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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
----------- ---------------------------------- -----------------
333-09033 Southern Investments UK plc None
(Registered in England & Wales)
800 Park Avenue
Aztec West
Almondsbury
Bristol
BS32 4SE, UK
(01144) 1454 201101
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Description of Shares Outstanding
Registrant Common Stock at January 31, 1999
- ---------- -------------- -------------------
Southern Investments UK plc Par Value(pound)1 Per Share 902,128,735
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report Form 10-Q of Southern Investments UK plc (the
"Company") contains forward-looking statements in addition to historical
information. The Company cautions that there are various important factors that
could cause actual results to differ materially from those indicated in the
forward-looking statements; accordingly, there can be no assurance that such
indicated results will be realized. These factors include, among other things,
legislative and regulatory issues (such as the results of the current review of
regulation, and the results of the supply and distribution price reviews
scheduled to take effect April 1, 2000, and possible full separation of the
Distribution and Supply businesses, see Management's Discussion and Analysis
"Future Earnings Potential"); the extent and timing of the entry of additional
competition in the supply market; potential business strategies, including
acquisitions or dispositions of assets or internal restructuring that may be
pursued by the Company or its subsidiaries; changes in or application of
environmental and other laws and regulations to which the Company and its
subsidiaries are subject; political, legal and economic conditions and
developments in which the Company and its subsidiaries operate; financial market
conditions and the results of financing efforts; changes in commodity prices and
interest rates; weather and other natural phenomena; the performance of projects
undertaken by the Company or its subsidiaries and the success of efforts to
invest in and develop new opportunities; and other factors whether or not
discussed elsewhere herein or in reports, filed from time to time by the Company
with the Securities and Exchange Commission ("SEC").
1
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Three Months Ended December 31,
--------------------------------------
1998 1997
---- ----
(Note A)
OPERATING REVENUES (pound) 211 $ 351 (pound) 209
COST OF SALES 142 236 136
----- ---- -----
GROSS MARGIN 69 115 73
----- ---- -----
OPERATING EXPENSES:
Maintenance 10 17 8
Depreciation and amortization 12 20 12
Selling, general, and administrative 16 26 15
----- ---- -----
Total operating expenses 38 63 35
----- ---- -----
Operating income 31 52 38
----- ---- -----
OTHER INCOME (EXPENSE):
Interest income 2 3 -
Interest expense (15) (25) (14)
Other, net 1 2 2
----- ---- -----
Total other income (expense) (12) (20) (12)
----- ---- -----
INCOME BEFORE INCOME TAXES 19 32 26
INCOME TAXES:
Customary (7) (12) (8)
Release of income tax accruals 7 12 -
----- ---- -----
NET INCOME (pound) 19 $ 32 (pound) 18
===== ==== =====
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
2
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months Ended December 31,
-------------------------------------
1998 1997
---- ----
(Note A)
OPERATING REVENUES (pound) 561 $ 933 (pound) 543
COST OF SALES 359 597 348
---- ----- ----
GROSS MARGIN 202 336 195
---- ----- ----
OPERATING EXPENSES:
Maintenance 27 45 25
Depreciation and amortization 37 61 35
Selling, general, and administrative 45 75 45
---- ----- ----
Total operating expenses 109 181 105
---- ----- ----
Operating income 93 155 90
---- ----- ----
OTHER INCOME (EXPENSE):
Interest income 2 3 1
Interest expense (45) (75) (42)
Other, net 10 17 9
---- ----- ----
Total other income (expense) (33) (55) (32)
---- ----- ----
INCOME BEFORE INCOME TAXES 60 100 58
INCOME TAXES:
Customary (20) (34) (24)
Release of income tax accruals 7 12 -
Effect of change in tax rates (Note I) 11 18 22
Windfall levy (Note J) - - (90)
---- ----- ----
NET INCOME (LOSS) (pound) 58 $ 96 (pound) (34)
==== ===== ====
The accompanying notes form an integral part of these condensed consolidated statements.
3
</TABLE>
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months Ended December 31,
--------------------------------------
1998 1997
---- ----
(Note A)
NET CASH PROVIDED BY OPERATING ACTIVITIES (pound) 70 $ 117 (pound) 56
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (58) (97) (62)
Other 10 17 3
----- ----- -----
Net cash used in investing activities (48) (80) (59)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of dividends (20) (33) (59)
Change in short-term borrowings (4) (7) 62
Issue of share capital (Note K) 402 668 -
Loans to affiliated company (Note K) (351) (583) -
Payment of premium in respect of loans to affiliated
company and related hedges (Note K) (51) (85) -
----- ----- -----
Net cash (used for) provided from financing
activities (24) (40) 3
----- ----- -----
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2) (3) -
CASH AND CASH EQUIVALENTS, beginning of
period 5 8 3
----- ----- -----
CASH AND CASH EQUIVALENTS, end of period (pound) 3 $ 5 (pound) 3
===== ===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (pound) (36) $ (60) (pound) (38)
===== ===== =====
Cash paid for income taxes:
Customary - - (pound) (5)
Windfall levy (Note J) (45) (75) (45)
----- ------ -----
Total cash paid for income taxes (pound) (45) $ (75) (pound) (50)
===== ====== =====
The accompanying notes form an integral part of these condensed consolidated statements.
4
</TABLE>
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, 1998 March 31,
----------------- ---------
(Unaudited) 1998
----------- ----
(Note A)
PROPERTY, PLANT, AND EQUIPMENT (pound) 1,434 $2,384 (pound) 1,389
Less accumulated depreciation 138 229 109
------ ------ ------
Property, plant, and equipment, net 1,296 2,155 1,280
------ ------ ------
OTHER ASSETS:
Investments 16 27 17
Prepaid pension cost 130 216 116
Goodwill, net of accumulated amortization of (pound)15 ($25) at
December 31, 1998 and(pound)11 at March 31, 1998 168 279 172
------ ------ ------
Total other assets 314 522 305
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 3 5 5
Investments 17 28 17
Receivables:
Customer accounts, less provision for uncollectables of (pound)10 ($17) at
December 31, 1998 and(pound)9 at March 31, 1998 82 136 85
Loans to affiliated company (Note K) 351 584 -
Other 14 24 14
------ ------ ------
Receivables, net 447 744 99
Materials and supplies 3 5 4
Prepaid expenses 15 25 18
Premium in respect of loans to affiliated company and related
hedges, net of accumulated amortization of (pound)1 ($2) at December
31, 1998 (Note K) 50 83 -
------ ------ ------
Total current assets 535 890 143
------ ------ ------
TOTAL ASSETS (pound) 2,145 $3,567 (pound) 1,728
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
5
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY AND LIABILITIES
<S> <C> <C> <C>
December 31, 1998 March 31,
---------------- ---------
(Unaudited) 1998
----------- ----
(Note A)
STOCKHOLDER'S EQUITY:
Common stock,(pound)1 par value, 902,128,735 and 500,400,587 shares
authorized, issued and outstanding at December 31, 1998, and
March 31, 1998, respectively (Note K) (pound) 902 $1,500 (pound) 500
Retained deficit (Note C) (125) (208) (163)
------ ----- ------
Total stockholder's equity 777 1,292 337
------ ----- ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SOUTHERN INVESTMENTS
UK CAPITAL TRUST I HOLDING COMPANY JUNIOR
SUBORDINATED DEBENTURES 50 83 50
NON-CURRENT LIABILITIES:
Long-term debt 301 501 301
Deferred income taxes 357 594 361
Provision for loss contracts (Note D) 70 116 72
Other 39 65 46
------ ------ ------
Total non-current liabilities 767 1,276 780
------ ------ ------
CURRENT LIABILITIES:
Commercial paper - - 80
Notes payable to banks 327 544 248
Notes payable to affiliated company 25 41 25
Other notes payable 7 12 10
Accounts payable 79 131 50
Accrued income taxes 43 72 82
Unearned revenue 4 7 4
Accrued interest 11 18 8
Other 55 91 54
------ ------ ------
Total current liabilities 551 916 561
------ ------ ------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,145 $3,567 (pound) 1,728
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
6
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
(A) Solely for the convenience of the reader, certain pounds sterling amounts
included in the condensed consolidated financial statements have been
translated into US dollars at the exchange rate of $1.6628 = (pound)1.00,
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, 1998.
(B) The condensed consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the SEC and in
conformity with accounting principles generally accepted in the United
States. In the opinion of the Company's management, the information
furnished herein reflects all adjustments necessary to present fairly
the results of the three-month and nine-month periods ended December 31,
1998 and 1997. The Company's fiscal year-end is March 31. Certain
information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations although the Company believes that the disclosures
are adequate to make the information presented not misleading.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's report on Form 10-K for the year ended March
31, 1998.
The condensed consolidated balance sheet as at March 31, 1998 included
herein has been extracted from audited consolidated financial statements;
all other figures are unaudited. The condensed consolidated financial
statements included herein have been reviewed by the Company's
independent public accountants and their report is included herein as
Exhibit 15.
There were no items for inclusion in a consolidated statement of
comprehensive income other than net income as shown on the condensed
consolidated statements of income. Consequently, a consolidated statement
of comprehensive income has not been included.
(C) The Company's main investment and only significant asset is the entire
share capital of SWEB, which is headquartered in Bristol, England. The
Company shows a retained earnings deficit primarily due to dividends in
the amount of (pound)191 million being declared and paid by the Company
during the fiscal year 1996 as proceeds from the sale of SWEB's shares in
The National Grid Group plc provided cash in addition to that provided
from operations. In addition, the first budget of the Labour government
included a "one-off windfall levy on the excess profits of the privatized
utilities"; SWEB's liability was assessed at (pound)90 million (see Note
J).
(D) 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 their present value of(pound)70 million at December 31, 1998
and (pound)72 million at March 31, 1998. 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.
7
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(E) Effective March 31, 1998, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 131, "Disclosure About Segments of
an Enterprise and Related Information". The Company is primarily engaged
in two electric industry segments: distribution, which involves the
transfer of electricity from the high voltage transmission system, and
its delivery, across low voltage distribution systems, to consumers; and
supply, which involves bulk purchase of electricity from the Pool and
arranging for its sale and transfer to its customers. All revenues are in
respect of sales to customers in the UK. Information about the Company's
operations in these individual segments, which also reflect its products
and services, is detailed below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Distribution Supply Other Eliminations Consolidated
------------ ------ ----- ------------ ------------
(in millions)
Three months ended December 31, 1998:
-------------------------------------
Operating revenues (pound) 68 (pound) 206 (pound) 6 (pound) (69) (pound) 211
Operating income 34 1 (4) - 31
Nine months ended December 31, 1998:
------------------------------------
Operating revenues (pound) 178 (pound) 529 (pound) 37 (pound) (183) (pound) 561
Operating income 80 5 8 - 93
Total assets at December 31, 1998 (pound)1,560 (pound) 118 (pound) 467 (pound) - (pound) 2,145
Three months ended December 31, 1997:
-------------------------------------
Operating revenues (pound) 63 (pound) 196 (pound) 8 (pound) (58) (pound) 209
Operating income 29 5 4 - 38
Nine months ended December 31, 1997:
------------------------------------
Operating revenues (pound) 166 (pound) 500 (pound) 38 (pound) (161) (pound) 543
Operating income 74 16 - - 90
Total assets at March 31, 1998 (pound)1,540 (pound) 110 (pound) 78 (pound) - (pound) 1,728
</TABLE>
Included in "Other" above are ancillary business activities that
generally support SWEB's main electricity distribution and supply
businesses, as well as corporate activities and items not
appropriate to allocate to specific segments. Interest expense
and taxes are wholly allocated to "Other" and are disclosed in
the condensed consolidated statements of income. The eliminations
above primarily relate to internal sales from the distribution
business to the supply business for the use of the network. Such
sales are priced at rates applicable to SWEB and other suppliers
operating in SWEB's Authorized Area.
(F) The Company and its subsidiaries have non-trading operations that are
exposed to certain market risks including changes in interest rates,
cross currency exchange rates and the volatility of prices of
electricity purchased in the Pool. To mitigate risk attributable to
these exposures the Company has entered into various derivative
financial instruments, the sole purpose of which is to hedge exposure
in these areas. At December 31, 1998, the status of outstanding
derivative contracts was as follows:
(i) The Company and SWEB utilize interest rate swaps to minimize
borrowing costs and mitigate their exposure to fluctuations in interest
rates by allowing them to effectively convert their outstanding
variable rate debt into fixed rate debt. These swaps are designed as
hedges of underlying debt obligations and, as such, the interest rate
differential is reflected as an adjustment to interest expense over the
life of the swaps. At December 31, 1998, sterling interest rate swaps
expiring between 2001 and 2012, with notional amounts totalling (pound)
600 million, resulted in an unrealized loss of (pound)78 million when
marked to market.
8
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ii) Foreign currency swap contracts are used by the Company and SWEB to
hedge exposure to currency fluctuations for US dollar denominated debt.
Gains and losses on these hedges are deferred and recognized as an
adjustment to the carrying amount when the hedged transaction occurs. At
December 31, 1998, currency swaps expiring between 2001 and 2007, with
notional amounts totalling (pound)350 million, resulted in an unrealized
gain of (pound)15 million when marked to market.
(iii) 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. SWEB's goal is to obtain competitively priced contracts to cover
the majority of its purchase requirements. The gains and losses on such
contracts are deferred and recognized as electricity is purchased.
Management believes that the nature of these contracts is such that the
fair value is not materially different from that recorded in the
accounts. SWEB also has commitments to purchase capacity under its long
term contracts (see Note D).
(iv) The Company is exposed to losses in the event of nonperformance by
counterparties to its financial instrument contracts. To mitigate 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. The Company is unaware
of any counterparty which will fail to meet its obligations.
(G) The Company and SWEB are routinely party to legal proceedings arising in
the ordinary course of business which are not material, either
individually or in aggregate. Neither the Company nor SWEB is a party to
any material legal proceedings nor are they currently aware of any
threatened material legal proceedings. As described below, the Company is
aware of an issue which could subsequently impact SWEB.
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 early 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 in June
1997. The High Court also granted the complainants leave to appeal to the
Court of Appeal. The Court of Appeal hearing took place between October
26 and 29, 1998, the outcome of which is anticipated in February 1999. If
the complainants' appeal is successful, either at the Court of Appeal or
on a subsequent appeal to the House of Lords, it will have an adverse
effect on SWEB. Unless the High Court decision is reversed, this case
should not impact SWEB significantly; however it is not practical to make
an estimate of the exposure at the present time.
9
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(H) The condensed consolidated financial statements included herein have
not been prepared in accordance with the policies of Statement of
Financial Accounting Standards No. 71 "Accounting for the Effects of
Certain Types of Regulation" ("SFAS No. 71"). This pronouncement,
under which most US electric utilities report financial statements,
applies to entities which are subject to cost-based rate regulation.
By contrast, SWEB is not subject to rate regulation, but rather, is
subject to price cap regulation and therefore the provisions of SFAS
No. 71 do not apply. Financial statements presented in accordance with
SFAS No. 71 often contain certain deferred items which have not been
included in rates charged to customers in compliance with the
respective regulatory authority rulings, but which would have been
included in the income statement of enterprises in general under US
GAAP. The accompanying consolidated financial statements of the
Company do not contain such deferrals.
(I) The UK government's Finance Bill 1998, which received Royal Assent on
July 31, 1998, included a reduction in the rate of UK corporation tax
from 31% to 30% effective April 1, 1999. This decrease resulted in an
accounting credit reducing SWEB's provision for deferred income taxes by
approximately (pound)11 million, during the second quarter fiscal year
1999.
In the comparative second quarter fiscal year 1998, the UK corporation
tax rate was reduced from 33% to 31% with effect from April 1, 1997,
which resulted in an accounting credit reducing the Company's provision
for deferred income taxes by approximately (pound)22 million.
(J) On July 2, 1997 the Labour government presented its first budget which
included a "one-off windfall levy on the excess profits of the privatized
utilities". Based upon the legislation, SWEB's liability was assessed at
(pound)90 million. The levy was paid in two equal installments; the first
on December 1, 1997 and the second in two tranches on November 30, 1998
and December 1, 1998.
(K) In December 1998 a more efficient capital structure for SWEB Holdings UK
("Holdings UK") and the Company was put in place. At that time, Holdings
UK became a co-obligor of the Company's existing long-term debt and
subordinated debentures. Sums totalling (pound)351 million were
contributed to the Company for newly issued shares and the Company made
three long-term loans (totalling (pound)351 million) to Holdings UK on
the same terms as the existing long-term debt and subordinated
debentures. In consideration of entering into these loans and their
related currency and interest rate swaps, the Company made premium
payments (independently calculated as a fair arms-length value between
unconnected parties) of (pound)51 million to Holdings UK. These premium
payments are being amortized over the life of the respective loans and
swaps.
10
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD FISCAL QUARTER 1999 vs. THIRD FISCAL QUARTER 1998
AND
FISCAL YEAR-TO-DATE 1999 vs. FISCAL YEAR-TO-DATE 1998
INTRODUCTION
The Company is a wholly-owned subsidiary of SWEB Holdings Limited
("Holdings"). Holdings is a wholly-owned subsidiary of Holdings UK, which is
owned indirectly by Southern Company ("Southern") and PP&L Resources, Inc.
("PP&L").
PP&L initially purchased a 25 percent stake in Holdings in July 1996. On
June 18, 1998, Southern sold an additional 26 percent interest in Holdings to
PP&L. This further sale increased PP&L's economic interest in Holdings to 51
percent. Subsequently on June 18, 1998, shares in Holdings held by Southern and
PP&L were exchanged for equivalent shares in Holdings UK. Under the terms of the
agreement, Southern retains operational and management control of SWEB and the
Holdings UK group. Southern continues to hold a majority of the voting shares in
Holdings UK and retains a majority of the Board of Directors.
On December 10, 1998, the Board of Directors elected W. P. Bowers, who had
been serving as senior vice president of marketing at Georgia Power, an
affiliated company, as Chairman and Chief Executive of SWEB. He replaces Gale
Klappa, who has returned to the US to assume new responsibilities with Southern.
The Company was incorporated as a public limited company under the laws of
England and Wales on June 23, 1995, as a vehicle for the acquisition of SWEB,
one of the 12 regional electricity companies ("RECs") in England and Wales
licensed to distribute, supply and, to a limited extent, generate electricity.
The Company's main investment and only significant asset is the entire share
capital of SWEB, which is headquartered in Bristol, England.
SWEB's two main business lines are the distribution of electricity and the
supply of electricity to approximately 1.3 million customers in its Authorized
Area in southwest England. This area covers approximately 5,560 square miles and
has a resident population of approximately 2.8 million.
RESULTS OF OPERATIONS
Earnings
Operating income for the third quarter and year-to-date fiscal year 1999
was(pound)31 million and(pound)93 million, respectively, compared to (pound)38
million and(pound)90 million for the corresponding periods of fiscal year 1998.
11
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<S> <C> <C>
Significant income statement items appropriate for discussion include the following:
Increase (Decrease)
--------------------------------------------------------
Third Quarter Year-To-Date
--------------------------------------------------------
(in millions) % (in millions) %
Operating revenues................................... (pound) 2 1 (pound) 18 3
Cost of sales........................................ 6 4 11 3
Interest income...................................... 2 - 1 100
Interest expense..................................... 1 7 3 7
Other income, net.................................... (1) (50) 1 11
Income taxes - customary............................. (1) (13) (4) (17)
Income taxes - release of income tax accruals........ 7 - 7 -
</TABLE>
Operating revenues
Revenue increases were primarily within the supply business where revenues
increased by (pound)10 million for the quarter and (pound)29 million
year-to-date. The number of electricity units supplied increased by 11% for the
quarter and by 13% year-to-date, when compared to the corresponding periods in
fiscal year 1998, due primarily to an increase in units supplied to Unregulated
Supply Customers. Revenues also increased within the distribution business by
(pound)5 million for the quarter and (pound)12 million year-to-date.
Revenues from ancillary businesses, after intra-business eliminations,
decreased by (pound)13 million for the quarter and by (pound)23 million
year-to-date. Due to the commencement of competition for Regulated Supply
Customers which began in SWEB's Authorised Area in November 1998, and the
uncertainty of recoverability of an element of the unbilled revenue receivable,
management reflected a (pound)9 million revision to this balance during the
quarter. The additional year-to-date decrease primarily reflects lower activity
in the gas retailing business due to restructuring of that business, including a
teaming arrangement with another organization.
Cost of sales
The increase in the cost of sales primarily relates to energy purchases
due to the increase in units supplied as explained above. This increase in
energy purchases is partly offset by reduced costs in the gas retailing
business.
Interest income
The increase in the quarter and year-to-date interest income is largely
due to interest on three long-term loans (totalling (pound)351 million) made to
Holdings UK during the current quarter.
Interest expense
The increase in the quarter and year-to-date interest expense is largely
due to increased short-term borrowings to finance the first and second
installments of the windfall levy, paid in December 1997 and November/December
1998 respectively.
Other income, net
The increase year-to-date reflects the gain on the disposition of certain
non-core assets, partly offset by additional income from an investment in
generating plant in the corresponding period of fiscal year 1998.
12
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Income taxes
The decrease in customary taxes in the quarter is primarily due to a lower
income before tax and a lower rate. The decrease year-to-date is primarily due
to a prudent increase to the provision in the corresponding period of fiscal
year 1998 to cover possible disallowable items. In the current quarter, it has
been possible to reduce the provision following the resolution of some of these
items. This is shown as release of income tax accruals.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative
of future earnings potential. The level of future earnings depends on numerous
factors including the outcome of the current distribution price review discussed
below, future regulatory price reviews, any required physical separation of the
Supply and Distribution businesses, and the level of energy sales and customer
growth/retention in the electricity businesses. A major impact on future
earnings will be the interest charges from funding requirements to meet the
second installment of the windfall levy of (pound)45 million paid in the current
quarter. An item that could also result in additional funding requirements
relates to the outcome of a court ruling related to a pension matter. See Notes
(J) and (G), respectively, in the Notes to the Condensed Consolidated Financial
Statements.
There are currently a number of issues which impact the electricity
industry and which are the subject of discussion and consultation papers. The
principal ones are:
(i) In March 1998 the government published a discussion paper ("Green Paper") on
the regulation of the water, electricity, gas and telecommunications utilities
within the UK entitled "A Fair Deal for Consumers: Modernizing the Framework for
Utility Regulation". The government's stated objective for the review is to set
a long term stable framework for utilities which is seen to be fair by all the
interested groups involved. The guiding principles are that regulation must be
transparent, consistent and predictable. The closing date for responses was May
1998. In July 1998 the government announced its conclusions on reform of utility
regulation. Key decisions include merging the electricity and gas regulators,
the retention of RPI - X (see below), social and environmental actions to be
issued by Ministers, and greater transparency. These proposals will be the
subject of new legislation as soon as Parliamentary time permits. In October,
1998, the government published their proposals in two areas for consultation.
The two documents are "The Future of Gas and Electricity Regulation" and
"Consumer Councils". The government is currently considering the responses
received.
(ii) In May 1998, the Director General of Electricity Supply (the "Regulator")
issued a consultation paper concerning the separation of businesses in the
context of the reviews of the price controls post 2000. It is the Regulator's
view that full separation of supply and distribution would be desirable.
However, he recognizes that it is likely that interim arrangements will be
necessary. In November 1998, the Regulator published a further consultation
paper on separation of the businesses. The Regulator remains of the view that
full separation between supply and distribution is desirable. However, the paper
acknowledges that for certain unspecified shared services they might allow an
interim exemption. Discussions are continuing.
13
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(iii) In October 1997, the government's Minister for Science, Energy and
Industry asked the Regulator to consider how a review of electricity trading
arrangements (including the operation of the Pool) might be undertaken, together
with changes in legislation. In July, 1998 the Regulator published his
proposals, which are for a market-based trading arrangement using forward
contracts for the physical delivery of electricity. A short-term bilateral
market is proposed to enable "fine tuning" of contract positions. The System
Operator will be responsible for balancing generation and demand from about four
hours before each half-hour trading period. Suppliers and generators will be
charged an imbalance fee for differences between their contractual and physical
positions by the System Operator. The Regulator also proposes to take a higher
degree of control than in the present trading arrangements. Following the
government's confirmation that the Regulator's proposals were "moving in the
right direction", the Regulator published a framework document in November,
1998. This explains how a program for the delivery of new electricity trading
arrangements will be taken forward.
(iv) The current distribution price control review, expected to be effective
April 1, 2000.
As these papers and review are only consultative at this time, it is not
possible for the Company to determine the impact until after such issues have
been finalized by the government, and firm proposals are made by the Regulator.
On the separation issue, the additional costs to the Company could be
significant if full separation was ultimately required.
The largest portion of SWEB's operating income, approximately 80% in the
fiscal year 1998, is derived from its distribution business - essentially the
operation and maintenance of the electricity network in its Authorized Area in
the southwest of England. SWEB is the only distributor of electricity in this
area, and management believes that economic, environmental and regulatory
factors are likely to prevent competitors from entering this business in SWEB's
Authorized Area.
Distribution revenues are subject to price cap regulation. The Regulator
applies a price control formula ("DPCF"), 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 and X is an adjustment factor determined by the Regulator. X
is currently 3% for SWEB.
The DPCF is usually set for a five-year period, subject to more frequent
adjustments as determined necessary by the Regulator. At each review, the
Regulator can require a one-time price adjustment. 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. In July 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 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 thereafter, before an allowed increase for
inflation. The Regulator is currently undertaking the next DPCF review expected
to become effective from April 1, 2000.
Within the supply business, customers fall into two categories,
Unregulated and Regulated. Until March 31, 1998, Unregulated Supply Customers
were defined as customers who had an electricity demand of more than 100kW. From
April 1, 1998, Unregulated Supply Customers are defined as customers who are
non-domestic and who have an annual consumption in excess of 12,000kWh.
Unregulated Supply Customers may contract for their electricity from any holder
of a supply license, however, Supply Customers with demand less than 100kW must
continue to take supply from their host REC until competition is allowed (see
below).
14
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Regulated Supply Customers are those customers who are not Unregulated
Supply Customers and largely comprise domestic and small business customers.
Prices charged to Regulated Supply Customers by a REC within its Authorized Area
are controlled by regulation. Until March 31, 1998, the calculation of the
maximum supply charge was based on a supply price control formula ("SPCF"),
similar to the DPCF, plus an ability to pass through certain costs, principally
the costs of energy purchases, transmission and distribution use of system
charges. For the four-year period ending March 31, 1998, an efficiency factor of
X = 2% (before an allowed increase for inflation) was applied to SWEB, offset by
an allowance for both unit and customer growth. For fiscal years 1999 and 2000,
supply business charges to Regulated Supply Customers are subject to maximum
price restraints instead of being based on the SPCF; the concept of pass through
costs no longer applies. This is intended to protect each REC's Regulated Supply
Customers which it supplies within its Authorized Area.
Following the announcement by the Regulator in October 1997, in respect of
its latest supply price review for Regulated Supply Customers effective from
April 1, 1998, SWEB has implemented a tariff reduction of 2.8% effective from
that date. A further 3% reduction (before an allowed increase for inflation) is
planned to be implemented for fiscal year 2000. This average tariff reduction
primarily reflects the expected reduction in power purchase costs after March
31, 1998 when expensive CFDs, (Note F), agreed by the government at the time of
privatization of the electricity industry, ended, and the fossil fuel levy will
be further reduced.
The exclusive right to supply Regulated Supply Customers (as defined prior
to April 1, 1998) was scheduled to be phased out over a six-month period
commencing April 1, 1998, after which all supply customers would have the
ability to choose their electricity supplier. An announcement by the Regulator
in October 1997 stated that the exclusive right to supply Regulated Supply
Customers should be phased out from September 1998. Each REC has an authorized
start date for competition to commence in its Authorized Area, and SWEB's
commenced on November 30, 1998. The first tranche represented approximately 10%
of SWEB's customers; the loss of customers to date will not have a material
impact on SWEB's results. Once a REC's Authorized Area is open to competition,
then it can compete in the Authorized Area of other RECs where competition has
commenced, and vice versa.
The Regulator has also proposed a penalty on all RECs, including SWEB,
related to the delay in opening competition to Regulated Supply Customers beyond
the April 1, 1998 deadline; any penalty imposed on SWEB is not expected to have
a material impact on earnings.
SWEB's distribution business does not involve the purchase and sale of
electricity, and therefore SWEB's risk management efforts are focused on the
supply business which is exposed to Pool price volatility. SWEB uses 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 total demand for fiscal year 1999 is substantially hedged through
various types of agreements, including CFDs.
15
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The most common contracts for supply to Unregulated 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. SWEB manages load shape risk by
setting individual customer sales prices based on their expected load shape and
including an additional premium to cover the risk of load shape variation.
Variable volume CFDs are also used when available at a competitive price. 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. SWEB intends to purchase cover at competitive prices and constantly
evaluates market conditions. No assurance can be given that an adequate,
transparent market for such products will in fact be available and thus that
contracts will be available at competitive prices.
SWEB constantly evaluates whether owning its own source of generation or
contracting for such source or sources is the most appropriate method for
managing purchase price risk, but no assurance can be given that such methods
would be available to, or economically appropriate for, SWEB.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for fiscal years beginning after June 15, 1999. While the
Company has not yet quantified the impact of adopting this statement on its
financial statements, it could increase volatility in earnings and other
comprehensive income.
YEAR 2000 READINESS
Year 2000 Challenge
To save valuable storage space, mainframe computer programmers in the
1960s and 1970s shortened the year portion of date entries to just two digits.
The date January 1, 1998, for example, was recorded by a computer as 010198.
Computers assumed, in effect, that all years began with "19". This practice was
widely adopted by programmers of additional computer platforms, such as personal
computers, and hard wired into computer chips and processors found in some
equipment. This approach, intended to save processing time and storage space
within computers, was used until the mid-90s.
If these functions are not corrected before the Year 2000 arrives,
affected software systems and devices containing computer chips or clocks could
automatically roll back to 1900 instead of moving forward to 2000. Some affected
software and devices will function without incident. Others may experience
erroneous results or the interruption of a process. This challenge does not
affect all software or all computer-controlled equipment.
16
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SWEB depends on complex computer systems for many aspects of its
operations, which is primarily the distribution of electricity, as well as other
business support activities. SWEB's goal is to have mission-critical assets Year
2000 ready by June 1999. "Mission-critical" refers to devices or software that
are required to maintain operations. "Year 2000 ready" means that the system or
application is determined suitable for continued use through the Year 2000.
Mission-critical systems include, but are not limited to, control center
computer systems, customer service systems, and telephone switches and
equipment.
Year 2000 Program
SWEB executive management recognizes the seriousness of the Year 2000
challenge and has dedicated resources it considers adequate to address the
issue. An executive steering committee reviews Millennium Project progress on a
regular basis, and Southern Company receives periodic updates and progress
reports.
SWEB's Millennium Project is divided into two phases:
Phase 1 began in 1996 and consisted of identifying and assessing corporate
assets (software systems and devices that contain a computer chip or clock).
This first phase was completed according to schedule in July 1997.
Phase 2, which consists of testing and remediating high priority systems
and devices, is targeted for completion in June 1999. Contingency planning is
included in this phase. The Millennium Project will continue to monitor SWEB's
affected computer systems, devices and applications through the end of 1999, and
into the year 2000.
Material Third Parties
SWEB is currently reviewing the Year 2000 readiness of material third
parties which provide goods and services crucial to SWEB's operations. SWEB is
developing contingency plans based on its assessment of each third party's
ability to continue supplying critical goods and services to SWEB. Among such
critical third parties are the National Grid, telecommunications, water, and
other suppliers.
Year 2000 Preparation Costs
Current projected costs of SWEB's Year 2000 readiness are approximately
(pound)15 million. This includes costs for time and labor necessary to identify,
test and renovate affected devices and systems during a process that will last
almost four years. From its inception through December 31, 1998, the Year 2000
program costs amounted to (pound)9 million.
Risks Associated with Year 2000 Challenge
SWEB is implementing a detailed process to minimize the possibility of
service interruptions related to the Year 2000 challenges. SWEB is taking what
it believes to be prudent steps to prepare for the Year 2000, and considers any
interruptions in service that may occur to be isolated and short in duration.
SWEB has followed a proven methodology for identifying and assessing
software and devices containing potential Year 2000 challenges. Remediation and
testing of those devices has been scheduled. SWEB is also assessing risks
associated with critical assets and third-party suppliers. Following risk
assessment, SWEB is preparing contingency plans as appropriate and is
participating with the UK Electricity Industry. A description of SWEB's
contingency planning follows below.
17
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
There is a potential for some earnings erosion caused by reduced
electrical demand by customers because of their Year 2000 issues.
Contingency Plans
Because of experience with storms, SWEB is skilled at using contingency
plans in unusual circumstances. As part of Year 2000 business continuity and
contingency planning, SWEB is drawing on that experience in making risk
assessments and developing additional plans to deal specifically with situations
that could arise relative to external suppliers and other Year 2000 challenges.
SWEB is participating with the rest of the UK Electricity Industry and
also with other utilities (water, telecommunications and gas) through the Year
2000 Utilities Interest Group where the focus now is very much on contingency
planning.
EUROPEAN MONETARY UNION
On the January 1, 1999, 11 European Union countries formed an economic and
monetary union and started using a single currency - the Euro. The UK did not
join at this time, but the UK government has indicated that it might in the
future. Some suppliers and possibly customers may be affected by the
introduction with a possible impact on SWEB. Currently, SWEB is assessing the
effort required to prepare itself for the potential introduction of the Euro to
the UK. The potential costs could have a material effect on SWEB's results.
FINANCIAL CONDITION
Overview
The major change in the Company's financial condition during the nine
months to December 31, 1998 was the expenditure by SWEB of approximately
(pound)58 million in property, plant, and equipment, largely in respect of the
distribution network. The funds required for such additions were derived
primarily from operations. It is expected that SWEB's capital requirements in
the foreseeable future for its investment in property, plant, and equipment will
be generated from operating activities.
The second installment of the windfall levy ((pound)45 million) required
external financing and the possible requirements of a pension matter (see notes
J and G respectively), could require additional external financing, and result
in increased interest expense. The payment of the windfall levy was funded by
short-term borrowings.
Demand for electricity in Great Britain, in general, and in SWEB's
Authorized Area, in particular, is seasonal, with demand being higher in the
winter months and lower in the summer months. SWEB balances the effect of this
and other cyclical influences on its working capital needs with drawings under
its available credit facilities.
18
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's main investment and only significant asset is the entire
share capital of SWEB. The Company is dependent upon dividends from SWEB for its
cash flow. SWEB can make distribution of dividends to the Company under English
law to the extent that it has distributable reserves, subject to the retention
of sufficient financial resources to conduct its supply and distribution
businesses as required by its regulatory license. The Company believes that
currently sufficient distributable reserves will continue to exist at SWEB to
allow for reasonable and necessary dividends from SWEB, through operations, to
be distributed to the Company. In the UK, the Accounting Standards Board is
currently reviewing the treatment of deferred income tax accounting. If full
provision for deferred income tax were required, SWEB's distributable reserves
could be eliminated.
Financing Activities
In December 1998 a more efficient capital structure for Holdings UK and
the Company was put in place. At that time, Holdings UK became a co-obligor of
the Company's existing long-term debt and subordinated debentures. Sums
totalling (pound)351 million were contributed to the Company for newly issued
shares and the Company made three long-term loans (totalling (pound)351 million)
to Holdings UK on the same terms as the existing long-term debt and subordinated
debentures. In consideration of entering into these loans and their related
currency and interest rate swaps, the Company made premium payments
(independently calculated as a fair arms-length value between unconnected
parties) of (pound)51 million to Holdings UK.
The Company has a US commercial paper program under which the maximum
available is $520 million. This program is supported by a swingline and
revolving credit facility provided by a syndicate of banks. The amount available
under the program, which is supported by the swingline and revolving credit
facility, at December 31, 1998 was $184 million. SWEB enters into foreign
currency contracts to hedge the currency risk associated with the interest and
principal of each utilization under this program.
SWEB actively manages its short-term debt, which includes a number of bank
lines of credit in addition to the commercial paper program. At December 31,
1998 the Company and SWEB together had short-term debt of (pound)359 million
($597 million) outstanding ($336 million from a swingline and revolving credit
facility, and $261 million in other short-term loans).
To meet short-term cash needs and contingencies, the Company and SWEB
together had at December 31, 1998 approximately (pound)3 million of cash and
(pound)41 million of unutilized committed lines of credit with banks. Also
available was $184 million of the swingline and revolving credit facility
mentioned above.
Excluding swaps between the Company and Holding UK, at December 31, 1998,
the Company and SWEB have sterling interest rate swaps expiring between 2001 and
2012, with notional amounts totalling (pound)600 million, and have cross
currency swaps expiring between 2001 and 2007, with notional amounts totalling
(pound)350 million.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
15 - Report of Independent Public Accountants
27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
No report on Form 8-K was filed by the Company during the quarter for which
this report is being filed.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN INVESTMENTS UK plc
/s/ W. P. Bowers
By W. P. Bowers
Director
/s/ C.B. (Mike) Harreld
By C. B. (Mike) Harreld
Director, Chief Financial and Accounting Officer
Date: February 9, 1999
21
<PAGE>
ARTHUR ANDERSEN
Exhibit 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Southern Investments UK plc
We have reviewed the accompanying condensed consolidated balance sheet of
SOUTHERN INVESTMENTS UK plc (a company incorporated in England and Wales) as of
December 31, 1998, and the related condensed consolidated statements of income
for the three-month and nine-month periods ended December 31, 1998 and 1997, and
the condensed consolidated statements of cash flows for the nine-month periods
ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles in the United States.
We have previously audited, in accordance with generally accepted auditing
standards in the United States, the consolidated balance sheet of SOUTHERN
INVESTMENTS UK plc as of March 31, 1998, and, in our report dated June 19, 1998,
we expressed an unqualified opinion on that consolidated balance sheet. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of March 31, 1998, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been derived.
/s/ ARTHUR ANDERSEN
ARTHUR ANDERSEN
Bristol, England
February 9, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
[TYPE] EX-27
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Southern
Investments UK plc Form 10-Q for the nine months ended December 31, 1998, and
is qualified in its entirety by reference to such financial statements.
Values are in (pound) sterling.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> British Pounds
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> DEC-31-1998
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<TOTAL-NET-UTILITY-PLANT> 1,281
<OTHER-PROPERTY-AND-INVEST> 329
<TOTAL-CURRENT-ASSETS> 535
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<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,145
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<CAPITAL-SURPLUS-PAID-IN> 902
<RETAINED-EARNINGS> (125)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 777
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<LONG-TERM-DEBT-NET> 301
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<TOTAL-OPERATING-EXPENSES> 468
<OPERATING-INCOME-LOSS> 93
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<INCOME-BEFORE-INTEREST-EXPEN> 103
<TOTAL-INTEREST-EXPENSE> 45
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0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 20
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</TABLE>
