527
Operating income 421 108 642 584
Net income from
continuing operations 196 48 127 373
G. Business Developments
Initial Public Offering. The Company's registration statements for the
sale of its common stock and its 6 1/4% convertible trust preferred securities
were declared effective by the SEC on September 26, 2000. On September 27, 2000,
the Company began the initial public offering of 58 million shares of its common
stock for an initial price of $22.00 per share and 6 million convertible trust
preferred securities for an initial price of $50.00 per preferred security. Both
offerings were completed with all shares of common stock and convertible trust
preferred securities having been sold on October 2, 2000. Simultaneously, the
underwriters exercised options to purchase from the Company an additional
8,700,000 shares of common stock at the initial price of $22.00 per share and
900,000 convertible trust preferred securities at the initial price of $50.00
per preferred security. This transaction was completed on October 2, 2000. The
net proceeds from the offerings, after deducting underwriting discounts and
commissions payable by the Company, were $1,731 million. The Company used the
net proceeds of the offerings to repay $900 million of short-term debt from
credit lines and $578 million of commercial paper. The remaining proceeds were
put into short-term investments to be used for general corporate purposes.
As part of its planned spin-off from Southern, the Company agreed to contribute
its finance and leveraged lease subsidiaries to Southern. In connection with
this contribution, on August 30, 2000 the Company issued to Southern one share
of Series B preferred stock, redeemable at the election of the Company in
exchange for the contribution of these subsidiaries to Southern. The issuance of
the preferred share on August 30, 2000, has been accounted for as a non-cash
transaction by the Company at the book value of these subsidiaries, resulting in
a reduction of shareholders equity during the three months ended September 30,
2000. The Company has not yet called its Series B preferred share for
redemption.
Sale of Hidroelectrica Alicura S. A. ("Alicura"). On August 25, 2000,
the Company completed the sale of its 55% indirect interest in Alicura to The
AES Corporation for total consideration of $205 million, including the
assumption of debt and the buy-out of minority partners. Alicura's principal
asset is a concession to operate a 1,000 MW hydroelectric facility located in
the province of Neuquen, Argentina. As part of the sale, the Company was
released from $200 million of credit support obligations related to Alicura's
bank financing. The sale of Alicura did not materially impact the Company's
financial position and did not have a material effect on the Company's results
of operations.
13
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of Hyder. On August 23, 2000, WPDL, a company jointly owned
by one of the Company's subsidiaries and PPL Global, made an offer to acquire
all of the outstanding shares of Hyder for a total purchase price for the
ordinary shares of Hyder of approximately (pound)565 million (approximately $847
million), or 365 pence (approximately $5.47) per Hyder share plus the assumption
of approximately (pound)2.1 billion (approximately $3.2 billion) of gross debt
as of March 31, 2000. On September 15, 2000, WPDL committed unconditionally to
purchase any shares of Hyder tendered by Hyder shareholders. As of September 30,
2000, WPDL had purchased from shareholders approximately 71% of the Hyder
shares. On October 30, 2000, WPDL finalized the acquisition of Hyder by making
payment for the additional shares needed to bring WPDL's ownership over 90%. The
acquisition of more than 90% of the outstanding shares allowed WPDL, under UK
company law, to acquire the remaining shares and on October 31, 2000, WPDL sent
notification to the outstanding shareholders exercising this right. With the
completion of this acquisition and with the approval of lenders, the Company and
PPL Global, effective December 2000, will modified the voting rights of WPD
Holdings to 50% each so that each party will share operational and management
control of WPD Holdings, which indirectly owns 100% of WPD. WPDL has replaced
Hyder's board of directors with employees of WPD, the Company and PPL Global.
The following unaudited pro forma results of operations for the three and nine
months ended September 30, 2000 and 1999 have been prepared assuming the
acquisition of Hyder was effective January 1999. 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 are for information
purposes only and are as follows.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
As reported Pro Forma As reported Pro Forma
-------------------------------------- ------------ ------------ ------------ ------------
2000
<S> <C> <C> <C> <C>
Operating revenues (in millions) $4,281 $4,281 $5,473 $5,473
Consolidated net income (in millions) $ 98 $ 89 $ 292 $ 335
Basic earnings per share $ 0.36 $ 0.33 $ 1.07 $ 1.23
1999
Operating revenues (in millions) $ 686 $ 686 $1,711 $1,711
Consolidated net income (in millions) $ 156 $ 132 $ 305 $ 319
Basic earnings per share $ 0.57 $ 0.49 $ 1.12 $ 1.17
</TABLE>
Acquisition of Generating Business of Potomac Electric Power Company
("PEPCO"). In June 2000, the Company announced an agreement with PEPCO to
purchase PEPCO's generating business in Maryland and Virginia, assume PEPCO's
entitlements under various power purchase agreements, operate two power stations
in Washington, D.C. retained by PEPCO, and supply PEPCO with power required to
meet its retail obligations for up to four years pursuant to transition power
agreements. The purchase price of this transaction is $2.65 billion plus an
estimate of $100 million for working capital and reimbursement of capital
expenditures, and approximately $260 million in the event that a certain power
purchase agreement is not transferred to the Company. This transaction is
expected to close in the fourth quarter.
Acquisition of SCEM. On September 11, 2000, the Company closed the
acquisition of Vastar Resources Inc.'s ("Vastar") 40% interest in SCEM for $250
million. The acquisition was effective as of
14
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
August 10, 2000. As a result of this transaction, SCEM became a wholly-owned
indirect subsidiary and is consolidated in the Company's financial statements as
of the effective date. The purchase price allocation reflected in the
accompanying financial information is preliminary.
As part of the transaction, the Company agreed to amend the gas purchase and
sale agreement whereby BP Amoco is obligated to deliver fixed quantities at
identified delivery points. The agreement will continue to be in effect through
December 31, 2007. The amendment became effective November 1, 2000. As part of
the transaction, the Company was relieved of any financial obligations to Vastar
under the SCEM partnership agreement, including any guaranteed minimum cash
distributions and any outstanding arbitration.
The following unaudited pro forma results of operations for the three and nine
months ended September 30, 2000 and 1999 have been prepared assuming the
acquisition of SCEM was effective January 1999. 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 are for information
purposes only and are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
As reported Pro Forma As reported Pro Forma
--------------------------------------- ------------ ------------ ------------ ------------
2000
<S> <C> <C> <C> <C>
Operating revenues (in millions) $4,281 $7,311 $5,473 $15,341
Consolidated net income (in millions) $ 98 $ 108 $ 292 $ 290
Basic earnings per share $ 0.36 $ 0.40 $ 1.07 $ 1.07
1999
Operating revenues (in millions) $ 686 $4,798 $1,711 $10,382
Consolidated net income (in millions) $ 156 $ 151 $ 305 $ 298
Basic earnings per share $ 0.57 $ 0.56 $ 1.12 $ 1.10
</TABLE>
H. Commitments and Contingent Matters
Companhia Energetica de Minas Gerais ("CEMIG"). In September 1999, the
state of Minas Gerais, Brazil, filed a lawsuit in a state court seeking
temporary relief against Southern Electric Brasil Participacoes, Ltda. ("SEB")
exercising voting rights under the shareholders' agreement, between the state
and SEB regarding SEB's interest in CEMIG, as well as a permanent rescission of
the agreement. On March 23, 2000, a state court in Minas Gerais, ruled that the
shareholder agreement was invalid. SEB has appealed this decision. The Company
believes that this is a temporary situation and expects that the shareholders'
agreement will be fully restored. Failure to prevail in this matter would limit
the Company's influence on the daily operations of CEMIG. However SEB would
still have 33% of the voting shares of CEMIG and hold 4 of 11 seats on CEMIG's
board of directors. SEB's economic interest in CEMIG would not be affected. The
significant rights SEB would lose relate to supermajority rights and the right
to participate in the daily operations of CEMIG. SEB obtained financing from
Banco Nacional de Desenvolvimento Economico e Social (BNDES) for approximately
50% of the total purchase price of the CEMIG shares which is secured by a pledge
of SEB's shares in CEMIG. The interest payment originally due May 15, 2000, in
the amount of $107.8 million, has been deferred until May 15, 2001.
15
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
State Line Energy, L.L.C. ("State Line"). On July 28, 1998, an
explosion occurred at State Line causing a fire and substantial damage to the
plant. The precise cause of the explosion and fire has not been determined. Thus
far, seven personal injury lawsuits have been filed against the Company, five of
which were filed in Cook County, Illinois. The Company filed a motion to dismiss
these five cases in 1998 for lack of "in personam" jurisdiction. The motion was
denied in August 1999. In October 1999, the Appellate Court of Illinois granted
our petition for leave to appeal. The outcome of these proceedings cannot now be
determined and an estimated range of loss cannot be made.
WPD Pension Scheme. WPD participates in the ESPS in the United Kingdom,
which includes members from the Regional Electricity Companies as well as other
industry members. WPD used a portion of its pension surplus to fund early
pension payments to terminated employees. An independent pension arbitrator has
issued a ruling directing that another industry employer refund similar amounts
paid, with interest to ESPS. This ruling is currently being appealed to the
House of Lords. The majority of WPD's employees are ESPS members. Based on the
Company's assessment of the current legal position, it anticipates that a
payment by WPD into the ESPS of 24 million pounds ($36 million) will ultimately
be required, should the other industry employer's appeal fail and WPD then be
named in a similar action. Management does not believe such payment would have a
material adverse impact on the Company's financial position, liquidity or
results of operations. Under SFAS No. 87, "Employers' Accounting for Pensions,"
there would be no immediate impact to the Company's results of operations.
SE California. SE California and its subsidiaries SE Delta and SE
Potrero acquired generation assets from Pacific Gas & Electric in April 1999,
subject to reliability-must-run agreements. SE California assumed these
agreements from Pacific Gas & Electric prior to the outcome of a FERC proceeding
initiated in October 1997 that will determine the percentage of a $158.8 million
annual fixed revenue requirement to be paid to the SE California parties by the
CAISO under the reliability-must-run agreements. This revenue requirement was
negotiated as part of a prior settlement of a FERC rate proceeding. SE
California contends that the amount paid by the CAISO should reflect an
allocation based on the CAISO's right to call on the units (as defined by the
reliability-must-run agreements) and the CAISO's actual calls. This approach
would result in annual payments by the CAISO of approximately $120 million, or
75% of the settled fixed revenue requirement. The decision in this case will
affect the amount the CAISO will pay to SE Delta and SE Potrero for the period
from June 1,1999 through December 31, 2001. On June 7, 2000, the administrative
law judge presiding over the proceeding issued an initial decision in which he
allocated responsibility for payment of approximately 3% of the revenue
requirement to the CAISO. On July 7, 2000, SE California appealed the
administrative law judge's decision to the FERC. The outcome of this appeal
cannot be determined. A final FERC order in this proceeding may be appealed to
the U.S. Court of Appeals.
If SE California is unsuccessful in its appeal of the administrative law judge's
decision, SE California will be required to refund certain amounts of the
revenue requirement billed to the CAISO for the period from June 1, 1999 until
the final disposition of the appeal. The amount of this refund as of September
30, 2000 would have been approximately $118 million, however, there would have
been no effect on net income for the three and nine months ended September 30,
2000. This amount does not include interest that may be payable in the event of
a refund. If SE California is unsuccessful in its appeal, it plans to pursue
other options available under the reliability-must-run agreements to mitigate
the impact of the administrative law judge's decision upon its future
operations. The outcome of this appeal is uncertain, and the Company cannot
assure you that it will be successful.
16
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 23, 2000, the FERC denied a complaint filed August 2, 2000 by San
Diego Gas & Electric that sought to extend the $250 price cap to all California
energy and ancillary service markets, not just the markets administered by the
CAISO. However, in its order the FERC instructed its staff to initiate an
investigation of the California power markets and to report its findings to the
FERC and held further hearing procedures in abeyance pending the outcome of this
investigation. On November 1, 2000, the FERC released a Staff Report detailing
the results of the Staff investigation, together with an "Order Proposing
Remedies for California Wholesale Markets" ("November 1 Order"). In the November
1 Order, the Commission found that the California power market structure and
market rules were seriously flawed, and that these flaws, together with short
supply relative to demand, resulted in unusually high energy prices. The
November 1 Order proposed specific remedies to the identified market flaws,
including: (a) imposition of a so-called "soft" price cap at $150/MWh, which
will allow bids above $150/MWh to be accepted, but will subject such bids to
certain reporting obligations requiring sellers to provide cost data and/or
identify applicable opportunity costs and specifying that such bids may not set
the overall market clearing price, (b) elimination of the requirement that the
California utilities sell into and buy from the PX, (c) establishment of
independent non-stakeholder governing boards for the CAISO and the PX, and (d)
establishment of penalty charges for scheduling deviations outside of a
prescribed range. While the FERC concluded that it lacked the legal authority to
order retroactive refunds, it moved the "refund effective date" to October 2,
2000, the date 30 days after the filing of the San Diego Gas & Electric Company
complaint, which is the earliest refund effective date permitted by section 206
of the Federal Power Act. Rates for service after that date will remain subject
to a refund condition until December 31, 2002. The FERC will receive comments on
the November 1 Order for a three-week period, and will issue a final order by
the end of this year. The extent to which the FERC's final order will depart
from the November 1 Order cannot now be determined, and the Company cannot
determine what effect any action by the FERC will have on its financial
condition. In addition to the matters discussed above, the Company is party to
legal proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the results of operations or financial position of the Company.
Commitments and Capital Expenditures
The Company has made firm commitments to buy materials and services in
connection with its ongoing operations and planned expansion and has made
financial guarantees relative to some of its investments. The material
commitments are as follows:
Energy Marketing and Risk Management Activities. The Company has provided
contingent performance guarantees and trade credits on behalf of SCEM and
Southern Energy Europe B.V. ("SEE"), its European energy marketing and risk
management operation. At September 30, 2000, outstanding guarantees related to
the estimated fair value of the Company's energy marketing and risk management
operations net contractual commitments were approximately $268 million an
increase of $122 million from December 31, 1999.
The Company also has additional guarantees related to Vastar, and to Brazos
Electric Power Cooperative, Inc. of $145 million and $70 million, respectively,
at September 30, 2000, an increase of $55 million and a decrease of $5 million
from December 31, 1999, respectively. In addition, a guarantee related to Pan
Alberta Gas, Ltd. of $64 million was issued in the second quarter of 2000.
Vastar and the Company have issued certain financial guarantees made in the
ordinary course of business, on behalf of the SCEM's counterparties, to
financial institutions and other credit grantors. The Company has agreed to
indemnify BP Amoco against losses under such guarantees in proportion to
Vastar's former ownership percentage of SCEM (Note G). At September 30, 2000,
such guarantees amounted to approximately $322 million.
17
<PAGE>
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SCEM has a contract with BP Amoco through December 31, 2007 to purchase the
natural gas that would have been produced by Vastar (now a unit of BP Amoco) in
Canada, Mexico, and the contiguous states of the United States. The negotiated
purchase price of delivered gas is generally equal to the daily spot rate
prevailing at each delivery point. As part of the Company's acquisition of
Vastar's 40% interest in SCEM, the Company agreed to amend the gas purchase and
sale agreement whereby BP Amoco is obligated to deliver fixed quantities at
identified delivery points. The agreement will continue to be in effect through
December 31, 2007. The amendment became effective November 1, 2000.
Periodically, the Company's energy marketing and risk management subsidiaries
also grant options with terms of less than three days for fixed-price,
commodity-based contractual commitments. There is no market for "firm quotes
held open," and these options were issued without cost. The Company's energy
marketing and risk management subsidiaries had no such amounts available under
these quotes at September 30, 2000.
Turbine Purchases and Other Construction-Related Commitments. The Company,
through one of its subsidiaries, has entered into agreements to purchase
additional turbines to support ongoing and planned construction efforts. Minimum
termination amounts under all purchase contracts were $145 million at September
30, 2000. Total amounts to be paid under the agreements if all turbines are
purchased as planned are estimated to be $2,302 million at September 30, 2000.
Other construction related commitments totaled $436 million at September 30,
2000.
Long-Term Service Agreements. The Company, through one of its subsidiaries, has
entered into long-term service agreements for the maintenance and repair of many
of its combustion-turbine or combined-cycle generating plants. These agreements
may be terminated in the event a planned construction project is cancelled. At
September 30, 2000, the amount committed for construction projects in process
was $68 million. The total amount committed if all turbines are purchased as
planned is $1,036 million.
18
<PAGE>
J. Segment Reporting
The Company's principal business segments primarily relate to the geographic
areas in which the Company conducts business: the Americas Group, the
Asia-Pacific Group and the Europe Group. The other reportable business segments
are the Company's financing segment ("SE Finance") and Corporate.
<TABLE>
<CAPTION>
Southern Energy, Inc.
Financial Data by Segment (Unaudited)
For the Three Months Ended September 30, 2000 and 1999
Corporate and
Americas Europe Asia-Pacific SE Finance Eliminations
--------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
(in millions)
Operating Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Generation and energy marketing $4,036 $ 319 $ - $ - $ 123 $ 75 $ - $ - $ - $ -
Distribution & integrated utility
revenues 43 42 71 242 - - - - - -
Other - - - - 4 3 - - 4 5
------ ------ ----- ----- ------ ----- ---- ---- ----- -----
Total operating revenues 4,079 361 71 242 127 78 - - 4 5
Operating Expenses:
Cost of fuel, electricity and other
products 3,562 185 7 124 - - - - - -
Depreciation and amortization 38 23 17 21 32 21 - - 2 2
Other operating expenses 296 100 28 37 30 40 - - 52 4
------ ------ ----- ----- ------ ----- ----- ----- ----- -----
Total operating expenses 3,896 308 52 182 62 61 - - 54 6
------ ------ ----- ----- ------ ----- ----- ----- ----- -----
Operating Income (Loss) 183 53 19 60 65 17 - - (50) (1)
Other Income (Expense):
Interest income (expense) (28) (17) (25) (28) (27) (3) - - (40) (32)
Net gain (loss) on sale of assets 10 16 9 266 - 1 - - (1) 1
Equity in income of affiliates 23 3 28 (2) 18 10 - - - -
Other 4 (6) (3) (2) (4) 3 - - 12 7
------ ------ ----- ----- ------ ----- ----- ----- ----- -----
Income (Loss) From Continuing Operations
Before Income Taxes and Minority
Interest 192 49 28 294 52 28 - - (79) (25)
Provision (benefit) for income taxes 75 15 6 86 9 (22) - - (5) (5)
Minority interest 4 - 3 113 10 5 - - - 1
------ ------ ----- ----- ------ ----- ----- ----- ----- -----
Income (Loss) From Continuing Operations 113 34 19 95 33 45 - - (74) (21)
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - 7 3 - -
------ ------ ----- ----- ------ ----- ----- ----- ----- -----
Net Income (Loss) $ 113 $ 34 $ 19 $ 95 $ 33 $ 45 $ 7 $ 3 $ (74) $ (21)
====== ====== ===== ===== ===== ===== ==== ==== ===== =====
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Southern Energy, Inc.
Financial Data by Segment (Unaudited)
For the Nine Months Ended September 30, 2000 and 1999
Corporate and
Americas Europe Asia-Pacific SE Finance Eliminations
-------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(in millions)
Operating Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Generation and energy marketing $4,698 $ 513 $ (2) $ - $ 369 $ 202 $ - $ - $ - $ -
Distribution & integrated utility
revenues 126 123 263 856 - - - - - -
Other - - - - 10 9 - - 9 8
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Total operating revenues 4,824 636 261 856 379 211 - - 9 8
Operating Expenses:
Cost of fuel, electricity and other
products 3,942 314 23 491 - - - - - -
Depreciation and amortization 87 48 58 64 97 64 - - 2 2
Other operating expenses 496 190 99 119 60 94 - - 81 22
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Total operating expenses 4,525 552 180 674 157 158 - - 83 24
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Operating Income (Loss) 299 84 81 182 222 53 - - (74) (16)
Other Income (Expense):
Interest income (expense) (98) (47) (79) (88) (79) (29) - - (83) (67)
Net gain (loss) on sale of assets 11 20 9 272 (1) - - - (1) 1
Equity in income of affiliates 27 19 56 36 49 103 - - - -
Other 12 7 5 5 16 18 - - 16 5
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Income (Loss) From Continuing Operations
Before Income Taxes and Minority
Interest 251 83 72 407 207 145 - - (142) (77)
Provision (benefit) for income taxes 105 34 (16) 102 (1) (4) - - (32) (24)
Minority interest 5 (7) 26 143 28 19 - - 1 -
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Income (Loss) From Continuing Operations 141 56 62 162 180 130 (111) (53)
Income From Discontinued Operations,
Net of Tax Benefit - - - - - - 20 10
------ ----- ----- ----- ----- ----- ---- ---- ---- ----
Net Income (Loss) $ 141 $ 56 $ 62 $ 162 $ 180 $ 130 $ 20 $ 10 $(111) $ (53)
====== ===== ===== ===== ====== ===== ==== ==== ===== =====
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Southern Energy, Inc.
Selected Balance Sheet Information by Segment (Unaudited)
At September 30, 2000
Corporate and
Assets Americas Europe Asia-Pacific SE Finance Eliminations Total
------------ ----------- --------------- ------------ ---------------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Current Assets $ 3,224 $ 136 $ 632 $ 72 $ 148 $ 4,212
Property, Plant & Equipment,
including Leasehold Interest 2,170 1,892 1,869 - 38 5,969
Total Assets 7,428 3,871 4,564 724 1,128 17,715
Total Debt 1,865 1,703 2,228 419 2,067 8,282
Common equity 1,991 689 1,784 181 (1,953) 2,692
</TABLE>
21
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
OVERVIEW
The Company is a global independent power producer and a leading energy
marketing and risk-management company, with extensive operations in the
Americas, Europe and Asia. The Company owns more than 12,600 megawatts of
electric generating capacity around the world, including about 7,400 megawatts
in the United States, with another 11,200 megawatts under advanced development.
The Company is approximately 80 percent-owned by Southern.
In the Americas region, the Company owns and operates power plants in North
America with a total generation capacity of over 7,300 MW and it controls over
1,700 MW of additional generating capacity through management contracts. The
Company also has projects under development or pending acquisitions of over
11,000 MW, including over 5,000 MW of generation capacity from PEPCO. This
acquisition is scheduled to close in the fourth quarter of 2000. On August 10,
2000 the Company completed the acquisition of the 40% interest, held by Vastar,
of SCEM, which is now wholly-owned and consolidated in its financial statements.
Through SCEM, the Company markets and trades energy and energy-linked
commodities, including electricity, gas, coal and emission allowances. SCEM is
one of the leading electricity and gas marketers in the U.S. In the Caribbean
and South America, the Company has ownership interests in electric utilities,
power plants and transmission facilities. These assets are located in the
Bahamas, Trinidad and Tobago, Brazil and Chile. The Company is pursuing the sale
of its Chilean subsidiary, and it recently sold its Argentine subsidiary.
In Europe, the Company owns a 26% interest in Bewag AG, an electric
utility serving over 2 million customers in Berlin, Germany. The Company also
has a 49% economic interest in WPD, which distributes electricity to
approximately 1.4 million end-users in Southwest England. On September 15, 2000,
WPDL, a company jointly owned by one of the Company's subsidiaries and PPL
Global, committed unconditionally to purchase any shares of Hyder, a U.K.
company, tendered by Hyder shareholders. On October 30, 2000, WPDL finalized the
acquisition of Hyder by making payment for the additional shares needed to bring
WPDL's ownership over 90%. The Company's European marketing and risk management
business began trading power in the Nordic energy markets in 1999 and the
Company expects to begin marketing power in the Dutch, German, Swiss and Italian
markets in the fourth quarter of 2000 and in 2001.
In the Asia-Pacific region, the Company has a net ownership interest in
over 3,000 MW of generation capacity in the Philippines and China. Most of the
Company's revenues in the Asia-Pacific region are derived from contracts with
government entities or regional power boards and are predominantly linked to the
U. S. dollar to mitigate foreign currency risk.
22
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------------------
Third Quarter Year-To-Date
--------------------------------------------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Revenues......................................... $3,595 524% $3,762 220%
Expenses
Cost of fuel, electricity and other products.. 3,260 1055% 3,160 393%
Depreciation and amortization ................ 22 33% 66 37%
Selling, general and administrative........... 204 232% 241 122%
Other operating............................... 17 28% 47 32%
Other Income (Expense)
Interest expense.............................. 44 37% 113 32%
Net gain on sale of assets.................... (266) (94)% (275) (94)%
Equity in income of affiliates................ 58 527% (26) (17)%
Other, net.................................... 7 350% 26 113%
Provision (benefit) for income taxes............. 11 15% (52) (48)%
Minority interest................................ (102) (86)% (95) (61)%
</TABLE>
Operating revenues. The Company's operating revenues for the three and
nine months ended September 30, 2000 were $4,281 million and $5,473 million,
respectively, an increase of $3,595 million and $3,762 million over the same
periods in 1999. The following factors were responsible for the increases in
operating revenues:
o Revenues from generation and energy marketing products for the three and
nine months ended September 30, 2000 were $4,159 million and $5,065
million, respectively, compared to $394 million and $715 million for the
same periods in 1999. These increases of $3,765 million and $4,350 million,
respectively, resulted primarily from the Company's acquisition of Vastar's
40% interest in SCEM effective on August 10, 2000, which is now
consolidated in the Company's financial statements. The increases in
revenue were also attributable to increased market demand in California as
well as the commencement of commercial operations of new plants in North
America in the fourth quarter of 1999 and the second quarter of 2000, and
the Sual plant in the Philippines in the fourth quarter of 1999. The
year-to-date increase is also due to the acquisition of the plants in
California and New York.
o Distribution and integrated utility revenues for the three and nine months
ended September 30, 2000 were $114 million and $389 million, respectively,
compared to $284 million and $979 million for the same periods in 1999.
These decreases of $170 million and $590 million, respectively, resulted
from a reduction in revenues at WPD associated with the September 1999 sale
of the SWEB supply business.
23
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating expenses. Operating expenses for the three and nine months
ended September 30, 2000 were $4,064 million and $4,945 million, respectively,
increases of $3,507 million and $3,537 million, respectively, over the same
periods in 1999. The following factors were responsible for the increases in
operating expenses:
o Cost of fuel, electricity and other products for the three and nine months
ended September 30, 2000 was $3,569 million and $3,965 million,
respectively, compared to $309 million and $805 million for the same
periods in 1999. Increases of $3,260 million and $3,160 million,
respectively, resulted primarily from the Company's acquisition of the
remaining 40% of SCEM, which is now consolidated in its financial
statements. These increases were also attributable to higher natural gas
prices and increased electricity market demand in California as well as the
commencement of commercial operations of new plants in North America in the
fourth quarter of 1999 and the second quarter of 2000, partially offset by
the sale of the SWEB supply business. The year-to-date increase is also due
to the acquisition of the plants in California and New York.
o Depreciation and amortization expense for the three and nine months ended
September 30, 2000 was $89 million and $244 million, respectively, compared
to $67 million and $178 million for the same periods in 1999. These
increases of $22 million and $66 million, respectively, are due to the
commencement of commercial operations of new plants in North America and
the Company's Sual plant in the Philippines in 1999. The year-to-date
increase is also due to the acquisition of the plants in California and New
York.
o Selling, general and administrative expense for the three and nine months
ended September 30, 2000 was $292 million and $438 million, respectively,
compared to $88 million and $197 million for the same periods in 1999.
The majority of these increases of $204 million and $241 million,
respectively, resulted from additional variable marketing costs paid to
SCEM, prior to the Company's acquisition of the remaining 40% of SCEM from
Vastar, increased market demand associated with the Company's generating
plants in North America, its acquisition of the remaining 40% of SCEM, the
commencement of commercial operations of Sual and provisions taken related
to revenues of its California operations under RMR contracts. The
year-to-date increase is also due to the acquisition of the plants in
California and New York. These increases were offset partially by the sale
of the SWEB supply business and a loan receivable provision recorded in the
third quarter of 1999 that related to the Company's operations in China.
o Other operating expense for the three and nine months ended September 30,
2000 was $78 million and $194 million, respectively, compared to $61
million and $147 million for the same periods in 1999. The majority of
these increases of $17 million and $47 million, respectively, resulted from
additional property taxes related to the commencement of commercial
operations of new plants in North America. The year-to-date increase is
also due to the acquisition of the plants in California and New York.
Other Income (Expense). Other expense for the three and nine months
ended September 30, 2000 was $24 million and $140 million, respectively,
compared to other income of $217 million and $255 million from the same period
in 1999. These changes of $241 million, and $395 million respectively, were
primarily due to:
24
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
o Interest expense for the three and nine months ended September 30, 2000 was
$162 million and $462 million, respectively, compared to $118 million and
$349 million for the same periods in 1999. These increases of $44 million
and $113 million, respectively, were due to interest on higher borrowings
to finance acquisitions, fund dividends paid to Southern Company and the
commencement of commercial operations of new plants in North America and of
Sual in the Philippines.
o Net gain on sale of assets for both the three and nine months ended
September 30, 2000 was $18 million, compared to $284 million and $293
million, respectively, for the same periods in 1999. These decreases of
$266 million, and $275 million, respectively, were primarily due to the
sale of the SWEB supply business in the third quarter of 1999 which
resulted in a gain $286 million prior to taxes and other expenses.
o Equity in income of affiliates for the three and nine months ended
September 30, 2000 was $69 million and $132 million, respectively, an
increase of $58 million, and a decrease of $26 million, from the same
periods in 1999. The increase for the quarter was primarily due to
increases in income from the Company's operations in China, and from SCEM
prior to the acquisition of the remaining 40% effective in August 2000. In
addition, 1999 equity income was increased by $54 million as a result of
the successful resolution of a dispute related to the Company's operations
in China, partially offset by expenses related to personnel reductions at
Bewag.
o Other, net for the three and nine months ended September 30, 2000 was $9
million and $49 million, respectively, an increase of $7 million and $26
million, from the same periods in 1999. The increase in the third quarter
was primarily due to $3 million of insurance proceeds received for an
equipment failure. The year-to-date increase includes additional income
from the settlement of a commercial dispute with an outside advisor.
Provision (Benefit) for Income Taxes. The provision for income taxes
for the three and nine months ended September 30, 2000 was $85 million and $56
million, respectively, an increase of $11 million and a decrease of $52 million,
respectively, for the same periods in 1999. The increase in the third quarter is
primarily due to the substantial increase in income generated by the Americas
Group, tax expense related to the Company's transition to a publicly traded
company, as well as additional taxes related to a change in the Company's cash
repatriation strategy for the Philippine operations. In addition, the Company
released a provision of $29 million in the third quarter of 1999 due to a change
in its business structure in China. The year-to-date decrease was also
attributable to a favorable $20 million agreement reached at WPD in the first
quarter of 2000 with the United Kingdom's taxing authority, Inland Revenue.
Minority Interest. Minority interest for the three and nine months
ended September 30, 2000 was $17 million and $60 million, respectively, a
decrease of $102 million and $95 million, from the same periods in 1999. The
decrease in the third quarter was primarily due to the sale of the SWEB supply
business in the third quarter of 1999. The year-to-date decrease is offset
partially by increased income from operations in the Philippines and South
America.
25
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Earnings
The Company's consolidated net income for the three and nine months ended
September 30, 2000 was $98 million ($0.36 per share) and $292 million ($1.07 per
share), respectively, compared to $156 million ($0.57 per share) and $305
million ($1.12 per share) for the corresponding periods of 1999. Earnings
decreased by $58 million or 37.2% and $13 million or 4.3% for the third quarter
and year-to-date 2000, respectively, when compared to the same periods of the
previous year. The decrease in the Company's earnings is due primarily to two
events. First, WPD sold the SWEB supply business in the third quarter of 1999,
increasing net income by $78 million. Second, the Company incurred costs related
to its transition to a publicly traded company of $28 million in the third
quarter of 2000. Excluding the effects of these two events, net income for the
three and nine months ended September 30, 2000 would have been $126 million
($0.46 per share) and $320 million ($1.18 per share), respectively, compared to
$78 million ($0.29 per share) and $227 million ($0.83 per share) for the
corresponding periods of 1999. The increases from operations of $48 million or
61.5% and $93 million or 41.0% for the third quarter and year-to-date 2000,
respectively, when compared to the same periods of the previous year are
attributable to the Company's business segments as follows:
Americas
Net income from the Americas Group totaled $113 million and $141 million for the
three and nine months ended September 30, 2000, respectively. These increases of
$79 million and $85 million, respectively, from the same periods in 1999 were
primarily due to increased market demand and strong performance from its assets
and marketing and risk management operations in California and New York as well
as commercial operation of new plants in North America. The year-to-date
increase is also due to the acquisitions of the plants in California and New
York.
Europe
Net income from the Europe Group totaled $19 million and $62 million for the
three and nine months ended September 30, 2000, respectively, a decrease of $76
million and $100 million, from the same periods in 1999. This decease in the
third quarter was primarily due to the sale of the SWEB supply business in the
third quarter of 1999, which resulted in a net gain of $78 million. This was
offset partially in the same quarter by expenses related to personnel reductions
at Bewag. Adjusting for the sale of the SWEB supply business, net income for the
three and nine months ended September 30, 1999 would have been $17 million and
$84 million, respectively.
Asia-Pacific
Net income from the Asia-Pacific Group totaled $33 million and $180 million for
the three and nine months ended September 30, 2000, respectively, a decrease of
$12 million and an increase of $50 million, from the same periods in 1999. The
third quarter decrease in net income includes an increase in accrued income
taxes in 2000 resulting from a change in the Company's cash repatriation
strategy for the Philippine operations. The third quarter decrease is also
attributable to the favorable resolution of disputes with outside parties in
1999. This is partially offset by the commencement of commercial operations at
Sual and improved performance from the Company's operations in China. The
increase in net income for the nine months ended September 30, 2000 is primarily
attributable to the commencement of commercial operations at Sual.
26
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SE Finance
Net income for the three and nine months ended September 30, 2000 was $7 million
and $20 million, respectively, an increase of $4 million and $10 million,
respectively, from the same periods in 1999. This increase is due to additional
income from leases that were entered into in the fourth quarter of 1999.
Corporate
After-tax corporate costs produced a net loss of $74 million and $111 million
for the three and nine months ended September 30, 2000, respectively, an
increase of $53 million and $58 million, for the same periods in 1999. The
increased loss primarily reflects costs of $28 million related to the Company's
transition to a publicly traded company as well as additional compensation
expenses related to the change in market value of its stock. In addition, the
Company incurred increased interest expense related to additional corporate debt
financings between the fourth quarter of 1999 and the third quarter of 2000 to
fund acquisitions and dividends to Southern Company.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, and for hedging activities. The Statement requires that certain
derivative instruments be recorded in the balance sheet as either assets or
liabilities measured at fair value, and that changes in the fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company intends to adopt the provisions of SFAS No. 133, as amended, on
January 1, 2001.
The Company utilizes financial instruments to reduce its exposure to changes in
interest rates and foreign currency exchange rates for some of its existing and
forecasted debt instruments. The Company also enters into commodity-related
derivatives to hedge exposure to changing prices on certain purchases and energy
sales. Upon adoption, these instruments may qualify as cash flow hedges under
SFAS No. 133, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur or are settled. Any
hedge ineffectiveness will be recognized currently in net income. The Company
also utilizes qualifying financial derivatives to hedge its net investments in
foreign subsidiaries, with related gains and losses deferred in the cumulative
translation adjustment, a component of other comprehensive income.
The Company has a number of energy purchases and sales contracts that meet the
definition of a derivative under SFAS No. 133. In many cases, such transactions
will meet the normal purchase and sale exception prescribed in SFAS No. 133 and
the related contracts will be accounted for under the accrual method. However,
the Company also enters into energy purchases and sales in its energy marketing
and risk management business, which are marked to market through current period
income under existing accounting requirements and will continue to be treated
similarly under SFAS No. 133.
Management continues to assess the effects of adopting SFAS No. 133 on its
consolidated financial statements. However, management expects the adoption of
SFAS No. 133 to have a minimal impact on the Company's net income, but to
increase volatility in other comprehensive income. Where derivatives do not meet
the hedge accounting requirements or the normal purchase and sale exception, the
Company continues to assess its action, which may include restructuring the
derivative instruments, to minimize any potential volatility that may arise in
net income. The application of SFAS No. 133 is still evolving and further
guidance from the FASB is expected. When established, this further guidance may
have additional impacts on the Company's financial statements.
27
<PAGE>
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Cash provided from operating activities totaled approximately $468 million for
the nine months ended September 30, 2000 as compared to approximately $181
million for the same period last year, an increase of approximately 159%. This
increase is primarily due to increased market demand in California as well as
the commencement of commercial operations of new plants in North America in the
fourth quarter of 1999 and the second quarter of 2000, and the Sual plant in the
Philippines in the fourth quarter of 1999. The year-to-date increase is also due
to the acquisition of the plants in California and New York.
As a result of the Company's separation from Southern Company, the Company has
reviewed the current strategy of earnings deferral from Asia. On July 1, 2000,
we adopted a strategy under which only a portion of the future earnings will be
deferred in order to reinvest funds for further growth in the Philippines, fund
construction efforts, or service debt obligations. The remaining earnings will
be repatriated for reinvestment elsewhere or to service parent debt obligations.
Cash used in investing activities totaled $609 million for the nine months ended
September 30, 2000 as compared to $1,538 million for the same period in 1999, a
decrease of approximately 60%. The decrease is primarily attributable to the
acquisitions of the California and New York operations as well as the
commencement of operations, in 1999, of the Company's Sual plant in the
Philippines, as capital expenditures for similar purposes were not made in the
first nine months of 2000. The Company has used cash flows provided by financing
activities primarily to finance investments in the Company's subsidiaries.
Cash provided from financing activities totaled approximately $541 million in
for the nine months ended September 30, 2000 as compared to $1,426 million for
the same period in 1999. The decrease is primarily attributable to financing the
acquisitions of the California and New York operations in 1999. The Company's
financing activities during the nine months ended September 1999 included $1,849
million of proceeds from the issuance of short-term and long-term debt. These
inflows were partially offset by $504 million in payments of long-term debt,
$503 million of dividends paid to Southern Company and $6 million in dividends
to minority interests during the nine months ended 2000. The Company also issued
notes receivable of $511 million primarily to finance the Hyder acquisition.
The Company expects its 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. The Company has generally financed the operations of the Company's
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 the Company 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.
The market price of the Company's common stock at September 30, 2000 was $31.37
per share and the book value was $9.90 per share based on the 272 million shares
outstanding at September 30, 2000, representing a market-to-book ratio of 317%.
28
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its energy marketing activities, the Company energy marketing and
risk management subsidiaries enter into a variety of contractual commitments,
such as swaps, swap options, cap and floor agreements, futures contracts,
forward purchase and sale agreements, and option contracts. These contracts
generally require future settlement and are either executed on an exchange or
traded as OTC instruments. Contractual commitments have widely varying terms and
have durations that range from a few days to a number of years, depending on the
instrument.
The way in which the Company accounts for and presents contractual commitments
in its financial statements depends on both the type and purpose of the
contractual commitment held or issued. As discussed in the summary of accounting
policies, the Company records all contractual commitments used for trading
purposes, including those used to hedge trading positions, at fair value.
Consequently, changes in the amounts recorded in the Company's consolidated
balance sheets resulting from movements in fair value are included in trading
revenues in the period in which they occur. Contractual commitments expose the
Company to both market risk and credit risk.
Market Risk
Market Risk is the potential loss that the Company may incur as a result of
changes in the 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 and the absolute and relative levels of interest rates, as well
as market volatility and liquidity. For instruments such as options, the time
period during which the option may be exercised and the relationship between the
current market price of the underlying instrument and the option's contractual
strike or exercise price also affects the level of market risk. The most
significant factor influencing the overall level of market risk to which the
Company is exposed is its use of various risk management techniques. 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 the stated periods. These
policies, including related risk limits, are approved by the Group boards and
are regularly assessed by management to ensure their appropriateness given the
Company's objectives.
Net notional amounts of electricity, natural gas and crude oil at
September 30, 2000 are as follows:
Net Notional Amounts Unit of Measure
----------------------- -----------------
Electricity 5,050,659 Mwh
Natural gas 16,872,820 Mmbtus
Crude oil (1,027,319) Barrels
29
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
The determination of net notional amounts does not consider any of the market
risk factors discussed above. Net notional amounts are indicative only of the
volume of activity and are not a measure of market risk. Market risk is also
influenced by the relationship among the various off-balance sheet categories,
as well as by the relationship between off-balance sheet items and items
recorded in the Company's consolidated balance sheets. For all of these reasons,
the interpretation of net notional amounts as a measure of market risk could be
misleading. The net notional amounts of the Company's other commodity positions
were immaterial at September 30, 2000.
The fair values of the Company's assets from risk management activities recorded
in the consolidated balance sheets at September 30, 2000, was comprised
primarily of approximately 43% electricity and 48% natural gas. The fair values
of the liabilities from risk management activities recorded in the consolidated
balance sheets at September 30, 2000, were comprised primarily of approximately
48% electricity and 44% natural gas.
Credit Risk.
In conducting its energy marketing and risk management activities, the Company
regularly transacts business with a broad range of entities and a wide variety
of end users, trading companies, and financial institutions. Credit risk is
measured by the loss the Company would record if its counterparties failed to
perform pursuant to the terms of their contractual obligations and the value of
collateral held, if any, were 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. Master netting agreements enable the Company to net
certain assets and liabilities by counterparty. The Company also nets across
product lines and against cash collateral, provided such provisions are
established in the master netting and cash collateral agreements. 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 basis and a group counterparty basis.
No single counterparty represents 10% or more of the Company's credit exposure
at September 30, 2000. The Company's overall exposure to credit risk may be
impacted, either positively or negatively, because its counterparties may be
similarly affected by changes in economic, regulatory, or other conditions.
30
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the section entitled "Business -Legal Proceedings" in the
prospectus filed by Southern Energy, Inc. with the SEC on September 27, 2000
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with
respect to Southern Energy's registration statement on Form S-1 (Registration
No. 333-35390), for information regarding certain legal and administrative
proceedings in which the Company is involved.
SE California. On November 1, 2000, the FERC released a Staff Report detailing
the results of the Staff investigation, together with an "Order Proposing
Remedies for California Wholesale Markets" ("November 1 Order"). In the November
1 Order, the Commission found that the California power market structure and
market rules were seriously flawed, and that these flaws, together with short
supply relative to demand, resulted in unusually high energy prices. The
November 1 Order proposed specific remedies to the identified market flaws,
including: (a) imposition of a so-called "soft" price cap at $150/MWh, which
will allow bids above $150/MWh to be accepted, but will subject such bids to
certain reporting obligations requiring sellers to provide cost data and/or
identify applicable opportunity costs and specifying that such bids may not set
the overall market clearing price, (b) elimination of the requirement that the
California utilities sell into and buy from the PX, (c) establishment of
independent non-stakeholder governing boards for the CAISO and the PX, and (d)
establishment of penalty charges for scheduling deviations outside of a
prescribed range. While the FERC concluded that it lacked the legal authority to
order retroactive refunds, it moved the "refund effective date" to October 2,
2000, the date 30 days after the filing of the San Diego Gas & Electric Company
complaint, which is the earliest refund effective date permitted by section 206
of the Federal Power Act. Rates for service after that date will remain subject
to a refund condition until December 31, 2002. The FERC will receive comments on
the November 1 Order for a three-week period, and will issue a final order by
the end of this year. The extent to which the FERC's final order will depart
from the November 1 Order cannot now be determined, and the Company cannot
determine what effect any action by the FERC will have on its financial
condition. In addition to the matters discussed above, the Company is party to
legal proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the results of operations or financial position of the Company.
(1) Reference is made to the Notes to the Financial Statements herein for
information regarding certain legal and administrative proceedings in
which the Company and its subsidiaries are involved.
31
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
The Company's registration statements for the sale of its common stock
(Registration Statement No. 333-35390) and the 6 1/4% convertible trust
preferred securities (Registration Statement No. 333-41680 and 333-41680-1) were
declared effective by the SEC on September 26, 2000. On September 27, 2000, the
Company began the initial public offering of the 58 million shares of its common
stock, excluding the underwriters overallotment option, for an initial price of
$22.00 per share and 6 million convertible trust preferred securities for an
initial price of $50.00 per preferred security. Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated were the joint book-running managers and the
representatives of the underwriters for both offerings. Both offerings were
completed with all shares of the common stock and convertible trust preferred
securities having been sold on October 2, 2000. Simultaneously, the underwriters
exercised options to purchase from the Company an additional 8,700,000 shares of
common stock at the initial price of $22.00 per share and 900,000 convertible
trust preferred securities at the initial price of $50.00 per preferred
security. This transaction was completed on October 2, 2000. The net proceeds
from the offerings, after deducting underwriting discounts and commissions
payable by the Company, were $1,731 million. The Company used the net proceeds
of the offerings to repay $900 million of short-term debt from credit lines and
$578 million of commercial paper. The remaining proceeds were put into
short-term investments to be used for general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
(b) Reports on Form 8-K.
-------------------
Southern Energy, Inc. filed a Current Report on Form 8-K dated
September 26, 2000.
Items Reported: Item 5
Item 7
Financial statements filed: None
Southern Energy, Inc. filed a Current Report on Form 8-K dated
October 25, 2000.
Items Reported: Item 9
Item 7
Financial statements filed: None
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SOUTHERN ENERGY, INC.
By /s/ James A. Ward
James A. Ward
Senior Vice President, Finance
And Accounting
(Principal Accounting Officer)
Date: November 14, 2000
