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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 June 30, 1999
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 July 31, 1999
- ---------- -------------- ------------------
Southern Investments UK plc Par Value(pound)1 Per Share 902,128,735
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes 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
legislative and regulatory initiatives regarding the current review of
regulation, and the results of the distribution price review scheduled to take
effect April 1, 2000; challenges related to Year 2000 readiness; potential
business strategies, including acquisitions or dispositions of assets or
internal restructuring that may be pursued by the Company or its subsidiaries;
the potential introduction of the Euro; 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 discussed elsewhere
herein and in other reports (including Form 10-K) filed from time to time by the
Company with the SEC.
1
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
1999 1998
---- ----
(Note A)
<S> <C> <C> <C>
OPERATING REVENUES (pound) 59 $ 93 (pound) 63
COST OF SALES 3 5 5
------ ------ ------
GROSS MARGIN 56 88 58
------ ------ ------
OPERATING EXPENSES:
Maintenance 8 13 8
Depreciation and amortization 13 20 12
Selling, general, and administrative 8 13 10
------ ------ ------
Total operating expenses 29 46 30
------ ------ ------
OPERATING INCOME 27 42 28
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated company 5 8 -
Interest expense (14) (22) (14)
Gain on sale of assets - - 7
Other, net 2 3 1
------ ------ ------
Total other income (expense) (7) (11) (6)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 20 31 22
INCOME TAXES 6 9 8
------ ------ ------
NET INCOME FROM CONTINUING OPERATIONS 14 22 14
INCOME FROM DISCONTINUED OPERATIONS,
net of income tax effect (Note D) - - 2
------ ------ ------
NET INCOME (pound) 14 $ 22 (pound) 16
====== ====== ======
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
For the Three Months Ended June 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C> <C>
(Note A)
OPERATING ACTIVITIES:
Net income (pound) 14 $ 22 (pound) 16
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13 20 12
Gain on asset sales - - (7)
Changes in certain current assets and liabilities:
Receivables, net 22 35 13
Accounts payable (5) (8) (12)
Income taxes, accrued/deferred 7 11 8
Other (1) (2) 17
------ ------ ------
Net cash provided from operating activities 50 78 47
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (14) (22) (15)
Other 1 2 8
------ ------ ------
Net cash used for investing activities (13) (20) (7)
------ ------ ------
FINANCING ACTIVITIES:
Payments of common stock dividends (4) (6) (20)
Change in short-term borrowings (33) (52) (23)
------ ------ ------
Net cash used for financing activities (37) (58) (43)
------ ------ ------
NET DECREASE IN CASH AND CASH
EQUIVALENTS - - (3)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 5 8 5
------ ------ ------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD (pound) 5 $ 8 (pound) 2
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) (pound) 15 $ 24 (pound) 10
Income taxes (pound) - $ - (pound) -
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
At June 30, 1999 At March
---------------- --------
(Unaudited) 31,1999
----------- --------
(Note A)
<S> <C> <C> <C>
PROPERTY, PLANT, AND EQUIPMENT (pound) 1,466 $ 2,311 (pound) 1,452
Less accumulated depreciation 164 259 151
------ ------ ------
Total 1,302 2,052 1,301
------ ------ ------
OTHER ASSETS:
Investments 16 25 16
Prepaid pension cost 138 218 134
Goodwill, net of accumulated amortization of (pound)17 ($27) at
June 30, 1999 and(pound)16 at March 31, 1999 166 262 167
Loans to affiliated company 351 553 351
Premium in respect of loans to affiliated company and related
hedges, net of accumulated amortization of (pound)4 ($6) at June 30,
1999 and (pound)3 at March 31, 1999 38 60 39
------ ------ ------
Total 709 1,118 707
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 5 8 5
Investments 14 22 15
Receivables:
Customer accounts, less provision for uncollectables of (pound)10 ($16)
at June 30, 1999 and(pound)10 at March 31, 1999 57 90 80
Other 19 30 17
Materials and supplies 2 3 3
Prepayments 14 22 11
------ ------ ------
Total 111 175 131
------ ------ ------
TOTAL ASSETS (pound) 2,122 $ 3,345 (pound) 2,139
====== ======= ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
4
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
<TABLE>
<CAPTION>
At June 30, 1999 At March
---------------- --------
(Unaudited) 31, 1999
---------- ---------
(Note A)
<S> <C> <C> <C>
STOCKHOLDER'S EQUITY:
Common stock, par value(pound)1 per share, 902,128,735 shares
authorized, issued and outstanding (pound) 902 $ 1,422 (pound) 902
Retained deficit (Note E) (136) (215) (146)
------ ------- ------
Total 766 1,207 756
------ ------- ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SOUTHERN INVESTMENTS
UK CAPITAL TRUST I HOLDING COMPANY JUNIOR
SUBORDINATED DEBENTURES 50 79 50
NON-CURRENT LIABILITIES:
Long-term debt 301 475 301
Accumulated deferred income taxes 363 572 363
Provision for loss contracts (Note F) 68 107 69
Miscellaneous 36 57 36
------ ------- ------
Total 768 1,211 769
------ ------- ------
CURRENT LIABILITIES:
Commercial paper 30 47 94
Notes payable to banks 304 479 273
Notes payable to affiliated company 25 40 25
Other notes payable 7 11 7
Accounts payable 40 63 44
Accrued income taxes 54 85 48
Interest accrued 13 20 9
Miscellaneous 65 103 64
------ ------- ------
Total 538 848 564
------ ------- ------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,122 $ 3,345 (pound) 2,139
====== ======= ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
5
</TABLE>
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 $1.5765 = (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 June 30, 1999.
(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 periods ended June 30, 1999 and 1998.
All such adjustments are of a normal recurring nature. 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 latest annual report on Form 10-K.
The condensed consolidated financial statements included herein have been
reviewed by the Company's independent public accountants as set forth in
their report included herein as Exhibit 15.
(C) The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 130, "Reporting Comprehensive Income". This statement
establishes rules for the reporting and display of comprehensive income
and its components. The objective of the statement is to report a measure
of all changes in common stock equity of an enterprise that result from
transactions and other economic events of the period other than
transactions with owners. 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
(D) On June 11, 1999, SWEB reached agreement to sell its supply business to
London Electricity for consideration of (pound)160 million cash and the
assumption of certain liabilities. The decision to accept London
Electricity's offer followed a review and evaluation of interest
from numerous parties. Approximately 800 SWEB staff will transfer to the
employment of London Electricity. SWEB's distribution business, which
owns and operates the electricity network in the south west of England,
is not part of this contract and ownership will not change.
On July 20, 1999, London Electricity was given European Commission
authorisation for the acquisition of SWEB's supply business. The
Commission concluded that the combined supply operations of London
Electricity and SWEB would not give rise to competition concern under the
merger rules of the European Union.
It is anticipated that the sale will be completed in August or September
1999. The Company expects to record a gain on the sale.
The supply business segment has been accounted for as a discontinued
operation, and accordingly, amounts in the financial statements and
related notes for all periods shown have been restated.
6
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The net assets directly attributable to the discontinued activity at June
30, 1999 amounted to (pound)3 million and largely comprised accounts
receivable and accounts payable. The value of net assets to be
transferred as part of the sale will be determined once the sale has been
completed.
(E) 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 during
fiscal year 1998.
(F) 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 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)68 million ($107 million) at June 30, 1999 and(pound)69 million
at March 31, 1999. Over the past three 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. As part of the sale of the
supply business, London Electricity will assume SWEB's obligations under
the contract.
(G) The Company engages in price risk management activities. Reference is
made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial
Instruments" and Note 7 to the financial statements of the Company in
Item 8 of the Form 10-K for a discussion of these activities. Activities
for non-trading purposes consist of transactions employed to mitigate the
Company's risk related to interest rates and foreign currency exchange
rate fluctuations. At June 30, 1999, the status of outstanding
non-trading related derivative contracts was as follows:
(i) Interest rate swaps expiring between 2001 and 2012 with notional
amounts totaling(pound)600 million, resulted in an unrealized loss of
(pound)53 million.
(ii) Currency swaps expiring between 2001 and 2007 with notional amounts
totaling(pound)350 million, resulted in an unrealized gain of(pound)16
million.
(H) The principal business segment is the distribution business.
This involves the transfer of electricity from the high voltage
transmission system, and its delivery, across lower voltage distribution
systems, to consumers.
7
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial data for business segments for the periods covered in the Form
10-Q are as follows:
<TABLE>
<CAPTION>
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
(in millions)
<S> <C> <C> >C> <C>
Three Months Ended June 30, 1999:
---------------------------------
Operating revenues (pound) 53 (pound) 13 (pound) (7) (pound) 59
Segment operating income 20 7 - 27
Total assets at June 30, 1999 (pound)1,606 (pound) 516 (pound) - (pound) 2,122
Three Months Ended June 30, 1998:
---------------------------------
Operating revenues (pound) 55 (pound) 14 (pound) (6) (pound) 63
Segment operating income 23 5 - 28
Total assets at March 31, 1999 (pound)1,599 (pound) 540 (pound) - (pound) 2,139
</TABLE>
The "Other" category includes ancillary business activities that
generally support SWEB's distribution business, including electricity
generation for standby purposes, property and telecommunications, as well
as corporate items and assets not allocated to specific segments and
energy purchasing. Interest expense and taxes are wholly allocated to
"Other" and are disclosed in the Consolidated Income Statements. With the
exception of total assets employed, the values above exclude discontinued
operations.
(I) 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. Reference is made to Note 2 to the
financial statements of the Company in Item 8 of the Form 10-K for
information regarding complaints made by members of the Electricity
Supply Pension Scheme ("ESPS") relating to another employer's use of the
ESPS surplus to offset the employer's costs of providing early pensions
on redundancies and certain other items.
(J) The condensed consolidated financial statements included herein have
not been prepared in accordance with the policies of Statement of
Financial Accounting Standards No. 71 "Accounting for the Effects of
Certain Types of Regulation" ("SFAS No. 71"). This pronouncement,
under which most US electric utilities report financial statements,
applies to entities which are subject to cost-based rate regulation.
By contrast, SWEB is not subject to rate regulation, but rather, is
subject to price cap regulation and therefore the provisions of SFAS
No. 71 do not apply. Financial statements presented in accordance with
SFAS No. 71 often contain certain deferred items which have not been
included in rates charged to customers in compliance with the
respective regulatory authority rulings, but which would have been
included in the income statement of enterprises in general under US
GAAP. The accompanying consolidated financial statements of the
Company do not contain such deferrals.
8
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER OF FISCAL YEAR 2000 vs. FIRST QUARTER OF FISCAL YEAR 1999
RESULTS OF OPERATIONS
Earnings
The Company's operating income from continuing operations for the first
quarter of fiscal year 2000 was(pound)27 million compared to(pound)28 million
for the corresponding period of fiscal year 1999.
SWEB's two main business lines during the period under review were the
distribution of electricity and the supply of electricity to approximately 1.3
million customers in its Authorized Area in the south west of England. This area
covers approximately 5,560 square miles and has a resident population of
approximately 2.8 million.
On June 11, 1999, SWEB reached agreement to sell its supply business to
London Electricity for consideration of (pound)160 million cash and the
assumption of certain liabilities. Reference is made to Note D in the "Notes to
the Consolidated Financial Statements" herein. The Consolidated Statements of
Income for all periods shown have been restated to reflect discontinued
operations accounting for this business segment.
Significant income statement items from continuing operations appropriate
for discussion include the following:
<TABLE>
<CAPTION>
Increase (Decrease)
----------------------------
First Quarter
(in millions) %
<S> <C> <C>
Operating revenues................................... (pound) (4) (6)
Interest income from affiliated Company.............. 5 -
Gain on sale of assets............................... (7) -
Income taxes - customary............................. (2) (25)
</TABLE>
Operating revenues from continuing operations. Revenues for the distribution
business for the first quarter of fiscal year 2000 decreased (pound)2 million
compared to the same period of fiscal year 1999. Revenues from ancillary
businesses (net of eliminations) for the first quarter of fiscal year 2000
decreased (pound)2 million compared to the same period of fiscal year 1999.
Interest income from affiliated company. The first quarter increase is due to
interest receivable on three long-term loans (totaling (pound)351 million) made
to an affiliated company in December 1998. Reference is made to Note 9 to the
financial statements of the Company in Item 8 of the Form 10-K for information
relating to capital restructuring.
Gain on sale of assets. The first quarter of fiscal year 2000 decrease is
attributed to the gain on the disposition of certain non-core assets in the
corresponding period of fiscal year 1999.
Income taxes. The first quarter decrease is primarily attributed to lower income
before tax and a reduction in the UK corporation tax rate from 31% in fiscal
year 1999 to 30% in fiscal year 2000.
9
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 review of regulation and the outcome of current and future
distribution price reviews.
The largest portion of SWEB's operating income is derived from its
distribution business - the operation and maintenance of the electricity
distribution 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.
For information relating to Year 2000 readiness, see "YEAR 2000
READINESS" below.
The FASB has issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement was originally scheduled to be adopted for fiscal years beginning
after June 15, 1999. However, in response to requests from entities and their
auditors for more time to study, understand, and implement the provisions of the
statement, the FASB has issued an exposure draft which proposes to defer the
effective date of the statement to fiscal years beginning after June 15, 2000.
The Company is in the process of quantifying the impact of adopting this
statement on its financial statements; the adoption could increase volatility in
earnings and other comprehensive income.
In January 1999, eleven 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. SWEB is currently assessing the changes to financial systems that would
be required if the Euro is introduced to the UK. The cost of conversion to Euro
compatible systems could have a significant impact on future earnings.
Reference is made to Notes (F) and (I) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential. Reference is also made to
Part II - Item 1 - "Legal Proceedings" herein.
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) 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. The
Regulator is currently undertaking the next DPCF review effective from April
2000; the final outcome of this review is expected to be announced by the
Regulator in November 1999.
10
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(ii) 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. 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
the RPI - X approach to regulation, 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.
(iii) 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. The Regulator published further consultation papers on separation in
November 1998 and May 1999. He remains of the view that full separation of
supply and distribution is desirable. However, the papers acknowledge that, for
certain unspecified shared services, an interim exemption may be allowed.
Discussions are continuing.
(iv) In October 1997 the government's Minister for Science, Energy and Industry
invited the Regulator to consider how a review of electricity trading
arrangements might be undertaken. In July 1998 the Regulator published a
proposals document describing new market based trading arrangements for
electricity. In October 1998 the government accepted these proposals. The
proposals envisage market-based trading arrangements more like those in
commodity markets elsewhere. Forwards and futures markets would operate up to
several years ahead, evolving in response to demand. A voluntary 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 proposals document sets a target
date of April 2000 for the introduction of these new arrangements. In November
1998 the Regulator published a Framework Document setting out how a program for
the delivery and implementation of new electricity trading arrangements will be
taken forward.
As these papers and review are only consultative at this time, it is not
possible for the Company to determine the impact, if any, on the distribution
and generation businesses, until after such issues have been finalized by the
government, and firm proposals are made by the Regulator. In relation to
separation, SWEB's supply business and associated staff will be employed by
London Electricity once the sale of SWEB's supply business has been completed.
These staff will continue to occupy SWEB's buildings along with distribution
business staff for the immediate future. Depending on the outcome of the
Regulator's review and the detailed agreements between SWEB and London
Electricity, there will be costs involved for physically separating the
business.
Until March 2000, a Regional Electricity Company ("REC") has the
exclusive right to provide meter operation, data collection, and data
aggregation services to non half-hourly metered customers (generally residential
and small businesses) in its Authorized Area. From April 2000, competition will
be introduced and suppliers, on behalf of non half-hourly metered customers,
will be able to contract these services from any company holding an appropriate
license. SWEB does not expect the introduction of competition to have a
significant impact on future earnings. Competition already exists for operations
related to the metering of network connections to half-hourly metered customers.
11
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
YEAR 2000 READINESS
Year 2000 Challenge
In order to save storage space, computer programmers in the 1960s and
1970s shortened the year portion of date entries to two digits. Computers
assumed, in effect, that all years began with "19". This practice was widely
adopted and hard-coded 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-1990s. Unless corrected before the Year
2000, affected software systems and devices containing a chip or microprocessor
with date and time functions could incorrectly process dates or the systems may
cease to function.
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 has met its goal to have critical devices or
software that are required to maintain operations Year 2000 ready by June 1999.
Year 2000 ready means that a system or application is determined suitable for
continued use through the Year 2000 and beyond. Critical systems include, but
are not limited to, control center computer systems, customer service systems,
and telephone switches and equipment.
Year 2000 Program and Status
SWEB's executive management recognizes the seriousness of the Year 2000
challenge and has dedicated what it believes to be adequate resources to address
the issue. An executive steering committee reviews Millennium Project progress
on a regular basis, and Southern receives periodic updates and progress reports.
SWEB's Millennium Project is divided into two phases. Phase one began in
1996 and consisted of identifying and assessing corporate assets related to
software systems and devices that contain a computer chip or clock. The first
phase was completed in July 1997. Phase two consists of testing and remediating
high priority systems and devices. Also, contingency planning is included in
this phase. The end of June 1999 target for phase two was met with the exception
of the remediation of a very small number of systems where SWEB has third party
dependencies. These systems have agreed delivery dates with the suppliers and
implementation will be complete by the end of October 1999. The Millennium
Project will continue to monitor the affected computer systems, devices, and
applications into the Year 2000.
Year 2000 Costs
Current projected costs of SWEB's Year 2000 readiness are approximately
(pound)14 million. These costs include labor necessary to identify, test and
renovate affected devices and systems. From its inception through June 30, 1999,
the Year 2000 program costs amounted to (pound)11 million.
Year 2000 Risks
SWEB is implementing a detailed process to minimize the possibility of
service interruptions related to the Year 2000. SWEB believes, based on current
tests, that the system can provide customers with electricity. These tests
increase confidence, but do not guarantee error-free operations. SWEB is taking
what it believes to be prudent steps to prepare for the Year 2000, and it
expects any interruptions in service that may occur to be isolated and short in
duration.
12
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SWEB has followed a proven methodology for identifying and assessing
software and devices containing potential Year 2000 challenges. Remediation and
testing of those devices are in progress. SWEB is also assessing risks
associated with critical assets and is participating with the UK Electricity
Industry.
SWEB is currently reviewing the Year 2000 readiness of material third
parties which provide goods and services crucial to SWEB's operations. Among
such critical third parties are the NGG, telecommunications, water, and other
suppliers. There is some risk associated with representations by third parties
regarding their readiness and completion of their own Year 2000 related work.
Contingency plans based on the assessment of each third party's ability to
continue supplying critical goods and services to SWEB are being developed.
There is a potential for some earnings erosion caused by reduced
electrical demand by customers because of their Year 2000 issues.
Year 2000 Contingency Plans
SWEB is skilled at using contingency plans in unusual circumstances
because of experience with storms. As part of Year 2000 business continuity and
contingency planning, SWEB is drawing on that experience to make risk
assessments and is developing additional plans to deal specifically with
situations that could arise relative to Year 2000 challenges. SWEB is
identifying critical operational locations, and key employees will be on duty at
those locations during the Year 2000 transition. In September 1999, drills are
scheduled to be conducted to test contingency plans. Because of the level of
detail of the contingency planning process, management feels that the
contingency plans will keep any service interruptions that may occur isolated
and short in duration.
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.
The material in this section constitutes forward looking statements made
pursuant to the Private Securities Litigation Reform Act of 1995. There can be
no assurance that the actual results of the Company, its suppliers, or other
third party dependencies will not materially differ from expectations.
FINANCIAL CONDITION
Overview
The major change in the Company's financial condition during the three
months to June 30, 1999 was the expenditure by SWEB of approximately (pound)14
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.
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.
13
<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 primarily 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 tax were required, SWEB's
distributable reserves could be eliminated. In addition, in March 1999, the
Regulator proposed a variation to the licenses under which all RECs (including
SWEB) operate such that the directors of a REC must certify to the Regulator
that it is reasonably foreseeable that the REC will not breach any of its
license conditions if it declares a dividend. This variation is currently
subject to further discussion. SWEB has no reason to believe that a breach of
its license would flow from declaring a reasonable dividend.
Financing Activities
The Company has a US commercial paper program, which is fully supported
by a swingline and revolving credit facility provided by a syndicate of banks,
under which the maximum available is $520 million. At June 30, 1999 the amount
unutilized under these facilities was $158 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 June 30,
1999 the Company and SWEB together had short-term debt of (pound)366 million
($577 million) outstanding ($47 million from a commercial paper program, $315
million from a swingline and revolving credit facility, and $215 million in
other short-term loans).
To meet short-term cash needs and contingencies, the Company and SWEB
together had at June 30, 1999 approximately (pound)5 million of cash and
(pound)40 million of unutilized committed lines of credit with banks. Also
available was $158 million of the swingline and revolving credit facility
mentioned above.
Excluding swap agreements between the Company and Holdings UK, at June
30, 1999, the Company and SWEB have sterling interest rate swaps expiring
between 2001 and 2012, with notional amounts totaling (pound)600 million, and
have cross currency swaps expiring between 2001 and 2007, with notional amounts
totaling (pound)350 million.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) Reference is made to the Notes to the Consolidated Financial Statements
herein for information regarding certain legal and administrative
proceedings in which the Company is involved.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
Exhibit 15 - Report of Independent Public Accountants
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
The Company filed a Current Report on Form 8-K dated June 21, 1999:
Item reported: Item 5
Financial statements filed: None
15
<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/ D. C. S. Oosthuizen
By D. C. S. Oosthuizen
Director, Chief Financial and Accounting Officer
Date: August 11, 1999
16
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
June 30, 1999, and the related condensed consolidated statements of income for
the three-month periods ended June 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the three-month periods ended June 30,
1999 and 1998. 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, 1999, and, in our report dated June 23, 1999,
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, 1999, 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
August 11, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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This schedule contains summary financial information extracted from Southern
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