===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q/A
Amendment No. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
----------- ----------------------------------- ------------------
333-09033 Southern Investments UK plc None
(Registered in England & Wales)
800 Park Avenue
Aztec West
Almondsbury
Bristol
BS32 4SE, UK
(01144) 1454 201101
==============================================================================
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X __ No __
<TABLE>
<CAPTION>
<S> <C> <C>
Description of Shares Outstanding
Registrant Common Stock at January 31, 1997
- ---------- -------------- -------------------
Southern Investments UK plc Par Value(pound)1 Per Share 500, 400, 587
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
<S> <C> <C>
For the Three For the Three
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
(pound) US $ (pound)
(Note G)
OPERATING REVENUES 242 414 219
COST OF SALES 173 296 143
---- ---- ----
GROSS MARGIN 69 118 76
---- ---- ----
OPERATING EXPENSES:
Maintenance 8 14 10
Depreciation and amortization 10 17 11
Selling, general, and administrative 12 20 18
---- ---- ----
Total operating expenses 30 51 39
---- ----- ----
Operating income 39 67 37
---- ----- ----
OTHER INCOME (EXPENSE):
Interest income - - 5
Interest expense (13) (23) (16)
Gain on sale of investments - - 7
Other, net 1 2 1
---- ---- ----
Total other income (expense) (12) (21) (3)
---- ---- ----
INCOME BEFORE INCOME TAXES 27 46 34
PROVISION FOR INCOME TAXES 11 19 12
---- ---- ----
NET INCOME 16 27 22
==== ==== ====
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
3
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months For the Nine Months
Ended December 31, 1996 Ended December 31, 1995
----------------------- -----------------------
(Pro forma - Note D)
` (pound) US $ (pound)
(Note G)
OPERATING REVENUES 602 1,031 541
COST OF SALES 417 714 343
---- ----- ----
GROSS MARGIN 185 317 198
---- ----- ---
OPERATING EXPENSES:
Maintenance 26 45 30
Depreciation and amortization 32 55 31
Selling, general, and administrative 37 63 57
---- ----- ----
Total operating expenses 95 163 118
---- ----- ----
Operating income 90 154 80
---- ----- ----
OTHER INCOME (EXPENSE):
Interest income 1 2 7
Interest expense (39) (67) (55)
Gain on sale of investments 1 2 7
Other, net 4 7 3
---- ----- ----
Total other income (expense) (33) (56) (38)
---- ----- ----
INCOME BEFORE INCOME TAXES 57 98 42
PROVISION FOR INCOME TAXES 22 38 15
---- ----- ----
NET INCOME 35 60 27
==== ===== ====
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
4
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months For the Period From
Ended December 31, 1996 Inception (June 23, 1995) to
----------------------- ----------------------------
December 31, 1995
----------------
(pound) US $ (pound)
(Note G)
NET CASH PROVIDED BY OPERATING ACTIVITIES 52 89 73
----- ---- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54) (93) (23)
Loans to related parties (2) (3) -
Proceeds from property sales 6 10 -
Consideration for the purchase of SWEB paid to former
shareholders - - (1,023)
Proceeds from sale of fixed asset investments 4 7 111
Disposal of current asset investments, net 6 10 -
----- ----- ------
Net cash used in investing activities (40) (69) (935)
----- ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent - - 315
Capital contributions received - - 185
Payments of dividends (12) (20) (75)
Proceeds of bond issues 300 514 597
Change in short term borrowings (318) (545) 139
----- ----- ------
Net cash (used in) provided by financing activities (30) (51) 1,161
----- ----- ------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (18) (31) 299
CASH AND CASH EQUIVALENTS, beginning of period 20 34 -
----- ----- ------
CASH AND CASH EQUIVALENTS, end of period 2 3 299
----- ----- ------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (39) (67) (8)
===== ===== ======
Cash (paid for) received from income tax (9) (15) 6
===== ===== ======
</TABLE>
The audited consolidated statement of cash flows in respect of SWEB for the
period from April 1, 1995 to September 17, 1995 (the date prior to the date of
acquisition) is included on page F-25 of the Registration Statement (Note A).
The accompanying notes form an integral part of these condensed consolidated
statements.
5
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
<S> <C> <C>
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
-----------
(pound) US $ (pound)
(Note G) (Note B)
PROPERTY, PLANT, AND EQUIPMENT: 1,298 2,223 1,227
Less accumulated depreciation 49 84 20
------ ------ ------
Property, plant, and equipment, net 1,249 2,139 1,207
------ ------ ------
OTHER ASSETS:
Investments 18 31 22
Prepaid pension cost 103 176 95
Goodwill, net of accumulated amortization of (pound)6
($10) at December 31 and(pound)2 at March 31 178 305 177
------ ------ ------
Total other assets 299 512 294
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 2 3 20
Investments 20 35 26
Receivables:
Customer accounts, less provision for
uncollectibles of (pound)14 ($24) at December
31 and(pound)17 at March 31 110 188 95
Other 16 27 20
------ ------ ------
Receivables, net 126 215 115
Materials and supplies 4 7 3
Prepaid expenses 11 19 25
------ ------ ------
Total current assets 163 279 189
------ ------ ------
Total assets 1,711 2,930 1,690
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
<S> <C> <C>
December 31, 1996 March 31, 1996
------------------ ---------------
(Unaudited)
----------
(pound) US $ (pound)
(Note G) (Note B)
STOCKHOLDER'S EQUITY:
Share capital, (pound)1 par value, 500,400,587 shares
authorized, issued, and outstanding 500 856 500
Retained deficit (134) (229) (132)
----- ------ -----
Total stockholder's equity 366 627 368
----- ------ -----
NON-CURRENT LIABILITIES:
Long-term debt 300 514 -
Deferred income taxes 376 644 352
Provision for loss contracts 68 116 62
Other (Note B) 64 110 70
----- ------ -----
Total non-current liabilities 808 1,384 484
----- ------ -----
CURRENT LIABILITIES:
Short-term borrowings 332 568 650
Accounts payable 55 94 45
Accrued income taxes 21 36 19
Unearned revenue 15 26 10
Common dividend declared 25 43 -
Other 89 152 114
----- ------ -----
Total current liabilities 537 919 838
----- ------ -----
COMMITMENTS AND CONTINGENT MATTERS (Notes E, F, and I)
Total stockholder's equity and liabilities 1,711 2,930 1,690
===== ====== =====
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
7
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Unaudited)
(A) This Form 10-Q is the first to be filed by Southern Investments UK plc
(the "Company"). The condensed consolidated financial statements
included herein have been prepared pursuant to the rules and
regulations of the SEC and in conformity with accounting principles
generally accepted in the United States. In the opinion of the
Company's management, the information furnished herein reflects all
adjustments (which included only normal recurring adjustments)
necessary to present fairly the results of the three-month and
nine-month periods ended December 31, 1996 and 1995. The Company's
fiscal year end is March 31. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements and footnotes be read in conjunction
with a prospectus dated November 18, 1996 issued by the Company and
filed with the SEC on Form S-1 as part of its Registration Statement
in respect of an issue of Senior Notes (the "Registration Statement").
(B) The financial statements of the Predecessor Company, South Western
Electricity plc ("SWEB"), have been restated for the year ended March
31, 1995, and consequently, the consolidated balance sheet of the
Company at March 31, 1996 has also been restated. This action was
taken as the directors identified certain exceptional costs,
principally relating to tree cutting, which due to existing
obligations should have been recognized in the accounts of SWEB in the
year ended March 31, 1995. The directors have revised the accounts of
SWEB for the year ended March 31, 1995 recognizing such costs. In the
opinion of the directors, all material adjustments necessary to
correct the financial statements have been recorded. The impact of
these adjustments on the consolidated balance sheet of the Company at
March 31, 1996 included herein, as originally reported, is as follows
(in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1996
Originally Restated
----------------------- ---------------------
(pound) $ (pound) $
Total assets 1,686 2,887 1,690 2,894
</TABLE>
(C) The condensed consolidated balance sheet at March 31, 1996 included
herein has been extracted from audited financial statements; all other
figures are unaudited. The condensed financial statements included herein
have been reviewed by the Company's independent public accountants and
their report is included herein as Exhibit 15.
(D) The unaudited pro forma condensed consolidated statement of income
presented herein for the nine months to December 31, 1995 reflects the
acquisition by the Company of SWEB as if it had occurred as of April 1,
1995. Such unaudited pro forma condensed consolidated statement of income
has been prepared by the Company based upon assumptions deemed proper by
it and reflects a preliminary allocation of the purchase price paid for
SWEB. The unaudited pro forma condensed consolidated statement of income
presented herein is shown for illustrative purposes only and is not
necessarily indicative of the future results of operations of the
Company or of the results of operations of the Company that would have
actually occurred had the transaction been in effect for the period
presented. The unaudited pro forma condensed consolidated statement of
income has been adjusted to reflect the acquisition as if it had occurred
at April 1, 1995, including increased depreciation and amortization, the
elimination of bid defense costs incurred by SWEB, and increased interest
expense using the assumption that the acquisition had been 100% funded
with short-term borrowings. A schedule detailing the pro forma
adjustments is included on pages 11 and 12.
8
<PAGE>
(E) The Company and SWEB utilize certain financial derivative contracts
solely for the purpose of risk management. The Company's and SWEB's
participation in derivative contracts has been to hedge business exposure
in connection with fluctuations in interest rates, currency rates related
to certain of the Company's liabilities, and electricity purchase costs.
At December 31, 1996, the status of outstanding derivative contracts was
as follows :
(i) Interest rate swaps with a notional amount of (pound)500 million, and
currency swaps with a notional amount of (pound)300 million. These swaps
have maturities of 2001-2012. The unrealized loss was (pound)20 million.
(ii) SWEB has contracts for differences ("CFDs") to mitigate its exposure
to volatility in the prices of electricity purchased through the
wholesale electricity trading market (the "Pool"). CFDs are in place to
hedge electricity purchases on approximately 27,851 GWh through the year
2008. In fiscal year 1996, SWEB purchased approximately 11,065 GWh.
Accordingly, the gains or 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 effects of which currently are not estimable.
(F) 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 aggregate. Neither the Company nor SWEB is a party to
any material legal proceedings nor is it currently aware of any
threatened material legal proceedings. As described below, the Company is
aware of an issue which could subsequently impact on SWEB.
The Pension Ombudsman (a UK arbitrator appointed by statute) has issued a
final determination in favor of complaints made by members of the
Electricity Supply Pension Scheme ("ESPS") relating to another employer's
use of the ESPS surplus to offset the employer's costs of the early
payment of pensions as a result of reorganization or redundancy, together
with additional contributions required after a valuation. Under that
determination the Pension Ombudsman directed the employer to pay into
ESPS the amount of that use of the surplus plus interest. The Pension
Ombudsman's final determination may be challenged through the courts and
no payments are required until such a challenge has been heard. If the
final determination is not successfully challenged, it will have an
adverse effect on SWEB, but no assurance can be given as to the extent of
that effect. It is not practical to make an estimate of the exposure at
the present time.
(G) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on December 31,
1996 of $1.7123 = (pound)1.00.
(H) In November 1996, the Company issued $168 million 6.375% Senior Notes due
2001 and $332 million 6.800% Senior Notes due 2006 as described in the
Registration Statement. In January 1997, the Company issued $82 million
subordinated debentures to a business trust formed by the Company.
(I) The Conservative Party has held power in the UK since 1979. The next
General Election in the UK must be held no later than May 1997, and may
be called on approximately three weeks' notice at any time before then.
Certain senior members of the Labour party, which is the main opposition
party, have made statements regarding policies which a Labour government
9
<PAGE>
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's financial position or results of
operations.
On May 1, 1997 a new Labour government in the UK was elected, and on
July 2, 1997 the newly elected Labour government presented its
first budget which included a "one-off windfall levy on the
excess profits of the privatized utilities". Based upon the
legislation, SWEB currently estimates its liability to be
approximately (pound)90 million. Earlier, the Company filed an
estimate of the windfall levy with the SEC. The Company has
refined its estimate based on final income data for the years the
tax impacted. The levy is payable in two equal installments on or
before December 1, 1997 and December 1, 1998.
(J) The condensed consolidated financial statements included herein have not
been prepared in accordance with the policies of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain Types
of Regulation" ("SFAS No. 71"). This pronouncement, under which most US
electric utilities report financial statements, applies to entities which
are subject to cost-based rate regulation. By contrast, SWEB is not
subject to rate regulation, but, rather, is subject to price cap
regulation and therefore the provisions of SFAS No. 71 do not apply.
Financial statements presented in accordance with SFAS No. 71 often
contain certain deferred items which have not been included in rates
charged to customers in compliance with the respective regulatory
authority rulings, but which would have been included in the income
statement of enterprises in general under US GAAP. The accompanying
financial statements of the Company do not contain such deferrals.
10
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE
MONTHS ENDED DECEMBER 31, 1995
As a result of the acquisition, the basis of accounting for the Successor
Company (the Company) differs from that for the Predecessor Company (SWEB). 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 fair value of its
liabilities.
The following unaudited pro forma statement of income from continuing operations
is based upon the consolidated statement of income for the period from inception
(June 23, 1995) to December 31, 1995 of the Successor Company and the
consolidated 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>
<S> <C> <C> <C> <C>
In Millions
--------------------------------------------------------------------------------------------------
|
Successor Period | Predecessor Period Pro Forma for the
Inception (June 23, 1995) | April 1, 1995 to Nine Months Ended
to December 31, 1995 | September 17, 1995 December 31, 1995
|
|
|
US GAAP | US GAAP Adjustments US GAAP
-------------------------|------------------ ------------------------------------------
|
|
` (pound) | (pound) 1 2 3 4 5 (pound)
|
OPERATING REVENUES 242 | 299 - - - - - 541
COST OF SALES 157 | 186 - - - - - 343
--- | --- -- -- -- --- -- ---
GROSS MARGIN 85 | 113 - - - - - 198
--- | --- -- -- -- --- -- ---
OPERATING EXPENSES: |
Maintenance 12 | 18 - - - - - 30
Depreciation and amortization 12 | 14 3 2 - - - 31
Selling, general, and administrative 24 | 41 - - - - (8) 57
|
--- | --- -- -- -- --- -- ---
Total operating expenses 48 | 73 3 2 - - (8) 118
|
--- | --- -- -- -- --- -- ---
Operating income 37 | 40 (3) (2) - - 8 80
|
--- | --- -- -- -- --- -- ---
OTHER INCOME (EXPENSE): |
Interest income 5 | 2 - - - - - 7
Interest expense (17) | (5) - - (1) (32) - (55)
Gain on sale of investments 7 | - - - - - - 7
Other, net 2 | 1 - - - - - 3
--- | --- -- -- -- --- -- ---
Total other income (expense) (3) | (2) - - (1) (32) - (38)
|
--- | --- -- -- -- --- -- ---
INCOME BEFORE INCOME TAXES 34 | 38 (3) (2) (1) (32) 8 42
|
PROVISION FOR INCOME TAXES 12 | 13 (1) (1) - (11) 3 15
--- | --- -- -- -- --- -- ---
INCOME FROM CONTINUING |
OPERATIONS 22 25 (2) (1) (1) (21) 5 27
=== === == == == === == ===
</TABLE>
(1) Depreciation expense which would have been recorded based on the
valuation of property, plant, and equipment recorded in connection with
the purchase
11
<PAGE>
business combination, as if such combination had occurred on April 1,
1995. It has been provided using composite straight line rates which
approximate 3.1% on an asset value of (pound)1,190 million for 170 days,
less depreciation already charged to the Predecessor Company's
consolidated statement of income.
(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. The
charge relates to notional interest ((pound)2 million) on a discounted
provision for onerous purchase contracts (`Teesside'), partly offset by a
reduction in interest to market rates on the HM Government debt put in
place at privatization ((pound)1 million).
(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. The impact of a 1/4% change in the assumed interest rate
would change income from continuing operations by (pound)0.4 million.
(5) Remove the costs incurred by the Predecessor Company relating to bid
defense associated with the Acquisition.
12
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD FISCAL QUARTER 1997 vs. THIRD FISCAL QUARTER 1996
AND
FISCAL YEAR-TO-DATE 1997 vs. FISCAL YEAR-TO-DATE 1996
INTRODUCTION
The Company is a wholly-owned subsidiary of Southern Investments UK Holdings
Limited, of which 75% is owned indirectly by Southern Company and 25% is owned
indirectly by PP&L Resources, Inc. 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 regional electricity
companies 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. The Company's sole investment and only significant asset is the
entire share capital of SWEB, which is headquartered in Bristol, England.
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. This area covers approximately 5,560 square
miles and has a resident population of approximately 2.8 million. It also has
ancillary business activities that support its main electricity businesses,
including electricity generation and gas supply.
RESULTS OF OPERATIONS
The revenues recorded for the franchise supply business for the pro forma nine
months ended December 31, 1995 and the nine months ended December 31, 1996 are
recognized, in part, using management estimates of the revenues which will be
permitted by the Director General of Electricity Supply to be earned during the
respective fiscal years ended March 31. Accordingly, increases in revenue,
operating income and net income between the two periods discussed below are not
necessarily indicative of the results which actually have been realized between
the pro forma nine months ended December 31, 1995 and the nine months ended
December 31, 1996 or which may actually be realized between the full fiscal
years.
Earnings
Operating income for the third quarter and year-to-date fiscal year 1997 was
(pound)39 million and (pound)90 million, respectively, compared to (pound)37
million and (pound)80 million for the corresponding periods of fiscal year 1996.
The increase in operating income of (pound)2 million in the third quarter is due
to an increase in the distribution business of (pound)2 million and ancillary
businesses of (pound)6 million, partly offset by a decrease in the supply
business of (pound)6 million. The increase in operating income of (pound)10
million for the year-to-date is due to increases in the distribution business of
(pound)5 million, in the supply business of (pound)1 million, and in ancillary
businesses of (pound)4 million.
Net income for the third quarter and year-to-date fiscal year 1997 was (pound)16
million and (pound)35 million, respectively, compared to (pound)22 million and
(pound)27 million for the corresponding periods of fiscal year
13
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1996. This reduction of (pound)6 million in net income in the third quarter was
primarily due to decreases in gains on the sale of investments of (pound)7
million and interest income of (pound)5 million, partly offset by an increase in
operating income discussed above of (pound)2 million, and a decrease in interest
expense of (pound)3 million, together with a fall in the provision for income
taxes of (pound)1 million. The increase of (pound)8 million in net income for
the year-to-date was primarily due to the increase in the operating income
discussed above of (pound)10 million, a reduction in interest expense of
(pound)16 million and an increase in other net income of (pound)1 million,
partly offset by decreases in interest income of (pound)6 million and in gains
on sale of investments of (pound)6 million, together with additional provision
for taxes of (pound)7 million.
Significant income statement items appropriate for discussion include the
following :
<TABLE>
<CAPTION>
<S> <C> <C>
Increase (Decrease)
--------------------------------------------------------
Third Quarter Year-To-Date
--------------------------- ----------------------------
(in millions) % (in millions) %
Revenues............................................ (pound) 23 11 (pound) 61 11
Cost of sales....................................... 30 21 74 22
Selling, general, and administrative expense........ (6) (33) (20) (35)
Interest income..................................... (5) (100) (6) (86)
Interest expense.................................... (3) (19) (16) (29)
Gain on sale of investments......................... (7) (100) (6) (86)
Provision for income taxes.......................... (1) (8) 7 47
</TABLE>
Revenues
Revenue increases were primarily within the supply business where revenues
increased by (pound)16 million for the quarter and (pound)57 million for the
year-to-date. This reflects SWEB's strategy of becoming more active in the
non-franchise supply market; SWEB has significantly increased the number of its
industrial and commercial customers, increasing its unit sales in the
non-franchise market by 178% and 210% for the quarter and year-to-date,
respectively.
Cost of sales
Cost of sales primarily relate to the purchase cost of electricity. The increase
is thus largely due to the increase in sales within the non-franchise market as
discussed above, together with an increase in the average purchase cost.
Selling, general, and administrative expense
The decrease in selling, general and administrative expenses resulted in part
from a decrease in labor costs resulting from a reduction in personnel and in
part from a decrease in the level of bad debts, together with a decrease in
certain classes of computer software development costs which were expensed
during the pro forma nine months ended December 31, 1995, but which were
capitalized in the nine months ended December 31, 1996, having satisfied the
criteria for capitalization under the Company's accounting policy.
14
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Interest income
A reduction in cash balances has resulted in a reduction in interest income.
Interest expense
Interest expense for the pro forma nine months ended December 31, 1995 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 until the acquisition date of September 18, 1995 at an
interest rate of 6% per year. However, in the nine months ended December 31,
1996, the Company benefited from the conversion of (pound)500 million of debt to
equity during the second half of fiscal year 1996.
Gain on sale of investments
The decrease is largely due to a pretax gain of (pound)7 million realized in
December 1995 in respect of the sale of a substantial portion of SWEB's equity
holding in The National Grid Group plc ("NGG"). This gain is nonrecurring in
nature as it is the result of changes in circumstances after the fair valuation
of the investment in NGG resulting from the application of APB No. 16 which
valuation was finalized shortly after the date of acquisition.
Provision for income taxes
The movements in the provision for income taxes result from the change in pretax
income.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from the success of the implementation of reorganisation plans
to the level of energy sales growth in the electricity supply business.
The largest portion (approximately 85%) of SWEB's operating income is derived
from its distribution business essentially the operation and maintenance of the
electricity network in its franchise area of the southwest of England. SWEB is
the only distributor of electricity in this area, and management believes that
economic, environmental and regulatory factors are likely to prevent competitors
from entering this business in SWEB's franchise area.
The supply market is subject to change as it is currently partially open to
competition and competition is scheduled to be extended to the remaining
customers (largely domestic and small commercial) after March 31, 1998.
Reference is made to Notes (E), (F) and (I) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
15
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
The major change in the Company's financial condition during the nine months to
December 31, 1996 was the addition by SWEB of approximately (pound)54 million
property, plant, and equipment, largely in respect of the distribution network.
The funds for these additions were derived primarily from operations. It is
expected that SWEB's capital requirements in the foreseeable future for its
investment in property, plant, and equipment will be met by cash generated from
its operating activities.
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 balances the effect of this and other
cyclical influences on its working capital needs with drawings under its
available credit facilities.
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. SWEB can make distribution 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 regulatory 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.
Financing Activities
In November 1996, the Company issued $500 million Senior Notes in the US, the
proceeds of which were used to reduce short-term bank loans in the UK. $168
million of the Senior Notes are due for redemption in 2001 and $332 million in
2006. The Company entered into currency swap transactions that effectively
convert the US dollar obligations of the Senior Notes into pounds sterling
obligations, with a nominal value of (pound)300 million.
Sources of Capital
In January 1997, Southern Investments UK Capital Trust I (the "Trust"), a
statutory business trust formed under the laws of the State of Delaware and
established for the sole purpose of issuing its own securities (the "Trust
Securities") and investing the proceeds thereof in the 8.23% subordinated
debentures issued by the Company and scheduled to mature on February 1, 2027,
sold $82 million of its 8.23% Trust Securities. The Company guarantees the
Trust's obligations under the Trust Securities. The proceeds received by the
Company from the sale of the subordinated debentures were used to repay
short-term bank loans. The Company entered into currency swap transactions that
effectively convert the US dollar obligations of the subordinated debentures
into pounds sterling obligations, with a nominal value of (pound)50 million.
To meet short-term cash needs and contingencies, the Company and SWEB together
had at December 31, 1996 approximately (pound)2 million of cash and cash
equivalents and (pound)149 million of unused committed lines of credit with
banks. At December 31, 1996 the Company and SWEB together had short-term debt of
(pound)332 million largely payable to banks.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
15 - Report of Independent Public Accountants
27 - Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
No report on Form 8-K was filed by the Company during the quarter for which this
report is being filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN INVESTMENTS UK plc
/s/ Gale E. Klappa
By Gale E. Klappa
Director
/s/ C. B. (Mike) Harreld
By C. B. (Mike) Harreld
Director, Chief Financial and Accounting Officer
Date: November 12, 1997
18
<PAGE>
ARTHUR ANDERSEN
Exhibit 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO : the Board of Directors of Southern Investments UK plc
We have reviewed the accompanying condensed consolidated balance sheet of
SOUTHERN INVESTMENTS UK plc (a company incorporated in England and Wales) as of
December 31, 1996, and the related condensed consolidated statements of income
for the three-month and nine-month periods ended December 31, 1996 and 1995, and
the condensed consolidated statements of cash flows for the nine-month period
ended December 31, 1996 and for the period from inception (June 23, 1995) to
December 31, 1995. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles in the United States.
We have previously audited, in accordance with generally accepted auditing
standards in the United States, the consolidated balance sheet of SOUTHERN
INVESTMENTS UK plc as of March 31, 1996, and, in our report dated July 25, 1996,
we expressed an unqualified opinion on that consolidated balance sheet. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of March 31, 1996, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen
ARTHUR ANDERSEN
Bristol, England
November 12, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Southern
Investments UK plc Form 10-Q for the quarter ended December 31, 1996, and
is qualified in its entirety by reference to such financial statements.
Values are in (pound) sterling.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> British Pounds Sterling
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.7123
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1230
<OTHER-PROPERTY-AND-INVEST> 318
<TOTAL-CURRENT-ASSETS> 163
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,711
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 500
<RETAINED-EARNINGS> (134)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 366
0
0
<LONG-TERM-DEBT-NET> 300
<SHORT-TERM-NOTES> 332
<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> 713
<TOT-CAPITALIZATION-AND-LIAB> 1,711
<GROSS-OPERATING-REVENUE> 602
<OTHER-OPERATING-EXPENSES> 512
<TOTAL-OPERATING-EXPENSES> 512
<OPERATING-INCOME-LOSS> 90
<OTHER-INCOME-NET> 6
<INCOME-TAX-EXPENSE> 22
<INCOME-BEFORE-INTEREST-EXPEN> 74
<TOTAL-INTEREST-EXPENSE> 39
<NET-INCOME> 35
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 37
<CASH-FLOW-OPERATIONS> 52
<TOTAL-INTEREST-ON-BONDS> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
