<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 2000.
REGISTRATION NOS. 333-41680
333-41680-01
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
SOUTHERN ENERGY, INC.
SEI TRUST I
(Exact names of registrants as specified in their charters)
-------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4911 58-2056305
DELAWARE 4911 APPLIED FOR
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
<TABLE>
<S> <C>
SOUTHERN ENERGY, INC.: SEI TRUST I:
900 ASHWOOD PARKWAY, SUITE 500 1403 FOULK ROAD, SUITE 102
ATLANTA, GEORGIA 30338 WILMINGTON, DELAWARE 19803
(770) 821-7000 (302) 427-1935
</TABLE>
(Address, including zip code, and telephone number, including area code, of
registrants' 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
600 PEACHTREE STREET, N.E. 599 LEXINGTON AVENUE
ATLANTA, GEORGIA 30308 NEW YORK, NEW YORK 10022
(404) 885-3000 (212) 848-4000
</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>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1)(2) PER UNIT(1)(2)(3)(4) OFFERING PRICE(1)(2)(3)(4) FEE(5)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Preferred Securities of SEI
Trust I ("Preferred Securities")... 6,900,000 $50 $345,000,000 $91,080
---------------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Debt Securities
of Southern Energy, Inc. for
issuance directly to SEI Trust I
("Junior Subordinated Debt")......
---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per
share of Southern Energy, Inc.
("Common Stock")(6)...............
---------------------------------------------------------------------------------------------------------------------------------
Guarantees of Preferred Securities
of SEI Trust I by Southern Energy,
Inc. ("Guarantees")...............
---------------------------------------------------------------------------------------------------------------------------------
Total..............................
$345,000,000 $91,080
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------
(1) Includes 900,000 Preferred Securities issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee and
exclusive of interest and dividends, if any.
(3) There are being registered hereunder such indeterminate number or amount
of Common Stock and Junior Subordinated Debt of Southern Energy, Inc. and
Preferred Securities of SEI Trust I as may from time to time be issued at
indeterminate prices. Junior Subordinated Debt will be issued and sold to
SEI Trust I; such Junior Subordinated Debt may later be distributed to
the holders of Preferred Securities upon a dissolution of SEI Trust I and
the distribution of its assets.
(4) Southern Energy, Inc. is also registering under this Registration
Statement all other obligations that it may have with respect to
Preferred Securities issued by SEI Trust I. No separate consideration
will be received for the Guarantee or any other such obligations.
(5) The registration fee for the securities to be registered has previously
been calculated in accordance with Section 6(b) of the Securities Act.
The entire registration fee was paid on July 18, 2000.
(6) Southern Energy, Inc. is registering Common Stock solely for issuance
upon conversion of any securities sold under this Registration Statement
that are convertible into Common Stock. Additionally, this registration
statement pertains to rights to purchase Series A preferred stock of
Southern Energy, Inc. Such rights will initially trade together with the
Common Stock.
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2000
PROSPECTUS
6,000,000 Preferred Securities
SEI TRUST I
% Convertible Trust Preferred Securities, Series A
(Liquidation Preference $50 per Preferred Security)
Fully and unconditionally guaranteed to the extent described herein by, and
convertible into common stock of,
SOUTHERN ENERGY, INC.
-------------------------
A brief description of the % Convertible Trust Preferred Securities,
Series A can be found under "Summary -- The Offering" in this prospectus.
The preferred securities have been approved for listing on the New York
Stock Exchange under the symbol "SOEPrA", subject to official notice of
issuance.
After , 2001, subject to Southern Energy's right to elect a cash
settlement in certain circumstances, the preferred securities are convertible
into Southern Energy common stock in the manner described in this prospectus at
an initial conversion price of $ per share of Southern Energy common
stock for each preferred security, which is equivalent to a conversion rate of
shares of Southern Energy common stock for each preferred security.
Southern Energy common stock will trade on the New York Stock Exchange under the
symbol "SOE."
Concurrently with this offering, Southern Energy is offering 58,000,000
shares of its common stock in an initial public offering by means of a separate
prospectus. The underwriters of the common stock offering have an option to
purchase up to 8,700,000 additional shares of Southern Energy's common stock to
cover over-allotments of shares. This offering is contingent on the common stock
offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING THE PREFERRED SECURITIES.
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 PREFERRED
SECURITY TOTAL
------------- ----------
<S> <C> <C>
Initial public offering price(1)............................ $ $
Underwriting commissions(2)................................. $ $
Proceeds to SEI Trust I..................................... $ $
</TABLE>
-------------------------
(1) Plus accumulated distributions, if any, from the date of original issuance
of the preferred securities.
(2) Underwriting commissions on the preferred securities will be paid by
Southern Energy.
The underwriters may, under certain circumstances, purchase up to an
additional 900,000 preferred securities from SEI Trust I at $ per preferred
security. Southern Energy will pay underwriting commissions of $ per
preferred security on each additional preferred security that is purchased by
the underwriters.
The underwriters expect to deliver the preferred securities in book-entry
form through the facilities of The Depository Trust Company in New York, New
York on , 2000.
-------------------------
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
-------------------------
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
UBS WARBURG LLC
-------------------------
Prospectus dated , 2000
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED IN THIS PROSPECTUS. WE
HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............. 1
Special Note Regarding Forward-
Looking Statements............ 13
Risk Factors.................... 14
Our Separation from Southern
Company....................... 34
Use of Proceeds................. 37
Accounting Treatment of the
Preferred Securities.......... 37
Dividend Policy................. 37
Capitalization.................. 38
Dilution........................ 39
Selected Financial
Information................... 40
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 43
Business........................ 64
Management...................... 126
Relationship with Southern
Company and Related
Transactions.................. 142
Agreements Between Us and
Southern Company.............. 143
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Federal Tax Matters Related to
Our Separation from Southern
Company....................... 151
Principal Stockholder........... 153
Description of SEI Trust I...... 154
Description of the Preferred
Securities.................... 156
Description of the Debentures... 181
Description of the Guarantee.... 193
Relationship Among the Preferred
Securities, the Debentures and
the Guarantee................. 197
Description of Capital Stock.... 199
Tax Consequences................ 208
Underwriting.................... 216
Legal Matters................... 219
Experts......................... 219
Where You Can Find More
Information................... 219
Index to Financial Statements... F-1
</TABLE>
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
i
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the preferred securities being sold in
this offering and our consolidated financial statements and notes thereto
appearing elsewhere in this prospectus, including the "Risk Factors" section.
SOUTHERN ENERGY, INC.
We are a competitive provider of electricity and energy-related products
and services. We have regionally based businesses in the Americas, Europe and
the Asia-Pacific region. We have built and acquired a portfolio of power plants
in which we have net ownership interests totaling 12,652 megawatts (MW) of
generation capacity. In addition, we have projects under development or pending
acquisition totaling 11,212 MW. We also market energy and energy-linked
commodities and manage the risk associated with market price fluctuations of
these commodities. By linking our electricity generation capabilities and our
access to natural gas supplies with our energy marketing and risk management
expertise, our strategy is to meet a wide range of customer requirements as well
as optimize the value of our electricity generating and gas assets.
In North America, we own and operate power plants with a total generation
capacity of 7,389 MW. We control an additional 1,738 MW of generation capacity
through management contracts. We also have projects under development or pending
acquisition totaling 11,101 MW, including 5,154 MW of generation capacity that
we have recently agreed to acquire from Potomac Electric Power Company. Through
Southern Company Energy Marketing, L.P. (SCEM), our wholly owned indirect
subsidiary, we market and trade energy and energy-linked commodities, including
electricity, gas, oil, coal and emission allowances.
In Europe, we own a 26% interest in Bewag AG, an electric utility serving
2.1 million customers in Berlin, Germany. We also have a 49% economic interest
in, and operating control of, Western Power Distribution, which distributes
electricity to approximately 1.4 million end-users in southwest England. Our
European marketing and risk management business began trading power in the
Nordic energy market in 1999. We expect to begin marketing power in the Dutch,
German, Swiss and Italian energy markets in 2000.
In the Asia-Pacific region, we have interests in 3,159 MW of generation
capacity in the Philippines and China. Most of our revenues in the Asia-Pacific
region are derived from contracts with government entities or regional power
boards and are predominantly linked to the U.S. dollar to mitigate foreign
currency exchange risks.
In the Caribbean and South America, we have ownership interests in electric
utilities, power plants and transmission facilities. These assets are located in
the Bahamas, Trinidad and Tobago, Brazil and Chile. We are pursuing the sale of
our Chilean subsidiary, and we recently sold our Argentine subsidiary.
RECENT DEVELOPMENTS
WPD Limited, a company indirectly owned by us and PPL Global, has offered
to acquire all of the outstanding shares of Hyder plc for L565 million
(approximately $847 million) plus the assumption of L2.1 billion (approximately
$3.2 billion) of debt. Hyder owns and operates the electricity network in South
Wales and the water distribution and waste water treatment business for all of
Wales. On September 15, 2000, WPD Limited committed unconditionally to purchase
any
1
<PAGE> 5
shares of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD
Limited had acquired approximately 68% of the shares of Hyder. In addition, WPD
Limited has replaced Hyder's board of directors with our employees and employees
of Western Power Distribution and PPL Global.
On September 11, 2000, we closed the acquisition of an additional 40%
interest in SCEM from Vastar Resources, Inc. for $250 million. The acquisition
was effective as of August 10, 2000. As a result of this transaction, SCEM
became our wholly owned indirect subsidiary.
THE POWER INDUSTRY
In the United States, the power industry had an estimated end-user market
of over $215 billion of electricity sales in 1999 produced by an aggregate base
of power generation facilities with a capacity of approximately 734,000 MW.
Historically, the power generation industry has been characterized by electric
utility monopolies selling to a franchise customer base. In response to
increasing customer demand for access to low-cost electricity and enhanced
services, new regulatory initiatives have been and are continuing to be adopted
to increase competition in the power industry.
We believe that increasing demand for electricity and the need to replace
older power plants will create a need for additional power generating capacity
throughout the United States. We believe that these market trends will create
opportunities for efficient, low-cost power producers that are able to produce
and sell energy to customers at competitive rates.
Outside of the United States, we expect many governments in developed
economies to privatize their utilities, having realized that their energy assets
can be sold to raise capital without impairing system reliability. We expect
these countries to develop regulatory structures to encourage competition in the
electricity sector. In developing countries, the demand for electricity is
expected to grow rapidly. In order to satisfy this anticipated increase in
demand, some developing countries have adopted government programs designed to
encourage private investment in power plants. We believe that these market
trends will continue to create opportunities to acquire and develop power
generation plants outside the United States.
Industry trends and regulatory initiatives are transforming existing
franchise customer markets, which are characterized by vertically integrated,
price-regulated utilities, into markets in which generators compete with each
other for their principal customers (wholesale power suppliers and major
end-users) on the basis of price, service quality and other factors. This
transformation requires that generators and their principal customers manage the
risks associated with producing and delivering energy commodities, thereby
creating opportunities to profitably market energy commodities and provide
services to manage the risks associated with market price fluctuations of these
commodities.
STRATEGY
Our strategy is to be a leading competitive provider of electricity and
energy-related products and services in our target markets of North America,
Europe and the Asia-Pacific region. We intend to acquire, develop and operate
power plants and gas transportation and storage assets primarily in our target
markets. We also intend to integrate power plants and gas assets with the
marketing of energy commodities and the management of market risk associated
with those commodities.
We plan to implement our growth strategy by:
- Maximizing the financial and operational performance of our current
investments,
- Capitalizing on opportunities generated by our regional presence,
- Developing new power plants and expanding our existing plants,
2
<PAGE> 6
- Acquiring power plants and gas assets in our target markets,
- Entering into contractual arrangements for the management and control of
generation capacity and gas transportation and storage assets,
- Integrating energy marketing and risk management with ownership and
control of energy assets, and
- Exploring energy information and e-commerce applications.
We may suffer from some competitive disadvantages which impede our ability
to implement this strategy. The need to develop the management infrastructure
required for an independent company may affect our ability to compete against
companies with longer histories as independent companies. We also expect that,
at least initially, we will not be able to raise equity capital to fund our
growth on terms as attractive as those available to our competitors.
OUR RELATIONSHIP WITH SOUTHERN COMPANY
We are currently a wholly owned subsidiary of Southern Company. Upon the
completion of the common stock 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 the common stock offering by distributing the remaining shares of
our common stock to the holders of Southern Company's common stock.
We have entered into agreements with Southern Company related to the
separation of our business from Southern Company. These separation agreements
govern our interim and ongoing relationships with Southern Company. In
particular, we have entered into an agreement under which Southern Company will
continue to provide various interim services to us, including financial,
accounting, engineering and other services. In addition, after the common stock
offering but prior to the distribution of our stock by Southern Company, we will
transfer the operations and obligations of our leasing and capital funding
subsidiaries to Southern Company. All of the separation agreements were
negotiated in the overall context of our separation from Southern Company and
the requirements of federal and state regulations.
We believe that we will realize certain benefits from our complete
separation from Southern Company, including the following: reduced governmental
regulation, increased capital financing flexibility, a more targeted investment
for stockholders, increased strategic focus, access to additional markets,
increased speed and responsiveness and targeted incentives for management and
employees.
We were incorporated in Delaware on April 20, 1993 as a wholly owned
subsidiary of Southern Company. Our executive offices are located at 900 Ashwood
Parkway, Suite 500, Atlanta, Georgia 30338-4780, and our telephone number is
(770) 821-7000.
3
<PAGE> 7
THE OFFERING
Title............................... % Convertible Trust Preferred
Securities, Series A.
Securities Offered.................. 6,000,000 preferred securities by SEI
Trust I. In addition, the trust has
granted the underwriters an option,
exercisable for 30 days, to purchase up
to an additional 900,000 preferred
securities at the initial public
offering price. Each preferred security
represents a preferred undivided
beneficial interest in the assets of
the trust.
Issuer.............................. SEI Trust I is a Delaware business
trust and a subsidiary of us. The
address of its principal office is 1403
Foulk Road, Suite 102, Wilmington,
Delaware 19803, and its telephone
number is (302) 427-1935.
Common Securities................... The trust will also issue common
securities to us. The common securities
represent common undivided beneficial
interests in the assets of the trust.
We will own all of the common
securities.
Debentures.......................... The trust will use the proceeds from
the sale of the preferred securities
and common securities to purchase from
us % Junior Convertible
Subordinated Debentures, Series A due
2030. The debentures will have the same
financial terms as the preferred
securities, including conversion
rights.
Distributions....................... If you purchase any preferred
securities, you will be entitled to
receive cash distributions at an annual
rate of % of the $50 liquidation
preference per preferred security.
Distributions are cumulative and will
begin to accumulate on the date of
original issuance of the preferred
securities, which we expect to be
, 2000. Distributions will be
payable quarterly in arrears on
, ,
and of
each year beginning ,
, unless we defer interest
payments on the debentures.
Distribution Deferral............... We can, on one or more occasions, defer
interest payments on the debentures for
up to 20 consecutive quarterly periods
unless an event of default on the
debentures has occurred and is
continuing. Interest payments will not
be due and payable on the debentures
during a deferral period. We cannot,
however, defer interest payments beyond
the maturity date of the debentures,
which is , 2030. If we
defer interest payments on the
debentures, the trust will defer
distribution payments on the preferred
securities
4
<PAGE> 8
and the common securities. During a
deferral period, distributions will
continue to accumulate on the preferred
securities. Additional cash
distributions will accumulate on any
deferred distributions.
Compounded interest will accrue on any
deferred interest payments. While
interest payments on the debentures are
deferred, we will generally not be
permitted to pay cash dividends on our
common stock or pay on debt that is
equal with or junior to the debentures.
Because of our ability to defer
interest payments, special tax rules
will apply that will require you to
include interest in income on an
accrual basis, regardless of when such
interest is paid to you. Accordingly,
if we defer payments of interest on the
debentures, you will be required to
include accrued interest income for the
deferred stated interest allocable to
your preferred securities in your gross
income for United States federal income
tax purposes before you actually
receive the related cash distributions.
Different rules may apply to non-U.S.
holders.
Conversion into Common Stock........ Unless we have redeemed the debentures,
and subject to our right to elect a
cash settlement as discussed below, you
will have the right to convert your
preferred securities into shares of our
common stock at any time after
, 2001 and prior to
, 2030. Preferred securities
that have been called for redemption
may only be converted on or before
close of business on the business day
prior to the applicable redemption
date. The preferred securities will
convert into our common stock at an
initial conversion rate of
shares of common stock
for each preferred security. This
conversion rate is equivalent to the
conversion price of $ per
share of our common stock. The initial
conversion rate may be subject to
adjustment.
From , 2001 and until the
next business day following the date of
the distribution of our common stock
held by Southern Company to its
stockholders, as discussed in this
prospectus, we may elect to make a cash
settlement in respect of any preferred
securities surrendered for conversion.
The amount of cash that you will
receive if we elect a cash settlement
will be equal to the value of the
underlying shares of common stock.
5
<PAGE> 9
Rights.............................. One right will be issued and attached
to each share of our common stock
issued upon conversion. Under
circumstances described in "Description
of Capital Stock -- Stockholder Rights
Plan" in this prospectus, each right
will entitle the holder to purchase one
one-thousandth of a share of our Series
A preferred stock.
Ranking............................. The preferred securities represent
preferred undivided beneficial
interests in the assets of the trust,
which will consist of % Junior
Convertible Subordinated Debentures,
Series A due 2030. Our obligations to
pay the debentures are junior to our
payment obligations under our senior
debt.
Redemption by the Trust............. The trust will redeem all of its
outstanding preferred securities and
common securities when the debentures
are paid at maturity on ,
2030. In addition, we can make the
trust redeem all or some of the
preferred securities at any time on or
after , 2003 by redeeming the
debentures at the applicable redemption
price, plus any accrued and unpaid
distributions; provided that we may
only redeem the debentures on or after
, 2003 and before
if the closing price of our
common stock exceeds % of the
conversion price for a specified period
of time before the notice of redemption
is given. If that happens, the trust
will use the cash it receives from our
redemption of the debentures to redeem,
on a pro rata basis, preferred
securities and common securities of an
aggregate liquidation amount equal to
the aggregate principal amount of the
debentures redeemed.
Special Event Redemption or
Distribution...................... We may redeem all outstanding
debentures at the special event
redemption price upon the occurrence of
a tax event described below or a change
in law that could require the trust to
register as an investment company under
the Investment Company Act of 1940 (and
thus cause the redemption of the
preferred securities at that price).
Upon the occurrence of a tax event, we
may elect to pay additional interest to
the trust so that the distributions to
holders of the preferred securities are
not reduced because of the tax event.
In addition, we have the right to
dissolve the trust at any time; if a
tax event or a change in law that could
require the trust to register as an
investment company under the Investment
Company Act
6
<PAGE> 10
occurs, we may elect to redeem the
preferred securities by distributing
the debentures to you.
A tax event generally means specified
tax changes that could result in:
- the trust being subject to United
States federal income taxes or more
than a de minimis amount of other
governmental charges or
- the non-deductibility of interest
payments on the debentures.
Conditional Right to Shorten Stated
Maturity of the Debentures........ We can shorten the stated maturity of
the debentures to as early as
, 2015 if there are specified
tax changes that could result in the
non-deductibility of interest payments
on the debentures. If we exercise this
option, the trust will redeem all of
the outstanding preferred securities
when the debentures are paid on their
new maturity date.
Liquidation Preference.............. If the trust is liquidated and the
debentures are not distributed to you,
you will generally be entitled to
receive $50 per preferred security plus
any accumulated and unpaid
distributions on each preferred
security you hold.
The Guarantee....................... We will guarantee the trust's payment
obligations on the preferred securities
to the extent described in this
prospectus. Under the guarantee, we
will guarantee the trust's payment
obligations, but only to the extent the
trust has sufficient funds to make
payments on the preferred securities.
If we do not make payments on the
debentures, the trust will not have
sufficient funds to make payments on
the preferred securities, in which case
you will be unable to rely on the
guarantee for payment. Our obligations
under the guarantee are junior to our
obligations to make payments on all of
our other liabilities, except as
discussed elsewhere in this prospectus.
Dissolution of the Trust and
Distribution of the Debentures.... We have the right to dissolve the trust
at any time. If we exercise this right,
the trust will redeem the preferred
securities by distributing the
debentures to you and to us, as holder
of the common securities, on a pro rata
basis. If the trust distributes the
debentures, we will use our best
efforts to have the debentures listed
on the New York Stock Exchange or on
any national exchange or automated
quotation system on which the preferred
securities are listed.
7
<PAGE> 11
Form of Preferred Securities........ The preferred securities will initially
be represented by a global certificate
registered in the name of Cede & Co.,
as nominee for The Depository Trust
Company.
Use of Proceeds..................... The trust will use the proceeds from
the sale of the preferred securities to
purchase the debentures from us. We
will use a portion of the net proceeds
from the sale of the debentures to the
trust and from the concurrent initial
public offering of common stock to
repay short-term debt of approximately
$839 million. The remaining proceeds
will be used for general corporate
purposes.
Voting Rights....................... Generally, you will not have any voting
rights as a holder of preferred
securities.
Listing............................. The preferred securities have been
approved for listing on the New York
Stock Exchange under the symbol "SOE
PrA", subject to official notice of
issuance. You should be aware that
listing of the preferred securities
will not ensure that an active and
liquid trading market will be available
for the preferred securities.
Concurrent Common Stock Offering.... Concurrently with this offering of
preferred securities, we are offering
by a separate prospectus 58,000,000
shares of our common stock in an
initial public offering. The
underwriters of the common stock
offering have an option to purchase up
to 8,700,000 additional shares of our
common stock to cover over-allotments.
This offering is contingent on the
common stock offering.
8
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL DATA
You should read the following summary historical financial data together
with our consolidated financial statements and the related notes and with
"Selected Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
In addition, you should read the following summary historical financial
data in light of the following:
- Our operating revenues declined in 1998 due to our contribution on
January 1, 1998 of our power marketing and risk management activities to
Southern Company Energy Marketing, L.P. (SCEM), our marketing and risk
management joint venture with Vastar formed in September 1997. When the
joint venture was formed in September 1997, we contributed only our gas
marketing and risk management assets to the venture. Prior to the
formation of the joint venture, our marketing and risk management
activities were wholly-owned and consolidated. From January 1, 1998 until
August 9, 2000, the day prior to the effective date of our acquisition of
Vastar's 40% interest in SCEM, we accounted for this joint venture under
the equity method of accounting. For 1997, operating revenues would have
been $1,768 million if we had not consolidated our marketing and risk
management operations. Effective August 10, 2000, we acquired Vastar's
40% interest in SCEM for $250 million. Upon the closing of the
transaction, Vastar transferred its interest in SCEM to us and SCEM
became our wholly owned indirect subsidiary and will be consolidated in
our financial statements on a prospective basis.
- The write-down of assets for 1998 includes write-downs of our investments
in our Argentine subsidiary, Hidroelectrica Alicura S.A. (Alicura), and
our Chilean subsidiary, Empresa Electrica del Norte Grande S.A.
(EDELNOR), to adjust for the difference between the carrying value of the
assets and their fair market value. The write-down for 1999 and the six
months ended June 30, 2000 includes further write-downs of our
investments in Alicura and EDELNOR to maintain the carrying value at the
fair market value as well as our interest in a $31 million write-down at
Western Power Distribution relating to impaired metering assets.
Pro forma balance sheet amounts and pro forma income statement amounts for
1999 and the six months ended June 30, 2000 give effect to the probable
acquisition of Hyder by WPD Limited, a UK-based company in which we expect to
own a 40% interest. As part of this acquisition, Western Power Distribution
would no longer be a consolidated subsidiary but, instead, our investment would
be accounted for under the equity method. The pro forma information below should
be read in conjunction with the Southern Energy pro forma financial statements
and Southern Energy's and Hyder's historical consolidated financial statements
included elsewhere in this prospectus.
Pro forma balance sheet amounts, as adjusted, give effect to the following
actions as though these actions had taken place as of June 30, 2000:
- the transfer of the operations of our capital funding subsidiary,
Southern Company Capital Funding, Inc. (Capital Funding), to Southern
Company;
- the transfer of our leasing subsidiary, SE Finance Capital Corporation
(SE Finance), to Southern Company. As a result of our decision on April
17, 2000 to transfer SE Finance to Southern Company, we have included the
historical results of operations of the related subsidiaries as a
discontinued operation; and
- the payment by us on July 7, 2000 of cash dividends to Southern Company
in the aggregate amount of $53 million, and short-term borrowings to fund
those dividends.
9
<PAGE> 13
Pro forma balance sheet amounts, as further adjusted, give effect to our
sale of 6,000,000 preferred securities in this offering at an assumed public
offering price of $50.00 per preferred security and the application of the
proceeds from this offering.
Pro forma balance sheet amounts, as finally adjusted, give effect to our
sale of 58,000,000 shares of common stock at an assumed initial public offering
price of $19.00 per share in a public offering concurrent with this offering and
the application of the proceeds from both offerings.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1998 1999 1999 1999 2000 2000
---- ------ ------ ------ ------ --------- ------ ------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues........................... $584 $1,600 $3,750 $1,819 $2,268 $1,292 $1,025 $1,194 $1,004
Write down of assets......................... -- -- -- 308 60 29 5 14 14
Operating income (loss)...................... 66 150 272 (5) 444 213 174 311 215
Other income (expense):
Interest income............................ 13 16 138 146 172 166 80 81 80
Interest expense........................... (64) (133) (345) (430) (502) (410) (231) (300) (259)
Gain on sales of assets.................... 11 66 24 41 313 27 9 -- --
Equity in income of affiliates............. 10 13 58 135 111 268 147 63 102
Receivables recovery....................... -- -- -- 29 64 64 12 -- --
Other, net................................. (1) 28 33 29 72 47 21 40 30
---- ------ ------ ------ ------ ------ ------ ------ ------
Total other (expense) income............. (31) (10) (92) (50) 230 162 38 (116) (47)
---- ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from continuing operations
before income taxes and minority
interest................................... 35 140 180 (55) 674 375 212 195 168
Provision (benefit) for income taxes:
Continuing operations...................... 8 54 27 (123) 129 (5) 34 (29) (31)
Windfall profits tax(1).................... -- -- 148 -- -- -- -- -- --
Minority interest............................ 13 13 29 80 183 19 36 43 10
---- ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from continuing operations..... 14 73 (24) (12) 362 $ 361 142 181 $ 189
====== ======
Income from discontinued operations, net of
income tax benefit of $10 in 1997, $22 in
1998, $15 in 1999, and $7 and $9 for the
six months ended June 30, 1999 and 2000,
respectively............................... -- -- 8 12 10 7 13
---- ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary item...... 14 73 (16) -- 372 149 194
Extraordinary gain on early extinguishment of
debt, net of income tax of $2 in 1995 and
$5 in 1996................................. 4 8 -- -- -- -- --
---- ------ ------ ------ ------ ------ ------
Net income (loss)........................ $ 18 $ 81 $ (16) $ -- $ 372 $ 149 $ 194
==== ====== ====== ====== ====== ====== ======
</TABLE>
10
<PAGE> 14
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1998 1999 1999 1999 2000 2000
------- ------ ------- ------- ------- --------- ------- ------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE INFORMATION:
BASIC:
From continuing operations...... $ 0.05 $ 0.27 $ (0.09) $ (0.04) $ 1.33 -- $ 0. 52 $ 0.67 --
From discontinued operations.... -- -- 0.03 0.04 0.04 -- 0.03 0.04 --
From extraordinary gain......... 0.02 0.03 -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------- ------
Net income.................... $ 0.07 $ 0.30 $ (0.06) $ -- $ 1.37 -- $ 0.55 $ 0.71 --
======= ====== ======= ======= ======= ======= ======
PRO FORMA BASIC(2):
From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64
===== ======
From discontinued operations.... 0.04 0.04
------- ------
Net income.................... $ 1.25 $ 0.65
======= ======
PRO FORMA DILUTED(2):
From continuing operations...... $ 1.21 $1.21 $ 0.61 $ 0.64
===== ======
From discontinued operations.... 0.04 0.04
------- ------
Net income.................... $ 1.25 $ 0.65
======= ======
STATEMENT OF CASH FLOWS DATA:
Cash flow from operating
activities...................... $ 158 $ (226) $ 264 $ 402 $ 515 -- $ 153 $ 217 --
Cash flow from investing
activities...................... (1,244) (136) (4,203) (1,741) (2,263) -- (1,668) (261) --
Cash flow from financing
activities...................... 1,653 (193) 4,177 1,502 1,516 -- 1,329 418 --
OTHER OPERATING DATA:
EBITDA(3)......................... $ 122 $ 258 $ 512 $ 351 $ 825 $ 661 $ 432 $ 529 $ 432
Ratio of combined fixed charges
and preference dividends to
earnings(4)..................... 3.1 1.9 1.4 0.6 2.0 1.4
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------------------------------------------
PRO FORMA, PRO FORMA,
PRO FORMA, AS FURTHER AS FINALLY
ACTUAL PRO FORMA AS ADJUSTED ADJUSTED ADJUSTED
------- --------- ----------- ---------- ----------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 691 607 $ 542 $ 542 $ 990
Property, plant and equipment, net................ 5,912 3,985 3,985 3,985 3,985
Investments....................................... 1,550 1,813 1,745 1,745 1,745
Investment in leveraged leases.................... 566 566 -- -- --
Total assets.................................... 14,308 11,980 10,188 10,188 10,636
Non-recourse debt(5).............................. 6,063 5,157 4,731 4,731 4,731
Total debt...................................... 7,834 6,928 6,555 6,265 5,663
Subsidiary obligated mandatorily redeemable
preferred securities(6)......................... 1,026 950 -- -- --
Minority Interest
Company obligated mandatorily redeemable
securities of a subsidiary holding solely
parent company debentures..................... -- -- -- 300 300
Stockholder's equity.............................. 2,775 2,775 2,549 2,549 3,599
</TABLE>
(1) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.
(2) Pro forma basic earnings per share information gives effect to the dividends
we paid to Southern Company in 2000 as though they had been paid during the
periods presented, in accordance with SEC Staff Accounting Bulletin Topic
1:B:3. Pro forma diluted earnings per share information gives effect to the
conversion of the Southern Energy value creation plan standard units
outstanding at December 31, 1999 and June 30, 2000, respectively, into
options to purchase our common stock.
(3) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it is
a widely accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA,
as defined, is not
11
<PAGE> 15
intended to represent cash flows for the period, nor is it presented as an
alternative to operating income or as an indicator of operating performance.
It should not be considered in isolation or as a substitute for a measure of
performance prepared in accordance with generally accepted accounting
principles (GAAP) in the United States and is not indicative of operating
income or cash flow from operations as determined under GAAP. Our method of
computation may or may not be comparable to other similarly titled measures
by other companies.
(4) The deficiency in reaching a 1.0 ratio during 1998 was $177 million.
(5) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
(6) As of June 30, 2000, this total included $950 million of preferred
securities and capital securities issued by special purpose financing
subsidiaries held by Capital Funding, the proceeds of which were loaned to
Southern Company. Southern Company pays interest on subordinated notes
issued in favor of the financing subsidiaries, which payments are used to
pay dividends on those preferred or capital securities. In addition,
Southern Company has guaranteed payments due under the terms of those
securities. These securities are non-recourse to us. In connection with our
separation from Southern Company, Capital Funding will be transferred to
Southern Company. The remaining $76 million of these securities were issued
by a special purpose finance subsidiary of Southern Investments UK plc. They
are also non-recourse to us but they are not guaranteed by Southern Company
and they will remain outstanding after the offerings but have been
eliminated in this pro forma presentation because Southern Investments UK
would no longer be consolidated by us after the acquisition of Hyder
(assuming successful completion of this acquisition).
12
<PAGE> 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks and
relate to future events, our future financial performance or our projected
business results. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors. These factors include:
- legislative and regulatory initiatives regarding deregulation and
restructuring of the electric utility industry;
- the extent and timing of the entry of additional competition in the
markets of our subsidiaries and affiliates;
- our pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
- state, federal and other rate regulations in the United States and in
foreign countries in which our subsidiaries and affiliates operate;
- changes in or application of environmental and other laws and regulations
to which we and our subsidiaries and affiliates are subject;
- political, legal and economic conditions and developments in the United
States and in foreign countries in which our subsidiaries and affiliates
operate;
- financial market conditions and the results of our financing efforts;
changes in commodity prices and interest rates; weather and other natural
phenomena;
- our performance of projects undertaken and the success of our efforts to
invest in and develop new opportunities; and
- other factors, including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We do not undertake a duty to update any
of the forward-looking statements after the date of this prospectus.
13
<PAGE> 17
RISK FACTORS
You should carefully consider the risks described below as well as other
information contained in this prospectus before buying securities in this
offering. The risks described in this section are those that we consider to be
the most significant to our offering. If any of these events occur, our
business, financial condition or results of operations could be materially
harmed, the trading price of the preferred securities and our common stock into
which the preferred securities may be converted could decline and you may lose
all or part of your investment.
RISKS RELATED TO OUR BUSINESS
CHANGES IN COMMODITY PRICES MAY INCREASE THE COST OF PRODUCING POWER AND
DECREASE THE AMOUNT WE RECEIVE FROM SELLING POWER, RESULTING IN FINANCIAL
PERFORMANCE BELOW OUR EXPECTATIONS.
Our generation and distribution businesses are subject to changes in power
prices and fuel costs which may impact our financial results and financial
position by increasing the cost of producing power and decreasing the amount we
receive from the sale of power. In addition, actual power prices and fuel costs
may differ from those assumed in our financial models. As a result, our
financial results may not meet our expectations.
OUR PROFITABILITY MAY DECLINE IF WE ARE NOT ABLE TO FULLY HEDGE AGAINST
CHANGES IN COMMODITY PRICES OR IF OUR HEDGING PROCEDURES DO NOT WORK AS
PLANNED.
To lower our financial exposure related to commodity price fluctuations,
our energy marketing and risk management business routinely enters into
contracts to hedge purchase and sale commitments, weather conditions, fuel
requirements and inventories of natural gas, coal, electricity, crude oil and
other commodities. As part of this strategy, we routinely utilize fixed-price
forward physical purchase and sales contracts, futures, financial swaps and
option contracts traded in the over-the-counter markets or exchanges. However,
we do not expect to cover the entire exposure from market price volatility of
our assets and the coverage will vary over time. In addition, as a result of
marketplace illiquidity and other factors, our marketing and risk management
operations may, at times, be unable to fully hedge their portfolios for market
risks. Failure to hedge against changes in commodity prices may cause our
profitability to decline.
We may, at times, have an open position in the market, within established
guidelines, resulting from the management of our portfolio. To the extent open
positions exist, fluctuating commodity prices can impact financial results and
financial position, either favorably or unfavorably.
Commodity price variability results from many factors, including:
- weather,
- illiquid markets,
- transmission or transportation inefficiencies,
- availability of competitively priced alternative energy sources,
- demand for energy commodities,
- natural gas, crude oil and coal production,
- natural disasters, wars, embargoes and other catastrophic events, and
- federal, state and foreign energy and environmental regulation and
legislation.
Furthermore, the risk management procedures we have in place may not always
be followed or may not always work as planned. As a result of these and other
factors, we cannot predict with precision the impact that our risk management
decisions may have on our businesses, operating results or financial position.
Although we devote a considerable amount of management efforts to these issues,
their outcome is uncertain.
14
<PAGE> 18
OUR PROJECTS LOCATED OUTSIDE OF THE UNITED STATES EXPOSE US TO RISKS RELATED
TO LAWS OF OTHER COUNTRIES, TAXES, ECONOMIC CONDITIONS, FLUCTUATIONS IN
CURRENCY RATES, LABOR SUPPLY AND RELATIONS, POLITICAL CONDITIONS AND POLICIES
OF FOREIGN GOVERNMENTS. THESE RISKS MAY DELAY OR REDUCE OUR REALIZATION OF
VALUE FROM OUR INTERNATIONAL PROJECTS.
We have substantial operations outside the United States. In 1999, we
derived approximately 78% of our net income from our foreign operations. The
acquisition, financing, development and operation of projects outside the United
States entail significant political and financial risks, which vary by country,
including:
- changes in laws or regulations,
- changes in foreign tax laws and regulations, including unexpected tax
liabilities,
- changes in United States laws, including tax laws, related to foreign
operations,
- compliance with United States foreign corrupt practices laws,
- changes in government policies or personnel,
- changes in general economic conditions affecting each country,
- difficulty in converting our earnings to U.S. dollars or moving funds out
of the country in which the funds were earned,
- fluctuations in currency exchange rates,
- changes in labor relations in operations outside the United States,
- political instability and civil unrest, and
- expropriation and confiscation of assets and facilities.
Despite contractual protections we have against many of these risks for our
operations in the Philippines, China and other countries in which we operate or
may invest in the future, our actual results may be affected by the occurrence
of any of these events. The occurrence of any of these events could
substantially delay or reduce the value of the project concerned.
Risk from fluctuations in currency exchange rates can arise when our
foreign subsidiaries borrow funds in one type of currency but receive revenue in
another. In such cases, an adverse change in exchange rates can reduce our
ability to meet debt service obligations. Foreign currency risk can also arise
when the revenues received by our foreign subsidiaries are not in U.S. dollars.
In such cases, a strengthening of the U.S. dollar could reduce the amount of
cash and income we receive from these foreign subsidiaries.
While we believe we have hedges and contracts in place to mitigate our most
significant foreign currency exchange risks, we have some exposure that is not
hedged. For example, while we use long-term cross-currency agreements to hedge a
significant portion of our net investments in both Western Power Distribution
and Bewag AG, we have a portion that is not hedged. We also have currency risks
with our investment in Companhia Energetica de Minas Gerais (CEMIG) in Brazil.
We believe that these risks are material but we have decided not to hedge them
due to the high cost and the uncertain effectiveness of implementing such a
hedge.
Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations of some
countries may limit our ability to hold a majority interest in some of the
projects that we may develop or acquire, thus limiting our ability to control
the development, construction and operation of those projects. In addition, the
legal environment in foreign countries in which we currently own assets or
projects or may develop projects in the future could make it more difficult for
us to enforce our rights under agreements relating to such projects. Our
international projects may also be subject to risks of being delayed, suspended
or terminated by the applicable foreign governments or may be subject to risks
of contract invalidation by commercial or governmental entities. For example, in
the Philippines pending electricity reform laws and implementing regulations are
intended to break-up and privatize most of the Philippines
15
<PAGE> 19
National Power Corporation, our main customer. We do not believe that these
regulations will have a material adverse effect on our operations in the
Philippines but we cannot assure you that this will be the case.
SOME OF OUR FACILITIES DEPEND ON ONLY ONE OR A FEW CUSTOMERS OR SUPPLIERS.
THESE PARTIES, AS WELL AS OTHER PARTIES WITH WHOM WE HAVE CONTRACTS, MAY FAIL
TO PERFORM THEIR OBLIGATIONS, WHICH MAY RESULT IN A DEFAULT ON PROJECT DEBT
AND MAY REQUIRE US TO INSTITUTE LEGAL PROCEEDINGS TO ENFORCE OUR AGREEMENTS.
Several of our power production facilities rely on a single customer or a
few customers to purchase all of the facility's output or on a single supplier
or a few suppliers to provide fuel, water and other services required for the
operation of the facility. Our sale and procurement agreements for these
facilities are long-term agreements that provide support for any project debt
used to finance the related facilities. The financial performance of these
facilities is dependent on the continued performance by customers and suppliers
of their obligations under their long-term agreements and, in particular, on the
credit quality of the facilities' customers. A facility's financial results
could be materially adversely affected if any one customer or supplier fails to
fulfill its contractual obligations and we are unable to find other customers or
suppliers to produce the same level of profitability. As a result of the failure
of a major customer or supplier to meet its contractual obligations, we may be
unable to repay obligations under our project or corporate debt.
Most significantly, for the year ended December 31, 1999, approximately 14%
and 35% of our revenues and net income, respectively, were attributable to sales
made by our Philippine operations under power sales agreements with National
Power Corporation. National Power Corporation is contractually committed to
purchase a significant amount of power, which we anticipate will generate
significant revenues and net income in the future. We cannot assure you that
National Power Corporation will make the payments it has contracted to make or
that the Philippine government will promptly honor its guarantee of the
contracts.
In addition, our marketing and risk management operations are exposed to
the risk that counterparties which owe us money or energy as a result of market
transactions will not perform their obligations. We have had to sue some
counterparties in the past because of their failure to perform, and one
counterparty filed for bankruptcy protection as a result.
WE MAY BE UNABLE TO OBTAIN THE FINANCING WE NEED TO PURSUE OUR GROWTH
STRATEGY, AND ANY FUTURE FINANCING WE RECEIVE MAY BE LESS FAVORABLE TO US THAN
OUR CURRENT ARRANGEMENTS. ANY DIFFICULTY WE EXPERIENCE IN OBTAINING FAVORABLE
FINANCING ARRANGEMENTS MAY ADVERSELY AFFECT OUR ABILITY TO EXPAND OUR
OPERATIONS AND, AS A RESULT, MAY ADVERSELY AFFECT THE VALUE OF OUR STOCK.
Each of our projects under development and those projects and businesses we
may seek to acquire or construct will require substantial capital investment.
Our continued access to capital with acceptable terms is necessary for the
success of our growth strategy. Our attempts to consummate future financings may
not be successful or on favorable terms.
We have generally been able to arrange for a majority of the financing of
each project or business on a basis that is substantially non-recourse to us. We
may attempt to continue this practice where and when we determine it to be in
our best interest, but we cannot assure you that market conditions and other
factors will permit future project and acquisition financings on terms similar
to those our subsidiaries have previously received. Our ability to arrange for
financing on a substantially non-recourse basis and the costs of such capital
are dependent on numerous factors, including general economic and capital market
conditions, credit availability from banks, investor confidence, the continued
success of current projects and the continued existence of tax and securities
laws which are conducive to raising capital in this manner. If we are not able
to obtain financing for our projects on
16
<PAGE> 20
a substantially non-recourse basis, we may have to finance them using recourse
capital which could take one of the following forms:
- issue additional debt at the corporate level,
- issue additional equity securities,
- make larger equity investments in our projects, or
- provide more financial support for our projects.
We may decide not to build new plants or acquire facilities. Any of these
alternatives could have a material adverse effect on our growth prospects and
the market price of our common stock and the preferred securities.
In the past, a significant amount of our debt and equity capital needs has
been provided by Southern Company. Southern Company has also periodically
provided credit support to us. In addition, we believe that we have obtained
third party financing on relatively favorable terms based in part on Southern
Company's ownership interest in us. Following the common stock offering,
Southern Company will no longer provide financing or credit support except for
specified transactions or for a limited period of time. As a result, we may not
be able to obtain third party financing on favorable terms or at all. We may
require or choose to obtain additional debt or equity financing in the future.
Future equity financings could be dilutive to existing holders of our common
stock, and future debt financings could involve restrictive covenants.
OUR ACTIVITIES ARE RESTRICTED BY SUBSTANTIAL INDEBTEDNESS. THIS INDEBTEDNESS
MAY BE ACCELERATED AND WE MAY BE FORCED TO DEFAULT ON OUR DEBT OBLIGATIONS IF
WE ARE UNABLE TO SERVICE IT. ACCELERATION OF SOME OF OUR DEBT MAY CAUSE OTHER
LENDERS TO ACCELERATE OTHER DEBT OBLIGATIONS.
We have incurred substantial indebtedness on a consolidated basis to
finance our business. As of June 30, 2000, our total consolidated indebtedness
was $8.9 billion, our total consolidated assets were $14.3 billion and our
stockholders' equity was $2.8 billion. Our ability to meet our debt service
obligations and to repay our outstanding indebtedness will depend primarily upon
cash flow produced by our business.
Our level of 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.
17
<PAGE> 21
If we are unable to comply with the terms of our debt agreements, we may be
required to refinance all or a portion of our debt or to obtain additional
financing. We may be unable to refinance or obtain additional financing because
of our high levels of debt and the debt incurrence restrictions under our debt
agreements. We may be forced to default on our debt obligations if cash flow is
insufficient and refinancing or additional financing is unavailable. If we
default under the terms of our indebtedness, the relevant debt holders may
accelerate the maturity of our obligations, which could cause cross-defaults or
cross-acceleration under our other obligations.
OUR COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT AND THE COST
OF COMPLIANCE WITH NEW ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT OUR
PROFITABILITY.
Our operations are subject to extensive federal, state, local and foreign
statutes, rules and regulations relating to environmental protection. To comply
with these legal requirements, we must spend significant sums on environmental
monitoring, pollution control equipment and emission fees. We may be exposed to
compliance risks from new projects, as well as from plants we have acquired. For
example, the State of New York has issued a notice of violation to the previous
owners of Plant Lovett, which we have acquired, alleging violations in the
operation of the plant prior to our acquisition. Although we have not received a
notice of violation and we dispute the allegations, we may incur costs
installing pollution control equipment at the plant. In addition, the U.S.
Environmental Protection Agency has commenced an enforcement action against a
number of electric utilities for alleged violations of Clean Air Act
requirements related to modifications of existing coal-fired power plants.
Our failure to comply with environmental laws may result in the assessment
of penalties and fines against us by regulatory authorities. With the trend
toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the number and types of assets operated by us
subject to environmental regulation, we expect our environmental expenditures to
be substantial in the future. As is true in many countries of the world, the
governments of the United States, China, the Philippines, various European
nations and Trinidad and Tobago recently have proposed increased environmental
regulation of many industrial activities, including increased regulation of air
quality, water quality and solid waste management. For example, the U.S.
Environmental Protection Agency has recently promulgated more stringent air
quality standards for particulate matter emitted from power plants. The scope
and extent of new environmental regulations, including their effect on our
operations, is unclear.
Unless our contracts with customers expressly permit us to pass through
increased costs attributable to new statutes, rules and regulations, we may not
be able to recover capital costs of complying with new environmental
regulations, which may adversely affect our profitability. Most of our contracts
with customers do not permit us to recover capital costs incurred by us to
comply with new environmental regulations. However, our contracts for our State
Line facility and the Power Generation Company of Trinidad and Tobago have
provisions that allow us to recover a portion of our capital costs. In addition,
the contracts for our Philippine operations have provisions that allow us to
negotiate with the Philippine government for the recovery of costs associated
with changes in environmental laws, although there is no guarantee that we can
recover any of those costs. Finally, there are provisions in the tariffs imposed
by the California Independent System Operator that potentially would allow us to
recover costs of capital additions, including environmental upgrades, for our
California operations.
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PRIOR TO OUR COMPLETE SEPARATION FROM SOUTHERN COMPANY, OUR BUSINESS WILL
CONTINUE TO BE SUBJECT TO REGULATION UNDER THE PUBLIC UTILITY HOLDING COMPANY
ACT. THAT ACT LIMITS OUR BUSINESS OPERATIONS, OUR ABILITY TO PAY DIVIDENDS,
OUR ABILITY TO RECEIVE DIVIDENDS FROM OUR SUBSIDIARIES AND OUR ABILITY TO
AFFILIATE WITH PUBLIC UTILITIES.
Until the distribution of our stock held by Southern Company, we will
continue to be subject to regulation under the Public Utility Holding Company
Act (PUHCA) as a subsidiary company of a public utility holding company
registered under PUHCA. As a result, we are subject to limitations under PUHCA
related to our acquisition, ownership and operation of energy assets outside of
our current business plan and payments of dividends by us and our subsidiaries
from unearned surplus. Additionally, as long as we are an affiliate of Southern
Company, we must obtain approval under PUHCA prior to acquiring the voting
securities of any public utility or taking any other actions that would result
in affiliation with another public utility. Following the distribution, we do
not expect to be subject to the provisions of PUHCA either as a subsidiary or an
affiliate of Southern Company. Further, we believe that as long as our domestic
power plants qualify as either exempt wholesale generators or as qualifying
facilities 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 exempt wholesale generators, foreign utility
companies and qualifying facilities, to engage in other energy-related
activities in the United States and to engage in energy marketing apart from
investments in exempt wholesale generators and foreign utility companies in the
United States and Canada. The SEC order expires on December 31, 2000. We have
filed an application to extend the expiration date of this order so that the
order will not expire until after the distribution. If the SEC does not extend
the order and we are still an affiliate of Southern Company, our operations may
be adversely affected and we may not be able to pursue our business strategies.
Further, we and our subsidiaries are authorized under an order issued by the SEC
to pay dividends out of unearned surplus. This order is necessary to exempt us
and our subsidiaries from restrictions on the payment of dividends contained in
PUHCA. The order expires June 30, 2001. If Southern Company has not completed
the distribution of our common stock by June 30, 2001, and if the SEC does not
extend the order beyond that date, cash may be trapped in some of our
subsidiaries, reducing our cash management flexibility and increasing our need
for working capital and external financing.
Our energy marketing business units are authorized under orders issued by
the SEC to conduct electricity and natural gas marketing in the United States
and Canada and, through December 31, 2000, to invest up to $300 million to
acquire assets related to energy marketing in the United States and Canada.
Prior to the distribution, this restriction will limit our ability to make a
major acquisition of an energy asset (which is not a foreign utility company,
exempt wholesale generator or a United States energy-related company) without
further PUHCA approvals.
OUR BUSINESS IN THE UNITED STATES IS SUBJECT TO COMPLEX GOVERNMENT REGULATIONS
AND CHANGES IN THESE REGULATIONS OR IN THEIR IMPLEMENTATION MAY AFFECT THE
RATES WE ARE ABLE TO CHARGE, THE COSTS OF OPERATING OUR FACILITIES OR OUR
ABILITY TO OPERATE OUR FACILITIES, ANY OF WHICH MAY NEGATIVELY IMPACT OUR
RESULTS OF OPERATIONS.
The majority of our generation operations in the United States are exempt
wholesale generators which sell electricity exclusively into the wholesale
market. Generally, our exempt wholesale generators are subject to regulation by
the FERC regarding rate matters and state public utility commissions regarding
non-rate matters. The majority of our generation from exempt wholesale
generators is sold at market prices under market rate authority exercised by the
FERC, although the FERC has the authority to impose "cost of service" rate
regulation if it determines that market
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pricing is not in the public interest. Any reduction by the FERC of the rates we
may receive for our generation activities may adversely affect our results of
operations.
For example, on June 7, 2000, an administrative law judge presiding over a
FERC proceeding involving our California operations issued an initial decision
allocating the responsibility for payment of a settled $158.8 million amount to
be paid under the reliability-must-run contracts between our California
subsidiaries and the California Independent System Operator (CAISO). The
administrative law judge allocated 3% of the responsibility to the CAISO and the
remainder to our California subsidiaries. Our California subsidiaries had
proposed to allocate 75%, $120 million, of the responsibility to the CAISO. On
July 7, 2000, we filed an appeal of this decision with the FERC. However, we
cannot assure you that our appeal will be successful. A final FERC order in this
proceeding may be appealed to the United States Circuit Court of Appeals. If we
are not successful in this appeal, our results of operations would be adversely
affected. For more information regarding this proceeding, see "Business -- Legal
Proceedings."
To conduct our business, we must obtain licenses, permits and approvals for
our plants. We cannot assure you that we will be able to obtain and comply with
all necessary licenses, permits and approvals for our plants. If we cannot
comply with all applicable regulations, our business, results of operations and
financial condition could be adversely affected.
THE ENERGY INDUSTRY IS RAPIDLY CHANGING TO INCREASED COMPETITION AND WE MIGHT
NOT BE SUCCESSFUL IN RESPONDING TO THESE CHANGES.
We may not be able to respond in a timely or effective manner to the many
changes intended to increase competition in the energy industry in both domestic
and international markets. These changes may include deregulation of the
electric utility industry in some markets, privatization of the electric utility
industry in other markets and increasing competition in all markets. To the
extent competitive pressures increase and the pricing and sale of electricity
assumes more characteristics of a commodity business, the economics of our
business may come under increasing pressure. Industry deregulation and
privatization may not only continue to fuel the current trend toward
consolidation in the utility industry but may also encourage the disaggregation
of vertically integrated utilities into separate generation, transmission and
distribution businesses. As a result, additional significant competitors could
become active in our industry and we may not be able to maintain our revenues
and earnings in this competitive marketplace or to acquire or develop new assets
to pursue our growth strategy.
Many states are implementing or considering regulatory initiatives designed
to increase competition in the domestic power generation industry and increase
access for independent power producers and electricity consumers to electric
utilities' transmission and distribution systems. Industry restructuring in
regions where we have substantial operations could affect our operations in a
manner which is difficult to predict, since the effects will depend on the form
and timing of the restructuring. Access to transmission and distribution systems
is essential to permit entry into markets by us and our competitors. In
addition, effective entry involves substantial investment in fixed assets, such
as building power plants. If a region's power transmission infrastructure is
inadequate, our recovery of costs and profits may be limited, and the imposition
of restrictive price regulation may reduce incentive to invest in expansion of
transmission infrastructures. In addition, regulations to which we are subject
may change in other ways which we cannot predict. The structure of these energy
regulations has been in the past, and may be in the future, the subject of
various challenges and restructuring proposals by utilities and other industry
participants. Regulatory initiatives in foreign countries where we have or will
have operations involve the same types of risks.
The United States Congress is considering legislation which would repeal
PURPA entirely, or at least eliminate the obligation of utilities to purchase
power from qualifying facilities. Various bills
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have also proposed repeal of PUHCA. In the event of a PUHCA repeal, competition
from independent power generators and from utilities with generation,
transmission and distribution would likely increase. Repeal of PURPA or PUHCA
may or may not be part of comprehensive legislation to restructure the electric
utility industry, allow retail competition and deregulate most electric rates.
We cannot predict the effect of this type of legislation, although we anticipate
that any legislation would result in increased competition. If we were unable to
compete in an increasingly competitive environment, our business and results of
operation may suffer.
The FERC has issued power and gas transmission initiatives that require
electric and gas transmission services be offered on a common carrier basis
unbundled from commodity sales. Although these initiatives are designed to
encourage wholesale market transactions for electricity and gas, there is the
potential that fair and equal access to transmissions systems will not be
available and we cannot predict the timing of industry changes as a result of
these initiatives or the adequacy of transmission additions in specific markets.
In Canada, national and provincial governments have instituted natural gas
regulations also designed to encourage the development of competitive markets.
However, we cannot predict the timing and scope of the development of a
competitive market in Canada or the effect of these or future regulations on
these markets.
We cannot predict whether the federal government, state legislatures or
foreign governments will adopt legislation relating to the deregulation of the
energy industry. We cannot assure you that the introduction of new laws or other
future regulatory developments will not have a material adverse effect on our
business, results of operations or financial condition.
CHANGES IN TECHNOLOGY MAY SIGNIFICANTLY IMPACT OUR BUSINESS BY MAKING OUR
POWER PLANTS LESS COMPETITIVE.
A basic premise of our business is that generating power at central power
plants achieves economies of scale and produces electricity at a low price.
There are other technologies that can produce electricity, most notably fuel
cells, microturbines, windmills and photovoltaic (solar) cells. The average cost
for new central station generated electricity is approximately 3(cent) per
kilowatt hour (kWh) while costs for current alternate electricity generation
methods range from approximately 5(cent) per kWh to 20(cent) per kWh. Research
and development activities are ongoing to seek improvements in the alternate
technologies. It is possible that advances will reduce the cost of alternate
methods of electric production to a level that is equal to or below that of most
central station electric production. If this were to happen, the value of our
power plants may be significantly impaired.
OUR FACILITIES MAY NOT OPERATE AS PLANNED, WHICH MAY LEAD TO POOR FINANCIAL
PERFORMANCE AND THE ACCELERATION OF OUR PROJECT DEBT.
Our operation of power plants involves many risks, including the breakdown
or failure of generation equipment or other equipment or processes, labor
disputes, fuel interruption and operating performance below expected levels. For
example, in 1998 an explosion and fire occurred at our State Line facility in
Indiana, which caused personal injuries and damage to equipment. In addition,
weather related incidents and other natural disasters can disrupt both
generation and transmission delivery systems. Operation of our power plants
below expected capacity levels may result in lost revenues or increased
expenses, including higher maintenance costs and penalties. In addition, we may
not be able to repay the project debt for an under-performing facility, which
could trigger default provisions in a project subsidiary's or project
affiliate's financing agreements and might allow the affected lenders to
accelerate that debt.
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OUR OPERATIONS DEPEND SUBSTANTIALLY ON THE PERFORMANCE OF OUR SUBSIDIARIES AND
AFFILIATES, SOME OF WHICH WE DO NOT CONTROL AND SOME OF WHICH ARE SUBJECT TO
RESTRICTIONS AND TAXATION ON DIVIDENDS AND DISTRIBUTIONS.
Almost all of our operations are conducted through our subsidiaries and
affiliates. As a result, we depend almost entirely upon their earnings and cash
flow.
Six of our major affiliates, listed below, are not subject to our control
of management and policies to the same extent as our consolidated subsidiaries:
- Birchwood Power Partners, L.P. (Birchwood), which owns the Birchwood
power plant in Fredericksburg, Virginia,
- Bewag AG, the Berlin electric utility,
- Guangdong Guonghope Power Co., Ltd., which controls the Shajiao C plant
in China,
- CEMIG,
- the Power Generation Company of Trinidad and Tobago, and
- Shandong International Power Development Company.
However, we do exercise significant influence over the operations of these
affiliates, and we account for these investments using the equity method of
accounting. These affiliates contributed approximately 30% of our income from
continuing operations in 1999.
In addition, if we complete our pending acquisition of Hyder on the terms
currently contemplated, we would no longer control Western Power Distribution,
nor would we control WPD Limited. However, we would exercise significant
influence over the operations of these entities, and we would account for these
investments using the equity method of accounting.
The debt agreements of some of our subsidiaries and affiliates restrict
their ability to pay dividends, make distributions or otherwise transfer funds
to us prior to the payment of other obligations, including operating expenses,
debt service and reserves. Further, if we elect to receive distributions of
earnings from our foreign operations, we may incur United States taxes, net of
any available foreign tax credits, on such amounts. Dividend payments from our
international projects to us are, in some countries, also subject to withholding
taxes.
OUR BUSINESS DEVELOPMENT ACTIVITIES MAY NOT BE SUCCESSFUL AND OUR PROJECTS
UNDER CONSTRUCTION MAY NOT COMMENCE OPERATION AS SCHEDULED DESPITE THE
EXPENDITURE OF SIGNIFICANT AMOUNTS OF CAPITAL.
Our business involves numerous risks relating to the acquisition,
development and construction of large power plants. Our success in developing a
particular project is contingent upon, among other things, negotiation of
satisfactory engineering, construction, fuel supply and power sales contracts,
receipt of required governmental permits and timely implementation and
satisfactory completion of construction. We may be unsuccessful in accomplishing
any of these matters or in doing so on a timely basis. Although we may attempt
to minimize the financial risks in the development of a project by securing a
favorable power sales agreement, obtaining all required governmental permits and
approvals and arranging adequate financing prior to the commencement of
construction, the development of a power project may require us to expend
significant sums for preliminary engineering, permitting and legal and other
expenses before we can determine whether a project is feasible, economically
attractive or capable of being financed.
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Currently, we have power plants under development or construction and we
intend to pursue the expansion of existing plants and the development of other
new plants. Our completion of these facilities without delays or cost overruns
is subject to substantial risks, including:
- changes in market prices,
- shortages and inconsistent qualities of equipment, material and labor,
- work stoppages,
- permitting and other regulatory matters,
- adverse weather conditions,
- unforeseen engineering problems,
- environmental and geological conditions,
- unanticipated cost increases, and
- our attention to other projects,
any of which could give rise to delays, cost overruns or the termination of the
plant expansion, construction or development.
If we were unable to complete the development of a facility, we would
generally not be able to recover our investment in the project. The process for
obtaining initial environmental, siting and other governmental permits and
approvals is complicated, expensive and lengthy, often taking more than one
year, and is subject to significant uncertainties. In addition, construction
delays and contractor performance shortfalls can result in the loss of revenues
and may, in turn, adversely affect our results of operations. The failure to
complete construction according to specifications can result in liabilities,
reduced plant efficiency, higher operating costs and reduced earnings. We cannot
assure you that we will be successful in the development or construction of
power production facilities in the future.
WE HAVE TAKEN INCOME TAX REPORTING POSITIONS THAT HAVE NOT BEEN AUDITED BY THE
INTERNAL REVENUE SERVICE AND COULD BE DISALLOWED. ANY DISALLOWANCE WOULD
ADVERSELY AFFECT US.
In connection with the acquisition of our international operations we have
taken federal income tax reporting positions that have not been audited by the
Internal Revenue Service (IRS) for any tax years after 1995. We believe that we
have substantial authority for the positions we have taken, and we have
disclosed on Southern Company's consolidated income tax returns that we have
taken these reporting positions. However, we cannot assure you that these or
other reporting positions will be sustained. The disallowance of one or more of
these reporting positions could have a material adverse effect on our cash flows
and net income (approximately $350 million if all reporting positions are
disallowed), which could impair, at least temporarily, our ability to finance
new investments. However, we do not expect any disallowance of tax reporting
positions that we have taken to prevent us from achieving our growth strategy.
RISKS RELATED TO OUR SEPARATION FROM SOUTHERN COMPANY
OUR CREDIT RATING WILL LIKELY DECLINE AS A RESULT OF OUR SEPARATION FROM
SOUTHERN COMPANY AND AS A RESULT WE MAY FACE INCREASED BORROWING COSTS, MORE
RESTRICTIVE COVENANTS AND REDUCED AMOUNTS OF CREDIT, WHICH MAY MAKE IT MORE
DIFFICULT AND EXPENSIVE TO PURSUE OUR GROWTH STRATEGY.
Our operation as a separate entity from Southern Company will likely have a
negative impact on our credit rating and may also affect the credit ratings of
our subsidiaries. In fact, rating agencies have recently announced that they
will re-assess our credit ratings and the credit ratings of our subsidiaries in
light of our separation from Southern Company. These announcements indicate that
our credit rating and the credit ratings of our subsidiaries will likely decline
upon completion of their re-assessment. Historically, Southern Company has
provided financing and credit support to us and our project financing
activities. Following the common stock offering, Southern Company will no longer
provide financing or credit support for our operations except for specified
transactions and for a
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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, we may face increased
borrowing costs, more restrictive covenants and reduced amounts of credit.
In addition, we have performance guarantees related to SCEM's business that
require us to maintain an investment grade credit rating. If our credit rating
declines below investment grade, we will be obligated to provide credit
enhancement to the guaranteed party in the form of a pledge of cash collateral,
a letter of credit or other similar credit enhancement. Furthermore, if the
credit ratings of our energy marketing and risk management subsidiaries decline
below an investment grade credit rating, our trading partners may refuse to
trade with us or trade only on terms unfavorable to us.
Any of these events would likely result in increased borrowing costs, more
restrictive covenants and reduced lines of credit from lenders, suppliers and
counterparties, all of which would adversely affect our business and results of
operations and our ability to raise capital to pursue our growth strategy. We
cannot assure you that our credit ratings will not be negatively affected after
our separation from Southern Company.
OUR CREDIT AGREEMENTS HAVE CHANGE OF CONTROL PROVISIONS THAT MUST BE WAIVED,
OR THE AGREEMENTS MUST BE REPLACED, PRIOR TO THE DISTRIBUTION OF OUR COMMON
STOCK BY SOUTHERN COMPANY. WE MAY INCUR MATERIAL COSTS IF WE ARE UNABLE TO
OBTAIN WAIVERS AND MUST REPAY OR REFINANCE THESE CREDIT AGREEMENTS. IN
ADDITION, OBTAINING WAIVERS AND REPLACING AGREEMENTS MAY RESULT IN SUBSTANTIAL
COSTS AND LESS FAVORABLE TERMS THAN WE CURRENTLY ENJOY.
The distribution of our common stock by Southern Company, if it occurs,
will constitute a change of control under provisions in all of our corporate
credit agreements and many of our subsidiary credit agreements. Without the
consent of or a waiver from the lenders under these agreements, the distribution
will result in an event of default. In addition, an event of default under one
of these credit agreements may trigger an event of default under our other
credit agreements. Upon an event of default under these credit agreements, the
lenders may terminate any obligation to make further advances and declare all
outstanding indebtedness immediately due and payable. We will seek consents or
waivers of these provisions prior to the distribution of our common stock by
Southern Company. We may incur additional costs to obtain these consents and
waivers. In addition, we may be required to renegotiate the terms of these
agreements or replace them on terms less favorable than we currently enjoy. We
cannot assure you that we will be successful in obtaining consents or waivers on
favorable terms or at all. If we cannot obtain consents or waivers, we may incur
material costs to repay or refinance these agreements. We cannot assure you that
we will be able to repay or refinance these agreements. Any of these events may
have an adverse effect on our business and our results of operations. Our
inability to obtain consents or waivers or to refinance project-level loans with
principal amounts totaling approximately $2.7 billion may require us to borrow
at the corporate level which could constrain our ability to raise sufficient
additional capital to achieve our strategic growth objectives.
OUR SEPARATION FROM SOUTHERN COMPANY WILL RESULT IN A LOSS OF INTANGIBLE
BENEFITS AND THE QUALIFIED EMPLOYMENT POOL CURRENTLY PROVIDED BY OUR
ASSOCIATION WITH SOUTHERN COMPANY.
In the past we have enjoyed "brand" identification, goodwill and other
intangible benefits as a result of being one of Southern Company's subsidiaries.
We have also had access to the pool of Southern Company employees in filling our
management, administrative and technical positions. We will no longer have
access to or be able to rely on these benefits, which may adversely affect our
business.
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OUR BUSINESS AND YOUR INVESTMENT IN THE PREFERRED SECURITIES MAY BE ADVERSELY
AFFECTED IF SOUTHERN COMPANY DOES NOT COMPLETE THE DISTRIBUTION OF OUR COMMON
STOCK BECAUSE WE WOULD REMAIN SUBJECT TO REGULATORY RESTRICTIONS AS A
SUBSIDIARY OF A PUBLIC UTILITY HOLDING COMPANY AND BECAUSE WE WOULD REMAIN
SUBJECT TO CONTROL BY SOUTHERN COMPANY.
Although Southern Company has advised us that it currently intends to
complete the distribution of our common stock within 12 months after the common
stock offering, we cannot assure you whether or when it will occur. Southern
Company is not obligated to complete the distribution of our common stock.
Southern Company currently intends that it will distribute to its stockholders
all of our common stock that it owns, although it is not obligated to do so.
Our separation from Southern Company and the distribution of our stock by
Southern Company requires PUHCA authorization, and we cannot assure you that
such authorization will be received. Southern Company is requesting an extension
of its general authority to continue to own us, required under PUHCA to
accomplish the distribution in calendar year 2001. The SEC also has general
authority over transactions among Southern Company affiliates under PUHCA.
Southern Company and we will file a request with the SEC to allow the
distribution to proceed as contemplated by the separation agreements. The SEC
may impose conditions on or disapprove of the proposed separation and any of the
separation agreements.
If Southern Company fails to complete the distribution of our common stock,
or fails to complete it substantially within the time contemplated, our business
would be adversely affected. We would remain subject to regulatory restrictions
as a subsidiary of a regulated public utility holding company, we would not be
able to raise equity capital without compliance with regulatory requirements and
we would likely not realize the benefits we anticipate resulting from our
separation from Southern Company. We cannot assure you that we will obtain the
expected benefits or as to the timing of any benefits.
In addition, until this distribution occurs, the risks discussed below
relating to Southern Company's control of us and the potential business
conflicts of interest between Southern Company and us will continue to be
relevant to you. If the distribution is delayed or not completed at all, the
liquidity of the preferred securities and our shares of common stock into which
those securities may be converted 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, which, in turn, could
affect the price of the preferred securities.
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 the common stock 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 the common stock offering, by themselves, will not be able to
affect the outcome of any stockholder vote prior to the planned distribution of
our stock to Southern Company stockholders. As a result, Southern Company,
subject to any fiduciary duty owed to our minority stockholders under Delaware
law, will be able to control all matters affecting us, including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers,
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- 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.
OUR HISTORICAL FINANCIAL RESULTS AS A SUBSIDIARY OF SOUTHERN COMPANY MAY NOT
BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE COMPANY.
The historical financial information we have included in this prospectus
does not necessarily reflect what our financial position, results of operations
and cash flows would have been had we been a separate, stand-alone entity during
the periods presented. Our costs and expenses reflect charges from Southern
Company for centralized corporate services and infrastructure costs, including:
- engineering,
- legal,
- accounting,
- information technology,
- investor relations and stockholder services,
- insurance and risk management,
- tax,
- environmental,
- human resources and payroll, and
- external affairs, including marketing and public relations.
These allocations have been determined based on regulatory limitations and
other bases that we and Southern Company considered to be reasonable reflections
of the utilization of services provided to us or for the benefits received by
us. This historical financial information is not necessarily indicative of what
our results of operations, financial position and cash flows will be in the
future. We may experience significant changes in our cost structure, funding and
operations as a result of our separation from Southern Company, including
increased costs associated with reduced economies of scale, increased marketing
expenses related to building a company brand identity separate from Southern
Company and increased costs associated with being a publicly traded, stand-alone
company.
IF THE DISTRIBUTION OF OUR STOCK BY SOUTHERN COMPANY TO ITS STOCKHOLDERS FAILS
TO QUALIFY AS A TAX-FREE TRANSACTION, WE MAY BE REQUIRED TO INDEMNIFY SOUTHERN
COMPANY FOR ANY RESULTING TAXES. THIS POTENTIAL OBLIGATION TO INDEMNIFY
SOUTHERN COMPANY MAY PREVENT OR DELAY A CHANGE OF CONTROL OF US AFTER SOUTHERN
COMPANY DISTRIBUTES OUR STOCK TO ITS SHAREHOLDERS.
Within 12 months after the completion of the common stock offering,
Southern Company intends to distribute the shares of our stock it owns to
Southern Company stockholders. On August 1, 2000, we and Southern Company
received a ruling from the IRS that the distribution will be tax-free to
Southern Company and its stockholders for United States federal income tax
purposes. However, under an agreement between us and Southern Company, if we
breach any representations in connection with the ruling, take any action which
causes our representations to be untrue or engage in a transaction after the
distribution that causes the distribution to be taxable to Southern Company, we
will be required to indemnify Southern Company for any resulting taxes. We
estimate that the amount of any indemnification payments would be approximately
$1 billion, and that payments by us of this amount would materially affect our
earnings and cause us not to have sufficient financial resources to achieve our
growth strategy.
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Current tax law provides for a presumption that the distribution of our
stock by Southern Company, if it occurs, may be taxable to Southern Company if
our company undergoes a 50% or greater change in stock ownership within two
years after the distribution. Under agreements between Southern Company and us,
Southern Company may require us to reimburse any taxation costs incurred by
Southern Company and its stockholders as a result of a transaction resulting in
a change in control of our company. These costs may be so great that they delay
or prevent a strategic acquisition or change in control of our company.
OUR DECONSOLIDATION FROM THE SOUTHERN COMPANY CONSOLIDATED TAX GROUP MAY
RESULT IN ADVERSE TAX CONSEQUENCES TO US.
Subsequent to the distribution of our stock by Southern Company, we will
cease to be a member of the Southern Company consolidated tax group. Our
separation from the Southern Company consolidated tax group will change our
overall future income tax posture. Based on our current structure and net
income, we could be limited in our future ability to effectively use tax
attributes such as foreign tax credits associated with overseas operations. The
inability to use these attributes could result in material tax liabilities. We
intend to undertake appropriate measures after deconsolidation in order to
mitigate any adverse tax effect of no longer being a part of the Southern
Company consolidated tax group. We cannot assure you that these efforts will be
successful. Should these efforts be unsuccessful, our deconsolidation from the
Southern Company tax group may have a material impact on our tax liabilities and
financial position. Currently, we cannot quantify these potential impacts.
However, we do not expect any such tax liabilities to materially affect our
ability to pursue our growth strategy.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH SOUTHERN COMPANY
WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF SOUTHERN
COMPANY'S CONTROLLING OWNERSHIP PRIOR TO THE DISTRIBUTION, WE MAY NOT BE ABLE
TO RESOLVE THESE CONFLICTS ON TERMS COMMENSURATE WITH THOSE POSSIBLE IN ARMS'
LENGTH TRANSACTIONS.
Conflicts of interest may arise between Southern Company and us in a number
of areas relating to our past and ongoing relationships. Conflicts of interest
with Southern Company may arise under many circumstances, including the
following:
- solicitation and hiring of employees from each other,
- the timing and manner of any sales or distributions by Southern Company
of all or any portion of its ownership interest in us,
- the nature and quality of transitional services Southern Company has
agreed to provide us,
- our business operations within Southern Company's service territory or
other business opportunities that would compete with Southern Company,
- actions and decisions of legislative bodies and administrative agencies,
and
- our dividend policy.
Following the common stock offering, the agreements we have entered into
with Southern Company may be amended upon agreement of the parties. While we are
controlled by Southern Company, Southern Company may be able to require us to
agree to amendments to these agreements. We may not be able to resolve any
potential conflicts with Southern Company, and even if we do, the resolution may
be less favorable than if we were dealing with an unaffiliated party.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF SOUTHERN COMPANY COMMON STOCK.
Many of our directors and executive officers own a substantial amount of
Southern Company common stock and options to purchase Southern Company common
stock. Ownership of Southern
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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, AND WE CANNOT ASSURE YOU THAT THE
TRANSITIONAL SERVICES THAT SOUTHERN COMPANY HAS AGREED TO PROVIDE US WILL BE
SUFFICIENT FOR OUR NEEDS.
We currently use Southern Company systems to support some of our
operations, including human resources, payroll and wide-area computer networks.
We are in the process of creating our own systems to replace Southern Company's
systems. These systems are very complex and we may not be successful in
implementing these systems or transitioning data from Southern Company's systems
to our own. Any failure or significant downtime in Southern Company's or our own
information systems could prevent us from paying payroll or performing other
administrative services and could harm our business. In addition, the
transitional services generally have a term of two years or less following the
effective date of the applicable agreement. After the expiration of these
various arrangements, we may not be able to replace the transitional services
with a comparable quality of service or on terms and conditions as favorable as
those we will receive from Southern Company.
Following the common stock offering, Southern Company has agreed to provide
transitional services to us, including, but not limited to, services related to:
- engineering and technical consulting,
- human resources, administration and payroll,
- accounting and treasury,
- procurement,
- auditing,
- legal,
- governmental affairs,
- information technology infrastructure, and
- insurance.
Under the separation agreements, Southern Company is only obligated to
provide services to us after it has satisfied its obligations to its other
subsidiaries and operating companies. In addition, Southern Company has wide
discretion on what employees it will utilize to provide services to us.
Consequently, the quality and quantity of the services we receive from Southern
Company may not be as good as the services we received prior to the
effectiveness of the separation agreements.
RISKS RELATED TO THE PREFERRED SECURITIES
THE TRUST MAY BE UNABLE TO MAKE DISTRIBUTIONS ON THE PREFERRED SECURITIES IF
WE DEFAULT ON OUR SENIOR DEBT BECAUSE OUR OBLIGATIONS TO PAY ON THE DEBENTURES
AND THE GUARANTEE ARE JUNIOR TO OUR PAYMENT OBLIGATIONS UNDER OUR SENIOR DEBT.
Because of the subordinated nature of the guarantee and the debentures, we:
- will not be permitted to make any payments of principal, including
redemption payments, or interest on the debentures if we default on our
senior debt, as described under "Description of the
Debentures -- Subordination" in this prospectus,
- will not be permitted to make payments on the guarantee if we default on
any of our other liabilities, including senior debt, other than
liabilities that are equal or subordinate to the guarantee by their terms
as described under "Description of the Guarantee" in this prospectus, and
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- must pay all of our senior debt before we make payments on the guarantee
or the debentures if we become bankrupt, liquidate or dissolve.
The preferred securities, the guarantee and the debentures do not limit our
or our subsidiaries' ability to incur additional indebtedness, including
indebtedness that ranks senior to the debentures and the guarantee. As of June
30, 2000, we had approximately $2.16 billion of senior debt.
THE DEBENTURES AND THE GUARANTEE WILL BE EFFECTIVELY SUBORDINATED TO
OBLIGATIONS OF OUR SUBSIDIARIES.
The debentures and the guarantee will be effectively subordinated to all
indebtedness and other obligations of our subsidiaries. Our subsidiaries are
separate legal entities and have no obligation to pay, or make funds available
to pay, any amounts due on the debentures, the preferred securities or the
guarantee. At June 30, 2000, our subsidiaries had total combined assets of
$14.15 billion, net of receivables from us, and liabilities of $9.90 billion,
exclusive of net payables to us.
THE GUARANTEE ONLY GUARANTEES PAYMENTS ON THE PREFERRED SECURITIES IF THE
TRUST HAS CASH AVAILABLE.
If we fail to make payments on the debentures, the trust will be unable to
make the related distribution, redemption or liquidation payments on the
preferred securities to you. In those circumstances, you cannot rely on the
guarantee for payments of those amounts. Instead, if we are in default under the
debentures, you may:
- rely on the property trustee of the trust to enforce the trust's rights
under the debentures or
- directly sue us or seek other remedies to collect your pro rata share of
payments owed.
OUR RIGHT TO DEFER INTEREST PAYMENTS ON THE DEBENTURES HAS TAX CONSEQUENCES
FOR YOU.
We can, on one or more occasions, defer interest payments on the debentures
for up to 20 consecutive quarterly periods unless an event of default under the
debentures has occurred and is continuing. We cannot, however, defer interest
payments beyond the maturity date of the debentures, which is , 2030.
If we defer interest payments on the debentures, the trust will also defer
distribution payments on the preferred securities and the common securities.
During a deferral period, distributions will continue to accumulate on the
preferred securities and the common securities. Also, additional distributions
will accumulate on any deferred distributions at an annual rate of %,
compounded quarterly, to the extent permitted by law.
Because of our ability to defer interest payments, special tax rules will
apply that will require you to include interest in income on an accrual basis,
regardless of when such interest is paid to you. Accordingly, if we defer
payments of interest on the debentures, you will be required to include accrued
interest income for the deferred interest allocable to your share of preferred
securities in your gross income for United States federal income tax purposes
prior to receiving any cash distributions. In addition, you will not receive
cash from the trust related to that income if you sell your preferred securities
prior to the record date for those distributions. YOU SHOULD CONSULT WITH YOUR
OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PREFERRED
SECURITIES. Please read the "Tax Consequences" section in this prospectus for
more information regarding the tax consequences of holding and selling the
preferred securities.
WE HAVE THE OPTION TO REDEEM THE DEBENTURES, THUS CAUSING THE REDEMPTION OF
YOUR PREFERRED SECURITIES, WITHOUT YOUR CONSENT IF SPECIFIED TAX EVENTS OCCUR
THAT RENDER INTEREST PAYMENTS ON THE DEBENTURES NON-DEDUCTIBLE OR SUBJECT THE
TRUST TO TAXATION OR UPON A CHANGE IN LAW THAT COULD REQUIRE THE TRUST TO
REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT.
If specified tax events occur that render interest payments on the
debentures non-deductible or subject the trust to taxation or upon a change in
law that could require the trust to register as an
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investment company under the Investment Company Act, as more fully described
under "Description of the Preferred Securities -- Special Event Redemption or
Distribution," we may redeem the debentures, causing the redemption of your
preferred securities. The special event redemption price you would receive if we
redeem the debentures will be 100% of the principal amount of the debentures,
plus accrued and unpaid interest. If we redeem the debentures, the trust will
use the cash it receives from the redemption of the debentures to redeem the
preferred securities and common securities. In addition, upon the occurrence of
a tax event, we may elect to pay any increased taxes or expenses of the trust
caused by the tax event.
THE TRUST MAY EXCHANGE THE DEBENTURES FOR PREFERRED SECURITIES WITHOUT YOUR
CONSENT.
As more fully described under "Description of the Preferred
Securities -- Distribution of the Debentures" in this prospectus, the trust may
exchange the debentures for preferred securities at any time.
WE MAY CAUSE THE PREFERRED SECURITIES TO BE REDEEMED ON OR AFTER ,
2003 WITHOUT YOUR CONSENT.
We may redeem all or some of the debentures at any time on or after
, 2003, subject to certain conditions, without your consent. If a
redemption occurs, the trust will use the cash it receives from the redemption
of the debentures to redeem an equivalent amount of preferred securities and
common securities on a pro rata basis. The redemption price you would receive in
that event may vary, but will be at least 100% of the principal amount of
preferred securities to be redeemed, plus any accrued and unpaid interest.
Please read "Description of the Preferred Securities -- Optional Redemption" in
this prospectus. You should assume that we will redeem the debentures if we can
refinance the debentures at a lower interest rate or if it is otherwise in our
interest to redeem the debentures.
WE MAY SHORTEN THE STATED MATURITY OF THE DEBENTURES WITHOUT YOUR CONSENT.
We may shorten the stated maturity of the debentures to as early as
, 2015 if specified tax changes relating to non-deductibility of
interest payments on the debentures occur, as more fully described under
"Description of the Debentures -- Our Right to Shorten Maturity." If that
happens, the trust will redeem all of the preferred securities when the
debentures are paid on their new maturity date.
IF WE DISTRIBUTE THE DEBENTURES TO YOU, YOU MAY HAVE ADVERSE TAX AND OTHER
CONSEQUENCES.
We may terminate the trust at any time. If that happens, the trust will
redeem the preferred securities and the common securities by distributing the
debentures to you and to us, as holder of the common securities, on a pro rata
basis. Under current United States federal income tax laws, a distribution of
debentures to you on the dissolution of the trust would not be a taxable event
to you. Nevertheless, if the trust is classified for United States federal
income tax purposes as a corporation at the time it is dissolved, a distribution
of debentures could be a taxable event to you. In addition, a change in law
could cause a distribution of debentures on the dissolution of the trust to be a
taxable event to you.
Although we may terminate the trust and cause the distribution of the
debentures at any time, we do not currently intend to do so. We anticipate that
we would consider exercising this right if expenses associated with maintaining
the trust were substantially greater than currently expected.
We cannot predict the market prices for the debentures that may be
distributed. Accordingly, any debentures you receive on a distribution, or the
preferred securities you hold pending that distribution, may trade at a discount
to the price you paid to purchase the preferred securities.
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Because you may receive debentures, you should make an investment decision about
the debentures in addition to the preferred securities. You should carefully
review all the information regarding the debentures contained in this
prospectus.
Although we will use our best efforts to list the debentures on the New
York Stock Exchange (or any other exchange on which the preferred securities are
then listed), if they are distributed, we cannot assure you that the debentures
will be approved for listing or that a trading market will develop for those
securities.
IF WE ELECT TO MAKE A CASH SETTLEMENT IN LIEU OF CONVERTING THE PREFERRED
SECURITIES INTO SHARES OF OUR COMMON STOCK, THERE MAY BE ADVERSE TAX
CONSEQUENCES TO YOU.
You will generally not recognize income, gain or loss upon the conversion
of your preferred securities into shares of our common stock. At any time prior
to the distribution of our common stock by Southern Company, however, we may
elect to make a cash settlement in respect of any preferred securities
surrendered for conversion. If we make this election in lieu of issuing shares
of common stock, you will be treated as having disposed of the preferred
securities in a taxable transaction and must recognize gain or loss.
TRADING PRICES OF THE PREFERRED SECURITIES MAY NOT REFLECT THE VALUE OF
ACCRUED BUT UNPAID INTEREST ON THE DEBENTURES.
The preferred securities are a new series of securities with no established
trading market. If we defer interest payments on the debentures in the future,
the market price of the preferred securities may not fully reflect the value of
accrued but unpaid interest on the debentures. If you sell preferred securities
during a deferral period, you may not receive the same return on investment as
someone who continues to hold preferred securities. In addition, our right to
defer interest payments on the debentures may mean that the market price for the
preferred securities will be more volatile than other securities that are not
subject to these rights.
IF YOU DISPOSE OF YOUR PREFERRED SECURITIES BETWEEN RECORD DATES FOR PAYMENTS
OF DISTRIBUTIONS, THERE MAY BE ADVERSE TAX CONSEQUENCES.
For tax purposes, if you dispose of your preferred securities between
record dates for payments of distributions you will be required to:
- include in your gross ordinary income accrued but unpaid interest on the
debentures through the date of disposition as original issue discount and
- add that amount to your adjusted tax basis in your pro rata share of the
underlying debentures that you are deemed to have disposed of.
Accordingly, you may recognize a capital loss to the extent that the selling
price, which may not fully reflect the value of accrued but unpaid interest, is
less than your adjusted tax basis, which will include accrued but unpaid
interest. In most instances, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. Accordingly, you may not
be able to offset such accrued but unpaid interest income against any such
capital loss.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET FOR THE PREFERRED
SECURITIES WILL DEVELOP.
Prior to this offering, there has been no public market for the preferred
securities. The underwriters currently plan to make a market in the preferred
securities. We cannot assure you, however, that the underwriters will engage in
those activities or that an active trading market for the preferred securities
will develop or be sustained. Any market that develops for the preferred
securities is likely to be influenced by the market for our common stock. If a
market were to develop, the
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preferred securities could trade at prices that may be higher or lower than
their initial public offering price depending upon many factors, including:
- prevailing interest rates,
- our common stock price,
- our operating results, and
- the market for similar securities.
YOU WILL HAVE LIMITED VOTING RIGHTS AS A HOLDER OF PREFERRED SECURITIES.
As a holder of preferred securities, you will have limited voting rights
relating only to the modification of the preferred securities and, in specified
circumstances, the exercise of the trust's rights as holder of the debentures
and the guarantee. Except for during an event of default with respect to the
debentures, only we can replace or remove any of the trustees or increase or
decrease the number of trustees.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Southern Company currently intends to distribute all of the 272,000,000
shares of our common stock it owns to Southern Company stockholders within 12
months after the common stock 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
complete the distribution of our common stock to the holders of its common
stock, 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.
THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK MAY NOT BE INDICATIVE OF
THE MARKET PRICE OF OUR STOCK AFTER THE COMMON STOCK OFFERING. IN ADDITION,
OUR STOCK PRICE MAY BE VOLATILE.
The initial public offering price of our common stock will be determined by
negotiations among us and the representatives of the underwriters. This price
will be based on numerous factors (discussed in the section of the common stock
prospectus entitled "Underwriting") and may not be indicative of the market
price for our common stock after the initial public offering. The market price
of our common stock could be subject to significant fluctuations after the
common stock offering, and may decline below the initial public offering price.
We cannot assure you that you will be able to resell the common stock at or
above the initial public offering price of the common stock. Among the factors
that could affect our stock price are:
- quarterly variations in the rate of growth of our financial indicators,
such as earnings per share, net income and revenues,
- changes in revenue or earnings estimates or publication of research
reports by analysts,
- speculation in the press or investment community,
- strategic actions by us or our competitors, such as acquisitions or
restructurings,
- actions by institutional investors or by Southern Company prior to its
distribution of our stock,
- general market conditions, including fluctuations in commodity prices,
and
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- domestic and international economic, legal and regulatory factors
unrelated to our performance.
The stock markets in general have experienced extreme volatility that has
often been unrelated to the operating performance of particular companies. These
broad market fluctuations may adversely affect the trading price of our common
stock.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT
ACQUISITION OF US, WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK.
Our restated certificate of incorporation and our bylaws contain provisions
that could make it harder for a third party to acquire us after the full
distribution by Southern Company without the consent of our board of directors.
These provisions disallow actions by our stockholders by written consent once
Southern Company ceases to own a majority of our common stock. In addition,
these provisions include procedural requirements relating to stockholder
meetings and stockholder proposals that could make stockholder actions more
difficult. Beginning at the time Southern Company ceases to own 33 1/3% of our
common stock, our board of directors will be classified into three classes of
directors serving staggered, three-year terms and may be removed only for cause.
Any vacancy on the board of directors may be filled only by the vote of the
majority of directors then in office. Our board of directors has the right to
issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer. Delaware law also
imposes some restrictions on mergers and other business combinations between us
and any holder of 15% or more of our outstanding common stock. Although we
believe these provisions provide for an opportunity to receive a higher bid by
requiring potential acquirers to negotiate with our board of directors, these
provisions apply even if the offer may be considered beneficial by some
stockholders.
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OUR SEPARATION FROM SOUTHERN COMPANY
OVERVIEW
On April 17, 2000, Southern Company announced its plan to make Southern
Energy, currently a wholly owned subsidiary, an independent, publicly traded
company focused on the worldwide competitive energy markets. Unless Southern
Company completes the distribution of our stock to its stockholders, we will
continue as a subsidiary of Southern Company.
BENEFITS OF THE SEPARATION
We believe that we will realize certain benefits from our complete
separation from Southern Company, which includes the distribution by Southern
Company of our common stock, including the following:
- ELIMINATE GOVERNMENTAL REGULATION UNDER PUHCA. Following the
distribution by Southern Company of our common stock, we will not be
affiliated with any public utility company within the meaning of PUHCA.
As a result, we anticipate that we will not be subject to regulation
under PUHCA. For example, we will not need to obtain PUHCA approval to
acquire interests in businesses other than public utility companies even
though acquisition of those businesses would not qualify as exempt from
PUHCA approval requirements if purchased by a holding company registered
under PUHCA. In addition, we will not need PUHCA approval for the
acquisition of assets or securities which results in affiliation with a
single public utility. After the distribution of our common stock by
Southern Company, we expect to conduct our business so that we remain
outside of PUHCA regulation.
- INCREASED CAPITAL FINANCING FLEXIBILITY. As a separate entity we expect
to be able to raise equity on more attractive terms because we expect our
earnings to grow faster than the regulated utility businesses of Southern
Company. Therefore, we expect our common stock to be valued at a higher
multiple of earnings than Southern Company's common stock. We will also
have the ability to use our equity securities as a form of consideration
for possible future acquisitions and to fund development projects. In
addition, Southern Company is limited in the amount of additional debt
that it can add to its consolidated balance sheet without affecting its
credit rating and its ability to recover the cost of its debt service
through rate increases. After the distribution, we will be able to raise
debt without this potential constraint related to the consolidated
Southern Company.
- PROVIDE A TARGETED INVESTMENT FOR OUR STOCKHOLDERS. The nature of
Southern Company's regulated utility business is substantially different
from our electricity and gas asset management and marketing and risk
management businesses. As a result of our complete separation from
Southern Company, we believe that we will offer an investment opportunity
that provides higher growth than that of the regulated utility business.
Our complete separation will allow investors to better align their
investment objectives through ownership of either Southern Company stock
or our stock.
- INCREASED STRATEGIC FOCUS. As a subsidiary of Southern Company we are
both capital constrained and limited by government regulations in the
businesses in which we can engage. We also have to compete with Southern
Company's other subsidiaries for investment opportunities and have a
longer review and approval process for new investments than many of our
competitors. As a separate entity, we will be able to develop our
strategy without regard to its effect on Southern Company and will thus
have greater independence in establishing and implementing our strategy
than we do now.
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- ACCESS TO ADDITIONAL MARKETS. We currently do not compete in Southern
Company's service territory in the southeastern United States. After the
distribution, we will be able to compete for wholesale and retail
customers and develop power plants in Southern Company's service
territory, thus giving us additional opportunities to grow our business.
- INCREASED SPEED AND RESPONSIVENESS. After the distribution, we expect to
be able to make decisions more quickly and efficiently because we will no
longer have to review these decisions with Southern Company's management
and board of directors. As a result, we expect to be able to respond to,
approve and act on new development and acquisition opportunities more
quickly. This will allow us to compete better with companies that do not
have to obtain multiple levels of reviews and approvals.
- TARGETED INCENTIVES FOR MANAGEMENT AND EMPLOYEES. As a subsidiary of a
much larger company, it has been difficult for us to create employee
compensation programs that directly compensate our employees for the
performance of our company. As a separate public company we will be able
to offer our employees compensation directly linked to the performance of
our business, which we expect to enhance our ability to attract and
retain qualified personnel. We also expect that incentive compensation
programs tied to the market performance of our common stock will
strengthen the focus of our management and the motivation of our
employees and align their interests with those of our stockholders.
SEPARATION AND TRANSITIONAL AGREEMENTS
We have entered into agreements with Southern Company providing for the
separation of our business from Southern Company, including a master separation
and distribution agreement. These agreements generally provide for various
interim and ongoing relationships between us and Southern Company including
transitional services Southern Company will provide to us. For a summary
description of these agreements, see "Agreements Between Us and Southern
Company."
In connection with our separation from Southern Company, we will transfer
two of our subsidiaries, SE Finance and Capital Funding, to Southern Company. In
order to facilitate the transfer to Southern Company, prior to the common stock
offering we have issued one share of our redeemable preferred stock to Southern
Company. After the common stock offering and prior to the distribution of our
stock by Southern Company, we will form a corporation with Southern Company
Energy Solutions, Inc., a wholly-owned subsidiary of Southern Company. We will
contribute the stock of SE Finance and Capital Funding to the corporation in
exchange for an 80% or greater interest. Southern Company Energy Solutions will
contribute its energy services assets to a limited liability company owned by
the corporation in exchange for a 20% or lesser interest. We will then redeem
the one share of redeemable preferred stock issued by us to Southern Company in
exchange for our entire interest in the corporation. We currently have credit
support obligations related to SE Finance. Following the transfer, Southern
Company will assume responsibility for these obligations.
THE DISTRIBUTION BY SOUTHERN COMPANY OF OUR COMMON STOCK
After completion of the common stock offering, Southern Company will own
over 80% of the outstanding shares of our common stock. Southern Company has
announced that it currently plans to complete its divestiture of our company
within 12 months after the completion of the common stock offering by
distributing all of its shares of our common stock to the holders of Southern
Company common stock. However, Southern Company is not obligated to complete the
distribution, and we cannot assure you as to whether or when it will occur. For
a description of some of the consequences that may result if Southern Company
does not complete the distribution, see "Risk Factors -- Risks Related to Our
Separation from Southern Company -- Our business and your investment in the
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preferred securities may be adversely affected if Southern Company does not
complete the distribution of our common stock because we would remain subject to
regulatory restrictions as a subsidiary of a public utility holding company and
because we would remain subject to control by Southern Company."
Southern Company has advised us that it would not complete the distribution
if its board of directors determines that the distribution is no longer in the
best interest of Southern Company and its stockholders. Southern Company has
further advised us that it currently expects that the principal factors that it
will consider in determining whether and when to complete the distribution
include:
- general market conditions and the relative market prices of our common
stock and of Southern Company's common stock,
- the receipt of a ruling from the IRS that the transaction will be
tax-free to Southern Company and its stockholders and that the
transaction will qualify as a tax-free distribution for United States
federal income tax purposes,
- receipt of necessary regulatory orders with terms and conditions
acceptable to Southern Company,
- the absence of any court orders, regulations, adverse regulatory action
or contractual restrictions prohibiting or restricting the completion of
the distribution,
- other conditions affecting our business or Southern Company's business,
and
- our ability to obtain waivers or consents from lenders or other parties
under our material financing agreements and other material contracts.
On August 1, 2000, we and Southern Company received a ruling from the IRS
that the distribution will be tax-free to Southern Company and its stockholders
and that the transaction will qualify as a tax-free distribution for United
States federal income tax purposes. However, under a tax indemnification
agreement between us and Southern Company, if we breach any representations in
connection with the ruling, take any action which causes our representations to
be untrue or engage in a transaction after the distribution that causes the
distribution to be taxable to Southern Company or its stockholders, we will be
required to indemnify Southern Company for any resulting taxes. We estimate that
the amount of any indemnification payments would be substantial and would
materially affect our earnings and cause us not to have sufficient financial
resources to achieve our growth strategy.
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USE OF PROCEEDS
The proceeds from the offering will be approximately $300 million. If the
underwriters exercise their over-allotment option in full, the total proceeds
will be approximately $345 million. All of the proceeds from the sale of the
preferred securities and the common securities will be invested by the trust in
the debentures.
We estimate that our net proceeds from the concurrent sale of the
58,000,000 shares of common stock in the common stock offering will be
approximately $1.05 billion (approximately $1.21 billion if the underwriters'
over-allotment option is exercised in full), based on an assumed initial public
offering price of $19.00 per share and after deducting underwriting discounts
and commissions.
We intend to use a portion of the net proceeds from the sale of the
debentures and from the concurrent common stock offering to repay commercial
paper balances, which were approximately $389 million with a weighted average
interest rate of approximately 7.0% at June 30, 2000. In addition, we intend to
use a portion of the net proceeds to repay a short-term loan of $450 million as
of June 30, 2000 drawn against a 364-day Bank of America credit facility with an
interest rate of approximately 7.3%. We will use any remaining proceeds from
these offerings for general corporate purposes.
The borrowings from the Bank of America credit facility were used to pay
$450 million of the $503 million dividend to Southern Company. The commercial
paper borrowings were used for working capital and to pay $53 million of the
$503 million dividend to Southern Company.
No proceeds of these offerings will be distributed to Southern Company.
ACCOUNTING TREATMENT OF THE PREFERRED SECURITIES
The trust will be treated as our subsidiary for financial reporting
purposes. Accordingly, the accounts of the trust will be included in our
consolidated financial statements. We will account for the preferred securities
in our consolidated balance sheets as a separate line item under Minority
Interest entitled "Company obligated mandatorily redeemable securities of a
subsidiary holding solely parent company debentures." We will also include
appropriate disclosures about the preferred securities, the debentures and the
guarantee in the notes to our consolidated financial statements. For financial
reporting purposes, we will record distributions payable on the preferred
securities as a minority interest in a subsidiary on our consolidated statements
of income.
DIVIDEND POLICY
We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, we do not anticipate paying any cash
dividends on our common stock in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for a discussion of the
limitations of our subsidiaries to pay dividends to us.
In 1999, we paid cash dividends totalling $165 million to Southern Company.
On May 26, 2000, we paid a cash dividend to Southern Company in the amount of
$450 million, funded by short-term borrowings. On July 7, 2000, we paid an
additional cash dividend to Southern Company in the amount of $53 million,
funded by commercial paper borrowings. These dividends were authorized under an
order issued by the SEC which allows us to pay dividends out of unearned
surplus.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. Our
capitalization is presented:
- on an actual basis;
- on a pro forma basis to reflect:
- the acquisition of Hyder by WPD Limited, a UK-based company in which we
will initially own a 40% interest,
- our investment in WPD Limited to fund its purchase of Hyder, which will
be L56 million (approximately $84 million), and
- the concurrent sharing of control of Western Power Distribution, a
UK-based electric distribution company. Shared control will result in
Western Power Distribution being accounted for under the equity method,
thereby causing a reduction in our consolidated debt balances;
- on a pro forma basis, as adjusted, to reflect:
- the transfer of our SE Finance and Capital Funding businesses to
Southern Company including reducing cash and cash equivalents by $65
million, current portion of non-recourse long-term debt by $24 million,
non-recourse long-term debt by $402 million, subsidiary obligated
mandatorily redeemable preferred securities by $950 million, and
stockholder's equity by $226 million, and
- the borrowing of $53 million to finance the cash dividends to Southern
Company that were paid on July 7, 2000;
- on a pro forma basis, as further adjusted, to reflect the receipt and
application of the estimated net proceeds from the sale of 6,000,000
preferred securities in this offering, at an assumed public offering price
of $50 per preferred security; and
- on a pro forma basis, as finally adjusted, to reflect the receipt and
application of the estimated net proceeds from the concurrent sale of
58,000,000 shares of common stock, at an assumed initial public offering
price of $19.00 per share.
You should read the information in this table together with our consolidated
financial statements and the related notes and with "Selected Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------------------------
PRO FORMA, PRO FORMA, PRO FORMA,
AS AS FURTHER AS FINALLY
ACTUAL PRO FORMA ADJUSTED ADJUSTED ADJUSTED
------- ---------- ---------- ----------- ----------
(IN MILLIONS, UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 691 $ 607 $ 542 $ 542 $ 990
======= ======= ======= ======= ======
Non-recourse short-term debt(1)............................. $ 1,639 $ 1,188 $ 1,188 $ 1,188 $1,188
Current portion of non-recourse long-term debt(1)........... 234 234 210 210 210
Current portion of long-term debt........................... 32 32 32 32 32
Short-term debt............................................. 939 939 992 702 100
------- ------- ------- ------- ------
Total short-term debt..................................... 2,844 2,393 2,422 2,132 1,530
------- ------- ------- ------- ------
Non-recourse long-term debt(1).............................. 4,190 3,735 3,333 3,333 3,333
Senior notes and other long-term debt....................... 800 800 800 800 800
------- ------- ------- ------- ------
Total long-term debt...................................... 4,990 4,535 4,133 4,133 4,133
------- ------- ------- ------- ------
Subsidiary obligated mandatorily redeemable preferred
securities(2)............................................. 1,026 950 -- -- --
Minority Interest
Company obligated mandatorily redeemable securities of a
subsidiary holding solely parent company debentures..... -- -- -- 300 300
Stockholder's equity........................................
Common stock, $.01 par value.............................. 3 3 3 3 4
Additional paid-in capital................................ 2,872 2,872 2,646 2,646 3,695
Accumulated other comprehensive loss........................ (111) (111) (111) (111) (111)
Retained earnings........................................... 11 11 11 11 11
------- ------- ------- ------- ------
Total capitalization...................................... $11,635 $10,653 $ 9,104 $ 9,114 $9,562
======= ======= ======= ======= ======
</TABLE>
-------------------------
(1) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
(2) Includes $950 million of preferred securities and capital securities issued
by special purpose financing subsidiaries held by Capital Funding, the
proceeds of which were loaned to Southern Company. Southern Company pays
interest on subordinated notes issued in favor of the financing
subsidiaries, which payments are used to pay dividends on those preferred or
capital securities. Southern Company also has guaranteed payments due under
the terms of those securities. These securities are non-recourse to us.
Capital Funding will be transferred to Southern Company prior to the
completion of this offering. The remaining $76 million of these securities
were issued by a special purpose finance subsidiary of Southern Investments
UK. They are also non-recourse to us but they are not guaranteed by Southern
Company and will remain outstanding after this offering but have been
eliminated in this pro forma presentation because Southern Investments UK
will no longer be consolidated by us after the acquisition of Hyder.
38
<PAGE> 42
DILUTION
Our pro forma net tangible book value at June 30, 2000, after giving effect
to:
- the acquisition of Hyder by WPD Limited (a UK-based company in which we
will initially own a 40% interest),
- our investment in WPD Limited to fund its purchase of Hyder,
- the deconsolidation of Western Power Distribution that will result from
the acquisition of Hyder,
- the transfer of our SE Finance and Capital Funding businesses to Southern
Company, and
- our borrowing of $53 million to finance the remaining cash dividends to
Southern Company that were paid on July 7, 2000,
was approximately $2 million, or $0.01 per share. After giving effect to our
sale of 58,000,000 shares of common stock in the common stock offering at an
assumed initial public offering price of $19.00 per share and after deducting an
assumed underwriting discount, our pro forma net tangible book value, as
adjusted, at June 30, 2000 would have been approximately $1.05 billion, or $3.19
per share. This represents an immediate increase in pro forma net tangible book
value of $3.18 per share to our existing stockholder and an immediate dilution
in pro forma net tangible book value of $15.81 per share to new investors
purchasing shares of common stock in the common stock offering. The following
table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 19.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $ 0.01
Increase in pro forma book value per share attributable to
new investors.......................................... 3.18
------
Pro forma net tangible book value per share after the
common stock offering.................................. 3.19
-------
Dilution in pro forma net tangible book value per share to
new investors.......................................... $ 15.81
=======
</TABLE>
The discussion and table above assume no exercise of options granted
pursuant to the conversion of units awarded under our value creation plan. It
also assumes no issuance of shares reserved for future issuance under our
employee stock purchase plan. See the sections of this prospectus entitled
"Management -- Value Creation Plan Conversion" and "-- Southern Energy Employee
Stock Purchase Plan." To the extent that any options are granted and exercised,
there will likely be further dilution to new investors.
The following table sets forth, as of June 30, 2000 on a pro forma basis,
as described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
Southern Company, our existing stockholder, and by the new investors in the
common stock offering at an assumed initial public offering price of $19.00 per
share, before deducting the estimated underwriting discounts and commissions and
offering expenses payable by us.
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED (DOLLARS IN MILLIONS)
------------------------ --------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder................ 272,000,000 82.4% $2,875 72.3% $10.57
New investors....................... 58,000,000 17.6 1,102 27.7 19.00
----------- ----- ------ ----- ------
Total.......................... 330,000,000 100.0% $3,977 100.0% $12.05
=========== ===== ====== ===== ======
</TABLE>
If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:
- the number of shares of common stock held by our existing stockholder
will decrease to approximately 80.3% of the total number of shares of
common stock outstanding; and
- the number of shares held by new investors will increase to 66,700,000
shares or approximately 19.7% of the total number of shares of our common
stock outstanding after the common stock offering.
39
<PAGE> 43
SELECTED FINANCIAL INFORMATION
The following tables present our selected consolidated financial
information. The information set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the notes
to those statements included in this prospectus. Our consolidated income
statement data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999
and the selected balance sheet data as of December 31, 1995, 1996, 1997, 1998
and 1999 are derived from our audited consolidated financial statements, which
were audited by Arthur Andersen LLP, independent public accountants. The
historical financial information may not be indicative of our future performance
and does not reflect what our financial position and results of operations would
have been had we operated as a separate, stand-alone entity during the periods
presented.
The following selected financial information should also be read in light
of the following:
- Our operating revenues declined in 1998 due to our contribution on
January 1, 1998 of our power marketing and risk management activities to
SCEM, our marketing and risk management joint venture with Vastar formed
in September 1997. When the joint venture was formed in September 1997,
we contributed only our gas marketing and risk management assets to the
venture. Prior to the formation of the joint venture, our marketing and
risk management activities were wholly-owned and consolidated. From
January 1, 1998 until August 9, 2000, the day prior to our effective
acquisition of Vastar's 40% interest in SCEM, we accounted for this joint
venture under the equity method of accounting. For 1997, operating
revenues would have been $1,768 million if we had not consolidated our
marketing and risk management operations. Effective August 10, 2000, we
acquired Vastar's 40% interest in SCEM for $250 million. Upon the closing
of the transaction, Vastar transferred its interest in SCEM to us and
SCEM became our wholly owned indirect subsidiary and will be consolidated
in our financial statements on a prospective basis.
- The write-down for 1998 includes write-downs of our investments in our
Argentine subsidiary, Alicura, and our Chilean subsidiary, EDELNOR, to
adjust for the difference between the carrying value of the assets and
the fair market value. The write-down for 1999 and the six months ended
June 30, 2000 includes further write-downs of our investments in Alicura
and EDELNOR to maintain the carrying value at the fair market value as
well as our interest in a $31 million write-down at Western Power
Distribution relating to impaired metering assets.
- On April 17, 2000, we decided to transfer to Southern Company our leasing
business, SE Finance. As a result, we have included the historical
results of operations of the related subsidiaries as a discontinued
operation.
- The consolidated income statement data for the six months ended June 30,
1999 and 2000 and the balance sheet data as of June 30, 2000 have been
derived from our unaudited financial statements, which were prepared on a
basis consistent with our audited consolidated statements.
Pro forma balance sheet and pro forma income statement amounts for 1999 and
the six months ended June 30, 2000 give effect to the probable acquisition of
Hyder by WPD Limited, a UK-based company in which we will initially own a 40%
interest. As part of this acquisition, Western Power Distribution would no
longer be a consolidated subsidiary for accounting purposes but, instead, our
investment would be accounted for under the equity method. The pro forma
information below should
40
<PAGE> 44
be read in conjunction with our pro forma financial statements and our and
Hyder's historical consolidated financial statements, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1998 1999 1999 1999 2000 2000
------- ------ ------ ------- ------- --------- ------- ------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues............. $ 584 $1,600 $3,750 $ 1,819 $ 2,268 $1,292 $ 1,025 $1,194 $1,004
------- ------ ------ ------- ------- ------ ------- ------ ------
Operating expenses:
Fuel......................... 17 75 74 47 392 392 109 344 344
Purchased power.............. 258 873 2,813 844 545 46 387 54 38
Maintenance.................. 19 71 74 80 116 60 49 68 44
Depreciation and
amortization............... 46 95 182 221 270 180 111 155 115
Selling, general and
administrative............. 108 174 188 160 253 240 109 146 148
Write down of assets......... -- -- -- 308 60 29 5 14 14
Other........................ 70 162 147 164 188 132 81 102 86
------- ------ ------ ------- ------- ------ ------- ------ ------
Operating income............... 66 150 272 (5) 444 213 174 311 215
------- ------ ------ ------- ------- ------ ------- ------ ------
Other income (expense):
Interest income.............. 13 16 138 146 172 166 80 81 80
Interest expense............. (64) (133) (345) (430) (502) (410) (231) (300) (259)
Gain on sales of assets...... 11 66 24 41 313 27 9 -- --
Equity in income of
affiliates................. 10 13 58 135 111 268 147 63 102
Receivables recovery......... -- -- -- 29 64 64 12 -- --
Other, net................... (1) 28 33 29 72 47 21 40 30
------- ------ ------ ------- ------- ------ ------- ------ ------
Total other (expense)
income................... (31) (10) (92) (50) 230 162 38 (116) (47)
------- ------ ------ ------- ------- ------ ------- ------ ------
Income (loss) from continuing
operations before income
taxes and minority
interest..................... 35 140 180 (55) 674 375 212 195 168
Provision (benefit) for income
taxes:
Continuing operations........ 8 54 27 (123) 129 (5) 34 (29) (31)
Windfall profits tax(1)...... -- -- 148 -- -- -- -- -- --
Minority interest.............. 13 13 29 80 183 19 36 43 10
------- ------ ------ ------- ------- ------ ------- ------ ------
Income (loss) from continuing
operations................... $ 14 $ 73 $ (24) $ (12) $ 362 $ 361 142 181 $ 189
====== ======
Income from discontinued
operations, net of income tax
benefit of $10 in 1997, $22
in 1998, $15 in 1999, and $7
and $9 for the six months
ended June 30, 1999 and 2000,
respectively................. -- -- 8 12 10 7 13
Income (loss) before
extraordinary item........... 14 73 (16) -- 372 149 194
------- ------ ------ ------- ------- ------- ------
Extraordinary gain on early
extinguishment of debt, net
of income tax of $2 in 1995
and $5 in 1996............... 4 8 -- -- -- -- --
------- ------ ------ ------- ------- ------- ------
Net income (loss).............. $ 18 $ 81 $ (16) $ -- $ 372 $ 149 $ 194
======= ====== ====== ======= ======= ======= ======
EARNINGS PER SHARE INFORMATION:
BASIC:
From continuing operations... $ 0.05 $ 0.27 $(0.09) $ (0.04) $ 1.33 $ 0.52 $ 0.67
From discontinued
operations................. -- -- 0.03 0.04 0.04 0.03 0.04
From extraordinary gain...... 0.02 0.03 -- -- -- -- --
------- ------ ------ ------- ------- ------- ------
Net income................. $ 0.07 $ 0.30 $(0.06) $ -- $ 1.37 $ 0.55 $ 0.71
======= ====== ====== ======= ======= ======= ======
PRO FORMA BASIC(2):
From continuing operations... $ 1.21 $ 1.21 $ 0.61 $ 0.64
====== ======
From discontinued
operations................. 0.04 0.04
------- ------
Net income................. ....... $ 1.25 $ 0.65
======= ======
</TABLE>
41
<PAGE> 45
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1998 1999 1999 1999 2000 2000
------- ------ ------ ------- ------- --------- ------- ------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA DILUTED(2):
From continuing operations... $ 1.21 $ 1.21 $ 0.61 $ 0.64
====== ======
From discontinued
operations................. 0.04 0.04
------- ------
Net income................. ....... $ 1.25 $ 0.65
======= ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1998 1999 1999 1999 2000 2000
------- ------ ------ ------- ------- --------- ------- ------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Cash flow from operating
activities................... $ 158 $ (226) $ 264 $ 402 $ 515 -- $ 153 $ 217 --
Cash flow from investing
activities................... (1,244) (136) (4,203) (1,741) (2,263) -- (1,668) (261) --
Cash flow from financing
activities................... 1,653 (193) 4,177 1,502 1,516 -- 1,329 418 --
OTHER OPERATING DATA:
EBITDA(3)...................... $ 122 $ 258 $ 512 $ 351 $ 825 $ 661 $ 432 $ 529 $ 432
Ratio of combined fixed charges
and preference dividends to
earnings(4).................. 3.1 1.9 1.4 0.6 2.0 1.4
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
AS OF DECEMBER 31, -------------------
--------------------------------------------- PRO FORMA
1995 1996 1997 1998 1999 2000 2000
------ ------ ------- ------- ------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 664 $ 161 $ 398 $ 561 $ 323 $ 691 $ 607
Property, plant and equipment, net............... 2,312 2,627 4,255 4,691 6,025 5,912 3,985
Investments...................................... 431 219 1,159 1,540 1,490 1,550 1,813
Total assets................................. 4,511 4,564 10,630 12,054 13,863 14,308 11,980
Non-recourse debt(4)............................. 1,702 1,753 4,615 5,101 6,202 6,063 5,157
Notes payable to Southern Company................ 422 -- 830 926 -- -- --
Total long term debt............................. 2,124 1,146 3,689 3,919 4,954 4,990 4,535
Total debt................................... 2,124 1,753 5,445 6,027 7,152 7,834 6,928
Subsidiary obligated mandatorily redeemable
preferred securities(5)........................ -- -- 682 1,033 1,031 1,026 950
Stockholder's equity............................. 778 988 2,132 2,642 3,102 2,775 2,775
</TABLE>
(1) In 1997, the United Kingdom imposed a windfall profits tax on the United
Kingdom's privatized utilities.
(2) Pro forma basic earnings per share information gives effect to the dividends
we paid to Southern Company in 2000 as though they had been paid during the
periods presented, in accordance with SEC Staff Accounting Bulletin Topic
1:B:3. Pro forma diluted earnings per share information gives effect to the
conversion of the Southern Energy value creation plan units outstanding at
December 31, 1999 and June 30, 2000 into options to purchase our standard
common stock.
(3) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it is
a widely accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA,
as defined, is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with GAAP in
the United States and is not indicative of operating income or cash flow
from operations as determined under GAAP. Our method of computation may or
may not be comparable to other similarly titled measures by other companies.
(4) The deficiency in reaching a 1.0 ratio during 1998 was $177 million.
(5) This debt is non-recourse to us but is recourse to the applicable
subsidiaries and their assets.
(6) As of June 30, 2000, this total included $950 million of preferred
securities and capital securities issued by special purpose financing
subsidiaries held by Capital Funding, the proceeds of which were loaned to
Southern Company. Southern Company pays interest on subordinated notes
issued in favor of the financing subsidiaries, which payments are used to
pay dividends on those preferred securities. In addition, Southern Company
has guaranteed payments due under the terms of those securities. These
securities are non-recourse to us. In connection with our separation from
Southern Company, Capital Funding will be transferred to Southern Company.
The remaining $76 million of these securities were issued by a special
purpose finance subsidiary of Southern Investments UK. They are also
non-recourse to us but they are not guaranteed by Southern Company and they
will remain outstanding after this offering. They have been eliminated in
this pro forma presentation because Southern Investments UK would no longer
be consolidated by us after the acquisition of Hyder.
42
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Risk
Factors," "Summary Historical Financial and Operating Data," "Selected Financial
Data" and our consolidated financial statements and the related notes included
elsewhere in this prospectus.
OVERVIEW
We are one of the world's largest independent power providers with
regionally based businesses in the Americas, Europe and the Asia-Pacific region.
Through SCEM, we are a leading energy marketer in the United States. We meet our
customers' specific requirements by integrating electricity generation,
management of gas assets, fuel procurement and marketing of energy and
energy-linked commodities. We also provide services to manage risk associated
with market price fluctuations in energy and energy-linked commodities.
To support our businesses we have built and acquired a portfolio of power
plants, an electric distribution company and electric utilities. Through these
businesses, we have a net ownership interest in 12,652 MW of generation
capacity, 11,775 MW of which we operate. We have ownership interests in
electricity distribution companies and integrated utilities which sell or
distribute electricity to over eight million customers.
Our current operations in North America include six major power generation
subsidiaries and SCEM. We own or control generation capacity in North America
totaling 7,389 MW, which represents approximately 60% of our worldwide total.
In Europe, we have a 49% economic interest in Western Power Distribution,
an electric distribution company in southwestern England, and we own 26% of
Bewag, the electric utility that serves Berlin. Together, these companies own
3,118 MW of generation capacity and provide electricity to approximately 3.5
million customers. Our net ownership interest in Western Power Distribution's
and Bewag's generation capacity is 848 MW.
In the Asia-Pacific region, we have a subsidiary that develops and owns
independent power projects in the Philippines and China with net ownership
interests in 3,159 MW of generation capacity, 2,308 MW of which we operate.
In the Caribbean and South America, we have ownership interests in electric
utilities, power plants and transmission facilities. These assets are located in
the Bahamas, Trinidad and Tobago, Brazil and Chile. We are pursuing the sale of
our Chilean subsidiary and we recently sold our Argentine subsidiary.
See Note G to our unaudited consolidated financial statements and Note 16
to our consolidated financial statements for information regarding segment
disclosure.
EFFECTS OF CERTAIN ORGANIZATIONAL CHANGES
The following discussion and analysis of financial condition and results of
operations should be read in light of the organizational changes related to our
marketing and risk management operations and the resulting impacts on operating
revenues and expenses. On September 1, 1997, we formed SCEM, a joint venture
with Vastar, and both parties contributed substantially all of their North
American gas marketing and risk management assets to the venture. On January 1,
1998, we and Vastar contributed our North American electric marketing and risk
management operations to the SCEM joint venture. From January 1, 1998 through
August 9, 2000, we accounted for our
43
<PAGE> 47
investment in this joint venture under the equity method of accounting as Vastar
had 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. Effective August 10, 2000, we acquired
Vastar's 40% interest in SCEM for $250 million. Upon the closing of the
transaction, Vastar transferred its interest in SCEM to us and SCEM became our
wholly owned indirect subsidiary and will be consolidated in our financial
statements on a prospective basis.
In September 1999, our UK 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. As a result of the
sale, we recorded a gain of $286 million prior to related expenses, minority
interest and income taxes and a gain of $78 million after these items.
Our operating revenues and expenses are primarily driven by the operations
of our controlled subsidiaries, which are consolidated for accounting purposes.
Significant consolidated subsidiaries include Southern Energy California, L.L.C.
(SE California), our wholly owned subsidiaries in New York (SE New York) and New
England (SE New England), State Line Energy, L.L.C. (State Line Energy), Western
Power Distribution, Southern Energy Asia-Pacific Limited (SE Asia-Pacific),
Alicura, EDELNOR and Freeport Power Company Limited (Freeport Power).
Investments in companies over which we exercise significant influence but do not
control are accounted for using the equity method of accounting and,
accordingly, the operating results of these entities impact other income in the
form of equity in income of affiliates. Major affiliates accounted for using the
equity method include Birchwood, Bewag, SE Asia-Pacific's investment in the
Shajiao C facility, CEMIG, Power Generation Company of Trinidad and Tobago and
Shandong International Power Development Company.
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 the common stock
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 the common stock offering, although we cannot assure you whether
or when this distribution will occur. We have entered into various agreements
with Southern Company related to interim and ongoing relationships between the
two companies. For a description of these agreements, see "Agreements Between Us
and Southern Company."
SALE OF ALICURA
On August 25, 2000, we completed the sale of our 55% indirect interest in
Hidroelectrica Alicura S.A. (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, we were released from $200 million of credit support
obligations related to Alicura's bank financing. Our sale of Alicura did not
materially impact our financial position and will not have a material effect on
our results of operations.
44
<PAGE> 48
ACQUISITION OF HYDER PLC
On September 15, 2000, WPD Limited, a Guernsey-based company in which we
will initially own a 40% interest, committed unconditionally to purchase any
shares of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD
Limited had acquired approximately 68% of the shares of Hyder. As part of this
acquisition, Western Power Distribution will no longer be a consolidated
subsidiary for accounting purposes but, instead, our investment will be
accounted for under the equity method. Information regarding both pro forma and
historical financial statements related to the acquisition of Hyder is included
in the unaudited pro forma financial information elsewhere in this prospectus.
The pro forma information presented in the prospectus is for informational
purposes and is not necessarily indicative of future earnings or financial
position or of what the earnings and financial position would have been had the
transaction occurred at the beginning of the respective periods.
ACQUISITION OF VASTAR'S INTEREST IN SCEM
On September 11, 2000, we closed the acquisition of Vastar's 40% interest
in SCEM for $250 million. The acquisition was effective as of August 10, 2000.
As a result of this transaction, SCEM became our wholly owned indirect
subsidiary, and we will consolidate SCEM's financial results in our financial
statements on a prospective basis.
BASIS OF PRESENTATION
Our consolidated financial statements include allocations to us of certain
Southern Company corporate assets, including pension assets; liabilities,
including profit sharing, pension and non-qualified deferred compensation
obligations; and expenses, including centralized engineering services, legal,
accounting and human resources, insurance services, information technology
services and other Southern Company corporate and infrastructure costs. The
expense allocations, which we believe meet the requirements of PUHCA, have been
determined on bases that Southern Company and we considered to be a reasonable
reflection of the utilization of the services provided to us or the benefit
received by us. The expense allocation methods include relative sales,
investment, headcount, square footage, transaction processing costs, adjusted
operating expenses and others.
On April 17, 2000, our board of directors authorized the transfer of our
leasing business, SE Finance, to Southern Company. As a result, we have included
the historical results of operations of the related subsidiaries as a
discontinued operation in the consolidated statements of income. Additionally,
because we recently sold our investment in Argentina and we intend to transfer
our Capital Funding subsidiary to Southern Company and dispose of our investment
in 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 may not be
indicative of our future financial position, results of operations or cash flows
or of what our financial position, results of operations or cash flows would
have been had we been a separate, stand-alone entity for the periods presented.
The financial information presented in this prospectus does not reflect the many
significant changes that will occur in our funding and operations as a result of
our becoming a stand-alone entity, the offerings and the distribution.
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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 and the six-months
ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating revenues........................... 100% 100% 100% 100% 100%
OPERATING EXPENSES:
Fuel......................................... 2.0 2.6 17.3 10.6 28.8
Purchased power.............................. 75.0 46.4 24.0 37.8 4.5
Maintenance.................................. 2.0 4.4 5.1 4.8 5.7
Depreciation and amortization................ 4.8 12.2 11.9 10.8 13.0
Selling, general and administrative.......... 5.0 8.8 11.2 10.6 12.2
Write-down of assets......................... 0.0 16.9 2.6 0.5 1.2
Other........................................ 3.9 9.0 8.3 7.9 8.5
---- ----- ----- ----- -----
Total operating expenses................... 92.7 100.3 80.4 83.0 73.9
Operating income (loss)...................... 7.3 (0.3) 19.6 17.0 26.1
---- ----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest income.............................. 3.7 8.0 7.5 7.8 6.8
Interest expense............................. (9.2) (23.6) (22.1) (22.5) (25.1)
Gain on sales of assets...................... 0.6 2.2 13.8 0.9 0.0
Equity in income of affiliates............... 1.5 7.4 4.9 14.3 5.3
Receivables recovery......................... 0.0 1.6 2.8 1.2 0.0
Other, net................................... 0.9 1.6 3.2 2.0 3.4
---- ----- ----- ----- -----
Total other income (expense)............... (2.5) (2.8) 10.1 3.7 (9.6)
---- ----- ----- ----- -----
Income (loss) from continuing operations
before income taxes and minority
interest................................... 4.8 (3.1) 29.7 20.7 16.5
PROVISION (BENEFIT) FOR INCOME TAXES:
Continuing operations........................ 0.7 (6.8) 5.7 3.3 (2.4)
Windfall profits tax......................... 3.9 0.0 0.0 0.0 0.0
Minority interest............................ 0.8 4.4 8.0 3.5 3.6
---- ----- ----- ----- -----
(Loss) income from continuing operations..... (0.6) (0.7) 16.0 13.9 15.3
Income from discontinued operations, net of
income tax benefit of $10 million in 1997,
$22 million in 1998, $15 million in 1999,
and $7 million and $9 million for the six
months ended June 30, 1999 and 2000,
respectively............................... 0.2 0.7 0.4 0.7 1.1
---- ----- ----- ----- -----
Net (loss) income.......................... (0.4)% 0.0% 16.4% 14.6% 16.4%
==== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES. Our operating revenues were $1,194 million for the
first six months of 2000, an increase of $169 million, or 16.5%, from the same
period in 1999. This increase was primarily attributable to a $470 million
increase in operating revenues in the Americas region, the
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<PAGE> 50
majority of which resulted from our North American acquisitions in California
and New York. In addition, the commencement of operations of our Sual plant in
the Philippines contributed revenues of $119 million during the first six months
of 2000. Those increases were primarily offset by a reduction of $422 million in
revenues at Western Power Distribution, primarily as a result of the 1999 sale
of the SWEB supply business.
OPERATING EXPENSES. Operating expenses for the first six months of 2000
were $883 million, an increase of $32 million, or 4%, from the same period in
1999. This increase is primarily due to the acquisitions of generating assets in
New York and California and the commencement of commercial operations of our
Sual plant in the Philippines in 1999, and offset by the decrease in operating
expenses for Western Power Distribution, primarily because of the sale of the
SWEB supply business.
OTHER INCOME (EXPENSE). Other expense was $116 million for the first six
months of 2000 compared to other income of $38 million for the first six months
of 1999. The following factors were responsible for this $154 million increase
in other expense:
- Interest expense for the first six months of 2000 was $300 million, an
increase of $69 million, or 30%, from the same period in 1999 due to
higher borrowings to finance acquisitions.
- Equity in income of affiliates for the first six months of 2000 was $63
million, a decrease of $84 million, or 57%, from the same period in 1999
primarily due to a decrease in our income from China, reduced earnings
from our energy trading and marketing joint venture and continued price
competition in Germany.
- Income from recovery of receivables during the first six months of 1999
was $12 million. This amount represents successful resolution of
negotiations with Hopewell Holdings Ltd. related to a warranty claim
settlement.
- Other, net for the first six months of 2000 was $40 million, an increase
of $19 million, or 90%, from the same period in 1999. This increase is
primarily the result of the settlement of a commercial dispute with an
outside advisor.
INCOME TAXES. The tax benefit for the first six months of 2000 was $29
million compared to tax expense of $34 million for the same period in 1999, a
decrease of $63 million. This decrease is primarily due to a tax provision of
$28 million at SE Asia-Pacific in 1999 related to operations in China. In
addition, in February 2000 we reached an agreement with the United Kingdom
Inland Revenue relating to prior year tax computations at Western Power
Distribution. This agreement resulted in a $20 million reduction in taxes. In
addition, we recognized increased tax benefits during the first six months of
2000 as a result of additional debt borrowings to finance acquisitions.
MINORITY INTEREST. Minority interest in income for the first six months of
2000 was $43 million, an increase of $7 million, or 19.4%, from the same period
in 1999. The increase is primarily the result of the minority share of the tax
settlement at Western Power Distribution.
NET INCOME. Net income for the first six months of 2000 was $194 million,
an increase of $45 million, or 30.2%, from the same period in 1999. The increase
in net income is attributable to our business segments as follows:
AMERICAS
Net income from our Americas operations totaled $28 million for the
first six months of 2000, and $22 million for the same period in 1999. This
change was primarily due to the devaluation of the Brazilian Real in 1999
and an increase in the tariff granted by the government
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<PAGE> 51
from our investment in Brazil in 2000. This was offset by a small decrease
in earnings from our North American operations.
EUROPE
Net income from our European operations totaled $43 million for the
first six months of 2000, a decrease of $24 million from the same period in
1999. The decrease is primarily the result of lower margins at Bewag and
start-up costs incurred by our European marketing and risk management
activities. Western Power Distribution's net income for the first six
months of 2000 improved slightly as compared to the same period in 1999.
This was primarily the result of a favorable UK tax settlement. This was
offset by the sale of the supply business in 1999.
ASIA-PACIFIC
Our net income in Asia-Pacific for the first six months of 2000
totaled $147 million, representing an increase of $62 million from the same
period in 1999. The significant increase is primarily related to the
commencement of operations of the Sual plant in October 1999 and increased
contributions from our operations in China.
CORPORATE
After tax corporate costs produced a net loss of $37 million for the
first six months of 2000 compared to a $32 million net loss for the same
period in 1999. The increased loss primarily reflects additional interest
expense from corporate debt borrowed in 1999 to finance acquisitions.
SE FINANCE
Net income for the first six months of 2000 was $13 million, an
increase of $6 million from the same period in 1999. This increase is due
to additional income from leases that were not established in 1999.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
OPERATING REVENUES. Our operating revenues were $2,268 million in 1999, an
increase of $449 million, or 25%, from 1998. This increase was primarily
attributable to a $678 million increase in the Americas region, the majority of
which resulted from our North American acquisitions in New England, California
and New York. In addition, the commencement of commercial operations of our Sual
plant in the Philippines contributed revenues of $48 million in 1999. Those
increases were partially offset by a reduction of $297 million, or 23%, in
revenues at Western Power Distribution, primarily as a result of the 1999 sale
of the SWEB supply business. Western Power Distribution estimates that its
annual revenues will decrease by approximately $60 million as the result of the
distribution price review, which is discussed in the section of this prospectus
entitled "Business -- Europe -- Western Power Distribution." As a result,
Western Power Distribution has attempted to maximize efficiency, in part by
reducing staffing levels.
OPERATING EXPENSES. Excluding the write-down of assets, our operating
expenses for 1999 were $1,764 million, an increase of $248 million, or 16%, from
1998. This increase was primarily attributable to a $574 million increase in the
Americas region, the majority of which resulted from our newly-acquired North
American business units. Western Power Distribution's operating expenses
decreased by $343 million, or 32%, primarily because of the sale of the SWEB
supply business and cost reduction efforts in 1999.
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<PAGE> 52
WRITE-DOWN OF ASSETS. The $308 million pre-tax write-down of assets in
1998 resulted from our decision to sell our investments in Alicura and EDELNOR.
This charge reduced the carrying value of these assets to their estimated fair
market value. The $60 million write-down of assets in 1999 consisted of two
principal components. First, as Alicura and EDELNOR continued to produce income
pending their sale, additional write-downs totaling $28 million were recorded to
avoid increasing the carrying value of these assets above their estimated fair
values. Second, we recorded a $32 million write-down primarily related to
Western Power Distribution's metering assets to reflect their reduced value as
the United Kingdom metering business becomes competitive. Based on the proposed
changes in regulation, we determined that the assets were impaired by comparing
associated undiscounted cash flows to the carrying value of metering assets. As
a result, we recorded an impairment loss to reflect the amount by which the
carrying value of metering assets exceeds their fair market value. The fair
market value was determined by computing the present value of estimated future
cash flows to be generated by the assets.
OTHER INCOME (EXPENSE). Other income was $230 million in 1999, an increase
of $280 million, reflecting a large increase in income from an overall expense
in 1998. The following factors were responsible for this increase:
- Interest expense for 1999 was $502 million, an increase of $72 million,
or 17%, from 1998 due to higher borrowing to finance acquisitions.
- The increase in gain on sales of assets reflects a gain of $286 million
relating to the 1999 sale of the SWEB supply business, before related
expenses, minority interest and taxes. This is further explained in Note
12 to our consolidated financial statements included in this prospectus.
- Equity in income of affiliates for 1999 was $111 million, a decrease of
$24 million, or 18%, from 1998. This decline is primarily due to a $50
million reduction in income from Bewag as a result of provisions recorded
there for employee severance and early retirement, partially offset by
increases from our operations in China.
- Income from recovery of receivables in 1999 was $64 million, an increase
of $35 million, or 121%, from 1998. These amounts represent successful
resolution of negotiations that allowed us to recover certain receivables
previously determined uncollectible, as further explained in Note 1 to
our consolidated financial statements included in this prospectus.
- Other, net for 1999 was $72 million, an increase of $43 million, or 148%,
from 1998. This increase resulted from several factors. We recognized an
insurance gain of $23 million in 1999 resulting from the receipt of
insurance proceeds in excess of book value of assets destroyed in an
explosion at the State Line plant in Indiana. Additionally, we recognized
higher equipment rental income at Western Power Distribution 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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<PAGE> 53
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 Western Power
Distribution's metering assets partially offset by cost reduction efforts
at Western Power Distribution.
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 that allowed us to
recover certain receivables previously determined to be uncollectible.
CORPORATE
After tax corporate costs produced a net loss of $69 million in 1999
versus a $29 million net loss for 1998. The increased loss primarily
reflects additional interest expense from corporate debt incurred during
1999 to finance acquisitions.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUES. Our operating revenues were $1,819 million in 1998,
representing a decrease of $1,931 million, or 51%, from $3,750 million in 1997.
This decline is primarily explained by a change to the equity method of
accounting for our energy marketing and risk management activities upon the
formation of SCEM. Excluding revenues associated with marketing and risk
management activities, operating revenues for 1998 increased approximately $51
million, or 3%, from comparable operating revenues of $1,768 million in 1997.
This increase included a $40 million increase in operating revenues related to
our acquisition of the State Line generating facility in December 1997 and a $26
million increase in our Asia-Pacific operations primarily due to an additional
month of ownership in 1998, offset by a $16 million decrease in operating
revenues at Alicura due to low water inflow to the reservoir which serves this
hydroelectric facility.
OPERATING EXPENSES. Our operating expenses were $1,824 million in 1998,
representing a decrease of $1,654 million, or 48%, from $3,478 million in 1997.
This decrease resulted primarily
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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 Western Power Distribution 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 Western Power
Distribution, the impact of the windfall profits tax on minority interest in
1997 and our divestiture of an additional economic interest in Western Power
Distribution during June 1998. The increase is also related to the improved
performance of our other majority owned consolidated affiliates.
NET INCOME. Net income for 1998 was $0, as compared to a net loss of $16
million in 1997. The increase in net income is attributable to our business
segments as follows:
AMERICAS
We recorded a net loss of $180 million in 1998 as compared to net
income of $2 million in 1997 in the Americas region. This decrease was
primarily related to a $200 million, after tax, write down of our
investments in Alicura and EDELNOR as a result of our decision to sell
those assets. In addition, in 1997 final construction profits of $20
million ($10 million, or 50%, of which was eliminated in consolidation)
were recorded related to construction of a coal-fired facility in King
George County, Virginia (Birchwood), which we built under a fixed price
contract for a 50 percent owned and unconsolidated partnership. These
decreases to net income were partially offset by increases in net income
related to the December 1997 acquisition of State Line and the January 1998
investment in CEMIG.
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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 Western Power Distribution 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 Western Power Distribution, improved operating income at
Western Power Distribution due to higher margins in the supply business and
ongoing cost control efforts and a full year's income from our investment
in Bewag.
ASIA-PACIFIC
Net income from Asia-Pacific was $68 million for 1998, an increase of
$29 million from net income of $39 million in 1997. This increase was
partially due to a full year's ownership of our Asia-Pacific operations in
1998, versus just six months at 80% ownership and five months at 100%
ownership in 1997. Improved operating performance in the Philippines and
successful resolution of negotiations with our supplier and partners in
China that allowed us to recover certain receivables previously determined
to be uncollectible also contributed to increased income for 1998.
CORPORATE
After tax corporate costs produced a net loss of $29 million in 1998
compared to a $9 million net loss in 1997. This change is primarily related
to increased interest expense from corporate debt.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have obtained cash from operations, borrowings under
credit facilities, issuances of commercial paper and senior notes, borrowings
and capital contributions from Southern Company and proceeds from non-recourse
project financing. These funds have been used to finance operations, service
debt obligations, fund the acquisition, development and/or construction of
generating facilities and distribution businesses, finance capital expenditures
and meet other cash and liquidity needs. Some of the cash receipts associated
with our businesses have been transferred to Southern Company from time to time,
and Southern Company has provided funds to cover our disbursements from time to
time. After this offering, we do not expect to receive any additional funds from
Southern Company or pay cash dividends to Southern Company.
The projects that we develop typically require substantial capital
investment. Some of the projects in which we have an interest have been financed
primarily with non-recourse debt that is repaid from the project's cash flows.
This debt is often secured by interests in the physical assets, major project
contracts and agreements, cash accounts and, in some cases, the ownership
interest in that project subsidiary. These financing structures are designed to
ensure that we are not contractually obligated to repay the project subsidiary's
debt, that is, they are "non-recourse" to us and to our subsidiaries not
involved in the project. However, we have agreed to undertake limited financial
support for some of our project subsidiaries in the form of limited obligations
and contingent liabilities such as guarantees of specified obligations. To the
extent we become liable under these guarantees or other agreements in respect of
a particular project, we may have to use distributions we receive from other
projects to satisfy these obligations.
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We intend to use a portion of the net proceeds from this offering and the
concurrent offering of common stock to repay commercial paper balances, which
were approximately $389 million with a weighted average interest rate of
approximately 7.0% per annum at June 30, 2000. In addition, we intend to use a
portion of the net proceeds to repay a short-term loan of $450 million as of
June 30, 2000 drawn against a 364-day Bank of America credit facility with an
interest rate of approximately 7.3% per annum. We will use the remaining
proceeds from these offerings for general corporate purposes. The borrowings
from the Bank of America credit facility were used to pay $450 million of the
$503 million dividend to Southern Company. The proceeds from the commercial
paper borrowings were used for working capital and payment of the remaining $53
million dividend to Southern Company.
Effects of Our Separation From Southern Company
In connection with our separation from Southern Company, we will transfer
to Southern Company our leasing subsidiary, SE Finance. SE Finance had net cash
flows from operations of $50 million in the first six months of 2000, $32
million in 1999, $(37) million in 1998, and $19 million in 1997. While there
were no cash flows from investing activities for the first six months of 2000,
SE Finance used cash flows for investing activities of $271 million in 1999,
$185 million in 1998 and $97 million in 1997. It also used cash flows from
financing activities of $32 million in the first six months of 2000, $240
million in 1999, $227 million in 1998 and $82 million in 1997.
Under agreements between Southern Company and us, we would be required to
indemnify Southern Company for taxation costs if we cause the distribution of
our stock to fail to be tax-free. We estimate that the amount of any
indemnification payments would be approximately $1 billion. We do not currently
maintain capital resources to fund potential indemnification payments to
Southern Company for this purpose. We believe the probability of an event
occurring that would require us to make these payments is sufficiently low and
sufficiently under our control that we do not allocate liquidity for this
contingency. If, however, the contingency should occur, we believe we could fund
the indemnification payments through cash flows from operations, new borrowings
and, if necessary, asset sales. Payment of this obligation would materially
affect our financial condition and our earnings and impair our ability to
achieve our growth strategy.
Operating Activities
For the first six months of 2000, we generated net cash from operations of
approximately $217 million compared to approximately $153 million for the same
period last year, an increase of approximately 42%. This increase is primarily
due to an increase in net income for the period of $45 million.
For the year ended December 31, 1999, we generated net cash from operations
of approximately $515 million compared to approximately $402 million for the
year ended December 31, 1998, an increase of approximately 28%. Cash provided by
operating activities in 1999 resulted primarily from net income adjusted for
non-cash charges for depreciation and amortization, deferred income taxes,
write-down of assets and changes in working capital. Cash flows provided by
operating activities are generally reinvested by our subsidiaries or used for
general corporate purposes, including business development activities.
Additionally, we have used a portion of these cash flows provided by operating
activities to fund investments in some of our subsidiary companies. As a result
of our proposed separation from Southern Company, we have reviewed our current
strategy of deferring distributions from Asia. On July 1, 2000, we adopted a
strategy under which only a portion of the future earnings will be deferred in
order to reinvest funds for further growth in Asia, fund construction efforts or
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service debt obligations. The remaining earnings will be repatriated for
reinvestment elsewhere in the world or to service parent debt obligations.
Investing Activities
During the first six months of 2000, we used $261 million in net cash in
investing activities compared to $1,668 million for the same period in 1999, a
decrease of approximately 84%. The decrease is primarily attributable to the
acquisitions during 1999 of SE California and SE New York as well as the
substantial completion during 1999 of our Sual plant in the Philippines, thus
reducing the amount of capital expenditures for those projects in the first six
months of 2000. We have used cash flows provided by financing activities
primarily to finance investments in our subsidiaries. From January 1, 1997
through June 30, 2000, excluding the transactions related to the subsidiary
obligated preferred securities, we have used approximately $7,488 million of
cash for our investing activities. During this period, our domestic and foreign
investments totaled $5,755 million, including $2,106 million for the acquisition
of SE Asia-Pacific, $820 million for the acquisition of a 26% interest in Bewag,
$840 million for the acquisition of SE California, $536 million for the
acquisition of SE New England, $476 for the acquisition of SE New York, $136
million for the purchase of a 3.6% economic interest in CEMIG, $107 million for
our 9.99% interest in Shandong International Power Development Company, $68
million for the acquisition of the State Line generating facility, $57 million
for the purchase of an additional 15% interest in EDELNOR and $64 million for
investment in SCEM. In addition, we invested $2,339 million in capital
expenditures. These cash flows used in investing activities have been partially
provided by $679 million of cash from the sale of a portion of our investments
in subsidiaries and dividends from affiliated companies.
Financing Activities
During the six months ended June 30, 2000, our financing activities
provided approximately $418 million in cash. Our financing activities during
this six months included $864 million of proceeds from the issuance of
short-term and long-term debt. These inflows were partially offset by $82
million in payments of long-term debt, $450 million of dividends paid to
Southern Company and $6 million in dividends to minority interests during this
six months.
Our financing activities provided approximately $1,516 million in cash
during 1999. Financing activities for 1999 included $1,730 million of proceeds
from the issuance of short-term and long-term debt and $360 million of capital
contributions from Southern Company. These inflows were partially offset by $503
million in payments of long-term debt, $165 million of dividends paid to
Southern Company and $66 million in dividends to paid minority interests.
From January 1, 1997 through June 30, 2000, excluding the transactions
related to the subsidiary obligated preferred securities, our financing
activities provided cash totaling approximately $6,603 million. These financing
activities included a total of approximately $4,684 million of proceeds from the
issuance of short-term and long-term debt, net of repayments. During this period
we also received a total of $2,030 million in capital contributions from
Southern Company and paid $615 million of dividends to Southern Company.
During 1999, we received $385 million in funds from Southern Company in the
form of a $360 million capital contribution and $25 million in proceeds from the
issuance of notes payable. We paid $1,116 million to Southern Company during
1999 in the form of a $165 million dividend payment and total repayments of
outstanding notes payable of $951 million. In addition, we paid $108 million in
interest related to notes payable to Southern Company. During the first six
months of 2000, we received $1 million of capital contributions from Southern
Company. However, we received no loans from and made no interest payments to
Southern Company during this period.
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During 1997 and 1998, $950 million of preferred securities and capital
securities were issued by special purpose financing subsidiaries held by Capital
Funding, the proceeds of which were loaned to Southern Company. Southern Company
pays interest on subordinated notes issued in favor of the financing
subsidiaries, which payments are used to pay dividends on those preferred or
capital securities. The payment terms and interest rates on the notes receivable
from Southern Company are identical to the related preferred securities. The
notes are due between 2027 and 2037 with fixed interest rates between 6.875% and
8.19%. Southern Company also has guaranteed payments due under the terms of
those securities. These securities are non-recourse to us. Capital Funding will
be transferred to Southern Company prior to the distribution of our shares by
Southern Company. In addition, $76 million of these subordinated notes were
issued by a special purpose finance subsidiary of Southern Investments UK. These
notes are also non-recourse to us but they are not guaranteed by Southern
Company and they will remain outstanding after this offering.
During 1999, we entered into three significant financing transactions in
order to refinance loans made to us by Southern Company related to our North
American acquisitions.
In April 1999, we entered into three revolving credit agreements with a
group of lending banks and Citibank, as agent, for commitments totaling $1.3
billion. Each of those corporate credit facilities was available for general
corporate purposes, including the support of our commercial paper program.
Facility A, with total commitments of $500 million, was intended to be a
temporary facility until we completed subsequent financings. Accordingly, we
canceled this facility in October 1999. Facility B, a $350 million 364-day
revolving line of credit, was originally scheduled to mature in March 2000. We
and the lending banks 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 a year-to-year extension feature and
commitment increase feature up to an additional $500 million, subject to the
lenders' approval. Facility C, totaling $450 million, also has letter of credit
options and matures in April 2004. The current interest rate applicable to
Facility B is LIBOR plus 60 basis points and an additional 12.5 basis points if
33 1/3% of the aggregate commitments under both Facility B and Facility C are
outstanding at any time. The current interest rate for Facility C is LIBOR plus
57.5 basis points and an additional 12.5 basis points if 33 1/3% of the
aggregate commitments under both facilities are outstanding at any time. The
commitment fee for Facility B is 15 basis points and for Facility C is 17.5
basis points. In April 1999, we also instituted a commercial paper program,
which we use in conjunction with the corporate credit facilities as an alternate
funding source.
In July 1999, we issued two series of senior unsecured notes totaling $700
million. The two series consist of $200 million of 7.40% Senior Notes due 2004
and $500 million of 7.90% Senior Notes due 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. (SE
North America Generating) to own substantially all of our then-owned power
plants in North America. In October 1999, SE North America Generating completed
a $1.45 billion bank financing consisting of three credit facilities. Facility A
is a $1,150 million, 364-day term loan with a two-year term-out option. In
August 2000, we exercised this term-out option such that the $1,150 million
balance matures in October 2002. Facility B is a $250 million, five-year
revolver to be used for capital expenditures and Facility C is a $50 million,
five-year revolver for working capital needs. The interest rate applicable to
Facility A is LIBOR plus 87.5 basis points. For both Facility B and C, the
interest rate is LIBOR plus 72.5 basis points and an additional 12.5 basis
points if 33 1/3% of the particular facility is drawn at any time. The majority
of the proceeds from these facilities were used by SE North America Generating
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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In May 2000, we entered into a $550 million, 364-day credit facility with
Bank of America. In June 2000, the facility was amended to increase the
available amount to $1 billion, with Bank of America acting as agent for
additional lenders. We may extend the maturity date an additional 364 days at
our option. The applicable interest rate for this facility is LIBOR plus 87.5
basis points.
In May 2000, we entered into a $375 million credit facility with Citibank
which expires on October 27, 2000. As of September 12, 2000, we had cancelled
$361 million of this facility and the available amount was $14 million. The fees
associated with it are LIBOR plus a margin of 60 basis points on the available
amount. This margin increases to 72.5 basis points if more than 33 1/3% of the
total commitment of $375 million is used. We also pay commitment fees of 15
basis points on the total commitments. All fees are paid quarterly in arrears
and on the termination date. As of September 12, 2000, there were no amounts
borrowed under this facility; however, we had letters of credit outstanding in
the amount of $13 million to support WPD Limited's offer to acquire Hyder. As
WPD Limited acquires additional shares of Hyder the available amount of this
credit facility and the amount of the outstanding letters of credit are both
reduced by the amount paid for our ownership percentage of Hyder shares acquired
by WPD Limited. We are lending our proportionate share of the funds to WPD
Limited that it is using to acquire shares in Hyder. These funds are provided by
cash flow from operations.
In August 2000, we entered into a $100 million credit facility with lenders
for which Wachovia Bank, N.A., acted as agent. This facility is available
exclusively to provide letters of credit, with any draws on these letters of
credit being funded with advances against this credit facility. The facility
matures on August 30, 2002. Fees associated with letters of credit are 60 basis
points plus an additional 12.5 basis points if outstanding letters of credit or
advances exceed 33 1/3% of the total commitment. The interest rate on advances
is the same amount as the fees for letters of credit, plus the LIBOR rate. In
addition, we pay commitment fees of 15 basis points on the total commitments.
Our credit agreements discussed above as to which we are the borrower
contain various business and financial covenants including, among other things,
(i) limitations on the incurrence of recourse indebtedness or the payment of
dividends, redemptions and repurchases of capital stock unless the ratio of cash
available for corporate debt service to corporate interest is at least 2.0 to
1.0; (ii) restrictions on liens on our non-cash assets; (iii) requirements that
we limit our ratio of recourse debt to recourse capital to 0.55 to 1.0; and (iv)
requirements that we cause our ratio of corporate debt service to corporate
interest to be at least 1.5 to 1.0.
In the SE North America Generating credit agreements referred to above, SE
North America Generating has agreed, among other things, to: (i) maintain a
ratio of cash available for corporate debt service to corporate interest of at
least 1.75 to 1.00; (ii) maintain a ratio of recourse debt to recourse capital
of not more than 0.65 to 1.00; (iii) refrain from incurring recourse debt,
unless its ratio of cash available for corporate debt service to corporate
interest is at least 2.25 to 1.00; and (iv) refrain from paying dividends,
repurchasing capital stock and making payments on affiliate indebtedness, unless
its ratio of cash available for corporate debt service to corporate interest is
at least 2.00 to 1.00.
In addition, these agreements generally provide for increases to the
applicable interest rate as a borrower's credit rating declines.
We and SE North America Generating are in compliance with our respective
covenants in these credit agreements, and we believe that these covenants do not
constitute a significant limitation on our liquidity for new investments,
working capital and capital expenditure needs, including letters of credit, for
the next 12 months.
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At June 30, 2000, we had $450 million outstanding under the Bank of America
facility and $389 million of outstanding commercial paper obligations. No
amounts were borrowed under the Citibank facilities B or C. However, we had
letters of credit outstanding under facility C in the amount of $450 million. On
June 30, 2000 there were no amounts borrowed under the May 2000 Citibank
facility. However, we had letters of credit outstanding in the amount of $150
million. At June 30, 2000, we had $1,150, $232 and $16 million outstanding under
the SE North America Generating facilities A, B and C, respectively,
Some of our credit facilities, and some credit facilities of our
subsidiaries, provide that it will be an event of default if Southern Company
ceases to own controlling percentages of our stock. Consequently, prior to
Southern Company's distribution of our stock, we expect to seek waivers of these
provisions or refinance these credit agreements. These corporate-level credit
agreements include the April 1999 credit agreements with Citibank, the May 2000
credit agreement with Bank of America, the May 2000 credit agreement with
Citibank and the August 2000 credit agreement with Wachovia. In addition, we
have project-level credit agreements under which it will be an event of default
if Southern Company ceases to own controlling percentage of our stock. Our
inability to obtain consents or waivers or to refinance these project-level
loans, which have principal amounts outstanding totaling approximately $2.7
billion, may require us to borrow at the corporate level which could constrain
our ability to raise sufficient additional capital to achieve our strategic
growth objectives.
In June 2000, we agreed with Potomac Electric Power Company (PEPCO) that we
will:
- purchase four power plants and related assets in Maryland and Virginia,
- assume PEPCO's entitlements under various power purchase agreements,
- operate two power stations in Washington, D.C. retained by PEPCO, and
- supply PEPCO with power required to meet its retail obligations for up to
four years pursuant to transition power agreements.
The purchase price of the transaction to be paid at closing is $2.65
billion plus amounts to be determined for working capital and reimbursement of
capital expenditures estimated to be $97 million, and approximately $260 million
in the event certain power purchase agreements are not transferred to us. To
fund this amount we plan to:
- enter into lease financing arrangements for a significant portion of the
PEPCO assets. We expect these lease transactions to provide $1.5 billion
of the purchase price at closing. The leases will be treated as operating
leases for book purposes whereby one of our subsidiaries will record
periodic lease rental expenses,
- issue $1.02 billion of debt at SE North America Generating, of which
approximately $938 million will be drawn at closing, and
- provide the balance from committed credit lines.
On September 13, 2000, we entered into credit agreements with Credit Suisse
First Boston, New York Branch, as arranger, and seven other lenders that provide
for a $1.5 billion credit facility with recourse to our indirectly wholly-owned
subsidiary Southern Energy Mid-Atlantic, L.L.C. (to be used in the event the
lease is not in place at closing), two facilities to SE North America Generating
totaling $1.02 billion with recourse to SE North America Generating and one
facility of $650 million to us with recourse to us. The applicable interest rate
on these commitments is LIBOR plus 87.5 basis points subject to adjustment if
the credit ratings of any of the respective borrowers is downgraded. The loan
facilities are available for a one-year period from the signing of the credit
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agreements, at which time all loans thereunder will mature unless we exercise
our option to extend the loans for a further term of one year.
One of the largest power purchase agreements to be transferred to us will
require us to assume PEPCO's rights and obligations with respect to contracts
with Ohio Edison. In addition, a power purchase contract that may be transferred
to us would require us to assume PEPCO's rights and obligations with respect to
Panda-Brandywine L.P., a Delaware partnership. The Ohio Edison contract expires
in 2005 and provides 450 MW of capacity and energy, while the Panda-Brandywine
contract expires in 2021 and would provide capacity and energy from a 230 MW
combined-cycle generation facility designed to be a qualifying facility under
PURPA. Both contracts require the purchaser to pay prices above current market
prices. The transition power agreements entered into with PEPCO provide that we
supply PEPCO with power required to meet PEPCO's retail obligations at prices
below current market prices. These obligations will be retained by us. The cash
shortfalls for the power purchase agreements and transition power agreements
will depend on future market conditions, and we currently estimate that these
shortfalls will be in the range of $850 to $950 million over the next four
years. We currently are considering plans to segregate specific funds to meet a
substantial portion of these expected obligations.
On August 11, 2000, WPD Limited, one of our subsidiaries, submitted an
offer of 365 pence (approximately $5.47) per share for the entire ordinary share
capital of Hyder, which owns and runs the electricity network in South Wales and
the water distribution and waste water treatment business for all of Wales. This
represents a total purchase price of L565 million (approximately $847 million).
On September 15, 2000, WPD Limited committed unconditionally to purchase any
shares of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD
Limited had acquired approximately 68% of the shares of Hyder. WPD Limited
expects to complete its acquisition of Hyder by September 30, 2000. Our portion
of the bid for Hyder is supported by letters of credit issued in favor of WPD
Limited under dedicated credit facilities of ours which are recourse to us.
Commitments and Capital Expenditures
We have commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $13 million, $25 million and $17 million during the years ended
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, 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>
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We have made firm commitments to buy materials and services in connection
with our ongoing operations and planned expansion and have made financial
guarantees relative to some of our investments. The material commitments are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1999 2000
--------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Financial guarantees related to SCEM
Trade credit support (at fair value)...................... $ 146 $ 278
Vastar gas purchase contract.............................. 41 79
Brazos contract performance guarantee..................... 75 70
Minimum distributions to Vastar........................... 85 85
Contingent commitment to buy an additional interest in
SCEM from Vastar....................................... 210 210
Turbine purchases for new and expanded generating plants.... 31 174
Other material construction-related commitments............. 93 122
Long-term service agreements for new turbines............... 40 68
Operating lease payments.................................... 178 261
------ --------
Total.................................................. $ 899 $ 1,347
====== ========
</TABLE>
Effective August 10, 2000, we acquired Vastar's 40% interest in SCEM for
$250 million. This purchase eliminated our commitment above associated with
minimum distributions to Vastar and the contingent commitments to buy an
additional interest in SCEM from Vastar.
The commitments for the turbine purchases and related long-term service
agreements reflect minimum required payments under termination clauses, where
applicable. If all the turbines are purchased as planned, the total payments
under these purchase agreements and the related long-term service agreements
would amount to $1,749 million and $1,036 million, respectively at June 30,
2000. Since June 30, 2000 we have contracted to buy additional turbines valued
at approximately $580 million. We currently have commitments to purchase 70
turbines, with an anticipated total capacity of approximately 15,000 MW. We have
options to purchase up to an additional 20 turbines, with an anticipated total
capacity of approximately 4,000 to 5,000 MW.
We expect our cash and financing needs over the next several years to be
met through a combination of cash flows from operations and debt and equity
financings. We have generally financed the operations of our project
subsidiaries primarily under financing arrangements requiring extensions of
credit to be repaid solely from each subsidiary's cash flows. In addition,
subsidiaries financed in this manner are often restricted in their ability to
pay dividends and management fees periodically to us by their respective project
credit documents. These limitations usually require that debt service payments
be current, debt service coverage ratios be met and there be no default or event
of default under the relevant credit documents. There are also additional
limitations that are adapted to the particular characteristics of each project
affiliate.
As of June 30, 2000, sources of liquidity included the April 1999 $800
million Citibank credit facility (facilities B and C), the May 2000 $1 billion
Bank of America credit facility and the Citibank dedicated facility for the
purchase of shares of Hyder. These three existing facilities, along with the
August 2000 Wachovia facility and the financing commitments related to the
acquisition of assets from PEPCO and credit facilities at our subsidiaries, are
expected to provide sufficient liquidity through the first half of 2001.
We expect to reassess our short-term financing requirements in the first
quarter of 2001. This coincides with the maturity of facility B of the April
1999 Citibank credit facility. Additionally, at this time, we anticipate the
need to obtain waivers for the requirement that exists in our credit agreements
that Southern Company control us.
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We plan to seek proposals in the first quarter of 2001 for credit
facilities that will replace existing Southern Energy level bank facilities.
These credit facilities will be designed to provide liquidity and letters of
credit. A portion of these credit facilities are expected to be replaced by a
capital markets issue later in 2001. The size of the new facilities will depend
primarily on the amount of new investment we expect to make in 2001 and the
amount of distributable cash our businesses generate.
These facilities are expected to provide sufficient liquidity for new
investments, working capital and capital expenditure needs, including letters of
credit, for the 12 months following their execution.
Any projects we develop in the future and those assets we may seek to
acquire, including the transactions discussed above, are likely to require
substantial capital investment. Our ability to arrange financing on a
substantially non-recourse basis is dependent on numerous factors and to satisfy
the capital needs of our projects in the future, we may have to provide more
financial support for the project entity.
The table below describes expansions, our planned acquisitions and capital
expenditures for construction projects. These transactions will be funded
through a combination of equity and debt issuances.
<TABLE>
<CAPTION>
PLANNED
ACQUISITION EXPENDITURES EXPENDITURES
OR AS OF FOR THE SIX
CONSTRUCTION DECEMBER 31, MONTHS ENDED
COSTS 1999 JUNE 30, 2000
------------ ------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(I.) PENDING ACQUISITIONS
PEPCO....................................................... $2,650 -- --
Hyder....................................................... 84 -- --
(II.) PROJECTS UNDER CONSTRUCTION
SE California............................................... $ 675 $ 2 $ 3
Apex........................................................ 365 -- 4
SE New York................................................. 360 1 3
SE New England.............................................. 500 4 3
State Line Energy........................................... 223 -- --
SEI Wisconsin............................................... 100 90 15
SEI Michigan................................................ 352 1 6
SEI Texas................................................... 215 81 59
Wrightsville Project........................................ 154 -- 12
Perryville Project.......................................... 174 -- --
Freeport Power.............................................. 33 3 3
EDELNOR..................................................... 176 136 9
</TABLE>
On July 28, 1998, an explosion and fire occurred at our State Line facility
in Hammond, Indiana causing substantial damage. Thus far, seven personal injury
lawsuits have been filed against us and our affiliates. The plaintiffs in all of
these cases are seeking money damages for personal injuries and related costs
and expenses. The total special damages being sought are approximately $8.3
million. The plaintiffs are also seeking unspecified amounts for pain and
suffering. Because this litigation has not yet reached discovery, the outcome of
these proceedings cannot not be determined and an estimated range of loss cannot
be made. See "Business -- Legal Proceedings."
As discussed in greater detail in the "Legal Proceedings" section of this
prospectus, SE California and its subsidiaries SE Delta and SE Potrero acquired
generation assets from Pacific Gas and Electric in April 1999 subject to
reliability-must-run agreements. SE California assumed these agreements from
Pacific Gas and Electric subject to the outcome of a FERC proceeding initiated
in
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October 1997 that will determine the percentage of a $158.8 million annual fixed
revenue requirement to be paid to the SE California parties by the CAISO under
the reliability-must-run agreements. On June 7, 2000, the administrative law
judge (ALJ) presiding over the allocation of the rate settlement issued an
initial decision in which the ALJ allocated responsibility for payment of
approximately 3% of the revenue requirement to the CAISO. On July 7, 2000, SE
California appealed the ALJ's decision to the FERC. A final FERC order in this
proceeding may be appealed to the U.S. Court of Appeals. The outcome of this
appeal cannot now be determined.
If SE California is unsuccessful in its appeal of the ALJ's decision, SE
California will be required to refund certain amounts of the revenue requirement
billed to the CAISO for the period from June 1, 1999 until the final disposition
of the appeal. The amount of this refund as of June 30, 2000 would have been
approximately $94 million and would have reduced net income by approximately $33
million. These amounts do not include interest that would be payable in the
event of a refund. If SE California is unsuccessful in its appeal, it plans to
pursue other options available under the reliability-must-run agreements to
mitigate the impact of the ALJ's decision upon its future operations. The
outcome of this appeal is uncertain, and we cannot assure you that we will be
successful.
In September 1999, the State of Minas Gerais, Brazil filed a lawsuit in a
Minas Gerais court seeking temporary relief against Southern Electric Brasil
Participacoes, Ltda. (Southern Electric Brasil) exercising voting and
appointment rights under the shareholders agreement between the state and
Southern Electric Brasil regarding Southern Electric Brasil's interest in CEMIG,
as well as a permanent rescission of the agreement. On March 23, 2000, the state
court ruled that the shareholders agreement was invalid. Southern Electric
Brasil has appealed this decision. While we believe that this is a temporary
situation and we expect that the shareholder's agreement will be fully restored,
we cannot assure you that we will be successful in appealing this ruling or in
defending the validity of the shareholders' agreement. Our failure in this
matter would limit our influence over the daily operations of CEMIG. However, we
and our investing partners would still have 33% of the voting shares of CEMIG
and hold four of 11 seats on CEMIG's board of directors. Our economic interest
in the company would not be affected. The most significant rights we would lose
relate to supermajority rights and the right to participate in the daily
operations of the company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, including changes in interest rates and
currency exchange rates. Through various hedging mechanisms, we attempt to
mitigate some of the impact of changes in energy prices, fuel costs, interest
rates and exchange rates on our results of operations. To manage the volatility
inherent in these market risks, we net the exposures to take advantage of
natural offsets and we may enter into hedging transactions for the remaining
exposures as part of our risk management program.
We use interest rate swaps to hedge underlying debt obligations. These
swaps hedge specific debt issuances and currently qualify for hedge accounting.
Consequently, the interest rate differential associated with a swap is reflected
as an adjustment to interest expense over the life of the instruments.
Additionally, some of our subsidiaries have entered into interest rate swaps in
foreign currencies. These swaps are designated as hedges of those subsidiaries'
related debt issuances in the same currency. If we sustained a 100 basis point
change in interest rates for all variable rate debt in all currencies, the
change would affect net income by approximately $16 million, based on variable
rate debt and derivatives and other interest rate sensitive instruments
outstanding at December 31, 1999.
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We use long-term cross-currency agreements to hedge a significant portion
of our net investments in both Western Power Distribution and Bewag. These
cross-currency agreements hedge our exposure to fluctuations in the British
Pound Sterling and Deutsche Mark exchange rates with the U.S. dollar. We also
have investments in various emerging market countries where the net investments
are not hedged, including 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 $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 subsidiary. These
swaps offset the dollar cash flows, thereby effectively converting debt to the
respective subsidiary's functional currency. Gains and losses related to
qualified hedges of foreign currency firm commitments are deferred and included
in the basis of the underlying transactions. To the extent that a qualifying
hedge is terminated or ceases to be effective as a hedge, any deferred gains and
losses to that point continue to be deferred and are included in the basis of
the underlying transaction.
We have hedge transactions that may not continue to qualify for hedge
accounting under the Financial Accounting Standards Board (FASB) proposed
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) and No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138).
We measure currency earnings risk related to our international holdings
based on changes in foreign currency rates using a sensitivity analysis. The
sensitivity analysis measures the potential loss in earnings based on a
hypothetical 10% change in currency exchange rates. We used exchange rates and
currency positions as of December 31, 1999 to perform the sensitivity analysis.
Such analysis indicates that a hypothetical 10% change in foreign currency
exchange rates would have decreased net income by approximately $10 million had
the U.S. dollar exchange rate increased relative to the currencies with which we
had exposure.
For all derivative financial instruments, we are exposed to losses in the
event of nonperformance by counterparties to these derivative financial
instruments. We have established controls to determine and monitor the
creditworthiness of counterparties to mitigate our exposure to counterparty
credit risk.
In addition to markets risks associated with our power plants, the business
and operations of our energy marketing and risk management subsidiaries
frequently involve market risks associated with managing energy commodities and
establishing open positions in the energy markets on a short-term basis. These
risks fall into three general categories: price and volume volatility, credit
risk of trading counterparties and adequacy of the control environment for
trading. We routinely enter into contracts to hedge purchase and sale
commitments, fuel requirements and inventories of natural gas, coal,
electricity, oil, emission allowances, weather derivatives and other commodities
to minimize the risk
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of market fluctuations on our marketing and risk management operations. We
measure our risk using the value at risk 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 value at
risk methodology on a daily basis. Value at risk is used to describe a
probabilistic approach to measuring the exposure to market risk. Value at risk
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 value at risk 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 value at risk is calculated
at $10 million, we can state with a 95% confidence level that if prices moved
against our positions, our pre-tax loss in liquidating the portfolio would not
exceed $10 million. Based on value at risk analysis of the overall commodity
price risk exposure of the trading businesses on June 30, 2000, we did not
anticipate a materially adverse effect on our consolidated financial statements
as a result of market fluctuations. However, we cannot assure you that market
volatility, failure of counterparties to meet their contractual obligations,
transactions entered into after that date or a failure of risk controls will not
lead to significant losses from our marketing and risk management activities.
See "Risk Factors -- Our profitability may decline if we are not able to fully
hedge against changes in commodity prices or if our hedging procedures do not
work as planned."
We are also exposed to market risk through performance guarantees we have
made to cover obligations of SCEM. At June 30, 2000, our exposure under these
guarantees was approximately $278 million based on the estimated fair value of
SCEM's net contractual commitments.
ACCOUNTING PRONOUNCEMENTS
We continue to analyze the effects of adoption of the rules promulgated by
SFAS No. 133 and its amendment by SFAS No. 138. These statements establish
accounting and reporting standards for derivative instruments, including
derivative instruments imbedded in other contracts, and for hedging activities.
The FASB recently deferred implementation of the provisions of SFAS No. 133 to
fiscal periods beginning after June 15, 2000. We intend to adopt the provisions
of SFAS No. 133 and No. 138 within this time frame and in accordance with the
requirements provided by those statements. We are currently assessing the
financial statement impact of both statements, but we have not yet determined
the impact at this time. Adoption of SFAS No. 133 and No. 138 could increase the
volatility of our net income and other comprehensive income.
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BUSINESS
INTRODUCTION
We are a leading power provider with regionally based businesses in the
Americas, Europe and the Asia-Pacific region. We meet our customers' specific
requirements by integrating electricity generation and distribution, management
of gas assets, fuel procurement and marketing of energy and energy-linked
commodities. To support our business we have built and acquired a portfolio of
power plants that make us one of the world's largest independent power
producers.
According to the McGraw-Hill publication 205 Independent Power Companies:
Profiles of Industry Players and Projects, we were ranked as the sixth and third
largest independent power producer in July 1998 and July 1999, respectively.
These rankings were based on total megawatts of electric generating capacity
acquired or built through debt or equity financing. Currently, we own 12,652 MW
of generation capacity and have 11,212 MW under development or pending
acquisition. We consider a project under development when we have contracted to
purchase machinery for the project, we own or control the project site and we
are in the permitting process. These projects may or may not have received all
of the necessary permits and approvals to begin construction. We cannot assure
you that these projects or pending acquisitions will be completed.
Our business also includes managing risk associated with market price
fluctuations of energy and energy-linked commodities for ourselves and our
customers. This provides us the opportunity to control the economic management
of additional power projects. We use these risk management capabilities to
optimize the value of our generating and gas assets and we also offer these risk
management services to others. We also own electric utilities with generation
transmission and distribution capabilities and an electricity distribution
company. We will seek to expand our business through control or ownership of
additional natural gas and electricity assets. Our strategy is to continue our
rapid growth by capitalizing on opportunities in markets where our unique
combination of strengths in physical asset management, electricity generation,
management of gas assets and power marketing and risk management services allows
us to position our company as a leading power provider.
Our regional operations reflect the prevailing political, regulatory and
market conditions where we operate. In North America, we own, operate and
control, through contractual arrangements, power plants and gas assets which are
supported by our power marketing and risk management activities. In Europe, the
pace of deregulation is accelerating and we expect to take advantage of
increasing opportunities to expand our asset operations and marketing and risk
management business. In the Asia-Pacific region, our revenues are primarily
derived from contracts with government entities or regional power boards.
In North America, we are an established leader in our industry. Excluding
non-U.S. based independent power producers, we were ranked as the fourth largest
independent power producer in North America in July 1998 and the second largest
independent power producer in North America in July 1999 by 205 Independent
Power Companies: Profiles of Industry Players and Projects. We operate power
plants in North America with a total generation capacity of 7,491 MW, of which
our net ownership interests represent 7,389 MW. We control an additional 1,738
MW in North America through management contracts. Additionally, we have
projects, which we will own and operate, under development or pending
acquisition in North America totaling 11,101 MW. We have integrated our
generating and natural gas assets with our marketing and risk management
capabilities to help optimize those assets, manage risk and enhance the value of
both our physical assets and our marketing and risk management business.
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<PAGE> 68
Through SCEM, we are a leading energy marketer in North America. In August
2000, Gas Daily ranked SCEM as the tenth largest North American gas marketer for
the second quarter of 2000 based on billions of cubic feet per day of natural
gas sold, as a result of SCEM selling 5.9 billions of cubic feet per day during
this quarter. In August 2000, Power Markets Week ranked SCEM as the fifth
largest North American power marketer for the second quarter of 2000 based on
the total MWh of electricity sold, as a result of SCEM selling 46.1 million MWh
during this quarter. In the first six months of 2000, we sold a total of 98
million MWh. SCEM markets and trades energy and energy-linked commodities,
including electricity, natural gas, oil, coal and emission allowances. According
to Power Markets Week, in 1999 SCEM was the number four-ranked physical marketer
of electricity in the United States by volume. Through SCEM, we also controlled
3.1 billion cubic feet per day of natural gas production, and 18.5 billion cubic
feet of natural gas storage and served approximately 25 local gas distribution
companies as of June 30, 2000. Most of our power plants in the United States
have entered into various fuel supply, power purchase and other ancillary
agreements with SCEM. For the first six months of 2000, our power plants
generated 9.1 million MWh of electricity, and as of June 30, 2000 were consuming
approximately 0.4 billions of cubic feet per day of natural gas.
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 July 2000, this consortium joined
the Atlanta-based Intercontinental Exchange, an internet exchange which plans to
begin trading energy commodities this fall.
In Europe, as the markets deregulate, we intend to follow a strategy
similar to our North American strategy by integrating power plants with
marketing and risk management. We have developed an energy marketing and risk
management business in Europe, based in Amsterdam, The Netherlands. Our European
marketing and risk management business, which is operated separately from SCEM,
began trading power in the Nordic market in 1999. We also expect to begin
marketing power in the Dutch, German, Swiss and Italian energy markets in 2000.
We currently own a 26% interest in Bewag AG, the electric utility with
generation, transmission and distribution assets serving 2.1 million customers
in Berlin, Germany, and a 49% economic interest in, and operating control of,
Western Power Distribution, 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.
On August 23, 2000, WPD Limited, a company indirectly owned by us and PPL
Global, made an offer to acquire all of the outstanding shares of Hyder for
approximately $847 million and the assumption of approximately $3.2 billion of
debt. On September 15, 2000, WPD Limited committed unconditionally to purchase
any shares of Hyder tendered by Hyder shareholders. As of September 18, 2000,
WPD Limited had acquired approximately 68% of the shares of Hyder. Hyder owns
and operates the electricity network in South Wales and the water distribution
and waste water treatment business for all of Wales.
In the Asia-Pacific region, SE Asia-Pacific owns net equity interests of
3,159 MW power plants in the Philippines and China. 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 55% interest in an electric utility in the Bahamas and a 39% interest in a
generation company in Trinidad and Tobago. In South America we have a 3.6%
economic interest in an electric utility with generation,
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<PAGE> 69
transmission and distribution assets in Brazil which has a generation capacity
of 5,514 MW and serves five million customers. We also hold an 82% interest in
an electric generation and transmission company in Chile. We recently sold our
Argentine subsidiary and we are pursuing the sale of our Chilean subsidiary.
Our business has grown significantly between 1995 and 1999 as shown in the
table below. This table reflects one-time events, including changing to the
equity method of accounting for our power marketing and risk management business
in 1998, the 1998 write-down of our Argentine and Chilean investments, and the
1997 United Kingdom windfall profits tax. Please review this table in
conjunction with the Summary Historical Financial Data provided earlier in this
prospectus, which discusses these one-time events.
<TABLE>
<CAPTION>
COMPOUND ANNUAL
1995 1996 1997 1998 1999 GROWTH RATE
------ ------ ------- ------- ------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 584 $1,600 $ 3,750 $ 1,819 $ 2,268 40%
EBITDA(1)...................... 122 258 512 351 825 61
Net Income (Loss).............. 18 81 (16) -- 372 113
Total Assets................... 4,511 4,564 10,630 12,054 13,863 32
Cash Flows From Operating
Activities................... 158 (226) 264 402 515 34
</TABLE>
(1) EBITDA represents our operating income (loss) plus depreciation and
amortization and our equity in income of affiliates. EBITDA excludes the
impact of minority interests. EBITDA, as defined, is presented because it is
a widely accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA,
as defined, is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. It should not be considered in isolation or as a
substitute for a measure of performance prepared in accordance with
generally accepted accounting principles (GAAP) in the United States and is
not indicative of operating income or cash flow from operations as
determined under GAAP. Our method of computation may or may not be
comparable to other similarly titled measures by other companies.
INDUSTRY OVERVIEW
Power generation and delivery historically have been controlled by either
state-owned enterprises or state-regulated private businesses. In the last
decade, many governments and regulatory bodies have taken steps to transform
their energy sectors to encourage competition, to raise capital for other
purposes and, in some cases, to improve the operational performance of strategic
energy assets. We believe that the emerging model of the industry is the
disaggregation of the traditional utility functions of generation, transmission,
distribution and marketing of electricity into competitive or partially
regulated businesses. To varying degrees, countries in the Americas, Europe and
the Asia-Pacific region are opening their energy sectors to competition. As
governments deregulate and privatize state-owned utilities, the energy sector
will offer significant opportunities for investment worldwide. These
opportunities will also include a significant need for additional power
generating capacity both to satisfy increasing demand and to replace old and
inefficient generating facilities. In addition, investment opportunities will be
created by utilities, independent power producers and industrial companies
disposing of their power generation facilities as they adjust strategies for the
new markets.
In the United States, in response to increasing customer demand for access
to low cost electricity and enhanced services, significant aspects of the
industry are currently being restructured. As of early 1999, new regulatory
initiatives to increase competition in the domestic power generation industry
had been adopted or were being considered at the federal level and by many
states.
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FERC issued Order 636 in 1992 and Order 888 in 1996 to increase competition
by easing entry into natural gas and electricity markets. These orders require
owners and operators of natural gas and power transmission systems,
respectively, to make transmission service available on a nondiscriminatory
basis to energy suppliers such as us. In order to better assure competitive
access to the transmission network on a nondiscriminatory basis, FERC issued
Order 2000 in December 1999, which encourages electric utilities with power
transmission assets to voluntarily form regional transmission organizations to
provide regional management and control of transmission assets independent of
control by firms that sell electricity. These regional organizations will have
the exclusive authority to initiate rate changes for the transmission system
under its control, exclusive operational control over a broad transmission
region, exclusive control over security and short-term reliability,
responsibility to assure the availability of generation needed to support
transmission services, ultimate responsibility for transmission planning and
expansion and responsibility to assure that an adequate method of monitoring the
competitiveness of the regional electricity market is in place. These regional
organizations are also expected to facilitate inter-regional coordination. In
the event the response of transmission-owning utilities to FERC Order 2000 is
deemed inadequate, FERC has announced that it will reexamine this voluntary
approach, but there is no assurance that such action will be taken. We expect
Order Nos. 636, 888 and 2000 to facilitate access for non-utility power
generators, such as us, who are not owners of transmission systems. However, the
impact of these orders on our business and operations depends on the effect of
these orders on the transmission operations in particular markets. Continued
uncertainty over transmission pricing may discourage utilities from investing in
needed transmission and a reduction in market opportunities, imposition of
wholesale price regulation, or both. For example, transmission constraints have
contributed, to some extent, to continued price regulation in New England and
California, as discussed in this prospectus under the headings "-- North
America -- Northeast Region -- SE New England" and "-- North America -- West
Region -- SE California". We believe there is a strong trend in the United
States toward competitive electric power and natural gas markets, but that our
business will continue to be affected by regional and local price regulation.
Outside the United States, many governments are privatizing their utilities
and their transmission and distribution networks and developing regulatory
structures that are expected to encourage competition in the sector. The growth
in both the number and reputation of energy companies which are operating
facilities globally has made many governments realize that their energy assets
can be sold to raise funds for other purposes while not hindering operating
performance or increasing costs to customers. As a result, many governments are
privatizing their existing energy and utility infrastructure facilities and
creating significant investment opportunities for industry participants. In
order to satisfy the anticipated increase in demand, many countries have adopted
active government programs designed to encourage private investment in power
generation facilities. We believe that these market trends will create
attractive opportunities to expand our business in those countries.
STRATEGY
Our strategy is to be a leading competitive power provider in our target
markets of North America, Europe and the Asia-Pacific region. We intend to
continue our growth through the acquisition, development and operation of power
plants and gas transportation and storage assets in our target markets. We also
intend to capitalize on our ability to integrate power plants and gas assets
with the marketing of energy products and the management of market risk
associated with these products. We plan to implement our strategy through the
development of new power plants (greenfield projects), the expansion of existing
power plants (brownfield projects), acquisitions of power and gas assets
competitively positioned in our targeted markets, contractual arrangements for
the control of generation capacity and gas management facilities, the expansion
of our marketing and risk management activities and the implementation of
information technology and e-commerce
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applications. To secure wholesale supply agreements or to provide additional
opportunities for growth, profitability or revenue stability, we may enter into
agreements to acquire, control or manage distribution and supply businesses or
other energy aggregators in selected markets.
We will focus primarily on three regions of the world: North America,
Europe and the Asia-Pacific region.
North America
- We are focusing on competitive market opportunities in North America
created by the deregulation of regional energy markets. We believe that
the integration of our owned and managed power generation and gas assets
with our marketing and risk management businesses enhances our ability to
compete in the evolving energy supply business and, through improved
operating flexibility, enhances the value of our physical assets.
Accordingly, we have invested significant resources in developing SCEM's
marketing and risk management operations and in the acquisition of net
ownership of approximately 7,389 MW of generation assets in the United
States. To date, we have been successful in acquiring existing generation
sites with opportunities for expansion.
- Over the next several years, we intend to continue our growth by
investing in generating capacity in regions of North America that we
consider attractive and that will enable us to own or control a total of
approximately 25,000 to 30,000 MW of capacity. In addition, we plan to
expand our access to, and marketing of, natural gas through SCEM by
acquiring or managing additional gas assets in areas of North America
where these resources complement our power generation business. We are
focusing our generation development in our West, Northeast, East and Gulf
Coast regions. Our goal by 2004 is to own or control generation which
would be relatively balanced across these regions. We expect over 60% of
our planned growth in generation capacity to come from the development of
new power plants (greenfield projects) and the expansion of existing
plants (brownfield projects), primarily consisting of gas-fired projects.
We expect natural gas to comprise over 70% of the total fuel consumed for
generation by 2004. In each of these regions, we are pursuing strategies
specifically tailored to that particular region's customer mix, fuel mix,
asset infrastructure and regulatory environment. We believe that our
flexibility in combining physical assets with products that fit evolving
customer needs is fundamental in pursuing these strategies. In the
Caribbean, we will continue to review potential acquisitions and
developments on an opportunistic basis.
Europe
- We will focus on developing a leading generation and marketing position
in those western and central European power markets where we can
capitalize on our commercial skills and current position and
relationships. As in North America, we plan to integrate our generation
and marketing and risk management capabilities. We currently trade power
in the Nordic market. As additional European markets develop and become
more liquid, we intend to expand our generation and marketing and risk
management activities throughout the Nordic region, the Benelux
countries, Germany, Switzerland, Italy and the Central European region.
Over the next several years we intend to acquire or develop additional
generation capacity in these regions and we currently have preliminary
development activities underway in Italy to explore greenfield projects.
Our target is to own or control at least 10,000 MW of capacity in Europe.
We also intend to review opportunities to acquire additional distribution
assets to gain access to noncompetitive markets as well as build on our
investment in Western Power Distribution. For example, we and PPL Global
have recently acquired a controlling interest in Hyder.
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<PAGE> 72
Asia-Pacific
- We plan to build on the base of over 3,100 MW of generation capacity we
have established in the Philippines and China and to expand into
countries with more developed economies that are opening their energy
sectors to competition, such as Australia and Singapore. In addition, we
will continue to explore opportunities in countries in the Asia-Pacific
region where we can build significant business and achieve economies of
scale, such as India. Over the next several years, we intend to acquire
additional generation capacity such that we will hold or control a total
of approximately 8,000 to 10,000 MW of capacity in the Asia-Pacific
region. We also intend to review opportunities to acquire distribution
assets as a means to obtain significant scale in the competitive supply
business.
In addition to our growth initiatives, we consistently seek to enhance the
financial and operational performance of our businesses through financial
management, cost controls and review and improvement of operations. We believe
that our strengths in design, engineering, finance, construction management,
fuel procurement, operations and marketing and risk management provide us with a
competitive advantage essential to achieving our strategy.
Although changes in industry structure and ownership are part of a global
trend, because of differences in current prices, the balance between supply and
demand within a single geographic area, fuel and transmission availability,
customer mix, political objectives and other factors, we believe that these
changes are essentially local in nature. We have experienced industry
restructuring and changes in regulations in the U.S., the United Kingdom,
Germany, Chile, Brazil and the Nordic region. Our experience has shown that each
country, and in the case of the U.S., each state, has adopted its own set of
rules and regulations related to the restructuring of the industry, each of
which differs from others, sometimes significantly, based on local interests and
objectives. As a result, the parts of the energy sector open to private
ownership and the rules governing competition are expected to vary based on
local considerations. To compete successfully, we believe we must have the
flexibility to operate in a variety of environments and throughout the entire
energy value chain. Our strategy to achieve this goal is based on the following
key elements:
Maximize the Financial and Operational Performance of Current and Future
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. In addition, when evaluating new investments, we
intend to consider the projected effect of the investment on our financial
performance, including the projected impact on our earnings strategy.
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
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<PAGE> 73
enhance their businesses because of relationships with local partners and
customers or information specific to a geographical market. A significant
presence within a region is advantageous in order to achieve a scale of
operations sufficient to promote efficiency, increase operational
flexibility and reliability and make full use of the skills of management
deployed to that region.
Integrate Energy Marketing and Risk Management with Ownership and Control of
Energy Assets
We expect that the deregulation of energy markets worldwide will lead
to the restructuring of energy markets. To be successful, we believe that a
company must be able to integrate asset ownership or control with the
ability to market energy products and the ability to manage market risk
associated with those products. Marketing and risk management enhances the
value of assets by assisting in optimizing capacity utilization, ensuring
physical delivery, providing a real-time market interface and managing
market price and fuel risks. Conversely, control of electric and gas assets
enhances the profitability of marketing and risk management by providing a
physical hedge and real-time information, increasing volumes and allowing
for a broader range of product offerings and improving our credibility as
an energy provider to customers.
Exploit Energy Information and E-commerce Applications
We believe that emerging information technologies and their increasing
use by businesses and our customers will present us with opportunities to:
- rapidly and efficiently extend our market reach to a broader base
and larger number of customers and suppliers,
- lower many of the basic transaction costs inherent in our high
volume business with geographically diverse customers, and
- improve the effectiveness of providing and obtaining information to
and from our customers.
We have e-commerce initiatives that target retail marketing,
aggregators, direct wholesale and large industrial customers and the
network of the related businesses and service providers with whom we
transact daily. For example, we have investments in Utility.com and a new
leading energy trading consortium and an option to invest in TenFold
Energy, Inc.
COMPETITION
As an integrated power provider in the energy supply business, we face
intense competition in all phases of the business in which we compete, both in
the United States and in international markets. We encounter competition from
companies of all sizes, having varying levels of experience, financial and human
resources and differing strategies. On the power generation side, we compete in
the development and operation of energy-producing projects, and our competitors
in this business include various utilities, industrial companies and independent
power producers (including affiliates of utilities). In our energy marketing and
risk management business, we compete with international, national and regional
full service energy providers, merchants, producers and pipelines in our ability
to aggregate competitively priced supplies from a variety of sources and
locations and to utilize efficient transmission or transportation.
The following summarizes our competitive position in several of our key
markets:
- North America: Excluding non-U.S. based independent power producers, we
were ranked the second and the fourth largest independent power producer
in July 1999 and July 1998
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according to the McGraw-Hill publication 205 Independent Power Companies:
Profiles of Industry Players and Projects. In addition, for the second
quarter of 2000 our marketing and risk management operations ranked as
the tenth largest gas marketer in North America and the fifth largest
power marketer in North America.
- Europe: In the European market, in general, we were ranked as the
thirteenth largest private power company based on total dollars invested
in private power assets according to Cambridge Energy Research
Associates. In addition, according to 1999 data, Bewag was the ninth
largest electricity producer in Germany based on total electricity
production (approximately 13 TWh). These rankings are based on VDEW, a
German electricity association.
- Asia-Pacific: In the Asian market, in general, we were ranked third among
the twenty largest private power companies based on total dollars
invested in private power assets according to Cambridge Energy Research
Associates. Specifically, we have an approximate 20% share of the total
installed capacity in the Philippines, and we are the largest private
producer of electricity in the country. In general, our coal-fired plants
in the Philippines are among the lowest operating cost plants in their
market and have exceeded their contractual availability requirements.
During the transition of the energy industry to competitive markets, it is
difficult for us to assess our position versus the position of existing power
providers and new entrants. This is due to the fact that each company may employ
widely differing strategies in their fuel supply and power sales contracts with
regard to pricing, terms and conditions. Further difficulties in making
competitive assessments of our company arise from the fact that many states and
countries are considering or implementing different types of regulatory and
privatization initiatives that are aimed at increasing competition in the power
industry. Increased competition that has resulted from some of these initiatives
has already contributed to a reduction in electricity prices and put pressure on
electric utilities to lower their costs, including the cost of purchased
electricity. Additionally, our business is rapidly becoming more competitive due
to technological advances in power generation, e-commerce enabling new ways of
conducting business, the increased role of full service providers and increased
efficiency of energy markets.
In general, however, we believe that our experience and expertise in
assessing and managing market and credit risk will allow us to remain
competitive during volatile or otherwise adverse market circumstances.
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DESCRIPTION OF GENERATION AND DISTRIBUTION OPERATIONS
The following table describes our significant generation and distribution
operations, expansions of existing projects, new projects under development and
pending acquisitions.
<TABLE>
<CAPTION>
OWNED AND OPERATED
-------------------------------
OUR % NET EQUITY
OWNERSHIP TOTAL INTEREST IN OPERATED
POWER GENERATION BUSINESS LOCATION PRIMARY FUEL INTEREST(1) MW TOTAL MW MW
------------------------- ------------------- -------------------- ----------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICA:
SE California..................... California Natural Gas 100% 3,065 3,065 3,065
Apex.............................. Nevada Natural Gas 100 -- -- --
SE New York....................... New York Natural Gas/Hydro/ 100 1,794 1,794 1,794
Coal/Oil
SE New England(2)................. Massachusetts Natural Gas/Oil 100 1,245 1,245 1,236
State Line Energy................. Indiana Coal/Natural Gas 100 490 490 490
Birchwood......................... Virginia Coal 50 222 111 222
SEI Wisconsin..................... Wisconsin Natural Gas 100 306 306 306
SEI Michigan...................... Michigan Natural Gas 100 -- -- --
SE Mid-Atlantic (PEPCO)(3)........ Maryland/Virginia Coal/Oil/Gas 100 -- -- --
SE Wichita Falls.................. Texas Natural Gas 100 80 80 80
SEI Texas......................... Texas Natural Gas 100 298 298 298
Wrightsville Project.............. Arkansas Natural Gas 51 -- -- --
Perryville Project................ Louisiana Natural Gas 50 -- -- --
------ ------ ------
Subtotal........................ 7,500 7,389 7,491
CARIBBEAN:
Freeport Power.................... Bahamas Oil 55 127 70 127
PowerGen.......................... Trinidad & Tobago Natural Gas 39 1,154 450 1,154
------ ------ ------
Subtotal........................ 1,281 520 1,281
SOUTH AMERICA:
CEMIG............................. Brazil Hydro 3.6 5,514 199 --
EDELNOR(4)........................ Chile Coal/Natural Gas 82.3 653 537 681
------ ------ ------
Subtotal........................ 6,167 736 681
EUROPE:
Western Power Distribution........ England Natural Gas 49 163 80 14
Hyder(3).......................... England Natural Gas 40 -- -- --
Bewag(5).......................... Germany Natural Gas/Oil/Coal 26 2,955 768 --
------ ------ ------
Subtotal........................ 3,118 848 14
------ ------ ------
ASIA-PACIFIC:
SIPD.............................. China Coal 9.99 4,158 415 --
Shajiao C......................... China Coal 32 2,038 652 --
Sual.............................. Philippines Coal 91.9 1,258 1,156 1,258
Pagbilao.......................... Philippines Coal 87.2 735 641 735
Navotas I and II.................. Philippines Oil 93 300 280 300
Bulacan........................... Philippines Diesel 100 15 15 15
------ ------ ------
Subtotal........................ 8,504 3,159 2,308
TOTAL........................... 26,570 12,652 11,775
====== ====== ======
<CAPTION>
UNDER DEVELOPMENT
---------------------------
NET EQUITY EXPECTED DATE
INTEREST IN OF COMMERCIAL
POWER GENERATION BUSINESS TOTAL MW(1) OPERATION
------------------------- ----------- -------------
<S> <C> <C>
NORTH AMERICA:
SE California..................... 1,050 2003
Apex.............................. 1,000 2003
SE New York....................... 785 2003
SE New England(2)................. 835 2004
State Line Energy................. 550 2003
Birchwood......................... -- --
SEI Wisconsin..................... -- --
SEI Michigan...................... 848 2002
SE Mid-Atlantic (PEPCO)(3)........ 5,154 2000
SE Wichita Falls.................. -- --
SEI Texas......................... 248 2001
Wrightsville Project.............. 281 2002
Perryville Project................ 350 2002
------
Subtotal........................ 11,101
CARIBBEAN:
Freeport Power.................... 8 2001
PowerGen.......................... -- --
------
Subtotal........................ 8
SOUTH AMERICA:
CEMIG............................. -- --
EDELNOR(4)........................ -- --
------
Subtotal........................ --
EUROPE:
Western Power Distribution........ -- --
Hyder(3).......................... 103 2000
Bewag(5).......................... -- --
------
Subtotal........................ 103
------
ASIA-PACIFIC:
SIPD.............................. -- --
Shajiao C......................... -- --
Sual.............................. -- --
Pagbilao.......................... -- --
Navotas I and II.................. -- --
Bulacan........................... -- --
------ ----
Subtotal........................ --
TOTAL........................... 11,212
======
</TABLE>
<TABLE>
<CAPTION>
OWNERSHIP CUSTOMERS/
DISTRIBUTION BUSINESS INTEREST END USERS
--------------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Freeport Power.............................................. Bahamas 63% 17
CEMIG....................................................... Brazil 3.6 5,000
Western Power Distribution.................................. England 49 1,400
Bewag....................................................... Germany 26 2,100
-----
Total...................................................... 8,517
=====
</TABLE>
-------------------------
(1) Amounts reflect our percent economic interest in the total MW.
(2) Total MW reflects a 1.4 percent interest in the 614 MW Wyman plant.
(3) Pending acquisition expected to close during 2000.
(4) We are pursuing the sale of our investment in EDELNOR. Please see the
section of this prospectus entitled "Business -- South America -- EDELNOR"
for further discussion.
(5) Total MW excludes 26 percent ownership of 5,740 MW of thermal capacity for
steam heating.
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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 for $801 million plus $39 million for
fuel inventory, capital expenditures and property taxes. These assets consist of
the Pittsburg Plant and the Contra Costa Plant (the Delta Plants) owned by SE
Delta and the Potrero Plant owned by SE Potrero.
The following table summarizes certain characteristics of SE California's
generating facilities in operation or under development:
<TABLE>
<CAPTION>
LOCATION TOTAL MW PRIMARY FUEL(1)
------------- -------- ---------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
DELTA PLANTS
Pittsburg Units 1-4(2).................................... Pittsburg 4 x 163 Natural Gas
Pittsburg Unit 5.......................................... Pittsburg 325 Natural Gas
Pittsburg Unit 6.......................................... Pittsburg 325 Natural Gas
Pittsburg Unit 7(3)....................................... Pittsburg 720 Natural Gas
Contra Costa Unit 6....................................... Antioch 340 Natural Gas
Contra Costa Unit 7....................................... Antioch 340 Natural Gas
-------
Subtotal................................................ 2,702
POTRERO PLANT
Potrero Unit 3............................................ San Francisco 207 Natural Gas
Potrero Units 4-6......................................... San Francisco 3 x 52 Distillate Fuel
-------
Subtotal................................................ 363
-------
Total................................................... 3,065
=======
PROJECTS UNDER DEVELOPMENT:
Contra Costa Expansion.................................... Antioch 530 Natural Gas
Potrero Expansion......................................... San Francisco 520 Natural Gas
-------
Total................................................... 1,050
=======
</TABLE>
-------------------------
(1) All of the Delta Plants and Potrero Unit 3 are also capable of using fuel
oil as a secondary fuel.
(2) These "total MW" figures reflect nameplate ratings; available capacity may
be less than those nameplate ratings. These units are scheduled to be
retired at the end of 2001 because they are not expected to meet nitrogen
oxide emission requirements in 2002 and because the cost of modifying these
plants to meet these requirements would not be economical.
(3) Due to boiler capacity limitations, Pittsburg Unit 7 has a maximum capacity
of 682 MW.
These generating assets, which include facilities which operate at both
higher-than-average (intermediate load) and very high (peak) demand levels, are
located in close proximity to or in San Francisco. The Delta Plants comprise
nine natural gas-fired steam generating units with approximately 2,702 MW of
generating capacity located approximately ten miles apart along the
Sacramento/San Joaquin River Delta. The Potrero Plant has one natural gas-fired
conventional steam generating unit and three distillate-fueled combustion
turbines with a combined capacity of 363 MW.
On September 23, 1996, the California General Assembly enacted Assembly
Bill 1890 in an effort to restructure the electric utility industry and
stimulate wholesale and retail competition in California. In addition to
allowing 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
coordinators with access to
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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. The
California Power Exchange is a wholesale electric market under the jurisdiction
of the FERC that provides a competitive auction for the establishment of
day-ahead and hour-ahead market prices, as well as forward energy sales. The
role of the California Power Exchange 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 California Power
Exchange, reliability-must-run contracts with the CAISO, discussed below, sales
of real-time energy and ancillary services to the CAISO and forward sales. While
the distribution of sales between these markets varies, currently approximately
42% of these sales are made into the CAISO markets, 25% are made through the
California Power Exchange markets and 33% reflect forward sales.
SE Potrero and SE Delta have entered into fuel supply, service and
marketing agreements with SCEM through which SCEM: (i) supplies fuel to the
plants; (ii) bids, schedules and dispatches the units in the market; (iii)
handles the settlement and billing process for CAISO and California Power
Exchange sales; (iv) purchases energy available for sale to the exchange; and
(v) assists in the administration of and compliance with SE California's
obligations under its contracts with the CAISO.
We are currently planning to expand our Contra Costa and Potrero plants by
530 MW and 520 MW, respectively. In January 2000, SE Delta filed an application
for certification with the California Energy Commission for the proposed
expansion of the Contra Costa plant. SE Potrero filed a similar application for
certification in May 2000. We expect these projects to begin commercial
operation during 2003.
The SE California subsidiaries that acquired generation assets from Pacific
Gas and Electric in April 1999 acquired these facilities subject to
reliability-must-run agreements. These agreements authorize the CAISO to
dispatch SE California's generation units to provide energy and ancillary
services when required by the CAISO to ensure reliability of the transmission
system. At the time the SE California subsidiaries acquired these assets, the
rates, terms and conditions of the reliability-must-run agreements were the
subject of a pending FERC proceeding. SE California agreed to assume these
agreements from Pacific Gas and Electric subject to the outcome of the FERC
proceeding. See the section of this prospectus entitled "Business -- Legal
Proceedings."
On June 1, 2000, the CAISO implemented its pre-dispatch procedures,
pursuant to which the CAISO is permitted to call on units subject to
reliability-must-run agreements before the unit owner has had the opportunity to
bid the unit's output into the California Power Exchange or CAISO-administered
markets for energy or ancillary services, thereby foreclosing the unit owner's
access to subsequent, and often more profitable, markets. In response to the
implementation of pre-dispatch, the SE California subsidiaries filed an
amendment to their reliability-must-run agreements that would authorize them to
recover from the CAISO, on an as-incurred basis, increased costs attributable to
the pre-dispatch of the units. On July 28, 2000, the FERC denied the proposed
amendment to the reliability-must-run agreements. The SE California subsidiaries
intend to make a revised filing in September 2000. At this time, the costs
attributable to pre-dispatch cannot be determined.
On June 28, 2000, the CAISO's Governing Board convened an emergency meeting
at which they voted to reduce the price cap applicable to the CAISO-administered
energy and ancillary services markets from $750 per MWh to $500 per MWh,
effective July 1, 2000. On August 1, 2000,
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<PAGE> 78
the CAISO board voted to reduce the price cap to $250 per MWh, effective August
7, 2000. The impact of the price caps applicable to the CAISO-administered
markets on our results of operations cannot be quantified at this time.
In response to highly publicized increases in retail electric rates for
customers of San Diego Gas & Electric Company, various California state
regulatory and legislative bodies have undertaken action to investigate these
prices and/or mitigate their impact on customers of San Diego Gas & Electric. To
this end, the Public Utilities Commission of the State of California has begun a
general, broad-based investigation into the state's electricity markets. The
California Electricity Oversight Board is pursuing a similar investigation.
Further, the California state legislature is currently considering various
proposals which would, among other things, freeze retail electricity rates,
while providing for recovery of higher wholesale power costs over a longer time
period. The current proposals focus primarily on mitigating high retail rates
and do not seek to impose price caps or other restrictive mechanisms on the
federally-regulated wholesale electric markets. Presently, we cannot predict
which, if any, of these proposals may be put into effect.
On July 26, 2000, the FERC issued an order directing its staff to undertake
a fact-finding investigation of the conditions in wholesale electric markets in
various regions of the country and to report its finding to the FERC by November
1, 2000. The focus of this investigation is "factors affecting competition and
market price fluctuations" in these markets. The FERC may use the results of
this investigation to
- assist in review of rate filings involving market pricing or market
rules,
- institute proceedings to modify market rules, transmission tariffs or
"existing institutions," such as independent systems operators, and
- analyze proposals required to be filed later this year under FERC Order
2000 relating to the separation of management and control of transmission
assets from control by firms that sell electricity.
This investigation is ongoing and we cannot determine what actions if any, the
FERC may take in response to its findings.
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. In addition, the FERC established October 30, 2000, as a "refund
effective date" under section 206 of the Federal Power Act, after which date the
FERC may adjust prices retroactively based on the results of the investigation
if it determines that the existing rates are not just and reasonable. As a
result, any price adjustment by the FERC may require the SE California
subsidiaries to refund some portion of the revenues received from sales made
after the refund effective date. The FERC's investigation is ongoing, and it
cannot be determined at this time what conclusions the report will reach, what
action the FERC may take in response to the report or whether the FERC will
order the payment of refunds. Consequently, we cannot determine what effect any
action by the FERC will have on our financial condition.
Apex
We are developing a 500 MW natural gas-fired combined cycle project fifteen
miles northeast of Las Vegas, Nevada in the Apex industrial park. The power
project, which is scheduled for
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<PAGE> 79
commercial operation in the first quarter of 2003, will be organized in a
limited liability company that will be owned by Southern Energy Nevada, which is
our indirect wholly owned subsidiary. The project is expected to have a capital
cost of approximately $300 million. Land and water rights purchase agreements
have been executed with the Apex Industrial Park, Inc. We are also in the
permitting process of an additional 500 MW natural gas-fired combined cycle
plant to be built on the Apex site. We expect to complete the permitting process
by June 2001 and to begin commercial operation in the third quarter of 2003.
The Apex project will sell its capacity and electric power output in
southern Nevada, Desert Southwest or the California SP-15 markets. SCEM will
assist the project in marketing its output and securing its fuel.
The Apex project is being developed to supply electricity into the southern
Nevada and neighboring markets. These markets are experiencing very high demand
growth, and peak period reserve margins are low, with small amounts of
generation located in the load centers. In addition, the State of Nevada has
passed legislation for the deregulation of its electricity market beginning in
2000, while California has already opened its generation market to competition,
and the other states of the Desert Southwest are in the process of doing so.
At its current stage of development, the Apex project faces a number of
market uncertainties. Among these are the price, terms and conditions of the
anticipated bilateral agreements as well as the ultimate market structure of
Nevada and the other Desert Southwest states.
NORTH AMERICA -- NORTHEAST REGION
SE New York
On June 30, 1999, three of our wholly owned subsidiaries (collectively
referred to as SE New York) acquired various power plants and related assets in
the state of New York with a total generating capacity of 1,794 MW from Orange
and Rockland Utilities, Inc. and Consolidated Edison Company of New York, Inc.
Our net purchase price for these acquisitions was approximately $493 million,
which included an amount to cover the market value of existing fuel inventories.
SE New York was selected as the winning bidder for the power plants following a
competitive bid process.
SE New York has three principal subsidiaries: (i) Southern Energy Bowline
L.L.C. (SE Bowline), which owns the Bowline Station, a 1,227 MW natural
gas-fired plant comprised of two units rated at a capacity of approximately 600
MW each, and an approximately 98-acre site adjacent to the Bowline Station; (ii)
Southern Energy Lovett L.L.C. (SE Lovett), which owns the Lovett Station, a 447
MW coal-fired plant consisting of three units; and (iii) Southern Energy NY-Gen,
L.L.C. (SE NY-Gen), which owns two units intended to operate during periods of
very high (peak) demand (the Hillburn Gas Turbine Station and the Shoemaker Gas
Turbine Station), three hydroelectric stations (Mongaup 1-4, Swinging Bridge 1-2
and Rio 1-2) and an operational interest in the Grahamsville Hydroelectric
Station. All generating units at Bowline and Lovett have the capability of
burning natural gas and oil.
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<PAGE> 80
The following table summarizes certain characteristics of SE New York's
generating facilities in operation and under development:
<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
--------------- -------- --------------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
BOWLINE PLANT
Bowline 1................................................. West Haverstraw 612 Natural Gas/Oil
Bowline 2................................................. West Haverstraw 615 Natural Gas/Oil
-----
Subtotal................................................ 1,227
LOVETT PLANT
Lovett 3.................................................. Tomkins Cove 70 Natural Gas/Oil
Lovett 4.................................................. Tomkins Cove 177 Coal/Natural Gas/Oil
Lovett 5.................................................. Tomkins Cove 200 Coal/Natural Gas/Oil
-----
Subtotal................................................ 447
SE NY-GEN PLANTS
Mongaup 1-4............................................... Mongaup River 4 Hydro
Swinging Bridge 1-2....................................... Mongaup River 13 Hydro
Rio 1-2................................................... Mongaup River 10 Hydro
Grahamsville.............................................. Grahamsville 17 Hydro
Hillburn GT............................................... Ramapo 40 Natural Gas/Oil
Shoemaker GT.............................................. Middletown 36 Natural Gas/Oil
-----
Subtotal................................................ 120
-----
Total................................................... 1,794
=====
PROJECT UNDER DEVELOPMENT:
Bowline Expansion......................................... West Haverstraw 785 Natural Gas
</TABLE>
In connection with the acquisition of these power plants, the project
companies entered into various agreements with Orange and Rockland Utilities
through July 1, 2004, under which SE New York will operate the plants as called
upon by Orange and Rockland Utilities to ensure its system reliability. The
project companies also entered into various transition agreements with Orange
and Rockland Utilities and Consolidated Edison to provide energy and installed
capacity to Orange and Rockland Utilities and Consolidated Edison for specified
periods after the closing. The only remaining obligation under these transition
agreements is a transition power sales agreement with Orange and Rockland
Utilities under which SCEM, under an assignment from SE New York, is obligated
to sell capacity through October 31, 2000.
SE Bowline, SE Lovett and SE NY-Gen have entered into fuel supply, energy
services and power marketing agreements with SCEM through which SCEM (i)
supplies fuel to the plants; (ii) will bid, schedule and dispatch the units
through the New York Independent System Operator (NYISO) into the
newly-deregulated (since November 18, 1999) New York market; (iii) handles the
settlement and billing process for NYISO sales and sales under power purchase
and installed capacity sales agreements; (iv) purchases excess energy and
installed capacity not purchased through power purchase agreements and installed
capacity sales agreements for sale in the NYISO; and (v) assists in the
administration of and compliance with the obligations of SE Bowline, SE Lovett
and SE NY-Gen under various fuel supply and transportation contracts and power
purchase agreements, installed capacity agreements and other contracts for the
sale and purchase of energy, installed capacity or other energy products sold in
the NYISO.
On March 27, 2000, the NYISO filed a petition with FERC seeking to suspend
the market-based 10-minute spinning and non-spinning reserve market, two types
of ancillary services markets in which SE New York currently participates. In
the 10-minute spinning reserve market, generators are compensated to operate
units below their full output level, so that the additional output may be
quickly brought into service if system reliability is threatened. In the 10
minute non-spinning reserve market, generators are compensated to stand by with
"quick start" units that are not currently
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<PAGE> 81
operating, such as combustion turbines or certain hydroelectric units. In
addition, the NYISO sought permission to make retroactive adjustments to market
clearing prices for the period from January 29, 2000 to March 28, 2000. In an
order issued June 1, 2000, the FERC rejected the proposed price cap on spinning
reserves but allowed the cap on non-spinning reserves through November 1, 2000,
provided that suppliers are able to recover their lost opportunity costs. Lost
opportunity costs would result when generators are withheld from energy market
participation so that they may stand by to meet unexpectedly high demand or
other generators' under-performance. The FERC also rejected the NYISO's
proposals for retroactive adjustment to market clearing prices in the reserve
markets. As a result of the FERC order, SE New York does not anticipate any
adverse financial implications due to the NYISO's reserve market filing.
On June 30, 2000, the NYISO sought rehearing of FERC's rejection of the
NYISO's proposal to retroactively adjust changes for 10-minute spinning reserves
for the January 29 to March 28, 2000 period. On July 31, 2000, the FERC granted
the NYISO a re-hearing for the purpose of further consideration. The NYISO also
requested a stay of the order's denial of authority to conduct an interim
rebilling for operating reserves for the month of March. The outcome of the
NYISO appeal is uncertain.
On June 30, 2000, the board of directors of the NYISO sought from the FERC
authority to impose $1,300 per MWh bid caps on the day-ahead and real-time
energy markets, for the July 6 to October 28, 2000 period. On July 26, 2000, the
FERC approved the imposition of a bid cap of $1,000 per MWh in the wholesale
electricity markets in New York State until October 28, 2000. This reduces the
current bid cap from $1,300 to $1,000 per MW. On September 7, 2000, the NYISO
management committee voted to continue $1,000 bid caps through April 30, 2001.
The NYISO board has not voted on this matter. However, we expect that this bid
cap will continue. SE New York does not anticipate any adverse financial
implications related to this bid cap.
In March 2000, SE Bowline filed an application with the State of New York
Department of Public Service for authorization to construct a 785 MW combined
cycle facility (a facility that utilizes both combustion and steam turbines) on
a 98-acre site adjacent to the Bowline plant. In addition, SE Bowline has filed
an application with the New York Department of Public Service to construct a 4.2
mile 24-inch natural gas line to meet the current and future natural gas needs
of the Bowline plant. This line would connect directly to the existing Columbia
gas transmission system. We expect to start commercial operation of the new
power facility in 2003 and the new gas line in 2001.
In October 1999, the State of New York announced an initiative to reduce
air emissions in the state beyond the requirements under the 1990 Clean Air Act
Amendments. Under this proposal, the standards would become effective in 2003
and would be phased in through 2007. A draft of the regulation is expected to be
proposed by year-end 2000. The impact of this potential regulation is uncertain
at this point. Along with several other electric utilities, SE New York received
an information request from the State of New York concerning the air quality
control implications of various repairs and maintenance activities at the Lovett
facility. SE New York responded fully to this request and provided all of the
information requested by the state. For more information about this matter, see
"-- Legal Proceedings."
A study is being conducted of the impact of water intake structures on fish
species in the Hudson River. Bowline's water intake is part of this study. The
resolution of this study is uncertain but could result in additional limitations
on Bowline's water intake or new technology requirements for the intake.
We are currently evaluating the sale of one or more of SE NY-Gen's
hydroelectric generation plants. We cannot assure you that the sale of one or
more of these plants will occur.
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SE New England
On December 30, 1998, subsidiaries of our wholly owned subsidiary, Southern
Energy New England, L.L.C., acquired various power plants, with a total capacity
of 1,245 MW, from subsidiaries of Commonwealth Energy System and Eastern
Utilities Associates for $536 million. The sales by Commonwealth Energy and
Eastern Utilities were required as part of deregulation plans adopted in
Massachusetts and Rhode Island. The assets consist of the Kendall Station (with
five generating units) acquired by Southern Energy Kendall, L.L.C. (SE Kendall)
and the Canal Station (Canal Units 1 and 2), the Martha's Vineyard Diesels and
the Wyman Unit 4 Interest, all acquired by Southern Energy Canal, L.L.C. (SE
Canal). In conjunction with the formation of Southern Energy North America
Generating, Inc. (SE North America Generating), as an indirect wholly owned
subsidiary of Southern Energy, Southern Energy New England, L.L.C. transferred
its ownership interests in SE Canal and SE Kendall to subsidiaries of SE North
America Generating in August 1999. These entities are collectively referred to
herein as SE New England.
The following table summarizes certain characteristics of SE New England's
generating facilities in operation and under development:
<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
---------------------- -------- --------------------
<S> <C> <C> <C>
GENERATION OPERATIONS:
CANAL PLANT
Canal Unit 1............................................ Sandwich, MA 563 Oil
Canal Unit 2............................................ Sandwich, MA 560 Natural Gas/Oil
-----
Subtotal.............................................. 1,123
Martha's Vineyard Diesels............................... Martha's Vineyard, MA 12 Oil
Wyman Unit 4 Interest................................... Yarmouth, ME 9 Oil
-----
Subtotal.............................................. 21
KENDALL PLANT
Kendall Steam, Units 1-2-3.............................. Cambridge, MA 63 Natural Gas/Oil
Kendall Jets, Units 1 & 2............................... Cambridge, MA 38 Oil
-----
Subtotal.............................................. 101
-----
Total................................................. 1,245
=====
PROJECTS UNDER DEVELOPMENT:
Canal and Kendall Expansion............................... Sandwich/Cambridge, MA 835 Natural Gas/Fuel Oil
</TABLE>
The Canal and Kendall plants, which are designed to operate during periods
of higher-than-average (intermediate load) and very high (peak) demand, are
located in close proximity to Boston, a major center for electricity demand in
New England. The Martha's Vineyard Diesels supply electricity on the island of
Martha's Vineyard during periods of high demand or in the event of a
transmission interruption. The Wyman Unit 4 Interest is a 1.4325% ownership
interest (equivalent to 9 MW) in the 614.5 MW Wyman Unit 4 located on Cousin's
Island, Yarmouth, Maine. It is primarily owned and operated by the Florida Power
and Light 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 fourth quarter of 2000. We expect to commence commercial
operation of these expansions in 2002 for Kendall and in mid-2004 for Canal.
The regulatory environment in the wholesale electricity market in the New
England region has evolved into a competitive market for electrical generation.
As such, the wholesale electricity market has changed away from a cost-based
structure to a bid-based structure. We believe that SE New England has better
opportunities for revenue enhancement under a competitive bid based system
because the bid based approach offers low cost, flexible generators, such as SE
New England, better opportunities to compete. The New England Power Pool was
formed in 1971 and is a voluntary association of utilities, power marketers,
generators, end-users and municipal entities. Independent
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<PAGE> 83
System Operator-New England, Inc. (ISO-NE) was established as a not-for-profit
private corporation on July 1, 1997 following its approval by the FERC. The
ISO-NE has responsibility for managing the New England region's electric bulk
power generation and transmission systems and administering the region's open
access transmission tariff. In addition, since inception of the new bid-based
markets on May 1, 1999, the ISO-NE has administered the restructured wholesale
electricity marketplace for the region.
Since the inception of the new markets, the ISO-NE has frequently taken
action to intervene in the market to change posted clearing prices that had been
set by the software used to dispatch the system and determine prices. The ISO-NE
stated that these interventions were necessary due to software errors and
operator errors associated with the implementation of the new system. The ISO-NE
has intervened most often during periods of high electrical demand and otherwise
high clearing prices. The ISO-NE's actions have sparked extensive discussions
and debate among participants in the generating sector in New England regarding
the propriety of these interventions.
The ISO-NE and the New England Power Pool have made numerous market rule
changes since market inception including changes in the manner that the energy
and ancillary services markets are settled. The transition period has been
difficult for the ISO-NE and the New England Power Pool participants; and there
is a significant amount of additional work that still needs to be completed to
implement a well functioning wholesale market system in New England.
In February 2000, the Massachusetts Secretary of Environmental Affairs
requested certain generation owners to submit a voluntary plan for achieving
prescribed emissions reductions. The requested plans were to achieve these
reductions by 2005, 2007 or 2010 depending on the nature of the emissions. SE
Canal was one of the generation owners asked to submit a plan. In March 2000, SE
Canal submitted a plan describing the expansion project proposed at the Canal
site, which results in significant emissions reductions and meets the
quantifiable targets prescribed by the Secretary. In June 2000, the
Massachusetts Department of Environmental Protection proposed new regulations
that include the Canal plant as an affected unit. These regulations are
currently in a draft form for public comment. The draft regulations call for
reductions in sulfur dioxide, nitrogen oxides, and carbon dioxide beginning in
the year 2004 and possible future reductions in mercury, particulate matter and
carbon monoxide.
In conjunction with the acquisition of its generating facilities, SE New
England also entered into an energy supply agreement with the utility
subsidiaries of Commonwealth Energy. Under the terms of this agreement, SE New
England supplies electricity at wholesale to meet a portion of Commonwealth
Energy's obligations to provide standard offer service at guaranteed rates to
eligible retail customers in Massachusetts. The agreement expires in 2005. SE
New England has entered into an agreement with SCEM for SCEM to supply the
electricity to meet SE New England's obligations under its agreement with
Commonwealth in exchange for payments by SE New England.
Except for the output from Canal Unit 1, which is committed to SE New
England and three other power purchasers under contracts through October 2002,
the capacity, energy and ancillary services from the generating units are sold
into the New England Power Pool through SCEM. SE Canal and SE Kendall have
entered into arrangements with SCEM regarding the marketing of capacity, energy
and ancillary services from the generating units. The arrangements with SCEM
became effective on the date of implementation of the New England Power Pool
bid-based markets. Under these arrangements, SCEM bids the output of the units
into the New England Power Pool 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> 84
payments to SE New England. Under this arrangement, SE New England has
guaranteed operational performance parameters of the units.
NORTH AMERICA -- EAST REGION
State Line Energy
In December 1997, we acquired, through an indirect, wholly owned
subsidiary, State Line Energy, L.L.C. (State Line Energy), the 490 MW State Line
facility from a subsidiary of Commonwealth Edison Company (Commonwealth Edison)
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. Commonwealth Edison retained the ownership
of the switchyard and transmission facilities connecting the State Line station
to the Commonwealth Edison transmission system, as well as the coal inventory
and the emissions allowances associated with the State Line facility.
State Line Energy supplies power to Commonwealth Edison under a 15-year
power purchase agreement expiring in 2012. Commonwealth Edison'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 Commonwealth Edison 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 Commonwealth Edison power purchase agreement. In addition,
State Line Energy has contracted with Commonwealth Edison to provide an
additional 25 MW capacity from the plant on a short-term arrangement.
The coal required to operate the facility is currently supplied by
Commonwealth Edison under a coal supply agreement. Because Commonwealth Edison
divested its fossil generation business, it transferred management of its coal
supply obligations to SCEM under a management agreement. Under this agreement,
all of Commonwealth Edison's remaining coal and logistics contracts will be
managed by SCEM.
State Line Energy is in the early stages of developing additional capacity
at its site to meet the growing demand for power in the region. The expansion,
if approved by all of the regulatory authorities, would consist of one gas-fired
combined cycle unit with a total generating capacity of 550 MW and is expected
to be completed in 2003.
On July 28, 1998, an explosion and fire occurred in a coal handling area at
the State Line facility. A total of 17 people were injured. The coal conveyor
system, which supplies coal to both units, sustained significant damage. Unit 4
was forced offline by the explosion and ensuing fire; however, it returned to
service on January 31, 1999. Unit 3 was offline undergoing a major maintenance
outage at the time of the incident and sustained less damage. Unit 3 returned to
service on February 8, 1999. Both units have met their net capacity under the
power purchase agreement since returning to service and have passed annual
environmental testing.
The State Line facility is covered under Southern Company's umbrella
insurance policy, which provides up to $400 million of coverage for a
combination of property damage, liability, and business interruption with
liability limits of $260 million. State Line Energy expects that insurance
proceeds will cover costs of property damage during the fire and explosion.
The EPA and the Indiana Department of Environmental Management are
currently proposing stricter nitrogen oxide emission standards through one-hour
ozone regulations and nitrogen oxide
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<PAGE> 85
State Implementation Plan calls. The monthly capacity charge (a fee charged to
cover fixed costs based on the availability and capacity of the plant) and a fee
charged for the energy produced is adjusted by a formula designed to pass
through to Commonwealth Edison the additional annual costs for changes related
to new nitrogen oxide emission standards including an amortized portion of the
associated capital costs based on full amortization by the year 2022.
Accordingly, we do not expect stricter nitrogen oxide emission standards to have
a material adverse effect through the term of the power purchase agreement.
Unicom, the parent company of Commonwealth Edison, announced a merger with
PECO Energy Services in September 1999. We do not expect any adverse effect on
the power purchase agreement as a result of this merger.
Birchwood
Birchwood Power Partners, L.P. is a limited partnership which owns the
nominal 222 MW Birchwood power facility. The facility is a coal-fired
cogeneration plant located approximately 12 miles southeast of Fredericksburg,
Virginia. We own a 50% interest in Birchwood, with the remaining 50% owned by a
subsidiary of Cogentrix Energy, Inc. The Birchwood facility was our first new
power plant (greenfield) project built in North America, and one of our
subsidiaries continues to operate and maintain the Birchwood facility. Power
generated at the plant is sold to Virginia Power, a utility that provides
electricity to two million customers in Virginia and North Carolina. In
addition, a subsidiary of ours and a subsidiary of Cogentrix each owns 50% of
the stock of Greenhost, Inc., which owns a greenhouse facility located adjacent
to the Birchwood facility and uses steam generated by the Birchwood facility.
Birchwood sells electricity to Virginia Power under a 25-year power
purchase agreement. Under the power purchase agreement, Birchwood sells all
electricity generated by the facility to Virginia Power through 2021. Birchwood
earns a fee based on a contractually determined rate per kilowatt month for the
available capacity of the facility, which is determined by semiannual capacity
tests. Variable operating and maintenance charges are paid by Virginia Power on
a per kilowatt-hour basis and are included in Birchwood's electric revenues.
Fuel costs are reimbursed by Virginia Power under the power purchase agreement.
Fuel charges are computed on the amount of kilowatt-hours generated, as well as
on a fixed heat rate and a contractually determined fuel compensation price.
Birchwood has fixed, indexed future costs for coal, coal transportation, ash
disposal and lime. Virginia Power has the option to terminate the power purchase
agreement for convenience on one year's notice. If this option is exercised,
Virginia Power must pay Birchwood the greater of the net book value of the
facility or the amount of the original permanent financing, adjusted by an
inflation base index, plus the net present value of all pre-tax profits for the
life of the power purchase agreement, plus all expenses associated with the
termination. We have entered into a separate agreement with Virginia Power to
sell an additional 20 MW of capacity from the Birchwood facility.
The Virginia legislature recently passed legislation that will increase
competition in the power production industry in Virginia. Competition will be
phased in starting in 2002 with full retail competition in effect by 2004. We
have not yet determined what effect this legislation will have on the Birchwood
facility or the existing power purchase agreement. Virginia Power is in the
process of determining its strategy with respect to its current non-utility
contracts, such as the power purchase agreement with Birchwood. Virginia Power,
as stated, has a termination option that it may exercise that provides for
Birchwood to be fully compensated if the option is exercised.
On January 18, 2000, the EPA published a new regulation, known as the
"Section 126 Rule," which allocates nitrogen oxide emissions allowances to
electric generating facilities in Delaware, Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Penn-
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sylvania, Virginia, West Virginia and the District of Columbia. This regulation
becomes effective on May 1, 2003. If a plant's emissions exceed its allocated
allowances under the Section 126 Rule, the plant must purchase additional
allowances from other regulated plants. We believe that the nitrogen oxide
allowances allocated to the Birchwood facility are incorrect due to the use of
incorrect data by the EPA. On March 17, 2000, Birchwood filed an appeal of the
Section 126 Rule with the EPA to challenge the nitrogen oxide emission
allowances for the Birchwood facility.
SEI Wisconsin
SEI Wisconsin, L.L.C. (SEI Wisconsin) is an indirect, wholly owned
subsidiary that was formed in 1998 to develop, construct, own, operate and
maintain the Neenah Power Plant. The Neenah plant is a 306 MW natural gas-fired
electric generating plant located in the Town of Neenah, Wisconsin. The plant
provides electricity during periods of very high (peak) demand. Construction of
the plant is complete and the final cost is expected to be approximately $100
million. The plant commenced operations on May 8, 2000.
SEI Wisconsin will initially sell all of its capacity and electric power
output to Wisconsin Electric Power Company under an eight-year power purchase
agreement entered into in August 1998. Wisconsin Electric provides electric, gas
and steam service to more than two million customers in southeastern Wisconsin.
The power purchase agreement is structured as a tolling arrangement, whereby
Wisconsin Electric pays SEI Wisconsin a monthly charge designed to provide SEI
Wisconsin a return on capital and to cover debt service and fixed operating
costs. Wisconsin Electric 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, Wisconsin Electric supplies natural
gas as well as any backup No. 2 fuel oil used to run the plant at no cost to SEI
Wisconsin. The power purchase agreement has bonus and penalty provisions
regarding capacity, heat rate and availability. Wisconsin Electric, prior to the
end of the sixth contract year, has the option to renew the power purchase
agreement for another five years beyond the current eight year term or purchase
the Neenah plant from us for $150 million at the end of the power purchase
agreement term.
At the expiration of the power purchase agreement, SEI Wisconsin may
convert the Neenah plant from a facility primarily designed to provide power
during periods of very high (peak) demand to a facility with approximately 515
MW of capacity to be used during periods of average (base load) and higher
(intermediate load) demand. At that time, SEI Wisconsin plans to sell the plant
output to SCEM under a long-term marketing agreement which may be structured as
a tolling agreement. This conversion may occur earlier through agreement with
Wisconsin Electric, which would contract for the increased output of the plant.
The Neenah plant is located in the Mid-America Interconnected Network
region under the North America Electric Reliability Council that covers
predominantly Illinois and eastern Wisconsin. The Mid-America Interconnected
Network market is nominally a 55 GW-sized market that is dominated by coal (54%)
and nuclear (28%) generating capacity. The Mid-America Interconnected Network
region is currently in need of both capacity designed for very high (peak)
demand periods as well as additional transmission capacity.
Deregulation of the electricity market in Wisconsin has been slow. The
Public Service Commission of Wisconsin and the state legislature are currently
studying the deregulation of the electricity market and no material legislation
has been enacted to date.
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SEI Michigan
We are currently developing an 848 MW natural gas-fired electric generating
plant at a previously undeveloped (greenfield) site in Zeeland, Michigan. In
1999, we formed an indirect, wholly owned subsidiary, SEI Michigan, L.L.C. (SEI
Michigan), to develop, construct, own, operate and maintain the Zeeland power
plant. We received all necessary permits in spring 2000 and construction began
in early summer 2000. SEI Michigan is being built in two phases.
Phase I is a 298 MW facility designed to provide electricity during very
high (peak) demand periods. We expect this phase to become operational June 2001
and cost approximately $110 million. SEI Michigan will initially sell all of the
Phase I capacity and electricity power output to SCEM under a five-year power
purchase agreement. SCEM has in turn entered into an agreement with Engage
Energy to sell the output of this phase. At the expiration of the tolling
agreement, SEI Michigan may add heat recovery equipment and a steam turbine
(combined cycle unit), which would allow the plant to operate during periods of
average (base load) and higher-than-average (intermediate load) demand, and
expand the capacity of Phase I from 298 MW to 550 MW. SEI Michigan expects to
enter into a new marketing agreement with SCEM at that time.
Phase II is a 550 MW facility that uses both combustion and steam turbines
(a combined-cycle unit) which would allow the plant to operate during periods of
average (base load) and higher-than-average (intermediate load) demand. This
phase is expected to be operational by July 2002 and cost approximately $242
million. We plan to sell the plant's capacity to customers in the East Central
Area Reliability Council market through marketing agreements with SCEM.
The East Central Area Reliability Council market is nominally a 106 GW
market that is dominated by coal generating capacity (82%). The region is
currently in need of capacity during periods of very high (peak) demand after
having experienced brown outs and curtailments on peak days and having excess
available capacity of less than 10%. Furthermore, the market faces the risk of
the reduced availability of base and intermediate resources due to retirement of
nuclear plants and the possibility that the market's coal-fired plants will be
unable to reach newly mandated environmental standards.
SE Mid-Atlantic
On June 7, 2000, we executed an asset purchase and sale agreement with
Potomac Electric Power Company (PEPCO) which sets forth the terms of sale and
purchase of PEPCO's generation business in Maryland and Virginia. Our purchase
price for these acquisitions is approximately $2.65 billion plus amounts to be
determined for working capital and capital expenditures estimated to be $97
million, and approximately $260 million in the event that a certain power
purchase agreement is not transferred to us. We were selected as the winning
bidder for the generation business following a competitive bid process.
Based on the current structure of this transaction, our newly formed
limited liability company subsidiary, Southern Energy Mid-Atlantic, LLC, will
acquire, among other things:
- the 1,412 MW coal and oil-fired Morgantown station located in Charles
County, Maryland, approximately 50 miles south of Washington, D.C.,
- the 2,423 MW coal, oil and gas-fired Chalk Point station located in
Prince George's County, Maryland, approximately 45 miles from Washington,
D.C., including the assignment of PEPCO's rights and obligations to the
84 MW Southern Maryland Electric Cooperative, Inc. combustion turbine
located at the Chalk Point station site,
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- the 837 MW coal, oil and gas-fired Dickerson station located in upper
Montgomery County, Maryland, approximately 30 miles from Washington,
D.C., and
- the 482 MW coal and oil-fired Potomac River station located in
Alexandria, Virginia, in close proximity to Washington, D.C.
The following table summarizes certain characteristics of PEPCO's power
plants that we are in the process of acquiring:
<TABLE>
<CAPTION>
LOCATION TOTAL MW FUEL
GENERATION OPERATIONS: ---------------------- --------- --------
<S> <C> <C> <C>
Morgantown
Morgantown 1.............................................. Charles County 582 Coal/Oil
Morgantown 2.............................................. Charles County 582 Coal/Oil
Morgantown CTs 1 and 2.................................... Charles County 2 x 16 Oil
Morgantown CTs 3-6........................................ Charles County 4 x 54 Oil
------
Subtotal................................................ 1,412
Chalk Point
Chalk Point 1............................................. Prince George's County 341 Coal/Gas
Chalk Point 2............................................. Prince George's County 342 Coal/Gas
Chalk Point 3............................................. Prince George's County 612 Oil/Gas
Chalk Point 4............................................. Prince George's County 612 Oil/Gas
Chalk Point CT 1.......................................... Prince George's County 18 Oil
Chalk Point CT 2.......................................... Prince George's County 30 Oil
Chalk Point CT 3.......................................... Prince George's County 85 Gas/Oil
Chalk Point CT 4.......................................... Prince George's County 85 Gas/Oil
Chalk Point CT 5.......................................... Prince George's County 107 Gas/Oil
Chalk Point CT 6.......................................... Prince George's County 107 Gas/Oil
SMECO CT.................................................. Prince George's County 84 Gas/Oil
------
Subtotal................................................ 2,423
Dickerson
Dickerson 1............................................... Montgomery County 182 Coal/Oil
Dickerson 2............................................... Montgomery County 182 Coal/Oil
Dickerson 3............................................... Montgomery County 182 Coal/Oil
Dickerson DCT1............................................ Montgomery County 13 Oil
Dickerson H1CT............................................ Montgomery County 139 Gas/Oil
Dickerson H2CT............................................ Montgomery County 139 Gas/Oil
------
Subtotal................................................ 837
Potomac River
Potomac River 1........................................... Alexandria 88 Coal/Oil
Potomac River 2........................................... Alexandria 88 Coal/Oil
Potomac River 3........................................... Alexandria 102 Coal/Oil
Potomac River 4........................................... Alexandria 102 Coal/Oil
Potomac River 5........................................... Alexandria 102 Coal/Oil
------
Subtotal................................................ 482
------
Total................................................. 5,154
======
</TABLE>
In addition to our generation capacity, we have power purchase agreements
to purchase approximately 735 MW of electricity. We are currently planning to
expand capacity of assets purchased from PEPCO by 615 MW.
The series of transactions contemplated in the asset purchase and sale
agreement includes the purchase of four electric generating stations in Maryland
and Virginia (as described above) totaling 5,154 MW; three separate coal ash
storage areas, a 51.5 mile oil pipeline serving the Chalk Point and Morgantown
stations; an engineering and maintenance service facility and related assets;
the lease of the land on which the Potomac River station is located; the sale of
power to PEPCO under two
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separate transition power agreements with terms of up to four years; the sale of
power to PEPCO under a local area support agreement requiring the Potomac River
station to operate for purposes of supporting a local load pocket; the execution
of a three-year operation and maintenance agreement for PEPCO's two generating
stations located in the District of Columbia (Benning and Buzzard Point); the
assumption of five of PEPCO's power purchase agreements totaling 735 MW (Ohio
Edison, Panda-Brandywine, Northeast Maryland Waste Disposal Authority, Prince
George's County Detention Center and Gude Landfill); and the execution of a
parent guarantee to support the obligations under any of the project agreements
in the event these obligations are assigned to one of our wholly owned
subsidiaries. It is estimated that approximately 1,000 PEPCO employees will
become our employees once the transaction is consummated. The closing date for
this transaction is targeted for November 2000, pending regulatory approvals.
The PEPCO assets are located in the PJM Interconnection, which encompasses
New Jersey, Maryland, Delaware, the District of Columbia and most of
Pennsylvania. The PJM Interconnection market is the largest centrally-dispatched
power pool in the United States with 56,000 MW of generating capacity. The PJM
Interconnection has facilitated a bid-based energy market since April 1997 and
initiated operation as an Independent System Operator on January 1, 1998. The
PJM Interconnection enables participants to buy and sell energy and ancillary
services, schedule bilateral transactions and reserve transmission service.
The PEPCO assets provide a range of capacity across the PJM Interconnection
dispatch curve. There is approximately 2,699 MW of baseload capacity, 1,400 MW
of cycling capacity, and 1,055 MW of peaking capacity. Likewise, there is a wide
range of fuels consumed at the facilities, and approximately 94% of the total
generating capacity can burn multiple fuels.
Under the asset purchase and sale agreement, we will enter into two
separate transition power agreements with PEPCO to provide energy, capacity and
ancillary services to PEPCO's default retail customers. One of the transition
power agreements is for service to PEPCO's default customers in Maryland and has
a term through June 30, 2004. The other transition power agreement is for
service to PEPCO's default customers in the District of Columbia and expires 49
months from the closing of the transaction. Under both transition power
agreements, we are obligated to provide capacity and ancillary services for the
entire term. We are also obligated under both contracts to provide 100% of the
energy requirements for the first contract year and 75% of the energy
requirements for the second contract year. Beginning in the second contract
year, PEPCO has the option of purchasing additional energy requirements in 25%
increments up to the level purchased in the prior contract year. PEPCO's current
peak demand requirements for the existing retail customers are approximately
5,300 MW. With a total generation portfolio of 5,889 MW, including the power
purchase agreements, these transition power agreements provide a significant
portion of our revenues for the first two to four years and thereby mitigate the
market price volatility risk. The pricing for these services in each of the
agreements is below current market prices and this was reflected in the total
asset purchase price.
Under the asset purchase and sale agreement, we will assume the obligations
and benefits of five power purchase agreements with a total capacity of 735 MW.
On an aggregate basis, the pricing terms of these power purchase agreements is
below market and this is reflected in the total asset purchase price. Three of
the power purchase agreements (Ohio Edison, Panda-Brandywine and Northeast
Maryland Waste Disposal Authority) represent 730 MW. The Ohio Edison power
purchase agreement provides for the sale of 450 MW of capacity and the
associated energy from the Ohio Edison system to PEPCO. As an element of the
Ohio Edison power purchase agreement, PEPCO is a party to a "purchase and
resale" agreement with Allegheny Power System under which Allegheny Power System
purchases this supply from Ohio Edison and resells it to PEPCO at the points of
interconnection between the Allegheny Power and PEPCO systems. PEPCO can also
elect to forgo the transmission across the Allegheny Power System and sell the
capacity and associated energy to
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third parties from the Ohio Edison system. This allows PEPCO the option of
selling this capacity and energy into either the East Central Area Reliability
Council or the PJM Interconnection markets. The term of the Ohio Edison power
purchase agreement is through December 31, 2005.
PEPCO has an agreement with Panda-Brandywine to purchase the capacity and
energy output from a cogeneration facility owned by Panda-Brandywine. The
Panda-Brandywine facility was designed to be a qualifying facility under PURPA.
Under this agreement, PEPCO is committed to purchase the dependable capacity and
a portion of the electrical output of the Panda-Brandywine facility.
Specifically, PEPCO is obligated to purchase approximately 99 MW of energy for
60 hours of each week. The balance of the capacity is dispatchable at PEPCO's
discretion. This agreement has an expiration date of October 2021.
PEPCO and the owner of the Panda-Brandywine facility are involved in
various legal proceedings. Panda-Brandywine has filed two separate actions, one
in a Texas court and the other before the Maryland Public Service Commission, in
an attempt to prohibit PEPCO from either assigning the Panda-Brandywine power
purchase agreement or entering into a back-to-back arrangement involving that
power purchase agreement. PEPCO has stated its belief that it will ultimately
prevail in both of these legal proceedings. If PEPCO is successful in these
proceedings, the Panda-Brandywine power purchase agreement will be assigned to
us at the closing, or PEPCO will enter into a back-to-back arrangement with us
at the closing, in either case as specifically contemplated by our asset
purchase and sale agreement with PEPCO. The asset purchase and sale agreement
does, however, also provide for the possibility that PEPCO will not be able to
either assign the Panda-Brandywine power purchase agreement or enter into a
back-to-back arrangement involving the power purchase agreement. In such event,
the asset purchase and sale agreement requires us to pay an additional amount of
approximately $260 million at closing into an escrow account, and PEPCO is
entitled to the proceeds from such account if the Panda-Brandywine power
purchase agreement is neither assigned to us nor the subject of a back-to-back
arrangement with us within 12 months of the closing. The proceeds from such
account revert to us in the event the Panda-Brandywine power purchase agreement
is either assigned or is the subject of a back-to-back arrangement during such
12-month period.
PEPCO has an agreement to purchase the energy and capacity output from a
solid waste recovery facility owned by Northeast Maryland Waste Disposal
Authority. This facility is located adjacent to the Dickerson Generating
Facility and has been certified as a qualifying small power production facility
under PURPA. The generating capacity of this facility is 50 MW but the facility
typically operates at a peak capacity of 32 MW. PEPCO is required to purchase
all electricity generated by the facility in excess of the facility's own total
requirements for electricity and to sell to the facility on a partial
requirements basis any electricity required in excess of the amount generated by
the facility. The price of electricity purchased under this contract is subject
to the "Standard Rates for Purchases from QFs" as set out in PEPCO's Rate
Schedule CG-SPP on file with the Maryland Public Service Commission. This
contract terminates in October 2019.
NORTH AMERICA -- GULF COAST REGION
SE Wichita Falls
In October 1999, we purchased, through an indirect wholly owned subsidiary,
Southern Energy Wichita Falls, L.P. (SE Wichita Falls), an 80 MW gas-fired
electric generating plant from Wichita Falls Energy Co. Ltd. of Fort Worth,
Texas for approximately $19 million. The plant is a facility designed for
periods of average (base load) demand, consisting of three gas turbines and one
steam turbine, fueled by natural gas transported through TXU Gas Company's Lone
Star pipeline. The turbines use propane gas as a backup fuel. The facility is
operated by Vetrotex CertainTeed Corporation (Vetrotex) under an operations and
steam sales agreement. Under this agreement,
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Vetrotex also purchases steam from the plant. In addition, we have entered into
a four-year power purchase agreement with SCEM for electricity generated by the
plant.
SE Wichita Falls is in the early stages of evaluating the addition of
capacity at its site to meet the growing demand for power in the region. The
proposed plan involves an expansion consisting of one or more combustion
turbines operating during periods of very high (peak) demand, with a combined
capacity of approximately 150 MW. The expected completion date for this
expansion, if it proceeds, is mid-2002. Depending on the availability of
equipment, the expansion could be completed as early as mid-2001.
SEI Texas
SEI Texas, L.P. (SEI Texas) is an indirect, wholly owned subsidiary that
was formed to develop, construct and operate a 546 MW natural gas-fired electric
generating plant in the Dallas-Fort Worth metropolitan area. The plant will
operate a total of four units with two operating during periods of very high
(peak) demand and a third combustion turbine with a corresponding steam turbine
that can be operated during periods of average (base load) and
higher-than-average (intermediate load) demand (a combined-cycle unit).
Construction of the facility is expected to cost approximately $215 million.
Units 1 and 2, representing 298 MW, became operational on June 1, 2000.
Construction has begun on the remaining 248 MW, Units 3 and 4, which we expect
to become operational in June 2001.
SEI Texas has agreed to sell all of the capacity and electric power output
from Units 1 and 2 to SCEM under a five-year power purchase agreement expiring
May 31, 2005. A separate agreement for Units 3 and 4 is currently being
negotiated with SCEM. Under the existing power purchase agreement, all fuel
required to run the facility will be provided and paid for by SCEM.
At the expiration of the power purchase agreement, SEI Texas may add heat
recovery equipment and a steam turbine to Units 1 and 2, which would allow these
units to operate during periods of average (base load) and higher (intermediate
load) demand, and expand the overall plant capacity to 750 MW. At that time, the
plant's capacity and energy will be sold to customers in the Electric
Reliability Council of Texas 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 Electric Reliability Council of Texas such
that all of the generation capacity in that market is managed through a common
transmission system. Another part of the restructuring may require investor
owned utilities to divest of large blocks of their generating assets. Both of
these actions will enhance SEI Texas' position in the marketplace by increasing
liquidity in the market and mitigating the market power of the incumbent
utilities.
Mobile Energy
We have a 1% interest in Mobile Energy Services Company, L.L.C. (Mobile
Energy) through our wholly owned subsidiary Southern Energy Resources, Inc. The
remaining 99% is indirectly owned by Southern Company through its wholly owned
subsidiary Mobile Energy Services Holdings, Inc. Mobile Energy is the owner of a
facility that generates electricity, produces steam and processes black liquor
as part of a pulp and paper complex in Mobile, Alabama. On May 5, 1998, Mobile
Energy received notice from Kimberly-Clark Tissue Company of its intention to
close its pulp mill, effective September 1, 1999. The pulp mill had historically
provided approximately 50% of Mobile Energy's revenues.
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On January 14, 1999, Mobile Energy and Mobile Energy Services Holdings
which guaranteed debt obligations of Mobile Energy, filed voluntary petitions in
the United States Bankruptcy Court for the Southern District of Alabama, seeking
protection under Chapter 11 of the United States Bankruptcy Code.
Mobile Energy, certain of its debt holders and Kimberly-Clark have reached
a tentative settlement related to disputes arising from the shutdown of
Kimberly-Clark's pulp mill in Mobile, Alabama and reconfiguration of energy
services at the site. As part of that settlement, Kimberly-Clark and Mobile
Energy have agreed to a modified energy services agreement under which Mobile
Energy will provide electricity and steam processing services to
Kimberly-Clark's facility through August 31, 2019 at rates intended to
approximate market rates. The settlement is conditional and will not become
final unless a variety of conditions are satisfied, including having a plan of
reorganization become effective for Mobile Energy by January 31, 2001. If these
conditions are not satisfied, the settlement agreement terminates and the
parties' relationships will be governed by the contractual relationship that
existed prior to the settlement agreement. We and Southern Energy Resources have
entered into a separate agreement with Mobile Energy related to a 165 MW
combined cycle, gas-fired combustion turbine project. We have agreed to supply
the combustion turbine required for the project at our cost (approximately $28
million) together with an associated long-term services agreement from the
combustion turbine vendor. The project is expected to reduce Mobile Energy's
non-fuel operating costs. Steam from the project will be used to meet on-site
demands. Power from the project is expected to be used to meet on-site demands
and is also expected to be sold into the wholesale power markets. Mobile Energy
and Southern Energy Resources are currently working to resolve transmission
issues that may affect the amount of the project's power output that can be sold
into the wholesale power markets during certain times. The project is expected
to begin commercial operation in 2002.
On August 4, 2000, Mobile Energy and Mobile Energy Services Holdings filed
a joint proposal plan of reorganization with the bankruptcy court. If the plan
of reorganization is approved as proposed, the ownership interests in Mobile
Energy Services Holdings and Mobile Energy held by Southern Company and Southern
Energy Resources will terminate upon the plan of reorganization becoming
effective, which is not expected to occur until late 2000 or early 2001.
S. Marce Fuller, our President, Chief Executive Officer and Director,
Raymond D. Hill, one of our Executive Vice Presidents and our Chief Financial
Officer, and James A. Ward, our Senior Vice President of Finance and Accounting,
were executive officers of Mobile Energy at the time it filed for bankruptcy.
Ms. Fuller and Mr. Hill continue to be executive officers of Mobile Energy. In
addition, Ms. Fuller was an executive officer of Mobile Energy Services Holdings
until January 1, 1999, Mr. Hill was an executive officer of Mobile Energy
Services Holdings until August 1997, and Mr. Ward was an executive officer of
Mobile Energy Services Holdings at the time it filed for bankruptcy and
continued to be an executive officer until June 1999.
Mobile Energy is also in the process of renegotiating its energy service
agreements with its other customer at the site -- Sappi Fine Paper (North
America) -- and is in discussion with a third party regarding the resumption of
a pulp mill operation at the site that would be about half of the size of the
previous pulp mill operation in terms of output. As part of the settlement with
Kimberly-Clark, Mobile Energy has an assignable option to purchase some of
Kimberly-Clark's pulp mill assets.
Wrightsville Project
We are currently constructing a 550 MW natural gas-fired, combined cycle
project in Wrightsville, Arkansas. The power project, which is scheduled for
commercial operation in June 2002, is organized as a limited liability company
jointly owned by us and Kinder Morgan Power, a
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subsidiary of Kinder Morgan. We hold a 51% interest in the Wrightsville project,
with Kinder Morgan Power owning the remaining 49%. Kinder Morgan Power has
responsibility for the engineering, procurement and construction of the power
plant. Our portion of the total estimated cost of this project is $154 million.
The project company will initially market and sell to SCEM all of its
capacity and electric power output under a multi-year power purchase agreement.
It is anticipated that the power purchase agreement will be structured as a
tolling agreement, whereby SCEM will pay the project company a monthly capacity
charge and other charges designed to cover debt service, defray operations and
maintenance expenses and provide a return on investment to the project. Under
the tolling arrangement, SCEM would be responsible for supplying and paying for
all fuel costs. Other essential plant services, such as water supply, will be
provided by contract with appropriate parties.
The Wrightsville project is being developed to supply electricity during
periods of average (base load), higher-than-average (intermediate load) and very
high (peak) demand for sale into the Entergy system and neighboring markets.
These markets are experiencing increasing demand growth, particularly in
intermediate and peak periods, and peak period reserve margins are constrained.
In addition, the State of Arkansas has passed legislation for the deregulation
of its electricity market beginning in 2002. Deregulation would be expected to
increase the number of potential customers for electricity sales within the
state.
Perryville Project
We are developing a 700 MW natural gas-fired power plant at a previously
undeveloped site near Perryville, Louisiana. The project has been organized as a
limited liability company named Perryville Energy Partners, LLC, jointly owned
by our subsidiary, Southern Energy Louisiana, Inc., and Perryville Energy
Holdings, a subsidiary of Cleco Corporation. Each of the owners holds a 50%
interest in the limited liability company. We are in the process of negotiating
definitive project agreements, including a credit facility, an operations and
maintenance agreement and an engineering, procurement and construction
agreement. We plan to make a bridge loan of up to $97.5 million to support the
project until it is able to obtain third-party financing. We have applied for
all major regulatory approvals and permits required to construct and operate the
plant. The estimated cost of this project is $174 million.
The Perryville project will consist of units designed to operate at periods
of very high (peak) demand and combined cycle units. We expect the first phase
of the project, a 150 MW gas turbine peaking plant, to be in commercial
operation in the summer of 2001. This portion of the project will supply
electricity primarily during periods of very high demand. The second phase of
the project, which we expect to become commercial in mid-2002, is a 550 MW
combined cycle plant designed to supply electricity during periods of average
(base load) and higher-than-average (intermediate) demand. The project will
primarily serve the wholesale power market defined by Entergy's transmission
system, including portions of Louisiana, Arkansas, Mississippi and East Texas.
Texas and Arkansas have passed legislation expanding retail competition in their
electricity sectors, while Louisiana is considering similar deregulation
initiatives.
We expect to sell the output of the project into the wholesale power market
under one or more medium to long-term power purchase agreements with major power
marketers. It is anticipated that the power purchase agreements will be
structured with the power marketer supplying fuel, dispatching the units and
taking the capacity and energy of the project. We anticipate that the power
purchase agreements will be designed to provide a monthly capacity payment that
will cover project debt service, operations and maintenance expenses and return
on investment. Water supply for the project will be obtained primarily from a
source of surface water in proximity to the plant site. The plant will
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be interconnected to a 500 kV transmission line owned by Entergy. We expect a
number of natural gas pipelines at or near the site to provide a gas supply for
the project.
NORTH AMERICA -- MARKETING AND RISK MANAGEMENT OPERATIONS
Southern Company Energy Marketing (SCEM)
In September 1997, we formed SCEM as a limited partnership between us and
Vastar, an 81.9%-owned subsidiary of Atlantic Richfield Company (ARCO), a
subsidiary of BP Amoco p.l.c. Vastar is a crude oil and natural gas exploration
and production company.
On September 11, 2000, we closed our acquisition of Vastar's 40% interest
in SCEM for $250 million. Under the terms of the transaction we acquired
Vastar's interest in SCEM effective as of August 10, 2000. As a result, as of
August 10, 2000, SCEM became our wholly owned indirect subsidiary, and we will
consolidate SCEM's financial results in our financial statements on a
prospective basis.
As part of the transaction, we agreed to amend the gas purchase and sale
agreement to make it easier for SCEM to administer, including reducing the
number of delivery points where Vastar delivers gas and predetermining the daily
and annual quantities of gas Vastar is obligated to deliver and SCEM is
obligated to purchase. The gas purchase and sale agreement will remain in effect
for the remaining seven years of its term. We anticipate that this amendment
will become effective before the end of this year. Accordingly, SCEM will
continue to purchase and market the natural gas produced by Vastar. In addition,
as part of the transaction, we were relieved of any financial obligations to
Vastar under the SCEM partnership agreement, including any guaranteed minimum
cash distributions and any outstanding arbitration.
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 purchase 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 statistics published in industry
journals, for the second quarter of 2000 SCEM ranked as the fifth largest
physical power marketer and tenth largest physical gas marketer in North America
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, certain of 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 contracted with SCEM to sell a significant portion of its domestic
natural gas production at market index prices to SCEM through the 10-year
natural gas supply agreement (which began in September 1997). Currently, SCEM
purchases approximately 1.2 billion cubic feet per day of
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Vastar's production. Under the amendment to the gas purchase and sale agreement,
Vastar's delivery obligations will be fixed at 1,075,000 MMBtu per day through
2001, 975,000 MMBtu per day during 2002, and 875,000 MMBtu per day during 2003
and each year thereafter.
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. Under the agreement, known as a "full
requirements agreement," SCEM is obligated to meet Brazos Electric Power's full
wholesale requirements. SCEM can meet these requirements from any source
available to SCEM, including Brazos Electric Power's existing asset base,
supplemented by market purchases and sales. In addition, we expect 600 MW of
capacity from our SEI Texas facility to satisfy projected Brazos Electric
Power's load growth. In addition, SCEM has the ability to market excess energy
from Brazos Electric Power's more than 1,650 MW of generating and contractual
capacity. SCEM manages Brazos Electric Power's generation and fuel supplies. By
combining these fuel and power supplies with its current trading portfolio, SCEM
is able to increase its trading volume and efficiency. We have guaranteed SCEM's
obligations to Brazos Electric Power up to an amount of $75 million.
SCEM entered into a three and a half year agreement, effective June 1,
2000, to manage the assets of Pan-Alberta Gas Ltd., the second-largest Canadian
exporter of natural gas. As part of the transaction, SCEM subleased
Pan-Alberta's office in Calgary, Alberta and will administer Pan-Alberta's
businesses with SCEM's Atlanta-based marketing and risk management operations.
Pan Alberta retains all obligations for current transportation and customer
agreements, and SCEM will be entitled to use the assets at its discretion. SCEM
can optimize the use of these assets which include 8.3 billion cubic feet of
storage capacity as part of the transaction. SCEM generates revenues when there
is a difference between the price of gas supplied by Pan-Alberta and the gas
prices in other locations to which SCEM has access. When Pan-Alberta gas prices
exceed the gas prices in other locations, SCEM may fulfill Pan-Alberta's
customer agreement by buying the cheaper, non-Pan Alberta gas and selling
Pan-Alberta gas in local markets and at local prices. Recently, Pan-Alberta was
marketing approximately 1.2 billion cubic feet of gas per day. We have
guaranteed SCEM's and a subsidiary of SCEM's obligations to Pan-Alberta up to
$97 million (plus specified fees and expenses).
In addition to the agreements related to Pan-Alberta, SCEM announced on
July 10, 2000 a similar relationship with CanWest Gas Supply, Inc. CanWest Gas
Supply is the largest natural gas aggregator in British Columbia, marketing the
gas supply of more than 100 Canadian producers. The Pan-Alberta infrastructure
will be used to manage the additional 500 million cubic feet per day previously
marketed by CanWest Gas Supply.
In March 2000, SCEM signed an agreement to supply wholesale electricity to
Utility.com's customers. Through this agreement, SCEM becomes the preferred
wholesale electricity provider to Utility.com, an Internet utility company. SCEM
has also purchased an equity stake in Utility.com.
SCEM has announced the formation of a new independent energy trading
consortium with five of the largest gas and electricity marketers in the United
States. In July 2000, the consortium joined the Intercontinental Exchange, an
internet commodity marketplace based in Atlanta. The platform plans to begin
trading energy commodities this fall. The platform will provide increased
trading liquidity and market efficiency as well as cost savings.
SCEM has invested in systems to increase the efficiency and reliability of
its risk management and control processes. SCEM and TenFold Corporation are
jointly developing a suite of energy risk management applications known as
EnergyNow! We expect EnergyNow! to be a multi-commodity, multi-currency,
multi-unit industry application designed to provide end-to-end business process
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support including pre-deal analytics, transaction processing, risk management,
commodity logistics and settlement/billing.
The board of SCEM has several working committees, including the audit
committee, the risk management and control committee and the credit committee.
The audit committee focuses on both procedures and compliance, and approves all
changes to the internal audit process. The risk management and control committee
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 risk management and control committee 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, value at risk limits, stress tests,
close monitoring of all positions and value at risk and an independent daily
marked-to-market portfolio valuation.
As part of the formation of SCEM we, Southern Company, Vastar and ARCO
jointly agreed to provide up to $700 million of contingent performance
guarantees on behalf of SCEM. As part of our acquisition of Vastar's interest in
SCEM, we agreed to indemnify Vastar against loss incurred on these guarantees.
If necessary to support SCEM's ongoing business, we may provide additional
guarantees. Contingent performance guarantees are an industry standard used to
support the physical and financial delivery of products. These guarantees
support contractual obligations such as commodity delivery or payment. The gross
amount represents total counterparty authority, but our actual exposure under
these guarantees is limited by the amount of business conducted under each
guarantee. For example, we may provide a $20 million guarantee to a counterparty
of SCEM; however, we are only exposed for the dollar amount of business that
SCEM currently has outstanding with the counterparty. We will be obligated to
make payments under these guarantees only if SCEM's liquidity is exhausted. Upon
the closing of the transaction with Vastar, we agreed to replace many of the
contingent performance guarantees of Vastar and Atlantic Richfield Company with
Southern Energy guarantees.
We have provided performance guarantees to counterparties related to SCEM's
business which require us to maintain an investment grade credit rating of at
least Baa3 from Moody's or BBB- from S&P. These guarantees relate to the
guarantee to Vastar of the gas purchased under our gas supply agreement and the
guarantee to Brazos Electric Power covering the Brazos Electric Power 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 date we cease to be a
subsidiary of Southern Company. 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 for U.S.
operations and a $25 million
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credit facility for Canadian operations (both of which are recourse to SCEM
only) and committed capital from Vastar and us in the amounts of $20 million and
$30 million, respectively. Upon the closing of the transaction with Vastar, we
assumed Vastar's portion of the committed capital, increasing our share to $50
million. In addition, SCEM received capital contributions during 2000 from us of
approximately $31 million and utilizes commercial paper to reduce funding costs.
SCEM currently has approximately $275 million of capital employed in its
business, with a maximum availability of approximately $350 million.
Southern Producer Services
In February 1999, we formed Southern Producer Services, L.P. 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 Southern Producer Services also enables
SCEM to aggregate gas commodities for its marketing efforts. Typically, Southern
Producer Services provides financing in exchange for the rights to market those
commodities, which rights would be exercised by SCEM. Southern Producer Services
plans to utilize various structures for its investments, including senior
secured debt, volumetric production payments, prepayment purchases and mezzanine
financings. We expect all of Southern Producer Services' investments to be
secured by the underlying commodity available for extraction based on an
independent appraisal of the value of the assets and for repayment to be made
from production proceeds.
All of Southern Producer Services' loans are secured with collateral in
excess of the loan amounts. In connection with its investments, Southern
Producer Services intends to realize returns from interest on debt instruments,
marketing rights, royalty income and warrants. In addition, Southern Producer
Services intends to market price risk management services to its customers.
Southern Producer Services has entered into a marketing agreement with SCEM
under which SCEM has a right of first offer with respect to energy commodities
obtained by Southern Producer Services.
Southern Producer Services obtains its capital from us and from a credit
facility that provides capital for Southern Producer Services on an unsecured
basis. Southern Producer Services has a $50 million facility with Bank One with
$22 million outstanding as of August 31, 2000. The interest rate is LIBOR plus
200 basis points. As of August 31, 2000, Southern Producer Services had provided
$150 million in financing, and had obtained marketing rights for approximately
100 million cubic feet per day of natural gas and 10,000 barrels per day of
crude oil. In connection with the credit facility, we agreed to provide
indemnities related to title and environmental defects to the bank, the amounts
of which are capped at the borrowings under the credit facility related to the
particular production facility.
THE CARIBBEAN
FREEPORT POWER COMPANY LIMITED
Freeport Power Company Limited (Freeport Power) is an integrated utility
that generates, transmits, distributes and sells electricity on Grand Bahama
Island. It operates oil-fired generation facilities with a total capacity of 127
MW and provides electricity to approximately 16,500 residential, commercial and
industrial customers on the island.
We acquired a 50% interest in Freeport Power from the Grand Bahama
Development Company Limited for $35.5 million in 1993. At the same time, Grand
Bahama Development Company assigned its remaining 50% interest in Freeport Power
to ICD Utilities Limited. In 1996, we increased our effective ownership to 62.5%
by purchasing a 25% interest in ICD Utilities for $15 million bringing
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our total investment in Freeport Power to $50.5 million. Private investors own
50% of ICD Utilities with the remaining 25% held by the Bahamian public and the
employees of Freeport Power. We plan to sell up to 70% of our 25% interest in
ICD Utilities which would make our effective ownership in Freeport Power 54%. We
sold approximately 57% of our interest in ICD Utilities during August 2000. With
this sale of ICD Utilities shares, our effective ownership in Freeport Power has
now become 55.4%. We expect to sell an additional 13% of our interest in ICD
Utilities in October, 2000.
Freeport Power has the exclusive right and obligation to supply electric
power to Grand Bahama Island. Freeport Power's power plants include three No. 6
oil-fired steam turbine generators, two simple cycle distillate-fired gas
turbines, two No. 2 oil-fired diesel engine generators and one 13.5 MW No. 6
oil-fired diesel engine generator. A second 13.5 MW No. 6 oil-fired diesel
engine generator is under construction and is scheduled to be operational in
2001. Freeport Power's distribution assets include three 69 kV transmission
lines, six substations and 25 distribution feeders. Freeport Power's rates are
approved by the Grand Bahama Port Authority. Rates have remained stable since
1995. A rate increase that averages 2.8% has been approved by the regulatory
board and went into effect on June 1, 2000 for May power consumption.
POWER GENERATION COMPANY OF TRINIDAD AND TOBAGO
The Power Generation Company of Trinidad and Tobago Limited (PowerGen
Trinidad) is a 1,154 MW power generation company that owns and operates three
gas-fired plants located on the island of Trinidad in the Caribbean. The
electricity produced by PowerGen Trinidad is provided to the Trinidad and Tobago
Electricity Commission, 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 Trinidad.
In 1994, we acquired a 39% interest in PowerGen Trinidad through a
competitive bid process conducted by the government of Trinidad and Tobago.
PowerGen Trinidad initially entered into a 15-year power purchase agreement with
the Trinidad and Tobago Electricity Commission, which expires in 2009. The
Trinidad and Tobago Electricity Commission's obligations under the Trinidad
power purchase agreement are unconditionally guaranteed by the government of
Trinidad and Tobago.
Our interest in PowerGen Trinidad is held through one of our wholly owned
subsidiaries, Southern Electric International-Trinidad (SEI-Trinidad). Amoco
Trinidad Power Resources Corporation owns 10% of PowerGen Trinidad and the
Trinidad and Tobago Electricity Commission owns the remaining 51%. SEI-Trinidad
and Amoco own "B" shares in PowerGen Trinidad, and the Trinidad and Tobago
Electricity Commission owns "A" shares. As "B" shareholders, we and Amoco
collectively select four members of the nine member board of directors and three
members of the six member management committee. We and Amoco have effective
control of the management committee as a result of our ability to appoint its
chairman, who has the right to cast the deciding vote in the event of a tied
issue. Amoco may appoint one member to each of the board and the management
committee, while SEI-Trinidad may appoint three members to the board and two
members to the management committee.
The power purchase agreement with the Trinidad and Tobago Electricity
Commission entitles PowerGen Trinidad to receive monthly capacity and energy
payments from the Trinidad and Tobago Electricity Commission, as well as a heat
rate bonus if operating conditions are met. The capacity payment is based on a
level of contracted capacity and is payable regardless of whether energy is
actually taken by the Trinidad and Tobago Electricity Commission. 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 the
Trinidad and Tobago Electricity Commission and are supported by an unsecured
payment guarantee issued by the government. The Trinidad and Tobago
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Electricity Commission is obligated to provide gas and fuel oil to PowerGen
Trinidad. The facilities of PowerGen Trinidad are connected to the Trinidad and
Tobago Electricity Commission's transmission and distribution system. PowerGen
Trinidad 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 Trinidad has
substantially improved the operations of the power plants. During the four years
prior to the acquisition, the plants were available for operation approximately
69% of the time. Since the acquisition, the operating availability of these
facilities has risen to approximately 82%.
In addition, PowerGen Trinidad has completed a restructuring program that
reduced the number of jobs and job classifications, resulting in a more flexible
and productive workforce. PowerGen Trinidad is conducting skill development
training as part of this process and has substantially completed an
organizational transformation program designed to create a team-driven business
culture.
SOUTH AMERICA
CEMIG
Companhia Energetica de Minas Gerais (CEMIG) is a fully integrated utility
that generates, transmits, distributes and sells electricity in the southeast
region of Brazil. On June 18, 1997, one of our wholly owned subsidiaries,
Southern Electric Brasil Participacoes, Ltda., acquired approximately 33% of the
voting shares of CEMIG for $1.052 billion through a public auction. At that
time, we owned 100% of the voting shares of Southern Electric Brasil, which was
minimally capitalized to meet the capitalization requirements of Brazilian law.
Southern Electric Brasil paid for the CEMIG shares in two equal installments, on
June 18, 1997 and June 13, 1998.
Southern Electric Brasil obtained financing from Banco Nacional de
Desenvolvimento Economico e Social for approximately 50% of the total purchase
price. The loan was taken in two tranches. The first tranche of $125.6 million
was drawn in June 1997 and is financed at 9.775% for a 12 year period. The
second tranche of $402.5 million was drawn in June 1998 and is financed at
8.823%, also for a 12 year period. The loan is secured by a pledge of Southern
Electric Brasil's shares in CEMIG. Southern Electric Brasil paid a $2.2 million
principal payment on May 15, 2000 and paid an additional $7.0 million of
principal on September 15, 2000. An interest payment of $107.8 million due on
May 15, 2000 has been deferred until May 15, 2001.
On June 18, 1997, 524 Participacoes S/A, a group of Brazilian institutional
investors, acquired 9.4% of the equity interest in Southern Electric Brasil for
$38.2 million. On June 19, 1997, we transferred the remaining 90.6% equity
interest in Southern Electric Brasil to Cayman Energy Traders for $369.0
million. Cayman Energy Traders is jointly owned by us and AES CEMIG
Empreendimentos, Inc. When we transferred our 90.6% interest in Southern
Electric Brasil, we owned 51% of the voting shares of Cayman Energy Traders.
However, at the time of the transfer, we had no economic interest in Cayman
Energy Traders or Southern Electric Brasil.
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In January 1998 we decided not to exercise our option to withdraw as a
shareholder of Cayman Energy Traders and, as a result, we were required to
transfer $114 million to Cayman Energy Traders. We transferred an additional $21
million in May 1998. We have made total equity contributions of $135 million,
which corresponds to a 27.59% economic interest in Cayman Energy Traders.
Although we own less than a 50% economic interest in Cayman Energy Traders, we
have always maintained a majority of Cayman Energy Traders' voting shares. The
following table shows the ownership percentages in voting and economic interests
of each company.
<TABLE>
<CAPTION>
COMPANY SHAREHOLDERS % VOTING SHARES % ECONOMIC INTEREST
------- ------------------------ --------------- -------------------
<S> <C> <C> <C>
CEMIG State of Minas Gerais 50.96% 23.44%
Southern Electric Brasil 32.96 14.41
Others 16.08 62.15
TOTAL 100.00% 100.00%
Southern Electric
Brasil Cayman Energy Traders 90.60 90.60
524 Participacoes 9.40 9.40
TOTAL 100.00% 100.00%
Cayman Energy Traders Southern Energy 51.0 27.59
AES 49.0 72.41
TOTAL 100.00% 100.00%
</TABLE>
As a result of our acquisition of a 27.59% economic interest in Cayman
Energy Traders in 1998, we acquired an indirect economic interest of 3.6% in
CEMIG (27.59% of Cayman Energy Traders, which owns 90.6% of Southern Electric
Brasil, which owns 14.41% of CEMIG). We continue to hold the majority of voting
capital at Cayman Energy Traders and indirectly, Southern Electric Brasil.
Upon its acquisition of shares of CEMIG, Southern Electric Brasil 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, Southern Electric Brasil's vote in the management of CEMIG. It grants
Southern Electric Brasil the right to elect four of the 11 members of the board
of directors of CEMIG and grants Southern Electric Brasil veto rights over key
operating issues such as significant changes in the budget. In addition,
Southern Electric Brasil may elect three members of the eight-member management
council.
Southern Electric Brasil's rights under the shareholders agreement are
currently the subject of pending litigation brought by the state of Minas
Gerais. In this litigation, the state is seeking rescission of the shareholders
agreement based upon the assertion that Southern Electric Brasil's veto rights
are an unconstitutional transfer of control of CEMIG from the state to Southern
Electric Brasil. On March 23, 2000, a state court in Minas Gerais ruled that the
shareholder agreement was invalid. Southern Electric Brasil has appealed this
decision. The status of this litigation is more fully described under the
heading "Legal Proceedings" in this section of the prospectus.
CEMIG is the second largest Brazilian electric company, as measured by
gigawatt-hours (GWh) of energy sold, providing approximately 97% of the
electricity consumed in Minas Gerais. Minas Gerais is the second most populous
state in Brazil with approximately 17 million residents. Minas Gerais is one of
the most mineral-rich states in Brazil and has an 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.
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CEMIG supplies electricity to approximately five 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 35% 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
39,347 GWh. CEMIG is also engaged in gas distribution through its subsidiary,
Companhia de Gas de Minas Gerais -- Gasmig, which currently supplies
approximately 800,000 cubic meters of gas per day to 55 industrial customers in
Minas Gerais.
CEMIG management has been able to implement several key operating
initiatives, including a downsizing program that has reduced staff from over
15,000 employees in June 1996 to less than 12,000 in 1999.
Regulatory Environment
In 1993, significant changes occurred in the regulation of electricity
rates in Brazil. Federal Law 8,631 abolished the concept of guaranteed returns
in favor of an individual rate structure for each utility. Under the new
structure, each utility proposes a rate structure based on its particular
circumstances -- including its rate of investment -- for approval by the federal
regulatory authorities. However, the Brazilian government, through the 1994
Federal Government Economic Stabilization Plan, suspended the rate setting
processes and froze rates in reals as of July 1, 1994. Since that date, rates
have been fixed on an annual basis by the federal government.
At the time of the share sale in 1997, CEMIG entered into a new 20-year
concession agreement with the Brazilian government. The new agreement superceded
any restrictions under the 1994 Federal Government Economic Stabilization Plan
and established an annual inflation-based formula for fixing rates which
provides CEMIG with more rate stability. The Brazilian government may grant more
frequent requests for rate increases at its discretion. In November 1995, CEMIG
was authorized to raise rates 11.8% and 59.5% to non-residential and other
concessionaires, respectively. 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
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- April 1999: 16.25% to both final customers and wholesale supply
- June 1999: 3.85% to both final customers and wholesale supply
- May 2000: 12.23% to both final customers greater than 90 kWh/month
average and wholesale 6% to customers with between 90 and 180 average
monthly kWh usage; no increase to customers with less than 90 kWh average
monthly usage.
Revenues are denominated in the Brazilian real but a significant portion of
expenses, including power purchase expenses and some interest expense, are
denominated in U.S. dollars and other foreign currencies. Pursuant to the
concession agreement, power purchase expenses as well as taxes are a
pass-through item. We do not expect CEMIG to bear increased purchased power
costs attributable to currency moves.
In January 1999, Brazil's central bank removed trading bands which allowed
the real to float versus other currencies. Over the ensuing three days, the real
devalued by more than 45% versus the U.S. dollar and by the end of February 1999
had reached R$2.065 per U.S. dollar (a 70% devaluation). As a result we incurred
a reduction of $83 million, net of income tax effects, in the recorded amount of
our investment in CEMIG. The exchange rate has appeared to stabilize in recent
months at approximately R$1.8 per U.S. dollar. CEMIG continues to evaluate the
impact of the devaluation on overall earnings and may be able to achieve
additional rate relief to reduce the impact of devaluation on items not
specifically recoverable under the concession agreement (such as the cost of
foreign currency-denominated debt).
EDELNOR
Empresa Electrica del Norte Grande S.A. (EDELNOR) is a partially integrated
electric utility engaged in the generation, transmission and marketing of
electric power in the Sistema Interconectado del Norte Grande, an interconnected
power grid in northern Chile. The major purchasers of electricity in the Sistema
Interconectado del Norte Grande are industrial mining companies that produce
copper, Chile's largest export, and five electric distribution companies that
provide power to the region's 740,000 inhabitants and to some small industrial
and commercial customers.
In 1993, our subsidiary SEI Chile, S.A. (SEI Chile) purchased approximately
35% of the shares of EDELNOR from Corporacion de Fomento de la Produccion and an
additional 3.5% interest from other sources to bring our total ownership at the
time to 38.5%. SEI Chile increased its ownership in EDELNOR to 65% in 1994 and
purchased an additional 2% in 1997 for a total ownership stake of 67%. In July
1998, SEI Chile invested $57 million to purchase additional shares of EDELNOR
via a rights offering. This investment increased our interest in EDELNOR to
82.3%.
In December 1998, we announced our intention to sell our interest in
EDELNOR. We are continuing to evaluate whether our investment in EDELNOR can be
recovered through a sale. We are uncertain whether we will be able to recover
the value of our investment.
EDELNOR owns generating facilities with a total capacity of approximately
653 MW, and operates 681 MW, including 28 MW which it leases. EDELNOR also owns
and operates approximately 1,060 km (657 miles) of high voltage transmission
lines, 15 substations and other ancillary transmission facilities.
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
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"take-or-pay" gas transportation agreements with Nor Andino to supply two 412 MW
gas-fired plants. These contracts began during the last quarter of 1999. EDELNOR
has signed a similar agreement sufficient to supply its Mejillones III
combined-cycle unit.
EDELNOR's principal generating assets are two coal-fired units and one
combined cycle gas turbine located just north of Antofagasta in Mejillones. The
first coal unit, Mejillones I, has a generating capacity of 154 MW and began
operation in December 1995. Mejillones II, also a coal unit, has a generating
capacity of 164 MW and began operating at the end of March 1998. The gas unit,
Mejillones III, began commercial operation on June 17, 2000 and has a generating
capacity of 243 MW.
The Mejillones I and II generating units have used a blend of petroleum
coke and coal as an alternative fuel to pure coal. Petroleum coke, or pet coke,
is a by product from the petroleum refinery process. The use of pet coke allows
these units to produce electric energy with a significant reduction of
production costs compared to running on pure coal, making these units more
economical. Competitors of EDELNOR filed complaints with the applicable local
environmental agency, the COREMA Region II agency, alleging that EDELNOR does
not have approval to burn pet coke as an alternative fuel. In February 1999, the
COREMA Region II agency 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 agency, 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 the agency. On March
2, 2000, the agency 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 on April 4, 2000. On
September 7, 2000, EDELNOR received the written resolution from CONAMA's meeting
of July 7, 2000. CONAMA did not reject the project, but did reject the
environmental impact study and provided guidelines for the preparation of a new
impact study, which must include data from a 60-day test burn of the petcoke and
coal mixture. We believe that EDELNOR can demonstrate its ability to comply with
all applicable regulations through the new environmental impact study. However,
we cannot assure you that we will be successful in gaining approval. If EDELNOR
is prohibited from using any pet coke, the units will be required to rely on
coal as the primary fuel, which is not as economical as natural gas. If this
occurs, there may be a significant reduction in EDELNOR's energy and capacity
revenues.
EDELNOR pursues a sales strategy comprising both contract and spot sales.
EDELNOR has contracts to supply the five distribution companies in the Sistema
Interconectado del Norte Grande. However, three of the five contracts,
(representing approximately 167 MW) are with the Chilean distributor EMEL S.A.
and will expire on December 31, 2001. The impact of the lost sales will begin in
2002 and is expected to be partially mitigated by revenues EDELNOR believes it
will derive from sales to the Sistema Interconectado del Norte Grande and from
charges to the new supplier for use of EDELNOR'S transmission facilities.
Further, EDELNOR has requested an investigation by the Antimonopoly Commission
into the contracting of EMEL S.A. with its new supplier. An investigation could
result in the nullification of these contracts and opening the contracts to bid.
If that occurs, EDELNOR may bid on the contracts again in an open process.
EDELNOR also supplies 11 other customers under long-term contracts
representing approximately 166 MW. These contracts have expiration dates ranging
from 2000 to 2017. One of these contracts, representing approximately 2 MW,
expires in December 2000. Energy sales to industrial customers increased 149%
from 1993 to 1999. These contracts are denominated in U.S. dollars and payable
in Chilean pesos. Most of the economic activity in the Sistema Interconectado
del Norte Grande is attributable, directly or indirectly, to the copper mining
industry which uses large amounts of electricity. In 1999, the copper mining
industry accounted for approximately 87% of the energy
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sold in the Sistema Interconectado del Norte Grande. During this time, EDELNOR
derived 52% of its revenues from copper mining and copper mining related
customers. Any significant decline in the production of copper in northern Chile
could lower the demand for electricity used in the copper production process and
might also result in lower demand for electricity due to any resulting economic
slowdown in the area.
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 business of marketing and
managing market risk associated with energy and energy-linked commodities. In
addition, WPD Limited, a company indirectly owned by us and PPL Global, is
pursuing the acquisition of Hyder, a company that owns and operates the
electricity network in South Wales and the water distribution and waste water
treatment business for all of Wales. Our strategy in Europe is to create a
business unit that integrates our generation and distribution with our marketing
and risk management capabilities. We intend to build upon our existing
businesses by expanding our marketing and risk management operations in several
countries where electricity markets have been most significantly liberalized, to
seek acquisitions and contractual arrangements for the control of generation and
distribution and to develop new projects to meet our strategic goals.
WESTERN POWER DISTRIBUTION
South Western Electricity plc, trading as Western Power Distribution is one
of the privatized regional electricity companies in England and Wales licensed
to distribute, supply and, to a limited extent, generate electricity. Western
Power Distribution's primary business is distribution of electricity.
Western Power Distribution 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.
Western Power Distribution sold that business, together with the name SWEB, to
London Electricity plc for L160 million ($264 million) and the assumption of
certain liabilities. The sale was effective September 30, 1999.
We acquired Western Power Distribution, 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, our
holding company for Western Power Distribution. Southern Investments UK 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, PPL
Global, a subsidiary of PPL Corporation, a utility holding company based in
Allentown, Pennsylvania, acquired a 25% interest in WPD Holdings Limited. 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.
HYDER
On August 23, 2000, WPD Limited, a company that subsidiaries of ours and
PPL Global jointly own, 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 L565 million (approximately $847 million), or 365 pence
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(approximately $5.47) per Hyder share plus the assumption of approximately L2.1
billion (approximately $3.2 billion) of gross debt as of March 31, 2000. On
September 15, 2000, WPD Limited committed unconditionally to purchase any shares
of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD Limited
had acquired approximately 68% of the shares of Hyder. In addition, WPD Limited
has replaced Hyder's board of directors with our employees and employees of
Western Power Distribution and PPL Global.
The total purchase price, including fees and expenses, is expected to be
L585 million (approximately $878 million). The purchase will be funded by bank
loans of L360 million (approximately $540 million) to be obtained by WPD
Holdings, an investment from Western Power Distribution for L85 million
(approximately $128 million), an investment from PPL Global of L84 million
(approximately $126 million) and an investment from us of L56 million
(approximately $84 million). PPL Global will own indirectly 60% of Hyder and we
will own indirectly 40% of Hyder. Our investment of L56 million (approximately
$84 million) will be funded by cash flow from operations.
Hyder provides water and sewerage, electricity distribution and other
services to customers in Wales. Following the closing of the Hyder acquisition,
we anticipate that a subsidiary of United Utilities will enter into a services
contract with Dwr Cymru Welsh Water (Welsh Water), Hyder's wholly owned
subsidiary that conducts the water and sewerage business. Under the services
contract, United Utilities would provide certain operational and maintenance and
customer services, until Welsh Water implements a program of competitive
outsourcing related to these activities. Western Power Distribution is currently
evaluating its options for the continued ownership of Welsh Water following
completion of the Hyder acquisition.
Severn Trent plc has filed a lawsuit against Hyder seeking to prevent Hyder
from entering into the services agreement with United Utilities. The lawsuit
alleges that the services contract relating to Welsh Water violates European and
UK procurement regulations and should have been competitively bid. A hearing for
this lawsuit is scheduled for September 22, 2000, although a judgment is not
expected to be delivered until after September 28, 2000.
Western Power Distribution has also agreed to sell Hyder's services
division to United Utilities for L40 million. In addition, Western Power
Distribution has granted an option to United Utilities for United Utilities to
acquire the Hyder industrial business for L75 million. This option is
exercisable for three months after United Utilities has received information
with regard to these businesses. Western Power Distribution expects to complete
the sales of Hyder's services and industrial businesses; however, there can be
no assurance that these sales will be consummated.
South Wales Electricity plc is Hyder's electricity distribution subsidiary.
It runs the electricity network in South Wales with approximately 18,700
kilometers of overhead electricity lines and 13,900 miles of underground cable.
For the year ended March 31, 2000, South Wales Electricity had revenue of L199.1
and operating profit before interest and taxes of L87.5 million. South Wales
Electricity's revenues are principally derived from charges to electricity
suppliers for using the distribution network. South Wales Electricity's
distribution network provides electricity to approximately 981,000 retail
customers. Once WPD Limited has completed the acquisition of Hyder, we expect
that the headquarters of South Wales Electricity will remain in South Wales and
that Western Power Distribution will provide management oversight for the
operations of South Wales Electricity.
We and PPL Global have entered into an agreement for us to own 40% of the
economic interest in WPD Limited and PPL Global to own 60%, and for us and PPL
Global to own 50% each of the voting interests in WPD Limited. As part of this
arrangement, we also have a call right to acquire an additional 9% economic
interest in WPD Limited from PPL Global. Concurrently, we and PPL
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Global also agreed to modify our ownership of voting shares of WPD Holdings to
50% each so that neither party will have operational or management control of
WPD Holdings.
Distribution Business
Western Power Distribution's distribution business is the ownership,
management and operation of the electricity distribution network within Western
Power Distribution'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 Western Power Distribution's power lines. These end users are
customers of licensed supply businesses, which in turn are the Western Power
Distribution distribution business customers. There are approximately 1.4
million end users connected to Western Power Distribution's network. Virtually
all electricity supplied to end users in Western Power Distribution's area is
transported through its distribution network, thus providing Western Power
Distribution with distribution volume that is stable from year to year. Western
Power Distribution 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 Western
Power Distribution's authorized area.
Western Power Distribution'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.
Western Power Distribution'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 we acquired Western Power Distribution in September 1995, Western
Power Distribution 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, Western Power Distribution has implemented a plan of voluntary and
other staff reductions, mainly in its distribution business. By December 31,
1999, staff numbers had been reduced by 752 persons (excluding staff transferred
to London Electricity as a result of the sale of the SWEB supply business). Part
of these reductions were made possible due to new work practices which Western
Power Distribution has developed with the cooperation of Western Power
Distribution's unions. Team restructuring in the engineering division and the
establishment of multi-skilled independent field teams have 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, Western Power Distribution transferred 833 employees
to London Electricity in connection with the sale by Western Power Distribution
of the SWEB supply business discussed above. Since December 1999, Western Power
Distribution 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 Western Power Distribution's strategy. Western Power
Distribution aims to meet or exceed all the performance criteria established by
the regulator who is responsible for setting the performance standards and
targets. Western Power Distribution 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.
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Ancillary Businesses
Western Power Distribution also has ancillary business activities that
support its main electricity distribution business. These include electricity
generation, real estate and telecommunications. Western Power Distribution owns
generating assets with 12 MW of capacity used to back up the distribution
network. In addition, Western Power Distribution 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. Western Power Distribution 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 Western Power Distribution's overhead distribution network.
Regulatory Environment
The political and regulatory climate in the United Kingdom has changed
significantly since our acquisition of Western Power Distribution in 1995. There
are currently a number of issues affecting the electricity industry, including
separation of distribution and supply businesses, market dominance and new
generation build-up. We have proactively taken steps to adjust to these future
changes, and we do not expect any of these changes to have a material adverse
impact on us.
Virtually all distribution customers in England and Wales are connected to
the distribution system of the regional electricity companies and cannot choose
their electricity distributor. The Office of Gas and Electricity Markets
controls the revenues earned by Western Power Distribution in its distribution
business and former supply business by applying a price control formula.
Distribution revenues are regulated by a formula 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 distribution revenue for distribution businesses.
For Western Power Distribution, 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, Western Power Distribution plans to maximize
efficiency and customer service as a focused distribution company. In order to
achieve these objectives, Western Power Distribution 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. Western Power
Distribution is currently evaluating further opportunities to reduce ongoing
operating costs.
The UK electricity regulator is introducing competition in metering
activities, namely meter fixing (providing, installing, certifying and repairing
meters) and meter reading. Meter fixing must be undertaken by authorized
providers, of which Western Power Distribution is one. Based on the anticipated
regulation, the original carrying value of metering assets was impaired. As a
result, Western Power Distribution recorded an impairment loss of $31 million in
the fourth quarter of 1999 to reflect the amount by which the carrying value of
metering assets exceeded their fair value. The fair value was determined by
computing the present value of estimated future cash flows attributable to the
assets.
Western Power Distribution 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. The
Electricity Supply Pension Scheme provides pension and other related defined
benefits, based on final pensionable pay, to substantially all employees
throughout the electricity supply industry in the United Kingdom. This ruling is
currently being appealed to the House of Lords. The majority of Western Power
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Distribution's employees are Electricity Supply Pension Scheme members. We
cannot assure you that this appeal will succeed or that Western Power
Distribution will not be required to refund to the Electricity Supply Pension
Scheme any amounts previously used to fund early retirement costs, which
management estimates to be approximately L24 million (approximately $36
million). Under FASB 87 "Employers' Accounting for Pensions," we do not
anticipate any immediate impact to our net income.
BEWAG
In September 1997, we were part of a consortium that purchased 51% of Bewag
AG, the integrated utility serving Berlin, Germany. The consortium included
PreussenElektra AG (Preussen), a subsidiary of VEBA AG, and Bayernwerk AG
(Bayernwerk), a subsidiary of VIAG AG. Including shares already held by Preussen
and Bayernwerk, the consortium controls 75% of Bewag. We hold a 26% economic
interest in Bewag, which we purchased for approximately $820 million, including
approximately $478 million of non-recourse debt. Although we own 26% of the
outstanding "A" shares and "B" shares of Bewag, we own 28.68% of the voting
rights of Bewag as the A shares carry single voting rights and the B shares
carry double voting rights.
Bewag's entire customer base is open to competition in accordance with
German electricity laws. Bewag serves approximately 2.1 million customers in the
city-state of Berlin. We believe Berlin and the surrounding region have
favorable prospects for long-term growth, in particular because Berlin has
resumed its position as the seat of the national government of Germany. In
addition, Bewag has direct access to Germany's high-voltage transmission lines,
which enhances its ability to purchase competitively priced power.
We entered into a 30-year shareholders agreement with Preussen, Bayernwerk
and VIAG. This agreement specifies governance issues and key financial elements.
Under the shareholders agreement, decisions on major business items (e.g., major
capital investments and divestments, establishment of new business lines, amount
of the dividend and ratification of Bewag's annually revised five-year business
plan) require approval by us and Bayernwerk, effectively giving both members
veto rights over major decisions made by the utility.
On June 16, 2000, VEBA and VIAG merged to create a new company named E.on
AG. Subsequently, on July 13, 2000, Preussen and Bayernwerk combined to create a
core energy subsidiary known as E.on Energie AG. E.on Energie made concessions
to the European Union to obtain approval for the merger. Among these concessions
is the sell-down of several holdings, including its 49% share of Bewag, as well
as its shares in Vereinigte Energiewerke AG, commonly known as VEAG, the East
German generation and high-voltage transmission company. E.on Energie has
announced a schedule for the sale of its shares in VEAG which contemplates a
bidding process to conclude in mid-November. VEAG has approximately 7,000 MW of
lignite-fired and 2,700 MW of pumped storage hydroelectric power plants. VEAG
has also announced its intention of merging with Laubag, the company that
supplies most of its lignite fuel.
We have publicly stated our interest in acquiring a controlling position in
Bewag and supporting Bewag in bidding for a controlling position in VEAG to
strengthen our position in the market. On August 10, 2000, E.on Energie
announced that it had reached an agreement with Hamburgische
Electricitaets-Werke AG (HEW) to sell E.on Energie's 49% share of Bewag
effective January 1, 2001. We had previously made an offer to purchase E.on
Energie's 49% interest in Bewag. On August 14, 2000, at the request of the State
of Berlin, the Berlin district court issued a temporary injunction preventing
E.on Energie from selling part of its stake in Bewag, as it had not obtained the
approval of the State of Berlin. This temporary injunction was extended by the
Berlin high court on August 16, 2000. On August 15, 2000, the Berlin high court
issued a separate preliminary injunction,
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at our request, to prevent the sale of the shares to HEW. Although we may
continue to pursue a resolution of this matter through the German legal system,
we have stated our desire to negotiate a settlement with E.on Energie and HEW
with respect to our future ownership of Bewag. We are uncertain whether we will
be able to resolve our future ownership of Bewag prior to the proposed sale by
E.on Energie of its shares of VEAG.
Bewag is a vertically integrated utility with 29 power and steam units
generating 2,955 MW of electricity and 5,740 MW of thermal energy sold for
heating. Bewag's generating assets are shown in the following table:
<TABLE>
<CAPTION>
PLANT ELECTRIC CAPACITY(MW) THERMAL CAPACITY(MW) FUEL
----- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Reuter West.................................. 600 780 Coal
Lichterfelde................................. 450 720 Natural Gas
Charlottenburg............................... 330 610 Coal, Oil
Mitte........................................ 380 620 Natural Gas
Wilmersdorf.................................. 280 330 Oil
Reuter....................................... 202 240 Coal
Oberhavel.................................... 200 0 Coal
Klingenberg.................................. 140 320 Coal, Oil, Natural Gas
Rudow........................................ 175 130 Coal
Moabit....................................... 151 200 Oil, Natural Gas
Lichtenberg.................................. 36 1,100 Oil, Natural Gas
Kopenick..................................... 10 50 Oil, Natural Gas
Buch......................................... 1 130 Oil, Natural Gas
Heating plants............................... 0 510 Coal, Oil, Natural Gas
----- -----
Total...................................... 2,955 5,740
===== =====
</TABLE>
Electric power is transmitted to Bewag's approximately 2.1 million electric
customers over 39,000 kilometers of cable, most of which is underground.
Construction is underway to interconnect both sides of Berlin with a 380
kilovolt (kv) line that is expected to be connected to the supra regional German
380 kv grid in late 2000 or early 2001. At the end of June 1999, Bewag began
trial operations of a new centralized distribution control system. We expect
that the new system will enhance the reliability and operational cost
effectiveness of Berlin's distribution system. Bewag earns approximately 75% of
its revenues from electricity sales.
All households and a portion of the low voltage-special contract customers
are considered tariff customers by the Berlin regulator. Tariff customers
purchased approximately 48% of the electricity sold in 1999, while approximately
3,000 industrial and commercial customers purchased the remaining 52%. Special
contract customers typically purchase power from Bewag through a standard
agreement, which is renewable annually. Future growth in demand is expected to
come from growth in single households, growth in the number of appliances and
growth due to the relocation of the German government in 1999 from Bonn to
Berlin.
In addition to electricity, Bewag provides district heating for
approximately 500,000 residential and commercial customers. Bewag has an
approximate market share of 30% of the heating market in Berlin through its
district heating system. Heat sales comprised 22% of Bewag's revenue in the
fiscal year ended June 1999.
Bewag has also acquired additional market share as a result of its
purchase, along with Gaz de France, of a controlling interest in GASAG Berliner
Gaswerke Aktiengesellschaft (GASAG). Bewag believes GASAG has substantial
opportunity to grow its market share. GASAG provides service to approximately
744,000 customers, which is the largest customer base of any German natural gas
supplier, utilizing over 4,000 miles of pipeline network. In the first quarter
of 1998, Bewag, which then owned approximately 12% of GASAG, increased its
direct interest in GASAG to 24.9%. In July
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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
July 1, 2000, the number of full-time employees was reduced to approximately
6,300 and another 1,100 employees have agreed to leave over the next two years.
The costs associated with these departures were recorded in 1999.
On July 17, 2000, Bewag concluded a new collective agreement with the trade
unions to implement a further workforce reduction plan. Bewag expects to record
additional employee cost reduction charges in the future related to this new
agreement. Bewag remains committed to reevaluating the competitive position of
its cost structure in the market.
Regulatory Environment
In September 1999, the Federal Cartel Authority announced that Bewag would
have to allow access by other suppliers to approximately 20% of the 400 MW of
transmission capacity into Berlin which is controlled by Bewag. When the new 380
kv line is completed, it will interconnect both sides of Berlin. Once the line
is completed, there will be few restrictions on other suppliers wishing to
supply power in Berlin. It is expected that the line will be completed by the
end of 2000.
The European Union has endorsed a directive which broadly aims to open
electricity markets to customer choice and competition known as the Directive
Concerning Common Rules for the Internal Market in Electricity. In response to
this directive a new German Energy Industry Act was introduced in April 1998.
The energy act provides for customer choice for all consumers of electricity,
and Bewag's customers may now choose their electricity supplier on a competitive
basis. In accordance with the requirements of the energy act, the eight
integrated generation companies which own the high voltage grid entered into a
voluntary agreement providing for third-party access to the transmission system,
subject to the exceptions permitted under the energy act. The voluntary
agreement has led to published pricing for transmission and distribution charges
in several areas of Germany and competition for customers. Further changes to
this agreement are expected to considerably simplify third-party access and lead
to a drop in fees. We believe that Bewag will need to continue to reduce its
costs and increase its supply pricing competitiveness as a result of the
deregulation of the German electricity market.
SE-EUROPE
We formed Southern Energy -- Europe B.V. (SE-Europe) in Amsterdam, in the
first quarter of 1999 to support our asset and business development activities,
acquisition efforts and future generation facilities in Europe through market
research and analysis, financial structuring consultation and joint marketing
efforts. SE Europe's services may include fuel procurement, market analysis,
risk management and control and physical and financial energy trading services
such as spot market price bidding and commercial dispatch, among others. We
intend to coordinate, where possible, SE-Europe's infrastructure development,
risk policies and procedures and overall corporate activities with SCEM to
ensure that knowledge, experiences, systems and governance philosophies are
appropriately leveraged.
During the second quarter of 1999, SE-Europe began trading electricity in
the Nordic power market, the most liquid and liberalized power market in Europe
at the time. By December 31, 1999, SE-Europe had traded approximately 77 TWh in
the Nordic market, primarily on the Nord Pool power exchange. SE-Europe's
volumes represented approximately 12% of the total volumes traded and cleared
through the Nord Pool power exchange.
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In addition to trading on the Nord Pool power exchange, SE-Europe has met
all requirements necessary for physical spot trading on the recently established
Amsterdam Power Exchange. Levels of activity will depend on market development
and liquidity of those markets. We are also in the process of obtaining
necessary legal and regulatory approvals to actively participate in physical and
financially settled trading throughout our target market extending through the
North-South corridor from the Nordic region through Central Europe to Northern
Italy. We expect to commence significant activity in these regions during 2000,
where market development permits.
Through coordinated efforts with our European asset development team,
SE-Europe intends to seek opportunities to position our European energy business
as a significant industry participant in the wholesale fuels, electric
generation and energy commodity trading segments of the European energy market.
We have identified the liberalizing markets of Western and Central Europe as the
focus of our growth strategy in Europe. In conjunction with our trading
operations in Amsterdam, we have integrated our marketing and business
development functions in these markets. We are seeking to apply our risk
management and fundamental market analysis skills to our European operations and
business development efforts. In addition to our operations in Amsterdam, we
have opened regional marketing and business development offices in Germany,
Italy and Switzerland. We expect to open an additional regional office in 2001.
Each office is charged with developing opportunities ranging from structured and
origination transactions to acquisition of assets or control of assets through
contractual arrangements. We intend to support existing participants in the
market and to forge alliances that will prove mutually beneficial with local
partners.
ASIA-PACIFIC
In January 1997, one of our wholly owned subsidiaries, Southern
Energy-Asia, Inc. (SE Asia), acquired 80% of Consolidated Electric Power Asia
Limited (CEPA), since renamed Southern Energy Asia-Pacific Limited (SE
Asia-Pacific), from Hopewell Holdings Limited (Hopewell) for approximately $2
billion. This acquisition was partially financed by SE Asia with a $792 million
bank loan. In August 1997, we purchased the remaining 20% of CEPA from Hopewell
for $150 million and the transfer to Hopewell of CEPA's interest in Tanjung Jati
B, a 1,320 MW power project then under development in Indonesia. Today, SE Asia
and one of its direct subsidiaries own 100% of SE Asia-Pacific.
SE Asia-Pacific is one of Asia's largest independent power producers and
has substantial experience in developing, constructing, holding an interest in
and operating electric power generation facilities in Asia. The majority of SE
Asia-Pacific's assets are located in the Philippines, with additional assets
located in China and Australia. By acquiring 100% of SE Asia-Pacific, we
acquired a net ownership interest in 3,388 MW of generating capacity operating
or under construction, a coal mining company in Australia and a development team
and corporate staff based in Hong Kong and the Philippines. We currently have a
net ownership interest in 3,159 MW of generating capacity. SE Asia-Pacific is
currently conducting business development activities in five countries:
Australia, China, India, the Philippines and Singapore. Specifically, SE
Asia-Pacific has a project in an advanced stage of development as one of SE
Asia-Pacific's Philippine subsidiaries has agreed to construct a sub-station and
two transmission lines in the Philippines to supply an industrial facility
partially from one of SE Asia-Pacific's other projects.
SE Asia-Pacific has been most successful in developing businesses in the
Philippines where it has a net ownership interest in five plants totaling 2,092
MW of capacity. SE Asia-Pacific has long-term energy conversion agreements with
National Power Corporation, under which SE Asia-Pacific accepts fuel from
National Power Corporation and converts that fuel to energy. National Power
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Corporation 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 2,038 MW coal-fired power
plant in Guandong Province (Shajiao C) in China. We own, through our subsidiary
SE China Investments, Inc. (SE China), a 9.99% interest in Shandong
International Power Development Company Limited. Shandong International Power
holds interests in 18 units in Shandong province in China totaling 4,158 MW.
SE Asia-Pacific also holds a 100% interest in Allied Queensland Coal Pty.
Ltd. (Allied Queensland Coal), a coal mining company located in Queensland,
Australia. Allied Queensland Coal has the mining rights to approximately 1.3
billion tons of low-sulfur, low-cost coal. Small amounts of coal are currently
being mined for sale in the domestic and overseas markets.
The following table depicts our investments in the Asia-Pacific region
currently in operation:
<TABLE>
<CAPTION>
NET
OWNERSHIP
INTEREST IN OPERATED
TOTAL MW OWNERSHIP % TOTAL MW MW
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
GENERATION OPERATIONS:
Philippines
Sual...................................................... 1,258 91.9% 1,156 1,258
Pagbilao.................................................. 735 87.2 641 735
Navotas I................................................. 200 90 180 200
Navotas II................................................ 100 100 100 100
Bulacan................................................... 15 100 15 15
China
Shajiao C................................................. 2,038 32 652 --
SIPD...................................................... 4,158 9.99 415 --
----- ----- -----
Total................................................... 8,504 3,159 2,308
===== ===== =====
</TABLE>
THE PHILIPPINES
SE Asia-Pacific's subsidiaries have entered into four separate energy
conversion agreements with National Power Corporation, one each for the Sual,
Pagbilao, Navotas I and Navotas II projects. The energy conversion agreements
are build-operate-transfer agreements. At the end of the term of each energy
conversion agreement, the associated plant is required to be transferred to
National Power Corporation, free from any lien or payment of compensation.
National Power Corporation acts as both the fuel supplier and the energy
off-taker under the energy conversion agreements. National Power Corporation
procures all of the fuel necessary for each plant, at no cost to SE
Asia-Pacific's subsidiary, and has accepted substantially all fuel risks and
fuel related obligations other than each plant's actual fuel burning efficiency.
The SE Asia-Pacific subsidiaries receive compensation under the energy
conversion agreements for fixed capacity fees, variable energy fees and other
incidental fees. Over 90% of the revenues are expected to come from fixed
capacity charges that are paid without regard to dispatch level of the plant.
Capital recovery fees, infrastructure fees, and service fees, which comprise
most of the fixed capacity charges, are denominated in U.S. dollars. The fixed
operating fees, energy fees and other incidental fees have both U.S. dollar and
Philippine peso components that are both indexed to inflation rates.
The energy conversion agreement contains a provision under which National
Power Corporation bears the financial risks for both political force majeure and
change of law. National Power Corporation's obligations under the energy
conversion agreements are guaranteed by the full faith and
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credit of the Philippine government. The following table summarizes the energy
conversion agreement terms, National Power Corporation transfer date and
capacity information for each asset in the Philippines:
<TABLE>
<CAPTION>
CAPACITY
COMMITTED TO
ENERGY CONVERSION TRANSFER TO PORTION OF 1999 NATIONAL POWER
AGREEMENT TERM NATIONAL POWER REVENUES AS CORPORATION
PROJECT (YEARS) CORPORATION CAPACITY FEES (MW)
------- ----------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Sual.................................. 25 Oct 2024 94% 1,000
Pagbilao.............................. 29 Aug 2025 95% 735
Navotas I............................. 12 Mar 2003 98% 200
Navotas II............................ 12 July 2005 98% 100
</TABLE>
SE Asia-Pacific, through its operating companies, is responsible for
management, operations and maintenance of the plants. The operating companies
earn fees including potential bonus fees for providing those services. The
Navotas I, Navotas II and Bulacan project companies operate and maintain their
respective plants. The following table presents generation sold and availability
data for each asset in the Philippines:
<TABLE>
<CAPTION>
1999
----------
GENERATION 1999
SOLD ------------
PROJECT (GWH) AVAILABILITY
------- ---------- ------------
<S> <C> <C>
Sual(1)..................................................... 1,231 92%
Pagbilao.................................................... 3,996 83%
Navotas I................................................... 10.3 95%
Navotas II.................................................. 8.4 83%
</TABLE>
(1) Began operation in late 1999
All of the projects in the Philippines have been granted preferred or
pioneer status which, among other things, has qualified them for income tax
abatements of three to six years. The expiration dates of the abatements for
Pagbilao and Sual are 2002 and 2005, respectively.
Most of our investments in the Philippines are owned through a subsidiary
holding company, Southern Energy Philippines Holdings (Southern Energy
Philippines). Part of our strategy is to increase the size of Southern Energy
Philippines through new projects in the Philippines while simultaneously
decreasing the percentage of Southern Energy Philippines owned by us. In order
to implement this strategy, we have been in discussions with parties who could
purchase part of Southern Energy Philippines. It is our intention to pursue
these types of opportunities only in circumstances where the proceeds would be
used to fund additional investment outside the Philippines. Most recently we
have had discussions with a party with whom we would possibly form a joint
venture and contribute 20% of Southern Energy Philippines in exchange for 50% of
the joint venture. Our prospective partner could contribute cash, power
generation assets or projects under development or any combination of these
assets to the joint venture.
SUAL
SE Asia-Pacific holds a 91.91% interest in the Sual plant, a 1,258 MW
coal-fired plant at Sual, Pangasinan, located approximately 216 km (130 miles)
north of Manila in the Philippines. The Sual plant consists of two 629 MW units
that commenced commercial operation in October 1999. The International Finance
Corporation and Commonwealth Development Corporation are the other
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shareholders. Most revenues are paid in U.S. dollars into an offshore account
administered by a loan trustee.
When we acquired SE Asia-Pacific in 1997, the Sual plant was still under
construction. The construction was completed in October 1999. The total
construction cost, including inventories, was $1,282 million at June 30, 2000
and is expected to be approximately $1,300 million. The construction was funded
by third party non-recourse project loans of $942 million and equity financing
by SE Asia-Pacific and two minority shareholders in the amounts of $312 million
and $28 million, respectively.
Southern Energy Asia-Pacific Pangasinan Limited (SE Asia-Pacific
Pangasinan), a subsidiary of SE Asia-Pacific formerly known as CEPA Pangasinan
Electric Limited, has acceded to the energy conversion agreement with National
Power Corporation. The energy conversion agreement obligates National Power
Corporation to purchase 1,000 MW of the total plant capacity of 1,258 MW. The
remaining net available capacity of 218 MW is not currently under contract;
however, SE Asia-Pacific expects this capacity to be sold to National Power
Corporation, large industrial or commercial users or distribution customers.
A consortium of banks and various other lenders have committed non-recourse
project debt with an expected average life of approximately five years and a
final maturity in the beginning of 2012. As of June 30, 2000, the balance of the
project debt was approximately $942 million. The distribution of our shares by
Southern Company would constitute a change in control under the loan agreement
and we cannot assure you that we will be able to obtain the required lender
consents. Most revenues are paid in U.S. dollars into an offshore account
administrated by a loan trustee.
The Sual project was not completed by the date specified in the
construction contract. As a result, SE Asia-Pacific Pangasinan currently has a
claim against the contractors for liquidated damages. SE Asia-Pacific Pangasinan
is currently in discussions with the contractors to resolve disputes regarding
the amounts to be paid.
National Power Corporation has informed SE Asia-Pacific that, in National
Power Corporation's opinion, the Sual plant was not completed by the dates, as
adjusted, contemplated in the energy conversion agreement. However, no formal
claim for liquidated damages has been made by National Power Corporation. SE
Asia-Pacific Pangasinan believes that the plant was completed before the
deadlines in the energy conversion agreement and that its exposure to potential
claims is not material.
Under the shareholder agreement, the minority shareholders of SE
Asia-Pacific Pangasinan can exercise a put option requiring SE Asia-Pacific
Pangasinan to purchase the minority shareholders' interests in the project. The
put option can be exercised between the third and sixth anniversaries of the
completion of the project construction or, in the event of any change in
control, a change in SE Asia-Pacific Pangasinan's charter documents or the
transfer of sponsor in violation of the sponsor support agreement, the put
option may be exercised on the earlier of the date of these changes or the
twelfth anniversary of the completion of the project construction. The
distribution of our shares by Southern Company will not constitute a change in
control under the shareholder agreement. If a minority shareholder exercises its
put option, SE Asia-Pacific Pangasinan must purchase the shareholder's interest
at a price to be determined based on the present value of the remaining years of
cash flow less the liabilities outstanding plus the current assets.
PAGBILAO
SE Asia-Pacific holds an 87.2% interest in the Pagbilao plant, a 735 MW
coal-fired plant located 100 km (62 miles) southeast of Manila. The Pagbilao
plant consists of two 367.5 MW units that commenced commercial operation in June
1996 and August 1996, respectively. The International
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<PAGE> 115
Finance Corporation, Commonwealth Development Corporation and the Asia
Development Bank are the other shareholders. Most revenues are paid in U.S.
dollars into an offshore account administered by a loan trustee.
The Pagbilao plant originally had non-recourse project debt totaling $698
million from banks and various other lenders. The balance of this debt as of
June 30, 2000 was $477 million, with the majority of the principal having a
final maturity in the beginning of 2007. This financing requires the project
company to maintain a debt service reserve equal to the amount due within the
next succeeding 12 months. Southern Company currently provides a $60 million
letter of credit, and we provide a $50 million letter of credit, for the benefit
of the lenders to satisfy this reserve requirement. At the time of the full
distribution of our stock by Southern Company, we expect to have to provide
letters of credit for the entire amount required by the financing. The
distribution of our shares by Southern Company would constitute a change in
control under the loan agreement and we cannot assure you that we will be able
to obtain the required lender consents.
Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Pagbilao project, Southern Energy
Quezon, Inc. (SE Quezon), can exercise a put option requiring SE Quezon to
purchase the minority shareholders' interests in the project. The put option can
be exercised between the sixth and twelfth anniversaries of the completion of
the project construction or, in the event of any change in control, a change in
SE Quezon's charter documents or the transfer of sponsor in violation of the
sponsor completion support agreement, the put option may be exercised on the
earlier of these changes or the twelfth anniversary of the completion of the
project construction. The distribution of our shares by Southern Company will
not constitute a change in control under the shareholders agreement. If a
minority shareholder exercises its put option, SE Quezon must purchase the
shareholder's interest at a price to be determined based on the present value of
the remaining years of cash flow less the liabilities outstanding plus the
current assets.
NAVOTAS I AND II
SE Asia-Pacific holds a 90% interest in the Navotas I plant, a 200 MW fuel
oil-fired plant located at the Navotas Fishport Complex north of Manila. The
Asian Development Bank is the other shareholder. SE Asia-Pacific also holds a
100% interest in the Navotas II plant, a 100 MW fuel oil-fired plant located at
the Navotas Fishport Complex.
BULACAN
SE Asia-Pacific owns a 100% interest in the Bulacan plant, a 15 MW plant
comprising four 3.75 MW diesel units located at the Navotas site. A SE
Asia-Pacific subsidiary has entered into a 15-year energy generation agreement
with Solid Development Corporation, a yarn manufacturing company. The agreement
term runs through 2013. Navotas staffing is used to operate the units.
BATAAN
An SE Asia-Pacific subsidiary has entered into an agreement with Bataan
Polyethylene Corporation (Bataan Polyethylene) to supply the power requirements
of Bataan Polyethylene in Bataan, the Philippines. Bataan Polyethylene is
expected to produce polyethylene products for the Philippine market and the
Asian region and is being financed by the International Finance Corporation.
Bataan Polyethylene is owned by BP Chemicals (a subsidiary of British
Petroleum), Petronas (Malaysian state oil company), Sumitomo Corporation and
local Philippine shareholders. Under this contract, the SE Asia-Pacific
subsidiary was required to construct a sub-station and two transmission lines to
provide up to 40 MW of power to the Bataan Polyethylene plant. The
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construction of this sub-station and these transmission lines was completed in
August 2000. SE Asia-Pacific intends to supply electricity to Bataan
Polyethylene sourced jointly from Sual and National Power Corporation on an
equal basis.
MINDORO
SE Asia-Pacific has entered into a 20 year power sales agreement with the
Oriental Mindoro Electric Cooperative (Oriental Mindoro Electric) pursuant to
which SE Asia-Pacific would install 7.5 MW of diesel generators on the Island of
Mindoro to supply Oriental Mindoro Electric. SE Asia-Pacific intends to meet its
obligations to Oriental Mindoro Electric 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.
ILIJAN
We are currently pursuing the acquisition of a minority interest in a 1,251
MW gas-fired combined cycle power plant under construction at Batangas. In March
2000, one of SE Asia-Pacific's subsidiaries entered into a memorandum of
agreement with the Korea Electric Power Corporation (Korea Electric Power) and
Mitsubishi Corporation to negotiate a joint development role and an equity stake
in the Ilijan project. Upon the closing of the transaction, the shareholders
will be Korea Electric Power (51%), Mitsubishi (21%), SE Asia-Pacific (20%), and
Kyushu Electric Corporation (8%). The Ilijan project has entered into a 20-year
energy conversion agreement for 1,200 MW with National Power Corporation and
will be able to offer a tariff rate of approximately 4.5 U.S. cents per kWh. We
expect to have the exclusive right to market excess capacity and energy (the
difference between 1,200 MW sold to National Power Corporation and the plant's
capacity of 1,251 MW) during the life of the project.
We have entered into an agreement with Korea Electric Power and Mitsubishi
under which Mitsubishi has advanced funds to the project company. Pursuant to
this agreement, we have agreed to credit Mitsubishi for such advances if we
eventually participate in this project. However, SE Asia-Pacific has not yet
entered into any agreement obligating it to make an investment. We are able to
defer the decision to invest until financial closing. Until financial closing,
Korea Electric Power or Mitsubishi is also able to exclude SE Asia-Pacific from
the project. Subject to signing definitive investment agreements, our initial
base equity investment is expected to be approximately $35 million invested over
the period 2000-2001, together with a pro rata contingent equity obligation
under the lending arrangements of approximately $5 million. In addition, we will
retain an option to purchase an additional 8.6% equity interest from Mitsubishi
which, if exercised, would bring our total equity investment to $50 million. The
closing of the transaction is expected to occur in the last quarter of 2000.
We anticipate taking an active role in the management of the project
through our right to designate a finance director, a general manager and one
senior plant manager.
National Power Corporation is responsible for constructing a new 500 kV
transmission line and has awarded the contract to Sumitomo. Construction
commenced in June 2000. The source of the natural gas is the Malampaya gas field
in Palawan, which is being developed by a consortium of Shell, Texaco and the
Philippine National Oil Company. The off-shore and on-shore pipelines are
reportedly on schedule for completion by October 2001, consistent with the
schedule for the Ilijan power plant.
The project is currently being constructed by a consortium of United
Engineers International, Inc., Raytheon-Ebasco Overseas Ltd, and Mitsubishi
Heavy Industries. We expect the construction to
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be completed in January 2002. Korea Electric Power and Mitsubishi Heavy
Industries are providing construction financing pending the arrangement of
project finance debt in the last quarter of 2000.
DEREGULATION AND PRIVATIZATION
In April 2000, the Philippine House of Representatives passed the
Electricity Industry Reform Act substantially in the form of the government
legislative bill which had proposed comprehensive restructuring in order to
deregulate the market for electricity. The Senate has passed a series of bills
which also propose deregulation but along different lines from those passed by
the House of Representatives. The Electricity Industry Reform Act seeks to
deregulate and privatize National Power Corporation to promote a competitive
industry structure and broaden the ownership base of various sectors of the
electric power industry. The Electricity Industry Reform Act is now awaiting the
Bicameral Conference Committee of the House and the Senate in order to agree on
a joint version of the law.
The Electricity Industry Reform Act seeks to establish, within three years
from its effectiveness, competition in the retail supply of electricity and open
access to the transmission and distribution systems. Prior thereto, concerned
government agencies are mandated to establish a wholesale electricity spot
market, ensure the unbundling of transmission and distribution wheeling rates
and remove existing cross-subsidies provided by industrial and commercial users
to residential customers.
Moreover, within three years from the effectiveness of the Electricity
Industry Reform Act, at least 70% of the National Power Corporation's generating
assets and contracts are mandated to be privatized. Thereafter, any undisposed
assets of the National Power Corporation would be transferred to the so-called
National Power Corporation Residual, a government-owned and controlled
corporation, which would perform the remaining functions of National Power
Corporation, such as administering the energy conversion agreements and other
contracts with independent power producers.
The Electricity Industry Reform Act, 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 Electricity Industry
Reform Act contemplates continued payments of National Power Corporation's
obligations under its energy conversion agreement contracts such as those with
SE Asia-Pacific subsidiaries. The energy conversion agreements of SE
Asia-Pacific are not assignable and will, therefore, remain with National Power
Corporation following privatization. The National Power Corporation may sell its
beneficial interest in the energy conversion agreements as part of the
privatization. These energy conversion agreements are in any event supported by
a sovereign guarantee of the Republic of the Philippines.
CLEAN AIR ACT
In July 1999, the Philippines enacted legislation, the Clean Air Act, which
applies to stationary emission sources and other operating plants. We expect
that the Department of Environment and Natural Resources will promulgate the
Clean Air Act's Implementing Rules and Regulations by the end of September 2000.
Pending promulgation of the Implementing Rules and Regulations, the Department
of Environment and Natural Resources 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 Department of
Environment and Natural Resources suggest potentially increasingly stringent
standards in emissions from all sources to maintain and/or improve the air
quality. This may require additional controls or equipment on some
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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 that the Sual plant can comply with the current requirements of
the Clean Air Act. Some additional pollution control or other expenditures may
be required for the Pagbilao plant and Bulacan plant to comply with the new
requirements. We do not expect these expenditures to be material. We believe
that the Navotas I and II will not be affected significantly by the Clean Air
Act. SE Asia-Pacific has been closely following the development of the
Implementing Rules and Regulations and is making contingency plans which are
capable of meeting the standards and deadlines once finalized.
CHINA
SHAJIAO C
SE Asia-Pacific holds a 32% interest in the Shajiao C plant, a 2,038 MW
coal-fired power plant located close to Hong Kong at Shajiao, Guangdong
Province, China. Shajiao C is the largest coal-fired power plant in Guangdong
Province. The plant is made up of three 679.4 MW units that began 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.
The other 20% of Southern Energy (Shajiao C) Limited 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 Southern Energy (Shajiao C) Limited 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.
All power produced at the plant is sold to Guangdong Generation Corporation
and Guangdong Electric Power Holding Company. These two entities are responsible
for operating and maintaining the plant and are also responsible for coal
supply. Each of them receives an operations fee, calculated on the basis of
electricity generated and a minimum take-or-pay requirement. Guangdong
Generation Corporation and Guangdong Electric Power Holding Company bear demand
risk through a contractual take-or-pay requirement, which imposes a minimum
annual offtake quantity of approximately 62% of total generation capacity,
subject to risks such as force majeure and construction defects. The minimum
offtake was not achieved during the years 1996-1999. The capacity payment
associated with the shortfall in each year has been paid in the respective
following year. Guangdong Generation Corporation and Guangdong Electric Power
Holding Company also bear fuel risks. Force majeure affecting fuel delivery does
not relieve them of their take-or-pay obligation.
While Guangdong Generation Corporation operates the plant pursuant to a
contractual agreement between the parties, a subsidiary of SE Asia-Pacific, in
its capacity as a partner in the Guangdong Power joint venture, provides
significant management and operational support for the facilities on a day to
day basis.
Payments to Guangdong Power are made in Renminbi. However, payments to
cover foreign currency expenses, debt service and an equity return are indexed
to U.S. dollars. For the first 10 years of operation (through June 2006),
Guangdong Generation Corporation receives the first 30% of distributable
after-tax profit. The remaining profits are split 60/40 between Guangdong
Generation Corporation (42% overall) and Southern Energy (Shajiao C) Limited
(28% overall). For years 11 through 20, Guangdong Generation Corporation
receives the first 60% of distributable after-tax profit.
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The remaining profits are split 60/40 between Guangdong Generation Corporation
(24% overall) and Southern Energy (Shajiao C) Limited (16% overall). The
shareholders of Guangdong Power provided funding to that company through a
series of loans and capital contributions. It is expected that Guangdong Power
will begin repaying these loans in 2000. Shareholder loans and invested capital
are to be returned prior to the payment of dividends.
The loans and capital contributions made to Guangdong Power as of June 30,
2000 are summarized as follows:
<TABLE>
<CAPTION>
GUANGDONG SE ASIA-PACIFIC
GENERATION AND ITS
CORPORATION SUBSIDIARIES
----------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Registered Capital.................................... $225.0 $150.0
Shareholder Loans..................................... 264.1 190.0
Shortfall Loans....................................... 137.9 40.5
Early Generation Profit Loans......................... 23.8 99.9
------ ------
Total............................................... $650.8 $480.4
====== ======
</TABLE>
All shortfall finance, early generation profit and shareholder loans bear a
coupon interest rate of 10% and are to be repaid once Guangdong Power's external
debt is paid in full. Guangdong Power retired its external debt in March 2000.
We expect that all available cash will be used to repay loans prior to being
applied to dividend payments. We expect that substantially all of the loans we
have provided will be repaid by the end of 2003. Shortfall finance loans
represent loans made to fund construction costs not financed by equity or other
debt. Similarly, shareholder loans are loans made by shareholders to provide
additional financing for the construction of the plant. Early generation profit
loans relate to early generation profit earned by Guangdong Power. Early
generation profit includes income from the sale of electricity and other
payments attributable to the time prior to commercial operation. Such income, by
agreement, is distributed to Guangdong Power joint venture partners and then
lent back to the joint venture company in the form of an early generation profit
loan.
SHANDONG INTERNATIONAL POWER DEVELOPMENT COMPANY
On June 30, 1999, we acquired a 9.99% interest in Shandong International
Power 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 Shandong
International Power's $261 million initial public offering on the Hong Kong
Stock Exchange.
Shandong International Power is the largest independent power producer in
China's Shandong province. Shandong Electric Power (Group) Company, the sole
purchaser of electricity as well as the grid operator in Shandong province, is
the largest shareholder of Shandong International Power. Shandong International
Power sells power to Shandong Electric under an offtake contract, pursuant to
which Shandong Electric agrees to purchase power in an amount based on average
generation of comparably sized units in all Shandong Province plants under its
jurisdiction. The power is purchased by Shandong Electric at a price pursuant to
a tariff intended to allow Shandong International Power to recover costs plus a
specified return on its average net book value of fixed assets. In addition,
Shandong Electric has granted to Shandong International Power the right of first
refusal to acquire any plant Shandong Electric chooses to sell. Shandong
Electric has also granted to Shandong International Power an option to acquire,
develop and operate future power projects within Shandong province for which
Shandong Electric Power has development rights.
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At December 31, 1999, Shandong International Power held 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 4,158 MW.
Shandong province, with a population of 88 million people and an installed
electricity generating capacity of approximately 18,000 MW, has China's
second-largest independent provincial power grid. Shandong is also one of six
provinces and municipalities that the Chinese central government has designated
as pilot sites for the deregulation of the power industry. We believe that
Shandong International Power is well positioned for deregulation by being a
low-cost provider with tariffs below the average in the Shandong province and by
being more focused on creating shareholder value and having access to
international capital markets for fund raising as a publicly traded company.
AUSTRALIA
Kogan Creek
SE Asia-Pacific has entered into a shareholders agreement with CS Energy
Limited (CS Energy) to develop the Kogan Creek Power Station in Queensland and
has also formed an alliance with CS Energy to develop other energy projects in
Australia. The agreements stipulate the joint development of the Kogan Creek
station, which is expected to be a 750MW coal-fired power station located 280 km
west of Brisbane. CS Energy has acquired 40% of the project while SE
Asia-Pacific has retained 60%. SE Asia-Pacific has also obtained an exclusive
right to acquire up to 40% of CS Energy's proposed 385 MW natural gas fired
station at Swanbank Power Station near Ipswich which recently commenced
construction. The Kogan Creek station has received all of its government
approvals, including Environment Australia sign-off as well as the Foreign
Investment Review Board approval in early June 2000.
Based on evaluations of the supply and demand balance in Queensland, we and
CS Energy are aware of a current surplus of generating capacity, and
consequently, plan to proceed with the Kogan Creek project at an undetermined
future date based on market demand. Financial close of Kogan Creek is unlikely
prior to 2003.
INDIA
BALAGARH
We are currently pursuing development of a 500 MW coal-fired power project
north of Calcutta, India. We have entered into a shareholders agreement with the
Calcutta Electricity Supply Company Limited, a private sector company which is
the local public utility supplying power exclusively to major parts of Calcutta.
The Calcutta Electricity Supply Company is the main sponsor of the project and
we are the co-sponsor. The International Finance Corporation and Asian
Development Bank are jointly planning to take a 13% equity stake and to provide
approximately $215 million in credit facilities. Korean Exim Bank has agreed in
principle to finance $153 million by way of export credit. While the project has
received all major permits and clearances, a date for financial close has not
been fixed. We expect to invest approximately $50 million of equity in this
project.
HIRMA
We are in initial development of a 3,960 MW mine-mouth project in the state
of Orissa, in eastern India. This plant would provide power to the Power Trading
Corporation of India Limited, a Government of India controlled corporation set
up in 1999. The project has been qualified by Government of India as a Mega
Project under the Government of India's recently revised Mega
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Power Project Policy and would therefore be eligible to receive a waiver of
import taxes and duties. In January 1999, a Joint Development Agreement was
signed with Reliance Industries Limited to be an equal co-sponsor. Key project
agreements are at a preliminary stage of negotiation and we do not yet have a
tariff agreement. At the present time, we have not fixed a target date for
financial close.
REGULATION
INTERNATIONAL REGULATION
Our international operations are subject to regulation by various foreign
governments and regulatory authorities. The laws and regulations that apply to
each of our international projects are more fully discussed under the
description of the particular project found elsewhere in this prospectus.
U.S. PUBLIC UTILITY REGULATION
The U.S. electric industry is subject to comprehensive regulation at the
federal and state levels. Currently, most of our U.S. facilities are exempt
wholesale generators under PUHCA. Our exempt wholesale generators are subject to
regulation by FERC under the Federal Power Act regarding rate matters and by
state public utility commissions regarding non-rate matters. The majority of our
generation from exempt wholesale generators 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 exempt wholesale generators 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 exempt wholesale generators 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 the
Electric Reliability Council, the wholesale power sales of our exempt wholesale
generators are subject exclusively to FERC regulation under the Federal Power
Act 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 exempt wholesale
generators, foreign utility companies, qualifying facilities, domestic and
Canadian marketing of natural gas and electricity and other energy-related
activities. Prior to the distribution, we may not acquire public utility assets
or the securities of public utility companies, unless these assets or companies
qualify as exempt wholesale generators, foreign utility companies or qualifying
facilities, without SEC approval under PUHCA.
In addition, Southern Company is limited in the amount of the aggregate
investment it may make in us through the proceeds of its security sales or
guarantees to an amount not to exceed 100% of Southern Company's consolidated
retained earnings. We and Southern Company have requests pending before the SEC
to increase Southern Company's authority to invest in us up to 175% of its
consolidated retained earnings and to increase its guarantee authority to a
similar extent. Following this offering, Southern Company will no longer provide
financing or credit support except for specified transactions or for a limited
period of time.
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Southern Company's plan to distribute our common stock to its stockholders
requires regulatory approval from both the FERC under the Federal Power Act and
the SEC under PUHCA. We cannot assure you that the requisite approvals from FERC
and the SEC can be obtained on a timely basis or on conditions acceptable to
Southern Company and us. Southern Company may determine not to complete the
distribution based upon the lack of requisite regulatory approval or an
assessment that timely approval cannot be obtained or can be obtained only on
conditions unacceptable to Southern Company.
The SEC monitors the consolidated capitalization of companies subject to
PUHCA, and will monitor the impact of the distribution on the financial
integrity of Southern Company. We believe that the distribution of our stock by
Southern Company will not cause the equity components of Southern Company's
consolidated capitalization to fall below levels required by the SEC, and that
the distribution will have no effect on the capitalization ratios of Southern
Company's operating subsidiaries. Southern Company has committed to the SEC that
it will not undertake the distribution if the distribution reduces the equity
component of Southern Company's consolidated capitalization below levels
required by the SEC.
If any state public service commission becomes concerned that the plan for
the distribution of our common stock by Southern Company may adversely affect
the consumers in its jurisdiction, the state commission may undertake to review
the plan of distribution. Even though the state commission may have no
jurisdiction over the distribution, Southern Company or us, any review may delay
or prevent Southern Company from completing the distribution.
It is possible that one or more regulatory authorizations for Southern
Company and us to conduct our operations may expire. The authorization under
PUHCA which allows us and our subsidiaries to pay dividends from unearned
surplus in accordance with applicable corporate law and applicable covenants to
security holders, has been extended and will expire June 30, 2001. If Southern
Company has not completed the distribution of our common stock by June 30, 2001,
and if the SEC does not extend the order beyond that date, cash may be trapped
in some of our subsidiaries, reducing our cash management flexibility and
increasing our need for working capital and external financing.
In addition, the SEC order providing the general authorization for Southern
Company to acquire our securities and authorizing us to undertake our business
of developing and owning and operating foreign utility companies, exempt
wholesale generators and energy-related subsidiaries is scheduled to expire on
December 31, 2000. Southern Company and we have filed for an extension of this
general authority. Other authorizations under PUHCA pertaining to our business
extend until the year 2003. Even though rules exempting certain acquisitions and
transactions from SEC approval may alleviate the effect of an expiration of the
SEC order, the effect of the expiration may be adverse to our business
operations.
Following the distribution we do not expect to be subject to PUHCA unless
or until we acquire the securities of a public utility company or public utility
assets that are not exempt as an exempt wholesale generator, foreign utility
company or qualifying facility. PUHCA, the Federal Power Act and applicable
state laws may limit Southern Company and its remaining subsidiaries' ability to
contract with or provide services to us.
Following the distribution of our stock by Southern Company, we will
compete with Southern Company. As a result of market information restrictions
imposed by the FERC Code of Conduct, we have not had access to market
intelligence concerning the Southeast region that is possessed by Southern
Company and other energy marketers that have been active in the Southeast region
for a number of years.
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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 would not constitute a foreign utility
company, exempt wholesale generator 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 qualifying facility
under PURPA. As a qualifying facility, Birchwood is exempted from most
provisions of the FPA and state laws relating to securities, rate and financial
regulation. PURPA requires electric utilities (i) to purchase electricity
generated by qualifying facilities 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 qualifying
facilities on a just, reasonable and non-discriminatory basis. To qualify for
qualifying facility status, the Birchwood facility must satisfy requirements
regarding the production of useful thermal energy as well as limitations on the
extent of ownership by utilities or utilities affiliates.
ENVIRONMENTAL REGULATION
Our operations are subject to extensive federal, state, local and foreign
laws and regulations relating to air quality, water quality, waste management,
natural resources and health and safety. Our projects and facilities in foreign
markets create exposures and obligations to the national, provincial and local
laws of each host country, including environmental standards and other
requirements imposed by these governments. Our compliance with these
environmental requirements necessitates significant capital and operating
expenditures related to monitoring, pollution control equipment, emission fees
and permitting at various operating facilities. Our expenditures, while not
prohibitive in the past, are anticipated to increase in the future along with
the increase in stricter standards, greater regulation, more extensive
permitting requirements and an increase in the number and types of assets
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we operate that are subject to environmental regulation. We cannot assure you
that future compliance with these environmental requirements will not adversely
affect our operations or financial condition.
Our operations in Europe are subject to comprehensive environmental
regulation similar to that in the United States, and these regulations are
expected to become more stringent in the future. Additionally, like many
countries of the world, the governments of China, the Philippines, Trinidad and
Tobago and several other countries recently have proposed increased
environmental regulation of many industrial activities, including increased
regulation of air quality, water quality and solid waste management. The scope
and extent of these newly proposed environmental regulations is unclear.
Over the past several years, the utility industry, state, federal and
foreign governments and international organizations have been concerned about
global climate change. Because our fossil fuel-fired plants emit carbon dioxide,
the costs of any "greenhouse gas" restrictions could adversely affect our
operations. The impact of the Kyoto Treaty on our domestic and foreign
facilities and operations remains uncertain.
The environmental laws and regulations in the United States illustrate the
comprehensive environmental regulations which govern our operations. Our most
significant environmental requirements in the U.S. result from the Clean Air Act
and the 1990 Clean Air Act Amendments. Under the Clean Air Act, we are required
to comply with a broad range of restrictions concerning air emissions, operating
practices and pollution control equipment. Several of our facilities are located
in metropolitan areas such as New York City, Boston, Chicago or San Francisco,
classified by EPA as not achieving the ambient air quality standards which
trigger the most stringent air regulation requirements.
In the future, we anticipate increased regulation of our facilities under
the Clean Air Act and applicable state laws and regulations concerning air
quality. EPA, several states and several foreign countries are in the process of
enacting more stringent air quality regulatory requirements. For example, EPA
recently promulgated a new regulation, known as the "Section 126 Rule," which
allocates nitrogen oxide emissions allowances to various electric generating
facilities in Delaware, Indiana, Kentucky, Maryland, Michigan, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Virginia, West Virginia and the
District of Columbia. We expect to incur additional 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 nitrogen oxide 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 nitrogen oxide and sulfur dioxide
emissions.
On November 3, 1999, the United States Department of Justice filed a
complaint against seven electric utilities, including two utility subsidiaries
of Southern Company, Alabama Power and Georgia Power, for alleged violations of
Clean Air Act requirements related to modifications of existing sources at 17
coal-fired utility generation stations located in the southern and midwestern
regions of the United States. The EPA also issued administrative notices of
violation alleging similar violations at eight other coal-fired power plants
owned by some of the electric utilities named as defendants in the lawsuit, and
also issued an administrative order to the Tennessee Valley Authority for
similar violations at seven of its coal-fired power plants. In early 2000, the
EPA filed a motion to amend its complaint to add the violations alleged in its
notice of violation, and to add Gulf Power, Mississippi Power and Savannah
Electric as defendants. To date, no lawsuits or administrative actions alleging
similar violations have been brought by the EPA against us, our subsidiaries or
any of our power plants. However, the State of New York has issued a notice of
violation to the previous owner of our Plant Lovett. For more information about
this matter, see "-- Legal Proceedings." We cannot assure
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you that lawsuits or other administrative actions against our power plants will
not be filed or taken in the future. If an action is filed against us or our
power plants, this could require substantial expenditures to bring our power
plants into compliance and have a material adverse effect on our financial
condition, cash flows and results of operations.
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
sets forth very comprehensive requirements for handling of solid and hazardous
wastes. The generation of electricity produces non-hazardous and hazardous
materials, and we incur substantial costs to store and dispose of waste
materials from our facilities. Recently, EPA indicated that it may begin to
regulate fossil fuel combustion materials, including types of coal ash, as
hazardous waste under the Resource Conservation and Recycling Act. 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, applies to our
facilities or other sites in the United States. The Comprehensive Environmental
Response, Compensation and Liability Act establishes a framework for dealing
with the cleanup of contaminated sites. Many states, like Massachusetts, New
Jersey and Georgia, have enacted state superfund statutes. Under these laws, we
are required to undertake, from time to time, corrective action for soil and
groundwater conditions identified at our facilities. We are currently
undertaking corrective action at some of our recently acquired facilities for
conditions that were identified during our due diligence related to the
acquisition. We have purchased environmental insurance to cover some of these
conditions, as well as other unknown environmental conditions, when we initially
acquired some of our facilities. We do not expect these corrective actions to
require significant expenditures.
In connection with asset acquisitions and other transactions, we also may
obtain or be required to provide indemnification against environmental
liabilities and responsibilities. Typically, indemnification we receive is
limited in scope and time period. In some transactions, we did not receive an
environmental indemnity. To minimize our exposure for such liabilities, we
conduct environmental assessments of the assets we wish to acquire or operate.
Thus far, we have not incurred any material environmental liabilities arising
from our acquisition or divestiture activities.
We have not incurred material costs for environmental remediation in the
past three years. We currently plan to spend approximately $50 million during
the remainder of 2000 and in 2001 to retrofit pollution control equipment on our
existing assets. We spent approximately $37 million during 1999 and the first
half of 2000 to retrofit pollution control equipment.
We believe we are in compliance in all material respects with applicable
environmental laws. However, while we believe our procedures and facilities
comply with applicable environmental laws and regulations, we cannot provide
assurances that additional costs will not be incurred as a result of new
interpretations or applications of existing laws and regulations or the
enactment of more stringent requirements.
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EMPLOYEES
At June 30, 2000, our corporate offices and majority owned or controlled
subsidiaries employed approximately 7,000 persons. This number includes
approximately 900 in the corporate headquarters in Atlanta and at SCEM and
approximately 6,100 at operating facilities. Approximately 520 of our domestic
employees are subject to collective bargaining agreements with one of the
following unions: International Brotherhood of Electrical Workers, Utilities
Workers of America or United Steel Workers. About 2,200 of our employees in
international business units belong to unions. These unions include the
International Brotherhood of Electrical Workers and Grand Bahamas Port Authority
Workers in the Bahamas; Oilfield Workers Trade Union and Senior Staff
Association in Trinidad and Tobago; UNISON, Amalgamated Engineering and
Electrical Union, General Municipal Boilermakers Union, Engineers and Managers
Association and Transport and General Workers Union in England; Sindicato de Luz
y Fuerza in Argentina; and Sindicato Arica-Parincota, Sindicato Trabajadores
Edelnor Iquique, Sindicato Trabajadores Segunda Region, Sindicato Edelnor S.A.
and Sindicato Ingenieros de Ejecucion in Chile. We believe we have satisfactory
relations with both union and non-union employees.
FACILITIES/PROPERTIES
Our corporate offices currently occupy approximately 242,000 square feet of
leased office space in Atlanta, Georgia. We are in the process of relocating our
corporate offices into a new two-building facility occupying approximately
357,000 square feet, currently under construction in Atlanta, Georgia. SCEM
began occupying the first completed phase of this building, a 67,000 square feet
state-of-the-art marketing and risk management facility, in December 1999. We
anticipate moving the remainder of our corporate offices to the second building,
a 290,000 square foot office building, between September and December 2000. We
have signed long-term leases for these facilities.
In addition to our corporate office space, we lease or own various real
property and facilities relating to our projects and our development activities.
Our project facilities are generally described under the project descriptions
contained elsewhere in this prospectus. We believe that we have satisfactory
title to our project facilities in accordance with standards generally accepted
in the energy industry, subject to exceptions which, in our opinion, would not
have a material adverse effect on the use or value of the facilities.
We believe that all of our existing office and generating facilities,
including the facilities under construction, are adequate for our needs through
calendar year 2000. If we require additional space, we believe that we will be
able to secure space on commercially reasonable terms without undue disruption
to our operations.
LEGAL PROCEEDINGS
In September 1999, the State of Minas Gerais, Brazil filed a lawsuit in a
Minas Gerais state court seeking temporary relief against Southern Electric
Brasil exercising voting and appointment rights under the shareholders agreement
between the state and Southern Electric Brasil regarding their interest in
CEMIG, as well as a permanent rescission of the agreement. The core issue in the
dispute is whether the shareholders agreement unconstitutionally transfers
control of CEMIG from the state to Southern Electric Brasil, which transfer
would have required specific legislative authorization. A lower court judge
denied the state's request, but one member of a three-judge State Appellate
Court granted a temporary injunction pending the outcome of the litigation
regarding rescission of the shareholders agreement. This injunction, however,
does not affect the status of the CEMIG directors appointed by Southern Electric
Brasil, as Southern Electric Brasil's right to appoint these directors is not
derived from the agreement. On March 23, 2000, the lower court judge in
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Minas Gerais ruled that the shareholders agreement was invalid. Southern
Electric Brasil has appealed 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 influence over the daily operations of CEMIG.
SE California and its subsidiaries SE Delta and SE Potrero acquired
generation assets from Pacific Gas and Electric in April 1999 subject to
reliability-must-run agreements. SE California assumed these agreements from
Pacific Gas and Electric subject to the outcome of a FERC proceeding initiated
in October 1997 that will determine the percentage of a $158.8 million annual
fixed revenue requirement to be paid to the SE California parties by the CAISO
under the reliability-must-run agreements. 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 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. A final FERC order in this
proceeding may be appealed to the U.S. Court of Appeals. The outcome of this
appeal cannot now be determined.
If SE California is unsuccessful in its appeal of the 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 June
30, 2000 would have been approximately $94 million and would have reduced net
income by approximately $33 million. These amounts do not include interest that
would be payable in the event of a refund. If SE California is unsuccessful in
its appeal, it plans to pursue other options available under the reliability
must-run agreements to mitigate the impact of the administrative law judge's
decision upon its future operations. The outcome of this appeal is uncertain,
and we cannot assure you that we will be successful.
On January 18, 2000, EPA published a new regulation, known as the "Section
126 Rule," which allocates nitrogen oxide emissions allowances to various
electric generating facilities in Delaware, Indiana, Kentucky, Maryland,
Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia,
West Virginia and the District of Columbia. This regulation becomes effective on
May 1, 2003. We believe that the nitrogen oxide allowances allocated to
Birchwood are incorrect due to EPA's use of incorrect data. On March 17, 2000,
Birchwood filed an appeal of the Section 126 Rule with EPA to challenge the
nitrogen oxide emission allowances for the Birchwood facility. A brief in
support of the appeal was filed on June 14, 2000. While waiting for EPA's formal
response, we are continuing with efforts to settle this dispute with EPA.
Along with several other electric generators which own facilities in New
York, in October 1999 we received an information request from the State of New
York concerning the air quality control implications of various repairs and
maintenance activities of SE New York at its Lovett facility. SE New York
responded fully to this request and provided all of the information requested by
the State. The State of New York issued notices of violation to some of the
utilities being investigated. The state issued a notice of violation to the
previous owner of Plant Lovett, Orange and Rockland Utilities, alleging
violations associated with the operation of Plant Lovett prior to the
acquisition of the plant by SE New York. To date, SE New York has not received a
notice of violation. We disagree with the allegations of violations in the
notice of violation issued to the previous owner. The
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notice of violation does not specify corrective actions which the State of New
York may require. Under the sales agreement with Orange and Rockland Utilities
for Plant Lovett, Orange and Rockland Utilities is responsible for fines and
penalties arising from historical operations, but SE New York may be responsible
for the cost of purchasing and installing emission control equipment, the cost
of which may be material. We are engaged in discussions with the State to
explore a resolution of this matter.
We acquired the State Line station in Hammond, Indiana from Commonwealth
Edison on December 31, 1997. On July 28, 1998, an explosion occurred causing a
fire and substantial damage to the plant. The precise cause and origin of the
explosion and fire are still under investigation. Thus far, seven personal
injury lawsuits have been filed against us and our affiliates. Five of these
lawsuits were filed in the Circuit Court in Cook County, Illinois in August and
September, 1998. We filed a motion to dismiss all five of these cases in 1998
for lack of "in personam" jurisdiction. The motion was denied in August 1999. In
October 1999, the Appellate Court of Illinois granted our petition for leave to
appeal. Briefs and reply briefs have been filed on the jurisdiction issue and
the parties presently await the setting of a date for oral argument, which is
anticipated to occur before the end of September. Given the posture of the
motion, no discovery has been allowed to date. The outcome of this motion cannot
now be determined. The two remaining cases were filed in Lake County Circuit
Court, Crown Point, Indiana, one in July 1998 and the other in April 2000. In
February 2000, one of the plaintiffs who originally filed in Indiana also filed
his case in Illinois. This plaintiff, however, will be forced to proceed in only
one forum.
The plaintiffs in all of these cases are seeking money damages for personal
injuries and related costs and expenses. The total special damages being sought
are approximately $8.3 million. The plaintiffs are also seeking unspecified
amounts for pain and suffering. The outcome of these proceedings cannot now be
determined and an estimated range of loss cannot be made.
Except for the CEMIG litigation, the SE California proceedings, the
Birchwood Section 126 issue, the SE New York information request, the State Line
litigation and the notice of violation issued to the previous owner of Plant
Lovett, we are not a party to any material legal proceedings. We experience
routine litigation from time to time in the normal course of our business, none
of which is expected to have a material adverse effect on our financial
condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our directors,
executive officers and key employees as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
A. W. Dahlberg.................... 60 Director and Chairman of the Board
S. Marce Fuller................... 40 President, Chief Executive Officer and Director
Raymond D. Hill................... 53 Executive Vice President and Chief Financial Officer
Richard J. Pershing............... 53 Executive Vice President and Chief Executive Officer,
Americas
Frederick D. Kuester.............. 50 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............ 47 Senior Vice President and Chief Technical Officer
Douglas L. Miller................. 49 Senior Vice President and General Counsel
James A. Ward..................... 48 Senior Vice President, Finance and Accounting
Edgardo A. Bautista............... 65 President, Southern Energy Holdings Philippines, Inc.
H. Allen Franklin................. 56 Director
Elmer B. Harris................... 61 Director
W. L. Westbrook................... 61 Director
A. D. Correll..................... 59 Proposed Director
William M. Hjerpe................. 48 Proposed Director
David J. Lesar.................... 47 Proposed Director
</TABLE>
A. W. DAHLBERG was elected our Chairman in August 2000 and has served as
one of our directors since April 1996. Mr. Dahlberg is considering whether to
continue as our Chairman following the distribution of our shares by Southern
Company. 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, our energy marketing and risk
management partnership, 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 January 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,
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acquisition, ownership and operation of energy generation investments and
marketing and risk management through SCEM. From November 1997 to October 1998,
he was one of our Senior Vice Presidents. Prior to joining us in 1992, Mr.
Pershing held various executive and management positions at Georgia Power. He
joined Southern Company in 1971.
FREDERICK D. KUESTER has been Chief Executive Officer, Asia-Pacific group,
since August 1999 and one of our Senior Vice Presidents since August 1999. He
oversees asset management and project development in the Asia-Pacific region. He
is also on the board of directors of SIPD, a power company in which we hold a
9.99% interest. In addition, since November 1998, he has served as Chief
Executive Officer of SE Asia-Pacific, one of the largest independent power
producers in Asia. From January 1997 to November 1998 Mr. Kuester served as
director of the commercial group at SE Asia-Pacific. Prior to that, Mr. Kuester
served as vice president of power generation for Mississippi Power Company, a
subsidiary of Southern Company. Mr. Kuester started his career at Southern
Company in 1971.
BARNEY S. RUSH has been Chief Executive Officer, Europe group and one of
our Senior Vice Presidents since August 1999. He is responsible for asset
management, business development and marketing and risk management operations
for the region. Mr. Rush is also chairman of the supervisory board of Bewag, the
German utility in which we have a 26% ownership interest. Until August 1999, he
served as vice president responsible for acquisitions and as managing director
of Southern Energy Development -- Europe, since May 1996 and September 1997,
respectively. Prior to joining us in May 1996, Mr. Rush was executive vice
president for business development and finance at Oxbow Power Corporation. He
has also held various positions at Lehman Brothers, including senior vice
president, in project finance and the utility and telecommunications group.
VANCE N. BOOKER has been our Senior Vice President, Administration and
External Affairs since August 1999. He is responsible for administration and
external affairs, which includes human resources, information resources,
corporate communications, economic development and corporate services. Mr.
Booker was previously our Vice President, Administration. Prior to joining us in
July 1996 he held various positions at Southern Company in strategic planning,
human resources, accounting and finance. Mr. Booker joined Southern Company in
1975.
ANDREW J. DEARMAN, III has been our Senior Vice President and Chief
Technical Officer since September 1999. He is responsible for our construction,
environmental, operations and maintenance technical support and safety programs.
Previously, from April 1997 until September 1999, Mr. Dearman was vice president
of power generation and delivery at Mississippi Power Company, a subsidiary of
Southern Company. From January 1995 to April 1997, he was division vice
president for Alabama Power Company, a subsidiary of Southern Company. Mr.
Dearman joined Southern Company in 1975.
DOUGLAS L. MILLER has been our Senior Vice President and General Counsel
since he joined us in October 1999. He directs outside counsel and oversees
company programs to comply with the laws and regulations of states and countries
where we conduct our business. From 1997 until he joined us in 1999, Mr. Miller
was managing partner of the Troutman Sanders LLP Hong Kong office where he
oversaw the Project Development and Finance Practice Group. Mr. Miller joined
Troutman Sanders in 1975.
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.
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EDGARDO A. BAUTISTA has been President of Southern Energy Holdings
Philippines, Inc., a wholly-owned subsidiary of SE Asia-Pacific, since shortly
after our acquisition of SE Asia-Pacific in January 1997. Since December 1997,
he has also been a member of the SE Asia-Pacific board of directors. In his
current role, Mr. Bautista provides the overall leadership for our business in
the Philippines. From 1995 to 1997 he was President and Director of Hopewell
Energy Philippines Corporation, a predecessor company to Southern Energy
Holdings Philippines, Inc. Mr. Bautista joined us in 1997.
H. ALLEN FRANKLIN has been one of our directors since May 1993. He also
serves as President and Chief Operating Officer of Southern Company, a position
he has held since June 1999. Mr. Franklin previously served as President and
Chief Executive Officer of Georgia Power, and executive vice president of
Southern Company from 1994 until June 1999. He is a director of SouthTrust
Corporation and Southern Company subsidiaries Alabama Power Company, Georgia
Power Company and Gulf Power Company. Mr. Franklin joined Southern Company in
1970.
ELMER B. HARRIS has been one of our directors since April 1997. He also
serves as Executive Vice President of Southern Company and is President and
Chief Executive Officer of Alabama Power, a subsidiary of Southern Company,
positions he has held since March 1989. Mr. Harris joined Southern Company in
1958. He is a director of Southern Company, Alabama Power Company and AmSouth
Bancorporation.
W. L. WESTBROOK has been one of our directors since May 1993. He also
serves as Financial Vice President, Chief Financial Officer and Treasurer of
Southern Company and Executive Vice President of Southern Company Services, a
subsidiary of Southern Company, positions he has held since April 1995. Mr.
Westbrook is responsible for accounting, finance, tax, investor relations,
treasury and risk management functions at Southern Company. Mr. Westbrook joined
Southern Company in 1964.
A. D. CORRELL will be appointed as an independent director of our board
upon the pricing of the common stock offering. Since May 1993, Mr. Correll has
been chief executive officer and president of Georgia-Pacific Corporation, a
manufacturer and distributor of building products, pulp and paper. He has been
chairman of the board of Georgia-Pacific since December 1993 and a director
since 1992. In addition, he has served as a director of Southern Company since
1994 and SunTrust Banks, Inc. since 1997. Upon becoming a member of our board of
directors, Mr. Correll will resign from Southern Company's board.
WILLIAM M. HJERPE will be appointed as an independent director of our board
upon the pricing of the common stock offering. Currently, Mr. Hjerpe is a
private investor. From March 1997 until October 1999, he served as president of
Honeywell Europe, Middle East and Africa, a subsidiary of Honeywell Inc. From
September 1994 until March 1997, Mr. Hjerpe was vice president and chief
financial officer of Honeywell. Mr. Hjerpe joined Honeywell in 1975 and served
in various financial and accounting positions, including executive level
positions since 1987.
DAVID J. LESAR will be appointed as an independent director of our board
upon the pricing of the common stock offering. On August 16, 2000, Mr. Lesar was
named chairman of the board, president and chief executive officer of
Halliburton Company, a diversified energy services company. Prior to that, he
served as president and chief executive officer of Halliburton, a position he
held since 1997. From September 1996 until June 1997 Mr. Lesar served as chief
executive officer and president of Brown & Root, Inc., a subsidiary of
Halliburton. From June 1995 until June 1997, he served as executive vice
president and chief financial officer of Halliburton. In addition, Mr. Lesar has
served as a director of Southern Company since 1998 and as a director of Lyondel
Chemical Company since July 2000. Upon becoming a member of our board of
directors, Mr. Lesar will resign from Southern Company's board.
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<PAGE> 132
BOARD STRUCTURE AND COMPENSATION
Beginning the day that Southern Company (or a majority-owned and controlled
subsidiary of Southern Company) ceases to own at least 33 1/3% of our common
stock, our board of directors will be divided into three classes serving
staggered three-year terms.
Directors who are also our employees or employees of Southern Company will
receive no remuneration for serving as directors or committee members. Our
non-employee directors will receive an annual retainer of $60,000 in our stock
and meeting fees of $2,500 for each board meeting and $1,250 for each committee
meeting. Directors may defer payment of their compensation. Directors do not
receive retirement benefits or health or life insurance.
BOARD COMMITTEES
Our board will have three standing committees: an audit committee, a
compensation committee and a nominating committee. Messrs. Correll, Hjerpe and
Lesar are expected to be appointed as the initial members of the audit
committee. Messrs. Correll, Hjerpe and Lesar will be appointed as the initial
members of the compensation committee. Messrs. Correll, Dahlberg and Hjerpe will
be appointed as the initial members of the nominating committee.
As additional persons join the board in connection with and following the
common stock offering, we expect that membership on some of these committees
will be modified and that we will complete the appointment of other members to
some of these committees. Upon the distribution of our common stock by Southern
Company, all of our directors who are directors or officers of Southern Company
will resign from their positions at either Southern Company or our company.
The nominating committee is charged with the responsibility for review and
oversight of the composition of our board and board committees. The nominating
committee will also make recommendations regarding the compensation of
directors. The audit committee will facilitate communication between the
internal and independent auditors and our board, recommend the independent
public accountants to audit our annual financial statements and will oversee the
annual audit. The audit committee will also oversee risk management and control
policies. The audit committee will also be responsible for acting on our behalf
in connection with transactions in which Southern Company has an interest
adverse to us. The compensation committee will establish compensation strategy,
administer compensation and employee benefit plans and determine the
compensation of the chief executive officer and other senior officers. Our board
may establish other committees from time to time to facilitate the management of
our business and affairs.
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<PAGE> 133
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our stock is currently owned by Southern Company and thus none of
our officers, directors and director nominees own any of our common stock.
The following table sets forth information as of December 31, 1999 with
respect to the beneficial ownership of the Southern Company common stock by each
director, each proposed director, the named executive officers, and all of our
directors, proposed directors and executive officers as a group. Except as
otherwise indicated in the footnotes, each individual has sole voting and
investment power with respect to the shares set forth in the following table.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED INCLUDE
----------------------------------
SHARES
INDIVIDUALS HAVE
SHARES PERCENT RIGHTS TO ACQUIRE SHARES HELD BY
BENEFICIALLY OF WITHIN FAMILY
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(2) 60 DAYS(3) MEMBERS(4)
------------------------ ------------ -------- ----------------- --------------
<S> <C> <C> <C> <C>
A. W. Dahlberg......................... 522,928 * 452,027 0
S. Marce Fuller........................ 23,842 * 19,650 0
Raymond D. Hill........................ 21,918 * 19,650 0
Richard J. Pershing.................... 44,685 * 19,650 0
Frederick D. Kuester................... 25,468 * 17,871 3,596
Barney S. Rush......................... 8,183 * 6,426 0
H. Allen Franklin...................... 220,337 * 191,114 0
Elmer B. Harris........................ 260,741 * 219,394 310
W. L. Westbrook........................ 116,450 * 48,959 76
A. D. Correll.......................... 22,407 * 0 0
William M. Hjerpe...................... 0 * 0 0
David J. Lesar......................... 1,580 * 0 0
Thomas G. Boren........................ 92,737 * 89,097 10
All executive officers, directors and
proposed directors as a group (14
persons)............................. 1,415,037 * 1,119,334 3,992
</TABLE>
-------------------------
* Less than 1% of outstanding shares.
(1) Beneficial ownership means the sole or shared power to vote, or to direct
the voting of, a security, or investment power with respect to a security,
or any combination thereof.
(2) Based on 648,627,046 shares of Southern Company common stock outstanding on
July 31, 2000.
(3) Indicates shares of the Company's common stock that executive officers have
the right to acquire within 60 days. Shares indicated are included in the
Shares Beneficially Owned column.
(4) Each director and officer disclaims any interest in the shares held by
family members. Shares indicated are included in the Shares Beneficially
Owned column.
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<PAGE> 134
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation information for the chief
executive officer and the four other executive officers who, based on salary and
bonus compensation, were the most highly compensated for the year ended December
31, 1999. All information set forth in this table reflects compensation earned
by these individuals for services with us and our subsidiaries for the year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- ---------------------------------------
RESTRICTED NUMBER OF
OTHER ANNUAL STOCK SECURITIES
SALARY BONUS COMPENSATION AWARDS UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(3) ($)(4) OPTIONS(5) PAYOUTS(6) COMPENSATION(7)
--------------------------- ---- -------- -------- ------------ ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S. Marce Fuller............ 1999 $341,462 $465,231 $ 8,872 $400,000 17,988(SO) -- $17,274
Chief Executive
Officer(1) 88,851(SEI)
Raymond D. Hill............ 1999 297,616 300,000 24,529 300,000 12,988(SO) -- 16,078
EVP and CFO 88,851(SEI)
Richard J. Pershing........ 1999 297,616 300,000 43,801 300,000 12,988(SO) -- 16,462
EVP, Americas Group 88,851(SEI)
Frederick D. Kuester....... 1999 240,635 300,000 -- 100,000 10,391(SO) 39,737 13,299
SVP, Asia-Pacific Group 52,375(SEI)
Barney S. Rush............. 1999 219,097 199,750 -- 100,000 7,689(SO) -- 11,874
SVP, Europe Group 46,919(SEI)
Thomas G. Boren............ 1999 235,577 256,667 56,143 -- 0(SO) -- 765,607
Chief Executive
Officer(2) 137,173(SEI)
</TABLE>
-------------------------
(1) S. Marce Fuller was named our president and chief executive officer on July
20, 1999.
(2) Thomas G. Boren served as our chief executive officer and executive vice
president of Southern Company until July 20, 1999. He retired on July 31,
1999. Upon his retirement, he was paid a severance amount of $750,000 and it
was agreed he would receive a pro-rata bonus through July 31, 1999 from the
Southern Energy Resources, Inc. Short-Term Incentive Plan for the 1999 plan
year. This has been paid and the amount ($256,667) is included in the above
table. Mr. Boren is also entitled to receive future payouts for awards under
the Southern Energy Resources, Inc. Deferred Incentive Compensation Plan and
the Southern Energy Resources, Inc. Value Creation Plan.
(3) No executive listed above received perquisites or personal benefits that
exceeded 25% of the total perquisites and other personal benefits reported
for that executive. This column includes the following earnings on Deferred
Incentive Compensation Plan balances that were deferred at the election of
the corresponding executive for 1999: Ms. Fuller, $7,726; Mr. Hill, $24,454;
Mr. Pershing, $25,149; and Mr. Boren, $49,561. The remaining amounts in this
column represent reimbursements during the fiscal year for the payment of
taxes.
(4) The amounts in the column reflect grants of phantom restricted stock in
1999. On December 31, 1999, the following named executive officers held
phantom restricted Southern Company stock, with a value at such date as
follows: Ms. Fuller, 15,570.31 shares, $365,902; Mr. Hill, 11,677.74 shares,
$274,427; and Mr. Pershing, 11,677.74 shares, $274,427. On December 31,
1999, the following named executive officers held our phantom stock, with a
value at such date as follows:
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<PAGE> 135
Mr. Kuester, 8,613.26 shares, $120,500; and Mr. Rush, 8,613.26 shares,
$120,500. Each of these grants is more fully described in the "-- Employment
Contracts" section.
(5) (SO) indicates options to acquire Southern Company common stock. (SEI)
indicates units granted under the Southern Energy, Inc. Value Creation Plan.
(6) Represents a payout to Mr. Kuester under the Southern Company Performance
Incentive Plan for the 4-year period ending December 31, 1999. The following
named executive officers deferred receipt of Deferred Incentive Compensation
Plan payouts due in 1999: Ms. Fuller, $56,587, Mr. Hill, $70,663, Mr.
Pershing, $70,663, and Mr. Boren, $141,324.
(7) Our contributions in 1999 to the Employee Savings Plan, Employee Stock
Ownership Plan and non-pension related accruals under the Supplemental
Benefit Plan, as well as the separation payment to Mr. Boren described in
footnote (2), are provided in the following table:
<TABLE>
<CAPTION>
TOTAL ALL
SEPARATION OTHER
NAME PAYMENT ESP($) ESOP($) SBP($) COMPENSATION
---- ---------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
S. Marce Fuller............................. -- 5,691 897 10,686 17,274
Raymond D. Hill............................. -- 7,200 897 7,981 16,078
Richard J. Pershing......................... -- 7,401 897 8,164 16,462
Frederick D. Kuester........................ -- 6,578 897 5,824 13,299
Barney S. Rush.............................. -- 6,891 897 4,086 11,874
Thomas G. Boren............................. 750,000 4,500 897 10,210 765,607
</TABLE>
SOUTHERN COMPANY STOCK OPTIONS
The following table shows all grants of options to acquire shares of
Southern Company common stock to the executive officers named in the summary
compensation table in the "-- Executive Compensation" section above in the year
ended December 31, 1999.
Unless exercised prior thereto, the options to purchase Southern Company
common stock reflected below will be replaced with options to purchase our
common stock in connection with the completion of the distribution. See
"Agreements Between Us and Southern Company -- Employee Matters Agreement."
SOUTHERN COMPANY OPTION GRANTS DURING FISCAL YEAR 1999
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR(2) ($/SH) DATE PRESENT VALUE(3)
---- -------------- ---------------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
S. Marce Fuller............... 17,988 0.85% $26.5625 07/19/2009 $113,145
Raymond D. Hill............... 12,988 0.62 26.5625 07/19/2009 81,695
Richard J. Pershing........... 12,988 0.62 26.5625 07/19/2009 81,695
Frederick D. Kuester.......... 10,391 0.49 26.5625 07/19/2009 65,360
Barney S. Rush................ 7,689 0.36 26.5625 07/19/2009 48,364
Thomas G. Boren............... 0 0.00 -- -- --
</TABLE>
-------------------------
(1) Stock option grants in Southern Company common stock were made from Southern
Company's Performance Stock Plan on July 19, 1999 and vest annually at a
rate of 33% on the anniversary date of the grant. Grants fully vest upon
termination because of death, total disability or
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<PAGE> 136
retirement. Exercise price is the average of the high and low fair market
value of Southern Company's common stock on the date granted.
(2) A total of 2,108,818 stock options were granted in 1999.
(3) Value was calculated using the Black-Scholes option valuation model. The
actual value, if any, ultimately realized depends on the market value of
Southern Company's common stock at a future date. Significant assumptions
are shown below.
<TABLE>
<CAPTION>
DISCOUNT FOR
FORFEITURE RISK:
RISK-FREE --------------------
RATE OF DIVIDEND BEFORE BEFORE
VOLATILITY RETURN OPPORTUNITY TERM VESTING EXPIRATION
---------- ----------------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
20.74% 5.79% 50% 10 years 7.79% 13.40%
</TABLE>
AGGREGATED SOUTHERN COMPANY OPTIONS EXERCISED IN 1999 AND YEAR-END OPTION VALUES
The following table shows aggregate exercises of options to purchase
Southern Company common stock in the year ended December 31, 1999 by the
executive officers named in the summary compensation table in the "-- Executive
Compensation" section above.
1999 SOUTHERN COMPANY OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller.................... 0 $0 19,650 32,660 $ 23,623 $11,258
Raymond D. Hill.................... 0 0 19,650 27,660 23,623 11,258
Richard J. Pershing................ 0 0 19,650 27,660 23,623 11,258
Frederick D. Kuester............... 0 0 17,871 20,217 25,403 7,884
Barney S. Rush..................... 0 0 6,426 14,240 9,450 4,725
Thomas G. Boren(2)................. 0 0 89,097 0 160,360 0
</TABLE>
-------------------------
(1) Represents the excess of the fair market value of Southern Company's common
stock of $23.50 per share, as of December 31, 1999, above the exercise price
of the options.
(2) Following the distribution, Mr. Boren's stock options will remain
exercisable for shares of Southern Company stock.
SOUTHERN ENERGY, INC. VALUE CREATION PLAN
In 1997, we initiated a long-term incentive plan, the Southern Energy, Inc.
value creation plan, which grants units to eligible employees to receive
appreciation over a base value. The value creation plan was designed to mimic a
stock option/stock appreciation rights plan in almost all manners except that
the valuation of units is done internally and participants do not have a right
to actual ownership in our company.
Employees have been granted two types of units: standard units, which, when
exercised, pay the employee any appreciation over a fixed base value, and
indexed units which, when exercised, pay the
133
<PAGE> 137
eligible employee for any appreciation over a base value which increases each
year by 13%. Standard units vest 25% per year for four years, and indexed units
vest 100% after four years.
The base value of a unit is set at the plan value on the date of grant. The
base value is the exercise price of the unit and does not fluctuate over the
term of the unit (except as stated in the paragraph above).
The plan value is determined once per year and is based on our discounted
future cash flows. The discounted cash flow calculation is computed by us and
verified by our independent auditors. The gain to an employee is equal to the
amount (if any) by which the plan value exceeds a unit's base value.
For each unit, we record compensation expense for the amount by which the
plan value is in excess of the base price, taking vesting into account. As of
December 31, 1999, we had 3.1 million standard units outstanding at an average
base price of $10.67 per unit and 3.0 million indexed units outstanding at an
average base price of $12.77 per unit.
For further discussion on how the outstanding units currently awarded under
the value creation plan will be treated following this transaction, see the
section below entitled "-- Value Creation Plan Conversion."
The table below describes the units awarded by the compensation committee
under the value creation plan to the executive officers named in the summary
compensation table in the "-- Executive Compensation" section above.
VALUE CREATION PLAN UNITS GRANTED DURING FISCAL YEAR 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF BASE OF BASE VALUE
TOTAL UNITS PRICE APPRECIATION FOR UNIT
GRANTED TO (EXERCISE TERM
NUMBER OF EMPLOYEES IN PRICE) EXPIRATION -------------------------
NAME UNITS GRANTED (1) FISCAL YEAR (2) ($/SH) DATE 5% 10%
---- ----------------- --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller.......... 88,851 5.0% $11.61 6/30/2009 649,882 1,640,189
Raymond D. Hill.......... 88,851 5.0 11.61 6/30/2009 649,882 1,640,189
Richard J. Pershing...... 88,851 5.0 11.61 6/30/2009 649,882 1,640,189
Frederick D. Kuester..... 52,375 2.9 11.61 6/30/2009 383,085 966,842
Barney S. Rush........... 46,919 2.6 11.61 6/30/2009 343,180 866,124
Thomas G. Boren.......... 137,173 7.7 11.61 6/30/2009 1,003,324 2,532,213
</TABLE>
-------------------------
(1) The above value creation plan units were granted on March 15, 1999 with a
base price set at $11.61 (the current plan value). These units vest annually
at a rate of 25% on each anniversary of their grant.
(2) Percentages based on a total of 1,781,803 units granted in 1999, consisting
of 1,456,665 standard units and 325,138 indexed units. No indexed units were
granted to the named executive officers.
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<PAGE> 138
The following table shows aggregate exercises of units in the year ended
December 31, 1999 by the executive officers named in the summary compensation
table in the "-- Executive Compensation" section above.
AGGREGATED UNITS EXERCISED IN 1999 AND YEAR END UNIT VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY UNITS AT
NUMBER OF UNITS AT DECEMBER 31,
NUMBER OF DECEMBER 31, 1999 (1) 1999 (2)
UNITS VALUE --------------------------- ----------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Marce Fuller............. 0 $0 40,128(S) 163,836(S) $164,817(S) $524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Raymond D. Hill............. 0 0 40,128(S) 163,836(S) 164,817(S) 524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Richard J. Pershing......... 0 0 40,128(S) 163,836(S) 164,817(S) 524,772(S)
0(I) 453,995(I) 0(I) 0(I)
Frederick D. Kuester........ 0 0 26,675(S) 103,059(S) 109,675(S) 336,605(S)
0(I) 58,685(I) 0(I) 0(I)
Barney S. Rush.............. 0 0 26,597(S) 113,031(S) 111,452(S) 391,458(S)
0(I) 27,357(I) 0(I) 0(I)
Thomas G. Boren............. 0 0 69,812(S) 270,343(S) 287,102(S) 883,479(S)
0(I) 762,712(I) 0(I) 0(I)
</TABLE>
-------------------------
(1) (S) = Standard Units. (I) = Indexed Units.
(2) Valued at the December 31, 1999 plan value of $13.99.
LONG-TERM INCENTIVE PLAN COMPENSATION
The following table sets forth information concerning awards made in the
year ended December 31, 1999 under the employment contracts described below to
each of the executive officers named in the summary compensation table in the
"-- Executive Compensation" section above.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR OTHER PERIOD
NUMBER OF SHARES, UNTIL MATURATION
UNITS OR OTHER RIGHTS OR PAYOUT
--------------------- ----------------------------
<S> <C> <C>
S. Marce Fuller................................... 15,570.31 July 2003
Raymond D. Hill................................... 11,677.74 March 2003
Richard J. Pershing............................... 11,677.74 May 2003
Frederick D. Kuester.............................. 8,613.26 January 2003
Barney S. Rush.................................... 8,613.26 January 2003
Thomas G. Boren................................... -- --
</TABLE>
The awards to Ms. Fuller and Messrs. Hill and Pershing represent phantom
restricted stock which is based on the value of Southern Company common stock.
The awards to Messrs. Kuester and Rush represent phantom stock which is based on
the base value under our value creation plan. Each of those awards is more fully
described in the "-- Employment Contracts" section below.
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<PAGE> 139
EMPLOYMENT CONTRACTS
The only compensation provided for in each of the employment agreements
discussed below is awards of phantom stock. In addition, the agreements with
Messrs. Hill and Pershing provide that additional years of service may be
included in pensions and supplemental executive retirement plan calculations.
The agreements do not provide for any payments of salary, bonus, other
compensation or severance payments. These agreements terminate when the employee
terminates his or her employment with us, or when the phantom stock is paid,
whichever occurs first. All of the awards granted under the following agreements
are forfeited upon termination for cause or resignation. Awards are paid
immediately if the employee dies, becomes disabled, or is terminated without
cause. It is anticipated that awards of Southern Company phantom stock granted
under the following agreements will convert to awards of our phantom stock upon
the distribution of our stock by Southern Company.
S. MARCE FULLER. On October 5, 1999, Southern Company, Southern Energy
Resources, Inc. and Ms. Fuller entered into an employment agreement. The
agreement provides for the award of $400,000 in phantom Southern Company stock,
valued as of the date of the agreement and paid out on July 1, 2003 if Ms.
Fuller is still employed by us. Should Ms. Fuller meet this criterion, she will
receive a payment of the phantom stock in cash, valued as of July 1, 2003,
including the reinvestment of any dividends paid during the period of the
agreement. In addition, the taxes due by Ms. Fuller for this payment will be
grossed up if certain goals are met. The goals for this agreement are to meet
and exceed net income and return on equity targets for the next three fiscal
years (2000, 2001, 2002). The targets for each of these goals will be determined
prior to the beginning of each year and will be the same as the goals for our
short-term incentive plan. Our board of directors, in conjunction with Southern
Company's board of directors, will determine whether or not these targets have
been achieved. This agreement will terminate at the earlier of (1) when Ms.
Fuller terminates her employment with us or (2) when the phantom stock is paid.
MESSRS. HILL AND PERSHING. In October 1999, we entered into compensation
agreements with Raymond D. Hill and Richard J. Pershing. Each of these
agreements provides for an award of $300,000 in phantom Southern Company stock,
valued as of the date of the agreement. Mr. Hill will receive the phantom stock
payment on March 1, 2003 if he is still employed by us on that date, and Mr.
Pershing will receive the phantom stock payment on May 1, 2003 if he is still
employed by us on that date. In addition, if Mr. Hill is still employed by us on
March 1, 2003, his retirement payments are calculated as if 10 years of
additional service are included in the pension and supplemental executive
retirement plan calculations. If Mr. Pershing is still employed by us on
November 1, 2002, his retirement payments are calculated as if three years of
additional service are included in the pension and supplemental executive
retirement plan calculations. These agreements terminate at the earlier of (1)
when Mr. Hill or Mr. Pershing terminates his employment with us or (2) when the
phantom stock is paid.
MESSRS. KUESTER AND RUSH. Effective December 9, 1999, we also entered into
compensation agreements with Frederick D. Kuester and Barney Rush. Each of these
agreements provide for the award of $100,000 in our phantom stock, at the
December 31, 1998 base value under our value creation plan. Under the terms of
these agreements, if the executives are still employed by us on January 1, 2003,
this award will be paid at the then current base value under our value creation
plan. In addition, Mr. Kuester has an agreement in place that would immediately
vest all of his outstanding value creation plan units upon his return from his
current assignment at SE Asia-Pacific. It is anticipated that awards based on
the base value under our value creation plan will be converted to awards of our
phantom stock upon the common stock offering.
136
<PAGE> 140
CHANGE IN CONTROL ARRANGEMENTS
Our executive officers named in the summary compensation table in the
"-- Executive Compensation" section above have change in control agreements that
are effective upon a change in control of either Southern Company or us. Neither
the common stock offering nor the distribution of our shares by Southern Company
will constitute a change in control under those agreements.
Within two years following a change in control of us, if an executive is
involuntarily terminated, other than for cause, or voluntarily terminated for
good reason, which is defined as a material diminution of duties, a significant
reduction in compensation or benefits or relocation, the agreements provide for:
- a lump sum payment of three times annual compensation for Ms. Fuller and
Messrs. Hill and Pershing and two times annual compensation for Messrs.
Kuester and Rush,
- up to five years' coverage under group health and life insurance plans,
- immediate vesting of all stock options and stock appreciation rights
previously granted,
- payment of any accrued long-term and short-term bonuses and dividend
equivalents, and
- payment of any excise tax liability incurred as a result of payments made
under the agreement for Ms. Fuller and Messrs. Hill and Pershing.
Payments of any excise tax liability incurred as a result of payments
made under this agreement are capped at IRS limits for Messrs. Kuester
and Rush.
The Southern Company and Southern Energy plans also provide for pro-rata
payments at not less than target-level performance for some incentive plans if a
change in control occurs and the plans are not continued or replaced with
comparable plans.
At such time as Southern Company owns less than 50% of our stock, we intend
to replace the existing agreements with similar arrangements for our executive
officers and other employees. We intend to maintain the current definition of
"change in control," which includes the following events:
- acquisition by a person of at least 20% of our stock,
- a defined change in the majority of the members of our board of
directors,
- a merger or other business combination that results in our stockholders
immediately before the merger owning less than 65% of the voting power
after the merger, or
- a sale of substantially all of our assets.
INCENTIVE PLANS
Following the common stock offering, we plan to grant, within the
provisions of the omnibus plan (discussed further below) annual short-term
incentive opportunities and annual awards of stock options. We intend for these
targeted incentive opportunities to be such that total compensation approximates
the median for similarly situated executives at similar companies.
The short-term incentive plan will measure, for each executive officer
named in the summary compensation table, primarily our net income and return on
equity. A smaller portion of the incentive opportunities will be based on
individual performance and, until full distribution of our stock by Southern
Company, Southern Company's earnings per share.
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SOUTHERN ENERGY OMNIBUS INCENTIVE COMPENSATION PLAN
We have adopted, with the approval of Southern Company as our sole
stockholder, the Southern Energy Omnibus Incentive Plan. The omnibus plan will
be administered by our board of directors or the compensation committee of our
board. The following is a description of the material provisions of the omnibus
plan.
The objectives of the omnibus plan are to:
- optimize our profitability and growth through annual and long-term
incentives that are consistent with our goals, are market based and link
the personal interests of participants to those of our stockholders,
- provide participants with an incentive for excellence in individual
performance, and
- promote teamwork among participants.
The omnibus plan is further intended to provide flexibility to us in our
ability to attract, motivate and retain the services of participants who make
significant contributions to our success and allow participants to share in our
success.
Our board will determine eligibility for awards under the omnibus plan for
all of our employees, officers and directors. The omnibus plan permits grants of
stock options, restricted stock, stock appreciation rights (SARs), performance
units (PUs), performance shares (PSs) and/or cash-based awards to eligible
participants in amounts and upon terms, and at any time and from time to time,
as determined by our board.
A total of 32,000,000 shares are reserved for issuance under the omnibus
plan. Shares received upon exercise of a stock option may be newly issued
shares, treasury shares or shares obtained by us through purchases on the open
market. It is anticipated that approximately 450 employees initially will
participate in the omnibus plan.
Options granted under the omnibus plan may be either incentive stock
options (ISOs) or non-qualified stock options, as determined by the board. ISOs
are options intended to qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (Internal
Revenue Code).
The terms of any option will be determined by the board, but no ISO may be
exercised later than 10 years after the date of grant. Options shall be
exercisable only in accordance with the terms and conditions established by the
board at the time of the grant.
Our board may grant SARs, PUs, PSs or cash-based awards to individuals,
from time to time, in amounts as it may determine. Each SAR or PS relates to one
share of our common stock, subject to adjustments described in the omnibus plan.
The value of a PU will be at the discretion of the board. SARs, PUs, PSs and
cash-based awards will be awarded without consideration other than the rendering
of services, unless the board decides otherwise. SARs, PUs, PSs and cash-based
awards shall vest, subject to the satisfaction of various conditions, at the
time or times determined by the board. In addition, the board may establish
performance vesting criteria with respect to all or any portion of a grant of
SARs, PUs, PSs and cash-based awards based on business criteria set forth in the
omnibus plan.
Awards which are subject to Section 162(m) of the Internal Revenue Code are
intended to qualify as performance based under that section and the provisions
of these awards will be interpreted in a manner consistent with that intent to
the extent appropriate.
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Our board generally has the power and authority to amend, modify, suspend
or terminate the omnibus plan at any time without the approval of our
stockholders, subject to applicable federal securities and tax law limitations
and NYSE regulations.
SOUTHERN ENERGY EMPLOYEE STOCK PURCHASE PLAN
In order to encourage our employees to become stockholders, we have
established the Southern Energy Stock Purchase Plan. This plan is intended to
comply with Section 423 of the Internal Revenue Code and has been approved by
our current shareholder, Southern Company.
This plan will permit eligible employees to purchase our common stock
through payroll deductions at a price per share which is equal to the lesser of
85% of the fair market value of the common stock on the first or last day of an
offering period. Each offering period will be up to, but not longer than 2
years.
Under this plan, participants will be permitted to purchase shares of
common stock with an aggregate fair market value of no more than $25,000 in any
one calendar year.
There are a total of 4,000,000 shares reserved for issuance under this
plan. The compensation committee of our board will administer this plan.
VALUE CREATION PLAN CONVERSION
Upon the common stock offering, all standard units outstanding under our
value creation plan will be converted into options to purchase our stock and all
indexed units will be converted into stock appreciation rights. The conversion
will be made at the plan's final base value, maintaining the same face value.
When converted, each option will maintain its in-the-money value and other
material terms (such as the length of a unit's term and vesting). The plan's
base value will be determined by Southern Company's Compensation Committee based
on our most recent discounted cash flow analysis.
Approximately 250 employees participate in this plan and will become stock
option holders as a result of the conversion. These grants will be made pursuant
to the Southern Energy Omnibus Incentive Compensation Plan.
INITIAL EQUITY GRANTS
In connection with the common stock offering, and in order to provide
incentive and retention for employees going forward, we will make grants of
performance restricted stock, stock units or stock options to approximately 450
employees prior to the common stock 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 of the common stock,
and will vest 33% on each of the first three anniversaries of the date of grant.
We anticipate that the grants of performance restricted stock and/or units will
vest 20% each time our stock price increases 20% over our initial public
offering price. We intend to make initial equity grants with a face value of
approximately $80,000,000. Of this, approximately $6,500,000 will be made in the
form of performance-restricted stock and/or performance-restricted stock units.
The remaining, $73,500,000 will be made in stock options.
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DEFERRED COMPENSATION PLAN
We have, through Southern Company, a voluntary deferred compensation plan
which allows executives to forgo current compensation (base salary and annual
incentives) and invest it on a phantom basis in Southern Company stock or a
prime rate fund. As required, any amounts deferred in 1999 are also included in
the appropriate columns of the summary compensation table. The balances under
the Southern Company deferred compensation plan for named officers as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
S. Marce Fuller............................................. $ 237,206
Raymond D. Hill............................................. 1,478,798
Richard J. Pershing......................................... 52,741
Frederick D. Kuester........................................ 465,428
Barney S. Rush.............................................. 0
Thomas G. Boren............................................. 0
</TABLE>
After the common stock offering, we intend to establish a similar plan and
these amounts will be transferred into the plan we establish.
DEFERRED INCENTIVE COMPENSATION PLAN
We maintain a Deferred Incentive Compensation Plan in which cash incentive
awards paid to participants may be deferred. No new awards paid to participants
can be deferred in the plan. Balances grow at the rate of our value increase
determined under our value creation plan. The plan has approximately 20
participants but no new participants are anticipated to become eligible. We will
continue this plan according to its terms with our public stock values replacing
phantom values.
The balances under the Southern Energy deferred incentive compensation plan
for named officers as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
S. Marce Fuller............................................. $ 358,425
Raymond D. Hill............................................. 555,244
Richard J. Pershing......................................... 559,331
Frederick D. Kuester........................................ 0
Barney S. Rush.............................................. 61,471
Thomas G. Boren............................................. 928,590
</TABLE>
PENSION PLANS
Our employees participate in the tax-qualified Southern Company Pension
Plan. Our benefit liabilities and pension assets are separately accounted for as
if our employees were in a separate pension plan. This separate accounting will
be continued until no later than the full distribution of our stock by Southern
Company. At that time, Southern Company will transfer from its pension plan our
employees' benefit liabilities and related assets (in an amount not less than
that required by the relevant legal requirements) to a tax-qualified pension
plan sponsored by us. Our pension plan will provide employees benefits that are
substantially the same as the benefits provided to them under the Southern
Company plan.
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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 annual bonus in
excess of 15% of base salary.
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>
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RELATIONSHIP WITH SOUTHERN COMPANY AND RELATED TRANSACTIONS
We have agreements with Southern Company Services, Inc. (a wholly owned
subsidiary of Southern Company) and each of the operating companies owned by
Southern Company under which those companies provide the following services to
us at cost: general engineering, design engineering, accounting and statistical
budgeting, business promotion and public relations, systems and procedures,
training, and administrative and financial services. In addition to these
services, facilities of Southern Company subsidiaries are made available to us
and our customers. We reimburse Southern Company subsidiaries at cost for these
services. Such costs amounted to approximately $20 million during 1999. As of
June 30, 2000, such costs have totalled $11.4 million during the current fiscal
year.
During 1999, we incurred interest expense on a note payable to Southern
Company of $37 million. We repaid the principal and interest on the note in
1999.
Our special purpose financing subsidiaries have issued subsidiary obligated
mandatorily redeemable preferred securities. Substantially all of the assets of
these special financing entities are junior subordinated notes issued by us. We
have loaned $950 million of the proceeds from the issuance of these subsidiary
obligated mandatorily redeemable preferred securities and an additional $30
million related to equity to Southern Company. Payment terms and interest rates
on the notes receivable from Southern Company are identical to the related
preferred securities. The notes are due between 2027 and 2037 with fixed
interest rates between 6.875% and 8.19%.
Periodically, we borrow funds from Southern Company to finance acquisitions
or working capital needs. We pay interest to Southern Company based on Southern
Company's short-term borrowing rate. No amounts were outstanding at December 31,
1999.
We and the other subsidiaries of Southern Company file a consolidated
federal income tax return. Under a joint income tax agreement, each company's
current and deferred tax expense is computed on a stand alone basis. Under this
agreement, we received tax allocation payments from Southern Company of
approximately $99 million during 1999.
For purposes of governing on-going relationships between us and Southern
Company, we will enter into, or continue in effect, various agreements and
relationships, including those described in this prospectus. The agreements
described below were negotiated in the context of our separation from Southern
Company and therefore are not the result of arm's-length negotiations between
independent parties.
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AGREEMENTS BETWEEN US AND SOUTHERN COMPANY
We have provided below a summary description of the master separation and
distribution agreement (referred to as the separation agreement) that we have
entered into with Southern Company, as well as key related agreements. Until the
distribution of our shares by Southern Company, these agreements, including the
pricing of services to be provided to us by Southern Company, will be subject to
the jurisdiction of the SEC under PUHCA. We and Southern Company have filed a
declaration with the SEC seeking affirmative authorization of these agreements
to the extent the SEC deems necessary. Southern Company has stated that it does
not intend to effect the distribution until the SEC issues an order making the
declaration effective.
This summary describes the material terms of these agreements, but may omit
a term or provision that you would consider important. We encourage you to read
the full text of these agreements, which have been filed with the SEC as
exhibits to the registration statement of which this prospectus is a part.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The master separation and distribution agreement contains the key
provisions relating to the separation, the common stock offering and the
distribution.
THE SEPARATION. The separation agreement became effective, and we began
operating independently from Southern Company, as of September 1, 2000. This
date is referred to as the separation date. Southern Company will deliver
additional agreements governing various interim and ongoing relationships
between Southern Company and us following the separation date. The ancillary
agreements include:
- a transitional services agreement,
- an indemnification and insurance matters agreement,
- a technology and intellectual property ownership and license agreement,
- a confidential disclosure agreement,
- an employee matters agreement,
- a tax indemnification agreement,
- a registration rights agreement, and
- agreements providing for the transfer of SE Finance and Capital Funding to
Southern Company.
To the extent that the terms of any of these ancillary agreements conflict
with the separation agreement, the terms of these ancillary agreements govern.
These agreements are described more fully below.
THE COMMON STOCK OFFERING. Under the separation agreement, we are
obligated to use our reasonable commercial efforts to satisfy the following
conditions prior to the consummation of the common stock offering (any of which
may be waived by Southern Company):
- the registration statement containing the common stock prospectus must be
effective,
- applicable state and foreign securities laws must be satisfied,
- our common stock must be approved for listing on the New York Stock
Exchange,
- all conditions to the obligations of the parties under the underwriting
agreement must have been met or waived,
- Southern Company must be satisfied that it will own more than 80% of our
stock after the common stock offering and must be satisfied that the
distribution will be tax free to it and to its U.S. stockholders,
- all required government approvals must be in effect,
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- no legal restraints may exist preventing the separation or the common
stock offering or any other transactions contemplated by the separation
agreement,
- the separation must have occurred, and
- the separation agreement must not have been terminated.
THE DISTRIBUTION. Within 12 months after the common stock offering,
Southern Company intends to distribute the remaining shares of our common stock
to its stockholders on a pro rata basis. We will prepare an information
statement with Southern Company and send it to Southern Company's stockholders
before the distribution becomes effective. The information statement will inform
the stockholders of the distribution and its specifics. Southern Company may, in
its sole discretion, change the terms of the distribution, including the
distribution date, or decide not to complete the distribution. Southern Company
intends to consummate the distribution only if the following conditions are met
(any of which may be waived by Southern Company):
- the IRS must have issued a favorable tax ruling on the tax-free status of
the transaction to Southern Company and its U.S. stockholders and the
transaction qualifies as a tax-free distribution under Section 355 of the
Internal Revenue Code,
- all required government approvals may be in effect,
- no legal restraints may exist preventing the distribution, and
- nothing has happened in the intervening time between the common stock
offering and the distribution that makes the distribution harmful to
Southern Company or its stockholders.
On August 1, 2000, we and Southern Company received a ruling from the IRS
that the distribution will be tax-free to Southern Company and its stockholders
for United States federal income tax purposes.
COVENANTS BETWEEN SOUTHERN COMPANY AND US. The separation agreement
includes covenants obligating us and Southern Company to cooperate in the
exchange of information, in auditing practices, to resolve disputes in
particular ways and other matters.
INFORMATION EXCHANGE. Both we and Southern Company have agreed to share
information with each other, at no cost to the requesting party, for the
following purposes, and to avoid doing so in a manner that would be commercially
detrimental:
- each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements,
- each party will retain records that may be beneficial to the other party
for a specified period of time. If the records are going to be destroyed,
the destroying party will give the other party an opportunity to retrieve
all relevant information from the records, and
- each party will do its best to provide the other party with personnel,
directors, officers or agents for use as witnesses in legal proceedings.
AUDITING PRACTICES. For any financial reporting period in which we are a
subsidiary of Southern Company, we have agreed to:
- not change independent accounting firms without Southern Company's prior
consent,
- use reasonable commercial efforts to cause our auditors to date their
opinion on our audited annual financial statements on the same date as
Southern Company's auditors' date their opinion on Southern Company's
consolidated financial statements,
- provide Southern Company with all relevant information to enable Southern
Company to prepare their consolidated financial statements (and Southern
Company has agreed to provide us all relevant information to enable us to
prepare our financial statements),
- grant each other's internal auditors access to our records, and
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- notify each other of any change in our accounting principles.
DISPUTE RESOLUTION. If problems arise between us and Southern Company,
both parties have agreed to the following procedures:
- the parties will make a good faith effort to first resolve the dispute
through negotiation,
- if negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation, and
- if mediation fails, the parties can resort to litigation. In addition,
nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would substantially
disadvantage that party.
REGULATORY MATTERS. We and Southern Company have agreed to cooperate in
various respects to obtain any required governmental approvals and to achieve
the intended regulatory effect of the distribution. We also have agreed that,
until 18 months after the date on which Southern Company no longer holds at
least 33 1/3% of our outstanding common stock, we will not initiate, intervene
in or participate in specified proceedings or matters before the FERC or any
agency or legislature of the states of Alabama, Florida, Georgia or Mississippi
which involve Southern Company or any of its subsidiaries.
SOUTHERN ENERGY BOARD REPRESENTATION. Although Southern Company intends to
distribute the remaining shares of our common stock that it holds to its
stockholders, we cannot be certain of whether or when the distribution will
occur. Consequently, we have agreed that if Southern Company should own in the
future more than 25% but less than 50% of our outstanding common shares,
Southern Company will be entitled to designate up to two persons to be nominated
for election to our board of directors. This right will only be available if and
to the extent Southern Company is not otherwise already represented on our board
of directors in a class of directors that is not up for election at that time.
CREDIT SUPPORT OBLIGATIONS. Southern Company has agreed to continue credit
support arrangements with respect to our existing business and to provide
limited additional credit support for certain of our subsidiaries until we are
no longer a subsidiary of Southern Company. We will pay Southern Company a fee
based on the amount of the credit support obligations then outstanding for the
maintenance of these credit support obligations after we are no longer a
subsidiary of Southern Company.
EXPENSES. We will pay all underwriting fees, discounts and commissions
incurred for the common stock offering. Southern Company will pay all other
out-of-pocket costs related to the common stock offering. Southern Company will
also pay all underwriting fees, discounts and commissions, if any, and other
out-of-pocket costs and expenses related to 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 the common stock offering. The
separation agreement and all ancillary agreements may be terminated at any time
after the closing of the common stock offering only with the consent of Southern
Company and us. As long as we are controlled by Southern Company, Southern
Company will be able to require us to terminate or amend these agreements.
TRANSITIONAL SERVICES AGREEMENT
Southern Company will provide various interim services to us, including
financial, accounting, engineering, information technology, legal and other
services, in a manner similar to the manner in
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which such services were provided to us prior to the separation. The
transitional services generally will be provided for a fee equal to the greater
of the cost, including the actual direct and indirect costs, of providing the
services or the market value for such services.
These transitional services will generally have a term of two years or less
from the date of separation. However, some transitional services, including
those for engineering services and payroll and information technology services,
may be extended beyond the initial two-year period.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
GENERAL RELEASE OF PRE-SEPARATION CLAIMS. Effective as of the separation
date, except for contractual agreements between us and Southern Company, we will
release Southern Company and its affiliates, agents, successors and assigns, and
Southern Company will release us and our affiliates, agents, successors and
assigns, from any liabilities arising from events occurring on or before the
separation date, including events occurring on or before the separation date in
connection with the activities to implement the separation, the common stock
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 the common stock 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 the common
stock offering,
- any breach by Southern Company of the separation agreement or any
ancillary agreement, and
- any liabilities of Southern Company other than the credit support
arrangements provided by Southern Company on our behalf.
The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.
INSURANCE MATTERS. The agreement also contains provisions governing our
insurance coverage from the separation date until the first date on which
Southern Company owns less than 50% of our outstanding common stock. In general,
we agree to reimburse Southern Company for premium expenses related to insurance
coverage during this period. Prior to the distribution, Southern Company will
maintain insurance policies on our behalf that are generally comparable to those
currently maintained for our benefit at Southern Company.
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Between our initial public offering and the distribution of our common
stock by Southern Company, our directors and officers will be insured by the
Southern Company directors and officers liability insurance program. Upon the
distribution of our common stock by Southern Company, we will effectuate a
separate insurance program for our directors and officers. Any historic
liabilities of our directors and officers arising from wrongful acts prior to
the distribution will remain insured by the Southern Company directors and
officers liability insurance program.
ASSIGNMENT. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent of the other party.
TECHNOLOGY AND INTELLECTUAL PROPERTY OWNERSHIP AND LICENSE AGREEMENT
We have entered into an agreement with Southern Company to govern the
division, transfer and license of technology used in our business. Pursuant to
this agreement, Southern Company has licensed to us technology owned by Southern
Company.
Also, Southern Company has agreed to license to us various Southern
Company-owned trademarks, including "Southern Energy," "Southern Company,"
"Southern Company Energy Marketing," "Energy to Serve Your World" and the
"Triangle Logo." The license to use these marks expires as of the change of
control date and thereafter we may use these marks only if Southern Company
grants us an extension of the license. Southern Company may not use the
"Southern Energy" or "Southern Company Energy Marketing" marks for 18 months
from the date we cease use of those marks.
Southern Company also has transferred and/or agreed to license to us other
technology (which includes copyrights, database rights, computer software,
domain names and other intellectual property rights, with the exception of
trademarks and patents) owned by Southern Company and currently used by us.
Southern Company will also use reasonable efforts to have us made a party to or
sublicense other agreements wherein Southern Company is a licensee for
technology we currently use.
CONFIDENTIAL DISCLOSURE AGREEMENT
The confidential disclosure agreement provides that both parties agree not
to disclose confidential information of the other party except in specific
circumstances.
EMPLOYEE MATTERS AGREEMENT
We have entered into an employee matters agreement with Southern Company to
allocate assets, liabilities and responsibilities relating to our current and
former employees and to address their participation in the benefit plans,
including stock plans, that Southern Company currently sponsors and maintains.
All of our eligible employees not subject to a collective bargaining
agreement will continue to participate in the Southern Company benefit plans. We
will establish comparable benefit plans for our current and former employees not
later than the earlier to occur of the distribution or the first date on which
Southern Company owns less than 80% of our outstanding common stock (the "group
change date"). Certain of our plans, such as the Southern Energy short-term
incentive plan, will be terminated but replaced with other plans to provide a
more cohesive design. However, our goal is to provide a total compensation
package that is comparable to that currently provided.
Our employees who participate in Southern Company plans and who retire
before the group change date will remain the responsibility of Southern Company
and will continue to participate in
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plans after the distribution. We and Southern Company have established a
mutually acceptable method to allocate the liabilities and the assets
attributable to this assumption of responsibility by Southern Company.
All of our eligible employees who are subject to a collective bargaining
agreement and currently participate in our plans will continue to participate in
the same benefits plans currently maintained on their behalf subject to
collective bargaining agreements.
Once we establish our own corresponding or new benefit plans, we may modify
or terminate any plan we maintain in accordance with its terms and our policies.
None of our benefit plans will provide benefits that duplicate benefits provided
under any corresponding Southern Company benefit plan at the time of the group
change date. Each of our benefit plans will provide that all service,
compensation and other benefits criteria that, as of the group change date, were
recognized under the corresponding Southern Company benefit plan will be taken
into account under our benefit plans.
We will assume a spun-off portion of the Southern Company pension plan for
the benefit of eligible employees not subject to a collective bargaining
agreement. Southern Company will transfer appropriate assets held in its master
trust under this plan to a master trust to be established by us. We will also
receive assets attributable to pension plans maintained for our employees
covered under collective bargaining agreements.
Prior to the group change date, our employees and employees of Southern
Company may not freely transfer employment. In order to transfer, a notice of
transfer request must be given and approved by each employing company.
In connection with the group change date, or such later date as we may
agree on with Southern Company, we will issue substitute options for our common
stock to our employees in exchange for their Southern Company options. The
conversion process will follow FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which dictates the
following:
- The aggregate intrinsic value of the options immediately after the
conversion will be equal to the aggregate intrinsic value prior to the
conversion.
- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.
In addition, because we will not establish a plan comparable to the
Southern Performance Dividend Plan (a bonus plan paying dividend equivalents),
we may grant additional options to our employees to make-up for this lost
compensation opportunity.
After the group change date, eligible management employees will participate
in non-qualified deferred compensation plans.
We have agreed to indemnify Southern Company for employment liabilities
arising from any acts of our employees, from claims by our officers against
Southern Company and from any breach of any of the separation agreements.
Southern Company has agreed to indemnify us for employment liabilities related
to Southern Company or employees of Southern Company, from claims by Southern
Company officers against us or from any breach by Southern Company of any of the
separation agreements.
TAX INDEMNIFICATION AGREEMENT
We have entered into a tax indemnification agreement with Southern Company
to govern the allocation of U.S. income tax liabilities and to set forth
agreements with respect to other tax matters.
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Under the Internal Revenue Code of 1986, as amended, we will cease to be a
member of the Southern Company consolidated group upon completion of the
distribution or if at any time Southern Company owns less than 80% of our
outstanding capital stock.
Southern Company generally will be responsible for filing any returns
required to be filed on a consolidated basis through the first date on which we
are no longer consolidated with Southern Company for tax purposes in accordance
with the existing income tax allocation agreement. For taxable periods ending on
or before the tax deconsolidation, payments to Southern Company or us, as the
case may be, will continue to be made in accordance with past practices. There
may be U.S. state and local jurisdictions in which we file separate income tax
returns, not combined or consolidated with Southern Company, for tax periods
prior to tax deconsolidation. Each party will, at all times, be responsible for
filing and paying taxes related to these separate returns. However, Southern
Company will be responsible for filing any tax returns related to the
newly-formed subsidiary to be used for the transfer of SE Finance and Capital
Funding to Southern Company.
Southern Company will determine all tax elections for tax periods during
which we are a member of the Southern Company consolidated group unless we
request Southern Company to make a particular election with respect to us, in
which case Southern Company will not unreasonably withhold consent to such
request. We will prepare and file all tax returns required to be filed by us for
all tax periods after we cease to be a member of the Southern Company
consolidated group.
If there are tax adjustments related to us arising after the distribution
date, which relate to a tax return filed for a pre-distribution period, we will
be responsible for any increased taxes and receive the benefit of any tax
refunds (except with respect to the new SE Finance/Capital Funding subsidiary
described below). In addition, we and Southern Company have agreed to cooperate
in any tax audits, litigation or appeals that involve, directly or indirectly,
tax returns filed for pre-distribution periods and to provide information
related to such periods. We and Southern Company have agreed to indemnify each
other for any tax liabilities resulting from the failure to pay any amounts due
under the terms of the agreement or for costs resulting from either party's
negligence in providing accurate or complete information in the preparation of
any tax return.
We and Southern Company have agreed that any taxes associated with the
transfer and operation of the new SE Finance/Capital Funding subsidiary will be
the responsibility of Southern Company. We and Southern Company have agreed that
any and all taxes arising from the deconsolidation of us from the Southern
Company consolidated group will be the responsibility of the entity that is
liable for such taxes under applicable law.
We and Southern Company are required to comply with representations made to
the Internal Revenue Service in connection with the private letter ruling that
was issued to Southern Company on August 1, 2000 regarding the tax-free nature
of the distribution of our stock by Southern Company to Southern Company
stockholders. In addition, we and Southern Company have agreed not to enter into
transactions after the tax deconsolidation that would result in a change of
control of either party pursuant to a plan unless a ruling is obtained from the
IRS that the transaction will not affect the tax-free nature of the
distribution. In the event either party takes any action which results in the
distribution becoming a taxable transaction, such party will indemnify the other
party for any and all taxes, on an after-tax basis, resulting from such actions.
Moreover, the party who would be subject to the additional tax may be entitled
to injunctive relief unless we or Southern Company, as the case may be, provides
an opinion that such proposed transaction will not result in adverse tax
consequences to the other party, or if such transaction will result in
additional taxes to the other party, such party agrees to provide adequate
assurances to the other party of its ability to satisfy the indemnity obligation
under the agreement.
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REGISTRATION RIGHTS AGREEMENT
As noted above, Southern Company intends to distribute the remaining shares
of our common stock to its stockholders on a pro rata basis. We cannot, however,
assure you as to whether or when this distribution will occur. See "Risk
Factors -- Risks Related to our Separation from Southern Company -- Our business
and your investment in the preferred securities may be adversely affected if
Southern Company does not complete the distribution of our common stock because
we would remain subject to regulatory restrictions as a subsidiary of a public
utility holding company and because we would remain subject to control by
Southern Company." In the event that Southern Company does not divest itself of
all of its shares of our common stock in the distribution, Southern Company
could not freely sell all of those shares without registration under the
Securities Act. Accordingly, we have entered into a registration rights
agreement with Southern Company to provide it with registration rights relating
to the shares of our common stock which it holds. These registration rights
generally become effective at such time as Southern Company informs us that it
no longer intends to proceed with or complete the distribution.
Under the registration rights agreement, in the event that Southern Company
provides us with written notice that it no longer intends to proceed with the
distribution of our common stock, and at the request of Southern Company, we
will use our best efforts to register shares of our common stock that are held
by Southern Company upon the completion of the common stock 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 the common stock offering,
and any additional shares issued in respect of those shares, in future
registrations of our securities under the Securities Act. We have agreed to
cooperate in these registrations and any related offering. If the registration
is at Southern Company's request, Southern Company will pay 80% of our
out-of-pocket costs and expenses related to our registration of Southern
Company's shares.
ARRANGEMENTS RELATING TO THE TRANSFER OF SE FINANCE AND CAPITAL FUNDING
In connection with our separation from Southern Company, we will transfer
two of our subsidiaries, SE Finance and Capital Funding, to Southern Company. In
order to facilitate the transfer to Southern Company, prior to the common stock
offering we have issued one share of our redeemable preferred stock to Southern
Company. After the common stock offering and prior to the distribution of our
stock by Southern Company, we will form a corporation with Southern Company
Energy Solutions, Inc., a wholly owned subsidiary of Southern Company. We will
contribute the stock of SE Finance and Capital Funding to the corporation in
exchange for an 80% or greater interest. Southern Company Energy Solutions will
contribute its energy services assets to a limited liability company owned by
the corporation in exchange for a 20% or lesser interest. We will then redeem
the one share of redeemable preferred stock issued by us to Southern Company in
exchange for our entire interest in the corporation. Following the transfer,
Southern Company will assume responsibility for all obligations of SE Finance
and Capital Funding.
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FEDERAL TAX MATTERS RELATED TO OUR SEPARATION FROM SOUTHERN COMPANY
Southern Company currently owns 100% of our common stock. Thus, we are
currently affiliated and are members of the same consolidated group. As members
of the same consolidated group, we file a consolidated federal income tax return
with Southern Company. This allows Southern Company to offset its federal
taxable income with our tax losses. After the common stock 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 the common stock 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.
On August 1, 2000, we and Southern Company received a ruling from the IRS
that the distribution will be tax-free to Southern Company and its stockholders
for United States federal income tax purposes. However, under a tax
indemnification agreement between us and Southern Company, if we breach any
representations in connection with the ruling, take any action which causes our
representations to be untrue or engage in a transaction after the distribution
that causes the distribution to be taxable to Southern Company or its
stockholders, we will be required to indemnify Southern Company for any
resulting taxes. The amount of any indemnification payments would be substantial
and we likely would not have sufficient financial resources to achieve our
growth strategy.
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, after this offering but prior to the
distribution of our stock by Southern Company, we will transfer the operations
of these subsidiaries to Southern Company. In particular, we will contribute the
stock of SE Finance and Capital Funding to a newly formed holding company, which
stock will subsequently be distributed to Southern Company prior to the
distribution transaction. On August 1, 2000, we received a ruling from the IRS
that the proposed transfer of SE Finance and Capital Funding will qualify as a
tax-free distribution.
Subsequent to the distribution, we will cease to be a member of the
Southern Company consolidated group. As such, there will then exist two separate
groups, the Southern Company group and our group. Each group will file separate
consolidated federal income tax returns, and Southern Company will not be able
to use our tax losses unless we request Southern Company to carry back losses
arising after the date of the distribution to a pre-distribution tax return to
the extent permitted by applicable law.
Under the current tax sharing agreement between Southern Company and us,
Southern Company is obligated to pay us for the utilization of net operating
losses generated by us to offset Southern Company's consolidated federal income
tax liability. After the distribution Southern Company will no longer have the
ability to use these net operating losses. Consequently, we will no longer
receive these payments from the Southern Company. Furthermore, under the tax
indemnification agreement with Southern Company, we may be required to make
other payments to Southern Company for tax liabilities.
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Subsequent to the distribution of our stock by Southern Company, we will
cease to be a member of the Southern Company consolidated tax group. Our
separation from the Southern Company consolidated tax group will change our
overall future income tax posture. Based on our current structure and net
income, we could be limited in our future ability to effectively use tax
attributes such as foreign tax credits associated with overseas operations. The
inability to use these attributes could result in material tax liabilities. We
intend to undertake appropriate measures after deconsolidation in order to
mitigate any adverse tax effect of no longer being a part of the Southern
Company consolidated tax group. We cannot assure you that these efforts will be
successful. Should these efforts be unsuccessful, our deconsolidation from the
Southern Company tax group may have a material impact on our tax liabilities and
financial position. Currently, we cannot quantify these potential impacts.
However, we do not expect any such tax liabilities to materially affect our
ability to pursue our growth strategy.
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PRINCIPAL STOCKHOLDER
Prior to the common stock offering, all of the outstanding shares of our
common stock have been owned by Southern Company. After the common stock
offering, Southern Company will own approximately 82.4% of our common stock, or
approximately 80.3% if the underwriters fully exercise their option to purchase
additional shares of our common stock. Under Delaware corporate law and our
charter documents, prior to the distribution by Southern Company of its
ownership of our common stock, Southern Company will be able, acting alone, to
elect our entire board of directors and to approve any action requiring the
approval of our stockholders. Except for Southern Company, we are not aware of
any person or group that will beneficially own more than 5% of the outstanding
shares of our common stock following the common stock 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 "Management -- 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 SEI TRUST I
The trust is a statutory business trust created under the Delaware Business
Trust Act on June 30, 2000. The trust was created under a trust agreement
between the trust's initial trustee and us by the filing of a certificate of
trust with the Secretary of State of the State of Delaware. The trust agreement
will be amended and restated in its entirety as of the date the trust initially
issues the preferred securities. The trust agreement will be qualified as an
indenture under the Trust Indenture Act of 1939, as amended. Unless the context
requires otherwise, "Southern Energy," "we," "us," "our" or similar terms in
this prospectus refer solely to Southern Energy, Inc. and not the trust or any
of our other consolidated subsidiaries.
The trust will have five trustees. Three of them, referred to as
administrative trustees, will be officers or employees of us. Bankers Trust
Company will serve as the trust's property trustee and Bankers Trust (Delaware)
will serve as the trust's Delaware trustee.
The trust's assets consist principally of the debentures and payments under
the debentures are its sole revenue. The trust exists for the purposes of:
- issuing the preferred securities,
- issuing the common securities to us,
- investing the gross proceeds from the sale of the preferred securities
and the common securities in the debentures,
- distributing payments received on the debentures to holders of the
preferred securities and the common securities, and
- engaging only in such other activities as are necessary, convenient or
incidental to the foregoing or are specifically authorized in the trust
agreement.
The holders of the preferred securities sold in this offering will own all
of the trust's issued and outstanding preferred securities. We will own all of
the trust's common securities. The common securities will represent common
undivided beneficial interests in the assets of the trust with an aggregate
liquidation amount equal to at least 3% of the total capital of the trust.
We have agreed to pay for all of the trust's debts and obligations, other
than with respect to the preferred securities and the common securities. We have
also agreed to pay for all of the trust's costs and expenses including:
- trustee's fees and expenses and
- any taxes to which the trust may become subject, except for United States
withholding taxes.
The property trustee holds title to the debentures for your benefit and the
benefit of us, as holder of the common securities. As holder of the debentures,
the property trustee has the power to exercise all the rights, powers and
privileges granted to the holder of the debentures under the indenture
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governing the debentures between us and Bankers Trust Company, as the indenture
trustee. In addition, the property trustee maintains exclusive control of a
segregated non-interest bearing bank account to hold all payments made in
respect of the debentures for your benefit and the benefit of us, as holder of
the trust's common securities.
We, as the direct or indirect holder of all of the trust's common
securities, have the right to appoint, remove or replace any of the trustees and
to increase or decrease the number of trustees; provided, however, that during
an event of default under the indenture, the property trustee and the Delaware
trustee may only be removed by the holders of a majority in liquidation amount
of the preferred securities.
The address of the principal office of the trust is 1403 Foulk Road, Suite
102, Wilmington, Delaware 19803, and its telephone number is (302) 427-1935.
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DESCRIPTION OF THE PREFERRED SECURITIES
The trust will issue the preferred securities pursuant to the terms of the
trust agreement. Bankers Trust Company, as property trustee, will act as the
indenture trustee under the trust agreement for purposes of the Trust Indenture
Act. The terms of the preferred securities include those stated in the trust
agreement and those made part of the trust agreement by the Trust Indenture Act
and the Delaware Business Trust Act. We have summarized the material provisions
of the trust agreement and the preferred securities below. This summary may omit
a term or provision that you would consider important. For a complete
description of the preferred securities, we encourage you to read the trust
agreement. We have filed a form of the trust agreement with the SEC.
GENERAL
The trust agreement authorizes the trust to issue the preferred securities
and the common securities. The preferred securities represent preferred
undivided beneficial interests in the assets of the trust. The common securities
represent common undivided beneficial interests in the assets of the trust. We
will own all of the common securities. The preferred securities and the common
securities will rank equal with each other and will generally have equivalent
terms. However, the terms of the preferred securities and the common securities
will differ in the following two respects:
- if an event of default under the trust agreement occurs and is
continuing, the rights of the holders of the common securities to
payments in respect of periodic distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights
of the holders of the preferred securities and
- except during an event of default with respect to the debentures, the
holders of common securities will have the exclusive right to appoint,
remove or replace the trustees and to increase or decrease the number of
trustees.
The trust may not:
- issue any securities other than the preferred securities and the common
securities,
- incur any indebtedness, or
- make any investment other than in the debentures.
The property trustee will own and hold the debentures as trust assets for
the benefit of the holders of the preferred securities and the common
securities. We will guarantee the payment of distributions and payments on
redemption or liquidation of the trust on a subordinated basis, but only if, and
to the extent, we have made corresponding payments to the trust on the
debentures. Please read the "Description of the Guarantee" section in this
prospectus.
DISTRIBUTIONS
If you purchase preferred securities, you will be entitled to receive cash
distributions at an annual rate of % of the $50 liquidation preference per
preferred security. Distributions are cumulative and will begin to accumulate on
the date of the original issuance of the preferred securities, which we expect
to be , 2000. Distributions will be payable quarterly in arrears, on
, , and of each year beginning
, , unless we defer interest payments on the debentures, as
described below.
Distributions that are not paid for more than one calendar quarter will
accumulate additional distributions at an annual rate of %, to the extent
permitted by law, compounded quarterly. We
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use the term "distributions" in this prospectus to mean the quarterly cash
distributions and any additional distributions, unless we state otherwise. The
amount of distributions payable for any full quarterly period will be computed
on the basis of a 360-day year of twelve 30-day months. The amount of
distributions for any period shorter than a full quarterly period will be
computed on the basis of the actual number of elapsed days based on a 360-day
year. If a distribution payment date is not a business day, the trust will make
the distributions on:
- the next succeeding day that is a business day without any interest or
other payment resulting from such delay or
- if the next succeeding day that is a business day is in the next
succeeding calendar year, interest will be paid on the immediately
preceding business day,
in each case with the same force and effect as if the distribution was made on
the date it was originally payable. A "business day" is any day other than a
Saturday or Sunday, or a day on which banking institutions in the City of New
York are authorized or required by law or executive order to remain closed or a
day on which the corporate trust office of the property trustee or indenture
trustee is closed for business.
OPTION TO DEFER DISTRIBUTIONS
We may, on one or more occasions, defer interest payments on the debentures
for up to 20 consecutive quarterly periods unless an event of default with
respect to the debentures has occurred and is continuing. Interest payments will
not be due and payable on the debentures during a deferral period. We cannot
defer interest payments beyond the maturity date of the debentures, which is
, 2030.
If we defer interest payments on the debentures, the trust will defer
distribution payments on the preferred securities and the common securities.
Distributions will continue to accumulate on the preferred securities and the
common securities at an annual rate of % of the liquidation preference of
$50 per preferred security or common security during a deferral period. Also,
additional cash distributions will accumulate on any deferred distributions at
the annual rate of %, compounded quarterly. Additional distributions will
only accumulate, however, to the extent permitted by applicable law, but not at
a rate greater than the rate at which interest is then accruing on the
debentures. We will be subject to restrictions during a deferral period on our
ability to pay dividends on our capital stock or to make payments on other debt
securities that are equal with or junior to the debentures. Please read the
"Description of the Debentures -- Option to Extend Interest Payment Period"
section in this prospectus for a more detailed discussion. We do not currently
intend to defer interest payments on the debentures.
We may extend a deferral period prior to the period's termination. We may
not, however, extend a deferral period, including all previous and further
extensions of the period, beyond 20 consecutive quarterly interest periods or
the maturity date of the debentures. Once a deferral period ends and we make all
payments due on the debentures, we can commence a new deferral period. We may
also prepay all or any portion of the interest accrued during a deferral period
at any time. Consequently, there could be multiple deferral periods of varying
lengths throughout the term of the debentures. Please read "Our right to defer
interest payments on the debentures has tax consequences for you" in the "Risk
Factors" section of this prospectus and the "Description of the
Debentures -- Interest" and "-- Option to Extend Interest Payment Period" and
"Tax Consequences" sections in this prospectus.
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PAYMENT OF DISTRIBUTIONS
The trust must pay distributions on the preferred securities on the
distribution payment dates to the extent that the property trustee has cash on
hand to make distributions. The property trustee will maintain that cash in a
segregated non-interest bearing bank account referred to as the "property
account." The only funds the property trustee will have to distribute to the
holders of the preferred securities will be from payments received from us on
the debentures. If we do not make interest payments on the debentures, the
property trustee will not have funds available to make distributions to you on
the preferred securities. If, and to the extent that, we make interest payments
on the debentures, the property trustee will be obligated to make distributions
on the preferred securities and the common securities on a pro rata basis. We
will guarantee the payment of distributions and other payments on the preferred
securities on a subordinated basis, but only if, and to the extent that, we have
made corresponding payments to the trust on the debentures and, as a result, the
property trustee has funds available to make distributions on the preferred
securities. Please read the "Description of the Guarantee" section in this
prospectus.
METHOD OF PAYMENT OF DISTRIBUTIONS
The trust will pay distributions to the holders of the preferred securities
as they appear on the books and records of the trust on the relevant record
dates, which will be the 15th day before the relevant distribution date.
If the trust fails to punctually pay distributions on the preferred
securities on any distribution payment date as a result of our failure to make
the corresponding interest payments on the debentures, the distributions will no
longer be payable to the registered holders of the preferred securities on the
relevant record date for the preferred securities. The trust will instead pay
any such defaulted distribution payments to the registered holders of the
preferred securities on a special record date set by the administrative
trustees. The special record date will correspond to the special record date or
other specified date for determining payment of the accrued interest payments on
the debentures. Distributions will not be payable on any distribution payment
date falling within a deferral period unless we have elected to make a full or
partial payment of interest accrued on the debentures on such distribution
payment date.
The property trustee will pay distributions on the preferred securities out
of payments received on the debentures and held in the property account for the
benefit of the holders of the preferred securities and the common securities.
Subject to any applicable laws and regulations and the provisions of the trust
agreement, each such payment with respect to the preferred securities will be
made as described under the "-- Book-Entry Only Issuance -- The Depository Trust
Company" section in this prospectus.
The payment dates and record dates for the preferred securities will be the
same as the payment dates and record dates for the debentures. The trust will
pay all distributions on the preferred securities and the common securities on a
pro rata basis.
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CONVERSION RIGHTS
GENERAL
Unless we have redeemed the debentures, and subject to our right to elect a
cash settlement as described below, holders of the preferred securities may
convert them into our common stock at any time after , 2001 and before
the earlier of:
- the close of business on the business day prior to the maturity date of
the debentures, which is , 2030 or
- in the case of preferred securities called for redemption, the close of
business on the business day prior to the redemption date.
Holders of preferred securities may convert them into common stock at an
initial conversion rate of shares of our common stock for each
preferred security. This conversion rate is equivalent to a conversion price of
$ per share of our common stock. The initial conversion rate is subject to
adjustment as described below under "-- Conversion Price Adjustments -- General"
and "-- Conversion Price Adjustments -- Merger, Consolidation or Sale of
Assets."
From , 2001 and until the next business day following the date of
the distribution of our common stock held by Southern Company to its
stockholders, we may elect to make a cash settlement in respect of any preferred
securities surrendered for conversion by delivering notice to the tendering
holder not more than five trading days after the preferred securities are
surrendered. The distribution is expected to occur within 12 months of the
completion of the common stock offering. If the distribution does not occur, our
option to elect a cash settlement in respect of preferred securities will
continue.
The amount of cash that you will receive in the case of a cash settlement
will be equal to the value of the underlying shares of common stock as
calculated by determining the product of (i) the then prevailing conversion rate
and (ii) the average of the closing price, as defined in the indenture, of our
common stock on the five trading days beginning two trading days after our
delivery of the notice to the holder. We will pay the cash settlement amount as
promptly as practicable after the completion of the five trading day period.
Whenever we issue shares of our common stock upon conversion of the
preferred securities and we have in effect at such time a stockholder rights
agreement under which holders of our common stock are issued rights entitling
the holders, under specified circumstances, to purchase additional shares of our
common stock or other capital stock, we will issue, together with each share of
our common stock, an appropriate number of rights. For a description of our
existing stockholder rights agreement, see "Description of Capital Stock" in
this prospectus.
Accrued distributions will not be paid on preferred securities that are
converted into our common stock, except that holders of the preferred securities
on a record date for a distribution will receive the distribution on the
distribution date even though the preferred securities are converted on or after
such record date but prior to the distribution date.
If you wish to exercise your conversion right, you must surrender your
preferred securities together with an irrevocable conversion notice to the
property trustee, as conversion agent, or any other agent appointed for that
purpose. The conversion agent will exchange your preferred securities for an
equivalent amount of debentures and convert the debentures into our common stock
or cash, as the case may be, on your behalf. You may obtain copies of the
required form of conversion notice from the conversion agent. If a book-entry
system for the preferred securities is in effect, however, the procedures for
converting preferred securities into shares of our common stock will differ.
Please
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read the "-- Book-Entry Only Issuance -- The Depository Trust Company" section
of this prospectus.
We will not issue any fractional shares of our common stock as a result of
a conversion of preferred securities. We will pay cash in lieu of a fractional
share of common stock. The cash payment will be based upon the closing price, as
defined in the indenture, of our common stock on the date the preferred
securities are surrendered for conversion, or, if such day is not a day on which
any securities are traded on the national securities exchange or quotation
system used to determine the closing price, on the next such trading day.
CONVERSION PRICE ADJUSTMENTS -- GENERAL
The initial conversion price is subject to adjustment for some events,
including:
- the issuance of our common stock as a dividend or other distribution on
our common stock,
- specified subdivisions, combinations and reclassifications of our common
stock,
- the issuance to all holders of our common stock of rights or warrants to
purchase our common stock at less than the then current market price,
- payment of dividends or distributions to all holders of our common stock
consisting of evidences of our indebtedness, securities or capital stock,
cash or assets, excluding any rights or warrants referred to in the prior
bullet point and dividends and distributions paid solely in cash,
- payment of dividends or distributions on our common stock paid
exclusively in cash, excluding:
- cash dividends that do not exceed the per share amount of the
immediately preceding regular cash dividend, as adjusted to reflect any
of the events described in the preceding bullet points,
- cash dividends, if the annualized per share amount thereof does not
exceed 12.5% of the current market price of our common stock on the
trading day immediately prior to the date of declaration of the
dividend, and
- a redemption of any rights issued under a rights agreement, and
- payment to holders of our common stock in respect of a tender or exchange
offer, other than an odd-lot offer, made by us or any subsidiary of ours
for our common stock in excess of 110% of the current market price of our
common stock as of the trading day next succeeding the last date tenders
or exchanges may be made in the tender or exchange offer.
If any action would require adjustment of the conversion price under more
than one of the provisions described above, only one adjustment will be made and
that adjustment will be the amount of adjustment that has the highest absolute
value to the holders of the preferred securities. An adjustment in the
conversion price will not be required unless the adjustment would require a
change of at least 1% in the conversion price then in effect. However, any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment.
There will be no adjustment of the conversion price in case of the issuance
of any of our common stock (or securities convertible into or exchangeable for
our common stock), except as specifically described above. For example, no
adjustment of the conversion price will be made upon the issuance of any shares
of our common stock under any present or future plan providing for the
reinvestment of dividends or interest payable on our securities or upon the
investment of additional
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optional amounts in shares of our common stock under any such plan or the
issuance of any shares of our common stock or options or rights to purchase
shares of our common stock under any employee benefit plan or program of ours or
pursuant to any option, warrant, right or exercisable, exchangeable or
convertible security that does not constitute an issuance to all holders of our
common stock of rights or warrants entitling holders of those rights or warrants
to subscribe for or purchase our common stock at less than the current market
price.
From time to time we may, to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 business days, in
which case we will give at least 15 days' notice of the reduction. In addition,
we have the option to make reductions in the conversion price, in addition to
those described above, as we deem advisable to avoid or diminish any income tax
to holders of our common stock resulting from any dividend or distribution of
stock or issuance of rights or warrants to acquire stock or from any event
treated as such for tax purposes or for any other reason. Please read the "Tax
Consequences -- Adjustment of Conversion Price" section in this prospectus.
CONVERSION PRICE ADJUSTMENTS -- MERGER, CONSOLIDATION OR SALE OF ASSETS
If we are a party to a transaction that results in shares of our common
stock being converted into the right to receive, or being exchanged for,
securities, cash or other property of a third party, the conversion price may be
adjusted as described below.
In the event that we are a party to:
- a merger (other than a merger that does not result in a reclassification,
conversion, exchange or cancellation of our common stock), consolidation,
sale of all or substantially all of our assets,
- recapitalization or reclassification of our common stock, other than a
change in par value, or from par value to no par value, or from no par
value to par value or as a result of a subdivision or combination of our
common stock, or
- any compulsory share exchange,
in each case, as a result of which shares of our common stock will be converted
into the right to receive, or will be exchanged for the right to receive other
securities, cash or property, we will ensure that lawful provision is made as
part of the terms of the transaction so that the holder of each preferred
security then outstanding will have the right thereafter to convert the
preferred securities only into:
- in the case of any transaction other than a transaction involving a
Common Stock Fundamental Change (as defined below) (and subject to funds
being legally available for that purpose under applicable law at the time
of conversion), the kind and amount of securities, cash or other property
receivable upon the consummation of the transaction by a holder of that
number of shares of common stock into which a preferred security was
convertible immediately prior to the transaction or
- in the case of a transaction involving a Common Stock Fundamental Change,
common stock of the kind received by holders of common stock as a result
of the Common Stock Fundamental Change,
but in each case after giving effect to any adjustment discussed below relating
to a Fundamental Change if the transaction constitutes a Fundamental Change.
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The holders of preferred securities will have no voting rights with respect
to any transaction described in this section.
If any Fundamental Change occurs, then the conversion price in effect will
be adjusted immediately after the Fundamental Change as follows:
- in the case of a Non-Stock Fundamental Change (as defined below), the
applicable conversion price of the preferred securities will become the
lower of:
- the applicable conversion price in effect immediately prior to the
Non-Stock Fundamental Change, but after giving effect to any other prior
adjustments and
- the result obtained by multiplying the greater of the Applicable Price
(as defined below) or the then applicable Reference Market Price (as
defined below) by a fraction, the numerator of which is $50 and the
denominator of which is (x) the amount of the redemption price per
preferred security if the redemption date were the date of the Non-Stock
Fundamental Change (or, for the period commencing on the first date of
original issuance of the preferred securities and through ,
2001 and the 12-month periods commencing , 2001 and
, 2002, the product of %, % and %, respectively,
multiplied by $50) plus (y) any then accrued and unpaid distributions on
one preferred security; and
- in the case of a Common Stock Fundamental Change, the applicable
conversion price of the preferred securities in effect immediately prior
to the Common Stock Fundamental Change, but after giving effect to any
other prior adjustments, will be adjusted by multiplying the applicable
conversion price by a fraction, the numerator of which is the Purchaser
Stock Price (as defined below) and the denominator of which is the
Applicable Price.
However, in the event of a Common Stock Fundamental Change in which:
- 100% of the value of the consideration received by a holder of our common
stock is common stock of the successor, acquiror or other third party
(and cash, if any, is paid only with respect to any fractional interests
in that common stock resulting from the Common Stock Fundamental Change)
and
- all of our common stock will have been exchanged for, converted into, or
acquired for common stock (and cash with respect to fractional interests)
of the successor, acquiror or other third party,
the applicable conversion price of the preferred securities in effect
immediately prior to the Common Stock Fundamental Change will be adjusted by
multiplying the applicable conversion price by a fraction the numerator of which
is one and the denominator of which is the number of shares of common stock of
the successor, acquiror or other third party received by a holder of one share
of our common stock as a result of the Common Stock Fundamental Change.
In the absence of the Fundamental Change provisions, in the case of a
transaction each preferred security would become convertible into the
securities, cash or property receivable by a holder of the number of shares of
our common stock into which each preferred security was convertible immediately
prior to such transaction. A failure to apply the Fundamental Change conversion
price adjustments described above could substantially lessen or eliminate the
value of the conversion privilege associated with the preferred securities. For
example, if we were acquired in a cash merger, each preferred security would
become convertible solely into cash and would no longer be convertible into
securities whose value would vary depending on our future prospects and other
factors.
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These conversion price adjustments are designed, in some circumstances, to
reduce the conversion price that would be applicable in Fundamental Change
transactions where all or substantially all of our common stock is converted
into securities, cash or property and not more than 50% of the value received by
the holders of our common stock consists of stock listed or admitted for listing
subject to notice of issuance on the New York Stock Exchange or a national
securities exchange or quoted on the Nasdaq National Market (a Non-Stock
Fundamental Change, as defined below). This reduction would result in an
increase in the amount of the securities, cash or property into which each
preferred security is convertible over that which would have been obtained in
the absence of those conversion price adjustments.
In a Non-Stock Fundamental Change transaction where the initial value
received per share of our common stock (measured as described in the definition
of Applicable Price) is lower than the then applicable conversion price of a
preferred security but greater than or equal to the Reference Market Price, the
applicable conversion price will be adjusted as described above with the effect
that each preferred security will be convertible into securities, cash or
property of the same type received by the holders of our common stock in the
transaction but in an amount per preferred security that would at the time of
the transaction have had a value equal to the then applicable redemption price
per preferred security described below under "-- Optional Redemption."
In a Non-Stock Fundamental Change transaction where the initial value
received per share of our common stock (measured as described in the definition
of Applicable Price) is lower than both the applicable conversion price of a
preferred security in effect prior to any adjustment described above and the
Reference Market Price, the conversion price will be adjusted as described above
but calculated as though the initial value had been the Reference Market Price.
In a Common Stock Fundamental Change transaction, the adjustments described
above are designed to provide in effect that:
- where our common stock is converted partly into that common stock and
partly into other securities, cash or property, each preferred security
will be convertible solely into a number of shares of that common stock
determined so that the initial value of those shares (measured as
described in the definition of "Purchaser Stock Price") equals the value
of the shares of our common stock into which each preferred security was
convertible immediately before the transaction (measured as described
above) and
- where our common stock is converted solely into that common stock, each
preferred security will be convertible into the same number of shares of
the common stock receivable by a holder of the number of shares of our
common stock into which each preferred security was convertible
immediately before that transaction.
The term "Applicable Price" means:
- in the case of a Non-Stock Fundamental Change in which the holders of our
common stock receive only cash, the amount of cash received by the holder
of one share of our common stock and
- in the event of any other Non-Stock Fundamental Change or any Common
Stock Fundamental Change, the average of the Closing Prices (as defined
below) for our common stock during the ten consecutive trading days prior
to and including the record date for the determination of the holders of
our common stock entitled to receive those securities, cash or other
property in connection with that Non-Stock Fundamental Change or Common
Stock Fundamental Change or, if there is no record date, the date that
the holders of our common stock will have the right to receive those
securities, cash or other property (that record date or
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distribution date being hereinafter referred to as the "Entitlement
Date"), in each case as adjusted in good faith by us to appropriately
reflect any of the events referred to under "-- Conversion Price
Adjustments -- General."
The term "Closing Price" means on any day, the last reported sales price on
that day or, if no sales take place on that day, the average of the reported
closing bid and asked prices on that day, in either case as reported on the New
York Stock Exchange Consolidated Transactions Tape, or, if the common stock is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which the common stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the average of the closing bid and asked prices as
furnished by any New York Stock Exchange member firm, selected by us under the
indenture for that purpose.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value, as determined in good faith by our board of
directors, of the consideration received by holders of our common stock consists
of common stock that for each of the ten consecutive trading days prior to the
Entitlement Date has been admitted for listing or admitted for listing subject
to notice of issuance on a national securities exchange or quoted on the Nasdaq
National Market; provided, however, that a Fundamental Change will not be a
Common Stock Fundamental Change unless either:
- we continue to exist after the occurrence of that Fundamental Change and
the outstanding preferred securities continue to exist as outstanding
preferred securities or
- not later than the occurrence of that Fundamental Change, the outstanding
preferred securities are converted into or exchanged for shares of
convertible preferred stock of any entity succeeding to the business of
our company or a subsidiary of our company, which convertible preferred
stock has powers, preferences and relative participating, optional or
other rights and qualifications, limitations and restrictions
substantially similar to those of the preferred securities.
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
our common stock will be exchanged for, converted into, acquired for or
constitute solely the right to receive securities, cash or other property
(whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise). However, in the case of a plan involving more than one of these
transactions or events, for purposes of adjustment of the conversion price, the
Fundamental Change will be deemed to have occurred when substantially all of our
common stock is exchanged for, converted into or acquired for or constitute
solely the right to receive securities, cash or other property, but the
adjustment will be based upon the consideration that a holder of our common
stock received in that transaction or event as a result of which more than 50%
of our common stock will have been exchanged for, converted into or acquired for
or constitute solely the right to receive securities, cash or other property.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in that Common Stock Fundamental Change for the ten consecutive trading
days prior to and including the Entitlement Date, as adjusted in good faith by
us to appropriately reflect any of the events referred to in "-- Conversion
Price Adjustments -- General."
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The term "Reference Market Price" initially means, $ (which is an
amount equal to 66 2/3% of the initial public offering price of our common
stock). In the event of any adjustment of the applicable conversion price, other
than as a result of a Non-Stock Fundamental Change, the Reference Market Price
will also be adjusted so that the ratio of the Reference Market Price to the
conversion price after giving effect to any adjustment will always be the same
as the ratio of the initial Reference Market Price to the initial conversion
price of the preferred securities.
Conversions of the preferred securities may be effected by delivering them
to the office of the conversion agent maintained for such purpose in the Borough
of Manhattan, the City of New York.
In certain circumstances, conversion price adjustments may result in
constructive distributions that could be taxable as dividends under the internal
revenue code to holders of preferred securities. Please read the "Federal Income
Tax Consequences -- Adjustment of Conversion Price" section in this prospectus.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence and continuance of a tax event or investment company
event as both are described below, at any time, we will have the option to
redeem the debentures in whole but not in part, and thus cause the redemption of
the preferred securities and common securities at the special event redemption
price.
If a tax event has occurred and is continuing, we may elect to pay
additional interest on the debentures, as described below, so that the
distributions to holders of the preferred securities are not reduced because of
the tax event. In addition, we may also distribute all, but not less than all,
of the debentures to you in exchange for your preferred securities as described
in "-- Distribution of the Debentures" below at any time, including upon the
occurrence of a tax event or an investment company event.
If we elect to redeem the debentures after a tax event or an investment
company event, the trust will use the proceeds to redeem preferred securities
and common securities with an aggregate liquidation preference equal to the
aggregate principal amount of the debentures redeemed at the special event
redemption price plus accrued and unpaid distributions to, but excluding, the
redemption date. The common securities will be redeemed on a pro rata basis with
the preferred securities except that if an event of default under the trust
agreement has occurred, the preferred securities will have a priority over the
common securities with respect to the redemption price.
As used in this prospectus, the special event redemption price will equal
the principal amount of the debentures or the liquidation preference of the
preferred securities.
The term "tax event" means the receipt by us and the administrative
trustees, on behalf of the trust, of an opinion rendered by a law firm having a
national United States tax and securities practice, to the effect that as a
result of:
- any amendment to, or change, including any announced prospective change,
in, the laws, or any regulations thereunder, of the United States or any
political subdivision or taxing authority of the United States or any
political subdivision,
- any amendment to, or change in, an interpretation or application of any
such laws or regulations by any legislative body, court, governmental
agency or regulatory authority, including the enactment of any
legislation and the publication of any judicial decision or regulatory
determination,
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- any interpretation or pronouncement by any legislative body, court,
governmental agency or regulatory authority that provides for a position
with respect to such laws or regulations that differs from its previous
position or a commonly accepted position, or
- any action taken by any governmental agency or regulatory authority,
in each case on or after the date of this prospectus, there is more than an
insubstantial risk that:
- the trust is, or will be within 90 days of the date of the opinion,
subject to United States federal income tax with respect to income
accrued or received on the debentures,
- interest payable by us on the debentures and/or the preferred securities
is not, or will not be within 90 days of the date of the opinion,
deductible by us, in whole or in part, for United States federal income
tax purposes,
- the timing of the deduction for interest payable by us on the debentures
and/or the preferred securities is, or will be within 90 days of the date
of the opinion, required to be made by reference to a system that defers
the timing of such deductions compared to the timing permitted under the
principles of economic accrual, or
- the trust is, or will be within 90 days of the date of the opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
An "investment company event" occurs if we and the administrative trustees,
on behalf of the trust, receive an opinion, rendered by a law firm experienced
in practice under the Investment Company Act, to the effect that, as a result of
the occurrence of a change, including any prospective change, in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority, there
is more than an insubstantial risk that the trust is or will be considered an
investment company that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of this
prospectus.
The redemption or distribution by us of the debentures will effectively
result in the cancellation of the preferred securities.
ADDITIONAL INTEREST
If the trust is required to pay any taxes, duties, assessments or other
governmental charges of any nature, other than withholding taxes, imposed by the
Internal Revenue Service or any other taxing authority, then we will pay such
additional amounts on the debentures as shall be required so that the net
amounts received and retained by the trust after paying any such taxes, duties,
assessments or other governmental charges will be equal to the amounts the trust
would have received had no such taxes, duties, assessments or other governmental
charges been imposed. Such additional amounts are referred to as "additional
interest."
DISTRIBUTION OF THE DEBENTURES
As holder of the common securities, we have the right to dissolve the trust
at any time. If that happens, after satisfaction of liabilities to creditors of
the trust as provided by applicable law, we will cause the trust to distribute
the debentures to the holders of the preferred securities and the common
securities in liquidation of the trust. The debentures may also be distributed
upon the occurrence of a tax event or an investment company event as more fully
described above in "-- Special Event Redemption or Distribution."
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If debentures are distributed to the holders of the preferred securities
and the common securities upon the dissolution and liquidation of the trust, the
debentures will be issued in denominations of $50 and integral multiples
thereof. If the debentures are distributed to holders of the preferred
securities and the common securities, we anticipate that the debentures will be
distributed in the form of one or more global debt securities and that The
Depository Trust Company, or any successor depository for the preferred
securities, will act as depository for the debentures. The depository
arrangements for the debentures will be substantially similar to those in effect
for the preferred securities. None of us, the indenture trustee or any paying
agent or any other agent of us will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in a global debt security for such debentures or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
For a description of the depository and the terms of the depository
arrangements relating to payments, transfers, voting rights, redemption and
other notices and other matters relating to the debentures, please read the
"Description of the Debentures -- Book-Entry and Settlement" section in this
prospectus.
On the date the trust dissolves and the debentures are distributed to the
holders of the preferred securities and the common securities:
- the preferred securities, the guarantee and the common securities will no
longer be outstanding and
- any certificates representing preferred securities and common securities
will be deemed to represent beneficial interests in debentures of an
amount equal to the aggregate stated liquidation amount of, and bearing
accrued and unpaid interest equal to accumulated and unpaid distributions
on, those preferred securities and common securities, until those
certificates are presented to us or our agent for transfer or reissuance.
If the trust is dissolved and the debentures are distributed, the market
price for the debentures will be uncertain. Accordingly, the debentures you
receive upon dissolution and liquidation of the trust may trade at a discount to
the price of the preferred securities exchanged. If the debentures are
distributed to the holders of the preferred securities upon the dissolution of
the trust, we will use our best efforts to list the debentures on the New York
Stock Exchange or on such other exchange or automated quotation system on which
the preferred securities are then listed.
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OPTIONAL REDEMPTION
Except as provided under "-- Mandatory Redemption" below and under
"-- Special Event Redemption or Distribution" above, the preferred securities
may not be redeemed by the trust prior to , 2003.
On and after that date, upon any redemption by us of debentures as
described under "Description of the Debentures -- Optional Redemption," the
preferred securities will be subject to redemption, in whole or in part, at the
following redemption prices expressed as percentages of their liquidation
preference plus accrued and unpaid distributions, if any, to the date fixed for
redemption if redeemed during the 12-month period commencing in
each of the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................
2004........................................................
2005........................................................
2006........................................................
2007........................................................
2008........................................................
2009........................................................
2010 and thereafter.........................................
</TABLE>
The aggregate liquidation preference of the preferred securities and common
securities redeemed will equal the aggregate principal amount of debentures
redeemed by us. The trust may not redeem the preferred securities in part unless
all accrued and unpaid distributions have been paid in full on all outstanding
preferred securities for all quarterly distribution periods terminating on or
before the redemption date. If fewer than all the outstanding preferred
securities are to be redeemed, the preferred securities to be so redeemed will
be selected as described under "-- Book-Entry Only Issuance -- The Depository
Trust Company."
In the event we redeem the debentures as described under "-- Special Event
Redemption or Distribution," the preferred securities will be redeemed at the
special event redemption price, together with accrued and unpaid distributions
to, but excluding, the redemption date.
MANDATORY REDEMPTION
Upon repayment at maturity or as a result of the acceleration of the
debentures upon the occurrence of an event of default under the indenture as
described in "Description of the Debentures -- Indenture Events of Default," the
preferred securities will be subject to mandatory redemption in whole, but not
in part, by us. The trust will promptly apply the proceeds from any repayment of
the debentures to redeem on a pro rata basis the preferred securities and the
common securities with an aggregate liquidation preference equal to the
aggregate principal amount of the debentures repaid or redeemed. See
"Description of Debentures -- Mandatory Redemption." The trust will redeem the
common securities on a pro rata basis with the preferred securities, unless an
event of default under the trust agreement has occurred and is continuing. If an
event of default occurs under the trust agreement, the preferred securities will
have a priority over the common securities with respect to payment of the
redemption price. Subject to the foregoing, the trust will redeem the preferred
securities and the common securities on a pro rata basis if fewer than all of
the outstanding preferred securities and common securities are redeemed.
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REDEMPTION PROCEDURES
The trust will redeem its preferred securities and common securities at the
applicable redemption price with the proceeds from the contemporaneous repayment
or redemption of debentures. The trust will redeem its preferred securities and
common securities on each redemption date only to the extent that it has funds
on hand available for the payment of the redemption price.
The trust will make any redemption upon not less than 30 nor more than 60
days' notice. If the trust gives a redemption notice, which notice will be
irrevocable, then, while the preferred securities are still in book-entry form,
by 2:00 p.m., New York City time, on the redemption date and provided that we
have paid to the property trustee a sufficient amount of cash in connection with
the related redemption or maturity of the debentures, the property trustee will
irrevocably deposit with the depository funds sufficient to pay the applicable
redemption price and will give the depository irrevocable instructions and
authority to pay the redemption price to you. Please read the "-- Book-Entry
Only Issuance -- The Depository Trust Company" section in this prospectus.
If the preferred securities are no longer in book-entry form, the property
trustee, to the extent funds are available, will irrevocably deposit with the
paying agent for the preferred securities funds sufficient to pay the applicable
redemption price and will give the paying agent irrevocable instructions and
authority to pay the redemption price to the holders of the preferred securities
upon surrender of their certificates. See "-- Register, Transfer Agent, Paying
Agent and Conversion Agent."
Distributions payable on or prior to the redemption date for any preferred
securities called for redemption will be paid to holders of preferred securities
as of the relevant record dates for the related distribution. If notice of
redemption shall have been given and funds deposited as required, then,
immediately prior to the close of business on the redemption date, distributions
will cease to accumulate on the preferred securities called for redemption,
those preferred securities will no longer be deemed to be outstanding and all
rights of holders of the preferred securities so called for redemption will
cease, except the right of the holders of those preferred securities to receive
the redemption price, but without interest on such redemption price. Neither the
trustees nor the trust shall be required to register or cause to be registered
the transfer of any preferred securities that have been so called for
redemption.
If the redemption date is not a business day, then payment of the
redemption price payable on that date will be made on the next succeeding day
that is a business day, and without any interest or other payment in respect of
any such delay. If that business day falls in the next calendar year, however,
the payment will be made on the immediately preceding business day, in each case
with the same force and effect as if made on such date fixed for redemption.
In the event that the trust or we, pursuant to the guarantee described
under "Description of the Guarantee," improperly withhold or refuse to pay the
applicable redemption price, then distributions on preferred securities will
continue to accrue at the then applicable rate, from the original redemption
date to the date the redemption price is actually paid. Under these
circumstances, the actual payment date will be the date fixed for redemption for
purposes of calculating the redemption price.
In the event that fewer than all of the outstanding preferred securities
are to be redeemed, the preferred securities will be redeemed as described below
under "-- Book-Entry Only Issuance -- The Depository Trust Company."
If a partial redemption of the preferred securities would result in the
delisting of the preferred securities by any national securities exchange or
other organization on which the preferred securities
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are then listed or traded, we will redeem debentures only in whole and, as a
result, under such circumstances the trust may redeem the preferred securities
only in whole.
Subject to the foregoing and applicable law, we or any of our subsidiaries
may at any time and from time to time purchase outstanding preferred securities
by tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution of the trust, each
holder of the preferred securities or common securities at that time will be
entitled to receive, after satisfaction of liabilities to creditors, as provided
by applicable law, an aggregate principal amount of debentures equal to the
aggregate liquidation preference of the preferred securities or common
securities held by that holder. If the property trustee determines that the
distribution of debentures is not practicable, holders of the preferred
securities or common securities will be entitled to receive out of the assets of
the trust, after satisfaction of the liabilities to creditors, as provided by
applicable law, distributions in an amount equal to the aggregate of the stated
liquidation preference of the preferred securities or the common securities,
plus accrued and unpaid distributions to the date of payment.
If, upon any dissolution, the liquidation distribution can be paid only in
part because the trust has insufficient assets on hand legally available to pay
in full the aggregate liquidation distribution, then the amounts payable
directly by the trust on the preferred securities shall be paid on a pro rata
basis. The holder of the common securities will be entitled to receive
liquidation distributions upon any such dissolution on a pro rata basis with the
holders of the preferred securities, except if an event of default under the
trust agreement has occurred and is continuing, the preferred securities will
have priority over the common securities.
The trust will dissolve on the earlier of:
- December 31, 2031, the expiration of its term,
- specified events of bankruptcy, dissolution or liquidation of us,
- the redemption, conversion or exchange of all of the preferred securities
and common securities,
- when all of the debentures have been distributed to the holders of the
preferred securities and the common securities in exchange for all of the
preferred securities and the common securities in accordance with the
terms of the preferred securities and the common securities, or
- upon a decree of judicial dissolution.
REMOVAL OF TRUSTEES
Unless an event of default under the debentures has occurred and is
continuing, we, as the holder of the common securities, may remove any trustee
at any time. If an event of default under the debentures has occurred and is
continuing, the holders of a majority in liquidation amount of the outstanding
preferred securities may remove the property trustee and the Delaware trustee.
In no event will holders of preferred securities have the right to appoint,
remove or replace the administrative trustees, which voting rights are vested
exclusively in us as the holder of the common securities. No resignation or
removal of the Delaware trustee or the property trustee and no
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appointment of a successor trustee will be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
trust agreement.
MERGERS, CONSOLIDATIONS, CONVERSIONS, AMALGAMATION OR REPLACEMENTS OF THE TRUST
The trust may not consolidate, convert into, amalgamate, merge with or
into, or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any corporation or other person, except as
described below or as otherwise set forth in the trust agreement. The trust may,
at our request, with the consent of the administrative trustees and without your
consent and the consent of the Delaware trustee or the property trustee,
consolidate, convert into, amalgamate, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets substantially as an entirety
to, a trust organized as such under the laws of any state if:
- the successor entity either
- expressly assumes all of the obligations of the trust under the
preferred securities, the common securities and the trust agreement or
- substitutes for the preferred securities and the common securities other
securities having substantially the same terms as the preferred
securities and the common securities, so long as the successor
securities rank the same as the preferred securities and the common
securities rank with respect to distributions and payments upon
liquidation, redemption and otherwise,
- we expressly appoint a trustee of the successor entity possessing the
same powers and duties as the property trustee as the holder of the
debentures,
- the successor securities are listed, or will be listed upon notification
of issuance, on any national securities exchange or with another
organization on which the preferred securities are then listed or quoted,
if any,
- the transaction does not cause the preferred securities, including any
successor securities, to be downgraded by any nationally recognized
statistical rating organization,
- the transaction does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities or the common
securities, including any successor securities, in any material respect,
other than with respect to any dilution of the holders' interest in the
new entity,
- the successor entity has purposes substantially identical to the purposes
of the trust,
- prior to the transaction, we have received an opinion of counsel
experienced in such matters to the effect that
- the transaction does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities and the common
securities, including any successor securities, in any material respect,
other than with respect to any dilution of the holders' interest in the
new entity,
- following the transaction, neither the trust nor the successor entity
will be required to register as an investment company under the
Investment Company Act, and
- following the transaction, the trust or such successor entity will
continue to be classified as a grantor trust for United States federal
income tax purposes, and
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- we (or any other permitted successor or assignee) own all of the common
securities of the successor entity and guarantee the obligations of the
successor entity under the successor securities at least to the extent
provided by the guarantee.
Notwithstanding the general provisions described above, the trust will not,
except with the consent of holders of 100% in aggregate liquidation amount of
the preferred securities and the common securities, consolidate, amalgamate,
merge with or into, convert into, or be replaced by or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety to, any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it, if such consolidation, amalgamation, merger, conversion,
replacement, conveyance, transfer or lease would cause the trust or the
successor entity to be classified as other than a grantor trust for United
States federal income tax purposes.
EVENTS OF DEFAULT UNDER THE TRUST AGREEMENT; NOTICE; ENFORCEMENT OF CERTAIN
RIGHTS BY HOLDERS OF PREFERRED SECURITIES
An event of default under the indenture will constitute an event of default
under the trust agreement. Pursuant to the trust agreement, the holder of the
common securities will be deemed to have waived any event of default with
respect to the common securities until all events of default with respect to the
preferred securities have been cured, waived or otherwise eliminated. Until all
such events of default with respect to the preferred securities have been so
cured, waived or otherwise eliminated, the property trustee will be deemed to be
acting solely on behalf of the holders of the preferred securities, and only the
holders of the preferred securities will have the right to direct the property
trustee with respect to certain matters under the trust agreement and
consequently under the indenture. In the event that any event of default with
respect to the preferred securities is waived by the holders of the preferred
securities as provided in the trust agreement, the holders of common securities
have agreed that such waiver also constitutes a waiver of such event of default
with respect to the common securities for all purposes under the trust agreement
without any further act, vote or consent of the holders of the common
securities.
Upon the occurrence of an event of default under the indenture, the
property trustee, subject to the limitations described below under "-- Voting
Rights," as the holder of all of the debentures will have the right under the
indenture to declare the principal of and interest on the debentures to be
immediately due and payable. In addition, the property trustee will, subject to
the limitations described below under "-- Voting Rights," have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee.
VOTING RIGHTS
The holders of the preferred securities will have no voting rights except
as provided below, under "-- Amendment of the Trust Agreement" and "Description
of the Guarantee -- Amendments and Assignment" in this prospectus and as
otherwise required by the Delaware Business Trust Act, the Trust Indenture Act
and the trust agreement.
So long as any debentures are held by the property trustee, the trustees
will not:
- direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee or exercising any trust or
power conferred on the indenture trustee with respect to the debentures,
- waive non-payment defaults that are waivable under the indenture, or
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- exercise any right to rescind or annul a declaration of acceleration of
the maturity of the principal of the debentures;
without, in each case, obtaining the prior approval of the holders of a majority
in liquidation amount of all outstanding preferred securities and common
securities voting as a single class. When the indenture requires the consent of
each holder of debentures, the property trustee cannot give its consent without
the prior consent of each holder of the preferred securities. The trustees will
not revoke any action previously authorized or approved by a vote of the holders
of the preferred securities except by subsequent vote of the holders of the
preferred securities. The property trustee will notify each holder of the
preferred securities of any notice of default with respect to the debentures. In
addition to obtaining the foregoing approvals of such holders of the preferred
securities and common securities, prior to taking any of the foregoing actions,
the trustees will obtain an opinion of counsel experienced in those matters to
the effect that for United States federal income tax purposes the trust will not
be classified as other than a grantor trust on account of such action.
If an event of default under the trust agreement has occurred and is
continuing, then the holders of a majority in liquidation amount of the
preferred securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the property trustee or to
direct the exercise of any right or power conferred upon the property trustee
under the trust agreement, including the right to direct the property trustee to
exercise the remedies available to it as a holder of the debentures. If the
property trustee fails to enforce its rights under the indenture, a holder of
the preferred securities, to the extent permitted by applicable law, after a
period of 60 days has elapsed from such holder's written request to the property
trustee to enforce such rights, may institute a legal proceeding directly
against us to enforce the property trustee's rights under the debentures without
first instituting any legal proceeding against the property trustee or any other
person or entity. If an event of default under the trust agreement has occurred
and is continuing and such event is attributed to our failure to pay interest or
principal on the debentures on the date such interest or principal is otherwise
payable, or in the case of redemption, on the redemption date, then a holder of
the preferred securities may directly institute a proceeding for enforcement of
payment to such holder of the principal of or interest on the debentures having
a principal amount equal to the aggregate liquidation amount of the preferred
securities of such holder on or after the respective due date specified in the
debentures. In connection with such direct action, we will be subrogated to the
rights of such holder of the preferred securities to the extent of any payment
made by us to such holders of the preferred securities in such direct action.
Except as provided in the preceding sentences, the holders of the preferred
securities will not be able to exercise directly any other remedy available to
the holders of the debentures.
A waiver of an event of default under the indenture by the property trustee
at the direction of holders of the preferred securities will constitute a waiver
of the corresponding event of default under the trust agreement in respect of
the preferred securities and the common securities.
In the event the consent of the property trustee as the holder of the
debentures is required under the indenture with respect to any amendment,
modification or termination of the indenture or the debentures, the property
trustee will request the written direction of the holders of the preferred
securities and the common securities with respect to such amendment,
modification or termination and shall vote with respect to such amendment,
modification or termination as directed by a majority in liquidation amount of
the preferred securities and the common securities voting together as a single
class; provided, however, that where any such amendment, modification or
termination under the indenture would require the consent or vote of holders of
debentures representing a specified percentage greater than a majority in
principal amount of the debentures, the property trustee may only vote with
respect to that amendment, modification or termination as directed by the vote
of holders of the preferred securities and common securities representing such
specified percentage of
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the aggregate liquidation amount of the preferred securities and common
securities; and, provided, further, that the property trustee will be under no
obligation to take any action in accordance with the directions of the holders
of the preferred securities and common securities unless the property trustee
has received an opinion of counsel experienced in such matters to the effect
that the trust will not be classified for United States federal income tax
purposes as other than a grantor trust on account of such action.
Any required approval or direction of holders of the preferred securities
may be given at a separate meeting of holders of the preferred securities
convened for such purpose, at a meeting of the holders of the preferred
securities or common securities or pursuant to written consent. The
administrative trustees will cause a notice of any meeting at which holders of
the preferred securities are entitled to vote, or of any matter upon which
action by written consent of those holders is to be taken, to be mailed to each
holder of record of the preferred securities. Each such notice will include a
statement setting forth:
- the date of such meeting or the date by which such action is to be taken,
- a description of any resolution proposed for adoption at such meeting on
which such holders are entitled to vote or of such matter upon which
written consent is sought, and
- instructions for the delivery of proxies or consents.
No vote or consent of the holders of the preferred securities will be
required for the trust to redeem and cancel the preferred securities or to
distribute the debentures in accordance with the trust agreement.
Notwithstanding that holders of the preferred securities are entitled to
vote or consent under any of the circumstances described above, any of the
preferred securities at such time that are owned by us or by any affiliate of
ours will not be entitled to vote or consent and shall, for purposes of such
vote or consent, be treated as if they were not outstanding.
The procedures by which persons owning the preferred securities registered
in the name of and held by DTC or its nominee may exercise their voting rights
as described under "-- Book-Entry Only Issuance -- The Depository Trust Company"
below.
You will have no rights to increase or decrease the number of trustees or
to appoint, remove or replace a trustee, which rights are vested exclusively in
the holders of the common securities at all times.
AMENDMENT OF THE TRUST AGREEMENT
The majority of the administrative trustees may amend the trust agreement,
provided, that if any proposed amendment provides for, or the administrative
trustees otherwise propose to effect:
- any action that would adversely affect the powers, preferences or special
rights of the preferred securities or the common securities, whether by
way of amendment to the trust agreement, other than as described below,
or otherwise or
- the dissolution, winding-up or termination of the trust other than
pursuant to the terms of the trust agreement;
then the holders of the outstanding preferred securities and the common
securities as a single class will be entitled to vote on the amendment or
proposal, and the amendment or proposal will not be effective except with the
approval of at least a majority in liquidation amount of the preferred
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securities and the common securities. If any amendment or proposal referred to
above would adversely affect only the preferred securities or the common
securities, then only the affected class will be entitled to vote on the
amendment or proposal and the amendment or proposal will not be effective except
with the approval of a majority in liquidation amount of the preferred
securities or common securities.
Notwithstanding the foregoing, no amendment may be made to the trust
agreement:
- unless the administrative trustees shall have first received:
- an officers' certificate from us that such amendment is permitted by,
and conforms to, the terms of the trust agreement and
- an opinion of counsel that such amendment is permitted by, and conforms
to, the terms of the trust agreement and that all conditions precedent,
if any, in the trust agreement to the execution and delivery of such
amendment have been satisfied; and
- to the extent the result of such amendment would be to
- cause the trust to fail to continue to be classified for purposes of
United States federal income taxation as a grantor trust,
- reduce or otherwise adversely affect the powers of the property trustee
in contravention of the Trust Indenture Act, or
- cause the trust to be deemed to be an "investment company" required to
be registered under the Investment Company Act.
Certain specified provisions of the trust agreement may not be amended
without the consent of all of the holders of the preferred securities and the
common securities including the distribution rate and conversion provisions. No
amendment that adversely affects the rights, powers and privileges of the
property trustee or the Delaware trustee may be made without the consent of the
property trustee or Delaware trustee, respectively. Certain provisions of the
trust agreement relating to our obligation to purchase the common securities and
to pay certain obligations and expenses of the trust as described under
"Description of SEI Trust I" section in this prospectus may not be amended
without our consent. The rights of holders of common securities under certain
provisions of the trust agreement to increase or decrease the number of, and to
appoint, replace or remove trustees shall not be amended without the consent of
each holder of common securities.
The trust agreement may be amended without the consent of the holders of
the preferred securities and the common securities to:
- cure any ambiguity,
- correct or supplement any provision in the trust agreement that may be
defective or inconsistent with any other provision of the trust
agreement,
- add to our covenants, restrictions or obligations,
- preserve the status of the trust as a grantor trust for United States
federal income tax purposes,
- conform to changes in, or a change in interpretation or application of,
certain Investment Company Act regulations by the SEC,
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- make any other provisions with respect to matters or questions arising
under the trust agreement that shall not be inconsistent with the other
provisions of the trust agreement,
- modify, eliminate or add to any provisions of the trust agreement to such
extent as shall be necessary to ensure that the trust will be classified
for United States federal income tax purposes as a grantor trust at all
times that any preferred securities or common securities are outstanding
or to ensure that the trust will not be required to register as an
"investment company" under the Investment Company Act, and
- evidence the acceptance of the appointment of a successor trustee or fill
a vacancy created by an increase in the number of administrative
trustees,
which amendment does not adversely affect in any material respect the rights,
preferences or privileges of the holders of the preferred securities or the
common securities.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company will act as securities depository for the
preferred securities. The preferred securities will be issued only as fully
registered securities registered in the name of DTC or its nominee. One or more
fully-registered global preferred securities certificates, representing the
total aggregate number of preferred securities, will be issued and will be
deposited with DTC or pursuant to DTC's instructions.
The laws of some jurisdictions require that some purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in a global preferred security.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act. DTC holds securities that its participants ("Direct Participants") deposit
with DTC. DTC also facilitates the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Direct Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). Direct Participants and
Indirect Participants are collectively referred to herein as "Participants." The
rules applicable to DTC and its Participants are on file with the SEC.
Upon issuance of a preferred securities global certificate, DTC will credit
on its book-entry registration and transfer system the number of preferred
securities represented by the preferred securities global certificate to the
accounts of institutions that have accounts with DTC. Ownership of beneficial
interests in a preferred securities global certificate will be limited to
Participants or persons that may hold interests through Participants. The
ownership interest of each actual purchaser of each preferred security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect
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Participants through which the Beneficial Owners purchased preferred securities.
Transfers of ownership interests in the preferred securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in the preferred securities, except in the event that
use of the book-entry system for the preferred securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the preferred
securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such preferred securities are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers. So long as DTC, or its
nominee, is the owner of a preferred securities global certificate, DTC or such
nominee, as the case may be, will be considered the sole owner and holder of
record of the preferred securities represented by such preferred securities
global certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
While DTC is acting as the securities depository for the preferred
securities, redemption notices will be sent by us and the trust directly to DTC.
DTC will then inform the Direct Participants, who will then contact the
Beneficial Owners. If less than all of the preferred securities are being
redeemed, DTC's practice is to determine by lot the interest of each Direct
Participant to be redeemed.
Although voting with respect to the preferred securities is limited, in
those instances in which a vote is required, neither DTC nor Cede & Co. will
consent or vote with respect to preferred securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the preferred
securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the preferred securities represented by a
preferred securities global certificate will be made by the property trustee to
DTC. DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and not of DTC, the trust or us, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
distributions to DTC is the responsibility of the trust, disbursement of such
payments to Direct Participants is the responsibility of DTC and disbursement of
such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants.
Except as provided herein, a Beneficial Owner will not be entitled to
receive physical delivery of preferred securities. Accordingly, each Beneficial
Owner must rely on the procedures of DTC to exercise any rights under the
preferred securities.
DTC may discontinue providing its services as securities depository with
respect to the preferred securities at any time by giving reasonable notice to
the trust. Under such circumstances, if a successor securities depository is not
obtained, preferred securities certificates will be required to be printed and
delivered. Additionally, the trust may decide to discontinue use of the system
of book-entry transfers through DTC (or a successor depository). In that event,
certificates for the preferred securities will be printed and delivered.
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Under the trust agreement, payments made by the trust to DTC or its nominee
will satisfy the trust's obligations under the trust agreement, to the extent of
the payments so made. Beneficial Owners will not be considered by the trust to
be and will not have any rights as owners of preferred securities under the
trust agreement.
WE, THE TRUST AND THE TRUSTEES WILL HAVE NO RESPONSIBILITY OR OBLIGATION TO
ANY DIRECT PARTICIPANT, INDIRECT PARTICIPANT OR ANY BENEFICIAL OWNER OR ANY
OTHER PERSON NOT SHOWN ON THE REGISTRATION BOOKS OF THE TRUST AS BEING A
REGISTERED OWNER WITH RESPECT TO: (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY
DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT, (2) THE PAYMENT OF ANY
AMOUNT DUE BY DTC TO ANY DIRECT PARTICIPANT OR BY ANY DIRECT PARTICIPANT OR
INDIRECT PARTICIPANT TO ANY BENEFICIAL OWNER IN RESPECT OF DISTRIBUTIONS, (3)
THE DELIVERY OF ANY NOTICE BY DTC TO ANY DIRECT PARTICIPANT OR BY ANY DIRECT
PARTICIPANT OR INDIRECT PARTICIPANT TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR
PERMITTED TO BE GIVEN TO REGISTERED OWNERS UNDER THE TERMS OF THE TRUST
AGREEMENT, (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE
EVENT OF ANY PARTIAL REDEMPTION OF THE PREFERRED SECURITIES OR (5) ANY CONSENT
GIVEN OR OTHER ACTION TAKEN BY DTC AS A REGISTERED OWNER.
The trustee and the trust, so long as a book-entry only system is used for
the preferred securities, will send any notice of redemption or of proposed
document amendments requiring consent of registered owners and any other notices
required by the document to be sent to registered owners only to DTC (or any
successor securities depository) or its nominee. Any failure of DTC to advise
any Direct Participant, or of any Direct Participant or Indirect Participant to
notify the Beneficial Owner, of any such notice and its content or effect will
not affect the validity of the redemption of the preferred securities called for
redemption, the document amendment or any other action premised on that notice.
We, the trust and the trustees cannot and do not give any assurances that
DTC will distribute distributions and other payments on the preferred securities
made to DTC or its nominee as the registered owner or any redemption or other
notices to the Participants, or that the Participants or others will distribute
such payments or notices to the Beneficial Owners, or that they will do so on a
timely basis, or that DTC will serve and act in the manner described in this
prospectus. Beneficial Owners should make appropriate arrangements with their
broker or dealer regarding distribution of information regarding the preferred
securities that may be transmitted by or through DTC.
The foregoing information concerning DTC and DTC's book-entry system is
based upon information obtained from DTC and contains statements that are
believed to describe accurately DTC, the method of effecting book-entry
transfers of securities distributed through DTC and certain related matters, but
neither the trust nor us take any responsibility for the accuracy of such
statements.
CERTIFICATED PREFERRED SECURITIES
The preferred securities represented by the global preferred securities
certificate will be exchangeable for certificated preferred securities in
definitive form of like tenor as the preferred securities in denominations of
U.S. $50.00 and integral multiples of $50.00 if:
- DTC notifies us or the trust that it is unwilling or unable to continue
as depository for the global preferred securities certificate, or if at
any time DTC ceases to be a clearing agency registered under the
Securities Exchange Act,
- we or the trust in our or its discretion at any time determines not to
have all of the preferred securities evidenced by a global certificate,
or
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- a default entitling you to accelerate the maturity of the preferred
securities has occurred and is continuing.
Any of the preferred securities that are exchangeable pursuant to the
preceding sentence are exchangeable for certificated preferred securities
issuable in authorized denominations and registered in the names as DTC directs.
Subject to the foregoing, the global preferred securities certificates are not
exchangeable, except for a global preferred securities certificate of the same
aggregate denomination to be registered in the name of DTC or its nominee.
REGISTRAR, TRANSFER AGENT, PAYING AGENT AND CONVERSION AGENT
In the event the preferred securities do not remain in book-entry only
form, the following provisions will apply.
Payment of distributions and payments on redemption of the preferred
securities will be payable, the transfer of the preferred securities will be
registrable and preferred securities will be exchangeable for preferred
securities of other denominations of a like aggregate liquidation amount at the
corporate trust office of the property trustee; provided that payment of
distributions may be made at the option of the administrative trustees on behalf
of the trust by check mailed to the address of the persons entitled thereto and
that the payment on redemption of any preferred securities will be made only
upon surrender of the preferred securities to the property trustee.
The property trustee will act as registrar, transfer agent and conversion,
paying and exchange agent for the preferred securities.
Registration of transfers or exchanges of preferred securities will be
effected without charge by or on behalf of the trust but only upon payment of
any tax or other governmental charges that may be imposed in connection with any
transfer or exchange.
The trust will not be required to register or cause to be registered the
transfer of preferred securities after the preferred securities have been called
for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, other than during the occurrence and continuance of
an event of default under the trust agreement, undertakes to perform only such
duties as are specifically set forth in the trust agreement and, after such an
event of default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the property trustee is under no obligation to exercise any
of the powers vested in it by the trust agreement at the request of any holder
of preferred securities unless it is offered indemnity satisfactory to it
against the costs, expenses and liabilities that it might incur. If no event of
default under the trust agreement has occurred and is continuing and the
property trustee is required to decide between alternative causes of action, is
required to construe ambiguous provisions in the trust agreement or is unsure of
the application of any provision of the trust agreement, and the matter is not
one on which holders of preferred securities are entitled under the trust
agreement to vote, then the property trustee shall take such action as is
directed by us and will have no liability except for its own bad faith,
negligence or willful misconduct.
We and certain of our subsidiaries maintain deposit accounts and conduct
other banking and corporate securities transactions and relationships with the
property trustee in the ordinary course of our businesses.
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GOVERNING LAW
Delaware law will govern the trust agreement, the preferred securities and
the common securities.
MISCELLANEOUS
The administrative trustees are authorized and directed to take such action
as they determine in their discretion to be necessary or desirable in carrying
out the purposes of the trust, including:
- causing the trust not to be deemed to be an "investment company" required
to be registered under the Investment Company Act,
- causing the trust to be classified for United States federal income tax
purposes as a grantor trust, and
- cooperating with us to ensure that the debentures will be treated as our
indebtedness for United States federal income tax purposes.
In this connection, the administrative trustees are authorized to take any
action not inconsistent with applicable law, the certificate of trust or the
trust agreement that the administrative trustees determine in their discretion
to be reasonable and necessary or desirable for such purposes.
The holders of preferred securities and the holders of the common
securities have no preemptive or similar rights.
The trust may not borrow money or issue debt or mortgage or pledge any of
its assets.
We and the administrative trustees on behalf of the trust will be required
to provide to the property trustee annually a certificate as to whether or not
we and the trust, respectively, are in compliance with all the conditions and
covenants under the trust agreement.
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DESCRIPTION OF THE DEBENTURES
We will issue the debentures under an indenture between us and Bankers
Trust Company, as indenture trustee. The indenture will be qualified under the
Trust Indenture Act. The terms of the debentures include those stated in the
indenture and those made part of the indenture by the Trust Indenture Act. The
financial terms of the debentures are the same for those of the preferred
securities, including the right to convert to common stock. We have summarized
the material provisions of the indenture and the debentures below. This summary
may omit a term or provision that you would consider important. For a complete
description of the debentures, we encourage you to read the indenture. We have
filed a form of the indenture with the SEC.
We may issue any amount of debt securities under the indenture from time to
time in one or more series. The debentures will be issued as a separate series
of debt securities under the indenture.
You may receive debentures if we exercise our right to terminate the trust.
Therefore, you should carefully review all the information regarding the
debentures contained in this prospectus. Please read the "Description of the
Preferred Securities -- Distribution of the Debentures" section in this
prospectus.
GENERAL
Concurrently with the issuance of the preferred securities, the trust will
invest the proceeds from the issuance of the preferred securities and the
consideration paid by us for the common securities in the debentures. The
debentures will be unsecured and rank junior and subordinate in right of payment
to all of our senior debt. The debentures will be limited in aggregate principal
amount to $309,278,350 ($355,670,100 if the underwriters exercise their
over-allotment option in full), which is the sum of:
- the aggregate stated liquidation preference of the preferred securities
and
- the capital contributed by us to the trust in exchange for the common
securities.
The indenture will not limit the incurrence or issuance by us of other
secured or unsecured debt, whether under the indenture or any existing or other
indenture that we may enter into in the future or otherwise.
The debentures will not be subject to any sinking fund provision. The
entire principal amount of the debentures will mature, and become due and
payable, together with any accrued and unpaid interest on the debentures, on
, 2030, unless we shorten the maturity date as described under "-- Our
Right to Shorten Maturity."
Payments of principal and interest on the debentures will be payable at the
corporate trust office of the indenture trustee in the City of New York.
The indenture contains no provisions that would grant the holders of
debentures protection in the event of a highly leveraged transaction involving
us or a change of control of us.
INTEREST
The debentures will bear interest at the rate of % per annum from
, 2000. Interest will be payable quarterly in arrears on
, , and of each
year, commencing on , . Interest will be payable to the person in
whose name the debenture is registered, subject to certain exceptions, at the
close of business on the 15th day next preceding such interest payment date.
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Interest payable on any debenture that is not punctually paid or duly
provided for on any interest payment date will cease to be payable to the person
in whose name such debenture is registered on the relevant record date. Such
defaulted interest will instead be payable to the person in whose name such
debenture is registered on the special record date or other specified date
determined in accordance with the indenture. Interest will not be considered
payable by us on any interest payment date falling within a deferral period
unless we have elected to make a full or partial payment of interest accrued on
the debentures on such interest payment date.
The amount of interest payable for any full quarterly interest period will
be computed on the basis of a 360-day year of twelve 30-day months. If the
amount of interest is calculated for any period shorter than a full quarterly
interest period, it will be computed on the basis of the number of days elapsed
based on a 360-day year. If interest is payable on a date that is not a business
day, then interest will be paid on:
- the next succeeding day that is a business day without any interest or
other payment resulting from such delay or
- if the next succeeding day that is a business day is in the next
succeeding calendar year, interest will be paid on the immediately
preceding business day,
in each case with the same force and effect as if the interest was paid on the
date it was originally payable.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no event of default under the indenture has occurred and is
continuing, we may, on one or more occasions, defer interest payments on the
debentures for up to 20 consecutive quarterly periods. We cannot defer interest
payments beyond the maturity date of the debentures. We do not currently intend
to defer interest payments on the debentures. We will not be obligated to pay
interest on the debentures during a deferral period. Any deferral period with
respect to the payment of interest on debentures will also apply to
distributions with respect to the preferred securities.
We may extend a deferral period prior to the period's termination. We may
not, however, extend a deferral period, including all previous and further
extensions of the period, beyond 20 consecutive quarterly interest periods. On
the interest payment date occurring at the end of each deferral period, we will
pay to the holders of debentures all accrued and unpaid interest on the
debentures, together with interest on that interest at the stated annual rate,
which is %, compounded quarterly, to the extent permitted by applicable law.
Once we make all interest payments due on the debentures, we can commence a new
deferral period, subject to the same limitations. We may also prepay all or any
portion of the interest accrued during a deferral period at any time. There is
no limitation on the number of times that we may elect to begin a new deferral
period. Consequently, there could be multiple deferral periods of varying
lengths throughout the term of the debentures. During a deferral period,
interest will continue to accrue and holders of the debentures (or holders of
the preferred securities while the preferred securities are outstanding) will be
required to recognize interest income for United States federal income tax
purposes. Please read the "Tax Consequences -- Original Issue Discount" section
of this prospectus. Our failure to make interest payments during a deferred
period would not constitute an event of default under the indenture or our
currently outstanding indebtedness.
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During any deferral period, neither we nor our subsidiaries will:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our capital
stock or
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any of our debt securities (including guarantees for
money borrowed), that rank equal with or junior in interest to the
debentures.
We may, however:
- make dividend, redemption, liquidation, interest, principal or guarantee
payments where the payment is made by way of securities (including
capital stock) that rank on par with or junior to the securities on which
that dividend, redemption, interest, principal or guarantee payment is
being made,
- make redemptions or purchases of any rights pursuant to any rights
agreement and the declaration of a dividend of those rights or the
issuance of preferred stock under those plans in the future,
- make payments under the guarantee related to the preferred securities,
- make purchases of our common stock related to the issuance of our common
stock under any of our benefit plans for our directors, officers or
employees,
- do any of the foregoing if it is the result of a reclassification of our
capital stock or the exchange or conversion of one series or class of our
capital stock for another series or class of our capital stock, and
- purchase fractional interests in shares of our capital stock pursuant to
the conversion or exchange provisions of that capital stock or the
security being converted or exchanged.
If the trust is the sole holder of the debentures, we will give the
property trustee, the administrative trustees and the indenture trustee notice
of our election to begin a deferral period at least one business day prior to
the earlier of:
- the record date for distributions that would have otherwise been payable
on the preferred securities (or, if no preferred securities are
outstanding, the debentures) but for the deferral or
- the date the property trustee is required to give notice to the New York
Stock Exchange or other applicable self-regulatory organization or to
holders of the preferred securities (or, if no preferred securities are
outstanding, the debentures) of that record date.
The property trustee will give notice of our election to begin a deferral
period to the holders of the preferred securities.
If debentures have been distributed to holders of preferred securities, we
will give such holders and the indenture trustee notice of our election to begin
a deferral period at least 10 business days prior to the earlier of:
- the next succeeding interest payment date or
- the date that we are required to give notice to holders of the debentures
of the record date or payment date of the related interest payment.
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MANDATORY REDEMPTION
We must repay the outstanding debentures at their stated maturity on
, 2030, unless earlier redeemed or converted. Upon repayment at
maturity or as a result of acceleration upon the occurrence of an event of
default under the indenture, we will redeem the debentures, in whole but not in
part, at a redemption price equal to 100% of the principal amount of the
debentures, together with any accrued and unpaid interest on the debentures. The
trust will concurrently apply the proceeds from the redemption or repayment, a
like amount of preferred securities and its common securities. See "Description
of Preferred Securities -- Mandatory Redemption." Any payment pursuant to this
provision will be made prior to 2:00 p.m., New York City time, on the date of
repayment or acceleration or at another time on an earlier date as the parties
agree. The debentures are not entitled to the benefit of any sinking fund or,
except as described above or as a result of acceleration, any other provision
for mandatory prepayment.
OPTIONAL REDEMPTION
We will have the right to redeem the debentures in whole or in part, at any
time on or after , 2003; provided, however, we may only redeem the
debentures on or after , 2003 and before if the
closing price of our common stock exceeds % of the conversion price for at
least 20 trading days within a period of 30 consecutive trading days ending
within 5 trading days of the date of the notice of redemption. The debentures
will be redeemed at the following redemption prices, expressed as percentages of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date fixed for redemption if redeemed during the twelve-month periods commencing
in each of the following years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................
2004........................................................
2005........................................................
2006........................................................
2007........................................................
2008........................................................
2009........................................................
2010 and thereafter.........................................
</TABLE>
We will also have the right to redeem the debentures, in whole but not in
part, following the occurrence of a tax event or investment company event.
Please read the "Description of the Preferred Securities -- Special Event
Redemption or Distribution" section of this prospectus.
REDEMPTION PROCEDURES
We may not redeem the debentures in any case unless all accrued and unpaid
interest has been paid in full on all outstanding debentures for all quarterly
periods terminating prior to and including the redemption date. If fewer than
all the outstanding debentures are to be redeemed, the debentures to be so
redeemed will be selected as described under "Description of the Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company."
If we redeem the debentures after a record date and on or before an
interest payment date, accrued and unpaid interest will be payable to holders of
record on the relevant record date.
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So long as the preferred securities and the common securities are
outstanding, the trust will use the proceeds from the redemption of any
debentures to redeem preferred securities and common securities.
We will make any redemption upon not less than 30 nor more than 60 days'
notice. If we give a redemption notice for the debentures it will be
irrevocable. Once we give a redemption notice, we will deposit irrevocably with
the indenture trustee funds sufficient to pay the applicable redemption price
and will give irrevocable instructions and authority to pay such redemption
price to the holders of the debentures by 2:00 p.m., New York City time, on the
redemption date. If we give a redemption notice and deposit funds as required,
then immediately prior to the close of business on the redemption date, interest
will cease to accrue on the debentures called for redemption. The debentures
will no longer be deemed to be outstanding and all rights of holders of
debentures so called for redemption will cease, except the right of the holders
of debentures to receive the applicable redemption price, but without interest
on such redemption price. If we fix a redemption date that is not a business
day, then we will pay the redemption price on the next succeeding day that is a
business day, without any interest or other payment in respect of any such
delay. If such business day falls in the next calendar year, however, we will
pay the redemption price on the immediately preceding business day, in each case
with the same force and effect as if made on the redemption date. If we fail to
repay the debentures on maturity or on the date fixed for redemption or if
payment of the redemption price in respect of debentures is improperly withheld
or refused and not paid by us, interest on such debentures will continue to
accrue from the original redemption date to the date of payment, in which case
the actual payment date will be considered the date fixed for redemption for
purposes of calculating the applicable redemption price. If fewer than all of
the debentures are to be redeemed, the debentures will be redeemed pro rata or
by lot or by any other equitable method determined by the indenture trustee.
In the event of any partial redemption, we will not be required to:
- issue, register the transfer of or exchange any debentures during a
period beginning at the opening of business 15 days before the mailing of
a notice of redemption of debentures and ending at the close of business
on the date of the mailing and
- register the transfer of or exchange any debentures so selected for
redemption, in whole or in part, except the unredeemed portion of any
debentures being redeemed in part.
BOOK-ENTRY AND SETTLEMENT
If any debentures are distributed to holders of preferred securities, such
debentures will be issued in the form of one or more global debt securities
registered in the name of the depository or its nominee. Except under the
limited circumstances described below, debentures represented by the global debt
security will not be exchangeable for, and will not otherwise be issuable as,
debentures in definitive form. The global debt securities described above may
not be transferred except by the depository to a nominee of the depository or by
a nominee of the depository to the depository or another nominee of the
depository or to a successor depository or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in a global
security.
Except as provided below, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of debentures in
definitive form and will not be considered the holders (as defined in the
indenture) thereof for any purpose under the indenture, and no global security
representing debentures shall be exchangeable, except for another global
security of like denomination
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and tenor to be registered in the name of the depository or its nominee or to a
successor depository or its nominee. Accordingly, each such beneficial owner
must rely on the procedures of the depository or, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest to exercise any rights of a holder under the indenture. If
debentures are distributed to holders of preferred securities, DTC will act as
securities depository for the debentures.
For a description of DTC and DTC's book-entry system, see "Description of
the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company." As of the date of this prospectus, the description herein of DTC's
book-entry system and DTC's practices as they relate to purchases, transfers,
notices and payments with respect to the preferred securities apply in all
material respects to any debt obligations represented by one or more global
securities held by DTC. We may appoint a successor to DTC or any successor
depository in the event DTC or such successor depository is unable or unwilling
to continue as a depository for the global securities.
None of us, the indenture trustee, any paying agent and any other agent of
us or the indenture trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in a global security for such debentures or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
A global security shall be exchangeable for debentures registered in the
names of persons other than the depository or its nominee only if:
- the depository notifies us that it is unwilling or unable to continue as
a depository for such global security and no successor depository shall
have been appointed,
- the depository, at any time, ceases to be a clearing agency registered
under the Exchange Act at which time the depository is required to be so
registered to act as such depository and no successor depository shall
have been appointed, or
- we, in our sole discretion, determine that such global security shall be
so exchangeable.
Any global security that is exchangeable pursuant to the preceding sentence
will be exchangeable for debentures registered in such names as the depository
shall direct. It is expected that such instructions will be based upon
directions received by the depository from its Participants with respect to
ownership of beneficial interests in such global security.
CONVERSION OF THE DEBENTURES INTO OUR COMMON STOCK
Unless we have redeemed the debentures, and subject to our right to elect a
cash settlement as described below, holders of the debentures may convert them
into our common stock at any time after , 2001 and before the earlier
of:
- the close of business on the business day prior to the maturity date of
the debentures, which is , 2030 or
- in the case of debentures called for redemption, the close of business on
the business day prior to the redemption date
at the initial conversion price, subject to the conversion price adjustments
described under "Description of the Preferred Securities -- Conversion Rights."
The trust has agreed not to convert debentures it holds except pursuant to a
notice of conversion delivered to the conversion agent by a holder of the
preferred securities.
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From , 2001 and until the next business day following the date of
the distribution of our common stock held by Southern Company to its
stockholders, we may elect to make a cash settlement in respect of any
debentures surrendered for conversion by delivering notice to the tendering
holder not more than five trading days after the debentures are surrendered. The
amount of cash that you will receive in the case of a cash settlement will be
equal to the value of the underlying shares of common stock as calculated under
"Description of the Preferred Securities -- Conversion Rights." We will pay the
cash settlement amount as promptly as practicable.
Upon surrender of the preferred securities to the conversion agent for
conversion, the trust will deliver debentures to the conversion agent on behalf
of the holder of the preferred securities so converted. Upon such delivery, the
conversion agent will convert such debentures into our common stock on behalf of
such holder. Our delivery to the holders of the debentures, through the
conversion agent, of the fixed number of shares of our common stock into which
the debentures are convertible, together with the cash payment, if any, in lieu
of fractional shares, will be deemed to satisfy our obligation to pay the
principal amount of the debentures so converted and any unpaid interest,
including compounded interest, accrued on such debentures at the time of such
conversion.
If a debenture is surrendered for conversion after the close of business on
any regular record date for payment of interest and before the opening of
business on the corresponding interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date will be paid in
cash to the person in whose name the debenture is registered at the close of
business on such record date.
COMPOUNDED INTEREST
Payments of compounded interest, if any, on the debentures held by the
trust will make funds available to pay additional cash distributions on
distributions in arrears in respect of the preferred securities pursuant to the
terms thereof to the extent permitted by law.
OUR RIGHT TO SHORTEN MATURITY
If a tax event occurs, then we will have the right
- prior to the dissolution of the trust, to shorten the stated maturity of
the debentures to the minimum extent required, but not less than 15 years
from the date of original issuance of the debentures or
- to direct the property trustee to dissolve the trust, if not previously
dissolved, and shorten the stated maturity of the debentures to the
minimum extent required, but not less than 15 years from the date of
original issuance of the debentures,
in each case, in the opinion of our counsel experienced in such matters, after
shortening the stated maturity, interest paid on the debentures will be
deductible for federal income tax purposes.
If we exercise our right and shorten the stated maturity of the debentures,
the trust will redeem all of the outstanding preferred securities when the
debentures are paid on their new maturity date.
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OUR COVENANTS APPLICABLE TO THE DEBENTURES
In the indenture, we will agree that, as long as any preferred securities
are outstanding, we will not make the payments and distributions described below
if either:
- we are in default on our guarantee payments or other payment obligations
under the guarantee,
- any event of default under the indenture with respect to the debentures
has occurred, or
- we have elected to defer payments of interest on the debentures by
extending the interest payment period and that deferral period is
continuing.
In the above circumstances, we will agree that we will not:
- declare or pay any dividends on our capital stock or redeem, purchase,
acquire or make a distribution or liquidation payment with respect to our
capital stock other than,
- dividends or distributions in shares of, or options, warrants, rights to
subscribe for or purchase our shares of, our common stock,
- transactions relating to a shareholders' rights plan,
- as a result of a reclassification of our capital stock or the exchange
or conversion of one class or series of our capital stock for another
class or series of our capital stock,
- the payment of accrued dividends and the purchase of fractional share
interests upon conversion or exchange of our capital stock, or
- purchases of our common stock related to benefit plans, dividend
reinvestment plans or stock purchase plans;
- make any payments on or repay, repurchase or redeem any debt that ranks
equally with or junior to the debentures; or
- make any guarantee payments on any guarantee by us of the debt of any of
our subsidiaries, other than a payment under the guarantee, if that
guarantee ranks equally with or junior to the debentures.
In addition, as long as preferred securities are outstanding, we will agree
that we will:
- permit the common securities of the trust to be transferred only as
permitted by the trust agreement, except to a successor of us under the
indenture,
- comply with our obligations and agreements in the trust agreement, and
- use reasonable efforts to cause the trust to continue to be treated as a
grantor trust for United States federal income tax purposes, except in
connection with a distribution of debentures to the holders of preferred
securities as provided in the trust agreement.
SUBORDINATION
Payment of principal of, any premium and interest on the debentures will
generally be subordinated and junior in right of payment to the prior payment in
full of all of our current and future senior debt.
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We may make no payment of principal, any premium or interest on the
debentures if:
- we are in default on our obligation to pay the principal, premium,
interest or any other amounts on any senior debt or
- the maturity of any senior debt has been accelerated because of a
default.
This restriction on payment will continue until the default is cured or waived
or ceases to exist or until we have discharged or paid the accelerated senior
debt in full.
If the maturity of the debentures is accelerated, we will make no payments
on the debentures until the holders of all senior debt are paid in full,
including any amounts due upon acceleration.
The subordination does not affect our obligation to pay, when due,
principal of, any premium and interest on the debentures. Our obligation to pay
is absolute and unconditional. In addition, the subordination does not prevent
the occurrence of any default under the indenture.
The indenture will not limit the amount of senior debt that we may incur.
As a result of the subordination of the debentures, if we became insolvent,
holders of debentures may receive less on a proportionate basis than other
creditors.
Senior debt generally means all notes or other indebtedness, including
guarantees, of us for money borrowed and similar obligations, unless the
indebtedness:
- is without recourse or
- states that it is subordinated to or equal with the debentures.
INDENTURE EVENTS OF DEFAULT
The following are events of default with respect to the debentures:
- failure to pay interest on the debentures for 30 days, unless we have
validly extended the interest payment period,
- failure to pay principal of or any premium on the debentures when due,
- failure by us to deliver shares of our common stock upon an appropriate
election by holders of debentures to convert those debentures,
- failure to comply in any material respect with any other covenant or
warranty in the indenture for 90 days after written notice to us by the
indenture trustee or by the holders of at least 25% in principal amount
of the outstanding debentures; however, this provision does not include
any warranty, covenant or provision that is included in the indenture
solely for the benefit of other series of junior subordinated debt
securities, and
- bankruptcy, insolvency or reorganization events of us.
If an event of default for the debentures occurs and is continuing, the
indenture trustee or the holders of at least 25% in principal amount of the
outstanding debentures may declare the principal of the debentures to be due and
payable. At any time after a declaration of acceleration of payment is made and
before a judgment for payment of money due is obtained, the acceleration will be
automatically annulled and rescinded if we have cured the default.
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In most cases, holders of a majority in principal amount of the outstanding
debentures may direct the time, method and place of:
- conducting any proceeding for any remedy available to the indenture
trustee or
- exercising any right or power conferred on the indenture trustee.
The holders of a majority in principal amount of the outstanding debentures
may waive any past default with respect to the debentures. Those holders may
waive any default in the payment of principal, any premium or interest, however,
only if we:
- have cured the default and
- have deposited with the indenture trustee an amount sufficient to pay all
matured installments of interest and principal, except those caused by
acceleration, and any premium.
In addition, the holders may not waive any call for redemption of the
debentures.
The indenture requires us to file annually with the indenture trustee a
certificate as to our compliance with the conditions and covenants contained in
the indenture.
An event of default under the indenture will constitute an event of default
under the trust agreement. A holder of preferred securities may directly
institute a proceeding against us for enforcement of payment to that holder of
principal, any premium or interest if:
- an event of default under the trust agreement has occurred and is
continuing and
- that event of default is attributable to our failure to pay principal,
any premium or interest on the debentures when due.
In any such proceeding, we will be subrogated to the rights of the holder under
the trust agreement to the extent of any payment we make to the holder in the
proceeding. Except as described in the preceding sentences, the holders of
preferred securities will not be able to exercise directly any other remedy
available to the holders of the debentures.
AMENDMENT OF THE INDENTURE
We and the indenture trustee may amend the indenture from time to time if
the holders of a majority in principal amount of the outstanding junior
subordinated debt securities of all series issued under the indenture and
affected by the amendment, acting as one class, consent to it. Without the
consent of the holder of each debt security affected, however, no amendment or
supplement may:
- extend the fixed maturity of the debt security,
- reduce the principal amounts of the debt security,
- reduce the rate of or extend the time for payment of interest on the debt
security,
- reduce any premium payable on the redemption of the debt security,
- adversely affect the right to convert the debt security, or
- reduce the amount of debt securities whose holders must consent to an
amendment, supplement or waiver.
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We and the indenture trustee may amend or supplement the indenture without
the consent of any holders of the debentures and any other junior subordinated
debt securities:
- to provide for the assumption of our obligations under the indenture by a
successor upon any merger, consolidation or asset transfer,
- to add additional covenants, restrictions, conditions or provisions for
the protection of the holders of the debt securities,
- to cure any ambiguity or to correct or supplement any defect or
inconsistency,
- to change any provision of the indenture effective after there are no
outstanding debt securities of any series entitled to the benefit of that
provision,
- to provide for the issuance of debt securities in coupon form,
- to provide for the acceptance of a successor trustee,
- to qualify or maintain the qualification of the indenture under the Trust
Indenture Act of 1939,
- to establish the form or terms of a series of debt securities, and
- to make any change that does not adversely affect the rights of any
holder of debt securities in any material respect.
CONSOLIDATION, MERGER AND SALE
The indenture generally does not prohibit a consolidation or merger between
us and another entity. It also permits the sale by us of all or substantially
all of our assets. We have agreed, however, that we will consolidate with or
merge into any entity or transfer or dispose of all or substantially all of our
assets to any entity only if:
- we are the continuing corporation, or
- if we are not the continuing corporation, the successor is a corporation
organized and existing under the laws of any United States jurisdiction
and assumes all of our obligations under the indenture and the
debentures, and
- in either case, immediately after giving effect to the transaction, no
event of default, and no event which, after notice or lapse of time or
both, would become an event of default, has occurred and is continuing.
DEFEASANCE AND DISCHARGE
The debentures will not be subject to defeasance and discharge or to
covenant defeasance.
ASSIGNMENT
We may at any time assign any of our rights or obligations under the
indenture to an affiliate subject to the terms of the indenture. If the
affiliate assumes all such rights and obligations, we will automatically be
released from all our obligations, provided that immediately after giving effect
to the transaction, there is no event of default, and no event that, after
notice or lapse of time or both, would have become an event of default under the
indenture. We also may assign the indenture to a successor in a merger,
consolidation or asset sale involving us permitted under the indenture.
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INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee is under no obligation to exercise any of the powers
vested in it by the indenture at the request of any holder of debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that it might incur. The indenture trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the indenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
We and certain of our subsidiaries maintain deposit accounts and banking
relationships with the indenture trustee.
GOVERNING LAW
New York law will govern the indenture and the debentures.
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DESCRIPTION OF THE GUARANTEE
When the preferred securities are issued, we will execute and deliver a
guarantee for the benefit of the holders of preferred securities. The guarantee
will be qualified as an indenture under the Trust Indenture Act. Bankers Trust
Company, as guarantee trustee, will act as the indenture trustee under the
guarantee for purposes of the Trust Indenture Act. The terms of the guarantee
include those in the guarantee and those made part of the guarantee by the Trust
Indenture Act. We have summarized the material provisions of the guarantee
below. This summary may omit a term or provision that you would consider
important. For a complete description of the guarantee, we encourage you to read
the guarantee. We have filed a form of the guarantee with the SEC.
GENERAL
To the extent described below, we will agree to pay the following amounts
in full if they are not paid by the trust:
- any accumulated and unpaid distributions on the preferred securities to
the extent we have made corresponding payments on the debentures to the
property trustee,
- the redemption price for any preferred securities called for redemption
by the trust, to the extent we have made corresponding payments on the
debentures to the property trustee, and
- payments upon the dissolution, winding-up or termination of the trust
equal to the lesser of:
- the liquidation amount plus all accumulated and unpaid distributions on
the preferred securities to the extent the trust has funds legally
available for those payments, and
- the amount of assets of the trust remaining legally available for
distribution to the holders of the preferred securities in liquidation
of the trust.
We will not be required to make these liquidation payments if:
- the trust distributes the debentures to the holders of the preferred
securities in exchange for their preferred securities, or
- the trust redeems the preferred securities upon the maturity or
redemption of the debentures.
The guarantee is a guarantee from the time of issuance of the preferred
securities. We will be obligated to make guarantee payments when due, regardless
of any defense, right of set-off or counterclaim that the trust may have or
assert. We may satisfy our obligation to make guarantee payments by either
making payments directly to holders of the preferred securities or by causing
the trust to make the payments to them.
The guarantee only covers distributions and other payments on the preferred
securities if and to the extent we have made corresponding payments on the
debentures to the property trustee. If we do not make those corresponding
payments
- the property trustee will not make distributions on the preferred
securities,
- the trust will not have funds available for payments on the preferred
securities, and
- we will not be obligated to make guarantee payments.
In addition to the circumstances described under the "-- Termination of the
Guarantee" section of this prospectus, the guarantee will terminate upon the
distribution, if any, of our common stock to
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holders of preferred securities upon conversion of all such holders' preferred
securities into our common stock.
OUR COVENANTS
In the guarantee, we will agree that, as long as any preferred securities
are outstanding, we will not make the payments and distributions described below
if:
- we are in default on our guarantee payments or other payment obligations
under the guarantee,
- any event of default under the trust agreement has occurred, or
- we have elected to defer payments of interest on the debentures by
extending the interest payment period and that deferral period is
continuing.
In the above circumstances, we will agree that we will not:
- declare or pay any dividends on our capital stock or redeem, purchase,
acquire or make a distribution or liquidation payment with respect to our
capital stock other than,
- dividends, payments or distributions in shares of, or options, warrants,
rights to subscribe for or purchase shares of, our common stock,
- transactions relating to a shareholders' rights plan,
- as a result of a reclassification of our capital stock or the exchange
or conversion of one class or series of our capital stock for another
class or series of our capital stock,
- the payment of accrued dividends and the purchase of fractional share
interests upon conversion or exchange of our capital stock, or
- purchases of our common stock related to benefit plans, dividend
reinvestment plans or stock purchase plans;
- make any payments on or repay, repurchase or redeem any debt that ranks
equally with or junior to the debentures (except by conversion into or
exchange for shares of our capital stock); or
- make any guarantee payments with respect to the above two bullet points.
In addition, as long as any preferred securities are outstanding, we will
agree that we will:
- remain the sole direct or indirect owner of all the outstanding common
securities of the trust, except as permitted by the trust agreement,
- permit the common securities of the trust to be transferred only as
permitted by the trust agreement, except to our successor under the
indenture, and
- use reasonable efforts to cause the trust to continue to be treated as a
grantor trust for United States federal income tax purposes, except in
connection with a distribution of debentures to the holders of preferred
securities.
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AMENDMENTS AND ASSIGNMENTS
We may amend the guarantee without the consent of any holder of preferred
securities if the amendment does not adversely affect the rights of the holders
in any material respect. In all other cases, we may amend the guarantee only
with the prior approval of the holders of at least a majority in liquidation
amount of the outstanding preferred securities.
We may assign our obligations under the guarantee only in connection with a
consolidation, merger or asset sale involving us permitted under the indenture.
TERMINATION OF THE GUARANTEE
The guarantee will terminate upon:
- full payment of the redemption price of all preferred securities and
accrued and unpaid distributions,
- distribution of the debentures to the holders of the preferred securities
and common securities in exchange for all the securities issued by the
trust,
- full payment of the amounts payable upon liquidation of the trust, or
- distribution of our common stock to you in respect of the conversion of
your preferred securities into common stock.
The guarantee will, however, continue to be effective or will be reinstated
if any holder of preferred securities must repay any amounts paid on those
preferred securities or under the guarantee.
STATUS OF THE GUARANTEE
Our obligation under the guarantee to make guarantee payments will be
unsecured and will rank:
- subordinate and junior in right of payment to all our other liabilities,
including the debentures, except those liabilities made equal or
subordinate to the guarantee by their terms, and
- senior to the following:
- all of our capital stock other than our most senior preferred shares and
- any guarantee we enter into relating to our capital stock, other than
our most senior preferred shares.
The guarantee will rank equal to our most senior preferred shares issued from
time to time. Our obligations under the guarantee will rank equally with
obligations under other guarantee agreements that we may enter into from time to
time if:
- the agreements are substantially in the form of the guarantee and provide
for comparable guarantees by us of payment on preferred securities issued
by other trusts or financing vehicles of us and
- the debt relating to those preferred securities are junior subordinated,
unsecured indebtedness of us.
Our obligations under the guarantee will be effectively junior to all debt
and other liabilities and preferred stock of our subsidiaries. By your
acceptance of the preferred securities, you agree to the subordination
provisions and other terms of the guarantee.
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The guarantee will constitute a guarantee of payment and not merely of
collection. This means that you may institute a legal proceeding directly
against us to enforce your payment rights under the guarantee without first
instituting a legal proceeding against any other person or entity.
We will deposit the guarantee with the guarantee trustee, acting in its
additional role as indenture trustee, to be held for the benefit of the holders
of preferred securities. The guarantee trustee will have the right to enforce
the guarantee on behalf of those holders. In most cases, the
holders of a majority in liquidation amount of the preferred securities will
have the right to direct the time, method and place of:
- conducting any proceeding for any remedy available to the guarantee
trustee or
- exercising any right or other power conferred upon the guarantee trustee
under the guarantee.
If the guarantee trustee fails to enforce the guarantee, you may institute
a legal proceeding directly against us to enforce your rights under the
guarantee without first instituting a legal proceeding against the trust, the
guarantee trustee or any other person or entity.
MISCELLANEOUS
We will be required to provide annually to the guarantee trustee a
statement as to our performance of our obligations and our compliance with all
conditions under the guarantee.
The guarantee trustee normally will perform only those duties specifically
given to it in the guarantee. There are no implied covenants in the guarantee.
If a default occurs on a guarantee, the guarantee trustee will use the same
degree of care and skill in exercise of its powers under the guarantee as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs. The guarantee trustee will become obligated to exercise any of its
rights or powers under the guarantee at the request or direction of any holder
of the preferred securities only if it is offered security and indemnity
satisfactory to it.
We and certain of our affiliates maintain deposit accounts and banking
relationships with the guarantee trustee.
GOVERNING LAW
New York law will govern the guarantee.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE DEBENTURES AND THE GUARANTEE
When taken together, the terms of the preferred securities, the debentures,
the trust agreement and the guarantee provide a full, irrevocable and
unconditional guarantee by us of the payments due on the preferred securities.
No single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes the full guarantee. The following summary
briefly explains the interrelationship between the preferred securities, the
debentures and the guarantee.
THE TRUST WILL BE ABLE TO MAKE PAYMENTS ON THE PREFERRED SECURITIES IF WE MAKE
PAYMENTS ON THE DEBENTURES.
As long as we make interest and other payments when due on the debentures,
the trust will have sufficient funds to make distribution and other payments
when due on the preferred securities for the following reasons:
- the trust will hold debentures in an aggregate principal amount equal to
the sum of the aggregate stated liquidation amount of the preferred
securities and the common securities,
- the interest rate and payment dates of the debentures will match the
distribution rate and payment dates of the preferred securities and the
common securities,
- the trustees may not cause or permit the trust to engage in any activity
that is not consistent with its limited purposes, and
- we have agreed to pay for all of the trust's debts and obligations, other
than with respect to the preferred securities and common securities, and
costs and expenses, including the fees and expenses of the trustees,
except for United States withholding taxes.
We have the right to set off any payment that we are otherwise required to
make under the indenture with and to the extent that we have already made, or
are concurrently on the date of payment making, any payment under the guarantee
used to satisfy the related payment of indebtedness under the indenture.
WE WILL GUARANTEE THAT PAYMENTS WILL BE MADE ON THE PREFERRED SECURITIES IF WE
MAKE PAYMENTS ON THE DEBENTURES.
If we make interest or other payments on the debentures, the property
trustee will be obligated to make corresponding distribution or other payments
on the preferred securities. We will guarantee such payments if the trust fails
to make them. The guarantee only covers distributions and other payments on the
preferred securities if and to the extent that we have made corresponding
payments on the debentures. The guarantee trustee will have the right to enforce
the guarantee on behalf of the holders of the preferred securities if we fail to
make any required guarantee payments. If the guarantee trustee fails to enforce
the guarantee, you may institute a legal proceeding directly against us to
enforce the guarantee trustee's rights under the guarantee. If we fail to make a
guarantee payment, you may also institute a legal proceeding directly against us
to enforce the guarantee. Please read the "Description of the Guarantee" section
in this prospectus.
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THE PROPERTY TRUSTEE MAY INSTITUTE LEGAL PROCEEDINGS AGAINST US IF WE FAIL TO
MAKE PAYMENTS ON THE DEBENTURES.
If we do not make interest or other payments on the debentures the trust
will not have funds available to make the corresponding distribution or other
payments on the preferred securities. The property trustee, as the holder of the
debentures, will have the right to enforce our obligations on the debentures if
an event of default under the debentures occurs. In addition, the holders of at
least a majority in liquidation amount of the preferred securities will have the
right to direct the property trustee with respect to certain matters under the
trust agreement. If the property trustee fails to enforce its rights, any holder
of preferred securities may, after a period of 60 days has elapsed from such
holder's written request to the property trustee to enforce such rights,
institute a legal proceeding against us to enforce such rights. Please read
"Description of the Preferred Securities" section in this prospectus.
IN THE EVENT OF ANY DISSOLUTION OF THE TRUST, EACH HOLDER OF THE PREFERRED
SECURITIES OR COMMON SECURITIES WILL BE ENTITLED TO RECEIVE DEBENTURES OR CASH
FROM THE TRUST.
In the event of any voluntary or involuntary dissolution of the trust, each
holder of the preferred securities or the common securities at that time will be
entitled to receive, after satisfaction of liabilities to creditors, an
aggregate principal amount of debentures equal to the aggregate liquidation
preference of the preferred securities or common securities held by that holder.
If the property trustee determines that the distribution of debentures is not
practicable, you or holders of the common securities will be entitled to receive
out of the assets of the trust, after satisfaction to creditors, distributions
in an amount equal to the aggregate of the stated liquidation preference of the
preferred securities or the common securities, plus accrued and unpaid
distributions thereon to the date of payment.
Upon any voluntary or involuntary liquidation or bankruptcy of us, the
property trustee, as holder of the debentures, would be a subordinated creditor
of ours. As such, the property trustee will be subordinated in right of payment
to all senior debt as set forth in the indenture, but entitled to receive
payment in full of principal (and premium, if any) and interest, before any of
our stockholders receive payments or distributions. Because we will be the
guarantor under the guarantee and will agree to pay for all costs, expenses and
liabilities of the trust, the positions of a holder of preferred securities and
a holder of debentures relative to other creditors and to our stockholders in
the event of our liquidation or bankruptcy are expected to be substantially the
same.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Under our restated certificate of incorporation, our authorized capital
stock consists of 2,125,000,000 shares, of which 2,000,000,000 shares are common
stock, par value $0.01 per share, and 125,000,000 shares are preferred stock,
par value $0.10 per share. Immediately following the common stock offering,
330,000,000 shares of common stock, or 338,700,000 shares if the U.S.
underwriters exercise their over-allotment option in full, will be outstanding.
The following descriptions are summaries of material terms of our restated
certificate of incorporation and bylaws. This summary is qualified by our
certificate of incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus is a part, and
by the provisions of applicable law.
COMMON STOCK
Each share of common stock entitles the holder to one vote on all matters
on which holders are permitted to vote. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to dividends when, as and if declared by the board of directors out of
funds legally available for that purpose. Upon liquidation, subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to a pro rata share in any distribution to
shareholders. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized, without approval of Southern Company
or any other stockholder, to cause shares of preferred stock to be issued from
time to time in one or more series, and our board of directors may fix the
designation, powers, 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, in addition to voting rights provided by law.
The Series A preferred stock described below under "Stockholder Rights
Plan" is a series of preferred stock that has been authorized by our board.
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The issuance of shares of preferred stock, or the issuance of rights to
purchase shares of preferred stock, could be used to discourage an unsolicited
acquisition proposal. For example, a business combination could be impeded by
issuing a series of preferred stock containing class voting rights that would
enable the holder or holders of this series to block that transaction.
Alternatively, a business combination could be facilitated by issuing a series
of preferred stock having sufficient voting rights to provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power and
other rights of the holders of the common stock. Although our board is required
to make any determination to issue any preferred stock based on its judgment as
to the best interests of our stockholders, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of our stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices of the stock. Our board does not at present intend to seek stockholder
approval prior to any issuance of currently authorized stock unless otherwise
required by law or applicable stock exchange requirements.
SERIES B REDEEMABLE PREFERRED STOCK
We have issued one share of Series B redeemable preferred stock to Southern
Company to facilitate the transfer of our SE Finance and Capital Funding
subsidiaries to Southern Company in connection with our separation from Southern
Company. In order to transfer SE Finance and Capital Funding to Southern
Company, after the common stock offering and prior to the distribution of our
stock by Southern Company, we will form a corporation with Southern Company
Energy Solutions, Inc., a wholly owned subsidiary of Southern Company. We will
contribute the stock of SE Finance and Capital Funding to the corporation in
exchange for an 80% or greater interest. Southern Company Energy Solutions, Inc.
will contribute its assets to a subsidiary of the corporation in exchange for a
20% or lesser interest. We will then redeem the one share of redeemable
preferred stock issued by us to Southern Company in exchange for our entire
interest in the joint venture.
The shares of Series B preferred stock rank senior to all classes of common
stock and on a par with each other class of stock we may issue as to
liquidation, winding-up and dissolution. Except as provided by Delaware law,
ownership of the share of Series B preferred stock does not give Southern
Company any voting rights, nor does it grant Southern Company any entitlement to
receive dividends. The share of Series B preferred stock may be redeemed, at our
option. Upon redemption, the share of the Series B preferred stock shall be
retired and restored to the status of an authorized but unissued share of
preferred stock without designation as to series.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAWS AND OUR CERTIFICATE AND BY-LAW PROVISIONS
Some provisions of Delaware law and our restated certificate of
incorporation and bylaws could make the following more difficult:
- acquisition of us by means of a tender offer,
- acquisition of us by means of a proxy contest or otherwise, or
- removal of our incumbent officers and directors.
These provisions, as well as our ability to issue preferred stock, are
designed to discourage coercive takeover practices and inadequate takeover bids.
These provisions are also designed to encourage persons seeking to acquire
control of us to first negotiate with our board of directors. We believe that
the benefits of increased protection give us the potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us, and that the benefits
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of this increased protection outweigh the disadvantages of discouraging those
proposals, because negotiation of those proposals could result in an improvement
of their terms.
ELECTION AND REMOVAL OF DIRECTORS
Our board of directors will be comprised of between two and 21 directors,
the exact number to be fixed from time to time by resolution of our board of
directors. Beginning at the time Southern Company (or a majority-owned and
controlled subsidiary of Southern Company) owns less than 33 1/3% of our common
stock, our board of directors will be divided into three classes. The directors
in each class will serve for a three-year term, one class being elected each
year by our stockholders. See "Management -- Directors and Executive Officers."
This system of electing and removing directors may discourage a third party from
making a tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors. In addition, beginning at the time Southern Company (or a
majority-owned and controlled subsidiary of Southern Company) owns less than
33 1/3% of our common stock, no director may be removed except for cause, and
directors may be removed for cause by a majority of the shares then entitled to
vote at an election of directors. Any vacancy occurring on the board of
directors, and any newly created directorship, may only be filled by a majority
of the remaining directors in office. If a director dies, resigns, retires, is
removed or otherwise ceases to serve as a director during his or her term, his
or her successor will serve until the next stockholders' meeting at which
directors of the former director's class are elected and until his or her
successor is elected and qualified, or until he or she resigns or is removed
from the board. The provisions described in this paragraph may not be amended or
repealed except by the vote of the holders of at least 66 2/3% of the voting
power of all outstanding shares of stock entitled to vote in the election of
directors.
STOCKHOLDER MEETINGS AND ADVANCED NOTICE REQUIREMENTS FOR STOCKHOLDER
NOMINATIONS AND PROPOSALS
Our restated certificate of incorporation provides that as of the day that
Southern Company (or a majority-owned and controlled subsidiary of Southern
Company) ceases to own at least a majority of our common stock, special meetings
of holders of common stock may be called only by the chairman of our board of
directors, our president or a majority of the board of directors and may not be
called by the holders of common stock; our restated certificate of incorporation
specifically denies any power of the stockholders to call a special meeting as
of such time. These provisions may not be amended or repealed except by the vote
of the holders of at least 66 2/3% of the voting power of all outstanding shares
of stock entitled to vote in the election of directors.
Our bylaws require that advance notice be delivered to us of any business
to be brought by a stockholder before an annual or special meeting of
stockholders and provide for procedures to be followed by stockholders in
nominating persons for election to our board of directors. In the case of an
annual meeting, stockholders generally must give written notice of a nomination
or proposal to the secretary of our company not later than 90 days nor earlier
than 120 days prior to the first anniversary of the preceding year's annual
meeting.
For special meetings, only business set forth in the notice of that special
meeting given by our company to our stockholders 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 who will be entitled to vote at 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
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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 to the secretary of our company 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.
The provisions regarding stockholder meetings and advance notice
requirements described in the preceding paragraphs may not be amended or
repealed except by the vote of the holders of at least 66 2/3% of the voting
power of all outstanding shares of stock entitled to vote in the election of
directors.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT
Our restated certificate of incorporation provides that, beginning the day
that Southern Company (or a majority-owned and controlled subsidiary of Southern
Company) ceases to own at least a majority of our common stock, holders of our
common stock will not be able to act by written consent without a meeting. Prior
to the distribution of our common stock, Southern Company will be able to take
any action requiring approval of our stockholders by written consent and without
the affirmative vote of our other stockholders. This provision may not be
amended or repealed except by the vote of the holders of at least 66 2/3% of the
voting power of all outstanding shares of stock entitled to vote in the election
of directors.
NO CUMULATIVE VOTING
Our restated certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors.
ADOPTION, AMENDMENT OR REPEAL OF BYLAWS BY OUR BOARD OF DIRECTORS
Our restated certificate of incorporation provides that our board of
directors may adopt, amend or repeal our bylaws. Holders of our common stock are
able to adopt additional bylaws and may amend or repeal a bylaw whether it was
adopted by the board or by shareholders. This provision may not be amended or
repealed except by the vote of the holders of at least 66 2/3% of the voting
power of all outstanding shares of stock entitled to vote in the election of
directors.
LIMITATION ON LIABILITY OF DIRECTORS
Our restated certificate of incorporation provides that no director shall
be liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except as required by law, as in effect from time to time.
Currently, Delaware law requires that liability be imposed for the following:
- any breach of the director's duty of loyalty to our company or our
stockholders,
- any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporate Law, and
- any transaction from which the director derived an improper personal
benefit.
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Our bylaws provide that, to the fullest extent permitted by law, we will
indemnify any person made or threatened to be made a party to any action by
reason of the fact that the person is or was our director or officer, or served
any other enterprise at our request as a director or officer. We will reimburse
the expenses, including attorneys' fees, incurred by a person indemnified by
this provision when we receive an undertaking to repay such amounts if it is
ultimately determined that the person is not entitled to be indemnified by us.
Amending this provision will not reduce our indemnification obligations relating
to actions taken before an amendment.
TRANSACTIONS AND CORPORATE OPPORTUNITIES
Our restated certificate of incorporation includes provisions which
regulate and define the conduct of certain business and affairs of our company.
These provisions serve to determine and delineate the respective rights and
duties of our company, Southern Company and some of our directors and officers
in anticipation of the following:
- directors, officers and/or employees of Southern Company continuing to
serve as our directors;
- Southern Company engaging in lines of business that are the same as,
similar or related to, or overlap or compete with, our lines of business;
and
- we and Southern Company engaging in material business transactions,
including transactions pursuant to the various agreements related to our
separation from Southern Company described elsewhere in this prospectus.
We may, from time to time, enter into and perform agreements with Southern
Company to engage in any transaction, and to agree to compete or not to compete
with each other, including to allocate, or to cause our and their respective
directors, officers and employees to allocate, corporate opportunities between
Southern Company and us. Our restated certificate of incorporation provides that
no such agreement, or its performance, shall be considered contrary to any
fiduciary duty of Southern Company, as the controlling stockholder of our
company, or of any such director or officer, if any of the following conditions
are satisfied:
- the agreement was entered into before our company ceased to be a
wholly-owned subsidiary of Southern Company and is continued in effect
after this time;
- the agreement or transaction was approved, after being made aware of the
material facts as to the agreement or transaction, by:
- our board, by affirmative vote of a majority of directors who are not
interested persons,
- a committee of our board consisting of members who are not interested
persons, by affirmative vote of a majority of those members, or
- one or more of our officers or employees who is not an interested
person and who was authorized by our board or a board committee as
specified above or, in the case of an employee, to whom authority has
been delegated by an officer to whom the authority to approve such an
action has been so delegated;
- the agreement or transaction was fair to us as of the time it was entered
into; or
- the agreement or transaction was approved by the affirmative vote of a
majority of the shares of capital stock entitled to vote and which do
vote on the agreement or transaction, excluding Southern Company and any
interested person in respect of such agreement or transaction.
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Under our restated certificate of incorporation, Southern Company has no
duty to refrain from engaging in similar activities or lines of business as us
and, except as discussed below, neither Southern Company nor any of its
officers, directors or employees will be liable to us or our stockholders for
breach of any fiduciary duty by reason of any of these activities. In addition,
if Southern Company becomes aware of a potential transaction which may be a
corporate opportunity for both Southern Company and us, Southern Company shall
have no duty to communicate or offer this corporate opportunity to us and shall
not be liable to us or our stockholders for breach of any fiduciary duty as a
stockholder by reason of the fact that Southern Company pursues or acquires the
corporate opportunity for itself, directs the corporate opportunity to another
person or does not communicate information regarding such corporate opportunity
to us.
In the event that one of our directors or officers, who is also a director
or officer of Southern Company, acquires knowledge of a potential transaction
which may be a corporate opportunity for both us and Southern Company, the
director or officer shall have satisfied his or her fiduciary duty to us and our
stockholders with respect to the corporate opportunity, and shall not be liable
to us and our stockholders for breach of any fiduciary duty by reason of the
fact that Southern Company pursues or acquires the corporate opportunity for
itself or directs the corporate opportunity to another person or does not
communicate information about the corporate opportunity to us, if the director
or officer acts consistently with the following: a corporate opportunity offered
to any person who is our director or officer, and who is also a director or
officer of Southern Company shall belong to us if the opportunity is expressly
offered to him or her solely in his or her capacity as our director or officer.
If an opportunity is not expressly offered to one of our directors or officers
solely in this capacity, the opportunity shall belong solely to Southern
Company.
For purposes of these provisions, an interested person is generally any
director, officer or employee of Southern Company and any individual who has a
financial interest in the relevant transaction.
The provisions of our restated certificate of incorporation with regard to
such transactions and/or corporate opportunities shall terminate when Southern
Company, together with its affiliates, ceases to be the owner of voting stock
representing 20% or more of the votes entitled to be cast by the holders of all
the then outstanding voting stock; provided, however, that the termination shall
not terminate the effect of these provisions with respect to any agreement
between us and Southern Company that was entered into before the time of
termination or any transaction entered into in the performance of such
agreement, whether entered into before or after such time, or any transaction
entered into between us and Southern Company or the allocation of any
opportunity between us and Southern Company before such time. These provisions
do not alter the fiduciary duty of loyalty of our directors under applicable
Delaware law. If you become a stockholder in our company, you will be deemed to
have notice of and consented to these provisions of our restated certificate of
incorporation.
The provisions regarding transactions and corporate opportunities described
in the preceding paragraphs may not be amended or repealed except by the vote of
the holders of at least 66 2/3% of the voting power of outstanding shares of
stock entitled to vote in the election of directors.
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
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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
common stock offering, Section 203 by its terms is currently not applicable to
business combinations with Southern Company even though Southern Company owns
more than 15% of our outstanding stock. If any other person acquires 15% or more
of our outstanding stock, that person will be subject to the provisions of
Section 203.
STOCKHOLDER RIGHTS PLAN
Our board has adopted a stockholder rights plan. Pursuant to the rights
plan, one right has been issued and is attached to each outstanding share of
capital stock. Each right will entitle the holder, in circumstances described
below, to purchase from our company a unit consisting of one one-thousandth of a
share of Series A preferred stock, par value $1.00 per share, at an exercise
price of $250 per right, subject to adjustment in certain events.
Initially, the rights will be attached to all certificates representing
outstanding shares of common stock and will be transferred with and only with
these certificates. The rights will become exercisable and separately
certificated only upon the rights distribution date, which will occur upon the
earlier of the following:
- any person or group of affiliated persons acquiring 15% or more of the
shares of common stock then outstanding, (unless the offer to acquire
such shares is approved by a majority of the board of directors who are
not affiliates of the acquiring person); or
- ten days following the commencement of or announcement of an intention to
make a tender offer or exchange offer the consummation of which would
result in a person or group causing the rights to become exercisable.
As soon as practicable after the rights distribution date, certificates
will be mailed to holders of record of common stock as of the close of business
on the rights distribution date. From and after the rights distribution date,
the separate certificates alone will represent the rights. Prior to the rights
distribution date, all shares of common stock issued will be issued with rights.
Shares of common stock issued after the rights distribution date will not be
issued with rights.
The final expiration date of the rights will be at the close of business on
August 22, 2010, unless earlier redeemed or exchanged by us as described below.
In the event that a person acquires 15% or more of the shares of common
stock then outstanding, except pursuant to any action or transaction approved by
a majority of our independent and disinterested board, before the person
acquires 15% or more of the shares of common stock then outstanding, each holder
of a right other than that person and certain related parties, whose rights will
automatically become null and void, will thereafter be entitled to receive, upon
exercise of the right, a number of shares of common stock, or, in certain
circumstances, other securities of our company, having a current market price
averaged over the previous 30 consecutive trading days equal to two times the
exercise price of the right.
In the event that, at any time on or after a person acquires 15% or more of
the shares of common stock then outstanding, our company effects a merger or
other business combination in
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which the holders of all of our outstanding common stock prior to such
transaction are not the holders of the surviving corporation's voting power or
50% or more of its assets or earning power is sold or transferred, then each
holder of a right, except rights owned by any person who has acquired 15% or
more of the shares of common stock then outstanding or certain related parties,
which will have become void as set forth above, shall thereafter have the right
to receive, upon exercise, a number of shares of common stock of the acquiring
company having a value equal to two times the exercise price of the right.
The purchase price payable, and the number of Series A preferred stock,
common shares or other securities issuable, upon exercise of the rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A preferred stock, (ii) upon the grant to holders of the Series A
preferred stock of certain rights or warrants to subscribe for or purchase
Series A preferred stock at a price, or securities convertible into shares of
Series A preferred stock with a conversion price, less than the then current
market price of the Series A preferred shares or (iii) upon the distribution to
holders of the Series A preferred stock of evidences of indebtedness or assets
or of subscription rights or warrants.
The number of outstanding rights and the number of one one-thousandths of a
Series A preferred share issuable upon exercise of each right are also subject
to adjustment in the event of a stock split of the common shares or a dividend
on the common shares payable in common shares or certain other adjustments to
the common shares which occur prior to the date on which the rights become
exercisable.
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments require an adjustment of at least 1% in
such purchase price. No fractional Series A preferred shares will be issued
(other than fractions which are one one-thousandth or integral multiples of one
one-thousandth of a Series A preferred share, which may, at our election, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made.
Series A preferred stock purchasable upon exercise of the rights will not
be redeemable. Each share of Series A preferred stock will be entitled to a
minimum preferential quarterly dividend payment of $10.00 per share but, if
greater, will be entitled to an aggregate dividend per share of 1,000 times the
dividend declared per common share. In the event of liquidation, the holders of
Series A preferred stock will be entitled to a minimum preferential liquidation
payment of $10.00 per share; thereafter, and after the holders of the common
stock receive a liquidation payment of $0.01 per share, the holders of the
Series A preferred stock and the holders of the common stock will share the
remaining assets in the ratio of 1,000 to 1 (as adjusted) for each share of
Series A preferred stock and common share so held, respectively. Each share of
Series A preferred stock will have a vote multiple of 1,000 votes per share,
subject to adjustment and will generally vote together with holders of common
stock as a single class. Finally, in the event of any merger, consolidation or
other transaction in which common stock is exchanged, each Series A preferred
share will be entitled to receive 1,000 times the amount received per common
share. These rights are protected by antidilution provisions. In the event that
the amount of accrued and unpaid dividends on the Series A preferred stock is
equivalent to six full quarterly dividends or more, the holders of the Series A
preferred stock shall have the right, voting as a class, to elect two directors
in addition to the directors elected by the holders of the common stock until
all cumulative dividends on the Series A preferred stock have been paid through
the last quarterly dividend payment date or until non-cumulative dividends have
been paid regularly for at least one year.
Our board may generally redeem the rights for nominal consideration at any
time prior to the earlier to occur of (i) a person acquiring 15% or more of the
shares of outstanding common stock,
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except pursuant to a board approved transaction or (ii) the expiration of the
rights, and under certain other circumstances, we may redeem the rights in
whole, but not in part, at a price of $.01 per right which redemption shall be
effective on an action of board of directors. Additionally, we may redeem
outstanding rights in connection with a merger or other business combination
transaction or series of transactions in which all holders of common shares are
treated alike but not involving a person acquiring 15% or more of the shares of
outstanding common stock or its affiliates or associates, except pursuant to a
board approved transaction.
All of the provisions of the rights agreement may be amended by our board
of directors prior to the date the rights become exercisable. After the date the
rights become exercisable, the provisions of the rights agreement may be amended
by our board in order to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of rights, or,
subject to certain limitations, to shorten or lengthen any time period under the
rights agreement. Until a right is exercised, the holder will have no rights as
a stockholder, including, without limitation, the right to vote or to receive
dividends.
The rights will have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire our company
without the approval of our board. As a result, the overall effect of the rights
may be to render more difficult or discourage any attempt to acquire our
company, even if such acquisition may be in the interest of our stockholders.
Because our board can redeem the rights or approve a permitted offer, the rights
will not interfere with a merger or other business combination approved by our
board.
Following the initial public offering of our common stock and prior to the
distribution of our shares by Southern Company, Southern Company's ownership of
our stock will not trigger these provisions of the rights agreement.
LISTING OF COMMON STOCK
Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "SOE," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is ChaseMellon
Shareholder Services, L.L.C.
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TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the ownership and disposition of the preferred securities, but
does not purport to be a complete analysis of all the potential tax
considerations relating thereto. Unless otherwise stated, this summary deals
only with preferred securities held as capital assets by holders who acquire
preferred securities upon original issuance at the price indicated on the cover
of this prospectus. The tax treatment of a holder may vary depending on its
particular situation. This summary does not deal with special classes of
holders, such as, for example, dealers in securities or currencies, banks,
thrifts, real estate investment trusts, regulated investment companies,
insurance companies, tax exempt organizations, persons holding preferred
securities as part of a straddle or as part of a hedging or conversion
transaction or other integrated investment, or persons whose functional currency
is not the United States dollar. Further, it does not include any description of
alternative minimum tax consequences or the tax laws of any state, local or
foreign government that may be applicable to the preferred securities. This
summary is based on the Code, the Treasury Regulations thereunder and
administrative and judicial interpretations thereof as of the date hereof, and
all of which are subject to change (possibly on a retroactive basis). In
particular, legislation was proposed by the Clinton Administration in 1996,
1997, 1998 and 1999 to prohibit or defer an issuer's ability to deduct interest
on certain types of debt instruments. If such legislation is ultimately enacted,
it could limit our ability to deduct interest with respect to the preferred
securities, which, in turn, would constitute a "tax event." Upon the occurrence
of a tax event, we are permitted to redeem the debentures, which would trigger a
redemption of the preferred securities. See "Description of the Preferred
Securities -- Special Event Redemption or Distribution." The authorities on
which this summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the ownership and
disposition of the preferred securities may differ from the treatment described
below. We have not sought any ruling from the IRS with respect to the statements
made and the conclusions reached in the following summary, and there can be no
assurance that the IRS will agree with such statements and conclusions. In
addition, the IRS is not precluded from successfully adopting a contrary
position. This summary does not consider the effect of any applicable foreign,
state, local or other tax laws.
As used herein, the term "United States Holder" means a beneficial owner of
preferred securities, that is for United States federal income tax purposes: (i)
a citizen or resident (as defined in Section 7701(b) of the Code) of the United
States, (ii) a corporation, partnership or other entity created or organized
under the laws of the United States or a political subdivision thereof, (iii) an
estate, the income of which is subject to federal income taxation regardless of
its source, or (iv) in general, a trust subject to the primary supervision of a
United States court and the control of one or more United States persons. A
"Foreign Holder" is any holder of preferred securities that is not a United
States Holder.
INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS AS TO THE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, UNDER FEDERAL INCOME AND ESTATE TAX
LAWS AND ANY APPLICABLE STATE, LOCAL, FOREIGN AND OTHER TAX LAWS OR TAX
TREATIES, INCLUDING THE EFFECTS OF POSSIBLE FUTURE CHANGES IN SUCH LAWS.
CLASSIFICATION OF THE DEBENTURES
We believe that the debentures should be classified for federal income tax
purposes as indebtedness. No assurance can be given, however, that such position
will not be challenged by the
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IRS or, if so challenged, that the challenge would not be successful. The
remainder of this discussion assumes that the debentures will be classified for
federal income tax purposes as indebtedness issued by us.
CLASSIFICATION OF THE TRUST
Assuming full compliance with the terms of the trust agreement, the trust
will be classified for federal income tax purposes as a grantor trust and not as
a corporation. Accordingly, each holder of common securities or preferred
securities will be considered the owner of a pro rata share of the debentures
held by the trust and will be required to include in gross income its pro rata
share of income on the debentures.
UNITED STATES HOLDERS
Interest Income
As a result of our option to defer the payment of interest on the
debentures, the holders of preferred securities will be required to recognize
interest income in accordance with the "original issue discount" rules of the
Code. Accordingly, each holder of preferred securities, including a holder that
uses the cash method of accounting, generally will be required to recognize its
pro rata share of interest income on the debentures as it accrues in accordance
with a constant yield method based on a compounding of interest, over the entire
term of the debentures. Holders will be required to recognize accrued interest
income regardless of whether distributions are made on the preferred securities,
and regardless of whether we exercise our option to extend any interest payment
period. The amount of interest income that will be recognized in any quarter
will approximately equal the amount of interest that accrues on the debentures
in the quarter at the stated interest rate. Actual distributions of stated
interest will not be separately reported as taxable income. Consequently, during
a deferral period, a holder will be required to include accrued interest in
gross income even though we have not made any actual cash payments.
A holder's initial tax basis for its pro rata share of the debentures will
be equal to the holder's purchase price paid for its preferred securities and
will be increased by the accrued interest includible in the holder's gross
income and reduced by the amount of distributions or other payments received by
the holder on the preferred securities. No portion of the amounts received on
the preferred securities will be eligible for the dividends received deduction.
Deferral of Interest Payment Period
Holders of preferred securities will be required to include accrued (but
unpaid) interest in income with respect to their pro rata share of the
debentures during a deferral period. Therefore, a holder who sells preferred
securities during such a deferral period will not be entitled to any cash
relating to accrued but unpaid interest (such cash will be paid to the holder of
record at the end of the deferral period), but will be required to include such
interest in income.
Distribution of Debentures
A distribution by the trust of the debentures as described under the
caption "Description of the Preferred Securities -- Distribution of the
Debentures" will result in the holder receiving directly its pro rata share of
the debentures previously held indirectly through the trust. Such a transaction
will be nontaxable to the holder, who will receive such debentures with a
holding period and tax basis equal to the holding period and adjusted tax basis
such holder was considered to have had in its pro rata share of the underlying
debentures prior to such distribution. A holder will include interest
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income in respect of the debentures received from the trust in the manner
described above under the caption "-- Interest Income."
Disposition of the Preferred Securities
Upon a sale, exchange or other disposition of preferred securities
(including a distribution of cash in redemption of a holder's preferred
securities, our election to make a cash settlement upon the holder's exercise of
the conversion feature or repayment of the underlying debentures, but excluding
a distribution of debentures), a holder will be considered to have disposed of
all or part of such holder's pro rata share of the debentures, and will
recognize gain or loss equal to the difference between (i) the amount of cash
proceeds and the fair market value of any property received on the sale,
exchange or other disposition (except to the extent such amount is attributable
to accrued interest income not previously included in income (which is taxable
as ordinary income)) and (ii) the holder's adjusted tax basis in its pro rata
share of the underlying debentures deemed disposed of. Such gain or loss will be
capital gain or loss and generally will be long-term capital gain or loss if the
preferred securities have been held by the holder for more than one year.
Holders are advised to consult their tax advisors as to the federal income tax
treatment of a capital gain or loss.
The preferred securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying
debentures. A holder who disposes of the preferred securities between record
dates for payments of distributions thereon will nevertheless be required to
include in income accrued but unpaid interest on the debentures through the date
of disposition, and to add such amount to its adjusted tax basis in its pro rata
share of the underlying debentures deemed disposed of. Accordingly, such a
holder will recognize a capital loss to the extent the selling price (which may
not fully reflect the value of accrued but unpaid interest) is less than the
holder's adjusted tax basis (which will include accrued but unpaid interest).
Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for federal income tax purposes. Therefore, it is
possible that the holder will not be able to offset such accrued but unpaid
interest income against any such capital loss (although such capital loss could
be used to offset capital gains of such holder).
Conversion of Preferred Securities into Common Stock
Provided that we do not elect to make a cash settlement in lieu of issuing
shares of our common stock upon a holder exercising the conversion feature of
the preferred securities, such holder generally will not recognize income, gain
or loss upon the conversion, through the conversion agent, of debentures into
our common stock. A holder will, however, recognize gain upon the receipt of
cash in lieu of a fractional share of our common stock equal to the amount of
cash so received less such holder's tax basis in such fractional share. A holder
who converts preferred securities into our common stock (i) will take a tax
basis in such stock that, in general, is equal to such holder's tax basis in the
preferred securities delivered to the conversion agent for exchange, less the
basis allocated to any fractional share for which cash is received, and (ii) the
holding period of such stock generally will include the holding period of the
preferred securities delivered to the conversion agent for exchange, except (in
the case of both (i) and (ii)) possibly with respect to any of our common stock
received in respect of accrued but unpaid interest.
Cash Settlement in Lieu of Conversion
If a holder exercises the conversion feature of the preferred securities,
and we elect to make a cash settlement in lieu of issuing shares of our common
stock upon such conversion as described under the caption "Description of the
Preferred Securities -- Conversion Rights," the holder will
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receive cash instead of our common stock in exchange for their preferred
securities. A holder who receives cash in exchange for their preferred
securities will be treated as having disposed of the preferred securities in a
taxable transaction and the holder will recognize gain or loss as described
under the caption "Disposition of the Preferred Securities."
The likelihood that we will exercise our option to make such a cash
settlement will be influenced by multiple market and extra-market forces. In
particular, we may be forced to elect to make a cash settlement in order to
avoid violating certain covenants made to Southern Company in connection with
the proposed distribution, which if violated, will result in our incurring a
significant liability under the tax indemnification agreement entered into with
Southern Company in connection with the proposed distribution.
Adjustment of Conversion Price
Tax regulations promulgated under Section 305 of the Code could treat
holders of preferred securities as receiving a constructive distribution upon
certain circumstances in which the conversion rate of the debentures is
adjusted. Accordingly, a reduction in the conversion price for the debentures
may, under certain circumstances, result in deemed dividend income to holders of
preferred securities to the extent of our current or accumulated earnings and
profits. Holders of preferred securities are advised to consult their tax
advisors as to the federal income tax consequences of adjustments in the
conversion rate of preferred securities.
Information Reporting and Back Up Withholding
The trust will report the interest accrued during the year with respect to
the debentures, and any gross proceeds received by the trust from the retirement
or redemption of the debentures, annually to the holders of record of the
preferred securities and to the IRS. The trust currently intends to deliver such
reports to holders of record not later than January 31st following each calendar
year. It is anticipated that persons who hold preferred securities as nominees
for beneficial owners will report the required tax information to beneficial
owners on Form 1099.
Payments made on, and proceeds from the sale of, preferred securities, any
debentures distributed by the trust, or any of our common stock received on
conversion may be subject to 31% backup withholding unless the holder complies
with certain identification requirements or otherwise qualifies for exemption.
Backup withholding is not an additional tax. Any withheld amounts will generally
be refunded or credited against the holder's federal income tax liability,
provided the required information is timely filed with the IRS.
FOREIGN HOLDERS
Interest Income
If the interest income of a Foreign Holder qualifies for the "portfolio
interest" exception and is not effectively connected with the conduct of a
United States trade or business, it is exempt from United States federal income
and withholding tax. A Foreign Holder of a preferred security generally will
qualify for the portfolio interest exemption if the United States person who
would otherwise be required to withhold tax from interest paid on the debenture
has received a statement which states that the beneficial owner of the
instrument is not a United States person and satisfies certain other
requirements set forth in the tax regulations and tax forms (including any
successor regulations and forms that will apply in the future).
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In the case of a Foreign Holder which is a foreign corporation, three
additional requirements must be met in order to qualify for the portfolio
interest exception:
- the Foreign Holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of our voting stock,
- the Foreign Holder is not a controlled foreign corporation that is
related to us through stock ownership, and
- the Foreign Holder is not a bank extending credit pursuant to a loan
agreement entered into in the ordinary course of business.
If a Foreign Holder's pro rata share of the interest on the debentures is
effectively connected with the conduct of a U.S. trade or business, the interest
income will be taxed to the Foreign Holder in the same manner as a United States
Holder, as described under the caption "-- United States Holders -- Interest
Income." Such effectively connected income received by a Foreign Holder which is
a corporation may in certain circumstances be subject to an additional "branch
profits tax" at a 30% rate or, if applicable, a lower treaty rate.
If the interest income of a Foreign Holder does not qualify for the
portfolio interest exception (see above), and is not effectively connected with
the conduct of a United States trade or business, it is subject to United States
federal withholding tax at a 30% rate, unless a tax treaty applies to reduce or
eliminate withholding. If a Foreign Holder's pro rata share of the interest on
the debentures is subject to the 30% tax, special rules apply because the
debentures are subject to the original issue discount rules. Generally, the tax
is only payable to the extent payments are made with respect to the debentures.
Accordingly, if a Foreign Holder receives an interest or principal payment with
respect to its pro rata share of the debentures that is subject to the 30% tax,
the portion of such payment which is taxable is equal to the accrued interest on
such debentures that has not previously been subject to tax. This could include
both the interest that accrued since the last payment date and, to the extent
not previously taxed, prior period interest accruals. However, the tax on such
payment cannot exceed the actual amount of such payment.
To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is effectively connected to a U.S. trade or business, the
Foreign Holder must provide a properly executed IRS Form W-8BEN, W-8IMY and
W-8ECI, as applicable, prior to the payment of interest. These forms must be
periodically updated. New tax regulations take effect in 2001. Foreign Holders
are advised to consult their tax advisors to ensure compliance with the new
rules.
Deferral of Interest Payment Period
As noted, if a Foreign Holder qualifies for the portfolio interest
exception, it will be exempt from U.S. taxation on its pro rata share of
interest income on the debenture. Accordingly, if we exercise our right to defer
payment of interest on the debentures, there will be no U.S. federal income tax
consequences to such a holder.
If a Foreign Holder's pro rata share of the interest on the debentures is
effectively connected with the conduct of a U.S. trade or business, such holder
will be taxable in the same manner as a United States Holder. Thus, if we
exercise our right to defer payment of interest on the debentures, such a holder
will have the same tax consequences as described under the caption "-- United
States Holders -- Deferral of Interest Payment Period."
If the interest income of a Foreign Holder does not qualify for the
portfolio interest exception and is not effectively connected to a United States
trade or business, then, as noted, it will be subject
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to United States federal withholding tax at the rate of 30%, unless a United
States income tax treaty applies to reduce or eliminate withholding. However,
unlike a United States Holder, the tax would not apply until the Foreign Holder
receives an interest or principal payment with respect to its pro rata share of
the debentures. Therefore, if we exercise our right to defer payment of interest
on the debentures, no tax liability will arise until we resume payments on the
debentures.
Distribution of Debentures
A distribution by the trust of the debentures as described under the
caption "Description of the Preferred Securities -- Distribution of the
Debentures" will result in a Foreign Holder receiving directly its pro rata
share of the debentures previously held indirectly through the trust. Such a
transaction will be nontaxable to such holder, who will receive such debentures
with a holding period and tax basis equal to the holding period and adjusted tax
basis such holder was considered to have had in its pro rata share of the
underlying debentures prior to such distribution. Thereafter, the tax treatment
to the Foreign Holder after such distribution will be identical to the tax
treatment that applied when the Foreign Holder indirectly owned the debentures
through the trust.
Disposition of the Preferred Securities
Upon a sale, exchange or other disposition of a Foreign Holder's preferred
securities (including a distribution of cash in redemption of preferred
securities, our election to make a cash settlement upon the holder's exercise of
the conversion feature or repayment of the underlying debentures, but excluding
a distribution of debentures), a Foreign Holder will be considered to have
disposed of all or part of its pro rata share of the debentures. A Foreign
Holder generally will not be subject to United States federal income tax or
withholding tax on any gain realized upon such disposition unless one of the
following circumstances applies:
- the Foreign Holder is a nonresident alien individual present in the U.S.
for 183 days or more during the taxable year and certain other conditions
are met,
- the gain is effectively connected with the conduct of a trade or business
of the Foreign Holder in the U.S., or
- the Foreign Holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates.
If the first circumstance applies, the gain is subject to U.S. federal
income tax at the rate of 30% (unless a U.S. income tax treaty applies to reduce
or eliminate such tax). In the case of the second and third circumstances, the
gain is subject to taxation to the same extent and in the same manner as a
United States Holder, as described under the caption, "-- United States
Holders -- Disposition of the Preferred Securities."
In addition to the foregoing, proceeds paid upon the disposition of a
debenture may be subject to U.S. federal income tax at the rate of 30% (unless
the portfolio interest exemption applies or a U.S. income tax treaty applies to
reduce or eliminate withholding), but only to the extent of any accrued but
unpaid interest that has not already been taxed.
Conversion of Preferred Securities Into Common Stock
Provided that we do not elect to make a cash settlement in lieu of issuing
shares of our common stock upon a Foreign Holder exercising the conversion
feature of the preferred securities, such holder generally will not recognize
income, gain or loss upon the conversion, through the conversion agent,
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of debentures into our common stock. Such holder will, however, realize gain
upon the receipt of cash in lieu of a fractional share of our common stock equal
to the amount of cash so received less such holder's tax basis in such
fractional share. The tax consequences of such gain will be the same as
described above under the caption "-- Foreign Holders -- Disposition of the
Preferred Securities."
A Foreign Holder who converts preferred securities into our common stock
(i) will take a tax basis in such stock that, in general, is equal to such
holder's tax basis in the preferred securities delivered to the conversion agent
for exchange, less the basis allocated to any fractional share for which cash is
received, and (ii) the holding period of such stock generally will include the
holding period of the preferred securities delivered to the conversion agent for
exchange, except (in the case of both (i) and (ii)) possibly with respect to any
of our common stock received in respect of accrued but unpaid interest.
Cash Settlement in Lieu of Conversion
If a Foreign Holder exercises the conversion feature of the preferred
securities, and we elect to make a cash settlement in lieu of issuing shares of
our common stock upon such conversion, as described under the caption
"Description of the Preferred Securities -- Conversion Rights," the holder will
receive cash instead of our common stock in exchange for their preferred
securities. A holder who receives cash in exchange for their preferred
securities will be treated as having disposed of the preferred securities and
the holder may recognize gain or loss as described under the caption "-- Foreign
Holders -- Disposition of the Preferred Securities."
Adjustment of Conversion Price
As described under the caption "-- United States Holders -- Adjustment of
Conversion Price," a reduction in the conversion price for the debentures may,
under certain circumstances, result in deemed dividend income to holders of
preferred securities to the extent of our current or accumulated earnings and
profits. Foreign Holders of preferred securities are advised to consult their
tax advisors as to the federal income tax consequences of adjustments in the
conversion rate of preferred securities. In general, dividends paid to Foreign
Holders are subject to U.S. federal income tax at the rate of 30% (unless a U.S.
withholding tax treaty applies to reduce or eliminate withholding). However, if
such dividend income is effectively connected with the conduct of a trade or
business of the Foreign Holder in the U.S., then such income is subject to the
regular United States federal income tax rules.
Information Reporting and Back Up Withholding
Information reporting requirements will apply to payments of interest to
Foreign Holders where such interest is subject to withholding, is exempt from
United States withholding tax pursuant to a tax treaty or comes within the
portfolio interest exception. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Foreign Holder resides.
In general, amounts that are already subject to United States federal
income tax withholding at a 30% rate (or lower treaty rate), or that are exempt
under the portfolio interest exception, are not subject to back up withholding
provided the Foreign Holder files the appropriate IRS forms and statements.
Foreign Holders are advised to consult their tax advisors to ensure compliance
with these requirements. Amounts that are effectively connected with the conduct
of a trade or business of the Foreign Holder in the U.S. may be subject to back
up withholding at a rate of 31%, as described under the caption "-- United
States Holders -- Information Reporting and Back Up Withholding."
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The applicable tax regulations provide that back up withholding and
information reporting will not apply to payments of principal of the preferred
securities by us to a Foreign Holder if the Foreign Holder certifies as to its
status as a Foreign Holder under penalties of perjury or otherwise establishes
an exemption (provided that neither us nor its paying agent has actual knowledge
that the holder is a United States person or that the conditions of any other
exemption are not, in fact, satisfied.)
Any amounts withheld under the back up withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
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UNDERWRITING
We, the trust and the underwriters for the offering named below have
entered into an underwriting agreement with respect to the preferred securities.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of preferred securities indicated in the following table. Goldman,
Sachs & Co. and Morgan Stanley & Co. Incorporated are the joint book-running
managers and the representatives of the underwriters. As joint book-running
managers on behalf of the underwriting syndicate, Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated will record a list of potential investors that
have expressed an interest in purchasing preferred securities as part of the
offering.
<TABLE>
<CAPTION>
NUMBER OF PREFERRED
UNDERWRITERS SECURITIES
------------ -------------------
<S> <C>
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
ABN AMRO Incorporated.......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierre, Fenner & Smith Incorporated..........
UBS Warburg LLC.............................................
-----------
Total............................................. 6,000,000
===========
</TABLE>
Because the trust will invest the proceeds from the sale of the preferred
securities in the debentures issued by us, the underwriting agreement provides
that we will pay an underwriting commission of $ per preferred security
(or $ for all of the preferred securities) to the underwriters, as
compensation.
Preferred securities 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 preferred securities sold by the underwriters to securities
dealers may be sold at a discount of up to $ per preferred security
from the initial public offering price. Any such securities dealers may resell
any preferred securities purchased from the underwriters to certain other
brokers and dealers at a discount of up to $ per preferred security
from the initial public offering price. If all of the preferred securities are
not sold at the initial public offering price, the representatives may change
the offering price and the other selling terms.
Under the terms of the underwriting agreement, the underwriters are
committed to take and pay for all of the preferred securities being offered, if
any are taken, other than the preferred securities covered by the over-allotment
option unless and until this option is exercised. If the underwriters sell more
preferred securities than the total number shown in the table above, the
underwriters have an option to buy up to an additional 900,000 preferred
securities from the trust to cover those sales. They may exercise that option
for 30 days. If any preferred securities are purchased through this option, the
underwriters will severally purchase the preferred securities in approximately
the same proportion shown in the table above.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the joint book-running managers of this offering
and may also be made available on web sites maintained by other underwriters.
The underwriters may agree to allocate a number of preferred securities to
underwriters for sale to their online brokerage account holders. Internet
distributions will be allocated by the joint book-running managers to
underwriters that may make Internet distributions on the same basis as other
allocations.
216
<PAGE> 220
We, Southern Company and the trust have agreed with the underwriters,
during the period 180 days from the date of this prospectus, not to offer, sell
or grant any option or warrant to offer or sell, any preferred securities, any
security convertible into or exchangeable for the preferred securities or the
debentures or any securities substantially similar to the debentures or the
preferred securities (except for the debentures and the preferred securities
issued pursuant to the underwriting agreement), our common stock or any security
convertible into or exchangeable for our common stock (excluding any securities
or options to purchase any securities granted or sold pursuant to any employee
or director compensation plan of us), without the prior written consent of
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated.
Prior to this offering, there has been no public market for the preferred
securities. The preferred securities have been approved for listing on the New
York Stock Exchange under the symbol "SOEPrA", subject to official notice of
issuance. In order to meet one of the requirements for listing the preferred
securities on the New York Stock Exchange, the underwriters have undertaken to
sell the preferred securities to a minimum of 400 beneficial owners. The
underwriters have advised us that they intend to make a market in the preferred
securities prior to the commencement of trading on the New York Stock Exchange,
but are not obligated to do so and may discontinue market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the preferred securities.
In connection with the offering, the underwriters may purchase and sell
preferred securities and shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of preferred securities than they are required
to purchase in the offering. "Covered" short sales are sales made in an amount
not greater than the underwriters' option to purchase additional preferred
securities from us in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase additional
preferred securities or purchasing preferred securities in the open market. In
determining the source of preferred securities to close out the covered short
position, the underwriters will consider, among other things, the price of
preferred securities available for purchase in the open market as compared to
the price at which they may purchase preferred securities through the
over-allotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
preferred securities in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the preferred securities in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of preferred
securities and our common stock made by the underwriters in the open market
prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased preferred
securities sold by or for the account of such underwriter in stabilizing or
short covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
preferred securities and our common stock, and, together with the imposition of
the penalty bid, may stabilize, maintain or otherwise affect the market price of
the preferred securities and the common stock. As a result, the price of the
preferred securities and the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise.
217
<PAGE> 221
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of preferred securities offered.
This offering is being made in compliance with the requirements of "Direct
Participation Programs" of the Conduct Rules 2810 of the National Association of
Securities Dealers, Inc. Accordingly, sales will not be made to a discretionary
account without the prior written consent of a purchaser.
In connection with any sales made to purchasers in the United Kingdom, each
underwriter has represented and agreed that
- it has not offered or sold and prior to the date six months after the
date of issue of the preferred securities will not offer or sell any
preferred securities to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances that have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
- it has complied, and will comply with, all applicable provisions of the
Financial Services Act of 1986 of Great Britain with respect to anything
done by it in relation to the preferred securities in, from or otherwise
involving the United Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of the preferred securities to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to
whom the document may lawfully be issued or passed on.
The preferred securities may not be offered, sold, transferred or delivered
in or from The Netherlands as part of their initial distribution or as part of
any re-offering. Neither this prospectus nor any other document in respect of
the offering may be distributed or circulated in The Netherlands, other than to
individuals or legal entities who or which trade or invest in securities in the
conduct of a business or profession. These legal entities include, but are not
limited to, banks, brokers, dealers, institutional investors and undertakings
with a treasury department.
The preferred securities have not been and will not be registered under the
Securities and Exchange Law of Japan. Accordingly, each of the managers has
agreed that it has not offered or sold and will not offer or sell any preferred
securities in Japan or to a resident of Japan except pursuant to an exemption
from the registration requirements of the Securities and Exchange Law of Japan.
As used in this paragraph, "resident of Japan" means any person resident in
Japan, including any corporation or other entity organized under the laws of
Japan.
We will pay the underwriting fees 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. These out-of-pocket costs and expenses are estimated to be
approximately $1.9 million.
We and the trust have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act.
218
<PAGE> 222
LEGAL MATTERS
Richards, Layton and Finger, P.A., special Delaware counsel to the trust
and us, will pass on certain matters of Delaware law relating to the validity of
the preferred securities. The validity of the guarantee and debentures will be
passed on by Troutman Sanders LLP, Atlanta, Georgia. Shearman & Sterling, New
York, New York will pass on certain legal matters for the underwriters.
EXPERTS
The financial statements of Southern Energy, Inc. as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Hyder plc as of March 31, 2000 and 1999 and for
each of the three years ended March 31, 2000 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Berliner Kraft-und Licht
(Bewag)-Aktiengesellschaft (currently Bewag AG) as of June 30, 1998 and for the
year ended June 30, 1998 included in this prospectus have been audited by KPMG
Deutsche Treuhand-Gesellschaft, independent accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C., a registration statement on
Form S-1 under the Securities Act with respect to the preferred securities
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 the preferred securities, 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 this 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.
219
<PAGE> 223
INDEX TO FINANCIAL STATEMENTS
SOUTHERN ENERGY, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Consolidated Balance Sheet as of June 30, 2000.... F-3
Unaudited Consolidated Statements of Income for the Six
Months Ended June 30, 1999 and 2000....................... F-4
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 2000....................... F-5
Notes to Unaudited Consolidated Financial Statements........ F-6
Report of Independent Public Accountants.................... F-16
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-17
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998, and 1999......................... F-18
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1997, 1998, and 1999............. F-19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999......................... F-20
Notes to Consolidated Financial Statements.................. F-21
</TABLE>
BERLINER KRAFT- UND LICHT (BEWAG)-AKTIENGESELLSCHAFT
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-67
Balance Sheet as of June 30, 1997 and 1998.................. F-68
Statement of Profit and Loss for the Years Ended June 30,
1997 and 1998............................................. F-69
Statement of Cash Flow for the Years Ended June 30, 1997 and
1998...................................................... F-70
Notes to the Financial Statements........................... F-71
Supplementary Information................................... F-86
Supervisory Board........................................... F-91
Bewag Notes................................................. F-93
Unaudited Balance Sheet as of June 30, 1998 and 1999........ F-101
Unaudited Statement of Profit and Loss for the Years Ended
June 30, 1998 and 1999.................................... F-102
Unaudited Statement of Cash Flow for the Years Ended
June 30, 1998 and 1999.................................... F-103
Notes to Unaudited Financial Statements..................... F-104
Unaudited Supervisory Board................................. F-130
</TABLE>
HYDER PLC
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-133
Principal Accounting Policies............................... F-134
Consolidated Profit and Loss Accounts for the Years Ended 31
March 2000, 1999 and 1998................................. F-140
Balance Sheets at 31 March 2000 and 1999.................... F-141
Consolidated Cash Flow Statements for the Years Ended 31
March 2000, 1999 and 1998................................. F-142
Statement of Total Recognised Gains and Losses for the Year
Ended March 2000, 1999 and 1998........................... F-144
Reconciliation of Movements in Shareholders' Funds for the
Year Ended 31 March 2000, 1999 and 1998................... F-144
Notes to the Financial Statements........................... F-145
</TABLE>
F-1
<PAGE> 224
INDEX TO FINANCIAL STATEMENTS
SOUTHERN ENERGY, INC. -- (CONTINUED)
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Introduction to Unaudited Pro Forma Financial Information... F-207
Unaudited Pro Forma Consolidated Statement of Income for the
Six Months Ended June 30, 2000............................ F-208
Unaudited Pro Forma Consolidated Statement of Income for the
Year Ended December 31, 1999.............................. F-211
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of June 30, 2000.......................................... F-214
</TABLE>
F-2
<PAGE> 225
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
(NOTE K)
---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 691 $ 691
Restricted deposits......................................... 20 20
Receivables:
Customer accounts, less provision for uncollectibles of
$24..................................................... 213 213
Other, less provision for uncollectibles of $14........... 642 642
Other....................................................... 178 178
------- -------
Total current assets.................................... 1,744 1,744
------- -------
PROPERTY, PLANT, AND EQUIPMENT.............................. 4,406 4,406
Less accumulated provision for depreciation................. (474) (474)
------- -------
3,932 3,932
Leasehold interests, net of accumulated amortization of
$181...................................................... 1,833 1,833
Construction work in progress............................... 147 147
------- -------
Total property, plant, and equipment, net............... 5,912 5,912
------- -------
NONCURRENT ASSETS:
Concession agreement, net of accumulated amortization of
$92....................................................... 266 266
Investments................................................. 1,550 1,550
Notes and other receivables, less provision for
uncollectibles of $30..................................... 1,297 1,297
Goodwill, net of accumulated amortization of $190........... 2,014 2,014
Other intangible assets, net of accumulated amortization of
$23....................................................... 511 511
Investment in leveraged leases.............................. 566 566
Miscellaneous deferred charges.............................. 448 448
------- -------
Total noncurrent assets................................. 6,652 6,652
------- -------
Total assets............................................ $14,308 $14,308
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt............................................. 2,578 2,631
Current portion of long-term debt........................... 266 266
Accounts payable............................................ 631 631
Taxes accrued............................................... 242 242
Other....................................................... 164 111
------- -------
Total current liabilities............................... 3,881 3,881
------- -------
NONCURRENT LIABILITIES:
Subsidiary obligated mandatorily redeemable preferred
securities................................................ 1,026 1,026
Notes payable............................................... 4,596 4,596
Other long-term debt........................................ 394 394
Deferred income taxes....................................... 694 694
Miscellaneous deferred credits.............................. 193 193
------- -------
Total noncurrent liabilities............................ 6,903 6,903
------- -------
MINORITY INTEREST IN SUBSIDIARY COMPANIES................... 749 749
------- -------
COMMITMENTS AND CONTINGENT MATTERS
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 272,000,000 shares issued and outstanding..... 3 3
Additional paid-in capital.................................. 2,872 2,872
Accumulated other comprehensive loss........................ (111) (111)
Retained earnings........................................... 11 11
------- -------
Total stockholder's equity.............................. 2,775 2,775
------- -------
Total liabilities and stockholder's equity.............. $14,308 $14,308
======= =======
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 226
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
OPERATING REVENUES.......................................... $ 1,025 $ 1,194
OPERATING EXPENSES:
Fuel........................................................ 109 344
Purchased power............................................. 387 54
Maintenance................................................. 49 68
Depreciation and amortization............................... 111 155
Selling, general, and administrative........................ 109 146
Write-down of assets........................................ 5 14
Other....................................................... 81 102
------- -------
Total operating expenses.................................. 851 883
------- -------
OPERATING INCOME............................................ 174 311
OTHER INCOME (EXPENSE):
Interest income............................................. 80 81
Interest expense............................................ (231) (300)
Gain on sales of assets..................................... 9 --
Equity in income of affiliates.............................. 147 63
Receivables recovery........................................ 12 --
Other, net.................................................. 21 40
------- -------
Total other income (expense).............................. 38 (116)
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST......................................... 212 195
Provision (Benefit) for Income Taxes........................ 34 (29)
MINORITY INTEREST........................................... 36 43
------- -------
INCOME FROM CONTINUING OPERATIONS........................... 142 181
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF
$7 AND $9 IN 1999 AND 2000, RESPECTIVELY.................. 7 13
------- -------
NET INCOME.................................................. $ 149 $ 194
======= =======
EARNINGS PER SHARE:
Basic
From continuing operations................................ $ 0.52 $ 0.67
From discontinued operations.............................. 0.03 0.04
------- -------
Net income................................................ $ 0.55 $ 0.71
======= =======
Pro forma basic (Note C)
From continuing operations................................ $ 0.61
From discontinued operations.............................. 0.04
-------
Net income................................................ $ 0.65
=======
Pro forma diluted (Note C)
From continuing operations................................ $ 0.61
-------
From discontinued operations.............................. 0.04
-------
Net income................................................ $ 0.65
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 227
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 2000
------- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 149 $ 194
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of affiliates...................... (143) (51)
Depreciation and amortization........................... 118 175
Write-down of assets.................................... -- --
Deferred income taxes................................... 56 59
Gain on sales of assets................................. (9) --
Minority interest....................................... 36 43
Other, net.............................................. (22) (59)
Changes in certain assets and liabilities:
Receivables, net..................................... (36) (205)
Other current assets................................. 24 17
Accounts payable..................................... (111) 57
Taxes accrued........................................ (2) 24
Other current liabilities............................ 93 (37)
------- -----
Total adjustments.................................. 4 23
------- -----
Net cash provided by operating activities.......... 153 217
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (252) (225)
Property insurance proceeds............................... -- 14
Proceeds received from the sale of investments............ 10 --
Dividends received from equity investments................ 15 11
Cash paid for acquisitions................................ (1,441) (61)
------- -----
Net cash used in investing activities.............. (1,668) (261)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Southern Company............... 355 1
Capital contributions from minority interest.............. 18 --
Issuance of notes receivable.............................. (65) (12)
Repayments on notes receivable............................ 195 109
Payment of dividends to Southern Company.................. -- (450)
Payment of dividends to minority interests................ (39) (6)
Proceeds from issuance of short-term debt, net............ 928 651
Proceeds from issuance of long-term debt.................. 282 213
Repayment of long-term debt............................... (345) (82)
Other..................................................... -- (6)
------- -----
Net cash provided by financing activities.......... 1,329 418
------- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (2) (6)
------- -----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (188) 368
CASH AND CASH EQUIVALENTS, beginning of period.............. 561 323
------- -----
CASH AND CASH EQUIVALENTS, end of period.................... $ 373 $ 691
======= =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized........ $ 189 $ 317
======= =====
Cash paid (refunds received) for income taxes............. $ (57) $ (53)
======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 228
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
A. ACCOUNTING AND REPORTING POLICIES
BASIS OF ACCOUNTING. The Company's accounting and reporting policies are
summarized in the Notes to the Consolidated Financial Statements ("Notes")
elsewhere in this prospectus. These interim financial statements should be read
in conjunction with the consolidated financial statements and the accompanying
footnotes. Management believes that the accompanying unaudited consolidated
financial statements reflect all adjustments, consisting of normal recurring
items, necessary for a fair statement of results for the interim periods
presented.
CONCENTRATION OF REVENUES. Revenues earned under the Company's long-term
power sales agreements with the Philippines' National Power Corporation ("NPC")
approximated 20% and 54% of the Company's total revenues and net income,
respectively, for the six months ended June 30, 2000, and 12% and 35% for the
same period in 1999, respectively. NPC has long-term contractual agreements to
purchase future power production. These agreements are supported by a sovereign
guarantee by the Philippines' government. If this agreement were terminated, it
could have a material adverse effect on the future operating results and
liquidity of the Company.
RECEIVABLES RECOVERY. During the six months ended June 30, 1999, the
Company recorded amounts totaling approximately $12 million, plus related
interest, in successful resolution of negotiations by the Company which allowed
it to record receivables that were assumed in conjunction with the SE
Asia-Pacific business acquisition. The Company has rights to an additional $40
million, plus related interest, as of June 30, 2000, which it has fully reserved
due to the risk of collection.
B. COMPREHENSIVE INCOME
The Company's comprehensive (loss) income consists of net income and
foreign currency translation adjustments. Total comprehensive (loss) income for
the six months ended June 30, 1999 and 2000 was $34 million and $175 million,
respectively.
C. EARNINGS PER SHARE
We calculate basic earnings per share by dividing the income available to
common shareowners by the weighted average number of common shares outstanding.
The following table shows our computation of basic earnings per share for the
six-month periods ended June 30, 1999 and 2000 (in millions, except per share
data) after giving effect to the stock split that will be effected in
conjunction with the offering of common stock (Note J). Pro forma basic earnings
per share information below gives effect to the dividend paid to Southern in
2000 as though it had occurred during 1999. Pro forma diluted earnings per share
information below gives effect to the conversion of the Company's value creation
plan ("VCP") standard units outstanding at June 30, 2000 into options to
purchase the Company's common stock. See Note 17 of the Notes.
F-6
<PAGE> 229
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FROM FROM
CONTINUING DISCONTINUED NET
OPERATIONS OPERATIONS INCOME
---------- ------------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Basic, 1999:
Income.................................................... $ 142 $ 7 $ 149
Shares.................................................... 272.0 272.0 272.0
------- ------- -------
Earnings per share........................................ $ 0.52 $ 0.03 $ 0.55
======= ======= =======
Basic, 2000:
Income.................................................... $ 181 $ 13 $ 194
Shares.................................................... 272.0 272.0 272.0
------- ------- -------
Earnings per share........................................ $ 0.67 $ 0.04 $ 0.71
======= ======= =======
Pro forma basic, 2000:
Income.................................................... $ 181 $ 13 $ 194
Shares.................................................... 272.0 272.0 272.0
Shares assumed due to dividend to Southern................ 26.5 26.5 26.5
------- ------- -------
Earnings per share........................................ $ 0.61 $ 0.04 $ 0.65
======= ======= =======
Pro forma diluted, 2000:
Income.................................................... $ 181 $ 13 $ 194
Add: effect of converting VCP units into options.......... 1 -- 1
------- ------- -------
Adjusted income........................................... $ 182 $ 13 $ 195
Shares.................................................... 272.0 272.0 272.0
Shares assumed due to dividend to Southern................ 26.5 26.5 26.5
Shares assumed due to conversion of VCP standard units.... 1.0 1.0 1.0
------- ------- -------
Adjusted shares........................................... 299.5 299.5 299.5
Earnings per share........................................ $ 0.61 $ 0.04 $ 0.65
======= ======= =======
</TABLE>
D. DEBT
Facility B, a $350 million 364-day revolving line of credit, was extended
to March 2001 during March 2000. See Note 7 of the Notes.
F-7
<PAGE> 230
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. FINANCIAL INSTRUMENTS
Southern Energy engages in commodity-related marketing and price risk
management activities. At June 30, 2000, the status of outstanding non-trading
related derivative contracts was as follows (in millions). The interest rate
notes in the following table represent the range of fixed interests rates that
Southern Energy pays on the related interest rate swaps. On virtually all of
these interest rate swaps, the Company receives floating interest rate payment
at LIBOR.
<TABLE>
<CAPTION>
YEAR OF
MATURITY OR INTEREST NUMBER OF NOTIONAL UNRECOGNIZED
TYPE TERMINATION RATES COUNTERPARTIES AMOUNT GAIN (LOSS)
---- ----------- ---------- -------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swaps... 2000-2012 6.55%-7.12% 4 $710 $ 7
2001-2012 6.56%-8.17% 6 L600 (46)
2002-2007 4.98%-5.78% 2 DM691 1
Cross currency
swaps............... 2001-2007 -- 7 L394 27
Cross currency
swaption............ 2003 -- 1 DM435 28
</TABLE>
L -- Denotes British pounds sterling. DM -- Denotes Deutsche Mark.
F. INVESTMENTS IN AFFILIATES
The following table sets forth certain summarized income statement
information of the Company's investments in 50% or less-owned investments
accounted for under the equity method for the six months ended June 30, 1999 and
2000 (in millions):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1999 2000
------ ------
<S> <C> <C>
COMBINED INVESTMENTS, excluding Bewag
INCOME STATEMENT:
Revenues.................................................... $1,387 $2,196
Operating income............................................ 893 1,382
Net income from continuing operations....................... 68 335
BEWAG
</TABLE>
Bewag financial information has not been released and is not available for
public disclosure at the time of this filing.
G. SEGMENT REPORTING
Southern Energy's principal business segments primarily consist of the
geographic areas in which the Company conducts business -- Americas,
Asia-Pacific, and Europe. The other reportable business segments are the
Company's financing segment ("SE Finance") and the Company's business
F-8
<PAGE> 231
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development and general corporate activities segment ("Corporate"). Intersegment
revenues are not material. Financial data for the Company's business segments is
as follows (in millions):
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
CONSOLIDATED AMERICAS EUROPE ASIA-PACIFIC SE FINANCE CORPORATE TOTAL
------------ -------- ------ ------------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30,
2000:
Operating revenues............ $ 745 $ 192 $ 252 $ 0 $ 5 $ 1,194
Segment net (loss) income..... 28 43 147 13 (37) 194
Total assets.................. 4,309 3,734 4,605 719 941 14,308
Six Months Ended June 30,
1999:
Operating revenues............ $ 275 $ 614 $ 133 $ 0 $ 3 $ 1,025
Segment net (loss) income..... 22 67 85 7 (32) 149
</TABLE>
H. ACQUISITIONS AND DIVESTITURES
SE NEW YORK
The Company has finalized its purchase price allocation for the SE New York
acquisition. The final allocation is as follows (in millions):
<TABLE>
<S> <C>
Current assets.............................................. $ 60
Property plant and equipment................................ 433
Acquired intangibles........................................ 47
Liabilities assumed and other............................... (47)
----
Purchase price.............................................. $493
====
</TABLE>
SALE OF HIDROELECTRICA ALICURA
On February 22, 2000, Southern Energy agreed to sell its interest in
Hidroelectrica Alicura, a 1,000 megawatt hydroelectric plan in Argentina, for
$205 million. The selling price releases the Company from its debt obligations
and allows it to buy out minority partners. The sale is subject to the approval
of Argentine regulatory authorities. There will be no impact on the Company's
results of operations due to the fact that the investment is carried at fair
value which is equal to the sales price. See Note K.
I. COMMITMENTS AND CONTINGENT MATTERS
COMPANHIA ENERGETICA DE MINAS GERAIS ("CEMIG"). In September 1999, the
state of Minas Gerais filed a lawsuit in a state court seeking temporary relief
against Southern Electric Brasil Participacoes, Ltda. ("SEB") exercising voting
rights under the shareholders agreement, between the state and SEB regarding
SEB's interest in CEMIG, as well as a permanent recision of the agreement. On
March 23, 2000, a state court in Minas Gerias, Brazil, ruled that the
shareholder agreement was invalid. SEB has appealed this decision.
The Company believes that this is a temporary situation and expects that
the shareholder's agreement will be fully restored. Failure to prevail in this
matter would limit the Company's influence on the daily operations of CEMIG.
However SEB would still have 33% of the voting shares of CEMIG and hold 4 of 11
seats on CEMIG's board of directors. SEB's economic interest in CEMIG
F-9
<PAGE> 232
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would not be affected. The significant rights SEB would lose relate to
supermajority rights and the right to participate in the daily operations of
CEMIG.
SEB obtained financing from Banco Nacional de Desenvolvimento Economico e
Social (BNDES) for approximately 50% of the total purchase price of the CEMIG
shares which is secured by a pledge of SEB's shares in CEMIG. SEB is currently
in discussions with BNDES to defer a $117 million principal and interest payment
due on May 15, 2000. Based on the Company's ownership of SEB, the Company's
portion of this amount is $29 million. See Note J.
ENERGY MARKETING AND RISK MANAGEMENT ACTIVITIES. The Company and Vastar
Resources, Inc. ("VRI") have jointly agreed to provide up to $700 million of
contingent performance guarantees and trade credits on behalf of Southern
Company Energy Marketing ("SCEM"). At June 30, 2000, outstanding guarantees
related to the estimated fair value of SCEM's net contractual commitments were
approximately $278 million, an increase of $132 million from December 31, 1999.
In addition, financial guarantees related to SCEM's gas purchase contract with
Vastar increased $38 million to $79 million during the six months ended June 30,
2000.
LONG-TERM SERVICE AGREEMENTS. The Company has entered into additional
long-term service agreements for the maintenance and repair of its combustion
turbine or combined cycle generating plants. These agreements may be terminated
in the event a planned construction project is cancelled. At June 30, 2000, the
amount committed for construction projects in process is $68 million. The total
amount committed if all turbines are purchased as planned is $1,036 million.
TURBINE PURCHASES AND OTHER CONSTRUCTION-RELATED COMMITMENTS. The Company
has entered into agreements to purchase additional turbines to support ongoing
and planned construction efforts. Minimum termination amounts under all purchase
contracts were $174 million at June 30, 2000. Total amounts to be paid under the
agreements if all turbines are purchased as planned are estimated to be $1,749
million at June 30, 2000. Other construction-related commitments totaled $122
million at June 30, 2000.
OPERATING LEASES. The Company's operating lease commitments totaled $261
million at June 30, 2000.
UNCERTAINTIES RELATED TO CONTRACT SALES. Several of the Company's
significant power generation facilities rely on either Power Purchase Agreements
or energy conversion agreements ("ECAs" and collectively with the Power Purchase
Agreements the "Power Contracts") with one or a limited number of entities for
the majority of, and in some cases all of, the relevant facility's output over
the life of the Power Contract.
The Power Contracts related to the Company's facilities are generally
long-term agreements covering the sale of power for 20 or more years. However,
the operation of such facilities is dependent on the continued performance by
customers and suppliers of their obligations under the relevant Power Contract,
and, in particular, on the credit quality of the purchasers. If a substantial
portion of the Company's long-term Power Contracts were modified or terminated,
the Company would be adversely affected to the extent that it was unable to find
other customers at the same level of profitability. Some of the Company's
long-term Power Contracts are for prices above current spot market prices. The
loss of one or more significant Power Contracts or the failure by any of the
parties to a Power Contract to fulfill its obligations thereunder could have a
material adverse effect on the Company's business, results of operations and
financial condition.
F-10
<PAGE> 233
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SE CALIFORNIA. Southern Energy California LLC ("SE California"), a wholly
owned subsidiary of the Company, and its subsidiaries are parties to a Federal
Energy Regulatory Commission ("FERC") proceeding that will determine the
percentage of a settled $158.8 million revenue requirement to be paid to the SE
California parties under the reliability must-run ("RMR") agreements between the
SE California parties and the California Independent System Operator ("CAISO").
Hearings were conducted before a FERC administrative law judge in March 2000.
The SE California parties have proposed to allocate approximately 75% of the
responsibility for payment of the revenue requirement to the CAISO, while the
CAISO and other aligned parties argue that the CAISO should pay no more than
approximately 7%. The decision in this case will affect the amount the CAISO
will pay to SE California and its subsidiaries for the period commencing June 1,
1999 through December 31, 2001. See Note K.
J. OTHER EVENTS
TRANSFER OF SUBSIDIARIES TO SOUTHERN. On April 17, 2000, the Company's
board of directors voted to transfer Southern Energy's leveraged lease and
capital funding subsidiaries to Southern. These transfers are expected to be
completed after the successful completion of the Stock Offering. The Company's
interest in its SE Finance leveraged leasing subsidiary has been treated as a
discontinued operation in the accompanying financial statements.
DIVIDEND TO SOUTHERN. A short-term credit facility was obtained by the
Company to fund the remaining cash dividend payments to Southern in the
aggregate amount of $53 million. Pro forma balance sheet and basic earnings per
share data for 1999 gives effect to such dividend in accordance with Staff
Accounting Bulletin Topic 1:B:3.
POTOMAC ELECTRIC POWER COMPANY ("PEPCO"). On June 8, 2000, the Company
announced it had entered into an agreement to purchase the bulk of PEPCO's
electric generation assets for $2.65 billion plus amounts to be determined for
working capital and approximately $260 million in the event certain purchase
power agreements are not transferred to the Company. The transaction is expected
to be completed in late 2000 and will be accounted for by the Company as a
purchase.
CEMIG. SEB obtained financing from Banco Nacional De Desenvolvimento
Economico e Social (BNDES) for approximately 50% of the total purchase price of
the CEMIG shares which is secured by a pledge of SEB's shares in CEMIG. A
portion of a principal payment that was originally due May 15, 2000, in an
amount of $9.2 million, has been deferred. SEB paid $2.2 million of this
principal payment on May 15, 2000 and expects to pay the remaining $7.0 million
on September 15, 2000. An interest payment of $107.8 million, also due on May
15, 2000, has been deferred until May 15, 2001.
K. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERINGS AND SEPARATION FROM SOUTHERN COMPANY. On August
22, 2000, the Company approved a 272,000 to 1 stock split and authorized the
execution of an underwriting agreement related to 66,700,000 new shares of
Southern Energy common stock (the "Stock Offering"). The Stock Offering is
expected to reduce Southern's ownership to approximately 80%. There can be no
assurance that this Stock Offering will be completed.
F-11
<PAGE> 234
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the Stock Offering, the Company will convert the
indexed units outstanding under the Value Creation Plan (Note 6 of the Notes)
into stock appreciation rights and will convert the standard units outstanding
under the Value Creation Plan (Note 6 of the Notes) into options to purchase
shares of the Company's common stock. The intrinsic value of the options will
equal the final value of standard units being converted. The standard units have
been treated under variable plan accounting as prescribed by APB Opinion No. 25.
Upon conversion to stock options, fixed plan accounting, as prescribed by APB
Opinion No. 25, will be followed. Under fixed plan accounting, the difference
between the fair value of the options at the date of the initial public offering
and their value at the date of grant that has not been previously expensed under
variable plan accounting will be recorded as compensation expense over the
remaining vesting period of the options.
The options will have a vesting period and life consistent with the
standard units under the value creation plan. These vesting periods and lives
will not begin anew upon conversion; rather, they will continue from their
original inception dates. The graded vesting period of standard units granted
prior to 2000 was four years; the 2000 grant has a graded vesting period of
three years. The Company recorded approximately $1.7 million during 1999 as
compensation expense for the standard units, approximately $500,000 for the six
months to June 2000, and expects to record an additional $21 million as
compensation expense over the remaining weighted average vesting period of 2.33
years (from June 30, 2000), based on the anticipated offering price of $19.00.
In conjunction with the Stock Offering, employees will be granted
approximately three million options to purchase our stock at the IPO price. The
options will have a 10-year term and vest ratably over 3 years. Certain of our
senior executives will be granted an aggregate of approximately 400,000
restricted stock units. Vesting of the Restricted Stock units will be based on
increases in our stock price. Each time our stock price increases 20% over the
offering price, 20% of the Restricted Stock units will vest.
Within twelve months following the completion of the Stock Offering,
Southern Company plans to distribute all of the remaining shares of the Company
owned by Southern Company to the holders of Southern common stock. There can be
no assurance that this distribution will be completed.
In connection with the completion of the distribution, substitute options
for the Company's common stock will be issued to our employees in exchange for
their Southern Company options. The conversion process will follow FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," which dictates the following:
- The aggregate face value of the options immediately after the conversion
will be equal to the aggregate face value prior to the conversion.
- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.
See Note 6 of the Notes where Southern options held by the Company's
officers and employees are further discussed.
The Company has negotiated service agreements with Southern to provide
transition services following the initial public offering of the Company's
shares in the areas of finance, accounting, human resources, auditing, legal,
information technology and engineering services. These services will be provided
at cost or at fair market value, whichever is greater. The Company has the
option to decline or terminate service with reasonable advance notice. Under
arrangements for similar services
F-12
<PAGE> 235
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currently in effect with Southern and its operating companies, under which
services are provided at cost, the Company paid $20 million in 1999. See Note 5
of the Notes.
In addition to the proposed common stock offering, the Company has filed a
registration statement with the Securities and Exchange Commission for an
underwritten public offering of convertible trust preferred securities. The
securities would be issued by a limited purpose Delaware trust which would use
the proceeds to purchase from the Company the same principal amount of the
Company's convertible junior subordinated debt securities. The net proceeds
would be used by the Company to repay short-term debt and for general corporate
purposes. There can be no assurance that the issuance of convertible trust
preferred securities will be completed. The financial statements for SEI Trust I
have not been included in the Registration Statement pertaining to the offering
of convertible trust preferred securities because the preferred securities are
fully and unconditionally guaranteed by the Company, the trust will have no
independent operations, and the trust is a wholly owned subsidiary of the
Company.
DIVIDEND TO SOUTHERN. The pro forma balance sheet and earnings per share
data included herein gives effect to the payment of the remaining $53 million of
the $503 million dividend to Southern (Note J). As of June 30, 2000, the
remaining of the dividend of $53 million had been declared but not paid.
Subsequent to the balance sheet date, the $53 million payment was made.
TURBINE PURCHASES. The Company has entered into agreements to purchase
additional turbines to support planned expansion efforts. Total amounts to be
paid under the new agreements if all turbines are purchased as planned are
estimated to be $580 million.
SCEM. Effective August 10, 2000, we acquired Vastar's 40% interest in SCEM
for $250 million. Upon the closing of the transaction, Vastar transferred its
interest in SCEM to us and SCEM became our wholly owned subsidiary and will be
consolidated in the Southern Energy, Inc. financial statements on a prospective
basis.
As part of the transaction, we agreed to amend the gas purchase and sale
agreement to make it easier for SCEM to administer, including reducing the
number of delivery points where Vastar delivers gas, predetermining the daily
and annual quantities of gas Vastar is obligated to deliver and SCEM is
obligated to purchase, and making certain other changes, but otherwise the gas
purchase and sale agreement will remain in effect for the remaining seven years
of its term. The amendment will become effective upon the occurrence of certain
events, which should happen before the end of this year. Accordingly, SCEM will
continue to purchase and market the natural gas produced by Vastar. As part of
the transaction, we were relieved of any financial obligations to Vastar under
the SCEM partnership agreement, including any guaranteed minimum cash
distributions and any outstanding arbitration.
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 subject to the outcome of a FERC proceeding initiated in
October 1997 that will determine the percentage of a $158.8 million annual fixed
revenue requirement to be paid to the SE California parties by the CAISO under
the reliability-must-run agreements. 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
F-13
<PAGE> 236
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the CAISO of approximately $120 million, or 75% of the settled fixed revenue
requirement. The decision in this case will affect the amount CAISO will pay to
SE Delta and SE Potrero for the period from June 1, 1999 through December 31,
2001. On June 7, 2000, the administrative law judge 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. A final FERC order in this proceeding may be appealed to the U.S. Court of
Appeals. The outcome of this appeal cannot now be determined.
If SE California is unsuccessful in its appeal of the 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 June
30, 2000 would have been approximately $94 million and would have reduced net
income by approximately $33 million. These amounts do not include interest that
would be payable in the event of a refund. If SE California is unsuccessful in
its appeal, it plans to pursue other options available under the reliability
must-run agreements to mitigate the impact of the administrative law judge's
decision upon its future operations. The outcome of this appeal is uncertain,
and we cannot assure you that we will be successful.
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. In addition, the FERC established October 30, 2000, as a "refund
effective date" under section 206 of the Federal Power Act, after which date the
FERC may adjust prices retroactively based on the results of the investigation
if it determines that the existing rates are not just and reasonable. As a
result, any price adjustment by the FERC may require the SE California
subsidiaries to refund some portion of the revenues received from sales made
after the refund effective date. The FERC's investigation is ongoing, and it
cannot be determined at this time what conclusions the report will reach, what
action the FERC may take in response to the report or whether the FERC will
order the payment of refunds. Consequently, we cannot determine what effect any
action by FERC will have on our financial condition.
HYDER. On August 23, 2000, WPD Limited, a company that subsidiaries of
ours and PPL Global jointly own, 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 L565 million (approximately $847 million), or 365 pence
(approximately $5.47) per Hyder share plus the assumption of approximately L2.1
billion (approximately $3.2 billion) of gross debt as of March 31, 2000. On
September 15, 2000, WPD Limited committed unconditionally to purchase any shares
of Hyder tendered by Hyder shareholders. As of September 18, 2000, WPD Limited
had received acceptances to its offer from shareholders representing
approximately 68% of the Hyder shares. WPD Limited has replaced Hyder's board of
directors with employees of WPD, Southern Energy and PPL Global.
The total purchase price, including fees and expenses, is expected to be
L585 million (approximately $878 million). The purchase will be funded by bank
loans of L360 million (approximately $540 million) to be obtained by WPD
Holdings, an investment from the WPD for L85 million, approximately $128
million, an investment from PPL Global of L84 million
F-14
<PAGE> 237
SOUTHERN ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(approximately $126 million) and an investment from us of L56 million
(approximately $84 million). If the transaction is consummated as currently
contemplated, PPL Global will own indirectly 60% of Hyder and we will own
indirectly 40% of Hyder. Our investment of L56 million (approximately $84
million) will be funded by cash flow from operations.
We and PPL Global expect to enter into an agreement for us to own 40% of
the economic interest in WPD Limited and PPL Global to own 60%, and for us and
PPL Global to own 50% each of the voting interests in WPD Limited. As part of
such arrangement, we will also have a call right to acquire an additional 9%
economic interest in WPD Limited from PPL Global. We and PPL Global have agreed
to modify our ownership of voting shares of WPD Holdings to 50% each so that
neither party will have operational or management control of WPD Holdings. This
was agreed to by Southern Energy to incent PPL Global to fund the additional 9%
economic interest in WPD Limited.
ALICURA. On August 25, 2000, we completed the sale of our 55% indirect
interest in Hidroelectrica Alicura S.A. (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, we were released from $200 million of credit
support obligations related to Alicura's bank financing. Our sale of Alicura did
not materially impact our financial position and we do not expect that it will
have a material affect on our results of operations.
F-15
<PAGE> 238
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 Notes 15 and 17,
as to which the date is August 22, 2000)
F-16
<PAGE> 239
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 2 AND 4):............. 3,108 4,147
Less accumulated provision for depreciation................. (312) (421)
------- -------
2,796 3,726
Leasehold interests, net of accumulated amortization of $85
and $137 for 1998 and 1999, respectively (Note 1)......... 927 1,934
Construction work in progress............................... 968 365
------- -------
Total property, plant, and equipment, net............... 4,691 6,025
------- -------
NONCURRENT ASSETS:
Concession agreement, net of accumulated amortization of $84
and $90 for 1998 and 1999, respectively (Notes 1 and 2)... 258 268
Investments (Notes 1, 3, 12 and 13)......................... 1,540 1,490
Notes and other receivables, less provision for
uncollectibles of $40 and $61 for 1998 and 1999,
respectively.............................................. 1,216 1,276
Goodwill, net of accumulated amortization of $106 and $164
for 1998 and 1999, respectively (Notes 1 and 12).......... 2,125 2,106
Other intangible assets, net of accumulated amortization of
$0 and $13 for 1998 and 1999, respectively (Notes 1 and
12)....................................................... 154 447
Investment in leveraged leases (Note 14).................... 264 556
Miscellaneous deferred charges.............................. 340 410
------- -------
Total noncurrent assets................................. 5,897 6,553
------- -------
Total assets............................................ $12,054 $13,863
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt (Note 7).................................... $ 702 $ 1,961
Note payable to Southern Company (Notes 5 and 7)............ 926 0
Current portion of long-term debt (Note 7).................. 480 237
Accounts payable............................................ 564 626
Taxes accrued............................................... 196 218
Other....................................................... 184 173
------- -------
Total current liabilities............................... 3,052 3,215
------- -------
NONCURRENT LIABILITIES:
Subsidiary obligated mandatorily redeemable preferred
securities (Note 7)....................................... 1,033 1,031
Notes payable (Note 7)...................................... 3,499 4,557
Other long-term debt (Note 7)............................... 420 397
Deferred income taxes (Note 8).............................. 573 680
Miscellaneous deferred credits.............................. 300 156
------- -------
Total noncurrent liabilities............................ 5,825 6,821
------- -------
MINORITY INTEREST IN SUBSIDIARY COMPANIES................... 535 725
------- -------
COMMITMENTS AND CONTINGENT MATTERS (NOTES 3, 7, 10, AND 11)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; 2,000,000,000 shares
authorized; 272,000,000 shares issued and outstanding
(Note 17)................................................. 3 3
Additional paid-in capital.................................. 2,624 2,984
Accumulated other comprehensive income (loss)............... 15 (92)
Retained earnings........................................... 0 207
------- -------
Total stockholder's equity.............................. 2,642 3,102
------- -------
Total liabilities and stockholder's equity.............. $12,054 $13,863
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-17
<PAGE> 240
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
OPERATING REVENUES.......................................... $3,750 $1,819 $2,268
------ ------ ------
OPERATING EXPENSES:
Fuel........................................................ 74 47 392
Purchased power............................................. 2,813 844 545
Maintenance................................................. 74 80 116
Depreciation and amortization............................... 182 221 270
Selling, general, and administrative........................ 188 160 253
Write-down of assets (Note 2)............................... 0 308 60
Other....................................................... 147 164 188
------ ------ ------
Total operating expenses.................................. 3,478 1,824 1,824
------ ------ ------
OPERATING INCOME (LOSS)..................................... 272 (5) 444
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income............................................. 138 146 172
Interest expense............................................ (345) (430) (502)
Gain on sales of assets (Note 12)........................... 24 41 313
Equity in income of affiliates (Notes 1, 3, and 13)......... 58 135 111
Receivables recovery (Note 1)............................... 0 29 64
Other, net.................................................. 33 29 72
------ ------ ------
Total other (expense) income.............................. (92) (50) 230
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST..................................... 180 (55) 674
PROVISION (BENEFIT) FOR INCOME TAXES:
Continuing operations....................................... 27 (123) 129
Windfall profits tax........................................ 148 0 0
------ ------ ------
Total Provision (Benefit) for Income Taxes................ 175 (123) 129
MINORITY INTEREST........................................... 29 80 183
------ ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS.................... (24) (12) 362
------ ------ ------
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF
$10, $22, AND $15 IN 1997, 1998, AND 1999, RESPECTIVELY... 8 12 10
------ ------ ------
(LOSS) NET INCOME........................................... $ (16) $ 0 $ 372
====== ====== ======
(LOSS) EARNINGS PER SHARE:
Basic
From continuing operations................................ $(0.09) $(0.04) $ 1.33
From discontinued operations.............................. 0.03 0.04 0.04
------ ------ ------
Net income................................................ $(0.06) $ -- $ 1.37
====== ====== ======
Pro forma basic -- unaudited (Note 17)
From continuing operations................................ $ 1.21
From discontinued operations.............................. 0.04
------
Net income................................................ $ 1.25
======
Pro forma diluted -- unaudited (Note 17)
From continuing operations................................ $ 1.21
From discontinued operations.............................. 0.04
------
Net income................................................ $ 1.25
======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-18
<PAGE> 241
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) (LOSS) INCOME
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. 3 $ 955 $ 16 $ 14
Net loss.............................. 0 0 (16) 0 $ (16)
Cumulative translation adjustment, net
of tax............................. 0 0 0 (7) (7)
-----
Comprehensive loss.................... $ (23)
=====
Capital contributions................. 0 1,167 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1997.............. 3 2,122 0 7
Net income............................ 0 0 0 0 $ 0
Cumulative translation adjustment, net
of tax............................. 0 0 0 8 8
-----
Comprehensive income.................. $ 8
=====
Capital contributions................. 0 502 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1998.............. 3 2,624 0 15
Net income............................ 0 0 372 0 $ 372
Cumulative translation adjustment, net
of tax............................. 0 0 0 (107) (107)
-----
Comprehensive income.................. $ 265
=====
Dividends............................. 0 0 (165) 0
Capital contributions................. 0 360 0 0
---- ------ ----- -----
BALANCE, DECEMBER 31, 1999.............. 3 $2,984 $ 207 $ (92)
==== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-19
<PAGE> 242
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (16) $ 0 $ 372
------- ------- -------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in income of affiliates............................ (53) (121) (95)
Depreciation and amortization............................. 203 229 286
Write-down of assets...................................... 0 308 60
Deferred income taxes..................................... 15 (40) 166
Gain on sales of assets................................... (24) (41) (313)
Minority interest......................................... 29 80 183
Other, net................................................ 15 (27) (93)
Changes in certain assets and liabilities, excluding
effects from acquisitions:
Receivables, net........................................ (214) 133 (133)
Other current assets.................................... 38 (47) (15)
Accounts payable........................................ 137 (141) (81)
Taxes accrued........................................... 114 (12) 22
Other current liabilities............................... 20 81 156
------- ------- -------
Total adjustments..................................... 280 402 143
------- ------- -------
Net cash provided by operating activities............. 264 402 515
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (720) (647) (747)
Cash paid for acquisitions.................................. (2,925) (998) (1,771)
Funds loaned to Southern Company............................ (619) (361) 0
Purchase of preferred shares................................ 0 0 (121)
Property insurance proceeds................................. 0 0 34
Proceeds received from the sale of investments (Note 12).... 32 198 284
Dividends received from equity investments.................. 29 67 58
------- ------- -------
Net cash used in investing activities................. (4,203) (1,741) (2,263)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Southern Company................. 1,167 502 360
Capital contributions from minority interests............... 0 0 18
Issuance of notes receivable................................ (84) (191) (199)
Repayments on notes receivable.............................. 231 398 341
Payment of dividends to Southern Company.................... 0 0 (165)
Payment of dividends to minority interests.................. (7) (22) (66)
Proceeds from issuance of short-term debt, net.............. 749 122 358
Proceeds from issuance of long-term debt.................... 1,847 730 1,372
Proceeds from issuance of subsidiary obligated mandatorily
redeemable preferred securities........................... 672 338 0
Repayment of long-term debt................................. (398) (375) (503)
------- ------- -------
Net cash provided by financing activities............. 4,177 1,502 1,516
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (1) -- (6)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 237 163 (238)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 161 398 561
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 398 $ 561 $ 323
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized.......... $ 269 $ 349 $ 419
======= ======= =======
Cash paid (refunds received) for income taxes............... $ 66 $ (33) $ (114)
======= ======= =======
BUSINESS ACQUISITIONS:
Fair value of assets acquired............................... $ 4,768 $ 1,072 $ 1,803
Less cash paid.............................................. 2,925 998 1,771
------- ------- -------
Liabilities assumed....................................... $ 1,843 $ 74 $ 32
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-20
<PAGE> 243
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Southern Energy, Inc. is a wholly owned subsidiary of Southern Company
("Southern" or the "Parent") and was incorporated in Delaware in 1993. Southern
Energy, Inc. and its subsidiaries (collectively, "Southern Energy" or the
"Company") acquire, develop, build, own, and operate power production and
delivery facilities and provide a broad range of energy-related services to
utilities and industrial companies around the world. The Company's business
includes independent power projects, integrated utilities, a distribution
company, and energy marketing and trading operations. Southern Energy has
operations and development offices in North America and the Caribbean, Asia,
Europe, and South America. Additionally, the Company operates a business
development and management entity. Operating entities, of which the Company has
less than 100% ownership, are as follows:
<TABLE>
<CAPTION>
ECONOMIC VOTING
OWNERSHIP INTEREST
PERCENTAGE AT PERCENTAGE
COUNTRY OF YEAR OF DECEMBER 31, DECEMBER 31,
OPERATIONS INVESTMENT 1999 1999
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ENTITIES CONSOLIDATED:
Western Power Distribution ("WPD"),
formerly "SWEB" (Note 2)............ United Kingdom 1995 49.0% 50.5%
Hidroelectrica Alicura S.A.
("Alicura") (Note 2)................ Argentina 1993 55.1 55.1
Empresa Electria del Norte Grande S.A.
(Note 2)............................ Chile 1993 82.3 82.3
Freeport Power Company................ Bahamas 1993 62.5 62.5
ENTITIES NOT CONSOLIDATED, ACCOUNTED
FOR UNDER EQUITY METHOD:
Southern Company Energy Marketing LP
("SCEM")............................ United States 1997 60.0 60.0
Birchwood Power Partners L.P.
("Birchwood")....................... United States 1994 50.0 50.0
Bewag AG ("Bewag").................... Germany 1997 26.0 28.7
Guangdong Guanghope Power Company
Limited ("Shajiao C")............... China 1997 32.0 44.44
Companhia Energetica de Minas Gerais
("CEMIG")........................... Brazil 1998 3.6 8.24
The Power Generation Company of
Trinidad and Tobago ("PowerGen").... Trinidad 1994 39.0 39.0
Shandong International Power
Development Company Limited
("SIPD")............................ China 1999 9.9 9.9 to 38
Carbontronics Synfuels Investors LP... United States 1998 25.0 25.0
Clairton 1314B LLC.................... United States 1997 27.0 27.0
</TABLE>
F-21
<PAGE> 244
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ECONOMIC VOTING
OWNERSHIP INTEREST
PERCENTAGE AT PERCENTAGE
COUNTRY OF YEAR OF DECEMBER 31, DECEMBER 31,
OPERATIONS INVESTMENT 1999 1999
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
ENTITY NOT CONSOLIDATED, ACCOUNTED FOR
UNDER COST METHOD:
Mobile Energy Services Company, LLC
("Mobile Energy")................... United States 1994 1.0 1.0
</TABLE>
Mobile Energy's remaining 99% ownership interest is held by Southern. Southern
Energy currently has a 49% economic interest in WPD Holdings UK, the UK parent
of WPD, yet retains operational and management control with 50.5% of the voting
rights and the right to appoint a majority of the board of directors. The
Company's economic interest in Shajiao C is stated after a preferential
distribution to Guangdong Generation Corporation, the joint venture partner in
China. The Company's voting interest in SIPD can increase to 38% when certain
shareholders become ineligible to vote on matters when there is a conflict of
interest, according to rules governing the listing of securities on the Stock
Exchange of Hong Kong Ltd.
BASIS OF PRESENTATION
The consolidated financial statements of the Company are presented in U.S.
dollars in conformity with accounting principles generally accepted in the
United States ("U.S. GAAP"). The accompanying financial statements have not been
prepared in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
pronouncement, under which most rate regulated U.S. electric utilities report
financial statements, applies to entities that are subject to cost-based rate
regulation. By contrast, the Company's operating investments generally are not
subject to cost-based rate regulation, and therefore, the provisions of SFAS No.
71 do not apply. Financial statements presented in accordance with SFAS No. 71
contain deferred items which have not yet been included in rates charged to
customers in compliance with the respective regulatory authorities, but which
would have been included in the income statement of enterprises in general under
U.S. GAAP. The accompanying financial statements of the Company do not contain
such deferrals.
The financial statements include the accounts of the Company and its wholly
owned and its controlled majority-owned subsidiaries and have been prepared from
records maintained by the Company and its subsidiaries in their respective
countries of operation. Certain prior year amounts have been reclassified to
conform with the current year financial statement presentation.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Investments in companies in which the Company exercises
significant influence over operating and financial policies are accounted for
using the equity method. In addition, majority or jointly owned affiliates where
control does not exist are accounted for using the equity method of accounting.
Mobile Energy is the only investment accounted for using the cost method.
F-22
<PAGE> 245
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
Revenues derived from power generation are recognized upon output, product
delivery, or satisfaction of specific targets, all as specified by contractual
terms. To the extent that power generation billings exceed the cumulative
average price per unit delivered, cumulative average revenues are recorded.
Substantially all of the Company's energy trading and marketing operations are
accounted for under a mark-to-market accounting methodology.
CONCENTRATION OF REVENUES AND NET INCOME
For the year ended December 31, 1999 approximately 14% and 35% of our
revenues and net income, respectively, were attributable to sales made by our
Philippine operations under power sales agreements with National Power
Corporation (NPC). NPC has long-term contractual agreements to purchase future
power production. These agreements are supported by a sovereign guarantee by the
Philippines' government. If this agreement were terminated, it could have a
material adverse effect on the future operating results and liquidity of the
Company.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
LONG-LIVED ASSETS AND INTANGIBLES
The Company records goodwill for the difference between the excess of the
fair value of investments over the purchase price. Goodwill is amortized on a
straight-line basis over a period between 30 and 40 years. The Company
recognizes specifically identifiable intangibles when specific rights and
contracts are acquired. These intangibles are amortized on a straight-line basis
over the lesser of their contractual or estimated useful lives between 20 and 30
years. The Company evaluates long-lived assets, such as property, plant and
equipment, goodwill, and specifically identifiable intangibles, when events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. The determination of whether an impairment has occurred is based
on an estimate of undiscounted cash flows attributable to the assets, as
compared to the carrying value of the assets. If an impairment has occurred, the
amount of the impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying value is
greater than fair value. For assets identified as held for sale, the carrying
value is compared to the estimated fair value less cost to sell to determine if
an impairment provision is required. Until the assets are disposed of, their
estimated fair value is reevaluated when circumstances or events change.
F-23
<PAGE> 246
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED DEPOSITS
The Company has restricted deposits for self-insurance reserves,
contractual, legal, or other corporate purposes.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost to the Company, which
includes materials, labor, appropriate administrative and general costs, and the
estimated cost of debt funds used during construction. The cost of maintenance,
repairs, and replacement of minor items of property is charged to maintenance
expense as incurred.
Depreciation of the recorded cost of depreciable property, plant, and
equipment is provided by using primarily composite straight-line rates (Note 4).
Leasehold improvements are amortized over the shorter of the respective lease
terms or the useful lives of the improvements. The Company's capitalization
policy expenses the cost of certain immaterial assets when purchased.
Upon the retirement or sale of assets, the cost of such assets and the
related accumulated depreciation are removed from the balance sheet and the gain
or loss, if any, is credited or charged to income.
LEASEHOLD INTERESTS
Certain of SE Asia Pacific Limited's ("SE Asia-Pacific") (formerly
Consolidated Electric Power Asia Limited) power generation facilities are
developed under "build, operate, and transfer agreements" ("BOT") with the
respective local country government. Under these agreements, SE Asia-Pacific
builds power generation facilities, operates them for a period of several years
(a "cooperation period"), and transfers ownership to the local country
government at the end of the cooperation period. Additionally, the land subject
to the BOT agreements is not controlled by SE Asia-Pacific. During construction,
the cost of these facilities is recorded as construction work in progress. Upon
completion of a facility, its entire cost is reclassified to leasehold interests
where the balance is amortized over the length of the respective cooperation
period.
CONCESSION AGREEMENT
The amount recorded as a concession agreement in the accompanying balance
sheets corresponds with the total value, net of amortization, assigned by the
Argentine government to the assets delivered to Alicura for operating purposes
pursuant to the concession contract for the Alicura hydroelectric complex. This
value was originally determined, without allocating any specific value to each
of the assets involved in the concession, based on the amount paid by the
Company to acquire 59% of the share capital of the company which holds the
concession, plus the proportion of the capital retained by the Argentine
government (41%), plus the liabilities undertaken by the concessionaire upon
signing the concession contract and the disbursements incurred by the Company
and subsequently transferred to Alicura to effect the acquisition.
This intangible asset is being amortized using the straight-line method
over 30 years (the concession period) from August 1993, which was the takeover
date of the hydroelectric complex.
F-24
<PAGE> 247
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During December 1998, Southern Energy, having received the appropriate
approval from executive management and the board of directors, committed itself
to a formal plan to dispose of its investment in Alicura. See Notes 2 and 17 for
further discussion.
LEVERAGED LEASES
The Company's net investment in leveraged leases consist of rentals
receivable, net of principal and interest on the related nonrecourse debt, the
estimated residual value of the leased facilities, and unearned income. The
earned income is included in the consolidated statements of income. Initial
direct costs incurred in consummating a leveraged lease transaction are
accounted for as part of the investment in the lease and are amortized over the
term of the lease.
INCOME TAXES
SFAS No. 109, "Accounting for Income Taxes," requires the asset and
liability approach for financial accounting and reporting for deferred income
taxes. The Company uses the liability method of accounting for deferred income
taxes and provides deferred income taxes for all significant income tax
temporary differences.
RECEIVABLES RECOVERY
In 1998 and 1999, the Company received amounts totaling approximately $29
million and $64 million, respectively, plus related interest in successful
resolution of negotiations by the Company with its supplier and partners in
China which allowed it to collect receivables that were assumed in conjunction
with the SE Asia-Pacific business acquisition. At the time of the purchase, the
Company did not place value on the receivables due to the uncertain credit
standing of the parties with whom the receivables were secured. The Company has
rights to an additional $40 million, plus related interest, as of December 31,
1999, which it has fully reserved due to the risk of collection.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international operations where the local currency
is the functional currency have been translated at year-end exchange rates, and
revenues and expenses have been translated using average exchange rates
prevailing during the year. Adjustments resulting from translation have been
recorded in other comprehensive income. The financial statements of
international operations where the U.S. dollar is the functional currency
reflect certain transactions denominated in a local currency that have been
remeasured in U.S. dollars. The remeasuring of local currencies into U.S.
dollars creates gains and losses from foreign currency transactions that are
included in net income in the amount of $(2), $4 and $2 million for 1997, 1998,
and 1999, respectively. The effect of the translation adjustment on other
comprehensive income is disclosed in the statements of stockholder's equity.
COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the financial statements.
The objective of the statement is to report a
F-25
<PAGE> 248
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measure of all changes in common stock equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners.
FINANCIAL INSTRUMENTS
Southern Energy engages in price risk management activities for both
nontrading and trading purposes. Nontrading financial instruments are used to
hedge exposures to fluctuations in interest rates, foreign currency exchange
rates, and certain commodity prices. Gains and losses on qualifying hedges are
deferred and recognized either in income or as an adjustment to the carrying
amount when the hedged transaction occurs.
Financial instruments used for trading purposes are recorded at either
quoted market value or, when market prices are not readily available for
specific contracts, at fair value, which is determined under an alternative
approach, such as model pricing. The determination of market or fair value
considers various factors, including closing exchange or over-the-counter
("OTC") market price quotations, time value and volatility factors underlying
options and contractual commitments, price activity for equivalent or synthetic
instruments in markets located in different time zones, counterparty credit
quality, and the potential impact on market prices of liquidating the Company's
positions in an orderly manner over a reasonable period of time under present
market conditions. All trading transactions and related expenses are recorded on
a trade-date basis. See Note 9 where financial instruments are discussed
further.
NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued a new Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement requires capitalization of certain costs of internal-use software.
Southern Energy adopted this statement in December 1998 without a material
impact on the financial statements.
The American Institute of Certified Public Accountants' SOP 98-5,
"Reporting on the Costs of Start-Up Activities," was implemented in the fourth
quarter of 1998. This statement requires that costs of start-up activities and
organizational costs be expensed as incurred. The new accounting requirement did
not have a significant effect on net income.
In December 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." The EITF
requires that energy trading contracts be marked to market through the income
statement, with gains or losses reflected rather than revenues and purchased
power. Energy trading contracts are defined as energy contracts entered into
with the objective of generating profits on or from exposure to shifts or
changes in market prices. The adoption of this accounting in January 1999 did
not have a material impact on the financial statements.
The Company continues to analyze the effects of adoption of the rules
promulgated by SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts, and for hedging activities. The FASB recently deferred
implementation of the provisions of SFAS No. 133 to fiscal periods beginning
after June 15, 2000. The Company
F-26
<PAGE> 249
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intends to adopt the provisions of SFAS No. 133 within this time frame and in
accordance with the requirements provided by this statement. Management is
currently assessing the financial statement impact of the statement, but we have
not determined the impact at this time. Adoption of SFAS No. 133 could increase
the volatility of earnings and other comprehensive income.
2. WRITE-DOWN OF ASSETS
In December 1998, Southern Energy designed and implemented a plan to
dispose of its Argentine and Chilean investments. As a result, Southern Energy
recorded a write-down of approximately $308 million in 1998 to reflect the
difference between the carrying value of these assets and the estimated fair
value of the businesses. The Company recorded an additional write-down of $28
million in 1999 to eliminate the impact of net earnings from the investments, in
order to prevent increasing the carrying value of these assets above their
estimated fair market value. Depreciation expense was suspended at the time of
the initial write-down. Southern Energy estimated the fair value of the
businesses held for sale based on bids received from prospective buyers, if
available, or the discounted expected future cash flows to be generated by the
assets. The adjusted carrying value of the Argentine and Chilean assets held for
disposal at December 31, 1999 was $92 million. See Note 17 for further
discussion. These assets impacted the financial statements of income as follows
(in millions):
<TABLE>
<CAPTION>
OPERATING OPERATING CONSOLIDATED
REVENUES INCOME NET INCOME
--------- --------- ------------
<S> <C> <C> <C>
Year:
1997..................................................... $180 $37 $5
1998..................................................... 180 37 5
1999..................................................... 171 23 2
</TABLE>
Additionally during 1999, Southern Energy recorded a write-down of
approximately $14 million, which primarily related to its interest in the
write-down of $31 million of WPD metering assets. These assets are to be held
and used by WPD. Future cash flows will be derived from competitive markets
being introduced in the UK for metering activities. An estimate of these
undiscounted future cash flows was compared to the carrying value of the assets
and it was determined that the assets were impaired. The fair value of the
assets was then determined by discounting the future cash flows. The amount of
the write-down was then computed by comparing the carrying value to the fair
value of the assets.
3. JOINT VENTURE INFORMATION
On September 1, 1997, Southern Energy and Vastar Resources, Inc. ("VRI")
entered into a 99-year partnership agreement designed to further develop both
parties' energy marketing and risk management operations and formed SCEM. Also
on such date, Southern Energy contributed $24.1 million, which includes
substantially all of its gas marketing and risk management assets and a working
capital contribution to the venture. As part of this transaction, VRI
contributed substantially all of the operating assets of Vastar Gas Marketing,
Inc. (a wholly owned subsidiary of VRI) to SCEM on September 1, 1997.
F-27
<PAGE> 250
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1998, VRI contributed substantially all operating assets of
Vastar Power Marketing, Inc. (a wholly owned subsidiary of VRI) to SCEM;
concurrently, certain long-term natural gas supply contracts were contributed by
Vastar Gas Marketing, Inc. Additionally, on January 1, 1998, Southern Energy
paid VRI $40 million and contributed $14.1 million, or substantially all of the
remaining energy marketing and trading assets of Southern Energy Trading and
Marketing, Inc., to SCEM.
Historical cost was used, as Southern Energy and VRI accounted for their
respective initial investments in SCEM as a joint venture. However, due to the
fact that both entities were marketing and energy trading operations,
substantially all of the contributed assets and liabilities were accounted for
using mark-to-market accounting. The partnership agreement provides both
Southern Energy and VRI with significant participatory rights with respect to
the operations of SCEM. Accordingly, Southern Energy accounts for its interest
in the joint venture under the equity method of accounting.
The general and limited partnership interest is 60% owned, indirectly, by
Southern Energy and 40% owned, indirectly, by VRI. Income and partnership
distributions will be made according to the ownership percentage, subject to
certain minimum distributions, provided for by the partnership agreement, to VRI
for the first five years of the partnership. These minimum distributions can be
reduced in the event that certain extraordinary items are experienced by SCEM.
To date, the Company has only paid VRI $5.8 million for the 1998 minimum
distribution as a result of credit losses in 1998. VRI believes it is entitled
to a higher payment and has requested arbitration in the matter. The Company
does not believe that the outcome of this matter will have a material effect on
its financial statements.
Under the partnership agreement, Southern Energy's ownership interest
automatically increases to 75% of SCEM on July 1, 2001. During calendar year
2002, Southern Energy may exercise a call provision to purchase an additional 5%
interest for $80 million. Beginning December 1, 2002 and ending January 2, 2003,
VRI may put its remaining ownership interest to Southern Energy for an amount of
either $130 million or $210 million depending on the interest owned by VRI at
that time, plus certain other contractual considerations. Both of these put and
call provisions provide for cash payments equal to the pro rata portion of
certain unamortized capital expenditures and the pro rata portion of the market
or fair values of financial instruments owned by the partnership on the date of
the option exercise. The partnership agreement also provides that in the event
of a change of control of VRI or the Company, the other party has a right to
purchase the interest in SCEM owned by the party affected by the change of
control. The purchase price would be determined by an appraisal.
4. PROPERTY, PLANT, AND EQUIPMENT
The Company records depreciation expense on a straight-line basis, using
the following estimated useful lives (in years):
<TABLE>
<S> <C>
Production.................................................. 15 to 40
Transmission and distribution............................... 35 to 40
Other....................................................... 3 to 30
</TABLE>
F-28
<PAGE> 251
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, plant, and equipment consisted of the following at December 31,
1998 and 1999 (in millions):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Production.................................................. $ 551 $1,615
Transmission and distribution............................... 2,463 2,417
Other....................................................... 94 115
------ ------
$3,108 $4,147
====== ======
</TABLE>
5. RELATED-PARTY TRANSACTIONS
The Company has agreements with Southern Company Services, Inc. (a wholly
owned subsidiary of Southern) and each of the system operating companies owned
by Southern under which those companies provide the following services to the
Company at cost: general engineering, design engineering, accounting and
statistical budgeting, business promotion and public relations, systems and
procedures, training, and administrative and financial services. In addition to
these services, certain facilities of the system companies are made available to
the Company and its customers. The Company reimburses the service company and
the various system operating companies at cost for these services. Such costs
amounted to approximately $28 million, $17 million, and $20 million, during
1997, 1998, and 1999, respectively.
Included in these costs are both directly incurred costs and allocated
costs. The allocated costs related to Southern Company Services, Inc.'s (SCS)
corporate general and administrative overhead amounted to approximately $2
million, $4 million and $5 million during 1997, 1998 and 1999, respectively.
SCS allocates costs to Southern Company subsidiaries based on single-year
statistical data on a one-year lag. Using these statistics, SCS allocated these
costs to the Company based on several methods of allocation. The majority of
these costs in 1999 were allocated based on the following methodologies:
Financial Basis
The Company was charged a percentage of SCS costs subject to
allocation based on net fixed assets, operating expenses and operating
revenue. The amounts allocated to the Company were based on its net fixed
assets, operating expenses and operating revenue as a percentage of
Southern Company's total net fixed assets, operating expenses and operating
revenue.
Employee Basis
The Company was charged a percentage of SCS costs subject to
allocation based on employee headcount. The amounts of the charges
allocated to the Company were based on the number of Company employees as a
percentage of the number of employees of all of SCS's client companies
receiving allocations. Employee groups not benefiting from the services are
not included in the allocation.
F-29
<PAGE> 252
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Market-Based Equity Basis
The Company was charged a percentage of SCS costs subject to
allocation based on market equity. The amounts allocated to the Company
were based on the ratio of the Company's total book equity, adjusted to
fair market value, to the sum of the total market-based equity of all SCS
client companies receiving allocations.
The Company's management believes that these allocation methods are
reasonable.
The Company incurred interest expense on a note payable to Southern Company
of $17 million $53 million, and $37 million during 1997, 1998, and 1999,
respectively. See Note 7 for discussion of related-party debt transactions.
The Company has various agreements with SCEM in which SCEM has agreed to
develop and manage its bidding strategy, manage fuel requirements, sell the
energy and provide accounting and settlement services for several generating
plants of the Company. These agreements apply to the Company's California, New
York, and New England operating entities and generally cover a term of 1 to 2.5
years. The first of these agreements was in place in December 1998 and the most
recent in July 1999 as amended in January 2000. Total fees paid to SCEM under
the marketing agreements totaled $16.8 million in 1999, and payments made for
fuel to SCEM totaled $257.9 million.
In January 1999, the Company contracted with SCEM to operate and maintain
the generating assets of Brazos Electric Power Cooperative in Texas for a period
of five years ending 2003.
For all agreements, the Company has obligated itself to meet certain
operating factors.
The Company's revenues and expenses related to its agreements with SCEM
during 1999 were $445.1 million and $274.7 million, respectively. Intercompany
profits and losses recognized by SCEM on a market to market accounting basis are
appropriately eliminated in consolidation. Activity with SCEM during 1998 was
not material to the Company.
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company offers pension benefits to its WPD, Freeport Power Company and
North American employees, through various pension plans.
WPD participates in the Electricity Supply Pension Scheme ("ESPS"), which
provides pension and other related defined benefits based on final pensionable
pay to substantially all employees throughout the electricity supply industry in
the United Kingdom. The measurement date for WPD is December 31 for each year
presented. See Note 11 for further discussion.
As a result of WPD's sale to London Electricity of its supply business
(Note 12) during 1999, a curtailment and settlement of a portion of WPD's
pension plan occurred for the pension assets and obligations that transferred to
the buyer. In accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", a curtailment gain of $5 million and a settlement loss of
$14 million were recorded during 1999 in conjunction with this event.
F-30
<PAGE> 253
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
The following tables show the actuarial results for the WPD defined benefit
pension plan as of December 31 for the respective years (in millions):
<TABLE>
<CAPTION>
PENSION PLAN
---------------
1998 1999
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 890 $1,063
Service cost.............................................. 12 13
Interest cost............................................. 67 59
Benefits paid............................................. (61) (70)
Actuarial loss (gain)..................................... 143 (91)
Amendments................................................ 0 41
Curtailment............................................... 0 (7)
Settlement................................................ 0 (41)
Foreign currency exchange rate change..................... 12 (30)
------ ------
Benefit obligation, end of year........................ $1,063 $ 937
</TABLE>
F-31
<PAGE> 254
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION PLAN
---------------
1998 1999
------ ------
<S> <C> <C>
====== ======
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>
The following tables show the collective actuarial results for the defined
benefit pension plans (excluding WPD) of the Company (in millions):
<TABLE>
<CAPTION>
PENSION PLAN
-------------
1998 1999
----- -----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 27 $ 32
Service cost.............................................. 1 3
Interest cost............................................. 2 3
Actuarial loss............................................ 1 2
Amendments................................................ 1 0
Acquisitions.............................................. 0 17
---- ----
Benefit obligation, end of year...................... $ 32 $ 57
==== ====
CHANGES IN PLAN ASSETS:
Fair value of plan assets, beginning of year................ $ 26 $ 30
Return on plan assets..................................... 1 4
Employer contributions.................................... 1 1
Receivables due to transfers.............................. 2 9
---- ----
Fair value of plan assets, end of year............... $ 30 $ 44
</TABLE>
F-32
<PAGE> 255
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION PLAN
-------------
1998 1999
----- -----
<S> <C> <C>
==== ====
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.
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>
F-33
<PAGE> 256
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
BENEFITS
---------------
1998 1999
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year....................... $ 5 $ 8
Service cost.............................................. 0 1
Interest cost............................................. 1 1
Actuarial gain............................................ 0 (1)
Amendments................................................ 1 0
Acquisitions.............................................. 1 10
---- ----
Benefit obligation, end of year............................. $ 8 $ 19
==== ====
FUNDED STATUS:
Funded status at end of year................................ $ (8) $(19)
Unrecognized net loss..................................... 2 1
Accruals for acquisitions................................. (8) 0
---- ----
Net amount recognized....................................... $(14) $(18)
==== ====
</TABLE>
The postretirement benefits were unfunded at December 31, 1998 and 1999.
The actuarially based costs of Southern Energy's postretirement benefits during
1997, 1998, and 1999 were not material.
STOCK-BASED COMPENSATION
Value Creation Plan
In 1997, the Company initiated a long-term incentive plan, the value
creation plan, which grants appreciation rights to eligible employees to receive
unit appreciation over a preestablished value on a stated number of units per
employee. Base values and subsequent annual valuations are calculated using a
discounted cash flow methodology, the key assumptions of which include cash flow
forecasts of each the Company's investments for the future five to seven years,
a terminal value assumption equal to 103%, and a discount rate of 13% for all
periods presented. Employees are granted two types of appreciation rights:
standard appreciation rights which pay each eligible employee for any
appreciation over a fixed base value and indexed appreciation rights which pay
each eligible employee for any appreciation over a base value which increases
each year by a predetermined interest rate. Standard appreciation rights vest
25% per year for four years, and indexed appreciation rights vest 100% after
four years. The Company records compensation expense ratably during the vesting
period for any appreciation of the units over a fixed base value in accordance
with APB Opinion 25. This expense amounted to $1.7 million in 1999 and was not
material in 1997 and 1998.
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock-based compensation plan under APB
Opinion 25 "Accounting for Stock Issued to Employees" and adopt the
disclosure-only provisions of SFAS No. 123. Accounting for cash-settled awards
under SFAS No. 123 is consistent with the accounting for such awards under APB
Opinion No. 25.
F-34
<PAGE> 257
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STANDARD EXERCISE INDEXED EXERCISE
RIGHTS PRICE RIGHTS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996................. 0 0 0 0
Granted.......................................... 559,579 $10.00 2,729,011 $10.00
Exercised........................................ 0 0 0 0
Forfeited........................................ 0 0 0 0
--------- ------ --------- ------
Outstanding at December 31, 1997................. 559,579 10.00 2,729,011 10.00
Granted.......................................... 1,093,849 9.73 54,582 11.30
Exercised........................................ 0 0 0 0
Forfeited........................................ 0 0 0 0
--------- ------ --------- ------
Outstanding at December 31, 1998................. 1,653,428 9.82 2,783,593 11.30
Granted.......................................... 1,456,665 $11.61 325,138 $12.77
Exercised........................................ (14,411) 9.90 0 0
Forfeited........................................ (24,995) 9.83 (91,216) 12.77
--------- ------ --------- ------
Outstanding at December 31, 1999................. 3,070,687 $10.67 3,017,515 $12.77
========= ====== ========= ======
Units exercisable at December 31, 1997........... 0 $ 0.00 0 $ 0.00
========= ====== ========= ======
Units exercisable at December 31, 1998........... 139,883 $10.00 0 $ 0.00
========= ====== ========= ======
Units exercisable at December 31, 1999........... 538,816 $ 9.87 0 $ 0.00
========= ====== ========= ======
</TABLE>
Exercise prices for standard rights outstanding as of December 31, 1999
ranged from $9.73 to $11.61. The following table provides certain information
with respect to standard rights outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RIGHTS WEIGHTED AVERAGE REMAINING
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE (YEARS)
--------------- ----------- ---------------- ------------------------
<S> <C> <C> <C>
Under $11.00............................. 1,614,022 $ 9.82 8.2
Over $11.00.............................. 1,456,665 11.61 9.5
--------- ------ ---
Total.................................. 3,070,687 $10.67 8.8
========= ====== ===
</TABLE>
The exercise price for indexed rights outstanding as of December 31, 1999
was $12.77, and such rights had a weighted average remaining contractual life of
7.7 years.
F-35
<PAGE> 258
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides certain information with respect to rights
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
STANDARD
UNITS WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------------
<S> <C> <C>
Under $11.00................................................ 538,816 $ 9.87
Over $11.00................................................. 0 0.00
------- ------
Total..................................................... 538,816 $ 9.87
======= ======
</TABLE>
In the event that the Company becomes publicly traded, the compensation
committee of the Southern Company has the right to convert the appreciation
rights into stock options or other appreciation rights of the Company. See Note
15.
Southern Company Options
Stock option grants in Southern common stock have been made from Southern
Company's Performance Stock Plan periodically and vest annually at a rate of 33%
on the anniversary date of the grant. Grants fully vest upon termination because
of death, total disability or retirement. Exercise price is the average of the
high and low fair market value of Southern Company's common stock on the date
granted.
Transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SOUTHERN EXERCISE
OPTIONS PRICE
--------- ----------
<S> <C> <C>
Outstanding at December 31, 1996 255,844 $ 22.41
Granted 273,940 21.25
Exercised 0 0.00
Forfeited (12,413) 21.97
--------- ----------
Outstanding at December 31, 1997 517,371 $ 21.81
Granted 283,864 27.03
Exercised (4,071) 21.87
Forfeited (1,693) 23.00
--------- ----------
Outstanding at December 31, 1998 795,471 $ 23.67
Granted 516,967 26.56
Exercised (6,001) 22.46
Forfeited (21,845) 25.31
--------- ----------
Outstanding at December 31, 1999 1,284,592 $ 24.81
========= ==========
Units exercisable at December 31, 1997 116,760 $ 21.92
========= ==========
Units exercisable at December 31, 1998 277,788 $ 21.91
========= ==========
Units exercisable at December 31, 1999 502,276 $ 22.83
========= ==========
</TABLE>
F-36
<PAGE> 259
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for Southern stock options outstanding as of December 31,
1999 ranged from $18.09 to $27.03. The following table provides certain
information with respect to Southern stock options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
OPTIONS EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE
------------------------ ----------- -------- ----------------
<S> <C> <C> <C>
$18.00 - $21.00.................................. 14,684 $18.77 4.2
$21.01 - $24.00.................................. 484,004 21.89 6.9
$24.01 - $28.00.................................. 785,904 26.72 9.2
---------
Total....................................... 1,284,592 $24.81 8.3
=========
</TABLE>
The following table provides certain information with respect to rights
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
------------------------ ----------- --------
<S> <C> <C>
$18.00 - $21.00............................................. 14,684 $18.77
$21.01 - $24.00............................................. 397,946 22.03
$24.01 - $28.00............................................. 89,646 27.03
-------
Total.................................................. 502,276 $22.83
======= ======
</TABLE>
The weighted average fair values at date of grant for options granted
during 1997, 1998 and 1999 were $4.26, $5.69 and $6.29, respectively, and were
estimated using the Black-Scholes option valuation model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expected life in years...................................... 10 10 10
Interest rate............................................... 6.49% 5.46% 5.79%
Volatility.................................................. 17.47% 19.16% 20.74%
Dividend yield.............................................. 6.1% 5.0% 5.0%
</TABLE>
Pro forma earnings and earnings per share information for the years ended
December 31, 1997, 1998 and 1999 is provided below, to take into account the
amortization of stock-based compensation to expense on a straight-line basis
over the vesting period. Had compensation costs been determined as prescribed by
SFAS No. 123, the Company's net income would have been reduced by less than $1
million in each of 1997 and 1998, and by less than $2 million in 1999. Earnings
per share would have been reduced by less than one cent in each period
presented.
Phantom Stock
During 1999, the Company made awards of approximately 39,000 phantom
Southern stock shares and approximately 130,000 phantom Company stock shares to
certain employees and officers. The aggregate amount awarded was approximately
$2.7 million with cliff vesting during 2003. The
F-37
<PAGE> 260
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company records compensation expense ratably during the vesting period, taking
into account the fluctuations in market value of the underlying stock during
each period. Compensation expense during 1999 was approximately $500,000.
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-38
<PAGE> 261
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 has bank credit arrangements with various lending institutions
totaling approximately $3.021 billion. At December 31, 1999, unused credit
arrangements with banks totaled $1.256 billion, of which $574 million expires
during 2000 and $682 million during 2001 and beyond. The credit arrangements
generally require payment of commitment fees based on the unused portion of the
commitments or the maintenance of compensating balances with the banks. These
balances are not legally restricted from withdrawal.
In April 1999, Southern Energy entered into three revolving credit
agreements with a group of lending banks, as agent, with commitments totaling
$1.3 billion. Each of the corporate credit facilities is available for general
corporate purposes, including commercial paper backstop. Facility A with total
commitments of $500 million was intended to be a temporary facility until the
Company completed subsequent financings. Accordingly, this facility was
cancelled in October 1999. Facility B, a $350 million, 364-day revolving line of
credit with an annual commitment fee of $2.1 million, matures in March 2000;
however, it has extension and commitment increase options subject to the
lenders' approval. Facility C, totaling $450 million with an annual commitment
fee of $3.15 million, also has a letter of credit option and matures in April
2004. No amounts were drawn under this credit arrangement at December 31, 1999.
However, the Company had letters of credit outstanding under Facility C in the
amount of $250 million at December 31, 1999. In April 1999, the Company also
instituted a commercial paper program which is used in conjunction with the
corporate credit facilities as an alternate funding source. $50 million was
outstanding at December 31, 1999 under this program.
The April 1999 Credit Agreements contain various business and financial
covenants including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the incurrence
of indebtedness and liens, (iii) limitations on capital expenditures, (iv)
limitations on ratio of recourse debt to recourse capital (v) maintenance of
minimum ratios of Corporate Debt Service to Corporate Interest. The Company is
in compliance with all of the covenants in the agreements governing this
indebtedness.
In October 1999, Southern Energy North America Generating, Inc. ("SENAG")
completed a $1.45 billion corporate-style bank financing consisting of three
credit facilities. Facility A is a $1.15 billion 364-day term loan with a
two-year term-out option and no commitment fee. Facility B is a $250 million
five-year revolver, with an annual commitment fee of $1.5 million, to be used
for capital expenditures, and Facility C is a $50 million five-year revolver,
with an annual commitment fee of $300,000, for working capital needs. The draws
under Facilities B and C, in the amount of $140 million, are included in
long-term debt in the accompanying financial statements. The SENAG facilities
contain covenants substantially equivalent to those discussed above for the
April 1999 Credit
F-39
<PAGE> 262
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement. SENAG is in compliance with all of the covenants in the agreements
governing this indebtedness.
In addition, Southern Energy, from time-to-time, borrows under uncommitted
lines of credit with banks and through commercial paper programs that have the
liquidity support of committed bank credit arrangements.
PREFERRED SECURITIES
In a series of transactions during 1997 and 1998, subsidiaries of the
Company borrowed $682 million and $350 million respectively, dollar denominated
income preferred securities. The securities are due between 2027 and 2037 with
fixed interest rates between 6.875% and 8.235%. The Company entered into a swap
agreement to effectively convert the $82 million security borrowed in 1997, to
British pound sterling at the time of issuance. Based on year end exchange
rates, $1,033 million and $1,031 million was outstanding on the securities at
December 31, 1998 and 1999 respectively. See Note 9 for further discussion of
the Company's liability management program.
Subsidiary obligated mandatorily redeemable preferred securities have been
issued by special purpose financing entities of Southern Energy. Substantially
all of the assets of these special financing entities are junior subordinated
notes issued by the Company. The Company has loaned $950 million of the proceeds
from the issuance of these subsidiary obligated mandatorily redeemable preferred
securities and an additional $30 million related to equity to Southern. Payment
terms and interest rates on the notes receivable from Southern Company are
identical to the related preferred securities. The notes are due between 2027
and 2037 with fixed interest rates between 6.875% and 8.19%. These receivables
from Southern are included in notes receivable in the accompanying balance
sheets.
NOTE PAYABLE TO SOUTHERN COMPANY
Periodically, the Company borrows funds from Southern to finance
acquisitions or working capital needs. The Company pays interest to Southern
based on Southern Company's short-term borrowing rate. At December 31, 1998 this
interest rate was 5.47%. No amounts were outstanding at December 31, 1999.
F-40
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SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Details of the income tax provision for the years ended December 31, 1997,
1998, and 1999 are as follows (in millions):
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ----
<S> <C> <C> <C>
INCOME TAX PROVISION:
Income tax from continuing operations:
United States:
Current benefit........................................ $(24) $ (87) $(16)
Deferred provision (benefit)........................... 35 (44) 36
International:
Current provision...................................... 45 15 18
Windfall profits tax assessed in the United Kingdom.... 148 0 0
Deferred (benefit) provision........................... (29) (7) 91
---- ----- ----
Total provision (benefit) from continuing
operations.......................................... $175 $(123) $129
==== ===== ====
Income tax from discontinued operations:
Current benefit........................................ (19) (33) (54)
Deferred provision..................................... 9 11 39
---- ----- ----
Total benefit from discontinued operations........... $(10) $ (22) $(15)
==== ===== ====
</TABLE>
In July 1997, the new Labor government in the United Kingdom introduced its
first budget, which became effective July 31, 1997. This budget included a
one-time windfall profit tax on privatized utilities in the United Kingdom,
which included the Company's subsidiary, WPD. As reflected in the accompanying
statements of income, the effect of this tax was recorded during fiscal year
1997. The Company paid the first installment of this tax on December 1, 1997 and
made the second and final installment on December 1, 1998.
F-41
<PAGE> 264
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-42
<PAGE> 265
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The undistributed earnings of certain foreign subsidiaries aggregated $435
million as of December 31, 1999, which, under existing tax law, will not be
subject to U.S. income tax until distributed. Of the total undistributed
earnings, provisions for U.S. taxes have not been accrued on $210 million
related to earnings that have been, or are intended to be, indefinitely
reinvested.
9. FINANCIAL INSTRUMENTS
COMMODITY-RELATED TRADING ACTIVITIES
During 1999, Southern Energy created an energy trading company in
Amsterdam, which provides risk management services associated with the energy
industry to its customers in the European market. These services are provided
primarily through a variety of exchange-traded energy contracts including
forward contracts, futures contracts, option contracts, and financial swap
agreements. These contractual commitments, which represent risk management
assets and liabilities, are accounted for using the mark-to-market method of
accounting. Accordingly, they are reflected at fair value, net of future
delivery costs, in the consolidated balance sheets.
The Amsterdam trading operations engage in risk management activities. All
such transactions and related expenses are recorded on a trade-date basis.
Financial instruments and contractual commitments utilized in connection with
these activities are accounted for using the mark-to-market method of
accounting. Under the mark-to-market method of accounting, financial instruments
and contractual commitments, including derivatives used for these purposes, are
recorded at fair value. The determination of fair value considers various
factors, including closing exchange or over-the-counter (OTC) market price
quotations, time value and volatility factors underlying options and contractual
commitments, price activity for equivalent or synthetic instruments in markets
located in different regions, and counterparty credit quality.
Net unrealized gains from risk management services related to the Amsterdam
trading operation are immaterial at December 31, 1999. The volumetric weighted
average maturity of the contractual commitments was 1.35 years. The net notional
amount of the risk management assets and liabilities at December 31, 1999 was
5.3 billion kilowatt-hours. The notional amount is indicative only of the volume
of activity and not of the amount exchanged by the parties to the financial
instruments. Consequently, these amounts are not a measure of market risk. The
fair value of these risk management assets and liabilities averaged $0.2 million
and $4 million, respectively. The averages for 1999 were based on month-end
balances. The fair value of these assets and liabilities at December 31, 1999
was $1 million and $5 million, respectively.
The Amsterdam trading operations involve elements of credit risk. Credit
risk relates to the risk of loss that the company would incur as a result of
nonperformance by counterparties pursuant to the terms of their contractual
obligations. The trading operation has attempted to mitigate this risk by
establishing controls to determine and monitor the creditworthiness of
counterparties. The Company monitors credit risk on both an individual and group
counterparty basis. Accordingly, Southern Energy does not anticipate any
material impact to its financial position or results of operations as a result
of counterparty nonperformance.
Effective in January 1998, Southern Energy and VRI combined their energy
trading and marketing activities to form a North American joint venture, SCEM
(Note 3). Southern Energy's investment in the joint venture is accounted for
under the equity method of accounting.
F-43
<PAGE> 266
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSET AND LIABILITY MANAGEMENT
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates, and certain commodity prices. To manage the volatility
relating to these exposures, the Company enters into various derivative
transactions pursuant to the Company's policies in such areas such as
counterparty exposure and hedging practices.
The Company's policy is to manage interest expense using a combination of
fixed- and variable-rate debt. To manage this mix in a cost-efficient manner,
the Company enters into interest rate swaps in which the Company agrees to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal
amount. These swaps are designated to hedge underlying debt obligations. For
qualifying hedges, the interest rate differential is reflected as an adjustment
to interest expense over the life of the swaps. Gains and losses resulting from
the termination of qualified hedges prior to their stated maturities are
recognized ratably over the remaining life of the instrument being hedged.
Currency swaps are used by the Company to hedge its net investment in
certain foreign subsidiaries. Gains or losses on these currency swaps designated
as hedges of net investments are offset against the translation effects
reflected in other comprehensive income, net of tax.
The Company utilizes currency swaps and forward agreements to hedge U.S.
dollar-denominated debt issued by our Southern Investments UK plc subsidiary.
These swaps offset the dollar cash flows, thereby effectively converting debt to
the respective subsidiary's functional currency. Gains and losses related to
qualified hedges of foreign currency firm commitments are deferred and included
in the basis of the underlying transactions.
Off-balance sheet derivative financial instruments at December 31, 1998 and
1999 held for purposes other than trading were as follows (in millions). The
interest rates noted in the following table represent the range of fixed
interest rates that Southern Energy pays on the related interest rate swaps. On
virtually all of these interest rate swaps, the Company receives floating
interest rate payment at LIBOR.
<TABLE>
<CAPTION>
YEAR OF
MATURITY OR 1998 1998 1999 1999
UNRECOGNIZED INTEREST NUMBER OF NOTIONAL UNRECOGNIZED NOTIONAL UNRECOGNIZED
TERMINATION RATES COUNTERPARTIES AMOUNT GAIN (LOSS) AMOUNT GAIN (LOSS)
------------ ------------ -------------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TYPE:
Interest rate
swaps............ 2000-2016 6.074%-7.12% 9 $ 928 $ (69) $ -- $ --
2000-2012 6.55%-7.12% 4 -- -- 1,910 (3)
2001-2012 6.56%-8.17% 6 L600 (130) L600 (49)
2002-2007 4.98%-5.78% 2 DM691 (30) DM691 (5)
CROSS CURRENCY:
Swaps.............. 2001-2007 -- 7 L429 11 L414 (11)
Swaption........... 2003 -- 1 DM555 (18) DM435 11
</TABLE>
-------------------------
L --denotes British Pound Sterling.
DM --denotes Deutsche Mark.
F-44
<PAGE> 267
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unrecognized gain/loss for interest rate swaps is determined based on
the estimated amount that the Company would receive or pay to terminate the swap
agreement at the reporting date based on third-party quotations. The
unrecognized gain/loss for cross-currency financial instruments is determined
based on current foreign exchange rates. As indicated in the previous table, if
the existing asset and liability management derivative financial instruments at
December 31, 1998 and 1999 had been discontinued or our counterparties defaulted
on those dates, the Company would have recognized gains of approximately $236
million and $57 million, respectively. However, as of December 31, 1999, the
Company believes that its exposure to credit risk due to nonperformance by the
counterparties to its asset and liability management financial derivatives is
insignificant, based on the investment grade rating of the counterparties.
Prior to the sale of its supply business, the Company's subsidiary, WPD,
utilized contracts to mitigate its exposure to volatility in the prices of
electricity purchased through the wholesale electricity market. Such contracts
allowed WPD to effectively convert the majority of its anticipated wholesale
electricity purchases from market prices to fixed prices. Due to the immaturity
of the electricity trading market in the United Kingdom and the complexity of
WPD's existing contracts, it was not practicable to estimate the fair value of
these contracts. Such contracts were sold in connection with the electricity
supply business sale.
MARKET RISK
Market risk is the potential loss the Company may incur as a result of
changes in the market or fair value of a particular instrument or commodity. All
financial and commodities-related instruments, including derivatives, are
subject to market risk. The Company's exposure to market risk is determined by a
number of factors, including the size, duration, composition, and
diversification of positions held, the absolute and relative levels of interest
rates, as well as market volatility and illiquidity. The most significant factor
influencing the overall level of market risk to which the Company is exposed is
its use of hedging techniques to mitigate such risk. The Company manages market
risk by actively monitoring compliance with stated risk management policies as
well as monitoring the effectiveness of its hedging policies and strategies. The
Company's risk management policies limit the amount of total net exposure and
rolling net exposure during stated periods. These policies, including related
risk limits, are regularly assessed to ensure their appropriateness given the
Company's objectives.
CREDIT RISK
The Company is exposed to losses in the event of nonperformance by
counterparties to its derivative financial instruments. Credit risk is measured
by the loss the Company would record if its counterparties failed to perform
pursuant to terms of their contractual obligations and the value of collateral
held, if any, was not adequate to cover such losses. The Company has established
controls to determine and monitor the creditworthiness of counterparties, as
well as the quality of pledged collateral, and uses master netting agreements
whenever possible to mitigate the Company's exposure to counterparty credit
risk. Additionally, the Company may require counterparties to pledge additional
collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely
F-45
<PAGE> 268
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affected, in a similar manner, by changes in the economy or other market
conditions. The Company monitors credit risk on both an individual and group
counterparty basis.
FAIR VALUES
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments.
Financial instruments recorded at market or fair value include cash and
interest-bearing equivalents, financial instruments used for trading purposes,
commodities, and related instruments used for trading purposes, including
options and contractual commitments. The following methods were used by the
Company to estimate its fair value disclosures for financial instruments not
carried at fair value on the accompanying balance sheets:
NOTES RECEIVABLE. The fair value of the Company's note receivables is
estimated using interest rates the Company would receive based on similar
types of arrangements.
NOTES PAYABLE AND OTHER LONG- AND SHORT-TERM DEBT. The fair value of
the Company's notes payable and long- and short-term debt is estimated
using discounted cash flow analysis based on current market interest rates
for similar types of borrowing arrangements and market quotes, when
available.
SUBSIDIARY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES. The
fair value of the Company's preferred securities is calculated based on
current market price.
The carrying or notional amounts and fair values of the Company's financial
instruments at December 31, 1998 and 1999 were as follows (in millions):
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Notes receivable, including current portion............. $1,517 $1,564 $1,368 $1,277
Notes payable and long- and short-term debt............. 6,027 5,722 7,152 6,779
Subsidiary obligated mandatorily redeemable preferred
securities............................................ 1,033 1,098 1,031 907
</TABLE>
10. REGULATORY MATTERS
The Office of Gas & Electricity Markets controls the revenues earned by WPD
in its distribution business and former supply business by applying a price
control formula. Distribution revenues are regulated by a formula ("DPCF") that
sets the maximum average price per unit of electricity distributed. The elements
used in the formula are generally established for a five-year period and are
subject to review by the regulator. In December 1999, the regulator published
final price proposals following his review of the DPCF for distribution
businesses. For WPD, these proposals represent a 20% reduction to distribution
prices from April 1, 2000, followed by a reduction in real terms of 3% each year
after April 1, 2001. This price control is scheduled to operate until March
2005.
F-46
<PAGE> 269
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENT MATTERS
STATE LINE
On July 28, 1998, an explosion occurred at State Line causing a fire and
substantial damage to the plant. The precise cause of the explosion and fire has
not been determined. Thus far, seven personal injury lawsuits have been filed
against the Company, five of which were filed in Cook County, Illinois. The
Company filed a motion to dismiss these five cases in 1998 for lack of "in
personam" jurisdiction. The motion was denied in August 1999. In October 1999,
the Appellate Court of Illinois granted our petition for leave to appeal. The
outcome of these proceedings cannot now be determined and an estimated range of
loss cannot be made.
COMPANHIA ENERGETICA DE MINAS GERAIS
In September 1999, the state of Minas Gerais filed a lawsuit in a state
court seeking temporary relief against Southern Electric do Brazil
Participacoes, S.A. ("SEB") exercising voting rights under the shareholders
agreement, between the state and SEB regarding SEB's interest in Companhia
Energetica de Minas Gerais ("CEMIG"), as well as a permanent recision of the
agreement. A lower court judge denied the state's request, but one member of a
three-judge State Appellate Court granted a temporary injunction pending the
outcome of the litigation regarding recision of the shareholders agreement.
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. 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.
SE CALIFORNIA
Southern Energy California LLC ("SE California"), a wholly owned subsidiary
of the Company, and its subsidiaries are parties to a Federal Energy Regulatory
Commission ("FERC") proceeding that will determine the percentage of a settled
$158.8 million revenue requirement to be paid to the SE California parties under
the reliability must-run ("RMR") agreements between the SE California parties
and the California Independent System Operator ("CAISO"). Hearings were
conducted before a FERC administrative law judge in March 2000. The SE
California parties have proposed to allocate approximately 75% of the
responsibility for payment of the revenue requirement to the CAISO, while CAISO
and other aligned parties argue that CAISO should pay no more than approximately
7%. The decision in this case will affect the amount CAISO will pay to SE
California and its subsidiaries for the period commencing June 1, 1999 through
December 31, 2001. The outcome of this proceeding is uncertain, and the parties
have recently commenced settlement
F-47
<PAGE> 270
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discussions. The Company's failure to prevail in this matter would adversely
effect its results of operations.
WPD PENSION SCHEME
WPD participates in the ESPS in the United Kingdom, which includes members
from the Regional Electricity Companies as well as other industry members. WPD
used a portion of its pension surplus to fund early pension payments to
terminated employees. An independent pension arbitrator has issued a ruling
directing that another industry employer refund similar amounts paid, with
interest to ESPS. This ruling is currently being appealed to the House of Lords.
The majority of WPD's employees are ESPS members. Based on the Company's
assessment of the current legal position, it anticipates that a payment by WPD
into the ESPS of L24 million ($36 million) will ultimately be required, should
the other industry employer's appeal fail and WPD then be named in a similar
action. Management does not believe such payment would have a material adverse
impact on the Company's financial position, liquidity or results of operations.
Under SFAS No. 87, "Employers' Accounting for Pensions," there would be no
immediate impact to the Company's results of operations.
In addition to the matters discussed above, the Company is party to legal
proceedings arising in the ordinary course of business. In the opinion of
management, the disposition of these matters will not have a material adverse
impact on the results of operations or financial position of the Company.
ENERGY MARKETING AND RISK MANAGEMENT COMMITMENTS
The following table provides a summary of the Company's commitments (in
millions) related to its energy marketing and risk management activities as of
December 31, 1998 and 1999.
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Trade credit support (at fair value)........................ $ 152 $ 146
Vastar gas purchase contract................................ 39 41
Brazos contract performance guarantee....................... -- 75
Minimum distributions to Vastar............................. 105 85
Contingent commitment to buy an additional interest in SCEM
from Vastar (Note 3)...................................... 210 210
------ ------
Total....................................................... $ 506 $ 557
====== ======
</TABLE>
The company and VRI have jointly agreed to provide up to $700 million of
contingent performance guarantees and trade credits on behalf of SCEM. Southern
Company, Southern Energy, Vastar, and ARCO provide the actual guarantees.
Southern Energy and Vastar have agreed to indemnify each other (subject to
certain limitations of liability) against loss in proportion to their respective
ownership shares of the SCEM (Note 3) entities with respect to any amounts paid
by Southern Company, Southern Energy, Vastar or their affiliates; although
Southern Energy would pay more (up to 100%) of the losses incurred on such
guarantees if necessary for Vastar to receive the minimum cash distributions
from SCEM (which are guaranteed by Southern Energy) in the years 1998 through
2002. If necessary to support SCEM's ongoing business, the amount of the
contingent performance guarantees and trade credits can exceed $700 million, and
to the extent that the actual aggregate liability on all such parent guarantees
were to exceed $700 million, Southern Energy has agreed to provide (at a
market-based price) for the amount in excess of $700 million. Additional
F-48
<PAGE> 271
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
guarantees may be provided for structured transactions with certain approvals
and those guarantees may not be subject to any right of indemnity or
contribution between SCEM's parent companies. Contingent performance guarantees
are an industry standard used to backstop the physical and financial delivery of
product. The gross amount represents total counterparty authority, but actual
exposure under these guarantees is limited by the amount of business conducted
under each guarantee. Notional amounts of trade credit support are $672 million
and $657 million at December 31, 1998 and 1999, respectively. Payments will be
made under these guarantees only if SCEM's liquidity is exhausted.
Southern Energy has also guaranteed the performance of SCEM's obligations
under a multiyear agreement entered into by SCEM with Brazos Electric Power
Cooperative ("Brazos"). Under the agreement, effective January 1999, SCEM
provides all the electricity required to meet the needs of the distribution
cooperatives served by Brazos. Also, SCEM is entitled to the output of Brazos'
generation facilities and its rights to electricity under power purchase
agreements Brazos has entered into with third parties. Southern Energy's
guarantee is $75 million for the first year of the agreement and declines by $5
million per year to $55 million in the fifth year of the agreement.
To the extent that the Company does not maintain an investment grade
rating, it would be forced to provide alternative collateral to Brazos and VRI
only. Such collateral might be in the form of letters of credit. As mentioned
above, performance guarantees assure a subsidiary's performance of contractual
obligations whether it is commodity delivery or payment.
VRI has contracted with SCEM to sell most of its domestic natural gas
production at market index prices to the joint venture through a 10-year natural
gas supply agreement. VRI has guaranteed minimum daily quantities equal to the
greater of 875 million cubic feet per day or 80% of VRI's annual equity volumes.
The Company has guaranteed SCEM's obligations under the gas supply agreement.
The guarantee generally covers fifty-five days of gas purchases and the amount
varies due to seasonal variability in gas prices and demand.
Southern Energy has guaranteed certain minimum annual cash distributions
owed by SCEM to VRI. These guaranteed cash distributions can be reduced by
certain extraordinary items. For 1999, this distribution, after adjustments, was
$17 million. Scheduled minimum cash distributions to VRI are $25 million in 2000
and $30 million in each of 2001 and 2002. See Note 3 where arbitration related
to the 1998 minimum cash distribution is discussed.
TURBINE PURCHASES
The Company has entered into agreements to purchase 24 General Electric 7
FA combustion turbines and four General Electric D-11 steam turbines scheduled
to be completed and delivered during the period December 1999 through August
2002. Minimum termination amounts under the contracts were $4 million and $31
million at December 31, 1998 and 1999, respectively. Total amounts to be paid
under the agreements if all turbines are purchased as planned were approximately
$673 million at December 31, 1999.
F-49
<PAGE> 272
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER CONSTRUCTION-RELATED COMMITMENTS
The Company has entered into firm commitments to meet ongoing construction
obligations at its projects, including contracts for materials purchases and
engineering, procurement and construction-related services. These commitments at
December 31, 1999 totaled $93 million.
LONG-TERM SERVICE AGREEMENTS
The Company has entered into long-term service agreements for the
maintenance and repair of its combustion turbine or combined cycle generating
plants. These agreements may be terminated in the event a planned construction
project is cancelled. At December 31, 1999, the amount committed for
construction projects in process is $40 million. Annual amounts committed if all
turbines are purchased as planned are as follows (in millions):
<TABLE>
<S> <C>
FISCAL YEAR ENDED:
2000........................................................ $ 3
2001........................................................ 8
2002........................................................ 28
2003........................................................ 51
2004........................................................ 62
Thereafter.................................................. 592
----
Total minimum payments $744
====
</TABLE>
POWER PURCHASE AGREEMENTS
The Company recognized a liability at the WPD acquisition date for the
excess power purchase costs over an estimate equivalent pool costs. The balance
of the recorded liability was $116 million at December 31, 1998 and was sold as
part of the electricity supply business of WPD. See Note 12.
OPERATING LEASES
The Company has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
approximately $13 million, $25 million, and $17 million during the years ended
December 31, 1997, 1998, and 1999, respectively. At December 31, 1999, estimated
minimum rental commitments for noncancellable operating leases were as follows
(in millions):
<TABLE>
<S> <C>
FISCAL YEAR ENDED:
2000........................................................ $ 16
2001........................................................ 16
2002........................................................ 15
2003........................................................ 14
2004........................................................ 14
Thereafter.................................................. 103
----
Total minimum payments $178
====
</TABLE>
F-50
<PAGE> 273
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS
Substantially all of WPD's employees are subject to one of five collective
bargaining agreements. Such agreements are ongoing in nature, and WPD's employee
participation level is consistent with that of the electric utility industry in
Great Britain.
At its State Line facility in Hammond, Indiana, Southern Energy has a labor
contract with the United Steel Workers that extends to January 1, 2004.
Southern Energy Canal LLC and Southern Energy Kendall LLC, both
subsidiaries of Southern Energy, have contracts with the Utilities Workers'
Union of America which expire on June 1, 2001 and March 1, 2001, respectively.
UNCERTAINTIES RELATED TO CONTRACT SALES
Several of the Company's significant power generation facilities rely on
either Power Purchase Agreements or energy conversion agreements ("ECAs" and
collectively with the Power Purchase Agreements 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.
The Company has entered into two significant power contracts. These two
contracts are Energy Conversion Agreements between subsidiaries of SE
Asia-Pacific and the National Power Corporation ("NPC") of the Philippines. The
contract for the Pagbilao plant is for 29 years and terminates in August 2025.
The contract for the Sual plant is for 25 years and terminates in June 2025. The
contracted capacity is 735 MW and 1,000 MW for Pagbilao and Sual, respectively.
The capacity fees are payable as compensation for capacity available for power
generation. These fees consist of capital recovery fees, fixed operating fees,
infrastructure fees and the components of service fees. Over 90% of the revenues
are expected to come from fixed capacity charges that are paid without regard to
dispatch level of the plant. The energy fees are based on energy sold and are
designed to cover variable operating and maintenance costs. In accordance with
the contracts, NPC assumes all fuel risks, including price and delivery.
F-51
<PAGE> 274
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MINORITY SHAREHOLDER PUT OPTIONS
Sual
Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Sual project (SEPI) can exercise a put
option requiring SEPI to purchase the minority shareholders' interest in the
project. The put option can be exercised between the third and sixth
anniversaries of the completion of the project construction or, in the event of
any change in control (including control of the Company by Southern Company), a
change in SEPI's charter documents or the transfer of sponsor in violation of
the sponsor support agreement, the put option may be exercised on the earlier of
the date of such changes or the twelfth anniversary of the completion of the
project construction. The price would be determined by a formula including the
present value of the remaining years of cash flow less the liabilities
outstanding plus the current assets.
Pagbilao
Under shareholder agreements, the minority shareholders of the SE
Asia-Pacific subsidiary which holds the Pagbilao project (SEQI) can exercise a
put option requiring SEQI to purchase the minority shareholders' interests in
the project. The put option can be exercised between the sixth and twelfth
anniversaries of the completion of the project construction or, in the event of
any change in control (including control of the Company by Southern Company), a
change in SEQI's charter documents or the transfer of sponsor in violation of
the sponsor completion support agreement the put option may be exercised on the
earlier of the date of such changes or the twelfth anniversary of the completion
of the project construction. The price would be determined by a formula
including the present value of the remaining years of cash flow less the
liabilities outstanding plus the current assets.
12. ACQUISITIONS AND DIVESTITURES
SE CALIFORNIA
On April 16, 1999, the Company, through SE California, acquired various
generating assets in California with a total capacity of 3,065 MW from Pacific
Gas & Electric Company for $801 million plus $39 million for fuel inventory,
capital expenditures and property taxes.
SE NEW YORK
On June 30, 1999, the Company, through certain of its wholly owned
subsidiaries (collectively referred to as SE New York), acquired the generating
asset business in the state of New York with a total capacity of 1,794 MW, from
Orange & 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
F-52
<PAGE> 275
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
studies. The pro forma operating results of this acquisition for the years
presented was not materially different from actual results. The initial
allocation of the purchase price is as follows (in millions):
<TABLE>
<S> <C>
Current assets.............................................. $ 28
Property, plant and equipment............................... 417
Acquired intangibles........................................ 15
Goodwill.................................................... 48
Liabilities assumed and other............................... (15)
----
Purchase price......................................... $493
====
</TABLE>
SIPD
On June 30, 1999, the Company, through a wholly owned subsidiary, acquired
a 9.99% interest in SIPD for $107 million. As of December 31, 1999, SIPD had an
ownership interest in 18 coal-fired power generating units with a total
installed capacity of 5,125 MW in China's Shandong province. The Company
accounts for its investment in SIPD under the equity method of accounting due to
the preferential board representation and significant operating influence.
WPD (FORMERLY SWEB)
In September 1999, SWEB sold its electricity supply business to London
Electricity for the British Pound Sterling equivalent of $264 million and the
assumption of certain liabilities resulting in a gain of $286 million prior to
expenses, minority interest, and income taxes, and a gain of $78 million after
these items. The Company retained its 49% interest in the distribution business,
the trading name of which has been changed to Western Power Distribution. The
Company continues to own 49% economic interest (50.5% voting interest) of WPD.
LOUISIANA GENERATING LLC
During September 1999, the Company sold its 50% investment in Louisiana
Generating LLC to its partner for $17 million. The Company recognized
approximately $10 million as an after-tax gain on the sale which is included in
the accompanying statements of income.
CEMIG
In January 1998, Southern Energy, as a shareholder in Cayman Energy Traders
("CET"), did not exercise its option to withdraw as a shareholder of CET and,
therefore, transferred approximately $114 million to CET in exchange for a
27.59% economic interest in CET in order to continue to participate in the CEMIG
project. Prior to this time, Southern Energy had no economic interest in CET or
CEMIG. In May 1998, this transaction was completed when Southern Energy
transferred an additional $21 million to CET. The Company accounts for this
investment under the equity method due to significant influence evidenced by 33%
voting shares held by the Company and its investing partner. Through our
acquisition of a 27.59% economic interest in CET in 1998, we acquired a 3.6%
economic interest in CEMIG.
F-53
<PAGE> 276
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)
----
Purchase price............................................ $536
====
</TABLE>
SE ASIA-PACIFIC
On January 29, 1997, the Company completed its acquisition of 80% of SE
Asia-Pacific, the largest independent power producer in Asia, for a total net
investment of approximately $2 billion (Note 2). Subsequently, in August 1997,
Southern Energy acquired the remaining 20% minority interest in SE Asia-Pacific
in exchange for approximately $150 million in cash and SE Asia-Pacific's
interest in the Tanjung Jati B project in Indonesia. The acquisition was
financed with a combination of long-term borrowings and a capital contribution
from Parent. The acquisition of SE Asia-Pacific was accounted for using the
purchase method of accounting in accordance with APB No. 16, "Accounting for
Business Combinations." The purchase price of SE Asia-Pacific was allocated to
the
F-54
<PAGE> 277
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 have been prepared assuming the acquisition of SE Asia-Pacific occurred
on January 1, 1997 and was financed with a combination of long-term debt,
short-term debt and a capital contribution. The pro forma results are not
necessarily indicative of the actual results that would have been realized had
the acquisition occurred on the assumed date, nor are they necessarily
indicative of future results. Pro forma operating results for 1997 are for
information purposes only and are as follows (in millions):
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- ------
<S> <C> <C>
Operating revenues.......................................... $3,750 $3,771
Income before extraordinary item............................ (16) (11)
Net income.................................................. (16) (11)
</TABLE>
BEWAG
During September 1997, the Company completed the acquisition of a 26%
interest in the Berlin, Germany, electric utility Bewag for approximately $820
million. The entire acquisition was funded through a combination of short-term
and long-term borrowings. The Company is part of a consortium with two German
utilities which, together with the Company, own a 75% total interest in Bewag.
Bewag is an integrated electric utility located in Berlin, Germany. The
Company's investment in Bewag is being accounted for under the equity method of
accounting.
STATE LINE
In December 1997, the Company acquired the assets of the State Line
Generating Station from Commonwealth Edison Company for approximately $68
million.
F-55
<PAGE> 278
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INVESTMENTS IN AFFILIATES
The Company has investments in various international and domestic energy
projects. The equity method of accounting is applied to such investments in
affiliated entities, which include corporations, joint ventures and
partnerships, because the ownership structure prevents the Company from
exercising a controlling influence over operating and financial policies. Under
this method, equity in income or losses of these entities is reflected as equity
in earnings of unconsolidated affiliates in the accompanying consolidated
statements of income.
The following table sets forth summarized financial information of the
Company's investments in 50% or less-owned investments accounted for under the
equity method (Note 1) as of December 31, 1998 and 1999 and for the years ended
December 31, 1997, 1998 and 1999 or periods from the respective affiliates'
acquisition date, if shorter:
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
COMBINED INVESTMENTS, EXCLUDING BEWAG
INCOME STATEMENT:
Revenues.................................................... $723 $2,685 $3,441
Operating income............................................ 383 728 831
Net income from continuing operations....................... 50 324 184
BALANCE SHEET:
Current assets.............................................. 629 1,189
Noncurrent assets........................................... 3,413 5,569
Current liabilities......................................... 1,056 1,611
Noncurrent liabilities...................................... 2,569 3,604
BEWAG
INCOME STATEMENT:
Revenues.................................................... $589 $2,366 $2,167
Operating income............................................ 82 419 (128)
Net income from continuing operations....................... 41 216 (84)
BALANCE SHEET:
Current assets.............................................. 677 605
Noncurrent assets........................................... 7,037 6,073
Current liabilities......................................... 1,464 1,582
Noncurrent liabilities...................................... 2,424 1,930
</TABLE>
F-56
<PAGE> 279
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had an excess of underlying equity in the net assets of Bewag
of $71 million and $61 million over the carrying amount of its investment in
Bewag at December 31, 1998 and 1999, respectively. This difference is due to an
excess of the fair market value of our interest in Bewag's net assets acquired
over the purchase price paid for this interest at September 1997, fluctuations
in exchange rates between the US dollar and Deutsche Mark and the impact of
other purchase accounting adjustments. This excess is being amortized to income
over a period of 26 years. Equity in income from Bewag was approximately $18
million, $64 million and $10 million during each of the three years in the
period ended December 31, 1999, and dividends received during the same periods
were approximately $17, $33 and $34 million, respectively.
As of December 31, 1999 the Company had accumulated $23 million in
undistributed earnings of entities accounted for by the equity method of
accounting.
14. SE-FINANCE
The company has investments in leveraged leases through it's leasing
subsidiary SE-Finance. The company entered into leveraged leases in December of
1996, 1998 and 1999. The Company's net investment in leveraged leases consists
of the following at December 31, 1998 and 1999 (in millions):
<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
Net rentals receivable...................................... $ 583 $ 1,339
Unearned income............................................. (319) (783)
--------- ----------
Investment in leveraged leases.............................. 264 556
Deferred taxes arising from leveraged leases................ (22) (58)
--------- ----------
Net investment in leveraged leases.......................... $ 242 $ 498
========= ==========
</TABLE>
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>
F-57
<PAGE> 280
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS PER SHARE
We calculate basic earnings per share by dividing net income available to
common shareholders by the weighted average number of common shares outstanding.
The following table shows our computation of earnings per share (in millions,
except per share data) after giving effect to the stock split that was effected
in conjunction with the offering of common stock (Note 17). Pro forma basic
earnings per share information below gives effect to the dividend paid to
Southern in 2000 as though it had occurred during 1999. Pro forma diluted
earnings per share information below gives effect to the conversion of the
Company's value creation plan ("VCP") standard units outstanding at December 31,
1999 into options to purchase the Company's common stock using the treasury
stock method. See Note 17.
<TABLE>
<CAPTION>
FROM FROM
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS NET
---------- ------------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Basic, 1997:
(Loss) income............................................. $ (24) $ 8 $ (16)
Shares.................................................... 272.0 272.0 272.0
------- ----- -------
(Loss) earnings per share................................. $ (0.09) $0.03 $ (0.06)
======= ===== =======
Basic, 1998:
(Loss) income............................................. $ (12) $ 12 $ --
Shares.................................................... 272.0 272.0 272.0
------- ----- -------
(Loss) earnings per share................................. $ (0.04) $0.04 $ --
======= ===== =======
Basic, 1999:
Income.................................................... $ 362 $ 10 $ 372
Shares.................................................... 272.0 272.0 272.0
------- ----- -------
Earnings per share........................................ $ 1.33 $0.04 $ 1.37
======= ===== =======
Pro forma basic, 1999:
Income.................................................... $ 362 $ 10 $ 372
Shares.................................................... 272.0 272.0 272.0
Shares assumed due to dividend to Southern................ 26.5 26.5 26.5
------- ----- -------
Earnings per share........................................ $ 1.21 $0.04 $ 1.25
======= ===== =======
Pro forma diluted, 1999:
Income.................................................... $ 362 $ 10 $ 372
Add: effect of converting VCP units into options.......... 1 -- 1
------- ----- -------
Adjusted income........................................... $ 363 $ 10 $ 373
Shares.................................................... 272.0 272.0 272.0
Shares assumed due to dividend to Southern................ 26.5 26.5 26.5
Shares assumed due to conversion of VCP standard units.... 1.0 1.0 1.0
------- ----- -------
Adjusted shares........................................... 299.5 299.5 299.5
Earnings per share........................................ $ 1.21 $0.04 $ 1.25
======= ===== =======
</TABLE>
F-58
<PAGE> 281
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT REPORTING
Effective December 31, 1997, Southern Energy adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." Southern
Energy's principal business segments consist of the geographic areas in which
the Company conducts business -- Americas, Asia-Pacific, and Europe. The other
reportable business segments are the Company's financing segment ("Southern
Energy Finance") and its business development and general corporate activities
segment ("Corporate"). Intersegment revenues are not material. Financial data
for business segments, products and services, and geographic areas is as follows
(in millions):
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
SOUTHERN
ENERGY
AMERICAS EUROPE ASIA-PACIFIC FINANCE CORPORATE CONSOLIDATED
-------- ------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997:
Operating revenues............ $2,201 $1,282 $ 247 $ 0 $ 20 $3,750
Depreciation and
amortization................ 40 63 76 0 3 182
Interest income............... 9 4 84 0 41 138
Interest expense.............. 43 95 151 0 56 345
Income taxes from
operations.................. (12) 50 (7) 0 (4) 27
Windfall profit tax........... 0 148 0 0 0 148
Net income from equity method
subsidiaries................ 20 18 20 0 0 58
Segment net income (loss)..... 2 (48) 39 8 (17) (16)
Total assets.................. 1,783 3,701 4,304 176 666 10,630
Investments in equity method
subsidiaries................ 127 822 85 94 0 1,128
Gross property additions...... 115 130 475 0 0 720
Increase in goodwill.......... 0 0 1,649 0 0 1,649
1998:
Operating revenues............ $ 261 $1,273 $ 273 $ 0 $ 12 $1,819
Depreciation and
amortization................ 44 79 96 0 2 221
Interest income............... 10 0 74 0 62 146
Interest expense.............. 59 123 141 0 107 430
Income taxes from
operations.................. (113) 22 (12) 0 (20) (123)
Write-down of generating
assets...................... 308 0 0 0 0 308
Net income from equity method
subsidiaries................ 27 64 44 0 0 135
Segment net income (loss)..... (180) 141 68 12 (41) 0
Total assets.................. 2,166 3,890 4,520 428 1,050 12,054
Investments in equity method
subsidiaries................ 373 923 131 84 0 1,511
Gross property additions...... 101 120 426 0 0 647
Increase in goodwill.......... 261 0 0 0 0 261
</TABLE>
F-59
<PAGE> 282
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SOUTHERN
ENERGY
AMERICAS EUROPE ASIA-PACIFIC FINANCE CORPORATE CONSOLIDATED
-------- ------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999:
Operating revenues............ $ 939 $ 976 $ 342 $ 0 $ 11 $2,268
Depreciation and
amortization................ 73 90 104 0 3 270
Interest income............... 18 6 72 0 76 172
Interest expense.............. 90 121 125 0 166 502
Income taxes from
operations.................. 34 96 25 0 (26) 129
Write-down of generating
assets...................... 29 31 0 0 0 60
Net income from equity method
subsidiaries................ 16 10 83 0 2 111
Segment net income (loss)..... 96 170 175 10 (79) 372
Total assets.................. 4,071 3,810 4,430 722 830 13,863
Investments in equity method
subsidiaries................ 248 762 254 76 0 1,340
Gross property additions...... 419 115 194 0 19 747
Increase in goodwill.......... 48 0 0 0 0 48
</TABLE>
PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
GENERATION DISTRIBUTION MARKETING FINANCE OTHER TOTAL
---------- ------------ --------- ------- ----- ------
(REVENUE IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997............................... $ 427 $1,283 $1,982 $ 0 $58 $3,750
1998............................... 494 1,273 1 0 51 1,819
1999............................... 1,222 977 0 0 69 2,268
</TABLE>
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-60
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SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERINGS AND SEPARATION FROM SOUTHERN COMPANY
On August 22, 2000, the Company approved a 272,000 to 1 stock split and
authorized the execution of an underwriting agreement related to 66,700,000 new
shares of Southern Energy common stock (the "Stock Offering"). The Stock
Offering has an anticipated offering price of $19.00 and is expected to reduce
Southern's ownership to approximately 80%. There can be no assurance that this
Stock Offering will be completed.
In conjunction with the Stock Offering, the Company will convert the
indexed units outstanding under the Value Creation Plan (Note 6) into stock
appreciation rights and will convert the standard units outstanding under the
Value Creation Plan (Note 6) into options to purchase shares of the Company's
common stock. The intrinsic value of the options will equal the final value of
standard units being converted. The standard units have been treated under
variable plan accounting as prescribed by APB Opinion No. 25. Upon conversion to
stock options, fixed plan accounting, as prescribed by APB Opinion No. 25, will
be followed. Under fixed plan accounting, the difference between the fair value
of the options at the date of the initial public offering and their value at the
date of grant that has not been previously expensed under variable plan
accounting will be recorded as compensation expense over the remaining vesting
period of the options.
The options will have a vesting period and life consistent with the
standard units under the value creation plan. These vesting periods and lives
will not begin anew upon conversion; rather, they will continue from their
original inception dates. The graded vesting period of standard units granted
prior to 2000 was four years; the 2000 grant has a graded vesting period of
three years. The Company recorded approximately $1.7 million during 1999 as
compensation expense for the standard units, approximately $500,000 for the six
months to June 2000, and expects to record an additional $17 million as
compensation expense over the remaining weighted average vesting period of 2.33
years (from June 30, 2000), based on the anticipated offering price of $19.00.
In conjunction with the Stock Offering, employees will be granted
approximately three million options to purchase our stock at the IPO price. The
options will have a 10 year term and vest ratably over 3 years. Certain of our
senior executives will be granted an aggregate of approximately 400,000
restricted stock units. Vesting of the Restricted Stock units will be based on
increases in our stock price. Each time our stock price increases 20% over the
offering price, 20% of the Restricted Stock units will vest.
Within twelve months following the completion of the Stock Offering,
Southern Company plans to distribute all of the remaining shares of the Company
owned by Southern Company to the holders of Southern common stock. There can be
no assurance that this distribution will be completed.
In connection with the completion of the distribution, substitute options
for the Company's common stock will be issued to our employees in exchange for
their Southern Company options. The conversion process will follow FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation," which dictates the following:
- The aggregate face value of the options immediately after the conversion
will be equal to the aggregate face value prior to the conversion.
F-61
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SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The ratio of the stock price (fair market value) per option to the
exercise price per option will remain the same.
See Note 6 where Southern options held by the Company's officers and
employees are further discussed.
The Company has negotiated service agreements with Southern to provide
transition services following the initial public offering of the Company's
shares in the areas of finance, accounting, human resources, auditing, legal,
information technology and engineering services. These services will be provided
at cost or at fair market value, whichever is greater. The Company has the
option to decline or terminate service with reasonable advance notice. Under
arrangements for similar services currently in effect with Southern and its
operating companies, under which services are provided at cost, the Company paid
$20 million in 1999. See Note 5.
On April 17, 2000, the Company's board of directors voted to transfer
Southern Energy's leveraged lease and capital funding subsidiaries to Southern.
These transfers are expected to be completed after the successful completion of
the Stock Offering. The Company's interest in its SE Finance leveraged leasing
subsidiary has been treated as a discontinued operation in the accompanying
financial statements.
In addition to the proposed common stock offering, the Company has filed a
registration statement with the Securities and Exchange Commission for an
underwritten public offering of convertible trust preferred securities. The
securities would be issued by a limited purpose Delaware trust which would use
the proceeds to purchase from the Company the same principal amount of the
Company's convertible junior subordinated debt securities. The net proceeds
would be used by the Company to repay short-term debt and for general corporate
purposes. There can be no assurance that the issuance of convertible trust
preferred securities will be completed. The financial statements for SEI Trust I
have not been included in the registration statement pertaining to the offering
of convertible trust preferred securities because the preferred securities are
fully and unconditionally guaranteed by the Company, the trust will have no
independent operations, and the trust is a wholly owned subsidiary of the
Company.
DIVIDEND TO SOUTHERN (UNAUDITED). A short-term credit facility was
obtained by the Company to fund the remaining cash dividend payments to Southern
in the aggregate amount of $53 million. Pro forma basic earnings per share data
for 1999 gives effect to such dividend in accordance with Staff Accounting
Bulletin Topic 1:B:3.
TURBINE PURCHASES (UNAUDITED). The Company has entered into agreements to
purchase additional turbines to support ongoing construction and planned
expansion efforts. Total amounts to be paid under the new agreements if all
turbines are purchased as planned are estimated to be $2,329 million and an
additional $1,036 million for related long-term service agreements.
POTOMAC ELECTRIC POWER COMPANY ("PEPCO") (UNAUDITED). On June 8, 2000, the
Company announced it had entered into an agreement to purchase the bulk of
PEPCO's electric generation business for $2.65 billion plus amounts to be
determined for working capital and approximately $260 million in the event
certain purchase power agreements are not transferred to the Company. The
F-62
<PAGE> 285
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction is expected to be completed in late 2000 and will be accounted for
by the Company as a purchase.
SE CALIFORNIA (UNAUDITED). SE California and its subsidiaries SE Delta and
SE Potrero acquired generation assets from Pacific Gas and Electric in April
1999 subject to reliability-must-run agreements. SE California assumed these
agreements from Pacific Gas and Electric subject to the outcome of a FERC
proceeding initiated in October 1997 that will determine the percentage of a
$158.8 million annual fixed revenue requirement to be paid to the SE California
parties by the CAISO under the reliability-must-run agreements. 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 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. A final FERC order in this
proceeding may be appealed to the U.S. Court of Appeals. The outcome of this
appeal cannot now be determined.
If SE California is unsuccessful in its appeal of the 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 June
30, 2000 would have been approximately $94 million and would have reduced net
income by approximately $33 million. These amounts do not include interest that
would be payable in the event of a refund. If SE California is unsuccessful in
its appeal, it plans to pursue other options available under the reliability
must-run agreements to mitigate the impact of the administrative law judge's
decision upon its future operations. The outcome of this appeal is uncertain,
and we cannot assure you that we will be successful.
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. In addition, the FERC established October 30, 2000, as a "refund
effective date" under section 206 of the Federal Power Act, after which date the
FERC may adjust prices retroactively based on the results of the investigation
if it determines that the existing rates are not just and reasonable. As a
result, any price adjustment by the FERC may require the SE California
subsidiaries to refund some portion of the revenues received from sales made
after the refund effective date. The FERC's investigation is ongoing, and it
cannot be determined at this time what conclusions the report will reach, what
action the FERC may take in response to the report or whether the FERC will
order the payment of refunds. Consequently, we cannot determine what effect any
action by FERC will have on our financial condition.
F-63
<PAGE> 286
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CEMIG (UNAUDITED). SEB obtained financing from Banco Nacional De
Desenvolvimento Economico e Social (BNDES) for approximately 50% of the total
purchase price of the CEMIG shares which is secured by a pledge of SEB's shares
in CEMIG. A portion of a principal payment that was originally due May 15, 2000,
in an amount of $9.2 million, has been deferred. SEB paid $2.2 million of this
principal payment on May 15, 2000 and expects to pay the remaining $7.0 million
on September 15, 2000. An interest payment of $107.8 million, also due on May
15, 2000, has been deferred until May 15, 2001.
ALICURA (UNAUDITED). On August 25, 2000, we completed the sale of our 55%
indirect interest in Hidroelectrica Alicura S.A. (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, we were released from $200 million
of credit support obligations related to Alicura's bank financing. Our sale of
Alicura did not materially impact our financial position and we do not expect
that it will have a material effect on our results of operations.
SCEM (UNAUDITED). Effective August 10, 2000, we acquired Vastar's 40%
interest in SCEM for $250 million. Upon the closing of the transaction, Vastar
transferred its interest in SCEM to us and SCEM became our wholly owned
subsidiary and will be consolidated in the Southern Energy, Inc. financial
statements on a prospective basis.
As part of the transaction, we agreed to amend the gas purchase and sale
agreement to make it easier for SCEM to administer, including reducing the
number of delivery points where Vastar delivers gas, predetermining the daily
and annual quantities of gas Vastar is obligated to deliver and SCEM is
obligated to purchase, and making certain other changes, but otherwise the gas
purchase and sale agreement will remain in effect for the remaining seven years
of its term. The amendment will become effective upon the occurrence of certain
events, which should happen before the end of this year. The remaining seven and
one half years of the term of the gas purchase and sale agreement between SCEM
and Vastar will remain in effect. Accordingly, SCEM will continue to purchase
and market the natural gas produced by Vastar. As part of the transaction, we
were relieved of any financial obligations to Vastar under the SCEM partnership
agreement, including any guaranteed minimum cash distributions and any
outstanding arbitration.
HYDER (UNAUDITED). On August 23, 2000, WPD Limited, a company that
subsidiaries of ours and PPL Global jointly own, 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 L565 million (approximately $847 million), or
365 pence (approximately $5.47) per Hyder share plus the assumption of
approximately L2.1 billion (approximately $3.2 billion) of gross debt as of
March 31, 2000. On September 15, 2000, WPD Limited committed unconditionally to
purchase any shares of Hyder tendered by Hyder shareholders. As of September 18,
2000, WPD Limited had received acceptances to its offer from shareholders
representing approximately 68% of the Hyder shares. WPD Limited has replaced
Hyder's board of directors with employees of WPD, Southern Energy and PPL
Global.
The total purchase price, including fees and expenses, is expected to be
L585 million (approximately $878 million). The purchase will be funded by bank
loans of L360 million (approximately $540 million) to be obtained by WPD
Holders, an investment from the WPD for L85 million (approximately $128 million)
an investment from PPL Global of L84 million (approximately
F-64
<PAGE> 287
SOUTHERN ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$126 million) and an investment from us of L56 million (approximately $84
million). If the transaction is consummated as currently contemplated, PPL
Global will own indirectly 60% of Hyder and we will own indirectly 40% of Hyder.
Our investment of L56 million (approximately $84 million) will be funded by cash
flow from operations.
We and PPL Global expect to enter into an agreement for us to own 40% of
the economic interest in WPD Limited and PPL Global to own 60%, and for us and
PPL Global to own 50% each of the voting interests in WPD Limited. As part of
such arrangement, we will also have a call right to acquire an additional 9%
economic interest in WPD Limited from PPL Global. We and PPL Global have agreed
to modify our ownership of voting shares of WPD Holdings to 50% each so that
neither party will have operational or management control of WPD Holdings. This
was agreed to by Southern Energy to incent PPL Global to fund the additional 9%
economic interest in WPD Limited.
F-65
<PAGE> 288
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS OF
BERLINER KRAFT-UND LICHT(BEWAG) - AKTIENGESELLSCHAFT
BUSINESS YEAR 1997/1998
AS REQUIRED BY REGULATION S-X 210.3-09
F-66
<PAGE> 289
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Berliner Kraft- und Licht (Bewag)-Aktiengesellschaft
Berlin, Germany
We have audited the accompanying balance sheet of Berliner Kraft- und Licht
(Bewag)-Aktiengesellschaft as of June 30, 1998, and the related statements of
profit and loss and cash flows for the year ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Germany and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bewag Aktiengesellschaft as
of June 30, 1998, and the results of its operations and cash flows for the year
ended June 30,1998, in conformity with accounting principles generally accepted
in Germany.
Generally accepted accounting principles in Germany vary in certain
significant respects from generally accepted accounting principles in the United
States of America. Application of generally accepted accounting principles in
the United States of America would have affected the result of operations for
the year ended June 30, 1998 and shareholders' equity as of June 30, 1998 to the
extent summarized in Appendix II to the financial statements.
KPMG Deutsche Treuhand-Gesellschaft AG (hand written)
Wirtschaftsprufungsgesellschaft
Berlin, Germany
September 8, 1998
F-67
<PAGE> 290
BEWAG AG
BUSINESS YEAR 1997/1998
BALANCE SHEET
<TABLE>
<CAPTION>
NOTES 30 JUNI 1998 30 JUNI 1997
NO. DM THOUSAND DM THOUSAND
(UNAUDITED)
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
ASSETS
FIXED ASSETS: (1)
-------------------------------------------------------------------------------------------------
Intangible assets........................................... (2) 330,978 330,410
Tangible assets............................................. (3) 6,997,728 6,951,993(1)
Financial assets............................................ (4) 854,553 513,865
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
8,183,259 7,796,268
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CURRENT ASSETS:
-------------------------------------------------------------------------------------------------
Inventories................................................. (5) 168,851 190,040
Accounts receivable and other assets:
Receivables for goods and services........................ (6) 546,744 480,187
Receivables from affiliated companies..................... (7) 3,265 1,047
Receivables from companies in which participations are
held.................................................... (8) 4,607 16,160
Other assets.............................................. (9) 127,679 135,497
Securities.................................................. (10) 203,529 262,154
Checks, cash on hand, on deposit with Deutsche Bundesbank
and Postbank, cash in other bank accounts................. (11) 226,830 367,461
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,281,505 1,452,546
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PREPAID EXPENSES............................................ (12) 134,192 146,439
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL LOSS ACCOUNT........................................ (13) 384,795 392,431(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,983,751 9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES
EQUITY:
-------------------------------------------------------------------------------------------------
Subscribed capital.......................................... (14) 560,000 560,000
Capital reserve............................................. (15) 56,800 56,800
Revenue reserves............................................ (16)
Statutory reserve......................................... 848,257 848,257(1)
Special reserve according to Section 17 Sub-section 4
DMBiLG.................................................. 384,795 392,431(1)
Other revenue reserves.................................... 1,532,535 1,469,899
-------------------------------------------------------------------------------------------------
2,765,587 2,710,587(1)
Net profit for the year................................. (17) 224,000 112,000
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
3,606,387 3,439,387
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER................ (18) 1,844,528 1,780,264
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEM FOR INVESTMENT BONUSES......................... (19) 410,711 451,354
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CONSTRUCTION COST SUBSIDIES................................. (20) 683,564 645,126
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PROVISIONS
-------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations............. 407,804 391,415
Provisions for taxes........................................ 103,452 49,766
Other provisions............................................ (21) 1,421,576 1,394,837(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,932,832 1,836,018
-------------------------------------------------------------------------------------------------
LIABILITIES................................................. (22)
-------------------------------------------------------------------------------------------------
Liabilities to banks........................................ (23) 858,713 1,047,640
Advance payments received................................... (24) 127,816 108,827
Liabilities for goods and services.......................... 305,481 269,097
Liabilities to affiliated companies......................... 786 845
Liabilities to companies in which participations are held... (25) 12,016 14,290
Other liabilities........................................... (26) 200,673 194,797
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,505,485 1,635,496
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
DEFERRED INCOME............................................. 244 39
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,983,751 9,787,684
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBiLG)
The accompanying notes are an integral part of these statements.
F-68
<PAGE> 291
BEWAG AG
BUSINESS YEAR 1997/1998
PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
1996/97
NOTES 1997/98 DM THOUSAND
NO. DM THOUSAND (UNAUDITED)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES REVENUE.................................... (27) 3,959,727 4,092,864
--------------------------------------------------------------------------------------
Stock movements and other internally produced and
capitalised assets............................. (28) 49,477 65,548
Other operating income........................... (29) 299,006 419,199
Cost of materials................................ (30) -1,227,481 -1,427,178(1)
Personnel expenses............................... (31) -1,159,845 -1,142,730(2)
Depreciation..................................... (32) -617,995 -625,880
Other operating expenses......................... (33) -779,942 -1,016,906(1)(2)
Income from financial assets..................... (34) -16,181 31
Net interest income.............................. (35) -51,557 -58,835
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
RESULT OF ORDINARY ACTIVITIES.................... 455,209 306,113
--------------------------------------------------------------------------------------
Taxes............................................ (36) -176,209 -121,613
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
NET INCOME FOR THE YEAR........................ 279,000 184,500
--------------------------------------------------------------------------------------
Allocations to other revenue reserves............ -55,000 -72,500
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
NET PROFIT FOR THE YEAR........................ 224,000 112,000
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
-------------------------
(1) After the reclassification of DM 104,592 thousand from other operating
expenses to cost of materials
(2) After the reclassification of DM 2,500 thousand from other operating
expenses to personnel expenses
The accompanying notes are an integral part of these statements.
F-69
<PAGE> 292
BEWAG AG
BUSINESS YEAR 1997/1998
CASH-FLOW STATEMENT
<TABLE>
<CAPTION>
1996/97
1997/98 DM MILLION
DM MILLION (UNAUDITED)
-----------------------------------------------------------------------------------------
<S> <C> <C>
Net income for the year..................................... 279 185
Depreciation of fixed assets................................ 634 619
Changes in long-term provisions............................. -64 -45
Allocation to special item.................................. 162 429
Release of special item..................................... -136 -136
Other expenses and income without effect on payments........ -23 -55
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
DVFA/SG CASH-FLOW........................................... 852 997
Result from disposals of fixed assets....................... 3 -9
Increase/Decrease in inventories, receivables for goods and
services and other assets................................. -7 607
Increase/Decrease in liabilities for goods and services and
other liabilities......................................... 262 105
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
INFLOW OF FUNDS FROM OPERATING ACTIVITIES................... 1,110 1,700
-----------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets..................... 18 32
Disbursements for capital investments in fixed assets....... -1,030 -921
(including increase of participation in GASAG)............ (-354) (--)
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR INVESTMENT ACTIVITIES.................. -1,012 -889
-----------------------------------------------------------------------------------------
Payments to shareholders (dividend)......................... -112 -90
Receipts from taking up loans............................... -- 54
Payments for redemption of loans............................ -185 -278
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR FINANCING ACTIVITIES................... -297 -314
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
CHANGES IN FINANCING RESOURCES WITH EFFECT ON PAYMENT....... -199 497
-----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM MILLION CHANGE
MOVEMENTS OF FINANCIAL FUNDS DM MILLION (UNAUDITED) DM MILLION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid funds..................................... 227 368 -141
Securities in current assets..................... 204 262 -58
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
FINANCIAL FUNDS.................................. 431 630 -199
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE> 293
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE FINANCIAL STATEMENTS
PRELIMINARY REMARKS
On 1 July 1993, Bewag was merged with the energy supply company
Energieversorgung Berlin AG (EBAG), which was located in the former East Berlin.
As a result of the merger under stock corporation law, legislation which,
according to the unification treaty applied only to companies in the former GDR,
now applies to Bewag as a whole. This is particularly relevant with regard to
the provisions of the DM-Balance Sheet Act (DMBilG) covering the special loss
account, the special reserves under Section 17 Sub-section 4 of the Act and
capital reorganisation under Section 27 of the Act. In certain circumstances
Section 36 DMBilG also stipulates changes in EBAG's DM opening balance sheet,
which then retroactively entail corrections in certain balance sheet item
valuations for each previous year.
As of 30 June 1998 CHANGES IN THE OPENING BALANCE SHEET were either
necessary or possible for the following items:
- Tangible assets increased by DM 0.2 million, because the total value
shown for land had increased pursuant to official notices of allocation
or adjustment.
- Provisions for compensation obligations were reduced by DM 4.9 million as
certain restitution claims had become more precise or due to court
decisions that had become legally effective.
- As a consequence of new investigations regarding the expenditure
necessary to rehabilitate contaminated properties, provisions for
contamination were reduced by DM 74.9 million. The special loss account
and the special reserve were also reduced by the same amount.
As a result of these changes, the statutory reserve was increased by DM
80.0 million.
Bewag must also take into account the stipulations of the LAND REGISTRY
ADJUSTMENT ACT (GBBerG). This act applies only to the territory which joined the
Federal Republic under the unification treaty, and especially covers easements
of utility supply companies in non-public land and compensation payments due to
the owners of such properties. Provisions were established for this purpose as
of 30 June 1995, the date of the initial application of the Act. At the time,
this provision did not affect operating results in the profit and loss account;
it had merely served to record such liabilities and related assets on the
balance sheet.
Since the obligations will become due in two equal installments, on 1
January 2001 and 2011, the easements were assessed at present value. The
difference between the value of the easements and the obligation was recorded as
prepaid expense.
In the year under review, detailed studies of the location and quality of
the properties showed that the provision should be increased by DM 49.6 million.
Under the accounting methodology used, this adjustment, rather than being
reported as an expense, merely increases the recorded assets and liabilities.
The only consequence is a DM 3.8 million increase in depreciation expense and an
adjustment of prepaid expenses.
Because of the insignificance of Bewag's shareholdings as a whole in
relationship to its financial and income position, the company took advantage of
the option in Section 296 Sub-section 2 of the Commercial Code (HGB) and chose
not to prepare a CONSOLIDATED ANNUAL STATEMENT.
ACCOUNTING AND VALUATION METHODS
In the balance sheet and the profit and loss account, certain items have
been combined for the sake of greater clarity; they are then shown in greater
detail in the notes. Furthermore, in an effort to provide more insight into the
company's financial position, a number of items have been added to the
F-71
<PAGE> 294
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE FINANCIAL STATEMENTS
PRELIMINARY REMARKS -- (CONTINUED)
balance sheet. The profit and loss account has been drawn up according to the
cost-summary method. DM figures shown in the annual statement represent
thousands.
Specifically, accounting and valuation are based on the following
principles:
ASSETS
Purchased INTANGIBLE ASSETS are valued at their acquisition costs less
regular straight-line depreciation.
TANGIBLE ASSETS are assessed at acquisition or production costs. The
following change was made in the year under review: With regard to the costs of
self constructed assets, Bewag does not use a lump-sum overhead cost factor, but
rather capitalizes only directly allocable costs. Interest paid on outside
capital has been excluded from this item since 1 January 1991. When new tangible
assets are added, investment subsidies are deducted from the costs of
acquisition or production. Regular depreciation for tangible assets is carried
out on a straight-line basis for buildings, and otherwise always at the highest
degression rate permissible under taxation law; straight-line depreciation is
favoured as soon as this leads to higher annual amounts. Plant for which special
depreciation can be claimed under Section 4 of the Development Area Act (FordG)
is also depreciated by the straight-line method, as stipulated by law.
Depreciation is based on the Federal Minister of Finance's depreciation table
for the energy and water supply sector.
In the in-service year of purchase or production, new plant is depreciated
at 75.0 per cent of the normal annual rate.
According to one of the options of Section 6 Sub-section 2 of the Income
Tax Act (EStG), minor assets are depreciated fully in the year of purchase or
production.
FINANCIAL ASSETS are valued at acquisition cost. Interest free loans are
discounted to their present value.
If the book value of an asset calculated according to the above principles
is greater than its quoted or market value at balance-sheet date, the excess
over the market value is written off.
INVENTORIES are valued at average acquisition costs, taking into account
the lower-of-cost-or-market rule. Deductions are made for inventories subject to
long storage and thus potentially less suitable for use. The amounts deducted
depend on the rate of turnover for the goods concerned.
With regard to RECEIVABLES AND OTHER ASSETS, an appropriate amount is
deducted for identifiable single risks. Other risks are taken into account in a
general allowance for bad debts and doubtful accounts. Advance payments on
receivables for goods and services are offset against electricity supplied but
not yet invoiced. Receivables for electricity supplied but not yet invoiced are
assessed on the basis of electricity consumption and revenue projections; a
differentiated group assessment procedure is applied. Interest-free receivables
are discounted according to their terms.
SECURITIES are valued at acquisition cost or at their market price if it is
lower.
No use is made of the option right to capitalize debt discount expenses:
such expenses are immediately recorded in the profit and loss account.
Provisions for which a SPECIAL LOSS ACCOUNT had been created in the opening
balance sheet of EBAG as of 1 July 1990 and which have been used up are not
reported as an expenditure in the
F-72
<PAGE> 295
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE FINANCIAL STATEMENTS
PRELIMINARY REMARKS -- (CONTINUED)
relevant items of the profit and loss account; instead, the special loss account
is depreciated by the amount of the used provisions.
SHAREHOLDERS' EQUITY AND LIABILITIES
As they become freely disposable, funds of the SPECIAL RESERVE UNDER
SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET ACT (DMBilG) are transferred to
other revenue reserves in accordance with the current version of the Act, which
has been in force since 25 July 1994.
The amount by which the regular depreciation of tangible assets differs
from the increased deduction for depreciation under Section 14 of the Berlin
Promotion Act (BerlinFG) and the special depreciation under Section 4 of the
Development Area Act (FordG) are disclosed as SPECIAL ITEMS WITH PARTIAL RESERVE
CHARACTER, together with the reserve under Section 6b of the Income Tax Act
(EStG). The difference between regular depreciation and increased deduction is
always released in accordance with established depreciation procedures, but the
release of the special depreciation begins at the end of the preferential
period.
Tax-free investment bonuses are shown under liabilities as SPECIAL ITEM FOR
INVESTMENT GRANTS. The release of this item into income is carried out on a
straight-line basis in accordance with the period of use of the subsidised
assets.
CONSTRUCTION COST SUBSIDIES are released into income at an annual rate of
5.0 per cent unless a shorter term has been agreed upon.
The PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS are formed according to
actuarial principles. Fractional values are determined on the basis of an
interest rate of 6.0 per cent.
OTHER PROVISIONS reflect all risks and uncertain obligations which are
identifiable according to the principles of the most probable estimate. For the
first time in the year under review, no discounting was used to calculate the
provisions for early retirement. In addition, a provision for future
expenditures for repairs under Section 249 Sub-section 2 of the Commercial Code
(HGB) was created on 30 June 1995.
LIABILITIES are reported at their repayment value.
FOREIGN CURRENCY CONVERSION
Receivables and liabilities in foreign currency are converted at the
exchange rate applicable on the date of origin of the claim or liability, unless
a fall or rise in the exchange rate makes a devaluation of the claim or an
upvaluation of the liability necessary.
CASH-FLOW STATEMENT
In accordance with the bulletin of the main specialist committee of the
Institute of Auditors (IDW) and with international accounting standards (IAS 7),
the cash-flow statement shows payments broken down into cash flow from
operations, from investment and from financing activities. Within the flow of
funds resulting from operations, cash flow is shown according to DVFA/SG. The
balance represents the total change in resources in the course of the business
year.
F-73
<PAGE> 296
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET
1. FIXED ASSETS
Changes in individual items of fixed assets in the 1997/98 business year,
including depreciation, are shown in the "Movements in fixed assets" section.
2. INTANGIBLE ASSETS
The two main intangible assets are DM 159.8 million for easements under
Section 9 of the Land Registry Adjustment Act (GBBerG) and the right of usage
for the connection to the Western European grid network, valued at DM 145.8
million.
3. TANGIBLE ASSETS
Additions and transfers to tangible assets involving completed and fully
charged installations amount to DM 809.2 million. The most significant additions
were investments made for power transmission and distribution equipment as well
as for district heating installations -- including DM 326.8 million for cable
and overhead line networks and DM 77.0 million for the Friedrichshain
substation.
The value of advance payments made and installations under construction
fell by DM 165.9 million to DM 709.0 million. This amount covers the 380-kV
underground link between Mitte and Friedrichshain substations as well as various
electricity and heat distribution installations.
4. FINANCIAL ASSETS
The decrease in our shares in affiliated companies is largely due to the
write off of EAB Fernwarme GmbH, Berlin to its assessed value. Lendings to
affiliated companies were exclusively to IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin.
The increase in our participations results mainly from the fact that we
extended our 11.95 per cent participation in GASAG Berlin Gaswerke AG, Berlin by
a further 13.04 per cent to 24.99 per cent. Lendings to companies in which we
hold participations were to the IT company BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, as well as to EUS
Energie und Umwelt Service GmbH, Berlin.
5. INVENTORIES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Raw materials and supplies........................ 155,681 172,111 -16,430
Work in progress for public lighting.............. 13,170 17,929 -4,759
------- ------- -------
Total........................................... 168,851 190,040 -21,189
======= ======= =======
---------------------------------------------------------------------------------------------
</TABLE>
F-74
<PAGE> 297
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
The reduction in raw materials and supplies is mainly due to reduced
amounts of fuel oil and operating materials. Deductions were made for
inventories that have been in storage for a long time with little turnover as
the value of such material had decreased.
6. RECEIVABLES FOR GOODS AND SERVICES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Electricity supplied.............................. 412,814 396,406 16,408
Heating supplied.................................. 116,748 77,594 39,154
Other goods and services supplied................. 17,182 6,187 10,995
------- ------- ------
Total........................................... 546,744 480,187 66,557
======= ======= ======
---------------------------------------------------------------------------------------------
</TABLE>
The increase in receivables is due largely to this year's new billing
procedure for heat supplied and, in the electricity sector, to the one-time
effects of the pricing and contract reform for special-contract customers
introduced on 1 October 1997.
Receivables for electricity and heating supplied include DM 769.0 million
in payments on account received for electricity and heating consumed but not yet
billed (previous year: DM 764.8 million).
Of the receivables shown here, DM 16,198 thousand (previous year: DM 15,398
thousand) have terms of more than one year.
7. RECEIVABLES FROM AFFILIATED COMPANIES
The receivables shown are mainly due from the district heating company EAB
Fernwarme GmbH and from IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin.
8. RECEIVABLES FROM COMPANIES IN WHICH PARTICIPATIONS ARE HELD
The receivables shown are largely due from the gas supply company GASAG
Berliner Gaswerke AG, Berlin, as well as from the IT company BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.
9. OTHER ASSETS
The other assets shown mainly contain DM 50.0 million in receivables from
orders and services not yet invoiced, DM 29.5 million in advance payments made
and DM 26.4 million in receivables from ancillary business and insurance
payments.
Of the other assets, DM 4,191 thousand (previous year: DM 3,977 thousand)
have terms of more than one year.
F-75
<PAGE> 298
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
10. SECURITIES
This item covers mortgage bonds, one federal treasury note and one state
government treasury note.
11. CHEQUES, CASH ON HAND AND ON DEPOSIT WITH DEUTSCHE BUNDESBANK, POSTBANK,
CASH IN OTHER BANK ACCOUNTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Cheques and cash on hand.......................... 528 524 4
Deposits with Deutsche Bundesbank and Postbank.... 21,103 60,509 -39,406
Cash in other bank accounts....................... 205,199 306,428 -101,229
------- ------- --------
Total........................................... 226,830 367,461 -140,631
======= ======= ========
</TABLE>
--------------------------------------------------------------------------------
12. PREPAID EXPENSES
Prepaid expenses contain the difference between the nominal value and the
present value of the compensation payments under Section 9 of the Land Registry
Adjustment Act (GBBerG) -- DM 130,8 million -- as well as prepayments for
pensions and other prepayments.
13. SPECIAL LOSS ACCOUNT UNDER SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET
ACT (DMBILG)
DM 7.6 million in provisions related to the special loss account were used
during the course of the year under review, and the special loss account was
reduced by this amount to a value of DM 384.8 million.
14. SUBSCRIBED CAPITAL
The subscribed capital at the balance-sheet date amounts to DM 560.0
million. Bayernwerk Aktiengesellschaft, Munich, and Southern Energy Holding
Beteiligungsgesellschaft mbH, Berlin, each hold 26.0 per cent. 23.0 per cent are
held by PreussenElektra Aktiengesellschaft, Hanover, and 25.0 per cent are in
scattered ownership.
The capital stock is distributed in:
GROUP A SHARES (bearer shares with single voting right)
75,333,400 shares with a face value of DM 5 each; 75,333,400 votes
GROUP B SHARES (registered shares with double voting right)
36,666,600 shares with a face value of DM 5 each; 73,333,200 votes
F-76
<PAGE> 299
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
15. CAPITAL RESERVE
The capital reserve contains allocations from share premiums and the
reserves arising from the Bewag opening balance sheet of 1 April 1949.
16. REVENUE RESERVES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Statutory reserve............................... 848,257 848,257(1) 0
Special reserve under Section 17
Sub-section 4 DMBilG.......................... 384,795 392,431(1) -7,636
Other revenue reserves.......................... 1,532,535 1,469,899 62,636
--------- --------- ------
Total......................................... 2,765,587 2,710,587(1) 55,000
========= ========= ======
</TABLE>
(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
--------------------------------------------------------------------------------
The statutory reserve contains DM 824.1 million from the earlier
realignment of the capital position of EBAG effected under Section 27
Sub-section 2 of the DM-Balance Sheet Act (DMBilG).
DM 55.0 million of this year's net income were allocated to the other
revenue reserves. In addition, a freely disposable amount of DM 7.6 million was
transferred from the special reserve under Section 17 Sub-section 4 of the
DM-Balance Sheet Act (DMBilG) to the other revenue reserves.
17. NET PROFIT FOR THE YEAR
After the allocation of DM 55.0 million of this year's net income of DM
279.0 million to the other revenue reserves, the net profit for the year is DM
224.0 million.
18. SPECIAL ITEM WITH PARTIAL RESERVE CHARACTER
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
30 JUNE 1997
30 JUNE 1998 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
------------ ------------ -----------
<S> <C> <C> <C>
Increased deduction for depreciation under Section
14 of the Berlin Promotion Act (BerlinFG)....... 511,861 571,826 -59,965
Special depreciations under Section 4 of the
Development Area Act (FordG).................... 1,324,150 1,191,768 132,382
Reserve under Section 6b of the Income Tax Act
(EStG).......................................... 8,517 16,670 -8,153
--------- --------- -------
Total........................................... 1,844,528 1,780,264 64,264
========= ========= =======
---------------------------------------------------------------------------------------------
</TABLE>
F-77
<PAGE> 300
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
In the year under review, the DM 16.7 million of last year's reserve under
Section 6b of the Income Tax Act was transferred to purchased land.
19. SPECIAL ITEM FOR INVESTMENT GRANTS
While DM 14.4 million was allocated to the special item for investment
grants, the overall reduction in this item results from the release into income
of an amount of DM 55.0 million.
20. CONSTRUCTION COST SUBSIDIES
DM 62.5 million of construction cost subsidies relate to construction in
progress. Of the remainder, DM 389.1 million apply to electricity supply, DM
231.3 million to heating supply and DM 0.7 million to public lighting.
21. OTHER PROVISIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 1998 30 JUNE 1997 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ -----------
<S> <C> <C> <C>
Contamination removal............................ 407,765 437,588(1) -29,823
Personnel........................................ 442,002 441,744 258
Easements under Section 9 of the Land Registry
Adjustment Act (GBBerG)........................ 384,575 334,996 49,579
Uncertain liabilities for supplies and
services....................................... 59,254 57,046 2,208
Compensation obligations for property............ 33,743 34,443(1) -700
Demolition and dismantling....................... 7,999 13,033 -5,034
Interest on old loans of the former EBAG......... -- 16,284 -16,284
Sundry........................................... 86,238 59,703 26,535
--------- --------- -------
Total.......................................... 1,421,576 1,394,837(1) 26,739
========= ========= =======
</TABLE>
(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
--------------------------------------------------------------------------------
The provisions for contamination removal take into account the costs
anticipated in the eastern districts of Berlin for the replacement of soil on
contaminated properties, the removal and disposal of oil-insulated cables, and
soil rehabilitation measures required as a result of leakages of oil-insulated
cables on properties owned by third parties. In addition, a deduction of DM
110.3 million has been made with regard to the value of contaminated properties
in the area formerly supplied by EBAG.
The provisions for personnel expenses mainly contain provisions for early
retirement arrangements, profit-sharing measures, anniversary payments, annual
bonus payments, residual holiday entitlement, and for our new arrangements for
part-time work of older employees.
The provisions for uncertain liabilities arising from supplies and services
also contain provisions for contingent losses for future expenditures.
F-78
<PAGE> 301
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
The sundry provisions mainly contain DM 38.4 million for expected
expenditure to repair the facade of the former main administration building,
which is classified as a historical monument, as well as DM 23.7 million for
outside services which have not yet been invoiced.
22. LIABILITIES
The composition and terms of our liabilities can be seen in the following
table:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TERMS
-----------------------------------------------------
UP TO 1 1 - 5 OVER 5
YEAR YEARS YEARS TOTAL
DM DM DM DM
TYPE OF LIABILITY THOUSAND THOUSAND THOUSAND THOUSAND
----------------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Liabilities to banks.......................... 454,817 170,316 233,580 858,713
previous year (unaudited)................... 197,929 350,165 499,546 1,047,640
Advanced payments received.................... 127,816 -- -- 127,816
previous year (unaudited)................... 108,827 -- -- 108,827
Liabilities for goods and services............ 305,481 -- -- 305,481
previous year (unaudited)................... 269,097 -- -- 269,097
Liabilities to affiliated companies........... 786 -- -- 786
previous year (unaudited)................... 845 -- -- 845
Liabilities to companies in which
participations are held..................... 12,016 -- -- 12,016
previous year (unaudited)................... 14,290 -- -- 14,290
Other liabilities............................. 96,801 61,472 42,400 200,673
previous year (unaudited)................... 91,230 46,767 56,800 194,797
including -- tax liabilities................ (23,445) (--) (--) (23,445)
previous year (unaudited)................... (34,041) (--) (--) (34,041)
social security............................. (25,341) (--) (--) (25,341)
previous year (unaudited)................... (24,393) (--) (--) (24,393)
------- ------- ------- ---------
Total liabilities........................ 997,717 231,788 275,980 1,505,485
------- ------- ------- ---------
previous year (unaudited).............. 682,218 396,932 556,346 1,635,496
======= ======= ======= =========
</TABLE>
--------------------------------------------------------------------------------
F-79
<PAGE> 302
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE BALANCE SHEET -- (CONTINUED)
23. LIABILITIES TO BANKS
The reduction of DM 188.9 million largely represents repayments of DM 185.2
million, DM 13.2 million of which were made in advance of due date. Liabilities
to banks also involve DM 126.7 million in loans under Section 16 of the Berlin
Promotion Act (BerlinFG) and DM 454.6 million in loans under Section 17 of the
same Act.
24. ADVANCE PAYMENTS RECEIVED
The increase in advance payments is largely attributable to electricity
operations.
25. LIABILITIES TO COMPANIES IN WHICH PARTICIPATIONS ARE HELD
These liabilities are almost entirely to the energy and environmental
service company EUS Energie und Umwelt Service GmbH, to the gas supply company
GASAG Gaswerke AG, Berlin, and to the IT company BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin.
26. OTHER LIABILITIES
Other liabilities of DM 200.7 million include a loan from an insurance
company of DM 100.0 million.
F-80
<PAGE> 303
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE PROFIT AND LOSS ACCOUNT
27. SALES REVENUES
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
BREAKDOWN BY AREA OF ACTIVITY DM THOUSAND (UNAUDITED) DM THOUSAND
----------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Electricity supplies.............................. 3,081,755 3,167,907 -86,152
Heating supplies.................................. 822,837 883,113 -60,276
Public lighting................................... 55,135 41,844 13,291
--------- --------- --------
Total........................................... 3,959,727 4,092,864 -133,137
========= ========= ========
</TABLE>
There was a decrease of 2.7 per cent in sales revenues from the supplies of
electricity. The discrepancy between this figure and the 0.4 per cent decrease
in the quantity of electricity sold is mainly due to the price reductions for
high and medium-voltage customers which went into force on 1 January 1997 as
well as at the time of the pricing and contract reform of 1 October 1997.
The reduction in sales revenues from heating supplies is mainly due to the
strong decrease in the amount of heat supplied as a result of the weather
conditions -- in spite of a slight increase in the thermal output capacity sold.
The rise in revenue in the area of public lighting is the result of an
increased release of funds by the state of Berlin for the operation and
maintenance of street and traffic lighting.
28. CHANGES IN INVENTORIES AND OTHER INTERNALLY PRODUCED AND CAPITALIZED ASSETS
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Changes in amount of work in progress for public
lighting........................................ (4,759) (10,265) 5,506
Other internally produced and capitalized
assets.......................................... 54,236 75,813 -21,577
------ ------- -------
Total........................................... 49,477 65,548 -16,071
====== ======= =======
</TABLE>
29. OTHER OPERATING INCOME
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Income from the release of special items:
with partial reserve character.................. 80,778 81,280 -502
for investment bonuses.......................... 55,032 54,588 444
Sundry operating income........................... 163,196 283,331 -120,135
------- ------- --------
Total........................................... 299,006 419,199 -120,193
======= ======= ========
</TABLE>
The income from the release of special items with partial reserve character
is attributable to the release of DM 60.0 million due to additional tax
depreciations made in earlier years under Section 14
F-81
<PAGE> 304
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)
of the Berlin Promotion Act (BerlinFG) and of DM 20.8 million due to special
depreciations made in previous years under Section 4 of the Development Area Act
(FordG).
The sundry operating income includes DM 33.1 million in refunds for changes
made to our distribution installations at the request of third parties, DM 28.0
million from repairs and other services, DM 27.7 million in income from the
release of provisions, DM 13.9 million from claim adjustments, DM 10.4 million
from rentals and leases, DM 9.2 million in credit notes from fuel deliveries for
previous years as well as DM 8.5 million in revenue from the sale of properties.
30. COST OF MATERIALS
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Expenditure for raw materials and supplies and for
purchased goods................................. 949,864 1,031,977 -82,113
including -- fuel................................. (524,184) (560,431) (-36,247)
-- power................................ (315,443) (358,419) (-42,976)
Expenditure for purchased services................ 277,617 395,201 -117,584
--------- --------- ---------
Total........................................... 1,227,481 1,427,178 -199,697
========= ========= =========
</TABLE>
The reduction in expenditure for fuel is due mainly to a decrease in
demand. In addition, structural shifts in our use of fuel from relatively
expensive fuel oil to less costly lignite have contributed to lower expenditure
levels.
We achieved considerable savings in our expenditure for power by buying
more of our purchased electricity in the spot market, where prices are more
favourable.
The decrease in expenditure for purchased services is mainly due to savings
in maintenance.
1996/97 expenditure for purchased services is now reported as being DM
104.6 million higher; this is because all maintenance expenditure is now shown
under this item, and no longer under other sundry operating expenses.
Correspondingly, the latter item has been reduced by DM 104.6 million. This
reclassification gives a better idea of the company's expenses.
31. PERSONNEL EXPENSES
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Wages and salaries................................ 896,403 879,130 17,273
Social security contributions and expenditure for
pensions and benefits........................... 263,442 263,600 -158
including payments for pensions................. (93,900) (95,680) (-1,780)
--------- --------- -------
Total........................................ 1,159,845 1,142,730 17,115
========= ========= =======
</TABLE>
F-82
<PAGE> 305
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)
The increase in personnel expenditure -- in spite of lower average numbers
of staff -- is mainly the result of the new provisions to cover arrangements on
part-time work for older employees and of the increased need for provisions for
early retirement arrangements. In addition, wage adjustments resulting from
collective bargaining, which were retroactive to the previous year, increased
expenditure by DM 17.3 million.
The 1996/97 figure is now reported as being DM 2.5 million higher, because
expenditures resulting from provisioning for residual holiday is now shown under
wages and salaries and no longer under sundry operating expenses.
Correspondingly, the previous year's figure for the latter item has been reduced
by DM 2.5 million. There has also been an increase of DM 1.4 million in the
previous year's payments for pensions, because this item now includes amounts
paid to the Mutual Benefit Association for Pension Security. These
reclassifications also give a better idea of our expenses.
32. DEPRECIATION
Depreciation of tangible and intangible assets can be seen in the
"Movements in fixed assets" overview. It includes extraordinary depreciation of
DM 10.2 million on advance payments for intangible assets as well as DM 12.6
million for tangible assets. In addition, the special loss account was
depreciated by DM 7.6 million.
33. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
CHANGE
1997/98 1996/97 DM THOUSAND
DM THOUSAND DM THOUSAND (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Allocation to special items with partial reserve
character....................................... 161,711 428,723 -267,012
Franchise fee..................................... 204,366 193,710 10,656
Sundry operating expenses......................... 413,865 394,473 19,392
------- --------- --------
Total........................................... 779,942 1,016,906 -236,964
======= ========= ========
</TABLE>
Allocations to special items with partial reserve character consist of
special depreciations of DM 153.2 million under Section 4 of the Development
Area Act (FordG) and a reserve of DM 8.5 million under Section 6b of the Income
Tax Act (EStG).
The higher franchise fee is based on the increase stipulated in the
franchise contract with the state of Berlin, which came into effect on 1 January
1997 and now affected the entire business year.
Sundry operating expenses especially include DM 77.1 million in outside
services for the administration and marketing departments, DM 43.7 million for
data centre services rendered by BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, DM 36.9 million in rent
and lease payments, DM 27.6 million in allowances on receivables and other
assets, DM 23.2 million for the purchase of materials for the administration and
marketing departments as well as DM 19.7 million in insurance premiums. The main
components of the item which are unrelated to this accounting period are DM 17.6
million on retroactive rate adjustments for heating, DM 12.0 million in costs
for dismantling and losses of DM 11.7 million from the retirement of assets.
F-83
<PAGE> 306
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)
34. INCOME FROM FINANCIAL ASSETS
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Income from companies in which participations are
held............................................ 5,720 3,014 2,706
including from affiliated companies............. (-2,993) (-2,671) (-322)
Income from other securities and from lending of
financial assets................................ 1,693 891 802
including from affiliated companies............. (716) (141) (-575)
Depreciation on financial assets and securities... -23,541 -1,556 -21,985
Expenses for losses transferred................... -53 -2,318 2,265
------- ------- -------
Total............................................. -16,181 31 -16,212
======= ======= =======
</TABLE>
Income from companies in which participations are held consists largely of
the 1997 dividends and corporation tax credits received for the district heating
company Fernheizwerk Neukolln AG, Berlin, and for the IT company BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin.
Depreciation on financial assets and securities covers mainly write off to
their assessed values of EAB Fernwarme GmbH, Berlin (DM 19.5 million), ARGE
Modellprojekt Berliner Energiesparpartnerschaft Bewag/Landis & Gyr, Berlin (DM
1.7 million), EAB Energie-Anlagen Berlin GmbH, Berlin (DM 1.3 million), EUS
Energie und Umwelt Service GmbH, Berlin (DM 0.6 million), EFR Europaische
Funk-Rundsteuerung GmbH, Berlin (DM 0.2 million) and Berliner Energieagentur
GmbH, Berlin (DM 0.2 million).
The expenses for losses transferred result entirely from the losses
incurred in the 1997 business year by "DEPOGAS-Gesellschaft zur Gewinnung und
Verwertung von Deponiegasen mbH" , a Berlin company for the exploitation of gas
from waste tips.
35. NET INTEREST INCOME
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Other interest and similar income................. 27,180 37,412 -10,232
Interest and similar expense...................... -78,737 -96,247 17,510
------- ------- -------
Total........................................... -51,557 -58,835 7,278
======= ======= =======
</TABLE>
The reduction in other interest and similar income is mainly due to the
lower total average of financial investments.
The decline in interest and similar expense is largely the result of
reduced average holdings in long-term loans.
F-84
<PAGE> 307
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES TO THE PROFIT AND LOSS ACCOUNT -- (CONTINUED)
36. TAXES
<TABLE>
<CAPTION>
1996/97
1997/98 DM THOUSAND CHANGE
DM THOUSAND (UNAUDITED) DM THOUSAND
----------- ----------- -----------
<S> <C> <C> <C>
Taxes on revenue and income....................... 169,496 98,710 70,786
Other taxes....................................... 6,713 22,903 -16,190
------- ------- -------
Total........................................... 176,209 121,613 54,596
======= ======= =======
</TABLE>
The increase in taxes on revenue and income is attributable to a rise in
taxable income.
The reduction in other taxes is due almost exclusively to the abolition of
the trading capital tax as of 1 January 1998 and the abolition of the net worth
tax as of 1 January 1997. This item now includes only real property tax and
motor vehicles tax.
F-85
<PAGE> 308
BEWAG AG
BUSINESS YEAR 1997/1998
SUPPLEMENTARY INFORMATION
EFFECTS OF VALUATION CHANGES AND TAX REGULATIONS ON THE REPORTED NET INCOME
Accounting changes (Section 284 Sub-section 2 no. 3 of the Commercial Code)
with regard to provisions for early retirement arrangements have resulted in
approximately DM 20 million in increased expenditure. However, because of the
reduction by the same amount in otherwise permissible special depreciation under
Section 4 of the Development Area Act (FordG), this measure has no effect on the
net income for the year.
On the basis of the balance of allocations and releases of special items
with partial reserve character, and the associated effect this has on the tax
expenditure and on other expenditure dependent on profits and dividends, the net
income declared for the year is approximately DM 39 million lower than the
amount which would otherwise have been declarable.
The future revenue tax burden arising from the release of special items
with partial reserve character will depend on the tax rates applicable at the
time.
OTHER FINANCIAL OBLIGATIONS
Future capital expenditure already approved by the Supervisory Board and
maintenance work needing to be done in the coming years represent purchase
commitments of approximately DM 650 million (previous year: DM 472 million).
This amount includes mainly capital expenditure for repairs and for the
extension of our electricity and heat generating and distribution installations.
The cash value of payment obligations arising from long-term rental and
leasing agreements is approximately DM 358 million (previous year: DM 366
million).
There are approximately DM 149 million (previous year: DM 209 million) in
other discounted purchase commitments, including approximately DM 112 million
(previous year: DM 147 million) relating to affiliated companies.
Fuel and power supplies are secured by long-term contracts in line with the
customs of the trade.
F-86
<PAGE> 309
BEWAG AG
BUSINESS YEAR 1997/1998
SHARE OWNERSHIP UNDER SECTION 285 NO. 11 OF THE COMMERCIAL CODE (HGB)
<TABLE>
<CAPTION>
SHARE IN EQUITY ON
CAPITAL DECEMBER 31, 1997 1997 RESULT
NAME AND LOCATION OF THE COMPANY % DM THOUSAND DM THOUSAND
-------------------------------- -------- ----------------- -----------
(DM THOUSAND)
<S> <C> <C> <C>
DEPOGAS-Gesellschaft zur Gewinnung und Verwertung
von Deponiegasen mbH, Berlin(1).................. 100.00 0 0
EAB Fernwarme GmbH, Berlin......................... 100.00 16,677 -6,307
Bewag Immobilienmanagement GmbH, Berlin............ 100.00 1,203 177
IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin............... 100.00 16,759 -2,931
Bewag Energiemanagement GmbH, Berlin............... 100.00 493 -7
FHW Fernheizwerk Neukolln Aktiengesellschaft,
Berlin........................................... 75.22 24,941 3,178
EAVV Energie Assekuranz Versicherungs Vermittlungs
GmbH, Berlin..................................... 60.00 420 320
ARGE Energiesparpartnerschaft Bewag/Landis & Gyr
GbR, Berlin...................................... 50.00 1,859 -3
BerlinDat Gesellschaft fur Informationsverarbeitung
und Systemtechnik mbH, Berlin(2)................. 50.00 4,527 2,527
EAB Energie-Anlagen Berlin GmbH, Berlin(3)......... 50.00 0 -3,234
Berliner Energieagentur GmbH, Berlin............... 33.33 3,372 -568
EFR Europaische Funk-Rundsteuerung GmbH, Berlin.... 30.00 0 -1,104
EBH Energie-Beteiligungsholding GmbH, Dortmund..... 25.00 550,260 2,254
EUS Energie und Umwelt Service GmbH, Berlin........ 25.00 68 -1,028
GASAG Berliner Gaswerke AG, Berlin................. 24.99 939,265 -98,161
</TABLE>
-------------------------
(1) There is a profit and loss transfer contract with the company.
(2) The business year ended on 30 September 1997.
(3) The shares were sold on 28 July 1998.
LIABILITY
Of the liabilities for sureties, which total DM 22.1 million (previous
year: DM 22.8 million), DM 19.6 million represent sureties for loans of the
district heating company EAB Fernwarme GmbH, Berlin, and DM 2.5 million for
loans of the waste tip gas exploitation company DEPOGAS-Gesellschaft zur
Gewinnung und Verwertung von Deponiegasen mbH, Berlin.
There are also guarantees of DM 17.2 million (previous year: DM 20.9
million). DM 15.9 million of this amount represent guarantees for affiliated
companies (previous year: also DM 15.9 million).
NOTIFICATIONS OF PARTICIPATION
In accordance with the stipulations of Section 20 Sub-section 5 in
connection with Sub-section 1 of the German Stock Corporation Act (AktG), the
state of Berlin notified Bewag in a letter dated
F-87
<PAGE> 310
BEWAG AG
BUSINESS YEAR 1997/1998
29 September 1997 that it no longer holds a participation of more than 25 per
cent in Bewag's capital stock.
In accordance with Section 20 Sub-section 1 of the German Stock Corporation
Act, Bewag was also notified by the Southern Company, Atlanta, on behalf of
Southern Energy Holding Beteiligungsgesellschaft mbH, Berlin, in a letter of 6
October 1997, and by Bayernwerk AG, Munich, in a letter of 13 January 1998, that
they own more than 25 per cent of Bewag stock.
AVERAGE PERSONNEL LEVEL IN THE BUSINESS YEAR
Employees (excluding apprentices)
<TABLE>
<CAPTION>
1997/98 1996/97 CHANGE
------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Craftsmen................................................... 3,563 3,927 -364
Technical staff............................................. 3,224 3,312 -88
Commercial staff............................................ 2,241 2,348 -107
----- ----- ----
Total..................................................... 9,028 9,587 -559
===== ===== ====
</TABLE>
DETAILS OF THE COMPANY'S CORPORATE GOVERNANCE
Members of Bewag's Supervisory Board and Board of Management are listed in
Appendix I to these notes.
For the 1997/98 business year, the total remuneration of the Board of
Management was DM 5,248,310 (previous year: DM 3,432,591) and the remuneration
for the Supervisory Board was DM 957,250 (previous year: DM 473,000).
A total of DM 2,519,819 (previous year: DM 2,296,560) was paid to former
members of the Board of Management and their surviving family; a total of DM
23,608 thousand (previous year: DM 20,297 thousand) is allocated as provision
for pension obligations to this group of persons.
DISTRIBUTION OF THE NET PROFIT FOR THE YEAR
We propose that the net profit for the year of DM 224,000,000 be used to
pay a dividend on the current capital stock of DM 560 million as well as on the
coming capital increase of a further DM 560 million from corporate funds.
Berlin, 8 September 1998
BERLINER KRAFT- UND LICHT (BEWAG)-AKTIENGESELLSCHAFT
The Board of Management
F-88
<PAGE> 311
BEWAG AG
BUSINESS YEAR 1997/1998
MOVEMENTS IN FIXED ASSETS
<TABLE>
<CAPTION>
ACQUISITION OR PRODUCTION COSTS
-------------------------------------------------------------------------------------------------
STATUS STATUS
1 JULI 1997 ADDITIONS TRANSFERS DISPOSALS 30 JUNI 1998
DM DM DM DM DM
THOUSAND THOUSAND THOUSAND THOUSAND THOUSAND
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
Industrial property rights and
similar rights and assets...... 427,535 25,937 1,517 3,774 451,215
Advance payments................. 22,277 6,258 -1,481 10,059 16,995
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
449,812 32,195 36 13,833 468,210
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Real estate, rights equivalent to
real estate and buildings,
including buildings on third
party land property............ 2,987,334(5) 11,347 62,082 12,596 3,048,167
Power plant installations........ 5,851,717 21,254 36,702 48,856 5,860,817
Electricity transmission and
distribution installations..... 5,000,839 150,818(1) 372,194 23,904(1) 5,499,947
District heating distribution
installations.................. 2,159,598 31,227 94,061 15,161 2,269,725
Other installations, operating
and business equipment......... 423,266 13,586(2) 15,903 25,215(2) 427,540
Advance payments and
installations under
construction................... 874,926 451,259 -580,978 36,234 708,973
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
17,297,680 679,491 -36 161,966 17,815,169
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Shares in affiliated companies... 88,126 500 -- -- 88,626
Loans to affiliated companies.... 6,400 8,000 -- -- 14,400
Participations................... 414,574 355,750 -- 1,954 768,370
Loans to companies in which
participations are held........ 18,993 500 -- -- 19,493
Other loans...................... 2,950 717 -- 596 3,071
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
531,043 365,467 -- 2,550 893,960
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
FIXED ASSETS..................... 18,278,535 1,077,153 -- 178,349 19,177,339
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Including minor assets: DM 10,682 thousands
(2) Including minor assets: DM 3,189 thousands
(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
The accompanying notes are an integral part of these statements.
F-89
<PAGE> 312
BEWAG AG
BUSINESS YEAR 1997/1998
MOVEMENT IN FIXED ASSETS
<TABLE>
<CAPTION>
NET BOOK VALUES
ACCUMULATED DEPRECIATION IN DM THOUSAND IN DM THOUSAND
----------------------------------------------------------------- ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
STATUS
STATUS STATUS STATUS 30 JUNI 1997
1 JULI 1997 ADDITIONS TRANSFERS DISPOSALS 30 JUNI 1998 30 JUNI 1998 (UNAUDITED)
----------- --------- --------- --------- ------------ ------------ ------------
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
Industrial property rights
and similar rights and
assets.................... 119,402 21,120 -- 3,290 137,232 313,983 308,133
Advance payments............ -- 10,189 -- 10,189 -- 16,995 22,277
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
119,402 31,309 -- 13,479 137,232 330,978 330,410
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Real estate, rights
equivalent to real estate
and buildings, including
buildings on third party
land property............. 903,848 87,664 355 5,181 986,686 2,061,481 2,083,486(5)
Power plant installations... 4,616,845 195,731 634 43,666 4,769,544 1,091,273 1,234,872
Electricity transmission and
distribution
installations............. 3,194,257 169,849(1) -722 22,804(1) 3,340,580 2,159,367 1,806,582
District heating
distribution
installations............. 1,303,872 87,165 87 11,664 1,379,460 890,265 855,726
Other installations,
operating and business
equipment................. 326,865 38,641(2) -354 23,981(2) 341,171 86,369 96,401
Advance payments and
installations under
construction.............. -- -- -- -- -- 708,973 874,926
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
10,345,687 579,050 -- 107,296 10,817,441 6,997,728 6,951,993
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Shares in affiliated
companies................. 11,000 19,506 -- -- 30,506 58,120 77,126
Loans to affiliated
companies................. -- -- -- -- -- 14,400 6,400
Participations.............. 6,082 4,019 -- 1,278 8,823 759,547 408,492
Loans to companies in which
participations are held... -- -- -- -- -- 19,493 18,993
Other loans................. 96(3) -- -- 18(4) 78 2,993 2,854
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
17,178 23,525 -- 1,296 39,407 854,553 513,865
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
FIXED ASSETS................ 10,482,267 633,884 -- 122,071 10,994,080 8,183,259 7,796,268
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Including minor assets: DM 10,682 thousands
(2) Including minor assets: DM 3,189 thousands
(3) Discount of interest
(4) Accumulation of interest because of retirements disposal
(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBilG)
The accompanying notes are an integral part of these statements.
F-90
<PAGE> 313
APPENDIX I
BEWAG AG
BUSINESS YEAR 1997/1998
SUPERVISORY BOARD
BARNEY S. RUSH
(from 26 September 1997)
Chairman from 15 December 1997
President of Southern Energy Development
Europe Ltd., London
ERNST-OTTO KOCK
Deputy chairman from 15 December 1997
Deputy Chairman of the Public Services and
Transport Trade Union, Berlin regional
administration, Berlin
SVEN BERGELIN
(From 15 December 1997)
Department head for industry of the
DAG-Union, Berlin-Brandenburg Land
Administration, Berlin
HANS-JURGEN CRAMER
(from 15 December 1997)
Head of a main department of Bewag, Berlin
RAINER FRANK ELSASSER
(from 15 December 1997)
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich
KLAUS FORSTER
Member of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich
DR. MANFRED GENTZ
(from 15 December 1997)
Member of the Board of Management of
Daimler Benz Aktiengesellschaft, Stuttgart
DR. HANS-DIETER HARIG
(Chairman until 15 December 1997)
Chairman of the Board of Management of
PreussenElektra Aktiengesellschaft, Hanover
BERND HELMS
(from 15 December 1997)
Head craftsmen of Bewag, Berlin
RITA KUHNER-PRZEWOSNIK
(from 15 December 1997)
Section head of Bewag, Berlin
CARL-FRIEDRICH MEISSNER
(from 15 December 1997)
Former Member of the Board of Management
of the Deutsche Telekom Aktiengesellschaft,
Calw
DR. GEORG OBERMEIER
(From 26 September 1997)
Member of the Board of Management of
VIAG Aktiengesellschaft, Munich
REINHOLD OFFERMANN
(from 15 December 1997)
Member of the Board of Management of
PreussenElektra Aktiengesellschaft, Springe
RICHARD J. PERSHING
(From 26 September 1997)
Senior Vice President of
Southern Energy Inc., Rosewell
KARL-HEINZ DIETER REGEL
(from 15 December 1997)
Project engineer of Bewag, Berlin
MARTIN SATTLER
(from 15 December 1997)
Meter fitter with special responsibilities of
Bewag, Berlin
UWE SCHARF
(from 15 December 1997)
Deputy Chairman of the Public Services
and Transport Trade Union, Berlin regional
administration, Berlin
MARIO SCHONIAN
(from 15 December 1997)
1st car mechanic of Bewag, Berlin
HERBERT STROBEL
1st senior clerk of Bewag, Berlin
DR. GIUSEPPE VITA
Chairman of the Board of Management
of Schering Aktiengesellschaft, Berlin
RESIGNED FROM THE SUPERVISORY BOARD
STEPHAN BOEHNKE
(until 15 December 1997)
Technician with special responsibilities of
Bewag, Berlin
F-91
<PAGE> 314
BEWAG AG
BUSINESS YEAR 1997/1998
DR. ALFRED DWORAK
(until 15 December 1997)
Chief executive of VEBA Aktiengesellschaft,
Berlin
DR. ANNETTE FUGMANN-HEESING
(until 2 September 1997)
Senator for Finance, Berlin
REGINA GEISS
(until 15 December 1997)
Section head of Bewag, Berlin
JAMES R. HARRIS
(from 26 September 1997 until
15 December 1997)
Vice President of
Southern Energy Inc., Marietta
HARALD JOOS
(until 28 August 1997)
Chairman of the management of Schindler
Aufzugefabrik GmbH, Berlin
JORG KLOSE
(until 15 December 1997)
Contract clerk of Bewag, Berlin
DR. KURT LANGE
(until 15 December 1997)
Chairman of the Public Services and Transport
Trade Union, Berlin regional administration,
Berlin
DR. OTTO MAJEWSKI
(until 15 December 1997)
Chairman of the Board of Management of
Bayernwerk Aktiengesellschaft, Munich
ELMAR PIEROTH
(until 2 September 1997)
Senator for Economic Affairs and Public Utility
Companies, Berlin
KLAUS POMMERANIG
(until 15 December 1997)
Former departmental head of the energy sector
in the Public Services and Transport Trade
Union, Berlin regional administration, Berlin
OLAF ROCH
(until 15 December 1997)
Shop supervisor of Bewag, Berlin
DR. JOACHIM SCHMELZER
(until 15 December 1997)
Head of a main department/Staff member with
special responsibilities of Bewag, Berlin
DR. LORENZ SCHOMERUS
(until 1 September 1997)
State secretary in the Federal Ministry of
Economics, Bonn
MANFRED SCHWARZE
(until 15 December 1997)
Chairman of the Works Council of
Bewag, Berlin
WOLFGANG STEINRIEDE
(until 23 September 1997)
Former spokesman of the Board of
Management of Bankgesellschaft Berlin
Aktiengesellschaft, Berlin
JAMES A. WARD
(from 26 September 1997 until
15 December 1997)
Vice President of Southern Energy Inc.,
Fayetteville
BOARD OF MANAGEMENT
PROF. DR. DIETMAR WINJE
Chairman
Energy business and corporate development,
Berlin
DR. BERND BALZEREIT
Finance and legal affairs, Berlin
DR. KLAUS BECHTOLD
Generation and heating, Berlin
J. BRUCE JONES
(from 1 February 1998)
Electricity grid and sales, Berlin
DR. KURT LANGE
(from 1 February 1998)
Human resources and employee services, Berlin
RESIGNED FROM THE BOARD OF MANAGEMENT
MICHAEL PAGELS
(until 31 October 1997)
Personnel and organisation, Teltow
F-92
<PAGE> 315
APPENDIX II
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES
SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Bewag financial statements comply with accounting principles generally
accepted in Germany ("German GAAP"), which differs in certain significant
respects from accounting principles generally accepted in the United States
("U.S. GAAP"). The significant differences that affect the net income and
shareholders' equity of Bewag as of and for the year ended June 30, 1998 are
described below:
(A) INVESTMENT IN SUBSIDIARIES
In accordance with German GAAP, investments in controlled subsidiaries are
not required to be consolidated if certain materiality tests are met, and can be
recorded under the cost method (and, if applicable, the lower of cost or market
method). As Bewag meets these materiality tests for all controlled subsidiaries,
it accounts for these entities under the cost method. Under the cost method of
accounting, dividends declared are the basis for recognizing earnings from an
investment.
A controlled subsidiary is generally defined under U.S. GAAP as all
majority-owned subsidiaries unless control is temporary or does not rest with
the majority owner. Under U.S. GAAP, controlled subsidiaries are consolidated,
with a minority interest shown as an adjustment to net income or loss and as a
separate item on the balance sheet.
Certain of Bewag's controlled subsidiaries were acquired in a purchase
requiring purchase accounting treatment under U.S. GAAP. The purchase method
requires that assets acquired and liabilities assumed be accounted for at fair
value. The excess of purchase price over the fair value of net assets acquired
is recorded as goodwill. Under U.S. GAAP, goodwill must be capitalized and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.
In accordance with German GAAP, Bewag has written down its investment in
EAB Fernwarme to its estimated value. The consolidation of EAB Fernwarme as
required under US GAAP resulted in the reversal of the amounts previously
written down, including the current year amount of DM 19.5 million. The attached
reconciliation also reflects the other entries necessary to completely
consolidate Bewag's controlled subsidiaries.
(B) MINORITY INTEREST
Under German GAAP, minority interest is included as a separate component of
shareholders' equity and included in net income. Bewag has not recorded minority
interest as subsidiaries have not been consolidated as allowed under German
GAAP. Under U.S. GAAP, minority interest is eliminated from income and is shown
as a liability to the minority owners on the balance sheet.
F-93
<PAGE> 316
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
(C) INVESTMENT IN AFFILIATED COMPANIES
In accordance with German GAAP, investments in affiliated companies
(affiliated companies generally are entities which are 20-50% owned by Bewag)
are not required to be accounted for under the equity method, if certain
materiality tests are met, and can be recorded under the cost method (and, if
applicable, the lower of cost or market method). As Bewag meets these
materiality tests for all affiliated companies, it accounts for these entities
under the cost method. Under the cost method of accounting, dividends declared
are the basis for recognizing earnings from an investment.
Under U.S. GAAP, investments in affiliated companies are recorded using the
equity method of accounting if an investment enables the investor to influence
the operating or financial decisions of the investee, with the balance of each
investment being increased or decreased, as appropriate, to account for the
investor's proportionate share of the investee earnings. Upon disposal, the
above differences would also result in differing gains and losses on
disposition.
Certain of Bewag's affiliated companies were acquired in a purchase
requiring purchase accounting treatment under U.S. GAAP. The purchase method
requires that assets acquired and liabilities assumed be accounted for at fair
value. The excess of purchase price over the fair value of net assets acquired
is recorded as goodwill. Under U.S. GAAP, goodwill must be capitalized and
amortized through the income statement over its estimated useful life, which may
not exceed 40 years.
In accordance with German GAAP, Bewag has written down its investment in
several affiliated companies to the estimated value of these investments. The
application of the equity method of accounting as required under U.S. GAAP
resulted in the reversal of the amounts previously written off, prior to booking
the appropriate entries to record Bewag's equity in the earnings of the
affiliated companies.
(D) DEPRECIATION
Under German GAAP, certain fixed and intangible assets are depreciated
based on accelerated depreciation methods permitted by German law. German GAAP
allows disclosure of the effect of accelerated depreciation in a special balance
sheet position known as "Sonderposten", or deduction from the cost basis of the
assets. The "Sonderposten" recorded under German GAAP includes depreciation in
accordance with section 4 FordG and section 14 BerlinFG. Further, depreciable
lives differ from those allowed under U.S. GAAP and 75% of the annual
depreciation amount is allowed in the year an asset is placed in-service. German
GAAP allows, under certain circumstances for the cost basis of assets to be
adjusted (e.g. assets sales gains being transferred to newly acquired fixed
assets). Such adjustments are not allowed under U.S. GAAP. Under U.S. GAAP,
fixed and intangible assets are recorded at cost and depreciated over their
useful life. For purposes of the reconciliation to U.S. GAAP, fixed and
intangible assets have been depreciated on a straight-line basis. Depreciation
in the in-service year is taken from the date the asset is placed in-service.
F-94
<PAGE> 317
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
(E) AMORTIZATION OF INVESTMENT GRANTS AND CONSTRUCTION COST SUBSIDIES
The amortization of certain deferred revenue, comprised of customer and
government payments in support of investments, which is being amortized over the
depreciable lives of the related assets for German GAAP purposes, has been
adjusted to reflect the useful lives used for U.S. GAAP purposes.
(F) INTEREST CAPITALIZATION
German GAAP permits, but does not require, the capitalization of interest
as part of the historical cost of the acquisition of assets that are constructed
or otherwise produced for an enterprise's own use. Bewag has elected to expense
these interest costs as incurred. U.S. GAAP requires the capitalization of such
interest costs. The additional cost is depreciated over the expected useful life
of the related asset.
(G) DEBT DISCOUNT
German GAAP permits, but does not require, discount associated with the
issuance of debt to be expensed as incurred. U.S. GAAP require that such
discount be capitalized and amortized to income over the life of the related
debt.
(H) PENSIONS AND OTHER EMPLOYEE BENEFITS
Under German GAAP, the Company provided for pension costs in accordance
with article 6a of the German Income Tax Act. Pension accounting under U.S. GAAP
is prescribed by Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions" ("SFAS 87"). SFAS 87 requires actuarial computation of the pension
costs for defined benefit plans using the Projected Unit Credit Method and
includes current service cost, interest cost, return on plan assets and
amortization of actuarial gains/losses and prior service cost. Prior service
cost is amortized over the future service period of active employees.
Unrecognized gains and losses exceeding 10% of the greater of the projected
obligation or the market-related value of the plan assets are amortized over the
average service period of active employees. Differences between U.S. GAAP and
German GAAP relate primarily to future service costs, which are required to
measured under SFAS 87 and interest costs, which are fixed under German GAAP.
SFAS 87 requires that companies located outside the United States adopt the
provisions of SFAS 87 for fiscal years beginning after December 15, 1988. Due to
the significant period of time which elapsed between the date when SFAS 87 would
have been required to be adopted and the time when Bewag first determined to
prepare U.S. GAAP financial information, adoption of the provisions of SFAS 87
as of July 1, 1989 was not feasible. Accordingly, SFAS 87 has been adopted from
July 1, 1997. As of the date of adoption, a transition obligation was calculated
under requirements of SFAS 87 and is being amortized over a 15 year period
beginning on the assumed implementation date of July 1, 1989.
(I) PROVISIONS AND ACCRUALS
German GAAP permits the recognition of accruals and provisions for
uncertain liabilities and loss contingencies. The amount of such accruals or
provision represents the anticipated expenses of
F-95
<PAGE> 318
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
the company. Specific examples include the establishment of a provision in the
amount of DM 38.4 million to repair the facade of the old corporate headquarters
as well as a DM 34 million provision for future lease payments for the current
corporate headquarters. Under U.S. GAAP, an accrual for a loss contingency is
recorded by a charge to income if it is probable that an asset has been impaired
or a liability has been incurred and at the same time the minimum amount of the
loss can be reasonably estimated. Less precisely determinable reserves for
future losses, costs, or risks do not meet the condition for accrual under U.S.
GAAP and have been eliminated.
(J) SPECIAL ITEM "RESERVE UNDER SECTION 6B ESTG"
Under German GAAP, gains on disposal of land can be transferred to new
acquisition of land by offsetting against acquisition costs within a period of
four years after the disposal became effective. Gains not yet transferred are
recorded as a special item (Reserve under section 6b EStG) in accordance with
German GAAP.
Under U.S. GAAP this treatment is not allowed. The special item for gains
on disposal of land therefore is eliminated. Gains of prior years increased
equity and the current gains added to the special item are taken to income under
U.S. GAAP.
(K) SPECIAL PROVISION IN ACCORDANCE WITH D-MARKBILANZGESETZ ("SPECIAL LOSS
ACCOUNT")
As allowed under German GAAP, Bewag has recorded a special provision in
accordance with D-Markbilanzgesetz ("special loss account") as an asset on the
balance sheet and a corresponding account shown as a component of equity. This
special provision relates to the opening balance sheet prepared under the
regulations of the D-Markbilanzgesetz (DMBilG) of the former East German
electric utility Energieversorgung Berlin AG ("EBAG") as of July 1, 1990, the
date when all East German companies converted their accounting systems. The
special provision relates to liabilities (primarily environmental related
liabilities and restitution claims) assumed by Bewag after merging with EBAG.
Adjustments made to these offsetting accounts do not impact earnings under
German GAAP. Under U.S. GAAP, the special provisions have been eliminated. The
associated liabilities are included on the balance sheet as appropriate for U.S.
GAAP with adjustments to the liabilities being treated as changes of estimates
and included in the U.S. GAAP operating results in the period the change in
estimate occurs.
(L) DEFERRED TAXES
Under German GAAP, deferred tax assets and liabilities are not generally
recognized for all differences between the book carrying values and the tax
bases of assets and liabilities.
Under U.S. GAAP, deferred tax assets and liabilities for temporary
differences using enacted tax rates in effect at year-end are recognized in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, net operating loss
carryforwards that are available to reduce future taxes are recognized as
deferred tax assets. Such amounts are reduced by a valuation allowance to the
extent that it is "more likely than not" that the deferred tax assets will not
be realized.
F-96
<PAGE> 319
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
The deferred tax liability on U.S. GAAP adjustments covers the future tax
burden related to the additional depreciation recorded for in the special item
with partial reserve character that is disclosed in the notes under German GAAP.
(M) OTHER
Several other differences from German GAAP to U.S. GAAP are considered
insignificant for the reconciliation of financial statements as of June 30,
1998.
Under German GAAP, securities and other investments are valued at the lower
of acquisition costs or market value at the balance sheet date. Adjustments to
record investments below cost are included in the income statement. Under U.S.
GAAP marketable equity and debt securities are classified into three categories:
held-to-maturity securities, available-for-sale securities or trading
securities. For U.S. GAAP purposes, Bewag's securities are considered to be held
to maturity and therefore carried at the adjusted cost at the balance sheet
date.
Other but insignificant differences in accounting principles include
unrealized gains from foreign currency translations and other costs and income
amounts in the German financial statements that are capitalized or deferred for
U.S. GAAP purposes, respectively.
(N) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", (SFAS No. 133), which is effective for fiscal years
beginning after June 15, 2000 (July 1, 2000 in the case of Bewag). This
statement requires that all derivative financial instruments be reflected on the
balance sheet at fair value, with changes in fair value recognized periodically
in earnings or as a component of other comprehensive income, depending on the
nature of the underlying item, changes in the fair value of the derivative will
be recognized currently in the statements of profit and loss. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133", that
amends SFAS No. 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000. Additionally, on June 15, 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133", that addresses a limited
number of issues causing implementation difficulties for a large number of
entities preparing to apply Statement 133.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition In Financial Statements. This
bulletin summarizes the views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. The
staff believes that the change must be reported, by all registrants, no later
than the fourth fiscal quarter of the fiscal year beginning after December 15,
1999.
F-97
<PAGE> 320
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
RECONCILIATION TO U.S. GAAP
The following is a summary of the significant adjustments to net income for
the year ended June 30, 1998 and to shareholders' equity at June 30, 1998 which
would be required if U.S. GAAP had been applied instead of German GAAP.
<TABLE>
<CAPTION>
YEAR ENDED
NOTE JUNE 30, 1998
---- -------------
TDM
<S> <C> <C>
Net income as reported in the statement of operations under
German GAAP............................................... 279,000
Adjustments required to conform to U.S. GAAP:
Investment in subsidiaries................................ (a) -17,117
Minority interest......................................... (b) -895
Investment in affiliated companies........................ (c) 1,283
Depreciation.............................................. (d) 41,439
Amortization of investment grants and construction cost
subsidies.............................................. (e) -22,472
Interest capitalization................................... (f) 2,918
Debt discount............................................. (g) -2,034
Pension and other employee benefits....................... (h) -45,896
Provisions and accruals................................... (i) 2,005
Special item "Reserve under section 6b EStG".............. (j) 8,517
Special provision in accordance with DMBilG............... (k) 87,703
Deferred taxes............................................ (l) -16,555
Deferred tax effect of U.S. GAAP adjustments.............. (l) 23,957
--------
Net income in accordance with U.S. GAAP................ 341,853
========
</TABLE>
F-98
<PAGE> 321
BEWAG AG
BUSINESS YEAR 1997/1998
NOTES -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF
NOTE JUNE 30, 1998
---- -------------
TDM
<S> <C> <C>
Shareholders' equity as reported in the balance sheet under
German GAAP............................................... 3,606,387
Adjustments required to conform to U.S. GAAP:
Investment in subsidiaries................................ (a) -42,067
Minority interest......................................... (b) -12,022
Investment in affiliated companies........................ (c) 80,977
Depreciation.............................................. (d) 5,429,538
Amortization of investment grants and construction cost
subsidies.............................................. (e) -291,520
Interest capitalized...................................... (f) 28,560
Debt discount............................................. (g) 6,983
Pension and other employee benefits....................... (h) -220,162
Provisions and accruals................................... (i) 103,440
Special item "Reserve under section 6b EStG".............. (j) 25,187
Special provision in accordance with DMBilG............... (k) -384,564
Deferred taxes............................................ (l) 90,410
Deferred tax effect of U.S. GAAP adjustments.............. (l) -2,646,565
-----------
Shareholders' equity in accordance with U.S. GAAP........... 5,774,582
===========
</TABLE>
F-99
<PAGE> 322
FINANCIAL STATEMENTS OF
BERLINER KRAFT-UND LICHT(BEWAG) - AKTIENGESELLSCHAFT
BUSINESS YEAR 1998/1999
UNAUDITED
AS REQUIRED BY REGULATION S-X 210.3-09
F-100
<PAGE> 323
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
BALANCE SHEET
<TABLE>
<CAPTION>
NOTES 30 JUNE 1999 30 JUNE 1998
NO. DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
FIXED ASSETS................................................ (1)
-------------------------------------------------------------------------------------------------
Intangible assets........................................... (2) 396,160 330,978
Tangible assets............................................. (3) 6,733,824 7,021,011(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Financial assets............................................ (4) 848,312 854,553
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
7,978,296 8,206,542
-------------------------------------------------------------------------------------------------
CURRENT ASSETS
-------------------------------------------------------------------------------------------------
Inventories................................................. (5) 167,872 168,851
Accounts receivable and other assets
Receivables for goods and services........................ (6) 522,116 546,744
Receivables from affiliated companies..................... (7) 2,053 3,265
Receivables from companies in which participations are
held.................................................... (8) 5,577 4,607
Other assets.............................................. (9) 91,036 127,679
-------------------------------------------------------------------------------------------------
Securities.................................................. (10) 184,295 203,529
Cheques, cash on hand, on deposit with Deutsche Bundesbank
and Postbank, cash in other bank accounts................. (11) 277,980 226,830
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
1,250,929 1,281,505
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PREPAID EXPENSES............................................ (12) 185,215 134,192
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL LOSS ACCOUNT........................................ (13) 358,821 365,238(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,773,261 9,987,477
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
EQUITY
-------------------------------------------------------------------------------------------------
Subscribed capital.......................................... (14) 1,120,000 560,000
Capital reserve............................................. (15) 56,800 56,800
Revenue reserves............................................ (16)
Statutory reserve......................................... 899,691 899,691(1)
Special reserve according to Section 17 Sub-Section 4
DMBilG.................................................. 358,821 365,238(1)
Other revenue reserves.................................... 1,029,551 1,532,535
2,288,063 2,797,464(1)
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Net profit for the year................................. (17) 246,400 224,000
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
3,711,263 3,638,264
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER................ (18) 1,884,341 1,844,528
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
SPECIAL ITEM FOR INVESTMENT BONUSES......................... (19) 386,546 410,711
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
CONSTRUCTION COST SUBSIDIES................................. (20) 697,711 683,564
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
PROVISIONS
-------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations............. (21) 464,209 407,804
-------------------------------------------------------------------------------------------------
Provisions for taxes........................................ 189,882 103,452
-------------------------------------------------------------------------------------------------
Other provisions............................................ (22) 1,534,302 1,393,425(1)
-------------------------------------------------------------------------------------------------
2,188,393 1,904,681
-------------------------------------------------------------------------------------------------
LIABILITIES (23)
-------------------------------------------------------------------------------------------------
Liabilities to banks........................................ (24) 381,160 858,713
Advance payments received................................... (25) 78,177 127,816
Liabilities for goods and services.......................... 226,746 305,481
Liabilities to affiliated companies......................... 953 786
Liabilities to companies in which participations are held... (26) 5,709 12,016
Other liabilities........................................... (27) 200,666 200,673
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
893,411 1,505,485
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
DEFERRED INCOME............................................. (28) 11,596 244
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
9,773,261 9,987,477
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
(1) After adjustment according to Section 36 of the DM-Balance Sheet Act
(DMBiLG)
The accompanying notes are an integral part of these statements.
F-101
<PAGE> 324
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
NOTES 1998/99 1997/98
NO. DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES REVENUES........................................... (29) 3,901,578 3,959,727
--------------------------------------------------------------------------------------------
Stock movements and other internally produced and
capitalised assets..................................... (30) 46,078 49,477
Other operating income................................... (31) 361,896 299,006
Cost of materials........................................ (32) -1,078,035 -1,227,614(1)
Personnel expenses....................................... (33) -1,196,754 -1,159,845
Depreciation............................................. (34) -671,446 -617,995
Other operating expenses................................. (35) -835,793 -786,522(1)(2)
Income from financial assets............................. (36) -13,242 -16,181
Net interest income...................................... (37) -29,204 -51,557
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
RESULTS OF ORDINARY ACTIVITIES........................... 485,078 448,496
--------------------------------------------------------------------------------------------
Taxes on income and revenue.............................. (38) -188,078 -169,496
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
NET INCOME FOR THE YEAR................................ 297,000 279,000
--------------------------------------------------------------------------------------------
Allocations to other revenue reserves.................... -50,600 -55,000
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
NET PROFIT FOR THE YEAR................................ 246,400 224,000
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
(1) After the reclassification of DM 133 thousand from other operating expenses
to cost of materials
(2) After the reclassification of other (taxes) (DM 6,713 thousand) to other
operating expenses
The accompanying notes are an integral part of these statements.
F-102
<PAGE> 325
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
CASH-FLOW STATEMENT
<TABLE>
<CAPTION>
1998/99 1997/98
DM MILLION DM MILLION
---------- ----------
-------------------------------------------------------------------------------------
<S> <C> <C>
Net income for the year..................................... 297 279
Depreciation of fixed assets................................ 689 634
Changes in long-term provisions............................. 51 -64
Allocation to special item.................................. 150 162
Release of special item..................................... -161 -136
Other expenses and income without effect on payments........ -10 -23
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
CASH FLOW (DVFA/SG)......................................... 1,016 852
Result from disposals of fixed assets....................... -22 3
Increase/decrease in inventories, receivables for goods and
services and other assets................................. 51 -7
Increase/decrease in liabilities for goods and services and
other liabilities......................................... 69 262
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
INFLOW OF FUNDS FROM OPERATING ACTIVITIES................... 1,114 1,110
-------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets..................... 56 18
Disbursements from capital investments in fixed assets...... -446 -1,030
including increase of participation in GASAG................ (--) (354)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR INVESTMENT ACTIVITIES.................. -390 -1,012
-------------------------------------------------------------------------------------
Payments to shareholders (dividend)......................... -224 -112
Receipts from taking up loans............................... -- --
Payments for redemption of loans............................ -469 -185
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
OUTFLOW OF FUNDS FOR FINANCING ACTIVITIES................... -693 -297
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
CHANGES IN FINANCING RESOURCES WITH EFFECT ON PAYMENT....... 31 -199
-------------------------------------------------------------------------------------
</TABLE>
MOVEMENTS OF FINANCIAL FUNDS
<TABLE>
<CAPTION>
30 JUNE 1999
DM MILLION 30 JUNE 1998 CHANGE
(UNAUDITED) DM MILLION DM MILLION
------------ ------------ ----------
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid funds......................................... 278 227 51
Securities in current assets......................... 184 204 -20
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
FINANCIAL FUNDS...................................... 462 431 31
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-103
<PAGE> 326
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES
PRELIMINARY REMARKS
On 1 July 1993, Bewag was merged with the former East Berlin energy supply
company Energieversorgung Berlin AG (EBAG), which was located in the former East
Berlin.
As a result of the merger under stock corporation law, legislation which,
according to the unification treaty applied only to companies in the former GDR,
now applies to Bewag as a whole. This is particularly relevant with regard to
the provisions of the DM-Balance Sheet Act (DMBiLG) covering the special-loss
account, the special reserve under Section 17 Sub-section 4 of the Act and
capital reorganisation under Section 27 of the Act. In certain circumstances,
Section 36 DMBiLG also stipulates changes in EBAG's DM opening balance sheet,
which then entail retroactive corrections in certain balance sheet item
valuations for each previous year.
As of 30 June 1999 such CHANGES IN THE OPENING BALANCE SHEET were either
necessary or possible for the following items:
- Tangible assets increased DM 23.3 million, because the total value shown
for the land has increased. This was primarily because the result of new
investigations allowed us to reduce capitalised deductions for future
expenditure to rehabilitate contaminated properties.
- Provisions for residual contamination were, for the same reason, also cut
back by DM 19.5 million. At the same time, the special-loss account and
the special reserve had to be reduced by the same amount.
- Provisions for compensation obligations were reduced by DM 8.6 million,
as certain restitution claims became more precise and court decisions had
become legally effective.
As a result of these changes, the statutory reserve had to be increased by
DM 51.4 million.
Bewag must also take into account the stipulations of the LAND REGISTRY
ADJUSTMENT ACT (GBBerG). This act applies only to the territory which joined the
Federal Republic under the unification treaty, and covers easements of utility
supply companies in non-public land as well as compensation payments due to the
owners of such properties. Provisions were established for this purpose as of 30
June 1995, date of the initial application of the Act. This provisioning did not
affect operating results in the profit and loss account; it had merely served to
record such liabilities and related assets on the balance sheet.
Since the obligations will become due in two equal installments on 1
January 2001 and 2011, the easements were assessed at present value. The
difference between the value of the easements and the obligation was recorded as
prepaid expense.
In the year under review, detailed studies of the location and quality of
the properties showed that the provision should be increased by DM 130.1
million. Under the accounting methodology used, this adjustment, rather than
being reported as an expense, merely increases the recorded assets and
liabilities. The only consequence is a DM 11.1 million increase in total expense
for depreciation and an adjustment of prepaid expenses.
F-104
<PAGE> 327
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
Because of the insignificance of Bewag's shareholdings as a whole in
relationship to its financial and income position, the company took advantage of
the option in Section 296 Sub-section 2 of the commercial Code (HGB) and chose
not to prepare a CONSOLIDATED ANNUAL STATEMENT.
ACCOUNTING AND VALUATION METHODS
In the balance sheet and the profit and loss account certain items have
been combined for the sake of greater clarity; they are shown in greater detail
in the notes. Furthermore, in an effort to provide more insight into the
company's financial position, a number of items have been added to the balance
sheet. The profit and loss account has been drawn up according to the
cost-summary method. DM figures shown in the annual statement represent
thousands.
Specifically, accounting and valuation are based on the following
principles:
ASSETS
Purchased INTANGIBLE ASSETS are valued at their acquisition costs less
regular straight-line depreciation.
TANGIBLE ASSETS are assessed at acquisition or production costs. With
regard to the cost of self constructed assets, Bewag capitalizes only directly
allocable costs. Interest paid on outside capital has been excluded from this
item since 1 January 1991. When new tangible assets are added, investment
subsidies are deducted from the costs of acquisition or production. Regular
depreciation for tangible assets is carried out on a straight-line basis for
buildings, and otherwise always at the highest degression rate permissible under
taxation law; straight-line depreciation is favoured as soon as this leads to
higher annual amounts. Plant for which special depreciation can be claimed under
Section 4 of the Development Area Act (FordG) is also depreciated by the
straight-line method, as stipulated by law. Depreciation is based on the Federal
Minister of Finance's depreciation table for the energy and water supply sector.
In the year of purchase or production, new plant is depreciated at 75.0 per
cent of the normal annual rate.
According to one of the options of Section 6 Sub-section 2 of the Income
Tax Act (EStG), minor assets are depreciated fully in the year of purchase or
production.
FINANCIAL ASSETS are valued at acquisition costs. Interest-free loans
included in the lendings are discounted to their present value.
If the book value of an asset calculated according to the above principles
is greater than its quoted or market value at balance sheet date, the excess
over the market value is written off.
INVENTORIES are valued at average acquisition costs, taking into account
the lower-of-cost-or-market rule. Deductions are made for inventories subject to
long-term storage and thus potentially less suitable for use from an economic
point of view. The amounts deducted depend on the rate of turnover for the goods
concerned. The procedure was slightly altered in the 1998/99 business year, as
F-105
<PAGE> 328
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
amounts deducted have now been limited to a fixed minimum. This has resulted in
additions to inventory assets.
With regard to ACCOUNTS RECEIVABLES AND OTHER ASSETS, an appropriate amount
is deducted for identifiable single risks. Other risks are taken into account in
a general allowance for bad debts and doubtful accounts. Advance payments on
receivables for goods and services are offset against electricity supplied but
not yet invoiced. Receivables for electricity supplied but not yet invoiced are
assessed on the basis of electricity consumption and revenue projections; a
differentiated group assessment procedure is applied. Interest-free receivables
are discounted according to their terms.
SECURITIES are valued at acquisition cost or at their market price if it is
lower.
No use is made of the option right to capitalise debt discount expenses:
such expenses are immediately recorded in the profit and loss account.
Provisions for which is a SPECIAL-LOSS ACCOUNT has been created in the DM
opening balance sheet of EBAG as at 1 July 1990 and which have been used up are
not reported as expenditure in the relevant items of the profit and loss
account; instead, the special-loss account is depreciated by the amount of the
used provisions.
SHAREHOLDERS' EQUITY AND LIABILITIES
As they become freely disposable, funds of the SPECIAL RESERVE UNDER
SECTION 17 SUB-SECTION 4 OF THE DM-BALANCE SHEET ACT (DMBiLG) are transferred to
other revenue reserves. This transfer serves to comply with the current version
of the Act, which has been in force since 25 July 1994.
The amounts by which the regular depreciation of tangible assets differs
from the increased depreciation under Section 14 of the Berlin Subsidy Act
(BerlinFG) and the special depreciation under Section 4 of the Development Area
Act (FordG) are disclosed as SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER,
together with the reserve under Section 6b of the Income Tax Act (EStG). While
the difference between regular and increased depreciation is always released in
accordance with established depreciation procedures, the release of the special
depreciation begins at the end of the preferential period.
Tax-free investment bonuses are shown under liabilities as SPECIAL ITEM FOR
INVESTMENT BONUSES. The release of this item into income is carried out on a
straight-line basis in accordance with the period of use of the subsidised
assets.
Unless a shorter term has been agreed upon, CONSTRUCTION COST SUBSIDIES are
released into income at an annual rate of 5.0 per cent.
The PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS are formed according to
actuarial principles. Fractional values are determined on the basis of an
interest rate of 6.0 per cent. One third of the amount to be allocated to these
provisions as a result of the application of the new guidelines (1998 Heubeck
guidelines), which show increased life expectancy, was set aside in the year
under review.
OTHER PROVISIONS reflect all risks and uncertain obligations identifiable
according to the principles of most probable estimate. No discounting is used
with regard to provisions for early retirement. In
F-106
<PAGE> 329
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
addition, a provision for repairs under Section 249 Sub-section 2 of the
Commercial Code (HGB) was created on 30 June 1995.
LIABILITIES are reported at their repayment value.
FOREIGN CURRENCY CONVERSION
Receivables and liabilities in foreign currency are converted at the
exchange rate applicable on the date of origin of the claim or liability, unless
a fall or rise in the exchange rate makes a devaluation of the claim or an
upvaluation of the liability necessary.
CASH-FLOW STATEMENT
In accordance with the 1/1995 statement of the main specialist committee of
the Institute of Auditors (IDW) and in compliance with international accounting
standards (IAS 7), the flow-of-funds analysis shows payments broken down into
cash flow from operations, from investment and from financing activities. Within
the flow of funds resulting from operations, cash flow is shown according to
DVFA/SG. The balance represents the total change in resources in the course of
the business year.
F-107
<PAGE> 330
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
1. FIXED ASSETS
Changes in individual items of fixed assets in the 1998/99 business year,
including depreciation, are shown in the "Movements in fixed assets" section.
2. INTANGIBLE ASSETS
The two main intangible assets are DM 213.2 million for easements under
Section 9 of the Land Registry Adjustment Act (GBBerG) and the right of usage
for the connection to the Western European grid network, which is valued at DM
142.7 million.
3. TANGIBLE ASSETS
Additions and transfers to tangible assets involving completed and fully
charged installations amount to DM 588.8 million. The most significant additions
were investments made for power transmission and distribution equipment as well
as for power plants. As a result of reduced investment activity, the value of
advance payments made and installations under construction fell by DM 216.4
million to DM 492.6 million.
4. FINANCIAL ASSETS
The decrease in our shares in affiliated companies is due to the
depreciation of Bewag Immobilienmanagement GmbH, Berlin to its assessed value.
The loan to EAB Fernwarme GmbH, Berlin, which was effected as an
equity-replacing loan, has been fully written off.
Our participations have remained virtually at the previous year's level.
Lendings to companies in which we hold participations were to BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin, to EFR
Europaische Funk-Rundsteuerung GmbH, Berlin, as well as to EUS Energie und
Umwelt Service GmbH, Berlin.
5. INVENTORIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and supplies....................... 154,920 155,681 -761
--------------------------------------------------------------------------------------------
Work in progress for public lighting............. 12,952 13,170 -218
--------------------------------------------------------------------------------------------
Total.......................................... 167,872 168,851 -979
--------------------------------------------------------------------------------------------
</TABLE>
The reduction in raw materials and supplies is mainly due to reduced
amounts of fuel oil and operating materials as well as to lower prices for coal.
On the other hand, changes in assessment procedures led to value deductions on
stocks of DM 13.0 million.
F-108
<PAGE> 331
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
6. RECEIVABLES FOR GOODS AND SERVICES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electricity supplied............................. 412,476 412,814 -338
--------------------------------------------------------------------------------------------
Heat supplied.................................... 107,642 116,748 -9,106
--------------------------------------------------------------------------------------------
Other goods and services supplied................ 1,998 17,182 -15,184
--------------------------------------------------------------------------------------------
Total.......................................... 522,116 546,744 -24,628
--------------------------------------------------------------------------------------------
</TABLE>
The decrease in receivables is due largely to changes in the terms of the
contract with the state of Berlin regarding construction and maintenance of
public street and traffic lighting. The effects of last year's new invoicing
procedure for heat supplied also led to a drop in the receivables amount.
Receivables for electricity and heat supplied include DM 980.4 million in
payments on account received for electricity and heat consumed but not yet
invoiced (previous year: DM 769.0 million).
Of the receivables shown here, DM 20,265 thousand (previous year: DM 16,198
thousand) have residual terms of more than one year.
7. RECEIVABLES FROM AFFILIATED COMPANIES
Receivables shown here are mainly due from EAB Fernwarme GmbH and from IPH
Institut "Pruffeld fur elektrische Hochleistungstechnik" GmbH, Berlin.
8. RECEIVABLES FROM COMPANIES IN WHICH PARTICIPATIONS ARE HELD
Receivables shown here are largely due from BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin and from the gas supply
company GASAG Berliner Gaswerke AG, Berlin.
9. OTHER ASSETS
The other assets shown mainly contain DM 36.2 million in receivables for
orders and services not yet invoiced, DM 23.8 million in receivables from
subsidiary transactions and claims for compensation, DM 8.8 million in advance
payments and DM 6.8 million in reimbursements of mineral oil tax.
Of the other assets, DM 10,819 thousand (previous year: DM 4,191 thousand)
have residual terms of more than one year.
10. SECURITIES
This item covers mortgage bonds and units.
F-109
<PAGE> 332
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
11. CHEQUES, CASH ON HAND, ON DEPOSIT WITH DEUTSCHE BUNDESBANK AND POSTBANK,
CASH IN OTHER BANK ACCOUNTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 1999 30 JUNE 1998 CHANGE
DM DM DM
THOUSAND THOUSAND THOUSAND
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cheques and cash on hand............................... 454 528 -74
-----------------------------------------------------------------------------------------------
Deposits with Deutsche Bundesbank and Postbank......... 323 21,103 -20,780
Cash in other bank accounts............................ 277,203 205,199 72,004
-----------------------------------------------------------------------------------------------
Total................................................ 277,980 226,830 51,150
-----------------------------------------------------------------------------------------------
</TABLE>
12. PREPAID EXPENSES
Prepaid expenses contain the difference between the nominal value and the
present value of the compensation payments under Section 9 of the Land Registry
Adjustment Act (GBBerG) -- DM 170.6 million -- as well as prepayments for taxes,
pensions and other prepayments.
13. SPECIAL-LOSS ACCOUNT UNDER SECTION 17 SUB-SECTION 4 TO THE DM-BALANCE SHEET
ACT (DMBILG)
DM 6.4 million in provisions related to the special loss account were used
in the course of the year under review, and the special loss account was reduced
by this amount to a value of DM 358.8 million.
14. SUBSCRIBED CAPITAL
The shareholders' meeting held on 14 December 1998 passed the following
resolutions with regard to subscribed capital:
- doubling the subscribed capital to DM 1,120.0 million from corporate
funds,
- changing over from par-value shares to no-par shares,
- stating the subscribed capital in euro rather than in DM.
As a result, the subscribed capital at balance sheet date amounts to euro
572,646,906.94. (DM 1,120,000,000). Bayernwerk AG, Munich, and Southern
Energy Holding Beteiligungsgesellschaft mbH, Berlin, each hold 26.0 per
cent. 23.0 per cent are held by PreussenElektra AG, Hanover, and 25.0 per
cent are in scattered ownership. The subscribed capital is distributed in:
GROUP A SHARES (bearer shares with single voting right) 150,666,800
no-par shares with 150,666,800 votes,
GROUP B SHARES (registered shares with double voting right) 73,333,200
no-par shares with 146,666,400 votes.
F-110
<PAGE> 333
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
15. CAPITAL RESERVE
The capital reserve contains allocations from share premiums and the
reserves arising from the Bewag opening balance sheet of 1 April 1949.
16. REVENUE RESERVES
<TABLE>
<CAPTION>
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory reserve............................ 899,691 899,691(1) 0
-------------------------------------------------------------------------------------------
Special reserve under Section 17 Sub-section
4 DMBIIG................................... 358,821 365,238(1) -6,417
-------------------------------------------------------------------------------------------
Other revenue reserves....................... 1,029,551 1,532,535 -502,984
-------------------------------------------------------------------------------------------
Total...................................... 2,288,063 2,797,464(1) -509,401
</TABLE>
(1) After adjustment according to Section 26 DMBiIG
--------------------------------------------------------------------------------
The statutory reserve contains DM 875.5 million from an earlier realignment
of the capital position of EBAG effected under Section 27 Sub-section 2 of the
DM-Balance Sheet Act (DMBiLG).
Within the scope of the capital increase, an amount of DM 560.0 million in
other revenue reserves was transferred into subscribed capital. Furthermore, DM
50.6 million of this year's net income were allocated to the other revenue
reserves. In addition, a freely disposable amount of DM 6.4 million was
transferred from the special reserve under Section 17 Sub-section 4 of the DM-
Balance Sheet Act (DMBiLG) to the other revenue reserves.
NOTES
17. NET PROFIT FOR THE YEAR
After the allocation of DM 50.6 million of this year's net income of DM
297.0 million to the other revenue reserves, the net profit for the year is DM
246.4 million.
F-111
<PAGE> 334
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
18. SPECIAL ITEM WITH PARTIAL RESERVE CHARACTER
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increased depreciation under Section 14 of the
Berlin Promotion Act (BerlinFG)................ 439,956 511,861 -71,905
Special depreciation under Section 4 of the
Development Area Act (FordG)................... 1,421,727 1,324,150 97,577
Reserve under Section 6b of the Income Tax Act
(EstG)......................................... 22,658 8,517 14,141
--------------------------------------------------------------------------------------------
Total.......................................... 1,884,341 1,844,528 39,813
--------------------------------------------------------------------------------------------
</TABLE>
In the year under review, the DM 8.5 million of last year's reserve under
Section 6b of the Income Tax act as well as an additional amount of DM 10.8
million were for the most part transferred to finished buildings.
19. SPECIAL ITEM FOR INVESTMENT BONUSES
While DM 26.4 million was allocated to the special item for investment
bonuses, the overall reduction in this item results from the release into income
of an amount of DM 50.6 million.
20. CONSTRUCTION COST SUBSIDIES
DM 46.2 million of construction cost subsidies relate to construction in
progress. Of the remainder, DM 421.8 million apply to electricity supply, DM
229.4 million to heat supply and DM 0.3 million to public lighting.
21. PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS
The DM 56.4 million increase in these provisions is, among other causes,
due to first-time application of the new 1998 Heubeck guidelines and to the
indexation of pensions for former staff members.
F-112
<PAGE> 335
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
22. OTHER PROVISIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 1999 30 JUNE 1998 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Easements under Section 9 of the Land Registry
Adjustment Act (GBBerG)....................... 514,691 384,575 130,116
Personnel....................................... 487,296 442,002 45,294
Contamination removal........................... 383,010 388,206(1) -5,196
Uncertain liabilities for supplies and
services...................................... 47,569 59,254 -11,685
Compensation obligations for property........... 25,151 25,151(1) 0
Demolition and dismantling...................... 5,724 7,999 -2,275
Sundry.......................................... 70,861 86,238 -15,377
-------------------------------------------------------------------------------------------
Total......................................... 1,534,302.. 1,393,425(1) 140,877
</TABLE>
(1) After adjustment according to Section 36 DMBiLG
--------------------------------------------------------------------------------
The provisions for personnel expenses mainly contain provisions for early
retirement arrangements, profit-sharing measures, anniversary payments, annual
bonus payments, residual holiday entitlement, and, for the first time, for the
working time accounts which were introduced along with our new flexible working
hours.
The provisions for contamination removal take into account the costs
anticipated in the eastern districts of Berlin for the replacement of soil on
contaminated properties, the removal and disposal of oil-insulated cables, and
soil rehabilitation measures required as a result of leakages of oil-insulated
cables on properties owned by third parties. In addition, a deduction of DM 87.1
million has been made with regard to the value of contaminated properties in the
area formerly supplied by EBAG.
The provisions for uncertain liabilities arising from supplies and services
also contain provisions for contingent losses for future contingent
expenditures.
The sundry provisions mainly contain DM 32.3 million for the expected cost
of repairs to one of the former main administration buildings, which is
classified as a historical monument, as well as obligations arising from
discounts and credits.
F-113
<PAGE> 336
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
23. LIABILITIES
The composition and residual terms of our liabilities can be seen in the
following table:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
RESIDUAL TERMS
---------------------------------------------------------------------------------------------
UP TO 1 YEAR 1-5 YEARS OVER 5 YEARS TOTAL
TYPE OF LIABILITY DM THOUSAND DM THOUSAND DM THOUSAND DM THOUSAND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities to banks................ 116,502 111,997 152,661 381,160
Previous year....................... 454,817 170,316 233,580 858,713
---------------------------------------------------------------------------------------------
Advanced payments received.......... 78,177 -- -- 78,177
Previous year....................... 127,816 -- -- 127,816
---------------------------------------------------------------------------------------------
Liabilities for goods and
services.......................... 226,746 -- -- 226,746
Previous year....................... 305,481 -- -- 305,481
---------------------------------------------------------------------------------------------
Liabilities to affiliated
companies......................... 953 -- -- 953
Previous year....................... 786 -- -- 786
Liabilities to companies in which
participations are held........... 5,709 -- -- 5,709
Previous year....................... 12,016 -- -- 12,016
---------------------------------------------------------------------------------------------
Other liabilities................... 111,313 61,353 28,000 200,666
Previous year..................... 96,801 61,472 42,400 200,673
---------------------------------------------------------------------------------------------
of which-tax liabilities.......... (46,353) (--) (--) (46,353)
previous year..................... (23,445) (--) (--) (23,445)
-social security liabilities...... (21,810) (--) (--) (21,810)
previous year..................... (25,341) (--) (--) (25,341)
---------------------------------------------------------------------------------------------
Total liabilities.............. 539,400 173,350 180,661 893,411
Previous year................ 997,717 231,788 275,980 1,505,485
---------------------------------------------------------------------------------------------
</TABLE>
24. LIABILITIES TO BANKS
The reduction of DM 477.6 million largely represents repayments of DM 468.7
million, DM 333.3 million of which were made in advance of due date. Liabilities
to banks also involve DM 31.8 million in loans under Section 16 of the Berlin
Promotion Act (BerlinFG) and DM 236.1 million in loans under Section 17 of the
same Act. In addition we took out a short-term money-market loan of DM 13.1
million.
25. ADVANCE PAYMENTS RECEIVED
The decrease in advance payments is largely attributable to electricity
operations and to ancillary operations.
F-114
<PAGE> 337
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
26. LIABILITIES TO COMPANIES IN WHICH PARTICIPATIONS ARE HELD
These liabilities are almost entirely to the gas supply company GASAG
Berliner Gaswerke AG, Berlin and to the energy and environmental service company
EUS Energie and Umwelt Service GmbH, Berlin.
27. OTHER LIABILITIES
The DM 200.7 million of this item include in addition to liabilities
arising from taxes and social security commitments an investment loan of DM
100.0 million from an insurance company.
28. DEFERRED INCOME
This amount represents almost exclusively an amount paid at the beginning
of a refrigeration supply contract; it is being amortised according to schedule.
NOTES ON THE PROFIT AND LOSS ACCOUNT
29. SALES REVENUE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
BREAKDOWN BY AREA OF ACTIVITY DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electricity supply............................... 2,972,231 3,081,755 -109,524
------------------------------------------------------------------------------------------
Electricity tax.................................. 46,948 -- 46,948
------------------------------------------------------------------------------------------
3,019,179 3,081,755 -62,576
------------------------------------------------------------------------------------------
Heat supply...................................... 850,638 822,837 27,801
------------------------------------------------------------------------------------------
Public lighting.................................. 31,761 55,135 -23,374
------------------------------------------------------------------------------------------
Total.......................................... 3,901,578 3,959,727 -58,149
------------------------------------------------------------------------------------------
</TABLE>
There was a decrease of 3.6 per cent in sales revenue from the supply of
electricity (excluding electricity tax). The discrepancy between this figure and
the 0.3 per cent increase in the quantity of electricity sold is mainly due to
price reductions for key-account and special-contract customers, to contract
changes among high and medium-voltage customers in connection with the general
pricing and contract reform of 1 October 1997, and to the decline in our
commercial customer rates as of 1 April 1999.
The electricity tax was introduced on 1 April 1999 as part of the first
stage of the ecological tax reform. Electricity suppliers are obligated to
collect this tax from their customers and transfer it to the taxation
authorities. This item therefore shows sales revenue which is offset by an equal
amount of expenditure.
The rise in sales revenue from the supply of heat is mainly due to the
strong increase in the amount of heat supplied as a result of the weather
conditions and of a slight increase in the thermal output capacity sold.
The drop in revenue in the area of public lighting is the result of price
reductions granted to the state of Berlin for the operation and maintenance of
street and traffic lighting.
F-115
<PAGE> 338
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
30. INVENTORY CHANGES AND OTHER INTERNALLY PRODUCED AND CAPITALISED ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Changes in amount of work in progress for public
lighting....................................... -219 -4,759 4,540
------------------------------------------------------------------------------------------
Other internally produced and capitalised
assets......................................... 46,297 54,236 -7,939
------------------------------------------------------------------------------------------
Total.......................................... 46,078 49,477 -3,399
------------------------------------------------------------------------------------------
</TABLE>
31. OTHER OPERATING INCOME
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from the release of special items with
partial reserve character...................... 110,057 80,778 29,279
for investment bonuses........................... 50,593 55,032 -4,439
------------------------------------------------------------------------------------------
Sundry operating income.......................... 201,246 163,196 38,050
------------------------------------------------------------------------------------------
Total.......................................... 361,896 299,006 62,890
------------------------------------------------------------------------------------------
</TABLE>
The income from the release of special items with partial reserve character
is attributable to the release of DM 71.9 million due to additional tax
depreciation made in earlier years under Section 14 of the Berlin Promotion Act
(BerlinFG) of DM 18.9 million due to special depreciation made in previous years
under Section 4 of the Development Area Act (FordG), and of DM 19.3 million from
the transfer of the reserve under Section 6b of the Income Tax Act (EStG).
The sundry operating income includes DM 33.4 million in income from the
sale of properties and buildings, DM 27.9 million in refunds for changes made to
our distribution installations at the request of third parties, DM 26.3 million
from repairs and other services, DM 24.4 million from claim adjustments, DM 10.5
million from rentals and leases as well as DM 10.3 million in income from the
release of provisions.
32. COST OF MATERIALS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenditure for raw materials and suppliers and
for purchased goods............................ 864,368 938,987 -74,619
of which -- fuel................................. (483,469) (524,184) (-40,715)
-- power............................... (289,956) (304,566) (-14,610)
------------------------------------------------------------------------------------------
Expenditure for purchased services............... 213,667 288,627 -74,960
------------------------------------------------------------------------------------------
Total.......................................... 1,078,035 1,227,614 -149,579
------------------------------------------------------------------------------------------
</TABLE>
F-116
<PAGE> 339
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
The reduction in expenditure for fuel is due mainly to a structural shift
in our use of fuel from relatively expensive fuel oil to less costly hard coal.
In addition, lower prices for natural gas and coal have also helped us cut
expenditure.
We were able to reduce expenditure for purchases of electricity by
increasing our own production.
The decrease in expenditure for purchased services is mainly due to savings
in maintenance. In the business year 1998/99, all amounts paid for the use of
third-party electricity lines are, for the first time, reported under
expenditure for purchased services. In order to adjust previous-year figures
accordingly, DM 10.9 million and DM 0.1 million have been shifted from the
figure for purchased power and from sundry operating expenses respectively. This
reclassification is intended to give a better idea of the company's expenses.
33. PERSONNEL EXPENSES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Wages and salaries............................... 902,414 896,403 6,011
------------------------------------------------------------------------------------------
Social security contributions and expenditure for
pensions and benefits.......................... 294,340 263,442 30,898
of which payments for pensions................. (131,592) (93,900) (37,692)
------------------------------------------------------------------------------------------
Total.......................................... 1,196,754 1,159,845 36,909
------------------------------------------------------------------------------------------
</TABLE>
The increase in wages and salaries -- with lower average numbers of
staff -- is mainly the result of the new provisions created to cover employee
working time accounts and working time credit balances resulting from the new
working time accounts and working time credit balances resulting from the new
working time model, and of the increased need for provisioning for early
retirement arrangements and part-time arrangements for older employees.
Expenditure for pensions increased mainly due to the application of the
amended 1998 Heubeck guidelines, and because of the indexation of pension
payments for retired staff members.
34. DEPRECIATION
Depreciation of tangible and intangible assets can be seen in the
"Movements in fixed assets" overview. It includes extraordinary depreciation of
DM 8.7 million for deposits on tangible assets and DM 2.8 million for intangible
assets, as well as DM 53.4 million in extraordinary depreciation on tangible
assets. This item also includes DM 6.4 million in depreciation on the
special-loss account and DM 19.3 million in depreciation from the transfer of
the reserve under Section 6b of the Income Tax Act (EStG).
F-117
<PAGE> 340
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
35. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allocation to special items with partial reserve
character...................................... 149,869 161,711 -11,842
------------------------------------------------------------------------------------------
Franchise fee.................................... 210,311 204,366 5,945
------------------------------------------------------------------------------------------
Electricity tax.................................. 47,290 -- 47,290
------------------------------------------------------------------------------------------
Other taxes...................................... 9,597 6,713 2,884
------------------------------------------------------------------------------------------
Sundry operating expenses........................ 418,726 413,732 4,994
------------------------------------------------------------------------------------------
Total.......................................... 835,793 786,522 49,271
------------------------------------------------------------------------------------------
</TABLE>
Allocations to special items with partial reserve character consist of DM
116.5 million in special depreciation under Section 4 of the Development Area
Act (FordG) and a reserve of DM 33.4 million under Section 6b of the Income Tax
Act (EStG).
The higher franchise fee is based on the increase stipulated in the
franchise contract with the state of Berlin, which came into effect on 1 January
1999.
Sundry operating expenses especially include DM 92.9 million in outside
services for the administration and marketing departments, DM 41.4 million for
data center services rendered by BerlinDat Gesellschaft fur
Informationsverarbeitung und Systemtechnik mbH, Berlin, DM 35.4 million in rent
and lease payments, DM 21.2 million in insurance premiums, DM 19.3 million in
depreciation on receivables and other assets as well as DM 17.0 million for the
purchase of materials for the administration and marketing departments. The main
components of the item which are unrelated to this accounting period are DM 11.8
million in losses from the retirement of assets and DM 10.3 million in
retroactive rate adjustments for heat.
The electricity tax reported here contains -- in addition to the amounts
collected from customers -- DM 0.3 million in tax arising from our own
consumption.
To give a better idea of the company's expenses, all other taxes are now
being reported in this item. The previous-year figure has been adjusted
accordingly.
F-118
<PAGE> 341
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
36. INCOME FROM FINANCIAL ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from companies in which participations are
held of which.................................. 9.604 5.720 3.884
from affiliated companies........................ (3.489) (2.993) (496)
------------------------------------------------------------------------------------------
Income from other securities and from lending of
financial assets of which...................... 2.405 1.693 712
from affiliated companies........................ (1.535) (716) (819)
------------------------------------------------------------------------------------------
Depreciation on financial assets and
securities..................................... -24.572 -23.541 -1.031
------------------------------------------------------------------------------------------
Expenses for losses transferred.................. -679 -53 -626
------------------------------------------------------------------------------------------
Total.......................................... -13.242 -16.181 2.939
------------------------------------------------------------------------------------------
</TABLE>
Income from companies in which participations are held consists largely of
the 1998 dividends and corporation tax credits received for BerlinDat
Gesellschaft fur Informationsverarbeitung und Systemtechnik mbH, Berlin, and for
Fernheizwerk Neukolln AG, Berlin.
Depreciation on financial assets and securities covers mainly write off of
loans to EAB Fernwarme GmbH, Berlin (DM 22.0 million) and to EUS Energie und
Umwelt Service GmbH, Berlin (DM 0.5 million). The item also includes write off
to their assessed value of Bewag Immobilienmanagement GmbH, Berlin (DM 1.2
million) and Berliner Energieagentur GmbH, Berlin (DM 0.1 million).
The expenses for losses transferred result entirely from the losses
incurred in the 1998 business year by DEPOGAS-Gesellschaft zur Gewinnung und
Verwertung von Deponiegasen mbH, Berlin.
37. NET INTEREST INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
DM THOUSAND DM THOUSAND DM THOUSAND
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other interest and similar income................ 18,912 27,180 -8,268
of which from affiliated companies............... (449) (--) (449)
------------------------------------------------------------------------------------------
Interest and similar expenditure................. -48,116 -78,737 30,621
------------------------------------------------------------------------------------------
Total.......................................... -29,204 -51,557 22,353
------------------------------------------------------------------------------------------
</TABLE>
The reduction in other interest and similar income is mainly due to the
lower total average of financial investments.
The decline in interest and similar expenditure is largely the result of
reduced average holdings in long-term loans.
F-119
<PAGE> 342
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTES -- (CONTINUED)
38. TAXES ON INCOME AND REVENUE
The increase in taxes on income and revenue is attributable to a rise in
taxable income and on the increase in the trade tax coefficient.
All other taxes are now being reported under other operating expenses.
UNBUNDLING
The new Energy Industry Act (EnWG) implementing the European Electricity
Guideline in Germany came into force on 29 April 1998. One of the stipulations
of section 9 of the act is the so-called "unbundling" of accounting processes in
integrated electricity supply companies. This means that for accounting purposes
the activities of the company must be separated into generation, transmission
and distribution, and non-electricity activities.
From a bookkeeping point of view, Bewag has based its unbundling process on
a profit-center concept with the following structure:
- Our operative business has been regrouped into centers for marketing and
electricity trading, customer service, networks, generation, and heating.
There are also super-ordinate central divisions, which are responsible
for tasks in the service area and in the area of corporate management and
control. Internally rendered services are assessed on the basis of
market-related prices.
- The centers for generation, marketing and electricity trading and
customer service constitute generation and other electricity activities.
- The electricity networks activity consists of the transmission and
distribution activities of the networks center, which is essentially
responsible for transport functions. The distinction between transmission
and distribution is made at 110 Kilovolt. On the basis of the so-called
"forwarder model," the networks center fulfills only a forwarding service
and is not the buyer of the power produced by the generation center.
- Non-electricity activities are the central areas and the heating center.
Management functions such as controlling, finance planning and accounting
are based on the concept of a national holding company.
F-120
<PAGE> 343
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
<TABLE>
<CAPTION>
GENERATION AND
OTHER
ELECTRICITY- ELECTRICITY NON-ELECTRICITY TOTAL
RELATED ACTIVITIES NETWORKS ACTIVITIES DM THOUSAND
BALANCE SHEET AS AT 30 JUNE 1999 (UNAUDITED) DM THOUSAND DM THOUSAND DM THOUSAND -----------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
FIXED ASSETS
------------------------------------------------------------------------------------------------------------------------
Intangible assets..................................... 5,928 248,501 141,731 396,160
Tangible assets....................................... 2,356,465 2,865,626 1,511,733 6,733,824
Financial assets...................................... -- -- 848,312 848,312
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2,362,393 3,114,127(1) 2,501,776 7,978,296
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
------------------------------------------------------------------------------------------------------------------------
Inventories........................................... 137,644 23,514 6,714 167,872
Accounts receivable and other assets Receivables for
goods and services.................................. 412,476 1,997 107,643 522,116
Receivables from affiliated companies and from
companies in which participations are held........ 2,101 6 5,523 7,630
Other assets........................................ 25,937 27,759 37,340 91,036
Securities............................................ -- -- 184,295 184,295
Cheques, cash on hand, on deposit with Deutsche
Bundesbank and Postbank, cash in other bank
accounts............................................ -- -- 277,980 277,980
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
578,158 53,276 619,495 1,250,929
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
PREPAID EXPENSES...................................... 5,112 84,982 95,121 185,215
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SPECIAL-LOSS ACCOUNT.................................. 24,769 133,335 200,717 358,821
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2,970,432 3,385,720 3,417,109 9,773,261
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AND LIABILITIES EQUITY
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Subscribed capital and reserves....................... 1,053,092 1,200,322 1,211,449 3,464,863
Balance of capital netting............................ 150,250 196,897 (347,147) --
Net profit for the year........................... 129,365 63,717 53,318 246,400
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
1,332,707 1,460,936 917,620 3,711,263
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SPECIAL ITEMS WITH PARTIAL RESERVE CHARACTER.......... 633,327 769,472(2) 481,542 1,884,341
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SPECIAL ITEM FOR INVESTMENT BONUSES................... 237,304 54,677 94,565 386,546
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION COST SUBSIDIES........................... -- 465,486 232,225 697,711
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
PROVISIONS
------------------------------------------------------------------------------------------------------------------------
Provisions for pensions and similar obligations....... 190,956 99,694 173,559 464,209
Provisions for taxes.................................. -- -- 189,882 189,882
Other provisions...................................... 295,722 489,117 749,463 1,534,302
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
486,678 588,811 1,112,904 2,188,393
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------------------------
Liabilities to banks.................................. -- -- 381,160 381,160
Advance payments received............................. 49,070 27,125 1,982 78,177
Liabilities for goods and services.................... 192,388 12,645 21,713 226,746
Liabilities to affiliated companies and to companies
in which participations are held.................... 5,317 375 970 6,662
Other liabilities..................................... 33,550 6,187 160,929 200,666
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
280,325 46,332 566,754 893,411
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME....................................... 91 6 11,499 11,596
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
2,970,432 3,385,720 3,417,109 9,773,261
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Including a transfer of DM 853,534 thousand.
(2) Including a transfer of DM 220,078 thousand.
The accompanying notes are an integral part of these statements.
F-121
<PAGE> 344
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
PROFIT AND LOSS ACCOUNT FOR 1998/99
<TABLE>
<CAPTION>
GENERATION AND
OTHER ELECTRICITY-
RELATED ELECTRICITY NON-ELECTRICITY
ACTIVITIES NETWORKS ACTIVITIES TOTAL
DM THOUSAND DM THOUSAND DM THOUSAND DM THOUSAND
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES REVENUE..................... 2,980,300(1) 70,640(2) 850,638 3,901,578
----------------------------------------------------------------------------------------------------
Inventory changes and other
internally produced and
capitalised assets.............. 2,903 29,902 13,273 46,078
Other operating income............ 143,113 88,970 129,813 361,896
Income resulting from netting with
other activities................ 585,967 1,160,979(3) 549,185 2,296,131
Cost of materials................. -914,724 -85,132 -78,179 -1,078,035
Personnel expenses................ -490,116 -260,191 -446,447 -1,196,754
Depreciation...................... -314,687 -197,640(4) -159,119 -671,446
Other operating expenses.......... -156,686 -371,396 -307,711 -835,793
Expenditure resulting from netting
with other activities........... -1,577,506 -313,333 -405,292 -2,296,131
Income from financial assets...... -- -- -13,242 -13,242
Net interest income............... 914 -11 -30,107 -29,204
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Result of ordinary activities..... 259,478 122,788 102,812 485,078
----------------------------------------------------------------------------------------------------
Taxes on income and revenue....... -100,607 -47,608 -39,863 -188,078
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Net income for the year......... 158,871 75,180 62,949 297,000
----------------------------------------------------------------------------------------------------
Allocations to other revenue
reserves........................ -29,506 -11,463 -9,631 -50,600
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Net profit for the year......... 129,365 63,717 53,318 246,400
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Reclassification to sales revenue for electricity operations
DM 2,980,300 thousand in sales revenue for generation and other
electricity-related activities
-DM 46,948 thousand in electricity tax
+DM 38,879 thousand for construction cost subsidies (included under sales
revenue, electricity networks)
--------------------------------------------------------------------------------
DM 2,972,231 thousand sales revenue for electricity operations
<TABLE>
<S> <C>
(2) Of which: for public lighting DM 31,761 thousand
(3) Of which: third-party access fees from
internal offsetting DM 1,015,504 thousand
(4) Of which: transfer DM 20,811 thousand
</TABLE>
The accompanying notes are an integral part of these statements.
F-122
<PAGE> 345
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
EXPLANATIONS
Balance sheet and profit and loss account items are normally directly
linked to individual activities. However, in cases where there is only an
indirect connection or where a further splitting of accounts would be overly
complicated, assignment to a particular item has been based on classification
according to appropriate sectors. The results of the notional holding, which for
the most part involve expenditure, have been fully spread over the various
operative divisions.
The starting balance sheet equity has been distributed among the activities
in a ratio proportional to the balance sheet total. This ensures that all areas
have the same capital ratio.
We have not shown the development of fixed assets for individual
activities. Asset movements with regard to technical installations correspond
largely to the asset movements of the overall company.
Because of this year's first-time compliance with unbundling requirements,
we have dispensed with previous-year figures.
MAJOR TRANSACTIONS
Under Section 9 Sub-section 4 of the Energy Industry Act (EnWG), major
transactions with affiliated or associated companies as well as with companies
belonging to the same shareholders must be reported. In the course of the
1998/99 business year, Bewag conducted major transactions in the sense covered
by the act on the basis of the following contracts with its business partners:
- contract dated 23 May 1986 and 25 November 1988 with GASAG Berliner
Gaswerke AG, Berlin and Ruhrgas Aktiengesellschaft, Essen, covering the
purchase of natural gas for the Lichterfelde combined heat and power
plant;
- contract dated 1 October 1991 with PreussenElektra AG, Hanover and VEAG
Vereinigte Energiewerke AG, Berlin, covering the operation, maintenance
and use of the Helmstedt-Wolmirstedt-Berlin 380-kilovolt double line. The
contract covers a period of 50 years from the date of completion of the
double line (7 December 1994);
- contract dated 1 October 1991 with PreussenElektra AG, Hanover, covering
the exchange of electricity begun on 7 December 1994. This contract has
an initial term of 20 years;
- contract dated 30 March 1995 with VEAG Vereinigte Energiewerke AG,
Berlin, covering cooperation in the field of electricity operations and
including provisions regarding cooperation in the operation of their
high-voltage networks. This contract, which became effective on 1 April
1995, has an initial expiry date of 31 March 2015;
- contract dated 23 June 1995 with GASAG Berliner Gaswerke AG, Berlin,
Verbundnetz Gas AG, Leipzig, Ruhrgas AG, Essen, and Brigitta Erdgas und
Erdol GmbH, Hanover, covering the delivery of natural gas for the
Lichtenberg, Mitte and Klingenberg combined heat and power plants and,
under certain conditions, for the Buch plant. Deliveries under this
contract began on 1 October 1995 and are initially due to continue until
30 September 2009;
F-123
<PAGE> 346
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
- contract dated 14 July/4 September 1998 with GASAG Berliner Gaswerke AG,
Berlin, and Ruhrgas AG, Essen, covering deliveries of gas for the
Lichterfelde combined heat and power plant from 1 January 1999 to 31
December 2000;
- contract dated 1 February/5 March 1999 with GASAG Berliner Gaswerke AG,
Berlin, covering deliveries of gas for small-sized power plants between 1
January 1999 and 1 January 2004.
PreussenElektra AG, Hanover, -- because of the interest it has in Bewag
together with Bayernwerk AG, Munich, and Southern Energy Holding
Beteiligungsgesellschaft mbH, Berlin -- is an affiliated company.
GASAG Berliner Gaswerke AG, Berlin, is one of Bewag's associated companies:
at balance sheet date, Bewag held 24.99 per cent of the capital stock of this
company.
And finally, both PreussenElektra AG, Hanover, and Bayernwerk AG, Munich,
own more than 20 per cent of the capital stock of VEAG Vereinigte Energiewerke
AG, Berlin. This means that the same shareholders hold significant amounts of
stock in both this company and Bewag.
In an analogue application of Section 286 Sub-section 3 of the Commercial
Code (HGB), we have not shown details of other existing business relationships.
F-124
<PAGE> 347
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
SUPPLEMENTARY INFORMATION
EFFECTS OF VALUATION CHANGES AND TAX REGULATIONS ON THE REPORTED NET INCOME
Changes in the assessment of inventories and the first-time application of
the new 1998 Heubeck guidelines in the calculation of provisions for pension
have resulted in a revenue balance of DM 0.4 million. However, these measures
have no effect on the net income for the year, as they are compensated by an
equal amount in special depreciation.
On the basis of the balance of allocations and releases of special items
with partial reserve character, and the associated effect this has on tax
expenditure and on other expenditure dependent on profits and dividends, the net
income declared for the year is approximately DM 28 million lower than the
amount which would otherwise have been declarable.
The future revenue tax burden arising from the release of special items
with partial reserve character will depend on the tax rates applicable at the
time.
OTHER FINANCIAL OBLIGATIONS
Future capital expenditure already approved by the Supervisory Board and
maintenance work needing to be done in the coming years represent purchase
commitments of approximately DM 515 million (previous year: DM 650 million).
This amount consists mainly of capital expenditure for repairs and for the
extension of our electricity and heat generating and distribution installations.
The cash value of payment obligations arising from long-term rental and
leasing agreements is approximately DM 351 million (previous year: DM 358
million).
There are approximately DM 303 million (previous year: DM 149 million) in
other discounted financial obligations, including approximately DM 76 million
(previous year: DM 112) relating to affiliated companies. This also includes the
amount for the 6.58 per cent increase in our participation in GASAG Berliner
Gaswerke AG, Berlin, which took place on 2 July 1999.
Fuel and power supplies are secured by long-term contracts.
F-125
<PAGE> 348
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
SHARE OWNERSHIP UNDER SECTION 285 NO. 11 OF THE COMMERCIAL CODE (HGB)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
SHARE IN EQUITY ON 1998
CAPITAL 31 DEC. 1998 RESULT
NAME AND LOCATION OF THE COMPANY % DM THOUSAND DM THOUSAND
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEPOGAS-Gesellschaft zur (Gewinnung und Verwertung
von Deponiegasen mbH, Berlin 1).................... 100.00 0 0
--------------------------------------------------------------------------------------------
EAB Fernwarme GmbH, Berlin(2)........................ 100.00 0 -39,490
--------------------------------------------------------------------------------------------
Bewag Immobilienmanagement GmbH, Berlin.............. 100.00 348 -855
--------------------------------------------------------------------------------------------
IPH Institut "Pruffeld fur elektrische
Hochleistungstechnik" GmbH, Berlin................. 100.00 15,105 -1,654
--------------------------------------------------------------------------------------------
Bewag Energiemanagement GmbH, Berlin................. 100.00 672 179
--------------------------------------------------------------------------------------------
FHW Fernheizwerk Neukolln Aktiengesellschaft,
Berlin............................................. 75.22 26,106 3,695
--------------------------------------------------------------------------------------------
EAVV Energie Assekuranz Versicherungs Vermittlungs
GmbH, Berlin....................................... 60.00 423 323
--------------------------------------------------------------------------------------------
ARGE Energiesparpartnerschaft Bewag/Landis & Gyr GbR,
Berlin............................................. 50.00 895 -1,212
--------------------------------------------------------------------------------------------
BerlinDat Gesellschaft fur Informationsverarbeitung
und Systemtechnik mbH, Berlin(3)................... 50.00 8,115 6,115
--------------------------------------------------------------------------------------------
BEG, Berliner Energieagentur GmbH, Berlin............ 33.33 3,024 -348
--------------------------------------------------------------------------------------------
EFR Europaische Funk-Rundsteuerung GmbH, Berlin...... 30.00 0 -946
--------------------------------------------------------------------------------------------
EBH Energie-Beteiligungsholding GmbH, Dortmund....... 25.00 549,682 -578
--------------------------------------------------------------------------------------------
EUS Energie und Umwelt Service GmbH, Berlin.......... 25.00 712 644
--------------------------------------------------------------------------------------------
GASAG Berliner Gaswerke AG, Berlin................... 24.99 849,840 -89,425
</TABLE>
(1) There is a profit and loss transfer contract with the company.
(2) The company was granted an equity-replacing loan in December 1998.
(3) The business year ended on 30 September 1998.
--------------------------------------------------------------------------------
LIABILITY
Of the liabilities for sureties, which total DM 24.8 million (previous
year: DM 22.1 million), DM 19.6 million represent sureties for loans of EAB
Fernwarme GmbH, Berlin, DM 2.1 million for loans of IPH Institut "Pruffeld fur
elektrische Hochleistungstechnik" GmbH, Berlin, DM 1.7 million for loans of
DEPOGAS-Gesellschaft zur Gewinnung und Verwertung von Deponiegasen mbH, Berlin,
and DM 1.4 million for loans of Berliner Energiemanagement GmbH, Berlin.
There are also guarantees worth DM 30.2 million for affiliated companies
(previous year: DM 17.2 million, of which DM 15.9 million for affiliated
companies). In view of current court decisions, all guarantees which are subject
to reporting have been reassessed vis-a-vis the previous business year.
F-126
<PAGE> 349
BEWAG AG
BUSINESS YEAR 1998/1999
(UNAUDITED)
NOTIFICATION OF PARTICIPATION
In accordance with Section 20 Sub-section 1 of the German Stock Corporation
Act, Bewag was notified by the Southern Company, Atlanta, on behalf of Southern
Energy Holding Beteiligungsgesellschaft mbH, Berlin, in a letter of 6 October
1997, and by Bayernwerk AG, Munich in a letter of 13 January 1998, that each of
these two companies owns more than 25 per cent of Bewag stock.
AVERAGE PERSONNEL LEVEL IN THE BUSINESS YEAR EMPLOYEES (EXCLUDING APPRENTICES)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998/99 1997/98 CHANGE
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Craftsmen................................................... 3,306 3,563 -257
----------------------------------------------------------------------------------------
Technical staff............................................. 3,196 3,224 -28
----------------------------------------------------------------------------------------
Commercial staff............................................ 2,185 2,241 -56
----------------------------------------------------------------------------------------
Total..................................................... 8,687 9,028 -341
----------------------------------------------------------------------------------------
</TABLE>
DETAILS OF THE COMPANY'S CORPORATE GOVERNANCE
Members of Bewag's Supervisory Board and Board of Management are listed on
Appendix I to these notes.
For the 1998/99 business year, the total remuneration of the Board of
Management was DM 4,268,748 (previous year: DM 5,248,310) and the remuneration
for members of the Supervisory Board totalled DM 514,000 (previous year: DM
957,250).
A total of DM 2,638,693 (previous year: DM 2,519,819) was paid to former
members of the Board of Management and their surviving families; a total of DM
31,310 thousand (previous year: DM 23,608 thousand) was allocated as provision
for pension obligations to this group of persons.
DISTRIBUTION OF THE BALANCE SHEET PROFIT
We propose that the balance sheet profit of DM 246,400,000 be used to pay a
dividend on the capital stock of euro 572,646,906.94, or DM 1,120,000,000.
Berlin, 1 September 1999
BEWAG AKTIENGESELLSCHAFT
The Board of Management
F-127
<PAGE> 350
BEWAG AG
MOVEMENTS IN FIXED ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITION OR PRODUCTION COSTS
IN DM THOUSAND
--------------------------------------------------------------------------------------------------
STATUS STATUS
1 JULY 1998 ADDITIONS TRANSFERS DISPOSALS 30 JUNE 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTANGIBLE ASSETS
--------------------------------------------------------------------------------------------------
Industrial property rights and
similar rights and assets....... 451,215 71,012 13,557 3,923 531,861
--------------------------------------------------------------------------------------------------
Advance payments.................. 16,995 15,028 -6,887 4,401 20,735
--------------------------------------------------------------------------------------------------
468,210 86,040 6,670 8,324 552,596
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
TANGIBLE ASSETS
--------------------------------------------------------------------------------------------------
Real estate, rights equivalent to
real estate and buildings,
including buildings on third
party land property............. 3,071,450(5) 16,178 43,927 27,042 3,104,513
--------------------------------------------------------------------------------------------------
Power plant installations......... 5,860,817 28,306 74,252 13,973 5,949,402
--------------------------------------------------------------------------------------------------
Electricity transmission and
distribution installations...... 5,499,947 85,266(1) 243,621 44,369(1) 5,784,465
--------------------------------------------------------------------------------------------------
District heating distribution
installations................... 2,269,725 14,049 41,856 4,268 2,321,362
--------------------------------------------------------------------------------------------------
Other installations, operating and
business equipment.............. 427,540 17,028(2) 24,321 61,057(2) 407,832
--------------------------------------------------------------------------------------------------
Advance payments and installations
under construction.............. 708,973 258,886 -434,647 40,651 492,561
--------------------------------------------------------------------------------------------------
17,838,452 419,713 -6,670 191,360 18,060,135
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
--------------------------------------------------------------------------------------------------
Shares in affiliated companies.... 88,626 -- -- -- 88,626
--------------------------------------------------------------------------------------------------
Loans to affiliated companies..... 14,400 24,600 -- 1,000 38,000
--------------------------------------------------------------------------------------------------
Participations.................... 768,370 1 -- 1,500 766,871
--------------------------------------------------------------------------------------------------
Loans to companies in which
participations are held......... 19,493 590 -- 7,000 13,083
--------------------------------------------------------------------------------------------------
Other loans....................... 3,071 188 -- 45 3,214
--------------------------------------------------------------------------------------------------
893,960 25,379 -- 9,545 909,794
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
FIXED ASSETS...................... 19,200,622 531,132 -- 209,229 19,522,525
--------------------------------------------------------------------------------------------------
</TABLE>
(1) Including minor assets DM 13,753 thousand
(2) Including minor assets DM 4,557 thousand
(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
The accompanying notes are an integral part of these statements.
F-128
<PAGE> 351
BEWAG AG
MOVEMENTS IN FIXED ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION NET BOOK VALUES
(IN DM THOUSANDS) (IN DM THOUSANDS)
---------------------------------------------------------------------------------------------------------------------
STATUS REINSTATED STATUS STATUS STATUS
1 JULY 1998 ADDITIONS TRANSFERS DISPOSALS DEPRECIATIONS 30 JUNE 1999 30 JUNE 1999 30 JUNE 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
137,232 22,305 711 3,812 -- 156,436 375,425 313,983
---------------------------------------------------------------------------------------------------------------------
-- 2,807 -- 2,807 -- -- 20,735 16,995
---------------------------------------------------------------------------------------------------------------------
137,232 25,112 711 6,619 -- 156,436 396,160 330,978
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
986,686 133,480 500 7,768 -- 1,112,898 1,991,615 2,084,764(5)
---------------------------------------------------------------------------------------------------------------------
4,769,544 196,135 2,135 10,182 -- 4,957,632 991,770 1,091,273
---------------------------------------------------------------------------------------------------------------------
3,340,580 178,764(1) 6,254 42,406(1) -- 3,483,192 2,301,273 2,159,367
---------------------------------------------------------------------------------------------------------------------
1,379,460 83,236 501 2,960 -- 1,460,237 861,125 890,265
---------------------------------------------------------------------------------------------------------------------
341,171 39,549(2) -10,101 58,267(2) -- 312,352 95,480 86,369
---------------------------------------------------------------------------------------------------------------------
-- 8,754 -- 8,754 -- -- 492,561 708,973
---------------------------------------------------------------------------------------------------------------------
10,817,441 639,918 -711 130,337 -- 11,326,311 6,733,824 7,021,011
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
30,506 1,153 -- -- -- 31,659 56,967 58,120
---------------------------------------------------------------------------------------------------------------------
-- 22,000 -- -- -- 22,000 16,000 14,400
---------------------------------------------------------------------------------------------------------------------
8,823 89 -- 1,501 150 7,261 759,610 759,547
---------------------------------------------------------------------------------------------------------------------
-- 500 -- -- -- 500 12,583 19,493
---------------------------------------------------------------------------------------------------------------------
78(3) -- -- 16(4) -- 62 3,152 2,993
---------------------------------------------------------------------------------------------------------------------
39,407 23,742 -- 1,517 150 61,482 848,312 854,553
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
10,994,080 688,772 -- 138,473 150 11,544,229 7,978,296 8,206,542
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Including minor assets DM 13,753 thousand
(2) Including minor assets DM 4,557 thousand
(3) Discount of interest
(4) Accumulation of interest because of retirement disposal
(5) After adjustment according to Section 36 of the DM-Balance Sheet Act
The accompanying notes are an integral part of these statements.
F-129
<PAGE> 352
BEWAG AG
CORPORATE GOVERNANCE
BUSINESS YEAR 1998/1999
(UNAUDITED)
APPENDIX I
SUPERVISORY BOARD
AS OF 30 JUNE 1999
BARNEY S. RUSH
Chairman
President of Southern Energy Development Europe Ltd., London
ERNST OTTO KOCK
Deputy Chairman
Deputy Chairman of Public Services
and Transport Trade Union,
Berlin regional administration,
Berlin
SVEN BERGELIN
Head of the industrial development of the Berlin-Brandenburg administration of
the German Employees' Trade Union, Berlin
HANG-JURGEN CRAMER
Head of corporation development,
Bewag, Berlin
PROF. RAINER FRANK ELSASSER
Member of the Board of Management of Bayernwerk Aktiengesellschaft, Munich
KLAUS FORSTER
Member of the Board of Management of Aktiengesellschaft,
Munich
DR. MANFRED GENTZ
Member of the Board of Management of DaimlerChrysler Aktiengesellschaft,
Esslingen and Berlin
DR. HANS-DIETER HARIG
Chairman of the Board of Management of PreussenElektra Aktiengesellschaft,
Hanover
BERND HELMS
Foreman, Bewag, Berlin
RITA KUHNER-PRZEWOSNIK
Head of employee communications
Bewag, Berlin
DR. OTTO MAJEWSKI
Chairman of the Board of Management of Bayernwerk Aktiengesellschaft, Munich
CARL-FRIEDRICH MEIBNER
Former Member of the Board of Management of Deutsche Telekom Aktiengesellschaft,
Calw
REINHOLD OFFERMANN
Member of the Board of Management of PreussenElektra Aktiengesellschaft, Hanover
RICHARD J. PERSHING
Executive Vice President of Southern Energy, Inc., Roswell, Georgia, USA
KARL-HEINZ DIETER REGEL
Project engineer, Bewag, Berlin
MARTIN SATTLER
Meter fitter with special responsibilities, Bewag, Berlin
UWE SCHARF
Deputy chairman of the Public Services and Transport Trade Union, Berlin
MARIO SCHONIAN
1st car mechanic, Bewag, Berlin
HERBERT STROBEL
Member of the operating committee, Bewag, Berlin
DR. GIUSEPPE VITA
Chairman of the Board of Management of Schering Aktiengesellschaft, Berlin
BOARD OF MANAGEMENT
PROF. DR. DIETMAR WINJE
Chairman
Marketing and Corporate Development,
Berlin
DR. BERND BALZEREIT
Finance and Legal Affairs,
Berlin
DR. KLAUS BECHTOLD
Generation and Heating,
Berlin
J. BRUCE JONES
Networks and Customer Service,
Berlin
DR. KURT LANGE
Human Resources and Services
Berlin
F-130
<PAGE> 353
APPENDIX II
BEWAG AG
BUSINESS YEAR 1998/1999
SIGNIFICANT DIFFERENCES BETWEEN GERMAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (UNAUDITED)
Differences in German and United States generally accepted accounting
principles for net income and stockholders' equity for the business year ended
June 30, 1999 would be similar in nature to those described in Appendix II of
the financial statements for the business year ended June 30, 1998.
F-131
<PAGE> 354
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS OF
HYDER PLC
AS REQUIRED BY REGULATION S-X 210.3-05
F-132
<PAGE> 355
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Hyder plc
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of profit and loss account, cash flows, total
recognized gains and losses, and reconciliation of movements in shareholders'
funds, present fairly, in all material respects, the financial position of Hyder
plc and its subsidiaries at March 31, 2000 and March 31, 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2000, in conformity with accounting principles which are
generally accepted in the United Kingdom. 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 of these statements in accordance with generally accepted auditing
standards in the United States and United Kingdom, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of consolidated net income expressed in British Pounds Sterling
for each of the three years in the period ended March 31, 2000 and the
determination of consolidated shareholders' equity and consolidated financial
position also expressed in British Pounds Sterling at March 31, 2000 and 1999 to
the extent summarized in Note 45 to the consolidated financial statements.
PricewaterhouseCoopers
Cardiff, United Kingdom
July 12, 2000, except for the contents of Note 45
which is as of August 18, 2000
F-133
<PAGE> 356
HYDER PLC
PRINCIPAL ACCOUNTING POLICIES
The financial statements have been prepared in accordance with Accounting
Standards applicable in the United Kingdom and, except for the treatment of
investment properties and certain grants and customer contributions, comply with
the Companies Act 1985. An explanation of these departures from the requirements
of the Companies Act 1985 are given in the "Grants, customer contributions and
infrastructure charges" and "Investment properties" sections below and notes
14(d) and 15 respectively. A summary of the principal group accounting policies,
which have been consistently applied, is shown below.
CHANGES IN PRESENTATION OF FINANCIAL INFORMATION
Since the previous directors' report and financial statements, the
Accounting Standards Board has issued Financial Reporting Standard (FRS)
16 -- Current tax. In addition the Urgent Issues Task Force (UITF) has issued a
number of abstracts in the year. FRS 15 -- Tangible fixed assets became
mandatory in respect of the year ended 31 March 2000. In preparing the accounts
for the year ended 31 March 1999, only the section of FRS 15 on infrastructure
maintenance accounting had been adopted. Where relevant these financial
statements comply with the new standards and UITF abstracts and have adopted in
full FRS 15. Where appropriate comparative figures have been restated.
BASIS OF ACCOUNTING
These financial statements have been prepared in accordance with the
historical cost convention, as modified by the inclusion of an external
professional valuation of the group's interest in certain investment properties.
BASIS OF CONSOLIDATION
The group financial statements comprise a consolidation of the financial
statements of Hyder plc and all its subsidiary undertakings and include the
group's share of the profits or losses and net assets of joint venture and
associated undertakings. The financial statements of the holding company and
each subsidiary company are prepared to 31 March. Uniform accounting policies
are adopted throughout the group.
ACQUISITIONS AND DISPOSALS
The results of companies and businesses acquired or disposed of during the
year are dealt with in the consolidated financial statements from the date of
acquisition or until the date of disposal. Where appropriate, adjustments are
made to bring different accounting policies of newly acquired companies into
line with the existing group accounting policies.
Goodwill arising from the purchase of subsidiary undertakings and
investments in associated undertakings prior to the introduction of FRS
10 -- Goodwill and intangible fixed assets, representing the excess of the fair
value of the purchase consideration (including costs of acquisition) over the
fair value of net assets acquired, was written off against consolidated reserves
in the year of acquisition. Goodwill, positive and negative, arising on
acquisitions after 1 April 1997 is treated in accordance with FRS 10 and, where
appropriate, is capitalised and amortised over its expected useful economic
life.
The profit or loss on the disposal of a previously acquired business is
derived after adjusting for the attributable amount of purchased goodwill
relating to that business not already charged to the profit and loss account.
F-134
<PAGE> 357
HYDER PLC
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
TURNOVER
Turnover represents the income receivable in the ordinary course of
business for services provided and excludes value added tax.
JOINT VENTURES AND ASSOCIATED UNDERTAKINGS
The group's share of results of joint ventures and associated undertakings
is included in the consolidated financial statements based on the latest audited
accounts for each joint venture or associated undertaking and the management
accounts for the relevant period up to 31 March.
EXCEPTIONAL ITEMS
Exceptional items are those that need to be disclosed by virtue of their
size and incidence. Such items are included within operating profit unless they
represent profits or losses on the sale or termination of an operation, costs of
a fundamental reorganisation or restructuring having a material effect on the
nature and focus of the group, or profits or losses on the disposal of fixed
assets. In these cases, separate disclosure is provided on the face of the
profit and loss account after operating profit.
INTANGIBLE FIXED ASSETS
Intangible fixed assets are included at cost and are amortised over their
estimated useful economic lives.
TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets comprise:
(i) water and sewerage infrastructure assets (being mains and sewers,
impounding and pumped raw water storage reservoirs, dams, sludge pipelines
and sea outfalls); and
(ii) other assets (including properties, overground water and sewerage
operational structures, electricity distribution networks, equipment and
fixtures and fittings).
WATER AND SEWERAGE INFRASTRUCTURE ASSETS
Infrastructure assets comprise a network of systems. Expenditure on
infrastructure assets relating to increases in capacity or enhancements of the
network and on maintaining the operating capability of the network in accordance
with defined standards of service, is treated as additions which are included at
cost after deducting grants and contributions.
The depreciation charge on infrastructure assets is the level of annual
expenditure required to maintain the operating capability of the network which
is based on the independently certified asset management plan.
F-135
<PAGE> 358
HYDER PLC
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets are included at cost less accumulated depreciation. Freehold
land is not depreciated. Other assets are depreciated over their estimated
useful economic lives, which are principally as follows:
<TABLE>
<S> <C>
Freehold buildings.......................................... 30-60 years
Leasehold properties........................................ over the period of the lease
Water and sewerage operational structures................... 40-80 years
Electricity distribution network assets..................... 40 years
Fixed plant................................................. 20-40 years
Vehicles, mobile plant, equipment, computer hardware &
capitalised software...................................... 3-10 years
</TABLE>
Assets in the course of construction are not depreciated until
commissioned.
Electricity distribution network assets are depreciated at 3% per year for
the first 20 years and 2% per year thereafter. All other assets are depreciated
evenly over their estimated economic life.
LEASED ASSETS
Where assets are financed by leasing arrangements which transfer
substantially all the risks and rewards of ownership of an asset to the lessee
(finance leases), the assets are treated as if they had been purchased and the
corresponding capital cost is shown as an obligation to the lessor. Leasing
payments are treated as consisting of a capital element and finance costs, the
capital element reducing the obligation to the lessor and the finance charges
being written off to the profit and loss account over the period of the lease in
reducing amounts in relation to the written down amount. The assets are
depreciated over the shorter of their estimated useful life and the lease
period. All other leases are regarded as operating leases. Rental costs arising
under operating leases are charged to the profit and loss account in the year to
which they relate.
Operating lease income receivable as lessor is recognised on a
straight-line basis over the term of the lease.
GRANTS, CUSTOMER CONTRIBUTIONS AND INFRASTRUCTURE CHARGES
Grants and customer contributions receivable relating to water and sewerage
infrastructure assets have been deducted from the cost of fixed assets. This is
not in accordance with the Companies Act 1985 which requires tangible fixed
assets to be shown at cost and hence grants and contributions as deferred
income. This departure from the requirements of the Companies Act 1985 is, in
the opinion of the directors, necessary for the financial statements to show a
true and fair view as while a provision is made for depreciation of
infrastructure assets, these assets do not have determinable finite lives and
therefore no basis exists on which to recognise grants and customer
contributions as deferred income. The effect of this treatment on the value of
tangible fixed assets is disclosed in note 14(d).
Grants and customer contributions in respect of expenditure on other fixed
assets are treated as deferred income and recognised in the profit and loss
account over the expected useful economic lives of the related assets.
Certain contributions noted above are wholly or partially refundable to
electricity customers if an agreed volume of electricity is distributed to them.
Such contributions are included in creditors until there is no further liability
to make refunds.
F-136
<PAGE> 359
HYDER PLC
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
INVESTMENT PROPERTIES
In accordance with Statement of Standard Accounting Practice No. 19
"Accounting for Investment Properties", investment properties are included in
the balance sheet at open market value. Depreciation is not applied, except
where properties are held by the group on leasehold with an unexpired term of 20
years or less. This treatment departs from the general requirement of the
Companies Act 1985 to provide depreciation on any asset which has a limited
useful economic life. The directors consider that, as these properties are not
held for consumption but for investment, to depreciate them would not give a
true and fair view and thus it is necessary to adopt SSAP 19 in order to give a
true and fair view (note 15).
Profits and losses on the disposal of investment properties are calculated
as the difference between the net sale proceeds and the net carrying value in
the accounts (ie the value at the latest valuation). Any revaluation surplus or
deficiency held within a revaluation reserve relating to the asset disposed of
is released to profit and loss as a movement on reserves, and therefore does not
impact on the statement of recognised gains and losses.
INVESTMENTS
Long term investments held as fixed assets are stated at cost less amounts
written off or provided to reflect impairments in value. Those held as current
assets are stated at the lower of cost and net realisable value.
Long term investments in infrastructure projects are recognised at the
total committed amounts for equity and loan stock with outstanding commitments
being disclosed as amounts due to associated undertakings and joint ventures.
STOCKS AND WORK IN PROGRESS
Stocks are stated at the lower of cost and net realisable value which takes
account of any provision necessary to recognise damage and obsolescence. Work in
progress is valued at the lower of cost and net realisable value. Cost includes
labour, materials, transport and directly attributable overheads.
AMOUNTS RECOVERABLE ON LONG TERM CONTRACTS
Amounts recoverable on long term contracts represent work undertaken but
not yet invoiced to customers. These amounts, which are included in debtors, are
stated at cost plus attributable profit, to the extent that such profit is
reasonably certain and after making provision for any foreseeable losses in
completing contracts, less payments on account. For this purpose, cost comprises
the direct costs of providing the service, together with directly attributable
overheads.
PENSION COSTS
Contributions are charged to the profit and loss account so as to spread
the cost of pensions over employees' working lives with the group. Contribution
rates are based on the advice of a professionally qualified actuary. Any
difference between the charge to the profit and loss account and contributions
paid is shown as an asset or liability in the balance sheet.
FOREIGN CURRENCIES
On consolidation, balance sheets and profit and loss accounts of subsidiary
undertakings are translated into sterling at closing rates of exchange. Exchange
differences resulting from the
F-137
<PAGE> 360
HYDER PLC
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
translation at closing rates of net investments in subsidiary and associated
undertakings are dealt with in the statement of total recognised gains and
losses.
Fixed asset investments denominated in foreign currencies which are hedged
by related currency borrowings are translated into sterling at the rate of
exchange ruling at the end of the financial year. The gains or losses arising
from the retranslation of these investments at each year end are offset against
those gains and losses arising on the retranslation of the related foreign
exchange borrowings. Those fixed asset investments which are not hedged by
related foreign currency borrowings are translated into sterling at the rate of
exchange ruling at the date of acquisition.
All other exchange gains or losses on settlement or translation at closing
rates of exchange of monetary assets and liabilities are included in the
determination of profit for the year.
FINANCIAL INSTRUMENTS
Derivative instruments utilised by the group are currency swaps, currency
forward exchange contracts, and interest rate swaps. Derivative instruments are
used for hedging purposes to alter the risk profile of existing underlying
exposures within the group. Currency swap agreements and currency forward
exchange contracts are translated at the rates ruling in the agreements and
contracts.
Interest differentials, under interest swap arrangements used to manage
interest rate exposure on borrowings and current asset investments, are
recognised by adjusting interest payable or receivable as appropriate.
RESEARCH AND DEVELOPMENT
Research and development expenditure is charged to the profit and loss
account in the year in which it is incurred.
DEFERRED TAXATION
Provision is made for deferred taxation, using the liability method, on all
material timing differences to the extent that it is probable that a liability
or asset will crystallise.
QUALIFYING EMPLOYEE SHARE OPTION TRUST (QUEST)
The consolidated accounts include the shares in the company held by the
group's Quest (note 30(c)). The shares held are included as fixed asset
investments and are stated at cost less amounts provided to reflect impairment
in value. Under the rules of the Quest dividends have been waived by the
trustee. The expenses of the Quest which are borne by the group are expensed as
incurred.
LONG TERM INCENTIVE PLAN (L-TIP)
The consolidated accounts include the shares in the company held by the
group's L-Tip (note 30(b)). Whilst the L-Tips are capable of vesting to the
directors the cost of the ordinary shares are written off against profits over
the three year performance period to which the conditional allocation relates.
The cost of shares which have lapsed under the L-Tip criteria are credited to
profits. The shares held are included in fixed assets investments and are stated
at cost less amounts provided to reflect impairment in value.
F-138
<PAGE> 361
HYDER PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 MARCH
<TABLE>
<CAPTION>
1999 1998
NOTE 2000 RESTATED RESTATED
------ -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
TURNOVER:
Group and share of joint ventures -- continuing
operations......................................... 810.8 709.7 664.3
Less: share of joint ventures........................ (30.9) (7.9) (6.9)
-------- ------- -------
Group turnover -- continuing operations.............. 779.9 701.8 657.4
Group turnover -- discontinued operations............ 506.0 592.6 527.7
-------- ------- -------
Group turnover....................................... 2&3 1,285.9 1,294.4 1,185.1
-------- ------- -------
NET OPERATING COSTS:................................. 4
Continuing operations................................ (615.8) (431.2) (417.8)
Discontinued operations.............................. (509.7) (566.6) (522.6)
-------- ------- -------
(1,125.5) (997.8) (940.4)
-------- ------- -------
GROUP OPERATING PROFIT:
Continuing operations................................ 164.1 270.6 239.6
Discontinued operations.............................. (3.7) 26.0 5.1
-------- ------- -------
160.4 296.6 244.7
-------- ------- -------
GROUP OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS:
Continuing operations................................ 274.8 270.6 279.6
Discontinued operations.............................. 14.2 26.0 5.1
-------- ------- -------
289.0 296.6 284.7
EXCEPTIONAL ITEMS:................................... 5
Continuing operations................................ (110.7) -- (40.0)
Discontinued operations.............................. (17.9) -- --
-------- ------- -------
(128.6) -- --
-------- ------- -------
GROUP OPERATING PROFIT AFTER EXCEPTIONAL ITEMS:
Continuing operations................................ 164.1 270.6 239.6
Discontinued operations.............................. (3.7) 26.0 5.1
-------- ------- -------
160.4 296.6 244.7
-------- ------- -------
SHARE OF OPERATING PROFIT IN:
Joint ventures -- continuing operations.............. 6.0 2.6 2.6
Associates -- continuing operations.................. 0.8 1.9 1.8
-------- ------- -------
167.2 301.1 249.1
</TABLE>
F-139
<PAGE> 362
HYDER PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 MARCH -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
NOTE 2000 RESTATED RESTATED
------ -------- -------- --------
LM LM LM
<S> <C> <C> <C> <C>
TOTAL OPERATING PROFIT -- GROUP AND SHARE OF JOINT
VENTURES AND ASSOCIATES:
Continuing operations................................ 170.9 275.1 244.0
Discontinued operations.............................. (3.7) 26.0 5.1
-------- ------- -------
167.2 301.1 249.1
Group income from investments -- continuing
operations......................................... 7 3.5 9.9 9.3
Profit on disposal of interests in investments....... 8 5.7 18.6 5.5
Profit on disposal of group operations............... 39 47.0 -- --
-------- ------- -------
Profit on ordinary activities before interest........ 223.4 329.6 263.9
Interest receivable.................................. 24.2 20.5 17.8
INTEREST PAYABLE:
Group................................................ 9 (166.3) (143.4) (113.5)
Joint ventures....................................... (4.6) (0.7) --
-------- ------- -------
Profit on ordinary activities before taxation........ 76.7 206.0 168.2
Ordinary taxation.................................... 10(a) (1.9) (8.6) (13.6)
-------- ------- -------
Profit on ordinary activities after ordinary
taxation........................................... 74.8 197.4 154.6
Exceptional taxation -- windfall tax................. 10(b) -- -- (281.9)
-------- ------- -------
Profit/(loss) on ordinary activities after
taxation........................................... 74.8 197.4 (127.3)
Equity minority interests............................ (0.2) -- --
Dividends on preference shares and appropriations.... 11 (16.4) (16.4) (16.4)
-------- ------- -------
Profit/(loss) attributable to ordinary
shareholders....................................... 58.2 181.0 (143.7)
Dividends on ordinary shares......................... 11 (10.1) (74.5) (73.3)
-------- ------- -------
Retained profit/(loss) for the year.................. 32 48.1 106.5 (217.0)
======== ======= =======
EARNINGS/(LOSS) PER ORDINARY SHARE:
-- Basic............................................. 12 39.0p 123.4p (99.8)p
-- Diluted........................................... 12 39.0p 122.5p (98.4)p
EARNINGS PER ORDINARY SHARE BEFORE EXCEPTIONAL ITEMS,
PROFIT ON DISPOSAL OF GROUP OPERATIONS AND WINDFALL
TAX:
-- Basic............................................. 12 97.2p 123.4p 122.7p
-- Diluted........................................... 12 97.1p 122.5p 120.9p
======== ======= =======
Dividends per ordinary share......................... 11 6.7p 50.4p 50.4p
======== ======= =======
</TABLE>
F-140
<PAGE> 363
HYDER PLC
BALANCE SHEETS AT 31 MARCH 2000
<TABLE>
<CAPTION>
GROUP COMPANY
------------------- -------------------
NOTE 2000 1999 2000 1999
----- -------- -------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C> <C>
FIXED ASSETS:
Intangible assets................................ 13 3.5 3.8 -- --
Tangible assets.................................. 14 2,951.1 2,832.4 2.2 2.4
Investment properties............................ 15 10.9 9.4 -- --
Investments in:.................................. 16
Joint ventures:
Share of gross assets....................... 217.2 150.2 -- --
Share of gross liabilities.................. (179.4) (129.8) -- --
37.8 20.4 -- --
Associates..................................... 10.4 9.8 -- --
Others......................................... 52.2 62.1 1,536.5 1,548.6
Own shares..................................... 10.3 21.7 10.3 21.7
-------- -------- -------- --------
3,076.2 2,959.6 1,549.0 1,572.7
-------- -------- -------- --------
CURRENT ASSETS:
Stocks and work in progress...................... 17 16.9 16.0 -- --
Debtors.......................................... 18 238.0 314.2 364.5 423.4
Current asset investments........................ 19 433.3 591.3 354.7 464.4
Cash at bank and in hand......................... 34.0 21.0 0.3 0.4
-------- -------- -------- --------
722.2 942.5 719.5 888.2
CURRENT LIABILITIES:
Creditors: amounts falling due within one year... 20(a) (363.6) (556.3) (113.3) (177.4)
-------- -------- -------- --------
Net current assets............................... 358.6 386.2 606.2 710.8
-------- -------- -------- --------
Total assets less current liabilities............ 3,434.8 3,345.8 2,155.2 2,283.5
-------- -------- -------- --------
Creditors: amounts falling due after more than
one year....................................... 20(b) (2,143.5) (2,147.0) (1,304.9) (1,302.2)
Provisions for liabilities and charges........... 27 (79.9) (143.1) (2.4) (2.4)
Accruals and deferred income..................... 28 (159.8) (155.3) -- --
-------- -------- -------- --------
Net assets....................................... 1,051.6 900.4 847.9 978.9
======== ======== ======== ========
CAPITAL AND RESERVES:
Called up share capital.......................... 29 392.8 388.4 392.8 388.4
Share premium account............................ 31 133.0 137.4 133.0 137.4
Reserves......................................... 32 525.1 372.0 322.1 453.1
Equity shareholders' funds....................... 844.3 691.2 641.3 772.3
Non-equity shareholders' funds................... 206.6 206.6 206.6 206.6
Total shareholders' funds........................ 1,050.9 897.8 847.9 978.9
Equity minority interests........................ 33 0.7 2.6 -- --
-------- -------- -------- --------
1,051.6 900.4 847.9 978.9
======== ======== ======== ========
</TABLE>
The financial statements on pages F-134 to F-198 were approved by the Board
of directors on 12 July 2000 and were signed on its behalf by:
<TABLE>
<S> <C>
J V H Robins P J Twamley
Chairman Group Finance Director
</TABLE>
F-141
<PAGE> 364
HYDER PLC
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS
ENDED 31 MARCH
<TABLE>
<CAPTION>
NOTE 2000 1999 1998
---- ------ ------ ------
LM LM LM
<S> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES:
-- Continuing operations................................. 34 368.7 382.5 318.6
-- Discontinued operations............................... 34 7.9 1.3 6.4
------ ------ ------
376.6 383.8 325.0
====== ====== ======
Dividends received from joint ventures and associated
undertakings............................................. 0.7 -- 0.9
====== ====== ======
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Interest received.......................................... 22.9 14.5 19.8
Interest paid.............................................. (144.8) (115.5) (96.0)
Preference dividend paid................................... (16.4) (16.4) (16.3)
Interest element of finance lease rental payments.......... (16.2) (9.7) (3.9)
Dividends received and other investment income............. 3.5 12.8 12.3
------ ------ ------
(151.0) (114.3) (84.1)
====== ====== ======
TAXATION:
UK corporation tax paid.................................... (0.9) (15.5) (21.8)
Windfall tax paid.......................................... -- (141.0) (140.9)
Overseas tax (paid)/repaid................................. (1.1) (0.2) 0.1
------ ------ ------
(2.0) (156.7) (162.6)
====== ====== ======
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT:
Sale of intangible fixed assets............................ 0.4 -- --
Purchase of tangible fixed assets.......................... (353.1) (447.4) (412.3)
Sale of tangible fixed assets.............................. 4.7 5.5 5.3
Purchase of fixed asset investments........................ (1.7) (5.7) (0.4)
Sale of fixed asset investments............................ 12.5 61.3 6.7
Grants and contributions received.......................... 14.3 19.0 29.4
------ ------ ------
(322.9) (367.3) (371.3)
====== ====== ======
ACQUISITIONS AND DISPOSALS:
Purchase of additional interest in subsidiary
undertakings............................................. 38 (1.5) (4.3) --
Net cash acquired with subsidiaries........................ -- 1.9 --
Investments in joint ventures and associated
undertakings............................................. (3.9) (11.9) (6.8)
Sale of group operations................................... 39 103.9 -- --
------ ------ ------
98.5 (14.3) (6.8)
====== ====== ======
Equity dividends paid...................................... (98.4) (18.5) (32.0)
------ ------ ------
Cash outflow before use of liquid resources and
financing................................................ (98.5) (287.3) (330.9)
====== ====== ======
MANAGEMENT OF LIQUID RESOURCES:
Purchase of commercial paper............................... (323.0) (467.0) (569.9)
Sale of commercial paper................................... 412.0 446.5 538.6
Net decrease/(increase) in deposits........................ 73.0 (269.2) (1.1)
------ ------ ------
162.0 (289.7) (32.4)
====== ====== ======
</TABLE>
F-142
<PAGE> 365
HYDER PLC
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS
ENDED 31 MARCH -- (CONTINUED)
<TABLE>
<CAPTION>
NOTE 2000 1999 1998
---- ------ ------ ------
LM LM LM
<S> <C> <C> <C> <C>
FINANCING:
Issue of ordinary shares................................... 36 -- 0.5 4.9
New loans, finance leases and bonds........................ 2.0 621.5 482.8
Expenses of issuing bonds.................................. 36 -- (6.6) (3.5)
Loan repayments............................................ 36 (57.5) (9.0) (150.1)
Capital element of finance lease rental payments........... 36 (0.2) (0.5) (0.5)
------ ------ ------
(55.7) 605.9 333.6
====== ====== ======
Increase/(decrease) in cash in the year.................... 37 7.8 28.9 (29.7)
====== ====== ======
</TABLE>
F-143
<PAGE> 366
HYDER PLC
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEARS ENDED MARCH
<TABLE>
<CAPTION>
2000 1999 1998
------- ----- ------
LM LM LM
<S> <C> <C> <C>
Profit/(loss) for the financial year attributable to
ordinary shareholders..................................... 58.2 181.0 (143.7)
Currency translation differences on foreign currency net
investments............................................... (1.3) 0.2 (3.2)
Surplus on revaluation of investment properties............. 1.5 1.0 (0.2)
------- ----- ------
Total recognised gains/(losses) for the year...... 58.4 182.2 (147.1)
======= ===== ======
</TABLE>
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE YEARS ENDED
31 MARCH
<TABLE>
<CAPTION>
2000 1999 1998
------- ----- ------
LM LM LM
<S> <C> <C> <C>
Total recognised gains/(losses) for the year................ 58.4 182.2 (147.1)
Ordinary dividends.......................................... (10.1) (74.5) (73.3)
New ordinary share capital issued........................... 4.4 2.0 7.5
Premium on ordinary share capital issued.................... -- 0.4 39.5
Scrip dividend issued in lieu of cash dividend.............. 21.5 14.6 14.9
Utilisation of share premium account for the nominal value
of ordinary shares issued under the scrip dividend........ (4.4) (1.9) (1.5)
Goodwill written off........................................ -- -- (0.3)
Goodwill written back on disposal........................... 84.0 2.0 --
Charge to reserves arising on issue of shares to qualifying
employee share ownership trust............................ -- -- (18.7)
Adjustment to reserves on increased shareholding in
subsidiary................................................ (0.7) (0.5) --
------- ----- ------
Net increase in shareholders' funds......................... 153.1 124.3 (179.0)
At 1 April.................................................. 897.8 773.5 952.5
------- ----- ------
At 31 March................................................. 1,050.9 897.8 773.5
======= ===== ======
</TABLE>
There is no material difference between the results disclosed in the profit
and loss account and the results on an unmodified historical cost basis.
F-144
<PAGE> 367
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS
1. COMPANY PROFIT AND LOSS ACCOUNT
As permitted by section 230 of the Companies Act 1985, the profit and loss
account of the company has not been included in these financial statements. The
loss after taxation for the year dealt with in the financial statements of the
company was L125.8m (1999 profit of L74.7m; 1998 profit of L298.1m).
2. SEGMENTAL ANALYSIS BY CLASS OF BUSINESS
(A) TURNOVER
<TABLE>
<CAPTION>
INTRA INTER
TOTAL SEGMENT SEGMENT EXTERNAL
TURNOVER TURNOVER TURNOVER TURNOVER
-------- -------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
YEAR ENDED 31 MARCH 2000:
Continuing operations:
Regulated water and sewerage activities.............. 472.7 -- 1.5 471.2
Regulated electricity distribution activities........ 199.1 -- 124.2 74.9
Infrastructure activities:
-- Group.......................................... 237.3 2.1 28.9 206.3
-- Joint ventures................................. 30.9 -- -- 30.9
Managed services activities.......................... 164.0 6.0 136.2 21.8
Other activities..................................... 21.6 -- 15.9 5.7
------- ---- ----- -------
1,125.6 8.1 306.7 810.8
Discontinued operations:
Energy supply activities............................. 501.9 -- 6.0 495.9
Infrastructure activities............................ 10.1 -- -- 10.1
------- ---- ----- -------
1,637.6 8.1 312.7 1,316.8
======= ==== ===== =======
Total:
-- Group.......................................... 1,606.7 8.1 312.7 1,285.9
-- Joint ventures................................. 30.9 -- -- 30.9
======= ==== ===== =======
YEAR ENDED 31 MARCH 1999:
Continuing operations:
Regulated water and sewerage activities.............. 456.0 -- 1.5 454.5
Regulated electricity distribution activities........ 195.4 -- 153.3 42.1
Infrastructure activities
-- Group.......................................... 225.8 4.6 33.4 187.8
-- Joint ventures................................. 7.9 -- -- 7.9
Managed services activities.......................... 176.1 4.4 162.1 9.6
Other activities..................................... 10.7 -- 2.9 7.8
------- ---- ----- -------
1,071.9 9.0 353.2 709.7
</TABLE>
F-145
<PAGE> 368
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INTRA INTER
TOTAL SEGMENT SEGMENT EXTERNAL
TURNOVER TURNOVER TURNOVER TURNOVER
-------- -------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
Discontinued operations:
Energy supply activities.......................... 588.9 -- 6.7 582.2
Infrastructure activities......................... 10.4 -- -- 10.4
------- ---- ----- -------
1,671.2 9.0 359.9 1,302.3
======= ==== ===== =======
Total:
-- Group.......................................... 1,663.3 9.0 359.9 1,294.4
-- Joint ventures................................. 7.9 -- -- 7.9
======= ==== ===== =======
YEAR ENDED 31 MARCH 1998:
Continuing operations:
Regulated water and sewerage activities.............. 440.7 -- 1.2 439.5
Regulated electricity distribution activities........ 190.4 -- 146.6 43.8
Infrastructure activities
-- Group.......................................... 200.2 1.2 35.1 163.9
-- Joint ventures................................. 6.9 -- -- 6.9
Managed services activities.......................... 145.4 12.7 126.7 6.0
Other activities..................................... 4.3 -- 0.1 4.2
------- ---- ----- -------
987.9 13.9 309.7 664.3
Discontinued operations:
Energy supply activities.......................... 534.2 -- 17.5 516.7
Infrastructure activities......................... 11.0 -- -- 11.0
------- ---- ----- -------
1,533.1 13.9 327.2 1,192.0
======= ==== ===== =======
Total:
-- Group.......................................... 1,526.2 13.9 327.2 1,185.1
-- Joint ventures................................. 6.9 -- -- 6.9
======= ==== ===== =======
</TABLE>
Turnover is derived from the following sources:
- External: transactions between group companies and external customers.
- Intra segment: transactions between group companies trading within the
same segment.
- Inter segment: transactions between group companies trading in different
segments.
F-146
<PAGE> 369
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(B) PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
2000 2000 1998 1998
BEFORE EXCEPTIONAL 1999 BEFORE EXCEPTIONAL 1998
EXCEPTIONAL ITEMS 2000 RESTATED EXCEPTIONAL ITEMS RESTATED
ITEMS (NOTE 5) TOTAL TOTAL ITEMS (NOTE 5) TOTAL
----------- ----------- ------ -------- ----------- ----------- --------
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
Regulated water and sewerage
activities..................... 186.0 (34.1) 151.9 166.6 178.3 (28.0) 150.3
Regulated electricity
distribution activities........ 87.5 (60.7) 26.8 96.0 86.1 (9.0) 77.1
Infrastructure activities........ 11.4 (4.4) 7.0 24.8 20.2 (5.2) 15.0
Managed services activities...... 6.7 (1.0) 5.7 22.2 21.9 3.3 25.2
Other activities................. 5.1 -- 5.1 5.4 4.5 -- 4.5
----- ------ ------ ------ ----- ----- -----
296.7 (100.2) 196.5 315.0 311.0 (38.9) 272.1
DISCONTINUED OPERATIONS:
Energy supply activities......... 14.9 (17.9) (3.0) 26.3 4.2 -- 4.2
Infrastructure activities........ (0.7) -- (0.7) (0.3) 0.9 -- 0.9
----- ------ ------ ------ ----- ----- -----
310.9 (118.1) 192.8 341.0 316.1 (38.9) 277.2
Business development costs and
corporate overheads............ (3.9) (10.5) (14.4) (7.6) (8.6) (1.1) (9.7)
Elimination of intercompany
operating profit capitalised... (2.0) -- (2.0) (3.8) (3.6) -- (3.6)
Profit on disposal of group
operations..................... 47.0 -- 47.0 -- -- --
----- ------ ------ ------ ----- ----- -----
Profit before interest........... 352.0 (128.6) 223.4 329.6 303.9 (40.0) 263.9
===== ====== ===== =====
Net interest payable............. (146.7) (123.6) (95.7)
------ ------ -----
Profit before taxation........... 76.7 206.0 168.2
====== ====== =====
</TABLE>
Infrastructure activities and Other activities include L9.2m (1999 L28.5m;
1998 L14.8m) in respect of income from investments (including profit on disposal
of investments) (notes 7 and 8 below) and L6.8m (1999 L4.5m; 1998 L4.4m) in
respect of share of operating profit of joint ventures and associates as this
reflects the management control of those investments.
F-147
<PAGE> 370
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(C) NET ASSETS
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Regulated water and sewerage activities..................... 1,991.3 1,825.9 1,643.2
Regulated electricity distribution activities............... 505.2 471.7 403.4
Regulated electricity distribution activities -- windfall
tax....................................................... -- -- (44.8)
Infrastructure activities................................... 146.9 152.8 154.1
Managed services activities................................. 67.2 81.1 58.3
Other activities............................................ 15.1 (44.0) (5.9)
Other activities -- windfall tax............................ -- -- (96.2)
-------- -------- --------
2,725.7 2,487.5 2,112.1
Discontinued operations:
Energy supply activities.................................... -- (19.6) (61.6)
Infrastructure activities................................... -- 6.6 5.2
-------- -------- --------
2,725.7 2,474.5 2,055.7
Net debt............................................... (1,674.1) (1,574.1) (1,282.2)
-------- -------- --------
1,051.6 900.4 773.5
======== ======== ========
</TABLE>
Infrastructure activities includes L48.2m (1999 L30.2m; 1998 L29.6m) in
respect of share of net assets of joint ventures and associates as this reflects
the management control of those investments.
3. SEGMENTAL ANALYSIS BY GEOGRAPHICAL AREA BY DESTINATION
(A) TURNOVER
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
LM LM LM
<S> <C> <C> <C>
United Kingdom and Europe:
-- Group.................................................. 1,223.6 1,223.7 1,120.7
-- Joint ventures......................................... 30.9 7.9 6.9
Asia Pacific................................................ 38.2 48.5 38.7
Rest of the World........................................... 24.1 22.2 25.7
------- ------- -------
Total:
-- Group.................................................. 1,285.9 1,294.4 1,185.1
-- Joint ventures......................................... 30.9 7.9 6.9
======= ======= =======
</TABLE>
Included in United Kingdom and Europe turnover by destination is turnover
of L506.0m (1999 L592.6m; 1998 L527.7m) relating to the discontinued energy
supply and infrastructure activities.
F-148
<PAGE> 371
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(B) PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
1999 1998
2000 RESTATED RESTATED
------ -------- --------
LM LM LM
<S> <C> <C> <C>
United Kingdom and Europe................................... 195.0 339.2 277.7
Asia Pacific................................................ (3.4) 0.6 (2.5)
Rest of the World........................................... 1.2 1.2 2.0
------ ------ -----
192.8 341.0 277.2
Business development costs and corporate overheads.......... (14.4) (7.6) (9.7)
Elimination of intercompany operating profit capitalised.... (2.0) (3.8) (3.6)
Profit on disposal of group operations...................... 47.0 -- --
------ ------ -----
Profit before interest...................................... 223.4 329.6 263.9
Net interest payable........................................ (146.7) (123.6) (95.7)
------ ------ -----
Profit before taxation...................................... 76.7 206.0 168.2
====== ====== =====
</TABLE>
United Kingdom and Europe include L9.2m (1999 L28.5m; 1998 L14.8m) in
respect of income from investments (including profit on disposal of investments)
(notes 7 and 8 below) and L6.8m (1999 L4.5m; 1998 L4.4m) in respect of share of
operating profit of joint ventures and associates as this reflects the
management control of those investments.
(C) NET ASSETS
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
LM LM LM
<S> <C> <C> <C>
United Kingdom and Europe................................... 2,690.1 2,450.4 2,035.0
Asia Pacific................................................ 7.0 4.6 8.4
Rest of the World........................................... 27.1 19.5 12.3
-------- -------- --------
2,724.2 2,474.5 2,055.7
Net debt (note 35(b))....................................... (1,674.1) (1,574.1) (1,282.2)
-------- -------- --------
1,050.1 900.4 773.5
======== ======== ========
</TABLE>
United Kingdom and Europe includes L48.2m (1999 L30.2m; 1998 L29.6m) in
respect of share of net assets of joint ventures and associates as this reflects
the management control of those investments. Turnover and profit before taxation
by origin are not materially different from that by destination.
4. NET OPERATING COSTS
<TABLE>
<CAPTION>
2000 2000 1998 1998
BEFORE EXCEPTIONAL BEFORE EXCEPTIONAL
EXCEPTIONAL ITEMS 2000 1999 EXCEPTIONAL ITEMS 1998
NOTE ITEMS (NOTE 5) TOTAL TOTAL ITEMS (NOTE 5) TOTAL
---- ----------- ----------- ------- ----- ----------- ----------- -----
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
Change in stocks and work in
progress..................... (0.6) -- (0.6) (1.9) (0.6) -- (0.6)
Staff costs.................... 6(b) 253.5 -- 253.5 236.4 224.7 -- 224.7
Severance and redundancy
costs........................ -- 21.9 21.9 2.0 -- 25.0 25.0
</TABLE>
F-149
<PAGE> 372
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
2000 2000 1998 1998
BEFORE EXCEPTIONAL BEFORE EXCEPTIONAL
EXCEPTIONAL ITEMS 2000 1999 EXCEPTIONAL ITEMS 1998
NOTE ITEMS (NOTE 5) TOTAL TOTAL ITEMS (NOTE 5) TOTAL
---- ----------- ----------- ------- ----- ----------- ----------- -----
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEPRECIATION:
-- Own assets.................. 126.5 -- 126.5 117.8 100.4 -- 100.4
-- Assets held under finance
leases....................... 10.3 -- 10.3 5.0 4.9 -- 4.9
Amounts written off fixed
assets....................... -- 51.0 51.0 7.1 0.1 1.5 1.6
Amounts written off fixed asset
investments.................. 1.1 -- 1.1 2.0 1.4 -- 1.4
Amounts written off own
shares....................... -- 10.0 10.0 -- -- -- --
Research and development....... 0.7 -- 0.7 0.7 1.3 -- 1.3
RENTALS UNDER OPERATING LEASES:
-- Hire of plant and
equipment.................... 9.0 -- 9.0 1.3 1.3 -- 1.3
-- Other....................... 5.0 -- 5.0 3.2 6.1 -- 6.1
FEES PAID TO AUDITORS:
-- Audit services.............. 0.7 -- 0.7 0.7 0.7 -- 0.7
-- Taxation services........... 0.1 -- 0.1 0.1 0.2 -- 0.2
-- Consultancy services........ -- 1.4 1.4 0.1 0.1 -- 0.1
-- Other services.............. 0.4 -- 0.4 -- 0.4 -- 0.4
Year 2000 costs................ 2.8 -- 2.8 7.0 1.5 -- 1.5
Other operating charges........ 178.1 26.4 204.5 132.3 117.0 13.5 130.5
Amortisation of grants and
contributions................ (6.0) -- (6.0) (5.9) (5.5) -- (5.5)
Loss/(profit) on disposal of
fixed assets................. 0.5 -- 0.5 -- (0.8) -- (0.8)
Own work capitalised........... (74.7) -- (74.7) (76.0) (75.0) -- (75.0)
Net rents receivable........... (2.3) -- (2.3) (0.7) (0.4) -- (0.4)
----- ----- ------- ----- ----- ---- -----
Net continuing operating
costs.................... 505.1 110.7 615.8 431.2 377.8 40.0 417.8
----- ----- ------- ----- ----- ---- -----
DISCONTINUED OPERATIONS:
Change in stocks and work in
progress..................... (0.3) -- (0.3) -- -- -- --
Staff costs.................... 6(b) 9.2 -- 9.2 9.3 7.2 -- 7.2
Severance and redundancy
costs........................ -- 0.5 0.5 -- -- -- --
DEPRECIATION:
-- Own assets.................. 3.6 -- 3.6 1.6 0.9 -- 0.9
Amounts written off fixed
assets....................... -- 16.3 16.3 -- -- -- --
Research and development....... 0.2 -- 0.2 0.1 0.1 -- 0.1
Rentals under operating leases:
-- Other....................... -- -- -- 0.5 0.4 -- 0.4
FEES PAID TO AUDITORS:
-- Consultancy services........ -- 0.1 0.1 0.4 -- -- --
Year 2000 costs................ 0.1 -- 0.1 1.7 0.6 -- 0.6
Energy purchases............... 287.1 -- 287.1 329.6 305.3 -- 305.3
Power purchase provision....... (6.4) -- (6.4) (7.3) -- -- --
Other operating charges........ 198.3 1.0 199.3 230.7 208.1 -- 208.1
----- ----- ------- ----- ----- ---- -----
Net discontinued operating
costs.................... 491.8 17.9 509.7 566.6 522.6 -- 522.6
----- ----- ------- ----- ----- ---- -----
Total operating costs...... 996.9 128.6 1,125.5 997.8 900.4 40.0 940.4
===== ===== ======= ===== ===== ==== =====
</TABLE>
F-150
<PAGE> 373
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Other fees paid to the auditors and capitalised were L91,500 (1999
L104,000; 1998 Lnil). Included in audit services is L9,250 (1999 L9,000; 1998
L8,650) in respect of audit fees incurred by the company.
Fees of L7,000 and L44,000 were paid to the auditors in 2000 for services
provided in respect of the disposal of the investment in UK Data Collection
Services Limited and the energy supply business respectively. These costs have
been deducted in arriving at the profit on disposal.
5. EXCEPTIONAL ITEMS
<TABLE>
<CAPTION>
2000 1999 1998
----- ---- ----
LM LM LM
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Restructuring costs:
Regulated water and sewerage activities................... 14.1 -- 25.8
Regulated electricity distribution activities............. 12.7 -- 8.8
Infrastructure activities................................. 2.8 -- 1.2
Managed services activities............................... 4.5 -- --
Other activities.......................................... -- -- 2.0
Business development costs and corporate overheads........ 0.5 -- 0.4
----- -- ----
34.6 -- 38.2
Restructuring credits
Regulated electricity distribution activities............. (6.7) -- --
Managed services activities............................... (3.5) -- (3.3)
----- -- ----
24.4 -- (3.3)
Computer system development costs:
Regulated electricity distribution services............... 54.7 -- --
AMOUNTS WRITTEN OFF OWN SHARES:
Business development costs and corporate overheads.......... 10.0 -- --
BAD AND DOUBTFUL DEBT PROVISIONS:
Regulated water and sewerage activities..................... 20.0 -- --
LEASEHOLD PROPERTY PROVISIONS:
Regulated water and sewerage activities..................... -- -- 2.2
Regulated electricity distribution activities............... -- -- 0.2
Business development costs and corporate overheads.......... -- -- 0.7
Infrastructure activities................................... 1.6 -- 2.0
----- -- ----
1.6 -- 5.1
----- -- ----
110.7 -- 40.0
----- -- ----
DISCONTINUED OPERATIONS:
Restructuring costs:
Energy supply activities............................... 0.5 -- --
Computer systems development costs:
Energy supply activities............................... 17.4 -- --
----- -- ----
17.9 -- --
----- -- ----
128.6 -- 40.0
===== == ====
</TABLE>
The tax credit attributable to these exceptional items is L9.7m (1999 Lnil;
1998 L1.6m).
F-151
<PAGE> 374
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Restructuring costs of L35.1m (1999 Lnil; 1998 L38.2m) principally relate
to job reductions in the regulated water and electricity distribution
businesses. Surplus provisions of L10.2m (1999 Lnil; 1998 L3.3m) relating to
prior year manpower reduction programmes were released after reappraisal of
obligations and were offset against the L35.1m (1999 Lnil; 1998 L38.3m) charge
in the year.
Computer system development costs written off amounting to L43.5m related
to the cancellation of a new utility billing system which did not meet the needs
of the rapidly developing and sophisticated multi purpose product offerings.
Computer system development costs of L24.1m were also written off following
the electricity distribution price review whereby the costs of systems developed
before the opening of the electricity competitive market were not remunerated by
the regulator. The carrying value of these computer systems were written down to
L8.8m. Costs of L4.5m relating to new electricity metering obligations,
effective from April 2000, have also been charged as an exceptional item.
The bad and doubtful debt provision of L20m arose from a reassessment of
our ability to collect domestic water and sewerage debt following the
Government's decision to ban disconnection of domestic water supplies, combined
with the ruling on the watercard and the High Court decision that the "Two in
One" budget scheme was not authorised under the Electricity Act.
The write down of own shares of L10.0m reflects the reduction of in value
of Hyder shares held by the company under the Qualifying employee share option
schemes and the directors' long term incentive scheme.
Property provisions of L1.6m (1999 Lnil; 1998 L5.1m) related to the
directors' assessment of the future cost of unoccupied leasehold properties and
amounts written off freehold properties.
6. DIRECTORS AND EMPLOYEES
DIRECTORS' EMOLUMENTS AND INTERESTS
(A) STATEMENT OF COMPLIANCE
Throughout the year the company complied with Schedule A and has given full
consideration to Schedule B of the Best Practice Provisions on Remuneration
committees as annexed to the Financial Services Authority Listing Rules.
(B) REMUNERATION COMMITTEE
The committee consists of the non-executive directors, other than the Group
Chairman, under the chairmanship of D G Hawkins. None of the committee has any
personal financial interests in the group (other than as a shareholder or
bondholder), has any conflict of interests arising from cross-directorships or
otherwise, or has day-to-day involvement in running the business. The committee
consults the Group Chairman and the Group Chief Executive about its proposals
and the performance of executive directors and has access to professional advice
from inside and outside the company.
(C) NON-EXECUTIVE DIRECTORS
The remuneration of the non-executive directors is determined by the Board
within the limits set out in the Articles of Association and based upon
independent advice in respect of fees paid to non-executive directors of similar
companies.
Since his appointment as Group Chairman in 1998 J V H Robins has been paid
fees at the rate of L125,000 per annum.
F-152
<PAGE> 375
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The fee paid to each non-executive director, excluding the chairman, was
L28,000 (1999 L28,000). Non-executive directors cannot participate in any of the
company's share option or incentive schemes and are not eligible to join the
company's pension scheme. The terms of office of the non-executive directors,
which are subject to renewal by agreement, expire not later than at the
conclusion of the annual general meeting in the following calendar years:
<TABLE>
<S> <C>
J V H Robins................................................ 2001
D G Hawkins................................................. 2001
R B Salmon.................................................. 2002
R H Sellier................................................. 2000
</TABLE>
However, save in respect of J V H Robins, where twelve months' written
notice is required to be given, appointments may be terminated earlier (without
compensation) by the company giving six months' notice in writing or in certain
other circumstances pursuant to the Articles of Association (including
retirement by rotation) or legislation.
(D) EXECUTIVE DIRECTORS
Executive remuneration packages are designed to attract, motivate and
retain executive directors, and to reward them for enhancing value to
shareholders. The performance measurement of the executive directors and the
determination of their annual remuneration package is undertaken by the
committee. No director attends during any decision about his own remuneration.
The committee discusses with the Group Chief Executive and the Group Chairman
the remuneration of the other executive directors.
There are currently four main elements in the remuneration package for
executive directors:
(a) basic annual salary;
(b) annual bonus payments;
(c) long term incentive arrangements; and
(d) pension arrangements.
Executive directors may accept non-executive appointments outside the
company, subject to the permission of the Board. Fees earned are retained by
each director.
(i) Basic Annual Salary
Each executive director's basic salary is determined by the Remuneration
committee at the beginning of each year and when an individual changes position
or responsibility. Following a review on 1 April 2000 basic salaries remain
unchanged from those agreed, and reported previously, and are set out below.
<TABLE>
<S> <C>
G A Hawker.................................................. L267,800
M P Brooker................................................. L150,380
J M James................................................... L195,700
P J Twamley................................................. L195,700
</TABLE>
(ii) Annual Bonus Payments
The committee establishes the objectives that must be met for each
financial year if a bonus is to be paid. The committee believes that any
incentive compensation awarded should be tied to the interests of the company's
shareholders. In respect of the year ended 31 March 2000 the principal measures
for annual bonus payments were, firstly, the profitability of the group,
secondly a specific set
F-153
<PAGE> 376
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
of personal objectives for each director and, where applicable, the performance
of that part of the business for which the executive director was responsible.
The maximum annual performance related bonus that can currently be paid is 40%
of basic salary of which a maximum of 10% of basic salary can be paid in
relation to achievement of personal objectives, other than in the case of J M
James where 30% of basic salary can be paid in relation to the achievement of
personal objectives.
No incentive payments have been paid in respect of the year ended 31 March
2000. In 1999 incentive payments varied between 32% and 37%.
Subsequent to the financial year end the committee determined that a bonus
of L50,000 be awarded to JM James. This award was previously disclosed in the
circular issued to Hyder shareholders on 28 April 2000. By way of clarification
of the disclosure set out in the circular, this conditional award is payable
only on successful completion of the Hyder strategic review and is therefore
made in respect of the financial year ending 31 March 2001.
(iii) Long Term Incentive Arrangements
The long term incentive plan for executive directors was approved by the
annual general meeting on 26 July 1996. A second long term incentive plan
specifically for JM James, which is in all essential terms identical to the plan
approved by shareholders, except that a time related proportion of the shares
earned up to the date of JM James' retirement will be vested and released at
that date, was approved by the Board with effect from 1 April 1998.
The long term incentive plans provide for the conditional award in each
year of ordinary shares in the company worth up to 50% of basic salary. The
ordinary shares in respect of each conditional award only become available to
executive directors to the extent that the performance targets, set at the
outset by the Remuneration committee, have been met over the three year period,
commencing with the conditional award. The performance targets relate to the
total shareholder return, over the three year period commencing with the
effective date of the conditional award, relative to the companies comprising
the 250 top companies by market capitalisation derived from the FTSE 100 and the
FTSE mid 250 indices.
The rules of the long term incentive plans provide that if the company's
ranking, by total shareholder return, in the FTSE mid 250 index at the end of
the performance period is lower than ranking position 125 (adjusted as
appropriate if any of the original comparator companies have dropped out of the
top 250 companies), the participants are entitled to no shares.
The ordinary shares for use under the long term incentive plans are
purchased in the market by an employee benefit trust with funds allocated by the
company. The trust conditionally allocated 51,052 ordinary shares to the
participating executive directors at 792.9p per share on 7 July 1999. Of the
51,052 ordinary shares allocated in the year, 46,936 ordinary shares were
reallocated from previously lapsed conditional allocations and 4,116 ordinary
shares were purchased in the market. The additional cost of the 51,052 ordinary
shares allocated in the year was L0.03m. The market value on 31 March 2000 of
the 137,850 shares held by the trust was L0.3m and the original cost was L1.23m.
The cost of the shares is written off over the period of the relevant
conditional allocation. Shares available from lapsed allocations are held by the
trust for conditional allocation in future years.
The table below lists conditional allocations of ordinary shares to each
director under the long term incentive plans, shares which have crystallised for
future vesting in each director pursuant to the scheme rules and lapsed shares
during the year.
On 8 March 2000 the FTSE Equity Indices Committee announced that the market
capitalisation of Hyder was below that necessary to maintain its status as part
of the FTSE mid 250 index.
F-154
<PAGE> 377
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly interests under the Hyder LTIP which would ordinarily vest in April
2001 and April 2002 would not, if present circumstances were to continue, be
capable at those future dates of meeting the performance criteria for these
awards to crystallise. The remuneration committee does not regard it appropriate
at this time to consider exercising its powers under the rules of the long term
incentive plans to modify the exercise criteria.
F-155
<PAGE> 378
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRICE PER
CONDITIONAL SHARES SHARE OF
1 APRIL 1 APRIL 1 APRIL ALLOCATION LAPSED 31 MARCH INCAPABLE ALLOCATION VESTING
1997 1998 1999 IN YEAR IN YEAR 2000 OF VESTING* (PENCE) DATE
------- ------- ------- ----------- ------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
G A Hawker........... 15,162 15,162 4,664 -- -- 4,664 -- 742 April 1999
-- 15,400 15,400 -- (15,400) -- -- 779 April 2000
-- -- 13,279 -- -- 13,279 (13,279) 978 April 2001
-- -- -- 16,887 16,887 (16,887) 793 April 2002
------ ------ ------- ------ ------- ------- ------- --- ----------
15,162 30,562 33,343 16,887 (15,400) 34,830 (30,166)
====== ====== ======= ====== ======= ======= ======= === ==========
M P Brooker.......... -- 8,663 8,663 -- (8,663) -- -- 779 April 2000
-- -- 7,457 -- -- 7,457 (7,457) 978 April 2001
-- -- -- 9,483 -- 9,483 (9,483) 793 April 2002
------ ------ ------- ------ ------- ------- ------- --- ----------
-- 8,663 16,120 9,483 (8,663) 16,940 (16,940)
====== ====== ======= ====== ======= ======= ======= === ==========
J M James............ -- -- 9,704 -- -- 9,704 (9,704) 978 April 2001
-- -- -- 12,341 -- 12,341 (12,341) 793 April 2002
------ ------ ------- ------ ------- ------- ------- --- ----------
-- -- 9,704 12,341 -- 22,045 (22,045)
====== ====== ======= ====== ======= ======= ======= === ==========
J E Roberts**........ 11,455 11,455 3,524 -- -- 3,524 -- 742 April 1999
-- 11,294 11,294 -- (11,294) -- -- 779 April 2000
-- -- 10,215 -- (10,215) -- -- 978 April 2001
------ ------ ------- ------ ------- ------- ------- --- ----------
11,455 22,749 25,033 (21,509) 3,524 --
====== ====== ======= ====== ======= ======= ======= === ==========
S J Doughty***....... 10,107 -- -- -- -- -- -- 742 April 1999
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
------ ------ ------- ------ ------- ------- ------- --- ----------
10,107 -- -- -- -- -- --
====== ====== ======= ====== ======= ======= ======= === ==========
P J Twamley.......... 10,107 10,107 3,109 -- -- 3,109 -- 742 April 1999
-- 11,294 11,294 -- (11,294) -- -- 779 April 2000
-- -- 9,704 -- -- 9,704 (9,704) 978 April 2001
-- -- -- 12,341 -- 12,341 (12,341) 793 April 2002
------ ------ ------- ------ ------- ------- ------- --- ----------
10,107 21,401 24,107 12,341 (11,294) 25,154 (22,045)
====== ====== ======= ====== ======= ======= ======= === ==========
46,831 83,375 108,307 51,052 (56,866) 102,493 (91,196)
====== ====== ======= ====== ======= ======= ======= === ==========
</TABLE>
-------------------------
* these interests at 31 March 2000 were incapable of vesting because at that
time the market capitalisation of Hyder was below that necessary to maintain
its status as part of the FTSE mid 250 index.
** resigned on 25 May 1999 as a result of which the 21,509 ordinary shares,
conditionally allocated but not yet crystallised, lapsed.
*** resigned on 2 October 1997. All ordinary shares, conditionally allocated but
not yet crystallised, lapsed.
Subsequent to the introduction of the long term incentive plan executive
directors are no longer eligible to participate in the company's discretionary
executive share option scheme, although the executive directors can participate
in the employee sharesave scheme which is open to all employees. The
Remuneration committee determines the maximum number of options granted under
the employee sharesave scheme which is an Inland Revenue approved scheme.
F-156
<PAGE> 379
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(iv) Pension Arrangements
Executive directors are members of the company pension scheme which is
detailed in note 41 to the financial statements. Normal retirement age for
executive directors is 60. Each executive director has been notified on an
individual basis of the estimated pension payable on retirement at 60. The total
pension at 60, including benefits in respect of previous employment, will be
restricted in all cases to a maximum of two-thirds of pensionable pay. Pensions
accrue uniformly between the date of joining the scheme and the normal
retirement date.
Normally an actuarial reduction applies if pensions are paid before the
normal retirement age but there is a discretion to pay pensions unreduced. The
pension for each director is based on his service with the company, together
with service transferred into the company's pension scheme from the director's
previous employers. The pension arrangements provide for a pension on retirement
based on salary alone. Post retirement pension increases are payable in line
with increases in the retail prices index, subject to a maximum of 5% per annum.
Retail prices increases in excess of 5% per annum are paid, providing the
actuary to the Hyder Water Pension Scheme certifies that the scheme's resources
are sufficient. Executive directors' dependants are eligible for dependant's
pensions and the payment of a lump sum in the event of a director's death in
service.
In the case of J M James (who has agreed to continue service for a further
18 months beyond attaining the age of 60) his pension will continue to accrue
during his extended period of service on an uniform basis.
Pension contributions are made on behalf of the executive directors at the
rate of 12.0% (1999 12.0%; 1998 12.0%) of pensionable pay.
To the extent that their benefits from the company scheme are restricted by
Inland Revenue limits, J M James, P J Twamley and J E Roberts have been granted
unfunded pension arrangements which have been set up to provide that part of
each director's pension entitlement which exceeds Inland Revenue limits.
The directors' pension benefits were as follows:
<TABLE>
<CAPTION>
TRANSFER
VALUE
EQUIVALENT
TOTAL INCREASE/ OF INCREASE/
ACCRUED (DECREASE) IN (DECREASE)
AGE AT PENSION AT ACCRUED IN ACCRUED CONTRIBUTIONS COMPANY
31 MARCH 31 MARCH PENSION IN PENSION OVER PAID BY EACH PENSION
2000 2000 THE YEAR THE YEAR DIRECTOR COST
-------- ---------- ------------- ------------ ------------- -------
L000 P.A. L000 P.A. L000 L000 L000
<S> <C> <C> <C> <C> <C> <C>
G A Hawker.................. 52 153 (3) (49) 16 (65)
M P Brooker................. 52 80 2 25 9 16
J M James................... 60 48 4 77 12 65
P J Twamley................. 53 54 4 62 12 50
J E Roberts *............... 54 17 1 19 3 16
</TABLE>
-------------------------
* resigned on 25 May 1999
The total accrued pension shown is the annual pension which would be
payable from age 60 to which each director would have been entitled, based on
service up to 31 March 2000 and based on
F-157
<PAGE> 380
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
31 March 2000 pay levels. The increase/(decrease) in accrued pension in the year
excludes any increase for inflation during the year ended 31 March 2000.
The transfer value figures have been calculated on the basis of actuarial
advice in accordance with Actuarial Guidance Note GN11.
The company pension cost is the transfer value equivalent of the increase
in accrued pension less contributions paid by each director. The transfer values
shown make no allowance for the cost of death in service or private health
insurance benefits. Paragraph 4.19 of the Report of Committee on Corporate
Governance (Hampel Report published January 1998) states that the transfer value
represents a liability of the company but not a sum paid or due to the
individual. Accordingly it cannot meaningfully be added to annual remuneration.
The figures for J M James, P J Twamley and J E Roberts include their
unapproved pensions.
Retirement benefits are accruing to four directors under defined benefit
schemes. No directors have benefits accruing under defined contribution schemes.
(E) REMUNERATION POLICY, SERVICE CONTRACTS AND COMPENSATION
In performing its duties, the committee has considered the provisions of
Schedule B of the Combined Code annexed to the London Stock Exchange Listing
Rules.
Directors' service contracts are on a one year rolling basis. In certain
circumstances the company may be obliged to pay compensation for the unexpired
portion of the contract, if it is terminated early. No other payments are made
for compensation for loss of office, and mitigation would normally be applied,
although mitigation does not apply in the event of a change in control. The
executive directors' service contracts will be available for inspection at the
annual general meeting.
(F) REMUNERATION
The combined emoluments of the directors for their services as directors of
the company and its subsidiaries are set out below:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
L000 L000 L000
<S> <C> <C> <C>
Fees........................................................ 218 215 222
Salary payments (including benefits in kind)................ 929 1,056 1,106
Performance related bonus................................... -- 345 355
----- ----- -----
1,147 1,616 1,683
Compensation for loss of office............................. -- -- 403
----- ----- -----
1,147 1,616 2,086
===== ===== =====
</TABLE>
F-158
<PAGE> 381
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The directors' emoluments, excluding pension contributions, were as
follows:
<TABLE>
<CAPTION>
PERFORMANCE
RELATED BENEFITS
SALARY/FEES BONUS IN KIND TOTAL
------------- ----------- ----------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999 1998
----- ----- ---- ---- ---- ---- ----- ----- -----
L000 L000 L000 L000 L000 L000 L000 L000 L000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
G A Hawker..................... 268 260 -- 95 13 10 281 365 345
M P Brooker.................... 150 146 -- 47 14 13 164 206 181
B H Charles(v)................. -- -- -- -- -- -- -- -- 64
S J Doughty(vi)................ -- -- -- -- -- -- -- -- 98
J M James...................... 196 190 -- 64 19 19 215 273 250
J E Roberts(iv)................ 52 200 -- 69 4 12 56 281 259
P J Twamley.................... 196 190 -- 70 17 16 213 276 263
----- ----- -- --- -- -- ----- ----- -----
862 986 -- 345 67 70 929 1,401 1,460
===== ===== == === == == ===== ===== =====
J V H Robins(i)................ 125 113 -- -- -- -- 125 113 14
I R Evans...................... -- 15 -- -- -- -- -- 15 126
A J Hales(vii)................. -- -- -- -- -- -- -- -- 8
D G Hawkins.................... 28 28 -- -- -- -- 28 28 25
T Knowles(ii).................. 9 28 -- -- -- -- 9 28 25
R B Salmon(iii)................ 28 3 -- -- -- -- 28 3 --
R H Sellier.................... 28 28 -- -- -- -- 28 28 25
----- ----- -- --- -- -- ----- ----- -----
218 215 -- -- -- -- 218 215 223
===== ===== == === == == ===== ===== =====
1,080 1,201 -- 345 67 70 1,147 1,616 1,683
===== ===== == === == == ===== ===== =====
</TABLE>
-------------------------
(i) appointed Group Chairman from 15 May 1998
(ii) retired as a non-executive director on 23 July 1999
(iii) appointed as non-executive director on 24 February 1999
(iv) resigned on 25 May 1999
(v) resigned 25 July 1997
(vi) resigned 2 October 1997, and as a result received the compensation for
loss of office referred to above
(vii) resigned 25 July 1997
F-159
<PAGE> 382
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
HIGHEST PAID DIRECTOR
<TABLE>
<CAPTION>
G A HAWKER G A HAWKER G A HAWKER
2000 1999 1998
---------- ---------- ----------
L000 L000 L000
<S> <C> <C> <C>
Aggregate emoluments................................. 281 365 345
Gains on share options exercised..................... -- -- 9
--- --- ---
281 365 354
=== === ===
Accrued pension at end of the year under defined
benefit pension schemes............................ 153 153 139
=== === ===
</TABLE>
(G) DIRECTORS' INTERESTS IN SHARES
The beneficial interests of the directors in the ordinary shares,
preference shares and options to subscribe for ordinary shares of the company at
31 March 2000, 31 March 1999 and 31 March 1998 were as follows:
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE OPTIONS OVER ORDINARY
PREFERENCE SHARES OF L1 SHARES OF 120P
ORDINARY SHARES OF 120P ------------------------ ------------------------
--------------------------------------------- 31 MARCH 31 MARCH
31 MARCH 31 MARCH 31 MARCH 31 MARCH 1999 AND 31 MARCH 1999 AND
2000 1999 1998 2000 1998 2000 1998
------------- ------------- ------------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
J V H Robins......... 1,109 1,016 1,000 -- -- -- --
G A Hawker........... 14,212 *14,212 13,932 13,408 13,408 894 894
M P Brooker.......... 13,158 13,158 13,158 14,408 14,408 794 794
J M James............ 13,084 20,584 28,284 450 450 41,070 41,070
P J Twamley.......... 5,202 4,538 4,354 2,070 2,070 14,839 15,076
D G Hawkins.......... 577 528 502 -- -- -- --
R B Salmon........... 4,500 -- -- -- -- -- --
R H Sellier.......... 294 268 255 252 252 -- --
T Knowles(i)......... n/a 5,415 5,415 n/a 5,850 n/a --
J E Roberts(ii)...... n/a 1,034 1,000 n/a -- n/a 2,484
------ ------- ------ ------ ------ ------ ------
52,136 60,753 67,900 30,588 36,438 57,597 60,318
====== ======= ====== ====== ====== ====== ======
</TABLE>
-------------------------
* The interest of GA Hawker has been revised from that previously reported
following notification of an under-reporting of his PEP interest in a
previous financial period
(i) Retired 23 July 1999
(ii) Resigned 25 May 1999
In addition, at 31 March 2000 R H Sellier was beneficially interested in
7.125% Sterling bonds redeemable in 2004 issued by Welsh Water Utilities Finance
PLC with a nominal value of L9,000 (1999 L9,000).
The above table does not include conditional allocations of shares under
the long term incentive plan, details of which are set out in note 6(c)(iii).
F-160
<PAGE> 383
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(H) SHARE OPTIONS
No director was granted any share options during the period 1 April 1999 to
31 March 2000.
Options held by each of the directors over the ordinary shares of the
company are as below. Options are held under the terms of the employee sharesave
scheme, except as marked sec. which were under the terms of the executive share
option scheme.
<TABLE>
<CAPTION>
SHARE
PRICE ON
OPTION DATE OF
1 APRIL 1 APRIL 1 APRIL GRANTED EXERCISED 31 MARCH PRICE EXERCISE DATE
1997 1998 1999 IN YEAR IN YEAR 2000 (PENCE) (PENCE) EXERCISABLE
------------ ------- ------- ------- --------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
G A Hawker........... 1,550 894 894 -- -- 894 650 -- Sept 2000
======== ====== ====== == === ====== === === =========
M P Brooker.......... 2,481 164 164 -- -- 164 521 -- Oct 2001
-- 630 630 -- -- 630 650 -- Sept 2000
-------- ------ ------ -- --- ------ --- --- ---------
2,481 794 794 -- -- 794
======== ====== ====== == === ======
J M James............ sec.44,938 41,070 41,070 -- -- 41,070 563 -- Jul 1996
======== ====== ====== == === ====== === === =========
P J Twamley.......... sec.18,707 14,839 14,839 -- -- 14,839 563 -- Jul 1996
237 237 237 -- 237 -- 523 544 Oct 1999
-------- ------ ------ -- --- ------ --- --- ---------
18,944 15,076 15,076 -- 237 14,839
======== ====== ====== == === ======
<CAPTION>
EXPIRY
DATE
--------
<S> <C>
G A Hawker........... Feb 2001
========
M P Brooker.......... Mar 2002
Feb 2001
--------
J M James............ Jul 2003
========
P J Twamley.......... Jul 2003
Mar 2000
--------
</TABLE>
In 1998 the directors exercised options which resulted in gains on exercise
of options of L246,000.
On 1 October 1999 PJ Twamley exercised 237 options under the sharesave
scheme. This resulted in a gain on exercise of options by directors during the
year of L48 (1999: nil). The gain is the difference between the share option
price and the share price on the date the share options are exercised.
No other director exercised any options during the 2000 year.
SJ Doughty resigned on 2 October 1997. As at 1 April 1997 he held 57,673
share options, all of which were exercised prior to 31 March 1998.
JE Roberts resigned as a director on 25 May 1999 and subsequently 2,484
options held under the sharesave scheme lapsed.
Executive share option prices are fixed at the closing mid market value on
the day preceding the date of grant. Employee sharesave options are fixed at the
closing mid market value on the day preceding the date of grant less 20%
discount.
All executive share options are exercisable between three and ten years
from the date of grant. Options granted under the employee sharesave scheme are
exercisable within six months after the expiry of a three, five or seven year
save as you earn savings contract. All options may be exercisable earlier in
certain circumstances (such as retirement or redundancy).
The middle market price of an ordinary share at the close of business on 31
March 2000 was 221.75p (1999: 786p; 1998: 978p) and the range during the year to
that date was 179p to 789.5p (1999: 748p to 1,040p; 1998: 774p to 1,049p).
F-161
<PAGE> 384
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(I) STAFF COSTS
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
LM LM LM
<S> <C> <C> <C>
Wages and salaries.......................................... 231.5 215.3 202.8
Social security costs....................................... 16.5 15.9 14.8
Pension costs............................................... 14.7 14.5 14.3
----- ----- -----
262.7 245.7 231.9
===== ===== =====
</TABLE>
Of the above, L38.4m (1999 L43.9m; 1998 L47.3m) has been charged to
capital.
(J) AVERAGE MONTHLY NUMBER OF EMPLOYEES DURING THE YEAR (INCLUDING EXECUTIVE
DIRECTORS)
<TABLE>
<CAPTION>
2000 1999 1998
NUMBER NUMBER NUMBER
------ ------ ------
<S> <C> <C> <C>
Continuing operations:
Regulated water and sewerage activities................... 1,737 1,906 2,071
Regulated electricity distribution activities............. 994 1,129 1,279
Infrastructure activities................................. 4,161 3,700 3,454
Managed services activities............................... 2,008 1,910 1,536
Other activities.......................................... 199 214 199
----- ----- -----
9,099 8,859 8,539
Discontinued operations:
Energy supply activities.................................. 193 236 126
Infrastructure activities................................. 254 287 279
----- ----- -----
9,546 9,382 8,944
===== ===== =====
</TABLE>
7. GROUP INCOME FROM INVESTMENTS
<TABLE>
<CAPTION>
1999 1998
2000 RESTATED RESTATED
---- -------- --------
LM LM LM
<S> <C> <C> <C>
Fixed asset investment income -- continuing operations:
Infrastructure activities................................. 3.0 6.5 8.9
Other activities.......................................... 0.5 3.4 0.4
--- --- ---
3.5 9.9 9.3
=== === ===
</TABLE>
F-162
<PAGE> 385
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. PROFIT ON DISPOSAL OF INTERESTS IN INVESTMENTS
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
LM LM LM
<S> <C> <C> <C>
Infrastructure activities:
Profit on disposal of investments......................... 2.3 18.6 --
Profit on the grant of option in Transurban Link
Limited................................................ -- -- 3.9
--- ---- ---
2.3 18.6 3.9
Other activities:
Profit on disposal of investments......................... 3.4 -- 1.6
--- ---- ---
5.7 18.6 5.5
=== ==== ===
</TABLE>
On 21 January 2000 the group disposed of 50% of its interest in Transurban
City Link for L7.3m realising a profit on disposal of L1.3m.
On 25 February 2000 the group received L1.6m in respect of a part disposal
by the Asian Infrastructure Fund of its shares in FLAG (Fibre Optic Cable
Company) following its listing on the New York Stock Exchange, realising a
profit of L1.0m.
On 4 August 1999 the group disposed of its interest in EA Technology
Limited for L0.4m realising a profit of L0.3m.
On 9 August 1999 the group disposed of its interest in UK Data Collection
Services Limited for L3.2m realising a profit of L3.1m.
On 5 May 1998 the group disposed of its interest in National
Telecommunications Inc for L45.3m realising a profit on disposal of L15.3m.
On 13 November 1998 the group disposed of the majority of its interest in
Severoceske Vcodovody a Kanalizace a.s. for L16.0m realising a profit on
disposal of L3.3m after writing back goodwill previously written off directly to
reserves of L2.0m.
On 5 November 1997 the group disposed of its interest in National Grid
Group Plc for L2.8m realising a profit on disposal of L1.6m.
9. GROUP INTEREST PAYABLE
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
LM LM LM
<S> <C> <C> <C>
On bank loans and overdrafts................................ 1.7 2.0 1.5
On other loans.............................................. 152.4 127.8 99.8
On finance leases........................................... 12.2 13.6 12.2
----- ----- -----
166.3 143.4 113.5
===== ===== =====
</TABLE>
F-163
<PAGE> 386
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10. TAXATION
(A) ORDINARY TAXATION
<TABLE>
<CAPTION>
1999 1998
2000 RESTATED RESTATED
----- -------- --------
LM LM LM
<S> <C> <C> <C>
Based on the results for the year:
UK corporation tax at 30% (1999 31%; 1998 31%)............ -- 66.4 10.9
Advance corporation tax (written back)/written off........ -- (40.3) 5.9
Deferred taxation......................................... 15.0 -- --
Overseas taxation......................................... 1.0 0.4 (0.1)
Share of joint ventures taxation.......................... 0.3 0.7 0.8
Share of associated undertakings taxation................. -- 0.4 0.5
----- ----- -----
16.3 27.6 18.0
Prior year adjustments:
Corporation tax........................................... (14.4) (16.8) 2.8
Overseas taxation......................................... -- (0.1) --
Consortium relief......................................... -- (2.1) (7.2)
----- ----- -----
1.9 8.6 13.6
===== ===== =====
</TABLE>
The tax charge on the profit for the year has been reduced by L12.2m (1999
increased by L9.0m; 1998 reduced by L32.8m) in respect of timing differences for
which no deferred tax provision is made, and by L9.7m (1999 Lnil; 1998 L1.6m) in
respect of exceptional items incurred in the year (note 5).
The cumulative amount of advance corporation tax written off of L51.2m
(1999 L35.3m; 1998 L64.5m) is available for relief against future tax
liabilities in very limited circumstances and therefore has not been treated as
reducing the unprovided amount of deferred taxation as disclosed in note 27(a).
There are losses within the group of approximately L1.0m (1999 L5.0m; 1998
L5.0m) available to carry forward against future profits of those companies
which incurred the losses.
(B) EXCEPTIONAL TAXATION -- WINDFALL TAX
The exceptional taxation charge relates to the windfall tax levied on
privatised utility companies. The liability was L281.9m in respect of the two
privatised utility businesses (L192.3m for Hyder plc and L89.6m for South Wales
Electricity plc). The first instalment of L140.9m was paid on 1 December 1997
and the balance of the liability was paid on 1 December 1998.
F-164
<PAGE> 387
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. DIVIDENDS
(A) DIVIDENDS ON EQUITY SHARES:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
LM LM LM
<S> <C> <C> <C>
Interim paid of 6.7p per ordinary share (1999 16.8p; 1998
16.2p).................................................... 10.1 24.8 23.4
Final proposed of nil pence per ordinary share (1999 33.6p;
1998 34.2p including 1.5p per share compensation for
delayed payment).......................................... -- 49.7 49.9
---- ---- ----
Total paid and proposed 6.7p per ordinary share (1999 50.4p;
1998 50.4p)............................................... 10.1 74.5 73.3
==== ==== ====
</TABLE>
(B) DIVIDENDS ON NON-EQUITY SHARES:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
LM LM LM
<S> <C> <C> <C>
Dividends of 7.875p (net) per preference share (1999 7.875p
(net); 1998 7.875p (net))................................. 16.4 16.4 16.4
==== ==== ====
</TABLE>
12. EARNINGS PER SHARE
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------ ------------------------------ -------------------------------
PROFIT EARNINGS PER PROFIT EARNINGS PER (LOSS)/PROFIT (LOSS)/EARNINGS
ATTRIBUTABLE SHARE ATTRIBUTABLE SHARE ATTRIBUTABLE PER SHARE
TO ORDINARY --------------- TO ORDINARY --------------- TO ORDINARY ---------------
SHAREHOLDERS BASIC DILUTED SHAREHOLDERS BASIC DILUTED SHAREHOLDERS BASIC DILUTED
------------ ----- ------- ------------ ----- ------- ------------- ----- -------
LM PENCE PENCE LM PENCE PENCE LM PENCE PENCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Profit attributable to
ordinary shareholders....... 58.2 39.0 39.0 181.0 123.4 122.5 (143.7) (99.8) (98.4)
Adjusting items:
Exceptional items (net of
taxation)................. 118.9 79.6 79.5 -- -- -- 38.4 26.7 26.3
Windfall tax................ -- -- -- -- -- -- 281.9 195.8 193.0
Profit on disposal of group
operations (net of
taxation)................. (32.0) (21.4) (21.4) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ------ ----- -----
Adjusted profit attributable
to ordinary shareholders.... 145.1 97.2 97.1 181.0 123.4 122.5 176.6 122.7 120.9
===== ===== ===== ===== ===== ===== ====== ===== =====
</TABLE>
EARNINGS PER SHARE HAVE BEEN CALCULATED BASED UPON:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER
------ ------- ------ ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Weighted average ordinary shares in
issue................................. 149.3 149.4 146.7 147.7 143.9 146.0
===== ===== ===== ===== ===== =====
</TABLE>
F-165
<PAGE> 388
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average number of shares disclosed above is stated after
excluding the 3.5m (1999 3.7m; 1998 3.9m) weighted average ordinary shares held
by the qualifying employee share options trust and under the executive
directors' long term incentive plan, the shares in which are treated as held by
the company until they vest. The difference between the basic and diluted
weighted average number of ordinary shares in issue is wholly attributable to
outstanding share options.
13. INTANGIBLE FIXED ASSETS
GROUP
<TABLE>
<CAPTION>
GOODWILL GOODWILL
FISHING RIGHTS (POSITIVE) (NEGATIVE) TOTAL
-------------- ---------- ---------- -----
LM LM LM LM
<S> <C> <C> <C> <C>
COST
At 1 April 1999................................... 0.9 5.2 (1.8) 4.3
Additions......................................... -- 0.3 0.1 0.4
Disposals......................................... (0.9) -- -- (0.9)
---- --- ---- ----
At 31 March 2000.................................. -- 5.5 (1.7) 3.8
==== === ==== ====
AMOUNTS PROVIDED
At 1 April 1999................................... 0.5 -- -- 0.5
Provided in the year.............................. -- 0.3 -- 0.3
Disposals......................................... (0.5) -- -- (0.5)
---- --- ---- ----
At 31 March 2000.................................. -- 0.3 -- 0.3
==== === ==== ====
NET BOOK VALUE
At 31 March 2000.................................. -- 5.2 (1.7) 3.5
==== === ==== ====
At 31 March 1999.................................. 0.4 5.2 (1.8) 3.8
==== === ==== ====
</TABLE>
Goodwill is amortised over a period of 20 years being the directors'
estimate of the useful economic life of these assets. Negative goodwill has
resulted from acquisitions where net assets are acquired at a discount to the
book value of net assets and is amortised between 2.5 years and 20 years.
F-166
<PAGE> 389
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14. TANGIBLE FIXED ASSETS
GROUP
<TABLE>
<CAPTION>
VEHICLES, PLANT,
LEASEHOLD WATER & EQUIPMENT,
PROPERTIES SEWERAGE ELECTRICITY COMPUTER
FREEHOLD AND INFRA- DISTRIBUTION HARDWARE &
LAND AND IMPROVE- STRUCTURE OPERATIONAL NETWORK CAPITALISED
BUILDINGS MENTS ASSETS STRUCTURES ASSETS SOFTWARE TOTAL
--------- ---------- --------- ----------- ------------ ---------------- -------
LM LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
COST OR VALUATION
At 1 April 1999.................... 76.9 6.7 1,060.0 1,425.5 902.4 435.8 3,907.3
Exchange difference................ (0.5) (0.1) -- -- -- (0.1) (0.7)
Additions.......................... 1.8 0.2 137.8 119.6 62.5 41.5 363.4
Grants and contributions........... -- -- (6.6) (1.4) -- -- (8.0)
Amounts written off................ (3.1) -- -- -- -- (80.2) (83.3)
Disposals.......................... (0.4) (3.9) (1.0) -- (1.8) (18.6) (25.7)
Sale of group operations........... -- -- -- -- -- (20.9) (20.9)
---- ---- ------- ------- ----- ----- -------
At 31 March 2000................... 74.7 2.9 1,190.2 1,543.7 963.1 357.5 4,132.1
==== ==== ======= ======= ===== ===== =======
ACCUMULATED DEPRECIATION
At 1 April 1999.................... 21.3 2.2 240.4 315.0 275.7 220.3 1,074.9
Exchange difference................ (0.1) -- -- -- -- -- (0.1)
Charge for the year................ 1.7 0.3 34.7 39.1 25.1 39.5 140.4
Amounts written off................ (1.0) -- -- -- -- (5.7) (6.7)
Disposals.......................... (0.1) (1.0) (1.0) -- (1.4) (17.0) (20.5)
Sale of group operations........... -- -- -- -- -- (7.0) (7.0)
---- ---- ------- ------- ----- ----- -------
At 31 March 2000................... 21.8 1.5 274.1 354.1 299.4 230.1 1,181.0
==== ==== ======= ======= ===== ===== =======
NET BOOK VALUE
At 31 March 2000................... 52.9 1.4 916.1 1,189.6 663.7 127.4 2,951.1
==== ==== ======= ======= ===== ===== =======
At 31 March 1999................... 55.6 4.5 819.6 1,110.5 626.7 215.5 2,832.4
==== ==== ======= ======= ===== ===== =======
ANALYSIS OF NET BOOK VALUE AT 31
MARCH 2000
Owned.............................. 52.9 0.8 916.1 964.1 663.7 127.0 2,724.6
Held under finance leases.......... -- 0.6 -- 225.5 -- 0.4 226.5
---- ---- ------- ------- ----- ----- -------
52.9 1.4 916.1 1,189.6 663.7 127.4 2,951.1
==== ==== ======= ======= ===== ===== =======
</TABLE>
(a) Tangible fixed assets at 31 March 2000 include L428.1m (1999 L429.5m)
of assets in the course of construction, which are not depreciated until
commissioned.
(b) The net book value of leasehold properties and improvements comprise:
<TABLE>
<CAPTION>
2000 1999
---- ----
LM LM
<S> <C> <C>
Long leasehold.............................................. 1.4 0.6
Short leasehold............................................. -- 3.9
--- ---
Total leasehold............................................. 1.4 4.5
=== ===
</TABLE>
(c) Electricity distribution network assets include assets leased to third
parties under operating leases. The cost of these was L3.8m (1999 L3.8m) and
accumulated depreciation amounted to L1.1m (1999 L0.9m) at 31 March 2000.
F-167
<PAGE> 390
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(d) The accounting treatment for grants and customer contributions in
respect of infrastructure assets is set out in the principal accounting
policies. This treatment is not in accordance with schedule 4 to the Companies
Act 1985. As a consequence the net book value of fixed assets and deferred
income is L156.3m (1999 L140.2m) lower than it would have been had this
treatment not been adopted.
COMPANY
<TABLE>
<CAPTION>
VEHICLES, PLANT,
EQUIPMENT
AND COMPUTER
HARDWARE &
FREEHOLD LAND CAPITALISED
AND BUILDINGS SOFTWARE TOTAL
------------- ---------------- -----
LM LM LM
<S> <C> <C> <C>
COST
At 1 April 1999........................................ 0.8 2.4 3.2
Additions.............................................. -- 0.1 0.1
--- --- ---
At 31 March 2000....................................... 0.8 2.5 3.3
=== === ===
ACCUMULATED DEPRECIATION
At 1 April 1999........................................ -- 0.8 0.8
Charge for the year.................................... -- 0.3 0.3
--- --- ---
At 31 March 2000....................................... -- 1.1 1.1
=== === ===
NET BOOK VALUE
At 31 March 2000....................................... 0.8 1.4 2.2
=== === ===
At 31 March 1999....................................... 0.8 1.6 2.4
=== === ===
</TABLE>
15. INVESTMENT PROPERTIES
GROUP
<TABLE>
<CAPTION>
LM
<S> <C>
At 1 April 1999............................................. 9.4
Adjustment to open market value............................. 1.5
----
At 31 March 2000............................................ 10.9
====
</TABLE>
Investment properties were valued at 31 March 2000 by Cooke & Arkwright, a
firm of Chartered Surveyors, on the basis of open market value. These properties
are rented to third parties under operating leases. Investment properties
comprise L10.9m (1999 L9.4m) of freehold properties.
The accounting treatment for investment properties is set out in the
principal accounting policies. This treatment is not in accordance with schedule
4 to the Companies Act 1985. As a consequence the profit before interest for the
year is L0.2m (1999 L0.2m) higher than it would have been had this treatment
been adopted.
F-168
<PAGE> 391
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
16. FIXED ASSET INVESTMENTS
GROUP
<TABLE>
<CAPTION>
INTERESTS IN INTERESTS IN
OWN JOINT ASSOCIATED LISTED UNLISTED
SHARES VENTURES UNDERTAKINGS INVESTMENTS INVESTMENTS TOTAL
------ ------------ ------------ ----------- ----------- -----
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
COST
At 1 April 1999................ 21.7 20.4 9.9 46.5 19.4 117.9
Exchange differences........... -- (0.1) 0.1 -- (0.1) (0.1)
Additions...................... -- 16.5 -- 1.8 -- 18.3
Disposals...................... (1.4) -- -- (6.6) (0.2) (8.2)
Share of retained profits...... -- 0.9 0.6 -- -- 1.5
Reclassification............... -- 0.1 (0.1) (4.3) -- (4.3)
---- ---- ---- ---- ---- -----
At 31 March 2000............... 20.3 37.8 10.5 37.4 19.1 125.1
==== ==== ==== ==== ==== =====
AMOUNTS PROVIDED
At 1 April 1999................ -- -- 0.1 3.0 0.8 3.9
Disposals...................... -- -- -- (1.1) -- (1.1)
Provided in the year........... 10.0 -- -- 1.6 -- 11.6
---- ---- ---- ---- ---- -----
At 31 March 2000............... 10.0 -- 0.1 3.5 0.8 14.4
==== ==== ==== ==== ==== =====
NET BOOK VALUE
At 31 March 2000............... 10.3 37.8 10.4 33.9 18.3 110.7
==== ==== ==== ==== ==== =====
At 31 March 1999............... 21.7 20.4 9.8 43.5 18.6 114.0
==== ==== ==== ==== ==== =====
</TABLE>
The market value of the listed investments, excluding the group's L27.9m
(1999 L27.1m) investment in the Asian Infrastructure Fund, is L15.4m (1999
L31.1m).
The directors consider that the market value of the group's investment in
the Asian Infrastructure Fund, which is a closed end fund with no ready market
for the shares, is not materially different from the carrying value of that
investment.
The listed investment of L4.3m has been reclassified as a current asset
investment (note 19).
Own shares relate to ordinary shares purchased under the qualifying
employee share option trust (note 30(c)) and the executive directors' long term
incentive plan (note 30(b)). The nominal value of these shares is L4.1m (1999
L4.3m).
F-169
<PAGE> 392
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
COMPANY
<TABLE>
<CAPTION>
INTERESTS
IN GROUP UNLISTED
OWN SHARES UNDERTAKINGS INVESTMENTS TOTAL
---------- ------------ ----------- -------
LM LM LM LM
<S> <C> <C> <C> <C>
COST
At 1 April 1999............................... 21.7 1,549.9 0.4 1,572.0
Additions..................................... -- 64.0 -- 64.0
Disposals..................................... (1.4) -- -- (1.4)
---- ------- --- -------
At 31 March 2000.............................. 20.3 1,613.9 0.4 1,634.6
==== ======= === =======
AMOUNTS PROVIDED
At 1 April 1999............................... -- 1.4 0.3 1.7
Provided in the year.......................... 10.0 76.1 -- 86.1
---- ------- --- -------
At 31 March 2000.............................. 10.0 77.5 0.3 87.8
==== ======= === =======
NET BOOK VALUE
At 31 March 2000.............................. 10.3 1,536.4 0.1 1,546.8
==== ======= === =======
At 31 March 1999.............................. 21.7 1548.5 0.1 1,570.3
==== ======= === =======
</TABLE>
Principal group undertakings are listed in note 44.
17. STOCKS AND WORK IN PROGRESS
GROUP
<TABLE>
<CAPTION>
2000 1999
---- ----
LM LM
<S> <C> <C>
Raw materials and consumables............................... 7.8 8.8
Work in progress............................................ 9.0 6.5
Finished goods and goods for resale......................... 0.1 0.7
---- ----
16.9 16.0
==== ====
</TABLE>
The replacement cost of stocks is not materially different from their
carrying value.
F-170
<PAGE> 393
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
18. DEBTORS
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
LM LM LM LM
<S> <C> <C> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR:
Trade debtors............................................... 101.6 145.2 -- --
Amounts recoverable on contracts............................ 29.2 26.1 -- --
Amounts owed by subsidiary undertakings..................... -- -- 353.8 410.9
Amounts owed by associated undertakings..................... 0.7 0.5 -- --
Net investment in finance leases............................ 0.2 0.1 -- --
Other debtors............................................... 29.6 40.1 0.6 3.2
Prepayments and accrued income.............................. 62.1 91.8 10.1 9.3
Amounts due on sale of group operations (note 39)........... 11.2 -- -- --
----- ----- ----- -----
234.6 303.8 364.5 423.4
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR:
Net investment in finance leases............................ 1.6 1.0 -- --
Other debtors............................................... 1.8 9.4 -- --
----- ----- ----- -----
238.0 314.2 364.5 423.4
===== ===== ===== =====
</TABLE>
19. CURRENT ASSET INVESTMENTS
MANAGEMENT OF LIQUID RESOURCES
<TABLE>
<CAPTION>
GROUP COMPANY
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
LM LM LM LM
<S> <C> <C> <C> <C>
INVESTMENTS IN:
Sterling fixed term and call deposits....................... 397.2 470.5 339.8 381.9
Sterling denominated commercial papers...................... 31.8 120.8 14.9 82.5
----- ----- ----- -----
429.0 591.3 354.7 464.4
Listed investment held for resale........................... 4.3 -- -- --
----- ----- ----- -----
433.3 591.3 354.7 464.4
===== ===== ===== =====
AMOUNTS BECOMING DUE:
Within one year............................................. 433.3 591.3 354.7 464.4
===== ===== ===== =====
</TABLE>
The fixed asset investment held for resale is the group's 20% interest in
the issued share capital of Severoceske Vodovody a Kanalizace a.s. ("ScVK")
which is held at cost. The market value of the ScVK investment is L2.6m (1999
L1.9m). The company has not reduced the carrying value of this investment as the
company has a put option which requires a third party to purchase this
investment at a price greater than the carrying value. The directors do not
consider that the group's 20% interest in ScVK gives them significant influence
over the operations of that company to include the investment as an associate.
F-171
<PAGE> 394
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
20. CREDITORS
(A) AMOUNTS FALLING DUE WITHIN ONE YEAR:
<TABLE>
<CAPTION>
GROUP COMPANY
----------------- -----------------
NOTE 2000 1999 2000 1999
----- ------- ------- ------- -------
LM LM LM LM
<S> <C> <C> <C> <C> <C>
Bank loans and overdrafts....................... 5.8 0.6 -- --
Loan notes...................................... 21(d) 4.2 6.3 3.4 6.3
Other loans..................................... 21(c) 8.1 54.7 -- 6.4
Obligations under finance leases................ 22 0.3 0.3 -- --
Payments received on account on contracts....... 19.9 18.1 -- --
Trade creditors................................. 115.6 145.1 -- --
Amounts owed to subsidiary undertakings......... -- -- 0.2 1.0
Loans from subsidiary undertakings.............. -- -- 50.0 --
Dividends payable............................... 2.7 112.5 2.7 112.5
Corporation tax................................. 12.8 28.0 -- 3.0
Other taxation and social security.............. 13.0 12.3 -- 0.1
Other creditors................................. 89.1 88.0 -- --
Accruals and deferred income.................... 86.4 90.4 57.0 48.1
Capital commitments due to joint ventures and
associates.................................... 5.7 -- -- --
------- ------- ------- -------
363.6 556.3 113.3 177.4
======= ======= ======= =======
(B) AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR:
Sterling bonds.................................. 21(a) 1,024.9 1,024.5 678.7 678.4
US$ bonds....................................... 21(b) 615.4 615.2 615.4 615.2
Other loans..................................... 21(c) 212.9 219.1 10.8 8.6
Obligations under finance leases................ 22 265.5 265.7 -- --
Creditors between one and five years:........... -- --
Capital commitments due to joint ventures and
associates................................. 17.7 10.3 -- --
Refundable customer contributions............. 4.0 4.9 -- --
Other......................................... 3.1 7.3 -- --
------- ------- ------- -------
2,143.5 2,147.0 1,304.9 1,302.2
======= ======= ======= =======
</TABLE>
F-172
<PAGE> 395
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
21. LOANS
(A) STERLING BONDS
<TABLE>
<CAPTION>
INTEREST NOMINAL PREMIUM ISSUE NET NET COSTS CARRYING
MATURITY DATE RATE VALUE ON ISSUE COSTS PROCEEDS AMORTISED VALUE
------------- -------- ------- -------- ----- -------- --------- --------
% LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
GROUP
2002............................... 10.750 75.0 -- (1.0) 74.0 0.8 74.8
2004............................... 7.125 100.0 1.1 (2.0) 99.1 0.5 99.6
2006............................... 8.750 200.0 3.2 (2.3) 200.9 (0.1) 200.8
2014............................... 7.625 100.0 0.8 (2.6) 98.2 0.5 98.7
2016............................... 9.500 200.0 6.8 (1.9) 204.9 (0.3) 204.6
2020............................... 9.250 150.0 1.7 (3.9) 147.8 0.1 147.9
2020............................... 7.000 200.0 -- (1.6) 198.4 0.1 198.5
------- ---- ----- ------- ---- -------
1,025.0 13.6 (15.3) 1,023.3 1.6 1,024.9
======= ==== ===== ======= ==== =======
COMPANY
2002............................... 10.750 75.0 -- (1.0) 74.0 0.8 74.8
2006............................... 8.750 200.0 3.2 (2.3) 200.9 (0.1) 200.8
2016............................... 9.500 200.0 6.8 (1.9) 204.9 (0.3) 204.6
2020............................... 7.000 200.0 -- (1.6) 198.4 0.1 198.5
------- ---- ----- ------- ---- -------
675.0 10.0 (6.8) 678.2 0.5 678.7
======= ==== ===== ======= ==== =======
</TABLE>
(B) US$ BONDS
<TABLE>
<CAPTION>
INTEREST NOMINAL PREMIUM ISSUE NET NET COSTS CARRYING
MATURITY DATE RATE VALUE ON ISSUE COSTS PROCEEDS AMORTISED VALUE
------------- -------- ------- -------- ----- -------- --------- --------
% LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C> <C>
GROUP & COMPANY
2004............................... 6.750 120.0 0.8 (1.4) 119.4 0.2 119.6
2007............................... 6.875 120.0 0.8 (1.4) 119.4 0.1 119.5
2008............................... 6.500 136.0 1.9 (2.1) 135.8 -- 135.8
2017............................... 7.250 60.0 0.4 (0.7) 59.7 -- 59.7
2028............................... 7.375 181.0 2.6 (2.9) 180.7 0.1 180.8
----- --- ---- ----- --- -----
617.0 6.5 (8.5) 615.0 0.4 615.4
===== === ==== ===== === =====
</TABLE>
Fixed interest rates on the sterling/US$ cross currency interest rate swaps
used to cover the US$ bonds referred to above range between 6.8% and 8.1%. The
full nominal value of US$1,025m was simultaneously swapped for sterling to match
the future US$ repayment liabilities at maturity.
F-173
<PAGE> 396
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(C) OTHER LOANS
<TABLE>
<CAPTION>
GROUP COMPANY
2000 1999 2000 1999
----- ----- ------- ----
LM LM LM LM
<S> <C> <C> <C> <C>
REPAYABLE AS FOLLOWS:
Within one year............................................. 8.1 54.7 -- 6.4
Between one and two years................................... 18.3 7.4 10.8 --
Between two and five years.................................. 24.2 24.5 -- --
After more than five years.................................. 170.4 187.2 -- 8.6
----- ----- ---- ----
221.0 273.8 10.8 15.0
===== ===== ==== ====
Repayable wholly within five years.......................... 11.2 49.0 10.8 6.4
Repayable wholly after five years........................... 140.0 148.6 -- 8.6
Repayable by instalments after five years................... 69.8 76.2 -- --
----- ----- ---- ----
221.0 273.8 10.8 15.0
===== ===== ==== ====
THESE LOANS ARE DENOMINATED IN THE FOLLOWING CURRENCIES:
Sterling.................................................... 206.4 243.7 -- --
Australian $................................................ -- 11.7 -- --
US$......................................................... 10.0 8.6 10.0 8.6
Canadian $.................................................. -- 6.4 -- 6.4
German marks................................................ 3.8 3.4 -- --
Euros....................................................... 0.8 -- 0.8 --
----- ----- ---- ----
221.0 273.8 10.8 15.0
===== ===== ==== ====
</TABLE>
Fixed interest rates on these loans range between 6.5% and 10.2% (1999 5.2%
and 10.2%) and variable interest rates varied between 1.0% below to 0.2% above
LIBOR (1999 1.0% below to 0.2% above LIBOR) (London Interbank offer rate).
(D) LOAN NOTES
The loan notes were issued in lieu of all or part of the cash consideration
due under the offer for South Wales Electricity plc to those of its shareholders
who elected as such. The notes bear interest, payable half yearly in arrears, at
the rate of 1% below six month LIBOR.
F-174
<PAGE> 397
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
22. FINANCE LEASES
GROUP
<TABLE>
<CAPTION>
2000 1999
----- -----
LM LM
<S> <C> <C>
AMOUNTS DUE UNDER FINANCE LEASES ARE PAYABLE AS FOLLOWS:
Within one year............................................. 0.3 0.3
Between one and two years................................... 0.1 0.2
Between two and five years.................................. -- 0.1
After more than five years.................................. 265.4 265.4
----- -----
265.8 266.0
===== =====
</TABLE>
A long dated interest rate swap was arranged on 1 April 1994 which has the
effect of fixing the rate of interest at 7.8% on floating rate sterling finance
lease obligations of L57.9m (1999 L59.3m). The obligations under the swap and
the finance lease reduce over a remaining period of 14 years.
23. MATURITY OF FINANCIAL LIABILITIES
The maturity profile of the group's gross borrowings, preference shares and
other financial liabilities, excluding bank overdrafts, was as follows:
<TABLE>
<CAPTION>
2000 1999
------- -------
LM LM
<S> <C> <C>
GROSS BORROWINGS:
In one year or less, or on demand........................... 12.6 61.3
In more than one year but not more than two years........... 94.8 7.6
In more than two years but not more than five years......... 249.8 198.7
In more than five years..................................... 1,774.1 1,918.2
------- -------
2,131.3 2,185.8
PREFERENCE SHARES:
In more than five years..................................... 206.6 206.6
OTHER FINANCIAL LIABILITIES:
In more than one year but not more than two years........... 3.0 7.7
In more than two years but not more than five years......... 17.5 5.8
In more than five years..................................... 4.3 9.0
------- -------
2,362.7 2,414.9
======= =======
</TABLE>
24. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(A) TREASURY MANAGEMENT AND FINANCIAL INSTRUMENTS
Group treasury activities are managed centrally within a formal set of
treasury policies and objectives which are regularly reviewed and approved by
the Board. The group's policy specifically prohibits any transactions of a
speculative nature and does not envisage the use of complex financial
instruments. The treasury team uses financial instruments including derivatives,
to raise finance and to manage risk from its operations. Surplus cash is
invested in short to medium term sterling financial
F-175
<PAGE> 398
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
investments. The Board annually establishes the investment criteria which is
restricted to banks or other institutions meeting required standards assessed by
reference to the major credit rating agencies.
The main treasury management risks faced relate to interest rate risk,
liquidity risk and foreign currency risk. The Board reviews and agrees policies
for managing these risks as summarised below.
(B) FINANCE AND INTEREST RATE RISK
The group's policy is to finance operating subsidiaries by a mixture of
retained profits, bank borrowings, finance leases and long term loans.
The group's policy is to keep the greater proportion of gross borrowings at
fixed rates of interest. Derivatives, predominately interest rate swaps and
forward rate agreements, are used to help manage the mix of fixed and floating
rate debt. At the year end, after taking account of interest rate swaps 89%
(1999 87%) of gross borrowings of L2,131m, were at long term fixed interest
rates, fixed for an average period of 12.9 years (1999 13.8 years). The
remaining 11% (1999 13%) were at floating rates of interest.
Exposure to floating rate debt of L244m (1999 L291m) is hedged against
interest rate movements by cash balances and deposits of L457m (1999 L612m).
Decisions on fixing interest rates on the floating rate loans will continue to
be considered as cash and deposit balances are utilised. The net effect of an
average increase in interest rates of 1% on the variable rate components of the
group's short term floating rate loans and cash balances during the year would
have resulted in an increase in profit before tax of L2.1m (1999 L0.5m).
(C) LIQUIDITY RISK
The group's objective is to maintain a balance between continuity of
funding and flexibility through the use of borrowings with a range of maturity
dates. The group's policy is to ensure that the maturity profile does not place
an excessive strain on the group's ability to repay loans. Currently no more
than 17% (1999 16%) of our borrowings mature in any twelve month period. In
addition, to preserve continuity of funding, at least 83% of borrowings will
mature in more than five years and at least 53% in more than ten years.
At the year end, 1% (1999 2%) of gross borrowings were due to mature in the
next twelve months; 16% (1999 10%) will mature in the following four years and
83% (1999 88%) thereafter.
In addition, the group's practice is to maintain adequate undrawn committed
facilities of at least 10% of borrowings in order to provide flexibility in the
management of the group's liquidity. At the year end we had multicurrency
committed facilities of L450m with ten banks of which L10.8m (1999 L14.7m) had
been utilised. The L10.8m utilisation relates to foreign currency loans required
for overseas investments thus creating a natural hedge. The weighted average
period until maturity of these facilities was 2.4 years.
Short term flexibility is achieved by managing an investment portfolio of
short term money market deposits and commercial paper purchases.
F-176
<PAGE> 399
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(D) FOREIGN CURRENCY RISK
Cumulative US Bond issues amounting to US$1,025m have been converted into
sterling as L617m.
The group has entered into US dollar swaps which ensure that the group is
not exposed to any currency exposure when the dollar repayments fall due.
The group has also entered into cross currency interest rate swaps whereby
the dollar coupon rates were exchanged for sterling interest rates.
The group has a number of overseas subsidiaries, joint venture and
associate entities reporting in local currencies and in order to protect the
group's sterling balance sheet from the movements in the respective
currency/sterling exchange rate, the group finances certain net investments in
subsidiary, joint ventures and associate entities by means of related currency
borrowings.
The group also has transactional currency exposures which arise from sales
and purchases by operating units in currencies other than the group's reporting
currency. All operating units are required to notify the treasury team of all
material currency contracts and commitments which potentially create currency
exposure on either a transaction or translation basis in order that the currency
exposure can be minimised.
At the year end, after taking into account the effects of forward foreign
exchange contracts, the group had foreign currency exposures with a net
unrealised loss of L1m (1999 L1m) in respect of unhedged foreign currency fixed
asset investments.
On average, foreign currencies relating to group activities did not move
materially against sterling during the year. Shareholders' funds were however
reduced by L1.3m at 31 March 2000 (1999 L0.2m increase) due to foreign exchange
movements affecting overseas debt, cash balances and other assets.
(E) CONTRACTS FOR DIFFERENCES
Contracts for differences (CFDs) existed within the energy supply business
prior to the disposal of the business to British Energy on 17 February 2000. The
CFDs largely insulated the group against the effects of variability of
electricity pool prices.
Any obligations arising under the CFDs were taken over by British Energy
when they acquired the energy supply businesses. No residual risk resides within
Hyder and as a consequence the unutilised power purchase provision of L59.3m
(note 27(e)) on 17 February 2000 was released to the profit and loss account as
part of the profit on disposal of group operations (note 39).
(F) SHORT TERM DEBTORS AND CREDITORS
Short term debtors and creditors have been excluded from the following
disclosures, other than the currency risk disclosures.
(G) INTEREST RATE SWAPS
The group and company have entered into interest rate swap arrangements in
order to manage the interest rate exposure of the group and the company and not
for trading or speculative purposes.
F-177
<PAGE> 400
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Group
The group's outstanding interest rate swap arrangements had a notional
principal balance of L724.9m (1999 L755.5m), with termination dates ranging
between December 2004 and December 2028 (1999 December 1999 and December 2028),
and interest rates ranging between 6.8% and 8.3% (1999 6.0% and 8.4%).
Company
At 31 March 2000 the company's outstanding interest rate swap arrangements
had a notional principal balance of L617.0m (1999 L617.0m) with termination
dates ranging between December 2004 and December 2028 (1999 December 2004 and
December 2028), and interest rates ranging between 6.8% and 8.1% (1999 6.9% and
8.2%).
(H) CURRENCY AND INTEREST RATE PROFILE OF FINANCIAL LIABILITIES
After taking into account the various interest rate and forward foreign
currency swaps entered into by the group, the fixed and floating interest rate
profile of the group's financial liabilities by currency was as follows:
<TABLE>
<CAPTION>
TOTAL FIXED RATE FLOATING RATE
----------------- ----------------- -------------
CURRENCY 2000 1999 2000 1999 2000 1999
-------- ------- ------- ------- ------- ----- -----
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Gross borrowings:
Sterling.................................. 2,116.7 2,155.7 1,887.7 1,894.9 229.0 260.8
US$....................................... 10.0 8.6 -- -- 10.0 8.6
Australian $.............................. -- 11.7 -- -- -- 11.7
Canadian $................................ -- 6.4 -- -- -- 6.4
German marks.............................. 3.8 3.4 -- -- 3.8 3.4
Euros..................................... 0.8 -- -- -- 0.8 --
------- ------- ------- ------- ----- -----
2,131.3 2,185.8 1,887.7 1,894.9 243.6 290.9
Preference shares:
Sterling.................................. 206.6 206.6 206.6 206.6 -- --
Other financial liabilities:
Sterling.................................. 19.8 15.4 -- -- -- --
Australian $.............................. 4.6 5.1 -- -- -- --
German marks.............................. 0.4 -- -- -- -- --
Finnish marks............................. -- 2.0 -- -- -- --
------- ------- ------- ------- ----- -----
2,362.7 2,414.9 2,094.3 2,101.5 243.6 290.9
======= ======= ======= ======= ===== =====
</TABLE>
The floating rate borrowings comprise:
- loans from the European Investment Bank that bear interest based on
sterling LIBOR rates;
- sterling denominated bank borrowings that bear interest based on sterling
LIBOR rates;
- finance leases;
F-178
<PAGE> 401
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
- loan notes that bear interest based on sterling LIBOR rates; and,
- foreign currency denominated bank borrowings that bear interest based on
prevailing interbank borrowing rates.
No interest is paid on the other financial liabilities.
All overseas currency borrowings set out in the above table are fully
hedged against assets denominated in those currencies.
(I) INTEREST RATE PROFILE OF FINANCIAL LIABILITIES
<TABLE>
<CAPTION>
FIXED RATE
FINANCIAL
LIABILITIES
WEIGHTED
WEIGHTED AVERAGE
AVERAGE PERIOD
INTEREST FOR WHICH
RATE RATE IS FIXED
----------- -------------
CURRENCY 2000 1999 2000 1999
-------- ---- ---- ----- -----
% % YEARS YEARS
<S> <C> <C> <C> <C>
Sterling:
Borrowings................................................ 8.0 8.0 12.9 13.8
Preference shares......................................... 7.9 7.9 13.3 14.3
=== === ==== ====
</TABLE>
No interest is paid on the other financial liabilities. The figures in the
above table take into account the interest rate and forward foreign currency
swaps used to manage the group's fixed interest rate profile.
(J) BORROWING FACILITIES
Undrawn committed borrowing facilities were:-
<TABLE>
<CAPTION>
2000 1999
----- -----
LM LM
<S> <C> <C>
Committed borrowing facilities available.................... 450.0 450.0
Drawn down as at 31 March................................... (10.8) (14.7)
----- -----
Expiring after more than two years.......................... 439.2 435.3
===== =====
</TABLE>
F-179
<PAGE> 402
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(K) CURRENCY AND INTEREST RATE PROFILE OF FINANCIAL ASSETS
<TABLE>
<CAPTION>
2000 1999
-------------------------------- --------------------------------
SHORT SHORT
CASH NET TERM CASH NET TERM
OF DEPOSITS OF DEPOSITS
OVERDRAFTS (NOTE 19) TOTAL OVERDRAFTS (NOTE 19) TOTAL
----------- ---------- ----- ----------- ---------- -----
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
CURRENCY:
Sterling......................... 8.6 428.7 437.3 10.7 568.1 578.8
US Dollars....................... 4.1 0.1 4.2 1.6 -- 1.6
EU currencies (other than
Sterling)...................... 13.6 0.2 13.8 2.2 5.3 7.5
Other currencies................. 1.9 -- 1.9 5.9 17.9 23.8
---- ----- ----- ---- ----- -----
28.2 429.0 457.2 20.4 591.3 611.7
LONG TERM DEBTORS:
Sterling......................... -- -- 3.4 -- -- 10.4
---- ----- ----- ---- ----- -----
At 31 March...................... 28.2 429.0 460.6 20.4 591.3 622.1
==== ===== ===== ==== ===== =====
CURRENCY:
Floating rate.................... 28.2 0.6 28.8 20.4 -- 20.4
Fixed rate....................... -- 428.4 428.4 -- 591.3 591.3
LONG TERM DEBTORS:
Nil interest rate................ -- -- 3.4 -- -- 10.4
---- ----- ----- ---- ----- -----
At 31 March...................... 28.2 429.0 460.6 20.4 591.3 622.1
==== ===== ===== ==== ===== =====
</TABLE>
The sterling money market deposits above comprise deposits placed on money
markets from overnight to four months. All the investments in commercial paper
are at fixed interest rates. The weighted average interest rate on commercial
paper and money market deposits is 5.7% (1999 5.5%) and the weighted average
time for which they are held is 55 days (1999 71 days). These assets are held as
part of the financing arrangements of the group.
Cash generated from operating activities and from long term loan drawdowns
in advance of future capital expenditure obligations is invested on a daily
basis in money market investments. These investments include term deposits,
government securities and corporate bonds and papers rated at not less than AA.
(L) FAIR VALUES OF FINANCIAL INSTRUMENTS
In the table below the fair value of short term borrowings, current asset
investments, cash at bank and in hand and bank loans and overdrafts approximates
to book values due to the short maturity of these instruments. The fair value of
long term borrowings has been determined by reference to prices available from
the financial markets on which these borrowings are traded. The fair value
fundamentally represents the change in anticipated future interest rates and
foreign exchange rates, to the dates of maturity of the borrowings, between the
date those long term borrowings were raised and the year end. The preference
shares are listed on the London Stock Exchange and the fair value has been
quoted at the listed price. The fair value of interest rate swaps
F-180
<PAGE> 403
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
and combined interest rate and forward foreign currency swaps are based on
market prices of comparable investments.
<TABLE>
<CAPTION>
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
NOTE 2000 2000 1999 1999
----- -------- -------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C> <C>
PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED
TO FINANCE THE GROUP'S OPERATIONS:
Short term borrowings........................ (12.6) (12.6) (61.3) (61.3)
Long term borrowings......................... (2,118.7) (2,188.7) (2,124.5) (2,321.0)
Preference shares............................ (206.6) (157.5) (206.6) (254.8)
Other financial liabilities.................. (24.8) (24.8) (22.5) (22.5)
Long term debtors............................ 3.4 3.4 10.4 10.4
Current asset investments.................... 19 429.0 429.0 591.3 591.3
Cash at bank and in hand..................... 34.0 34.0 21.0 21.0
Bank loans and overdrafts.................... 20(a) (5.8) (5.8) (0.6) (0.6)
-------- -------- -------- --------
(1,902.1) (1,923.0) (1,792.8) (2,037.5)
DERIVATIVE FINANCIAL INSTRUMENTS HELD TO
MANAGE THE INTEREST RATE AND CURRENCY
PROFILE AND MATCHED BY PRIMARY FINANCIAL
INSTRUMENTS:
Interest rate swaps.......................... -- (6.3) -- (10.5)
Combined interest rate and forward foreign
currency swaps............................. -- (59.2) -- (51.1)
-------- -------- -------- --------
(1,902.1) (1,988.5) (1,792.8) (2,099.1)
DERIVATIVE FINANCIAL INSTRUMENTS HELD TO
MANAGE THE INTEREST RATE PROFILE AND NOT
MATCHED BY A PRIMARY FINANCIAL INSTRUMENT:
Interest rate swaps.......................... -- (3.5) -- (8.1)
-------- -------- -------- --------
(1,902.1) (1,992.0) (1,792.8) (2,107.2)
======== ======== ======== ========
</TABLE>
The fair value of derivative financial instruments matched by primary
financial instruments relates to long term borrowings with a book value of
L673.4m (1999 L674.5m) which have been included within the primary financial
instruments issued to finance the group's operations at a fair value of L637.6m
(1999 L676.3m), which is the redemption value of those borrowings.
F-181
<PAGE> 404
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(M) LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of losses on derivative financial instruments are not
recognised in the financial statements. These instruments are held to manage the
group's interest rate and currency exposures and the resultant fixed interest
charges are made in the accounting periods to which they relate. The table below
analyses the composition of the fair value losses (note 24(l)).
<TABLE>
<CAPTION>
UNRECOGNISED
TOTAL NET
GAINS/LOSSES
2000
------------
LM
<S> <C>
Losses on hedges at 1 April 1999............................ (69.7)
Gains not included in 1999/2000 income...................... 0.7
-----
Losses on hedges at 31 March 2000........................... (69.0)
=====
Of which:
Losses expected to be included in 2000/01 income............ (0.6)
Losses expected to be included in 2001/02 income or later
years..................................................... (2.9)
Losses not expected to be included in 2001/02 income or
later years............................................... (65.5)
-----
(69.0)
=====
</TABLE>
25. CAPITAL COMMITMENTS
GROUP
<TABLE>
<CAPTION>
2000 1999
----- -----
LM LM
<S> <C> <C>
Contracted for but not provided in the financial
statements................................................ 155.4 182.5
===== =====
</TABLE>
In order to meet additional quality and service standards, together with
growth and new demands, the group has capital investment obligations over the
next five years amounting to approximately L1.13 billion at current prices in
the regulated water and sewerage business and approximately L250 million at
current prices, within the regulated electricity distribution business.
26. LEASING COMMITMENTS
At 31 March 2000 there were revenue commitments, in the ordinary course of
business in the next year relating to the payment of rentals on non-cancellable
operating leases expiring:
GROUP
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHERS
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
LM LM LM LM
<S> <C> <C> <C> <C>
Within one year............................................. 0.5 0.9 2.9 4.7
Between two and five years.................................. 1.4 2.8 4.2 2.6
After five years............................................ 3.5 2.6 0.3 3.0
--- --- --- ----
5.4 6.3 7.4 10.3
=== === === ====
</TABLE>
F-182
<PAGE> 405
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
COMPANY
<TABLE>
<CAPTION>
LAND AND
BUILDINGS OTHERS
----------- -----------
2000 1999 2000 1999
---- ---- ---- ----
LM LM LM LM
<S> <C> <C> <C> <C>
Within one year............................................. 0.2 0.2 -- --
After five years............................................ 0.1 0.1 -- --
--- --- -- --
0.3 0.3 -- --
=== === == ==
</TABLE>
27. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
GROUP COMPANY
------------ -----------
NOTE 2000 1999 2000 1999
---- ---- ----- ---- ----
LM LM LM LM
<S> <C> <C> <C> <C> <C>
Deferred taxation.......................................... (a) 15.0 -- -- --
Group insurance funds...................................... (b) 15.1 12.9 -- --
Reorganisation provision................................... (c) 26.9 47.9 0.4 0.7
Pensions provision......................................... (d) 2.8 2.8 1.5 1.2
Power purchase provision................................... (e) -- 65.7 -- --
Other provisions........................................... (f) 20.1 13.8 0.5 0.5
---- ----- --- ---
79.9 143.1 2.4 2.4
==== ===== === ===
</TABLE>
(A) DEFERRED TAXATION
Group
<TABLE>
<CAPTION>
AMOUNT AMOUNTS
PROVIDED UNPROVIDED
------------ --------------
2000 1999 2000 1999
---- ---- ----- -----
LM LM LM LM
<S> <C> <C> <C> <C>
Tax effect of timing differences:
Excess of tax allowances over depreciation............ -- -- 371.3 355.3
Other timing differences.............................. -- -- (8.7) (20.5)
---- -- ----- -----
-- -- 362.6 334.8
Capital gains rolled over............................... 15.0 -- 7.7 0.2
Earnings retained overseas.............................. -- -- 4.3 3.3
---- -- ----- -----
15.0 -- 374.6 338.3
==== == ===== =====
</TABLE>
F-183
<PAGE> 406
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Company
<TABLE>
<CAPTION>
AMOUNT
UNPROVIDED
------------
2000 1999
---- ----
LM LM
<S> <C> <C>
Tax effect of timing differences:
Excess of tax allowances over depreciation................ 0.2 0.2
Other timing differences.................................. (0.6) (0.4)
---- ----
(0.4) (0.2)
==== ====
</TABLE>
(B) GROUP INSURANCE FUNDS
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 12.9 --
Premiums.................................................... 5.7 --
Claims...................................................... (3.1) --
Released to profit and loss account......................... (0.4) --
---- --
At 31 March 2000............................................ 15.1 --
==== ==
</TABLE>
Cover against certain risks is provided by Brecon Insurance Company
Limited, a wholly owned subsidiary undertaking of the group.
(C) REORGANISATION PROVISION
<TABLE>
<CAPTION>
NOTE GROUP COMPANY
---- ----- -------
LM LM
<S> <C> <C> <C>
At 1 April 1999............................................. 47.9 0.7
Charged to profit and loss account.......................... 5 35.1 0.5
Released to profit and loss account......................... 5 (10.2) --
Utilised.................................................... (45.9) (0.8)
----- ----
At 31 March 2000............................................ 26.9 0.4
===== ====
</TABLE>
The reorganisation provision includes severance, related pension costs and
property costs for restructuring initiatives which will be completed within the
next 24 months.
F-184
<PAGE> 407
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(D) PENSIONS PROVISION
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 2.8 1.2
Charged to profit and loss account.......................... 0.4 0.3
Utilised.................................................... (0.4) --
---- ---
At 31 March 2000............................................ 2.8 1.5
==== ===
</TABLE>
This provision relates to unfunded directors pensions (note 6 (d)(iv)) and
the "Barber" provisions which are expected to be utilised within the next 24
months.
(E) POWER PURCHASE PROVISION
<TABLE>
<CAPTION>
NOTE GROUP COMPANY
---- ----- -------
LM LM
<S> <C> <C> <C> <C>
At 1 April 1999............................................. 65.7 --
Utilised.................................................... 4 (6.4) --
Released to profit and loss account on disposal of supply
business.................................................. 39 (59.3) --
----- --
At 31 March 2000............................................ -- --
===== ==
</TABLE>
(F) OTHER PROVISIONS
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 13.8 0.5
Charged to profit and loss account.......................... 10.1 --
Utilised.................................................... (3.8) --
---- ---
At 31 March 2000............................................ 20.1 0.5
==== ===
</TABLE>
These provisions principally relate to leasehold property provisions,
onerous contracts, uninsured losses and other claims arising which are expected
to be utilised within the next 16 years.
28. ACCRUALS AND DEFERRED INCOME
GROUP
<TABLE>
<CAPTION>
LM
<S> <C>
At 1 April 1999............................................. 155.3
Receivable during the year.................................. 10.5
Released to profit and loss account......................... (6.0)
-----
At 31 March 2000............................................ 159.8
=====
</TABLE>
F-185
<PAGE> 408
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income represents grants and customer contributions received in
respect of investment in non-infrastructure fixed assets. These grants are
amortised to the profit and loss account over the estimated useful economic life
of the related assets.
29. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
2000 1999
----- -----
LM LM
<S> <C> <C>
AUTHORISED:
166,666,667 ordinary shares of 120p each (1999
166,666,667).............................................. 200.0 200.0
209,000,000 cumulative redeemable preference shares (7.875%
net) of L1 each (redeemable 31 July 2013) (1999
209,000,000).............................................. 209.0 209.0
----- -----
409.0 409.0
===== =====
ALLOTTED, CALLED UP AND FULLY PAID:
154,710,591 ordinary shares of 120p each (1999
151,018,332).............................................. 185.6 181.2
207,181,776 cumulative redeemable preference shares (7.875%
net) of L1 each (redeemable 31 July 2013) (1999
207,181,776).............................................. 207.2 207.2
----- -----
392.8 388.4
===== =====
</TABLE>
All cumulative redeemable preference shares are redeemable at par on 31
July 2013. These shares are non-voting and have a preferential right to return
of capital on a winding up.
Ordinary shares were issued in the year resulting from the exercise of
share options under the Hyder and South Wales Electricity plc employee sharesave
and executive share option schemes at prices between 354p and 676p per share.
In total 3,692,259 ordinary shares, with an aggregate nominal value of
L4.4m were issued in the year. The cash consideration received in respect of the
issue of 5,957 ordinary shares was L37,000. Included within the total are
3,686,302 ordinary shares with an aggregate nominal value of L4.4m issued in
relation to the scrip dividend plan for which no cash consideration was
received.
30. EMPLOYEE SHARE SCHEMES
(A) HYDER PLC SHARE SCHEMES
The company has four Inland Revenue approved share option schemes for its
employees and those of subsidiary undertakings. There is also an unapproved
scheme (the Hyder overseas share plan) which extends share scheme arrangements
for the benefit of overseas employees resident outside of the United Kingdom.
The employee sharesave scheme is savings related and the share options are
exercisable within six months of completion of a three, five or seven year save
as you earn contract. Employee sharesave options are fixed at the closing mid
market value on the day preceding the date of grant less 20% discount. The
executive share option scheme is a discretionary scheme for senior employees
under which options are granted at fixed prices at the closing mid market value
on the day preceding the date of grant. Executive share options granted after
July 1993 are performance related and can only be exercised if the increase in
the share price of an ordinary share exceeds the increase in the Retail
F-186
<PAGE> 409
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Prices Index plus 2% per annum compound (pro rata for any period of less than
one year) in the period between the date of grant and the exercise date. All
executive share options are exercisable between three and ten years from the
date of grant. No new options may be granted to executive directors under this
scheme.
Options granted but not yet exercised under these schemes at 31 March 2000
together with their exercise prices and dates are shown below:
<TABLE>
<CAPTION>
NUMBER OF 120P
ORDINARY
DATE OPTION PRICE SHARES
OPTION NORMAL DATE OF PER SHARE ---------------------
GRANTED EXERCISE (PENCE) 2000 1999
--------- --------------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
EMPLOYEE SHARESAVE
SCHEME................. Dec 1992 Mar 2000 - Aug 2000 425 - 427 103,830 321,180
Sept 1994 Oct 1999 - Mar 2000 522 - 525 -- 358,333
Sept 1994 Oct 2001 - Mar 2002 522 - 525 143,096 165,911
Dec 1994 Feb 2000 - Aug 2000 522 - 525 55,240 243,724
Dec 1994 Feb 2002 - Aug 2002 522 - 525 87,153 107,021
Jul 1997 Sep 2000 - Feb 2001 650 525,180 734,208
Jul 1997 Sep 2002 - Feb 2003 650 1,780,396 2,477,291
--------- ---------
2,694,895 4,407,668
--------- ---------
EXECUTIVE SHARE OPTION
SCHEME.............. Jul 1991 Jul 1994 - Jul 2001 354 23,021 24,049
Jul 1993 Jul 1996 - Jul 2003 563 55,909 55,909
Aug 1993 Aug 1996 - Aug 2003 648 13,937 21,146
Jan 1994 Jan 1997 - Jan 2004 716 151,442 151,442
Jan 1995 Jan 1998 - Jan 2005 676 16,928 21,857
--------- ---------
261,237 274,403
--------- ---------
OVERSEAS SHARE PLAN.... Oct 1997 Nov 2000 - Apr 2001 841 38,749 67,280
Oct 1997 Nov 2002 - Apr 2003 841 14,424 32,910
--------- ---------
53,173 100,190
--------- ---------
3,009,305 4,782,261
========= =========
</TABLE>
No options were granted during the year ended 31 March 2000. All options
and rights over Hyder plc ordinary shares held under Inland Revenue approved
share schemes can be exercised early in certain exceptional circumstances such
as retirement or redundancy.
During the year ended 31 March 1999 two Inland Revenue approved profit
sharing schemes were established, one for the benefit of staff employed by Hyder
Utilities (the utilities scheme) and a separate scheme for the benefit of
employees of Hyder plc (the plc scheme). The number of Hyder ordinary shares
appropriated under these schemes in July 1998 and held in trust at 31 March 2000
were 146,263 (1999 72,211) ordinary shares under the utilities scheme and 3,748
(1999 1,688) ordinary shares under the plc scheme. All shares are held in trust
under the rules of the schemes. A further appropriation of shares will take
place in July 2000 subject to scheme targets and eligibility criteria being met.
F-187
<PAGE> 410
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(B) HYDER PLC LONG TERM INCENTIVE PLAN (L-TIP)
The company L-Tip is available to executive directors and selected senior
executives. Full details of this scheme are set out in note 6. The ordinary
shares which are conditionally allocated under the L-Tip are purchased in the
market by an employee benefit trust with funds allocated by the company. The
trustees have waived dividends on the shares held.
A second L-Tip was established in 1999 for the benefit of a director, J M
James, who does not participate in the main L-Tip. Details are disclosed in note
6.
(C) QUALIFYING EMPLOYEE SHARE OPTION TRUST (QUEST)
In March 1998 the company established a qualifying employee share option
trust (Quest) as a vehicle to procure ordinary shares in Hyder plc to meet in
part the obligations of the company pursuant to valid exercises of options under
the rules of the Hyder and South Wales Electricity sharesave schemes. At 31
March 2000 Hyder Share Scheme Trustee (2) Limited, as trustee, held 3,261,565
ordinary shares (1999 3,437,499) with a value, based on the average closing
price of the shares in the thirty days up to 7 July, being the latest
practicable date prior to the directors' approving the financial statements, of
L10.4m (1999 market value L27.0m). If the shares are transferred at this value
otherwise than for a qualifying purpose of the Quest, an income tax charge of
L5.3m will be payable by Hyder Share Scheme Trustees (2) Limited.
The accounts include the shares held by the Quest, which are included as
fixed asset investments. Under the rules of the Quest dividends have been waived
by the trustee. The expenses of Quest which are borne by the group are expensed
as incurred. The purchase of shares by Hyder Share Scheme Trustee (2) Limited as
trustee was financed by loans from Hyder plc.
Details of share options outstanding under the sharesave schemes are stated
in notes 30(a) above.
31. SHARE PREMIUM ACCOUNT
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 137.4 137.4
Nominal value of ordinary shares issued under scrip dividend
in lieu of cash dividend (note 29)........................ (4.4) (4.4)
----- -----
At 31 March 2000............................................ 133.0 133.0
===== =====
</TABLE>
F-188
<PAGE> 411
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
32. RESERVES
(A) PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 370.8 443.5
Profit/(loss) retained for the year......................... 48.1 (152.3)
Goodwill written back on disposal........................... 84.0 --
Scrip dividend issued in lieu of cash dividend.............. 21.5 21.5
Foreign currency translation losses......................... (1.3) (0.2)
Reserves adjustment on acquisition of additional interest in
subsidiary................................................ (0.7) --
----- ------
At 31 March 2000............................................ 522.4 312.5
===== ======
</TABLE>
The cumulative goodwill written off directly to reserves is L544.3m (1999
L628.3m).
In accordance with the group's accounting policy, Lnil of net exchange
differences (1999 L0.2m net gains) on foreign currency loans which match
investments have been offset in reserves.
(B) CAPITAL RESERVE
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999 and 31 March 2000........................... -- 9.6
== ===
</TABLE>
The capital reserve arose on the acquisition of South Wales Electricity plc
and comprised the fair value of the options granted by the company to South
Wales Electricity plc share option holders less the option price to be received
by the company on the exercise of those options.
(C) INVESTMENT REVALUATION RESERVE
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 1.2 --
Revaluations (note 15)...................................... 1.5 --
--- --
At 31 March 2000............................................ 2.7 --
=== ==
</TABLE>
(D) CAPITAL REDEMPTION RESERVE
On 30 December 1994 the group and company created a capital redemption
reserve of L1 following the redemption at par of the special rights redeemable
preference share of L1.
F-189
<PAGE> 412
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
33. EQUITY MINORITY INTEREST
<TABLE>
<CAPTION>
GROUP COMPANY
----- -------
LM LM
<S> <C> <C>
At 1 April 1999............................................. 2.6 --
Adjustment to fair value of assets.......................... (0.4) --
Purchase of minority interest............................... (1.5) --
Recognition of results for the year......................... 0.2 --
Currency translation differences............................ (0.2) --
---- --
At 31 March 2000............................................ 0.7 --
==== ==
</TABLE>
34. NET CASH INFLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
LM LM LM
<S> <C> <C> <C>
Continuing operations:
Operating profit............................................ 164.1 270.6 239.6
Non cash element of exceptional items (excluding
reorganisation costs)..................................... 73.3 -- --
Depreciation of tangible fixed assets....................... 136.8 122.8 100.4
Amounts written off tangible fixed assets................... -- 7.1 1.5
Amounts provided on intangible fixed assets and fixed asset
investments............................................... 1.1 2.0 1.5
Amortisation of grants and contributions.................... (6.0) (5.9) (5.5)
Loss/(profit) on sale of fixed assets....................... 0.5 -- (0.8)
Net increase in stocks...................................... (1.7) (1.9) (0.6)
Net (increase)/decrease in debtors.......................... (34.0) 1.2 (12.2)
Net increase/(decrease) in creditors........................ 46.5 4.0 (13.0)
Contribution from/(to) insurance fund....................... 2.3 0.1 (2.8)
Reorganisation provisions................................... (20.5) (11.2) 10.6
Contributions to pension fund............................... -- (0.2) (0.1)
Other provisions -- storm damage............................ -- (6.5) --
Other provisions............................................ 6.3 0.4 --
----- ----- -----
Net cash inflow from continuing operating activities........ 368.7 382.5 318.6
----- ----- -----
Discontinued operations:
Operating (loss)/profit..................................... (3.7) 26.0 5.1
Non cash element of exceptional items (excluding
reorganisation costs)..................................... 12.8 -- --
Depreciation of tangible fixed assets....................... 3.6 1.6 0.9
Net increase in stocks...................................... (0.3) -- --
Net decrease/(increase) in debtors.......................... 1.1 (29.0) (11.5)
Net increase in creditors................................... 1.9 9.9 12.8
Contribution (to)/from insurance fund....................... (0.1) 0.1 --
</TABLE>
F-190
<PAGE> 413
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
LM LM LM
<S> <C> <C> <C>
Reorganisation provisions................................... (0.5) -- (0.9)
Power purchase provision release............................ (6.4) (7.3) --
Other provisions............................................ (0.5) -- --
----- ----- -----
Net cash inflow from discontinued operating activities...... 7.9 1.3 6.4
----- ----- -----
Net cash inflow from operating activities................... 376.6 383.8 325.0
===== ===== =====
</TABLE>
Debtors have increased in the continuing operations in 2000 principally due
to amounts owing to the electricity distribution business by the energy supply
business which in 1999 and 1998 were intercompany balances and eliminated in the
group accounts.
35. ANALYSIS OF NET DEBT
(A) MOVEMENTS IN THE YEAR
<TABLE>
<CAPTION>
CASH LESS CURRENT DEBT AND
BANK ASSET FINANCE
OVERDRAFTS INVESTMENTS LEASES TOTAL
---------- ----------- -------- --------
LM LM LM LM
<S> <C> <C> <C> <C>
At 1 April 1999.................................. 20.4 591.3 (2,185.8) (1,574.1)
Consolidated cashflow statement.................. 7.8 (162.0) 55.7 (98.5)
Bond issue costs written back.................... -- -- (0.6) (0.6)
Currency translation differences................. -- (0.3) (0.6) (0.9)
---- ------ -------- --------
At 31 March 2000................................. 28.2 429.0 (2,131.3) (1,674.1)
==== ====== ======== ========
</TABLE>
(B) YEAR END RECONCILIATION
<TABLE>
<CAPTION>
NOTE 2000 1999
----- -------- --------
LM LM
<S> <C> <C> <C>
Loans and finance lease obligations:
Amounts falling due within one year......................... 20(a) (12.6) (61.3)
Amounts falling due after more than one year................ 20(b) (2,118.7) (2,124.5)
-------- --------
35(a) (2,131.3) (2,185.8)
Current asset investments................................... 19 429.0 591.3
Cash at bank and in hand.................................... 34.0 21.0
Bank loans and overdrafts................................... 20(a) (5.8) (0.6)
-------- --------
35(a) (1,674.1) (1,574.1)
======== ========
</TABLE>
F-191
<PAGE> 414
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
36. ANALYSIS OF CHANGES IN FINANCING IN THE YEAR
<TABLE>
<CAPTION>
SHARE CAPITAL LOANS & FINANCE
(INCLUDING PREMIUM) LEASE OBLIGATIONS
-------------------- ----------------------
2000 1999 2000 1999
------ ------ ------- -------
LM LM LM LM
<S> <C> <C> <C> <C>
At 1 April.................................. 525.8 525.3 2,185.8 1,575.1
New loans and bonds......................... -- -- 2.0 529.4
New finance leases.......................... -- -- -- 92.1
Loans acquired with subsidiaries............ -- -- -- 3.4
Loan notes issued on acquisition of
subsidiaries.............................. -- -- -- 1.7
Loan repayments............................. -- -- (57.5) (9.0)
Finance lease repayments.................... -- -- (0.2) (0.5)
Bond issue costs written back............... -- -- 0.6 0.1
Proceeds from the issue of ordinary
shares.................................... -- 0.5 -- --
Expenses of issuing bonds................... -- -- -- (6.6)
Currency translation difference............. -- -- 0.6 0.1
----- ----- ------- -------
At 31 March................................. 525.8 525.8 2,131.3 2,185.8
===== ===== ======= =======
</TABLE>
37. RECONCILIATION OF NET CASH FLOW TO INCREASE IN NET DEBT
<TABLE>
<CAPTION>
NOTE 2000 1999
----- -------- --------
LM LM
<S> <C> <C> <C>
Increase in cash as per cashflow statement.................. 7.8 28.9
Decrease/(increase) in loans and finance lease
obligations............................................... 35(a) 55.7 (605.4)
(Decrease)/increase in liquid resources held as current
asset investments......................................... 35(a) (162.0) 289.7
-------- --------
Increase in net debt resulting from cash flows.............. (98.5) (286.8)
Acquired with subsidiaries.................................. -- (3.4)
Issued on acquisition of subsidiaries....................... -- (1.7)
Bond issue costs written back............................... (0.6) (0.1)
Currency translation differences............................ 35(a) (0.9) 0.1
-------- --------
Increase in net debt........................................ (100.0) (291.9)
At 1 April.................................................. (1,574.1) (1,282.2)
-------- --------
At 31 March................................................. (1,674.1) (1,574.1)
======== ========
</TABLE>
38. ACQUISITION
During the year the group increased its shareholding in AcerPlan GmbH from
56% to 89%. These operations have been integrated into the continuing activities
of the group. The additional shareholding of 33% resulted from a further
consideration of L1.7m, of which L0.2m is deferred consideration.
F-192
<PAGE> 415
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
39. DISPOSALS OF GROUP OPERATIONS
On 17 February 2000 the group sold SWALEC Gas Limited and the electricity
supply business of South Wales Electricity plc for a consideration of L106.8m.
On 31 March 2000 the group also disposed of Environmental Laboratories, an
unincorporated division of Hyder Consulting Limited, for a consideration of
L11.4m of which the final payment of L11.2m was received on 7 April 2000. The
values of the assets disposed of were as follows:
<TABLE>
<CAPTION>
LM
<S> <C>
Tangible fixed assets....................................... 13.9
Debtors..................................................... 102.7
Work in progress............................................ 1.1
Cash........................................................ 1.0
Creditors................................................... (84.1)
Provisions arising on disposal.............................. 1.3
Tangible fixed assets written off........................... 8.5
Transaction costs........................................... 2.1
Goodwill previously written off to reserves................. 84.0
Power purchase provision released on disposal............... (59.3)
-----
71.2
Profit on disposal.......................................... 47.0
-----
118.2
=====
CONSIDERATION:
Cash received in the year................................... 107.0
Cash received on 7 April 2000............................... 11.2
-----
118.2
=====
</TABLE>
The net inflow of cash arising from the above disposals was as follows:
<TABLE>
<CAPTION>
LM
<S> <C>
Cash received............................................... 107.0
Cash released............................................... (1.0)
Transaction costs........................................... (2.1)
-----
103.9
=====
</TABLE>
The amounts included in the consolidated profit and loss account and
cashflows up to the date of disposal in respect of the energy supply business
and Environmental Laboratories are shown in notes 2, 4 and 34.
The deferred tax charge of L15.0m in respect of the above disposals relates
to capital gains rolled over (note 27(a)).
40. DIRECTORS' AND OFFICERS' LOANS AND TRANSACTIONS
No loans or credit transactions with any directors, officers or connected
persons subsisted during the year or were outstanding at the end of the year.
F-193
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HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
41. PENSION SCHEMES
The group operates a number of pension schemes both in the UK and overseas.
The assets of each pension scheme are held separately from the assets of the
group and are administered by trustees. The principal schemes are defined
benefit schemes in the UK -- the Hyder Water Pension Scheme (HWPS), the Water
Mirror Image Pension Scheme (WMIS), the Electricity Supply Pension Scheme (ESPS)
and the Acer Group Pension Scheme (AGPS).
The employer's contributions and pension cost under the accounting standard
Statement of Standard Accounting Practice No. 24 "Accounting for Pension Costs"
(SSAP24) for the HWPS and WMIS has been assessed in accordance with the advice
of William M. Mercer Limited, consulting actuaries, using the projected unit
method for HWPS and the attained age method for WMIS. For this purpose the
actuarial assumptions adopted are based upon investment growth of 6.5% per
annum, pay growth of 4.5% per annum and increases to pensions in payment and
deferred pensions of 3% per annum.
The last actuarial valuations for HWPS and WMIS were carried out as at 31
March 1998 with the market values being L324.6m and L99.9m respectively. Using
the assumptions adopted for SSAP 24, the actuarial value of assets represented
113% for HWPS and 118% for WMIS of the value of the accrued benefits after
allowing for expected future earnings increases. In deriving the pension cost
under SSAP24 the surpluses in HWPS and WMIS are spread over the future working
lifetime of employees.
The employer's contributions and pension cost for the South Wales section
of the ESPS has been assessed in accordance with advice from Bacon and Woodrow,
consulting actuary, at 31 March 1998, using the attained age actuarial method.
For this purpose the principal actuarial assumptions adopted were an investment
growth of 8.5% per annum, pay growth of 6% per annum and increases to pensions
in payment of 4.5% per annum.
The latest actuarial valuation was carried out at 31 March 1998, with the
market value of the assets being L526.3m. Using the assumptions adopted for
SSAP24 the actuarial value of the assets represented 110% of the value of the
accrued benefits after allowing for expected future earnings increases. In
deriving the pension cost under SSAP24 the surplus in the scheme is being
recognised as a reduction to pension cost over the future working lifetime of
the employees and to cover short term early retirement costs.
The employer's contributions and pension cost for AGPS, being the principal
UK scheme for Hyder Consulting Group Limited, has been assessed in accordance
with the advice of Buck Consultants Limited using the projected unit method. For
this purpose the main actuarial assumptions used are based upon investment
growth of 7.5% per annum, pay growth of 4.5% per annum, and increases to
pensions in payment of 3.5% per annum.
The latest actuarial valuation was carried out as at 1 May 1999 with the
market value of the assets being L55.0m. Using the assumptions adopted for
SSAP24 the actuarial value of the assets represented 94% of the value of the
accrued benefits after allowing for expected future earnings increases. In
deriving the pension cost under SSAP24 the deficit in the scheme is being spread
over the future working lifetime of employees by way of increased employer's
contribution rates.
The total group pension cost for the period was L14.7m (1999 L14.5m). A
prepayment of pension costs of L8.5m (1999 L6.6m) is included in note 18 within
prepayments and accrued income.
F-194
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HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
As a consequence of changes made by the Finance Act 1989 the group is unable to
provide fully for approved pension for some executive directors who have joined
the group since 1989. The group has therefore made alternative arrangements in
these cases. Provision for the cost of unfunded pension is included in the
charge for the period on a basis consistent with SSAP 24. These arrangements
will not result in any individual executive director receiving any greater
benefit than would have applied if the full approved provision had been
possible.
42. CONTINGENT LIABILITIES
GROUP
In accordance with normal commercial practice, various group companies have
provided a number of third party guarantees in relation to trading or investment
obligations arising from contracts entered into in the normal course of
business. In addition guarantees of L12m (1999 Lnil) have been provided in
respect of third party debt obligations.
COMPANY
The company has provided guarantees in respect of finance lease and loan
facilities granted to its subsidiary Dwr Cymru Cyfyngedig amounting to L464.8m
(1999 L500.4m). The loan and finance lease facilities are fully drawn down and
therefore no further guarantees are required.
The company is a participant in a cash pooling arrangement operated by
National Westminster Bank Plc in the United Kingdom. The company has guaranteed
the bank overdraft balances of the participating companies, all of which are
subsidiaries of the company, subject to a maximum amount equal to the company's
own cash balance with the bank. At 31 March 2000 the overdrafts in subsidiary
companies in the cash pooling arrangement amounted to L29.9m (1999 L29.8m).
The company, as ultimate holding company, has provided third party
guarantees of L35.5m (1999 L18.8m) in relation to investment obligations entered
into by subsidiary companies. The company has also provided a number of third
party guarantees in relation to contractual obligations entered into by
subsidiary companies in the normal course of business.
43. ELAN AQUEDUCT
In 1984 Welsh Water Authority entered into a conditional sale and purchase
agreement with Severn Trent Water Authority for the sale of the aqueduct and
associated works by which the bulk supply to Severn Trent reservoirs is
conveyed.
The sum of L31.7m, representing the consideration for the conditional sale,
has been invested in a trust fund. The principal function of the fund was to
provide an income to Welsh Water Authority, whilst preserving the capital value
of the fund in real terms. Welsh Water Authority's interest in this fund was
vested in Dwr Cymru Cyfyngedig under the provisions of the Water Act 1989. The
assets of the fund are not included in these financial statements.
F-195
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HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
44. PRINCIPAL GROUP UNDERTAKINGS
<TABLE>
<CAPTION>
COUNTRY OF
INCORPORATION, SHAREHOLDING
REGISTRATION ---------------------
AND OPERATION DIRECTLY INDIRECTLY
----------------- -------- ----------
% %
<S> <C> <C> <C>
SUBSIDIARY UNDERTAKINGS
UTILITY ACTIVITIES
Hyder Utilities (Holdings) Limited.................. England and Wales 100
REGULATED WATER AND SEWERAGE ACTIVITIES
Dwr Cymru Cyfyngedig.............................. England and Wales 100
Welsh Water Utilities Finance PLC.............. England and Wales 100
Hyder Utilities (Operations) Limited........... England and Wales 50
REGULATED ELECTRICITY DISTRIBUTION ACTIVITIES
South Wales Electricity plc (distribution
business)...................................... England and Wales 100
Hyder Utilities (Operations) Limited........... England and Wales 50
MANAGED SERVICES ACTIVITIES
Hyder Services Limited............................ England and Wales 100
INFRASTRUCTURE ACTIVITIES
Hyder Consulting Group Limited...................... England and Wales 100
Hyder Consulting Limited.......................... England and Wales 100
Hyder Consulting (Pte) Limited.................... Singapore 100
Hyder Australia Pty Limited....................... Australia 100
Hyder Consulting Limited.......................... Hong Kong 100
Freeman Fox Group Limited......................... Hong Kong 100
Hyder Industrial Group Limited...................... England and Wales 100
Hyder Industrial Limited.......................... England and Wales 100
Hyder Holdings Inc................................ USA 100
Hyder Investments Limited........................... England and Wales 100
Hyder Overseas Investments Limited................ England and Wales 100
Hyder Infrastructure Management Limited............. England and Wales 100
Phoenix Electrical Company Limited................ England and Wales 100
OTHER ACTIVITIES
Brecon Insurance Co Limited......................... Guernsey 100
</TABLE>
F-196
<PAGE> 419
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
JOINT VENTURES AND ASSOCIATED UNDERTAKINGS
<TABLE>
<CAPTION>
TOTAL JOINT VENTURE
COUNTRY OF /ASSOCIATE GROUP
INCORPORATION COMPANY'S EQUITY SHAREHOLDING
----------------- ------------------- ------------
<S> <C> <C> <C>
JOINT VENTURES
UK Highways M40 (Holdings) plc........... England and Wales
Ordinary shares of L1 each............. L11.0m 44.0%
UK Highways A55 (Holdings) Limited....... England and Wales
Ordinary shares of L1 each............. L0.5m 45.0%
Subordinated loan stock................ L9.3m 45.0%
City Greenwich Lewisham Link Rail plc.... England and Wales
Ordinary shares of L1 each............. L1.5m 40.0%
Loan stock............................. L11.0m 40.0%
Tieyhtio Nelostie Oy..................... Finland
Shares of Fmk 100 each................. Fmk 50,000 43.0%
Loan stock............................. Fmk 50m 43.0%
Laing Hyder plc.......................... England and Wales
Ordinary shares of L1 each............. L4.0m 50.0%
Loan stock............................. L0.5m 50.0%
CountyRoute Limited...................... England and Wales
Ordinary shares........................ L0.5m 50.0%
Loan stock............................. L9.4m 50.0%
Citylink Telecommunications (Holdings)
Limited................................ England and Wales
Ordinary shares........................ L10.7m 19.5%
Loan stock............................. L32.2m 19.5%
Coastal Clearwater (Holdings) Limited.... England and Wales
Ordinary shares........................ L0.1m 50.0%
Loan stock............................. L0.9m 50.0%
ASSOCIATED UNDERTAKINGS
The China Water Co Ltd................... Cayman Islands
Shares of US$0.50 each................. US$64.8m 20.0%
</TABLE>
The above companies are franchise operators within the highways, railways
and telecommunications sectors, with the exception of The China Water Co Ltd and
Coastal Clearwater (Holdings) Limited which are infrastructure investment
businesses operating in the Chinese and UK water and waste water sectors and
Laing Hyder plc, which is an infrastructure investment business operating in the
UK Public Private Partnership accommodation sector.
All the above companies are, in the opinion of the directors, material to
the group. A complete list of all subsidiary, joint venture and associate
companies is available from the Company Secretary.
F-197
<PAGE> 420
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
45. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The Group's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United Kingdom
("UK GAAP"). Such principles differ in certain respects from generally accepted
accounting principles in the United States ("US GAAP"). A summary of principal
differences applicable to the group is set out below. While this is not a
comprehensive summary of all differences between UK and US GAAP, other
differences would not have a significant effect on the consolidated net income
or shareholders equity of the group.
RECONCILIATION OF PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION UNDER UK GAAP
TO NET INCOME UNDER US GAAP
<TABLE>
<CAPTION>
EXPLANATION
REFERENCE 2000 1999
----------- ------ ------
LM LM
<S> <C> <C> <C>
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION UNDER UK
GAAP........................................................ 74.8 197.4
Less: Equity minority interest.............................. (xi) (0.2) (--)
: Dividend on redeemable preferred stock................ (x) (16.4) (16.4)
------ ------
NET INCOME BEFORE US GAAP ADJUSTMENTS....................... 58.2 181.0
US GAAP adjustments:
Depreciation of infrastructure assets..................... (i) (13.0) (11.5)
Pensions.................................................. (ii) 19.9 40.9
Goodwill amortization - continuing operations............. (iii) (20.0) (19.9)
Goodwill amortization - discontinued operations........... (iii) (1.8) (2.1)
Profit on disposal of business and investments in
associates............................................. (iv) 8.6 0.6
Impairment of goodwill.................................... (v) (432.0) --
Deferred taxation -- application of FAS 109............... (vi) (17.6) (3.6)
Investment properties -- depreciation..................... (vii) (0.2) (0.2)
Capitalised interest...................................... (viii) 33.5 31.0
Depreciation on capitalised interest...................... (viii) (5.5) (4.4)
Own shares -- impairment in value......................... (xii) 10.0 --
Business development costs................................ (xiii) (3.3) (0.8)
Deferred compensation..................................... (xv) (1.5) (1.6)
Restructuring costs....................................... (xvi) (5.8) (5.0)
Financial instruments..................................... (xvii) 4.6 1.4
Deferred tax on US GAAP adjustments....................... (6.4) (14.7)
------ ------
NET (LOSS)/INCOME UNDER US GAAP............................. (372.3) 191.1
====== ======
</TABLE>
F-198
<PAGE> 421
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EXPLANATION
REFERENCE 2000 1999
----------- ------ -----
LM LM
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS)/INCOME IN ACCORDANCE WITH US
GAAP
Net (loss)/income from continuing operations.............. (413.1) 172.4
Net (loss)/income from discontinued operations (net of tax
benefit and expense: L0.7m and L8.4m, respectively).... (xviii) (1.5) 18.7
Net income from sale of discontinued operations (net of
tax expense: L13.3m)................................... (xviii) 42.3 --
------ -----
Net (loss)/income under US GAAP........................... (372.3) 191.1
====== =====
</TABLE>
EARNINGS PER SHARE
<TABLE>
<CAPTION>
EXPLANATION
REFERENCE 2000 1999
----------- ------- -------
(PENCE) (PENCE)
<S> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH US GAAP
Basic earnings per ordinary share:.......................... (xix)
Continuing operations..................................... (276.6) 117.5
Discontinued operations................................... 27.3 12.7
Net (loss)/income........................................... (249.3) 130.2
Diluted earnings per ordinary share:........................ (xix)
Continuing operations..................................... (276.6) 116.7
Discontinued operations................................... 27.3 12.6
Net (loss)/income........................................... (249.3) 129.3
</TABLE>
F-199
<PAGE> 422
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EXPLANATION
REFERENCE 2000 1999
----------- ------- -------
LM LM
<S> <C> <C> <C>
NET ASSETS UNDER UK GAAP.................................... 1,051.6 900.4
Less: Equity minority interests............................. (xi) (0.7) (2.6)
------ -------
SHAREHOLDERS' FUNDS UNDER UK GAAP........................... 1050.9 897.8
US GAAP adjustments:
Infrastructure assets....................................... (i) (83.5) (70.5)
Pensions.................................................... (ii) 189.0 169.1
Goodwill.................................................... (iii) 7.5 536.7
Deferred taxation........................................... (vi) (457.1) (433.4)
Investment properties....................................... (vii) (3.6) (1.9)
Capitalised interest........................................ (viii) 182.3 148.8
Depreciation on capitalised interest........................ (viii) (21.7) (16.2)
Ordinary dividends.......................................... (ix) -- 49.7
Redeemable preferred stock.................................. (x) (206.6) (206.6)
Own shares.................................................. (xii) (10.3) (21.7)
Business development costs.................................. (xiii) (4.1) (0.8)
Listed investments.......................................... (xiv) 6.4 16.7
Deferred compensation -- cumulative expense................. (xv) 4.8 3.3
Deferred compensation -- unrecognized expense............... (xv) 2.4 3.9
Deferred compensation -- increase to share premium.......... (xv) (7.2) (7.2)
Restructuring costs......................................... (xvi) 2.0 7.8
Financial instruments....................................... (xvii) (3.5) (8.1)
------ -------
SHAREHOLDERS' FUNDS UNDER US GAAP........................... 647.7 1,067.4
====== =======
</TABLE>
(I) DEPRECIATION OF INFRASTRUCTURE ASSETS
Under UK GAAP, depreciation is not provided on infrastructure assets which
increases capacity or enhances the network because the network of systems is
required to be maintained in perpetuity and therefore has no finite economic
life. Expenditures on maintaining the operating capability of the network in
accordance with defined standards of service are capitalized as fixed asset
additions and depreciated each year based on the level of annual expenditures
required to maintain the operating capability of the network based on the
independently certified asset management plan. Under US GAAP, depreciation is
required to be charged on all assets, excluding land, and infrastructure assets
are written off in equal annual installments over 85 years, being the estimated
economic life under US GAAP. The difference between amounts depreciated under UK
GAAP for capitalized maintenance and amounts which would be expensed under US
GAAP for maintenance are not material.
(II) PENSIONS
Under UK GAAP the cost of providing pension benefits under defined benefit
pension schemes is expensed over the average expected service lives of eligible
employees and is aimed to produce an
F-200
<PAGE> 423
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
estimate of cost based on long-term actuarial assumptions. Variations from the
regular pension cost arising from, for example, experience deficiencies or
surpluses, are charged or credited to the profit and loss account over the
expected average remaining service lives of current employees in the schemes.
Under US GAAP the annual pension cost for such schemes comprises the
estimated cost of benefits accruing in the period as determined in accordance
with SFAS 87, which requires readjustment of the significant actuarial
assumptions annually to reflect current market and economic conditions.
(III) GOODWILL, CAPITALISATION AND AMORTISATION
Both UK GAAP and US GAAP require purchase consideration to be allocated to
the net assets acquired at their fair value on the date of acquisition, with the
difference between the consideration paid and the fair value of the identifiable
net assets acquired recognized as goodwill. Under applicable UK GAAP, goodwill
and negative goodwill arising on acquisitions subsequent to April 1, 1997 are
capitalised and amortised over their useful economic lives, not to exceed 20
years. Goodwill arising on acquisitions prior to that date were written off
against reserves. Under US GAAP, goodwill is capitalised and amortised over its
estimated useful life, not to exceed 40 years. Prior to 1 April 1997, Hyder
acquired South Wales Electricity plc, an electricity supply and distribution
business, and the Acer Group Limited, an engineering consultancy business.
A summary of the movements in the goodwill balance during fiscal year 2000
is as follows:
<TABLE>
<S> <C>
Goodwill, net of amortization, at December 31, 1999......... 536.7
Amortization of goodwill -- continuing operations........... (20.0)
Amortization of goodwill -- discontinued operations......... (1.8)
Goodwill allocated to sale of discontinued operations....... (75.4)
Impairment of goodwill(v)................................... (432.0)
-------
Goodwill, net of amortization, at December 31, 2000......... 7.5
=======
</TABLE>
(IV) PROFITS ON DISPOSAL OF BUSINESSES AND INVESTMENTS IN ASSOCIATES
Under UK GAAP, on the subsequent disposal or termination of a previously
acquired business, the profit or loss on disposal is calculated after charging
the amount of any related goodwill previously taken directly to reserves for UK
GAAP. Under US GAAP, unamortized goodwill is taken into account in calculating
profits or losses on disposal.
(V) GOODWILL IMPAIRMENT
Under UK GAAP, goodwill previously written off to reserves is not charged
to profit and loss account if impaired. Under US GAAP, Hyder reviews long-lived
assets for potential impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held for use is measured by comparing the carrying
amount of an asset to the undiscounted estimated future cash flows expected to
be generated by the asset. In estimating expected future cash flows for
determining whether an asset is impaired, assets are grouped at the lowest level
for which there are identifiable cash flows that are largely independent of
F-201
<PAGE> 424
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
the cash flows of other groups of assets. If any such assets are considered to
be impaired, the impairment to be recognized is the amount by which the carrying
amount of the assets exceeds its fair value.
Following the electricity price review, effective from 1 April 2000, the
Group reviewed its long lived assets and goodwill for impairment. The impairment
review resulted in identification of an impairment of the goodwill associated
with the acquisition of South Wales Electricity plc.
(VI) DEFERRED TAXATION
Under UK GAAP deferred taxation is calculated, using the liability method,
in respect of timing differences arising from the difference between accounting
and taxable profits. Provision is made for deferred taxation only to the extent
that it is probable that a liability or asset will crystallize in the
foreseeable future.
Under US GAAP deferred tax is provided for on a full liability basis. Under
the full liability method deferred tax assets or liabilities are recognized for
differences between the financial and tax basis of assets and liabilities and
for tax loss carry forwards at the statutory rate at each reporting date. A
valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The deferred
income tax adjustment presented reflects the application of the full liability
method to the UK GAAP financial statements as well as temporary differences
arising from the US GAAP adjustments.
(VII) INVESTMENT PROPERTIES
Under UK GAAP, Hyder values investment properties at fair market value.
Depreciation is not applied, except where properties are held on leasehold with
an unexpired term of 20 years or less. Under US GAAP, investment properties are
valued at cost less accumulated depreciation.
(VIII) CAPITALISED INTEREST
As permitted under UK GAAP, the company expenses interest incurred in
respect of specific or general borrowings to finance the construction of
tangible fixed assets. US GAAP requires that, subject to specific criteria, such
interest should be capitalized and amortized over the useful life of the related
asset.
(IX) ORDINARY DIVIDENDS
Under UK GAAP the proposed and paid ordinary dividends are recognized in
the financial year to which they relate. Under US GAAP such dividends are not
recognized until the period in which they are formally approved.
(X) REDEEMABLE PREFERRED STOCK
Under UK GAAP, redeemable preferred stock is accounted for in equity and
the fixed rate coupon on the preferred stock is treated as dividends.
F-202
<PAGE> 425
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under US GAAP all issues of mandatorily redeemable stock are excluded from
the shareholders' equity section of the balance sheet and are presented
separately as long-term debt. Dividends on such stock are treated as interest
and deducted from net income.
(XI) EQUITY MINORITY INTERESTS
Under UK GAAP, minority interests in Hyder group subsidiaries are treated
as an element of equity. Under US GAAP, minority interests are accounted for
outside of equity.
(XII) OWN SHARES -- IMPAIRMENT IN VALUE
Under UK GAAP, the company's own shares reacquired are held as fixed asset
investments and are stated at cost less amounts provided to reflect impairment
in value.
Under US GAAP, own shares are classified as treasury stock, which is
recognized as a reduction in shareholders' equity and no impairment is
recognized.
(XIII) BUSINESS DEVELOPMENT COSTS
Under UK GAAP, internal business development costs and contract tendering
costs, in certain circumstances, are capitalized and expensed against future
income streams. Under US GAAP, internal business development costs and contract
tendering costs are expensed as incurred.
(XIV) LISTED INVESTMENTS
Under UK GAAP, listed investments are investments in companies which are
listed on an internationally recognized stock exchange. Under US GAAP, these
investments are classified as available for sale and unrealized holding gains
and losses are excluded from earnings and included as a component of other
comprehensive income within shareholders' funds.
(XV) DEFERRED COMPENSATION
Under US GAAP the difference between market price and grant price of shares
issued under the Employee Sharesave Schemes is recorded in the balance sheet as
deferred compensation and is amortized over the vesting period. Under UK GAAP,
no compensation expense is recognized under the schemes.
(XVI) RESTRUCTURING COSTS
The Company has recorded a provision for planned restructuring costs. Under
US GAAP, certain specific criteria must be met before costs can be included in a
restructuring provision. If
these criteria fail to be met, the costs must be expensed in the financial year
in which the costs are incurred. In 1999, under UK GAAP, Hyder adopted the
provisions of FRS 12 which sets forth criteria for the recognition of
restructuring reserves which are substantially consistent with US GAAP.
F-203
<PAGE> 426
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(XVII) FINANCIAL INSTRUMENTS
Under UK GAAP, gains and losses on hedges are deferred and recognized in
income when they have crystallised.
Under US GAAP, the applicable accounting practice for financial instruments
depends on management's intention for their disposition and may require
adjustments to their market or fair value. Under US GAAP, the following
conditions must be met for an item to be accounted for as a hedge: (a) the item
to be hedged must expose the company to price or interest rate risk; (b) it must
be probable that the results of the futures contracts will substantially offset
the effects of price or interest rate changes on the hedged item; and (c) the
futures contracts must be designated by management as a hedge of the item. For
futures contracts that are accounted for as a hedge of items reported at the
lower of cost or market, gains and losses on futures contracts are deferred and
recognized in income when costs related to the hedged item are recognized in
income. Derivative financial instruments held by Hyder which manage the interest
rate profile and are not matched by a primary financial instrument do not
qualify for hedge accounting and changes in their fair value are required to be
recorded as a gain or loss in the period.
(XVIII) DISCONTINUED OPERATIONS
During the year ended March 31, 2000, the Group sold its energy supply
business and its environmental laboratories business. Under UK GAAP, both of
these businesses qualify as discontinued operations. Under US GAAP, only the
energy supply business is considered a segment of the Group and qualifies as a
discontinued operation.
(XIX) NET INCOME PER ORDINARY SHARE
Under UK GAAP basic earnings per share is based on the weighted average number
of ordinary shares outstanding during the period after excluding the weighted
average ordinary shares held by the qualifying share option trusts and the
directors' long term incentive plan. Earnings per share is the profit in pence
attributable to each equity share, based on the profit after tax, minority
interests, dividend on preferred stock and exceptional items, divided by the
number of equity shares issued and ranking for dividend in respect of period.
This method is also used for basic earnings per share under US GAAP.
Under UK GAAP, the calculation of fully diluted earnings per ordinary share
is based on the profit after tax, minority interests, dividend on preferred
stock and exceptional items, plus notional interest on outstanding share
options. Under US GAAP, diluted earnings per share must also be disclosed.
Diluted earnings or loss per share is determined by dividing the net earnings or
loss by the sum of (1) the weighted average number of common shares outstanding
and (2) if not anti-dilutive, the effect of outstanding warrants and stock
options determined utilising the treasury stock method. Under this method, the
funds that would be received from the exercise of options are assumed to be
utilised in reacquiring shares. The potential dilution caused by the exercise of
share options therefore represents the difference between the number of shares
that would be issued on the exercise of the option and the theoretical number of
shares that could be reacquired utilising the funds received.
F-204
<PAGE> 427
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share computed in accordance with US GAAP has been based on
the following number of shares:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED MARCH 31
---------------
2000 1999
------ ------
NUMBER NUMBER
(M) (M)
<S> <C> <C>
Weighted average number of shares under US GAAP -- basic
EPS....................................................... 149.3 146.7
Common stock equivalents -- dilutive share options.......... 0.0 1.0
----- -----
Weighted average number of shares under US GAAP -- diluted
EPS....................................................... 149.3 147.7
----- -----
</TABLE>
For the year ended March 31, 2000, 0.1 million common stock equivalents
were excluded from the calculation as inclusion of these shares would have been
anti-dilutive.
(XX) CASH FLOW STATEMENTS
The consolidated cash flow statements have been prepared under UK GAAP in
accordance with FRS 1 (revised) and present substantially the same information
as required under SFAS 95. However, there are certain differences between FRS 1
(revised) and SFAS 95 with regard to classification of items within the cash
flow statement.
In accordance with FRS 1 (revised), cash flows are prepared separately for
operating activities, returns on investments and servicing of finance, taxation,
capital expenditure and financial investment, acquisitions and disposals, equity
dividends paid, management of liquid resources and financing. Under SFAS 95,
cash flows are classified under operating activities, investing activities and
financing activities.
Under FRS 1 (revised), cash is defined as cash in hand and deposits
repayable on demand, less overdrafts repayable on demand. Under SFAS 95, cash
and cash equivalents are defined as cash and investments with original
maturities of three months or less. Bank overdrafts have been included within
financing activities under US GAAP.
F-205
<PAGE> 428
HYDER PLC
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the group's cash flows from operating, investing and financing
activities classified in accordance with SFAS 95 is presented below.
<TABLE>
<CAPTION>
2000 1999
------ ------
LM LM
<S> <C> <C>
Net cash provided by operating activities................... 257.8 143.8
Net cash used in investing activities....................... (257.9) (412.6)
Net cash provided by financing activities................... 22.1 339.1
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 22.0 70.3
Effect of exchange rate changes on cash..................... (0.3) 0.2
Cash and cash equivalents at beginning of year.............. 316.8 246.3
------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... 338.5 316.8
------ ------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR ARE:
Cash at bank and in hand.................................... 34.0 21.0
Current asset investments................................... 304.5 295.8
====== ======
</TABLE>
F-206
<PAGE> 429
SOUTHERN ENERGY, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
WPD Limited, a company indirectly owned 40% by us and 60% by PPL Global,
has offered to acquire all of the outstanding shares of Hyder plc for L565
million (approximately $847 million) plus the assumption of L2.1 billion
(approximately $3.2 billion) of debt, and as of September 18, 2000 had acquired
approximately 68% of the shares. Southern Energy's share of the purchase price
will total approximately $84 million. In conjunction with the acquisition of
Hyder plc by WPD Limited, Southern Energy's voting control of WPD will be
reduced to control being shared with the 51% owner of WPD. Southern Energy and
PPL Global have agreed to modify the ownership structure of the voting shares of
WPD Holdings, which owns 100% of WPD, to 50% each. This change in structure will
result in neither Southern Energy nor PPL Global having operational or
management control of WPD Holdings or WPD. Accordingly, WPD will no longer be
consolidated by Southern Energy. The pro forma financial information gives
effect to the deconsolidation of WPD by Southern Energy and the equity share of
Hyder being purchased indirectly by Southern Energy through WPD Limited.
The purchase price of approximately L565 million (approximately $847
million) to be paid by WPD Limited to acquire Hyder will be assigned to assets
and liabilities based upon their fair value subsequent to the acquisition. The
accompanying pro forma financial statements give effect to purchase accounting
adjustments under US GAAP.
The pro forma financial statements should be read in conjunction with
Southern Energy's and Hyder plc's historical consolidated financial statements,
included elsewhere in this prospectus. The unaudited pro forma consolidated
statements of income for the six months ended June 30, 2000 and for the year
ended December 31, 1999 reflect the purchase of Hyder plc by WPD Limited and the
concurrent deconsolidation of WPD as though the purchase had occurred at the
beginning of the fiscal year period presented. The unaudited pro forma
consolidated balance sheet at June 30, 2000 reflects the probable transaction as
though it had occurred on June 30, 2000.
The pending sale of Hyder's services and industrial businesses discussed on
page 96 of this prospectus are not expected to have a material impact on Hyder's
results of operations. During Hyder's fiscal year 2000, the services and
industrial businesses contributed less than 3% and 3.5% of Hyder's income from
continuing operations, respectively. The pro forma information presented
includes the results of these businesses.
Hyder plc's fiscal year ended March 31, 2000 results have been utilized for
purposes of preparing Southern Energy's pro forma statement of income for the
year ended December 31, 1999. Hyder plc's six months ended March 31, 2000
results have been utilized for purposes of preparing Southern Energy's pro forma
statement of income for the six months ended June 30, 2000. Thus, Hyder plc's
six months ended March 31, 2000 results have been included in both pro forma
statements of income presented.
The pro forma information presented is for informational purposes only and
is not necessarily indicative of future earnings or financial position or of
what the earnings and financial position would have been had the transaction
occurred at the beginning of the respective periods or as of the date for which
pro forma financial information is presented.
F-207
<PAGE> 430
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS SOUTHERN
SOUTHERN -------------- ENERGY, INC.
ENERGY, INC. (1) (2) PRO FORMA
------------ ----- ----- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES................................ $1,194 $(190) $1,004
OPERATING EXPENSES:
Fuel.............................................. 344 -- 344
Purchased power................................... 54 (16) 38
Maintenance....................................... 68 (24) 44
Depreciation and amortization..................... 155 (40) 115
Selling, general, and administrative.............. 146 2 148
Write-down of assets.............................. 14 -- 14
Other............................................. 102 (16) 86
------ ----- ----- ------
Total operating expenses........................ 883 (94) -- 789
------ ----- ----- ------
OPERATING INCOME (LOSS)........................... 311 (96) -- 215
OTHER INCOME (EXPENSE):
Interest income................................... 81 (1) 80
Interest expense.................................. (300) 41 (259)
Gain on sale of assets............................ -- -- --
Equity in income (loss) of affiliates............. 63 31 8 102
Receivables recovery.............................. -- -- --
Other, net........................................ 40 (10) 30
------ ----- ----- ------
Total other income (expense).................... (116) 61 8 (47)
------ ----- ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST.............. 195 (35) 8 168
Provision (benefit) for income taxes.............. (29) (2) (31)
MINORITY INTEREST................................. 43 (33) 10
------ ----- ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS.......... $ 181 $ -- $ 8 $ 189
====== ===== ===== ======
PRO FORMA EARNINGS PER SHARE FROM CONTINUING
OPERATIONS(3):
Basic........................................... $ 0.61 $ 0.64
Diluted......................................... $ 0.61 $ 0.64
</TABLE>
---------------
(1) Reflects the deconsolidation of WPD by Southern Energy due to shared control
of WPD resulting from the Hyder acquisition by WPD Limited.
(2) Reflects Southern Energy's equity method income from Hyder, after purchase
accounting adjustments applied in accordance with APB Opinion No. 16.
Historical Hyder U.S. GAAP net income from continuing operations differs
from that presented in the audited U.S. GAAP Hyder financial statements
included elsewhere in this prospectus because of a December 1999 impairment
loss recorded in Hyder's historical financial statements. Given that the pro
forma results included herein assume that the purchase of Hyder occurred at
the beginning of the fiscal year period presented and our purchase price and
preliminary valuation reflect the reduction in value that created this
goodwill impairment on Hyder's US GAAP financial statements, this impairment
charge has been eliminated from Hyder's historical operating results in our
F-208
<PAGE> 431
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN MILLIONS)
calculation of our pro forma equity in the income of Hyder. However, had the
goodwill impairment recorded in Hyder's historical US GAAP financial
statements not been excluded from our computation, we would have recognized
pro forma equity in the income (loss) of Hyder of approximately $(272)
million. An exchange rate of 1.62 was used in developing the pro forma
results, which was the average interbank exchange rate for Hyder's six
months ended March 31, 2000.
<TABLE>
<CAPTION>
($ IN MILLIONS)
---------------
<S> <C>
Hyder U.S. GAAP Income (Loss) from continuing operations.... $ (662)
Add: Impairment loss during allocation period eliminated as
part of fair valuation................................. 700
------
Adjusted historical Hyder U.S. GAAP net income from
continuing operations..................................... $ 38
Purchase accounting adjustments:
Goodwill amortization..................................... (3)
Depreciation expense...................................... 2
Interest expense.......................................... (24)
Income tax impact of adjustments.......................... 8
U.S. residual income tax expense............................ (1)
------
Adjusted Hyder U.S. GAAP net income from continuing
operations................................................ $ 20
Southern Energy indirect ownership.......................... 40%
------
Southern Energy equity in income of Hyder................... $ 8
======
</TABLE>
GOODWILL. The Company's initial purchase price allocation places a
fair value on the assets and liabilities acquired of approximately $3.9
billion and $3.2 billion, respectively. After taking into account the
purchase price of $847 million, goodwill of approximately $120 million is
expected to result. The goodwill arises from the reallocation of values
between Hyder's assets and liabilities on a fair value basis. Amortization
of $3 million reflected above is the result of an estimated amortization
period of 20 years on the goodwill balance.
DEPRECIATION. The initial fair valuation of depreciable assets
indicates a value of approximately $843 million, a decrease of
approximately $93 million from Hyder's historical basis in such assets.
Depreciable lives are not expected to change, resulting in a reduction in
the depreciation expense recorded of approximately $2 million.
INTEREST EXPENSE. Hyder is expected to be acquired utilizing
approximately $672 million in debt at an interest rate of 7.25%. The impact
of a 1% change in the assumed interest rate would change Southern Energy's
equity in income of Hyder by approximately $1 million.
INCOME TAX IMPACT OF ADJUSTMENTS. The historical Hyder U.S. GAAP net
income from continuing operations reflects U.K. income taxes of 30%. This
30% rate has been applied to the purchase accounting adjustments.
F-209
<PAGE> 432
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN MILLIONS)
U.S. RESIDUAL INCOME TAX EXPENSE. Income taxes of 5% are reflected on
both the historical Hyder U.S. GAAP net income from continuing operations
and the purchase accounting adjustments.
SOUTHERN ENERGY INDIRECT OWNERSHIP. The Company anticipates that 100%
of Hyder shares will be tendered and purchased. The impact of each 5%
reduction in the percentage of Hyder shares purchased would reduce Southern
Energy's 40% equity in income of Hyder by approximately $0.5 million.
(3) Pro forma basic earnings per share gives effect to the dividends we paid to
Southern Company in 2000 as though they had been paid during the period
presented, in accordance with SEC Staff Accounting Bulletin Topic 1:B:3. Pro
forma diluted earnings per share gives effect to the conversion of the
Southern Energy value creation plan standard units outstanding at June 30,
2000 into options to purchase our common stock. The number of shares used to
determine pro forma basic and diluted earnings per share was 298.5 million
and 299.5 million, respectively.
F-210
<PAGE> 433
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS SOUTHERN
SOUTHERN ------------------- ENERGY, INC.
ENERGY, INC. (1) (2) PRO FORMA
------------ -------- -------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES.............................. $2,268 $(976) $1,292
OPERATING EXPENSES:
Fuel............................................ 392 -- 392
Purchased power................................. 545 (499) 46
Maintenance..................................... 116 (56) 60
Depreciation and amortization................... 270 (90) 180
Selling, general, and administrative............ 253 (13) 240
Write-down of assets............................ 60 (31) 29
Other........................................... 188 (56) 132
------ ----- ----- ------
Total operating expenses...................... 1,824 (745) 1,079
------ ----- ----- ------
OPERATING INCOME (LOSS)......................... 444 (231) 213
OTHER INCOME (EXPENSE):
Interest Income................................. 172 (6) 166
Interest Expense................................ (502) 92 (410)
Gain on sale of assets.......................... 313 (286) (1) 27
Equity in income (loss) of affiliates........... 111 158 268
Receivables recovery............................ 64 -- 64
Other, net...................................... 72 (25) 47
------ ----- ----- ------
Total other income (expense).................. 230 (67) (1) 162
------ ----- ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST............ 674 (298) (1) 375
Provision (Benefit) for Income Taxes............ 129 (134) (5)
MINORITY INTEREST............................... 183 (164) 19
------ ----- ----- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS........ $ 362 $ -- $ (1) $ 361
====== ===== ===== ======
PRO FORMA EARNINGS PER SHARE FROM CONTINUING
OPERATIONS(3):
Basic......................................... $ 1.21 $ 1.21
Diluted....................................... $ 1.21 $ 1.21
</TABLE>
---------------
(1) Reflects the deconsolidation of WPD by Southern Energy due to shared control
of WPD resulting from the Hyder acquisition by WPD Limited.
(2) Reflects Southern Energy's equity method income from Hyder, after purchase
accounting adjustments applied in accordance with APB Opinion No. 16.
Historical Hyder U.S. GAAP net income from continuing operations differs
from that presented in the audited U.S. GAAP Hyder financial statements
included elsewhere in this prospectus because of a December 1999 impairment
loss recorded in Hyder's historical financial statements. Given that the pro
forma results included herein assume that the purchase of Hyder occurred at
the beginning of the fiscal year period presented and our purchase price and
preliminary valuation reflect the reduction in value that created this
goodwill impairment on Hyder's US GAAP financial statements, this impairment
charge has been eliminated from Hyder's historical operating results in our
F-211
<PAGE> 434
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
calculation of our pro forma equity in the income of Hyder. However, had the
goodwill impairment recorded in Hyder's historical US GAAP financial
statements not been excluded from our computation, we would have recognized
pro forma equity in the income (loss) of Hyder of approximately $(281)
million. An exchange rate of 1.61 was used in developing the pro forma
results which was the average interbank exchange rate for Hyder's fiscal
year ended March 31, 2000.
<TABLE>
<CAPTION>
($ IN MILLIONS)
---------------
<S> <C>
Audited Hyder U.S. GAAP Income (Loss) from continuing
operations................................................ $(669)
Add: Impairment loss during allocation period eliminated as
part of fair valuation.................................... 700
-----
Adjusted historical Hyder U.S. GAAP net income from
continuing operations..................................... $ 31
Purchase accounting adjustments:
Goodwill amortization..................................... (6)
Depreciation expense...................................... 5
Interest expense.......................................... (49)
Income tax impact of adjustments.......................... 15
U.S. residual income tax expense............................ 1
-----
Adjusted Hyder U.S. GAAP net income from continuing
operations................................................ (3)
Southern Energy indirect ownership.......................... 40%
-----
Southern Energy equity in income of Hyder................... $ (1)
=====
</TABLE>
GOODWILL. The Company's initial purchase price allocation places a fair
value on the assets and liabilities acquired of approximately $3.9 billion
and $3.2 billion, respectively. After taking into account the purchase price
of $847 million, goodwill of approximately $120 million is expected to
result. The goodwill arises from the reallocation of values between Hyder's
assets and liabilities on a fair value basis. Amortization of $6 million
reflected above is the result of an estimated amortization period of 20
years on the goodwill balance.
DEPRECIATION. The initial fair valuation of depreciable assets indicates a
value of approximately $843 million, a decrease of approximately $93 million
from Hyder's historical basis in such assets. Depreciable lives are not
expected to change, resulting in a reduction in the depreciation expense
recorded of approximately $5 million.
INTEREST EXPENSE. Hyder is expected to be acquired utilizing approximately
$672 million in debt at an interest rate of 7.25%. The impact of a 1% change
in the assumed interest rate would change Southern Energy's equity in income
of Hyder by approximately $2 million.
INCOME TAX IMPACT OF ADJUSTMENTS. The historical Hyder U.S. GAAP net income
from continuing operations reflects U.K. income taxes of 30%. This 30% rate
has been applied to the purchase accounting adjustments.
F-212
<PAGE> 435
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
U.S. RESIDUAL INCOME TAX EXPENSE. Income taxes of 5% are reflected on both
the historical Hyder U.S. GAAP net income from continuing operations and the
purchase accounting adjustments.
SOUTHERN ENERGY INDIRECT OWNERSHIP. The Company anticipates that 100% of
Hyder shares will be tendered and purchased. The impact of each 5% reduction
in the percentage of Hyder shares purchased would reduce Southern Energy's
40% equity in income of Hyder by approximately $1 million.
(3) Pro forma basic earnings per share gives effect to the dividends we paid to
Southern Company in 2000 as though they had been paid during the period
presented, in accordance with SEC Staff Accounting Bulletin Topic 1:B:3. Pro
forma diluted earnings per share gives effect to the conversion of the
Southern Energy value creation plan standard units outstanding at December
31, 1999 into options to purchase our common stock. The number of shares
used to determine pro forma basic and diluted earnings per share was 298.5
million and 299.5 million, respectively.
F-213
<PAGE> 436
SOUTHERN ENERGY, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS SOUTHERN
SOUTHERN --------------- ENERGY, INC.
ENERGY, INC. (1) (2) PRO FORMA
------------ ------- ----- ------------
<S> <C> <C> <C> <C>
ASSETS
TOTAL CURRENT ASSETS.............................. $ 1,744 $ (106) $ (84) $ 1,554
PROPERTY, PLANT AND EQUIPMENT, NET................ 5,912 (1,927) -- 3,985
NONCURRENT ASSETS:
Investments....................................... 1,550 179 84 1,813
Goodwill, net of accumulated amortization......... 2,014 (244) -- 1,770
Other noncurrent assets........................... 3,088 (230) -- 2,858
------- ------- ----- -------
Total noncurrent assets......................... 6,652 (295) 84 6,441
------- ------- ----- -------
Total assets.................................... $14,308 $(2,328) $ -- $11,980
======= ======= ===== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt................................... $ 2,578 $ (451) $ -- $ 2,127
Current portion of long-term debt................. 266 -- -- 266
Other current liabilities......................... 1,037 (220) -- 817
------- ------- ----- -------
Total current liabilities....................... 3,881 (671) -- 3,210
NONCURRENT LIABILITIES:
Notes payable..................................... 4,596 (455) -- 4,141
Other long-term debt.............................. 394 -- -- 394
Subsidiary obligated mandatorily redeemable
preferred securities............................ 1,026 (76) -- 950
Deferred income taxes............................. 694 (617) -- 77
Other noncurrent liabilities...................... 193 (29) -- 164
------- ------- ----- -------
Total noncurrent liabilities.................... 6,903 (1,177) -- 5,726
MINORITY INTEREST IN SUBSIDIARY COMPANIES......... 749 (480) -- 269
STOCKHOLDER'S EQUITY:
Additional paid in capital........................ 2,872 -- -- 2,872
Other stockholder's equity........................ (108) -- -- (108)
Retained earnings (accumulated deficit)........... 11 -- -- 11
------- ------- ----- -------
Total stockholder's equity...................... 2,775 -- -- 2,775
------- ------- ----- -------
Total liabilities and stockholder's equity...... $14,308 $(2,328) $ -- $11,980
======= ======= ===== =======
</TABLE>
-------------------------
(1) Reflects the deconsolidation of WPD by Southern Energy due to shared control
of WPD resulting from the Hyder acquisition by WPD Limited.
(2) Reflects Southern Energy's indirect equity method investment in Hyder as if
the investment was made on June 30, 2000.
F-214
<PAGE> 437
SOUTHERN ENERGY, INC.
<PAGE> 438
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........................................ $ 91,080
NASD filing fee............................................. 30,500
NYSE listing fee............................................ 55,000
Rating Agency fees.......................................... 270,000
Printing costs.............................................. 720,000
Accounting fees and expenses................................ 150,000
Legal fees and expenses..................................... 172,500
Blue sky fees and expenses.................................. 6,000
Charges of trustees (including counsel)..................... 17,000
Miscellaneous............................................... 357,920
----------
Total..................................................... $1,870,000
==========
</TABLE>
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 successful on the merits or otherwise in defense of any
such action, suit or proceeding, or in defense
II-1
<PAGE> 439
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.
Article NINTH of the Certificate of Incorporation of Southern Energy
provides that a director of Southern Energy shall not be liable to Southern
Energy or its stockholders for monetary damages for breach of fiduciary duty as
a director, except to the extent that such exemption from liability or
limitation thereof is not permitted under the Delaware General Corporation Law
as currently in effect or as the same may hereafter be amended. No amendment,
modification or repeal of Article NINTH shall adversely affect any right or
protection of a director with respect to events occurring prior to such
amendment, modification or repeal.
Section 6.4 of the By-Laws of Southern Energy provides that Southern Energy
(for purposes of this paragraph, the "Corporation") shall indemnify to the full
extent permitted by law any person made or threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director or officer of the Corporation or serves or
served at the request of the Corporation any other enterprise as a director or
officer. Expenses, including attorneys' fees, incurred by any such person in
defending any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of or on behalf of
such person to repay such amounts if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation. The rights provided
to any person by Section 6.4 shall be enforceable against the Corporation by
such person who shall be presumed to have relied upon it in serving or
continuing to serve as a director or officer as provided above. No amendment of
Section 6.4 shall impair the rights of any person arising at any time with
respect to events occurring prior to such amendment. For purposes of Section 6.4
and this paragraph, the term "Corporation" includes any predecessor of the
Corporation and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger; the term
"other enterprise," shall include any corporation, partnership, joint venture,
trust or employee benefit plan; service "at the request of the Corporation"
shall include service as a director, officer or employee of the Corporation
which imposes duties on, or involves services by, such director, officer or
employee with respect to an employee benefit plan, its participants or
beneficiaries; any excise taxes assessed on a person with respect to an employee
benefit plan shall be deemed to be indemnifiable expenses; and action by a
person with respect to an employee benefit plan which such person reasonably
believes to be in the interest of the participants and beneficiaries of such
plan shall be deemed to be action not opposed to the best interests of the
Corporation.
All of Southern Energy's directors and officers will be covered by
insurance policies against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933, as
amended.
Between the initial public offering of Southern Energy's common stock and
the distribution of Southern Energy's common stock by Southern Company, the
directors and officers of Southern Energy will be insured by the Southern
Company directors and officers liability insurance program. Upon the
distribution of Southern Energy's common stock by Southern Company, Southern
Energy will effect a separate insurance program for its directors and officers
and Southern Company will
II-2
<PAGE> 440
retain its current program for its respective directors and officers. Any
historic liabilities of the Southern Energy directors and officers arising from
wrongful acts prior to distribution shall remain insured by the Southern Company
directors and officers liability insurance program.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 26, 1999, we sold $200,000,000 7.4% senior notes due 2004 and
$500,000,000 7.9% senior notes due 2009. The purchase price of these notes was
paid in cash by the certain institutional investors. All of these notes were
offered and sold only to qualified institutional buyers in transactions not
involving a public offering in reliance upon the exemption provided by Section
4(2) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement for the Preferred Securities.
3.1 -- Restated Certificate of Incorporation (Designated in
Registration No. 333-35390 as Exhibit 3.1).
3.2 -- Bylaws (Designated in Registration No. 333-35390 as Exhibit
3.2).
4.1 -- Specimen Stock Certificate (Designated in Registration No.
333-35390 as Exhibit 4.1).
4.2* -- Certificate of Trust.
4.3* -- Trust Agreement.
4.4* -- Form of Amended and Restated Trust Agreement.
4.5 -- Form of Preferred Security (included in Exhibit 4.4).
4.6* -- Form of Junior Subordinated Note Indenture.
4.7* -- Form of First Supplemental Indenture.
4.8 -- Form of Junior Convertible Subordinated Note (included in
Exhibit 4.7).
4.9* -- Form of Guarantee.
4.10 -- Form of Agreement as to Expenses and Liabilities (included
in Exhibit 4.4).
4.11 -- Certificate of Designation of Series A Preferred Stock
(Designated in Registration No. 333-35390 as Exhibit 4.11).
4.12 -- Certificate of Designation of Series B Preferred Stock
(Designated in Registration No. 333-35390 as Exhibit 4.12).
4.13 -- Rights Agreement between Southern Energy, Inc. and
ChaseMellon Shareholder Services, L.L.C. (Designated in
Registration No. 333-35390 as Exhibit 4.13).
5.1* -- Opinion of Troutman Sanders LLP.
5.2* -- Opinion of Richards, Layton and Finger, P.A.
5.3* -- Opinion of Shearman & Sterling.
8.1* -- Opinion of Troutman Sanders LLP.
10.1 -- Form of Master Separation and Distribution Agreement
(Designated in Registration No. 333-35390 as Exhibit 10.1).
</TABLE>
II-3
<PAGE> 441
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.2 -- Form of Transitional Services Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.2).
10.3 -- Form of Indemnification and Insurance Matters Agreement
(Designated in Registration No. 333-35390 as Exhibit 10.3).
10.4 -- Form of Technology and Intellectual Property Ownership and
Licenses Agreement (Designated in Registration No. 333-35390
as Exhibit 10.4).
10.5 -- Form of Confidential Disclosure Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.5).
10.6 -- Form of Employee Matters Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.6).
10.7 -- Form of Tax Indemnification Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.7).
10.8 -- Form of Registration Rights Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.8).
10.9 -- Form of Southern Energy Employee Stock Purchase Plan
(Designated in Registration No. 333-35390 as Exhibit 10.9).
10.10 -- Form of Southern Energy Omnibus Incentive Compensation Plan
(Designated in Registration No. 333-35390 as Exhibit 10.10).
10.11 -- Deferred Compensation Agreement with S. Marce Fuller
(Designated in Registration No. 333-35390 as Exhibit 10.11).
10.12 -- Deferred Compensation Agreement with Raymond D. Hill
(Designated in Registration No. 333-35390 as Exhibit 10.12).
10.13 -- Deferred Compensation Agreement with Richard J. Pershing
(Designated in Registration No. 333-35390 as Exhibit 10.13).
10.14 -- Amended and Restated Employment Retention Agreement with
Frederick D. Kuester (Designated in Registration No.
333-35390 as Exhibit 10.14).
10.15 -- Employment Retention Agreement with Barney S. Rush
(Designated in Registration No. 333-35390 as Exhibit 10.15).
10.16 -- Intentionally Omitted.
10.17 -- Formation Agreement by and between SEI Holdings, Inc. and
Vastar Resources, Inc. dated August 8, 1997 (Designated in
Registration No. 333-35390 as Exhibit 10.17).
10.18 -- Energy Conversion Agreement for a Coal Fired Thermal Power
Station at Sual Pangasinan, Philippines between National
Power Corporation and CEPA Pangasinan Electric Limited dated
May 20, 1994 (Designated in Registration No. 333-35390 as
Exhibit 10.18).
10.19 -- Build, Operate and Transfer Project Agreement for a Gas
Turbine Power Station in Navotas, Manila between National
Power Corporation and Hopewell Project Management Company
Limited dated 16th November, 1988 (Designated in
Registration No. 333-35390 as Exhibit 10.19).
10.20 -- Navotas II, Build, Operate and Transfer Project Agreement
for a Gas Turbine Power Station in Navotas, Manila between
National Power Corporation and Hopewell Energy International
Limited, dated 29 June, 1992 (Designated in Registration No.
333-35390 as Exhibit 10.20).
</TABLE>
II-4
<PAGE> 442
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
10.21 -- Energy Conversion Agreement for a Coal Fired Thermal Power
Station at Barangay Ibabang Pulo, Pagbilao, Quezon,
Philippines between National Power Corporation and Hopewell
Energy International Limited, dated 9th November, 1991
(Designated in Registration No. 333-35390 as Exhibit 10.21).
10.22 -- Amendment Agreement, dated the 30th day of March 1993, to an
Energy Conversion Agreement between Hopewell Energy
International Limited, National Power Corporation and
Hopewell Power (Philippines) Corp. dated 9th November 1991
(Designated in Registration No. 333-35390 as Exhibit 10.22).
10.23 -- Asset Purchase and Sale Agreement for Generating Plants and
Related Assets by and between Potomac Electric Power Company
and Southern Energy, Inc., dated June 7, 2000, and exhibits
thereto (Designated in Registration No. 333-35390 as Exhibit
10.23).
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
12.2 -- Computation of Ratio of Earnings to Fixed Charges plus
Preferred Dividend Requirements.
21.1 -- Subsidiaries of Registrant (Designated in Registration No.
333-35390 as Exhibit 21.1).
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of KPMG Deutsche Treuhand-Gesellschaft.
23.3* -- Consent of PricewaterhouseCoopers.
23.4 -- Consent of Troutman Sanders LLP (included in Exhibit 5.1).
23.5 -- Consent of Richards, Layton and Finger, P.A. (included in
Exhibit 5.2).
23.6 -- Consent of Shearman & Sterling (included in Exhibit 5.3).
24.1* -- Power of Attorney.
25.1* -- Statement of Eligibility under Trust Indenture Act of 1939,
as amended, of Bankers Trust Company, as Indenture Trustee.
25.2* -- Statement of Eligibility under Trust Indenture Act of 1939,
as amended, of Bankers Trust Company, as Property Trustee.
25.3* -- Statement of Eligibility under Trust Indenture Act of 1939,
as amended, of Bankers Trust Company, as Guarantee Trustee.
27.1 -- Financial Data Schedule (for SEC use only) (Designated in
Registration No. 333-35390 as Exhibit 27.1).
99.1* -- Consent of A. D. Correll.
99.2* -- Consent of David J. Lesar.
99.3* -- Consent of William M. Hjerpe.
</TABLE>
Exhibits listed above that have been filed with the Commission and that
were designated as noted above are hereby incorporated herein by reference and
made a part hereof with the same effect as if filed herewith.
-------------------------
* Previously filed.
II-5
<PAGE> 443
(b) The following financial statement schedule is filed as part of this
Registration Statement:
SCHEDULE II -- Valuation and Qualifying Accounts and Reserves of
Southern Energy, Inc. and Subsidiary Companies for the years ended December
31, 1997, 1998 and 1999.
ITEM 17. UNDERTAKINGS
The undersigned registrants hereby undertake 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 registrants pursuant to the foregoing provisions, or otherwise, the
registrants have 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
registrants of expenses incurred or paid by a director, officer or controlling
person of the registrants 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 registrants will, unless in
the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by them is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrants hereby undertake 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 registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE> 444
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Southern
Energy, Inc. has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on September 26, 2000.
SOUTHERN ENERGY, INC.
By: *
------------------------------------
S. Marce Fuller
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities indicated below and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief *
----------------------------------------------------- Executive Officer and
S. Marce Fuller Director (Principal
Executive Officer)
* Executive Vice President *
----------------------------------------------------- and Chief Financial
Raymond D. Hill Officer (Principal
Financial Officer)
* Senior Vice President, *
----------------------------------------------------- Finance and Accounting
James A. Ward (Principal Accounting
Officer)
* Director *
-----------------------------------------------------
A.W. Dahlberg
* Director *
-----------------------------------------------------
H. Allen Franklin
* Director *
-----------------------------------------------------
Elmer B. Harris
* Director *
-----------------------------------------------------
W.L. Westbrook
*By: /s/ Elizabeth B. Chandler September 25, 2000
-------------------------------------------------
Elizabeth B. Chandler
Attorney-in-fact
</TABLE>
II-7
<PAGE> 445
Pursuant to the requirements of the Securities Act of 1933, SEI Trust I
certifies that it has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on September 26, 2000.
SEI TRUST I
By: SOUTHERN ENERGY, INC.
Depositor
By: /s/ Elizabeth B. Chandler
------------------------------------
Elizabeth B. Chandler
Secretary and Vice President
II-8
<PAGE> 446
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Southern Energy, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Southern Energy, Inc. included in this
registration statement and have issued our report thereon dated February 16,
2000. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the Company's management, is presented for purposes of
complying with the Securities and Exchange Commission's rules, and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000
<PAGE> 447
SOUTHERN ENERGY, INC. AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Stated in Thousands of Dollars)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT BEGINNING CHARGED TO CHARGED TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD
----------- -------------------- ---------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Provision for
uncollectible
accounts (current)
1999................. $101,243 $ 19,566 $(11,805) $65,418(Note 1) $ 43,586
1998................. 67,443 33,082 6,153 5,435(Note 1) 101,243
1997................. 23,806 14,522 36,220 7,105(Note 1) 67,443
Provision for
uncollectible
accounts (long-term)
1999................. $ 40,000 $ 30,543 $(10,000) $ 0 $ 60,543
1998................. 0 40,000 0 0 40,000
1997................. 0 0 0 0 0
</TABLE>
---------------
Note 1: Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
