<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997.
REGISTRATION NO. 333-26939
333-26939-01
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
<TABLE>
SOUTHERN INVESTMENTS UK PLC SOUTHERN INVESTMENTS UK CAPITAL TRUST I
<S> <C>
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND AND WALES 4911 NONE DELAWARE 6733 52-2032200
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.) JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER) INCORPORATION OR CODE NUMBER)
ORGANIZATION) ORGANIZATION)
</TABLE>
-------------
800 PARK AVENUE C/O BANKERS TRUST (DELAWARE)
AZTEC WEST 1001 JEFFERSON STREET, SUITE 550
ALMONDSBURY WILMINGTON, DELAWARE 19801-1457
BRISTOL BS12 4SE, ENGLAND (302) 576-3305
44-1454-201-101 (ADDRESS,INCLUDING ZIP CODE, AND TELEPHONE
(ADDRESS, INCLUDING ZIP CODE, NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S
AND TELEPHONE NUMBER, INCLUDING PRINCIPAL EXECUTIVE OFFICES)
AREA CODE, OF REGISTRANT'S JAMES A. WARD
PRINCIPAL EXECUTIVE OFFICES) SOUTHERN ENERGY, INC.
JAMES A. WARD 900 ASHWOOD PARKWAY
SOUTHERN ENERGY, INC. SUITE 500
900 ASHWOOD PARKWAY ATLANTA, GEORGIA 30338-4780
SUITE 500 (770) 379-7000
ATLANTA, GEORGIA 30338-4780 (NAME, ADDRESS, INCLUDING ZIP CODE, AND
(770) 379-7000 TELEPHONE NUMBER, INCLUDING AREA CODE, OF
(NAME, ADDRESS, INCLUDING ZIP AGENT FOR SERVICE)
CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
-------------
PLEASE SEND COPIES OF ALL CORRESPONDENCE TO:
THOMAS J. HARTLAND, JR.
TROUTMAN SANDERS LLP
600 PEACHTREE STREET, N.E., SUITE 5200
ATLANTA, GEORGIA 30308
(404) 885-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
-------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)(6)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exchange Capital
Securities, Liquidation
Amount $1000 per
Capital Security, of
Southern Investments UK
Capital Trust I....... $82,000,000 100% $82,000,000 $24,849
- --------------------------------------------------------------------------------------
Exchange Subordinated
Debentures of Southern
Investments UK
plc(2)................
- --------------------------------------------------------------------------------------
Southern Investments UK
plc Exchange Guarantee
with respect to
Exchange Capital
Securities(3)(4)......
- --------------------------------------------------------------------------------------
Total(5)............... $82,000,000 100% $82,000,000 $24,849
- --------------------------------------------------------------------------------------
</TABLE>
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(1) Estimated for the sole purpose of computing the registration fee. Pursuant
to Rule 547(n) under the Securities Act, no separate fee is payable with
respect to the Exchange Capital Securities Guarantee (the "Exchange
Guarantee").
(2) No separate consideration will be received for the Exchange Subordinated
Deferrable Interest Debentures (the "Exchange Subordinated Debentures")
distributed upon any liquidation of Southern Investments UK Capital Trust
I.
(3) No separate consideration will be received for the Southern Investments UK
plc Exchange Guarantee.
(4) This Registration Statement (as the same may be amended from time to time
(the "Registration Statement")) is deemed to cover rights of holders of
Exchange Capital Securities of Southern Investments UK Capital Trust I
under the Amended and Restated Declaration of Trust (the "Declaration of
Trust"), the rights of holders of Exchange Subordinated Debentures under
the Indenture, the rights of the holders of such Exchange Capital
Securities under the Exchange Guarantee and certain backup undertakings as
described herein.
(5) Such amount represents the liquidation amount of the Southern Investments
UK Capital Trust I Exchange Capital Securities to be exchanged hereunder
and the principal amount of Exchange Subordinated Debentures that may be
distributed to holders of such Exchange Capital Securities upon any
liquidation of Southern Investments UK Capital Trust I.
(6) Previously paid. -------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT 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.
- -------------------------------------------------------------------------------
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<PAGE>
$82,000,000
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
OFFER TO EXCHANGE ITS
8.23% EXCHANGE SUBORDINATED CAPITAL INCOME SECURITIES
(LIQUIDATION AMOUNT $1,000 PER EXCHANGE CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
8.23% ORIGINAL SUBORDINATED CAPITAL INCOME SECURITIES
(LIQUIDATION AMOUNT $1,000 PER ORIGINAL CAPITAL SECURITY)
------------------
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
SOUTHERN INVESTMENTS UK PLC
------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JULY 25, 1997, UNLESS EXTENDED.
------------------
Southern Investments UK Capital Trust I, a statutory business trust formed
under the laws of the State of Delaware (the "Trust"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (as the same
may be amended or supplemented from time to time, the "Prospectus") and in the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange up to $82,000,000 aggregate liquidation amount of its
8.23% Exchange Subordinated Capital Income Securities (the "Exchange Capital
Securities") which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement (as
defined herein) of which this Prospectus constitutes a part, for a like
liquidation amount of its outstanding 8.23% Subordinated Capital Income
Securities (the "Original Capital Securities"), of which $82,000,000 aggregate
liquidation amount are issued and outstanding. Pursuant to the Exchange Offer,
Southern Investments UK plc, a public limited company incorporated under the
laws of England and Wales (the "Company"), is also offering to exchange (i)
its guarantee of payments of cash distributions and payments on liquidation of
the Trust or redemption of the Original Capital Securities (the "Original
Guarantee") for a like guarantee in respect of the Exchange Capital Securities
(the "Exchange Guarantee") and (ii) $84,537,000 aggregate principal amount of
its 8.23% Subordinated Debentures due February 1, 2027 (the "Original
Subordinated Debentures") for a like aggregate principal amount of its 8.23%
Exchange Subordinated Debentures due February 1, 2027 (the "Exchange
Subordinated Debentures"), which Exchange Guarantee and Exchange Subordinated
Debentures also have been registered under the Securities Act. The Original
Capital Securities, the Original Guarantee and the Original Subordinated
Debentures are collectively referred to herein as the "Original Securities"
and the Exchange Capital Securities, the Exchange Guarantee and the Exchange
Subordinated Debentures are collectively referred to herein as the "Exchange
Securities."
(Continued on next page)
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Original Capital Securities on June 25, 1997.
------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 22 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER ORIGINAL CAPITAL
SECURITIES IN THE EXCHANGE OFFER.
------------------
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.
The date of this Prospectus is June 25, 1997.
<PAGE>
(Continued from the previous page)
The terms of the Exchange Securities are identical in all material respects
to the respective terms of the Original Securities, except that (i) the
Exchange Securities have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable
to the Original Securities, (ii) the Exchange Capital Securities will not
contain the $100,000 minimum liquidation amount transfer restriction, (iii)
the Exchange Capital Securities will not provide for any increase in the
distribution rate thereon and (iv) the Exchange Subordinated Debentures will
not provide for any increase in the interest rate thereon. See "Description of
the Exchange Capital Securities", "Description of the Exchange Subordinated
Debentures" and "Description of the Original Securities." The Exchange Capital
Securities are being offered for exchange in order to satisfy certain
obligations of the Company and the Trust under the Registration Rights
Agreement dated as of January 29, 1997 (the "Registration Rights Agreement")
among the Company, the Trust and the Initial Purchasers (as defined herein).
In the event that the Exchange Offer is consummated, any Original Capital
Securities which remain outstanding after consummation of the Exchange Offer
and the Exchange Capital Securities issued in the Exchange Offer will vote
together as a single class for purposes of determining whether holders of the
requisite percentage in outstanding liquidation amount thereof have taken
certain actions or exercised certain rights under the Declaration (as defined
herein).
The Exchange Capital Securities and the Original Capital Securities
(collectively, the "Capital Securities") represent preferred undivided
beneficial interests in the assets of the Trust. The Company is the owner of
all of the undivided beneficial interests represented by common securities of
the Trust (the "Common Securities," and together with the Capital Securities,
the "Trust Securities"). Bankers Trust Company is the Institutional Trustee
(the "Institutional Trustee") of the Trust. The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds thereof in
the Subordinated Debentures (as defined herein). The Subordinated Debentures
will mature on February 1, 2027 (the "Stated Maturity Date"). The Capital
Securities will have a preference over the Common Securities under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of the Exchange Capital
Securities."
Except as described herein, the Capital Securities will be represented by
global Capital Securities in fully registered form, deposited with a custodian
for and registered in the name of a nominee of The Depository Trust Company
("DTC"). Beneficial interests in such Capital Securities will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants. Beneficial interests in such Capital Securities will trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity
in such interests will therefore settle in immediately available funds.
Holders of the Exchange Capital Securities will be entitled to receive
preferential cumulative cash distributions arising from the payment of
interest on the Subordinated Debentures, accruing from January 29, 1997 and
payable semi-annually in arrears on February 1 and August 1 of each year,
commencing August 1, 1997, at the annual rate of 8.23% of the liquidation
amount of $1,000 per Capital Security. The Company will have the right to
defer payments of interest on the Subordinated Debentures at any time and from
time to time for a period not exceeding 10 consecutive semi-annual periods
with respect to each deferral period (each, an "Extension Period"), provided
that no Extension Period may extend beyond the Stated Maturity Date. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period, subject to the
requirements set forth herein. If and for so long as interest payments on the
Subordinated Debentures are so deferred, semi-annual distributions on the
Trust Securities will also be deferred and the Company will not be permitted,
subject to certain exceptions described herein, to declare or pay any cash
distributions with respect to the Company's capital stock (which includes
common and preferred stock) or to make any payment with respect to debt
securities of the Company that rank pari passu with or junior to the
Subordinated Debentures. During an Extension Period, interest on the
Subordinated Debentures will continue to accrue (and the amount of
distributions to which holders of the Trust Securities are entitled will
continue to accumulate) at the rate of 8.23% per annum, compounded semi-
annually, to the extent permitted by applicable law, and holders of Trust
Securities will be required to accrue interest income for United States
federal income tax purposes. See "Description of the Exchange Subordinated
Debentures--Option to Extend Interest Payment
2
<PAGE>
Period" and "Certain Income Tax Considerations--US Federal Income Tax
Considerations--Interest Income and Original Issue Discount."
The Company will, through the Capital Securities Guarantee, the Declaration,
the Subordinated Debentures and the Indenture (each as defined herein), taken
together, fully, irrevocably and unconditionally guarantee all of the Trust's
obligations under the Trust Securities. See "Relationship Among the Capital
Securities, the Subordinated Debentures and the Capital Securities Guarantee--
Full and Unconditional Guarantee." The Capital Securities Guarantee will
guarantee payments of distributions and payments on liquidation or redemption
of the Trust Securities, but in each case only to the extent that the Trust
holds funds on hand legally available therefor and has failed to make such
payments, as described herein. See "Description of the Exchange Guarantee." If
the Company fails to make a required payment on the Subordinated Debentures,
the Trust will not have sufficient funds to make the related payments,
including any semi-annual distributions, on the Trust Securities. The Capital
Securities Guarantee will not cover any such payment when the Trust does not
have sufficient funds on hand legally available therefor. In such event, a
holder of Capital Securities may institute a legal proceeding directly against
the Company to enforce its rights in respect of such payment. The obligations
of the Company under the Capital Securities Guarantee and the Subordinated
Debentures will be subordinate and junior in right of payment to all Senior
Indebtedness (as defined in "Description of the Exchange Subordinated
Debentures--Subordination").
The Trust Securities will be subject to mandatory redemption at the
applicable Redemption Price (as defined herein), (a) in whole but not in part,
(i) on the Stated Maturity Date upon repayment of the Subordinated Debentures,
or (ii) at any time, contemporaneously with the optional prepayment of the
Subordinated Debentures by the Company in the event that it has or will become
obligated to pay Additional Amounts (as defined herein) or upon the occurrence
and continuation of a Special Event (as defined herein), and (b) in whole or
in part, contemporaneously with the optional prepayment by the Company of the
Subordinated Debentures on or after February 1, 2007. See "Description of the
Exchange Capital Securities--Special Event Redemption or Distribution" and
"Description of the Exchange Capital Securities--Mandatory Redemption."
The Company will have the right at any time to terminate the Trust and cause
a distribution of the Subordinated Debentures to the holders of the Trust
Securities in liquidation of the Trust. Unless the Subordinated Debentures are
distributed to the holders of the Trust Securities, in the event of a
termination of the Trust as described herein, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the
holders of the Capital Securities generally will be entitled to receive a
liquidation amount of $1,000 per Capital Security plus accumulated
distributions thereon to the date of payment. See "Description of the Exchange
Capital Securities--Liquidation Distribution Upon Dissolution."
The Trust is making the Exchange Offer of the Exchange Capital Securities in
reliance on the position of the staff of the Division of Corporation Finance
of the Securities and Exchange Commission (the "Commission") as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, neither the Company nor the Trust has sought its own interpretive
letter and there can be no assurance that the staff of the Division of
Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the staff of the Division of
Corporation Finance of the Commission, and subject to the two immediately
following sentences, the Company and the Trust believe that Exchange Capital
Securities issued pursuant to this Exchange Offer in exchange for Original
Capital Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such Exchange Capital Securities are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person
to participate, in a distribution (within the meaning of the Securities Act)
of such Exchange Capital Securities. However, any holder of Original Capital
Securities who is an "affiliate" of the Company or the Trust or who intends to
participate in the Exchange Offer for the purpose of distributing Exchange
Capital Securities, or any broker-dealer who purchased Original Capital
3
<PAGE>
Securities from the Trust to resell pursuant to Rule 144A under the Securities
Act ("Rule 144A") or any other available exemption under the Securities Act,
(a) will not be able to rely on the interpretations of the staff of the
Division of Corporation Finance of the Commission set forth in the above-
mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Original Capital Securities in the Exchange Offer and (c) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Original
Capital Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Original Capital Securities acquired for its own account as a result of
market-making or other trading activities and exchanges such Original Capital
Securities for Exchange Capital Securities, then such broker-dealer must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such Exchange Capital Securities.
Each holder of Original Capital Securities who wishes to exchange Original
Capital Securities for Exchange Capital Securities in the Exchange Offer will
be required to represent that (i) it is not an "affiliate" of the Company or
the Trust, (ii) any Exchange Capital Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Capital Securities, and (iv)
if such holder is not a broker-dealer, such holder is not engaged in, and does
not intend to engage in, a distribution (within the meaning of the Securities
Act) of such Exchange Capital Securities. In addition, the Company and the
Trust may require such holder, as a condition to such holder's eligibility to
participate in the Exchange Offer, to furnish to the Company and the Trust (or
an agent thereof) in writing information as to the number of "beneficial
owners" (within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) on behalf of whom such holder holds the
Original Capital Securities to be exchanged in the Exchange Offer. Each
broker-dealer that receives Exchange Capital Securities for its own account
pursuant to the Exchange Offer must acknowledge that it acquired the Original
Capital Securities for its own account as the result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Capital Securities. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company and the Trust believe that broker-dealers who
acquired Original Capital Securities for their own accounts, as a result of
market-making activities or other trading activities ("Participating Broker-
Dealers"), may fulfill their prospectus delivery requirements with respect to
the Exchange Capital Securities received upon exchange of such Original
Capital Securities (other than Original Capital Securities which represent an
unsold allotment from the initial sale of the Original Capital Securities)
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such
Exchange Capital Securities. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer
during the period referred to below in connection with resales of Exchange
Capital Securities received in exchange for Original Capital Securities
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Trust and the Company have agreed that, for a
period not exceeding 90 days after the Expiration Date (as defined herein),
they will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution." However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Exchange Capital Securities received in exchange for
Original Capital Securities pursuant to the Exchange Offer must notify the
Company or the Trust, or cause the Company or the Trust to be notified, on or
prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "The Exchange Offer--Exchange Agent." Any Participating
Broker-Dealer who is an "affiliate" of the Company or the Trust may not rely
on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer--Resales of Exchange Capital
Securities."
4
<PAGE>
In that regard, each Participating Broker-Dealer who surrenders Original
Capital Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal or delivery of an Agent's
Message (as defined herein), that upon receipt of notice from the Company or
the Trust of the occurrence of any event or the discovery of any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or which causes this Prospectus to omit to
state a material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Exchange Capital Securities (or the Exchange
Guarantee or the Exchange Subordinated Debentures, as applicable) pursuant to
this Prospectus until the Company or the Trust has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating Broker-
Dealer, or the Company or the Trust has given notice that the sale of the
Exchange Capital Securities (or the Exchange Guarantee or the Exchange
Subordinated Debentures, as applicable) may be resumed, as the case may be. If
the Company or the Trust gives such notice to suspend the sale of the Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Subordinated
Debentures, as applicable), it shall extend the 90-day period referred to
above during which Participating Broker-Dealers are entitled to use this
Prospectus in connection with the resale of Exchange Capital Securities by the
number of days during the period from and including the date of the giving of
such notice to and including the date when Participating Broker-Dealers shall
have received copies of the amended or supplemented Prospectus necessary to
permit resales of the Exchange Capital Securities or to and including the date
on which the Company or the Trust has given notice that the sale of Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Subordinated
Debentures, as applicable) may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Original Capital Securities. The Exchange Capital
Securities will be a new issue of securities for which there currently is no
market. Although Lehman Brothers Inc. and J.P. Morgan Securities Inc., the
initial purchasers of the Original Capital Securities (the "Initial
Purchasers"), have informed the Company and the Trust that they each currently
intend to make a market in the Exchange Capital Securities, they are not
obligated to do so, and any such market making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development
or liquidity of any market for the Exchange Capital Securities. The Company
and the Trust currently do not intend to apply for listing of the Exchange
Capital Securities on any securities exchange or for quotation through the
NASD Automated Quotation System.
Any Original Capital Securities not tendered and accepted in the Exchange
Offer will remain outstanding and will be entitled to all the same rights and
will be subject to the same limitations applicable thereto under the
Declaration (except for those rights which terminate upon consummation of the
Exchange Offer). Following consummation of the Exchange Offer, the holders of
Original Capital Securities will continue to be subject to all of the existing
restrictions upon transfer thereof and neither the Company nor the Trust will
have any further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the
Original Capital Securities held by them. To the extent that Original Capital
Securities are tendered and accepted in the Exchange Offer, a holder's ability
to sell untendered Original Capital Securities could be adversely affected.
See "Risk Factors--Consequences of a Failure to Exchange Original Capital
Securities."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL CAPITAL SECURITIES ARE URGED TO READ THIS
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE
OFFER.
Original Capital Securities may be tendered for exchange on or prior to 5:00
p.m., New York City time, on July 25, 1997 (such time on such date being
hereinafter called the "Expiration Date"), unless the Exchange
5
<PAGE>
Offer is extended by the Company or the Trust (in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended). Tenders of Original Capital Securities may be withdrawn at
any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum liquidation amount of Original Capital Securities
being tendered for exchange. However, the Exchange Offer is subject to certain
events and conditions which may be waived by the Company or the Trust and to
the terms and provisions of the Registration Rights Agreement. Original
Capital Securities may be tendered in whole or in part having an aggregate
liquidation amount of not less than $100,000 (100 Original Capital Securities)
or any integral multiple of $1,000 liquidation amount (one Original Capital
Security) in excess thereof. The Company has agreed to pay all expenses of the
Exchange Offer. See "The Exchange Offer--Fees and Expenses." Holders of the
Original Capital Securities whose Original Capital Securities are accepted for
exchange will not receive distributions on such Original Capital Securities
and will be deemed to have waived the right to receive any distributions on
such Original Capital Securities accumulated from and after January 29, 1997.
Accordingly, holders of Exchange Capital Securities as of the record date for
the payment of distributions on August 1, 1997 will be entitled to receive
distributions accumulated from and after January 29, 1997. See "The Exchange
Offer--Distributions on Exchange Capital Securities."
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the Exchange Capital Securities offered hereby. No dealer-manager
is being used in connection with this Exchange Offer. See "Use of Proceeds"
and "Plan of Distribution."
As used herein, (i) the "Indenture" means the Indenture, dated as of January
29, 1997, as supplemented from time to time, among the Company, Bankers Trust
Company, as trustee (the "Indenture Trustee"), and Bankers Trust Luxembourg
S.A., as paying and transfer agent, relating to the Subordinated Debentures,
(ii) the "Declaration" means the Amended and Restated Declaration of Trust
relating to the Trust among the Company, as sponsor, Bankers Trust Company, as
Institutional Trustee (the "Institutional Trustee"), Bankers Trust (Delaware),
as Delaware Trustee (the "Delaware Trustee"), and the Regular Trustees named
therein, and (iii) the "Capital Securities Guarantee" means the Guarantee
Agreement relating to the Capital Securities between the Company and Bankers
Trust Company, as trustee (the "Guarantee Trustee"). In addition, as the
context may require, (i) "Capital Securities" and "Trust Securities" include
the Original Capital Securities and the Exchange Capital Securities, (ii)
"Subordinated Debentures" includes the Original Subordinated Debentures and
the Exchange Subordinated Debentures and (iii) "Capital Securities Guarantee"
includes the Original Guarantee and the Exchange Guarantee.
6
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material may also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov).
No separate financial statements of the Trust have been included herein. The
Company and the Trust do not consider that such financial statements would be
material to holders of the Capital Securities because the Trust is a newly
formed special purpose entity, has no significant operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Subordinated Debentures,
issuing the Trust Securities and engaging in other activities as are
necessary, advisable or incidental thereto. See "Southern Investments UK
Capital Trust I," "Description of the Exchange Capital Securities,"
"Description of the Exchange Subordinated Debentures" and "Description of the
Exchange Guarantee." In addition, the Company does not expect that the Trust
will file reports, proxy statements and other information under the Exchange
Act with the Commission.
This Prospectus constitutes a part of a registration statement on Form S-4
(the "Registration Statement") filed by the Company and the Trust with the
Commission under the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission,
and reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company, the
Trust and the Exchange Securities. Any statements contained herein concerning
the provisions of any document 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 or otherwise filed with the Commission. Each
such statement is qualified in its entirety by such reference.
7
<PAGE>
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 Declaration and the Trust Securities will be governed by, and construed
in accordance with, the laws of the State of Delaware. The Capital Securities
Guarantee, the Indenture and the Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York. The
Company has submitted to the non-exclusive jurisdiction of the Supreme Court
of New York, New York County and the United States District Court for the
Southern District of New York and any appellate court from either thereof for
any suit, legal action or proceeding against the Company or its properties,
assets or revenues with respect to its obligations, liabilities or any other
matter arising out of or in connection with the Capital Securities Guarantee,
the Indenture and the Subordinated Debentures. See "Description of the
Exchange Subordinated Debentures--Governing Law; Submission to Jurisdiction."
----------------
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.
----------------
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 December
31, 1996 of $1.7123 = (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.
8
<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 (as defined below) 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," and, 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 November 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 December
31, 1996, the Company had consolidated assets of (Pounds)1.711 billion ($2.930
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 ($192
million) and (Pounds)15 million ($26 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."
9
<PAGE>
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
The Trust is a statutory business trust formed under the Delaware Business
Trust Act pursuant to (i) the Declaration executed by the Company, as Sponsor,
Bankers Trust Company, as Institutional Trustee, Bankers Trust (Delaware), as
Delaware Trustee, and the two individual Regular Trustees named therein, and
(ii) the filing of a certificate of trust with the Delaware Secretary of State
on January 21, 1997. The Trust's business and affairs are conducted by the
Institutional Trustee, the Delaware Trustee, and the two individual Regular
Trustees, who are employees or officers of or affiliated with the Company. The
Trust exists for the exclusive purposes of (i) issuing and selling the Trust
Securities and effecting the Exchange Offer, (ii) using the proceeds from the
sale of the Trust Securities to acquire the Original Subordinated Debentures
issued by the Company, (iii) exchanging the Original Subordinated Debentures
for Exchange Subordinated Debentures in the Exchange Offer, and (iv) engaging
in only those other activities necessary, advisable or incidental thereto (such
as registering the transfer of the Trust Securities). Accordingly, the
Subordinated Debentures are now and will be the sole assets of the Trust, and
payments under the Subordinated Debentures will be the sole revenue of the
Trust. All of the Common Securities are owned by the Company.
THE EXCHANGE OFFER
The Exchange Offer.......... Up to $82,000,000 aggregate liquidation amount of
Exchange Capital Securities are being offered in
exchange for a like aggregate liquidation amount
of Original Capital Securities. Original Capital
Securities may be tendered for exchange in whole
or in part in a liquidation amount of $100,000
(100 Original Capital Securities) or any integral
multiple of $1,000 (one Original Capital Securi-
ty) in excess thereof. The Company and the Trust
are making the Exchange Offer in order to satisfy
their obligations under the Registration Rights
Agreement relating to the Original Capital Secu-
rities. For a description of the procedures for
tendering Original Capital Securities, see "The
Exchange Offer--Procedures for Tendering Original
Capital Securities."
Expiration Date............. 5:00 p.m., New York City time, on July 25, 1997,
unless the Exchange Offer is extended by the Com-
pany or the Trust (in which case the Expiration
Date will be the latest date and time to which
the Exchange Offer is extended). See "The Ex-
change Offer--Terms of the Exchange Offer."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain condi-
tions, which may be waived by the Company and the
Trust in their sole discretion. The Exchange Of-
fer is not conditioned upon any minimum liquida-
tion amount of Original Capital Securities being
tendered. See "The Exchange Offer--Conditions to
the Exchange Offer." The Company and the Trust
reserve the right in their sole and absolute dis-
cretion, subject to applicable law, at any time
and from time to time, (i) to delay the accept-
ance of the Original Capital Securities for ex-
change, (ii) to terminate the Exchange Offer if
certain specified conditions have not been satis-
fied, (iii) to extend the Expiration Date of the
Exchange Offer and retain all Original Capital
Securities tendered pursuant to the Exchange Of-
fer, subject, however, to the right
10
<PAGE>
of holders of Original Capital Securities to
withdraw their tendered Original Capital Securi-
ties, or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any re-
spect. See "The Exchange Offer--Terms of the Ex-
change Offer."
Withdrawal Rights........... Tenders of Original Capital Securities may be
withdrawn at any time on or prior to the Expira-
tion Date by delivering a written notice of such
withdrawal to the Exchange Agent in conformity
with certain procedures set forth below under
"The Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Original Capital
Securities................. Tendering holders of Original Capital Securities
must complete and sign a Letter of Transmittal in
accordance with the instructions contained
therein and forward the same by mail, facsimile
or hand delivery, together with any other re-
quired documents, to the Exchange Agent, either
with the Original Capital Securities to be ten-
dered or in compliance with the specified proce-
dures for guaranteed delivery of Original Capital
Securities. Certain brokers, dealers, commercial
banks, trust companies and other nominees may
also effect tenders by book-entry transfer. Hold-
ers of Original Capital Securities registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee are urged to con-
tact such person promptly if they wish to tender
Original Capital Securities pursuant to the Ex-
change Offer. See "The Exchange Offer--Procedures
for Tendering Original Capital Securities."
Letters of Transmittal and certificates repre-
senting Original Capital Securities should not be
sent to the Company or the Trust. Such documents
should only be sent to the Exchange Agent.
Resales of Exchange Capital
Securities................. The Company and the Trust are making the Exchange
Offer in reliance on the position of the staff of
the Division of Corporation Finance of the Com-
mission as set forth in certain interpretive let-
ters addressed to third parties in other transac-
tions. However, neither the Company nor the Trust
has sought its own interpretive letter and there
can be no assurance that the staff of the Divi-
sion of Corporation Finance of the Commission
would make a similar determination with respect
to the Exchange Offer as it has in such
interpretive letters to third parties. Based on
these interpretations by the staff of the Divi-
sion of Corporation Finance of the Commission,
and subject to the two immediately following sen-
tences, the Company and the Trust believe that
Exchange Capital Securities issued pursuant to
this Exchange Offer in exchange for Original Cap-
ital Securities may be offered for resale, resold
and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer)
without further compliance with the registration
and prospectus delivery require-
11
<PAGE>
ments of the Securities Act, provided that such
Exchange Capital Securities are acquired in the
ordinary course of such holder's business and
that such holder is not participating, and has no
arrangement or understanding with any person to
participate, in a distribution (within the mean-
ing of the Securities Act) of such Exchange Capi-
tal Securities. However, any holder of Original
Capital Securities who is an "affiliate" of the
Company or the Trust or who intends to partici-
pate in the Exchange Offer for the purpose of
distributing the Exchange Capital Securities, or
any broker-dealer who purchased the Original Cap-
ital Securities from the Trust to resell pursuant
to Rule 144A or any other available exemption un-
der the Securities Act, (a) will not be able to
rely on the interpretations of the staff of the
Division of Corporation Finance of the Commission
set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to
tender such Original Capital Securities in the
Exchange Offer and (c) must comply with the reg-
istration and prospectus delivery requirements of
the Securities Act in connection with any sale or
other transfer of such Original Capital Securi-
ties unless such sale is made pursuant to an ex-
emption from such requirements. In addition, as
described below, if any broker-dealer holds Orig-
inal Capital Securities acquired for its own ac-
count as a result of market-making or other trad-
ing activities and exchanges such Original Capi-
tal Securities for Exchange Capital Securities,
then such broker-dealer must deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resales of such Exchange Cap-
ital Securities.
Each holder of Original Capital Securities who
wishes to exchange Original Capital Securities
for Exchange Capital Securities in the Exchange
Offer will be required to represent that (i) it
is not an "affiliate" of the Company or the
Trust, (ii) any Exchange Capital Securities to be
received by it are being acquired in the ordinary
course of its business, (iii) it has no arrange-
ment or understanding with any person to partici-
pate in a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securi-
ties, and (iv) if such holder is not a broker-
dealer, such holder is not engaged in, and does
not intend to engage in, a distribution (within
the meaning of the Securities Act) of such Ex-
change Capital Securities. Each broker-dealer
that receives Exchange Capital Securities for its
own account in exchange for Original Capital Se-
curities must acknowledge that such Original Cap-
ital Securities were acquired by such broker-
dealer as a result of market-making activities or
other trading activities and must agree that it
will deliver a prospectus in connection with any
resale of such Exchange Capital Securities. See
"Plan of Distribution." The Letter of Transmittal
states that, by so acknowledging and by deliver-
ing a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. Based
on the position taken by the staff of the Divi-
sion of Corporation Finance of the Commission in
the interpretive letters referred to above, the
Company and the Trust
12
<PAGE>
believe that Participating Broker-Dealers who ac-
quired Original Capital Securities for their own
accounts as a result of market-making activities
or other trading activities may fulfill their
prospectus delivery requirements with respect to
the Exchange Capital Securities received upon ex-
change of such Original Capital Securities (other
than Original Capital Securities which represent
an unsold allotment from the initial sale of the
Original Capital Securities) with a prospectus
meeting the requirements of the Securities Act,
which may be the prospectus prepared for an ex-
change offer so long as it contains a description
of the plan of distribution with respect to the
resale of such Exchange Capital Securities. Ac-
cordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by
a Participating Broker-Dealer in connection with
resales of Exchange Capital Securities received
in exchange for Original Capital Securities where
such Original Capital Securities were acquired by
such Participating Broker-Dealer for its own ac-
count as a result of market-making or other trad-
ing activities. Subject to certain provisions set
forth in the Registration Rights Agreement and to
the limitations described below under "The Ex-
change Offer--Resales of Exchange Capital Securi-
ties," the Company and the Trust have agreed that
this Prospectus, as it may be amended or supple-
mented from time to time, may be used by a Par-
ticipating Broker-Dealer in connection with re-
sales of such Exchange Capital Securities for a
period not exceeding 90 days after the Expiration
Date (subject to extension under certain limited
circumstances). See "Plan of Distribution." Any
Participating Broker-Dealer who is an "affiliate"
of the Company or the Trust may not rely on such
interpretive letters and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any re-
sale transaction. See "The Exchange Offer--Re-
sales of Exchange Capital Securities."
Exchange Agent.............. The exchange agent with respect to the Exchange
Offer is Bankers Trust Company (the "Exchange
Agent"). The addresses, and telephone and facsim-
ile numbers, of the Exchange Agent are set forth
in "The Exchange Offer--Exchange Agent" and in
the Letter of Transmittal.
Use of Proceeds............. Neither the Company nor the Trust will receive
any cash proceeds from the issuance of the Ex-
change Capital Securities offered hereby. See
"Use of Proceeds."
Certain United States
Federal Income Tax
Consequences; ERISA
Considerations.............
Holders of Original Capital Securities should re-
view the information set forth under "Certain In-
come Tax Considerations--US Federal Income Tax
Considerations" and "Certain ERISA Considera-
tions" prior to tendering Original Capital Secu-
rities in the Exchange Offer.
13
<PAGE>
THE EXCHANGE CAPITAL SECURITIES
Securities Offered.......... Up to $82,000,000 aggregate liquidation amount of
the Trust's Exchange Capital Securities which
have been registered under the Securities Act
(liquidation amount $1,000 per Exchange Capital
Security). The Exchange Capital Securities will
be issued and the Original Capital Securities
were issued under the Declaration. The Exchange
Capital Securities and any Original Capital Secu-
rities which remain outstanding after consumma-
tion of the Exchange Offer will vote together as
a single class for purposes of determining
whether holders of the requisite percentage in
outstanding liquidation amount thereof have taken
certain actions or exercised certain rights under
the Declaration. See "Description of the Exchange
Capital Securities--Voting Rights; Modification
and Amendment of the Declaration." The terms of
the Exchange Capital Securities are identical in
all material respects to the terms of the Origi-
nal Capital Securities, except that the Exchange
Capital Securities have been registered under the
Securities Act and will not be subject to certain
restrictions on transfer applicable to the Origi-
nal Capital Securities and will not provide for
any increase in the distribution rate thereon.
See "The Exchange Offer--Purpose of the Exchange
Offer," "Description of the Exchange Capital Se-
curities" and "Description of the Original Secu-
rities."
Distribution Dates.......... February 1 and August 1 of each year, commencing
August 1, 1997.
Extension Periods........... Distributions on Capital Securities will be de-
ferred for the duration of any Extension Period
elected by the Company with respect to the pay-
ment of interest on the Subordinated Debentures.
No Extension Period will exceed 10 consecutive
semi-annual periods or extend beyond the Stated
Maturity Date. See "Description of the Exchange
Subordinated Debentures--Option to Extend Inter-
est Payment Period" and "Certain Income Tax Con-
siderations--US Federal Income Tax Considera-
tions--Interest Income and Original Issue Dis-
count."
Ranking..................... The Exchange Capital Securities will rank pari
passu, and payments thereon will be made pro ra-
ta, with the Original Capital Securities and the
Common Securities except as described under "De-
scription of the Exchange Capital Securities."
The Exchange Subordinated Debentures will consti-
tute unsecured obligations of the Company and
will rank junior in right of payment to all Se-
nior Indebtedness of the Company to the extent
and in the manner set forth in the Indenture. See
"Description of the Exchange Subordinated Deben-
tures--Subordination." The Company's obligation
under the Exchange Capital Securities Guarantee
to make any Guarantee Payments will rank pari
passu with the Original Guarantee and will con-
stitute an unsecured obligation of the Company
and will rank subordinate and junior in right of
payment to all other liabilities of the Company,
including the Subordinated Debentures, except for
liabilities made pari passu or subordinate by
their terms. See "Description of the Exchange
Capital Securities Guarantee--Status of the Capi-
tal Securities Guarantee."
14
<PAGE>
Redemption.................. The Trust Securities will be subject to mandatory
redemption (a) in whole but not in part (i) on
the Stated Maturity Date upon repayment of the
Subordinated Debentures or (ii) upon the optional
prepayment by the Company of the Subordinated De-
bentures in the event the Company has or will be-
come obligated to pay Additional Amounts (as de-
fined herein) or upon the occurrence and continu-
ation of a Special Event and (b) in whole or in
part, at any time contemporaneously with the op-
tional prepayment of the Subordinated Debentures
by the Company on or after February 1, 2007, in
each case at the applicable Redemption Price. See
"Description of the Exchange Capital Securities--
Mandatory Redemption" and "Description of the Ex-
change Capital Securities--Special Event Redemp-
tion or Distribution."
Distribution of
Subordinated Debentures.... The Company will have the right at any time to
terminate the Trust and cause the Subordinated
Debentures to be distributed to the holders of
Capital Securities in liquidation of the Trust.
See "Description of the Exchange Capital Securi-
ties--Special Event Redemption or Distribution."
Ratings..................... The Capital Securities are rated "A-" by Standard
& Poor's Ratings Services, "A-" by Duff & Phelps
Credit Rating Company and "Baa2" by Moody's In-
vestors Service, Inc.
ERISA Considerations........ Prospective purchasers must carefully consider
the restrictions on purchases set forth under
"Certain ERISA Considerations."
Transfer Restrictions ...... The Exchange Capital Securities will be issued,
and may be transferred, only in minimum denomina-
tions of not less than $1,000. See "Description
of the Exchange Capital Securities--Restrictions
on Transfer." Any such transfer of Exchange Capi-
tal Securities in denominations of less than
$1,000 shall be deemed to be void and of no legal
effect whatsoever.
Absence of Market for the
Exchange Capital
Securities................. The Exchange Capital Securities will be a new is-
sue of securities for which there currently is no
market. Although the Initial Purchasers have in-
formed the Trust and the Company that they each
currently intend to make a market in the Exchange
Capital Securities, the Initial Purchasers are
not obligated to do so, and any such market mak-
ing may be discontinued at any time without no-
tice. Accordingly, there can be no assurance as
to the development or liquidity of any market for
the Exchange Capital Securities. If an active
market does not develop, the market price and li-
quidity of the Exchange Capital Securities may be
adversely affected. The Trust and the Company do
not intend to apply for listing of the Exchange
Capital Securities on any securities exchange or
for quotation through the NASD Automated Quota-
tion System. See "Plan of Distribution."
Governing Law............... The Declaration and the Trust Securities will be
governed by, and construed in accordance with,
the laws of the State of Delaware. The Capital
Securities Guarantee, the Indenture and the Sub-
ordinated Debentures will be governed by, and
construed in accordance with, the laws of the
State of New York.
15
<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.
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <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
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS)
<S> <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
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <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>
16
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
YEAR ENDED MARCH 31, APRIL 1, 1995 NINE MONTHS ENDED
-------------------------- TO SEPTEMBER 17, DECEMBER 31, 1995
1994 1995 1995(8) (UNAUDITED)(9)
------------ ------------ ---------------- -----------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 808 (Pounds) 776 (Pounds) 299 (Pounds) 541
Operating income....... 122 139 40 80
Interest, net.......... (7) (4) (3) (48)
Gain on Sale of invest-
ment.................. -- -- -- 7
Other, net............. 16 16 1 3
Provision for income
taxes................. (43) (50) (13) (15)
------------ ------------ ------------ -------------
Income from continuing
operations............ 88 101 25 27
Discontinued opera-
tions................. -- (7) (1) --
------------ ------------ ------------ -------------
Net income............. (Pounds) 88 (Pounds) 94 (Pounds) 24 (Pounds) 27
============ ============ ============ =============
Dividends declared per
share ................ (Pounds)0.21 (Pounds)0.25 (Pounds)0.85 (Pounds) 0.85
============ ============ ============ =============
<CAPTION>
MARCH 31,
1995
------------
(AMOUNTS
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 PRO FORMA
YEAR ENDED MARCH 31, APRIL 1, 1995 NINE MONTHS ENDED
-------------------------- TO SEPTEMBER 17, DECEMBER 31, 1995
1994 1995 1995(8) (UNAUDITED)(9)
------------ ------------ ---------------- -----------------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 142 (Pounds) 162 (Pounds) 43 (Pounds) 97
EBITDA(5).............. 170 193 58 128
Cash flow from opera-
tions(6).............. 236 100 69 142
Ratio of earnings to
fixed charges(7)...... 13 15 9 2
</TABLE>
17
<PAGE>
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA NINE MONTHS
INCEPTION FISCAL YEAR ENDED ENDED
(JUNE 23, 1995) MARCH 31, 1996 DECEMBER 31, 1996
TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
---------------------------------------------- -------------------------
(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 $ 823 (Pounds) 780 $1,336 (Pounds) 602 $ 1,031
Operating income....... 86 147 129 221 90 154
Interest, net.......... (21) (36) (57) (98) (38) (65)
Gain on sale of invest-
ments................. 14 24 -- -- 1 2
Other, net............. 2 3 3 5 4 7
Provision for income
taxes................. (28) (48) (26) (44) (22) (38)
-------------- ------- ------------- ------ -------------- -------
Income from continuing
operations............ 53 90 (Pounds) 49 $ 84 35 60
============= ======
Extraordinary gain on
early
extinguishment of
debt.................. 6 10 -- --
-------------- ------- -------------- -------
Net income............. (Pounds) 59 $ 100 (Pounds) 35 $ 60
============== ======= ============== =======
Dividends declared per
share................. (Pounds) 3.82 $ 6.54 (Pounds) 4.67 $ 8.00 (Pounds) 0.02 $ 0.03
============== ======= ============= ====== ============== =======
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1996 (UNAUDITED)
------------------------- -------------------------
(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 $ 2,067 (Pounds) 1,249 $ 2,139
Total assets........... 1,686 2,887 1,711 2,930
Total stockholder's eq-
uity.................. 368 630 366 627
Short-term debt........ 650 1,113 332 568
<CAPTION>
PERIOD FROM PRO FORMA NINE MONTHS
INCEPTION FISCAL YEAR ENDED ENDED
(JUNE 23, 1995) MARCH 31, 1996 DECEMBER 31, 1996
TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
---------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 95 $ 163 (Pounds) 141 $ 241 (Pounds) 96 $ 165
EBITDA(5).............. 117 200 182 311 128 220
Cash flow from opera-
tions(13)............. 25 43 94 161 52 89
Ratio of earnings to
fixed charges(7)...... 4 2 2
</TABLE>
18
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <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
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <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>
19
<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
----------- ------------ ------------------
(AMOUNTS IN MILLIONS)
<S> <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
------------
(AMOUNTS
IN MILLIONS)
<S> <C>
ASSETS:
Electricity distribution.......... (Pounds)531
Electricity supply................ 93
Other............................. 245
-----------
Total.......................... (Pounds)869
</TABLE>
20
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM FISCAL YEAR ENDED NINE MONTHS ENDED
INCEPTION (JUNE 23, 1995) MARCH 31, 1996 DECEMBER 31, 1996
TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
------------------------------------------------ -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
---------------- ---------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribu-
tion.................. (Pounds) 147 $ 252 (Pounds)252 $ 431 (Pounds) 169 $ 289
Electricity supply..... 450 770 726 1,243 560 959
Other.................. 33 56 54 93 41 70
Less: Intra-busi-
ness(11).............. (149) (255) (252) (431) (168) (287)
---------------- --------- ----------- ------ -------------- -------
Total............... (Pounds) 481 $ 823 (Pounds)780 $1,336 (Pounds) 602 $ 1,031
OPERATING INCOME (LOSS):
Electricity distribu-
tion.................. (Pounds) 72 $ 123 (Pounds)112 $ 192 (Pounds) 76 $ 130
Electricity supply..... 13 22 15 26 12 21
Other.................. 1 2 3 5 3 5
Less: Intra-busi-
ness(11).............. -- -- (1) (2) (1) (2)
---------------- --------- ----------- ------ -------------- -------
Total............... (Pounds) 86 $ 147 (Pounds)129 $ 221 (Pounds) 90 $ 154
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1996 (UNAUDITED)
----------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
---------------- ----------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS(12):
Electricity distribu-
tion.................. (Pounds) 1,422 $ 2,435 (Pounds) 1,480 $ 2,534
Electricity supply..... 102 175 132 226
Other.................. 162 277 99 170
---------------- --------- -------------- -------
Total............... (Pounds) 1,686 $ 2,887 (Pounds) 1,711 $ 2,930
</TABLE>
- --------
(1) The financial data for the Predecessor Company shown on pages (i) 16 and
19 and (ii) 17 and 20 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. EBIT for the period from inception (June 23,
1995) to March 31, 1996 and for Pro Forma Fiscal Year 1996 excludes a
nonrecurring gain on sale of investment of (Pounds)14 million ($24
million). This information is provided for informational purposes only and
such measure should not be construed as an alternative to operating income
(as determined in accordance with US GAAP) as an indicator of operating
performance, or as an alternative to cash flows from operating activities
(as determined in accordance with US GAAP) as a measure of liquidity.
(5) EBITDA equals income from continuing operations before the sum of interest
expense, income taxes, depreciation and amortization. EBITDA for the
period from inception (June 23, 1995) to March 31, 1996 and for Pro Forma
Fiscal Year 1996 excludes a nonrecurring gain on sale of investment of
(Pounds)14 million ($24 million). This information is provided for
informational purposes only and such measure should not be construed as an
alternative to operating income (as determined in accordance with US GAAP)
as an indicator of operating performance, or as an alternative to cash
flows from operating activities (as determined in accordance with US GAAP)
as a measure of liquidity.
(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 Nine Months Ended December 31, 1995 and 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 F-42, F-43 and F-44 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 December 31,
1996 of $1.7123 = (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 ($296 million) and (Pounds)95 million ($163 million),
respectively, at March 31, 1996.
(13) Cash flow from operations for the period from inception (June 23, 1995) to
March 31, 1996 includes the settlement of accounts payable balances of
(Pounds)39 million ($67 million).
21
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors in connection
with the Exchange Offer and the Exchange Capital Securities offered hereby.
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--The Structure of the Electricity 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 take place over a period of six months commencing April 1, 1998 when
competition in supply to Franchise Supply Customers will be phased in. 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"), which was established at the time of
privatization for bulk trading of electricity in England and Wales between
generators and suppliers. 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 Businesses--Supply
Business."
22
<PAGE>
FACTORS RELATING TO THE EXCHANGE OFFER
CONSEQUENCES OF A FAILURE TO EXCHANGE ORIGINAL CAPITAL SECURITIES
The Original Capital Securities have not been registered under the
Securities Act or any state securities laws and therefore may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws,
or pursuant to an exemption therefrom or in a transaction not subject thereto,
and in each case in compliance with certain other conditions and restrictions.
Original Capital Securities which remain outstanding after consummation of the
Exchange Offer will continue to bear a legend reflecting such restrictions on
transfer. In addition, upon consummation of the Exchange Offer, holders of
Original Capital Securities which remain outstanding will not be entitled to
any rights to have such Original Capital Securities registered under the
Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions). The Company and the Trust
do not intend to register under the Securities Act any Original Capital
Securities which remain outstanding after consummation of the Exchange Offer
(subject to such limited exceptions, if applicable). To the extent that
Original Capital Securities are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Original Capital Securities could be
adversely affected.
The Exchange Capital Securities and any Original Capital Securities which
remain outstanding after consummation of the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding liquidation amount thereof have taken certain
actions or exercised certain rights under the Declaration. See "Description of
the Exchange Capital Securities--Voting Rights; Modification and Amendment of
the Declaration."
The Original Capital Securities provide, among other things, that, if a
registration statement relating to the Exchange Offer has not been filed by
June 28, 1997 and declared effective by July 28, 1997, the distribution rate
borne by the Original Capital Securities will increase by 0.25% per annum
until such registration statement has been filed or declared effective, as the
case may be. Upon consummation of the Exchange Offer, holders of Original
Capital Securities will not be entitled to any increase in the distribution
rate thereon or any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Description of the
Original Securities."
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Capital Securities in exchange for Original Capital
Securities pursuant to the Exchange Offer will be made only after a timely
receipt by the Exchange Agent of such Original Capital Securities, a properly
completed and duly executed Letter of Transmittal or Agent's Message in lieu
thereof and all other required documents. Therefore, holders of the Original
Capital Securities desiring to tender such Original Capital Securities in
exchange for Exchange Capital Securities should allow sufficient time to
ensure timely delivery. Neither the Company nor the Trust is under any duty to
give notification of defects or irregularities with respect to the tenders of
Original Capital Securities for exchange.
FACTORS RELATING TO THE CAPITAL SECURITIES AND THE SUBORDINATED DEBENTURES
RANKING OF SUBORDINATED OBLIGATIONS UNDER CAPITAL SECURITIES GUARANTEE AND
SUBORDINATED DEBENTURES
The obligations of the Company under the Subordinated Debentures are
unsecured obligations of the Company and will be subordinate and junior in
right of payment, to the extent set forth herein, to all Senior Indebtedness
of the Company, except obligations and securities made pari passu or
subordinate by their terms, but senior to all capital stock now or hereafter
issued by the Company and to any guarantee now or hereafter entered into by
the Company in respect of its capital stock. The Company's obligations under
the Capital
23
<PAGE>
Securities Guarantee to make any Guarantee Payments will constitute unsecured
obligations and will rank subordinate and junior in right of payment to all
other liabilities of the Company, including the Subordinated Debentures,
except for liabilities made pari passu or subordinate by their terms. At
December 31, 1996, liabilities of the Company on a consolidated basis
aggregated approximately (Pounds)1,345 million ($2,303 million). The terms of
the Capital Securities, the Subordinated Debentures or the Capital Securities
Guarantee do not limit the ability of the Company to incur additional
indebtedness or other liabilities, including indebtedness that ranks senior to
or pari passu with the Subordinated Debentures and the Capital Securities
Guarantee, or the ability of its subsidiaries to incur additional indebtedness
or other liabilities. See "Description of the Exchange Guarantee--Status of
the Capital Securities Guarantee" and "Description of the Exchange
Subordinated Debentures--Subordination."
The Indenture contains no provisions which would afford the holders of
Subordinated Debentures protection in the event of a highly leveraged
transaction involving the Company or a change of control of the Company.
TRUST DISTRIBUTIONS DEPENDENT ON THE COMPANY'S PAYMENTS ON SUBORDINATED
DEBENTURES
The Trust's ability to make distributions and other payments on the Capital
Securities is solely dependent upon the Company making interest and other
payments on the Subordinated Debentures deposited as trust assets as and when
required. If the Company were not to make distributions or other payments on
the Subordinated Debentures for any reason, including as a result of the
Company's election to defer the payment of interest on the Subordinated
Debentures by extending the interest period on the Subordinated Debentures,
the Trust will not make payments on the Trust Securities. In such an event,
holders of the Capital Securities would not be able to rely on the Capital
Securities Guarantee since distributions and other payments on the Capital
Securities are subject to such Guarantee only if and to the extent that the
Company has made a payment to the Trust of interest or principal on the
Subordinated Debentures deposited in the Trust as trust assets. Instead,
holders of Capital Securities would rely on the enforcement by the
Institutional Trustee of its rights against the Company pursuant to the terms
of the Indenture. However, if the Trust's failure to make distributions on the
Capital Securities is a consequence of the Company's exercise of its right to
extend the interest payment period for the Subordinated Debentures, the
Institutional Trustee will have no right to enforce the payment of
distributions on the Capital Securities until an Event of Default under the
Declaration shall have occurred.
The Declaration provides that the Company shall pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs
and expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject.
THE COMPANY MAY DEFER INTEREST PAYMENTS ON SUBORDINATED DEBENTURES
So long as the Company shall not be in default in the payment of interest on
the Subordinated Debentures, the Company has the right under the Indenture to
defer payments of interest on the Subordinated Debentures by extending the
interest payment period from time to time on the Subordinated Debentures for
an Extension Period not exceeding 10 consecutive semi-annual interest periods,
during which no interest shall be due and payable, provided that no Extension
Period may extend beyond the Stated Maturity Date of the Subordinated
Debentures. In such an event, semi-annual distributions on the Capital
Securities would not be made (but would continue to accrue with interest
thereon at the rate of 8.23% per annum, compounded semi-annually, to the
extent permitted by applicable law) by the Trust during any such Extension
Period. If the Company exercises the right to extend an interest payment
period, the Company may not during such Extension Period (a) declare or pay
dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its capital stock except for
dividends, payments or distributions payable in shares of its capital stock,
reclassifications of its capital stock and conversions or exchanges of capital
stock of one class or series for capital stock of another class or series and
except for a redemption, purchase or other acquisition of shares of its
capital stock made for
24
<PAGE>
the purpose of an employee incentive plan or benefit plan or other similar
arrangement of the Company or any of its subsidiaries or (b) make any payment
of interest, principal of or premium, if any, on, or repay, repurchase or
redeem any debt securities issued by the Company that rank pari passu with or
junior to the Subordinated Debentures (except by conversion into or exchange
for shares of its capital stock) or (c) make any guarantee payment with
respect to the foregoing. Any Extension Period with respect to payment of
interest on the Subordinated Debentures will apply to distributions with
respect to the Capital Securities.
Prior to the termination of any Extension Period, the Company may further
extend such Extension Period; provided that such Extension Period together
with all such previous and further extensions thereof may not exceed 10
consecutive semi-annual interest periods. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the above requirements. The
Company may also pay on any Interest Payment Date all or any portion of the
interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to six Extension Periods of
10 consecutive semi-annual interest periods each or more numerous shorter
Extension Periods) throughout the term of the Subordinated Debentures. See
"Description of the Exchange Capital Securities--Distributions" and
"Description of the Exchange Subordinated Debentures--Option to Extend
Interest Payment Period."
TAX CONSEQUENCES OF EXTENSION OF INTEREST PAYMENT PERIODS
Should an Extension Period occur, a holder of Capital Securities will
continue to accrue income (in the form of original issue discount) in respect
of its pro rata share of the Subordinated Debentures held by the Trust for
United States federal income tax purposes. As a result, a holder of Capital
Securities will include such income in gross income for United States federal
income tax purposes in advance of the receipt of cash, and will not receive
the cash related to such income from the Trust if the holder disposes of the
Capital Securities prior to the record date for the payment of distributions.
See "Certain Income Tax Considerations--US Federal Income Tax Considerations--
Interest Income and Original Issue Discount."
POTENTIAL MARKET VOLATILITY DURING EXTENSION PERIOD
As described above, the Company has the right to extend an interest payment
period on the Subordinated Debentures from time to time for periods not
exceeding 10 consecutive semi-annual interest periods. If the Company
determines to extend an interest payment period, the market price of the
Capital Securities is likely to be adversely affected. In addition, as a
result of such rights, the market price of the Capital Securities (which
represent an undivided interest in the Trust) may be more volatile than other
similar securities that do not have such rights. A holder that disposes of its
Capital Securities during an Extension Period, therefore, may not receive the
same return on its investment as a holder that continues to hold its Capital
Securities. See "Description of the Exchange Subordinated Debentures--Option
to Extend Interest Payment Period."
LACK OF ESTABLISHED TRADING MARKET FOR EXCHANGE CAPITAL SECURITIES
The Original Capital Securities were issued to, and the Company believes
such securities are currently owned by, a relatively small number of
beneficial owners. The Original Capital Securities have not been registered
under the Securities Act and will be subject to restrictions on
transferability if they are not exchanged for the Exchange Capital Securities.
Although the Exchange Capital Securities may be resold or otherwise
transferred by the holders (who are not affiliates of the Company or the
Trust) without compliance with the registration requirements under the
Securities Act, they will constitute a new issue of securities with no
established trading market. Original Capital Securities may be transferred by
the holders thereof only in blocks having a liquidation amount of not less
than $100,000 (100 Original Capital Securities). The Company and the Trust
have been advised by the Initial Purchasers that the Initial Purchasers
presently intend to make a market in the Exchange Capital Securities. However,
the Initial Purchasers are not obligated to do so and any market-
25
<PAGE>
making activity with respect to the Exchange Capital Securities may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer. Accordingly, no
assurance can be given that an active public or other market will develop for
the Exchange Capital Securities or the Original Capital Securities, or as to
the liquidity of or the trading market for the Exchange Capital Securities or
the Original Capital Securities. If an active public market does not develop,
the market price and liquidity of the Exchange Capital Securities may be
adversely affected.
If a public trading market develops for the Exchange Capital Securities,
future trading prices will depend on many factors, including, among other
things, prevailing interest rates, the financial condition of the Company and
the market for similar securities. Depending on these and other factors, the
Exchange Capital Securities may trade at a discount.
Notwithstanding the registration of the Exchange Capital Securities in the
Exchange Offer, holders who are "affiliates" (as defined under Rule 405 of the
Securities Act) of the Company or the Trust may publicly offer for sale or
resell the Exchange Capital Securities only in compliance with the provisions
of Rule 144 under the Securities Act.
Each broker-dealer that receives Exchange Capital Securities for its own
account in exchange for Original Capital Securities, where such Original
Capital Securities were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Capital
Securities. See "Plan of Distribution."
SPECIAL EVENT REDEMPTION; DISTRIBUTION OF SUBORDINATED DEBENTURES
Upon the occurrence and during the continuation of a Tax Event or Investment
Company Event (each as defined herein), the Company will have the option to
redeem the Subordinated Debentures in cash (with the result that the Capital
Securities shall be redeemed). In addition, the Company will have the right at
any time to terminate the Trust and cause the Subordinated Debentures to be
distributed to the holders of the Trust Securities in liquidation of the
Trust. See "Description of the Exchange Capital Securities--Special Event
Redemption or Distribution." There can be no assurance as to the market prices
for the Subordinated Debentures that may be distributed in exchange for
Capital Securities if a termination and liquidation of the Trust were to
occur.
Under current United States federal income tax law, a distribution of the
Subordinated Debentures upon liquidation of the Trust would not be a taxable
event to holders of the Capital Securities, provided, however, that a
redemption of the Subordinated Debentures may be taxable. See "Certain Income
Tax Considerations--US Federal Income Tax Considerations--Receipt of
Subordinated Debentures or Cash Upon Liquidation of the Trust."
LIMITED VOTING RIGHTS
Holders of Capital Securities will have limited voting rights and will not
be able to appoint, remove or replace, or to increase or decrease the number
of, Trustees, which rights are vested exclusively in the holders of the Common
Securities. See "Description of the Exchange Capital Securities--Voting
Rights."
OTHER FACTORS
CHANGE OF GOVERNMENT IN THE UK
On May 1, 1997 a new Labour government in the UK was elected. The Labour
Party's election manifesto includes the commitment to introduce "a one-off
windfall levy on the excess profits of privatised utilities". The total amount
of government revenue to be raised by the tax and the allocation of the tax
between utilities is scheduled to be announced as part of the government's
budget in early July 1997. There can be no assurance that the introduction of
a windfall tax or other taxes or policies of the new government will not
adversely affect the Company.
26
<PAGE>
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
The Trust is a statutory business trust that was formed under the Delaware
Business Trust Act (the "Business Trust Act") on January 21, 1997 pursuant to
a declaration of trust dated January 21, 1997, as amended and restated on
January 29, 1997 among the Trustees (as defined herein) and the Company, as
sponsor, and the filing of a certificate of trust with the Secretary of State
of Delaware. The Trust exists for the purpose of (a) issuing and selling the
Trust Securities and effecting the Exchange Offer, (b) using the proceeds from
the sale of the Trust Securities to acquire the Original Subordinated
Debentures, (c) exchanging the Original Subordinated Debentures for the
Exchange Subordinated Debentures in the Exchange Offer and (d) engaging in
such other activities as are necessary, advisable or incidental thereto. The
rights of the holders of the Capital Securities, including economic rights,
rights to information and voting rights, are set forth in the Declaration, the
Trust Indenture Act (as defined below) to the extent applicable and the
Business Trust Act. The Company acquired Common Securities in an amount equal
to at least 3% of the total capital of the Trust and owns, directly or
indirectly, all of the issued and outstanding Common Securities. The Capital
Securities and the Common Securities have equivalent terms; provided that (i)
if an Event of Default under the Declaration occurs and is continuing, the
holders of Capital Securities will have a priority over holders of the Common
Securities with respect to distributions and payments upon liquidation,
redemption or otherwise and (ii) holders of Common Securities have the
exclusive right (subject to the terms of the Declaration) to appoint, remove
or replace Trustees and to increase or decrease the number of Trustees.
The number of Trustees of the Trust is initially four. Two of the Trustees
are the Regular Trustees, who are employees or officers of or affiliated with
the Company. The third trustee is Bankers Trust Company, as Institutional
Trustee, which will act as the indenture trustee for purposes of the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The fourth
trustee is Bankers Trust (Delaware), which will serve as the Delaware Trustee.
The Regular Trustees, the Institutional Trustee and the Delaware Trustee are
sometimes collectively referred to herein as the "Trustees". Pursuant to the
Declaration, the Institutional Trustee will have the power to exercise all
rights, powers and privileges under the Indenture with respect to the
Subordinated Debentures. The Institutional Trustee will promptly make
distributions to the holders of the Trust Securities out of any funds in the
Trust. The Capital Securities Guarantee will be held by Bankers Trust Company,
acting in its separate capacity as Capital Securities Guarantee Trustee for
the benefit of the holders of the Capital Securities.
Under the Declaration, the Trust shall not, and the Trustees (including the
Institutional Trustee) shall cause the Trust not to, engage in any activity
other than in connection with the purposes of the Trust or other than as
required or authorized by the Declaration. In particular, the Trust shall not
and the Trustees (including the Institutional Trustee) shall not (a) invest
any proceeds received by the Trust from holding the Subordinated Debentures
but shall promptly distribute all such proceeds to holders of Trust Securities
pursuant to the terms of the Declaration and of the Trust Securities; (b)
acquire any assets other than as expressly provided in the Declaration; (c)
possess Trust property for other than a Trust purpose; (d) make any
investments, other than investments represented by the Subordinated
Debentures; (e) possess any power or otherwise act in such a way as to vary
the Trust assets or the terms of the Trust Securities in any way whatsoever;
(f) issue any securities or other evidences of beneficial ownership of, or
beneficial interests in, the Trust other than the Trust Securities; (g) incur
any indebtedness for borrowed money or (h)(1) except as otherwise provided in
the Declaration or the Capital Securities, direct the time, method and place
of exercising any trust or power conferred upon the Indenture Trustee with
respect to the Subordinated Debentures, (2) waive any past default that is
waivable under the applicable provisions of the Indenture, (3) exercise any
right to rescind or annul any declaration that the principal of all of the
Subordinated Debentures shall be due and payable or (4) consent to any
amendment, modification or termination of the Indenture or the Subordinated
Debentures or the Declaration, in each case where such consent shall be
required, unless in the case of this clause (h) the Institutional Trustee
shall have received an opinion of nationally recognized independent tax
counsel experienced in such matters to the effect that such action will not
cause more than an insubstantial risk that the Trust will not be classified as
a grantor trust for United States federal income tax purposes.
27
<PAGE>
Except as provided below or under the Business Trust Act and the Trust
Indenture Act, holders of Capital Securities will have no voting rights. See
"Description of the Exchange Capital Securities--Voting Rights."
The Institutional Trustee, for the benefit of the holders of the Trust
Securities, is authorized under the Declaration to exercise all rights under
the Indenture with respect to the Subordinated Debentures and to enforce the
Company's obligations under the Subordinated Debentures upon the occurrence of
an Indenture Event of Default. The Institutional Trustee, as the Guarantee
Trustee, shall also be authorized to enforce the rights of holders of Capital
Securities under the Capital Securities Guarantee. If the Trust's failure to
make distributions on the Capital Securities is a consequence of the Company's
exercise of its right to extend the interest payment period for the
Subordinated Debentures, the Institutional Trustee will have no right to
enforce the payment of distributions on the Capital Securities until an Event
of Default under the Declaration shall have occurred. Holders of at least a
majority in liquidation amount of the Capital Securities will have the right
to direct the Institutional Trustee with respect to certain matters under the
Declaration and the Capital Securities Guarantee. Any holder of Capital
Securities may institute a legal proceeding against the Company to enforce the
Capital Securities Guarantee. See "Description of the Exchange Capital
Securities--Voting Rights."
If an Indenture Event of Default occurs and is continuing with respect to
any Subordinated Debenture, an Event of Default under the Declaration will
occur and be continuing with respect to the Trust Securities. In such event,
the Declaration provides that the holders of Common Securities will be deemed
to have waived any such Event of Default with respect to the Common Securities
until all Events of Default with respect to the Capital Securities have been
cured or waived. Until all such Events of Default with respect to the Capital
Securities have been so cured or waived, the Institutional Trustee will be
deemed to be acting solely on behalf of the holders of the Capital Securities
and only the holders of the Capital Securities will have the right to direct
the Institutional Trustee with respect to certain matters under the
Declaration and consequently under the Indenture. If any Event of Default with
respect to the Capital Securities is waived by the holders of the Capital
Securities as provided in the Declaration, the holders of Common Securities
pursuant to the Declaration have agreed that such waiver also constitutes a
waiver of such Event of Default with respect to the Common Securities for all
purposes under the Declaration without any further act, vote or consent of the
holders of the Common Securities. See "Description of the Exchange Capital
Securities."
The Declaration provides that the Trustees may treat the person in whose
name a Capital Security is registered on the books and records of the Trust as
the sole holder thereof for purposes of receiving distributions and for all
other purposes and, accordingly, shall not be bound to recognize any equitable
or other claim to or interest in such Capital Securities on the part of any
person, whether or not the Trust shall have actual or other notice thereof.
Capital Securities will be issued in fully registered form. Subject to the
rules and procedures of DTC described under "Description of the Exchange
Capital Securities--Form, Denomination, Book-Entry Procedures and Transfer,"
interests in the Capital Securities will be held in the form of a global
certificate registered on the books and records of the Trust in the name of
DTC or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with DTC (or any
successor depositary) for all purposes, including the payment of
distributions and receiving approvals, votes or consents under the
Declaration, and except as set forth in the Declaration, shall have no
obligation to persons owning Capital Securities ("Capital Security
Beneficial Owners") registered in the name of and held by DTC (or any
successor depositary) or its nominee; and
(ii) the rights of Capital Security Beneficial Owners shall be exercised
only through DTC (or any successor depositary) and shall be limited to
those established by law and agreements between such Capital Security
Beneficial Owners and DTC and/or its participating organizations
("Participants"). See "Description of the Exchange Capital Securities--
Form, Denomination, Book-Entry Procedures and Transfer." With respect to
Capital Securities registered in the name of and held by DTC or its
nominee, all notices and other communications required under the
Declaration shall be given to, and all distributions on such Capital
Securities shall be given or made to, DTC (or its successor).
28
<PAGE>
In the Declaration, the Company has agreed to pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs
and expenses of the Trust, including the fees and expenses of the Trustees and
any taxes and all costs and expenses with respect thereto, to which the Trust
may become subject, except for United States withholding taxes. See "Risk
Factors--Trust Distributions Dependent on the Company's Payments on
Subordinated Debentures." The foregoing obligations of the Company under the
Declaration are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses and taxes are owed (a
"Creditor") whether or not such Creditor has received notice thereof. Any such
Creditor may enforce such obligations of the Company directly against the
Company and the Company has irrevocably waived any right or remedy to require
that any such Creditor take any action against the Trust or any other person
before proceeding against the Company. The Company has agreed in the
Declaration to execute such additional agreements as may be necessary or
desirable in order to give full effect to the foregoing.
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION IS A
DISCUSSION OF THE MATERIAL TERMS OF THE DECLARATION, BUT DOES NOT PURPORT TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION.
The business address of the Trust is Southern Investments UK Capital Trust I
c/o Bankers Trust (Delaware), 1001 Jefferson Street, Suite 550, Wilmington,
Delaware 19801-1457.
29
<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 November 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 December
31, 1996, the Company had consolidated assets of (Pounds)1.711 billion ($2.930
billion). The following organizational chart illustrates the ownership
structure of the Company and SWEB in summary form.
[ORGANIZATIONAL CHART APPEARS HERE]
The Southern PP&L Resources, Inc.
Company
75% 25%
Southern Investments
UK Holdings Limited
100%
SOuthern Investments
UK pic
100%
South Western
Electricity pic
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 ($192 million)
and (Pounds)15 million ($26 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.
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
30
<PAGE>
(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 and population
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 1996 and has also benefited from an average unemployment rate during
calendar year 1996 of approximately 6.3%, which was below the UK average of
7.5%, according to a 1997 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 2.3% 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 667 staff reductions (mainly in the distribution business and
representing 20% of staff at the time of the acquisition by the Company of
SWEB) are planned, of which 611 occurred prior to December 31, 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 continue,
subject to price regulation, until March 31, 1998, from which date competition
to supply Franchise Supply Customers is scheduled to be progressively
introduced.
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
31
<PAGE>
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
continuing work on improving and enhancing a 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 75 power plants with more than 320 generating
units and with total electric generating capacity of over 36,000 MW. Southern
Energy, Inc. ("Southern Energy"), 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 Energy has management supervisory 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, China, the Bahamas, Indonesia, the Philippines 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 January 1997, Southern indirectly
acquired a controlling interest in Consolidated Electric Power Asia ("CEPA").
CEPA is the largest independent power producer in Asia.
PP&L Resources is the holding company for Pennsylvania Power & Light Company
("PP&L") and Power Markets Development Company ("PMDC"). PP&L, a public
utility company headquartered in Allentown, Pennsylvania, provides electric
service to approximately 1.2 million homes and businesses throughout a 10,000
square mile area in central and eastern Pennsylvania. PMDC, which has been a
subsidiary of PP&L Resources since 1995, develops, owns and operates electric
generation and distribution companies in Argentina, Bolivia, Peru, Spain,
Portugal, and the United Kingdom, with the most significant commitment to date
being PMDC's
32
<PAGE>
investment in Holdings. In March 1997, PMDC entered into an agreement to
acquire a controlling interest in a Chilean holding company that owns several
electric distribution companies in Chile and Bolivia. PMDC intends to continue
its strategic growth in Europe and Latin America with the intent of providing
a significant contribution to PP&L Resources earnings by the year 2000.
USE OF PROCEEDS
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the Exchange Capital Securities and the Exchange Guarantee offered
hereby. In consideration for issuing the Exchange Capital Securities in
exchange for Original Capital Securities as described in this Prospectus, the
Trust will receive Original Capital Securities in like liquidation amount. The
Original Capital Securities surrendered in exchange for the Exchange Capital
Securities will be retired and canceled.
All of the proceeds from the sale of the Original Capital Securities were
invested by the Trust in the Original Subordinated Debentures. The Company
used the net proceeds from the sale of the Original Subordinated Debentures,
amounting to approximately $81 million ((Pounds)50 million), to refinance a
term loan and for general corporate purposes.
CAPITALIZATION
The following table sets forth, at December 31, 1996, (i) the actual
consolidated capitalization of the Successor Company, and (ii) the
consolidated capitalization adjusted to reflect the issuance of the
Subordinated Debentures and the application of the net proceeds thereof. 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>
DECEMBER 31, 1996
----------------------------------------------------
ACTUAL AS ADJUSTED
------------------------- -------------------------
(Pounds) $ % (Pounds) $ %
----------- ------ --- ----------- ------ ---
(AMOUNTS IN MILLIONS, EXCEPT %)
<S> <C> <C> <C> <C> <C> <C>
Capitalization:
Short-term debt........ (Pounds)307 $ 525(1) 31% (Pounds)282 $ 483(1) 28%
Senior Notes........... 300 500 31 300 500 30
Company Obligated
Mandatorily Redeemable
Subordinated Capital
Income Securities of
Subsidiary Trust Hold-
ing Company Subordi-
nated Debentures(3)... -- -- -- 50 82(2) 5
Total stockholder's eq-
uity.................. 366 627(1) 38 366 627(1) 37
----------- ------ --- ----------- ------ ---
Total capitalization... (Pounds)973 $1,652 100% (Pounds)998 $1,692 100%
=========== ====== === =========== ====== ===
</TABLE>
- --------
(1) Solely for convenience of the reader, UK pounds sterling amounts have been
translated into US dollars at the Noon Buying Rate on December 31, 1996 of
$1.7123 = (Pounds)1.00.
(2) Adjusted on the basis that the net proceeds of the issuance of the Capital
Securities were $81 million ((Pounds)50 million).
(3) As described in this Prospectus, all of the assets of the Trust will be
the Subordinated Debentures of the Company with an aggregate principal
amount not exceeding $84,537,000, and upon redemption of such debt, the
Capital Securities will be mandatorily redeemable.
33
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The Capital Securities
will be presented as a separate line item in the consolidated balance sheet of
the Company, and appropriate disclosures concerning the Capital Securities,
the Capital Securities Guarantee and the Subordinated Debentures will be
included in the notes to the consolidated financial statements. For financial
reporting purposes, the Company will record distributions payable on the
Capital Securities as an expense.
EXCHANGE RATES
The following table sets out, for the periods indicated, certain information
concerning the exchange rates between UK pounds sterling and US dollars based
on the Noon Buying Rates.
<TABLE>
<CAPTION>
FISCAL YEAR PERIOD END AVERAGE(1) HIGH LOW
----------- ---------- ---------- ---- ----
($ 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 December 31.................... 1.71 1.59 1.71 1.50
</TABLE>
- --------
(1) The average of the Noon Buying Rates in effect on the last business day of
each month during the relevant period.
34
<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 inception (June 23, 1995) to March 31, 1996,
have been derived from the audited consolidated financial statements of the
Predecessor Company and the Successor Company, respectively. The unaudited
consolidated income statement data for the nine months ended December 31, 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 December 31, 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.
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <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>
YEAR ENDED MARCH 31,
------------------------------------------------------
1992 1993 1994 1995
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS)
<S> <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
------------ ------------ ------------ ------------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <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>
35
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
YEAR ENDED MARCH 31, APRIL 1, 1995 NINE MONTHS ENDED
-------------------------- TO SEPTEMBER 17, DECEMBER 31, 1995
1994 1995 1995(8) (UNAUDITED)(9)
------------ ------------ ---------------- -----------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues..... (Pounds) 808 (Pounds) 776 (Pounds) 299 (Pounds) 541
Operating income....... 122 139 40 80
Interest, net.......... (7) (4) (3) (48)
Gain on sale of invest-
ment.................. -- -- -- 7
Other, net............. 16 16 1 3
Provision for income
taxes................. (43) (50) (13) (15)
------------ ------------ ------------ ------------
Income from continuing
operations............ 88 101 25 27
Discontinued opera-
tions................. -- (7) (1) --
------------ ------------ ------------ ------------
Net income............. (Pounds) 88 (Pounds) 94 (Pounds) 24 (Pounds) 27
============ ============ ============ ============
Dividends declared per
share ................ (Pounds)0.21 (Pounds)0.25 (Pounds)0.85 (Pounds)0.85
============ ============ ============ ============
<CAPTION>
MARCH 31,
1995
------------
(AMOUNTS
IN MILLIONS)
<S> <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>
PRO FORMA
PERIOD FROM NINE MONTHS ENDED
YEAR ENDED MARCH 31, APRIL 1, 1995 DECEMBER
-------------------------- TO SEPTEMBER 17, 31, 1995
1994 1995 1995(8) (UNAUDITED)(9)
------------ ------------ ---------------- -----------------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 142 (Pounds) 162 (Pounds) 43 (Pounds) 97
EBITDA(5).............. 170 193 58 128
Cash flow from opera-
tions(6).............. 236 100 69 142
Ratio of earnings to
fixed charges(7)...... 13 15 9 2
</TABLE>
36
<PAGE>
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
PERIOD FROM FISCAL YEAR ENDED ENDED
INCEPTION (JUNE 23, 1995) MARCH 31, 1996 DECEMBER 31, 1996
TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
-------------------------------------------------- -------------------------
(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 $ 823 (Pounds) 780 $1,336 (Pounds) 602 $ 1,031
Operating income....... 86 147 129 221 90 154
Interest, net.......... (21) (36) (57) (98) (38) (65)
Gain on sale of invest-
ments................. 14 24 -- -- 1 2
Other, net............. 2 3 3 5 4 7
Provision for income
taxes................. (28) (48) (26) (44) (22) (38)
---------------- --------- ------------- ------ -------------- -------
Income from continuing
operations............ 53 90 (Pounds) 49 $ 84 35 60
============= ======
Extraordinary gain on
early extinguishment
of debt............... 6 10 -- --
---------------- --------- -------------- -------
Net income............. (Pounds) 59 $ 100 (Pounds) 35 $ 60
================ ========= ============== =======
Dividends declared per
share................. (Pounds) 3.82 $ 6.54 (Pounds) 4.67 $ 8.00 (Pounds) 0.07 $ 0.12
================ ========= ============= ====== ============== =======
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1996 (UNAUDITED)
----------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
---------------- ----------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Property, plant and
equipment, net........ (Pounds) 1,207 $ 2,068 (Pounds) 1,249 $ 2,139
Total assets........... 1,686 2,887 1,711 2,930
Total stockholder's eq-
uity.................. 368 630 366 627
Short-term debt........ 650 1,113 332 568
<CAPTION>
PRO FORMA NINE MONTHS
PERIOD FROM FISCAL YEAR ENDED ENDED
INCEPTION (JUNE 23, 1995) MARCH 31, 1996 DECEMBER 31, 1996
TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
-------------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
---------------- ------------------------ ------ -------------- ---------
(AMOUNTS IN MILLIONS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)................ (Pounds) 95 $ 163 (Pounds) 141 $ 241 (Pounds) 96 $ 165
EBITDA(5).............. 117 200 182 311 128 220
Cash flow from opera-
tions(13)............. 25 43 94 161 52 89
Ratio of earnings to
fixed charges(7)...... 4 2 2
</TABLE>
37
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <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>
YEAR ENDED MARCH 31,
--------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <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>
38
<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
----------- ------------ ------------------
(AMOUNTS IN MILLIONS)
<S> <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
------------
(AMOUNTS
IN MILLIONS)
<S> <C>
ASSETS:
Electricity distribution...... (Pounds)531
Electricity supply............ 93
Other......................... 245
-----------
Total...................... (Pounds)869
</TABLE>
39
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA NINE MONTHS
INCEPTION FISCAL YEAR ENDED ENDED
(JUNE 23, 1995) TO MARCH 31, 1996 DECEMBER 31, 1996
MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED)
-------------------------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10) (Pounds) $(10)
-------------- -------------------- ------ -------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity distribu-
tion.................. (Pounds) 147 $ 252 (Pounds)252 $ 431 (Pounds) 169 $ 289
Electricity supply..... 450 770 726 1,243 560 959
Other.................. 33 56 54 93 41 70
Less: Intra-busi-
ness(11).............. (149) (255) (252) (431) (168) (287)
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 481 $ 823 (Pounds)780 $1,336 (Pounds) 602 $ 1,031
OPERATING INCOME (LOSS):
Electricity distribu-
tion.................. (Pounds) 72 $ 123 (Pounds)112 $ 192 (Pounds) 76 $ 130
Electricity supply..... 13 22 15 26 12 21
Other.................. 1 2 3 5 3 5
Less: Intra-busi-
ness(11).............. -- -- (1) (2) (1) (2)
-------------- ------- ----------- ------ -------------- -------
Total............... (Pounds) 86 $ 147 (Pounds)129 $ 221 (Pounds) 90 $ 154
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1996 (UNAUDITED)
------------------------- -------------------------
(Pounds) $(10) (Pounds) $(10)
-------------- --------- -------------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS(12):
Electricity distribu-
tion.................. (Pounds) 1,422 $ 2,435 (Pounds) 1,480 $ 2,534
Electricity supply..... 102 175 132 226
Other.................. 162 277 99 170
-------------- ------- -------------- -------
Total............... (Pounds) 1,686 $ 2,887 (Pounds) 1,711 $ 2,930
</TABLE>
- --------
(1) The financial data for the Predecessor Company shown on pages (i) 35 and
38 and (ii) 36 and 39 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. EBIT for the period from inception (June 23,
1995) to March 31, 1996 and for Pro Forma Fiscal Year 1996 excludes a
nonrecurring gain on sale of investment of (Pounds)14 million ($24
million). This information is provided for informational purposes only
and such measure should not be construed as an alternative to operating
income (as determined in accordance with US GAAP) as an indicator of
operating performance, or as an alternative to cash flows from operating
activities (as determined in accordance with US GAAP) as a measure of
liquidity.
(5) EBITDA equals income from continuing operations before the sum of
interest expense, income taxes, depreciation and amortization. EBITDA for
the period from inception (June 23, 1995) to March 31, 1996 and for Pro
Forma Fiscal Year 1996 excludes a nonrecurring gain on sale of investment
of (Pounds)14 million ($24 million). This information is provided for
informational purposes only and such measure should not be construed as
an alternative to operating income (as determined in accordance with US
GAAP) as an indicator of operating performance, or as an alternative to
cash flows from operating activities (as determined in accordance with US
GAAP) as a measure of liquidity.
(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 Nine Months Ended December 31, 1995 and 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 F-42, F-43 and F-44 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 December 31,
1996 of $1.7123 = (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 ($296 million) and (Pounds)95 million ($163 million),
respectively, at March 31, 1996.
(13) Cash flow from operations for the period from inception (June 23, 1995)
to March 31, 1996 includes the settlement of accounts payable balances of
(Pounds)39 million ($67 million).
40
<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 with the consolidated financial
statements and the notes thereto of South Western Electricity plc and its
subsidiaries (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 November 1995, the
Company acquired the remaining shares of SWEB. Total consideration for the
acquisition was (Pounds)1.063 billion ($1.820 billion) excluding a special
dividend of (Pounds)52 million ($89 million) paid by SWEB to its former
shareholders (other than those whose shares the Company had purchased in the
open market). Such dividend, when considered in aggregate with the final
dividend of (Pounds)23 million ($39 million) paid in October 1995 in respect
of fiscal year 1995, yields the (Pounds)75 million ($128 million) payment of
preacquisition dividends disclosed in the financial statements located
elsewhere in this Prospectus.
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 ($3.022 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 ($1.502 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 unaudited pro forma information presented for the nine months ended
December 31, 1995, consists of the historical results of the Company for the
period from inception (June 23, 1995) to December 31, 1995 and of SWEB for the
period from April 1, 1995 to September 17, 1995, both of which have been
adjusted for the effects of the acquisition as though it had taken place on
April 1, 1995. The pro forma adjustments relate to the allocation of fair
values of assets acquired and liabilities assumed, as well as the reversal of
certain non-recurring items.
41
<PAGE>
The information for Pro Forma Fiscal Year 1996 and that for the pro forma
nine months ended December 31, 1995 has been prepared for illustrative
purposes only and, because of its nature, cannot give a complete picture of
the Company's results of operations for the relevant period 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.
Unaudited amounts have been prepared based upon the consolidated financial
statements of the Company, which have been prepared in accordance with US
GAAP.
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 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)39
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
PRO FORMA NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED WITH NINE MONTHS ENDED
DECEMBER 31, 1996
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 Regulator to be earned during the respective fiscal
years ended March 31. See "The Electric Utility Industry in Great Britain--
Electricity Supply." Accordingly, increases in revenue, operating income and
net income between the two periods discussed below are not necessarily
indicative of the comparative 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.
42
<PAGE>
Earnings
Operating income increased by (Pounds)10 million (13%) from (Pounds)80
million in the pro forma nine months ended December 31, 1995 to (Pounds)90
million in the nine months ended December 31, 1996. This increase was
primarily due to a (Pounds)1 million increase in operating income from the
supply business, a (Pounds)5 million increase in operating income from the
distribution business and a (Pounds)4 million increase in operating income
from ancillary businesses.
Net income increased by (Pounds)8 million from (Pounds)27 million in the pro
forma nine months ended December 31, 1995 to (Pounds)35 million in the nine
months ended December 31, 1996. This increase was primarily attributable to
reduced after-tax interest expense of (Pounds)11 million resulting from the
repayment during the second half of fiscal year 1996 of debt issued to finance
the acquisition, increased operating income as described above, partly offset
by the decrease in after-tax interest income of (Pounds)4 million and in
after-tax gain on sale of investments of (Pounds)4 million.
Revenues
Operating revenues increased by (Pounds)61 million (11%) from (Pounds)541
million in the pro forma nine months ended December 31, 1995 to (Pounds)602
million in the nine months ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
--------------------------------
INCREASE (DECREASE) FROM THE PRO
FORMA NINE MONTHS ENDED
DECEMBER 31, 1995 TO THE
NINE MONTHS ENDED
DECEMBER 31, 1996
--------------------------------
((Pounds) MILLIONS, EXCEPT %)
<S> <C>
Electricity distribution.................... (12)
Electricity supply.......................... 57
Other....................................... 3
Less:Intra-business(1)...................... (13)
---
Total operating revenues.................. 61
===
Percentage change......................... 11%
===
</TABLE>
- --------
(1) The change in intra-business revenues has the effect of increasing total
operating revenues due to the elimination of intra-business revenues in
consolidation.
43
<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 nine months ended December 31, 1996, application of the
Distribution Price Control Formula resulted in a reduction in SWEB's
distribution revenues as compared to the pro forma nine months ended December
31, 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)12 million (7%) from (Pounds)181 million for the pro
forma nine months ended December 31, 1995 to (Pounds)169 million for the nine
months ended December 31, 1996 as a result of the following factors:
<TABLE>
<CAPTION>
OPERATING REVENUES FROM
ELECTRICITY DISTRIBUTION
--------------------------------
INCREASE (DECREASE) FROM THE PRO
FORMA NINE MONTHS ENDED
DECEMBER 31, 1995 TO THE
NINE MONTHS ENDED
DECEMBER 31, 1996
--------------------------------
((Pounds) MILLIONS, EXCEPT %)
<S> <C>
Application of Distribution Price Control
Formula.................................. (12)
Sales growth.............................. 2
Other revenue attributable to distribution
businesses............................... (2)
---
Total distribution revenues............... (12)
===
Percentage change......................... (7)%
===
</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
the 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)57 million (11%) from
(Pounds)503 million for the pro forma nine months ended December 31, 1995 to
(Pounds)560 million for the nine months ended December 31, 1996. In the nine
months ended December 31, 1996, the number of electricity units supplied
increased by 26% but total revenues produced by the supply business increased
by only 11%, 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%, offset by a reduction in allowable income as set by
the Supply Price Control Formula.
Cost of Sales
Cost of sales increased by (Pounds)74 million (22%) from (Pounds)343 million
in the pro forma nine months ended December 31, 1995 to (Pounds)417 million in
the nine months ended December 31, 1996. This increase was principally the
result of an increase in the supply business cost of sales of (Pounds)62
million reflecting an increase in purchases of electricity to supply the
increase in unit sales as discussed above.
44
<PAGE>
Operating Expenses
Operating expenses decreased by (Pounds)23 million (19%) from (Pounds)118
million in the pro forma nine months ended December 31, 1995 to (Pounds)95
million in the nine months ended December 31, 1996. This decrease was
primarily due to a (Pounds)4 million decrease in maintenance costs and a
(Pounds)20 million decrease in selling, general and administrative costs,
which were partially offset by a (Pounds)1 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 pro forma nine months ended December 31, 1995
but were capitalized in the nine months ended December 31, 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.
Interest Expense
Interest expense decreased by (Pounds)16 million from (Pounds)55 million in
the pro forma nine months ended December 31, 1995 to (Pounds)39 million in the
nine months ended December 31, 1996, principally as a result of the financing
costs associated with the amount of debt issued for the acquisition. Interest
expense for 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 at an interest rate of 6% per year. However, in the nine months
ended December 31, 1996, the Company benefitted from the retirement of
(Pounds)96 million of debt and the conversion of (Pounds)500 million of debt
to equity during the second half of fiscal year 1996. Such retirement and
conversion were not reflected in the financial statements for pro forma nine
months ended December 31, 1995.
Gain on sale of investments
The decrease is largely due to a pretax gain of (Pounds)7 million realized
in December 1995 in respect of the sale of a substantial portion of SWEB's
equity holding in 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.
Income Taxes
Income taxes increased by (Pounds)7 million from (Pounds)15 million in the
pro forma nine months ended December 31, 1995 to (Pounds)22 million in the
nine months ended December 31, 1996. This increase was primarily attributable
to an increase in pre-tax income.
FISCAL YEAR 1995 COMPARED WITH PRO FORMA FISCAL YEAR 1996
Earnings
Operating income decreased by (Pounds)10 million (7%) from (Pounds)139
million in fiscal year 1995 to (Pounds)129 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)10 million decrease in operating expenses.
Net income decreased by (Pounds)45 million (48%) from (Pounds)94 million in
fiscal year 1995 to (Pounds)49 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.
45
<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 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 change 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.
46
<PAGE>
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.
Operating Expenses
Operating expenses decreased by (Pounds)10 million (6%) from (Pounds)157
million in fiscal year 1995 to (Pounds)147 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. The weighted average balance of debt outstanding
during the Pro Forma Fiscal Year 1996 was (Pounds)876 million at a weighted
average interest rate of 7.5% compared to (Pounds)93 million at 11.9% during
fiscal year 1995.
Income Taxes
Income taxes decreased by (Pounds)24 million from (Pounds)50 million in
fiscal year 1995 to (Pounds)26 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.
47
<PAGE>
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:
<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
business(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.
48
<PAGE>
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
The principal sources of funds during Pro Forma Fiscal Year 1996 were
(Pounds)94 million ($161 million) cash from operations, (Pounds)270 million
($462 million) of proceeds from the disposal of the Company's investment in
NGG, (Pounds)500 million ($856 million) of equity contributions from Southern,
and (Pounds)1,247 million ($2,135 million) of proceeds from the issuance of
short-term debt. During Pro Forma Fiscal Year 1996, the Company invested cash
of (Pounds)1,023 million ($1,752 million) in its acquisition of SWEB, and
(Pounds)59 million ($101 million) in capital expenditures. In addition, the
Company repaid (Pounds)696 million ($1,192 million) of its short-term debt,
paid (Pounds)75 million ($128 million) in dividends related to activities of
SWEB prior to the acquisition, and paid (Pounds)191 million ($327 million) of
dividends related to activities subsequent to the acquisition.
The principal sources of funds of the Predecessor Company during fiscal year
1995 were (Pounds)100 million ($171 million) cash from operations and
(Pounds)24 million ($41 million) of net additional short-term borrowings.
During fiscal year 1995, the Predecessor Company invested (Pounds)68 million
($116 million) in capital expenditures, paid dividends of (Pounds)30 million
($51 million), and repurchased common stock totaling (Pounds)103 million ($176
million).
The principal sources of funds of the Predecessor Company during fiscal year
1994 were (Pounds)236 million ($404 million) cash from operations. During
fiscal year 1994, the Predecessor Company invested (Pounds)61 million ($104
million) in capital expenditures, purchased (Pounds)15 million ($26 million)
of investments, paid dividends of (Pounds)26 million ($45 million) and reduced
its short-term borrowings by (Pounds)37 million ($63 million).
At March 31, 1996, the Company had negative working capital of (Pounds)649
million ($1,111 million), compared to positive working capital of the
Predecessor Company of (Pounds)14 million ($24 million) at March 31, 1995. The
working capital deficit at March 31, 1996 is primarily the result of the
initial financing structure of the acquisition of SWEB.
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)292 million ($500 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)90 million provided by banking institutions. At
the end of fiscal year 1996, a total of (Pounds)292 million had been drawn
from these facilities.
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
49
<PAGE>
(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, 1996 and 1997, capital expenditures, net of customer contributions, were
(Pounds)61 million, (Pounds)68 million, (Pounds)60 million and (Pounds)69
million, respectively. SWEB expects total capital expenditures, net of
customer contributions, to be approximately (Pounds)70 million in fiscal year
1998. 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.
In November 1996, the Company issued its $168,000,000 6.375% Senior Notes
due 2001 and its $332,000,000 6.800% Senior Notes due 2006. In January 1997,
the Company and the Trust issued the Original Securities.
At the end of 1996, the Company had outstanding approximately (Pounds)15
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)500 million. These transactions have maturities of between 5 and 15
years. The Company effectively reversed certain of the swap agreements at the
time of issuance of fixed rate Senior Notes in November 1996 and issuance of
the Subordinated Debentures in January 1997.
The Company has foreign currency swap contracts in place, which swap the US
dollar liabilities associated with the Senior Notes back to pounds sterling to
effectively hedge the currency risk associated with the interest on and
principal of the Senior Notes. The Company has also entered into foreign
currency swap contracts to hedge the currency risk associated with the
interest and principal on the Subordinated Debentures, by swapping the US
dollar liabilities back to pounds sterling for the period to February 2007.
Management believes that cash flow from operations, together with its
existing sources of credit and the proceeds from the offering of the Original
Securities, will provide sufficient financial resources to meet the
50
<PAGE>
Company's capital needs and expenditure requirements for at least the next
twelve months. Management further believes that cash flow from operations,
together with its existing sources of credit, will provide sufficient
financial resources to meet the Company's projected capital needs and other
expenditure requirements for the foreseeable future.
The financial statements included elsewhere in this Prospectus 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 contain deferred items which have not yet been included in rates
charged to customers in compliance with the respective regulatory authorities,
but which would have been included in the income statement of enterprises in
general under US GAAP. The accompanying financial statements of the Company do
not contain such deferrals.
51
<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 November 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 December 31,
1996 the Company had consolidated assets of (Pounds)1.711 billion ($2.930
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 ($192 million) and (Pounds)15 million ($26 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 1996 and
has also benefited from an average unemployment rate during calendar year 1996
of approximately 6.3% which was below the UK average of 7.5% according to a
1997 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 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
52
<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 after which some form of price restraint is likely to apply for
smaller customers at least for a transitional period. The franchise supply
market is expected to be opened progressively over a six month period
commencing April 1, 1998 (see "The Electric Utility Industry in Great
Britain--The Structure of the Electricity Industry in Great Britain--
Electricity Supply") to any competitors who have obtained the necessary
license, which is generally referred to as a "second tier license." Non-
Franchise Supply Customers may already be supplied by anyone who has obtained
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"). 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."
53
<PAGE>
SWEB's distribution business has grown in both its customer base and in the
number of units distributed, primarily reflecting economic and population
growth in the South West of England. 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.
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 667 (mainly in the distribution business and representing 20% of staff at
the time of the acquisition of SWEB by the Company), of which 611 reductions
occurred prior to December 31, 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 and units distributed.
54
<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..... 1,309,819 99.78 0.81% 8.6 62 1.57% 80
above 100kW to 1MW...... 2,600 0.20 4.48 2.3 17 4.86 11
above 1MW............... 235 0.02 4.62 2.9 21 2.44 9
--------- ------ ---- ---------- --------- ---------- ---
Total................. 1,312,654 100.00 0.82 13.8 100 2.26 100
========= ====== ==== ========== ========= ========== ===
</TABLE>
- --------
(1) At December 31, 1996.
(2) Represents the compound annual growth rate ("CAGR") for the period from
January 1, 1992 through December 31, 1996.
(3) In terawatt hours for calendar year 1996.
(4) Represents the CAGR for the period from January 1, 1992 through December
31, 1996.
(5) For calendar year 1996.
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 December 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>
UNDERGROUND
OVERHEAD LINES CABLES
OPERATING VOLTAGE: (CIRCUIT MILES) (CIRCUIT MILES)
------------------ --------------- ---------------
<S> <C> <C>
132kv........................................ 907 37
33kv......................................... 1,740 610
11kv......................................... 10,732 3,882
6.6kv........................................ 15 77
480 or 415/240v.............................. 4,751 6,960
------ ------
Total...................................... 18,145 11,566
====== ======
</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............................. 83 5,070
33kv/11kv or 6.6kv............................... 551 7,510
11kv or 6.6kv/lower voltages (including 36,291
pole mounted transformers)...................... 47,797 6,536
<CAPTION>
SUBSTATIONS:
------------
<S> <C>
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.
55
<PAGE>
Electricity is received by customers at various voltages depending upon
their requirements. At March 31, 1997, 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 a control center located in Exeter. A
telecontrol system has been implemented to provide remote information
gathering and to provide remote operation of 132kv and selected 33kv and 11kv
switchgear.
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 all 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 in phases over a
six month period. Supply prices for these customers are currently 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, 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 (which has
been in place since April 1996);
. improvements and enhancements to the billing and customer service system
which will enable employees at the call center to act on or resolve
customer billing and account inquiries on line during their calls (which
should be operational in 1998); and
. a restructuring of meter reading operations which should enable almost
all meters to be read quarterly, thereby reducing estimated readings
(which has already begun and is expected to be completed in 1997). (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.)
56
<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.
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
(which has already begun);
. increasing the number of proposals and bids made to customers and
potential customers (which has already begun);
. development of an integrated contract customer sales, electronic
registration and marketing system with full customer life-cycle
management and tracking facilities (which was brought into service during
February 1997); and
. further enhancement of a competitive price setting system used to
determine appropriate contract supply prices (which was completed in
March 1997).
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 be
phased out over a six month period commencing April 1, 1998, after which 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. During 1996 SWEB met or
exceeded all eight Overall Standards of Performance set by the Regulator and
achieved a 99.98% success rate in meeting the Guaranteed Standard of Service.
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.
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.
57
<PAGE>
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 1998 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.
SWEB is also investigating whether owning its own source of generation or
contracting for such source or sources would be an appropriate method for
partially managing purchase price risk, but no assurance can be given that
such methods would be available to or economically appropriate for SWEB.
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.
58
<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 December 31, 1996, SWEB had 2,729
employees (2,640 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.
Legal proceedings concerning the Electricity Supply Pension Scheme involving
another company have been taken and may affect SWEB in the future. See
"Business--Legal Proceedings."
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
buildings.
NETWORK LAND AND BUILDINGS
SWEB has 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
SWEB has 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, except
as described below.
The Pensions Ombudsman (a UK statutorily appointed independent arbitrator)
has issued a determination in favor of complaints made by members of the
Electricity Supply Pension Scheme ("ESPS") relating to another
59
<PAGE>
employer's use of ESPS surplus to offset the employer's costs of providing
enhanced pensions on redundancies and certain other items. Under that
determination the Pensions Ombudsman directed the employer to pay into ESPS
the amount of that use of the surplus plus interest. The determination was
challenged in the High Court by the employer, and the High Court upheld the
employer's appeal in a judgment delivered on June 10, 1997. The High Court
also granted the complainants leave to appeal to a higher court. No date has
yet been set for any hearing in the higher court. If the complainants' appeal
is successful either at the higher court or on a subsequent appeal to the
House of Lords, it will have an adverse effect on SWEB. No payments are
required until such challenge has been heard. It is not practical to make an
estimate of the exposure at the present time.
60
<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
61
<PAGE>
December 1995. Since the summer of 1995, eleven 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 acquired by Hanson PLC; this company
subsequently has obtained a stock market listing as part of the demerger of
Hanson's energy related interests).
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, competition
for the supply of electricity to all customers in Great Britain, including
domestic customers, is scheduled to be introduced in phases over a six month
period commencing 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
62
<PAGE>
to the Regulator. If the Regulator wishes to refuse the request, he must refer
it to the Monopolies and Mergers Commission ("MMC").
In setting the distribution charges each year, the holder of a PES license
will have to make a projection of the permitted maximum average 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, were to be free
to choose their electricity supplier. However, following wide consultation in
the industry, the Regulator proposed, in December 1996, that competition for
Franchise Supply Customers should be phased in over a six month period,
commencing April 1, 1998.
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
63
<PAGE>
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.
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. Over a period of six months from
April 1, 1998, the exclusive right of the RECs to supply Franchise Supply
Customers is scheduled to come to an end. However, the Regulator has indicated
that some form of price regulation for supply to Franchise Supply Customers
may be continued 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
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<PAGE>
reimburse the generators and the RECs for the extra costs involved. The
Regulator sets the amount of the Fossil Fuel Levy annually. On July 16, 1996
the Regulator reduced the Fossil Fuel Levy from 10% of the value of sales of
electricity generated from fossil fuel sources to 3.7% effective for the
period November 1, 1996 to March 31, 1997. On December 20, 1996 the Regulator
announced a further reduction to 2.2% effective from April 1, 1997. The
Regulator further announced that the Fossil Fuel Levy in respect of nuclear
commitments will cease as of April 1, 1998.
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.
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<PAGE>
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 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 published on August 15, 1996 further information relating to
the RECs' performance in relation to their distribution and supply price
controls. The publication entitled "Yardstick of Electricity Purchase Costs"
includes information about the generation costs which they pass through to
Franchise Supply Customers under the Supply Price Control Formula. The
Regulator also stated that it was 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. He issued a consultation paper on this matter on
September 5, 1996 entitled "The Competitive Electricity Market from 1998:
Price Restraints."
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 December 1996, the Regulator gave consent, subject to
certain conditions, to Eastern Group plc, in the context of its acquisition of
6,000 MW of generating capacity from National Power and PowerGen, to relax the
own-generation limits.
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 38 second tier supply license holders for England and Wales and
26 for Scotland.
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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 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 to 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 years'
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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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 December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard J. Pershing........ 50 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............. 46 Director
C. Philip Saunders......... 44 Director
Charles W. Whitney......... 50 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 Energy, a wholly-owned subsidiary of Southern. From June
1992 to February 1994, he served as Vice President of International Business
Development at Southern Energy. 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 Energy 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 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 Energy. 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.
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<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 Energy. 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. Petersen represents Mighteager at meetings of the
Directors of the Company. Roger L. Petersen has represented Mighteager at
meetings of the Directors of the Company since July 1996. From January 1995 to
the present, Mr. Petersen has served as Vice President of PMDC. From October
1986 to December 1994, Mr. Petersen served as Vice President of Mission
Energy.
Accentacross and Mighteager were elected by PMDC UK as members of the board
of directors of the Company pursuant to a Shareholders' Agreement dated July
1, 1996 (the "Shareholders' Agreement") among Southern Electric International-
Europe Inc. ("SEI-Europe"), PMDC UK and Holdings. The Shareholders' Agreement
provides that each shareholder of Holdings owning 10 percent or more of the
shares of Holdings has the right to elect one director for every 10 percent
held. This right applies not only to the board of directors of Holdings but
also extends to the board of directors of the Company as a wholly-owned
subsidiary of Holdings. Thus, PMDC UK, as holder of 25 percent of the shares
of Holdings, has the right to elect two directors to the board of the Company.
Accentacross and Mighteager are represented on the board of directors of the
Company by Messrs. Fagan and Petersen, respectively.
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 Energy, their primary employer and an affiliate of the Company.
The Company is charged by Southern Energy 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 Energy,
and Southern Energy is reimbursed by the Company, in accordance with a
services agreement between the Company and Southern Energy. 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 Energy for the services performed by them for Southern Energy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is charged by Southern Energy 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 Energy, and Southern Energy is reimbursed by the Company, in
accordance with a services agreement between the Company and Southern Energy.
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 Energy for the services performed by them for
Southern Energy.
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<PAGE>
SECURITY OWNERSHIP
The authorized share capital of the Company consists of 500,400,587 ordinary
shares of (Pounds)1 each, all of which have been issued fully paid and are
held by Holdings. The following table sets forth, as of December 31, 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
Holdings' 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%
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
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 SEI-Europe, an indirect wholly-owned subsidiary
of Southern.
(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
December 31, 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 Southern common stock outstanding as of
December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TITLE OF SECURITY BENEFICIALLY OWNED(1)(2)
----------------- ------------------------
<S> <C> <C>
C. B. (Mike) Harreld.... The Southern Company common 5,285
Alan W. Harrelson....... The Southern Company common 13,690
Gale E. Klappa.......... The Southern Company common 31,914
C. Philip Saunders...... The Southern Company common 8,242
Charles W. Whitney...... The Southern Company common 7,419
Thomas G. Boren......... The Southern Company common 28,279
Richard J. Pershing..... The Southern Company common 19,937
Directors and Executive
Officers of the Company
as a group (9 persons)
(3).................... The Southern Company common 114,766
</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, 15,012 shares; Mr. Boren, 16,987 shares; and all
directors and executive officers of the Company as a group, 33,509 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.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Original Capital Securities, the Company
and the Trust entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Company and the Trust agreed to use their
reasonable best efforts to file and to cause to become effective with the
Commission a registration statement with respect to the exchange of the
Original Capital Securities for capital securities with terms identical in all
material respects to the terms of the Original Capital Securities except as
described herein. A copy of the Registration Rights Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company and the Trust under the Registration Rights Agreement. The form
and terms of the Exchange Capital Securities are the same as the form and
terms of the Original Capital Securities except that the Exchange Capital
Securities have been registered under the Securities Act and will not be
subject to certain restrictions on transfer applicable to the Original Capital
Securities, and will not provide for any increase in the distribution rate
thereon. In that regard, the Original Capital Securities provide, among other
things, that, if a registration statement relating to the Exchange Offer has
not been filed by June 28, 1997 and declared effective by July 28, 1997, the
distribution rate borne by the Original Capital Securities will increase by
0.25% per annum until such registration statement is filed or declared
effective, as the case may be. Upon consummation of the Exchange Offer,
holders of Original Capital Securities will not be entitled to any increase in
the distribution rate thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Original Capital Securities"
and "Description of the Original Securities."
The Exchange Offer is not being made to, nor will the Trust accept tenders
for exchange from, holders of Original Capital Securities in any jurisdiction
in which the Exchange Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Original Capital Securities
are registered on the books of the Trust or any other person who has obtained
a properly completed bond power from the registered holder, or any person
whose Original Capital Securities are held of record by DTC who desires to
deliver such Original Capital Securities by book-entry transfer at DTC.
Pursuant to the Exchange Offer, the Company will exchange as soon as
practicable after the date hereof the Original Guarantee for the Exchange
Guarantee and the Original Subordinated Debentures for a like aggregate
principal amount of the Exchange Subordinated Debentures. The Exchange
Guarantee and Exchange Subordinated Debentures have also been registered under
the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Trust hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $82,000,000 aggregate liquidation amount of Exchange Capital
Securities for a like aggregate liquidation amount of Original Capital
Securities properly tendered on or prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described below. The
Trust will issue, promptly after the Expiration Date, an aggregate liquidation
amount of up to $82,000,000 of Exchange Capital Securities in exchange for a
like liquidation amount of outstanding Original Capital Securities tendered
and accepted in connection with the Exchange Offer. Holders may tender their
Original Capital Securities in whole or in part in a liquidation amount of not
less than $100,000 (100 Original Capital Securities) or any integral multiple
of $1,000 liquidation amount (one Original Capital Security) in excess
thereof.
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<PAGE>
The Exchange Offer is not conditioned upon any minimum liquidation amount of
Original Capital Securities being tendered. As of the date of this Prospectus,
$82,000,000 aggregate liquidation amount of the Original Capital Securities is
outstanding.
Holders of Original Capital Securities do not have any appraisal or
dissenters' rights in connection with the Exchange Offer. Original Capital
Securities which are not tendered for or are tendered but not accepted in
connection with the Exchange Offer will remain outstanding and be entitled to
the benefits of the Declaration, but will not be entitled to any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Risk Factors--Consequences of a Failure to
Exchange Original Capital Securities" and "Description of the Original
Securities."
If any tendered Original Capital Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Capital
Securities will be returned, or appropriate book-entry transfer will be made,
as the case may be, without expense, to the tendering holder thereof promptly
after the Expiration Date.
Holders who tender Original Capital Securities in connection with the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Original Capital Securities in connection with the
Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange
Offer. See "--Fees and Expenses."
NEITHER THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY NOR ANY TRUSTEE
OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF ORIGINAL CAPITAL
SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION.
HOLDERS OF ORIGINAL CAPITAL SECURITIES MUST MAKE THEIR OWN DECISIONS WHETHER
TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF
ORIGINAL CAPITAL SECURITIES TO TENDER BASED ON SUCH HOLDERS' OWN FINANCIAL
POSITIONS AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on July 25,
1997, unless the Exchange Offer is extended by the Company or the Trust (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
The Company and the Trust expressly reserve the right in their sole and
absolute discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Original Capital Securities for
exchange, (ii) to terminate the Exchange Offer (whether or not any Original
Capital Securities have theretofore been accepted for exchange) if the Company
or the Trust determines, in its sole and absolute discretion, that any of the
events or conditions referred to under "--Conditions to the Exchange Offer"
have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Original Capital
Securities tendered pursuant to the Exchange Offer, subject, however, to the
right of holders of Original Capital Securities to withdraw their tendered
Original Capital Securities as described under "--Withdrawal Rights," and (iv)
to waive any condition or otherwise amend the terms of the Exchange Offer in
any respect. If the Exchange Offer is amended in a manner determined by the
Company and the Trust to constitute a material change, or if the Company and
the Trust waive a material condition of the Exchange Offer, the Company and
the Trust will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Original
Capital Securities, and the Company and the Trust will extend the Exchange
Offer to the extent required by Rule 14e-1 under the Exchange Act.
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Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of
an extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company and the Trust may choose to make any
public announcement and, subject to applicable law, the Company and the Trust
shall have no obligation to publish, advertise or otherwise communicate any
such public announcement other than by issuing a release to an appropriate
news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE CAPITAL SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange, and will issue to the Exchange Agent, Exchange Capital
Securities for Original Capital Securities validly tendered and not withdrawn
promptly after the Expiration Date.
In all cases, delivery of Exchange Capital Securities in exchange for
Original Capital Securities tendered and accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(i) Original Capital Securities or a book-entry confirmation of a book-entry
transfer of Original Capital Securities into the Exchange Agent's account at
DTC, including an Agent's Message (as defined below) if the tendering holder
has not delivered a Letter of Transmittal, (ii) the Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or (in the case of a book-entry transfer) an Agent's
Message in lieu of the Letter of Transmittal, and (iii) any other documents
required by the Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of Original Capital Securities into the Exchange Agent's
account at DTC. The term "Agent's Message" means a message, transmitted by DTC
to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment
from the tendering DTC participant, which acknowledgment states that such
participant has received and agrees to be bound by the Letter of Transmittal
and that the Trust and the Company may enforce such Letter of Transmittal
against such participant.
Subject to the terms and conditions of the Exchange Offer, the Trust will be
deemed to have accepted for exchange, and thereby exchanged, Original Capital
Securities validly tendered and not withdrawn as, if and when the Trust gives
oral or written notice to the Exchange Agent of the Trust's acceptance of such
Original Capital Securities for exchange pursuant to the Exchange Offer. The
Exchange Agent will act as agent for the Trust for the purpose of receiving
tenders of Original Capital Securities, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Original Capital Securities, Letters of Transmittal and related documents and
transmitting Exchange Capital Securities to validly tendering holders. Such
exchange will be made promptly after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Original Capital
Securities tendered pursuant to the Exchange Offer is delayed (whether before
or after the Trust's acceptance for exchange of Original Capital Securities)
or the Trust extends the Exchange Offer or is unable to accept for exchange or
exchange Original Capital Securities tendered pursuant to the Exchange Offer,
then, without prejudice to the Trust's rights set forth herein, the Exchange
Agent may, nevertheless, on behalf of the Trust and subject to Rule 14e-1(c)
under the Exchange Act, retain tendered Original Capital Securities and such
Original Capital Securities may not be withdrawn except to the extent
tendering holders are entitled to withdrawal rights as described under "--
Withdrawal Rights."
Pursuant to the Letter of Transmittal or Agent's Message in lieu thereof, a
holder of Original Capital Securities will warrant and agree in the Letter of
Transmittal that it has full power and authority to tender, exchange, sell,
assign and transfer Original Capital Securities, that the Trust will acquire
good, marketable and unencumbered title to the tendered Original Capital
Securities, free and clear of all liens, restrictions, charges and
encumbrances, and the Original Capital Securities tendered for exchange are
not subject to any adverse claims or proxies. The holder also will warrant and
agree that it will, upon request, execute and deliver any additional documents
deemed by the Trust or the Exchange Agent to be necessary or desirable to
complete the exchange, sale, assignment, and transfer of the Original Capital
Securities tendered pursuant to the Exchange Offer.
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PROCEDURES FOR TENDERING ORIGINAL CAPITAL SECURITIES
Valid Tender. Except as set forth below, in order for Original Capital
Securities to be validly tendered pursuant to the Exchange Offer, a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees, or (in the case of a book-entry tender) an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must be received by the Exchange Agent at one of its addresses set
forth under "--Exchange Agent," and either (i) tendered Original Capital
Securities must be received by the Exchange Agent, or (ii) such Original
Capital Securities must be tendered pursuant to the procedures for book-entry
transfer set forth below and a book-entry confirmation, including an Agent's
Message if the tendering holder has not delivered a Letter of Transmittal,
must be received by the Exchange Agent, in each case on or prior to the
Expiration Date, or (iii) the guaranteed delivery procedures set forth below
must be complied with.
If less than all of the Original Capital Securities are tendered, a
tendering holder should fill in the amount of Original Capital Securities
being tendered in the appropriate box on the Letter of Transmittal. The entire
amount of Original Capital Securities delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer. The Exchange Agent will establish an account with
respect to the Original Capital Securities at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Original Capital
Securities by causing DTC to transfer such Original Capital Securities into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Original Capital Securities may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees, or an Agent's Message in
lieu of the Letter of Transmittal, and any other required documents, must in
any case be delivered to and received by the Exchange Agent at its address set
forth under "--Exchange Agent" on or prior to the Expiration Date, or the
guaranteed delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees. Certificates for the Original Capital Securities need
not be endorsed and signature guarantees on the Letter of Transmittal are
unnecessary unless (a) a certificate for the Original Capital Securities is
registered in a name other than that of the person surrendering the
certificate or (b) such holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of Transmittal.
In the case of (a) or (b) above, such certificates for Original Capital
Securities must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter
of Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1
to the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender Original Capital
Securities pursuant to the Exchange Offer and the certificates for such
Original Capital Securities are not immediately available or time will not
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permit all required documents to reach the Exchange Agent on or prior to the
Expiration Date, or the procedures for book-entry transfer cannot be completed
on a timely basis, such Original Capital Securities may nevertheless be
tendered, provided that all of the following guaranteed delivery procedures
are complied with:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is
received by the Exchange Agent, as provided below, on or prior to the
Expiration Date; and
(c) the certificates (or a book-entry confirmation) representing all
tendered Original Capital Securities, in proper form for transfer, together
with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees, or an Agent's
Message in lieu of the Letter of Transmittal, and any other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within three New York Stock Exchange trading days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of Exchange Capital
Securities in exchange for Original Capital Securities tendered and accepted
for exchange pursuant to the Exchange Offer will in all cases be made only
after timely receipt by the Exchange Agent of Original Capital Securities, or
of a book-entry confirmation with respect to such Original Capital Securities,
and a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), together with any required signature guarantees, or an Agent's
Message in lieu of the Letter of Transmittal, and any other documents required
by the Letter of Transmittal. Accordingly, the delivery of Exchange Capital
Securities might not be made to all tendering holders at the same time, and
will depend upon when Original Capital Securities, book-entry confirmations
with respect to Original Capital Securities and other required documents are
received by the Exchange Agent.
The Trust's acceptance for exchange of Original Capital Securities tendered
pursuant to any of the procedures described above will constitute a binding
agreement between the tendering holder and the Trust upon the terms and
subject to the conditions of the Exchange Offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Original Capital Securities will be determined by the Company
and the Trust, in their sole discretion, whose determination shall be final
and binding on all parties. The Company and the Trust reserve the absolute
right, in their sole and absolute discretion, to reject any and all tenders
determined by them not to be in proper form or the acceptance of which, or
exchange for, may, in the opinion of counsel to the Company and the Trust, be
unlawful. The Company and the Trust also reserve the absolute right, subject
to applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any condition or
irregularity in any tender of Original Capital Securities of any particular
holder whether or not similar conditions or irregularities are waived in the
case of other holders.
The interpretation by the Company and the Trust of the terms and conditions
of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final and binding. No tender of Original Capital
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. Neither the Company,
the Trust, any affiliates or assigns of the Company or the Trust, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in tenders or incur any liability for failure to give any
such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company
and the Trust, proper evidence satisfactory to the Company and the Trust, in
their sole discretion, of such person's authority to so act must be submitted.
A beneficial owner of Original Capital Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial holder wishes to participate in the Exchange Offer.
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RESALES OF EXCHANGE CAPITAL SECURITIES
The Trust is making the Exchange Offer for the Exchange Capital Securities
in reliance on the position of the staff of the Division of Corporation
Finance of the Commission as set forth in certain interpretive letters
addressed to third parties in other transactions. However, neither the Company
nor the Trust sought its own interpretive letter and there can be no assurance
that the staff of the Division of Corporation Finance of the Commission would
make a similar determination with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based on these interpretations by
the staff of the Division of Corporation Finance of the Commission, and
subject to the two immediately following sentences, the Company and the Trust
believe that Exchange Capital Securities issued pursuant to this Exchange
Offer in exchange for Original Capital Securities may be offered for resale,
resold and otherwise transferred by a holder thereof (other than a holder who
is a broker-dealer) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Capital Securities are acquired in the ordinary course of such
holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such Exchange Capital
Securities. However, any holder of Original Capital Securities who is an
"affiliate" of the Company or the Trust or who intends to participate in the
Exchange Offer for the purpose of distributing Exchange Capital Securities, or
any broker-dealer who purchased Original Capital Securities from the Trust to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
staff of the Division of Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will not be permitted or
entitled to tender such Original Capital Securities in the Exchange Offer and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such
Original Capital Securities unless such sale is made pursuant to an exemption
from such requirements. In addition, as described below, if any broker-dealer
holds Original Capital Securities acquired for its own account as a result of
market-making or other trading activities and exchanges such Original Capital
Securities for Exchange Capital Securities, then such broker-dealer must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such Exchange Capital Securities.
Each holder of Original Capital Securities who wishes to exchange Original
Capital Securities for Exchange Capital Securities in the Exchange Offer will
be required to represent that (i) it is not an "affiliate" of the Company or
the Trust, (ii) any Exchange Capital Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Capital Securities, and (iv)
if such holder is not a broker-dealer, such holder is not engaged in, and does
not intend to engage in, a distribution (within the meaning of the Securities
Act) of such Exchange Capital Securities. In addition, the Company and the
Trust may require such holder, as a condition to such holder's eligibility to
participate in the Exchange Offer, to furnish to the Company and the Trust (or
an agent thereof) in writing information as to the number of "beneficial
owners" (within the meaning of Rule 13d-3 under the Exchange Act) on behalf of
whom such holder holds the Original Capital Securities to be exchanged in the
Exchange Offer. Each broker-dealer that receives Exchange Capital Securities
for its own account pursuant to the Exchange Offer must acknowledge that it
acquired the Original Capital Securities for its own account as the result of
market-making activities or other trading activities and must agree that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Capital Securities. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Based on the position taken by the staff of
the Division of Corporation Finance of the Commission in the interpretive
letters referred to above, the Company and the Trust believe that
Participating Broker-Dealers who acquired Original Capital Securities for
their own accounts as a result of market-making activities or other trading
activities may fulfill their prospectus delivery requirements with respect to
the Exchange Capital Securities received upon exchange of such Original
Capital Securities (other than Original Capital Securities which represent an
unsold allotment from the initial sale of the Original Capital Securities)
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such
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Exchange Capital Securities. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales
of Exchange Capital Securities received in exchange for Original Capital
Securities where such Original Capital Securities were acquired by such
Participating Broker-Dealer for its own account as a result of market-making
or other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company and the Trust have agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of such
Exchange Capital Securities for a period not exceeding 90 days after the
Expiration Date (subject to extension under certain limited circumstances
described below). See "Plan of Distribution." However, a Participating Broker-
Dealer who intends to use this Prospectus in connection with the resale of
Exchange Capital Securities received in exchange for Original Capital
Securities pursuant to the Exchange Offer must notify the Company or the
Trust, or cause the Company or the Trust to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or
may be delivered to the Exchange Agent at one of the addresses set forth
herein under "--Exchange Agent." Any Participating Broker-Dealer who is an
"affiliate" of the Company or the Trust may not rely on such interpretive
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Original
Capital Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal or delivery of an Agent's
Message in lieu thereof, that upon receipt of notice from the Company or the
Trust of the occurrence of any event or the discovery of (i) any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or (ii) any fact which causes this Prospectus
to omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading, or (iii) of the occurrence of
certain other events specified in the Registration Rights Agreement, such
Participating Broker-Dealer will suspend the sale of Exchange Capital
Securities (or the Exchange Guarantee or the Exchange Subordinated Debentures,
as applicable) pursuant to this Prospectus until the Company or the Trust has
amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer, or the Company or the Trust has given notice
that the sale of the Exchange Capital Securities (or the Exchange Guarantee or
the Exchange Subordinated Debentures, as applicable) may be resumed, as the
case may be. If the Company or the Trust gives such notice to suspend the sale
of the Exchange Capital Securities (or the Exchange Guarantee or the Exchange
Subordinated Debentures, as applicable), it shall extend the 90-day period
referred to above during which Participating Broker-Dealers are entitled to
use this Prospectus in connection with the resale of Exchange Capital
Securities by the number of days during the period from and including the date
of the giving of such notice to and including the date when Participating
Broker-Dealers shall have received copies of the amended or supplemented
Prospectus necessary to permit resales of the Exchange Capital Securities or
to and including the date on which the Company or the Trust has given notice
that the sale of Exchange Capital Securities (or the Exchange Guarantee or the
Exchange Subordinated Debentures, as applicable) may be resumed, as the case
may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Original Capital Securities
may be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "--Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Original Capital Securities to be
withdrawn, the aggregate principal amount of Original Capital Securities to be
withdrawn, and (if certificates for such Original Capital Securities have been
tendered) the name of the registered holder of the Original Capital Securities
as set forth on the Original Capital Securities, if different from that of the
person who tendered such Original Capital Securities. If Original Capital
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Securities have been delivered or otherwise identified to the Exchange Agent,
then prior to the physical release of such Original Capital Securities, the
tendering holder must submit the serial numbers shown on the particular
Original Capital Securities to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case
of Original Capital Securities tendered for the account of an Eligible
Institution. If Original Capital Securities have been tendered pursuant to the
procedures for book-entry transfer set forth in "--Procedures for Tendering
Original Capital Securities," the notice of withdrawal must specify the name
and number of the account at DTC to be credited with the withdrawal of
Original Capital Securities, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written, telegraphic, telex or
facsimile transmission. Withdrawals of tenders of Original Capital Securities
may not be rescinded. Original Capital Securities properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "--Procedures for
Tendering Original Capital Securities."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Trust, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, the Trust, any affiliates or assigns of the
Company or the Trust, the Exchange Agent nor any other person shall be under
any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification.
Any Original Capital Securities which have been tendered but which are
withdrawn will be returned to the holder thereof promptly after withdrawal.
DISTRIBUTIONS ON EXCHANGE CAPITAL SECURITIES
Holders of Original Capital Securities whose Original Capital Securities are
accepted for exchange will not receive distributions on such Original Capital
Securities and will be deemed to have waived the right to receive any
distributions on such Original Capital Securities accumulated from and after
January 29, 1997. Accordingly, holders of Exchange Capital Securities as of
the record date for the payment of distributions on August 1, 1997 will be
entitled to receive distributions accumulated from and after January 29, 1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, the Company and the Trust will not be required to
accept for exchange, or to exchange, any Original Capital Securities for any
Exchange Capital Securities, and, as described below, may terminate the
Exchange Offer (whether or not any Original Capital Securities have
theretofore been accepted for exchange) or may waive any conditions to or
amend the Exchange Offer, if any of the following conditions has occurred or
exists or has not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Exchange Capital Securities issued
pursuant to the Exchange Offer in exchange for Original Capital Securities
to be offered for resale, resold and otherwise transferred by holders
thereof (other than broker-dealers and any such holder which is an
"affiliate" of the Company or the Trust within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Capital Securities are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such Exchange Capital
Securities; or
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company or the Trust, would
reasonably be expected to impair its ability to proceed with the Exchange
Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company or the Trust, threatened for that purpose, or any governmental
approval has not been obtained, which approval the Company or the Trust
shall, in its sole discretion, deem necessary for the consummation of the
Exchange Offer as contemplated hereby; or
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(d) the Company shall receive an opinion of counsel experienced in such
matters to the effect that there is more than an insubstantial risk that
consummation of the Exchange Offer would result in interest payable to the
Trust on the Subordinated Debentures being not deductible by the Company
for United States earnings and profits purposes.
If the Company or the Trust determines in its sole and absolute discretion
that any of the foregoing events or conditions has occurred or exists or has
not been satisfied, it may, subject to applicable law, terminate the Exchange
Offer (whether or not any Original Capital Securities have theretofore been
accepted for exchange) or may waive any such condition or otherwise amend the
terms of the Exchange Offer in any respect. If such waiver or amendment
constitutes a material change to the Exchange Offer, the Company or the Trust
will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Original
Capital Securities and will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
Bankers Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed
to the Exchange Agent as follows:
<TABLE>
By Mail: By Hand: By Overnight Mail or Courier:
<S> <C> <C>
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Agency Group Corporate Trust & Agency Group
P.O. Box 292737 Receipt & Delivery Window Reorganization Unit
Nashville, TN 37229-2737 123 Washington Street, 1st Floor 648 Grassmere Park Road
New York, NY 10006 Nashville, TN 37211
For Information Call:
(800) 735-7777
Confirm By Telephone:
(615) 835-3572
Facsimile Transmissions:
(615) 835-3701
(ELIGIBLE INSTITUTIONS ONLY)
</TABLE>
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Original Capital Securities, and in
handling or tendering for their customers.
Holders who tender their Original Capital Securities for exchange will not
be obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Capital Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Original Capital
Securities tendered, or if a transfer tax is imposed for any reason other than
the exchange of Original Capital Securities in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
Neither the Company nor the Trust will make any payment to brokers, dealers
or other nominees soliciting acceptances of the Exchange Offer.
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DESCRIPTION OF THE EXCHANGE CAPITAL SECURITIES
The following summary of certain material terms and provisions of the
Exchange Capital Securities does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the Declaration. The Original
Capital Securities and the Common Securities were issued and the Exchange
Capital Securities will be issued pursuant to the terms of the Declaration.
The Declaration incorporates by reference terms of the Trust Indenture Act.
The Declaration has been qualified under the Trust Indenture Act. Bankers
Trust Company as the Institutional Trustee, but not the other Trustees of the
Trust, will act as the indenture trustee for purposes of the Trust Indenture
Act. The description of the Exchange Capital Securities and the Declaration
set forth below summarizes the material terms thereof and is subject to, and
qualified in its entirety by reference to, the Declaration, the Business Trust
Act and the Trust Indenture Act. Capitalized terms not otherwise defined
herein have the meanings assigned to them in the Declaration.
GENERAL
The Exchange Capital Securities will be issued in fully registered form
without interest coupons.
The Declaration authorizes the Trust to issue the Capital Securities
(including the Original Capital Securities and the Exchange Capital
Securities), which represent preferred undivided beneficial interests in the
assets of the Trust, and the Common Securities, which represent common
undivided beneficial interests in the assets of the Trust. All of the Common
Securities are owned, directly or indirectly, by the Company. The Common
Securities and the Capital Securities will have equivalent terms except that
(i) if an Event of Default under the Declaration occurs and is continuing, the
rights of the holders of the Common Securities to payment in respect of
periodic distributions and payments upon liquidation, redemption or otherwise
are subordinated to the rights of the holders of the Capital Securities and
(ii) holders of Common Securities have the exclusive right (subject to the
terms of the Declaration) to appoint, remove or replace Trustees and to
increase or decrease the number of Trustees. The Declaration does not permit
the issuance by the Trust of any securities or other evidences of beneficial
ownership of, or beneficial interests in, the Trust other than the Capital
Securities and the Common Securities, the incurrence of any indebtedness for
borrowed money by the Trust or the making of any investment other than in the
Subordinated Debentures. The payment of distributions out of monies held by
the Trust and payments on redemption of the Capital Securities or liquidation
of the Trust are guaranteed by the Company on a subordinated basis as and to
the extent described under "Description of the Exchange Guarantee". Bankers
Trust Company, in its capacity as Exchange Capital Securities Guarantee
Trustee, will hold the Exchange Guarantee for the benefit of holders of the
Exchange Capital Securities. The Exchange Guarantee covers distributions and
other payments on the Exchange Capital Securities only if and to the extent
that the Company has made a payment to the Institutional Trustee of interest
or principal on the Subordinated Debentures deposited in the Trust as trust
assets. The Exchange Guarantee, when taken together with the Company's
obligations under the Subordinated Debentures and the Indenture and its
obligations under the Declaration, including its obligation to pay costs,
expenses and certain liabilities of the Trust, constitutes a full and
unconditional guarantee of amounts due on the Exchange Capital Securities.
DISTRIBUTIONS
Distributions on the Capital Securities will be fixed at a rate per annum of
8.23% of the stated liquidation amount of $1,000 per Capital Security.
Distributions in arrears will bear interest thereon at the rate per annum of
8.23%, compounded semi-annually, to the extent permitted by applicable law.
The amount of distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months and for any period shorter
than a full semi-annual period for which distributions are computed, the
amount of the distribution payable will be computed on the basis of the actual
number of days elapsed in such a 30-day month.
Distributions on the Capital Securities will be cumulative, will accrue from
January 29, 1997 and, except as otherwise described below, will be payable
semi-annually in arrears, on February 1 and August 1 of each year, commencing
on August 1, 1997, but only if, and to the extent that, interest payments are
made in respect of the
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Subordinated Debentures held by the Trust. The term "distribution" as used
herein includes any such interest (including any Additional Sums and
Additional Amounts, each as defined herein) payable unless otherwise stated.
So long as the Company shall not be in default in the payment of interest on
the Subordinated Debentures, the Company has the right under the Indenture to
defer payments of interest on the Subordinated Debentures by extending the
interest payment period from time to time on the Subordinated Debentures for a
period not exceeding 10 consecutive semi-annual interest periods and, as a
consequence, semi-annual distributions on the Capital Securities would not be
made (but would continue to accrue with interest thereon at the rate of 8.23%
per annum, compounded semi-annually, to the extent permitted by applicable
law) by the Trust during any such Extension Period. In the event that the
Company exercises this right, then, during such period, the Company (i) shall
not declare or pay dividends on, make distributions with respect to, or
redeem, purchase or acquire, or make a liquidation payment with respect to,
any of its capital stock except for dividends, payments or distributions
payable in shares of its capital stock, reclassifications of its capital stock
and conversions or exchanges of capital stock of one class or series into
capital stock of another class or series and except for a redemption, purchase
or other acquisition of shares of its capital stock made for the purpose of an
employee incentive plan or benefit plan or other similar arrangement of the
Company or any of its subsidiaries, (ii) shall not make any payment of
interest, principal of or premium, if any, on, or repay, repurchase or redeem
any debt securities issued by the Company that rank pari passu with or junior
to the Subordinated Debentures (except by conversion into or exchange for
shares of its capital stock), and (iii) shall not make any guarantee payments
with respect to the foregoing. Prior to the termination of any such Extension
Period, the Company may further extend such Extension Period; provided that
such Extension Period together with all such previous and further extensions
thereof may not exceed 10 consecutive semi-annual interest periods. Upon the
termination of any Extension Period and the payment of all amounts then due,
the Company may commence a new Extension Period, subject to the above
requirements. The Company may also pay on any Interest Payment Date all or any
portion of the interest accrued during an Extension Period. Consequently,
there could be multiple Extension Periods of varying lengths (up to six
Extension Periods of 10 consecutive semi-annual interest periods each or more
numerous shorter Extension Periods) throughout the term of the Subordinated
Debentures, provided that no Extension Period may extend beyond the Stated
Maturity Date of the Subordinated Debentures. See "Description of the Exchange
Subordinated Debentures--Interest" and "--Option to Extend Interest Payment
Period". Payments of accrued distributions will be payable to holders of
Capital Securities as they appear on the books and records of the Trust on the
first record date after the end of an Extension Period.
Distributions on the Capital Securities must be paid on the dates payable to
the extent that the Trust has cash on hand to permit such payment. The funds
available for distribution to the holders of the Capital Securities will be
limited to payments received by the Trust in respect of the Subordinated
Debentures that are deposited in the Trust as trust assets. See "Description
of the Exchange Subordinated Debentures". If the Company does not make
interest payments on the Subordinated Debentures, the Trust will not make
distributions on the Capital Securities. Under the Declaration, if and to the
extent the Company does make interest payments on the Subordinated Debentures
deposited in the Trust as trust assets, the Trust is obligated to make
distributions on the Trust Securities on a Pro Rata Basis. The payment of
distributions on the Capital Securities is guaranteed by the Company on a
subordinated basis as and to the extent set forth under "Description of the
Exchange Guarantee". The Capital Securities Guarantee covers distributions and
other payments on the Capital Securities only if and to the extent that the
Company has made a payment to the Trust of interest or principal on the
Subordinated Debentures deposited in the Trust as trust assets.
Distributions on the Capital Securities will be made to the holders thereof
as they appear on the books and records of the Trust on the relevant record
dates, which will be 15 days prior to the relevant distribution dates. Subject
to any applicable laws and regulations and the provisions of the Declaration,
each such payment will be made as described under "--Form, Denomination, Book-
Entry Procedures and Transfer". The Declaration provides that the payment
dates or record dates for the Capital Securities shall be the same as the
payment dates and record dates, to the extent there are record dates, for the
Subordinated Debentures. Distributions payable on
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any Capital Securities that are not punctually paid on any distribution date
as a result of the Company having failed to make the corresponding interest
payment on the Subordinated Debentures will forthwith cease to be payable to
the person in whose name such Capital Security is registered on the relevant
record date, and such defaulted distribution will instead be payable to the
person in whose name such Capital Security is registered on the special record
date established by the Regular Trustees, which record date shall correspond
to the special record date, if any, or other specified date determined in
accordance with the Indenture; provided, however, that distributions shall not
be considered payable on any distribution payment date falling within an
Extension Period unless the Company has elected to make a full or partial
payment of interest accrued on the Subordinated Debentures on such
distribution payment date. All distributions paid with respect to the Trust
Securities shall be paid on a Pro Rata Basis to the holders thereof entitled
thereto. If any date on which distributions are to be made on the Capital
Securities is not a Business Day (as defined below), then payment of the
distribution to be made on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
date.
"Business Day" means a day other than (i) a Saturday or a Sunday, (ii) a day
on which banks in New York, New York or Bristol, England are authorized or
obligated by law or executive order to remain closed, or (iii) a day on which
the Indenture Trustee's Corporate Trust Office or Institutional Trustee's
principal corporate trust office is closed for business.
MANDATORY REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment prior to the
Stated Maturity Date of the Subordinated Debentures, the proceeds from such
repayment or payment will be promptly applied to redeem Capital Securities and
Common Securities having an aggregate liquidation amount equal to the
Subordinated Debentures so repaid or prepaid, as the case may be, upon not
less than 15 nor more than 60 days' notice of a date of redemption (the
"Redemption Date"), at the applicable Redemption Price (as defined below).
Under the terms of the Indenture, the Company will have the option to prepay
the Subordinated Debentures, (a) in whole or in part, at any time on or after
February 1, 2007 or (b) in whole but not in part, (i) if the Company has or
will become obligated to pay Additional Amounts as described under
"Description of the Exchange Subordinated Debentures--Additional Amounts", or
(ii) upon the occurrence and continuation of a Special Event as described
under "--Special Event Redemption or Distribution".
The Common Securities will be entitled to be redeemed on a Pro Rata Basis
with the Capital Securities, except that if an Event of Default under the
Declaration has occurred and is continuing, the Capital Securities will have a
priority over the Common Securities with respect to payment of the Redemption
Price. Subject to the foregoing, if fewer than all outstanding Capital
Securities and Common Securities are to be redeemed, the Capital Securities
and Common Securities will be redeemed on a Pro Rata Basis. In the event fewer
than all outstanding Capital Securities are to be redeemed, Capital Securities
registered in the name of and held by DTC (or a successor depositary) or its
nominee will be redeemed pro rata as described under "--Form, Denomination,
Book-Entry Procedures and Transfer".
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Special Event Redemption
Upon the occurrence and continuance of a Tax Event or an Investment Company
Event (each as hereinafter defined, and each a "Special Event") at any time,
the Company will have the option to redeem the Subordinated Debentures in
whole but not in part (and thus cause the redemption of the Capital Securities
in whole) at the applicable Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained an opinion
of nationally recognized independent tax counsel experienced in such matters
to the effect that as a result of (a) any amendment to, or
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change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States, the United Kingdom or any
political subdivision or taxing authority thereof or therein, (b) any
amendment to, or change in, an interpretation or application of any such laws
or regulations by any legislative body, court, governmental agency or
regulatory authority (including the enactment of any legislation and the
publication of any judicial decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the theretofore generally accepted
position or (d) any action taken by any governmental agency or regulatory
authority, which amendment or change is enacted, promulgated, issued or
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after January 23, 1997, there is
more than an insubstantial risk that (i) the Trust is, or will be within 90
days of the date of such opinion subject to United States federal or United
Kingdom income tax with respect to income accrued or received on the
Subordinated Debentures, (ii) the Trust is, or will be within 90 days of the
date of such opinion, subject to more than a de minimis amount of other taxes,
duties or other governmental charges or (iii) interest payable by the Company
to the Trust on the Subordinated Debentures is not, or within 90 days of the
date of such opinion, will not be, deductible by the Company for United States
earnings and profits purposes or United Kingdom income tax purposes.
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced
in practice under the Investment Company Act of 1940, as amended (the "1940
Act"), that, as a result of the occurrence of a change in law or regulation or
a change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law"), there is more
than an insubstantial risk that the Trust is or will be considered an
"investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after January 23, 1997
Payment of Additional Sums
If a Tax Event has occurred and is continuing and the Trust is the holder of
all of the Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of any distribution then due and payable by the Trust on the
outstanding Capital Securities and Common Securities shall not be reduced as a
result of any additional taxes, duties and other governmental charges to which
the Trust has become subject as a result of a Tax Event.
Distribution of Subordinated Debentures
The Company will have the right at any time to terminate the Trust and,
after satisfaction of liabilities to creditors of the Trust, if any, cause the
Subordinated Debentures to be distributed to the holders of Capital Securities
in liquidation of the Trust. This right is optional and wholly within the
discretion of the Company.
On the date fixed for any distribution of Subordinated Debentures, upon
dissolution of the Trust, (i) the Capital Securities and the Common Securities
will no longer be deemed to be outstanding and (ii) certificates representing
Trust Securities will be deemed to represent beneficial interests in the
Subordinated Debentures having an aggregate principal amount equal to the
stated liquidation amount of, and bearing accrued and unpaid interest equal to
accrued and unpaid distributions on, such Trust Securities until such
certificates are presented to the Company or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Subordinated
Debentures which may be distributed in exchange for Trust Securities if a
dissolution and liquidation of the Trust were to occur. Accordingly, the
Subordinated Debentures which the investor may subsequently receive on
dissolution and liquidation of the Trust may trade at a discount to the price
of the Trust Securities exchanged. If the Subordinated Debentures are
distributed to the holders of Trust Securities upon the dissolution of the
Trust, the Company will use its reasonable best efforts to list the
Subordinated Debentures on any securities exchange or other organization on
which the Capital Securities are then listed.
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REDEMPTION PRICE
"Redemption Price" means the amount set forth under "Description of the
Exchange Subordinated Debentures--Optional Redemption" if the Subordinated
Debentures are redeemed on or after February 1, 2007, plus accrued and unpaid
interest thereon to the redemption date (including interest, if any, accrued
during an Extension Period), or, in the case of a redemption as a result of
the occurrence and continuance of a Special Event, means the greater of (i)
the amount equal to 100% of the principal amount of the Subordinated
Debentures being redeemed or (ii) the amount equal to the sum of the present
values of the remaining scheduled payments of principal of and interest on the
Subordinated Debentures being redeemed through February 1, 2007 discounted to
the date of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at a discount rate equal to the Treasury
Yield plus 110 basis points, in the case of such a redemption before February
1, 1998, and the Treasury Yield plus 50 basis points, in the case of such a
redemption on or after February 1, 1998 but prior to February 1, 2007, plus,
for (i) or (ii) above, whichever is applicable, accrued interest on the
Subordinated Debentures 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 through February 1, 2007 of the Subordinated Debentures
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 through
February 1, 2007 of the Subordinated Debentures.
"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 most recently
weekly statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "H.15 (519)" 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 Indenture Trustee.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
Indenture 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 Indenture 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 appointed by the Company and reasonably acceptable to the
Indenture Trustee.
REDEMPTION PROCEDURES
The Trust may not redeem fewer than all the outstanding Capital Securities
unless all accrued and unpaid distributions have been paid on all Capital
Securities for all semi-annual distribution periods terminating on or prior to
the Redemption Date.
If the Trust gives a notice of redemption in respect of Capital Securities
(which notice will be irrevocable), then immediately prior to the close of
business on the Redemption Date, provided that the Company has paid to the
Trust a sufficient amount of cash in connection with the related redemption or
maturity of the Subordinated Debentures, distributions will cease to accrue on
the Capital Securities called for redemption, such Capital
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Securities shall no longer be deemed to be outstanding and all rights of
holders of such Capital Securities so called for redemption will cease, except
the right of the holders of such Capital Securities to receive the Redemption
Price, but without interest on such Redemption Price. Neither the Trustees nor
the Trust shall be required to register or cause to be registered the transfer
of any Capital Securities which have been so called for redemption. If any
date fixed for redemption of Capital Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date fixed for redemption. If the Company fails to repay Subordinated
Debentures on the Stated Maturity Date or Redemption Date or if payment of the
Redemption Price in respect of Capital Securities is improperly withheld or
refused and not paid by the Trust or by the Company pursuant to the Capital
Securities Guarantee described under "Description of the Exchange Guarantee",
distributions on such Capital Securities will continue to accrue from the
original Redemption Date of the Capital Securities to the date of payment in
which case the actual payment date will be considered the date fixed for
redemption for purposes of calculating the Redemption Price.
The Trust shall not be required to (i) issue, register the transfer of or
exchange of any Trust Securities during a period beginning at the opening of
business 15 days before the mailing of a notice of redemption of Trust
Securities and ending at the close of business on the day of the mailing of
the relevant notice of redemption and (ii) register the transfer of or
exchange of any Trust Securities so selected for redemption, in whole or in
part, except the unredeemed portion of any Trust Securities being redeemed in
part.
If a partial redemption of the Capital Securities would result in the
delisting of the Capital Securities by any national securities exchange or
other organization on which the Capital Securities are then listed, the
Company pursuant to the Indenture will only redeem the Subordinated Debentures
in whole and, as a result, the Trust may only redeem the Capital Securities in
whole.
Subject to the foregoing and applicable law (including, without limitation,
United States federal securities laws), the Company or any of its subsidiaries
may at any time and from time to time purchase outstanding Capital Securities
by tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution, winding-up or
termination of the Trust, the holders of the Capital Securities and Common
Securities at the date of dissolution, winding-up or termination of the Trust
will be entitled to receive on a Pro Rata Basis solely out of the assets of
the Trust, after satisfaction of liabilities of creditors (to the extent not
satisfied by the Company as provided in the Declaration), an amount equal to
the aggregate of the stated liquidation amount of $1,000 per Trust Security
plus accrued and unpaid distributions thereon to the date of payment (such
amount being the "Liquidation Distribution"), unless, in connection with such
dissolution, winding-up or termination, Subordinated Debentures in an
aggregate principal amount equal to the aggregate stated liquidation amount of
such Trust Securities, and bearing accrued and unpaid interest in an amount
equal to the accrued and unpaid distributions on such Trust Securities, shall
be distributed on a Pro Rata Basis to the holders of the Capital Securities
and Common Securities in exchange therefor.
If, upon any such dissolution, the Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Capital Securities and the Common Securities shall, except as
provided below, be paid on a Pro Rata Basis.
The holders of the Common Securities will be entitled to receive
distributions upon any such dissolution on a Pro Rata Basis with the holders
of the Capital Securities, except that if an Event of Default under the
Declaration has occurred and is continuing, the Capital Securities shall have
a priority over the Common Securities with respect to payment of the
Liquidation Distribution.
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Pursuant to the Declaration, the Trust shall terminate on the earliest to
occur of: (i) December 31, 2027, (ii) when all of the Trust Securities shall
have been called for redemption and the amounts necessary for redemption
thereof shall have been paid to the holders of Trust Securities in accordance
with the terms of the Trust Securities, or (iii) when all of the Subordinated
Debentures shall have been distributed to the holders of Trust Securities in
exchange for all of the Trust Securities in accordance with the terms of the
Trust Securities.
NO MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets to, any
corporation or other entity except in accordance with the Declaration.
DECLARATION EVENTS OF DEFAULT
An Indenture Event of Default will constitute an Event of Default under the
Declaration; provided that pursuant to the Declaration, the holder of the
Common Securities will be deemed to have waived any such Event of Default with
respect to the Common Securities until all Events of Default with respect to
the Capital Securities have been cured or waived. Until all such Events of
Default with respect to the Capital Securities have been cured or waived, the
Institutional Trustee will be deemed to be acting solely on behalf of the
holders of the Capital Securities, and only the holders of the Capital
Securities will have the right to direct the Institutional Trustee with
respect to certain matters under the Declaration and consequently under the
Indenture. In the event that any Event of Default with respect to the Capital
Securities is waived by the holders of the Capital Securities as provided in
the Declaration, the holders of Common Securities pursuant to the Declaration
have agreed that such waiver also constitutes a waiver of such Event of
Default with respect to the Common Securities for all purposes under the
Declaration without any further act, vote or consent of the holders of the
Common Securities. See "--Voting Rights".
Upon the occurrence of an Event of Default, the Institutional Trustee will
have the right under the Indenture to declare the principal of and interest on
the Subordinated Debentures to be immediately due and payable. In addition,
the Institutional Trustee will have the power to exercise all rights, powers
and privileges under the Indenture. See "Description of the Exchange
Subordinated Debentures."
VOTING RIGHTS
Except as provided below, under "--Modification and Amendment of the
Declaration" and "Description of the Exchange Guarantee--Amendments and
Assignment" and as otherwise required by the Business Trust Act, the Trust
Indenture Act and the Declaration, the holders of the Capital Securities will
have no voting rights.
Subject to the requirements of the second to last sentence of this
paragraph, the holders of a majority in aggregate liquidation amount of the
Capital Securities have the right (i) on behalf of all holders of Capital
Securities, to waive any past default that is waivable under the Declaration
and (ii) to direct the time, method and place of conducting any proceeding for
any remedy available to the Institutional Trustee, or exercising any trust or
power conferred upon the Institutional Trustee under the Declaration;
provided, however, that the holders of the Capital Securities will vote as a
single class (the "Capital Trust Voting Class") with respect to the right to
direct an Institutional Trustee, to (x) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee with respect
to the Subordinated Debentures, (y) waive any past default and its
consequences that is waivable under the applicable provisions of the Indenture
with respect to the Subordinated Debentures or (z) exercise any right to
rescind or annul a declaration that the principal of all Subordinated
Debentures shall be due and payable; provided that where a consent under the
Indenture would require the consent of (1) holders of Subordinated Debentures
representing a specified percentage greater than a majority in principal
amount of such securities or (2) each holder of such securities affected
thereby, no such consent shall be given by any Trustee without the prior
consent of, in the case of clause (1) above, holders of securities in the
Capital Trust Voting Class representing such specified percentage or, in the
case of clause (2) above, each holder of securities in the Capital
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Trust Voting Class affected thereby. The Institutional Trustee shall not
revoke or take any action inconsistent with any action previously authorized
or approved by a vote of the holders of Capital Securities. The Institutional
Trustee shall notify all holders of record of Capital Securities of any notice
of default received from the Indenture Trustee with respect to the
Subordinated Debentures. Other than with respect to directing the time, method
and place of conducting any proceeding for any remedy available to the
Institutional Trustee or the Indenture Trustee as set forth above, the
Institutional Trustee shall be under no obligation to take any of the
foregoing actions at the direction of the holders of the Capital Securities
unless the Institutional Trustee shall have obtained an opinion of nationally
recognized independent tax counsel recognized as expert in such matters to the
effect that the Trust will not be classified for United States federal income
tax purposes as an association taxable as a corporation or a partnership on
account of such action and will be treated as a grantor trust for United
States federal income tax purposes following such action. If the Institutional
Trustee fails to enforce its rights under the Declaration (including, without
limitation, its rights, powers and privileges as a holder of the Subordinated
Debentures under the Indenture), any holder of Capital Securities may, to the
extent permitted by applicable law, upon such holder's written request to the
Institutional Trustee to enforce such rights, institute a legal proceeding
directly against the Company to enforce the Institutional Trustee's rights
under the Declaration, without first instituting a legal proceeding against
the Institutional Trustee or any other Person.
A waiver of an Indenture Event of Default by the Institutional Trustee at
the direction of holders of the Capital Securities will constitute a waiver of
the corresponding Event of Default under the Declaration in respect of the
Trust Securities.
In the event the consent of the Trust as the holder of the Subordinated
Debentures is required under the Indenture with respect to any amendment,
modification or termination of the Indenture or the Subordinated Debentures,
the Institutional Trustee shall request the direction of the holders of the
Trust Securities with respect to such amendment, modification or termination
and shall vote with respect to such amendment, modification or termination as
directed by a majority in liquidation amount of the Trust Securities voting
together in the Capital Trust Voting Class; provided, however, that where any
such amendment, modification or termination of the Indenture would require the
consent of (i) holders of Subordinated Debentures representing a specified
percentage greater than a majority in principal amount of such securities or
(ii) each holder of Subordinated Debentures, the Trustee may only give such
consent at the direction of the holders of securities in the Capital Trust
Voting Class representing such specified percentage in the case of clause (i)
above, or each holder of securities in the Capital Trust Voting Class affected
thereby, in the case of clause (ii) above; and provided further that the
Institutional Trustee shall be under no obligation to take any such action in
accordance with the directions of the holders of the Trust Securities unless
the Institutional Trustee has obtained an opinion of nationally recognized
independent tax counsel recognized as expert in such matters to the effect
that the Trust will not be classified for United States federal income tax
purposes as an association taxable as a corporation or a partnership on
account of such action and will be treated as a grantor trust for United
States federal income tax purposes following such action.
Any required approval or direction of holders of Capital Securities may be
given at a separate meeting of holders of Capital Securities convened for such
purpose, at a meeting of all of the holders of Trust Securities or pursuant to
written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Capital Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Capital Securities. Each such notice will
include a statement setting forth (i) the date of such meeting or the date by
which such action is to be taken, (ii) a description of any resolution
proposed for adoption at such meeting on which such holders are entitled to
vote or of such matter upon which written consent is sought and (iii)
instructions for the delivery of proxies or consents.
No vote or consent of the holders of Capital Securities will be required for
the Trust to redeem and cancel Capital Securities or distribute Subordinated
Debentures in accordance with the Declaration.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities at such time that are owned by the Company or by
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any entity directly or indirectly controlling or controlled by or under direct
or indirect common control with the Company shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
The procedures by which persons owning Capital Securities registered in the
name of and held by DTC or its nominee may exercise their voting rights are
described under "--Form, Denomination, Book-Entry Procedures and Transfer".
Holders of the Capital Securities will have no rights to increase or
decrease the number of Trustees or to appoint, remove or replace a Trustee,
which rights are vested exclusively in the holder of the Common Securities.
MODIFICATION AND AMENDMENT OF THE DECLARATION
The Declaration may be modified and amended on approval of the Regular
Trustees, provided that, if any proposed modification or amendment provides
for, or the Regular Trustees otherwise propose to effect, (i) any action that
would adversely affect the powers, preferences or special rights of the Trust
Securities, whether by way of amendment to the Declaration or otherwise, or
(ii) the dissolution, winding-up or termination of the Trust other than
pursuant to the terms of the Declaration, then the holders of the outstanding
Trust Securities as a class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in liquidation amount of the Trust Securities,
provided that if any amendment or proposal referred to in clause (i) above
would adversely affect only the Capital Securities or the Common Securities,
then only the affected class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of a majority in liquidation amount of such class of Trust
Securities.
Notwithstanding the foregoing, (i) no amendment or modification may be made
to the Declaration unless the Regular Trustees shall have obtained (A) either
a ruling from the Internal Revenue Service or a written opinion of nationally
recognized independent tax counsel experienced in such matters to the effect
that such amendment will not cause the Trust to be classified for United
States federal income tax purposes as an association taxable as a corporation
or a partnership and to the effect that the Trust will not be treated as other
than a grantor trust for purposes of United States federal income taxation on
account of such amendment and (B) a written opinion of nationally recognized
independent counsel experienced in such matters to the effect that such
amendment will not cause the Trust to be an "investment company" which is
required to be registered under the 1940 Act, (ii) certain specified
provisions of the Declaration may not be amended without the consent of all of
the holders of the Trust Securities, (iii) no amendment which adversely
affects the rights, powers and privileges of the Institutional Trustee shall
be made without the consent of the Institutional Trustee, (iv) certain
provisions of the Declaration relating to the obligation of the Company to
purchase the Common Securities and to pay certain obligations and expenses of
the Trust as described under "Southern Investments UK Capital Trust I" may not
be amended without the consent of the Company, and (v) the rights of holders
of Common Securities under the Declaration to increase or decrease the number
of, and to appoint, replace or remove, Trustees shall not be amended without
the consent of each holder of Common Securities.
The Declaration further provides that it may be amended without the consent
of the holders of the Trust Securities to (i) cure any ambiguity, (ii) correct
or supplement any provision in the Declaration that may be defective or
inconsistent with any other provision of the Declaration, (iii) add to the
covenants, restrictions or obligations of the Company, (iv) preserve the
status of the Trust as a grantor trust for United States federal income tax
purposes, and (v) to conform to changes in, or a change in interpretation or
application of, certain 1940 Act requirements by the Commission, which
amendment does not adversely affect the rights, preferences or privileges of
the holders of Trust Securities.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Capital Securities will be issued in blocks having a
liquidation amount of not less than $1,000 and may be transferred or exchanged
in such blocks in the manner and at the offices described below. The
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Exchange Capital Securities initially will be represented by one or more
Capital Securities in registered, global form (collectively, the "Global
Capital Securities"). The Global Capital Securities will be deposited upon
issuance with the Institutional Trustee as custodian for DTC, in New York, New
York, and registered in the name of DTC or its nominee, in each case for
credit to an account of a direct or indirect participant in DTC as described
below.
Except as set forth below, the Global Capital Securities may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Global Capital Securities may
not be exchanged for Capital Securities in certificated form except in the
limited circumstances described below.
Transfers of beneficial interests in the Global Capital Securities will be
subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of the Euroclear System
("Euroclear") and Cedel Bank, societe anonyme ("Cedel Bank")), which may
change from time to time.
Depositary Procedures
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company created to hold securities for Participants and to facilitate
the clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers
(including the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Capital Securities, DTC will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the liquidation amount of the Global Capital Securities and (ii)
ownership of such interests in the Global Capital Securities will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interests in the Global Capital Securities).
The Company understands that under existing industry practices, if either
the Company or the Institutional Trustee requests any action of holders of
Capital Securities or if an owner of an interest in the Capital Securities
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 Capital Securities is
entitled to give or take under the Deposit Agreement relating to the
Subordinated Debentures, DTC would authorize the Participants owning the
relevant interests in the Capital Securities 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
such Capital Securities holding through them.
Investors in the Global Capital Securities may hold their interests therein
directly through DTC if they are participants in such system, or indirectly
through organizations (including Euroclear and Cedel Bank) which are
participants in such system. Euroclear and Cedel Bank will hold interests in
the Global Capital Securities on behalf of their participants through
customers' securities accounts in their respective names on the books of their
respective depositaries, which are Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear, and Citibank, N.A., as facilitator
for Cedel Bank's access to DTC. The depositaries, in turn, will hold such
interests in the Global Capital Securities in customers' securities accounts
in the depositaries' names on the books of DTC. All interests in a Global
Capital Security, including those held through Euroclear or Cedel Bank, may be
subject to the procedures and requirements of DTC. Those interests held
through Euroclear or Cedel Bank may also be subject to the procedures and
requirements of such system. The laws of some states
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require that certain persons take physical delivery in certificated form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Capital Security to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Capital Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the
lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Capital Securities in certificated form and will
not be considered the registered owners or holders thereof under the
Declaration for any purpose.
Payments in respect of the Global Capital Security registered in the name of
DTC or its nominee will be payable by the Institutional Trustee to DTC in its
capacity as the registered holder under the Declaration. Under the terms of
the Declaration, the Institutional Trustee will treat the persons in whose
names the Capital Securities, including the Global Capital Securities, are
registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Regular Trustees, Institutional Trustee nor any agent of either thereof has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Capital
Securities, or for maintaining, supervising or reviewing any of DTC's records
or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Capital Securities or (ii) any
other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Trust and the
Company that its current practice, upon receipt of any payment in respect of
securities such as the Capital Securities, is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in liquidation amount of beneficial
interests in the relevant security as shown on the records of DTC unless DTC
has reason to believe it will not receive payment on such payment date.
Payments by the Participants and the Indirect Participants to the beneficial
owners of Capital Securities will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the
Institutional Trustee, the Trust or the Company. Neither the Trust or the
Company nor the Institutional Trustee will be liable for any delay by DTC or
any of its Participants in identifying the beneficial owners of the Capital
Securities, and the Trust or the Company and the Institutional Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel Bank participants,
interests in the Global Capital Securities will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear and Cedel Bank will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Capital Securities described herein, cross-market transfers between the
Participants in DTC, on the one hand, and Euroclear and Cedel Bank
participants, on the other hand, will be effected through DTC in accordance
with DTC's rules on behalf of Euroclear or Cedel Bank, as the case may be, by
its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or Cedel Bank, as the case may
be, by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such
system. Euroclear or Cedel Bank, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Capital Securities in
DTC, and making or
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receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Cedel Bank
participants may not deliver instructions directly to the depositaries for
Euroclear and Cedel Bank.
Because of time zone differences, the securities account of a Euroclear or
Cedel Bank participant purchasing an interest in a Global Capital Security
from a participant in DTC will be credited, and any such crediting will be
reported to the relevant Euroclear or Cedel Bank participant, during the
securities settlement processing day (which must be a business day for
Euroclear or Cedel Bank) immediately following the settlement date of DTC.
Cash received in Euroclear or Cedel Bank as a result of sales of interests in
a Global Capital Security by or through a Euroclear or Cedel Bank participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Cedel Bank cash account
only as of the business day for Euroclear or Cedel Bank following DTC's
settlement date.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Capital Securities only at the direction
of one or more Participants to whose account with DTC interests in the Global
Capital Securities are credited and only in respect of such portion of the
liquidation amount of the Capital Securities as to which such Participant or
Participants has or have given such direction. However, if there is an Event
of Default under the Declaration, DTC reserves the right to exchange the
Global Capital Securities for Capital Securities in certificated form and to
distribute such Capital Securities to its Participants.
The information in this section concerning DTC, Euroclear and Cedel Bank and
their book-entry systems has been obtained from sources that the Trust and the
Company believe to be reliable, but neither the Trust nor the Company takes
responsibility for the accuracy thereof.
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures to facilitate transfers of interest in the Global Capital
Securities among participants in DTC, Euroclear and Cedel Bank, they are under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Trust or the Company
nor the Institutional Trustee will have any responsibility for the performance
by DTC, Euroclear and Cedel Bank or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
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
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.
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Exchange of Book-Entry Capital Securities for Certificated Capital Securities
A Global Capital Security is exchangeable for Exchange Capital Securities in
registered certificated form if (i) DTC (x) notifies the Trust that it is
unwilling or unable to continue as Depositary for the Global Capital Security
and the Trust thereupon fails to appoint a successor Depositary within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act,
(ii) the Company in its sole discretion elects to cause the issuance of the
Exchange Capital Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default under the Declaration.
In addition, beneficial interests in a Global Capital Security may be
exchanged for certificated Exchange Capital Securities upon request but only
upon at least 20 days' prior written notice given to the Institutional Trustee
by or on behalf of DTC in accordance with customary procedures. In all cases,
certificated Exchange Capital Securities delivered in exchange for any Global
Capital Security or beneficial interests therein will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the Depositary (in accordance with its customary procedures).
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities held in global form shall be
made to the Depositary, which shall credit the relevant accounts at the
Depositary on the applicable distribution dates, or in respect of the Capital
Securities that are not held by the Depositary, such payments shall be made by
check mailed to the address of the holder entitled thereto as such address
shall appear on the register. The paying agent (the "Paying Agent") shall
initially be the Institutional Trustee and any co-paying agent chosen by the
Institutional Trustee and acceptable to the Regular Trustees and the Company.
The Paying Agent shall be permitted to resign as Paying Agent upon 30 days'
written notice to the Institutional Trustee and the Company. In the event that
the Institutional Trustee shall no longer be the Paying Agent, the Regular
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Regular Trustees and the Company) to act as Paying Agent.
RESTRICTIONS ON TRANSFER
The Exchange Capital Securities will be issued, and may be transferred only
in minimum denominations of not less than $1,000 and multiples of $1,000 in
excess thereof. Any transfer, sale or other disposition of Exchange Capital
Securities in a denomination of less than $1,000 shall be deemed to be void
and of no legal effect whatsoever. Any such transferee shall be deemed not to
be the holder of such Exchange Capital Securities for any purpose, including
but not limited to the receipt of distributions on such Exchange Capital
Securities, and such transferee shall be deemed to have no interest whatsoever
in such Exchange Capital Securities.
REGISTRAR AND TRANSFER AGENT
Bankers Trust Company will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required to register or cause to be registered
the transfer of the Capital Securities after they have been called for
redemption.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee, prior to a default with respect to the Trust
Securities, undertakes to perform only such duties as are specifically set
forth in the Declaration and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provision, the Institutional Trustee is under no
obligation to exercise any of the powers vested in it by the Declaration at
the request of any holder of Capital Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
might be incurred thereby. The Institutional Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Institutional Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
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The Company and certain of its affiliates maintain deposit accounts and
banking relationships with the Institutional Trustee.
GOVERNING LAW
The Declaration and the Trust Securities will be governed by, and construed
in accordance with, the laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to take such action as they
deem reasonable in order that the Trust will not be deemed to be an
"investment company" required to be registered under the 1940 Act or that the
Trust will not be classified for United States federal income tax purposes as
an association taxable as a corporation or a partnership and will be treated
as a grantor trust for United States federal income tax purposes. In this
connection, the Regular Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust or the Declaration,
that the Regular Trustees determine in their discretion to be reasonable and
necessary or desirable for such purposes, as long as such action does not
adversely affect the interests of holders of the Trust Securities.
The Company and the Regular Trustees on behalf of the Trust will be required
to provide to the Institutional Trustee annually a certificate as to whether
or not the Company and the Trust, respectively, are in compliance with all the
conditions and covenants under the Declaration.
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DESCRIPTION OF THE EXCHANGE GUARANTEE
Set forth below is a summary of information concerning the Exchange
Guarantee that will be executed and delivered by the Company in connection
with the issuance by the Trust of the Exchange Capital Securities for the
benefit of the holders from time to time of Exchange Capital Securities. The
Original Guarantee was executed and delivered by the Company concurrently with
the issuance of the Original Capital Securities by the Trust for the benefit
of the holders from time to time of the Original Capital Securities. As soon
as practicable after the date hereof, the Original Guarantee will be exchanged
by the Company for the Exchange Guarantee. The Exchange Guarantee will be held
by Bankers Trust Company acting in its capacity as Capital Securities
Guarantee Trustee with respect thereto, for the benefit of the holders of the
Exchange Capital Securities. The Exchange Guarantee incorporates by reference
the terms of the Trust Indenture Act. The Exchange Guarantee has been
qualified under the Trust Indenture Act. The summary set forth below does not
purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Exchange Guarantee.
GENERAL
Pursuant to the Capital Securities Guarantee, the Company will agree, to the
extent set forth therein, to pay in full to the holders of the Capital
Securities, the Guarantee Payments (as defined below) (without duplication of
amounts theretofore paid by the Trust), to the extent not paid by the Trust,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert. The following payments or distributions with respect to the
Capital Securities to the extent not paid or made by the Trust (the "Guarantee
Payments") will be subject to the Capital Securities Guarantee (without
duplication): (i) any accrued and unpaid distributions on the Capital
Securities and the Redemption Price, including all accrued and unpaid
distributions to the date of the redemption, with respect to the Capital
Securities called for redemption by the Trust but only if and to the extent
that in each case the Company has made a payment to the Institutional Trustee
of interest or principal on the Subordinated Debentures and (ii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Subordinated Debentures to
holders of Trust Securities or the redemption of all of the Capital Securities
on maturity or upon redemption of the Subordinated Debentures), the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on the Capital Securities to the date of payment, to the extent
the Trust has funds available therefor, and (b) the amount of assets of the
Trust remaining available for distribution to holders of Capital Securities in
liquidation of the Trust. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to
the holders of Capital Securities or by paying the required amount to the
Trust and causing the Trust to pay such amounts to such holders. The Capital
Securities Guarantee, when taken together with the Company's obligations under
the Subordinated Debentures and the Indenture and its obligations under the
Declaration, including its obligation to pay costs, expenses and certain
liabilities of the Trust, constitutes a full and unconditional guarantee of
amounts due on the Capital Securities.
CERTAIN COVENANTS OF THE COMPANY
In the Capital Securities Guarantee, the Company will covenant that, so long
as any Capital Securities remain outstanding, the Company will not (a) declare
or pay any dividends on, or redeem, purchase, acquire or make a distribution
or liquidation payment with respect to, any of its capital stock except for
dividends, payments or distributions payable in shares of its capital stock,
reclassifications of its capital stock and conversions or exchanges of capital
stock of one class or series for capital stock of another class or series and
except for a redemption, purchase or other acquisition of shares of its
capital stock made for the purpose of an employee incentive plan or benefit
plan or other similar arrangement of the Company or any of its subsidiaries or
(b) make any payment of interest, principal of or premium, if any, on, or
repay, repurchase or redeem any debt securities issued by the Company that
rank pari passu with or junior to the Subordinated Debentures (except by
conversion into or exchange for shares of its capital stock) or (c) make any
guarantee payment with respect to the foregoing, if at such time (i) the
Company shall be in default with respect to its Guarantee Payments or other
payment obligations under the Capital Securities Guarantee, (ii) there shall
have occurred and be continuing an Indenture Event of Default or (iii) the
Company shall have given notice of its selection of an Extension Period as
provided
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in the Indenture and such period, or any extension thereof, is continuing. In
addition, so long as any Capital Securities remain outstanding, the Company
(i) has agreed to remain the sole direct or indirect owner of all of the
outstanding Common Securities and shall not cause or permit the Common
Securities to be transferred except to the extent permitted by the
Declaration; provided that any permitted successor of the Company under the
Indenture may succeed to the Company's ownership of the Common Securities, and
(ii) will not take any action which will cause the Trust to cease to be
treated as a grantor trust for United States federal income tax purposes
except in connection with a distribution of Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights
of holders of Capital Securities (in which case no consent will be required),
the Capital Securities Guarantee may be amended only with the prior approval
of the holders of not less than a majority in liquidation amount of the
outstanding Capital Securities. The manner of obtaining any such approval of
holders of the Capital Securities will be as set forth under "Description of
the Exchange Capital Securities--Voting Rights". All guarantees and agreements
contained in the Capital Securities Guarantee shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall
inure to the benefit of the holders of the Capital Securities then
outstanding. Except in connection with a consolidation, merger or sale
involving the Company that is permitted under the Indenture, the Company may
not assign its obligations under the Capital Securities Guarantee.
TERMINATION OF THE CAPITAL SECURITIES GUARANTEE
The Capital Securities Guarantee will terminate and be of no further force
and effect as to the Capital Securities upon full payment of the Redemption
Price of all Capital Securities, or upon distribution of the Subordinated
Debentures to the holders of Capital Securities in exchange for all of the
Capital Securities, or upon full payment of the amounts payable upon
liquidation of the Trust. Notwithstanding the foregoing, the Capital
Securities Guarantee will continue to be effective or will be reinstated, as
the case may be, if at any time any holder of Capital Securities must restore
payment of any sums paid with respect to the Capital Securities or the Capital
Securities Guarantee.
STATUS OF THE CAPITAL SECURITIES GUARANTEE
The Company's obligations under the Capital Securities Guarantee to make the
Guarantee Payments will constitute unsecured obligations of the Company and
will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company, including the Subordinated Debentures, except
liabilities made pari passu or subordinate by their terms, and (ii) senior to
all capital stock now or hereafter issued by the Company, and to any guarantee
now or hereafter entered into by the Company in respect of any of its capital
stock. The Declaration provides that each holder of Capital Securities by
acceptance thereof agrees to the subordination provisions and other terms of
the Capital Securities Guarantee.
The Capital Securities Guarantee will constitute a guarantee of payment and
not of collection, thus, any holder of Capital Securities may institute a
legal proceeding directly against the Company to enforce such holder's rights
under the Capital Securities Guarantee, without first instituting a legal
proceeding against the Trust or any other person or entity. The Capital
Securities Guarantee will be deposited with the Institutional Trustee, as
Guarantee Trustee, to be held in trust for the benefit of the holders of the
Capital Securities. The Institutional Trustee shall enforce the Capital
Securities Guarantee on behalf of the holders of the Capital Securities. The
holders of not less than a majority in aggregate liquidation amount of the
Capital Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available in respect of the Capital
Securities Guarantee, including the giving of directions to the Institutional
Trustee.
The Company and certain of its affiliates maintain deposit accounts and
banking relationships with the Institutional Trustee.
GOVERNING LAW
The Capital Securities Guarantee will be governed by and construed in
accordance with the laws of the State of New York.
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DESCRIPTION OF THE EXCHANGE SUBORDINATED DEBENTURES
The Original Subordinated Debentures were issued and the Exchange
Subordinated Debentures will be issued under the Indenture dated as of January
29, 1997 among the Company, Bankers Trust Company, as the Indenture Trustee,
and Bankers Trust Luxembourg S.A., as paying agent and transfer agent. The
Indenture has been qualified under the Trust Indenture Act. This summary of
certain terms and provisions of the Subordinated Debentures and the Indenture
does not purport to be complete, and where reference is made to particular
provisions of the Indenture, such provisions, including the definitions of
certain terms, some of which are not otherwise defined herein, are qualified
in their entirety by reference to all of the provisions of the Indenture and
those terms made a part of the Indenture by the Trust Indenture Act.
Upon the dissolution of the Trust at the option of the Company, Subordinated
Debentures may be distributed to the holders of the Trust Securities in
liquidation of the Trust. See "Description of the Exchange Capital
Securities--Special Event Redemption or Distribution".
GENERAL
Concurrently with the issuance of the Common Securities and the Original
Capital Securities, the Trust invested the proceeds thereof in the Original
Subordinated Debentures issued by the Company.
The Subordinated Debentures are unsecured, subordinated obligations of the
Company, limited in aggregate principal amount to (i) the aggregate
liquidation amount of the Capital Securities issued by the Trust and (ii) the
proceeds received by the Trust upon issuance of the Common Securities to the
Company (which proceeds will be used to purchase an equal principal amount of
Subordinated Debentures).
The Subordinated Debentures mature on February 1, 2027. The Subordinated
Debentures are not subject to any sinking fund.
The Original Subordinated Debentures are, and the Exchange Subordinated
Debentures will be, listed on the Luxembourg Stock Exchange.
If Book-Entry Interests in the Subordinated Debentures are distributed to
holders of Trust Securities in dissolution of the Trust, such Book-Entry
Interests will be transferred by the Trust to DTC, which will operate a book-
entry system for interests in the Book-Entry Interests. DTC will initially
credit Participants holding Capital Securities with interests in the Book-
Entry Interests (pro rata to their holdings of Capital Securities) and DTC
will issue to such Participants interests in such Book-Entry Interests in the
same form as the Capital Securities which such interests replace. To the
extent any Capital Securities are held in certificated form, such Book-Entry
Interests in the Subordinated Debentures will be issued in certificated form
of like denominations.
Payments of principal and interest on Subordinated Debentures will be
payable, the transfer of the Definitive Registered Debentures will be
registrable, and Definitive Registered Debentures will be exchangeable for
Subordinated Debentures of other denominations of a like aggregate principal
amount, at the corporate trust office of the Indenture Trustee in The City of
New York; provided that payments of interest on Definitive Registered
Debentures may be made at the option of the Company by check mailed to the
address of the persons entitled thereto and that the payment of principal with
respect to any Subordinated Debenture will be made only upon surrender of such
Subordinated Debenture to the Indenture Trustee. So long as the Subordinated
Debentures are listed on the Luxembourg Stock Exchange and the rules of such
exchange so require, the Company will maintain a paying and transfer agent in
Luxembourg, which will initially be Bankers Trust Luxembourg S.A. Payments of
principal of and interest on and the transfer of the Subordinated Debentures
in Luxembourg will be through the Luxembourg paying and transfer agent.
If the Subordinated Debentures are distributed to the holders of Trust
Securities upon the dissolution of the Trust, the Company will use its
reasonable best efforts to list the Subordinated Debentures on any securities
exchange or other organization on which the Capital Securities are then
listed.
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The Indenture contains no provisions which would afford the holders of
Subordinated Debentures protection in the event of a highly leveraged
transaction involving the Company or a change of control of the Company.
INTEREST
The Subordinated Debentures will bear interest at an annual rate of 8.23%
from January 29, 1997. Interest will be payable semi-annually in arrears on
February 1 and August 1 of each year (each, an "Interest Payment Date"),
commencing on August 1, 1997, to (in the case of the Global Debenture) the
Book-Entry Depositary or (in the case of a Definitive Registered Debenture)
the person in whose name such Definitive Registered Debenture is registered,
subject to certain exceptions, at the close of business on the Business Day
next preceding such Interest Payment Date. Interest payable on any Definitive
Registered Debenture that is not punctually paid or duly provided for on any
Interest Payment Date will forthwith cease to be payable to the person in
whose name such Definitive Registered Debenture is registered on the relevant
record date, and such defaulted interest will instead be payable to the person
in whose name such Definitive Registered Debenture is registered on the
special record date or other specified date determined in accordance with the
Indenture; provided, however, that interest shall not be considered payable by
the Company on any Interest Payment Date falling within an Extension Period
unless the Company has elected to make a full or partial payment of interest
accrued on the Subordinated Debentures on such Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months and for any period shorter than a
full semi-annual period for which interest is computed, the amount of interest
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month. If any Interest Payment Date is not a Business Day, then
payment of the interest payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as the Company shall not be in default in the payment of interest on
the Subordinated Debentures, the Company shall have the right to extend the
interest payment period from time to time for a period not exceeding 10
consecutive semi-annual interest periods. The Company has no current intention
of exercising its right to extend an interest payment period. In the event
that the Company exercises this right, then, during such period the Company
(i) shall not declare or pay dividends on, make distributions with respect to,
or redeem, purchase or acquire, or make a liquidation payment with respect to,
any of its capital stock except for dividends, payments or distributions
payable in shares of its capital stock, reclassifications of its capital stock
and conversions or exchanges of capital stock of one class or series into
capital stock of another class or series and except for a redemption, purchase
or other acquisition of shares of its capital stock made for the purpose of an
employee incentive plan or benefit plan or other similar arrangement of the
Company or any of its subsidiaries, (ii) shall not make any payment of
interest, principal of or premium, if any, on, or repay, repurchase or redeem
any debt securities issued by the Company that rank pari passu with or junior
to the Subordinated Debentures (except by conversion into or exchange for
shares of its capital stock), and (iii) shall not make any guarantee payments
with respect to the foregoing. No interest shall be due and payable during an
Extension Period, except at the end thereof. Any Extension Period with respect
to payment of interest on the Subordinated Debentures will also apply to
distributions with respect to the Capital Securities. Prior to the termination
of any such Extension Period, the Company may further extend the interest
payment period; provided that such Extension Period together with all such
previous and further extensions thereof may not exceed 10 consecutive semi-
annual interest periods. On the Interest Payment Date occurring at the end of
each Extension Period, the Company shall pay to the holders of Subordinated
Debentures of record on the record date for such Interest Payment Date
(regardless of who the holders of record may have been on other dates during
the Extension Period) all accrued and unpaid interest on the Subordinated
Debentures (together with interest thereon at the rate specified for the
Subordinated Debentures compounded semi-annually to the extent permitted by
law). Upon the termination of
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any Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the above requirements. The
Company may also pay on any Interest Payment Date all or any portion of the
interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to six Extension Periods of
10 consecutive semi-annual interest periods each or more numerous shorter
Extension Periods) throughout the term of the Subordinated Debentures;
provided that no Extension Period may extend beyond the Stated Maturity Date
of the Subordinated Debentures. The failure by the Company to make interest
payments during an Extension Period would not constitute a default or an event
of default under the Indenture or the Company's currently outstanding
indebtedness.
If the Trust shall be the sole holder of the Subordinated Debentures, the
Company shall give the Institutional Trustee and the Indenture Trustee notice
of its selection of such Extension Period at least one Business Day prior to
the earlier of (i) the next succeeding date on which the distributions on the
Capital Securities are payable or (ii) the date the Company is required to
give notice to the holders of the Capital Securities of the record date or the
date such distribution is payable. The Trust shall give notice of the
Company's selection of such Extension Period to the holders of the Capital
Securities.
If Subordinated Debentures have been distributed to holders of Trust
Securities, the Company shall give the holders of the Subordinated Debentures
and the Indenture Trustee notice of its selection of such Extension Period at
least ten Business Days prior to the earlier of (i) the next succeeding
Interest Payment Date or (ii) the date the Company is required to give notice
to holders of the Subordinated Debentures of the record or payment date of
such related interest payment.
OPTIONAL REDEMPTION
Except as provided below, the Subordinated Debentures may not be redeemed
prior to February 1, 2007. The Company shall have the right to redeem the
Subordinated Debentures, in whole or in part, from time to time, on or after
February 1, 2007 upon not less than 15 nor more than 60 days' notice, at a
Redemption Price equal to the percentages specified below of the principal
amount of the Subordinated Debentures to be redeemed, plus any accrued and
unpaid interest, to the redemption date, including interest accrued during an
Extension Period if redeemed during the 12 month period beginning February 1
of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2007 104.115%
2008 103.704
2009 103.292
2010 102.881
2011 102.469
2012 102.058
2013 101.646
2014 101.235
2015 100.823
2016 100.412
2017 and thereafter 100.000
</TABLE>
The Company will also have the right to redeem the Subordinated Debentures at
any time upon not less than 15 nor more than 60 days' notice at the applicable
Redemption Price upon the occurrence and continuation of a Special Event as
described under "Description of the Exchange Capital Securities--Special Event
Redemption or Distribution", or if the Company has or will become obligated to
pay Additional Amounts as described under "Description of the Exchange
Subordinated Debentures--Optional Tax Redemption".
If the Company gives a notice of redemption in respect of Subordinated
Debentures (which notice will be irrevocable), then, on or before the
redemption date, the Company will deposit irrevocably with the Indenture
Trustee funds sufficient to pay the applicable redemption price and will give
irrevocable instructions and authority to pay such redemption price to the
holders of the Subordinated Debentures. If notice of redemption
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shall have been given and funds deposited as required, then upon the date of
such deposit, interest will cease to accrue on the Subordinated Debentures
called for redemption, such Subordinated Debentures will no longer be deemed
to be outstanding and all rights of holders of such Subordinated Debentures so
called for redemption will cease, except the right of the holders of such
Subordinated Debentures to receive the applicable redemption price, but
without interest on such redemption price. If any date fixed for redemption of
Subordinated Debentures is not a Business Day, then payment of the redemption
price payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay) except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date fixed for redemption.
If payment of the redemption price in respect of Subordinated Debentures is
improperly withheld or refused and not paid by the Company, interest on such
Subordinated Debentures will continue to accrue compounded semi-annually, from
the original redemption date to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the applicable redemption price. If fewer than all of the
Subordinated Debentures are to be redeemed for any reason prior to the
maturity date, the Subordinated Debentures to be redeemed shall be selected by
lot or pro rata or in some other equitable manner determined by the Indenture
Trustee.
The Company shall not be required to (i) issue, register the transfer of or
exchange of any Definitive Registered Debentures during a period beginning at
the opening of business 15 days before the giving of a notice of redemption of
Subordinated Debentures and ending at the close of business on the day of the
giving of the relevant notice of redemption and (ii) register the transfer of
or exchange of any Definitive Registered Debentures so selected for
redemption, in whole or in part, except the unredeemed portion of any
Subordinated Debentures being redeemed in part.
ADDITIONAL AMOUNTS
All payments of principal and interest in respect of the Subordinated
Debentures 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 Subordinated Debentures 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 Subordinated Debentures by reason of such holder
having some connection with the UK (including being a citizen or resident
or national of, or carrying on a business or maintaining a permanent
establishment in, or being physically present in, the UK) other than the
mere holding of a Subordinated Debenture or the receipt of principal and
interest in respect thereof;
(b) to, or to a Person on behalf of, a holder who presents a Subordinated
Debenture (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 Subordinated Debenture 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 Subordinated
Debenture (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
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(e) to, or to a Person on behalf of, a holder of a Definitive Registered
Debenture issued pursuant to the request of owners of interests
representing a majority in outstanding principal amount in Book-Entry
Interest following and during the continuance of an Event of Default if
such holder (or any predecessor holder) was one of such owners requesting
that Definitive Registered Debentures be so issued.
Such Additional Amounts will also not be payable where, had the beneficial
owner of the Subordinated Debentures (or any interest therein) been the holder
of the Subordinated Debentures, he would not have been entitled to payment of
Additional Amounts by reason of any one or more of the clauses (a) through (e)
above. If the Company shall determine that Additional Amounts will not be
payable because of the immediately preceding sentence, the Company will inform
such holder promptly after making such determination setting forth the
reason(s) therefor.
"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 Indenture
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 TAX REDEMPTION
If (a) the Company satisfies the Indenture Trustee prior to the giving of a
notice as provided below that it has or will become obligated to pay
Additional Amounts with respect to the Subordinated Debentures 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 January 23, 1997 or (y) the issuance of Definitive
Registered Debentures pursuant to the first sentence or clause (a) or (b) of
the third sentence of "--Definitive Subordinated Debentures" 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 60
nor less than 15 days' notice to the holders, redeem, as a whole but not in
part, the Subordinated Debentures at 100% of the principal amount of the
Subordinated Debentures then outstanding, together with accrued and unpaid
interest to the redemption date; 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 Subordinated Debentures then due. Prior to the publication of
any notice of redemption pursuant to this paragraph, the Company shall deliver
to the Indenture 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 Indenture 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. If any date fixed for redemption of
Subordinated Debentures is not a Business Day, then payment of the redemption
price payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay) except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date fixed for redemption.
In the event the Global Debenture 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 Debenture, an equal amount of the related Book-Entry Interest. The
redemption price payable in connection with the redemption of such Book-Entry
Interest will be equal to the amount received by the Book-Entry Depositary in
connection with the redemption of the Global Debenture.
CERTAIN COVENANTS OF THE COMPANY APPLICABLE TO THE SUBORDINATED DEBENTURES
In the Indenture, the Company will covenant that it will not (a) declare or
pay any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its capital stock except
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for dividends, payments or distributions payable in shares of its capital
stock, reclassifications of its capital stock and conversions or exchanges of
capital stock of one class or series for capital stock of another class or
series and except for a redemption, purchase or other acquisition of shares of
its capital stock made for the purpose of an employee incentive plan or
benefit plan or similar arrangement of the Company or any of its subsidiaries
or (b) make any payment of interest, principal of or premium, if any, on, or
repay, repurchase or redeem any debt securities issued by the Company that
rank pari passu with or junior to the Subordinated Debentures (except by
conversion into or exchange for shares of its capital stock) or (c) make any
guarantee payment with respect to the foregoing, if at such time (i) the
Company shall be in default with respect to its Guarantee Payments or other
payment obligations under the Capital Securities Guarantee, (ii) there shall
have occurred any Indenture Event of Default with respect to the Subordinated
Debentures or (iii) the Company shall have given notice of its selection of an
Extension Period as provided in the Indenture and such period, or any
extension thereof, is continuing. In addition, so long as the Capital
Securities remain outstanding, the Company has agreed (i) not to cause or
permit the Common Securities to be transferred except to the extent permitted
by the Declaration; provided that any permitted successor of the Company under
the Indenture may succeed to the Company's ownership of the Common Securities,
(ii) to comply fully with all of its obligations and agreements contained in
the Declaration and (iii) not to take any action which would cause the Trust
to cease to be treated as a grantor trust for United States federal income tax
purposes except in connection with a distribution of Subordinated Debentures.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinate and
junior in right of payment to all Senior Indebtedness of the Company. In the
event (a) of any insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings in respect of the
Company or its property or any proceeding for voluntary liquidation,
dissolution or other winding-up of the Company, or (b) that Subordinated
Debentures are declared due and payable before the Stated Maturity Date
because of the occurrence of an Event of Default under the Indenture (under
circumstances other than as set forth in clause (a) above), then the holders
of all Senior Indebtedness shall first be entitled to receive payment of the
full amount due thereon in money, before the holders of any of the
Subordinated Debentures are entitled to receive a payment on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by
such Subordinated Debentures. In the event and during the continuation of any
default in payment of any Senior Indebtedness or if any event of default shall
exist and all grace periods with respect thereto shall have expired under any
Senior Indebtedness, as "event of default" is defined therein or in the
agreement under which the same is outstanding, no payment of the principal of,
premium, if any, or interest on the Subordinated Debentures shall be made.
The term "Senior Indebtedness" means (a) the principal of and premium, if
any, and interest on all indebtedness of the Company, whether outstanding on
the date of the Indenture or thereafter created, (i) for money borrowed by the
Company, (ii) for money borrowed by, or obligations of, others and either
assumed or guaranteed, directly or indirectly, by the Company, (iii) in
respect of letters of credit and acceptances issued or made by banks, or (iv)
constituting purchase money indebtedness, or indebtedness secured by property
included in the property, plant and equipment accounts of the Company at the
time of the acquisition of such property by the Company, for the payment of
which the Company is directly liable, (b) all deferrals, renewals, extensions
and refundings of, and amendments, modifications and supplements to, any such
indebtedness, and (c) all other general unsecured obligations and liabilities
of the Company, including without limitation, trade payables. As used in the
preceding sentence the term "purchase money indebtedness" means indebtedness
evidenced by a note, debenture, bond or other instrument (whether or not
secured by any lien or other security interest) issued or assumed as all or a
part of the consideration for the acquisition of property, whether by
purchase, merger, consolidation or otherwise. Notwithstanding anything to the
contrary in the Indenture or the Subordinated Debentures, Senior Indebtedness
shall not include (i) any indebtedness of the Company which, by its terms or
the terms of the instrument creating or evidencing it or by the law governing
it, is subordinate in right of payment to or pari passu with the Subordinated
Debentures, as the case may be, and, in particular, the Subordinated
Debentures shall rank pari passu with all other debt securities and guarantees
in respect of those debt securities, issued to any other Southern Investments
Capital Trust or (ii) any indebtedness of the Company to a subsidiary.
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The Indenture does not limit the aggregate amount of Senior Indebtedness or
other indebtedness that may be issued. There are no terms in the Capital
Securities, the Subordinated Debentures or the Capital Securities Guarantee
that limit the Company's ability to incur additional indebtedness, including
indebtedness that ranks senior to the Subordinated Debentures and the Capital
Securities Guarantee, or the ability of its subsidiaries to incur additional
indebtedness. See "Description of the Exchange Guarantee--Status of the
Capital Securities Guarantee".
RESTRICTIONS ON MERGERS AND SALES OF ASSETS
Nothing contained in the Indenture or in the Subordinated Debentures will
prevent any consolidation of the Company with, or merger of the Company with
or into, any other corporation or corporations (whether or not affiliated with
the Company), or successive consolidations or mergers to which the Company or
its successor will be a party, or will prevent any sale, lease or conveyance
of the property of the Company, as an entirety or substantially as an
entirety; provided that upon any such consolidation, merger, sale, lease or
conveyance to which the Company is a party and in which the Company is not the
surviving corporation, the due and punctual performance and observance of all
of the covenants and conditions of the Indenture to be performed or observed
by the Company and the due and punctual payment of the principal of and
interest on all of the Subordinated Debentures, according to their tenor,
shall be expressly assumed by supplemental indenture satisfactory in form to
the Indenture Trustee, executed and delivered to the Indenture Trustee, by the
corporation formed by such consolidation, or into which the Company shall have
been merged, or which shall have acquired such property. In addition, the
Company may assign and delegate all of its rights and obligations under the
Indenture, the Subordinated Debentures, any supplemental indenture relating to
the Subordinated Debentures, the Deposit Agreement and all other documents,
agreements and instruments related thereto to any person that owns all of the
ordinary shares of the Company or to any person that owns all of the ordinary
shares of a person that owns all of the ordinary shares of the Company, and
upon any such person assuming such rights and obligations the Company shall be
automatically released from such obligations, provided that 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.
In the event that any such successor entity is organized under the laws of a
country located outside of the UK and withholding or deduction is required by
law 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 such country in which the successor entity is
organized or by or within any political subdivision thereof or any authority
therein or thereof having power to tax, the successor entity shall pay to the
relevant holder of the Global Debentures or to the relevant holders of the
Definitive Registered Debentures, as the case may be, such additional amounts,
under the same circumstances and subject to the same limitations as are
specified for "UK Taxes," as is set forth under "--Additional Amounts" above,
but substituting for the UK in each place the name of the country under the
laws of which such successor entity is organized. In addition, such successor
entity shall be entitled to effect optional tax redemption under the same
circumstances and subject to the same limitations as are set forth under "--
Optional Tax Redemption" above, but substituting for the UK in each place the
name of the country under the laws of which such successor entity is
organized.
EVENTS OF DEFAULT AND NOTICE THEREOF
The Indenture defines an Event of Default with respect to the Subordinated
Debentures as being any one of the following events: (a) failure to pay
interest for 30 days after becoming due; (b) failure to pay principal or
premium, if any, after becoming due at maturity, upon redemption or otherwise;
(c) material default in the performance, or material breach, of any other
covenant of the Company for 90 days after notice; and (d) certain events of
bankruptcy, insolvency or reorganization of the Company.
If an Event of Default in respect of Subordinated Debentures occurs and is
continuing, either the Indenture Trustee or the holders of at least 25% in
aggregate principal amount of the Subordinated Debentures outstanding may
declare the principal amount of all of the Subordinated Debentures of to be
due and payable immediately.
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At any time after such a declaration of acceleration in respect of the
Subordinated Debentures has been made, but before a judgment or decree for the
payment of money due upon acceleration has been obtained by the Indenture
Trustee, then such declaration of acceleration shall be automatically annulled
and rescinded if all Events of Default in respect of the Subordinated
Debentures, other than the non-payment of principal due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture.
The Indenture contains a provision entitling the Indenture Trustee, subject
to the duty of a trustee during a default to act with the required standard of
care, to be indemnified by the holders of Subordinated Debentures, before
proceeding to exercise any right or power under the Indenture at the request
of such holders. Subject to such provisions in the Indenture for the
indemnification of the Indenture Trustee and certain other limitations, the
holders of a majority in principal amount of the outstanding Subordinated
Debentures may direct the time, method and place of conducting any proceeding
for any remedy available to the Indenture Trustee, or exercising any trust or
power conferred on the Indenture Trustee.
The Indenture provides that no holder of Subordinated Debentures may
institute any action against the Company under the Indenture (except actions
for payment of overdue principal or interest, provided that a declaration of a
valid Extension Period by the Company shall not constitute a failure to pay
interest for this purpose) unless such holder previously shall have given to
the Indenture Trustee written notice of default and continuance thereof and
unless the holders of not less than 25% in principal amount of the
Subordinated Debentures then outstanding shall have requested the Indenture
Trustee to institute such action and shall have offered the Indenture Trustee
reasonable indemnity, the Indenture Trustee shall not have instituted such
action within 60 days of such notice, request and indemnity and the Indenture
Trustee shall not have received direction inconsistent with such written
request by the holders of a majority in principal amount of the Subordinated
Debentures.
The Indenture contains a covenant that the Company will file annually with
the Indenture Trustee a certificate that no default existed or a certificate
specifying any default that existed, each as of the end of the fiscal year so
ended.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides with respect to the Subordinated Debentures that the
Company may elect either (a) to defease and be discharged from any and all
obligations with respect to the Subordinated Debentures (except for the
obligations to register the transfer or exchange of the Definitive Registered
Debentures, to replace temporary or mutilated, destroyed, lost or stolen
Subordinated Debentures, to maintain an office or agency in respect of the
Subordinated Debentures and to hold moneys for payment in trust) ("legal
defeasance") or (b) to be released from its obligations with respect to the
Subordinated Debentures (except for the obligations set forth as exceptions in
the preceding clause (a) and except for the obligations to pay the principal
of, premium, if any, and any interest on the Subordinated Debentures, to
compensate and indemnify the Indenture Trustee and to appoint a successor
Indenture Trustee) ("covenant defeasance"), upon the deposit with the
Indenture Trustee (or other qualifying trustee), in trust for such purpose, of
money or U.S. Government Obligations (as defined in the Indenture) which
through the payment of principal and interest in accordance with their terms
will provide money in an amount sufficient to pay the principal of, premium,
if any, and any interest on the Subordinated Debentures, on the due date
thereof. Such a trust may only be established, if among other things, the
Company has delivered to the Indenture Trustee an opinion of counsel (as
specified in the Indenture) to the effect that the holders of the Subordinated
Debentures will not recognize income, gain or loss for United States federal
income tax purposes as a result of such legal defeasance or covenant
defeasance and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same time as would have been the case
if such legal defeasance or covenant defeasance had not occurred. Such
opinion, in the case of legal defeasance under clause (a) above, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable federal income tax law occurring after the date of the Indenture.
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MODIFICATION OF THE INDENTURE
The Indenture provides that the Company and the Indenture Trustee may enter
into supplemental indentures without the consent of the holders of
Subordinated Debentures to: (a) secure any Subordinated Debentures, (b)
evidence the assumption by a successor corporation of the obligations of the
Company, (c) add covenants for the protection of the holders of Subordinated
Debentures, (d) cure any ambiguity or correct any inconsistency in the
Indenture, (e) provide for uncertificated Subordinated Debentures and (f)
evidence the acceptance of appointment by a successor trustee.
The Indenture also contains provisions permitting the Company and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of all Subordinated Debentures then outstanding and
affected, to add any provisions to, or change in any manner or eliminate any
of the provisions of, the Indenture or modify in any manner the rights of the
holders of the Subordinated Debentures so affected; provided that the Company
and the Indenture Trustee may not, without the consent of the holder of each
outstanding Subordinated Debenture affected thereby, (a) extend the stated
maturity of the principal of any Subordinated Debenture, or reduce the
principal amount thereof or reduce the rate or extend the time of payment of
interest thereon (except that a declaration of a valid Extension Period by the
Company shall not constitute an extension of time of payment of interest for
this purpose), or reduce any amount payable on the redemption thereof or
change the currency in which the principal thereof, premium, if any, or any
interest thereon is payable or impair the right to institute suit for the
enforcement of any payment on any Subordinated Debenture when due or (b)
reduce the aforesaid percentage in principal amount of Subordinated
Debentures, the consent of the holders of which is required for any such
modification.
CONCERNING THE INDENTURE TRUSTEE
The Company and its subsidiaries maintain ordinary banking relationships
with the Indenture Trustee and its affiliates.
FORM, BOOK-ENTRY PROCEDURES AND TRANSFER
General
The Subordinated Debentures will be issued initially only as a Global
Debenture in bearer form and will be payable only in U.S. dollars. Title to
such Global Debenture will pass by delivery. The Global Debenture will be
deposited on issue with Bankers Trust Company, as book-entry depositary (the
"Book-Entry Depositary"), which will hold the Global Debenture for the benefit
of the Trust pursuant to the terms of the deposit agreement (the "Deposit
Agreement") dated as of January 29, 1997 among the Company, the Book-Entry
Depositary and the holders and beneficial owners from time to time of
interests in the Book-Entry Interests (as defined below). Pursuant to the
Deposit Agreement, the Book-Entry Depositary will issue one or more
certificateless depositary interests (the "Book-Entry Interests"), which
together will represent a 100% interest in the Global Debenture. Such Book-
Entry Interests will initially be issued to the Trust.
If Book-Entry Interests are distributed to holders of Capital Securities in
liquidation of such holders' interests in the Trust, the Global Debenture held
by the Book-Entry Depositary and representing all of the Subordinated
Debentures will cease to be held for the benefit of the Trust and will, for
all purposes under the Indenture and the Deposit Agreement, be held by the
Book-Entry Depositary for the benefit of DTC and its Participants, and all of
the Book-Entry Interests in the Global Debenture will be transferred by the
Trust to DTC, which will operate a book-entry system for interests in the
Book-Entry Interests, and to the extent that Capital Securities are held in
certificated form, such Book-Entry Interests will be issued in certificated
form. DTC will initially credit Participants holding Capital Securities with
interests in the Book-Entry Interests (pro rata to their holdings of Capital
Securities) and DTC will issue to such Participants interests in such Book-
Entry Interests in the same form as the Capital Securities which such
interests replace and any Global Capital Security will be replaced by one or
more Global Book-Entry Interests registered in the name of DTC or its nominee.
Unless and until the Global Debenture is exchanged in whole for Definitive
Registered Debentures, Book-Entry Interests
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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. For a
description of DTC and its book-entry system, see "Description of the Exchange
Capital Securities--Form, Denomination, Book-Entry Procedures and Transfer".
As of the date of this Prospectus, the description herein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the Capital Securities applies in all material
respects to any Book-Entry Interests registered in the name of and held by DTC
or its nominee. The Company may appoint a successor to DTC or any successor
depositary in the event DTC or such successor depositary is unable or
unwilling to continue as depositary for the Global Subordinated Debentures.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in such Global
Subordinated Debentures.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
Global Debenture, the Book-Entry Depositary or such nominee, as the case may
be, will be considered the sole holder of the Global Debenture (and the
Subordinated Debentures) for all purposes under the Indenture. Except as set
forth below with respect to the issuance of Definitive Registered Debentures,
if the Subordinated Debentures are held through the facilities of DTC,
Participants or Indirect Participants will not be entitled to have
Subordinated Debentures registered in their names, will not receive or be
entitled to receive physical delivery of Subordinated Debentures in definitive
bearer or registered form and will not be considered the owners or holders
thereof under the Indenture or the Deposit Agreement. Accordingly, if the
Subordinated Debentures are held through the facilities of DTC, each person
owning an interest in the Book-Entry Interests 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.
In addition to a Paying Agent in the Borough of Manhattan, The City of New
York, the Company will, so long as Subordinated Debentures are listed on the
Luxembourg Stock Exchange and the rules of such Stock Exchange so require,
maintain a Paying Agent in Luxembourg.
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 the persons entitled thereto in respect
of the Subordinated Debentures or the Book-Entry Interests. None of the
Company, the Indenture 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 Interests
or for maintaining, supervising or reviewing any records relating to a
Participant's or Indirect Participant's interests in the Book-Entry Interests.
Payments on the Subordinated Debentures
Payments of any amounts in respect of the Global Debenture 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 the
persons entitled thereto. If the Subordinated Debentures are held through the
facilities of DTC, such payments will be made by the Book-Entry Depositary to
DTC, which will distribute such payments to its Participants.
If any Definitive Registered Debenture has been issued, the interest payable
on such Definitive Registered Debenture other than at maturity will be paid to
the holder in whose name such Definitive Registered Debenture is registered at
the close of business on the fifteenth day (whether or not a Business Day)
immediately preceding the due date for such payment (each a "Record Date").
The principal of a Definitive Registered Debenture will be payable to the
person in whose name such Definitive Registered Debenture is registered at the
close of business on the immediately preceding Record Date upon surrendering
such Definitive Registered Debenture. Interest payable at maturity will be
payable to the person to whom principal is payable.
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If any Definitive Registered Debenture has been issued, payments of interest
on such Definitive Registered Debenture 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 Debentures may also be made, in the case of a holder of at least
US$1,000,000 aggregate principal amount of Subordinated Debentures of a
series, 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 Indenture 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
Indenture Trustee may accept in its discretion).
Any monies paid by the Company to the Indenture 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 Subordinated Debentures 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 Indenture Trustee and such Paying Agent with
respect thereto will cease.
All payments to the Book-Entry Depositary in respect of the Global
Debenture, and all payments to the holders of the Definitive Registered
Debentures, 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 Debenture or of any Definitive
Registered Debenture, after such deduction or withholding, will equal the
amounts that such holder would have otherwise received in respect of the
Global Debenture or of such Definitive Registered Debenture absent such
deduction or withholding.
If the due date for payment of principal or any interest installment or any
Additional Amount in respect of any Subordinated Debenture 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.
Redemption
In the event the Global Debenture (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 Debenture to the persons entitled thereto and (in
the case of redemption in full) surrender the Global Debenture to the
Indenture Trustee for cancellation. The redemption price payable in connection
with the redemption of interests in a Book-Entry Interest will be equal to the
amount received by the Book-Entry Depositary in connection with the redemption
of the Global Debenture (or a portion thereof). For any redemption of the
Global Debenture in part, if the Subordinated Debentures are held through the
facilities of DTC, selection of interests in the related 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 such Book-
Entry Interest of $1,000 principal amount or less shall be redeemed in part.
Once redeemed in part, a new Global Debenture in the principal amount equal to
the unredeemed portion thereof will be issued and delivered to the Book-Entry
Depositary.
Action by Holders of Subordinated Debentures
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 Subordinated Debentures, the Book-Entry Depositary will mail to the
Institutional Trustee (or, if the Subordinated Debentures are then held
through the facilities of DTC, 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 the Institutional Trustee (or DTC, as
applicable) will be entitled to instruct the Book-Entry Depositary as to the
consent, waiver or other action, if any, pertaining to the Subordinated
Debentures and (c) a statement as to the manner in which such instructions may
be given. Upon the written request of the Institutional Trustee (or DTC, as
applicable), the Book-Entry Depositary shall endeavor
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insofar as practicable to take such action regarding the requested consent,
waiver or other action in respect of the Subordinated Debentures in accordance
with any instructions set forth in such request. DTC is expected to follow the
procedures described under "Description of the Exchange Capital Securities--
Form and Delivery--Information Regarding DTC, Cedel Bank and Euroclear" 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 or
the Indenture.
Meetings of Holders of Subordinated Debentures
A meeting of the holders of Subordinated Debentures may be called at any
time from time to time pursuant to the Indenture (a) to give any notice to the
Company or to the Indenture Trustee, or to consent to the waiving of any
Default and its consequence, or to take any other action authorized to be
taken by holders, (b) to remove the Indenture Trustee and appoint a successor
trustee, or (c) to consent to the execution of a supplemental indenture.
To be entitled to vote at any meeting of holders, a Person shall be (a) a
holder or (b) a Person appointed by an instrument in writing as proxy for a
holder or holders by such holder or holders. The only Persons who shall be
entitled to be present or to speak at any meeting of holders shall be the
Persons so entitled to vote at such meeting and their counsel, any
representatives of the Indenture Trustee and its counsel, and any
representatives of the Company and its counsel.
At any meeting of holders, the representative of Persons holding or
representing Subordinated Debentures in an aggregate principal amount
sufficient under the appropriate provision of the Indenture to take action
upon the business for the transaction of which such meeting was called shall
constitute a quorum. No action at a meeting of holders shall be effective
unless approved by Persons holding or representing Subordinated Debentures in
the aggregate principal amount required by the provision of the Indenture
pursuant to which such action is being taken. At any meeting of holders, each
holder or proxy shall be entitled to one vote for each $1,000 principal amount
of outstanding Subordinated Debentures held or represented.
At any time prior to (but not after) the evidencing to the Indenture Trustee
of the taking of any action at a meeting of holders by the holders of the
percentage in aggregate principal amount of the Subordinated Debentures
specified in the Indenture in connection with such action, any holder of a
Subordinated Debenture the serial number of which is included in the
Subordinated Debentures the holders of which have consented to such action
may, by filing written notice with the Indenture Trustee at its principal
corporate trust office and upon proof of holding as provided in the Indenture,
revoke such consent so far as concerns such Subordinated Debentures. Except as
aforesaid any such consent given by the holder of any Subordinated Debentures
shall be conclusive and binding upon such holder and upon all future holders
and owners of such Subordinated Debentures and of any securities issued in
exchange therefor, in lieu thereof or upon transfer thereof, irrespective of
whether or not any notation in regard thereto is made upon such securities.
Any action taken by the holders of the percentage in aggregate principal
amount of the holders specified in the Indenture in connection with such
action shall be conclusively binding upon the Company, the Indenture Trustee
and the holders of all the Subordinated Debentures.
Reports and Notices
So long as the Subordinated Debentures are listed on the Luxembourg Stock
Exchange and the rules of such Stock Exchange so require, notice to holders of
the Subordinated Debentures will be published in a leading newspaper having
general circulation in Luxembourg (which is expected to be the Luxemburger
Wort) in addition to notifying the Book-Entry Depositary and any registered
holders of the Subordinated Debentures. If any Subordinated Debentures have
been distributed to holders of Capital Securities, 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 Subordinated
Debentures. In the case of Definitive Registered Debentures, all notices
regarding the Subordinated Debentures will, in addition to publication as
referred to above, be mailed to holders by first-class mail at their
respective addresses as they appear on the registration books of the
Registrar.
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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 the 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 Securities
Act, the Exchange Act, or the 1940 Act, 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 Subordinated
Debentures 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
(if any Subordinated Debentures are then held through the facilities of DTC)
or the beneficial owners of the interests in the Book-Entry Interests. No
amendment which materially adversely affects any holder or beneficial owner of
an interest in the Book-Entry Interests may be made to the Deposit Agreement
without the consent of such holder or beneficial owner.
If Definitive Registered Debentures are issued by the Company in exchange
for the entire Global Debenture, the Book-Entry Depositary, as holder of the
Global Debenture, will surrender the Global Debenture against receipt of the
Definitive Registered Debentures and distribute the Definitive Registered
Debentures to the holders of Book-Entry Interests (or such other persons as
the Book-Entry Depositary becomes aware are entitled thereto), whereupon the
Deposit Agreement will terminate. The Deposit Agreement may also be terminated
upon the resignation of the Book-Entry Depositary if no successor has been
appointed within 120 days.
Resignation of Book-Entry Depositary
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
with respect to the Global Debenture. 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 Debenture 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 Debentures with respect to the Global Debenture. On
receipt of such Definitive Registered Debentures, the Book-Entry Depositary
will surrender the Global Debenture and distribute such Definitive Registered
Debentures to the persons entitled thereto. The Deposit Agreement will then
terminate.
Obligation of Book-Entry Depositary
The Book-Entry Depositary will assume no obligation or liability under the
Deposit Agreement other than to act in good faith without negligence or wilful
misconduct in the performance of its duties thereunder.
Definitive Subordinated Debentures
Owners of interests in a Book-Entry Interest will be entitled to receive
definitive Subordinated Debentures in registered form ("Definitive Registered
Debentures") in respect of such interest only if an Event of Default has
occurred and is continuing with respect to the Subordinated Debentures and the
holder, in such circumstance, upon instructions from owners of interests
representing a majority in outstanding principal amount in such Book-Entry
Interest shall have requested in writing that the Global Debenture be
exchanged for one or more Definitive Registered Debentures. If any owners of
interests in a Book-Entry Interest make a request pursuant to the preceding
sentence, all of the owners of interests in such Book-Entry Interest will
receive Definitive Registered Debentures in respect of their interests. In
addition, Definitive Registered Debentures shall be issued if at any time (a)
DTC notifies the Company and the Book-Entry Depositary that it is unwilling to
or unable to continue to hold the Book-Entry Interests 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, (b)
the Book-Entry Depositary notifies the Company that it is unwilling or unable
to continue as Book-Entry Depositary with respect to the Global Debenture and
no successor is appointed by the Company within 120 days or (c) the
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Company in its sole discretion determines that Definitive Registered
Debentures shall be issued and executes and delivers to the Indenture Trustee
an Officer's Certificate providing that the Global Debenture shall be so
exchanged. Definitive Registered Debentures 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 Debentures
shall be registered in the name or names of such person or persons as the
Book-Entry Depositary shall notify the Indenture Trustee. If the Book-Entry
Interests are then held through the facilities 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 Interests.
PARTICIPANTS AND INDIRECT PARTICIPANTS SHOULD BE AWARE THAT, UNDER CURRENT
UK TAX LAW, UPON THE ISSUANCE OF DEFINITIVE REGISTERED DEBENTURES, THE
INTEREST PAYABLE ON THE DEFINITIVE REGISTERED DEBENTURES WILL BECOME SUBJECT
TO UK INCOME TAX (CURRENTLY AT THE RATE OF 20%) TO BE WITHHELD ON ANY PAYMENTS
OF INTEREST ON THE SUBORDINATED DEBENTURES AS SET FORTH UNDER "CERTAIN INCOME
TAX CONSIDERATIONS--UK INCOME TAX CONSIDERATIONS". IF SUCH DEFINITIVE
REGISTERED DEBENTURES ARE ISSUED PURSUANT TO THE REQUEST OF AN OWNER OF AN
INTEREST IN THE BOOK-ENTRY INTEREST FOLLOWING AN EVENT OF DEFAULT, THE COMPANY
WILL NOT BE OBLIGATED TO PAY ANY ADDITIONAL AMOUNTS TO THAT OWNER OR ANY OF
ITS TRANSFEREES.
In the event that Definitive Registered Debentures are in issue, a holder
may transfer or exchange the Definitive Registered Debentures in accordance
with the Indenture. The Registrar and the Indenture 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 Subordinated Debentures selected for redemption or
for a period of 15 days before a selection of Subordinated Debentures to be
redeemed. Upon the issuance of Definitive Registered Debentures, holders will
be able to transfer and exchange Definitive Registered Debentures 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.
RESTRICTIONS ON TRANSFER
The Exchange Subordinated Debentures will be issued, and may be transferred
only, in minimum denominations of not less than $1,000 and multiples of $1,000
in excess thereof. Any transfer, sale or other disposition of Exchange
Subordinated Debentures in a denomination of less than $1,000 shall be deemed
to be void and of no legal effect whatsoever. Any such transferee shall be
deemed not to be the holder of such Exchange Subordinated Debentures for any
purpose, including but not limited to the receipt of payments on such Exchange
Subordinated Debentures, and such transferee shall be deemed to have no
interest whatsoever in such Exchange Subordinated Debentures.
GOVERNING LAW; SUBMISSION TO JURISDICTION
The Indenture and the Subordinated Debentures will be governed by, and
construed in accordance with, the laws of the State of New York.
Any suit, legal action or proceeding against the Company or its properties,
assets or revenues with respect to its obligations, liabilities or any other
matter arising out of or in connection with the Indenture or a Subordinated
Debenture may be brought in the Supreme Court of New York, New York County or
in the United States District Court for the Southern District of New York and
any appellate court from either thereof. 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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DESCRIPTION OF THE ORIGINAL SECURITIES
The terms of the Original Securities are identical in all material respects
to the Exchange Securities, except that (i) the Original Securities have not
been registered under the Securities Act, are subject to certain restrictions
on transfer and are entitled to certain rights under the Registration Rights
Agreement (which rights will terminate upon consummation of the Exchange
Offer, except under limited circumstances), (ii) the Exchange Capital
Securities will not contain the $100,000 minimum liquidation amount transfer
restriction and certain other restrictions on transfer applicable to Original
Capital Securities, (iii) the Exchange Capital Securities will not provide for
any increase in the distribution rate thereon and (iv) the Exchange
Subordinated Debentures will not provide for any increase in the interest rate
thereon. The Original Securities provide that, in the event that a
registration statement relating to the Exchange Offer has not been filed by
June 28, 1997 and been declared effective by July 28, 1997, or, in certain
limited circumstances, in the event a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the Original Capital
Securities is not declared effective by the time required by the Registration
Rights Agreement, then liquidated damages will accrue at the rate of 0.25% per
annum on the principal amount of the Original Subordinated Debentures and
Additional Distributions will accrue at the rate of 0.25% per annum on the
liquidation amount of the Original Capital Securities, for the period from the
occurrence of such event until such time as such registration statement has
been filed or declared effective, as the case may be. The Exchange Securities
are not, and upon consummation of the Exchange Offer the Original Securities
will not be, entitled to any such additional interest or distributions.
Accordingly, holders of Original Capital Securities should review the
information set forth under "Risk Factors--Consequences of a Failure to
Exchange Original Capital Securities" and "Description of the Exchange Capital
Securities."
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
SUBORDINATED DEBENTURES AND THE CAPITAL SECURITIES GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of distributions and other amounts due on the Capital Securities
(to the extent the Trust has funds on hand legally available for the payment
of such Distributions) will be irrevocably guaranteed by the Company as and to
the extent set forth under "Description of the Exchange Guarantee". Taken
together, the Company's obligations under the Subordinated Debentures, the
Indenture, the Declaration and the Exchange Guarantee will provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the Capital Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guarantee. It is only the combined operation
of these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Capital
Securities. If and to the extent that the Company does not make the required
payments on the Subordinated Debentures, the Trust will not have sufficient
funds to make the related payments, including distributions, on the Capital
Securities. The Capital Securities Guarantee will not cover any such payment
when the Trust does not have sufficient funds on hand legally available
therefor. In such event, the remedy of a holder of Capital Securities is to
institute a direct action against the Company. The obligations of the Company
under the Capital Securities Guarantee will be subordinate and junior in right
of payment to all other liabilities of the Company, including the Subordinated
Debentures.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Capital Securities, primarily
because: (i) the aggregate principal amount of the Subordinated Debentures
will be equal to the sum of the liquidation amount or Redemption Price, as
applicable, of the Capital Securities and Common Securities; (ii) the interest
rate and interest and other payment dates for the Trust Securities will match
the distribution rate
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and distribution and other payment dates for the Trust Securities; (iii) the
Company shall pay for all and any costs, expenses and liabilities of the Trust
except the Trust's obligations to holders of Trust Securities under such Trust
Securities; and (iv) the Declaration will provide that the Trust is not
authorized to engage in any activity that is not consistent with the limited
purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding directly
against the Company to enforce its rights under the Capital Securities
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, the Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Declaration. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments
may be made in respect of the Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Subordinated Debentures
would constitute an Event of Default under the Declaration.
LIMITED PURPOSE OF THE TRUST
The Capital Securities will represent preferred undivided beneficial
interests in the assets of the Trust, and the Trust exists for the sole
purpose of issuing and selling the Trust Securities, using the proceeds from
the sale of the Trust Securities to acquire the Subordinated Debentures and
engaging in only those other activities necessary, advisable or incidental
thereto. A principal difference between the rights of a holder of a Capital
Security and a holder of a Subordinated Debenture is that a holder of a
Subordinated Debenture will be entitled to receive from the Company the
principal amount of (and premium, if any) and interest on Subordinated
Debentures held, while a holder of a Capital Security is entitled to receive
distributions from the Trust (or, in certain circumstances, from the Company
under the Capital Securities Guarantee) if and to the extent the Trust has
funds on hand legally available for the payment of such distributions.
RIGHTS UPON TERMINATION
Unless the Subordinated Debentures are distributed to holders of the Trust
Securities, upon any voluntary or involuntary termination and liquidation of
the Trust, the holders of the Trust Securities will be entitled to receive,
out of assets held by the Trust, the Liquidation Distribution in cash. See
"Description of the Exchange Capital Securities--Liquidation Distribution Upon
Dissolution". Upon any voluntary or involuntary liquidation or bankruptcy of
the Company, the Institutional Trustee, as holder of the Subordinated
Debentures, would be a subordinated creditor of the Company, subordinated in
right of payment to all Senior Indebtedness as set forth in the Indenture, but
entitled to receive payment in full of principal (and premium, if any) and
interest, before any stockholders of the Company receive payments or
distributions. Since the Company will be the guarantor under the Capital
Securities Guarantee and will agree to pay for all costs, expenses and
liabilities of the Trust (other than the Trust's obligations to the holders of
its Trust Securities), the positions of a holder of Capital Securities and a
holder of Subordinated Debentures relative to other creditors and to
stockholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
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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 and represent the opinion of Allen & Overy, special UK
counsel to the Company, so far as such comments relate to matters of law or
legal conclusions. They relate only to holders of Subordinated Debentures who
are the absolute beneficial owners of Subordinated Debentures and related
interest and may not apply to certain classes of persons such as dealers. Any
prospective holders of Capital Securities who are in doubt as to the tax
position should consult their professional advisers.
PAYMENTS ON THE SUBORDINATED DEBENTURES
For UK tax purposes, while Subordinated Debentures remains represented by
the Global Debenture 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 to the Trust or other holder may be made
without withholding or deduction for or on account of UK income tax for so
long as the Company's paying agent, the Book-Entry Depositary, if different,
and the Trust are outside the UK.
In other cases, and in particular if Definitive Registered Debentures are
issued, interest will be paid after deduction of UK income tax (currently at
the lower rate of 20%). A US holder of Subordinated Debentures may 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 of Subordinated Debentures 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 Subordinated Debentures 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
Subordinated Debentures 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
Capital Securities are attributable, or who is a Commonwealth citizen or
otherwise entitled to a UK personal allowance.
Holders of Capital Securities should be aware that under current UK tax law
upon the issuance of Definitive Registered Debentures the holders of such
Definitive Registered Debentures will (subject to any entitlement to make a
claim under the provisions of an applicable double tax treaty as described
above) become subject to
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UK withholding tax on any payments of interest with respect to such Definitive
Registered Debentures. 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 Exchange Subordinated Debentures--Additional
Amounts" and under "Description of the Exchange Subordinated Debentures--
Definitive Subordinated Debentures," and then subject to the right of the
Company in certain circumstances to redeem the Subordinated Debentures early.
See "Description of the Exchange Subordinated Debentures--Optional Tax
Redemption."
Interest on the Subordinated Debentures 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, UK tax chargeable on interest from a UK source beneficially owned
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 beneficially owned by a person 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 Subordinated Debentures
are attributable. There are exemptions for interest received by certain
categories of agent (such as some brokers and investment managers).
US FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
In the opinion of Troutman Sanders LLP, counsel to the Company and the Trust
("Tax Counsel"), the following is a summary of certain of the material United
States federal income tax consequences of the purchase, ownership and
disposition of Capital Securities held as capital assets by a U.S. Holder (as
defined below) who or that purchases such Capital Securities upon initial
issuance. It does not deal with special classes of holders such as banks,
thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Capital Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Capital
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or
of any foreign government that may be applicable to the Capital Securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations thereunder, the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis.
As used herein, the term "U.S. Holder" means a holder of Capital Securities
who or that is for United States federal income tax purposes (i) a citizen or
individual resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to United States federal income tax regardless of its source, or (iv) a trust
if both: (A) a court within the United States is able to exercise primary
jurisdiction over the administration of the trust and (B) one or more United
States trustees or fiduciaries have authority to control all substantial
decisions of the trust.
EXCHANGE OF CAPITAL SECURITIES
The exchange of Original Capital Securities for Exchange Capital Securities
should not be a taxable event for United States federal income tax purposes,
and the tax attributes of the Original Capital Securities immediately before
the exchange should carry over to the Exchange Capital Securities. For
example, a U.S. Holder should have the same issue price, tax basis, holding
period and market discount or bond premium in the Exchange Capital Securities
as the holder did in the Original Capital Securities immediately before the
exchange.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
In connection with the issuance of the Subordinated Debentures, Tax Counsel
has rendered its opinion generally to the effect that, under then current law
and assuming full compliance with the terms of the Indenture
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(and certain other documents), and based on certain facts and assumptions
contained in such opinion, the Subordinated Debentures will be classified for
United States federal income tax purposes as indebtedness of the Company. An
opinion of Tax Counsel, however, is not binding on the Internal Revenue
Service (the "IRS") or the courts. Prospective investors should note that no
rulings have been or are expected to be sought from the IRS with respect to
any of these issues and no assurance can be given that the IRS will not take
contrary positions. Moreover, no assurance can be given that any of the
opinions expressed herein will not be challenged by the IRS or, if challenged,
that such a challenge would not be successful.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel has
rendered its opinion generally to the effect that, under then-current law and
assuming full compliance with the terms of the Declaration and the Indenture
(and certain other documents), and based on certain facts and assumptions
contained in such opinion, the Trust will be classified for United States
federal income tax purposes as a grantor trust and not as an association
taxable as a corporation. Accordingly, for United States federal income tax
purposes, each holder of Capital Securities generally will be considered the
owner of an undivided interest in the Subordinated Debentures, and each holder
will be required to include in its gross income any interest (or OID accrued)
with respect to its allocable share of those Subordinated Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations (the "Regulations"), a "remote"
contingency that stated interest will not be timely paid will be ignored in
determining whether a debt instrument is issued with original issue discount
("OID"). The Company believes that the likelihood of its exercising its option
to defer payments of interest is "remote" since exercising that option would
prevent the Company from declaring dividends on any class of its equity
securities. Accordingly, the Company intends to take the position, based on
the advice of Tax Counsel, that interest on the Subordinated Debentures
generally will be taxable to a holder as ordinary income at the time it is
paid or accrued in accordance with such holder's method of accounting.
Under the Regulations, if the Company were to exercise its option to defer
payments of interest, the Subordinated Debentures would at that time be
treated as reissued with OID, and all stated interest on the Subordinated
Debentures would thereafter be treated as OID as long as the Subordinated
Debentures remain outstanding. In such event, all of a holder's taxable
interest income with respect to the Subordinated Debentures would thereafter
be accounted for on an economic accrual basis regardless of such holder's
method of tax accounting, and actual distributions of stated interest would
not be reported as taxable income. Consequently, a holder of Capital
Securities would be required to include in gross income OID even though the
Company would not make actual cash payments during an Extension Period.
Moreover, under the Regulations, if the option to defer the payment of
interest was determined not to be "remote," the Subordinated Debentures would
be treated as having been originally issued with OID. In such event, all of a
holder's taxable interest income with respect to the Subordinated Debentures
would be accounted for on an economic accrual basis regardless of such
holder's method of tax accounting, and actual distributions of stated interest
would not be reported as taxable income.
The Regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to Tax Counsel's interpretation herein.
Because income on the Capital Securities will constitute interest or OID,
corporate holders of the Capital Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with
respect to the Capital Securities.
A U.S. 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
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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.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Company will have the right at any time to liquidate the Trust and cause
the Subordinated Debentures to be distributed to the holders of the Trust
Securities. Under current law, such a distribution, for United States federal
income tax purposes, would be treated as a nontaxable event to each holder,
and each holder would receive an aggregate tax basis in the Subordinated
Debentures equal to such holder's aggregate tax basis in its Capital
Securities. A holder's holding period in the Subordinated Debentures so
received in liquidation of the Trust would include the period during which the
Capital Securities were held by such holder. If, however, the Trust is
characterized for United States federal income tax purposes as an association
taxable as a corporation at the time of its dissolution, the distribution of
the Subordinated Debentures may constitute a taxable event to holders of
Capital Securities and a holder's holding period in Subordinated Debentures
would begin on the date such Subordinated Debentures were received.
Under certain circumstances described herein (see "Description of the
Exchange Capital Securities"), the Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption
of their Capital Securities. Under current law, such a redemption would, for
United States federal income tax purposes, constitute a taxable disposition of
the redeemed Capital Securities, and a holder could recognize gain or loss as
if it sold such redeemed Capital Securities for cash. See "United States
Federal Income Taxation--Sales of Capital Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities will recognize gain or loss equal to
the difference between its adjusted tax basis in the Capital Securities and
the amount realized on the sale of such Capital Securities (other than with
respect to accrued and unpaid interest which has not yet been included in
income, which will be treated as ordinary income). A holder's adjusted tax
basis in the Capital Securities generally will be its initial purchase price
increased by OID (if any) previously includable in such holder's gross income
to the date of disposition and decreased by payments (if any) received on the
Capital Securities other than qualified stated interest. Such gain or loss
generally will be capital gain or loss and generally will be a long-term gain
or loss if the Capital Securities have been held for more than one year.
The Capital Securities may trade at a price that does not accurately reflect
the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder who disposes of his Capital Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Subordinated Debentures through the
date of disposition in income as ordinary income (i.e., interest or, possibly,
OID), and to add such amount to his adjusted tax basis in his pro rata share
of the underlying Subordinated Debentures deemed disposed of. To the extent
the selling price is less than the holder's adjusted tax basis (which will
include all accrued but unpaid interest) a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied
to offset ordinary income for United States federal income tax purposes.
PROPOSED TAX LEGISLATION
On February 6, 1997, as part of President Clinton's Fiscal 1998 Budget
Proposal, the United States Treasury Department proposed legislation that
would, among other things, deny an issuer a deduction for United States
Federal income tax purposes for the payment of interest on instruments with
characteristics similar to the Subordinated Debentures. If the proposed
legislation were enacted in its current form, it is not expected to apply to
the Subordinated Debentures since the proposed effective date for this
provision is the date of first committee action. There can be no assurances,
however, that the proposed legislation, if enacted, or similar legislation
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enacted after the date hereof would not adversely affect the tax treatment of
the Subordinated Debentures, resulting in a Tax Event. The occurrence of a Tax
Event may result in the redemption of the Subordinated Debentures for cash, in
which event the holders of the Capital Securities would receive cash in
redemption of their Capital Securities. See "Description of the Exchange
Capital Securities--Redemption" and "Description of the Exchange Subordinated
Debentures--Special Event Redemption."
NON-U.S. HOLDERS
Income realized from Capital Securities by a nonresident alien individual,
foreign corporation, foreign partnership, or foreign estate or trust, which
income is not effectively connected with the conduct of a United States trade
or business of the recipient, will not be subject to United States federal
income tax.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to holders on
Forms 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities may
be subject to a "backup" withholding tax of 31 percent unless the holder
complies with certain identification requirements. Any withheld amounts will
be allowed as a credit against the holder's United States federal income tax,
provided the required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
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CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an
investment in the Capital Securities. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence
and diversification requirements of ERISA and would be consistent with the
documents and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or
"disqualified persons" under the Code ("Parties in Interest") with respect to
such Plan. A violation of these "prohibited transaction" rules may result in
an excise tax or other liabilities under ERISA and/or Section 4975 of the Code
for such persons, unless exemptive relief is available under an applicable
statutory or administrative exemption. Employee benefit plans that are
governmental plans (as defined in Section 3(32) of ERISA), certain church
plans (as defined in Section 3(33) of ERISA) and foreign plans (as described
in Section 4(b)(5) of ERISA) are not subject to the requirements of ERISA or
Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Trust would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the Trust
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the assets
of the Trust would not be deemed to be "plan assets" of investing Plans if,
immediately after the most recent acquisition of any equity interest in the
Trust, less than 25% of the value of each class of equity interests in the
Trust were held by Plans, other employee benefit plans not subject to ERISA or
Section 4975 of the Code (such as governmental, church and foreign plans), and
entities holding assets deemed to be "plan assets" of any Plan (collectively,
"Benefit Plan Investors"). No assurance can be given that the value of the
Capital Securities held by Benefit Plan Investors will be less than 25% of the
total value of such Capital Securities at the completion of the initial
offering or thereafter, and no monitoring or other measures will be taken with
respect to the satisfaction of the conditions to this exception. All of the
Common Securities will be purchased and initially held by the Company.
Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Capital Securities were acquired with "plan
assets" of such Plan and the assets of the Trust were deemed to be "plan
assets" of Plans investing in the Trust. For example, if the Company is a
Party in Interest with respect to an investing Plan, extensions of credit
between the Company and the Trust (as represented by the Subordinated
Debentures and the Guarantee) would likely be prohibited by Section
406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive
relief were available under an applicable administrative exemption (see
below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect
prohibited transactions that may arise from the purchase or holding of the
Capital Securities if assets of the Trust were deemed to be "plan assets" of
Plans investing in the Trust as described above. Those class exemptions are
PTCE 96-23 (for certain transactions determined by in-house asset managers),
PTCE 95-60 (for certain transactions involving insurance company general
accounts), PTCE 91-38 (for certain transactions involving bank collective
investment funds), PTCE 90-1 (for certain transactions involving insurance
company separate accounts), and PTCE 84-14 (for certain transactions
determined by independent qualified asset managers).
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Because the Capital Securities may be deemed to be equity interests in the
Trust for purposes of applying ERISA and Section 4975 of the Code, the Capital
Securities may not be purchased or held by any Plan, any entity whose
underlying assets include "plan assets" by reason of any Plan's investment in
the entity (a "Plan Asset Entity") or any person investing "plan assets" of
any Plan, unless such purchaser or holder is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable
exemption. Any purchaser or holder of the Capital Securities or any interest
therein will be deemed to have represented by its purchase and holding thereof
that it either (a) is not a Plan or a Plan Asset Entity and is not purchasing
such securities on behalf of or with "plan assets" of any Plan or (b) is
eligible for the exemptive relief available under PTCE 96-23, 95-60, 91-38,
90-1 or 84-14 or another applicable exemption with respect to such purchase or
holding. If a purchaser or holder of the Capital Securities that is a Plan or
a Plan Asset Entity elects to rely on an exemption other than PTCE 96-23, 95-
60, 91-38, 90-1 or 84-14, the Company and the Trust may require a satisfactory
opinion of counsel or other evidence with respect to the availability of such
exemption for such purchase and holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Capital
Securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the potential consequences if the assets of the Trust were
deemed to be "plan assets" and the availability of exemptive relief under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14 or any other applicable exemption.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Capital Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Capital Securities.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer during the period referred to below in connection
with resales of Exchange Capital Securities received in exchange for Capital
Securities where such Capital Securities were acquired by such broker-dealer
for its own account as a result of market-making activities or other trading
activities. The Trust and the Company have agreed that, for a period not
exceeding 90 days after the Expiration Date, they will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale. In addition, until September 23, 1997, all
dealers effecting transactions in the Exchange Securities may be required to
deliver a prospectus.
The Trust and the Company will not receive any proceeds from any sale of
Exchange Capital Securities offered hereby. Exchange Capital Securities
received by broker-dealers for their own accounts pursuant to the Exchange
Offer may be sold from time to time in one or more transactions, in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Capital Securities or a combination of such methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such Exchange Capital Securities. Any
broker-dealer that resells Exchange Capital Securities that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Capital Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Capital Securities and any commissions
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The National Association of Securities Dealers, Inc. ("NASD") is expected to
view the Exchange Capital Securities as interests in a "direct participation
program" (as defined in Rule 2810 of the NASD's Conduct Rules). Broker-dealers
who are members of the NASD may participate in a public offering of a direct
participation program only in accordance with the terms of said Rule 2810.
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VALIDITY OF EXCHANGE CAPITAL SECURITIES
Certain matters of Delaware law relating to the validity of the Exchange
Capital Securities will be passed upon by Richards, Layton & Finger, special
Delaware counsel to the Company and the Trust. Certain legal matters relating
to the validity of the Exchange Subordinated Debentures and the Exchange
Guarantee will be passed upon for the Company by Troutman Sanders LLP, Atlanta,
Georgia. Certain matters relating to United States federal income tax
considerations will be passed upon for the Company by Troutman Sanders LLP.
Certain legal matters relating to English law, including taxation, will be
passed upon for the Company by Allen & Overy, London, England.
Troutman Sanders LLP will rely, without independent
investigation, upon Richards, Layton & Finger and Allen & Overy with respect
to matters relating to Delaware and English law, respectively. Troutman
Sanders LLP will rely, without independent investigation, upon Shearman &
Sterling, New York, New York, with respect to matters relating to New York law.
EXPERTS
The consolidated financial statements of Southern Investments UK plc
(Successor Company) as of March 31, 1996 and for the period from inception
(June 23, 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 Prospectus 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.
At the request of the board of directors of SWEB, Ernst & Young, Chartered
Accountants, tendered their resignation, which was accepted effective
September 18, 1995, as independent auditors of SWEB, the reports of which did
not contain an adverse opinion or a disclaimer of opinion for fiscal years
1995 or 1994. Nor were such reports modified as to uncertainty, audit scope,
or accounting principles. During fiscal years 1995 and 1994, and during the
interim periods of fiscal year 1996 preceding September 18, 1995, there were
no unresolved disagreements with Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have warranted reference to the subject matter of such
disagreement(s) in connection with its reports.
On September 18, 1995, the board of directors of the Company approved the
engagement of Arthur Andersen, Independent Public Accountants, as independent
auditors of SWEB. Arthur Andersen has been the independent auditor of the
Company since its inception (June 23, 1995), and is the independent auditor of
Southern, the ultimate parent of SWEB.
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
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.
120
<PAGE>
GLOSSARY
6.375% Notes: Direct, unsecured and unsubordinated obligations of the
Company due 2001 in the aggregate principal amount of $168,000,000 ranking
pari passu with all other unsecured and unsubordinated obligations of the
Company.
6.800% Notes: Direct, unsecured and unsubordinated obligations of the
Company due 2006 in the aggregate principal amount of $332,000,000 ranking
pari passu with all other unsecured and unsubordinated obligations of the
Company.
Accentacross: Accentacross Limited, a Director of the Company.
Additional Amounts: Additional amounts that the Company may be required to
pay such that the holder of Subordinated Debentures 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.
Additional Sums: The additional amounts as may be necessary in order that
the amount of any distribution then due and payable by the Trust on the
outstanding Capital Securities and Common Securities shall not be reduced as a
result of any additional taxes, duties and other governmental charges to which
the Trust has become subject as a result of a Tax Event.
Affiliate: As defined in Rule 144 under the Securities Act.
Book-Entry Depositary: Bankers Trust Company.
Book-Entry Interests: Certificateless depositary interests to be issued by
the Book-Entry Depositary to DTC.
Business Day: "Business Day" means a day other than (i) a Saturday or a
Sunday, (ii) a day on which banks in New York, New York or Bristol, England
are authorized or obligated by law or executive order to remain closed, or
(iii) a day on which the Indenture Trustee's Corporate Trust Office or
Institutional Trustee's principal corporate trust office is closed for
business.
Business Trust Act: Chapter 38 of Title 12 of the Delaware Code, 12 Del. .
(S) (S) 38 et seq., as it may be amended from time to time, or any successor
legislation.
CAGR: Compound annual growth rate.
Capital Securities: The Original Capital Securities and the Exchange Capital
Securities.
Capital Security Beneficial Owners: Persons owning Capital Securities
representing preferred undivided beneficial interests in the Trust.
Capital Securities Guarantee: The Original Guarantee and the Exchange
Guarantee.
Capital Trust Voting Class: The holders of the Capital Securities when
voting as a single class.
Cedel Bank: Cedel Bank, societe anonyme.
CFDs: Contracts for differences.
Code: The US Internal Revenue Code of 1986, as amended.
121
<PAGE>
Commission: The Securities and Exchange Commission.
Common Securities: The securities representing undivided beneficial
interests in the assets of the Trust with such terms as may be set out in the
Declaration.
Company: Southern Investments UK plc.
Creditor: Any person to whom any debts, obligations, costs, expenses and
taxes, except for United States withholding taxes, are owed by the Company
under the provisions of the Trust as set forth in the Declaration.
Declaration: The Amended and Restated Declaration of Trust dated as of
January 29, 1997 relating to the Trust among the Company, as Sponsor, Bankers
Trust Company, as Institutional Trustee, Bankers Trust (Delaware), as Delaware
Trustee, and the Regular Trustees named therein.
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 Interests.
Definitive Registered Debenture: The definitive Subordinated Debentures in
registered form that the owners of interests in a Book-Entry Interest will be
entitled to in certain circumstances described under "Description of the
Exchange Subordinated Debentures--Form, Book-Entry Procedures and Transfer--
Definitive Subordinated Debentures."
Delaware Trustee: Bankers Trust (Delaware).
Depositary: DTC and its successor.
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.
DOL: U. S. Department of Labor
DTC: The Depository Trust Company.
DWAC: The DTC Deposit/Withdraw at Custodian system.
Electricity Act: The Electricity Act 1989.
Electricity Business Agreement: A collective bargaining agreement to which
all SWEB employees who are not party to a personal employment contract are
subject.
EMFs: Electromagnetic fields.
ERISA: Employee Retirement Income Statement Act of 1974, as amended.
Equity Interest: Any interest in an entity other than an instrument which is
treated as indebtedness under applicable local law and which has not
substantial equity features and specifically includes a beneficial interest in
a trust.
Euroclear: The Euroclear System.
Exchange Act: The US Securities Exchange Act of 1934, as amended.
Exchange Capital Securities: The $82,00,000 aggregate liquidation amount of
8.23% Subordinated Capital Income Securities to be issued by the Trust in
exchange for Original Capital Securities.
122
<PAGE>
Exchange Guarantee: The Capital Securities Guarantee Agreement from the
Company in favor of Bankers Trust Company, as Capital Securities Guarantee
Trustee for the benefit of the holders of the Exchange Capital Securities to
be issued in exchange for the Original Guarantee.
Exchange Offer: This exchange offer pursuant to which the Exchange Capital
Securities, the Exchange Subordinated Debentures and the Exchange Guarantee,
each covered by a registration statement filed by the Company and the Trust,
and having the same terms (except with respect to the transfer restrictions
and, in certain circumstances, an increased distribution rate) as the Original
Capital Securities, the Original Guarantee and the Original Subordinated
Debentures, respectively, are offered in exchange for the Original Capital
Securities, the Original Guarantee and the Original Subordinated Debentures,
respectively.
Exchange Securities: The Exchange Capital Securities, the Exchange Guarantee
and the Exchange Subordinated Debentures.
Exchange Subordinated Debentures: The $84,537,000 aggregate liquidation
amount of Exchange Subordinated Debentures due 2027 to be issued by the
Company to the Trust in exchange for Original Subordinated Debentures.
Expiration Date: July 25, 1997, unless the Exchange Offer is extended by the
Company or the Trust (in which case the term Expiration Date shall mean the
latest date and time to which the Exchange Offer is extended).
Extension Period: A deferral period not exceeding 10 consecutive semi-annual
interest periods in which the Company has the right to defer payments of
interest on the Subordinated Debentures, provided that no Extension Period may
extend beyond the Stated Maturity Date.
Financial Institution: A securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business.
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.
GDP: Gross domestic product.
Georgia Power: Georgia Power Company, a subsidiary of Southern.
Global Capital Securities: Capital Securities represented by one or more
Capital Securities in registered, global form.
Guarantee Payments: Certain payments or distributions with respect to the
Capital Securities to the extent not paid or made by the Trust and payable
under the Capital Securities Guarantee.
Holdings: Southern Investments UK Holdings Limited, the direct parent
company of the Company.
Indenture: The Indenture dated as of January 29, 1997 between the Company,
Bankers Trust Company, as trustee, and Bankers Trust Luxembourg, as paying and
transfer agent.
Indenture Trustee: Bankers Trust Company.
Indirect Participants: Persons that hold interests in the Book-Entry
Interest through persons that have accounts with DTC.
123
<PAGE>
Initial Purchasers: Lehman Brothers Inc. and J.P. Morgan Securities Inc., as
initial purchasers of the Capital Securities.
Institutional Trustee: Bankers Trust Company.
Interest Payment Date: Semi-annual dates, in arrears, on February 1 and
August 1 of each year, commencing on August 1, 1997, when interest payments
are payable.
IRS: Internal Revenue Service.
Investment Company Event: As a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, there is more than an insubstantial risk that the Trust is or will
be considered an "investment company" which is required to be registered under
the Investment Company Act of 1940.
Luxembourg Wort: A leading newspaper having general circulation in
Luxembourg.
Mighteager: Mighteager Limited, a Director of the Company.
Mission Energy: Mission Energy Company.
MMC: The UK Monopolies and Mergers Commission.
NASD Automated Quotation System: The automated quotation system of the
National Association of Securities Dealers.
NFFOs: Obligations of RECs to obtain a specified amount of generating
capacity from non-fossil fuel sources.
NGC: The National Grid Company plc, which is wholly-owned by NGG.
NGC Settlements Limited: A subsidiary of NGC.
NGG: The National Grid Group plc.
Noon Buying Rate: 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.
Non-franchise: Competitive sector of the electricity market.
Non-Franchise Supply Customers: Customers with demand greater than 100kW.
Original Capital Securities: The $82,000,000 aggregate liquidation amount of
8.23% Subordinated Capital Income Securities issued by the Trust on January
29, 1997.
Original Guarantee: The Capital Securities Guarantee Agreement dated as of
January 29, 1997 from the Company in favor of Bankers Trust Company, as
Capital Securities Guarantee Trustee for the benefit of the holders of
Original Capital Securities.
Original Securities: The Original Capital Securities, the Original Guarantee
and the Original Subordinated Debentures.
124
<PAGE>
Original Subordinated Debentures: The $84,537,000 aggregate liquidation
amount of 8.23% Subordinated Debentures due 2027 issued by the Company to the
Trust on January 29, 1997.
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.
Participating Broker-Dealer: Any broker-dealer who acquired the Capital
Securities for its own account as a result of market-making or other trading
activities.
Paying Agent: Initially, the Institutional Trustee and any co-paying agent
chosen by the Institutional Trustee and acceptable to the Regular Trustees and
the Company.
PES license: A Public Electricity Supply license.
PESs: The public electricity (or first tier) suppliers.
PMDC: Power Markets Development Company, an indirect 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.
PSB: NGG's pumped storage electricity generation business.
PTCE's: Prohibited transaction class exemptions.
Purchase Money Indebtedness: Indebtedness evidenced by a note, debenture,
bond or other instrument.
Qualified Institutional Buyers: As defined in Rule 144A under the Securities
Act.
RECs: The 12 regional electricity companies in England and Wales licensed to
distribute, supply and, to a limited extent, generate electricity.
RPI: Retail Price Index.
Redemption Price: As defined in "Description of the Exchange Capital
Securities--Redemption Price."
Registration Rights Agreement: The Registration Rights Agreement dated as of
January 29, 1997 among the Company, the Trust and the Initial Purchasers for
the benefit of the holders of the Capital Securities.
Regulator: The Director General of Electricity Supply in Great Britain.
125
<PAGE>
Regular Trustees: See "Southern Investments UK Capital Trust I."
Relevant Date: Whichever is the later of (i) the date on which a payment on
the Subordinated Debentures 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.
Securities Act: The United States Securities Act of 1933, as amended.
Secretary of State: The UK Secretary of State for Trade and Industry.
SEI Holdings, Inc.: A subsidiary of Southern.
Senior Notes: The 6.375% Notes and the 6.800% Notes.
SFAS: US GAAP Statement of Financial Accounting Standards.
SFAS No. 71: Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation."
Shareholders' Agreement: Shareholders' Agreement dated July 1, 1996 among
SEI-Europe PMDC UK and Holdings.
Southern: The Southern Company, the ultimate parent company of the Company.
Southern Company system: Southern and its subsidiaries.
Southern Energy: Southern Energy, Inc., an affiliate of the Company and a
wholly-owned subsidiary of Southern.
Special Event: A Tax Event or an Investment Company Event.
Staff: The staff of the Securities and Exchange Commission.
Stated Maturity Date: February 1, 2027, the scheduled maturity date of the
Subordinated Debentures.
Subordinated Debentures: The Original Subordinated Debentures and the
Exchange Subordinated Debentures.
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.
Tax Event: As defined in "Description of the Capital Exchange Securities--
Special Event Redemption or Distribution."
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.
126
<PAGE>
Trust: Southern Investments UK Capital Trust I, a statutory business trust
formed under the Delaware Business Trust Act.
Trust Indenture Act: The Trust Indenture Act of 1939, as amended.
Trust Securities: The Common Securities and the Capital Securities.
Trustees: The Regular Trustees, the Institutional Trustee and the Delaware
Trustee are sometimes collectively referred to as the Trustees.
Unit: Electricity expressed in kilowatt hours for determining the maximum
average price that can be charged by a REC.
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 GAAP: Accounting principles generally accepted in the United States of
America.
U.S. Holder: A holder of Capital Securities who or that is for United States
federal income tax purposes (i) a citizen or individual resident of the United
States, (ii) a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income tax
regardless of its source, or (iv) a trust if both: (A) a court within the
United States is able to exercise primary jurisdiction over the administration
of the trust and (B) one or more United States trustees or fiduciaries have
authority to control all substantial decisions of the trust.
127
<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 Inception (June 23,
1995) to March 31, 1996................................................ F-4
Consolidated Statement of Changes in Stockholder's Equity for the Period
From Inception (June 23, 1995) to March 31, 1996....................... F-5
Consolidated Statement of Cash Flows for the Period From Inception (June
23, 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-20
Report of Independent Public Accountants.................................. F-21
Financial Statements
Consolidated Balance Sheet as of March 31, 1995......................... F-22
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-23
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-24
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-25
Notes to the Consolidated Financial Statements............................ F-26
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 December 31, 1996.. F-36
Unaudited Condensed Consolidated Statements of Income for the Nine
Months Ended December 31, 1995 and 1996................................ F-37
Unaudited Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended
December 31, 1996...................................................... F-38
Unaudited Condensed Consolidated Statement of Cash Flows for the Period
from Inception (June 23, 1995) to December 31, 1995.................... F-39
Notes to the Unaudited Condensed Consolidated Financial Statements........ F-40
Unaudited Pro Forma Consolidated Financial Information.................... F-42
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
March 31, 1996........................................................... F-43
Unaudited Pro Forma Consolidated Statement of Income for the Nine Months
Ended December 31, 1995.................................................. F-44
</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 inception (June 23, 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 inception (June 23, 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 2,101
Less accumulated depreciation............................. 20 34
----- -----
Property, plant, and equipment, net..................... 1,207 2,067
----- -----
OTHER ASSETS:
Investments (Note 11)..................................... 22 37
Prepaid pension cost (Note 2)............................. 95 163
Goodwill, net of accumulated amortization of (Pounds)2
($3)..................................................... 173 296
----- -----
Total other assets...................................... 290 496
----- -----
CURRENT ASSETS:
Cash and cash equivalents................................. 20 34
Investments (Note 11)..................................... 26 45
Receivables:
Customer accounts, less provision for uncollectibles of
(Pounds)17 ($29)........................................ 95 163
Other.................................................... 20 34
----- -----
Receivables, net.......................................... 115 197
Materials and supplies.................................... 3 5
Prepaid expenses.......................................... 25 43
----- -----
Total current assets.................................... 189 324
----- -----
Total assets............................................ 1,686 2,887
===== =====
<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...................... 500 856
Retained earnings/(deficit)............................... (132) (226)
----- -----
Total stockholder's equity.............................. 368 630
----- -----
OTHER NON-CURRENT LIABILITIES
Deferred income taxes (Note 6)............................ 352 603
Provision for loss contracts (Note 4)..................... 62 106
Other..................................................... 66 113
----- -----
Total other non-current liabilities..................... 480 822
----- -----
CURRENT LIABILITIES:
Short-term debt (Note 10)................................. 650 1,113
Accounts payable.......................................... 45 77
Accrued income taxes...................................... 19 33
Unearned revenue.......................................... 10 17
Other..................................................... 114 195
----- -----
Total current liabilities............................... 838 1,435
----- -----
COMMITMENTS AND CONTINGENT MATTERS (Notes 2, 4 and 10)
Total stockholder's equity and liabilities.............. 1,686 2,887
===== =====
</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 INCEPTION (JUNE 23, 1995) TO MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S. $
-------- ------
<S> <C> <C>
OPERATING REVENUES............................................ 481 823
COST OF SALES................................................. 318 544
--- ---
GROSS MARGIN.................................................. 163 279
--- ---
OPERATING EXPENSES:
Maintenance.................................................. 21 36
Depreciation and amortization................................ 22 38
Selling, general, and administrative......................... 34 58
--- ---
Total operating expenses................................... 77 132
--- ---
Operating income........................................... 86 147
--- ---
OTHER INCOME (EXPENSE):
Interest income.............................................. 7 12
Interest expense............................................. (28) (48)
Gain on sale of investments (Note 11)........................ 14 24
Other, net................................................... 2 3
--- ---
Total other expense........................................ (5) (9)
--- ---
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... 81 138
PROVISION FOR INCOME TAXES.................................... 28 47
--- ---
INCOME FROM CONTINUING OPERATIONS............................. 53 91
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT, net of in-
come tax effect of (Pounds)3 ($5) (Note 10).................. 6 10
--- ---
NET INCOME.................................................... 59 101
=== ===
</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 INCEPTION (JUNE 23, 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, June 23, 1995...................... 0 0 0 0
Net income................................. 0 59 59 101
Proceeds from sale of National Grid Hold-
ings reflected as dividends
(Note 12)................................. 0 (191) (191) (327)
Conversion of advances to equity (Note
12)....................................... 315 0 315 539
Equity contribution (Note 12).............. 185 0 185 317
--- ---- ---- ----
BALANCE, March 31, 1996..................... 500 (132) 368 630
=== ==== ==== ====
</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 INCEPTION (JUNE 23, 1995) TO MARCH 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S.$
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. 59 101
------ -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ............................................ 20 34
Amortization of goodwill................................. 2 3
Gain on sales of investments............................. (14) (24)
Gain on early extinguishment of debt..................... (9) (15)
Changes in assets and liabilities:
Receivables, net....................................... 6 10
Accounts payable....................................... (39) (66)
Accrued income taxes................................... 5 9
Other, net................................................. (5) (9)
------ -------
Total adjustments.................................... (34) (58)
------ -------
Net cash provided by operating activities............ 25 43
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Consideration for purchase of SWEB paid to former share-
holders................................................... (1,023) (1,752)
Capital expenditures....................................... (37) (63)
Proceeds received from the disposal of investments......... 270 462
------ -------
Net cash used in investing activities................ (790) (1,353)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from Parent (Note 12)............... 315 539
Capital contribution received (Note 12).................... 185 317
Payments of dividends (Note 12)............................ (191) (327)
Payment of preacquisition dividends........................ (75) (128)
Proceeds from issuance of notes............................ 650 1,113
Proceeds from issuance of bonds............................ 597 1,022
Repayment of bonds......................................... (696) (1,192)
------ -------
Net cash provided by financing activities............ 785 1,344
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................... 20 34
CASH AND CASH EQUIVALENTS, beginning of period............... 0 0
------ -------
CASH AND CASH EQUIVALENTS, end of period..................... 20 34
====== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest..................................... 21 36
====== =======
Cash paid for income taxes................................. 26 45
====== =======
Business acquisitions:
Fair value of assets acquired............................ 1,940 3,322
Less equity contribution to purchase common stock...... (500) (856)
Less bonds issued to purchase common stock............. (523) (896)
Less noncash consideration issued in exchange for com-
mon stock............................................. (40) (68)
------ -------
Liabilities assumed...................................... 877 1,502
====== =======
Non-cash conversion of advances from Parent to equity (Note
12)....................................................... 315 539
====== =======
</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 (together with its
subsidiaries "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 approximately 84% of its shares (the
"Acquisition"). Accordingly, the Company has designated September 18, 1995 as
the effective date of the Acquisition (the "Acquisition Date"). 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 distribute,
supply, 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
accompanying financial statements 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 U.S. 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 (Note 3) and therefore the provisions of
SFAS No. 71 do not apply. Financial statements presented in accordance with
SFAS No. 71 contain deferred items which have not yet been included in rates
charged to customers in compliance with the respective regulatory authorities,
but which would have been included in the income statement of enterprises in
general under U.S. GAAP. The accompanying financial statements of the Company
do not contain such deferrals.
The 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
F-7
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
significant influence over operating and financial policies are accounted for
using the equity method. Other investments are accounted for using the cost
method (Note 11).
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. $1.7123, 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 December 31, 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.
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 property, plant, and
equipment is provided by using primarily composite straight-line rates (Note
9), which approximate 3.1% per year (2.5% per year for depreciable utility
plant in service).
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
F-8
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incurred. This policy has been adopted effective October 1, 1995 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.
Prior to this change in accounting policy the Company expensed all IT
consultancy and development costs as incurred. The effect of adopting this
policy has resulted in the capitalization of (Pounds)3.0 million in the three
months to December 31, 1995, (Pounds)5.2m of costs in the year ended March 31,
1996 and (Pounds)8.6m of costs in the nine months to December 31, 1996. If the
policy had been adopted by the Predecessor Company, the amount that would have
been capitalized at acquisition 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 undiscounted operating cash flow
analysis) is reviewed annually or sooner if events or changes in circumstances
indicate that the carrying amount may exceed fair value, in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Goodwill shown in the accompanying consolidated
financial statements relates to the acquisition of SWEB (Note 7).
Investments
The Company accounts for its current investments in accordance with 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 Company's long-term investments consist of investments accounted for using
the cost method (See Note 11).
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.
F-9
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
which 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
inception (June 23, 1995) through March 31, 1996.
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 ($8.2 million) for the period from inception (June
23, 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):
F-10
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1996
--------- ---------
(Pounds) $
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits................................... (488) (836)
Nonvested benefits................................ 0 0
---- -----
Accumulated benefit obligation...................... (488) (836)
Effect of future increases in compensation.......... (37) (63)
---- -----
Projected benefit obligation........................ (525) (899)
Less:
Fair value of plan assets....................... 642 1,099
Unrecognized net gain........................... (22) (38)
---- -----
Prepaid asset recognized in the consolidated balance
sheets............................................. 95 162
==== =====
</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
inception (June 23, 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 38
Actual return on plan assets................................ (50) (86)
Net amortization and deferral............................... 22 38
--- ---
Net pension income.......................................... (4) (7)
=== ===
</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.
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 = 2% 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
twelve months from April 1, 1996, followed by an efficiency factor of X = 3%
for each year until March 31, 2000, before an allowed increase for inflation.
F-11
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
sets escalating electricity purchase prices at predetermined levels. The
Company has recognized an accrual at the acquisition date for the excess of
these Teesside power purchase costs in each year over an estimate of the
equivalent pool costs in that respective year. These costs have been
discounted at an appropriate rate to today's present value of (Pounds)60
million ($103 million). Over the past two years, the pool prices have been
less than anticipated when the accrual was recognized. The Company is
continuing to review the trend of pool prices and an adjustment to the
provision may be required in the future.
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 ($5 million) for the period from inception (June 23, 1995) to March
31, 1996. At March 31, 1996, estimated minimum rental commitments for
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------
((Pounds)M) ($M)
<S> <C> <C>
Fiscal year:
1997.................................................. 2 3
1998.................................................. 2 3
1999.................................................. 2 3
2000.................................................. 1 2
2001.................................................. 1 2
Thereafter............................................ 10 17
--- ---
Total minimum payments.............................. 18 30
=== ===
</TABLE>
Labor Subject to Collective Bargaining Agreements
Substantially all of SWEB's employees are subject to one of two 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-12
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Change of Government in the UK
On May 1, 1997 a new Labour government in the UK was elected.The Labour
Party's election manifesto includes the commitment to introduce "a one-off
windfall levy on the excess profits of privatised utilities". The total amount
of government revenue to be raised by the tax and the allocation of the tax
between utilities is scheduled to be announced as part of the government's
budget in early July 1997. There can be no assurance that the introduction of
a windfall tax or other taxes or policies of the new government will not
adversely affect the Company.
Pension Contingency
The Pensions Ombudsman (a UK statutorily appointed independent arbitrator)
has issued a determination in favor of complaints made by members of the
Electricity Supply Pension Scheme ("ESPS") relating to another employer's use
of ESPS surplus to offset the employer's costs of providing enhanced pensions
on redundancies and certain other items. Under that determination the Pensions
Ombudsman directed the employer to pay into ESPS the amount of that use of the
surplus plus interest. The determination was challenged in the High Court by
the employer, and the High Court upheld the employer's appeal in a judgment
delivered on June 10, 1997. The High Court also granted the complainants leave
to appeal to a higher court. No date has yet been set for any hearing in the
higher court. If the complainants' appeal is successful either at the higher
court or on a subsequent appeal to the House of Lords, it will have an adverse
effect on SWEB. No payments are required until such challenge has been heard. It
is not practical to make an estimate of the exposure at the present time.
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 inception (June 23, 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...... 147 252 450 770 33 57 (149) 255 481 824
Operating income........ 72 123 13 22 1 2 0 0 86 147
Depreciation and amorti-
zation................. 16 27 1 2 5 9 0 0 22 38
Total assets employed at
period-end............. 1,422 2,435 102 175 162 277 0 0 1,686 2,887
Capital expenditures.... 32 55 1 2 4 7 0 0 37 64
</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. The
eliminations above primarily relate to internal sales from the distribution
business to the supply business for use of the network. Such sales are priced
at rates applicable to SWEB and other suppliers operating in the SWEB
franchise area.
6. INCOME TAXES
Details of the income tax provision for the period from inception (June 23,
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 21
<S> <C> <C>
Deferred.................................................... 19 32
--- ---
Total provision........................................... 31 53
=== ===
</TABLE>
F-13
<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............. 341 584
Pensions..................................................... 32 55
--- ---
Total...................................................... 373 639
--- ---
Deferred tax assets:
Acquisition related accruals................................. 21 36
Other........................................................ 0 0
--- ---
Total...................................................... 21 36
--- ---
<CAPTION>
Net deferred tax liabilities................................... 352 603
0 0
Portion included in current liabilities, net................... -------- ---
Accumulated deferred income taxes in the consolidated balance 352 603
sheets........................................................ ======== ===
</TABLE>
A reconciliation of the UK statutory rate to the effective income tax rate
for the period from inception (June23, 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
The Acquisition of SWEB in the amount of (Pounds)1.063 ($1.820) billion was
accomplished through the purchase of shares via both cash and non-cash
consideration (see accompanying consolidated statement of cash flows) between
July and November 1995. The Company purchased 14% of SWEB through open market
purchases during July and August 1995. On August 25, 1995, the Company
acquired an additional 16% of SWEB through open market purchases. On August
31, 1995, the Company's offer to purchase all shares of SWEB was endorsed by
its Directors. By September 18, 1995, the Company had gained effective control
of approximately 84% of its shares, and, therefore, effective control of SWEB.
The Company acquired the remaining shares by November 27, 1995, the date on
which the notice for compulsory acquisition from non-assenting shareholders
expired. The Company's equity in the earnings of SWEB prior to September 18,
1995 and the minority interest in the earnings of SWEB subsequent to the
Acquisition Date were each immaterial and, accordingly, are not separately
presented in the accompanying consolidated statement of income.
The Acquisition was accounted for using the purchase method of accounting in
accordance with APB No. 16, "Accounting for Business Combinations" ("APB No.
16"). The purchase price of SWEB has been allocated to the underlying assets
and liabilities based on estimated fair values at the acquisition date. The
acquisition cost exceeded the fair market value of net assets acquired,
including (Pounds)28 million ($48 million) of acquisition related costs, by
(Pounds)175 million ($300 million) and is considered goodwill. The operating
results of
F-14
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SWEB have been included in the Company's financial statements from the
effective date of the Acquisition. The revisions to the estimate of fair
values on the Acquisition Date were not material; the final valuations are
shown in the "Notes to the Unaudited Condensed Consolidated Financial
Statements" for the nine months ended December 31 , 1996.
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 2,037
Current assets........................................... 317 543
Investments.............................................. 258 442
Goodwill................................................. 175 300
Current liabilities...................................... (244) (418)
Other liabilities........................................ (633) (1,084)
------ ------
Purchase price........................................... 1,063 1,820
====== ======
</TABLE>
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 by the end
of calendar 1997, 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 44 11 19
Utilized....................................... (2) (3) (5) (9)
--- --- --- ---
Balance at March 31, 1996....................... 24 41 6 10
=== === === ===
</TABLE>
Liabilities existing at March 31, 1996 in respect of business disposals
represent outstanding contractual commitments to the respective purchasers,
which will be resolved by March, 1999.
The following pro forma information has been prepared assuming that the
Acquisition had occurred at the beginning of the respective periods. This pro
forma information includes adjustments for depreciation expense resulting from
the fair valuation of the assets upon acquisition, amortization of goodwill
resulting from the excess of the fair values of the assets minus liabilities
over the purchase price, incremental interest expense resulting from the fair
valuation of debt obligations upon acquisition, interest expense that would
have been incurred to finance the acquisition as if they were incurred at the
beginning of the period, and the exclusion of the Company's gain on sale of
its investment in NGG and its acquisition bid defense costs. The pro forma
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been had the
Acquisition occurred at the beginning of the respective periods, nor is the
information necessarily indicative of the results of operations which may
occur in the future.
F-15
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31
-----------------------------
1996 1995
-------------- --------------
(Pounds) $ (Pounds) $
<S> <C> <C> <C> <C>
Operating Revenues (in millions) ........... 780 1,336 776 1,329
Net income (in millions).................... 54 92 47 80
</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 33,000 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 effects 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 ($428 million), resulted in an unrealized gain of
(Pounds)11 million ($19 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-16
<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 1,923
Non-network land and buildings........................ 41 70
Fixtures and equipment................................ 48 82
Vehicles and mobile plant............................. 13 22
------ -----
1,227 2,100
Accumulated depreciation.............................. (20) (34)
------ -----
Property, plant, and equipment, net................... 1,207 2,066
====== =====
</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........................ 325 556
Borrowings under revolving credit facility................. 160 274
Short term notes--banks.................................... 138 236
Loan notes to former shareholders.......................... 27 46
--- -----
650 1,112
=== =====
</TABLE>
The weighted average balance of debt outstanding during the period was
(Pounds)605 million ($1,036 million) at a weighted average interest rate of
8.7%.
At March 31, 1996, the Company had in place a (Pounds)325 million ($556
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 ($471 million) revolving credit
facility with certain banks, under which (Pounds)160 million ($274 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
F-17
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 2002. Accordingly, these notes are classified as current
liabilities in the accompanying balance sheet. Also, on October 6, 1995 and on
November 24, 1995, the Company issued a total of (Pounds)597 million ($1,022
million) of Secured Floating Rate Bonds to finance the acquisition of SWEB
which were redeemed on February 8, 1996.
During the period, SWEB purchased from, and extinguished certain debt held
by, the UK government. Shortly after the Acquisition Date, management had all
the facts necessary to complete a calculation of the fair value of such debt.
The principal and interest amounts to be paid and relevant current market
interest rates were known, permitting a fair calculation based on the present
value of the amounts to be paid discounted at an appropriate market interest
rate, in accordance with APB No. 16. The terms of such debt gave SWEB no
redemption right (except at a redemption premium considered by SWEB to be not
economically feasible), unless the UK government were to offer the debt for
public sale.
On November 21, 1995, the Company learned of the UK government's intent to
conduct a public auction of a portion of the UK RECs' debt and subsequently
submitted a bid to the UK government to redeem such debt for (Pounds)98
million ($168 million), together with accrued interest. The offer made was
below the fair value of the debt at the Acquisition Date as a result of two
changes in circumstances which were not anticipated by SWEB. First, the UK
government elected to hold the debt auction. Because the premium on redemption
in excess of the par value of the debt is not deductible by SWEB, the UK
government agreed to apply a premium in SWEB's bid reflecting the present
value of the income tax related to the deduction for interest expense which
SWEB would no longer be able to deduct once the debt was extinguished. Second,
the market's perception of SWEB's credit risk changed due to the acquisitions
of several other RECs which occurred in late 1995 and uncertainty in the
market with respect to the future debt levels of SWEB following the
Acquisition.
Consequently, the market rate of interest on similar debt had increased from
the time of the Acquisition to the auction date. The premium applied by the UK
government and the higher market interest rate allowed SWEB to offer a price
for the redemption of the debt which was lower than such debt's fair value
upon Acquisition. The UK government accepted SWEB's offer on February 1, 1996.
Accordingly, the Company recorded an extraordinary gain on the early
extinguishment of this debt in the amount of (Pounds)6 million ($10 million),
net of taxes of (Pounds)3 million ($5 million). This gain is nonrecurring in
nature as it is the result of changes in circumstances after the fair
valuation of such debt resulting from the application of APB No. 16, which
valuation was finalized shortly after the Acquisition Date.
11. SALE OF INVESTMENTS
The Company's long-term investments accounted for under the cost method
consist of its 7.69% ownership of Teesside (Note 4), the fair value of which
is not readily determinable. The Company's short-term investments are
classified as available-for-sale under SFAS No. 115, the fair value of which
approximated cost at March 31, 1996.
During the period, SWEB sold its share of The National Grid Holding plc
("NGH") into the market, following the listing of the NGH shares on the London
Stock Exchange on December 11, 1995. At the Acquisition Date, the eventual
listing of shares in NGH was not certain as it required numerous actions by
the 12 RECs, NGH and the UK government followed by the consent of the
shareholders given at meetings of each of the 12 RECs on the terms of a
listing. Regardless of the outcome of the above uncertainties, the Company
intended to retain its investment even if such listing did ultimately occur.
Accordingly, management determined that it had all the facts necessary to
complete a calculation of the fair value of its long term investment in NGH,
and it utilized a discounted cash flow methodology to determine the asset's
fair value shortly after the Acquisition
F-18
<PAGE>
SOUTHERN INVESTMENTS UK PLC AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Date in accordance with APB No. 16. The Company's valuation of (Pounds)199
million ($341 million) was within the range of independent appraisals of NGH
performed during the same period.
Subsequent to the Acquisition Date, certain facts and circumstances changed
which increased the value of the Company's investment in NGH. First, the
listing of shares was structured in a manner found acceptable by the
shareholders of each of the RECs, thereby transforming the Company's illiquid
investment into a liquid investment. Additionally, while the Company viewed
its investment in NGH as long-term in nature at the Acquisition Date, the
acquisition of SWEB and the acquisition of several RECs subsequent to the
Acquisition Date caused the UK government to be concerned that the listing of
NGH would not result in NGH being broadly held by the public and that the NGH
would be controlled by the holding companies that had acquired, or announced
plans to acquire, RECs. As such, at the insistence of the UK government, each
REC, including SWEB, agreed to dispose of its investment in NGH within one
year of the listing and that such shares could not be retained by a REC's
parent holding company, such as the Company.
SWEB disposed of its shares over a period of approximately two months
through a series of market transactions. The net proceeds of such sales were
(Pounds)201 million ($344 million) resulting in a pretax gain of (Pounds)14
million ($24 million). (Further proceeds of (Pounds)12 million were received
from the sale of shares transferred to SWEB's former shareholders and bring
the total proceeds received to (Pounds)213 million.) This gain is nonrecurring
in nature as it is the result of changes in circumstances after the fair
valuation of the investment in NGH resulting from the application of APB No.
16 which valuation was finalized shortly after the Acquisition Date.
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 ($67 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 ($539 million) of
advances from the parent of the Company were converted to share capital, an
equity contribution of (Pounds)185 million ($317 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 ($327 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 ($208 million).
F-19
<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-20
<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-21
<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-22
<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)
Investment income........................ 15 14 1
Other, net............................... 1 2 0
--- --- ---
Total other income (expense)......... 9 12 (2)
--- --- ---
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME
TAXES..................................... 131 151 38
PROVISION FOR INCOME TAXES................. 43 50 13
--- --- ---
INCOME FROM CONTINUING OPERATIONS.......... 88 101 25
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income tax effect of (Pounds)0 for
all periods (Note 12)..................... 0 1 (1)
LOSS ON DISPOSAL OF DISCONTINUED OPERA-
TIONS, 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-23
<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-24
<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................ (53) (66) (28)
Proceeds from sales of investments...... 38 66 26
--- ---- ---
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-25
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
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 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 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 accompanying financial statements 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 U.S. 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 (Note 4) and therefore the
provisions of SFAS No. 71 do not apply. Financial statements presented in
accordance with SFAS No. 71 contain deferred items which have not yet been
included in rates charged to customers in compliance with the respective
regulatory authorities, but which would have been included in the income
statement of enterprises in general under U.S. GAAP. The accompanying
financial statements of the Company do not contain such deferrals.
The 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.
F-26
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 property, plant, and
equipment is provided by using composite straight-line rates, except for
distribution network assets which are charged at 3% for 20 years and 2% for
the remaining 20 years (Note 9), which are approximately 4.2% per year (2.8%
per year for depreciable utility plant in service).
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 fair value
of which approximates cost. The Company's long-term investments are accounted
for using the cost-method and consist of its 7.69% ownership of Teesside (Note
5) the fair value of which is not readily determinable.
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
F-27
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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).
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):
F-28
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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>
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 its common
shares. There were two plans in operation.
The Sharesave Plan, which qualifies as a noncompensatory plan under APB
Opinion No. 25, 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:
F-29
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
March 31, 1993 outstanding and exercisable..................... 3,958,004
1994 activity:
Exercised.................................................... (192,924)
---------
March 31, 1994 outstanding and exercisable................... 3,765,080
1995 activity:
Exercised.................................................... (279,801)
---------
March 31, 1995 outstanding and exercisable................... 3,485,279
Activity to September 17, 1995:
Exercised.................................................... (81,122)
---------
September 17, 1995 outstanding and exercisable............... 3,404,157
=========
</TABLE>
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
F-30
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
announcement meant a further real reduction of 11% in allowable distribution
income for the 12 months starting from April 1, 1996 followed by an efficiency
factor 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 above 100kW were opened to
full competition starting in April 1994.
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-31
<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.
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>
F-32
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR 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,
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 effects of which currently are not estimable.
CFDs have been entered into with UK Power Generators.
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>
F-33
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
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 depending on when such consortia have UK taxable income.
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.
F-34
<PAGE>
SOUTH WESTERN ELECTRICITY PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
176,526 ordinary shares were issued during the year ended March 31, 1995
under South Western Electricity's Sharesave Scheme (Note 3) to employees who
had left the Company. The shares were fully paid up by the former employees 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 ($208.0 million).
F-35
<PAGE>
SOUTHERN INVESTMENTS UK PLC
(SUCCESSOR COMPANY)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) U.S. $
-------- ------
<S> <C> <C>
ASSETS
PROPERTY, PLANT, AND EQUIPMENT................................. 1,298 2,223
Less accumulated depreciation................................. 49 84
----- -----
Property, plant, and equipment, net....................... 1,249 2,139
----- -----
OTHER ASSETS:
Investments................................................... 18 31
Prepaid pension cost.......................................... 103 176
Goodwill, net of accumulated amortization of (Pounds)6($10)... 178 305
----- -----
Total other assets........................................ 299 512
----- -----
CURRENT ASSETS:
Cash and cash equivalents..................................... 2 3
Investments................................................... 20 35
Receivables:
Customer accounts, less provision for uncollectibles of
(Pounds)14 ($24)........................................... 110 188
Other....................................................... 16 27
----- -----
Receivables, net.......................................... 126 215
Materials and supplies........................................ 4 7
Prepaid expenses.............................................. 11 19
----- -----
Total current assets...................................... 163 279
----- -----
Total assets.............................................. 1,711 2,930
===== =====
STOCKHOLDER'S EQUITY AND LIABILITIES
STOCKHOLDER'S EQUITY:
Share capital, (Pounds)1 par value, 500,400,587 shares autho-
rized, issued, and outstanding............................... 500 856
Accumulated deficit (Note 1).................................. (134) (229)
----- -----
Total stockholder's equity............................... 366 627
----- -----
OTHER NON-CURRENT LIABILITIES:
Long-term debt................................................ 300 514
Deferred income taxes......................................... 376 644
Provision for loss contracts.................................. 68 116
Other......................................................... 64 110
----- -----
Total other non-current liabilities....................... 808 1,384
----- -----
CURRENT LIABILITIES:
Short-term borrowings......................................... 332 568
Accounts payable.............................................. 55 94
Accrued income taxes.......................................... 21 36
Unearned revenue.............................................. 15 26
Common dividend declared...................................... 25 43
Other......................................................... 89 152
----- -----
Total current liabilities................................. 537 919
----- -----
COMMITMENTS AND CONTINGENT MATTERS (Note 3)
Total stockholder's equity and liabilities................ 1,711 2,930
===== =====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-36
<PAGE>
SOUTHERN INVESTMENTS UK PLC
(SUCCESSOR COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
SUCCESSOR SUCCESSOR
PRO FORMA COMPANY COMPANY
1995(1) 1996 1996
--------- --------- ---------
(Pounds) (Pounds) U.S.$
<S> <C> <C> <C>
OPERATING REVENUES.............................................................................. 541 602 1,031
COST OF SALES................................................................................... 343 417 714
--- --- -----
GROSS MARGIN.................................................................................... 198 185 317
=== === =====
OPERATING EXPENSES:
Maintenance.................................................................................... 30 26 45
Depreciation and amortization.................................................................. 31 32 55
Selling, general, and administrative........................................................... 57 37 63
--- --- -----
Total operating expenses................................................................... 118 95 163
--- --- -----
Operating income........................................................................... 80 90 154
--- --- -----
OTHER INCOME (EXPENSE):
Interest income................................................................................ 7 1 2
Interest expense............................................................................... (55) (39) (67)
Gain on sale of investment..................................................................... 7 1 2
Other, net..................................................................................... 3 4 7
--- --- -----
Total other expense........................................................................ (38) (33) (56)
=== === =====
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........................................... 42 57 98
PROVISION FOR INCOME TAXES...................................................................... (15) (22) (38)
--- --- -----
NET INCOME...................................................................................... 27 35 60
- --------------------------------------------------
=== === =====
</TABLE>
- --------
(1) Pro forma 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 page F-44.
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE>
SOUTHERN INVESTMENTS UK PLC
(SUCCESSOR COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
SUCCESSOR SUCCESSOR
COMPANY COMPANY
1996 1996
--------- ---------
(Pounds) U.S.$
<S> <C> <C>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES............. 52 89
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (54) (93)
Loans to related parties.................................. (2) (3)
Proceeds from property sales.............................. 6 10
Proceeds from sale of fixed asset investments............. 4 7
Disposal of current asset investments, net................ 6 10
---- ----
Net cash used in investing activities................. (40) (69)
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends..................................... (12) (20)
Proceeds of bond issues................................... 300 514
Change in short term borrowings........................... (318) (545)
---- ----
Net cash used in financing activities................. (30) (51)
---- ----
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (18) (31)
CASH AND CASH EQUIVALENTS, beginning of period.............. 20 34
---- ----
CASH AND CASH EQUIVALENTS, end of period.................... 2 3
==== ====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest................................ (39) (67)
==== ====
Cash paid for income tax refunds...................... (9) (15)
==== ====
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-38
<PAGE>
SOUTHERN INVESTMENTS UK PLC
(SUCCESSOR COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 23, 1995) TO DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
(Pounds) $
-------- ------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 73 125
------ ------
CASH FLOWS FORM INVESTING ACTIVITIES:
Consideration for purchase of SWEB paid to former sharehold-
ers......................................................... (1,023) (1,752)
Proceeds from sale of fixed asset investments................ 111 190
Capital expenditures......................................... (23) (39)
------ ------
Net cash used in investing activities....................... (935) (1,601)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from Parent........................... 315 539
Capital contributions received............................... 185 317
Payments of dividends........................................ (75) (128)
Proceeds of bond issues...................................... 597 1,022
Charges in short-term borrowings............................. 139 238
------ ------
Net cash provided by financing activities................... 1,161 1,988
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS......................... 299 512
CASH AND CASH EQUIVALENTS, beginning of period................ 0 0
------ ------
CASH AND CASH EQUIVALENTS, end of period...................... 299 512
====== ======
Cash paid for interest....................................... (8) (14)
Cash received from income tax................................ 6 10
</TABLE>
The Predecessor Company audited consolidated statement of cash flows for the
period from April 1, 1995 to September 17, 1995 is included on page F-25.
The accompanying notes are an integral part of this consolidated statement.
F-39
<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 Predecessor Company audited consolidated statement of cash flows for the
period from April 1, 1995 to September 17, 1995 is included on page F-25.
As shown within the Consolidated Statement of Changes in Stockholder's
Equity on page F-5, the accumulated deficit is due to the proceeds from the
sale of the Company's investment in NGH being reflected as dividends.
The financial statements as of December 31, 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. $1.7123,
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
December 31, 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 nine months ended December 31, 1996 and pro forma
results for the nine months ended December 31, 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 Unaudited Condensed Consolidated Statements of Income show a pro forma
statement of income for the nine months to December 31, 1995. This pro forma
statement comprises 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 for the Predecessor Company for the
period from April 1, 1995 to September 17, 1995, adjusted for the effects of
the acquisition as though it had taken place on April 1, 1995. See page F-44.
F-40
<PAGE>
NOTES TO THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the six months ended September 30, 1996, as required by APB No. 16
the Company completed its assessment of the fair values of assets and
liabilities acquired at the date of Acquisition Date. As a result, goodwill
increased from (Pounds)175 million to (Pounds)183 million. The recorded assets
and liabilities of SWEB immediately prior to the time the Company gained
effective control of SWEB were (Pounds)855 million ($1.464 billion) and
(Pounds)515 million ($882 million), respectively. As a result of applying the
purchase method of accounting, the amount of SWEB's assets recorded on the
books of the Company was increased by (Pounds)927 million ($1.587 billion) to
their fair value of (Pounds)1.782 billion ($3.051 billion), and the amount of
SWEB's liabilities recorded on the books of the Company was increased by
(Pounds)385 million ($659 million) to their fair value of (Pounds)900 million
($1.541 billion). The increase in liabilities included the establishment of
reserves totaling (Pounds)44 million ($75 million) related to staff reductions
and the disposition of ancillary businesses. The resulting difference between
the purchase price of (Pounds)1.065 billion ($1.824 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)183 million ($313 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
($103 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 (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 17
--- ---
Total minimum payments.................................. 18 30
=== ===
</TABLE>
F-41
<PAGE>
Labor Subject to Collective Bargaining Agreements
Substantially all of SWEB's employees are subject to one of two 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.
Change of Government in the UK
On May 1, 1997 a new Labour government in the UK was elected. The Labour
Party's election manifesto includes the commitment to introduce "a one-off
windfall levy on the excess profits of privatised utilities". The total amount
of government revenue to be raised by the tax and the allocation of the tax
between utilities is scheduled to be announced as part of the government's
budget in early July 1997. There can be no assurance that the introduction of
a windfall tax or other taxes or policies of the new government will not
adversely affect the Company.
Pension Contingency
The Pensions Ombudsman (a UK statutorily appointed independent arbitrator)
has issued a determination in favor of complaints made by members of the
Electricity Supply Pension Scheme ("ESPS") relating to another employer's use
of ESPS surplus to offset the employer's costs of providing enhanced pensions
on redundancies and certain other items. Under that determination the Pensions
Ombudsman directed the employer to pay into ESPS the amount of that use of the
surplus plus interest. The determination was challenged in the High Court by the
employer, and the High Court upheld the employer's appeal in a judgment
delivered on June 10, 1997. The High Court also granted the complainants leave
to appeal to a higher court. No date has yet been set for any hearing in the
higher court. If the complainants' appeal is successful either at the higher
court or on a subsequent appeal to the House of Lords, it will have an adverse
effect on SWEB. No payments are required until such challenge has been heard. It
is not practical to make an estimate of the exposure at the present time.
F-42
<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 inception (June 23, 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 unaudited pro
forma consolidated statement of income for the nine months ended December 31,
1995 reflects the historical results of Southern Investments UK plc for the
period from inception (June 23, 1995) to December 31, 1995 and of South
Western Electricity plc for the period from April 1, 1995 to September 17,
1995, adjusted for the effects of the acquisition as though it had taken place
on April 1, 1995. The pro forma adjustments relate to the allocation of fair
values of assets acquired and liabilities assumed, as well as the reversal of
certain non-recurring items.
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-43
<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 inception (June 23, 1995)
to March 31, 1996 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>
IN MILLIONS
-------------------------------------------------------------------------------------
SUCCESSOR PERIOD PREDECESSOR PERIOD PRO FORMA FOR
INCEPTION (JUNE 23, 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 5 (Pounds) U.S. $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues................... 481 299 -- -- -- -- -- 780 1,336
Cost of sales........................ 318 186 -- -- -- -- -- 504 863
--- --- --- --- --- --- --- --- -----
Gross margin......................... 163 113 -- -- -- -- -- 276 473
--- --- --- --- --- --- --- --- -----
Operating expenses:
Maintenance........................ 21 18 -- -- -- -- -- 39 67
Depreciation and amortization...... 22 14 3 2 -- -- -- 41 70
Selling, general, and
administrative.................... 34 41 -- -- -- -- (8) 67 115
--- --- --- --- --- --- --- --- -----
Total operating expenses......... 77 73 3 2 -- -- (8) 147 252
--- --- --- --- --- --- --- --- -----
Operating income................. 86 40 (3) (2) -- -- 8 129 221
--- --- --- --- --- --- --- --- -----
Other income (expense):
Interest income.................... 7 2 -- -- -- -- -- 9 15
Interest expense................... (28) (5) -- -- (1) (32) -- (66) (113)
Gain on sale of investment......... 14 -- -- -- -- -- (14) -- --
Other, net......................... 2 1 -- -- -- -- -- 3 5
--- --- --- --- --- --- --- --- -----
Total other expense.............. (5) (2) -- -- (1) (32) (14) (54) (93)
--- --- --- --- --- --- --- --- -----
Income from continuing operations
before income taxes................. 81 38 (3) (2) (1) (32) (6) 75 128
Provision for income taxes........... 28 13 (1) (1) -- (11) (2) 26 44
--- --- --- --- --- --- --- --- -----
Income from continuing operations.... 53 25 (2) (1) (1) (21) (4) 49 84
=== === === === === === === === =====
</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. It has been provided using composite straight line rates which
approximate 3.1% on an asset value of (Pounds)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 ((Pounds)2 million) on the discounted
provision in respect of Teesside, partly offset by a reduction in interest
to market rates on the HM debt ((Pounds)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 1/8% change in the assumed interest rate
would change income from continuing operations by (Pounds)0.4 million.
(5) Remove gain on the sale of investment in NGG and costs incurred by the
Predecessor Company relating to bid defense associated with the
Acquisition.
The unaudited pro forma consolidated statement of income information above
does not give effect to the Senior Notes issued, nor to the Original Capital
Securities issued. Interest expense for the pro forma fiscal year would have
increased by (Pounds)3 million ($5 million) assuming the Senior Notes were
outstanding as of April 1, 1995. Refer to "Use of Proceeds" and
"Capitalization" on page 33 of this Prospectus for further information
regarding the impact of the Offering on the debt of the Company.
F-44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
DECEMBER 31, 1995
The following unaudited pro forma statement of income 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>
IN MILLIONS
-------------------------------------------------------------------------------------
PRO FORMA
FOR THE
NINE MONTHS
SUCCESSOR PERIOD PREDECESSOR PERIOD ENDED
INCEPTION (JUNE 23, 1995) APRIL 1, 1995 TO DECEMBER 31,
TO DECEMBER 31, 1995 SEPTEMBER 17, 1995 1995
U.S. GAAP U.S. GAAP ADJUSTMENTS U.S. GAAP
------------------------- ------------------ ----------------------- ------------
(Pounds) (Pounds) 1 2 3 4 5 (Pounds) U.S. $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues................... 242 299 -- -- -- -- -- 541 926
Cost of sales........................ 157 186 -- -- -- -- -- 343 587
--- --- --- --- --- --- --- --- ---
Gross margin......................... 85 113 -- -- -- -- -- 198 339
--- --- --- --- --- --- --- --- ---
Operating expenses:
Maintenance........................ 12 18 -- -- -- -- -- 30 51
Depreciation and amortization...... 12 14 3 2 -- -- -- 31 53
Selling, general, and
administrative.................... 24 41 -- -- -- -- (8) 57 98
--- --- --- --- --- --- --- --- ---
Total operating expenses......... 48 73 3 2 -- -- (8) 118 202
--- --- --- --- --- --- --- --- ---
Operating income................. 37 40 (3) (2) -- -- 8 80 137
--- --- --- --- --- --- --- --- ---
Other income (expense):
Interest income.................... 5 2 -- -- -- -- -- 7 12
Interest expense................... (17) (5) -- -- (1) (32) -- (55) (94)
Gain on sale of investment......... 7 -- -- -- -- -- -- 7 12
Other, net......................... 2 1 -- -- -- -- -- 3 5
--- --- --- --- --- --- --- --- ---
Total other expense.............. (3) (2) -- -- (1) (32) -- (38) (65)
--- --- --- --- --- --- --- --- ---
Income from continuing operations
before income taxes................. 34 38 (3) (2) (1) (32) 8 42 72
Provision for income taxes........... 12 13 (1) (1) -- (11) 3 15 26
--- --- --- --- --- --- --- --- ---
Income from continuing operations.... 22 25 (2) (1) (1) (21) 5 27 46
=== === === === === === === === ===
</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. It has been provided using composite straight line rates which
approximate 3.1% on an asset value of (Pounds)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 ((Pounds)2 million) on the discounted
provision in respect of Teesside, partly offset by a reduction in interest
to market rates on the HM debt ((Pounds)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 1/8% change in the assumed interest rate
would change income from continuing operations by (Pounds)0.4 million.
(5) Remove the costs incurred by the Predecessor Company relating to bid
defense associated with the Acquisition.
F-45
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Trust. Neither the delivery of this Pro-
spectus nor any sale made hereunder shall under any circumstance create an im-
plication that there has been no change in the affairs of the Company or the
Trust since the date hereof. This Prospectus does not constitute an offer or
solicitation by anyone in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to anyone to whom it is unlawful to make such offer
or solicitation.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 7
Enforceability of Civil Liabilities...................................... 8
Summary.................................................................. 9
Risk Factors............................................................. 22
Southern Investments UK Capital Trust I.................................. 27
The Company.............................................................. 30
Use of Proceeds.......................................................... 33
Capitalization........................................................... 33
Accounting Treatment..................................................... 34
Exchange Rates........................................................... 34
Selected Financial Data.................................................. 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Business................................................................. 52
The Electric Utility Industry in Great Britain........................... 61
Management............................................................... 68
Certain Relationships and Related Transactions........................... 69
Security Ownership....................................................... 70
The Exchange Offer....................................................... 71
Description of the Exchange Capital Securities........................... 80
Description of the Exchange Guarantee.................................... 94
Description of the Exchange Subordinated Debentures...................... 96
Description of the Original Securities................................... 110
Relationship Among the Capital Securities, the Subordinated Debentures
and the Capital Securities Guarantee.................................... 110
Certain Income Tax Considerations........................................ 112
Certain ERISA Considerations............................................. 117
Plan of Distribution..................................................... 119
Validity of Exchange Capital Securities.................................. 120
Experts.................................................................. 120
Glossary................................................................. 121
Index to the Consolidated Financial Statements........................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$82,000,000
SOUTHERN
INVESTMENTS UK
CAPITAL TRUST I
8.23% Exchange Subordinated Capital Income Securities
(Liquidation Amount $1,000 per Exchange Capital Security)
Fully and Unconditionally Guaranteed,
as Described Herein, by
SOUTHERN
INVESTMENTS UK PLC
---------------
PROSPECTUS
JUNE 25, 1997
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. 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 exemption
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 Energy provide that no present or future director or
officer of Southern Energy 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 Energy 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.
The Bylaws of Southern Energy further provide that each person who is or was
a director of Southern Energy or officer or employee of Southern Energy
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 Energy
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 Energy 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 Energy or officer or employee of
Southern Energy holding one or more Management Positions with respect to the
defense of any such claim, action, suit or proceeding may be advanced by
Southern Energy 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 Energy under such provisions or otherwise.
II-1
<PAGE>
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.
Under the Declaration, the Company, as Sponsor of the Trust, has agreed to
indemnify each of the Trustees, and to hold such Trustees harmless, against
any and all loss, damage, claim, liability or expense incurred without willful
misconduct, negligence or bad faith on their part, arising out of or in
connection with the acceptance or administration of the Declaration, including
the costs and expenses of defending themselves against any claim or liability
in connection with the exercise or performance of any of their powers or
duties under the Declaration.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
Indenture of Southern Investments UK plc relating to the
4.1 Subordinated Debentures*
4.2 Form of Certificate of Subordinated Debentures (included as
Exhibit A to Exhibit 4.1)*
4.3 Certificate of Trust of Southern Investments UK Capital Trust I*
4.4 Amended and Restated Declaration of Trust of Southern Investments
UK Capital Trust I*
4.5 Form of Capital Security Certificate for Southern Investments UK
Capital Trust I (included as Exhibit A-1 to Exhibit 4.4)*
4.6 Form of Exchange Guarantee of Southern Investments UK plc relating
to the Exchange Capital Securities*
4.7 Registration Rights Agreement*
4.8 Capital Securities Guarantee of Southern Investments UK plc
relating to the Original Capital Securities*
4.9 Common Securities Guarantee of Southern Investments UK plc
relating to the Common Securities*
4.10 Deposit Agreement between Bankers Trust Company, as Book-Entry
Depositary, and Southern Investments UK plc*
5.1 Opinion of Troutman Sanders LLP to Southern Investments UK plc as
to legality of the Exchange Subordinated Debentures and the
Exchange Guarantee to be issued by Southern Investments UK plc
5.2 Opinion of Richards, Layton & Finger, special Delaware counsel, as
to legality of the Exchange Capital Securities to be issued by
Southern Investments UK Capital Trust I
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
8.1 Opinion of Troutman Sanders LLP, special tax counsel, as to
certain United States federal income tax matters
8.2 Opinion of Allen & Overy, special tax counsel, as to certain
United Kingdom income tax matters
12.1 Statement re: Computation of ratio of earnings to fixed charges*
16.1 Letter re: Change in Certifying Accountants*
21.1 List of Subsidiaries of Southern Investments UK plc*
23.1 Consent of Arthur Andersen*
23.2 Consent of Ernst & Young*
23.3 Consent of Arthur Andersen*
23.4 Consent of Troutman Sanders LLP (included in Exhibit 5.1)
23.5 Consent of Richards, Layton & Finger (included in Exhibit 5.2)
23.6 Consent of Troutman Sanders LLP (included in Exhibit 8.1)
23.7 Consent of Allen & Overy (included in Exhibit 8.2)
24.1 Power of Attorney of certain officers and directors of Southern
Investments UK plc*
24.2 Resolution of Southern Investments UK plc re: Power of Attorney*
25.1 Form T-1 Statement of Eligibility of Bankers Trust Company*
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement
</TABLE>
- --------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules of the Predecessor Company and
the Successor Company are filed as part of this Registration Statement:
II-3
<PAGE>
SOUTH WESTERN 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 INCEPTION (JUNE 23, 1995) TO MARCH 31, 1996
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
each undersigned Registrant pursuant to the provisions, or otherwise, each
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by each
undersigned Registrant of expenses incurred or paid by a director, officer of
controlling person of each 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, each Registrant
will, unless in the opinion of its counsel the matter has been settled by the
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired or involved therein, that was not the subject of and included
in the registration statement when it became effective.
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 INCORPORATED AND
EXISTING UNDER THE LAWS OF ENGLAND AND WALES, HAS DULY CAUSED THIS AMENDMENT TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON THE
25TH DAY OF JUNE, 1997.
Southern Investments UK plc
RICHARD J. PERSHING
By: DIRECTOR AND CHIEF EXECUTIVE
OFFICER
By: /s/ Wayne Boston
-----------------------------------
WAYNE BOSTON
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 DIRECTORS AND
OFFICERS OF SOUTHERN INVESTMENTS UK PLC IN THE CAPACITIES AND ON THE DATE
INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
Richard J. Pershing Chairman and Chief
Executive Officer
C. B. Harreld Chief Financial and
Accounting Officer
Thomas G. Boren
Alan W. Harrelson
Gale E. Klappa
C. Philip Saunders
Charles W. Whitney
Directors
Accentacross Limited
By: Roger L. Petersen
Director
Mighteager Limited
By: Stephen J. Feerrar
Director
II-5
<PAGE>
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Wayne Boston June 25, 1997
- -------------------------------------
WAYNE BOSTON
Attorney-in-Fact
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, SOUTHERN
INVESTMENTS UK CAPITAL TRUST I HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON THE
25TH DAY OF JUNE, 1997.
Southern Investments UK Capital
Trust I
By: /s/ Wayne Boston
--------------------------------
WAYNE BOSTON
REGULAR TRUSTEE
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 21(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 is 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 21(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 21(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 is 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>
SOUTH WESTERN 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 INCEPTION (JUNE 23, 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 Uncollecti-
ble Accounts:
Period from Inception
(June 23, 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 DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
Indenture of Southern Investments UK plc relating to the
4.1 Subordinated Debentures*
4.2 Form of Certificate of Subordinated Debentures (included as
Exhibit A to Exhibit 4.1)*
4.3 Certificate of Trust of Southern Investments UK Capital Trust
I*
4.4 Amended and Restated Declaration of Trust of Southern
Investments UK Capital Trust I*
4.5 Form of Capital Security Certificate for Southern Investments
UK Capital Trust I (included as Exhibit A-1 to Exhibit 4.4)*
4.6 Form of Exchange Guarantee of Southern Investments UK plc
relating to the Exchange Capital Securities*
4.7 Registration Rights Agreement*
4.8 Capital Securities Guarantee of Southern Investments UK plc
relating to the Original Capital Securities*
4.9 Common Securities Guarantee of Southern Investments UK plc
relating to the Common Securities*
4.10 Deposit Agreement between Bankers Trust Company, as Book-Entry
Depositary, and Southern Investment UK plc*
5.1 Opinion of Troutman Sanders LLP to Southern Investments UK plc
as to legality of the Exchange Subordinated Debentures and the
Exchange Guarantee to be issued by Southern Investments UK plc
5.2 Opinion of Richards, Layton & Finger, special Delaware counsel,
as to legality of the Exchange Capital Securities to be issued
by Southern Investments UK Capital Trust I
8.1 Opinion of Troutman Sanders LLP, special tax counsel, as to
certain United States federal income tax matters
8.2 Opinion of Allen & Overy, special tax counsel, as to certain
United Kingdom income tax matters
12.1 Statement re: Computation of ratio of earnings to fixed charges*
16.1 Letter re: Change in Certifying Accountants*
21.1 List of Subsidiaries of Southern Investments UK plc*
23.1 Consent of Arthur Andersen*
23.2 Consent of Ernst & Young*
23.3 Consent of Arthur Andersen*
23.4 Consent of Troutman Sanders LLP (included in Exhibit 5.1)
23.5 Consent of Richards, Layton & Finger (included in Exhibit 5.2)
23.6 Consent of Troutman Sanders LLP (included in Exhibit 8.1)
23.7 Consent of Allen & Overy (included in Exhibit 8.2)
24.1 Power of Attorney of certain officers and directors of Southern
Investments UK plc*
24.2 Resolution of Southern Investments UK plc re: Power of
Attorney*
25.1 Form T-1 Statement of Eligibility of Bankers Trust Company*
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement
</TABLE>
- --------
* Previously filed.
EXHIBIT 5.1
Troutman Sanders LLP
600 Peachtree Street
Atlanta, Georgia 30303
404-885-3000
June 25, 1997
Southern Investments UK plc
800 Park Avenue
Aztec West
Almondsbury
Bristol BS12 4SE, England
Re: Southern Investments UK plc Exchange Offer
Gentlemen:
We have acted as special U.S. counsel to Southern Investments UK plc
(the "Company") and Southern Investments UK Capital Trust I (the "Trust") in
connection with the preparation of a Registration Statement on Form S-4 (File
Nos. 333-26939 and 333-26939-01), as amended (the "Registration Statement"),
which has been filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), relating to the proposed offer
to exchange up to $82,000,000 aggregate liquidation amount of the Trust's 8.23%
Exchange Subordinated Capital Income Securities (the "Exchange Capital
Securities") for a like liquidation amount of its outstanding 8.23% Subordinated
Income Capital Securities (the "Original Capital Securities"), of which
$82,000,000 aggregate liquidation amount are issued and outstanding. The
Exchange Capital Securities will be guaranteed (the "Exchange Guarantee") by the
Company pursuant to a guarantee agreement (the "Guarantee Agreement") between
the Company and Bankers Trust Company, as trustee (the "Guarantee Trustee"),
with respect to the payment of distributions and payments upon liquidation,
redemption and otherwise to the extent set forth in the Prospectus (the
"Prospectus") filed as part of the Registration Statement.
In connection with the offer to exchange the Exchange Capital
Securities for the Original Capital Securities, the Company will also offer to
exchange $84,537,000 aggregate principal amount of its 8.23% Exchange
Subordinated Debentures due February 1, 2027 (the "Exchange Subordinated
Debentures") for a like aggregate principal amount of its 8.23% Subordinated
Debentures due February 1, 2027 (the "Original Subordinated Debentures"), which
were purchased by the Trust with the proceeds of the Original Capital
Securities. Like the Exchange Capital Securities, the Exchange Subordinated
Debentures and the Exchange Guarantee will be registered under the Act.
<PAGE>
Southern Investments UK plc
June 25, 1997
Page 2
The Original Capital Securities were, and the Exchange Capital
Securities are being, issued pursuant to the Amended and Restated Declaration of
Trust dated as of January 29, 1997 among the Company, as sponsor, Bankers Trust
Company, as institutional trustee, Bankers Trust (Delaware), as Delaware
trustee, and the regular trustees named therein. The Original Capital Securities
were, and the Exchange Capital Securities will be, guaranteed by the Company on
a subordinated basis with respect to distributions and payments upon
liquidation, redemption and otherwise pursuant to the Guarantee Agreement. The
Original Subordinated Debentures were, and the Exchange Subordinated Debentures
will be, issued pursuant to an Indenture dated as of January 29, 1997 (the
"Indenture") among the Company, Bankers Trust Company, as trustee, and Bankers
Trust Luxembourg S.A., as paying agent and transfer agent.
We have reviewed copies of the Registration Statement and the
Prospectus and such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
Based on the foregoing, we are of the opinion that:
(i) assuming (a) due authorization, execution and delivery of
the Indenture, (b) establishment of the terms of the Exchange
Subordinated Debentures in conformity with the Indenture and (c) due
execution, delivery, authentication and issuance of the Exchange
Subordinated Debentures in accordance with the Indenture and exchange
for a like principal amount of validly tendered Original Subordinated
Debentures, the Exchange Subordinated Debentures will constitute valid
and binding obligations of the Company entitled to the benefits of the
Indenture and enforceable against the Company in accordance with their
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting creditors' rights generally and except as enforcement thereof
is subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law); and
(ii) assuming due authorization, execution and delivery of the
Guarantee Agreement by the Company and the Guarantee Trustee, the
Exchange Guarantee will constitute a valid and binding obligation of
the Company enforceable against the Company in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting creditors' rights generally and except as enforcement thereof
is subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
<PAGE>
Southern Investments UK plc
June 25, 1997
Page 3
In rendering the foregoing opinion, with respect to matters of New York
law, we have relied on the opinion of Shearman & Sterling attached hereto as
Annex I.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Troutman Sanders LLP
under the caption "Validity of Exchange Capital Securities" in the Registration
Statement. In giving the foregoing consent, we do not hereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/Troutman Sanders LLP
TROUTMAN SANDERS LLP
<PAGE>
ANNEX I
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022-6069
June 25, 1997
Troutman Sanders LLP
NationsBank Plaza
600 Peachtree Street, N.E.
Suite 5200
Atlanta, GA 30308-2216
Southern Investments UK plc
Southern Investments UK Capital Trust I
Ladies and Gentlemen:
We have acted as special New York counsel to Southern
Investments UK Capital Trust I, a statutory business trust organized under the
Business Trust Act (the "Delaware Act") of the State of Delaware (Chapter 38,
Title 12, of the Delaware Code, 12 Del. C. Section 3801 et seq.)(the "Trust")
and Southern Investments UK plc, a public limited company incorporated under the
laws of England and Wales (the "Company" and, together with the Trust, the
"Offerors"), in connection with the filing by the Offerors of a registration
statement on Form S-4 (Registration No. 333-26939) (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the Registration Statement, the Offerors are offering to exchange
(i) 8.23% Exchange Subordinated Capital Income Securities (the "Exchange Capital
Securities") for a like liquidation amount of the Trust's 8.23% Subordinated
Capital Income Securities (the "Original Capital Securities"), (ii) 8.23%
Exchange Subordinated Debentures (the "Exchange Subordinated Debentures") for a
like aggregate principal amount of the Company's 8.23% Subordinated Debentures
(the "Original Subordinated Debentures") and (iii) a guarantee agreement dated
as of January 29, 1997 (the "Guarantee Agreement") between the Company and
Bankers Trust Company, as trustee (the "Guarantee Trustee") referring to an
original guarantee (the "Original Guarantee") and an exchange guarantee (the
"Exchange Guarantee).
The Original Capital Securities were, and the Exchange Capital
Securities are being, issued pursuant to the Amended and Restated Declaration of
Trust dated as of
<PAGE>
2
January 29, 1997 among the Company, as sponsor, Bankers Trust Company, as
trustee, Bankers Trust (Delaware), as trustee and the regular trustees. The
Original Capital Securities were, and the Exchange Capital Securities will be,
guaranteed by the Company on a subordinated basis with respect to distributions
and payments upon liquidation, redemption and otherwise pursuant to the
Guarantee Agreement. The Original Subordinated Debentures were, and the Exchange
Subordinated Debentures will be, issued pursuant to an Indenture dated as of
January 29, 1997 (the "Indenture") among the Company, Bankers Trust Company, as
trustee (the "Indenture Trustee"), and Bankers Trust Luxembourg, as paying agent
and transfer agent.
In our capacity as special New York counsel to the Offerors,
we have examined originals, or copies identified to our satisfaction, of such
documents as we have deemed necessary as a basis for the opinions hereinafter
expressed. In our examinations, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the originals of all documents submitted to us as copies.
Our opinions set forth below are limited to the laws of the
State of New York and the federal laws of the United States and we do not
express any opinion herein concerning any other law.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) assuming (a) due authorization, execution and delivery of
the Indenture by the Company and the Indenture Trustee, (b)
establishment of the terms of the Exchange Subordinated Debentures in
conformity with the Indenture and (c) due execution, delivery,
authentication and issuance of the Exchange Subordinated Debentures in
accordance with the Indenture and exchange for a like principal amount
of validly tendered Original Subordinated Debentures, the Exchange
Subordinated Debentures will constitute valid and binding obligations
of the Company entitled to the benefits of the Indenture and
enforceable against the Company in accordance with their terms, except
as enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent
transfer), reorganization, moratorium or similar laws affecting
creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law); and
(ii) assuming due authorization, execution and delivery of the
Guarantee Agreement by the Company and the Guarantee Trustee, the
Exchange Guarantee will constitute a valid and binding obligation of
the Company enforceable against the Company in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfer), reorganization, moratorium or similar laws
affecting creditors' rights generally and except as enforcement thereof
is subject to general principles of
<PAGE>
3
equity (regardless of whether enforcement is considered in a proceeding
in equity or at law).
In rendering the opinion expressed above, we have assumed the
existence of each party to each document referred to therein, that the execution
and delivery of each such document will be effected in accordance with all laws,
regulations, procedures and contractual restrictions applicable to the party
taking such action and that such action will not violate any such law,
regulation, contractual restriction or procedure.
This opinion is furnished solely for your benefit in
connection with your rendering an opinion to the Company in response to Exhibit
5 to the Registration Statement and we hereby consent to your attaching this
opinion as an annex to such opinion. This opinion may not be relied upon for any
other purpose, or quoted to or relied upon by any other person, firm or entity
for any purpose, without our prior written consent.
Very truly yours,
/s/Shearman & Sterling
Exhibit 5.2
Richards, Layton & Finger
One Rodney Square
Wilmington, Delaware 19899
(302) 658-6541
June 25, 1997
Southern Investments UK Capital Trust I
c/o Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
Re: Southern Investments UK Capital Trust I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Southern Investments UK plc,
a public limited liability company incorporated under the laws of England and
Wales (the "Company"), and Southern Investments UK Capital Trust I, a Delaware
business trust (the "Trust" ), in connection with the matters set forth herein.
At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust, dated January 21, 1997, as filed
with the office of the Secretary of State of the State of Delaware (the
"Secretary of State") on January 21, 1997;
(b) The Declaration of Trust of the Trust, dated as of January 21, 1997
between the Company and the trustees of the Trust named therein, as amended and
restated by
<PAGE>
Southern Investments UK Capital Trust I
June 25, 1997
Page 2
the Amended and Restated Declaration of Trust of the Trust, dated as of January
29, 1997, including Annex I and Exhibits A-1 and A-2 thereto (the "Declaration
of Trust"), among the Company, the trustees of the Trust named therein
(collectively, the "Trustees") and the holders, from time to time, of the
undivided beneficial interests in the assets of the Trust;
(c) Amendment No. 1 to the Registration Statement (the "Registration
Statement") on Form S-4, including a preliminary prospectus with respect to the
Trust (the "Prospectus") relating to the 8.23% Exchange Subordinated Capital
Income Securities of the Trust representing preferred undivided beneficial
interests in the assets of the Trust (each, a "Capital Security" and
collectively, the "Capital Securities"), to be filed by the Company and the
Trust with the Securities and Exchange Commission on or about June 25, 1997;
(d) A Certificate of Good Standing for the Trust, dated June 25, 1997,
obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Declaration of Trust.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed in paragraphs (a) through (d) above. In particular, we have
not reviewed any document (other than the documents listed in paragraphs (a)
through (d) above) that is referred to in or incorporated by reference into the
documents reviewed by us. We have assumed that there exists no provision in any
document that we have not reviewed that is inconsistent with the opinions stated
herein. We have conducted no independent factual investigation of our own but
rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration of
Trust constitutes the entire agreement among the parties thereto with respect to
the subject matter thereof, including with respect to the creation, operation
and termination of the Trust, and that the Declaration of Trust and the
Certificate of Trust are in full force and effect and have not been amended,
(ii) except to the extent provided in paragraph 1 below, the due organization or
due formation, as the case may be, and valid existence in good standing of each
party to the documents examined by us under the laws of the jurisdiction
governing its creation, organization
<PAGE>
Southern Investments UK Capital Trust I
June 25, 1997
Page 3
or formation, (iii) the legal capacity of natural persons who are parties to
the documents examined by us, (iv) that each of the parties to the documents
examined by us has the power and authority to execute and deliver, and to
perform its obligations under, such documents, (v) the due authorization,
execution and delivery by all parties thereto of all documents examined by us,
(vi) the receipt by each Person to whom a Capital Security is to be issued by
the Trust (collectively, the "Capital Security Holders") of a certificate for
such Capital Security in the form prescribed by the Declaration of Trust and the
payment for such Capital Security, in accordance with the Declaration of Trust
and the Registration Statement, and (vii) that the Capital Securities are issued
and sold to the Capital Security Holders in accordance with the Declaration of
Trust and the Registration Statement. We have not participated in the
preparation of the Registration Statement and assume no responsibility for its
contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good standing
as a business trust under the Business Trust Act.
2. The Capital Securities of the Trust will represent valid and, subject to
the qualifications set forth in paragraph 3 below, fully paid and nonassessable
undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, as beneficial owners of the Trust, will be
entitled to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. We note that the Capital Security Holders may be
obligated to make payments as set forth in the Declaration of Trust.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. We hereby consent to the
use of our name under the heading "Validity of Exchange Capital Securities" in
the Prospectus. In giving the foregoing consents, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules
<PAGE>
Southern Investments UK Capital Trust I
June 25, 1997
Page 4
and regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other person for any purpose.
Very truly yours,
/s/Richards, Layton & Finger
EXHIBIT 8.1
Troutman Sanders LLP
600 Peachtree Street
Atlanta, Ga 30303
404-885-3000
June 25, 1997
Southern Investments UK plc
800 Park Avenue
Aztec West
Almondsbury
Bristol BS12 4SE, England
Re: Southern Investments UK Capital Trust I
Certain United States Federal Income Tax Matters
Gentlemen:
We have acted as special U.S. tax counsel to Southern Investments UK
plc (the "Company") and Southern Investments UK Capital Trust I (the "Trust") in
connection with the preparation of a Registration Statement on Form S-4, as
amended (the "Registration Statement"), which has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), relating to the proposed offer to exchange up to $82,000,000 aggregate
liquidation amount of the Trust's 8.23% Exchange Subordinated Capital Income
Securities (the "Exchange Capital Securities") for a like liquidation amount of
its outstanding 8.23% Subordinated Income Capital Securities (the "Original
Capital Securities"), of which $82,000,000 aggregate liquidation amount are
issued and outstanding. The Exchange Capital Securities will be guaranteed (the
"Exchange Guarantee") by the Company with respect to the payment of
distributions and payments upon liquidation, redemption and otherwise to the
extent set forth in the Prospectus (the "Prospectus") filed as part of the
Registration Statement.
In connection with the offer to exchange the Exchange Capital
Securities for the Original Capital Securities, the Company will also offer to
exchange $84,537,000 aggregate principal amount of its 8.23% Exchange
Subordinated Debentures due February 1, 2027 (the "Exchange Subordinated
Debentures") for a like aggregate principal amount of its 8.23% Subordinated
Debentures due February 1, 2027 (the "Original Subordinated Debentures"), which
were purchased by the Trust with the proceeds of the Original Capital
Securities. Like the Exchange Capital Securities, the Exchange Subordinated
Debentures and the Exchange Guarantee will be registered under the Act.
We have reviewed copies of the Registration Statement and the
Prospectus and such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
<PAGE>
Southern Investments UK plc
June 25, 1997
Page 2
Based on the foregoing, we are of the opinion that if the offer and
sale of the Exchange Capital Securities are conducted in the manner described in
the Prospectus and if the terms of the Exchange Capital Securities are as
contemplated by the Prospectus, then the statements as to matters of law and
legal conclusions contained in the Registration Statement under the caption
"Certain Income Tax Considerations - US Federal Income Tax Considerations" are
correct in all material respects and the discussion thereunder does not omit any
material provision with respect to the matters covered.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Troutman Sanders LLP
under the caption "Certain Income Tax Considerations - US Federal Income Tax
Considerations" and "Validity of Exchange Capital Securities" in the
Registration Statement. In giving the foregoing consent, we do not hereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/Troutman Sanders LLP
TROUTMAN SANDERS LLP
Exhibit 8.2
Allen & Overy
One New Change
London EC4M 9QQ
Telephone: 0171-330 3000
Fax (Group 3): 0171-330 9999
Fax (Group 4): 0171-248 1100
DX No. 73
Our Ref: GWF/YEMS/ICM2:261374.1
25th June, 1997
Southern Investments UK plc
800 Park Avenue
Aztec West
Almondsbury
Bristol
BS12 4SE
England
Dear Sirs,
We have acted as legal advisers as to English law to Southern Investments UK plc
(the "Company") in connection with the preparation of a Registration Statement
on Form S-4, as amended (the "Registration Statement"), which has been filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), relating to the proposed offer to exchange up to
$82,000,000 aggregate liquidation amount of the 8.23% Exchange Subordinated
Capital Income Securities (the "Exchange Capital Securities") of Southern
Investments UK Capital Trust 1 (the "Trust") for a like liquidation amount of
its outstanding 8.23% Subordinated Capital Income Securities (the "Original
Capital Securities"), of which $82,000,000 aggregate liquidation amount are
issued and outstanding. The Exchange Capital Securities will be guaranteed (the
"Exchange Guarantee") by the Company with respect to the payment of
distributions and payments upon liquidation, redemption and otherwise to the
extent set forth in the prospectus filed as part of the Registration Statement
(the "Prospectus").
In connection with the offer to exchange the Exchange Capital Securities for the
Original Capital Securities, the Company will also offer to exchange $84,537,000
aggregate principal amount of its 8.23% Exchange Subordinated Debentures due
February 1, 2027 (the "Exchange Subordinated Debentures") for a like aggregate
principal amount of its 8.23% Subordinated Debentures due February 1, 2027 (the
"Original Subordinated Debentures"), which were purchased by the Trust with the
proceeds of the Original Capital Securities. Like the Exchange Capital
Securities, the Exchange Subordinated Debentures and the Exchange Guarantee will
be registered under the Act.
We have reviewed copies of the Registration Statement and the Prospectus and
such other documents as we have deemed necessary or appropriate as a basis for
the opinion set forth below.
The statements made in the Prospectus under the headings "Certain Income Tax
Considerations - UK Income Tax Consideration", insofar as such statements
constitute summaries or description of UK law, UK Inland Revenue practice or
legal conclusions, have been reviewed by us and are correct in all material
respects, provided that we express no opinion as to the reasonableness,
completeness or fairness of those statements in the context of a prospectus used
in the United States.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Yours faithfully
/s/Allen & Overy
A list of the names of partners and their professional qualifications is open
to inspection at the above office. The partners are either solicitors or
registered foreign lawyers.
LONDON BEIJING BRUSSELS BUDAPEST DUBAI FRANKFURT HONG KONG MADRID MOSCOW
NEW YORK PARIS PRAGUE SINGAPORE TOKYO WARSAW
Exhibit 99.1
LETTER OF TRANSMITTAL
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
OFFER TO EXCHANGE ITS 8.23% SUBORDINATED CAPITAL INCOME SECURITIES WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING 8.23% SUBORDINATED CAPITAL INCOME SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
PURSUANT TO THE PROSPECTUS DATED JUNE 25, 1997
THE EXCHANGE OFFER AND WITHDRAWAL
RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JULY 25,
1997, UNLESS THE OFFER IS
EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANKERS TRUST COMPANY
BY MAIL/OVERNIGHT DELIVERY/HAND:
FOUR ALBANY STREET
4TH FLOOR
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST AND AGENCY GROUP
MANAGER PUBLIC UTITLITIES GROUP
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 250-6826
FACSIMILE TRANSMISSIONS:
(ELIGIBLE INSTITUTIONS ONLY)
(212) 250-6725
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same
meaning given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Original
Capital Securities (as defined below) either if Original Capital Securities are
to be forwarded herewith or if tenders of Original Capital Securities are to be
made by book-entry transfer to an account maintained by Bankers Trust Company
(the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in "The Exchange Offer -- Procedures for Tendering Original
Capital Securities" in the Prospectus.
Holders of Original Capital Securities whose certificates (the
"Certificates") for such Original Capital Securities are not immediately
available or who cannot deliver their Certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date (as defined
in the Prospectus) or who cannot complete the procedures for book-entry transfer
on a timely basis, must tender their Original Capital Securities according to
the guaranteed delivery procedures set forth in "The Exchange Offer --
Procedures for Tendering Original Capital Securities" in the Prospectus.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<S> <C> <C> <C> <C>
Please Print Name and Please Show Original Capital Principal Amount of Beneficial Holders
Address of Registered Certificate Securities Tendered Original Capital and Names in Which
Holder Number(s) (Need not (Attach additional Securities Tendered such Securities are
be Competed by list if needed.) (if Principal Amount held.
Book-Entry Holders) of Original Capital
Securities is Less
than All.)*
</TABLE>
* All Original Capital Securities held shall be deemed tendered unless
a lesser number is specified in this column.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[] CHECK HERE IF TENDERED ORIGINAL CAPITAL SECURITIES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH
DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
DTC Account Number:
Transaction Code Number:
[] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED ORIGINAL CAPITAL SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s):
Window Ticket Number (if any):
Date of Execution of Notice of Guaranteed Delivery:
Name of Institution which Guaranteed Delivery:
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution:
DTC Account Number:
Transaction Code Number:
[] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED ORIGINAL
CAPITAL SECURITIES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET
FORTH ABOVE.
[] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE ORIGINAL CAPITAL
SECURITIES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING
ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
Address:
Ladies and Gentlemen:
The undersigned hereby tenders to Southern Investments UK Capital Trust
I, a a statutory business trust formed under the laws of the State of Delaware
(the "Trust"), and Southern Investments UK plc, a public limited company
incorporated under the laws of England and Wales, as Sponsor ("the Company"),
the above described aggregate liquidation amount of the Trust's 8.23%
Subordinated Capital Income Securities (the "Original Capital Securities") in
exchange for a like aggregate liquidation amount of the Trust's 8.23% Capital
Securities (the "Exchange Capital Securities") which have been registered under
the Securities Act of 1933 (the "Securities Act"), upon the terms and subject to
the conditions set forth in the Prospectus dated June 25, 1997 (as the same may
be amended or supplemented from time to time, the "Prospectus"), receipt of
which is acknowledged, and in this Letter of Transmittal (which, together with
the Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Original Capital Securities tendered herewith in accordance with
the terms and conditions of the Exchange Offer (including, if the Exchange Offer
is extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Trust all right, title and interest in and to such Original Capital
Securities as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as its agent and attorney-in-fact
(with full knowledge that the Exchange Agent is also acting as agent of the
Company and the Trust in connection with the Exchange Offer) with respect to the
tendered Original Capital Securities, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), subject only to the right of withdrawal described in the Prospectus,
to (i) deliver Certificates for Original Capital Securities to the Company or
the Trust together with all accompanying evidences of transfer and authenticity
to, or upon the order of, the Trust, upon receipt by the Exchange Agent, as the
undersigned's agent, of the Exchange Capital Securities to be issued in exchange
for such Original Capital Securities, (ii) present Certificates for such
Original Capital Securities for transfer, and to transfer the Original Capital
Securities on the books of the Trust, and (iii) receive for the account of the
Trust all benefits and otherwise exercise all rights of beneficial ownership of
such Original Capital Securities, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENT(S) AND WARRANT(S) THAT THE UNDERSIGNED
HAS FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
ORIGINAL CAPITAL SECURITIES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED
FOR EXCHANGE, THE TRUST WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE ORIGINAL CAPITAL SECURITIES TENDERED HEREBY ARE NOT SUBJECT TO ANY
ADVERSE CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND
DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY, THE TRUST OR THE
EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT
AND TRANSFER OF THE ORIGINAL CAPITAL SECURITIES TENDERED HEREBY, AND THE
UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT.
THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE
OFFER.
The name(s) and address(es) of the registered holder(s) of the Original
Capital Securities tendered hereby should be printed above, if they are not
already set forth above, as they appear on the Certificates representing such
Original Capital Securities. The Certificate number(s) and the Original Capital
Securities that the undersigned wishes to tender should be indicated in the
appropriate boxes above.
If any tendered Original Capital Securities are not exchanged pursuant
to the Exchange Offer for any reason, or if Certificates are submitted for more
Original Capital Securities than are tendered or accepted for exchange,
Certificates for such nonexchanged or nontendered Original Capital Securities
will be returned (or, in the case of Original Capital Securities tendered by
book-entry transfer, such Original Capital Securities will be credited to an
account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Original Capital Securities
pursuant to any one of the procedures described in "The Exchange Offer --
Procedures for Tendering Original Capital Securities" in the Prospectus and in
the instructions hereto will, upon the Company's and the Trust's acceptance for
exchange of such tendered Original Capital Securities, constitute a binding
agreement among the undersigned, the Company and the Trust upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company and
the Trust may not be required to accept for exchange any of the Original Capital
Securities tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions," below, the undersigned hereby directs that the Exchange Capital
Securities be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Original Capital Securities, that such Exchange Capital
Securities be credited to the account indicated above maintained at DTC. If
applicable, substitute Certificates representing Original Capital Securities not
exchanged or not accepted for exchange will be issued to the undersigned or, in
the case of a book-entry transfer of Original Capital Securities, will be
credited to the account indicated above maintained at DTC. Similarly, unless
otherwise indicated under "Special Delivery Instructions," please deliver
Exchange Capital Securities to the undersigned at the address shown below the
undersigned's signature.
BY TENDERING ORIGINAL CAPITAL SECURITIES AND EXECUTING THIS LETTER OF
TRANSMITTAL, THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE
UNDERSIGNED IS NOT AN "AFFILIATE" OF THE COMPANY OR THE TRUST, (II) ANY EXCHANGE
CAPITAL SECURITIES TO BE RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN THE
ORDINARY COURSE OF ITS BUSINESS, (III) THE UNDERSIGNED HAS NO ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A DISTRIBUTION (WITHIN THE
MEANING OF THE SECURITIES ACT) OF SUCH EXCHANGE CAPITAL SECURITIES, AND (IV) IF
THE UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH EXCHANGE CAPITAL SECURITIES. BY TENDERING ORIGINAL
CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF
TRANSMITTAL, A HOLDER OF ORIGINAL CAPITAL SECURITIES WHICH IS A BROKER-DEALER
REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY
THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE
COMMISSION TO THIRD PARTIES, THAT (A) SUCH ORIGINAL CAPITAL SECURITIES HELD BY
THE BROKER-DEALER ARE HELD ONLY AS A NOMINEE, OR (B) SUCH ORIGINAL CAPITAL
SECURITIES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT
OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT WILL DELIVER THE
PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE CAPITAL SECURITIES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY
DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT
IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY AND THE TRUST HAVE AGREED THAT, SUBJECT TO THE PROVISIONS
OF THE REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS
DEFINED BELOW) IN CONNECTION WITH RESALES OF EXCHANGE CAPITAL SECURITIES
RECEIVED IN EXCHANGE FOR ORIGINAL CAPITAL SECURITIES, WHERE SUCH ORIGINAL
CAPITAL SECURITIES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR
A PERIOD NOT EXCEEDING 90 DAYS AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION
UNDER CERTAIN LIMITED CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS). IN THAT
REGARD, EACH BROKER-DEALER WHO ACQUIRED ORIGINAL CAPITAL SECURITIES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER"), BY TENDERING SUCH ORIGINAL CAPITAL SECURITIES
AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE
FROM THE COMPANY OR THE TRUST OF THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF
(I) ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN
THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR (II) ANY FACT WHICH CAUSES THE
PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR (III) OF THE
OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS
AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF EXCHANGE
CAPITAL SECURITIES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY OR THE TRUST HAS
AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION
AND HAS FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE
PARTICIPATING BROKER-DEALER OR THE COMPANY OR THE TRUST HAS GIVEN NOTICE THAT
THE SALE OF THE EXCHANGE CAPITAL SECURITIES MAY BE RESUMED, AS THE CASE MAY BE.
IF THE COMPANY OR THE TRUST GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE
EXCHANGE CAPITAL SECURITIES, IT SHALL EXTEND THE 90-DAY PERIOD REFERRED TO ABOVE
DURING WHICH PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN
CONNECTION WITH THE RESALE OF EXCHANGE CAPITAL SECURITIES BY THE NUMBER OF DAYS
DURING THE PERIOD FROM AND INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO
AND INCLUDING THE DATE WHEN PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED
COPIES OF THE SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF
THE EXCHANGE CAPITAL SECURITIES OR TO AND INCLUDING THE DATE ON WHICH THE
COMPANY OR THE TRUST HAS GIVEN NOTICE THAT THE SALE OF EXCHANGE CAPITAL
SECURITIES MAY BE RESUMED, AS THE CASE MAY BE.
Holders of Original Capital Securities whose Original Capital
Securities are accepted for exchange will not receive accrued interest on such
Original Capital Securities for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Original Capital Securities prior to the original issue date of the Exchange
Capital Securities or, if no such interest has been paid or duly provided for,
will not receive any accrued interest on such Original Capital Securities, and
the undersigned waives the right to receive any interest on such Original
Capital Securities accrued from and after such Interest Payment Date or, if no
such interest has been paid or duly provided for, from and after January 29,
1997.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
Please be advised that the Company and the Trust are making the
Exchange Offer in reliance on the position of the staff of the Division of
Corporation Finance of the Securities and Exchange Commission set forth in
certain interpretive letters addressed to third parties in other transactions.
In addition, the Company has authorized us to inform you as follows: The Company
has not entered into any arrangement or understanding with any person to
distribute the Exchange Capital Securities to be received in the Exchange Offer
and, to the best of its information and belief, each person participating in the
Exchange Offer is acquiring the Exchange Capital Securities in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution of the Exchange Capital Securities to be
received in the Exchange Offer. In this regard, the Company will make each
person participating in the Exchange Offer aware that if such person is
participating in the Exchange Offer for the purpose of distributing the Exchange
Capital Securities to be acquired in the Exchange Offer, such person (a) could
not rely on the Staff position enunciated in Exxon Capital or interpretative
letters to similar effect and (b) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. The Company acknowledges that such a secondary
resale transaction by such person participating in the Exchange Offer for the
purpose of distributing the Exchange Capital Securities should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 or 508, as applicable, of Regulation S-K.
Furthermore, the Company will include in the transmittal letter to be executed
by an exchange offeree in order to participate in the Exchange Offer (x) an
acknowledgment that if such exchange offeree is a broker-dealer that will
receive Exchange Capital Securities for its own account in exchange for Original
Capital Securities that were acquired as a result of market-making activities or
other trading activities, it will deliver a prospectus in connection with any
resale of such Exchange Capital Securities and (y) a statement that by so
acknowledging and by delivering a prospectus, such exchange offeree will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED
IF REQUIRED BY INSTRUCTION 2)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
Dated:
--------------------, 1997
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Original Capital Securities hereby tendered or on a
security position listing, or by any person(s) authorized to become the
registered holder(s) by endorsements and documents transmitted herewith
(including such options of counsel, certifications and other information as may
be required by the Trust or the Trustee for the Original Capital Securities to
comply with the restrictions on transfer applicable to the Original Capital
Securities). If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary
capacity or representative capacity, please set forth the signer's full title.
See Instruction 5.
Name(s)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title):
- -------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Telephone Number
- --------------------------------------------------------------------------------
Tax ID Number
- --------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
Date:
---------------------, 199--
Name of Firm:
- --------------------------------------------------------------------------------
Capacity (full title):
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
- -------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, AND 6)
To be completed ONLY if the Exchange Capital Securities are to be
issued in the name of someone other than the registered holder of the Original
Capital Securities whose name(s) appear(s) above.
Issue New Exchange Securities to:
[ ] Original Capital Securities not tendered
[ ] Exchange Capital Securities to:
Name(s)
- ------------------------------------------------------------
Address
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- -----------------------------------------------------------------
(INCLUDE ZIP CODE)
Telephone
Number
- ------------------------------------------------
Tax ID Number
- ------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, AND 6)
To be completed ONLY if Exchange Capital Securities are to be sent to someone
other than the registered holder of the Original Capital Securities whose
name(s) appear(s) above, or such registered holder(s) at an address other than
that shown above.
Mail Exchange Capital Securities to:
[ ] Original Capital Securities not tendered
[ ] Exchange Capital Securities to:
Name(s)
- --------------------------------------------------
Address
- ------------------------------------------------------
- ------------------------------------------------------
- -----------------------------------------------------
(INCLUDE ZIP CODE)
Telephone Number
- -----------------------------------------------------
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Original Capital Securities" in the
Prospectus. Certificates, or timely confirmation of a book-entry transfer of
such Original Capital Securities into the Exchange Agent's account at DTC, as
well as this Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein on or prior to the Expiration
Date.
Holders who wish to tender their Original Capital Securities and (i)
whose Original Capital Securities are not immediately available or (ii) who
cannot deliver their Original Capital Securities, this Letter of Transmittal and
all other required documents to the Exchange Agent on or prior to the Expiration
Date or (iii) who cannot complete the procedures for delivery by book-entry
transfer on a timely basis, may tender their Original Capital Securities by
properly completing and duly executing a Notice of Guaranteed Delivery pursuant
to the guaranteed delivery procedures set forth in "The Exchange Offer --
Procedures for Tendering Original Capital Securities" in the Prospectus.
Pursuant to such procedures: (i) such tender must be made by or through an
Eligible Institution (as defined below); (ii) a properly completed and duly
executed Notice of Guaranteed Delivery, substantially in the form made available
by the Company, must be received by the Exchange Agent on or prior to the
Expiration Date; and (iii) the Certificates (or a book-entry confirmation (as
defined in the Prospectus)) representing all tendered Original Capital
Securities, in proper form for transfer, together with a Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such Notice of Guaranteed
Delivery, all as provided in "The Exchange Offer -- Procedures for Tendering
Original Capital Securities" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Original Capital Securities to be properly tendered pursuant to the guaranteed
delivery procedure, the Exchange Agent must receive a Notice of Guaranteed
Delivery on or prior to the Expiration Date. As used herein and in the
Prospectus, "Eligible Institution" means a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as "an eligible guarantor institution,"
including (as such terms are defined therein) (i) a bank; (ii) a broker, dealer,
municipal securities broker or dealer or government securities broker or dealer;
(iii) a credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Neither the Company nor the Trust will accept any alternative,
conditional or contingent tenders. Each tendering holder, by execution of a
Letter of Transmittal (or facsimile thereof), waives any right to receive any
notice of the acceptance of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the Original
Capital Securities) of Original Capital Securities tendered herewith, unless
such holder(s) has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" above, or
(ii) such Original Capital Securities are tendered for the account of a
firm that is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Original Capital Securities" is inadequate, the Certificate
number(s) and/or the principal amount of Original Capital Securities and any
other required information should be listed on a separate signed schedule which
is attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. If less than all the Original
Capital Securities evidenced by any Certificate submitted are to be tendered,
fill in the principal amount of Original Capital Securities which are to be
tendered in the box entitled "Principal Amount of Original Capital Securities
Tendered (if less than all)." In such case, new Certificate(s) for the remainder
of the Original Capital Securities that were evidenced by your old
Certificate(s) will only be sent to the holder of the Original Capital Security,
promptly after the Expiration Date. All Original Capital Securities represented
by Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Original Capital
Securities may be withdrawn at any time on or prior to the Expiration Date. In
order for a withdrawal to be effective on or prior to that time, a written,
telegraphic, telex or facsimile transmission of such notice of withdrawal must
be timely received by the Exchange Agent at its address set forth above or in
the Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Original Capital Securities
to be withdrawn, the aggregate principal amount of Original Capital Securities
to be withdrawn, and (if Certificates for Original Capital Securities have been
tendered) the name of the registered holder of the Original Capital Securities
as set forth on the Certificate for the Original Capital Securities, if
different from that of the person who tendered such Original Capital Securities.
If Certificates for the Original Capital Securities have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Certificates for the Original Capital Securities, the tendering holder
must submit the serial numbers shown on the particular Certificates for the
Original Capital Securities to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case of
Original Capital Securities tendered for the account of an Eligible Institution.
If Original Capital Securities have been tendered pursuant to the procedures for
book-entry transfer set forth in "The Exchange Offer -- Procedures for Tendering
Original Capital Securities," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Original
Capital Securities, in which case a notice of withdrawal will be effective if
delivered to the Exchange Agent by written, telegraphic, telex or facsimile
transmission. Withdrawals of tenders of Original Capital Securities may not be
rescinded. Original Capital Securities properly withdrawn will not be deemed
validly tendered for purposes of the Exchange Offer, but may be retendered at
any subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer -- Procedures
for Tendering Original Capital Securities."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Company and the
Trust, in their sole discretion, whose determination shall be final and binding
on all parties. The Company and the Trust, any affiliates or assigns of the
Company and the Trust, the Exchange Agent or any other person shall not be under
any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification. Any
Original Capital Securities which have been tendered but which are withdrawn
will be returned to the holder thereof without cost to such holder promptly
after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the
Original Capital Securities tendered hereby, the signature(s) must correspond
exactly with the name(s) as written on the face of the Certificate(s) without
alteration, enlargement or any change whatsoever.
If any of the Original Capital Securities tendered hereby are owned of
record by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If any tendered Original Capital Securities are registered in different
name(s) on several Certificates, it will be necessary to complete, sign and
submit as many separate Letters of Transmittal (or facsimiles thereof) as there
are different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Company and the Trust, in their sole discretion, of
such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of
the Original Capital Securities listed and transmitted hereby, no endorsement(s)
of Certificate(s) or separate bond power(s) are required unless Exchange Capital
Securities are to be issued in the name of a person other than the registered
holder(s). Signature(s) on such Certificate(s) or bond power(s) must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Original Capital Securities listed, the Certificates
must be endorsed or accompanied by appropriate bond powers, signed exactly as
the name or names of the registered owner(s) appear(s) on the Certificates, and
also must be accompanied by such opinions of counsel, certifications and other
information as the Company, the Trust or the Trustee for the Original Capital
Securities may require in accordance with the restrictions on transfer
applicable to the Original Capital Securities. Signatures on such Certificates
or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Capital
Securities are to be issued in the name of a person other than the signer of
this Letter of Transmittal, or if Exchange Capital Securities are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of Transmittal
should be completed. Certificates for Original Capital Securities not exchanged
will be returned by mail or, if tendered by book-entry transfer, by crediting
the account indicated above maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company and the Trust will determine, in their
sole discretion, all questions as to the form of documents, validity,
eligibility (including time of receipt) and acceptance for exchange of any
tender of Original Capital Securities, which determination shall be final and
binding on all parties. The Company and the Trust reserve the absolute right to
reject any and all tenders determined by either of them not to be in proper form
or the acceptance of which, or exchange for, may, in the view of counsel to the
Company and the Trust, be unlawful. The Company and the Trust also reserve the
absolute right, subject to applicable law, to waive any of the conditions of the
Exchange Offer set forth in the Prospectus under "The Exchange Offer - Certain
Conditions to the Exchange Offer" or any conditions or irregularity in any
tender of Original Capital Securities of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The Company's and the Trust's interpretation of the terms and conditions of the
Exchange Offer (including this Letter of Transmittal and the instructions
hereto) will be final and binding. No tender of Original Capital Securities will
be deemed to have been validly made until all irregularities with respect to
such tender have been cured or waived. The Company, the Trust, any affiliates or
assigns of the Company, the Trust, the Exchange Agent, or any other person shall
not be under any duty to give notification of any irregularities in tenders or
incur any liability for failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal
income tax law, a holder whose tendered Original Capital Securities are accepted
for exchange is required to provide the Exchange Agent with such holder's
correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If
the Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Original
Capital Securities exchanged pursuant to the Exchange Offer may be subject to
31% backup withholding.
The box in Part 2 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 2 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-9.
If the holder furnishes the Exchange Agent with its TIN within 60 days after the
date of the Substitute Form W-9, the amounts retained during the 60 day period
will be remitted to the holder and no further amounts shall be retained or
withheld from payments made to the holder thereafter. If, however, the holder
has not provided the Exchange Agent with its TIN within such 60 day period,
amounts withheld will be remitted to the IRS as backup withholding. In addition,
31% of all payments made thereafter will be withheld and remitted to the IRS
until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Original Capital Securities or of the last transferee appearing on the
transfers attached to, or endorsed on, the Original Capital Securities. If the
Original Capital Securities are registered in more than one name or are not in
the name of the actual owner, consult the enclosed "Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9" for additional
guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting a properly completed IRS Form W8,
signed under penalties of perjury, attesting to that holder's exempt status.
Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax.
Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Original Capital Securities have been lost, destroyed or stolen,
the holder should promptly notify the Exchange Agent. The holder will then be
instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES. Holders who tender their Original Capital
Securities for exchange will not be obligated to pay any transfer taxes in
connection therewith. If, however, Exchange Capital Securities are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Original Capital Securities tendered, or if a transfer
tax is imposed for any reason other than the exchange of Original Capital
Securities in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
TO BE COMPLETED BY ALL
TENDERING SECURITY HOLDERS
(SEE INSTRUCTION 9)
PAYER'S NAME: BANKERS TRUST COMPANY
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN) AND CERTIFICATION
PART 1 -- PLEASE PROVIDE YOUR TIN ON THE LINE AT RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW
TIN
- ----------------------------------------------
Social Security Number or Employer Identification Number
NAME
ADDRESS
CITY, STATE & ZIP CODE
PART 2
Awaiting TIN [ ]
PART 3 -- CERTIFICATION
UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT (1) the number shown on this form
is my correct taxpayer identification number (or I am waiting for a number to be
issued to me), (2) I am not subject to backup withholding either because (i) I
am exempt from backup withholding, (ii) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (iii) the IRS has notified me
that I am no longer subject to backup withholding, and (3) any other information
provided on this form is true and correct.
SIGNATURE DATE
You must cross out item (iii) in Part (2) above if you have been notified by the
IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return and you have not been notified by the
IRS that you are no longer subject to backup withholding.
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
payments made to me on account of the Exchange Capital Securities shall be
retained until I provide a taxpayer identification number to the Exchange Agent
and that, if I do not provide my taxpayer identification number within 60 days,
such retained amounts shall be remitted to the Internal Revenue Service as
backup withholding and 31% of all reportable payments made to me thereafter will
be withheld and remitted to the Internal Revenue Service until I provide a
taxpayer identification number.
Signature ______________________________
Date: ________________, 1997
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY FOR TENDER OF 8.23%
SUBORDINATED CAPITAL INCOME SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
OF
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
FULLY AND UNCONDITIONALLY GUARANTEED BY
SOUTHERN INVESTMENTS UK plc
This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Trust's (as defined below) 8.23% Subordinated Capital
Income Securities (the "Original Capital Securities") are not immediately
available, (ii) Original Capital Securities, the Letter of Transmittal and all
other required documents cannot be delivered to Bankers Trust Company (the
"Exchange Agent") on or prior to the Expiration Date (as defined in the
Prospectus referred to below) or (iii) the procedures for delivery by book-entry
transfer cannot be completed on a timely basis. This Notice of Guaranteed
Delivery may be delivered by hand, overnight courier or mail, or transmitted by
facsimile transmission, to the Exchange Agent. See "The Exchange Offer --
Procedures for Tendering Original Capital Securities" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANKERS TRUST COMPANY
BY MAIL/OVERNIGHT DELIVERY/HAND:
FOUR ALBANY STREET
4TH FLOOR
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST AND AGENCY GROUP
MANAGER PUBLIC UTILITIES GROUP
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 250-6826
FACSIMILE TRANSMISSIONS:
(ELIGIBLE INSTITUTIONS ONLY)
(212) 250-6725
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA FACSIMILE
TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF
A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN
"ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE
MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER
OF TRANSMITTAL.
Ladies and Gentlemen:
The undersigned hereby tenders to Southern Investments UK Capital Trust
I, a Delaware business trust (the "Trust"), upon the terms and subject to the
conditions set forth in the Prospectus dated June 25, 1997 (as the same may be
amended or supplemented from time to time, the "Prospectus"), and the related
Letter of Transmittal (which together constitute the "Exchange Offer"), receipt
of which is hereby acknowledged, the aggregate principal amount of Original
Capital Securities set forth below pursuant to the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange Offer --
Procedures for Tendering Original Capital Securities."
Name(s) of Registered Holder(s):
- --------------------------------------------------
Aggregate Principal Amount Tendered:
- ------------------------------------------------
Certificate No(s):
- -------------------------------------------------------------------
Address(es):
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Area Code and Telephone Number(s):
- -----------------------------------------------
If Original Capital Securities will be tendered by book-entry transfer, provide
the following information:
Signature(s):
- -------------------------------------------------------------------------
DTC Account Number:
- -------------------------------------------------------------
Date:
- -----------------------------------------------------------------------------
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association recognized program (each of the foregoing being
referred to as an "Eligible Institution"), hereby guarantees to deliver to the
Exchange Agent, at its address set forth above, either the Original Capital
Securities tendered hereby in proper form for transfer, or confirmation of the
book-entry transfer of such Original Capital Securities to the Exchange Agent's
account at The Depositary Trust Company ("DTC"), pursuant to the procedures for
book-entry transfer set forth in the Prospectus, in either case together with
one or more properly completed and duly executed Letter(s) of Transmittal (or
facsimile thereof) and any other required documents within five business days
after the date of execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Original Capital Securities tendered hereby to the Exchange
Agent within the time period set forth above and that failure to do so could
result in a financial loss to the undersigned.
Name of Firm:
- --------------------------------------------
Authorized Signature:
- --------------------------------------------
Title:
- --------------------------------------------
Address:
- --------------------------------------------
- --------------------------------------------
Telephone Number:
- --------------------------------------------
Date:
- --------------------------------------------
NOTE: DO NOT SEND ORIGINAL CAPITAL SECURITIES WITH THIS NOTICE OF
GUARANTEED DELIVERY. ACTUAL SURRENDER OF ORIGINAL CAPITAL SECURITIES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
Exhibit 99.3
EXCHANGE AGENT AGREEMENT
June __, 1997
Bankers Trust Company
Attention: Corporate Trust and Agency Group
Manager Public Utilities Group
Four Albany Street
4th Floor
New York, New York 10006
Ladies and Gentlemen:
Southern Investments UK plc, a public limited company incorporated
under the laws of England and Wales, as Sponsor (the "Company"), and Southern
Investments UK Capital Trust I, a Delaware statutory business trust (the
"Trust"), hereby appoint Bankers Trust Company ("Bankers Trust") to act as
exchange agent (the "Exchange Agent") in connection with an exchange offer by
the Company and the Trust to exchange up to $82,000,000 aggregate liquidation
amount of the Trust's 8.23% Exchange Subordinated Capital Income Securities (the
"Exchange Capital Securities"), which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), for a like aggregate liquidation
amount of the Trust's outstanding 8.23% Subordinated Capital Income Securities
(the "Original Capital Securities" and, together with the Exchange Capital
Securities, the "Capital Securities"). The terms and conditions of the exchange
offer are set forth in a Prospectus dated June 25, 1997 (as the same may be
amended or supplemented from time to time, the "Prospectus") and in the related
Letter of Transmittal, which together constitute the "Exchange Offer." The
registered holders of the Capital Securities are hereinafter referred to as the
"Holders." Capitalized terms used herein and not defined shall have the
respective meanings ascribed thereto in the Prospectus.
On the basis of the representations, warranties and agreements of the
Company, the Trust and Bankers Trust contained herein and subject to the terms
and conditions hereof, the following sets forth the agreement among the Company,
the Trust and Bankers Trust, as Exchange Agent for the Exchange Offer:
1. APPOINTMENT AND DUTIES AS EXCHANGE AGENT.
a. The Company and the Trust hereby authorize Bankers Trust to act as
Exchange Agent in connection with the Exchange Offer and Bankers Trust agrees to
act as Exchange Agent in connection with the Exchange Offer. As Exchange Agent,
Bankers Trust will perform those services as are outlined herein, including
accepting tenders of Original Capital Securities, and communicating generally
regarding the Exchange Offer with brokers, dealers, commercial banks, trust
companies and other persons, including Holders of the Original Capital
Securities.
b. The Company and the Trust acknowledge and agree that Bankers Trust
has been retained pursuant to this Agreement to act solely as Exchange Agent in
connection with the Exchange Offer and, in such capacity, Bankers Trust shall
perform such duties in good faith as are outlined herein.
c. Bankers Trust will examine each of the Letters of Transmittal and
certificates for Original Capital Securities and any other documents delivered
or mailed to Bankers Trust by or for Holders of the Original Capital Securities,
and any book-entry confirmations received by Bankers Trust with respect to the
Original Capital Securities, to ascertain whether:
(i) the Letters of Transmittal and any such other documents are
duly executed and properly completed in accordance with the
instructions set forth therein and that such book-entry confirmations
are in due and proper form and contain the information required to be
set forth therein,
(ii) the Original Capital Securities have otherwise been properly
tendered, and
(iii) Holders have provided their correct Tax Identification
Number or required certification.
Determination of all questions as to validity, form, eligibility and acceptance
for exchange of any Original Capital Securities shall be made by the Company or
the Trust, whose determination shall be final and binding. In each case where
the Letters of Transmittal or any other documents have been improperly completed
or executed or where book-entry confirmations are not in due and proper form or
omit certain information, or any of the certificates for Original Capital
Securities are not in proper form for transfer or some other irregularity in
connection with the tender or acceptance of the Original Capital Securities
exists, Bankers Trust will endeavor upon request of the Company or the Trust to
advise the tendering Holders of the irregularity and to take any other action as
the Company or the Trust may request to cause such irregularity to be corrected.
Notwithstanding the above, Bankers Trust shall not be under any duty to give any
notification of any irregularities in tenders or incur any liability for failure
to give any such notification.
d. With the approval of the Chairman, the Chief Accounting Officer or
the Corporate Secretary or any other party designated by any such officer of the
Company (such approval, if given orally, to be confirmed in writing), Bankers
Trust is authorized to waive any irregularities in connection with any tender of
Original Capital Securities pursuant to the Exchange Offer.
e. Tenders of Original Capital Securities may be made only as set forth
in the Letter of Transmittal and in the section of the Prospectus captioned "The
Exchange Offer" and Original Capital Securities shall be considered properly
tendered only when tendered in accordance with such procedures set forth
therein. Notwithstanding the provisions of this paragraph, Original Capital
Securities which the Chairman, the Chief Accounting Officer or the Corporate
Secretary or any other party designated by any such officer of the Company shall
approve (such approval, if given orally, to be confirmed in writing) as having
been properly tendered shall be considered to be properly tendered.
f. Bankers Trust shall advise the Company and the Trust with respect to
any Original Capital Securities received as soon as possible after 5:00 p.m.,
New York City Time, on the Expiration Date and accept its instructions with
respect to disposition of such Original Capital Securities.
g. Bankers Trust shall deliver certificates for Original Capital
Securities tendered in part to the transfer agent for split-up and shall return
any untendered Original Capital Securities or Original Capital Securities which
have not been accepted by the Company and the Trust to the Holders promptly
after the expiration or termination of the Exchange Offer.
h. Upon acceptance by the Company and the Trust of any Original Capital
Securities duly tendered pursuant to the Exchange Offer (such acceptance, if
given orally, to be confirmed in writing), the Company and the Trust will cause
Exchange Capital Securities in exchange therefor to be issued as promptly as
possible and Bankers Trust will deliver such Exchange Capital Securities on
behalf of the Company and the Trust at the rate of $100,000 (100 Capital
Securities) liquidation amount of Exchange Capital Securities for each $100,000
liquidation amount of Original Capital Securities tendered as promptly as
possible after acceptance by the Company and the Trust of the Original Capital
Securities for exchange and notice (such notice, if given orally, to be
confirmed in writing) of such acceptance by the Company and the Trust. Unless
otherwise instructed by the Company or the Trust, Bankers Trust shall issue
Exchange Capital Securities only in denominations of $100,000 (100 Capital
Securities) or any integral multiple of $1,000 in excess thereof.
i. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and the conditions set forth in the Prospectus and the
Letter of Transmittal, Original Capital Securities tendered pursuant to the
Exchange Offer may be withdrawn at any time on or prior to the Expiration Date
in accordance with the terms of the Exchange Offer.
j. The Company shall not be required to exchange any Original Capital
Securities tendered if any of the conditions set forth in the Exchange Offer are
not met. Notice of any decision by the Company and the Trust not to exchange any
Original Capital Securities tendered shall be given by the Company or the Trust
either orally (if given orally, to be confirmed in writing) or in a written
notice to Bankers Trust.
k. If, pursuant to the Exchange Offer, the Company and the Trust do not
accept for exchange all or part of the Original Capital Securities tendered
because of an invalid tender, the occurrence of certain other events set forth
in the Prospectus under the caption "The Exchange Offer -- Conditions to the
Exchange Offer" or otherwise, Bankers Trust shall, upon notice from the Company
or the Trust (such notice, if given orally, to be confirmed in writing),
promptly after the expiration or termination of the Exchange Offer return such
certificates for unaccepted Original Capital Securities (or effect appropriate
book-entry transfer), together with any related required documents and the
Letters of Transmittal relating thereto that are in Bankers Trust's possession,
to the persons who deposited such certificates.
l. Certificates for reissued Original Capital Securities, unaccepted
Original Capital Securities or Exchange Capital Securities shall be forwarded by
(a) first-class certified mail, return receipt requested under a blanket surety
bond obtained by Bankers Trust protecting Bankers Trust, the Company and the
Trust from loss or liability arising out of the non-receipt or non-delivery of
such certificates or (b) by registered mail insured by Bankers Trust separately
for the replacement value of each such certificate.
m. Bankers Trust is not authorized to pay or offer to pay any
concessions, commissions or solicitation fees to any broker, dealer, commercial
bank, trust company or other nominee or to engage or use any person to solicit
tenders.
n. As Exchange Agent, Bankers Trust:
(i) shall have no duties or obligations other than those
specifically set forth herein or as may be subsequently agreed to in
writing;
(ii) will make no representations and will have no
responsibilities as to the validity, value or genuineness of any of
the certificates for the Original Capital Securities deposited
pursuant to the Exchange Offer, and will not be required to and will
make no representation as to the validity, value or genuineness of the
Exchange Offer;
(iii) shall not be obligated to take any legal action hereunder
which might in Bankers Trust's reasonable judgment involve any expense
or liability, unless Bankers Trust shall have been furnished with
indemnity reasonably satisfactory to it and additional fees for the
taking of such action;
(iv) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter,
telegram or other document or security delivered to Bankers Trust and
reasonably believed by Bankers Trust to be genuine and to have been
signed by the proper party or parties;
(v) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its
due execution and validity and effectiveness of its provisions, but
also as to the truth and accuracy of any information contained
therein, which Bankers Trust believes in good faith to be genuine and
to have been signed or represented by a proper person or persons
acting in a fiduciary or representative capacity;
(vi) may rely on and shall be protected in acting upon written or
oral instructions from the Chairman, the Chief Accounting Officer or
the Corporate Secretary or any other designated officer of the
Company;
(vii) may consult with its own counsel with respect to any
questions relating to Bankers Trust's duties and responsibilities and
the advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted to
be taken by Bankers Trust hereunder in good faith and in accordance
with the advice of such counsel; and
(viii) shall not advise any person tendering Original Capital
Securities pursuant to the Exchange Offer as to whether to tender or
refrain from tendering all or any portion of its Original Capital
Securities or as to the market value, decline or appreciation in
market value of any Original Capital Securities that may or may not
occur as a result of the Exchange Offer or as to the market value of
the Exchange Capital Securities.
p. Bankers Trust shall take such action as may from time to time be
requested by the Company or the Trust to furnish copies of the Prospectus,
Letter of Transmittal and the Notice of Guaranteed Delivery or such other forms
as may be approved from time to time by the Company and the Trust, to all
persons requesting such documents and to accept and comply with telephone
requests for information relating to the Exchange Offer. The Company and the
Trust will furnish Bankers Trust with copies of such documents at its request.
q. Bankers Trust shall advise orally and promptly thereafter confirm in
writing to the Company and the Trust and such other person or persons as the
Company and the Trust may request, daily (and more frequently during the week
immediately preceding the Expiration Date and if otherwise reasonably requested)
up to and including the Expiration Date, the aggregate liquidation amount of
Original Capital Securities which have been tendered pursuant to the terms of
the Exchange Offer and the items received by Bankers Trust pursuant to the
Exchange Offer and this Agreement. In addition, Bankers Trust will also provide,
and cooperate in making available to the Company and the Trust, or any such
other person or persons upon request made from time to time, such other
information in its possession as the Company and the Trust may reasonably
request. Such cooperation shall include, without limitation, the granting by
Bankers Trust to the Company and the Trust, and such person or persons as the
Company and the Trust may request, access to those persons on Bankers Trust's
staff who are responsible for receiving tenders, in order to ensure that
immediately prior to the Expiration Date the Company and the Trust shall have
received adequate information in sufficient detail to enable the Company and the
Trust to decide whether to extend the Exchange Offer. Bankers Trust shall
prepare a final list of all persons whose tenders were accepted, the aggregate
liquidation amount of Original Capital Securities tendered, the aggregate
liquidation amount of Original Capital Securities accepted and deliver said list
to the Company and the Trust.
r. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery shall be stamped by Bankers Trust as to the date and the
time of receipt thereof and shall be preserved by Bankers Trust for a period of
time at least equal to the period of time Bankers Trust preserves other records
pertaining to the transfer of securities, or one year, whichever is longer, and
thereafter shall be delivered by Bankers Trust to the Company and the Trust.
Bankers Trust shall dispose of unused Letters of Transmittal and other surplus
materials by returning them to the Company or the Trust.
s. Bankers Trust hereby expressly waives any lien, encumbrance or right
of set-off whatsoever that Bankers Trust may have with respect to any funds
deposited with it for the payment of transfer taxes by reason of amounts, if
any, borrowed by the Company or the Trust, or any of its or their subsidiaries
or affiliates pursuant to any loan or credit agreement with Bankers Trust or for
compensation owed to Bankers Trust hereunder or for any other matter.
2. COMPENSATION.
For services rendered as Exchange Agent hereunder, Bankers Trust shall
be entitled to such reasonable compensation as shall be agreed to by the
Company.
3. INDEMNIFICATION.
The Company and the Trust hereby agree to indemnify the Exchange Agent
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence, bad faith or willful misconduct on its part arising out of
or in connection with the acceptance or administration of this Agreement and the
performance of its duties hereunder, including the costs and expenses of
defending itself against any claim of liability in connection with the exercise
or performance of any of its powers or duties hereunder. This indemnification
shall survive the termination of this Agreement pursuant to Section 10 hereof.
4. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York applicable to contracts executed in and to be
performed in that state.
5. NOTICES.
Any communication or notice provided for hereunder shall be in writing
and shall be given (and shall be deemed to have been given upon receipt) by
delivery in person, telecopy, or overnight delivery or by registered or
certified mail (postage prepaid, return receipt requested) to the applicable
party at the addresses indicated below:
If to the Company: Southern Investments UK plc
c/o Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
Attn: Chief Financial Officer
Telephone: (770) 379-7000
Facsimile: (770) 379-7001
If to Bankers Trust: Bankers Trust Company
Four Albany Street
4th Floor
New York, New York 10006
Telephone: (212) 250-6826
Facsimile: (212) 250-6725
If to the Trust: Southern Investments UK Capital Trust I
c/o Southern Energy, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
Attn: Chief Financial Officer
Telephone: (770) 379-7000
Facsimile: (770) 379-7001
or, as to each party, at such other address as shall be designated by such party
in a written notice complying as to delivery with the terms of this Section.
6. PARTIES IN INTEREST.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto and nothing in this Agreement, express or implied, is intended
to or shall confer upon any other person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement. Without limitation to
the foregoing, the parties hereto expressly agree that no holder of Original
Capital Securities or Exchange Capital Securities shall have any right, benefit
or remedy of any nature whatsoever under or by reason of this Agreement.
7. COUNTERPARTS; SEVERABILITY.
This Agreement may be executed in one or more counterparts, and by
different parties hereto on separate counterparts, each of which when so
executed shall be deemed an original, and all of such counterparts shall
together constitute one and the same agreement. If any term or other provision
of this Agreement or the application thereof is invalid, illegal or incapable of
being enforced by any rule of law, or public policy, all other provisions of
this Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the agreements contained herein is not affected
in any manner adverse to any party. Upon such determination that any term or
provision or the application thereof is invalid, illegal or unenforceable, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the agreements contained herein may be performed
as originally contemplated to the fullest extent possible.
8. CAPTIONS.
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
9. ENTIRE AGREEMENT; AMENDMENT.
This Agreement constitutes the entire understanding of the parties
hereto with respect to the subject matter hereof. This Agreement may not be
amended or modified nor may any provision hereof be waived except in writing
signed by each party to be bound thereby.
10. TERMINATION.
This Agreement shall terminate upon the earliest of (a) the 90th day
following the expiration, withdrawal, or termination of the Exchange Offer, (b)
the close of business on the date of actual receipt of written notice by Bankers
Trust from the Company and the Trust stating that this Agreement is terminated,
(c) one year following the date of this Agreement, or (d) the time and date on
which this Agreement shall be terminated by mutual consent of the parties
hereto.
11. MISCELLANEOUS.
Bankers Trust hereby acknowledges receipt of the Prospectus and the
Letter of Transmittal and the Notice of Guaranteed Delivery and further
acknowledges that it has examined each of them. Any inconsistency between this
Agreement, on the one hand, and the Prospectus and the Letter of Transmittal and
the Notice of Guaranteed Delivery (as they may be amended or supplemented from
time to time), on the other hand, shall be resolved in favor of the latter three
documents, except with respect to the duties, liabilities and indemnification of
Bankers Trust as Exchange Agent which shall be controlled by this Agreement.
Kindly indicate your willingness to act as Exchange Agent and Bankers Trust's
acceptance of the foregoing provisions by signing in the space provided below
for that purpose and returning to the Company a copy of this Agreement so
signed, whereupon this Agreement and Bankers Trust's acceptance shall constitute
a binding agreement among Bankers Trust, the Company and the Trust.
Very truly yours,
SOUTHERN INVESTMENTS UK plc
By:___________________________
Name:
Title:
SOUTHERN INVESTMENTS UK CAPITAL TRUST I
By:___________________________
Name:
Title:
Accepted as of the date first above written:
BANKERS TRUST COMPANY,
as Exchange Agent
By:___________________________
Name:
Title:
