<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1996.
REGISTRATION NO. 333-09033
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SOUTHERN INVESTMENTS UK PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND AND WALES 4911 NONE
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OR OTHER IDENTIFICATION NO.)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
800 PARK AVENUE
AZTEC WEST
ALMONDSBURY
BRISTOL BS12 4SE, ENGLAND
44-1454-201-101
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
JAMES A. WARD
900 ASHWOOD PARKWAY
SUITE 500
ATLANTA, GEORGIA 30338-4780
(770) 379-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
PLEASE SEND COPIES OF ALL CORRESPONDENCE TO:
JOHN T. W. MERCER, ESQUIRE JOHN A. MILLARD, ESQUIRE
TROUTMAN SANDERS LLP SHEARMAN & STERLING
600 PEACHTREE STREET, N.E., SUITE 599 LEXINGTON AVENUE
5200 NEW YORK, NEW YORK 10022
ATLANTA, GEORGIA 30308 (212) 848-4000
(404) 885-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
----------------
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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Notes due
2006................... $235,000,000 100% $235,000,000 $81,035
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(a).
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated , 1996
$235,000,000
SOUTHERN INVESTMENTS UK PLC
% SENIOR NOTES DUE 2006
------------
Southern Investments UK plc, a public limited company incorporated under the
laws of England and Wales (the "Company"), is offering (the "Offering")
US$235,000,000 aggregate principal amount of its % Senior Notes due 2006 (the
"Senior Notes"). Interest on the Senior Notes will be payable semiannually on
and of each year, commencing , 1996. The Senior Notes will
mature on , 2006.
The Senior Notes will be redeemable prior to maturity only as follows: The
Senior Notes will be redeemable, in whole but not in part, at the principal
amount thereof, plus any accrued and unpaid interest, in the event of certain
tax law changes and other events requiring the payment of Additional Amounts
(as defined herein); and the Senior Notes will be redeemable in whole or in
part at the option of the Company at any time, at a redemption price equal to
the greater of (i) 100% of the principal amount of the Senior Notes being
redeemed or (ii) the sum of the present values of the remaining scheduled
payments of principal of and interest on the Senior Notes being redeemed
discounted to the date of redemption on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Yield (as defined
herein) plus basis points; plus, for (i) or (ii) above, whichever is
applicable, accrued interest on the Senior Notes to the date of redemption. The
Senior Notes will not be subject to any sinking fund. See "Description of the
Senior Notes."
The Senior Notes will be direct, unsecured and unsubordinated obligations of
the Company ranking pari passu with all other unsecured and unsubordinated
obligations of the Company (other than those obligations preferred by operation
of law). The Senior Notes will effectively rank junior to any secured
indebtedness of the Company to the extent of the assets securing such
indebtedness and to any indebtedness of the Company's subsidiaries to the
extent of the assets of such subsidiaries. Substantially all of the Company's
consolidated assets other than the stock of its only Significant Subsidiary (as
defined herein) are currently held by the Company's subsidiaries. The Indenture
for the Senior Notes contains no restrictions on the amount of additional
indebtedness which may be incurred by the Company or its subsidiaries; however,
the Indenture contains certain restrictions on the ability of the Company and
its Significant Subsidiaries to incur secured indebtedness. See "Description of
the Senior Notes--Covenants--Limitation on Liens."
The Senior Notes will be represented by a global Senior Note (the "Global
Note") in bearer form and deposited with Bankers Trust Company, as depositary
(the "Book-Entry Depositary"), which will hold the Senior Notes for the benefit
of The Depository Trust Company ("DTC") and its participants, including
Euroclear (as defined herein) and Cedel Bank (as defined herein). The Book-
Entry Depositary will issue to DTC one or more certificateless depositary
interests (the "Book-Entry Interest") which together will represent a 100%
interest in the underlying Global Note. DTC will operate a system of dealing in
the Book-Entry Interest in book-entry form. Interests in the Book-Entry
Interest will be shown on, and transfers thereof will be effected only through,
records maintained by DTC and its participants. Except in
limited circumstances, registered definitive Senior Notes will not be issued in
exchange for interests in the Global Note. Interests in the Book-Entry Interest
will clear and settle in DTC's Same-Day Funds Settlement System. Interests in
the Book-Entry Interest will be issued only in denominations of US$1,000 and
integral multiples thereof. See "Description of the Senior Notes--Description
of the Book-Entry System."
Application has been made to list the Senior Notes on the Luxembourg Stock
Exchange.
------------
SEE "RISK FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SENIOR NOTES.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per % Senior Note........................ % % %
- --------------------------------------------------------------------------------
Total..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------
The Senior Notes offered hereby are being offered by the Underwriters named
herein, subject to prior sale, to withdrawal, cancellation or modification of
the offer without notice, to delivery and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of the Senior Notes
will be made through the facilities of DTC on or about , 1996.
------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
, 1996
<PAGE>
[MAP DEPICTING DISTRIBUTION NETWORK.]
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES
AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a public limited company incorporated under the laws of
England and Wales. Several of the directors and executive officers of the
Company (and certain experts named in this Prospectus) are citizens or
residents of the United Kingdom (the "UK"). All or a substantial portion of
the assets of such persons and substantially all the assets of the Company are
located outside the United States of America (the "US"). As a result, it may
not be possible for investors to effect service of process within the US upon
such persons or the Company or to enforce against them judgments of US courts
predicated upon civil liabilities under US federal securities laws. There is
doubt as to the enforceability in England and Wales, in original actions or in
actions for enforcement of judgments of US courts, of civil liabilities
predicated upon US federal securities laws.
----------------
The Company accepts responsibility for the information contained in this
document. To the best of the knowledge and belief of the Company (which has
taken all reasonable care to ensure that such is the case) the information
contained in this document is in accordance with the facts and does not omit
anything likely to affect the import of such information.
----------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A
TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT
WITH THE PROVISIONS OF THIS PARAGRAPH.
----------------
The Company publishes its consolidated financial statements in pounds
sterling. In this Prospectus, references to "pounds sterling," "(Pounds),"
"pence" or "p" are to UK currency and references to "US dollars," "US$" or "$"
are to US currency. For the convenience of the reader, this Prospectus
contains translations of certain pounds sterling amounts into US dollars at
specified rates, or, if not so specified, the noon buying rate in New York
City for cable transfers in pounds sterling as certified for customs purposes
by the Federal Reserve Bank of New York (the "Noon Buying Rate") on June 28,
1996 of $1.5529 = (Pounds)1.00. No representation is made that the pounds
sterling amounts have been, could have been or could be converted into US
dollars at the rates indicated or at any other rates. See "Exchange Rates" for
historical information regarding Noon Buying Rates.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed financial and other information contained
elsewhere in this Prospectus. References herein to the "Predecessor Company"
mean SWEB prior to its acquisition by the Company. All references to a "fiscal"
year mean a year ended March 31 and all references to a "calendar" year mean a
year ended December 31. References to Pro Forma Fiscal Year 1996 mean the
unaudited pro forma financial information of the Company presented for fiscal
year 1996 as if the acquisition of SWEB by the Company had occurred as of April
1, 1995.
THE COMPANY
The Company is a wholly-owned subsidiary of Southern Investments UK Holdings
Limited ("Holdings"), of which 75% is owned indirectly by The Southern Company
("Southern", together with its subsidiaries, the "Southern Company system") and
25% is owned indirectly by PP&L Resources, Inc. ("PP&L Resources"). The Company
was incorporated as a public limited company under the laws of England and
Wales on June 23, 1995, as a vehicle for the acquisition of South Western
Electricity plc ("SWEB"), one of the 12 regional electricity companies ("RECs")
in England and Wales licensed to distribute, supply and, to a limited extent,
generate electricity. In September 1995, the Company gained effective control
of SWEB, having acquired approximately 84% of its shares. The Company
subsequently replaced SWEB's board of directors and certain senior managers
with officers and employees of companies from within the Southern Company
system. In December 1995, the Company acquired the remaining shares of SWEB.
The Company's sole investment and only significant asset is the entire share
capital of SWEB, which is headquartered in Bristol, England. At June 30, 1996,
the Company had consolidated assets of (Pounds)1.659 billion ($2.576 billion).
See "The Company."
SWEB's two main business lines are the distribution of electricity and the
supply of electricity to approximately 1.3 million customers primarily in its
franchise area in southwest England (the "Franchise Area"). This area covers
approximately 5,560 square miles and has a resident population of approximately
2.8 million. The distribution business and the supply business are distinct
business segments and produced operating income of (Pounds)112 million ($174
million) and (Pounds)15 million ($23 million), respectively, in Pro Forma
Fiscal Year 1996, representing substantially all of the Company's consolidated
operating income in that pro forma fiscal year. See "Business--SWEB's Main
Businesses."
SWEB is the only distributor of electricity in its Franchise Area, and
management believes that economic, environmental and regulatory factors are
likely to prevent competitors from entering this business in SWEB's Franchise
Area. SWEB has an exclusive right to supply electricity to customers in its
Franchise Area with demand of not more than 100kW, which is scheduled to
continue until at least March 31, 1998. The supply business to consumers with
demand above 100kW, both inside and outside SWEB's Franchise Area, is open to
competition, and SWEB is able to competitively bid or negotiate to supply
electricity to such customers. See "The Electric Utility Industry in Great
Britain."
The operations of SWEB are regulated under its Public Electricity Supply
license ("PES license") pursuant to which the distribution business, and the
supply business to consumers with demand of not more than 100kW, are subject to
a price cap regulatory framework that provides economic incentives to SWEB to
increase the number of units of electricity distributed and supplied and to
operate in a more cost-efficient manner.
SWEB also has ancillary business activities that support the main businesses,
including power generation and gas supply. See "Business--SWEB's Other Business
Activities."
4
<PAGE>
THE OFFERING
Issuer........................ Southern Investments UK plc.
Securities Offered............ $235,000,000 aggregate principal amount of
% Senior Notes due 2006.
Maturity Date................. , 2006.
Interest...................... The Senior Notes will bear interest from
the date of original issuance at the rate
of % per annum payable semiannually in
arrears.
Interest Payment Dates........ and , commencing , 1996.
Ranking....................... The Senior Notes are direct, unsecured and
unsubordinated obligations of the Company
ranking pari passu with all other unsecured
and unsubordinated obligations of the
Company (other than those obligations
preferred by operation of law). The Senior
Notes will effectively rank junior to any
secured indebtedness of the Company to the
extent of the assets securing such
indebtedness and to any indebtedness of the
Company's subsidiaries to the extent of the
assets of such subsidiaries. Substantially
all of the Company's consolidated assets
other than the stock of SWEB, the Company's
only Significant Subsidiary (as defined
herein), are currently held by the
Company's subsidiaries. The Indenture for
the Senior Notes contains no restrictions
on the amount of additional indebtedness
which may be incurred by the Company or its
subsidiaries; however, the Indenture
contains certain restrictions on the
ability of the Company and its Significant
Subsidiaries to incur secured indebtedness.
See "Description of the Senior Notes--
Covenants."
Ratings....................... The Senior Notes have been assigned ratings
of by Standard & Poor's Ratings
Services ("S&P"), by Duff & Phelps
Credit Rating Company ("DCR") and by
Moody's Investors Service, Inc.
("Moody's"). These ratings have been
obtained with the understanding that S&P,
DCR and Moody's will continue to monitor
the credit rating of the Company and will
make future adjustments to the extent
warranted. A rating reflects only the views
of S&P, DCR or Moody's, as the case may be,
and is not a recommendation to buy, sell or
hold the Senior Notes. There is no
assurance that any such rating will be
retained for any given period of time or
that it will not be revised downward or
withdrawn entirely by S&P, DCR or Moody's,
as the case may be, if, in their respective
judgments, circumstances so warrant.
5
<PAGE>
Optional Redemption........... The Senior Notes will be redeemable in
whole or in part at the option of the
Company at any time, at a redemption price
equal to the greater of (i) 100% of the
principal amount of the Senior Notes being
redeemed or (ii) the sum of the present
values of the remaining scheduled payments
of the principal of and interest on the
Senior Notes being redeemed discounted to
the date of redemption on a semi-annual
basis (assuming a 360-day year consisting
of twelve 30-day months) at the Treasury
Yield (as defined herein) plus basis
points; plus, for (i) or (ii) above,
whichever is applicable, accrued interest
on the Senior Notes being redeemed to the
date of redemption. See "Description of the
Senior Notes--Optional Redemption."
Optional Tax Redemption....... In the event of changes in the tax laws of
the UK after the date hereof and certain
other events that would obligate the
Company to pay Additional Amounts, the
Senior Notes may be redeemed at the option
of the Company, in whole but not in part,
at the principal amount thereof, plus
accrued and unpaid interest. See
"Description of the Senior Notes--Optional
Tax Redemption."
Principal Covenants........... The Indenture under which the Senior Notes
are to be issued will not contain any
limitation on the Company's or its
subsidiaries' right to incur indebtedness.
The Indenture will, however, contain
certain covenants, including covenants
applicable to the Company and its
Significant Subsidiaries with respect to
(i) limitations on liens, (ii) limitations
on sale and lease-back transactions and
(iii) limitations regarding consolidation,
merger, conveyance, sale or lease
transactions. See "Description of the
Senior Notes--Covenants--Limitation on
Liens," "--Limitation on Sale and Lease-
Back Transactions" and "--Consolidation,
Merger, Conveyance, Sale or Lease."
Events of Default............. For a discussion of certain events that
will permit acceleration of the principal
of the Senior Notes (together with all
interest accrued and unpaid thereon), see
"Description of the Senior Notes--Events of
Default."
Withholding Tax............... Payments in respect of the Global Note will
be made free and clear of any present or
future UK withholding and other deductions
existing in the UK, except as set forth
under "Description of the Senior Notes--
Additional Amounts." Subject to certain
exceptions, the Company will pay such
additional amounts (the "Additional
Amounts") as will result in receipt by the
holder of the Global Note of such amounts
as would have been received by it had no
such withholding or deduction been
required. See "Description of the Senior
Notes--Additional Amounts."
6
<PAGE>
Use of Proceeds............... The Company intends to use the net proceeds
of the Offering principally to refinance a
portion of its existing debt. See "Use of
Proceeds" and "Capitalization."
Form and Denomination.........
The Senior Notes will be issued only in the
form of one global bearer note and
deposited with the Book-Entry Depositary
which will hold the Senior Notes for the
benefit of DTC and its participants. The
Book-Entry Depositary will issue the Book-
Entry Interest to DTC which will operate a
system of dealing in the Book-Entry
Interest. Ownership of interests in the
Book-Entry Interest will be limited to
persons who have accounts with DTC
("Participants") or persons who may hold
interests through such participants
("Indirect Participants"). Interests in the
Book-Entry Interest will be shown on, and
transfers thereof will be effected only
through, records maintained by DTC and its
Participants, including Morgan Guaranty
Trust Company of New York, Brussels office,
as operator of the Euroclear System
("Euroclear"), and Cedel Bank, societe
anonyme ("Cedel Bank").
Except as set forth under "Description of
the Senior Notes," Participants and
Indirect Participants will not be entitled
to receive physical delivery of Definitive
Registered Notes or to have Senior Notes
issued and registered in their names and
will not be considered the owners or
holders of the Senior Notes under the
Indenture pursuant to which the Senior
Notes are issued. See "Risk Factors--
Considerations Related to Book-Entry
Interest."
Interests in the Book-Entry Interest and
the Definitive Registered Notes, if any,
will be issued in minimum denominations of
US$1,000 and integral multiples of US$1,000
in excess thereof.
Governing Law................. The Indenture and the Senior Notes will be
governed by, and construed in accordance
with, the laws of the State of New York.
Trustee, Registrar and Book-
Entry Depositary.............
Bankers Trust Company.
Paying Agents................. Bankers Trust Company and Bankers Trust
Luxembourg S.A.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary consolidated financial data for the
Company (the "Successor Company" or the "Company") and the Predecessor Company.
For a description of the financial statements and records from which the
following financial data have been derived, see "Selected Financial Data." This
information should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto of the Successor
Company and the Predecessor Company included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated income statement and other
data presented below for fiscal year 1996 reflect the acquisition by the
Company of SWEB as if it had occurred as of April 1, 1995. Such unaudited pro
forma condensed consolidated income statement and other data have been prepared
by the Successor Company based upon assumptions deemed proper by it and reflect
a preliminary allocation of the purchase price paid for the Predecessor
Company. The unaudited pro forma condensed consolidated income statement and
other data presented herein are shown for illustrative purposes only and are
not necessarily indicative of the future results of operations of the Successor
Company or of the results of operations of the Successor Company that would
have actually occurred had the transaction been in effect for the period
presented. The Successor Company's consolidated financial statements reflect
the operations of the Successor Company from September 18, 1995, the date on
which the Company acquired effective control of SWEB.
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Turnover............... (Pounds) 847 (Pounds) 892 (Pounds) 900 (Pounds) 875
Operating costs........ (759) (790) (791) (755)
------------ ------------ ------------ ------------
Operating profit....... 88 102 109 120
Exceptional item(2).... -- -- -- (20)
Other income........... 10 11 15 17
Interest, net.......... (15) (12) (7) (5)
Tax on profit.......... (21) (23) (24) (26)
------------ ------------ ------------ ------------
Profit for financial
period(3)............. (Pounds) 62 (Pounds) 78 (Pounds) 93 (Pounds) 86
============ ============ ============ ============
Dividends declared per
share................. (Pounds)0.17 (Pounds)0.20 (Pounds)0.24 (Pounds)0.27
============ ============ ============ ============
<CAPTION>
MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets........... (Pounds) 490 (Pounds) 544 (Pounds) 579 (Pounds) 615
Current assets......... 212 213 301 254
Creditors: Amounts
falling due within one
year.................. (179) (176) (205) (243)
------------ ------------ ------------ ------------
Total assets less cur-
rent liabilities...... 523 581 675 626
Creditors: Amounts
falling due in more
than one year (85) (87) (92) (95)
Total shareholders'
funds................. 425 479 543 494
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 99 (Pounds) 115 (Pounds) 126 (Pounds) 142
EBITDA(5).............. 123 141 154 173
Cash flow from opera-
tions(6).............. 128 140 245 124
Ratio of earnings to
fixed charges(7)...... 6 8 12 13
</TABLE>
8
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1995 THREE MONTHS
-------------------------- TO SEPTEMBER 17, ENDED
1994 1995 1995(8) JUNE 30, 1995
------------ ------------ ---------------- -------------
(POUNDS STERLING IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 808 (Pounds) 776 (Pounds) 299 (Pounds) 167
Operating income....... 122 139 40 26
Interest, net.......... (7) (4) (3) (2)
Other, net............. 16 16 1 1
Provision for income
taxes................. (43) (50) (13) (9)
------------ ------------ ------------ ------------
Income from continuing
operations............ 88 101 25 16
Discontinued opera-
tions................. -- (7) (1) --
------------ ------------ ------------ ------------
Net income............. (Pounds) 88 (Pounds) 94 (Pounds) 24 (Pounds) 16
============ ============ ============ ============
Dividends declared per
share ................ (Pounds)0.21 (Pounds)0.25 (Pounds)0.65 --
============ ============ ============ ============
<CAPTION>
MARCH 31,
1995
------------
(POUNDS
STERLING
IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Property, plant and
equipment, net........ (Pounds) 541
Total assets........... 869
Total stockholder's eq-
uity.................. 374
Long-term debt......... 95
Short-term debt........ 24
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1995 THREE MONTHS
-------------------------- TO SEPTEMBER 17, ENDED
1994 1995 1995(8) JUNE 30, 1995
------------ ------------ ---------------- -------------
(POUNDS STERLING IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 142 (Pounds) 162 (Pounds) 43 (Pounds) 28
EBITDA(5).............. 170 193 58 36
Cash flow from opera-
tions(6).............. 236 100 69 21
Ratio of earnings to
fixed charges(7)...... 13 15 9 9
</TABLE>
9
<PAGE>
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PRO FORMA FISCAL
PERIOD FROM YEAR ENDED THREE MONTHS
SEPTEMBER 18, 1995 MARCH 31, 1996 ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
---------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 481 $ 747 (Pounds) 780 $1,211 (Pounds) 181 $ 281
Operating income....... 86 133 121 188 27 42
Interest, net.......... (21) (32) (57) (88) (13) (20)
Gain on sale of invest-
ments................. 14 22 14 22
Other, net............. 2 3 3 4 3 4
Provision for income
taxes................. (28) (43) (30) (46) (6) (9)
-------------- ------- ------------- ------ -------------- -------
Income from continuing
operations............ 53 83 51 80 11 17
Extraordinary gain on
early extinguishment
of debt............... 6 9 6 9 -- --
Discontinued opera-
tions................. -- -- (1) (2) -- --
-------------- ------- ------------- ------ -------------- -------
Net income............. (Pounds) 59 $ 92 (Pounds) 56 $ 87 (Pounds) 11 $ 17
============== ======= ============= ====== ============== =======
Dividends declared per
share................. (Pounds) 3.82 $ 5.93 (Pounds) 4.67 $ 7.25 (Pounds) 0.02 $ 0.03
============== ======= ============= ====== ============== =======
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
-------------- --------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Property, plant and
equipment, net........ (Pounds) 1,207 $ 1,874 (Pounds) 1,212 $ 1,882
Total assets........... 1,686 2,618 1,659 2,576
Total stockholder's eq-
uity.................. 368 571 366 568
Short-term debt........ 650 1,009 637 989
<CAPTION>
PRO FORMA FISCAL
PERIOD FROM YEAR ENDED THREE MONTHS
SEPTEMBER 18, 1995 MARCH 31, 1996 ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
---------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 109 $ 169 (Pounds) 147 $ 228 (Pounds) 30 $ 47
EBITDA(5).............. 131 203 189 293 40 62
Cash flow from opera-
tions(13)............. 12 19 73 113 30 47
Ratio of earnings to
fixed charges(7)...... 4 2 2
</TABLE>
10
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TURNOVER:
Electricity distribu-
tion.................. (Pounds)230 (Pounds)235 (Pounds)250 (Pounds)274
Electricity supply..... 763 787 772 725
Retailing(2)........... 53 72 79 82
Other.................. 21 59 78 84
Less: Intra-busi-
ness(11).............. (220) (261) (279) (290)
----------- ----------- ----------- -----------
Total............... (Pounds)847 (Pounds)892 (Pounds)900 (Pounds)875
OPERATING PROFIT (LOSS):
Electricity distribu-
tion.................. (Pounds) 90 (Pounds) 85 (Pounds) 77 (Pounds) 96
Electricity supply..... 4 16 25 15
Retailing(2)........... (1) (2) 1 1
Other.................. (5) 4 6 9
Less: Intra-busi-
ness(11).............. -- -- -- (1)
----------- ----------- ----------- -----------
Total............... (Pounds) 88 (Pounds)103 (Pounds)109 (Pounds)120
<CAPTION>
MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Electricity distribu-
tion.................. (Pounds)449 (Pounds)454 (Pounds)472 (Pounds)504
Electricity supply..... 139 134 91 89
Retailing(2)........... 32 38 56 64
Other.................. 82 131 261 212
----------- ----------- ----------- -----------
Total............... (Pounds)702 (Pounds)757 (Pounds)880 (Pounds)869
</TABLE>
11
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM
------------------------- APRIL 1, 1995 TO
1994 1995 SEPTEMBER 17, 1995
----------- ------------ ------------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribution...... (Pounds)250 (Pounds)274 (Pounds) 105
Electricity supply............ 772 725 276
Other......................... 54 57 23
Less: Intra-business(11)...... (268) (280) (105)
----------- ----------- ------------
Total...................... (Pounds)808 (Pounds)776 (Pounds) 299
OPERATING INCOME (LOSS):
Electricity distribution...... (Pounds) 84 (Pounds)112 (Pounds) 42
Electricity supply............ 27 18 2
Other......................... 11 10 (4)
Less: Intra-business(11)...... -- (1) --
----------- ----------- ------------
Total...................... (Pounds)122 (Pounds)139 (Pounds) 40
<CAPTION>
MARCH 31,
1995
------------
(POUNDS
STERLING
IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS:
Electricity distribution...... (Pounds)531
Electricity supply............ 93
Other......................... 245
-----------
Total...................... (Pounds)869
</TABLE>
12
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM FISCAL YEAR ENDED
SEPTEMBER 18, 1995 MARCH 31, 1996 THREE MONTHS ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
-------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- -------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribu-
tion.................. (Pounds) 147 $ 228 (Pounds)252 $ 391 (Pounds) 53 $ 82
Electricity supply..... 450 699 726 1,127 170 264
Other.................. 33 51 54 84 13 20
Less: Intra-busi-
ness(11).............. (149) (231) (252) (391) (55) (85)
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 481 $ 747 (Pounds)780 $1,211 (Pounds) 181 $ 281
OPERATING INCOME (LOSS):
Electricity distribu-
tion.................. (Pounds) 72 $ 111 (Pounds)112 $ 174 (Pounds) 23 $ 36
Electricity supply..... 13 20 15 23 6 9
Other.................. 1 2 (6) (9) (2) (3)
Less: Intra-busi-
ness(11).............. -- -- -- -- -- --
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 86 $ 133 (Pounds)121 $ 188 (Pounds) 27 $ 42
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
-------------- --------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Electricity distribu-
tion.................. (Pounds) 1,249 $ 1,940 (Pounds) 1,275 $ 1,980
Electricity supply..... 102 158 96 149
Other(12).............. 335 520 288 447
-------------- ------- -------------- -------
Total............... (Pounds) 1,686 $ 2,618 (Pounds) 1,659 $ 2,576
</TABLE>
- --------
(1) The financial data for the Predecessor Company shown on pages (i) 8 and 11
and (ii) 9 and 12 were derived from financial statements for the
Predecessor Company prepared, respectively, in accordance with UK GAAP and
US GAAP. The principal differences between US GAAP and UK GAAP as applied
to the Predecessor Company relate to the treatment of discontinued
operations, pension costs and deferred taxes.
(2) A provision for the disposition of the electrical appliance retailing
business resulted in an exceptional item for the fiscal year ended March
31, 1995. The actual disposition of this business segment occurred in June
1995.
(3) Excluding the exceptional item, profit for fiscal year 1995 would have
been (Pounds)98 million.
(4) EBIT equals income from continuing operations before the sum of interest
expense and income taxes.
(5) EBITDA equals income from continuing operations before the sum of interest
expense, income taxes, depreciation and amortization.
(6) Cash flow from operations increased in fiscal year 1994 as a result of
customers who paid bills in advance in order to avoid paying value added
taxes which were introduced by the British government.
(7) The ratio of earnings to fixed charges is computed as the sum of pretax
income from continuing operations and fixed charges divided by fixed
charges. Fixed charges consist of interest expensed.
(8) On September 18, 1995, the Successor Company obtained effective control of
the Predecessor Company pursuant to the Successor Company's offer to
acquire the Predecessor Company.
(9) Pro Forma Fiscal Year 1996 financial information gives effect to the
acquisition of the Predecessor Company by the Successor Company as if it
had occurred on April 1, 1995. See pages A-1 and A-2 included in this
Prospectus.
(10) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on June 28, 1996
of $1.5529 = (Pounds)1.00.
(11) Intra-business eliminations consist primarily of intercompany transactions
between the distribution business and the supply business and intra-
business transactions between ancillary support businesses. Pursuant to
the UK regulatory framework, SWEB's distribution of electricity to its
supply customers within its own Franchise Area is billed to SWEB's supply
business, which in turn incorporates the distribution charge into the bill
sent to the final end user.
(12) Includes goodwill, net of amortization, and prepaid pension costs of
(Pounds)173 million ($269 million) and (Pounds)95 million ($148 million),
respectively.
(13) Cash flow from operations for the period from September 18, 1995 to March
31, 1996 includes the settlement of accounts payable balances of
(Pounds)52 million ($80 million).
13
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Senior Notes offered by this Prospectus.
FACTORS RELATING TO THE ELECTRIC UTILITY BUSINESS IN GREAT BRITAIN
PRICE REGULATION OF DISTRIBUTION
The distribution business of SWEB is regulated under its PES license
pursuant to which revenue of the distribution business is controlled by the
Distribution Price Control Formula (as defined herein). The Distribution Price
Control Formula determines the maximum average price per unit of electricity
(expressed in kilowatt hours, a "unit") that a REC may charge. The elements
used in the Distribution Price Control Formula are established for a five-year
period and are subject to review by the Director General of Electricity Supply
(the "Regulator") at the end of each five-year period and at other times in
the discretion of the Regulator. At each review, the Regulator can adjust the
value of certain elements in the Distribution Price Control Formula. In July
1994, a review resulted in a 14% price reduction, before allowing for
inflation, effective April 1, 1995. In July 1995, a further review of
distribution prices was concluded by the Regulator for fiscal years 1997 to
2000. As a result of this further review, SWEB's distribution prices were
reduced by a further 11%, before allowing for inflation, effective April 1,
1996. There can be no assurance that any review by the Regulator will not
adversely affect the Company. See "The Electric Utility Industry in Great
Britain--Structure of the Electric Utility Industry in Great Britain--
Distribution of Electricity."
COMPETITION IN SUPPLY
Each PES license holder currently has an exclusive right, subject to price
cap regulation, to supply customers in its franchise area with a maximum
demand of not more than 100kW ("Franchise Supply Customers"). However, the
supply business is being progressively opened to competition. The market for
customers with a maximum demand above 1MW has been open to competition for
suppliers of electricity since privatization while, for customers with a
maximum demand above 100kW ("Non-Franchise Supply Customers"), the market
became competitive in April 1994. The final stage of this process is expected
to occur on March 31, 1998, when the exclusive right to supply Franchise
Supply Customers is scheduled to end. There can be no assurance that
competition among suppliers of electricity will not adversely affect the
Company. See"Business--SWEB's Main Businesses--Supply Business."
POOL PURCHASE PRICE VOLATILITY
SWEB's supply business to Non-Franchise Supply Customers generally involves
entering into fixed price contracts to supply electricity to its customers.
SWEB obtains the electricity to satisfy its obligations under such contracts
primarily by purchases from the wholesale trading market for electricity in
England and Wales (the "Pool"). See "The Electric Utility Industry in Great
Britain." Because the price of electricity purchased from the Pool can be
volatile, to the extent that SWEB purchases electricity from the Pool, SWEB is
exposed to risk arising from differences between the fixed price at which it
sells and the fluctuating prices at which it purchases electricity unless it
can effectively hedge such exposure. SWEB's ability to manage such risk at
acceptable levels will depend, in part, on the specifics of the supply
contracts that SWEB enters into, SWEB's ability to implement and manage an
appropriate hedging strategy and the development of an adequate market for
hedging instruments. No assurance can be given that this risk will be
effectively mitigated. See "Business--SWEB's Main Business--Supply Business."
OTHER FACTORS
CHANGE IN GOVERNMENT POLICY
The Conservative Party has held power in the UK since 1979 and currently has
a one-seat majority over all other parties. The next general election in the
UK must be held no later than May 1997, and may be called at approximately
three weeks' notice at any time before then. Certain senior members of the
Labour Party, which is the main opposition party, have recently made
statements regarding policies which a Labour government would intend to
introduce, including a windfall tax on excess profits of privatized utilities
and referring the whole electricity industry to the competition authorities.
There can be no assurance that the policies of the UK government, by whichever
party it is controlled, would not adversely affect the Company.
14
<PAGE>
CURRENCY RISKS; HEDGING TRANSACTIONS
The Company expects to obtain a significant portion of its financing from
the sale of the Senior Notes which will be denominated in US dollars. The
Company's revenues will be generated primarily in pounds sterling while the
Company's interest and principal payment obligations with respect to the
Senior Notes will be payable in US dollars. As a result, any change in the
currency exchange rate that reduces the amount in pounds sterling obtained
upon conversion of the US dollar-based net proceeds of the Senior Notes or
that increases the effective principal and interest payment obligations
represented by the Senior Notes upon conversion of pounds sterling-based
revenues into US dollars may, if not appropriately hedged, have a material
adverse effect on the Company or on its ability to make payments on the Senior
Notes. See "Exchange Rates" for certain information concerning the Noon Buying
Rate for pounds sterling expressed in US dollars. Although the Company expects
to enter into certain transactions to hedge risks associated with exchange
rate fluctuations, there can be no assurance that the Company will engage in
such transactions or that any such transaction will be successful in reducing
such risks.
LACK OF ESTABLISHED MARKET FOR THE SENIOR NOTES
Although the Underwriters have informed the Company that they currently
intend to make a market in the Senior Notes, they are not obligated to do so,
and any such market-making may be discontinued at any time without notice.
There can be no assurance as to the development or liquidity of any market for
the Senior Notes. If an active public market does not develop, the market
price and liquidity of the Senior Notes may be adversely affected.
CONSIDERATIONS RELATED TO BOOK-ENTRY INTEREST
Unless and until Definitive Registered Notes are issued in exchange for
interests in the Book-Entry Interest, owners of interests in the Book-Entry
Interest will not be considered the owners or holders of Senior Notes under
the Indenture. The Book-Entry Depositary, or its nominee, will be the sole
holder (the "Holder") of the Senior Notes in the form of a single global
Senior Note in bearer form. Accordingly, each person owning an interest in the
Book-Entry Interest must rely on the procedures of the Book-Entry Depositary
and DTC and, if such person is not a Participant in DTC, on the procedures of
the Participant (including Euroclear and Cedel Bank) through which such person
owns its interest to exercise any rights and obligations of a Holder under the
Indenture.
Payments of principal, interest and other amounts owing on or in respect of
the Global Note will be made to the Book-Entry Depositary, which will in turn
distribute payments to Cede & Co. (as nominee of DTC), and thereafter payments
will be made to DTC Participants (and to persons who own an interest in the
Book-Entry Interest through DTC Participants). None of the Company, the
Trustee, the Book-Entry Depositary, any paying agent or any registrar will
have any responsibility or liability for any aspect of the records relating
to, or payments made on account of, the Book-Entry Interest or interests
therein or for maintaining, supervising or reviewing any records relating to
such Book-Entry Interest or interests therein.
Unlike Holders of the Senior Notes themselves, owners of interests in the
Book-Entry Interest will not have the direct right under the Indenture to act
upon solicitations by the Company of consents or requests by the Company for
waivers or other actions from Holders of the Senior Notes. Instead, owners of
interests in the Book-Entry Interest will be permitted to act only to the
extent they have received appropriate proxies to do so from DTC and, if
applicable, DTC Participants. There can be no assurance that procedures
implemented for the granting of such proxies will be sufficient to enable
owners of interests in the Book-Entry Interest to vote on any requested
actions on a timely basis. Similarly, upon the occurrence of an Event of
Default (as defined), unless and until Definitive Registered Notes are issued,
owners of interests in the Book-Entry Interest will be restricted to acting
through DTC, its Participants and the Book-Entry Depositary. There can be no
assurance that the procedures to be implemented by DTC, its Participants and
the Book-Entry Depositary under such circumstances will be adequate to ensure
the timely exercise of remedies under the Indenture. See "Description of the
Senior Notes--Description of the Book-Entry System."
15
<PAGE>
THE COMPANY
The Company is a wholly-owned subsidiary of Holdings, of which 75% is owned
indirectly by Southern and 25% is owned indirectly by PP&L Resources. The
Company was incorporated as a public limited company under the laws of England
and Wales on June 23, 1995, as a vehicle for the acquisition of SWEB, one of
the 12 RECs in England and Wales licensed to distribute, supply and, to a
limited extent, generate electricity. In September 1995, the Company gained
effective control of SWEB, having acquired approximately 84% of its shares.
The Company subsequently replaced SWEB's board of directors and certain senior
managers with officers and employees of companies from within the Southern
Company system. In December 1995, the Company acquired the remaining shares of
SWEB. The Company's sole investment and only significant asset is the entire
share capital of SWEB, which is headquartered in Bristol, England. At June 30,
1996, the Company had consolidated assets of (Pounds)1.659 billion ($2.576
billion). The following organizational chart illustrates the ownership
structure of the Company and SWEB in summary form.
LOGO
SWEB's two main business lines are the distribution of electricity and the
supply of electricity to approximately 1.3 million customers in its Franchise
Area. The distribution business and the supply business are distinct business
segments and produced operating income of (Pounds)112 million ($174 million)
and (Pounds)15 million ($23 million), respectively, in Pro Forma Fiscal Year
1996, representing substantially all of the Company's consolidated operating
income in that pro forma fiscal year.
The Company's registered office and principal executive offices are located
at 800 Park Avenue, Aztec West, Almondsbury, Bristol BS12 4SE, England, and
its telephone number is 44-1454-201-101.
FRANCHISE AREA
SWEB operates primarily in its Franchise Area which covers approximately
5,560 square miles extending from Bristol and Bath in the northeast, 188 miles
southwest along the peninsula to Land's End and 28 miles beyond to the Isles
of Scilly. SWEB's Franchise Area has a resident population of approximately
2.8 million. The map on the inside front cover of this Prospectus outlines
SWEB's Franchise Area.
16
<PAGE>
REGULATION
The revenues and operations of SWEB are regulated by the Regulator through
SWEB's PES license. Under that license, SWEB provides electricity distribution
services to virtually all consumers in its Franchise Area (whether supplied by
SWEB's independent supply business or by other suppliers) and must offer
electricity supply services to all consumers in its Franchise Area. Franchise
Supply Customers within the Franchise Area (primarily residential/domestic and
small commercial consumers) can only be supplied by SWEB. Non-Franchise Supply
Customers within the Franchise Area (primarily large commercial and
agricultural and industrial consumers) may choose to be supplied by SWEB or
another supplier. Similarly, SWEB may supply electricity to Non-Franchise
Supply Customers outside SWEB's Franchise Area.
Under the terms of SWEB's PES license, the distribution business and the
supply business to Franchise Supply Customers are subject to a price cap
regulatory framework that provides economic incentives to SWEB to increase the
number of units of electricity distributed and supplied and to operate in a
cost-efficient manner. The price cap framework, however, does not apply to
Non-Franchise Supply Customers, and SWEB is able to competitively bid or
negotiate to supply electricity to such customers. SWEB's PES license also
limits the scope of SWEB's business activities and its ability, among other
things, to transfer assets and make loans. See "The Electric Utility Industry
in Great Britain--The Structure of the Electricity Industry in Great Britain--
Distribution of Electricity" and "--Electricity Supply."
DISTRIBUTION BUSINESS
SWEB's distribution business is the ownership, management and operation of
the electricity distribution network within SWEB's Franchise Area. The primary
activity of the distribution business is the receipt of electricity from the
national grid transmission system and its distribution to end users of
electricity that are connected to SWEB's power lines. Virtually all
electricity supplied (whether by SWEB's independent supply business or by
other suppliers) to consumers in SWEB's Franchise Area is transported through
its distribution network, thus providing SWEB with distribution volume that is
stable from year to year.
SWEB's distribution business has grown in both its customer base and in the
number of units distributed, primarily reflecting economic growth in the South
West of England. The South West, of which the Franchise Area forms the greater
part, has benefited from economic growth (as measured by gross domestic
product, "GDP") which exceeded the UK average from 1991 through 1995 and has
also benefited from an average unemployment rate during calendar year 1995 of
approximately 6.9%, which was below the UK average of 8.2%, according to a
recent study by Cambridge Econometrics. At March 31, 1996, SWEB had
experienced a 5-year compound annual growth rate of 0.8% in customers and a 5-
year compound annual growth rate of 1.6% in units distributed.
Since its acquisition by the Company, SWEB has introduced several
initiatives that focus on its distribution business. A number of areas for
cost savings and performance improvement have been identified which, together
with service innovations, are expected to improve the current level of
customer satisfaction and SWEB's financial performance. In this regard, a
total of 704 staff reductions (mainly in the distribution business and
representing 21% of staff at the time of the acquisition by the Company of
SWEB) are planned, of which 460 occurred prior to June 30, 1996. In addition,
new work practices developed in consultation with SWEB's unions have
contributed to cost savings. See "Business--SWEB's Main Businesses--
Distribution Business--Strategy."
SUPPLY BUSINESS
SWEB's supply business is selling electricity to end users, purchasing such
electricity, primarily from the Pool, and arranging for its distribution to
those end users. SWEB's supply business is comprised predominantly of
supplying Franchise Supply Customers. In fiscal year 1996, these customers
accounted for approximately 82% of all units of electricity supplied by SWEB.
SWEB's exclusive right to supply these customers is scheduled to
17
<PAGE>
continue, subject to price regulation, until March 31, 1998, at which time
competition to supply Franchise Supply Customers is scheduled to commence.
Since its acquisition by the Company, SWEB has completed a review of the
supply market, established new goals for its supply business and adopted new
strategies for achieving those goals. The key goals established are the
retention of its current Franchise Supply Customers as supply customers after
March 31, 1998 and the increase of SWEB's share of electricity supplied to
Non-Franchise Supply Customers both inside and outside SWEB's Franchise Area.
As a result of this strategy, SWEB expects to supply a larger portion of units
to Non-Franchise Supply Customers than in fiscal year 1996.
SWEB's strategy for retaining its Franchise Supply Customers is to build
customer loyalty and offer competitive prices. SWEB seeks to build customer
loyalty by providing superior service, including reliable distribution
service. To provide responsive service for billing and other matters, SWEB has
installed a state-of-the-art call center to handle customers' needs and is
completing work on a new billing system to provide customers with important
information in a user-friendly format.
Most of SWEB's Non-Franchise Supply Customers, who are primarily large
commercial and industrial companies, are located in SWEB's Franchise Area.
They are typically supplied through individual contracts for a duration of one
to two years based on competitively bid or negotiated prices.
SWEB's strategy for increasing market share among Non-Franchise Supply
Customers is to provide more competitive pricing, the superior service
described above and customized service that will be supported through an
expanded staff of key customer account managers utilizing new integrated
information systems.
OTHER BUSINESS ACTIVITIES
SWEB also has ancillary business activities that support the main
electricity businesses, including power generation and gas supply. See
"Business--SWEB's Other Business Activities."
PARENT COMPANIES
Southern owns several companies that together constitute one of the largest
investor-owned electric utility systems in the United States in terms of total
sales, electricity revenues and installed capacity. The Southern Company
system provides energy to approximately 4.8 million customers in Alabama,
Georgia, the panhandle of Florida, southeastern Mississippi and southwestern
England through its five southeastern United States utility operating
subsidiaries, which are Alabama Power Company, Georgia Power Company, Gulf
Power Company, Mississippi Power Company and Savannah Electric and Power
Company, and in England through SWEB. The Southern Company system currently
has ownership interests in over 70 power plants with more than 300 generating
units and with total electric generating capacity of over 32,000 MW. Southern
Electric International, Inc. ("Southern Electric"), a wholly owned subsidiary
of Southern, focuses on management of, and investment opportunities related
to, international and domestic power generation, the independent US domestic
power market and international electricity businesses. Within the Southern
Company system, Southern Electric has management oversight responsibility for
Holdings, the Company and SWEB, as well as certain other investments by the
Southern Company system in electricity businesses in the United States,
Argentina, Chile, the Bahamas and Trinidad and Tobago. SWEB is the third
largest operating company in the Southern Company system in terms of revenue,
assets and number of customers. The acquisition of SWEB is consistent with
Southern's stated objective of growing businesses outside of its core US
regulated utilities to contribute to the consolidated earnings growth of
Southern.
In late 1994, PP&L Resources established the Power Markets Development
Company ("PMDC") as its non-regulated, international power business. In
addition to its indirect minority ownership interest in SWEB, PMDC owns
interests in operating companies in Portugal, Bolivia and Argentina and is
currently developing power projects in Peru, Spain and India. The investment
by PP&L Resources in Holdings is significantly greater than that in any of
these other companies.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately US$228
million ((Pounds)147 million) after deduction of underwriting commissions and
discounts and expenses payable by the Company.
The Company intends to use such net proceeds principally to refinance a
portion of an existing term loan. The existing term loan matures on February
5, 1997 and bears interest at the London inter-bank offered rate for pounds
sterling plus 20 basis points. Morgan Guaranty Trust Company of New York, an
affiliate of JP Morgan Securities Inc, is a lender and agent under the
Company's term loan, and as such lender will receive a portion of the proceeds
of the Offering in repayment of a portion of such term loan. See
"Underwriting."
CAPITALIZATION
The following table sets forth, at June 30, 1996 (i) the actual consolidated
capitalization of the Successor Company, and (ii) the consolidated
capitalization adjusted to reflect the issuance of the Senior Notes and the
application of the net proceeds thereof, as described under "Use of Proceeds."
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto of the
Successor Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------------------------
ACTUAL AS ADJUSTED
------------------------ ------------------------------
(Pounds) $(1) % (Pounds) $(1) %
------------- ------ --- ------------- ------ ---
(AMOUNTS IN MILLIONS, EXCEPT %)
<S> <C> <C> <C> <C> <C> <C>
Capitalization:
Short-term debt........ (Pounds) 637 $ 989 64% (Pounds) 490(2) $ 761(2) 49%
Senior Notes offered
hereby................ -- -- -- 151 235 15
Total stockholder's eq-
uity.................. 366 568 36 366 568 36
------------- ------ --- ------------- ------ ---
Total capitalization... (Pounds)1,003 $1,558 100% (Pounds)1,007 $1,564 100%
============= ====== === ============= ====== ===
</TABLE>
- --------
(1) Solely for convenience of the reader, UK pounds sterling amounts have been
translated into US dollars at the Noon Buying Rate on June 28, 1996 of
$1.5529 = (Pounds)1.00.
(2) Calculated by assuming that the net proceeds of the Offering will be $228
million ((Pounds) 147 million).
EXCHANGE RATES
The following table sets out, for the periods indicated, certain information
concerning the exchange rates between UK pounds sterling and US dollars based
on the Noon Buying Rates.
<TABLE>
<CAPTION>
PERIOD
FISCAL YEAR END AVERAGE(1) HIGH LOW
----------- ------ ---------- ---- ----
($ PER (Pounds)1.00)
<S> <C> <C> <C> <C>
1992........................................... 1.51 1.77 2.00 1.51
1993........................................... 1.48 1.50 1.59 1.42
1994........................................... 1.57 1.53 1.64 1.46
1995........................................... 1.55 1.58 1.64 1.53
1996........................................... 1.53 1.53 1.56 1.50
1997, through June 30.......................... 1.55 1.54 1.55 1.51
</TABLE>
- --------
(1) The average of the Noon Buying Rates in effect on the last business day of
each month during the relevant period.
19
<PAGE>
SELECTED FINANCIAL DATA
The income statement and balance sheet data of the Predecessor Company for
each of the four fiscal years ended 1995 and for the period from April 1 to
September 17, 1995, and of the Company (the "Successor Company" or the
"Company") for the period from September 18, 1995 to March 31, 1996 have been
derived from the audited consoldiated financial statements of the Predecessor
Company and the Successor Company, respectively. The unaudited consolidated
income statement data for the three months ended June 30, 1995 and 1996, have
been derived from the unaudited consolidated financial statements of the
Predecessor and Successor Company, respectively. The unaudited consolidated
balance sheet data as of June 30, 1996 have been derived from the financial
statements of the Successor Company. In the opinion of the management of the
Company, all adjustments (consisting of only normal recurring adjustments)
considered necessary for fair presentation of the condensed unaudited
consolidated financial statements have been included, and the accompanying
condensed consolidated financial statements present fairly the financial
position and the results of operations for the interim periods presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto of the
Predecessor Company and the Successor Company included elsewhere in this
Prospectus.
The unaudited pro forma condensed consolidated income statement and other
data presented below for fiscal year 1996 reflect the acquisition by the
Company of SWEB as if it had occurred as of April 1, 1995. Such unaudited pro
forma condensed consolidated income statement and other data have been
prepared by the Successor Company based upon assumptions deemed proper by it
and reflect a preliminary allocation of the purchase price paid for the
Predecessor Company. The unaudited pro forma condensed consolidated income
statement and other data presented herein are shown for illustrative purposes
only and are not necessarily indicative of the future results of operations of
the Successor Company or of the results of operations of the Successor Company
that would have actually occurred had the transaction been in effect for the
period presented. The Successor Company's consolidated financial statements
reflect the operations of the Successor Company from September 18, 1995, the
date on which the Company acquired effective control of SWEB.
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Turnover............... (Pounds) 847 (Pounds) 892 (Pounds) 900 (Pounds) 875
Operating costs........ (759) (790) (791) (755)
------------ ------------ ------------ ------------
Operating profit....... 88 102 109 120
Exceptional item(2).... -- -- -- (20)
Other income........... 10 11 15 17
Interest, net.......... (15) (12) (7) (5)
Tax on profit.......... (21) (23) (24) (26)
------------ ------------ ------------ ------------
Profit for financial
period(3)............. (Pounds) 62 (Pounds) 78 (Pounds) 93 (Pounds) 86
============ ============ ============ ============
Dividends declared per
share................. (Pounds)0.17 (Pounds)0.20 (Pounds)0.24 (Pounds)0.27
============ ============ ============ ============
<CAPTION>
MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets........... (Pounds) 490 (Pounds) 544 (Pounds) 579 (Pounds) 615
Current assets......... 212 213 301 254
Creditors: Amounts
falling due within one
year.................. (179) (176) (205) (243)
------------ ------------ ------------ ------------
Total assets less cur-
rent liabilities...... 523 581 675 626
Creditors: Amounts
falling due in more
than one year (85) (87) (92) (95)
Total shareholders'
funds................. 425 479 543 494
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(POUNDS STERLING IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 99 (Pounds) 115 (Pounds) 126 (Pounds) 142
EBITDA(5).............. 123 141 154 173
Cash flow from opera-
tions(6).............. 128 140 245 124
Ratio of earnings to
fixed charges(7)...... 6 8 12 13
</TABLE>
20
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1995 THREE MONTHS
-------------------------- TO SEPTEMBER 17, ENDED
1994 1995 1995(8) JUNE 30, 1995
------------ ------------ ---------------- -------------
(POUNDS STERLING IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 808 (Pounds) 776 (Pounds) 299 (Pounds) 167
Operating income....... 122 139 40 26
Interest, net.......... (7) (4) (3) (2)
Other, net............. 16 16 1 1
Provision for income
taxes................. (43) (50) (13) (9)
------------ ------------ ------------ ------------
Income from continuing
operations............ 88 101 25 16
Discontinued opera-
tions................. -- (7) (1) --
------------ ------------ ------------ ------------
Net income............. (Pounds) 88 (Pounds) 94 (Pounds) 24 (Pounds) 16
============ ============ ============ ============
Dividends declared per
share ................ (Pounds)0.21 (Pounds)0.25 (Pounds)0.65 --
============ ============ ============ ============
<CAPTION>
MARCH 31,
1995
------------
(POUNDS
STERLING
IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Property, plant and
equipment, net........ (Pounds) 541
Total assets........... 869
Total stockholder's eq-
uity.................. 374
Long-term debt......... 95
Short-term debt........ 24
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1995 THREE MONTHS
-------------------------- TO SEPTEMBER 17, ENDED
1994 1995 1995(8) JUNE 30, 1995
------------ ------------ ---------------- -------------
(POUNDS STERLING IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 142 (Pounds) 162 (Pounds) 43 (Pounds) 28
EBITDA(5).............. 170 193 58 36
Cash flow from opera-
tions(6).............. 236 100 69 21
Ratio of earnings to
fixed charges(7)...... 13 15 9 9
</TABLE>
21
<PAGE>
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM FISCAL YEAR ENDED THREE MONTHS
SEPTEMBER 18, 1995 MARCH 31, 1996 ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
---------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 481 $ 747 (Pounds) 780 $1,211 (Pounds) 181 $ 281
Operating income....... 86 133 121 188 27 42
Interest, net.......... (21) (32) (57) (88) (13) (20)
Gain on sale of invest-
ments................. 14 22 14 22
Other, net............. 2 3 3 4 3 4
Provision for income
taxes................. (28) (43) (30) (46) (6) (9)
-------------- ------- ------------- ------ -------------- -------
Income from continuing
operations............ 53 83 51 80 11 17
Extraordinary gain on
early extinguishment
of debt............... 6 9 6 9 -- --
Discontinued opera-
tions................. -- -- (1) (2) -- --
-------------- ------- ------------- ------ -------------- -------
Net income............. (Pounds) 59 $ 92 (Pounds) 56 $ 87 (Pounds) 11 $ 17
============== ======= ============= ====== ============== =======
Dividends declared per
share................. (Pounds) 3.82 $ 5.93 (Pounds) 4.67 $ 7.25 (Pounds) 0.02 $ 0.03
============== ======= ============= ====== ============== =======
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
-------------- --------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Property, plant and
equipment, net........ (Pounds) 1,207 $ 1,874 (Pounds) 1,212 $ 1,882
Total assets........... 1,686 2,618 1,659 2,576
Total stockholder's eq-
uity.................. 368 571 366 568
Short-term debt........ 650 1009 637 989
<CAPTION>
PRO FORMA
PERIOD FROM FISCAL YEAR ENDED THREE MONTHS
SEPTEMBER 18, 1995 MARCH 31, 1996 ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
---------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 109 $ 169 (Pounds) 147 $ 228 (Pounds) 30 $ 47
EBITDA(5).............. 131 203 189 293 40 62
Cash flow from opera-
tions(13)............. 12 19 73 113 30 47
Ratio of earnings to
fixed charges(6)...... 4 2 2
</TABLE>
22
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TURNOVER:
Electricity distribu-
tion.................. (Pounds)230 (Pounds)235 (Pounds)250 (Pounds)274
Electricity supply..... 763 787 772 725
Retailing(2)........... 53 72 79 82
Other.................. 21 59 78 84
Less: Intra-busi-
ness(11).............. (220) (261) (279) (290)
----------- ----------- ----------- -----------
Total............... (Pounds)847 (Pounds)892 (Pounds)900 (Pounds)875
OPERATING PROFIT (LOSS):
Electricity distribu-
tion.................. (Pounds) 90 (Pounds) 85 (Pounds) 77 (Pounds) 96
Electricity supply..... 4 16 25 15
Retailing(2)........... (1) (2) 1 1
Other.................. (5) 4 6 9
Less: Intra-busi-
ness(11).............. -- -- -- (1)
----------- ----------- ----------- -----------
Total............... (Pounds) 88 (Pounds)103 (Pounds)109 (Pounds)120
<CAPTION>
MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Electricity distribu-
tion.................. (Pounds)449 (Pounds)454 (Pounds)472 (Pounds)504
Electricity supply..... 139 134 91 89
Retailing(2)........... 32 38 56 64
Other.................. 82 131 261 212
----------- ----------- ----------- -----------
Total............... (Pounds)702 (Pounds)757 (Pounds)880 (Pounds)869
</TABLE>
23
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, PERIOD FROM
------------------------- APRIL 1, 1995 TO
1994 1995 SEPTEMBER 17, 1995
----------- ------------ ------------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribution...... (Pounds)250 (Pounds)274 (Pounds) 105
Electricity supply............ 772 725 276
Other......................... 54 57 23
Less: Intra-business(11)...... (268) (280) (105)
----------- ----------- ------------
Total...................... (Pounds)808 (Pounds)776 (Pounds) 299
OPERATING INCOME (LOSS):
Electricity distribution...... (Pounds) 84 (Pounds)112 (Pounds) 42
Electricity supply............ 27 18 2
Other......................... 11 10 (4)
Less: Intra-business(11)...... -- (1) --
----------- ----------- ------------
Total...................... (Pounds)122 (Pounds)139 (Pounds) 40
<CAPTION>
MARCH 31,
1995
------------
(POUNDS
STERLING
IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS:
Electricity distribution...... (Pounds)531
Electricity supply............ 93
Other......................... 245
-----------
Total...................... (Pounds)869
</TABLE>
24
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM FISCAL YEAR ENDED THREE MONTHS
SEPTEMBER 18, 1995 MARCH 31, 1996 ENDED
TO MARCH 31, 1996(8) (UNAUDITED)(9) JUNE 30, 1996
-------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- -------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribu-
tion.................. (Pounds) 147 $ 228 (Pounds)252 $ 391 (Pounds) 53 $ 82
Electricity supply..... 450 699 726 1,127 170 264
Other.................. 33 51 54 84 13 20
Less: Intra-busi-
ness(11).............. (149) (231) (252) (391) (55) (85)
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 481 $ 747 (Pounds)780 $1,211 (Pounds) 181 $ 281
OPERATING INCOME (LOSS):
Electricity distribu-
tion.................. (Pounds) 72 $ 111 (Pounds)112 $ 174 (Pounds) 23 $ 36
Electricity supply..... 13 20 15 23 6 9
Other.................. 1 2 (6) (9) (2) (3)
Less: Intra-busi-
ness(11).............. -- -- -- -- -- --
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 86 $ 133 (Pounds)121 $ 188 (Pounds) 27 $ 42
<CAPTION>
MARCH 31, 1996 JUNE 30, 1996
------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
-------------- --------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Electricity distribu-
tion.................. (Pounds) 1,249 $ 1,940 (Pounds) 1,275 $ 1,980
Electricity supply..... 102 158 96 149
Other(12).............. 335 520 288 447
-------------- ------- -------------- -------
Total............... (Pounds) 1,686 $ 2,618 (Pounds) 1,659 $ 2,576
</TABLE>
- --------
(1) The financial data for the Predecessor Company shown on pages (i) 20 and
23 and (ii) 21 and 24 were derived from financial statements for the
Predecessor Company prepared, respectively, in accordance with UK GAAP
and US GAAP. The principal differences between US GAAP and UK GAAP as
applied to the Predecessor Company relate to the treatment of
discontinued operations, pension costs and deferred taxes.
(2) A provision for the disposition of the electrical appliance retailing
business resulted in an exceptional item for the fiscal year ended March
31, 1995. The actual disposition of this business segment occurred in
June 1995.
(3) Excluding the exceptional item, profit for fiscal year 1995 would have
been (Pounds)98 million.
(4) EBIT equals income from continuing operations before the sum of interest
expense and income taxes.
(5) EBITDA equals income from continuing operations before the sum of
interest expense, income taxes, depreciation and amortization.
(6) Cash flow from operations increased in fiscal year 1994 as a result of
customers who paid bills in advance in order to avoid paying value added
taxes which were introduced by the British government.
(7) The ratio of earnings to fixed charges is computed as the sum of pretax
income from continuing operations and fixed charges divided by fixed
charges. Fixed charges consist of interest expensed.
(8) On September 18, 1995, the Successor Company obtained effective control
of the Predecessor Company pursuant to the Successor Company's offer to
acquire the Predecessor Company.
(9) Pro Forma Fiscal Year 1996 financial information gives effect to the
acquisition of the Predecessor Company by the Successor Company as if it
had occurred on April 1, 1995. See pages A-1 and A-2 included in this
Prospectus.
(10) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on June 28, 1996
of $1.5529 = (Pounds)1.00.
(11) Intra-business eliminations consist primarily of intercompany
transactions between the distribution business and the supply business
and intra-business transactions between ancillary support businesses.
Pursuant to the UK regulatory framework, SWEB's distribution of
electricity to its supply customers within its own Franchise Area is
billed to SWEB's supply business, which in turn incorporates the
distribution charge into the bill sent to the final end user.
(12) Includes goodwill, net of amortization, and prepaid pension costs of
(Pounds)173 million ($269 million) and (Pounds)95 million ($148 million),
respectively.
(13) Cash flow from operations for the period from September 18, 1995 to March
31, 1996 includes the settlement of accounts payable balances of
(Pounds)52 million ($80 million).
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto of Southern Investments UK plc (the
"Successor Company" or the "Company") and of South Western Electricity plc
(the "Predecessor Company" or "SWEB") and "Selected Financial Data" included
elsewhere in this Prospectus. The consolidated financial statements of the
Successor Company and the consolidated financial statements of the Predecessor
Company discussed in this Section are presented in accordance with US GAAP.
INTRODUCTION
BACKGROUND
The Company was incorporated as a public limited company under the laws of
England and Wales in June 1995, as a vehicle for the acquisition of SWEB. In
September 1995, the Company gained effective control of SWEB, having acquired
approximately 84% of its shares. The Company subsequently replaced SWEB's
board of directors and certain senior managers with officers and employees of
companies from within the Southern Company system. In December 1995, the
Company acquired the remaining shares of SWEB. Total consideration for the
acquisition was (Pounds)1.063 billion ($1.651 billion) excluding a special
dividend of (Pounds)52 million ($81 million) paid by SWEB to its former
shareholders (other than those whose shares the Company had purchased in the
open market).
ACCOUNTING FOR THE ACQUISITION
The recorded assets and liabilities of SWEB immediately prior to the time
the Company gained effective control of SWEB were (Pounds)855 million and
(Pounds)515 million, respectively. As a result of the purchase method of
accounting, the amount of SWEB's assets recorded on the books of the Company
was increased by (Pounds)910 million to their fair value of (Pounds)1.765
billion ($2.741 billion), and the amount of SWEB's liabilities recorded on the
books of the Company was increased by (Pounds)362 million to their fair value
of (Pounds)877 million ($1.362 billion). The increase in liabilities included
the establishment of reserves totaling (Pounds)44 million related principally
to staff reductions and the disposition of ancillary businesses. The resulting
difference between the purchase price of (Pounds)1.063 billion and the
difference between the fair value of the assets acquired and the fair value of
the liabilities assumed as well as the reserves established resulted in
goodwill of (Pounds)175 million.
The unaudited pro forma information presented for fiscal year 1996 ("Pro
Forma Fiscal Year 1996") consists of the historical results of operations of
the Predecessor Company prior to the acquisition and the results of operations
of the Successor Company subsequent to the acquisition, both of which have
been adjusted for the effects of the acquisition as though it had taken place
on April 1, 1995. The effects of the acquisition that are reflected in Pro
Forma Fiscal Year 1996 include: (i) depreciation expense based on property,
plant and equipment valued according to the purchase method of accounting as
if the acquisition had occurred on April 1, 1995, (ii) amortization of
goodwill valued according to the purchase method of accounting as if the
acquisition had occurred on April 1, 1995, (iii) fair valuation of existing
liabilities and the related interest expense as if the acquisition had
occurred on April 1, 1995, (iv) debt issued to finance the acquisition and the
related interest expense as if the acquisition had occurred on April 1, 1995
and (v) recognition of pension fund surplus and the reduction of pension
expense in the accounts of the Company. The information for Pro Forma Fiscal
Year 1996 is presented for illustrative purposes only and does not purport to
represent the actual results that would have occurred if the acquisition had
taken place on April 1, 1995.
SIGNIFICANT EVENTS
During fiscal year 1996, the sale by SWEB of its shares in The National Grid
Group plc ("NGG") and related actions produced a nonrecurring pre-tax gain of
(Pounds)14 million over the fair value established at the time of the
Company's acquisition of effective control of SWEB and resulted in net pre-tax
cash flow of (Pounds)241 million. In October 1995, the 12 RECs and Her
Majesty's Government (owning one special share) agreed to seek a listing for
the NGG shares on the London Stock Exchange. The listing took place in
December 1995. Following that, SWEB progressively sold its approximately 6.3%
ownership interest in NGG for total proceeds of (Pounds)213 million, including
(Pounds)12 million in respect of shares sold by SWEB to the Company. The
listing was conditional upon the
26
<PAGE>
prior demerger of NGG's pumped storage electricity generation business ("PSB")
in order for NGG to sell that business. PSB was sold in December 1995. SWEB
had received (Pounds)36 million of its share of the total proceeds from that
sale by the end of fiscal year 1996. SWEB's estimated total share of the
proceeds from the sale is (Pounds)43 million. As part of the agreement among
the shareholders of NGG, each of the RECs agreed to provide a discount to each
of their respective Franchise Supply Customers which, together with the
associated reduction in the Fossil Fuel Levy (as defined in "The Electric
Utility Industry in Great Britain"), produced a credit on each Franchise
Supply Customer's bill of just over (Pounds)50. The cost to SWEB of providing
the discount amounted to (Pounds)57 million which was credited to customers in
the last quarter of fiscal year 1996. In order to compensate the RECs for the
cost of the customer discount and other costs associated with the listing and
sale, NGG paid a special dividend shortly before the listing. SWEB's share of
the special dividend after taxation amounted to (Pounds)61 million. Between
September 18, 1995 and March 31, 1996, SWEB paid to the Company and the
Company paid to Holdings a dividend of (Pounds)191 million which was made
possible because of the proceeds from the sale of SWEB's interest in NGG.
SWEB has progressively withdrawn from its involvement in non-core
businesses. Neither the contribution to SWEB's or the Company's operating
income from the disposed businesses nor the effect of the dispositions on
SWEB's or the Company's net income was material after taking into account the
reserves established in connection with the acquisition. SWEB sold its
appliance retailing business in June 1995; its appliance servicing business in
February 1996; its creditor and warranty insurance business and electrical
installation and contracting business in March 1996; and its interest in a
cable television and telecommunications company in July 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1996
The condensed financial information included herein compares the results of
the Successor Company for the three months ended June 30, 1996 with those of
the Predecessor Company for the three months ended June 30, 1995.
Earnings
Operating income increased by (Pounds)1 million (4%) from (Pounds)26 million
in the three months ended June 30, 1995 to (Pounds)27 million in the three
months ended June 30, 1996. This increase was primarily due to an (Pounds)8
million increase in operating income from the supply business which was
partially offset by a (Pounds)4 million decrease in operating income from the
distribution business, resulting primarily from the price reduction mandated
by the Regulator, and a (Pounds)3 million decrease in operating income from
ancilliary businesses.
Net income decreased by (Pounds)5 million (31%) from (Pounds)16 million in
the three months ended June 30, 1995 to (Pounds)11 million in the three months
ended June 30, 1996. This decrease was primarily attributable to increased
after-tax interest expense of (Pounds)7 million resulting from debt issued to
finance the acquisition, partially offset by an after-tax increase in other
income of (Pounds)1 million.
Revenues
Operating revenues increased by (Pounds)14 million (8%) from (Pounds)167
million in the three months ended June 30, 1995 to (Pounds)181 million in the
three months June 30, 1996 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE) FROM THE THREE MONTHS
ENDED JUNE 30, 1995 TO THE
THREE MONTHS ENDED JUNE 30, 1996
-----------------------------------------
((Pounds) MILLIONS, EXCEPT %)
<S> <C>
Electricity distribution........... (5)
Electricity supply ................ 16
Less: Intra-business(1)............ (3)
---
Total operating revenues........... 14
===
Percentage change.................. 8%
</TABLE>
- --------
(1) The decrease in intra-business revenues has the effect of increasing total
operating revenues due to the elimination of intra-business revenues in
consolidation.
27
<PAGE>
Two factors determine the amount of revenues produced by the main
electricity distribution business: the unit price of the electricity
distributed (which is controlled by the Distribution Price Control Formula)
and the number of electricity units distributed. Following the Regulator's
distribution price review in 1994, the Regulator reduced SWEB's allowable
expected distribution revenues, effective beginning fiscal year 1996, by 14%,
before an allowed increase for inflation. Subsequently, the Regulator
announced a further distribution price reduction which has had and will
continue to have the effect of reducing SWEB's allowable expected distribution
revenues, effective beginning fiscal year 1997, by a further 11%, before an
allowed increase for inflation. See "The Electric Utility Industry in Great
Britain." In the three months ended June 30, 1996, application of the
Distribution Price Control Formula resulted in a reduction in SWEB's
distribution revenues as compared to the three months ended June 30, 1995. The
number of units distributed depends on the demands of SWEB's customers for
electricity. That demand varies based, in part, upon weather conditions and
economic activity. Revenues from the distribution business decreased by
(Pounds)5 million (8%) from (Pounds)58 million for the three months ended June
30, 1995 to (Pounds)53 million for the three months ended June 30, 1996 as a
result of the following factors:
<TABLE>
<CAPTION>
OPERATING REVENUES FROM
ELECTRICITY DISTRIBUTION
INCREASE (DECREASE) FROM
THE THREE MONTHS ENDED
JUNE 30, 1995
TO THE THREE MONTHS ENDED
JUNE 30, 1996
-------------------------
((Pounds) MILLIONS,
EXCEPT %)
<S> <C>
Application of Distribution Price Control Formu-
la.............................................. (7)
Sales growth..................................... 3
Other revenue attributable to distribution busi-
ness............................................ (1)
---
Total distribution revenues.................... (5)
===
Percentage change.............................. (8)%
===
</TABLE>
Two factors determine the amount of revenues produced by the supply
business: the unit price of the electricity supplied (which, in the case of
Franchise Supply Customers, is controlled by the Supply Price Control Formula)
and the number of electricity units supplied. Until April 1998, SWEB is
expected to have the exclusive right to supply all Franchise Supply Customers
in its Franchise Area.
Franchise Supply Customers are generally residential/domestic and small
commercial customers. The volume of unit sales of electricity for Franchise
Supply Customers is influenced largely by the number of customers in the
Franchise Area, weather conditions and prevailing economic conditions. Unit
sales to Non-Franchise Supply Customers are determined primarily by the
success of the supply business in entering into contracts to supply customers
with electricity.
Revenues from the supply business increased by (Pounds)16 million (10%) from
(Pounds)154 million for the three months ended June 30, 1995 to (Pounds)170
million for the three months ended June 30, 1996. In the three months ended
June 30, 1996, the number of electricity units supplied increased by 22% but
total revenues produced by the supply business increased by only 10%, because
a majority of the increase in total units supplied was to Non-Franchise Supply
Customers, who are the larger energy users charged at generally lower average
unit prices than those charged to Franchise Supply Customers. Within the
franchise market, the number of electricity units supplied increased by 2% but
this was offset by a reduction in allowable income as set by the Supply Price
Control Formula.
Cost of Sales
Cost of sales increased by (Pounds)15 million (14%) from (Pounds)107 million
in the three months ended June 30, 1995 to (Pounds)122 million in the three
months ended June 30, 1996. This increase was principally the result of an
increase in the supply business cost of sales of (Pounds)15 million reflecting
an increase in purchases of electricity to supply the increase in unit sales
as discussed above.
28
<PAGE>
Operating Expenses
Operating expenses decreased by (Pounds)2 million (6%) from (Pounds)34
million in the three months ended June 30, 1995 to (Pounds)32 million in the
three months ended June 30, 1996. This decrease was primarily due to a
(Pounds)1 million decrease in maintenance costs and a (Pounds)3 million
decrease in selling, general and administrative costs, which were partially
offset by a (Pounds)2 million increase in depreciation and amortization
resulting from the application of the purchase method of accounting.
The decrease in selling, general and administrative costs resulted in part
from a decrease in certain classes of computer software development costs
which were expensed during the three months ended June 30, 1995 but were
capitalized in the three months ended June 30, 1996, having satisfied the
criteria for capitalization under the Company's accounting policy (see Note 1
to the Consolidated Financial Statements of the Successor Company). The
decrease in selling, general and administrative costs was also due to a
decrease in labor costs resulting from a reduction in personnel. The decrease
in selling, general and administrative costs was partially offset by an
increase in pension costs.
Other Income
Other income increased by (Pounds)2 million from (Pounds)1 million in the
three months ended June 30, 1995 to (Pounds)3 million in the three months
ended June 30, 1996. This increase was primarily attributable to additional
proceeds of (Pounds)1.3 million from the sale by NGG, of which SWEB owned
6.3%, of NGG's pumped storage electricity generation business. See "--
Significant Events."
Interest Expense
Interest expense increased by (Pounds)10 million from (Pounds)3 million in
the three months ended June 30, 1995 to (Pounds)13 million in the three months
ended June 30, 1996, principally as a result of the financing costs associated
with the increased amount of debt issued for the acquisition.
Income Taxes
Income taxes decreased by (Pounds)3 million (33%) from (Pounds)9 million in
the three months ended June 30, 1995 to (Pounds)6 million in the three months
ended June 30, 1996. This decrease was primarily attributable to a decrease in
pre-tax income.
FISCAL YEAR 1995 COMPARED WITH PRO FORMA FISCAL YEAR 1996
Earnings
Operating income decreased by (Pounds)18 million (13%) from (Pounds)139
million in fiscal year 1995 to (Pounds)121 million in Pro Forma Fiscal Year
1996. This decrease was due to a (Pounds)24 million increase in cost of sales,
partially offset by a (Pounds)4 million increase in operating revenues and a
(Pounds)2 million decrease in operating expenses.
Net income decreased by (Pounds)38 million (40%) from (Pounds)94 million in
fiscal year 1995 to (Pounds)56 million in Pro Forma Fiscal Year 1996. In
addition to the factors discussed in the previous paragraph which reduced
operating income, the decrease in net income was primarily due to increased
after-tax interest expense of (Pounds)37 million principally due to debt
issued for the acquisition, partially offset by an after-tax extraordinary
gain on the early extinguishment of debt of (Pounds)6 million and an after-tax
decrease in losses from discontinued operations of (Pounds)6 million.
29
<PAGE>
Revenues
Operating revenues increased by (Pounds)4 million (1%) from (Pounds)776
million in fiscal year 1995 to (Pounds)780 million in Pro Forma Fiscal Year
1996 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM FISCAL FISCAL YEAR 1995
TO PRO FORMA FISCAL YEAR 1996
-----------------------------
((Pounds) MILLIONS, EXCEPT %)
<S> <C>
Electricity distribution....................... (22)
Electricity supply............................. 1
Other activities............................... (3)
Less: Intra-business(1)........................ (28)
---
Total operating revenues..................... 4
===
Percentage change............................ 1%
===
</TABLE>
- --------
(1) The decrease in intra-business revenues has the effect of increasing total
operating revenues due to the elimination of intra-business revenues in
consolidation.
Following the Regulator's distribution price review in 1994, the Regulator
reduced SWEB's allowable expected distribution revenues, effective beginning
fiscal year 1996, by 14%, before an allowed increase for inflation.
Subsequently, the Regulator announced a further distribution price reduction
which has had and will continue to have the effect of reducing SWEB's
allowable expected distribution revenues, effective beginning fiscal year
1997, by a further 11%, before an allowed increase for inflation. See "The
Electric Utility Industry in Great Britain." Revenues from the distribution
business decreased by (Pounds)22 million (8%) from (Pounds)274 million in
fiscal year 1995 to (Pounds)252 million in Pro Forma Fiscal Year 1996 as a
result of the following factors:
<TABLE>
<CAPTION>
OPERATING REVENUES FROM
ELECTRICITY DISTRIBUTION
INCREASE (DECREASE) FROM
FISCAL YEAR 1995
TO PRO FORMA FISCAL YEAR 1996
-----------------------------
((Pounds) MILLIONS, EXCEPT %)
<S> <C>
Application of Distribution Price Control
Formula...................................... (20)
Sales growth................................. 9
Other revenue attributed to distribution
business(1)................................. (11)
---
Total distribution revenues................ (22)
===
Percentage change.......................... (8)%
===
</TABLE>
- --------
(1) Represents non-recurring revenues received in fiscal year 1995 for
installing the telecommunications fiberoptic infrastructure.
Revenues from the supply business increased by (Pounds)1 million from
(Pounds)725 million in fiscal year 1995 to (Pounds)726 million in Pro Forma
Fiscal Year 1996. This increase reflects an increase of (Pounds)11 million in
revenues from the franchise supply market which offset a (Pounds)10 million
reduction in revenues from the non-franchise supply market which was primarily
due to lower unit sales. This increase was the result of an overall increase
in unit sales to supply customers and application of the Supply Price Control
Formula which resulted in an upward inflation adjustment that exceeded the
downward regulatory factor adjustment.
Intra-business revenues decreased by (Pounds)28 million (10%) from
(Pounds)280 million in fiscal year 1995 to (Pounds)252 million in Pro Forma
Fiscal Year 1996 primarily as the result of the decrease in revenues from the
distribution business described above.
Cost of Sales
Cost of sales increased by (Pounds)24 million (5%) from (Pounds)480 million
in fiscal year 1995 to (Pounds)504 million in Pro Forma Fiscal Year 1996. This
increase is principally the result of an increase in the supply business
energy purchase costs of (Pounds)20 million.
30
<PAGE>
Operating Expenses
Operating expenses decreased by (Pounds)2 million (1%) from (Pounds)157
million in fiscal year 1995 to (Pounds)155 million in Pro Forma Fiscal Year
1996. This decrease was principally due to a reduction in severance costs of
(Pounds)6 million as a result of providing for severance costs under the
purchase method of accounting at the acquisition date and a net decrease in
certain classes of computer software development costs which were expensed
during fiscal year 1995 but were capitalized in Pro Forma Fiscal Year 1996,
having satisfied the criteria for capitalization under the Company's
accounting policy (see Note 1 to the Consolidated Financial Statements of the
Successor Company), partially offset by an increase in net pension costs and
an increase in depreciation and amortization expense.
Interest Expense
Interest expense increased by (Pounds)55 million from (Pounds)11 million in
fiscal year 1995 to (Pounds)66 million in Pro Forma Fiscal Year 1996
principally as a result of the financing costs associated with the increased
amount of debt issued for the acquisition. Interest expense for Pro Forma
Fiscal Year 1996 reflects interest expense recorded in connection with the
acquisition as if the acquisition had occurred on April 1, 1995 and had been
100% financed with short-term borrowings at an interest rate of 6% per year.
However, in fiscal year 1996, the Company retired an aggregate of (Pounds)96
million of debt and converted (Pounds)500 million of debt to equity, and such
retirement and conversion were not reflected in the financial statements for
Pro Forma Fiscal Year 1996.
Income Taxes
Income taxes decreased by (Pounds)20 million from (Pounds)50 million in
fiscal year 1995 to (Pounds)30 million in Pro Forma Fiscal Year 1996. This
decrease is primarily attributable to a decrease in pre-tax income.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1995
Earnings
Operating income increased by (Pounds)17 million (14%) from (Pounds)122
million in fiscal year 1994 to (Pounds)139 million in fiscal year 1995,
primarily due to a (Pounds)28 million increase in operating income from the
distribution business which was partially offset by a (Pounds)9 million
decrease in operating income from the supply business.
Net income increased by (Pounds)6 million (7%) from (Pounds)88 million in
fiscal year 1994 to (Pounds)94 million in fiscal year 1995. The increase was
primarily due to an increase of (Pounds)11 million in after-tax operating
income, an increase of (Pounds)2 million in after-tax interest income and an
increase of (Pounds)1 million in after-tax gain from discontinued operations,
partly offset by a one-time, after-tax loss of (Pounds)8 million on the sale
of the retail appliance business.
Revenues
Operating revenues decreased by (Pounds)32 million (4%) from (Pounds)808
million in fiscal year 1994 to (Pounds)776 million in fiscal year 1995 as
follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM FISCAL YEAR 1994
TO FISCAL YEAR 1995
---------------------
((Pounds) MILLIONS,
EXCEPT %)
<S> <C>
Electricity distribution............................... 24
Electricity supply..................................... (47)
Other activities....................................... 3
Less: Intra-business(1)................................ 12
---
Total operating revenues............................. (32)
===
Percentage change.................................... (4)%
===
</TABLE>
- --------
(1) The increase in intra-business revenues has the effect of decreasing total
operating revenues due to the elimination of intra-business revenues in
consolidation.
Revenues from the distribution business increased by (Pounds)24 million
(10%) from (Pounds)250 million in fiscal year 1994 to (Pounds)274 million in
fiscal year 1995 as a result of the following factors:
31
<PAGE>
<TABLE>
<CAPTION>
OPERATING REVENUES FROM
ELECTRICITY DISTRIBUTION
INCREASE FROM
FISCAL YEAR 1994
TO FISCAL YEAR 1995
------------------------
((Pounds) MILLIONS,
EXCEPT %)
<S> <C>
Application of Distribution Price Control
Formula........................................... 8
Sales growth...................................... 2
Other revenue attributed to distribution busi-
ness(1).......................................... 14
---
Total operating revenue......................... 24
===
Percentage change............................... 10%
===
</TABLE>
- --------
(1) Represents primarily non-recurring revenues received in fiscal year 1995
for installing the telecommunications fiberoptic infrastructure.
Revenues from the supply business decreased by (Pounds)47 million (6%) from
(Pounds)772 million in fiscal year 1994 to (Pounds)725 million in fiscal year
1995 almost entirely as a result of lower unit sales in the non-franchise
supply market. The impact of the first supply price review was to reduce
revenues from Franchise Supply Customers by approximately (Pounds)3 million,
although additional revenues of (Pounds)14 million were achieved in the
franchise supply market as a result of extinguishing the under-recovery from
fiscal year 1994.
Cost of Sales
Cost of sales decreased by (Pounds)31 million (6%) from (Pounds)511 million
in fiscal year 1994 to (Pounds)480 million in fiscal year 1995. This decrease
was principally the result of a decrease in the amount of energy purchased due
to a reduction in unit sales to Non-Franchise Supply Customers.
Operating Expenses
Operating expenses decreased by (Pounds)18 million (10%) from (Pounds)175
million in fiscal year 1994 to (Pounds)157 million in fiscal year 1995
resulting primarily from a (Pounds)10 million reduction in severance costs and
a (Pounds)10 million reduction in pension costs, partially offset by an
increase of (Pounds)2 million in other expenses.
Income Taxes
Income taxes increased by (Pounds)7 million from (Pounds)43 million in
fiscal year 1994 to (Pounds)50 million in fiscal year 1995 reflecting an
increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
To meet short-term cash needs and contingencies, the Company had
approximately (Pounds)20 million of cash and cash equivalents, on a
consolidated basis, at the end of fiscal year 1996.
The Company's sole investment and only significant asset is the entire share
capital of SWEB. The Company is therefore dependent upon dividends from SWEB
for its cash flow. The Company's primary need for liquidity is to pay interest
on its debt, and the Company expects to receive sufficient amounts of
dividends from SWEB to make such payments. SWEB can make distributions of
dividends to the Company under English law to the extent that it has
distributable reserves, subject to the retention of sufficient financial
resources to conduct its supply and distribution businesses as required by its
PES license. The Company believes that sufficient distributable reserves will
exist at SWEB to allow for any and all cash flow generated at SWEB through
operations to be distributed to the Company through dividends to the Company.
SWEB's need for liquidity is to pay interest on its debt and to fund its costs
of operations and capital expenditure programs.
The Company, on a consolidated basis, has four primary sources of liquidity
available to it. SWEB's internal source of funds is cash from operations,
which totalled (Pounds)74 million in Pro Forma Fiscal Year 1996. SWEB has a
(Pounds)275 million, three-year revolving credit facility provided by a
banking consortium. SWEB also has five bilateral committed loan facilities
totaling (Pounds)120 million and several uncommitted loan facilities totalling
(Pounds)105 million provided by banking institutions. At the end of fiscal
year 1996, a total of (Pounds)292 million had been drawn from these
facilities.
32
<PAGE>
Demand for electricity in Great Britain, in general, and in SWEB's Franchise
Area, in particular, is seasonal, with demand being higher in the winter
months and lower in the summer months. SWEB bills its Franchise Supply
Customers on a staggered quarterly basis while it is generally required to pay
related expenses (principally the cost of purchased electricity) on 28-day
terms. However, approximately 40% of the Franchise Supply Customers settle
their accounts using regular payment plans which either allow prepayment or
spreading of the cost of their annual bill evenly throughout the year. A
majority of SWEB's contracts for supply of electricity to Non-Franchise Supply
Customers require SWEB's customers to pay a fixed price per unit, while the
cost of supply to SWEB from the Pool, if not covered by hedging mechanisms,
varies throughout the year, generally being higher in winter months and lower
in summer months. SWEB balances the effect of these timing and cyclical
influences on its working capital needs with drawings under its available
credit facilities.
The distribution business charges licensed suppliers monthly for the
provision of its distribution services. The majority of the distribution
revenue is received from SWEB's supply business. In the case of second-tier
suppliers to Non-Franchise Supply Customers in SWEB's Franchise Area,
distribution charges are billed directly to the suppliers on a monthly basis.
SWEB's capital expenditures are primarily related to the distribution
business and include expenditures for load-related, non-load-related and non-
operational capital assets. Load-related capital expenditures are largely
required by new business growth. Customer contributions are normally received
where capital expenditures are made to extend or upgrade service to customers
(except to the extent that such capital expenditures are made to enhance
SWEB's distribution network generally). Non-load-related capital expenditures
include asset replacement which is expected to continue until at least the
next decade. Other non-load-related expenditures include system upgrade work
that provides for load growth and has the additional benefit of improving
network security and reliability. Non-operational capital expenditures are for
assets such as generation, fixtures and equipment. For the fiscal years 1994,
1995 and 1996, capital expenditures, net of customer contributions, were
(Pounds)61 million, (Pounds)68 million and (Pounds)60 million, respectively.
SWEB expects total capital expenditures, net of customer contributions, to be
approximately (Pounds)75 million in fiscal year 1997. The increase from prior
years is due primarily to increased capitalization of significant expenditures
on new information technology systems related principally to a new customer
information system. The Company expects the level of information technology
expenditure to return to the previous lower levels when the new billing system
is implemented. The Company expects the levels of load-related and non-load-
related capital expenditures to remain stable relative to current levels for
several years. Since its inception, SWEB has generated sufficient funds from
operations to meet its capital expenditure requirements and is expected to do
so in the future.
The Company currently has a (Pounds)325 million term loan outstanding that
is scheduled to mature in February 1997. The Company does not intend to create
reserves to repay the loan at maturity. Thus, it is anticipated that the
outstanding principal of the loan will be repaid from the proceeds of
refinancings. The net proceeds of the Offering will be used to partially repay
the term loan. The Company anticipates additional capital markets borrowings,
the proceeds of which will be used to repay the remainder of the term loan and
which the Company expects will have the effect of extending the maturities of
the Company's debt. At the end of fiscal year 1996, the Company also had
outstanding approximately (Pounds)27 million of loan notes issued as part of
the Company's acquisition of SWEB. Holders of the loan notes have the right to
require the Company to redeem the loan notes on semi-annual interest payment
dates. The Company intends to meet those redemption obligations with cash on
hand.
To assure the stability of future interest charges, the Company has entered
into a series of interest rate swap transactions with total notional amounts
of (Pounds)450 million. These transactions have maturities of between 5 and 10
years. The Company expects to effectively reverse the swap agreements at the
time of issuance of additional fixed rate debt.
The Company does not have any foreign currency hedging contracts in place;
however, it does intend to swap the US dollar liabilities associated with the
Offering back to pounds sterling to effectively hedge the currency risk
associated with the interest on and principal of the Senior Notes.
Management believes that cash flows from operations, together with its
existing sources of credit and future refinancings, will provide sufficient
financial resources to meet the Company's projected capital needs and other
expenditure requirements. However, there can be no assurance that future
refinancings will be available to the Company or that they will be on terms
favorable to the Company.
33
<PAGE>
BUSINESS
GENERAL
The Company is a wholly-owned subsidiary of Holdings, of which 75% is owned
indirectly by Southern and 25% is owned indirectly by PP&L Resources. The
Company was incorporated as a public limited company under the laws of England
and Wales in June 1995 as a vehicle for the acquisition of SWEB, one of the 12
RECs in England and Wales licensed to distribute, supply and, to a limited
extent, generate electricity. In September 1995, the Company gained effective
control of SWEB, having acquired approximately 84% of its shares. The Company
subsequently replaced SWEB's board of directors and certain senior managers
with officers and employees of companies from within the Southern Company
system. In December 1995, the Company acquired the remaining shares of SWEB.
The Company's sole investment and only significant asset is the entire share
capital of SWEB, which is headquartered in Bristol, England. At June 30, 1996
the Company had consolidated assets of (Pounds)1.659 billion ($2.576 billion).
SWEB's two main business lines are the distribution of electricity and
supply of electricity to approximately 1.3 million customers in its Franchise
Area in southwest England. The distribution business and the supply business
are distinct business segments and produced operating income of (Pounds)112
million ($174 million) and (Pounds)15 million ($23 million), respectively, in
Pro Forma Fiscal Year 1996, representing substantially all of the Company's
consolidated operating income in that pro forma fiscal year.
SWEB's Franchise Area covers approximately 5,560 square miles extending from
Bristol and Bath in the northeast, 188 miles southwest along the peninsula to
Land's End and 28 miles beyond to the Isles of Scilly, and has a resident
population of approximately 2.8 million. The South West of England, of which
the Franchise Area forms the greater part, has benefitted from economic growth
(as measured by GDP) which exceeded the UK average from 1991 through 1995 and
has also benefited from an average unemployment rate during calendar year 1995
of approximately 6.9% which was below the UK average of 8.2% according to a
recent study by Cambridge Econometrics. The largest cities and towns in SWEB's
Franchise Area are Bath, Bristol, Exeter, Plymouth and Taunton. Business
activity is generally concentrated in the population centers around Bristol,
Bath and Plymouth. The Bristol and Bath area is served by the M4 and M5
motorways, a strong rail network, the rail link between Bristol and London and
a commercial port at Avonmouth.
The Company and SWEB have undertaken to make SWEB a more focused and
competitive company concentrating on the main electricity businesses of
distribution and supply. Several businesses not related to distribution and
supply have been sold, and the remaining ancillary businesses have been
redirected to focus on support for the main electricity businesses.
The key goals which the Company and SWEB are pursuing include cost savings
and improved customer service. The objective of cost savings is to increase
profitability. Cost savings have been realized through programs of staff
reduction and working with the unions on a program of job redesign leading to
changes in work practices. The objective of improved customer service is to
prepare for the increasingly competitive aspects of the supply business by
building customer loyalty through improvements in system performance and
responsiveness to customers' needs, and to meet and exceed the performance
criteria established by the Regulator. Improvements in customer service are
being pursued in part through improvements in system performance, as measured
primarily by reductions in customer minutes lost and overall number of
outages.
OVERVIEW OF THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
In 1990, the electric utility industry in Great Britain was privatized, and
SWEB was created along with the other 11 RECs. In connection with the
privatization, distribution assets in England and Wales, previously owned
indirectly by Her Majesty's Government, were allocated among the RECs,
licensing requirements were established for the RECs and price controls were
implemented in the areas of distribution and supply. In England and Wales,
generation assets (other than nuclear facilities) were allocated to two
generating companies, and the
34
<PAGE>
high voltage transmission assets were allocated to The National Grid Company
plc ("NGC," which is wholly owned by NGG). See "The Electric Utility Industry
in Great Britain."
The high voltage transmission system in England and Wales, which is
generally referred to as the "national grid," carries the generated
electricity in bulk from the power stations to the regional and local
distribution systems. This transmission system is owned and operated by NGC.
Distributors transfer electricity over their networks, generally at lower
voltage than the national grid, from supply points on the national grid to
final consumers. The distribution systems in England and Wales are owned by
the 12 RECs. Virtually all customers in England and Wales are connected to the
distribution system of the RECs and have no choice as to the distribution
system from which they receive their electricity. Distribution prices charged
by the RECs are regulated by the Distribution Price Control Formula.
Suppliers sell electricity to end users. Each REC is required to have a PES
license which authorizes it to supply electricity to any customers within its
franchise area. Electricity customers fall into two categories, Franchise
Supply Customers and Non-Franchise Supply Customers. Prices for supply of
electricity to Franchise Supply Customers are regulated by the Supply Price
Control Formula. Such price control is currently scheduled to expire on March
31, 1998, at which time the franchise supply market is expected to be open to
any competitors who have obtained the necessary license, which is generally
referred to as a "second tier license." Such second tier suppliers, including
SWEB, compete for business nationally and at prices determined by competitive
bids or negotiation.
At the time of privatization, the Pool was established for bulk trading of
electricity in England and Wales between generators and suppliers. The Pool
reflects two principal characteristics of the physical generation and supply
of electricity from a particular generator to a particular supplier. First, it
is not possible to trace electricity from a particular generator to a
particular supplier. Second, it is not practicable to store electricity in
significant quantities, creating the need for a constant matching of supply
and demand. Subject to certain exceptions, all electricity generated in
England and Wales must be sold and purchased through the Pool. All licensed
generators and suppliers must become signatories to a pooling and settlement
agreement, which governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers (the "Pooling
and Settlement Agreement"). The Pool also provides centralized settlement of
accounts and clearing. Prices for electricity are set by the Pool daily for
each half hour of the following day based on the bids of the generators and a
complex set of calculations matching supply and demand and taking account of
system stability, security and other costs. See "The Electric Utility Industry
in Great Britain--The Structure of the Electricity Industry in Great Britain--
The Pool."
SWEB'S MAIN BUSINESSES
DISTRIBUTION BUSINESS
SWEB's distribution business is the ownership, management and operation of
the electricity distribution network within SWEB's Franchise Area. The primary
activity of the distribution business is the receipt of electricity from the
national grid transmission system and its distribution to end users of
electricity that are connected to SWEB's power lines. Virtually all
electricity supplied (whether by SWEB's independent supply business or by
other suppliers) to consumers in SWEB's Franchise Area is transported through
its distribution network, thus providing SWEB with distribution volume that is
stable from year to year. As a holder of a PES license, SWEB is subject to a
price cap regulatory framework that provides economic incentives to increase
the number of units of electricity distributed and to operate in a more cost-
efficient manner. See "The Electric Utility Industry in Great Britain."
SWEB's distribution business has grown in both its customer base and in the
number of units distributed, primarily reflecting economic growth in the South
West of England. At March 31, 1996 SWEB had experienced
35
<PAGE>
a 5-year compound annual growth rate of 0.8% in customers and a 5-year
compound annual growth rate of 1.6% in units distributed.
Strategy
Since being acquired by the Company, SWEB has reviewed and refined its
distribution strategy and has established key goals of cost savings and
improved customer service.
Staff reductions play a key role in cost savings. SWEB has implemented a
plan of voluntary and other staff reductions to reduce the number of employees
by 704 (mainly in the distribution business and representing 21% of staff at
the time of the acquisition of SWEB by the Company), of which 460 reductions
occurred prior to June 30, 1996. Part of these reductions are made possible
due to new work practices which SWEB has developed with the cooperation of
SWEB's unions. Team restructuring in the engineering department of SWEB has
commenced, and the establishment of multi-skilled independent teams has been
achieved. In addition, management restructuring has produced a flatter
organizational structure by reducing management levels from seven to three.
Improvements in customer service in the distribution business, if achieved,
are part of SWEB's strategy to retain Franchise Supply Customers in its
Franchise Area after March 31, 1998 and are expected to enable SWEB to meet or
exceed the performance criteria established by the Regulator who is
responsible for setting the performance standards of the RECs. SWEB believes
that achieving these goals is important both for building customer loyalty for
the benefit of the supply business by maintaining and improving customer
satisfaction and for maintaining good relations with the Regulator.
Improvements in customer service are being pursued, in part, through
improvements in system performance, measured primarily in terms of customer
minutes lost and overall number of outages. To that end, several initiatives
are being pursued including:
. eliminating the backlog of tree-trimming near distribution lines;
. implementing a program of network improvements that will create more dual
routing;
. reordering the priorities of SWEB's capital expenditure program to focus
on improving system reliability; and
. introducing a single-number telephone call center supported by new
computerized information systems which allows employees at the call
center (including advisory engineers) to initiate engineering work orders
to satisfy customer needs for repairs or maintenance of the distribution
network.
Customers
Most of SWEB's distribution customers are Franchise Supply Customers. This
customer group consists predominantly of residential and small commercial
consumers which provides SWEB a stable customer base. SWEB's fastest growing
category of distribution customers, in terms of units distributed and
revenues, is large commercial and small industrial customers. Commercial
activity of SWEB's customers is mostly service based and includes financial
services, electronics and technology-related businesses. SWEB also distributes
electricity to industrial concerns in its Franchise Area. The principal
activities of SWEB's largest distribution customers include china clay
extraction, ship repair, fertilizer production, aerospace, defense
engineering, cement and paper manufacturing and water supply. SWEB's 20
largest distribution customers in its Franchise Area accounted for 9.8% of
total electricity distributed by SWEB in fiscal year 1996 in terms of units
distributed, with no single customer exceeding 2.3% of total electricity
distributed. The following table sets out details of SWEB's distribution
customers, units distributed and distribution revenues.
36
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION BUSINESS
------------------------------------------------------------------------------
DISTRIBUTION CUSTOMERS ELECTRICITY UNITS DISTRIBUTED REVENUES(5)
---------------------------- ---------------------------------- -----------
5 YEAR VOLUME % OF 5-YEAR
NUMBER(1) % OF TOTAL CAGR(2) (TWH)(3) TOTAL CAGR(4) % OF TOTAL
--------- ---------- ------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
not more than 100kW..... 1,298,795 99.79 0.81% 8.2 62 0.19% 81
above 100kW to 1MW...... 2,300 0.19 4.50 2.1 16 5.11 11
above 1MW............... 230 0.02 6.47 2.9 22 1.98 8
--------- ------ ---- ---------- --------- ---------- ---
Total................. 1,301,325 100.00 -- 13.2 100 -- 100
========= ====== ==== ========== ========= ========== ===
</TABLE>
- --------
(1) At December 31, 1995.
(2) Represents the compound annual growth rate ("CAGR") for the period from
July 1, 1990 through December 31, 1995.
(3) In terawatt hours for calendar year 1995.
(4) Represents the CAGR for the period from January 1, 1991 through December
31, 1995.
(5) For calendar year 1995.
Distribution Facilities
Electricity is transported across the national grid transmission system at
400kv or 275kv to eight grid supply points within SWEB's distribution network,
where it is transformed by SWEB to 132kv and enters SWEB's distribution
system. Electricity is also transported to two national grid supply points
located in neighboring RECs' franchise areas, which are connected to SWEB's
distribution system by overhead lines and underground cables. Substantially
all electricity which enters SWEB's system is received at these ten grid
supply points.
At March 31, 1996, SWEB's electricity distribution network (excluding
service connections to consumers) included overhead lines and underground
cables at the operating voltage levels indicated in the table below:
<TABLE>
<CAPTION>
OVERHEAD LINES UNDERGROUND CABLES
OPERATING VOLTAGE: (CIRCUIT MILES) (CIRCUIT MILES)
- ------------------ --------------- ------------------
<S> <C> <C>
132kv........................................ 907 37
33kv......................................... 1,736 607
11kv......................................... 10,676 3,839
6.6kv........................................ 15 77
480 or 415/240v.............................. 4,759 6,896
------ ------
Total...................................... 18,093 11,456
====== ======
</TABLE>
In addition to the circuits referred to above, SWEB's distribution
facilities also include approximately:
<TABLE>
<CAPTION>
AGGREGATE CAPACITY
(MEGA VOLT
TRANSFORMERS: NUMBER AMPERES)
- ------------- ------ ------------------
<S> <C> <C>
132kv/lower voltages................................ 91 5,348
33kv/11kv or 6.6kv.................................. 533 7,255
11kv or 6.6kv/lower voltages (including 36,336 pole
mounted transformers).............................. 47,936 6,504
SUBSTATIONS:
- ------------
132kv/33kv.......................................... 40
33kv/11kv or 6.6kv.................................. 309
11kv or 6.6kv/415v or 240v.......................... 11,790
</TABLE>
Substantially all substations are owned in freehold, and most of the balance
are held on leases which will not expire within 10 years.
37
<PAGE>
Electricity is received by customers at various voltages depending upon
their requirements. At March 31, 1996, SWEB's distribution system was
connected to over 1.3 million customers. In providing service connections to
customers and to street lighting, traffic lights and other installations from
its network, SWEB uses lengths of overhead lines and underground cables in
addition to those referred to above.
Operation and control of SWEB's distribution system is continuously
monitored and coordinated from two control centers located in Bristol and
Exeter. The Exeter control center is responsible for the entire 132kv network.
Responsibility for the 33kv and 11kv networks is divided between the two
control centers. A telecontrol system has been implemented to provide remote
information gathering and to provide remote operation of 132kv and selected
33kv and 11kv switchgear. See also the map on the inside cover page of this
Prospectus.
SUPPLY BUSINESS
SWEB's supply business is selling electricity to end users, purchasing such
electricity, primarily from the Pool, and arranging for its distribution to
those end users. SWEB's supply business is comprised predominantly of
supplying Franchise Supply Customers. In fiscal year 1996, these customers
accounted for approximately 82% of all units of electricity supplied by SWEB.
SWEB's exclusive right to supply these customers is scheduled to continue,
subject to price regulation, until March 31, 1998, at which time competition
to supply Franchise Supply Customers is scheduled to commence. Supply prices
for these customers are regulated, and SWEB's prudent costs of purchasing and
delivering electricity and hedging the purchase price are charged to them.
The market to supply Non-Franchise Supply Customers is fully competitive,
principally with other RECs and the major generators. Non-Franchise Supply
Customers are typically supplied through individual contracts for a duration
of one to two years with competitively bid or negotiated prices.
Strategy
Since its acquisition by the Company, SWEB has completed a review of the
supply market, established new goals for its supply business and adopted new
strategies for achieving those goals. The key goals established are the
retention of its current Franchise Supply Customers as supply customers after
March 31, 1998 and the increase of SWEB's share of electricity supplied to
Non-Franchise Supply Customers both inside and outside SWEB's Franchise Area.
As a result of this strategy, SWEB expects to supply a larger portion of units
to Non-Franchise Supply Customers than in fiscal year 1996.
SWEB's strategy for retaining its Franchise Supply Customers is to build
customer loyalty and to offer competitive prices. SWEB seeks to build customer
loyalty by providing superior service, including reliable distribution
service, responsive service in dealing with billing and other matters and
providing other service enhancements. SWEB is revamping its marketing, sales
and customer service operations under the direction of Executive Directors of
SWEB transferred from other companies within the Southern Company system, who
are experienced in competitive electricity marketing.
Initiatives in relation to the Franchise Supply Customers include:
. a single-number, local rate, telephone service call center;
. a state-of-the-art billing and customer service system which enables
employees at the call center to act on or resolve customer billing and
account inquiries on line during their calls; and
. a restructuring of meter reading operations which should enable almost
all meters to be read quarterly, thereby reducing estimated readings. (In
Great Britain, most meters are located within structures, and meter
readers are required to obtain access from occupants in order to read
meters. As a result, actual readings were often obtained only on an
annual or biennial basis.)
38
<PAGE>
SWEB's strategy for expanding its market share of electricity sold to Non-
Franchise Supply Customers both inside and outside its Franchise Area is to
offer competitive pricing and, with respect to its Non-Franchise Supply
Customers inside its Franchise Area, to build customer loyalty through the
measures described above and through the measures described in "--Distribution
Business."
Additional initiatives to support growth in market share in the Non-
Franchise Supply Customer market include:
. the expanded use of account managers for Non-Franchise Supply Customers;
. increase the number of proposals and bids made to customers and potential
customers;
. development of an integrated contract customer sales, electronic
registration and marketing system with full customer life-cycle
management and tracking facilities; and
. further enhancement of a competitive price setting system used to
determine appropriate contract supply prices.
Franchise Supply Market
Under the terms of its PES license, SWEB currently holds the right to supply
approximately 1.3 million Franchise Supply Customers within its Franchise
Area. See "Business--General." During fiscal year 1996, sales to Franchise
Supply Customers represented 82% of total units supplied by SWEB and produced
86% of SWEB's total supply revenue.
The exclusive right to supply Franchise Supply Customers is scheduled to end
on March 31, 1998, at which time all supply customers will have the ability to
choose their electricity supplier. SWEB intends to retain its market share of
these customers by providing superior customer service and competitive
pricing. In fiscal year 1995, SWEB met or exceeded the Regulator's overall
standards of performance in 99.9% of the services measured by the Regulator.
See "--Strategy."
Non-Franchise Supply Market
In addition to competing for Non-Franchise Supply Customers in its Franchise
Area, SWEB holds a second tier license to compete with the RECs and other
suppliers to provide electricity to Non-Franchise Supply Customers outside its
Franchise Area. At the end of fiscal year 1996, SWEB had approximately 1,500
Non-Franchise Supply Customers, consisting primarily of large commercial and
industrial accounts. Revenue from these customers during fiscal year 1996
accounted for only 14% of total supply revenues. SWEB has achieved a
significant increase in the number of Non-Franchise Supply Customers since the
Company acquired SWEB.
SWEB'S OTHER BUSINESS ACTIVITIES
SWEB also has ancillary business activities that support its main
electricity distribution and supply businesses, including electricity
generation and gas supply. SWEB owns generating assets with 24MW of capacity
used to back up the distribution network as well as minority investments in
windfarms and a 7.7% interest in Teesside Power Limited, owner of a 1,875 MW
combined cycle plant. SWEB has a 75% joint venture interest in a supplier of
gas and derives small amounts of revenue from the lease of fibers within the
fiber optic cables carried on its distribution network. SWEB also markets and
develops property no longer used in the main electricity businesses.
39
<PAGE>
RISK MANAGEMENT
Because SWEB's distribution business does not involve the purchase and sale
of electricity, SWEB's risk management efforts are focused on the supply
business which is exposed to Pool price volatility.
Regulations governing the franchise supply market permit the pass-through to
customers of prudent costs which include the cost of arrangements such as
contracts for differences ("CFDs") to hedge against Pool price volatility.
CFDs are contracts predominantly between generators and suppliers which fix
the price of electricity for a contracted quantity of electricity over a
specific time period. Differences between the actual price set by the Pool and
the agreed prices give rise to difference payments between the parties to the
particular CFD. At the present time, SWEB's forecast franchise supply market
demand for fiscal year 1997 is substantially hedged through various types of
agreements including CFDs.
The most common contracts for supply to Non-Franchise Supply Customers are
for a twelve-month term and contain fixed rates. SWEB is exposed to two
principal risks associated with such contracts: load shape risk (the risk
associated with a shift in the customer's usage pattern, including absolute
amounts demanded and timing of amounts demanded) and purchasing price risk
(the cost of purchased electricity relative to the price received from the
supply customer). SWEB employs risk management methods to maximize its return
consistent with an acceptable level of risk. Generally load shape risk
decreases as SWEB's portfolio of supply customers in the non-franchise supply
market increases. SWEB hedges purchasing price risk by employing a variety of
risk management tools, including management of its supply contract portfolio,
hedging contracts and other means which mitigate risk of future Pool price
volatility.
SWEB's ability to manage its purchasing price risk depends, in part, on the
future availability of properly priced risk management mechanisms such as
CFDs. No assurance can be given that an adequate, transparent market for such
products will in fact be available.
UK ENVIRONMENTAL REGULATION
SWEB's businesses are subject to numerous regulatory requirements with
respect to the protection of the environment. The Electricity Act 1989 (the
"Electricity Act") obligates the UK Secretary of State for Trade and Industry
(the "Secretary of State") to take into account the effect of electricity
generation, transmission and supply activities upon the physical environment
in approving applications for the construction of generating facilities and
the location of overhead power lines. The Electricity Act requires SWEB to
have regard to the desirability of preserving natural beauty and the
conservation of natural and man-made features of particular interest, when it
formulates proposals for development in connection with certain of its
activities. The Company mitigates the effects its proposals have on natural
and man-made features and is required to carry out an environmental assessment
when it intends to lay cables, construct overhead lines or carry out any other
development in connection with its licensed activities. SWEB also has produced
an Environmental Policy Statement which sets out the manner in which it
intends to comply with its obligations under the Electricity Act.
The Environmental Protection Act 1990 addresses waste management issues and
imposes certain obligations and duties on companies which handle and dispose
of waste. Some of SWEB's distribution activities produce waste, but SWEB
believes that it is in compliance with the applicable standards in such
regard.
Possible adverse health effects of electromagnetic fields ("EMFs") from
various sources, including transmission and distribution lines, have been the
subject of a number of studies and increasing public discussion. The
scientific research currently is inconclusive as to whether EMFs may cause
adverse health effects. The only UK standards for exposure to power frequency
EMFs are those promulgated by the National Radiological Protection Board and
relate to the levels above which non-reversible physiological effects may be
observed. SWEB fully complies with these standards. However, there is the
possibility that passage of legislation and change of regulatory standards
would require measures to mitigate EMFs, with resulting increases in capital
and operating costs. In addition, the potential exists for public liability
with respect to lawsuits brought by plaintiffs alleging damages caused by
EMFs.
40
<PAGE>
SWEB believes that it has taken and continues to take measures to comply
with the applicable laws and governmental regulations for the protection of
the environment. There are no material legal or administrative proceedings
pending against SWEB or the Company with respect to any environmental matter.
EMPLOYEES
SWEB had 3,178 employees (3,079 full time equivalent) and the Company had no
employees at the end of fiscal year 1996. At June 30, 1996, SWEB had 2,880
employees (2,785 full time equivalent). Of SWEB's employees, 95% are
represented by labor unions. All SWEB employees who are not party to a
personal employment contract are subject to a collective bargaining agreement
called The Electricity Business Agreement. This Agreement may be amended by
agreement between SWEB and the unions and is terminable with 12 months notice
by either side. SWEB is currently holding discussions with the unions to
introduce a separate collective bargaining agreement to include meter reading
staff. SWEB believes that its relations with its employees are favorable.
PROPERTY
The Company through a subsidiary of SWEB owns the freehold of its principal
executive offices in Bristol. SWEB has both network and non-network land and
building.
NETWORK LAND AND BUILDINGS
At March 31, 1996 SWEB had freehold and leasehold interests in approximately
12,000 network properties, comprising principally sub-station sites. The
recorded cost of total network land and buildings at March 31, 1996 was
(Pounds)62 million. SWEB owns, directly or indirectly, the freehold of such
land and buildings.
NON-NETWORK LAND AND BUILDINGS
At March 31, 1996 SWEB had freehold and leasehold interests in non-network
properties comprising chiefly offices, former retail outlets, depots,
warehouses and workshops. The recorded cost of total non-network land and
buildings at March 31, 1996 was (Pounds)40.3 million.
The number of properties in each category is:
<TABLE>
<CAPTION>
FREEHOLD OR
LONG LEASEHOLD LEASEHOLD
-------------- ---------
<S> <C> <C>
Depots.............................................. 24 1
Offices............................................. 8 --
Surplus property(1)................................. 78 25
</TABLE>
- --------
(1) Largely unused retail sites. The number of freeholds is approximated.
For a discussion of other properties and other assets of SWEB, see
"Business--SWEB's Main Businesses--Distribution Facilities."
LEGAL PROCEEDINGS
The Company and SWEB are routinely party to legal proceedings arising in the
ordinary course of business which are not material, either individually or in
the aggregate. The Company is not a party to any material legal proceedings
nor is it currently aware of any threatened material legal proceedings.
41
<PAGE>
THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
THE STRUCTURE OF THE ELECTRICITY INDUSTRY IN GREAT BRITAIN
The electric utility industry in Great Britain consists of the following
activities:
Generation: the production of electricity at power stations;
Transmission:
the bulk transfer of electricity across a high voltage
transmission system;
Distribution:
the transfer of electricity from the high voltage transmission
system and its delivery, across low voltage distribution systems,
to consumers; and
Supply: the bulk purchase of electricity by suppliers and its sale to
consumers.
INDUSTRY STRUCTURE
Great Britain has two separate but connected markets, each with a different
commercial framework. In England and Wales electricity is produced by
generators, the largest of which are National Power, PowerGen and Nuclear
Electric, a subsidiary of the recently privatized British Energy. Electricity
is transmitted through the national grid transmission system by NGC and
distributed by the twelve RECs in their respective franchise, or authorized,
areas. Most customers are currently supplied with electricity by their local
REC, although there are other suppliers holding second tier supply licenses,
including other generators and RECs, who can compete to supply larger
customers in that REC's authorized area.
In Scotland there are two vertically integrated companies, Scottish Power
and Hydro-Electric, each generating, transmitting, distributing and supplying
electricity within their respective franchise areas as well as competing to
supply electricity elsewhere. Scottish Nuclear, another subsidiary of British
Energy, sells all the electricity it generates to Scottish Power and Hydro-
Electric under the Nuclear Energy Agreement.
The interconnection between the two transmission systems, owned by Scottish
Power and NGC, is capable of transferring electricity between Scotland and
England and Wales. There is also an interconnection with France, owned by NGC
and Electricite de France, through which electricity can be transferred
between the transmission systems of France and England and Wales.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. A generator which is a
Pool member and also a licensed supplier must nevertheless sell all the
electricity it generates into the Pool, and purchase all the electricity which
it supplies from the Pool. Because Pool prices fluctuate, generators and
suppliers may enter into bilateral arrangements, such as CFDs, to provide a
degree of protection against such fluctuations.
There is no equivalent to the Pool in Scotland, but Scottish Power and
Hydro-Electric are obligated by their licenses to offer electricity for sale
to second tier suppliers. They are also required to provide access to their
transmission and distribution systems on a non-discriminatory basis to
competing suppliers and generators.
INDUSTRY BACKGROUND
The industry structure described above was put in place in March 1990. At
the same time, a licensing regime was introduced for the electricity industry
both in England and Wales and in Scotland. The Regulator was first appointed
in 1989.
The RECs, which at that time collectively owned NGG, NGC's holding company,
were privatized in December 1990. National Power and PowerGen were privatized
in March 1991 (with the balance of the UK Government's holding being sold in
March 1995), Scottish Power and Hydro-Electric were privatized in June 1991
and British Energy was privatized in July 1996. NGG was listed on the London
Stock Exchange in
42
<PAGE>
December 1995. Since the summer of 1995, seven of the RECs have been acquired
by other companies. In particular, SWEB was acquired by the Company in
September 1995.
In 1990, the vast majority of generating capacity was owned by three
generators. However, since that time competition in generation has increased
as RECs and other new entrant generators have constructed new plant and as
imports through the interconnections with Scotland and France have grown. In
addition, pursuant to undertakings given to the Regulator, National Power and
PowerGen have disposed of an aggregate of 6,000 MW of plant to Eastern Group
plc (a REC holding company which was recently acquired by Hanson PLC).
Competition in supply has also been progressively introduced both in England
and Wales and in Scotland. The RECs in England and Wales, and Scottish Power
and Hydro-Electric in Scotland, are subject to competition from second tier
suppliers for the supply of electricity to larger customers in their
respective franchise areas. Under the current licensing regime, all
electricity customers in Great Britain, including domestic customers, are
scheduled to be able to choose their electricity supplier from April 1, 1998.
DISTRIBUTION OF ELECTRICITY
Each of the RECs is required to offer terms for connection to its
distribution system to any person, for use of its distribution system to any
authorized electricity operator and for the provision of top-up and stand-by
supplies to any person. In providing use of its distribution system, a REC
must not discriminate between its own supply business and that of any other
authorized electricity operator, or between those of other authorized
electricity operators; nor may its charges differ except where justified by
differences in cost. Similar principles apply to the provision of top-up and
stand-by supplies of electricity, and in the carrying out of connection works.
Disputes over the terms of offers may be determined by the Regulator.
Most revenue of the distribution business is controlled by a formula based
on P+RPI-Xd where Xd is currently 3% (the "Distribution Price Control
Formula"). P reflects the previous maximum average price per unit of
electricity distributed. RPI reflects the percentage change in the Retail
Price Index between the previous year and the current year. The Xd factor is
established by the Regulator following review. This formula determines the
maximum average price per unit of electricity distributed (in pence per
kilowatt hour) which a REC is entitled to charge. This price, when multiplied
by the expected number of units to be distributed, determines the expected
distribution revenues of the REC for the relevant year. The Distribution Price
Control Formula permits RECs to partially retain additional revenues due to
increased distribution of units and allows for a pound-for-pound increase in
operating income for efficient operations and reduction of expenses. The
current Distribution Price Control Formula has been in effect since April 1,
1996 and applies for the four year period ending March 31, 2000.
On August 11, 1994, the Regulator announced the results of a review of the
Distribution Price Control Formula. A one-time reduction in the distribution
charges of all the RECs was made with effect from April 1, 1995 and ranged
from 11% to 17% (the reduction in SWEB's case being 14%), in each case before
allowing for inflation. In addition, the Regulator halved from 100% to 50% the
weight of units in the Distribution Price Control Formula and allocated the
remaining 50% to the number of customers. The stated intention of the
Regulator in introducing this change was "to remove any artificial incentive
on the companies to sell more electricity, while retaining a general incentive
for companies to seek out and meet the needs of their customers." In the light
of information concerning the financial position of the RECs that emerged
during the course of the unsuccessful bid by Trafalgar House plc for Northern
Electric plc (one of the RECs), the Regulator further reduced distribution
charges of all the RECs with effect from April 1, 1996 ranging from 10% to 13%
(the reduction in SWEB's case being 11%), in each case before allowing for
inflation.
The Distribution Price Control Formula is expected to be further reviewed
with effect from April 1, 2000. A REC may seek disapplication of its
Distribution Price Control Formula with effect from that date by request to
the Regulator. If the Regulator wishes to refuse the request, he must refer it
to the Monopolies and Mergers Commission ("MMC").
43
<PAGE>
In setting the distribution charges each year, the holder of a PES license
will have to make a projection of the permitted maximum charge per unit
distributed in that year. The projection will have to take account of
forecasts of units distributed, distribution losses and the actual change in
RPI. Failure to forecast accurately may result in over or under charging; this
is taken into account in the following year through a correction factor in the
price control formula. If a REC has overcharged in the previous year, the
maximum average charge per unit distributed is reduced by an amount to reflect
the excess income received, to which is added interest. In the event of
undercharging, the Distribution Price Control Formula allows the licensee to
recover the shortfall in income plus interest.
If, in any year, the average charge per unit distributed exceeds the
permitted maximum average charge per unit distributed by more than 3%, then,
in the next following year, the REC may not increase distribution charges
unless it has satisfied the Regulator that the average charge per unit in that
next following year is not likely to exceed the permitted maximum average
charge. If, in respect of any two successive years, the sum of the amounts by
which the average charge per unit distributed has exceeded the permitted
maximum average charge per unit distributed in the second of those years is
more than 4% of that permitted maximum average charge, then, in the next
following year, the REC may be required by the Regulator to adjust its charges
so that they fall within the maximum permitted average charge. If, in respect
of two successive years, the licensee undercharges by more than 10% of the
maximum average charge, the Regulator may, by directions to the licensee,
limit the amount by which such undercharging may be recovered.
ELECTRICITY SUPPLY
Subject to minor exceptions, all electricity customers in Great Britain must
be supplied by a licensed supplier. Licensed suppliers purchase electricity
and make use of the transmission and distribution networks to achieve delivery
to customers' premises.
There are two types of licensed suppliers; public electricity (or first
tier) suppliers ("PESs"); and second tier suppliers. PESs are the RECs,
Scottish Power and Hydro-Electric each supplying in its respective franchise
area. Second tier suppliers include National Power, PowerGen, Nuclear
Electric, Scottish Power, Hydro-Electric and other PESs supplying outside
their respective franchise areas. There are also a number of independent
second tier suppliers.
At present, a Franchise Supply Customer can only buy electricity from the
PES authorized to supply the relevant franchise area. Franchise Supply
Customers typically include domestic and small commercial and industrial
customers. Non-Franchise Supply Customers are not limited to buying
electricity from the local PES and can choose to buy from a second tier
supplier. Such customers are typically larger commercial, agricultural and
industrial electricity users. Second tier suppliers compete with one another
and with the local PES to supply customers in this competitive (or "non-
franchise") sector of the market.
Under the current licensing regime, from April 1, 1998 all customers,
including those who are currently Franchise Supply Customers, will be free to
choose their electricity supplier.
The supply of electricity to Franchise Supply Customers is subject to price
control. The maximum average charge per unit supplied (in pence per kilowatt
hour) is controlled by a formula based upon P+RPI-Xs+Y (the "Supply Price
Control Formula") where Xs is currently 2%. As with the Distribution Price
Control Formula, P reflects the previous maximum average price per unit of
electricity supplied (in pence per kilowatt hour). RPI reflects the percentage
change in the Retail Price Index between the previous year and the current
year. The Xs factor is established by the Regulator following review. The Y
term is a pass through of certain costs which are either largely outside the
control of the REC or have been regulated elsewhere. It thus covers the REC's
electricity purchase costs, including both direct Pool purchase costs and
costs of hedging, transmission charges made by NGC, distribution charges made
by its own and other REC distribution businesses and the Fossil Fuel Levy
(described below) or amounts equivalent thereto in respect of the purchase of
non-leviable electricity which are attributable to Franchise Supply Customers.
As with the Distribution Price Control Formula, there is a correction factor
in the Supply Price Control Formula in the event of over or under charging.
44
<PAGE>
If a REC has overcharged in the previous year, the maximum average charge
per unit supplied is reduced by an amount to reflect the excess income
received, to which is added interest. In the event of undercharging, the
Supply Price Control Formula allows the licensee to recover the shortfall in
income plus interest.
If, in any year, the average charge per unit supplied exceeds the permitted
maximum average charge per unit supplied by more than 4%, then, in the next
following year, the REC may not increase supply charges to Franchise Supply
Customers unless it has satisfied the Regulator that the average charge per
unit in that next following year is not likely to exceed the permitted maximum
average charge. If, in respect of any two successive years, the sum of the
amounts by which the average charge per unit supplied has exceeded the
permitted maximum average charge per unit supplied in the second of those
years is more than 5% of that permitted maximum average charge, then, in the
next following year, the REC may be required by the Regulator to adjust its
charges so that they fall within the maximum permitted average charge. If, in
respect of two successive years, the licensee undercharges by more than 10% of
the maximum average charge, the Regulator may, by directions to the licensee,
limit the amount by which such undercharging may be recovered.
The initial value of Xs was set at 0 for all the RECs on March 31, 1990. The
Supply Price Control Formula was reviewed by the Regulator with effect from
April 1, 1994, when the Xs term was set at 2% for all the RECs. This will
apply to the period ending March 31, 1998. On this date, the exclusive right
of the RECs to supply Franchise Supply Customers is scheduled, under the
current licensing structure, to come to an end. However, the Regulator has
indicated that price regulation for supply to Franchise Supply Customers may
be extended for an interim period until an adequate level of competition is
established.
THE POOL
The Pool was established at the time of privatization for bulk trading of
electricity in England and Wales between generators and suppliers. The Pool
reflects two principal characteristics of the physical generation and supply
of electricity from a particular generator to a particular supplier. First, it
is not possible to trace electricity from a particular generator to a
particular supplier. Second, it is not practicable to store electricity in
significant quantities, creating the need for a constant matching of supply
and demand. Subject to certain exceptions, all electricity generated in
England and Wales must be sold and purchased through the Pool. All licensed
generators and suppliers must become signatories to the Pooling and Settlement
Agreement, which governs the constitution and operation of the Pool and the
calculation of payments due to and from generators and suppliers. The Pool
also provides centralized settlement of accounts and clearing. The Pool does
not itself buy or sell electricity.
Prices for electricity are set by the Pool daily for each half hour of the
following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system
stability, security and other costs. A computerized system (the settlement
system) is used to calculate prices and to process metered, operational and
other data and to carry out the other procedures necessary to calculate the
payments due under the Pool trading arrangements. The settlement system is
administered on a day-to-day basis by NGC Settlements Limited, a subsidiary of
NGC, as settlement system administrator.
FOSSIL FUEL LEVY
All the RECs are subject to an obligation to obtain a specified amount of
generating capacity from non-fossil fuel sources (the "NFFOs"). Because
electricity generated from non-fossil fuel plants is generally more expensive
than electricity from fossil fuel plants, a levy system (the "Fossil Fuel
Levy") has been instituted to reimburse the generators and the RECs for the
extra costs involved. The Regulator sets the amount of the Fossil Fuel Levy
annually. The current Fossil Fuel Levy is 10% of the value of sales of
electricity generated from fossil fuel sources. However, the Regulator stated
on June 11, 1996 that he expected to announce a reduction to 3.7% for the
period November 1, 1996 to March 31, 1997.
45
<PAGE>
REGULATION UNDER THE ELECTRICITY ACT 1989
THE REGULATOR
The principal legislation governing the structure and regulation of the
electricity industry in Great Britain is the Electricity Act. The Electricity
Act established the industry structure described above so as to enable
privatization to take place. The Electricity Act also created the
institutional framework under which the industry is currently regulated,
including the office of the Regulator, who is appointed by the Secretary of
State. The present Regulator, Professor Stephen Littlechild, was appointed for
a five year term commencing September 1, 1989 and has since been reappointed
for a further five year term.
The Regulator's functions under the Electricity Act include granting
licenses to generate, transmit or supply electricity (a function which he
exercises under a general authority from the Secretary of State); proposing
modifications to licenses, and making license modification references to the
MMC; enforcing compliance with license conditions; advising the Secretary of
State in respect of the setting of each NFFO; calculating the Fossil Fuel Levy
rate and collecting the levy; determining certain disputes between electricity
licensees and customers; and setting standards of performance for electricity
licensees.
The Regulator exercises concurrently with the Director General of Fair
Trading certain functions relating to monopoly situations under the Fair
Trading Act 1973 and certain functions relating to courses of conduct which
have, or are intended or likely to have, the effect of restricting, distorting
or preventing competition in the generation, transmission or supply of
electricity under the Competition Act 1980.
The Electricity Act requires the Regulator and the Secretary of State to
exercise their functions in the manner each considers is best calculated: to
secure that all reasonable demands for electricity are satisfied; to secure
that license holders are able to finance their licensed activities; and to
promote competition in the generation and supply of electricity.
Subject to these duties, the Secretary of State and the Regulator are
required to exercise their functions in the manner which each considers is
best calculated: to protect the interests of consumers of electricity supplied
by licensed suppliers in respect of price, continuity of supply, and the
quality of electricity supply services; to promote efficiency and economy on
the part of licensed electricity suppliers and the efficient use of
electricity supplied to consumers; to promote research and development by
persons authorized by license to generate, transmit or supply electricity; to
protect the public from the dangers arising from the generation, transmission
or supply of electricity; and to secure the establishment of machinery for
promoting the health and safety of workers in the electricity industry. The
Secretary of State and the Regulator also have a duty to take into account the
effect on the physical environment of activities connected with the
generation, transmission or supply of electricity.
In performing their duties to protect the interests of consumers in respect
of prices and other terms of supply, the Secretary of State and the Regulator
have a duty to take into account in particular the interests of consumers in
rural areas. In performing their duties to protect the interests of consumers
in respect of the quality of electricity supply services, they have a duty to
take into account in particular the interests of those who are disabled or of
pensionable age.
LICENSES
Generation Licenses
Unless covered by an exemption, all electricity generators operating a power
station in Great Britain are required to have a generation license. There are
currently 41 generation license holders in Great Britain. The conditions
attached to a generation license in England and Wales require the holder,
among other things, to comply with a grid code, be a member of the Pool and
submit relevant generating sets for central dispatch. The conditions attached
to generation licenses in Scotland require the holder, among other things, to
comply with a
46
<PAGE>
grid code. Failure to comply with any of the generation license conditions may
subject the licensee to a variety of sanctions, including enforcement orders
by the Regulator, or license revocation if an enforcement order is not
complied with.
PES Licenses
Each of the RECs, Scottish Power and Hydro-Electric has a PES license for
its franchise area and is required, under the Electricity Act, to supply
electricity upon request to any premises in that area, except in specified
circumstances. Each PES is also required not to discriminate between its own
supply business and other users of its distribution system. PESs are subject
to separate price controls on the amounts they may charge for the supply of
electricity to Franchise Supply Customers and in respect of distribution
charges. The PES licenses also require the licensee to procure electricity at
the best price reasonably obtainable having regard to the sources available.
The Regulator has stated that he intends to publish shortly further
information relating to the RECs' performance in relation to their
distribution and supply price controls and that this will include information
about the generation costs which they pass through to Franchise Supply
Customers under the Supply Price Control Formula. The Regulator has also
stated that it is his intention to review the supply price controls applicable
to PESs with a view to proposing possible new controls to take effect on April
1, 1998 when the present franchise supply market will be opened to
competition, and that he may issue a consultation paper on this matter in
August or September 1996.
In England and Wales, each PES license limits the extent of the generation
capacity in which the relevant REC may hold an interest without the prior
consent of the Regulator ("own-generation limits"). These own-generation
limits, expressed in megawatts, currently restrict the participation of a REC
in generation to a level of approximately 15% of the total electricity
consumption in that REC's franchise area. In the case of SWEB, the own-
generation limit is fixed at 400 MW.
The Regulator has stated that it would be reasonable to consider a REC's
request to increase its own-generation limit on condition that it accepted
explicit restrictions on the contracts it signed with its supply business, and
that at a minimum the REC would be prohibited from passing additional own-
generation contracts into its franchise supply market. He considers that an
increase in own-generation limits subject to such restrictions could allow a
REC to contribute more fully to the development of competition in generation
without the allegation that it was exploiting its captive market and local
monopoly position. In June 1996, the Regulator stated that he had indicated to
Eastern Group plc, in the context of its acquisition of 6,000 MW of generating
capacity from National Power and PowerGen, that he would be favorably inclined
to relax the own-generation limits subject to the Regulator and Eastern Group
plc agreeing to license modifications as set out in a consultation paper which
he had published in August 1995.
Second Tier Supply Licenses
Other than a PES in its franchise area and subject to certain other
exceptions, a supplier of electricity to premises in Great Britain must
possess a second tier supply license. Subject to the restrictions described in
"Electricity Supply" above, second tier licensees may compete for the supply
of electricity with one another and with the PES for the relevant area. There
are currently 39 second tier supply license holders for England and Wales and
24 for Scotland.
Transmission Licenses
In England and Wales, NGC is the only transmission license holder. The
transmission license imposes on NGC the obligation to operate the merit order
system for the central dispatch of generating sets and gives NGC
responsibility for the economic purchasing of ancillary services from
generators and suppliers. The transmission
47
<PAGE>
license requires NGC to offer terms on a non-discriminatory basis for the
carrying out of works for connection to, and use of, the transmission system
and for use of the interconnections.
Modifications to Licenses
Subject to a power of veto by the Secretary of State, the Regulator may
modify license conditions with the agreement of the license holder. He must
first publish the proposed modifications and consider representations or
objections made. Following the acquisition of SWEB by the Company, SWEB's PES
license was modified, by agreement, to take into account the fact that the PES
license was now held by a subsidiary company. In particular, the license was
modified to provide that, with few exceptions, the only business activities
which SWEB is permitted to undertake directly are its franchise and second
tier supply businesses and its distribution business. The license now also
requires SWEB to ensure that it has sufficient management and financial
resources and facilities to conduct its supply and distribution businesses and
to comply with its statutory and license obligations. The directors of SWEB
are required to give annual certificates to the Regulator to that effect.
Further, the consent of the Regulator is required for SWEB to create security
over its assets, to incur indebtedness or to give guarantees, unless the
transaction is on normal commercial and arm's length terms and for a
"permitted purpose" (which refers to the supply, distribution or generation
business, or any business conducted by SWEB or its affiliates or related
undertakings (subsidiaries) prior to the take-over). The consent of the
Regulator is also required before SWEB may transfer assets or make loans to
affiliates or related undertakings (subsidiaries). However, various matters,
such as payment of dividends out of distributable reserves, repayments of
capital, and payments on normal commercial and arm's length terms for goods,
services or assets supplied, do not require the consent of the Regulator.
These provisions are subject to an overriding provision in the PES license
which prevents any REC from disposing of (which would include creating a
security interest in) distribution assets.
If the Regulator fails to agree modifications with a license holder, he may
refer a matter relating to generation, transmission or supply of electricity
under a license to the MMC. If the MMC finds that the matter referred to it
has, or may be expected to have, specified effects adverse to the public
interest which could be remedied or prevented by a license modification, the
Regulator is required to make modifications that appear to him requisite for
the purpose of remedying or preventing the adverse effects identified by the
MMC. Modifications to license conditions may also be made by the Secretary of
State as a consequence of monopoly, merger or other competition references
under general UK competition law.
Term and Revocation of Licenses
SWEB's PES license shall continue until at least 2025 unless revoked. Under
ordinary circumstances, the license may not be revoked except on 25 year's
prior notice, which notice may not be given until 2000. Otherwise, the
Secretary of State may revoke a PES license by not less than 30 days' notice
in writing to the licensee in certain specified circumstances including any
failure to comply with a final order of the Regulator requiring the license
holder to comply with its license conditions or requirements.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of July 1, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------------------
<S> <C> <C>
Richard J. Pershing..... 49 Director, Chief Executive Officer
C. B. (Mike) Harreld.... 52 Director, Chief Financial and Accounting Officer
Thomas G. Boren......... 47 Director
Alan W. Harrelson....... 48 Director
Gale E. Klappa.......... 45 Director
C. Philip Saunders...... 44 Director
Charles W. Whitney...... 49 Director
Accentacross Limited.... Director
Mighteager Limited...... Director
</TABLE>
RICHARD J. PERSHING has been a Director of the Company since June 1995 and
Chief Executive Officer since July 1996. From February 1994 to the present,
Mr. Pershing has served as Senior Vice President and International Executive
Officer of Southern Electric, a wholly-owned subsidiary of Southern. From June
1992 to February 1994, he served as Vice President of International Business
Development at Southern Electric. From January 1991 to June 1992, he served as
Vice President of Human Resources at Georgia Power Company ("Georgia Power"),
also a subsidiary of Southern.
C.B. (MIKE) HARRELD has been a Director of the Company since September 1995
and Chief Financial and Accounting Officer of the Company since July 1996. He
has also been the Finance Director of SWEB since September 1995. From February
1986 to August 1995, he served as Vice President, Comptroller and Chief
Accounting Officer of Georgia Power. Prior to joining Georgia Power in 1982,
Mr. Harreld spent 13 years with Arthur Andersen in Atlanta and Missouri. He
graduated from the University of Kentucky in 1966 (BS Commerce with Honors)
and from the University of Missouri in 1967 (MA Accounting with Honors).
THOMAS G. BOREN has been a Director of the Company since July 1995 and
President and Chief Executive Officer of Southern Electric since February
1992. From May 1989 to February 1992, Mr. Boren served as Senior Vice
President of Administration at Georgia Power. From 1981 to May 1989, he held
positions with Georgia Power in power supply, finance and accounting. Mr.
Boren holds a B.S. degree in Industrial Management from the Georgia Institute
of Technology and an M.B.A. degree from Georgia State University.
ALAN W. HARRELSON has been a Director of the Company since September 1995.
From January 1994 to September 1995 Mr. Harrelson served as General Manager,
Northern Region Power Delivery of Georgia Power. From June 1991 to December
1993, he served as Network Underground Manager, Power Delivery of Georgia
Power. Mr. Harrelson holds a bachelor's degree in Industrial Engineering from
Georgia Institute of Technology, 1971, and a Juris Doctor--Atlanta Law School,
1981.
GALE E. KLAPPA has been a Director of the Company since September 1995. From
February 1992 to September 1995 he served as Senior Vice President of
Marketing for Georgia Power. From May 1991 to February 1992, Mr. Klappa served
as Vice President of Southern Company Services, Inc. He graduated cum laude
from the University of Wisconsin-Milwaukee in 1972 with a bachelor's degree in
Mass Communications.
C. PHILIP SAUNDERS has been a Director and Commercial Marketing Director of
the Company since September 1995. From February 1994 to September 1995, he
served as Western Region and Power Marketing Director for US business
development at Southern Electric. From May 1992 to February 1994, Mr. Saunders
was Assistant to the Senior Vice President of Marketing at Georgia Power. He
graduated from Auburn University in 1974 with a bachelor's degree in
Electrical Engineering.
49
<PAGE>
CHARLES W. WHITNEY has been a Director of the Company since July 1995. From
November 1995 to the present, Mr. Whitney has served as Vice President of SEI
Holdings, Inc., also a subsidiary of Southern. From June 1994 to November
1995, he served as Vice President of Southern Electric. From January 1991 to
June 1994, he served as Vice President of Georgia Power.
ACCENTACROSS LIMITED ("ACCENTACROSS") has been a Director of the Company
since July 1996. Robert D. Fagan represents Accentacross at meetings of the
Directors of the Company. Robert D. Fagan has represented Accentacross at
meetings of the Directors of the Company since July 1996. From November 1995
to the present, Mr. Fagan has served as President of PMDC. From April 1989 to
November 1994, he served as Vice President and General Manager of Mission
Energy Company ("Mission Energy"). Mr. Fagan is also currently a Director of
PMDC.
MIGHTEAGER LIMITED ("MIGHTEAGER") has been a Director of the Company since
July 1996. Roger L. Peterson represents Mighteager at meetings of the
Directors of the Company. Roger L. Peterson has represented Mighteager at
meetings of the Directors of the Company since July 1996. From January 1995 to
the present, Mr. Peterson has served as Vice President of PMDC. From October
1986 to December 1994, Mr. Peterson served as Vice President of Mission
Energy.
DIRECTOR AND OFFICER COMPENSATION
Accentacross and Mighteager (the "PMDC Directors") do not receive
compensation for their services as Directors of the Company. The other
officers and directors listed above (such officers and directors, with the
exception of the PMDC Directors, each a "Southern Company system Officer or
Director," as applicable) have received, and will continue to receive,
compensation in respect of services performed by such persons in their
capacities as Southern Company system Officers or Directors of the Company
from Southern Electric, their primary employer and an affiliate of the
Company. The Company is charged by Southern Electric for the time spent by
those Southern Company system Officers and Directors who do not devote their
full time to the affairs of the Company and for a portion of the overhead
costs associated with each such Southern Company system Officer and Director.
The salaries of all Southern Company system Officers and Directors are paid by
Southern Electric, and Southern Electric is reimbursed by the Company, in
accordance with a services agreement between the Company and Southern
Electric. The Southern Company system Officers and Directors receive no cash
or non-cash compensation as a result of these arrangements beyond that which
they would otherwise receive from Southern Electric for the services performed
by them for Southern Electric.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is charged by Southern Electric for the time spent by those
Southern Company system Officers and Directors who do not devote their full
time to the affairs of the Company and for a portion of the overhead costs
associated with each such Southern Company system Officer and Director. The
salaries of all Southern Company system Officers and Directors are paid by
Southern Electric, and Southern Electric is reimbursed by the Company, in
accordance with a services agreement between the Company and Southern
Electric. The Southern Company system Officers and Directors receive no cash
or non-cash compensation as a result of these arrangements beyond that which
they would otherwise receive from Southern Electric for the services performed
by them for Southern Electric.
50
<PAGE>
SECURITY OWNERSHIP
All of the shares of the Company are owned by Holdings. The following table
sets forth, as of July 1, 1996, certain information regarding beneficial
ownership of Holdings' common stock held by each person known by the Company
to own beneficially more than 10% of Holding's outstanding common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS CLASS OF SHARES NUMBER OF SHARES PERCENT OF CLASS
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
The Southern Company......... A Ordinary 150,000(1) 100%
64 Perimeter Center East
Atlanta, Georgia 30346
PP&L Resources, Inc.......... B Ordinary 50,000(2) 100%
11350 Random Hills Road
Suite 800
Fairfax, Virginia 22030
</TABLE>
- --------
(1) Such shares are owned by Southern Electric International-Europe Inc., an
indirect wholly-owned subsidiary of The Southern Company.
(2) Such shares are owned by PMDC UK, an indirect wholly-owned subsidiary of
PP&L Resources, Inc.
The A Ordinary shares and the B Ordinary shares have the same voting rights,
and the only material difference between the A Ordinary shares and the B
Ordinary shares is that the holders of the B Ordinary shares are entitled to a
smaller proportion of dividends paid in respect of earnings during calendar
year ending December 31, 1996 than the holders of the A Ordinary shares.
The following table shows the number of shares of the common stock of
Southern owned by the directors and executive officers of the Company as of
July 1, 1996. It is based on information furnished to the Company by the
directors and executive officers of the Company. The shares owned by all
directors and executive officers as a group constitute less than one percent
of the total number of shares of the respective classes outstanding as of July
1, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TITLE OF SECURITY BENEFICIALLY OWNED (1) (2)
--------------------------- --------------------------
<S> <C> <C>
Carson B. Harreld....... The Southern Company common 2,975
Alan W. Harrelson....... The Southern Company common 13,330
Gale E. Klappa.......... The Southern Company common 24,857
C. Philip Saunders...... The Southern Company common 7,879
Charles W. Whitney...... The Southern Company common 7,015
Thomas G. Boren......... The Southern Company common 17,325
Richard J. Pershing..... The Southern Company common 18,791
Directors and Executive
Officers of the Company
as a group (9 persons)
(3).................... The Southern Company common 92,692
</TABLE>
- --------
(1) "Beneficial ownership" means the sole or shared power to vote, or to
direct the voting of, a security and/or investment power with respect to a
security.
(2) The shares shown include shares of common stock which certain directors
and executive officers have the right to acquire beneficial ownership
within 60 days pursuant to The Southern Company Executive Stock Plan as
follows: Mr. Klappa, 8,544 shares; Mr. Boren, 6,737 shares; and all
directors and executive officers of the Company as a group, 15,281 shares.
(3) The two corporate directors, Accentacross Limited and Mighteager Limited,
do not own any equity securities of the Company or any of its parents or
subsidiaries.
51
<PAGE>
DESCRIPTION OF THE SENIOR NOTES
The Senior Notes are to be issued under and governed by an Indenture, to be
dated as of , 1996 (the "Indenture"), between the Company and Bankers Trust
Company, as trustee (the "Trustee"), a copy of which is filed as an exhibit to
the Registration Statement. The following summaries of certain provisions of
the Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indenture. Copies of the Indenture are available for inspection during normal
business hours at the principal office of the Company and at the office of the
Trustee in the City of New York. The Holders are entitled to the benefits of,
are bound by, and are deemed to have notice of, all the provisions of the
Indenture. Wherever particular sections or defined terms of the Indenture are
referred to, such sections or defined terms are incorporated herein by
reference.
GENERAL
The Indenture does not limit the aggregate principal amount of the debt
securities that may be issued thereunder and provides that debt securities may
be issued from time to time in one or more series. The Senior Notes will
mature on , 2006 and will be limited to US$235,000,000 in aggregate
principal amount. Each Senior Note will bear interest at the rate per annum
shown on the cover page of this Prospectus from , 1996 or from the most
recent interest payment date to which interest has been paid or provided for.
Interest on the Senior Notes will be payable semiannually on and
of each year, commencing on , 1996 until the principal amount has been
paid or made available for payment. Interest on the Senior Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
The principal of and interest on the Senior Notes will be payable in U.S.
dollars or in such other coin or currency of the United States of America as
at the time of payment is legal tender for the payment of public and private
debts.
Application has been made to list the Senior Notes on the Luxembourg Stock
Exchange.
The Senior Notes will be direct, unsecured and unsubordinated obligations of
the Company ranking pari passu with all other unsecured and unsubordinated
obligations of the Company (except those obligations preferred by operation of
law). The Senior Notes will effectively rank junior to any secured
indebtedness of the Company to the extent of the assets securing such
indebtedness and to any indebtedness of the Company's subsidiaries to the
extent of the assets of such subsidiaries. Substantially all of the Company's
consolidated assets other than the stock of SWEB are currently held by the
Company's subsidiaries. The Indenture contains no restrictions on the amount
of additional indebtedness which may be incurred by the Company or its
subsidiaries; however, the Indenture contains certain restrictions on the
ability of the Company and its Significant Subsidiaries to incur secured
indebtedness. See "--Covenants--Limitation on Liens." The ability of the
Company to pay principal and interest on the Senior Notes is, to a large
extent, dependent upon the payment to it of distributions, dividends, interest
or other amounts by SWEB. While the Company does not intend to pay principal
of the Senior Notes out of such amounts, but rather intends to refinance such
principal, its ability to do so will also be, to a large extent, dependent
upon the payment to it of such amounts by SWEB.
DESCRIPTION OF THE BOOK-ENTRY SYSTEM
GENERAL
The Senior Notes will be issued only as a Global Note in bearer form and
will be payable only in US dollars. Title to such Global Note will pass by
delivery. The Global Note will be deposited on issue with Bankers Trust
Company, as book-entry depositary (the "Book-Entry Depositary"), which will
hold the Global Note for the benefit of DTC and its Participants pursuant to
the terms of the deposit agreement (the "Deposit Agreement") dated as of
,1996 among the Company, the Book-Entry Depositary and the holders and
beneficial owners from time to time of interests in the Book-Entry Interest
(as defined below). Pursuant to the Deposit Agreement
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<PAGE>
and an agreement between DTC and the Book-Entry Depositary (the "DTC
Agreement"), the Book-Entry Depositary will issue one or more certificateless
depositary interests (the "Book-Entry Interest"), which together will
represent a 100% interest in the underlying Global Note. Such Book-Entry
Interest will be issued to DTC, which will operate a book-entry system for
interests in the Book-Entry Interest. Unless and until the Global Note is
exchanged in whole for Definitive Registered Notes (as defined below), the
Book-Entry Interest held by DTC may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC or by DTC or any such nominee to a successor of DTC or a nominee of such
successor.
Ownership of interests in the Book-Entry Interest will be limited to
persons, including depositaries for Euroclear and Cedel Bank, that have
accounts with DTC ("Participants") or persons that hold interests through
Participants ("Indirect Participants"). Upon the issuance by the Book-Entry
Depositary of the Book-Entry Interest to DTC, DTC will credit, on its book-
entry registration and transfer system, the Participants' accounts with the
respective interests owned by such Participants. Ownership of interests in the
Book-Entry Interest will be shown on, and the transfer of such interests in
the Book-Entry Interest will be effected only through, records maintained by
DTC (with respect to interests of Participants) and on the records of
Participants (with respect to interests of Indirect Participants). The laws of
some states may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability of such purchasers to own, transfer or pledge interests in
the Book-Entry Interest.
So long as the Book-Entry Depositary, or its nominee, is the Holder of the
Global Note, the Book-Entry Depositary or such nominee, as the case may be,
will be considered the sole Holder of such Global Note (and the Senior Notes)
for all purposes under the Indenture. Except as set forth below under "--
Definitive Senior Notes," Participants or Indirect Participants will not be
entitled to have Senior Notes registered in their names, will not receive or
be entitled to receive physical delivery of Senior Notes in definitive bearer
or registered form and will not be considered the owners or Holders thereof
under the Indenture or the Deposit Agreement. Accordingly, each person owning
an interest in the Book-Entry Interest must rely on the procedures of the
Book-Entry Depositary and DTC and, if such person is not a Participant in DTC,
on the procedures of the Participant through which such person owns its
interest, to exercise any rights and obligations of a Holder under the
Indenture or the Deposit Agreement. See "--Action by Holders of Senior Notes."
In addition to a Paying Agent in the Borough of Manhattan, The City of New
York, the Company will, so long as the Senior Notes are listed on the
Luxembourg Stock Exchange and the rules of such Exchange so require, maintain
a Paying Agent in Luxembourg.
INFORMATION REGARDING DTC, EUROCLEAR AND CEDEL BANK
DTC
DTC has advised the Company as follows: 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 of 1934, as amended
(the "Exchange Act"). DTC holds securities that its Participants deposit with
DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a
number of its Participants and by the New York Stock Exchange Inc. and 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 Participant, either directly or
indirectly. The rules applicable to DTC and its Participants are on file with
the Securities and Exchange Commission (the "Commission").
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<PAGE>
Euroclear and Cedel Bank
Euroclear and Cedel Bank each hold securities for their account holders and
facilitate the clearance and settlement of securities transactions by
electronic book-entry transfer between their respective account holders,
thereby eliminating the need for physical movements of certificates and any
risk from lack of simultaneous transfers of securities.
Euroclear and Cedel Bank provide various services including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Euroclear and Cedel Bank also deal with
domestic securities markets in several countries through established
depositary and custodial relationships. Euroclear and Cedel Bank have
established an electronic bridge between their two systems across which their
respective account holders may settle trades with each other.
Account holders in Euroclear and Cedel Bank are world-wide financial
institutions, including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to Euroclear and
Cedel Bank is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
Account holders' overall contractual relations with Euroclear and Cedel Bank
are governed by the respective rules and operating procedures of Euroclear and
Cedel Bank and any applicable laws. Euroclear and Cedel Bank act under such
rules and operating procedures only on behalf of their respective account
holders and have no record of or relationship with persons holding through
their respective account holders.
The Company understands that under existing industry practices, if either
the Company or the Trustee requests any action of owners of interests in the
Book-Entry Interest or if an owner of an interest in the Book-Entry Interest
desires to give or take any action that a Holder is entitled to give or take
under the Indenture, DTC would authorize the Participants owning the interests
in the Book-Entry Interest to give or take such action, and such Participants
would authorize Indirect Participants to give or take such action or would
otherwise act upon the instructions of such Indirect Participants.
PAYMENTS ON THE SENIOR NOTES
Payments of any amounts in respect of the Global Note will be made through a
Paying Agent to the Book-Entry Depositary, as the Holder thereof. The Book-
Entry Depositary will pay an amount equal to each such payment to DTC, which
will distribute such payments to its Participants.
DTC, upon receipt of any such payment from the Book-Entry Depositary, will
immediately credit Participants' accounts with payments in amounts
proportionate to their respective ownership of interests in the Book-Entry
Interest as shown on the records of DTC. The Company expects that payments by
Participants to owners of interests in the Book-Entry Interest held through
such Participants will be governed by standing customer instructions and
customary practices and will be the responsibility of such Participants.
Neither the Company nor any agent of the Company will have any
responsibility or liability for any aspect relating to payments made or to be
made by the Book-Entry Depositary to DTC in respect of the Senior Notes or the
Book-Entry Interests. None of the Company, the Trustee, the Book-Entry
Depositary or any agent of any of the foregoing will have any responsibility
or liability for any aspect relating to payments made or to be made by DTC on
account of a Participant's or Indirect Participant's ownership of an interest
in the Book-Entry Interest or for maintaining, supervising or reviewing any
records relating to a Participant's or Indirect Participant's interests in the
Book-Entry Interest.
If any Definitive Registered Note has been issued, the interest payable on
such Definitive Registered Note other than at maturity will be paid to the
holder in whose name such Definitive Registered Note is registered at the
close of business on the or (whether or not a Business Day), as the
case may be, immediately preceding the due date for such payment (each a
"Record Date"). The principal of a Definitive Registered Note
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will be payable to the person in whose name such Definitive Registered Note is
registered at the close of business on the immediately preceding Record Date
upon surrendering such Definitive Registered Note. Interest payable at
maturity will be payable to the person to whom principal is payable.
If any Definitive Registered Notes have been issued, payments of interest on
such Definitive Registered Notes to be paid other than at maturity will be
made by check to the person entitled thereto at such person's address
appearing on the Security Register. Payments of any interest on the Definitive
Registered Notes may also be made, in the case of a Holder of at least
US$1,000,000 aggregate principal amount of Senior Notes, by wire transfer to a
US Dollar account maintained by the payee with a bank in the United States;
provided that such Holder elects payment by wire transfer by giving written
notice to the Trustee or a Paying Agent to such effect designating such
account no later than 15 days immediately preceding the relevant due date for
payment (or such other date as the Trustee may accept in its discretion).
Any monies paid by the Company to the Trustee or any Paying Agent, or held
by the Company in trust, for the payment of the principal of or any interest
or Additional Amounts on any Senior Notes and remaining unclaimed at the end
of two years after such principal, interest or Additional Amounts become due
and payable will be repaid to the Company, or released from the trust, upon
its written request, and upon such repayment or release all liability of the
Company, the Trustee and such Paying Agent with respect thereto will cease.
If the due date for payment of principal or any interest installment or any
Additional Amount in respect of any Senior Note is not a Business Day, the
Holder thereof will not be entitled to payment of the amount due until the
next succeeding Business Day and will not be entitled to any further interest
or other payment in respect of any such delay.
All payments to the Book-Entry Depositary in respect of the Global Note,
and all payments to the Holders of the Definitive Registered Notes, if issued,
will be made without deduction or withholding for any UK taxes or other
governmental charges, or if any such deduction or withholding is required to
be made under the provisions of any applicable UK law or regulation, except as
described under "--Additional Amounts," such Additional Amounts will be paid
as may be necessary in order that the net amounts received by any Holder of
the Global Note or of any Definitive Registered Note, after such deduction or
withholding, will equal the net amounts that such Holder would have otherwise
received in respect of the Global Note or of such Definitive Registered Note
absent such deduction or withholding.
REDEMPTION
In the event the Global Note (or a portion thereof) is redeemed, the Book-
Entry Depositary will deliver all amounts received by it in respect of the
redemption of the Global Note to DTC and surrender the Global Note to the
Trustee for cancellation. The redemption price payable in connection with the
redemption of interests in the Book-Entry Interest will be equal to the amount
received by the Book-Entry Depositary in connection with the redemption of the
Global Note (or a portion thereof). For any redemptions of the Global Note in
part, selection of interests in the Book-Entry Interest to be redeemed will be
made by DTC on a pro rata basis (or on such other basis as DTC deems fair and
appropriate); provided that no interest in the Book-Entry Interest of $1,000
principal amount or less shall be redeemed in part. Once redeemed in part, a
new Global Note in the principal amount equal to the unredeemed portion
thereof will be issued and delivered to the Book-Entry Depositary.
TRANSFERS
All transfers of interests in the Book-Entry Interest will be recorded in
accordance with the book-entry system maintained by DTC, pursuant to customary
procedures established by DTC and its Participants. See "--General."
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ACTION BY HOLDERS OF SENIOR NOTES
The Company understands that under existing industry practices, if it
requests any action of Holders of Senior Notes or if an owner of an interest
in the Book-Entry Interest desires to give or take any action that a Holder is
entitled to give or take under the Indenture or the owner of an interest in
the Book-Entry Interest is entitled to give or take under the Deposit
Agreement, DTC would authorize the Participants owning the relevant interest
in the Book-Entry Interest to give or take such action, and such Participants
would authorize Indirect Participants to give or take such action or would
otherwise act upon the instructions of owners of interests in the Book-Entry
Interest holding through them.
As soon as practicable after receipt by the Book-Entry Depositary of notice
of any solicitation of consents or request for a waiver or other action by the
Holders of Senior Notes, the Book-Entry Depositary will mail to DTC a notice
containing (a) such information as is contained in such notice, (b) a
statement that at the close of business on a specified record date DTC will be
entitled to instruct the Book-Entry Depositary as to the consent, waiver or
other action, if any, pertaining to the Senior Notes and (c) a statement as to
the manner in which such instructions may be given. Upon the written request
of DTC, the Book-Entry Depositary shall endeavor insofar as practicable to
take such action regarding the requested consent, waiver or other action in
respect of the Senior Notes in accordance with any instructions set forth in
such request. DTC is expected to follow the procedures described above with
respect to soliciting instructions from its Participants. The Book-Entry
Depositary will not exercise any discretion in the granting of consents or
waivers or the taking of any other action relating to the Deposit Agreement,
the DTC Agreement or the Indenture.
REPORTS AND NOTICES
So long as the Senior Notes are listed on the Luxembourg Stock Exchange and
the rules of the Luxembourg Stock Exchange so require, notices to Holders of
the Senior Notes will, in addition to being sent to the Book-Entry Depositary,
also be published in a leading newspaper having general circulation in
Luxembourg (which is expected to be the Luxemburger Wort). The Book-Entry
Depositary will immediately send to DTC a copy of any notices, reports and
other communications received by it relating to the Company or the Senior
Notes. In the case of Definitive Registered Notes, all notices regarding the
Senior Notes will be mailed to Holders by first-class mail at their respective
addresses as they appear on the registration books of the Registrar.
ACTION BY BOOK-ENTRY DEPOSITARY
Upon the occurrence of an Event of Default with respect to the Senior Notes
or in connection with any other right of the Holder of the Global Note under
the Indenture, if requested in writing by DTC, the Book-Entry Depositary will
take such action as shall be requested in such notice, provided that the Book-
Entry Depositary has been offered reasonable security or indemnity against the
costs, expenses and liabilities that might be incurred by it in compliance
with such request by DTC.
AMENDMENT AND TERMINATION
The Deposit Agreement may be amended by agreement between the Company and
the Book-Entry Depositary, and the consent of DTC shall not be required in
connection with any amendment to the Deposit Agreement (i) to cure any formal
defect, omission, inconsistency or ambiguity in such Deposit Agreement, (ii)
to add to the covenants and agreements of the Company or the Book-Entry
Depositary, (iii) to effect the assignment of the Book-Entry Depositary's
rights and duties to a qualified successor, (iv) to comply with the US
Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act or
the US Investment Company Act of 1940, as amended, or any other applicable
securities laws, (v) to modify the Deposit Agreement in connection with an
amendment to the Indenture that does not require the consent of the Holders of
Senior Notes or (vi) to modify, alter, amend or supplement the Deposit
Agreement in any other respect not inconsistent with such agreement which, in
the opinion of counsel acceptable to the Company, is not materially adverse to
DTC or the beneficial owners of the Book-Entry Interest. No amendment which
materially adversely affects any holder
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or beneficial owner of an interest in the Book-Entry Interest may be made to
the Deposit Agreement without the consent of such holder or beneficial owner.
If Definitive Registered Notes are issued by the Company in exchange for the
entire Global Note, the Book-Entry Depositary, as Holder of the Global Note,
will surrender the Global Note against receipt of the Definitive Registered
Notes and distribute the Definitive Registered Notes to the persons and in the
amounts as specified by DTC, whereupon the Deposit Agreement will terminate
with respect to the Senior Notes. The Deposit Agreement may also be terminated
upon the resignation of the Book-Entry Depositary if no successor has been
appointed within 120 days as set forth under "--Resignation of Book-Entry
Depositary" below. Any Definitive Registered Notes will be issued, if at all,
in accordance with the provisions described under "--Definitive Senior Notes"
below.
RESIGNATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary may at any time resign as Book-Entry Depositary.
If a successor depositary meeting the requirements specified in the Deposit
Agreement has agreed to enter into arrangements with the same effect as the
Deposit Agreement, the Book-Entry Depositary shall deliver the Global Note to
that successor. If no such successor has so agreed within 120 days, the terms
of the Deposit Agreement will oblige the Book-Entry Depositary to request the
Company to issue Definitive Registered Notes. On receipt of such Definitive
Registered Notes, the Book-Entry Depositary will surrender the Global Note and
distribute such Definitive Registered Notes in accordance with the directions
of DTC. The Deposit Agreement will then terminate with respect to the Senior
Notes.
OBLIGATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary will assume no obligation or liability under the
Deposit Agreement or the DTC Agreement other than to act in good faith without
negligence or wilful misconduct in the performance of its duties thereunder.
SETTLEMENT
Initial settlement for the Senior Notes and settlement of any secondary
market trades in the Senior Notes will be made in same-day funds. Interests in
the Book-Entry Interest will settle in DTC's Same-Day Funds Settlement System.
DEFINITIVE SENIOR NOTES
Owners of interests in the Book-Entry Interest will be entitled to request
and receive definitive Senior Notes in registered form ("Definitive Registered
Notes") in respect of such interest if (a) DTC notifies the Company and the
Book-Entry Depositary that it is unwilling to or unable to continue to hold
the Book-Entry Interest or if at any time it ceases to be a "clearing agency"
registered under the Exchange Act and, in either case, a successor is not
appointed by the Company within 120 days or (b) an Event of Default has
occurred and is continuing with respect to the Senior Notes. In addition,
Definitive Registered Notes shall be issued if at any time (x) the Book-Entry
Depositary notifies the Company that it is unwilling or unable to continue as
Book-Entry Depositary with respect to the Global Note and no successor Book-
Entry Depositary is appointed within 120 days or (y) the Company in its sole
discretion determines that Definitive Registered Notes shall be issued.
Definitive Registered Notes so issued will be issued in denominations of
$1,000 or integral multiples thereof and will be issued in registered form
only, without coupons. Such Definitive Registered Notes shall be registered in
the name or names of such person or person as the Book-Entry Depositary shall
notify the Trustee based on the instructions of DTC. It is expected that such
instructions may be based upon directions received by DTC from its
Participants with respect to ownership of beneficial interests in the Book-
Entry Interest.
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PARTICIPANTS AND INDIRECT PARTICIPANTS SHOULD BE AWARE THAT, UNDER CURRENT
UK TAX, LAW, UPON THE ISSUANCE TO SUCH PARTICIPANTS AND INDIRECT PARTICIPANTS
OF DEFINITIVE REGISTERED NOTES, SUCH PARTICIPANTS AND INDIRECT PARTICIPANTS,
AS HOLDERS OF DEFINITIVE REGISTERED NOTES WILL BECOME SUBJECT TO UK INCOME TAX
(CURRENTLY AT THE RATE OF 20%) TO BE WITHHELD ON ANY PAYMENTS OF INTEREST ON
THE SENIOR NOTES AS SET FORTH UNDER "CERTAIN INCOME TAX CONSIDERATIONS--UK
INCOME TAX CONSIDERATIONS." IF SUCH DEFINITIVE REGISTERED NOTES ARE ISSUED
PURSUANT TO THE REQUEST OF A PARTICIPANT OR INDIRECT PARTICIPANT FOLLOWING AN
EVENT OF DEFAULT, THE COMPANY WILL NOT BE OBLIGATED TO PAY ANY ADDITIONAL
AMOUNTS WITH RESPECT TO SUCH DEFINITIVE REGISTERED NOTES.
TRANSFER AND EXCHANGE OF DEFINITIVE SENIOR NOTES
In the event that Definitive Registered Notes are in issue, a Holder may
transfer or exchange the Definitive Registered Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents, and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Senior Notes selected for redemption or for a period of 15 days
before a selection of Senior Notes to be redeemed. Upon the issuance of
Definitive Registered Notes, Holders will be able to transfer and exchange
Definitive Registered Notes at the offices of the Paying and Transfer Agents;
provided that all transfers and exchanges must be effected in accordance with
the terms of the Indenture and, among other things, be recorded in the
Register maintained by the Registrar.
COVENANTS
Except as otherwise set forth under "--Defeasance," below, for so long as
any Senior Notes remain outstanding or any amount remains unpaid on any of the
Senior Notes, the Company will comply with the terms of the covenants set
forth below.
PAYMENT OF PRINCIPAL AND INTEREST
The Company will duly and punctually pay the principal of and interest and
Additional Amounts, if any, on the Senior Notes in accordance with the terms
of the Senior Notes and the Indenture.
MAINTENANCE OF OFFICE OR AGENCY
The Company will maintain (i) in the Borough of Manhattan, The City of New
York, an office or agency of a Paying Agent where the Senior Notes may be paid
and notices and demands to or upon the Company in respect of the Senior Notes
and the Indenture may be served and, if Definitive Registered Notes have been
issued, an office or agency of a Transfer Agent where Senior Notes may be
surrendered for registration of transfer and exchange, and (ii) an office or
agency of a Paying Agent where the Senior Notes may be paid in Luxembourg so
long as the Senior Notes are listed on the Luxembourg Stock Exchange and the
rules of such Exchange so require. The Company will give prompt written notice
to the Trustee of the location, and any change in the location, of any such
office or agency. If at any time the Company shall fail to maintain any
required office or agency or shall fail to furnish the Trustee with the
address thereof, all presentations, surrenders, notices and demands may be
served at the office of the Trustee.
FURTHER ASSURANCES
The Company and the Trustee will execute and deliver all such documents,
instruments and agreements and do or cause to be done all such other acts and
things as may be reasonably required to enable the Trustee to
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exercise and enforce its rights under the Indenture and under the documents,
instruments and agreements required under the Indenture and to carry out the
intent of the Indenture.
COMPLIANCE CERTIFICATES
The Company will deliver to the Trustee within 120 days after the end of
each fiscal year of the Company a certificate from the principal executive,
financial or accounting officer of the Company, stating that in the course of
the performance by each signer of his duties as an officer of the Company he
would normally have knowledge of any default by the Company in the performance
and observance of any of the covenants contained in the Indenture, stating
whether or not he has knowledge of any such default without regard to any
period of grace or requirement of notice and, if so, specifying each such
default of which such signer has knowledge and the nature thereof.
CONSOLIDATION, MERGER, CONVEYANCE, SALE OR LEASE
Nothing contained in the Indenture shall prevent the Company from
consolidating with or merging into another corporation or conveying,
transferring or leasing its properties and assets substantially as an entirety
to any person, provided that (a) the successor entity assumes the Company's
applicable obligations on the Senior Notes and (b) immediately after giving
effect to such transaction no Event of Default, and no event which, after
notice or lapse of time or both, would become an Event of Default, shall have
happened and be continuing.
LIMITATION ON LIENS
Nothing contained in the Indenture in any way restricts or prevents the
Company or any subsidiary of the Company from incurring any indebtedness;
provided that neither the Company nor any Significant Subsidiary (as defined
below) shall issue, assume or guarantee any notes, bonds, debentures or other
similar evidences of indebtedness, in each case for money borrowed ("Debt"),
secured by a mortgage, lien, pledge, security interest or other encumbrance
("Lien") upon any property or assets (other than cash) without effectively
providing that the outstanding Senior Notes (together with, if the Company so
determines, any other indebtedness or obligation then existing or thereafter
created ranking equally with the Senior Notes) shall be secured equally and
ratably with (or prior to) such Debt so long as such Debt shall be so secured;
provided, however, that the term Lien shall not mean any easements, rights-of-
way, restrictions and other similar encumbrances and encumbrances consisting
of zoning restrictions, leases, subleases, licenses, sublicenses, restrictions
on the use of property or defects in the title thereto. The foregoing
restriction or Liens will not, however, apply to:
(a) Liens in existence on the date of original issue of the Senior Notes;
(b) (i) any Lien created or arising over any property which is acquired,
constructed or created by the Company or any of its Significant
Subsidiaries, but only if (A) such Lien secures only principal amounts (not
exceeding the cost of such acquisition, construction or creation) raised
for the purposes of such acquisition, construction or creation, together
with any costs, expenses, interest and fees incurred in relation thereto or
a guarantee given in respect thereof, (B) such Lien is created or arises on
or before 90 days after the completion of such acquisition, construction or
creation and (C) such Lien is confined solely to the property so acquired,
constructed or created; or (ii) any Lien to secure indebtedness for
borrowed money incurred in connection with a specifically identifiable
project where the Lien relates to a property (including, without
limitation, shares or other rights of ownership in the entity(ies) which
own such property or project) involved in such project and acquired by the
Company or a Significant Subsidiary after the date of original issue of the
Senior Notes and the recourse of the creditors in respect of such
indebtedness is limited to any or all of such project and property
(including as aforesaid);
(c) any Lien securing amounts not more than 90 days overdue or otherwise
being contested in good faith;
(d) (i) rights of financial institutions to offset credit balances in
connection with the operation of cash management programs established for
the benefit of the Company and/or a Significant Subsidiary or in
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connection with the issuance of letters of credit for the benefit of the
Company and/or a Significant Subsidiary; (ii) any Lien securing
indebtedness of the Company and/or a Significant Subsidiary for borrowed
money incurred in connection with the financing of accounts receivable;
(iii) any Lien incurred or deposits made in the ordinary course of
business, including, but not limited to, (A) any mechanics', materialmen's,
carriers', workmen's, vendors' or other like Liens and (B) any Liens
securing amounts in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) any Lien upon specific
items of inventory or other goods and proceeds of the Company and/or a
Significant Subsidiary securing obligations of the Company and/or a
Significant Subsidiary in respect of bankers' acceptances issued or created
for the account of such person to facilitate the purchase, shipment or
storage of such inventory or other goods; (v) any Lien incurred or deposits
made securing the performance of tenders, bids, leases, trade contracts
(other than for borrowed money), statutory obligations, surety bonds,
appeal bonds, government contracts, performance bonds, return-of-money
bonds and other obligations of like nature incurred in the ordinary course
of business; (iv) any Lien created by the Company or a Significant
Subsidiary under or in connection with or arising out of any pooling and
settlement agreements or pooling and settlement arrangements of the
electricity industry or any transactions or arrangements entered into in
connection with the hedging or management of risks relating to the
electricity industry; (vii) any Lien constituted by a right of set off or
right over a margin call account or any form of cash or cash collateral or
any similar arrangement for obligations incurred in respect of the hedging
or management of risks under transactions involving any currency or
interest rate swap, cap or collar arrangements, forward exchange
transaction, option, warrant, forward rate agreement, futures contract or
other derivative instrument of any kind; (viii) any Lien arising out of
title retention or like provisions in connection with the purchase of goods
and equipment in the ordinary course of business; and (ix) any Lien
securing reimbursement obligations under letters of credit, guaranties and
other forms of credit enhancement given in connection with the purchase of
goods and equipment in the ordinary course of business;
(e) Liens in favor of the Company or a Significant Subsidiary;
(f) (i) Liens on any property or assets acquired from a corporation which
is merged with or into the Company or a Significant Subsidiary, or any
Liens on the property or assets of any corporation or other entity existing
at the time such corporation or other entity becomes a subsidiary of the
Company and, in either such case, is not created in anticipation of any
such transaction (unless such Lien was created to secure or provide for the
payment of any part of the purchase price of such corporation); (ii) any
Lien on any property or assets existing at the time of acquisition thereof
and which is not created in anticipation of such acquisition (unless such
Lien was created to secure or provide for the payment of any part of the
purchase price of such property or assets); and (iii) any Lien created or
outstanding on or over any asset of any company which becomes a Significant
Subsidiary on or after the date of the issuance of the Senior Notes where
such Lien is created prior to the date on which such company becomes a
Significant Subsidiary;
(g) Liens required by any contract or statute in order to permit the
Company or a Significant Subsidiary to perform any contract or subcontract
made by it with or at the request of a governmental entity or any
department, agency or instrumentality thereof, or to secure partial,
progress, advance or any other payments by the Company or a Significant
Subsidiary to such governmental unit pursuant to the provisions of any
contract or statute; (ii) any Lien securing industrial revenue, development
or similar bonds issued by or for the benefit of the Company or a
Significant Subsidiary, provided that such industrial revenue, development
or similar bonds are nonrecourse to the Company and/or such Significant
Subsidiary; and (iii) any Lien securing taxes or assessments or other
applicable governmental charges or levies;
(h) (i) any Lien which arises pursuant to any order of attachment,
distraint or similar legal process arising in connection with court
proceedings and any Lien which secures the reimbursement obligation for any
bond obtained in connection with an appeal taken in any court proceeding,
so long as the execution or other enforcement of such Lien arising pursuant
to such legal process is effectively stayed and the claims secured thereby
are being contested in good faith and, if appropriate, by appropriate legal
proceedings, or any Lien in favor of a plaintiff or defendant in any action
before a court or tribunal as security for costs
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and/or expenses; or (ii) any Lien arising by operation of law or by order
of a court or tribunal or any Lien arising by an agreement of similar
effect, including, without limitation, judgment Liens; or
(i) any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, or any Liens referred to
in the foregoing clauses, for amounts not exceeding the principal amount of
the Debt secured by the Lien so extended, renewed or replaced, provided
that such extension, renewal or replacement Lien is limited to all or a
part of the same property, shares and/or stock of the Company and/or a
subsidiary of the Company that secured the Lien extended, renewed or
replaced (plus improvements on such property).
Notwithstanding the foregoing, the Company and/or a Significant
Subsidiary may create or permit to subsist Liens over any property, shares
and/or stock so long as the aggregate amount of Debt secured by all such
Liens (excluding therefrom the amount of Debt secured by Liens set forth in
clauses (a) through (i), inclusive, above) does not exceed 10% of the
consolidated net tangible assets of the Company and its subsidiaries on a
consolidated basis.
"Significant Subsidiary" means, at any particular time, any subsidiary of
the Company whose gross assets or gross revenues (having regard to the
Company's direct and/or indirect beneficial interest in the shares, or the
like, of that subsidiary) represent at least 25% of the consolidated gross
assets or, as the case may be, consolidated gross revenues of the Company
and its subsidiaries on a consolidated basis.
Consolidated net tangible assets is defined in the Indenture as the total
of all assets (including revaluations thereof as a result of commercial
appraisals, price level restatement or otherwise) appearing on a
consolidated balance sheet of the Company and the Significant Subsidiaries,
net of applicable reserves and deductions, but excluding goodwill, trade
names, trademarks, patents, unamortized debt discount and all other like
intangible assets (which term shall not be construed to include such
revaluations), less the aggregate of the current liabilities of the Company
and the Significant Subsidiaries appearing on such balance sheet.
LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS
The Indenture provides that, so long as any of the Senior Notes remain
outstanding, neither the Company nor any Significant Subsidiary shall enter
into any arrangement with any person providing for the leasing by the Company
or a Significant Subsidiary of any assets which have been or are to be sold or
transferred by the Company or such Significant Subsidiary to such person (a
"Sale and Lease-Back Transaction") unless: (i) such transaction involves a
lease for a temporary period not to exceed three years; (ii) such transaction
is between the Company or a Significant Subsidiary and an affiliate of the
Company; (iii) the Company would be entitled to incur indebtedness secured by
a Lien on the assets or property involved in such transaction at least equal
in amount to the attributable debt with respect to such Sale and Lease-Back
Transaction, without equally and ratably securing the Senior Notes, pursuant
to "--Limitation on Liens" above, other than pursuant to the penultimate
paragraph thereof; (iv) such transaction is entered into within 60 days after
the initial acquisition by the Company of the assets or property subject to
such transaction; (v) after giving effect thereto, the aggregate amount of all
attributable debt with respect to all such Sale and Lease-Back Transactions
does not exceed 10% of consolidated net tangible assets of the Company and its
subsidiaries on a consolidated basis; or (vi) the Company or a Significant
Subsidiary within the 12 months preceding the sale or transfer or the 12
months following the sale or transfer, regardless of whether such sale or
transfer may have been made by the Company or such Significant Subsidiary, as
the case may be, applies, in the case of a sale or transfer for cash, an
amount equal to the net proceeds thereof and, in the case of a sale or
transfer otherwise than for cash, an amount equal to the fair value of the
assets so leased at the time of entering into such arrangement (as determined
by the Board of Directors of the Company or such Significant Subsidiary, as
the case may be), (a) to the retirement of indebtedness for money borrowed,
incurred or assumed by the Company or a Significant Subsidiary, as the case
may be, which by its terms matures at, or is extendible or renewable at the
option of the obligor to, a date more than 12 months after the date of
incurring, assuming or guaranteeing such debt or (b) to investment in any
assets of the Company or a Significant Subsidiary, as the case may be.
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MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of a majority in aggregate in principal amount
of the outstanding Senior Notes, to modify the Indenture or any supplemental
indenture or the rights of the Holders of the Senior Notes; provided that no
such modification shall without the consent of each Holder of Senior Notes (a)
change the stated maturity upon which the principal of or the interest on the
Senior Notes is due and payable, (b) reduce the principal amount thereof or
the rate of interest thereon, (c) change any obligation of the Company to pay
Additional Amounts, (d) change any place of payment or the currency in which
the Senior Notes or the interest thereon is payable, (e) impair the right to
institute suit for the enforcement of any such payment on or after the stated
maturity thereof (or, in the case of redemption, on or after the redemption
date), (f) reduce the percentage in principal amount of the outstanding Senior
Notes, the consent of whose Holders is required for any waiver of compliance
with certain provisions of the Indenture or certain defaults thereunder and
their consequences provided for in the Indenture, (g) reduce the requirements
contained in the Indenture for quorum or voting or (h) modify certain
provisions of the Indenture. The Indenture provides that Senior Notes owned by
the Company or any of its Affiliates shall be deemed not to be outstanding
for, among other purposes, consenting to any such modification.
The Indenture also contains provisions permitting the Company and the
Trustee to amend the Indenture in certain circumstances without the consent of
the Holders of any Senior Notes to cure any ambiguity, to correct or
supplement any provision therein which may be defective or inconsistent with
any other provision therein, to evidence the merger of the Company or the
replacement of the Trustee and to make any other changes that do not
materially adversely affect the rights of any Holders of Senior Notes.
EVENTS OF DEFAULT
An Event of Default with respect to the Senior Notes is defined in the
Indenture as being: (a) default for 30 days in payment of any interest or any
Additional Amounts on the Global Note or the Definitive Registered Notes; (b)
default in payment of principal of the Global Note or the Definitive
Registered Notes; (c) material default in the performance, or material breach,
of any covenant or obligation of the Company in the Indenture and continuance
of such material default or breach for a period of 60 days after written
notice is given to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in aggregate principal amount of the
Senior Notes; (d) default in the payment of the principal of any bond,
debenture, note or other evidence of indebtedness, in each case for money
borrowed, or in the payment of principal under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed, of the Company or any
Significant Subsidiary which default for payment of principal is in an
aggregate principal amount exceeding US$50,000,000 (or its equivalent in any
other currency or currencies) when such indebtedness becomes due and payable
(whether at maturity, upon redemption or acceleration or otherwise), if such
default shall continue unremedied or unwaived for more than 30 Business Days
and the time for payment of such amount has not been expressly extended; and
(e) the failure of the Company or a Significant Subsidiary generally to pay
its debts as they become due, or the admission in writing of its inability to
pay its debts generally, or the making of a general assignment for the benefit
of its creditors, or the institution of any proceeding by or against the
Company or a Significant Subsidiary (other than any such proceeding brought
against the Company or a Significant Subsidiary that is dismissed within 180
days from the commencement thereof) seeking to adjudicate it bankrupt or
insolvent, or seeking liquidation (other than a solvent liquidation), winding
up, reorganization, arrangement, adjustment, protection, relief or composition
of it or its debts under any law relating to bankruptcy, insolvency,
reorganization, moratorium or relief of debtors, or seeking the entry of an
order for relief or appointment of an administrator, receiver, trustee,
intervenor or other similar official for it or for any substantial part of its
property, or the taking of any action by the Company or a Significant
Subsidiary to authorize any of the actions set forth in this subparagraph (e).
If an Event of Default with respect to the Senior Notes shall occur and be
continuing, either the Trustee or the Holders of at least 25% in aggregate
principal amount of the Senior Notes may declare the principal amount of the
Senior Notes, and any interest accrued thereon, to be due and payable
immediately. At any time after such
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declaration of acceleration has been made, but before a judgment or decree for
payment of money has been obtained, if all Events of Default have been cured
(other than the non-payment of principal of the Senior Notes which has become
due solely by reason of such declaration of acceleration) then such
declaration of acceleration shall be automatically annulled and rescinded.
No holder of the Senior Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to the Indenture, or for the
appointment of a receiver or trustee, or for any other remedy thereunder,
unless (a) such holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Senior Notes and (b) the
Holders of not less than 25% in principal amount of the Senior Notes shall
have made written request to the Trustee to institute proceedings in respect
of such Event of Default in its own name as Trustee.
ADDITIONAL AMOUNTS
All payments of principal and interest in respect of the Global Note and the
Definitive Registered Notes shall be made free and clear of, and without
withholding or deduction for or on account of, any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed,
levied, collected, withheld or assessed by or within the UK or by or within
any political subdivision thereof or any authority therein or thereof having
power to tax ("UK Taxes"), unless such withholding or deduction is required by
law. In the event of any such withholding or deduction the Company shall pay
to the relevant Holder of the Global Note or to the relevant Holders of the
Definitive Registered Notes, as the case may be, such additional amounts
("Additional Amounts") as will result in the payment to each such Holder of
the amount that would otherwise have been receivable by such Holder in the
absence of such withholding or deduction, except that no such Additional
Amounts shall be payable:
(a) to, or to a Person on behalf of, a Holder who is liable for such UK
Taxes in respect of the Senior Notes by reason of such Holder having some
connection with the UK other than the mere holding of a Senior Note or the
receipt of principal and interest in respect thereof;
(b) to, or to a Person on behalf of, a Holder who presents a Senior Note
(where presentation is required) for payment more than 30 days after the
Relevant Date (as defined below) except to the extent that such Holder
would have been entitled to such Additional Amounts on presenting such
Senior Note for payment on the last day of such period of 30 days;
(c) to, or to a Person on behalf of, a Holder who presents a Senior Note
(where presentation is required) in the United Kingdom;
(d) to, or to a Person on behalf of, a Holder who would not be liable or
subject to the withholding or deduction by making a declaration of non-
residence or similar claim for exemption to the relevant tax authority; or
(e) to, or to a Person on behalf of, a Holder who requests a Definitive
Registered Note following an Event of Default.
"Relevant Date" means whichever is the later of (i) the date on which such
payment first becomes due and (ii) if the full amount payable has not been
received in The City of New York by the Book-Entry Depositary or the Trustee
on or prior to such due date, the date on which, the full amount having been
so received, notice to that effect shall have been given to the Holders in
accordance with the Indenture.
OPTIONAL REDEMPTION
The Senior Notes will be redeemable in whole or in part, at the option of
the Company at any time, at a redemption price equal to the greater of (i)
100% of the principal amount of the Senior Notes being redeemed or (ii) the
sum of the present values of the remaining scheduled payments of principal of
and interest on the Senior Notes being redeemed discounted to the date of
redemption on a semi-annual basis (assuming a 360-day year
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consisting of twelve 30-day months) at a discount rate equal to the Treasury
Yield plus basis points, plus, for (i) or (ii) above, whichever is
applicable, accrued interest on the Senior Notes to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed
as a percentage of its principal amount) equal to the Comparable Treasury
Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable
to the remaining term of such Senior Notes to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the Senior Notes.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for US
Government Securities" or (ii) if such release (or any successor release) is
not published or does not contain such prices on such business day, the
Reference Treasury Dealer Quotation for such redemption date.
"Independent Investment Banker" means an independent investment banking
institution of national standing appointed by the Company and reasonably
acceptable to the Trustee.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount and quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such redemption date).
"Reference Treasury Dealer" means a primary US Government securities dealer
in New York City (a "Primary Treasury Dealer") appointed by the Company and
reasonably acceptable to the Trustee.
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not less than 15 days nor more than 30 days prior to the date fixed for
redemption.
If fewer than all the Senior Notes are to be redeemed, selection of Senior
Notes for redemption will be made by the Trustee in any manner the Trustee
deems fair and appropriate and that complies with applicable legal and
securities exchange requirements.
Unless the Company defaults in payment of the redemption price, from and
after the redemption date, the Senior Notes or portions thereof called for
redemption will cease to bear interest, and the holders thereof will have no
right in respect to such Senior Notes except the right to receive the
redemption price thereof.
OPTIONAL TAX REDEMPTION
If (a) the Company satisfies the Trustee prior to the giving of a notice as
provided below that it has or will become obliged to pay Additional Amounts as
a result of either (x) any change in, or amendment to, the laws or regulations
of the UK or any political subdivision or any authority or agency thereof or
therein having power to tax or levy duties, or any change in the application
or interpretation of such laws or regulations, which change or amendment
becomes effective on or after the date of this Prospectus or (y) the issuance
of Definitive Registered Notes pursuant to clause (a) or clause (x) of "--
Definitive Senior Notes" above, and (b) such obligation cannot be avoided by
the Company taking reasonable measures available to it, the Company may, at
its option, on giving not more than 30 nor less than 15 days' notice to the
Holders, redeem all, but not some only, of the Senior Notes,
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in each case at their principal amount, together with accrued and unpaid
interest, provided that no such notice of redemption shall be given earlier
than 90 days prior to the earliest date on which the Company would be obliged
to pay such Additional Amounts were a payment in respect of the Senior Notes
then due. Prior to the publication of any notice of redemption pursuant to
this paragraph, the Company shall deliver to the Trustee a certificate signed
by a director of the Company stating that the obligation referred to in (a)
above cannot be avoided by the Company taking reasonable measures available to
it, and the Trustee shall accept such certificate as sufficient evidence of
the satisfaction of the condition precedent set out in (b) above, in which
event it shall be conclusive and binding on the Holders.
In the event the Global Note is redeemed in whole or in part pursuant to
this provision or "Optional Redemption" above, the Book-Entry Depositary will
redeem, from the amount received by it in respect of the redemption of the
Global Note, an equal amount of the Book-Entry Interest issued to DTC. The
redemption price payable in connection with the redemption of Book-Entry
Interest will be equal to the amount received by the Book-Entry Depositary in
connection with the redemption of the Global Note.
DEFEASANCE
The Company, at its option, (a) will be discharged from any and all
obligations in respect of the Senior Notes (except in each case for certain
obligations, including to register the transfer or exchange of Senior Notes,
replace stolen, lost or mutilated Senior Notes, maintain paying agencies and
hold moneys for payment in trust) or (b) need not comply with certain
covenants of the Indenture described under "Limitation on Consolidation,
Merger, Conveyance, Sale or Lease", "Limitation on Liens" and "Limitation on
Sale and Lease-Back Transactions" in each case, if the Company irrevocably
deposits with the Trustee, in trust, (i) money or (ii) in certain cases, (A)
U.S. government obligations which through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount, or (B) a combination thereof, in each case sufficient to pay and
discharge the principal and interest on the outstanding Senior Notes on the
dates such payments are due in accordance with the terms of the Senior Notes
(or if the Company has designated a redemption date pursuant to the final
sentence of this paragraph, to and including the redemption date so designated
by the Company), and no Event of Default or event which with notice or lapse
of time would become an Event of Default (including by reason of such deposit)
with respect to the Senior Notes shall have occurred and be continuing on the
date of such deposit. To exercise any such option, the Company is required to
deliver to the Trustee (x) an opinion of counsel (who may be counsel to the
Company) to the effect that the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit, defeasance
and discharge, which in the case of (a) must be based on a change in law or a
ruling by the U.S. Internal Revenue Service, and (y) an Officers' Certificate
as to compliance with all conditions precedent provided for in the Indenture
relating to the satisfaction and discharge of the Senior Notes. If the Company
has deposited or caused to be deposited money or U.S. government obligations
to pay or discharge the principal of and interest, if any, on the outstanding
Senior Notes to and including the redemption date on which all of the
outstanding Senior Notes are to be redeemed, such redemption date shall be
irrevocably designated by a board resolution delivered to the Trustee on or
prior to the date of deposit of such money or U.S. government obligations, and
such board resolution shall be accompanied by an irrevocable request that the
Trustee give notice of such redemption in the name and at the expense of the
Company not less than 15 nor more than 30 days prior to such redemption date
in accordance with the Indenture.
GOVERNING LAW; SUBMISSION TO JURISDICTION
The Indenture and the Senior Notes will be governed by, and construed in
accordance with, the laws of the State of New York.
Any suit, action or proceeding against the Company or its properties, assets
or revenues with respect to the Indenture or a Senior Note may be brought in
the Supreme Court of the State of New York, County of New York or in the
United States District Court for the Southern District of New York. The
Company has submitted to the non-exclusive jurisdiction of such courts for the
purposes of any such proceeding and has irrevocably waived, to the fullest
extent it may effectively do so, any objection to the laying of venue of any
such proceeding in any such court and the defense of an inconvenient forum.
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CERTAIN INCOME TAX CONSIDERATIONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS INCLUDED HEREIN SOLELY FOR
INFORMATIONAL PURPOSES. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED
TO BE, LEGAL OR TAX ADVICE. NO REPRESENTATION WITH RESPECT TO THE CONSEQUENCES
TO ANY PARTICULAR PURCHASER OF THE BOOK-ENTRY INTEREST IS MADE. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES AND THE EFFECTS OF STATE, LOCAL OR FOREIGN LAWS,
INCLUDING UK TAX LAWS TO WHICH THEY MAY BE SUBJECT.
UK INCOME TAX CONSIDERATIONS
The comments below are of a general nature based on current UK law and
Inland Revenue practice. They relate only to the position of persons who are
the absolute beneficial owners of their Senior Notes and related interest and
may not apply to certain classes of persons such as dealers. Any holders of
Senior Notes who are in doubt as to their tax position should consult their
professional advisers.
PAYMENTS ON THE SENIOR NOTES
For UK tax purposes, while the Senior Notes remain represented by the Global
Note in bearer form and continue to be listed on the Luxembourg Stock Exchange
or some other stock exchange recognized by the UK Inland Revenue, payments of
interest (whether on the Global Note to the Book-Entry Depositary or the Book-
Entry Interest to DTC) may be made without withholding or deduction for or on
account of UK income tax for so long as the Company's paying agent and the
Book-Entry Depositary, if different, are outside the UK.
In other cases, and in particular if Definitive Registered Notes are issued,
interest will be paid after deduction of UK income tax (currently at the lower
rate of 20%). A US holder will normally be eligible to recover in full any UK
tax withheld from payments of interest to which such holder is beneficially
entitled by making a claim under the US/UK Double Tax Treaty on the
appropriate form. Alternatively, a claim may be made by a US holder in advance
of a payment of interest. If the claim is accepted by the Inland Revenue, they
will authorize subsequent payments to that US holder to be made without
withholding of UK income tax. Claims for repayment must be made within six
years of the end of the UK year of assessment (generally April 5 in each year)
to which the interest relates and must be accompanied by the original
statement provided by the Company when the interest payment was made showing
the amount of UK income tax deducted. Because a claim is not considered until
the UK tax authorities receive the appropriate form from the Internal Revenue
Service, forms should be sent to the Internal Revenue Service, in the case of
an advance claim, well before the relevant interest payment date or, in the
case of a claim for the repayment of the tax, well before the end of the
appropriate limitation period.
Holders in other jurisdictions may be entitled to a refund of any UK income
tax deducted or withheld or to make a claim for interest on the Senior Notes
to be paid without, or subject to a reduced rate of, deduction or withholding
under the provisions of an applicable double tax treaty.
Refund of all or part of any UK income tax deducted or withheld may,
depending on individual circumstances, be available to a holder of Senior
Notes who is resident in the UK or who carries on a trade, profession or
vocation in the UK through a branch or agency to which the Senior Notes are
attributable, or who is a Commonwealth citizen or otherwise entitled to a UK
personal allowance.
Holders should be aware that under current UK tax law upon the issuance of
Definitive Registered Notes such holders may become subject to UK withholding
tax on any payments of interest with respect to such Senior Notes. However,
such holders will be entitled to the payment of Additional Amounts in respect
of the tax withheld, except as set forth under "Description of the Senior
Notes--Additional Amounts," and subject to the
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right of the Company in certain circumstances to redeem the Senior Notes
early. See "Description of the Senior Notes--Optional Tax Redemption."
Interest on the Senior Notes constitutes UK source income for tax purposes
and, as such, may be subject to UK income tax by direct assessment even where
paid without deduction or withholding.
However, interest from a UK source received by persons not regarded as
resident in the UK for tax purposes will normally be limited to the tax, if
any, deducted at source on payment of such interest. This will not apply if
interest is received by a Holder who is not resident for tax purposes in the
UK if that Holder carries on a trade, profession or vocation in the UK through
a UK branch or agency in connection with which the interest is received or to
which the Senior Notes are attributable. There are exemptions for interest
received by certain categories of agent (such as some brokers and investment
managers).
UK CORPORATION TAXPAYERS
In general Holders which are within the charge to UK corporation tax will be
charged to tax on all returns on and fluctuations in value of the Senior Notes
broadly in accordance with their statutory accounting treatment. Such Holders
will generally be charged to tax in each accounting period by reference to
interest and discount accrued in that period.
Any gains or losses on Senior Notes held by UK resident corporate Holders or
certain other Holders who are within the charge to UK corporation tax, which
are attributable to fluctuations in the value of US dollars relative to, in
most cases sterling, will, subject to reliefs and exclusions contained in the
relevant legislation, be included in the calculation of such Holders' taxable
income on an accruals basis for each accounting period during which the Senior
Notes are held. Any gain or loss arising on a disposal (including redemption)
of such Senior Notes would be outside the scope of UK taxation of chargeable
gains.
OTHER UK TAX PAYERS
Taxation of Chargeable Gains
A disposal of Senior Notes by an individual Holder who is resident or
ordinarily resident in the UK, or who carries on a trade, profession or
vocation in the UK through a branch or agency to which the Senior Notes are
attributable, may give rise to a chargeable gain or allowable loss for the
purposes of the UK taxation of chargeable gains.
Accrued Income Scheme
On a disposal of Senior Notes by a Holder, any interest which has accrued
since the last interest payment date may be chargeable to tax as income if
that Holder is resident or ordinarily resident in the UK or carries on a trade
in the UK through a branch or agency to which the Senior Notes are
attributable.
Taxation of discount
Based on the Company's understanding of the Inland Revenue's practice in
this area, it is considered that the Senior Notes will not be treated as
constituting "relevant discounted securities" for the purposes of Schedule 13
of the Finance Act 1996. Therefore, individual Holders who are within the
scope of UK income tax as described above should not be liable to UK income
tax on gains made on sales or other disposals (including redemption) of the
Senior Notes.
UK STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK Stamp Duty or Stamp Duty Reserve Tax is payable on the issue or
transfer by delivery of a Senior Note or on its redemption.
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US FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material US federal income tax
consequences of the acquisition, ownership and disposition of Senior Notes to
initial purchasers who are US citizens or residents, corporations,
partnerships or other entities created or organized in or under the laws of
the US or any state thereof, or an estate or trust, the income of which is
subject to US federal income taxation regardless of its source, and who are
residents in the US and not resident in the UK for purposes of the current
double taxation convention between the US and the UK ("US Holders") and who
hold their beneficial interests in the Senior Notes as capital assets. The
discussion is based upon the provisions of the US Internal Revenue Code of
1986, as amended (the "Code"), regulations, rulings and judicial decisions now
in effect, all of which are subject to change, possibly with retroactive
effect. The summary does not discuss all aspects of US federal income taxation
that may be relevant to particular investors in light of their particular
investment circumstances, nor does it discuss any aspects of state, local or
foreign tax laws or any estate or gift tax considerations. The summary does
not deal with non-US persons or with certain classes of US persons subject to
special treatment under the US federal income tax laws (for example, dealers
in securities, banks, life insurance companies or tax-exempt organizations).
In addition, because the tax consequences may differ depending on individual
circumstances, each prospective purchaser of the Senior Notes is strongly
urged to consult his own tax advisor with respect to his particular tax
situation.
PAYMENTS OF INTEREST
Except as set forth below, interest on the Senior Notes generally will be
taxable to a US Holder as ordinary income from US sources at the time it is
received or accrued in accordance with the US Holder's method of accounting
for US federal income tax purposes. In addition, if any Additional Amounts are
paid, such payment will be taxable as ordinary income in accordance with such
US Holder's method of accounting. Thus, a US Holder will be required to report
income in an amount greater than the cash it receives in respect of payments
on its Senior Notes. However, a US Holder, subject to certain limitations, may
be eligible to claim as a credit or deduction for purposes of computing its US
federal income tax liability UK Taxes withheld (if any). For that purpose,
interest income and the Additional Amounts will generally be treated as
foreign source passive income (or, in the case of certain US Holders,
financial services income). The rules relating to foreign tax credits are
extremely complex, and US Holders should consult with their own tax advisors
with regard to the availability of a foreign tax credit and the application of
the foreign tax credit to their particular situation.
SALE OR OTHER TAXABLE DISPOSITION OF THE SENIOR NOTES
A US Holder's tax basis in the Senior Notes will, in general, be the US
Holder's cost therefor. A US Holder will recognize gain or loss on the sale,
exchange, redemption or other taxable disposition of the Senior Notes, equal
to the difference (if any) between the amount realized upon the sale, exchange
or retirement (converted into US dollars if any foreign currency is received)
and the adjusted tax basis of the Senior Notes. Such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if, at the
time of sale, exchange or retirement, the Senior Notes have been held for more
than one year. Under current law, net capital gains are, in certain
circumstances, taxed at lower rates than ordinary income. The deductibility of
capital losses is subject to limitations. If the US dollar is not the
functional currency of the US Holder, such Holder may recognize ordinary gain
or loss due to the currency exchange fluctuation.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, a US Holder may be subject, under certain circumstances, to
US backup withholding at a 31% rate with respect to payments by the Company or
any of its paying agents of interest or the gross proceeds of dispositions
thereof. This withholding only applies if the US Holder fails to furnish a
correct social security or other taxpayer identification number to the
Company, fails to report interest income in full or fails to certify to the
Company that such US Holder has provided a correct taxpayer identification
number and that such US Holder is not subject to withholding, the Company is
required to withhold a 31% federal backup withholding tax
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on certain amounts paid to the US Holder. Special rules may apply with respect
to the payment of the proceeds from the sale of the Senior Notes to or through
foreign offices of certain brokers.
The backup withholding tax is not an additional tax and may be credited
against a US Holder's regular US federal income tax liability or refunded by
the IRS where applicable.
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UNDERWRITING
Upon the terms and conditions set forth in the Underwriting Agreement, dated
the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company has agreed to sell to such Underwriters, the
principal amount of the Senior Notes set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NAME PRINCIPAL AMOUNT OF THE SENIOR NOTES
---- ------------------------------------
<S> <C>
Lehman Brothers Inc................... US$
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................
J.P. Morgan Securities Inc............
--------------
Total............................. US$235,000,000
==============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Notes
being sold pursuant to the Underwriting Agreement if any of the Senior Notes
being sold pursuant to the Underwriting Agreement are purchased.
The Underwriters have advised the Company that the Underwriters propose to
offer the Senior Notes to the public initially at the public offering price
set forth on the cover page of this Prospectus and to selected dealers at such
price less a concession of not more than % of the principal amount of the
Senior Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of the principal amount of the Senior Notes
to certain other dealers. After the initial offering, the offering price and
other selling terms may be changed by the Underwriters.
The Senior Notes represent a new issue of securities. If the Senior Notes
are traded after their initial issuance, they may trade at a discount from
their initial public offering price depending upon prevailing interest rates,
the market for similar securities and other factors. In addition, no assurance
can be given that a holder of Senior Notes will be able to sell such Senior
Notes in the future or that such sale will be at a price equal to or higher
than the initial public offering price of such Senior Notes.
Although the Underwriters have informed the Company that they currently
intend to make a market in the Senior Notes and interests in the Book-Entry
Interest, they are not obligated to do so, and any such market-making may be
discontinued at any time without notice. There can be no assurance as to the
development or liquidity of any market for the Senior Notes or interests in
the Book-Entry Interest. If an active public market does not develop, the
market price and liquidity of the Senior Notes or interests in the Book-Entry
Interest may be adversely affected.
The Company has agreed to indemnify the Underwriters and its controlling
persons against certain liabilities, including liabilities under the
Securities Act.
It is possible that more than 10% of the net proceeds of the Offering will
be paid to one or more entities who are affiliated with Underwriters in the
Offering. See "Use of Proceeds." Therefore, the Offering is being conducted
pursuant to the provisions of Rule 2710(c)(8) of the National Association of
Securities Dealers, Inc.'s Corporate Financing Rules.
Each of the Underwriters has severally represented and agreed in the
Underwriting Agreement that (i) it has not offered or sold, and prior to the
date six months after the date of issue of the Senior Notes will not offer or
sell, any Senior Notes to persons in the UK 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 which have not resulted in and will not result in
an offer to the public in the UK within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 (the "FSA") with
respect to anything done by it in relation to the Senior Notes in, from or
otherwise involving the UK; (iii) it has only issued or passed on and will
only issue or pass on in the UK any document received by it in connection with
the issue of the Senior Notes to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986
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<PAGE>
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on; and (iv) it has
not issued or caused to be issued and will not issue or cause to be issued in
the UK any advertisement inviting persons to subscribe or purchase the Senior
Notes or containing information calculated to lead directly or indirectly to
persons subscribing or purchasing the Senior Notes except to persons (a) who
are authorized under the FSA or (b) whose ordinary business involves the
acquisition and disposal of property of the same kind as the Senior Notes, and
has not advised or procured and will not advise or procure any person (except
as aforesaid) in the UK to subscribe or purchase the Senior Notes.
LEGAL MATTERS
Certain legal matters relating to the Senior Notes will be passed upon for
the Company by Troutman Sanders LLP, Atlanta, Georgia and for the Underwriters
by Shearman & Sterling, New York, New York. Certain legal matters relating to
English law will be passed upon for the Company by Allen & Overy, London,
England.
Troutman Sanders, LLP and Shearman & Sterling will rely, without independent
investigation, upon Allen & Overy with respect to matters relating to English
law.
EXPERTS
The consolidated financial statements of Southern Investments UK plc
(Successor Company) as of March 31, 1996 and for the period from September 18,
1995 to March 31, 1996, and the consolidated financial statements of South
Western Electricity plc (Predecessor Company) for the period from April 1,
1995 to September 17, 1995, included in this Registration Statement have been
audited by Arthur Andersen, 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 consolidated financial statements of South Western Electricity plc
(Predecessor Company) at March 31, 1995 and for the years ended March 31, 1995
and 1994, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young, Chartered Accountants, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Senior Notes offered hereby.
This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement and the
exhibits and schedules thereto for further information with respect to the
Company and the Senior Notes offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and
in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits and
schedules filed therewith, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Room 1228, 75 Park Place, New York, New
York 10007 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
71
<PAGE>
Upon completion of the Offering, the Company will be subject to the
informational reporting requirements of the Exchange Act and, in accordance
therewith, will file reports and other information with the Commission. In
accordance with the Indenture, the Company will also provide such information
to the Trustee and the registered holders of the Senior Notes.
LUXEMBOURG STOCK EXCHANGE AND OTHER INFORMATION
The issue of the Senior Notes was authorized pursuant to a resolution of the
Board of Directors of the Company dated July 26, 1996.
The legal notice relating to the issue of the Senior Notes and the
Memorandum and Articles of Association of the Company will be registered prior
to the listing with the Chief Registrar of the District Court in Luxembourg
(Greffier en Chef du Tribunal d'Arrondissement de et--Luxembourg), where such
documents are available for inspection and where copies thereof can be
obtained upon request.
The financial information in respect of the Company and the Predecessor
Company set forth in "Summary Financial Information," "Selected Financial
Data," "Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" herein does not constitute statutory
accounts under Section 240 of the Companies Act 1985. Statutory accounts for
the fiscal year to which such financial information relates have been, and for
fiscal year 1996 will be, delivered to the Registrar of Companies in England
and Wales. The auditors of the Company and the Predecessor Company have made a
report under Section 235 of the Companies Act 1985 on the statutory accounts
for each such fiscal year which was not qualified within the meaning of
Section 262 of the Companies Act 1985 and did not contain a statement made
under Section 237(2) or 237(5) of that Act.
Copies of the Indenture, the Deposit Agreement, the DTC Agreement, the
Memorandum and Articles of Association of the Company and the most recent
publicly available annual report of the Company will be available for
inspection, for so long as the Senior Notes are outstanding and are listed on
the Luxembourg Stock Exchange, during usual business hours on any weekday
(except Saturdays and public holidays) at the specified offices of the Paying
Agents and at the office of the listing agent, Banque Generale du Luxembourg
S.A., in Luxembourg.
Save as disclosed herein, there has been no significant change in the
financial or trading position of the Company since March 31, 1996, the end of
the last financial period of the Company.
There are no legal or arbitration proceedings (including any such
proceedings which are pending or, to the best of the Company's knowledge and
belief, threatened) involving the Company which may have, or have had during
the period since incorporation, a significant effect on the financial position
of the Company.
The objects of the Company are set out in clause 4 of its Memorandum of
Association.
The addresses of the paying agents in respect of the Senior Notes are .
The address of Arthur Andersen, Independent Public Accountants, who have
audited the accounts of the Company for the period from the date of its
incorporation to March 31, 1996 is Broad Quay House, Broad Quay, Bristol BS1
4DJ, England.
72
<PAGE>
ANNEX
GLOSSARY
Accentacross: Accentacross Limited, a Director of the Company.
Additional Amounts: Amounts that the Company may be required to pay such
that the holder of the Global Note will receive such amounts as would have
been received without withholding or deduction for or on account of any
present or future taxes, duties, assessments of governmental charges of
whatever nature imposed, levied, collected, withheld or assessed by or within
the UK or by or within any political subdivision thereof or any authority
therein or thereof having power to tax, unless such withholding or deduction
is required by law.
Book-Entry Depositary: Bankers Trust Company.
Book-Entry Interest: Certificateless depositary interest to be issued by the
Book-Entry Depositary to DTC.
CAGR: Compound annual growth rate.
Calendar Year: A year ended December 31.
Cedel Bank: Cedel Bank, societe anonyme.
CFDs: Contracts for differences.
Code: The US Internal Revenue Code of 1986, as amended.
Commission: The Securities and Exchange Commission.
Company: Southern Investments UK plc.
Comparable Treasury Issue: In the case of the Senior Notes, the United
States Treasury security selected by an Independent Investment Banker as
having a maturity comparable to the remaining term of such Senior Notes to be
redeemed that would be utilized, at the time of selection and in accordance
with customary financial practice, in pricing new issues of corporate debt
securities of comparable maturity to the remaining term of the Senior Notes.
Comparable Treasury Price: With respect to any redemption date, (i) the
average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for US
Government Securities" or (ii) if such release (or any successor release) is
not published or does not contain such prices on such business day, the
Reference Treasury Dealer Quotation for such redemption date.
DCR: Duff & Phelps Credit Rating Company.
Debt: Money borrowed as evidenced by the issuance, assumption or guarantee
of any notes, bonds, debentures or other similar evidences of indebtedness.
Deposit Agreement: The deposit agreement among the Company, the Book-Entry
Depositary and the holders and beneficial owners from time to time of
interests in the Book-Entry Interest.
Definitive Registered Notes: Definitive Senior Notes in registered form.
Distribution Price Control Formula: A formula of P+RPI-Xd where P reflects
the previous maximum average price per unit of electricity distributed, RPI
reflects the percentage change in the Retail Price Index between the previous
year and the current year and the Xd factor is established by the Regulator
following review.
A-1
<PAGE>
DTC: The Depositary Trust Company.
DTC Agreement: The agreement between DTC and the Book-Entry Depositary
pursuant to which the Book-Entry Depositary will issue one or more
certificateless depositary interests and pursuant to which the DTC will
operate a book-entry system for interests in the Book-Entry Interest.
Electricity Act: The Electricity Act 1989.
EMFs: Electromagnetic fields.
Euroclear: The Euroclear System.
Exchange Act: The US Securities Exchange Act of 1934, as amended.
Fiscal Year: A year ended March 31.
Fossil Fuel Levy: A levy system instituted to reimburse the generators and
the RECs for the extra costs involved in generating electricity from non-
fossil fuel plants as compared to generating electricity from fossil fuel
plants.
Franchise Area: SWEB's service area as determined by its PES license.
Franchise Supply Customers: Customers with demand of not more than 100kW.
FSA: The Financial Services Act 1986.
Georgia Power: Georgia Power Company, a subsidiary of Southern.
Global Note: The global Senior Note representing the Senior Notes.
Holdings: Southern Investments UK Holdings Limited, the direct parent
company of the Company.
Indenture: The Indenture between the Company and Bankers Trust Company.
Independent Investment Banker: An independent investment banking institution
of national standing appointed by the Company and reasonably acceptable to the
Trustee.
Indirect Participants: Persons that hold interests in the Book-Entry
Interest through persons that have accounts with DTC.
Lien: Debt secured by a mortgage, lien, pledge, security interest or other
encumbrance on any property or assets (other than cash).
Mighteager: Mighteager Limited, a Director of the Company.
Mission Energy: Mission Energy Company.
MMC: The UK Monopolies and Mergers Commission.
Moody's: Moody's Investors Service, Inc.
NFFOs: Non-fossil fuel sources of generating capacity.
NGC: The National Grid Company plc, which is wholly-owned by NGG.
A-2
<PAGE>
NGG: The National Grid Group plc.
Non-Franchise Supply Customers: Customers with demand greater than 100kW.
Own-generation limits: The limit imposed by the PES license on the extent of
generation capacity in which a REC may hold an interest.
Participants: Persons that have accounts with DTC.
PES license: A Public Electricity Supply license.
PESs: The public electricity (or first tier) suppliers.
PMDC: Power Markets Development Company, a shareholder in Holdings and a
subsidiary of PP&L Resources.
PMDC Directors: Accentacross and Mighteager.
Pool: The wholesale trading market for electricity in England and Wales.
Pooling and Settlement Agreement: The agreement which governs the
constitution and operation of the Pool and the calculation of payments to and
from generators and suppliers.
PP&L Resources: PP&L Resources, Inc., the parent of PMDC.
Predecessor Company: South Western Electricity plc prior to its acquisition
by the Company.
Primary Treasury Dealer: A primary US Government securities dealer in New
York City.
Pro Forma Fiscal Year 1996: Unaudited pro forma information for the fiscal
year ended March 31, 1996.
PSB: NGG's pumped storage electricity generation business.
RECs: The 12 regional electricity companies in England and Wales licensed to
distribute, supply and, to a limited extent, generate electricity.
Reference Treasury Dealer: A primary US Government securities dealer in New
York City appointed by the Company and reasonably acceptable to the Trustee.
Reference Treasury Dealer Quotation: With respect to the Reference Treasury
Dealer and any redemption date, the average, as determined by the Trustee, of
the bid and asked prices for the Comparable Treasury Issue expressed in each
case as a percentage of its principal amount and quoted in writing to the
Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business
day preceding such redemption date.
Regulator: The UK Director General of Electricity Supply.
Relevant Date: Whichever is the later of (i) the date on which a payment on
the Senior Notes first becomes due and (ii) if the full amount payable has not
been received in The City of New York by the Book-Entry Depositary or the
Trustee on or prior to such due date, the date on which, the full amount
having been so received, notice to that effect shall have been given to the
Holders in accordance with the Indenture.
Sale and Lease-Back: The leasing by the Company or a Significant Subsidiary
of any assets from a person which have been or are to be sold or transferred
by the Company to such person.
Securities Act: The US Securities Act of 1933, as amended.
Secretary of State: The UK Secretary of State for Trade and Industry.
A-3
<PAGE>
Senior Notes: Direct, unsecured and unsubordinated obligations of the
Company ranking pari passu with all other unsecured and unsubordinated
obligations of the Company in the aggregate principal amount of $235,000,000.
SFAS: US GAAP Statement of Financial Accounting Standards.
Significant Subsidiary: Any subsidiary of the Company whose gross assets or
gross revenues (having regard to the Company's direct and/or indirect
beneficial interest in the shares, or the like, of that subsidiary) represent
at least 25% of the consolidated gross assets or gross revenues of the Company
and all of its subsidiaries taken together.
Southern: The Southern Company, the ultimate parent company of the Company.
Southern Company system: Southern and its subsidiaries.
Southern Electric: Southern Electric International, Inc., an affiliate of
the Company and a wholly-owned subsidiary of Southern.
S&P: Standard & Poors.
Successor Company: Southern Investments UK plc and its subsidiaries.
Supply Price Control Formula: P+RPI-Xs+Y where P reflects the maximum
average price per unit of electricity supplied, RPI reflects the percentage
change in the Retail Price Index between the previous year and the current
year, the Xs factor is established by the Regulator following review and the Y
term is a pass through of certain costs.
SWEB: South Western Electricity plc, a subsidiary of the Company.
Treasury Yield: With respect to any redemption date, the rate per annum
equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed
as a percentage of its principal amount) equal to the Comparable Treasury
Price for such redemption date.
Trustee: Bankers Trust Company.
UK: The United Kingdom.
UK GAAP: Accounting principles generally accepted in the United Kingdom.
UK Taxes: Any taxes, duties, assessments or any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed,
levied, collected, withheld or assessed by or within the UK or by or within
any political subdivision thereof or any authority therein or thereof having
power to tax.
US: The United States of America.
US GAAP: Accounting principles generally accepted in the United States of
America.
US Holders: US citizens or residents, corporations, partnerships or other
entities created or organized in or under the laws of the US or any state
thereof, or an estate or trust, the income of which is subject to US federal
income taxation regardless of its source, and who are residents in the US and
not resident in the UK for purposes of the current double taxation convention
between the US and the UK and who hold their beneficial interests in the
Senior Notes as capital assets.
A-4
<PAGE>
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES (SUCCESSOR COMPANY)
Report of Independent Public Accountants.................................. F-2
Financial Statements...................................................... F-3
Consolidated Balance Sheet as of March 31, 1996......................... F-3
Consolidated Statement of Income for the Period From September 18, 1995
to March 31, 1996...................................................... F-4
Consolidated Statement of Changes in Stockholder's Equity for the Period
From September 18,
1995 to March 31, 1996................................................. F-5
Consolidated Statement of Cash Flows for the Period From September 18,
1995 to March 31, 1996................................................. F-6
Notes to the Consolidated Financial Statements............................ F-7
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES (PREDECESSOR COMPANY)
Report of Independent Auditors............................................ F-17
Report of Independent Public Accountants.................................. F-18
Financial Statements
Consolidated Balance Sheet as of March 31, 1995......................... F-19
Consolidated Statements of Income for the Years Ended March 31, 1994 and
1995 and for the Period From April 1, 1995 to September 17, 1995....... F-20
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended March 31, 1994 and March 31, 1995 and for the Period From April
1, 1995 to September 17, 1995.......................................... F-21
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994
and 1995 and the Period From April 1, 1995 to September 17, 1995....... F-22
Notes to the Consolidated Financial Statements............................ F-23
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES (SUCCESSOR COMPANY)
AND SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES (PREDECESSOR COMPANY)
Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1996...... F-33
Unaudited Condensed Consolidated Statements of Income for the Three
Months Ended June 30, 1995 and 1996.................................... F-34
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended
June 30, 1995 and 1996................................................. F-35
Notes to the Unaudited Condensed Consolidated Financial Statements........ F-36
Unaudited Pro Forma Consolidated Financial Information.................. F-38
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
March 31, 1996......................................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Southern Investments UK plc:
We have audited the accompanying consolidated balance sheet of SOUTHERN
INVESTMENTS UK plc AND SUBSIDIARIES (Successor Company) as of March 31, 1996
and the related consolidated statements of income, changes in stockholder's
equity, and cash flows for the period from September 18, 1995 to March 31,
1996. 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 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 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 Southern Investments UK
plc and subsidiaries as of March 31, 1996 and the results of their operations
and their cash flows for the period from September 18, 1995 to March 31, 1996
in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN
Bristol, England July 25, 1996
F-2
<PAGE>
SOUTHERN INVESTMENTS UK PLC
AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
ASSETS 1996 1996
------ --------- ---------
(Pounds) U.S. $
<S> <C> <C>
PROPERTY, PLANT, AND EQUIPMENT (Note 9).................... 1,227 1,905
Less accumulated depreciation............................. 20 31
----- -----
Property, plant, and equipment, net..................... 1,207 1,874
----- -----
OTHER ASSETS:
Investments............................................... 22 34
Prepaid pension cost (Note 2)............................. 95 148
Goodwill, net of accumulated amortization of (Pounds)2
($3)..................................................... 173 269
----- -----
Total other assets...................................... 290 451
----- -----
CURRENT ASSETS:
Cash and cash equivalents................................. 20 31
Investments............................................... 26 40
Receivables:
Customer accounts, less provision for uncollectibles of
(Pounds)17 ($26)........................................ 95 148
Other.................................................... 20 31
----- -----
Receivables, net.......................................... 115 179
Materials and supplies.................................... 3 4
Prepaid expenses.......................................... 25 39
----- -----
Total current assets.................................... 189 293
----- -----
Total assets............................................ 1,686 2,618
===== =====
<CAPTION>
STOCKHOLDER'S EQUITY AND LIABILITIES
------------------------------------
(Pounds) U.S. $
<S> <C> <C>
STOCKHOLDER'S EQUITY (Note 12):
Share capital, (Pounds)1 par value; 500,400,587 shares
authorized, issued, and outstanding...................... 500 776
Retained earnings/(deficit)............................... (132) (205)
----- -----
Total stockholder's equity.............................. 368 571
----- -----
OTHER NON-CURRENT LIABILITIES
Deferred income taxes (Note 6)............................ 352 547
Provision for loss contracts (Note 4)..................... 62 96
Other..................................................... 66 103
----- -----
Total other non-current liabilities..................... 480 746
----- -----
CURRENT LIABILITIES:
Short-term debt (Note 10)................................. 650 1,009
Accounts payable.......................................... 45 70
Accrued income taxes...................................... 19 29
Unearned revenue.......................................... 10 16
Other..................................................... 114 177
----- -----
Total current liabilities............................... 838 1,301
----- -----
COMMITMENTS AND CONTINGENT MATTERS (Notes 2, 4 and 10)
Total stockholder's equity and liabilities.............. 1,686 2,618
===== =====
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
SOUTHERN INVESTMENTS UK PLC
AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM SEPTEMBER 18, 1995 TO MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S. $
-------- ------
<S> <C> <C>
OPERATING REVENUES............................................ 481 747
COST OF SALES................................................. 318 494
--- ---
GROSS MARGIN.................................................. 163 253
--- ---
OPERATING EXPENSES:
Maintenance.................................................. 21 33
Depreciation and amortization................................ 22 34
Selling, general, and administrative......................... 34 53
--- ---
Total operating expenses................................... 77 120
--- ---
Operating income........................................... 86 133
--- ---
OTHER INCOME (EXPENSE):
Interest income.............................................. 7 11
Interest expense............................................. (28) (43)
Gain on sale of investments (Note 11)........................ 14 22
Other, net................................................... 2 3
--- ---
Total other expense........................................ (5) (7)
--- ---
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... 81 126
PROVISION FOR INCOME TAXES.................................... 28 43
--- ---
INCOME FROM CONTINUING OPERATIONS............................. 53 83
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT, net of in-
come tax effect of (Pounds)3 ($5) (Note 10).................. 6 9
--- ---
NET INCOME.................................................... 59 92
=== ===
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE>
SOUTHERN INVESTMENTS UK PLC
AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM SEPTEMBER 18, 1995 TO MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
RETAINED
SHARE EARNINGS/
CAPITAL (DEFICIT) TOTAL TOTAL
(Pounds) (Pounds) (Pounds) U.S. $
-------- --------- -------- ------
<S> <C> <C> <C> <C>
BALANCE, September 18, 1995................. 0 0 0 0
Net income................................. 0 59 59 92
Proceeds from sale of National Grid Hold-
ings reflected as dividends
(Note 12)................................. 0 (191) (191) (297)
Conversion of advances to equity (Note
12)....................................... 315 0 315 489
Equity contribution (Note 12).............. 185 0 185 287
--- ---- ---- ----
BALANCE, March 31, 1996..................... 500 (132) 368 571
=== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 18, 1995 TO MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S.$
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. 59 92
------ ------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 22 34
Gain on sales of investments.............................. (14) (22)
Gain on early extinguishment of debt...................... (9) (14)
Changes in assets and liabilities:
Receivables, net........................................ 6 9
Accounts payable........................................ (52) (80)
Accrued income taxes.................................... 5 8
Other, net.................................................. (5) (8)
------ ------
Total adjustments..................................... (47) (73)
------ ------
Net cash provided by operating activities............. 12 19
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (37) (57)
Dividends received from, and disposal of, investments....... 270 419
------ ------
Net cash provided by investing activities............. 233 362
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Consideration for purchase of SWEB paid to former sharehold-
ers........................................................ (748) (1,161)
Capital contribution received (Note 12)..................... 185 287
Payments of dividends (Note 12)............................. (191) (297)
Payment of preacquisition dividends......................... (75) (116)
Proceeds from issuance of notes............................. 650 1,009
Proceeds from issuance of bonds............................. 597 927
Repayment of bonds.......................................... (696) (1,081)
------ ------
Net cash used in financing activities................. (278) (432)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (33) (51)
CASH AND CASH EQUIVALENTS, beginning of period................ 53 82
------ ------
CASH AND CASH EQUIVALENTS, end of period...................... 20 31
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest...................................... 21 33
====== ======
Cash paid for income taxes.................................. 26 40
====== ======
Business acquisitions:
Fair value of assets acquired............................. 1,940 3,013
Less cash paid for common stock......................... (1,023) (1,589)
Less noncash consideration issued....................... (40) (62)
------ ------
Liabilities assumed......................................... 877 1,362
====== ======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The Company is a wholly-owned subsidiary of Southern Investments UK Holdings
Limited ("Holdings"), which is wholly-owned indirectly by The Southern Company
("Southern") (see Note 13). The Company was incorporated as a public limited
company under the laws of England and Wales on June 23, 1995 as a vehicle for
the acquisition of South Western Electricity plc ("SWEB"), one of the 12
regional electricity companies ("RECs") in England and Wales licensed to
distribute, supply, and, to a limited extent, generate electricity. On
September 18, 1995, the Company gained effective control of SWEB, having
acquired 84% of its shares (the "Acquisition"). Accordingly, the Company has
designated September 18, 1995 as the effective date of the Acquisition. Given
that SWEB represents substantially all of the current operations of the
Company, SWEB is considered the Predecessor Company (the "Predecessor
Company"). All references in the financial statements to the Successor Company
represent the Company and to the Predecessor Company represent South Western
Electricity plc and its subsidiaries. See Note 7 for a further discussion of
the Acquisition.
SWEB is one of the twelve RECs in England and Wales licensed to supply,
distribute, and, to a limited extent, generate electricity. The RECs were
created as a result of the privatization of the UK electricity industry in
1990 after the state owned low voltage distribution networks were allocated to
the then existing twelve regional boards. SWEB's main business, the
distribution and supply of electricity to customers in the southwest of
England, is regulated under the terms of SWEB's Public Electricity Supply
license by the Office of Electricity Regulation ("OFFER").
SWEB's operates primarily in its franchise area in southwest England. SWEB's
franchise area covers approximately 5,560 square miles running from Bristol
and Bath in the northeast, 188 miles southwest along the peninsula to Land's
End and 28 miles beyond to the Isles of Scilly, and has a resident population
of approximately 2.8 million.
Basis of Presentation
The financial statements of the Company are presented in conformity with
accounting principles generally accepted in the United States.
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority-owned subsidiaries and have been prepared
from records maintained by SWEB in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in companies in which the Company's ownership interests range from
20% to 50% and the Company exercises significant influence over operating and
financial policies are accounted for using the equity method. Other
investments are accounted for using the cost method.
These financial statements are presented in pounds sterling ((Pounds)) and
in U.S. dollars ($ or U.S. $), solely for the convenience of the reader, at
the exchange rate of (Pounds)1 = U.S. $1.5529, the noon buying rate in New
York City for cable transfers in pounds sterling as certified for customs
purposes by the Federal Reserve Bank of New York on June 28, 1996. No
representation is made that the pounds sterling amounts have been, could have
been, or could be converted into U.S. dollars at that or any other rate of
exchange.
F-7
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
SWEB records revenue net of value added tax and accrues revenues for
services provided but unbilled at the end of each reporting period. SWEB
purchases power primarily from a market for the bulk trading of electricity
(the "Pool").
The Company has a diversified base of customers. No single customer or
industry comprises 10% or more of revenues.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at fair market value as adjusted
at the acquisition date (Note 7) in accordance with Accounting Principles
Board Opinion ("APB") No. 16, "Accounting for Business Combinations." Items
capitalized subsequent to the Acquisition are recorded at original cost, which
includes materials, labor, appropriate administrative and general costs, and
the estimated cost of funds used during construction. The cost of maintenance,
repairs, and replacement of minor items of property is charged to maintenance
expense.
Depreciation of the recorded cost of depreciable utility plant in service is
provided by using primarily composite straight-line rates (Note 9), which
approximate 2.5% per year.
Information Technology Consultancy and Development Costs
Significant information technology ("IT") consultancy and development costs
are capitalized when they become technologically feasible and are amortized
over their estimated useful economic life from the date of first use. Other IT
consultancy and development costs are charged to income in the period in which
they are incurred. This policy has been adopted as the Company has embarked on
a significant program of investment and will be incurring significant
development costs which are fundamental to the future performance of the
business and which will benefit the business for a number of years. The
Directors are of the opinion that in relation to the planned development costs
to be incurred in the future, the policy followed by the Predecessor Company
of writing off such costs to the Statement of Income does not give a fair
reflection of the period over which the benefits will accrue. The effect of
adopting this policy has resulted in the capitalization of (Pounds)5.2m of
costs in the year ended March 31, 1996. If the policy had been adopted at
March 31, 1995, the amount that would have been capitalized would have been
zero, as no tangible benefits were believed to have accrued from current
development work at that date and any costs relating to earlier development
work had been fully amortized.
Goodwill
The Company amortizes costs in excess of fair value of net assets of the
business acquired using the straight-line method over a period of 40 years.
Recoverability (performed on the basis of cash flow analysis) is reviewed
annually or sooner if events or changes in circumstances indicate that the
carrying amount may exceed fair value. Goodwill shown in the accompanying
consolidated financial statements relates to the acquisition of SWEB (Note 7).
F-8
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments
The Company accounts for its current investments in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for
Investments for Certain Debt and Equity Securities." These investments
represent investments in debt securities, which management classifies as
available-for-sale securities in accordance with SFAS No. 115. The unrealized
holding loss on investments was immaterial for the period presented. The
Company's long-term investments consist of investments accounted for using the
cost method.
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.
Unearned Revenue
Unearned revenue primarily represents the liability for payments received
from customers in connection with the assessment of a value added tax ("VAT")
on electricity sales, which was imposed by the UK government effective April
1, 1994 to include electricity sales to residential customers. As part of the
adoption of the tax, customers were allowed to prepay their bills and avoid
the VAT on the element of the future electricity consumption which was
prepaid. Revenues are recognized as electricity is supplied to these
customers.
The Regulator permits the Company to bill for all estimated allowed revenue,
while actual allowed revenue is not known until after the end of the fiscal
year. When billings exceed the actual allowed revenue, revenues are deferred
on the excess amounts. The deferred amount is deducted from revenues and
included in current liabilities. When billings are less than the allowed
revenue, no anticipation of any potential future recovery is made.
Financial Instruments
The Company uses financial instruments primarily to mitigate the risk of
exposure to volatility in electricity prices and fluctuations in interest
rates. Such instruments are accounted for as hedges, and accordingly, gains
and losses are deferred and recognized over the same period as the item hedged
(Note 8).
The Company's carrying amount of financial instruments at March 31, 1996 was
zero (Note 8).
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 121 provides guidance on when to assess and how
to measure impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used, and for long-lived
assets and certain intangibles to be disposed of. The Company adopted SFAS No.
121 on January 1, 1996, with no material effect on its financial position or
results of operations.
2. RETIREMENT BENEFITS
Pension Plans
SWEB has two pension plans, a defined benefit plan and a defined
contribution plan.
Defined Contribution Plan
The defined contribution plan was established in the year ended March 31,
1994. The assets of the defined contribution plan are held and administered by
an independent trustee. Contributions to the plan by SWEB on behalf of its
employees were (Pounds)0.1 million ($0.2 million) for the period from
September 18, 1995 through March 31, 1996.
F-9
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Defined Benefit Plan
SWEB participates in the Electricity Supply Pension Scheme, 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. Contributions to the plan by SWEB on behalf of its employees
were (Pounds)4.8 million ($7.5 million) for the period from September 18, 1995
through March 31, 1996.
In accordance with SFAS No. 87, as of the date of the Acquisition, the
assignment of the purchase price to individual assets acquired and liabilities
assumed includes the plan assets in excess of the projected benefit
obligation. SWEB uses the "entry age normal method with a frozen initial
liability" actuarial method for funding purposes. Amounts funded to the
pension trust(s) are primarily invested in equity and fixed-income securities.
SFAS No. 87 requires use of the "projected unit credit" actuarial method for
financial reporting purposes.
The following table shows the actuarial results and assumptions for pension
benefits as computed under SFAS No. 87 (in millions):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1996
--------- ---------
(Pounds) $
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits................................... (488) (758)
Nonvested benefits................................ 0 0
---- ----
Accumulated benefit obligation...................... (488) (758)
Effect of future increases in compensation.......... (37) (57)
---- ----
Projected benefit obligation........................ (525) (815)
Less:
Fair value of plan assets....................... 642 997
Unrecognized net gain........................... (22) (34)
---- ----
Prepaid asset recognized in the consolidated balance
sheets............................................. 95 148
==== ====
</TABLE>
The weighted average rates assumed in the actuarial calculations were as
follows at March 31, 1996:
<TABLE>
<S> <C>
Discount rate....................................................... 8.75%
Annual salary rate increase......................................... 6.00
Long term rate of return on plan assets............................. 9.50
</TABLE>
The components of the plan's net pension income during the period from
September 18, 1995 to March 31, 1996 are shown below (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
Benefits earned during the period........................... 2 3
Interest cost on projected benefit obligation............... 22 34
Actual return on plan assets................................ (50) (77)
Net amortization and deferral............................... 22 34
--- ---
Net pension income.......................................... (4) (6)
=== ===
</TABLE>
3. REGULATORY MATTERS
OFFER controls the revenues generated by SWEB in its distribution and supply
businesses by applying a price control formula, P + RPI - X (where X is
currently 3% for distribution and 2% for supply), where P is the price level
at the beginning of each new regulatory period, RPI is the change in the
Retail Price Index and X is an adjustment factor determined by OFFER.
F-10
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the distribution business, the Distribution Price Control Formula
("DPCR") is usually set for a five-year period, subject to more frequent
adjustments as determined necessary by the Director General of Electricity
Supply (the "Regulator"). At each review, the Regulator can require a one-time
price reduction. An initial review by the Regulator of allowable income in the
distribution business led to a reduction of the price level by 14% for SWEB
starting April 1, 1995, followed by efficiency factors of X = 3% for each year
until March 2000. On July 6, 1995, the Regulator announced the result of a
further distribution price review which was precipitated by certain market
events in the UK electric utility industry. For SWEB, such announcement meant
a further real reduction of 11% in allowable distribution income for the
period from April 1, 1996 to March 31, 2000, before an allowed increase for
inflation.
In the supply business, which is progressively being opened to competition,
price regulation still applies to the market for customers with a demand of
not more than 100kW. The calculation of the maximum supply charge is based on
a Supply Price Control Formula, similar to the DPCR and is set for a four-year
period. In 1993, OFFER announced the supply franchise market (i.e., with
demand of not more than 100kW) income entitlement for the four-year period
ending March 1998. A relatively small efficiency factor of X = 2% was applied
to SWEB and is being offset by an allowance for both unit and customer growth.
The nonfranchise markets (above 1MW) were opened to full competition during
privatization in 1990; the nonfranchise markets (above 100 kW and not more
than 1MW) were opened to full competition starting in April 1994.
4. COMMITMENTS AND CONTINGENT MATTERS
Power Purchase Agreements
SWEB has entered into a contract relating to the purchase of 200 megawatts
of capacity from a 7.69%-owned related party, Teesside Power Limited
("Teesside"), for a period of 15 years beginning April 1, 1993. The contract
with Teesside involves purchases which were above market rates at the
acquisition date. Accordingly, the Company recognized a (Pounds)60 million
($93 million) accrual at the acquisition date for the cost of this contract.
The Company has additional contracts with unaffiliated parties relating to
the purchase of electricity, which expire by March 31, 1998, and contracts
relating to the purchase of gas which expire by September 30, 1998, the terms
of which are immaterial with respect to quantity and price, both annually and
in the aggregate.
Operating Leases
SWEB has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled (Pounds)3
million ($5 million) for the period from September 18, 1995 to March 31, 1996.
At March 31, 1996, estimated minimum rental commitments for noncancelable
operating leases were as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------
((Pounds)M) ($M)
<S> <C> <C>
Fiscal year:
1997.................................................. 2 3
1998.................................................. 2 3
1999.................................................. 2 3
2000.................................................. 1 2
2001.................................................. 1 2
Thereafter............................................ 10 15
--- ---
Total minimum payments.............................. 18 28
=== ===
</TABLE>
F-11
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Labor Subject to Collective Bargaining Agreements
Substantially all of SWEB's employees are subject to one of five collective
bargaining agreements. Such agreements are ongoing in nature, and SWEB's
employee participation level is consistent with that of the electric utility
industry in Great Britain.
5. SEGMENT REPORTING
The Company is primarily engaged in two electric industry segments:
distribution, which involves the transmission of electricity across its
network and its transfer and delivery to its customers, and supply, which
involves bulk purchase of electricity from the Pool and arranging for its sale
and transfer to its customers. Intersegment sales primarily represent sales
from distribution to supply for the use of the distribution network.
Information about the Company's operations in these individual segments during
the period from September 18, 1995 through March 31, 1996 and as of March 31,
1996 is detailed below (in millions):
<TABLE>
<CAPTION>
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------- --------------
(Pounds) $ (Pounds) $ (Pounds) $ (Pounds) $ (Pounds) $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... 147 228 450 699 33 51 (149) (231) 481 747
Operating income........ 72 111 13 20 1 2 0 0 86 133
Depreciation and amorti-
zation................. 16 24 1 2 5 8 0 0 22 34
Total assets employed at
period-end............. 1,249 1,940 102 158 335 520 0 0 1,686 2,618
Capital expenditures.... 32 49 1 2 4 6 0 0 37 57
</TABLE>
Included in "Other" above are insignificant operating subsidiaries of SWEB,
as well as corporate activities and assets not allocated to specific segments
(i.e., dividends, taxes, investments, and financing), with the exception of
total assets employed, the values above exclude discontinued operations.
6. INCOME TAXES
Details of the income tax provision for the period from September 18, 1995
to March 31, 1996 (including the amount related to the extraordinary gain in
the accompanying consolidated statement of operations) are as follows (in
millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
Provision for income taxes:
<CAPTION>
Currently payable........................................... 12 18
<S> <C> <C>
Deferred.................................................... 19 30
--- ---
Total provision........................................... 31 48
=== ===
</TABLE>
F-12
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE 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>
MARCH 31,
1996
------------
(Pounds) $
-------- ---
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment basis differences............. 341 530
Pensions..................................................... 32 50
--- ---
Total...................................................... 373 580
--- ---
Deferred tax assets:
Acquisition related accruals................................. 21 33
Other........................................................ 0 0
--- ---
Total...................................................... 21 33
--- ---
<CAPTION>
Net deferred tax liabilities................................... 352 547
0 0
Portion included in current liabilities, net................... -------- ---
Accumulated deferred income taxes in the consolidated balance 352 547
sheets........................................................ ======== ===
</TABLE>
A reconciliation of the UK statutory rate to the effective income tax rate
for the period from September 18, 1995 to March 31, 1996 is as follows:
<TABLE>
<CAPTION>
UK statutory rate..................................................... 33%
<S> <C>
Nondeductible amortization of goodwill................................ 1
---
Effective income tax rate............................................. 34%
===
</TABLE>
7. ACQUISITION
On September 18, 1995, the Company acquired SWEB for (Pounds)1.063 ($1.651)
billion. The Acquisition was accounted for using the purchase method of
accounting in accordance with APB No. 16, "Accounting for Business
Combinations." The purchase price of SWEB has been allocated to the underlying
assets and liabilities based on estimated fair values at the acquisition date.
Such estimates may be revised at a later date. The acquisition cost exceeded
the fair market value of net assets acquired by (Pounds)175 million ($272
million) and is considered goodwill. The operating results of SWEB have been
included in the Company's financial statements from the effective date of the
Acquisition.
The net purchase price of (Pounds)1.063 billion was allocated as follows (in
millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ------
<S> <C> <C>
Property, plant, and equipment........................... 1,190 1,848
Current assets........................................... 317 492
Investments.............................................. 258 401
Goodwill................................................. 175 272
Current liabilities...................................... (244) (379)
Other liabilities........................................ (633) (983)
------ ------
Purchase price........................................... 1,063 1,651
====== ======
</TABLE>
F-13
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company recognized certain liabilities in connection with the
Acquisition, including a plan to increase the ongoing severance program and
costs to exit its electrical contracting and servicing business lines. A
program of staff reductions is being effected which, when completed is
expected to reduce the number of staff in the main electricity business by 21%
compared to that at the date of acquisition by the Company. The Company
recorded this provision related to exiting these businesses in accordance with
EITF Consensus No. 95-3, "Recognition of Liabilities in Connection With a
Purchase Business Combination." During the period, the Company sold South
Western Electricity (Connect) Limited to its existing management and SWEB
Servicing Limited to an unaffiliated party. The activity in these categories
is as follows (in millions):
<TABLE>
<CAPTION>
BUSINESS
SEVERANCE DISPOSALS
------------ ------------
(Pounds) $ (Pounds) $
<S> <C> <C> <C> <C>
Balance at Acquisition ......................... 26 40 11 17
Utilized....................................... (2) (3) (5) (8)
--- --- --- ---
Balance at March 31, 1996....................... 24 37 6 9
=== === === ===
</TABLE>
Liabilities existing in respect of business disposals at March 31, 1996
represent outstanding contractual commitments.
8. FINANCIAL INSTRUMENTS
SWEB utilizes contracts for differences ("CFDs") to mitigate its exposure to
volatility in the prices of electricity purchased through the Pool. Such
contracts allow the Company to effectively convert the majority of its
anticipated Pool purchases from market prices to fixed prices. CFDs are in
place to hedge a portion of electricity purchases on approximately 33,000 GWh
through the year 2008. Accordingly, the gains and losses on such contracts are
deferred and recognized as electricity purchased. It is not possible to
estimate the fair value of these contracts at present as the contract prices
are based on future events, the effect of which currently are not estimable.
Current CFD's have been entered into with UK Power Generators.
Interest rate swaps are used by the Company to hedge its exposure to
fluctuations in interest rates by allowing the Company to effectively convert
its outstanding variable-rate debt into fixed rates. At March 31, 1996,
sterling interest rate swaps expiring February 8, 2006 with notional amounts
totaling (Pounds)250 million ($388 million), resulted in an unrealized gain of
(Pounds)11 million ($17 million).
The fair value of the swaps is estimated using pricing models which provide
the present value of the difference between the contracted swap rates and
market interest rates over the remaining life of the swaps and represent the
amounts the bank would pay to terminate the swaps at March 31, 1996. Should
the Company terminate the swaps, the gain or loss on termination would be
deferred and amortized to interest expense over the period of the related
debt.
The Company is exposed to losses in the event of nonperformance by
counterparties to both its CFDs and interest rate swaps. To manage this credit
risk, the Company selects counterparties based on their credit ratings, limits
its exposure to any one counterparty under defined guidelines, and monitors
the market position of the programs and its relative market position with each
counterparty.
9. PROPERTY, PLANT, AND EQUIPMENT
The Company records book depreciation expense on a straight-line basis,
using the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Distribution network assets....................................... 40
Generation assets................................................. 15
Buildings......................................................... 40
Fixtures and equipment............................................ 3 to 20
Vehicles and mobile plant......................................... 4 to 10
</TABLE>
F-14
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, plant, and equipment consisted of the following (in millions):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1996
--------- ---------
(Pounds) $
<S> <C> <C>
Generation............................................ 2 3
Distribution.......................................... 1,123 1,743
Non-network land and buildings........................ 41 64
Fixtures and equipment................................ 48 75
Vehicles and mobile plant............................. 13 20
------ -----
1,227 1,905
Accumulated depreciation.............................. (20) (31)
------ -----
Property, plant, and equipment, net................... 1,207 1,874
====== =====
</TABLE>
At March 31, 1996, nonnetwork land and buildings include approximately
(Pounds)2 million ($3 million) of property and equipment held for sale.
Management believes that the carrying amount of these assets approximates
their net realizable value. There is an arrangement in place whereby HM
Government is entitled to a share in the profits realized by the Company on
certain property disposals made up to March 2000. Full provision for such
clawback liabilities is made as soon as the sale is recognized.
10. DEBT
Short-term debt at March 31, 1996 consists of the following (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- -----
<S> <C> <C>
Borrowings under term loan facility........................ 325 505
Borrowings under revolving credit facility................. 160 248
Short term notes--banks.................................... 138 214
Loan notes to former shareholders.......................... 27 42
--- -----
650 1,009
=== =====
</TABLE>
At March 31, 1996, the Company had in place a (Pounds)325 million ($505
million) term loan facility with certain banks. Interest is payable monthly
based on an interest rate of LIBOR plus 0.23%, which was 6.355% at March 31,
1996. Outstanding borrowings are due February 5, 1997.
SWEB has in place a (Pounds)275 million ($427 million) revolving credit
facility with certain banks, under which (Pounds)160 million ($248 million)
had been drawn at March 31, 1996 at an interest rate of 6.46% (LIBOR plus
0.58%). Each revolving advance may have a term of up to six months, and this
facility expires February 6, 1999.
Short-term notes represent borrowings by SWEB from banks which have
maturities of 90 days or less from March 31, 1996. Amounts outstanding include
(Pounds)120 million from committed loan facilities and (Pounds)12 million from
uncommitted loan facilities. Interest rates on outstanding borrowings were
between 6.06% and 6.19% at March 31, 1996.
In lieu of cash payments to former shareholders of SWEB for their shares,
the Company offered loan notes at the time of acquisition; the notes are
redeemable at the option of the note holders between June 30, 1996 and
December 31, 2002. Accordingly, these notes are classified as current
liabilities in the accompanying balance sheet.
F-15
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the period, the Company extinguished certain debt due to the UK
government, resulting in an extraordinary gain of (Pounds)6 million ($9
million), net of taxes of (Pounds)3 million ($5 million). Also on October 6,
1995, the Company issued (Pounds)597 million ($927 million) of Secured
Floating Rate Bonds to finance the acquisition of SWEB which were redeemed on
February 8, 1996.
11. SALE OF INVESTMENTS
On December 11, 1995, the Company and the other eleven RECs which jointly
owned The National Grid Holding plc ("NGH") sold their shares of NGH in a
public offering on the London Stock Exchange. The Company received proceeds
relating to the sale of its shares of (Pounds)201 million ($312 million),
which resulted in a pretax gain of (Pounds)14 million ($22 million).
The offering of NGH was conditional on the prior demerger of NGH's Pumped
Storage Business ("PSB") which was completed in November 1995. The Company's
estimated share of the proceeds from the sale of the PSB on December 21, 1995
was (Pounds)39 million ($61 million). No gain or loss was recognized on this
sale.
12. STOCKHOLDER'S EQUITY
As discussed in Note 7, the Company obtained effective control of SWEB on
September 18, 1995. During October 1995, (Pounds)315 million ($489 million) of
advances from the parent of the Company were converted to share capital, an
equity contribution of (Pounds)185 million ($287 million) was received from
the parent of the Company, and a combination of short-term and long-term debt
financing was obtained to facilitate the payment of the former shareholders.
These transactions are reflected in the accompanying consolidated statements
of changes in stockholder's equity and cash flows.
Dividends in the amount of (Pounds)191 million ($297 million) were declared
and paid by the Company during the period ending March 31, 1996 as proceeds
from the sale of the Company's shares in NGH (Note 11) provided cash in
addition to that provided from operations during the period.
13. SUBSEQUENT EVENT
On July 1, 1996, PP&L Resources, Inc. indirectly purchased a 25% share of
the Company's parent, Southern Investments UK Holdings Limited, for
(Pounds)121.5 million ($189 million).
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
South Western Electricity plc:
We have audited the accompanying consolidated balance sheet of SOUTH WESTERN
ELECTRICITY plc AND SUBSIDIARIES (Predecessor Company) as of March 31, 1995
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the two years in the period then ended.
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 United Kingdom auditing standards
which do not differ in any significant respect from those 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 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 consolidated financial position of South Western
Electricity plc and subsidiaries as of March 31, 1995 and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period then ended in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG
Chartered Accountants
Bristol, England
August 27, 1996
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
South Western Electricity plc:
We have audited the accompanying consolidated statement of income, statement
of changes in stockholders' equity and statement of cash flows for the period
from April 1, 1995 to September 17, 1995 of SOUTH WESTERN ELECTRICITY plc AND
SUBSIDIARIES (Predecessor Company). 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of South Western Electricity plc and subsidiaries for the period from
April 1, 1995 to September 17, 1995 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN
Bristol, England
August 27, 1996
F-18
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
(Pounds)
<S> <C>
ASSETS
PROPERTY, PLANT, AND EQUIPMENT (Note 9).............................. 830
Less accumulated depreciation...................................... 289
---
Property, plant, and equipment, net............................ 541
---
OTHER ASSETS:
Investments........................................................ 25
Prepaid pension cost (Note 2)...................................... 52
Other.............................................................. 17
---
Total other assets............................................. 94
---
CURRENT ASSETS:
Cash and cash equivalents.......................................... 27
Investments........................................................ 21
Receivables:
Customer accounts, less provision for uncollectibles of
(Pounds)12...................................................... 113
Other............................................................ 15
---
Receivables, net................................................. 128
Materials and supplies............................................. 18
Prepaid taxes...................................................... 33
Prepaid expenses................................................... 7
---
Total current assets........................................... 234
---
Total assets................................................... 869
===
STOCKHOLDERS' EQUITY AND LIABILITIES
STOCKHOLDERS' EQUITY (Note 11):
Share capital, 50p par value common shares; 200 million shares au-
thorized, 111.1 million issued, and outstanding................... 56
Capital redemption reserve......................................... 6
Retained earnings.................................................. 312
---
Total stockholders' equity..................................... 374
---
Long-term debt (Note 10)............................................. 95
OTHER NON-CURRENT LIABILITIES:
Deferred income taxes (Note 7)..................................... 154
Other.............................................................. 26
---
Total other non-current liabilities............................ 180
---
CURRENT LIABILITIES:
Accounts payable................................................... 50
Electricity purchases payable...................................... 36
Accrued income taxes............................................... 43
Unearned revenue................................................... 34
Regulatory overrecovery............................................ 6
Bank loans......................................................... 24
Other.............................................................. 27
---
Total current liabilities...................................... 220
---
COMMITMENTS AND CONTINGENT MATTERS (Notes 2, 5 and 10)
Total stockholders' equity and liabilities..................... 869
===
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-19
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
FOR YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE PERIOD FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31, APRIL 1, 1995 TO
----------------- SEPTEMBER 17,
1994 1995 1995
-------- -------- ----------------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
OPERATING REVENUES.......................... 808 776 299
COST OF SALES............................... 511 480 186
--- --- ---
GROSS MARGIN................................ 297 296 113
--- --- ---
OPERATING EXPENSES:
Maintenance............................... 42 45 18
Depreciation.............................. 28 31 15
Selling, general, and administrative...... 105 81 40
--- --- ---
Total operating expenses.............. 175 157 73
--- --- ---
Operating income...................... 122 139 40
--- --- ---
OTHER INCOME (EXPENSE):
Interest income........................... 4 7 2
Interest expense.......................... (11) (11) (5)
Other, net................................ 16 16 1
--- --- ---
Total other income (expense).......... 9 12 (2)
--- --- ---
INCOME FROM CONTINUING OPERATIONS BEFORE IN-
COME
TAXES...................................... 131 151 38
PROVISION FOR INCOME TAXES.................. 43 50 13
--- --- ---
INCOME FROM CONTINUING OPERATIONS........... 88 101 25
INCOME FROM DISCONTINUED OPERATIONS, net of
income tax effect of (Pounds)0 for all pe-
riods (Note 12)............................ 0 1 (1)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income tax effect of (Pounds)4...... 0 (8) 0
--- --- ---
NET INCOME.................................. 88 94 24
=== === ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE PERIOD FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARE CAPITAL TOTAL
ORDINARY SHARES OF PREMIUM REDEMPTION RETAINED STOCKHOLDERS'
SHARES 50P EACH ACCOUNT RESERVE EARNINGS EQUITY
--------- --------- -------- ---------- -------- -------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C> <C>
APRIL 1, 1993........... 123 62 0 0 289 351
Issue of share capi-
tal.................. 0 0 0 0 0 0
Dividends (21p per
share)............... 0 0 0 0 (26) (26)
Net income............ 0 0 0 0 88 88
--- --- --- --- ---- ----
MARCH 31, 1994.......... 123 62 0 0 351 413
Repurchase of own
shares (Note 11)..... (12) (6) 0 6 (103) (103)
Issue of share capi-
tal.................. 0 0 0 0 0 0
Dividends (25p per
share)............... 0 0 0 0 (30) (30)
Net income............ 0 0 0 0 94 94
--- --- --- --- ---- ----
MARCH 31, 1995.......... 111 56 0 6 312 374
Issue of share capi-
tal.................. 1 -- 2 0 0 2
Dividends:
20p per share for
111 million
shares............. 0 0 0 0 (23) (23)
65p per share for 81
million shares..... 0 0 0 0 (52) (52)
Net income............ 0 0 0 0 24 24
--- --- --- --- ---- ----
SEPTEMBER 17, 1995...... 112 56 2 6 261 325
=== === === === ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE PERIOD FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
------------------- APRIL 1, 1995 TO
MARCH 31, MARCH 31, SEPTEMBER 17,
1994 1995 1995
--------- --------- ----------------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. 88 94 24
--- ---- ---
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Depreciation.......................... 28 31 15
Changes in assets and liabilities:
Prepaid pension cost................ (15) (24) (8)
Receivables, net.................... 28 (5) 32
Credit sales, noncurrent............ (1) (6) 16
Materials and supplies.............. (1) (1) 12
Prepaid expenses.................... (8) (2) (3)
Accounts payable.................... 12 1 (7)
Accrued income taxes................ (8) (5) (3)
Unearned revenue.................... 61 (30) (9)
Other liabilities................... 3 24 (9)
Deferred taxes...................... 33 13 4
Other, net.......................... 16 10 5
--- ---- ---
Total adjustments.................. 148 6 45
--- ---- ---
Net cash provided by operating ac-
tivities.......................... 236 100 69
--- ---- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................... (61) (68) (22)
Loans to related parties................ 0 0 (3)
Proceeds from property, plant, and
equipment sales........................ 1 1 5
Purchases of investments, net........... (15) 0 (2)
--- ---- ---
Net cash used in investing activi-
ties.............................. (75) (67) (22)
--- ---- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of share capital.................. 0 0 2
Common shares purchased................. 0 (103) 0
Payments of dividends................... (26) (30) 0
Change in short term borrowings......... (37) 24 (23)
--- ---- ---
Net cash used in financing activi-
ties.............................. (63) (109) (21)
--- ---- ---
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 98 (76) 26
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 5 103 27
--- ---- ---
CASH AND CASH EQUIVALENTS, end of peri-
od...................................... 103 27 53
=== ==== ===
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................. 10 11 5
=== ==== ===
Cash paid for income taxes.............. 11 33 6
=== ==== ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
South Western Electricity plc ("SWEB") is one of the twelve regional
electricity companies ("RECs") in England and Wales licensed to supply,
distribute, and, to a limited extent, generate electricity. The RECs were
created as a result of the privatization of the UK electricity industry in
1990 after the state owned low voltage distribution networks were allocated to
the then existing twelve regional boards. SWEB's main business, the
distribution and supply of electricity to customers in the southwest of
England, is regulated under the terms of SWEB's Public Electricity Supply
license by the Office of Electricity Regulation ("OFFER").
SWEB operates primarily in its Franchise Arm in southwest England. SWEB's
Franchise area covers approximately 5,560 square miles running from Bristol
and Bath in the northeast, 188 miles southwest along the peninsular to Land's
End and 28 miles beyond to the Isles of Scilly, and has a resident population
of approximately 2.8 million.
Basis of Presentation
The financial statements of the Company are presented in pounds sterling
((Pounds)) and in conformity with accounting principles generally accepted in
the United States.
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries and have been prepared
from records maintained by SWEB in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in companies in which the Company's ownership interests range from
20% to 50% and the Company exercises significant influence over operating and
financial policies are accounted for using the equity method. Other
investments are accounted for using the cost method. Dividends received from
investments accounted for under the cost method were (Pounds)9 million for the
year ended 1994, (Pounds)12 million for the year ended 1995, and nil for the
period from April 1, 1995 to September 17, 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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
SWEB records revenue net of value added tax ("VAT") and accrues revenues for
services provided but unbilled at the end of each reporting period. SWEB
purchases power primarily from a market for the bulk trading of electricity
(the "Pool").
The Company has a diversified base of customers. No single customer or
industry comprises 10% or more of revenues.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
F-23
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant, and Equipment
Property, plant, and equipment are recorded at original cost which includes
materials, labor, appropriate administrative and general costs, and the
estimated cost of funds used during construction. The cost of maintenance,
repairs, and replacement of minor items of property is charged to maintenance
expense.
Depreciation of the recorded cost of depreciable utility plant in service is
provided by using primarily composite straight-line rates (Note 9), which are
approximately 2.8% per year.
Information Technology Consultancy and Development Costs
Information technology consultancy and development costs are expensed when
incurred.
Investments
The Company accounts for its current investments in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for
Investments for Certain Debt and Equity Securities." These investments
represent investments in debt securities, which management classifies as
available-for-sale securities in accordance with SFAS No. 115. The unrealized
holding loss on investments was immaterial for the periods presented. The
Company's long-term investments consist of investments accounted for using the
cost-method.
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.
Unearned Revenue
Unearned revenue primarily represents the liability for payments received
from customers in connection with the assessment of a VAT on electricity
sales, which was imposed by the UK government effective April 1, 1994 to
include electricity sales to residential customers. As part of the adoption of
the tax, customers were allowed to prepay their electricity bills and avoid
the VAT on the element of the future electricity consumption which was
prepaid. Revenues are recognized as electricity is supplied to these
customers.
Price regulation permits the Company to bill for all estimated allowed
revenue, while actual allowed revenue is not known until after the end of the
fiscal year. When billings exceed the actual allowed revenue, revenues are
deferred on the excess amounts. The deferred amount is deducted from revenues
and included in current liabilities. When billings are less than the allowed
revenue, no anticipation of any potential future recovery is made.
Financial Instruments
The Company uses financial instruments primarily to mitigate the risk of
exposure to volatility in electricity prices. Such instruments are accounted
for as hedges, and accordingly, gains and losses are deferred and recognized
over the same period as the item hedged (Note 8).
The Company's carrying amount of financial instruments at March 31, 1995 was
zero (Note 8).
F-24
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RETIREMENT BENEFITS
Pension Plans
The Company operates two schemes, one based on defined contributions and a
second based on defined benefits.
Defined Contribution
The defined contribution plan was established in the year ended March 31,
1994. The assets of the defined contribution plan are held and administered by
an independent trustee. Contributions to the defined plan were not material
for any period presented.
Defined Benefit
SWEB participates in the Electricity Supply Pension Scheme, 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. Contributions to the plan by SWEB on behalf of its employees
were (Pounds)9.6 million for the period ended March 31, 1994, (Pounds)9.8
million for March 31, 1995, and (Pounds)3.7 million for the period from April
1, 1995 to September 17, 1995.
SWEB uses the "entry age normal method with a frozen initial liability"
actuarial method for funding purposes. Amounts funded to the pension are
primarily invested in equity and fixed income securities.
It was not feasible to adopt SFAS No. 87 on the effective date of the
standard. Accordingly, the unrecognized net transition asset at the date of
initial application of SFAS No. 87, April 1, 1993, is being amortized over 15
years, beginning April 1, 1989, in accordance with the interpretations of the
staff of the Securities and Exchange Commission. The amount of the
unrecognized net transition asset credited to equity on April 1, 1993 was
(Pounds)12.9 million.
The following table shows the actuarial results and assumptions for pension
benefits in respect of SWEB's share of the scheme, as computed under SFAS No.
87 (in millions):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
(Pounds)
<S> <C>
Actuarial present value of benefit obligation:
Vested benefits............................................... (443)
Nonvested benefits............................................ 0
----
Accumulated benefit obligation.................................. (443)
Effect of future increase in compensation....................... (33)
----
Projected benefit obligation.................................... (476)
----
Less:
Fair value of plan assets................................... 547
Unrecognized net transition asset........................... (29)
Unrecognized net loss....................................... 10
----
528
----
Prepaid pension asset........................................... 52
====
</TABLE>
F-25
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average rates assumed in the actuarial calculations as of the
following dates were:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate..................................... 8.75% 8.25% 8.75%
Annual salary rate increase....................... 6.0 5.5 6.0
Long-term rate of return on plan assets........... 9.5 9.5 9.5
</TABLE>
The components of the plan's net pension income during the periods are shown
below (in millions):
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
------------------- APRIL 1, 1995 TO
MARCH 31, MARCH 31, SEPTEMBER 17,
1994 1995 1995
--------- --------- ----------------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Benefits earned during the period........ 6 5 3
Interest cost on projected benefit obli-
gation.................................. 37 37 20
Actual return on plan assets............. (89) 0 (69)
Net amortization and deferral............ 40 (56) 42
--- --- ---
Net pension income....................... (6) (14) (4)
=== === ===
</TABLE>
3. EMPLOYEE INCENTIVE PLANS
South Western Electricity plc had established incentive compensation plans
under which it was authorized to grant incentive stock options in it's common
shares. There were two plans in operation.
The Sharesave Plan was open to all eligible employees at the date of grant
on December 11, 1990 at a price of (Pounds)1.75. The options were exercisable
in 1996 or at an earlier date if the employee retired or if the Company was
subject to acquisition (see Note 13). The activity in this plan was:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
March 31, 1993 outstanding..................................... 3,958,004
1994 activity:
Exercised.................................................... (192,924)
---------
March 31, 1994 outstanding................................... 3,765,080
1995 activity:
Exercised.................................................... (279,801)
---------
March 31, 1995 outstanding................................... 3,485,279
Activity to September 17, 1995:
Exercised.................................................... (81,122)
---------
September 17, 1995 outstanding............................... 3,404,157
=========
</TABLE>
F-26
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Executive Share Option Plan was open to Executive Directors and Senior
Employees. Options were granted at a price equal to the market value of the
stock at the date of grant and generally became exercisable over three to ten
years following the grant. The activity in this plan was:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF OPTION
OPTIONS PRICE
--------- --------
(Pounds)
<S> <C> <C>
March 31, 1993 outstanding........................... 1,356,447 2.96
1994 activity:
Granted............................................ 73,202 6.90
Exercised.......................................... (692,902) 2.64
Lapsed............................................. (15,822) 3.16
---------
March 31, 1994 outstanding........................... 720,925
1995 activity:
Granted............................................ 429,295 7.57
Exercised.......................................... (563,388) 3.17
---------
March 31, 1995 and September 17, 1995 outstanding.... 586,832 7.00
=========
</TABLE>
4. REGULATORY MATTERS
OFFER controls the revenues generated by SWEB in its distribution and supply
businesses by applying a price control formula, P + RPI - X, where P is the
price level at the beginning of each new regulatory period, RPI is the change
in the Retail Price Index (inflation) and X is an adjustment factor determined
by OFFER. For the year ended March 31, 1994, X was -2.25% for distribution and
0.0% for supply. For the year ended March 31, 1995, X was -2.25% for
distribution and 2.0% for supply, and for the period April 1, 1995 to
September 17, 1995, X was 3.0% for distribution and 2.0% for supply.
In the distribution business, the Distribution Price Control Formula
("DPCR") is usually set for a five-year period, subject to more frequent
adjustments as determined necessary by the Director General of Electricity
Supply (the "Regulator"). At each review, the Regulator can require a one-time
price reduction. An initial review by the Regulator of allowable income in the
distribution business led to a reduction of the price level by 14% for SWEB
for the twelve months starting April 1, 1995, followed by efficiency factors
of X= 2.0% for each year until March 2000. On July 6, 1995, the Regulator
announced the result of a further distribution price review which was
precipitated by certain market events in the UK electric utility industry. For
SWEB, such announcement meant a further real reduction of 11% in allowable
distribution income for the 12 months starting from April 1, 1996 using
efficiency factors of X= 3.0% for each year until March 31, 2000.
In the supply business, which is progressively being opened to competition,
price regulation still applies to the market for customers with a demand of up
to 100kW. The calculation of the maximum supply charge is based on a Supply
Price Control Formula, similar to the DPCR and is set for a four-year period.
In 1993, OFFER announced the supply franchise market (customers with demand of
not more than 100 kW) income
entitlement for the four-year period ending March 1998. A relatively small
efficiency factor of X= 2.0% was applied to SWEB and is being offset by an
allowance for both unit and customer growth. The nonfranchise markets above
1MW were opened to full competition during privatization in 1990; the
nonfranchise markets between 100kW and 1MW were opened to full competition
starting in April 1994.
F-27
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENT MATTERS
Power Purchase Agreements
SWEB has entered into a contract relating to the purchase of 200 megawatts
of capacity from a 7.69%-owned related party, Teesside Power Limited
("Teesside"), for a period of 15 years beginning April 1, 1993.
The Company has additional contracts with unaffiliated parties relating to
the purchase of electricity, which expire by March 31, 1998, and contracts
relating to the purchase of gas which expire by September 30, 1998, the terms
of which are immaterial with respect to quantity and price, both annually and
in the aggregate.
Operating Leases
SWEB has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled
(Pounds)5.7 million, (Pounds)6.1 million, and (Pounds)2.6 million, for the
years ended March 31, 1994 and 1995 and for the period from April 1, 1995 to
September 17, 1995, respectively. At March 31, 1995, estimated minimum rental
commitments for noncancelable operating leases were as follows (in millions):
<TABLE>
<CAPTION>
AMOUNT
--------
(Pounds)
<S> <C>
Fiscal year:
1996.......................................................... 5
1997.......................................................... 4
1998.......................................................... 3
1999.......................................................... 3
2000.......................................................... 3
Thereafter.................................................... 34
---
Total minimum payments...................................... 52
===
</TABLE>
Labor Subject to Collective Bargaining Agreements
Substantially all of SWEB's employees are subject to one of five collective
bargaining agreements. Such agreements are ongoing in nature, and SWEB's
employee participation level is consistent with that of the electric utility
industry in the Great Britain.
F-28
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SEGMENT REPORTING
The Company is primarily engaged in two electric industry segments:
distribution, which involves the transmission of electricity across its
network and its transfer and delivery to its customers, and supply, which
involves bulk purchase of electricity from the Pool and arranging for its sale
and transfer to its customers. Intersegment sales primarily represent sales
from distribution to supply for the use of the distribution networks.
Information about the Company's operations in these individual segments during
the years ended March 31, 1994 and 1995, and for the period from April 1, 1995
through September 17, 1995 and as of those respective period ends is detailed
below (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1994
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 250 772 54 (268) 808
Operating income........ 84 27 11 0 122
Depreciation............ 21 0 7 0 28
Total assets employed at
period end............. 483 92 324 (50) 849
Capital expenditures.... 53 1 10 0 64
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 274 725 57 (280) 776
Operating income........ 112 18 10 (1) 139
Depreciation............ 24 0 7 0 31
Total assets employed at
period end............. 531 93 294 (49) 869
Capital expenditures.... 54 0 13 0 67
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 105 276 23 (105) 299
Operating income........ 42 2 (4) 0 40
Depreciation............ 12 0 3 0 15
Total assets employed at
period end............. 537 54 289 (45) 835
Capital expenditures.... 19 0 2 0 21
</TABLE>
Included in "Other" above are insignificant operating subsidiaries of SWEB
(as well as corporate activities), and with the exception of total assets
employed, the values above exclude discontinued operations.
F-29
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Details of the income tax provision for the years ended March 31, 1994 and
1995 and for the period from April 1, 1995 to September 17, 1995 are as
follows (in millions):
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
MARCH 31 APRIL 1, 1995 TO
----------------- SEPTEMBER 17,
1994 1995 1995
-------- -------- ----------------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Provision for income taxes:
Currently payable................... 10 33 10
Deferred............................ 33 13 3
--- --- ---
Total provision................... 43 46 13
=== === ===
</TABLE>
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>
MARCH 31,
1995
---------
(Pounds)
<S> <C>
Deferred tax liabilities:
Property, plant, and equipment basis differences............ 147
Pensions.................................................... 17
---
Total................................................... 164
Deferred tax assets........................................... 10
---
Accumulated deferred income taxes in the consolidated balance
sheet........................................................ 154
===
</TABLE>
Reconciliations of the UK statutory rate to the effective income tax rate
for the year ended March 31, 1994, March 31, 1995, and for the period from
April 1, 1995 to September 17, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
MARCH 31 APRIL 1, 1995 TO
------------- SEPTEMBER 17,
1994 1995 1995
----- ----- ----------------
<S> <C> <C> <C>
UK statutory rate........................ 33% 33% 33%
Permanent differences.................... (0) (0) 2
----- -- --
Effective income tax rate................ 33% 33% 35%
===== == ==
</TABLE>
8. FINANCIAL INSTRUMENTS
SWEB utilizes contracts for differences ("CFDs") to mitigate its exposure to
volatility in the prices of electricity purchased through the Pool. Such
contracts allow the Company to effectively convert the majority of its
anticipated Pool purchases from market prices to fixed prices. CFDs are in
place to hedge a portion of electricity purchases on approximately 39,100 GWh
through the year 2008. Accordingly, the gains and losses on such contracts are
deferred and recognized as electricity is purchased. It is not possible to
estimate the fair value of these contracts at present as the contract prices
are based on future events, the effect of which currently are not estimable.
CFDs have been entered into with UK Power Generators.
F-30
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is exposed to losses in the event of nonperformance by
counterparties to its CFDs. To manage this credit risk, the Company selects
counterparties based on their credit ratings, limits its exposure to any one
counterparty under defined guidelines, and monitors the market position of the
programs and its relative market position with each counterparty.
9. PROPERTY, PLANT, AND EQUIPMENT
The Company records book depreciation expense on a straight-line basis,
except for distribution network assets which are charged at 3% for 20 years and
2% for the remaining 20 years. Assets are depreciated using the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Distribution network assets...................................... 40
Generation assets................................................ 15 to 40
Buildings........................................................ Up to 60
Fixtures and equipment........................................... 3 to 20
Vehicles and mobile plant........................................ 4 to 10
</TABLE>
Leasehold improvements are depreciated over the shorter of their useful lives
or related lease terms.
Property, plant, and equipment consisted of the following (in millions):
<TABLE>
<CAPTION>
MARCH 31,
1995
---------
(Pounds)
<S> <C>
Generation...................................................... 2
Distribution.................................................... 804
Nonnetwork land and buildings................................... 46
Fixtures and equipment.......................................... 101
Vehicles and mobile plant....................................... 24
Consumers' contributions........................................ (147)
----
830
Accumulated depreciation........................................ (289)
----
Property, plant, and equipment, net............................. 541
====
</TABLE>
There is an arrangement in place, known as "clawback," whereby HM Government
is entitled to a share in the profits realized by the Company on certain
property disposals made up to March 2000. Full provision for such clawback
liabilities is made as soon as the sale is recognized.
10. DEBT
Long-term debt at March 31, 1995 consisted of the following (in millions):
<TABLE>
<CAPTION>
(Pounds)
--------
<S> <C>
HM Government bonds.............................................. 80
Consortium tax creditor.......................................... 10
Long term loan................................................... 5
---
Total.......................................................... 95
===
</TABLE>
F-31
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 22, 1990, the Predecessor Company issued (Pounds)80 million
12.365% bonds to HM Government which were due for repayment at par in 2008;
these were redeemed on February 8, 1996 at a premium of (Pounds)18.1 million.
Based on market rates, the HM Government bonds had a fair value of (Pounds)100
million at March 31, 1995.
Consortium tax creditor represents the benefit of losses surrendered from
consortia in which the Company has invested, which are required to be repaid
at a later date.
The carrying value of the remaining debt instruments approximate fair value.
No interest is payable on debts other than the (Pounds)80 million HM
Government bonds.
11. STOCKHOLDERS' EQUITY
Under the authority of a special resolution passed at the 1994 Annual
General Meeting, the Company purchased 12.3 million of its own shares during
the year ended March 31, 1995, which were subsequently canceled. The total
consideration was (Pounds)103.1 million. The excess of cost over par value
((Pounds)96.9 million) was charged to retained earnings.
176,526 ordinary shares were issued during the year ended March 31, 1995
under South Western Electricity's Sharesave Scheme to employees who had left
the Company. The shares were fully paid up at an exercise price of
(Pounds)1.75 per ordinary share. The average market price of SWEB's shares
during the year ended March 31, 1995 was (Pounds)7.14.
One special rights redeemable preference share, held by the Secretary of
State, was redeemed at par on March 30, 1995 in accordance with the Company's
Articles of Association.
The share premium account and the capital redemption reserve are not
distributable.
12. DISCONTINUED OPERATIONS
On June 5, 1995, the Company sold its electrical retailing business for
(Pounds)4.3 million plus payment for materials and supplies, which resulted in
a loss on disposal of (Pounds)8.1 million, net of income tax effect of
(Pounds)4 million. A (Pounds)7.9 million charge for write-down of electrical
retailing assets is included in income from discontinued operations. These
losses and charges were included in net income for year ended March 31, 1995.
Subsequent revenues in the period April 1, 1995 to June 5, 1995 were (Pounds)9
million and (Pounds)77 million for the year ended March 31, 1995.
In connection with the acquisition of SWEB, the Company announced its plans
to dispose of the appliance servicing business on December 13, 1995 and its
electrical installation and contracting business on January 25, 1996. The
sales were completed in February 1996 and March 1996, respectively. All of
these losses and charges were provided on acquisition at September 18, 1995.
13. SUBSEQUENT EVENTS
On September 18, 1995, Southern Investments UK plc's ("SIUK") agreed bid for
SWEB was declared wholly unconditional, and as a result, SWEB's parent Company
is SIUK. SIUK is a wholly owned subsidiary of Southern Investments UK Holdings
Limited ("Holdings"), which was itself wholly owned indirectly by The Southern
Company.
On July 1, 1996, PP&L Resources, Inc. indirectly purchased a 25% share of
Holdings for (Pounds)121.5 million ($185 million).
F-32
<PAGE>
SOUTHERN INVESTMENTS UK PLC
(SUCCESSOR COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S. $
-------- ------
<S> <C> <C>
ASSETS
PROPERTY, PLANT, AND EQUIPMENT................................. 1,240 1,925
Less accumulated depreciation................................. 28 43
----- -----
Property, plant, and equipment, net....................... 1,212 1,882
----- -----
OTHER ASSETS:
Investments................................................... 22 34
Prepaid pension cost.......................................... 97 151
Goodwill, net of accumulated amortization of (Pounds)4........ 171 265
----- -----
Total other assets........................................ 290 450
----- -----
CURRENT ASSETS:
Cash and cash equivalents..................................... 21 33
Investments................................................... 11 17
Receivables:
Customer accounts, less provision for uncollectibles of
(Pounds)12 and (Pounds)19.................................. 100 155
Other....................................................... 10 16
----- -----
Receivables, net.......................................... 110 171
Materials and supplies........................................ 4 6
Prepaid expenses.............................................. 11 17
----- -----
Total current assets...................................... 157 244
----- -----
Total assets.............................................. 1,659 2,576
===== =====
</TABLE>
<TABLE>
<S> <C> <C>
STOCKHOLDER'S EQUITY AND LIABILITIES
STOCKHOLDER'S EQUITY:
Share capital, (Pounds)1 par value, 500,400,587 shares autho-
rized, issued, and outstanding................................. 500 776
Accumulated deficit............................................. (134) (208)
----- -----
Total stockholder's equity................................. 366 568
----- -----
OTHER NON-CURRENT LIABILITIES:
Deferred income taxes........................................... 377 585
Provision for loss contracts.................................... 67 104
Other........................................................... 62 97
----- -----
Total other non-current liabilities......................... 506 786
----- -----
CURRENT LIABILITIES:
Debt............................................................ 637 989
Accounts payable................................................ 38 59
Accrued income taxes............................................ 20 31
Unearned revenue................................................ 7 11
Other........................................................... 85 132
----- -----
Total current liabilities................................... 787 1,222
----- -----
COMMITMENTS AND CONTINGENT MATTERS (Note 3)
Total stockholder's equity and liabilities.................. 1,659 2,576
===== =====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-33
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR SUCCESSOR
COMPANY COMPANY COMPANY
1995 1996 1996
----------- --------- ---------
(Pounds) (Pounds) U.S.$
<S> <C> <C> <C>
OPERATING REVENUES............................................................................ 167 181 281
COST OF SALES................................................................................. 107 122 189
--- --- ---
GROSS MARGIN.................................................................................. 60 59 92
=== === ===
OPERATING EXPENSES:
Maintenance.................................................................................. 10 9 14
Depreciation and amortization................................................................ 8 10 16
Selling, general, and administrative......................................................... 16 13 20
--- --- ---
Total operating expenses................................................................. 34 32 50
--- --- ---
Operating income......................................................................... 26 27 42
--- --- ---
OTHER INCOME (EXPENSE):
Interest income.............................................................................. 1 0 0
Interest expense............................................................................. (3) (13) (20)
Other, net................................................................................... 1 3 4
--- --- ---
Total other expense...................................................................... (1) (10) (16)
=== === ===
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......................................... 25 17 26
PROVISION FOR INCOME TAXES.................................................................... (9) (6) (9)
- --------------------------------------------------
--- --- ---
NET INCOME.................................................................................... 16 11 17
=== === ===
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR SUCCESSOR
COMPANY COMPANY COMPANY
1995 1996 1996
----------- --------- ---------
(Pounds) (Pounds) U.S.$
<S> <C> <C> <C>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES............................................... 21 30 47
--- --- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................................ (9) (14) (22)
Loans to related parties.................................................................... 0 (3) (5)
Proceeds from property sales................................................................ 17 3 5
Purchases of investments, net............................................................... (10) 10 16
--- --- ---
Net cash used in investing activities................................................... (2) (4) (6)
--- --- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends....................................................................... 0 (12) (19)
Change in short term borrowings............................................................. (21) (13) (20)
--- --- ---
Net cash used in financing activities................................................... (21) (25) (39)
--- --- ---
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................................................................. (2) 1 2
CASH AND CASH EQUIVALENTS, beginning of period................................................ 27 20 31
--- --- ---
CASH AND CASH EQUIVALENTS, end of period...................................................... 25 21 33
=== === ===
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................................................. (3) (13) (20)
- --------------------------------------------------
=== === ===
Cash paid for income taxes.............................................................. (13) (12) (19)
=== === ===
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE>
NOTES TO THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the management of Southern Investments UK plc (the
"Company") in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
usually found in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. In the opinion
of the management of the Company, all adjustments (consisting of only normal
recurring adjustments) considered necessary for fair presentation of the
condensed consolidated financial statements have been included, and the
accompanying condensed consolidated financial statements present fairly the
financial position and the results of operations for the interim periods
presented. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included elsewhere in
this prospectus.
The financial statements as of June 30, 1996 are presented in pounds
sterling ("(Pounds)") and in U.S. dollars ("$ or U.S. $"), solely for the
convenience of the reader, at the exchange rate of (Pounds)1 = U.S. $1.5529,
the noon buying rate in New York City for cable transfers in pounds sterling
as certified for customs purposes by the Federal Reserve Bank of New York on
June 28, 1996. No representation is made that the pounds sterling amounts have
been, could have been, or could be converted into U.S. dollars at that or any
other rate of exchange.
2. COMPARABILITY OF PERIODS
The condensed financial information included herein shows the results of the
Successor Company for the three months ended June 30, 1996 and those of the
Predecessor Company for the three months ended June 30, 1995. The results for
both periods have been prepared under US GAAP.
As a result of the acquisition, the basis of accounting for the Successor
Company differs from that for the Predecessor Company. The condensed
consolidated financial statements of the Predecessor Company are presented on
a historical cost basis while the consolidated financial statements of the
Successor Company reflect the acquisition under the purchase method of
accounting. Under the purchase method of accounting, fair value was assigned
to the assets and liabilities of SWEB at the date the Company acquired
effective control of SWEB. Goodwill was created to the extent the purchase
price exceeded the difference between the fair value of SWEB's assets and the
fair value of its liabilities.
The recorded assets and liabilities of SWEB immediately prior to the time
the Company gained effective control of SWEB were (Pounds)855 million ($1.328
billion) and (Pounds)515 million ($800 million), respectively. As a result of
the purchase method of accounting, the amount of SWEB's assets recorded on the
books of the Company was increased by (Pounds)910 million ($1.413 billion) to
their fair value of (Pounds)1.765 billion ($2.741 billion), and the amount of
SWEB's liabilities recorded on the books of the Company was increased by
(Pounds)362 million ($562 million) to their fair value of (Pounds)877 million
($1.362 billion). The increase in liabilities included the establishment of
reserves totaling (Pounds)44 million ($68 million) related to staff reductions
and the disposition of ancillary businesses. The resulting difference between
the purchase price of (Pounds)1.063 billion ($1.651 billion) and the
difference between the fair value of the assets acquired and the fair value of
the liabilities assumed as well as the reserves established resulted in
goodwill of (Pounds)175 million ($272 million).
3. COMMITMENTS AND CONTINGENT MATTERS
Power Purchase Agreements
SWEB has entered into a contract relating to the purchase of 200 megawatts
of capacity from a 7.69%-owned related party, Teesside Power Limited
("Teesside"), for a period of 15 years beginning April 1, 1993. The contract
with Teesside involves purchases which were above market rates at the
acquisition date. Accordingly, the Company recognized a (Pounds)60 million
($93 million) accrual at the acquisition date for the cost of this contract.
F-36
<PAGE>
The Company has additional contracts with unaffiliated parties relating to
the purchase of electricity, which expire by March 31, 1998, and contracts
relating to the purchase of gas which expire by September 30, 1998, the terms
of which are immaterial with respect to quantity and price, both annually and
in the aggregate.
Operating Leases
SWEB has commitments under operating leases with various terms and
expiration dates. Expenses associated with these commitments totaled (Pounds)3
million ($5 million) for the period from September 18, 1995 to March 31, 1996.
At March 31, 1996, estimated minimum rental commitments for noncancelable
operating leases were as follows (in millions):
<TABLE>
<CAPTION>
AMOUNT
------------
(Pounds) $
<S> <C> <C>
Fiscal year:
1997...................................................... 2 3
1998...................................................... 2 3
1999...................................................... 2 3
2000...................................................... 1 2
2001...................................................... 1 2
Thereafter................................................ 10 15
--- ---
Total minimum payments.................................. 18 28
=== ===
</TABLE>
Labor Subject to Collective Bargaining Agreements
Substantially all of SWEB's employees are subject to one of five collective
bargaining agreements. Such agreements are ongoing in nature, and SWEB's
employee participation level is consistent with that of the electric utility
industry in Great Britain.
F-37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of income for the year ended
March 31, 1996 reflects the historical results of Southern Investments UK plc
for the period from September 18, 1995 to March 31, 1996 and of South Western
Electricity plc for the period from April 1, 1995 to September 17, 1995,
adjusted to show the results for the year ended March 31, 1996, as if the
purchase business combination had occurred on April 1, 1995. The pro forma
adjustments relate to the allocation of fair values of assets acquired and
liabilities assumed, as well as reflect the Predecessor period in US GAAP.
The pro forma consolidated information does not consider the (Pounds)9
million of bid defense costs incurred during the Predecessor period.
This information is prepared for illustrative purposes only and, because of
its nature, cannot give a complete picture of the Company's results of
operations had the transactions been consummated on the date assumed and does
not project the Company's financial position or results of operations for any
future date or period. The unaudited pro forma consolidated statement of
income should be read in conjunction with the consolidated financial
statements of Southern Investments UK plc and the related notes thereto.
Unaudited amounts have been prepared based upon the consolidated financial
statements of the Company, which have been prepared in accordance with US
GAAP.
F-38
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH
31, 1996
The following unaudited pro forma statement of income is based upon the
consolidated statement of income for the period from September 18, 1995 to
March 31, 1996 of the Successor Company and the statement of income of the
Predecessor Company for the period from April 1, 1995 to September 17, 1995,
adjusted to reflect the items described in notes (1) to (5) below as if the
purchase business combination had occurred at the beginning of the period.
<TABLE>
<CAPTION>
IN MILLIONS
------------------------------------------------------------------------
SUCCESSOR PERIOD PREDECESSOR PERIOD PRO FORMA FOR
SEPTEMBER 18, 1995 APRIL 1, 1995 TO THE YEAR ENDED
TO MARCH 31, 1996 SEPTEMBER 17, 1995 MARCH 31, 1996
U.S. GAAP U.S. GAAP ADJUSTMENTS U.S. GAAP
------------------ ------------------ ------------------ --------------
(Pounds) (Pounds) 1 2 3 4 (Pounds) U.S.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues................................. 481 299 -- -- -- -- 780 1,211
Cost of sales...................................... 318 186 -- -- -- -- 504 783
--- --- --- --- --- --- --- -----
Gross margin....................................... 163 113 -- -- -- -- 276 428
--- --- --- --- --- --- --- -----
Operating expenses:
Maintenance...................................... 21 18 -- -- -- -- 39 60
Depreciation and amortization.................... 22 15 3 2 -- -- 42 65
Selling, general, and administrative............. 34 40 -- -- -- -- 74 115
--- --- --- --- --- --- --- -----
Total operating expenses....................... 77 73 3 2 -- -- 155 240
--- --- --- --- --- --- --- -----
Operating income............................... 86 40 (3) (2) -- -- 121 188
--- --- --- --- --- --- --- -----
Other income (expense):
Interest income.................................. 7 2 -- -- -- -- 9 14
Interest expense................................. (28) (5) -- -- (1) (32) (66) (102)
Gain on sale of property......................... 14 -- -- -- -- -- 14 22
Other, net....................................... 2 1 -- -- -- -- 3 4
--- --- --- --- --- --- --- -----
Total other expense............................ (5) (2) -- -- (1) (32) (40) (62)
--- --- --- --- --- --- --- -----
Income from continuing operations before income
taxes............................................. 81 38 (3) (2) (1) (32) 81 126
Provision for income taxes......................... 28 13 -- -- -- (11) 30 46
--- --- --- --- --- --- --- -----
Income from continuing operations.................. 53 25 (3) (2) (1) (21) 51 80
Extraordinary gain on early extinguishment of debt,
net of income tax effect of (Pounds)3 million..... 6 -- -- -- -- -- 6 9
Discontinued operations, net....................... -- (1) -- -- -- -- (1) (2)
- -------------------------------------------------- --- --- --- --- --- --- --- -----
Net income......................................... 59 24 (3) (2) (1) (21) 56 87
=== === === === === === === =====
</TABLE>
- --------
(1) Depreciation expense which would have been recorded based on the valuation
of property, plant, and equipment recorded in connection with the purchase
business combination, as if such combination had occurred on April 1,
1995.
(2) Amortization of goodwill recorded in connection with the purchase business
combination as if the combination had occurred on April 1, 1995.
(3) Reflect the fair value of long-term debt obligations and associated
interest expense recorded in connection with the purchase business
combination as if the combination had occurred on April 1, 1995.
(4) Reflect the interest expense recorded in connection with the purchase
business combination as if the combination had occurred on April 1, 1995
and had been 100% financed with short-term borrowings at an interest rate
of 6% per year.
F-39
<PAGE>
===============================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SENIOR NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OF-
FERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 14
The Company.............................................................. 16
Use of Proceeds.......................................................... 19
Capitalization........................................................... 19
Exchange Rates........................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 34
The Electric Utility Industry in Great Britain........................... 42
Management............................................................... 49
Certain Relationships and Related Transactions........................... 50
Security Ownership....................................................... 51
Description of the Senior Notes.......................................... 52
Certain Income Tax Considerations........................................ 66
Underwriting............................................................. 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Available Information.................................................... 71
Luxembourg Stock Exchange and Other Information.......................... 72
Glossary................................................................. A-1
Index to Financial Statements............................................ F-1
</TABLE>
------------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE SENIOR NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
$235,000,000
SOUTHERN INVESTMENTS UK PLC
% SENIOR NOTES DUE 2006
------------------
PROSPECTUS
, 1996
------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P.MORGAN & CO.
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale
and distribution of the securities being registered.
<TABLE>
<CAPTION>
ITEM
-------
<S> <C>
SEC registration fee............................................. $81,035
Blue Sky fees and expenses....................................... +
Printing and engraving expenses.................................. +
Legal fees and expenses.......................................... +
Accountants fees and expenses.................................... +
Trustee and Book-Entry Depositary fees and expenses.............. +
Miscellaneous.................................................... +
-------
Total.......................................................... $ +
=======
</TABLE>
--------
+ To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under UK law there is a general rule that any provision (whether contained
in a company's articles or in any other arrangement with the company)
exempting an officer of the company from, or indemnifying him against, any
liability for negligence or other breach of duty in relation to the company is
void (this would include liability for fraud or dishonesty). As an exception
to this rule, a company may indemnify an officer against a liability incurred
by him in defending any proceedings in which judgment is given in his favor or
in which he is acquitted. A company may also give an indemnity where, in any
proceedings against a director, the court relieves him from liability for
negligence or breach of duty where he has acted honestly and reasonably and
ought fairly to be excused from liability. An indemnity is permitted where a
director acts within his powers and is not guilty of negligence or other
breach of duty. A company is also permitted to purchase insurance against any
such liability.
Southern has an insurance policy covering the liabilities and expenses of
Southern and its direct and indirect subsidiaries which might arise in
connection with their lawful indemnification of their directors and officers
for certain of their liabilities and expenses and also covering their officers
and directors against certain other liabilities and expenses.
The Bylaws of Southern Electric provide that no present or future director
or officer of Southern Electric shall be liable for any act, omission, step,
or conduct taken or had in good faith, which is required, authorized, or
approved by any order or orders issued pursuant to the Public Utility Holding
Company Act of 1935, the Federal Power Act, or any federal or state statute or
municipal ordinance regulating Southern Electric or its parent by reason of
their being holding or investment companies, public utility companies, public
utility holding companies, or subsidiaries of public utility holding
companies. In the event that the foregoing provisions are found not to
constitute a valid defense on the grounds of not being applicable to the
particular class of plaintiff, each such director and officer is required to
be reimbursed under such Bylaws for, or indemnified against, all expenses and
liabilities incurred by him or imposed on him, in connection with, or arising
out of, any such action, suit, or proceeding based on any act, omission, step,
or conduct taken or had in good faith as in such provisions described.
II-1
<PAGE>
The Bylaws of Southern Electric further provide that each person who is or
was a director of Southern Electric or officer or employee of Southern
Electric holding one or more positions of management through and inclusive of
Project managers and Business Development Managers (but not positions below
the level of such managers) (such positions being hereinafter referred to as
"Management Positions") and who was or is a party or was or is threatened to
be made a party to any threatened, pending or completed claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was serving at the request of Southern
Electric as a director, alternate director, officer, employee, agent or
trustee of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall be indemnified by Southern Electric as
a matter of right against any and all expenses (including attorneys' fees)
actually and reasonably incurred by him and against any and all claims,
judgments, fines, penalties, liabilities and amounts paid in settlement
actually incurred by him in defense of such claim, action, suit or proceeding,
including appeals, to the full extent permitted by applicable law. Expenses
(including attorneys' fees) incurred by a director of Southern Electric or
officer or employee of Southern Electric holding one or more Management
Positions with respect to the defense of any such claim, action, suit or
proceeding may be advanced by Southern Electric prior to the final disposition
of such claim, action, suit or proceeding, as authorized by the board of
directors in the specific case, upon receipt of an undertaking by or on behalf
of such person to repay such amount unless it shall ultimately be determined
that such person is entitled to be indemnified by Southern Electric under such
provisions or otherwise.
The Articles of Association of the Company provide that, without prejudice
to the provisions of Regulation 118 of Table A of the Companies Acts 1985 to
1989 under UK law, the directors shall have power to purchase and maintain
insurance for or for the benefit of any persons who are or were at any time
directors, officers, or employees or auditors of the Company, or of any other
company which is its holding company or parent undertaking or in which the
Company or such holding company or parent undertaking or any of the
predecessors of the Company or of such holding company or parent undertaking
has any interest whether direct or indirect or which is in any way allied to
or associated with the Company, or of any subsidiary undertaking of the
Company or of any such other company, or who are or were at any time trustees
of any pension fund in which any employees of the Company or of any such other
company or subsidiary undertaking are interested, including (without prejudice
to the generality of the foregoing) insurance against any liability incurred
by such persons in respect of any act or omission in the actual or purported
execution and/or discharge of their duties and/or in the exercise or purported
exercise of their powers and/or otherwise in relation to their duties, powers
or offices in relation to the Company or any such other company, subsidiary
undertaking or pension fund. For the purposes of this Regulation "holding
company" "parent undertaking" and "subsidiary undertaking" shall have the same
meanings as in the Companies Acts 1985 to 1989.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Upon its incorporation on June 23, 1995, the Company issued two ordinary
shares at (Pounds)1 each to its two corporate incorporators, both of which
were incorporated in England and Wales. On July 4, 1995 the Company issued
49,998 ordinary shares at an aggregate price of (Pounds)49,998 to Holdings,
formerly Premier American Investments plc, at which time Holdings also
acquired the 2 shares held by the incorporators. On October 6, 1995 the
Company issued to Holdings an additional 500,350,587 ordinary shares at an
aggregate price of (Pounds)500,350,587, one of which is held by a UK resident
individual as nominee for Holdings.
During the period July 13, 1995 to August 24, 1995 the Company issued a
series of bonds underwritten by Swiss Bank Corporation (acting through its
division, SBC Warburg), Chemical Investment Bank Limited, IBJ International
plc, National Westminster Bank plc and The Toronto-Dominion Bank with an
aggregate offering price of (Pounds)627,070,000 and underwriting discounts and
commissions in the amount of (Pounds)6,270,700.
All such issuances and sales were exempt from registration requirements of
the Securities Act, by reason of the fact that such securities were offered
and sold outside the United States to persons who were not citizens of the
United States or in transactions which were exempt from registration pursuant
to Regulation S of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement among the Company and the Underwrit-
ers.*
3.1 Memorandum of Association of the Company.**
3.2 Articles of Association of the Company.**
4.1 Form of Trust Indenture between the Trustee and the Company.**
4.2 Form of First Supplemental Indenture between the Trustee and the Com-
pany.**
5.1 Opinion of Shearman & Sterling regarding the legality of the securi-
ties being registered.*
8.1 Opinion of Troutman Sanders LLP regarding taxation.*
8.2 Opinion of Allen & Overy regarding taxation.*
10.1 SWEB Public Electricity Supply License dated January 31, 1996.**
10.2 Modifications of License Conditions dated March 31, 1994, March 30,
1994, June 30, 1993, June 15, 1992, and April 22, 1992.**
10.3 Pooling and Settlement Agreement as amended and restated at December
2, 1994 between SWEB, Energy Settlements and Information Services (as
Settlement System Administrator), Energy Pool Funds Administration
Limited (as Pool Funds Administrator), The National Grid Company plc
(as Grid Operator and Ancillary Services Provider), SWEB and Other
Parties.**
10.4 Master Connection and Use of System Agreement dated as of March 30,
1990 among The National Grid Company plc and its users (including
SWEB).**
10.5 Form of Supplemental Agreement between The National Grid Company plc
and SWEB.**
10.6 Master Agreement dated as of October 25, 1995 among The National Grid
Holding plc, The National Grid Company plc, SWEB and the other RECs.**
10.7 Memorandum of Understanding between The National Grid Group plc, SWEB
and each of the RECs, dated November 17, 1995.**
10.8 Form of SWEB Use of Distribution System Agreement.**
10.9 Form of Agreement for the Connection of an Exit Point.**
10.10 Services Agreement dated as of January 1, 1996 between Southern Elec-
tric International, Inc. and the Company.**
10.11 Services Agreement dated as of January 1, 1996 between Southern Elec-
tric International, Inc. and SWEB.**
10.12 Services Agreement dated as of January 1, 1996 between SWEB and South-
ern Investments UK Holdings Limited.**
10.13 Services Agreement dated as of January 1, 1996 between the Company and
SWEB.**
12.1 Statements re: Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries of the Company.**
23.1 Consent of Arthur Andersen.
23.2 Consent of Ernst & Young.
23.3 Consent of Arthur Andersen.
23.4 Consent of Shearman & Sterling (included in Exhibit 5.1).*
23.5 Consent of Troutman Sanders LLP (included in Exhibit 8.1).*
23.6 Consent of Allen & Overy (included in Exhibit 8.2).*
24.1 Resolution and Powers of Attorney.**
25.1 Statement of Eligibility of Trustee.*
27.1 Financial Data Schedule.
99.1 The (Pounds)600 million Revolving Credit and Term Loan Agreement dated
January 12, 1996, among Southern Investments UK plc and South Western
Electricity plc as borrowers, J.P. Morgan Securities Ltd. as arranger
and Morgan Guaranty Trust Company as Agent and the banks named there-
in.**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Predecessor, and the
Successor Company are filed as part of this Company Registration Statement:
SOUTHWESTERN ELECTRICITY plc
(Predecessor Company)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For Years Ended March 31, 1994 and 1995
And for the Period From April 1, 1995 to September 17, 1995
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
(Successor Company)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
And for the Period From September 18, 1995 to March 31, 1996
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted as to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act, 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-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT,
SOUTHERN INVESTMENTS UK PLC, A PUBLIC LIMITED COMPANY DULY ORGANIZED AND
EXISTING UNDER THE LAWS OF ENGLAND AND WALES, HAS DULY CAUSED THIS AMENDMENT TO
THE REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ATLANTA, GEORGIA ON THE 28TH DAY OF
AUGUST 1996.
SOUTHERN INVESTMENTS UK PLC
*
By: _________________________________
RICHARD J. PERSHING
DIRECTOR AND CHIEF EXECUTIVE
OFFICER
/s/ Edwin Adams
*By: ________________________________
EDWIN ADAMS
ATTORNEY-IN-FACT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON AUGUST
28, 1996 IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
* Chairman and Chief Executive
- ------------------------------------- Officer
RICHARD J. PERSHING
* Chief Financial and
- ------------------------------------- Accounting Officer
C.B. HARRELD
* Director
- -------------------------------------
THOMAS G. BOREN
* Director
- -------------------------------------
ALAN W. HARRELSON
* Director
- -------------------------------------
GALE E. KLAPPA
* Director
- -------------------------------------
C. PHILIP SAUNDERS
* Director
- -------------------------------------
CHARLES W. WHITNEY
II-5
<PAGE>
SIGNATURE TITLE
ACCENTACROSS LIMITED
* Director
By: _________________________________
ROBERT D. FAGAN
MIGHTEAGER LIMITED
* Director
By: _________________________________
ROBERT D. FAGAN
/s/ Edwin Adams
*By: ________________________________
EDWIN ADAMS
ATTORNEY-IN-FACT
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To the Board of Directors of Southern Investments UK plc:
We have audited in accordance with generally accepted auditing standards, the
financial statements of SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(Successor Company) included in this registration statement and have issued
our report thereon dated July 25, 1996. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 16(b) is the responsibility of the company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. The schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen
Bristol, England
July 25, 1996
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON SCHEDULE
To: THE BOARD OF DIRECTORS
South Western Electricity plc
We have audited the consolidated financial statements of South Western
Electricity plc (Predecessor Company) as of March 31, 1995 and for the years
ended March 31, 1995 and 1994, and have issued our report thereon dated August
27, 1996. Our audit also included the financial statement schedule listed in
Item 16(b). This schedule is the responsibility of the company's management.
Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
ERNST & YOUNG
Chartered Accountants
Bristol, England
August 27, 1996
S-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To the Board of Directors of South Western Electricity plc:
We have audited in accordance with generally accepted auditing standards, the
financial statements of SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(Predecessor Company) included in this registration statement and have issued
our report thereon dated August 27, 1996. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The schedule
listed in Item 16(b) is the responsibility of the company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen
Bristol, England
August 27, 1996
S-3
<PAGE>
SOUTHWESTERN ELECTRICITY PLC
(PREDECESSOR COMPANY)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR YEARS ENDED MARCH 31, 1994 AND 1995
AND FOR THE PERIOD FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
(IN MILLIONS (Pounds))
<TABLE>
<CAPTION>
ADDITIONS
-----------------
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING OF AND TO OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Provision for Uncollecti-
ble Accounts:
Year Ended March 31,
1994................... 14 6 (7) 13
=== === === === ===
Year Ended March 31,
1995................... 13 7 (8) 12
=== === === === ===
Period from April 1,
1995 to September 17,
1995................... 12 2 (3) 11
=== === === === ===
</TABLE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
AND FOR THE PERIOD FROM SEPTEMBER 18, 1995 TO MARCH 31, 1996
(IN MILLIONS (Pounds))
<TABLE>
<CAPTION>
ADDITIONS
-----------------
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING OF AND TO OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Provision for Uncollectible
Accounts:
Period from September 18,
1995 to March 31, 1996.. 15(1) 3 (1) 17
=== === === === ===
</TABLE>
- --------
(1) Includes an additional (Pounds)4 million of provision created resulting
from the application of purchase accounting at the acquisition.
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Company and the Under-
writers.*
3.1 Memorandum of Association of the Company.**
3.2 Articles of Association of the Company.**
4.1 Form of Trust Indenture between the Trustee and the Company.**
4.2 Form of First Supplemental Indenture between the Trustee and
the Company.**
5.1 Opinion of Shearman & Sterling regarding the legality of the
securities being registered.*
8.1 Opinion of Troutman Sanders LLP regarding taxation.*
8.2 Opinion of Allen & Overy regarding taxation.*
10.1 SWEB Public Electricity Supply License dated January 31,
1996.**
10.2 Modifications of License Conditions dated March 31, 1994, March
30, 1994, June 30, 1993, June 15, 1992, and April 22, 1992.**
10.3 Pooling and Settlement Agreement as amended and restated at De-
cember 2, 1994 between SWEB, Energy Settlements and Information
Services (as Settlement System Administrator), Energy Pool
Funds Administration Limited (as Pool Funds Administrator), The
National Grid Company plc (as Grid Operator and Ancillary Serv-
ices Provider), SWEB and Other Parties.**
10.4 Master Connection and Use of System Agreement dated as of March
30, 1990 among The National Grid Company plc and its users (in-
cluding SWEB).**
10.5 Form of Supplemental Agreement between The National Grid Com-
pany plc and SWEB.**
10.6 Master Agreement dated as of October 25, 1995 among The Na-
tional Grid Holding plc, The National Grid Company plc, SWEB
and the other RECs.**
10.7 Memorandum of Understanding between The National Grid Group
plc, SWEB and each of the RECs, dated November 17, 1995.**
10.8 Form of SWEB Use of Distribution System Agreement.**
10.9 Form of Agreement for the Connection of an Exit Point.**
10.10 Services Agreement dated as of January 1, 1996 between Southern
Electric International, Inc. and the Company.**
10.11 Services Agreement dated as of January 1, 1996 between Southern
Electric International, Inc. and SWEB.**
10.12 Services Agreement dated as of January 1, 1996 between SWEB and
Southern Investments UK Holdings Limited.**
10.13 Services Agreement dated as of January 1, 1996 between the Com-
pany and SWEB.**
12.1 Statements re: Computation of Ratio of Earnings to Fixed
Charges.
21.1 List of Subsidiaries of the Company.**
23.1 Consent of Arthur Andersen.
23.2 Consent of Ernst & Young.
23.3 Consent of Arthur Andersen.
23.4 Consent of Shearman & Sterling (included in Exhibit 5.1).*
23.5 Consent of Troutman Sanders LLP (included in Exhibit 8.1).*
23.6 Consent of Allen & Overy (included in Exhibit 8.2).*
24.1 Resolution and Powers of Attorney.**
25.1 Statement of Eligibility of Trustee.*
27.1 Financial Data Schedule.
99.1 The (Pounds)600 million Revolving Credit and Term Loan Agree-
ment dated January 12, 1996, among Southern Investments UK plc
and South Western Electricity plc as borrowers, J.P. Morgan Se-
curities Ltd. as arranger and Morgan Guaranty Trust Company as
Agent and the banks named therein.**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY UK GAAP PREDECESSOR COMPANY US GAAP
----------------------------------- ----------------------------------
YEAR ENDED PERIOD FROM
YEAR ENDED MARCH 31, MARCH 31, APRIL 1, 1995 TO
----------------------------------- ---------- SEPTEMBER 17,
1992 1993 1994 1995 1994 1995 1995
-------- -------- -------- -------- -------- -------- ----------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense on
debt.................. 15.7 13.6 10.8 11.3 11.0 11.0 5.0
==== ===== ===== ===== ===== ===== ====
Earnings:
Consolidated net in-
come.................. 62.3 77.7 92.9 85.9 88.0 94.0 24.0
Extraordinary loss
(gain)................ -- -- -- 20.0 -- -- --
Consolidated provision
for income taxes...... 20.7 23.4 23.9 25.6 43.0 50.0 13.0
Discontinued opera-
tions, net............ -- -- (2.1) (1.3) -- 7.0 1.0
Fixed charges.......... 15.7 13.6 10.8 11.3 11.0 11.0 5.0
---- ----- ----- ----- ----- ----- ----
98.7 114.7 125.5 141.5 142.0 162.0 43.0
==== ===== ===== ===== ===== ===== ====
Ratio of earnings to
fixed changes.......... 6.3 8.4 11.6 12.5 12.9 14.7 8.6
==== ===== ===== ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
SUCCESSOR COMPANY US GAAP US GAAP US GAAP
------------------------------- ------------- -------------
SEPTEMBER 18,
1995 PRO FORMA THREE MONTHS THREE MONTHS
MARCH 31, FISCAL YEAR ENDED ENDED ENDED
1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ----------------- ------------- -------------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Fixed charges:
Interest expense on
debt.................. 28.0 66.0 3.0 13.0
===== ===== ==== ====
Earnings:
Consolidated net in-
come.................. 59.0 56.0 16.0 11.0
Extraordinary loss
(gain)................ (6.0) (6.0) -- --
Consolidated provision
for income taxes...... 28.0 30.0 9.0 6.0
Discontinued opera-
tions, net............ -- 1.0 -- --
Fixed charges.......... 28.0 66.0 3.0 13.0
----- ----- ---- ----
109.0 147.0 28.0 30.0
===== ===== ==== ====
Ratio of earnings to
fixed changes.......... 3.9 2.2 9.3 2.3
===== ===== ==== ====
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated July 25, 1996 on the financial statements of SOUTHERN INVESTMENTS UK PLC
AND SUBSIDIARIES (Successor Company) and the related financial statement
schedule included in this registration statement.
Arthur Andersen
Bristol, England
August 27, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to the
use of our reports dated August 27, 1996 with respect to the financial
statements of South Western Electricity plc (Predecessor Company) in Amendment
No. 1 to the Registration Statement (Form S-1 No. 333-09033) of Southern
Investments UK plc for the registration of $235,000,000 of its Senior Notes
Due 2006.
ERNST & YOUNG
Chartered Accountants
Bristol, England
August 27, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated August 27, 1996 on the financial statements of SOUTH WESTERN ELECTRICITY
PLC AND SUBSIDIARIES (Predecessor Company) and the related financial statement
schedule included in this registration statement.
Arthur Andersen
Bristol, England
August 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000,000
<CURRENCY> BRITISH POUNDS STERL
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> SEP-18-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1.5529
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,207
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 189
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 290
<TOTAL-ASSETS> 1,686
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 500
<RETAINED-EARNINGS> (132)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 368
0
0
<LONG-TERM-DEBT-NET> 0
<SHORT-TERM-NOTES> 650
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 668
<TOT-CAPITALIZATION-AND-LIAB> 1,686
<GROSS-OPERATING-REVENUE> 481
<INCOME-TAX-EXPENSE> 28
<OTHER-OPERATING-EXPENSES> 395
<TOTAL-OPERATING-EXPENSES> 395
<OPERATING-INCOME-LOSS> 86
<OTHER-INCOME-NET> 23
<INCOME-BEFORE-INTEREST-EXPEN> 109
<TOTAL-INTEREST-EXPENSE> 28
<NET-INCOME> 59
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 191
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 12
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
