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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
<TABLE>
<CAPTION>
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
----------- ----------------------------------- -----------------
<S> <C> <C>
333-09033 Southern Investments UK plc None
(Registered in England & Wales)
Avonbank
Feeder Road
Bristol
BS2 0TB, UK
(01144) 117 9332000
</TABLE>
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
<TABLE>
<CAPTION>
Description of Shares Outstanding
Registrant Common Stock at January 31, 2000
- ---------- ------------ -------------------
<S> <C> <C>
Southern Investments UK plc Par Value(pound)1 Per Share 902,128,735
</TABLE>
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 impact of the distribution price review which takes effect
April 1, 2000; 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>
<TABLE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
<CAPTION>
For the Three Months Ended December 31,
---------------------------------------
1999 1998
---- ----
(Note A)
<S> <C> <C> <C>
OPERATING REVENUES (pound) 74 $ 119 (pound) 68
COST OF SALES 5 8 6
------ ------ ------
GROSS MARGIN 69 111 62
------ ------ ------
OPERATING EXPENSES:
Maintenance 9 15 10
Depreciation and amortization 18 29 12
Selling, general, and administrative (15) (25) 8
Write down of meters (Note D) 22 36 -
Incremental expenses incurred as a direct consequence
of the disposal of the supply business (Note E) 2 3 -
------ ------ ------
Total operating expenses 36 58 30
------ ------ ------
OPERATING INCOME 33 53 32
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated company 5 8 1
Interest expense (13) (21) (13)
Other, net 2 3 2
------ ------ ------
Total other income (expense) (6) (10) (10)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 27 43 22
INCOME TAXES:
Customary (9) (14) (7)
Release of income tax accruals - - 7
------ ------ ------
INCOME FROM CONTINUING OPERATIONS 18 29 22
DISCONTINUED OPERATIONS:
Loss from operations of discontinued supply business
(less applicable income taxes of(pound)- ($-), and(pound)(1)) - - (3)
Gain on disposal of supply business (less applicable
income taxes of(pound)1 ($2)) (Note E) 1 2 -
------ ------ ------
NET INCOME (pound) 19 $ 31 (pound) 19
====== ======= ======
The accompanying notes form an integral part of these condensed consolidated statements.
2
</TABLE>
<PAGE>
<TABLE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
<CAPTION>
For the Nine Months Ended December 31,
--------------------------------------
1999 1998
---- ----
(Note A)
<S> <C> <C> <C>
OPERATING REVENUES (pound) 203 $ 328 (pound) 188
COST OF SALES 14 23 12
------ ------ ------
GROSS MARGIN 189 305 176
------ ------ ------
OPERATING EXPENSES:
Maintenance 27 43 27
Depreciation and amortization 44 71 37
Selling, general, and administrative 4 6 26
Write down of meters (Note D) 22 36 -
Incremental expenses incurred as a direct consequence
of the disposal of the supply business (Note E) 3 5 -
------ ------ ------
Total operating expenses 100 161 90
------ ------ ------
OPERATING INCOME 89 144 86
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated company 15 24 1
Interest expense (41) (66) (41)
Gain on sale of assets - - 7
Other, net 8 13 4
------ ------ ------
Total other income (expense) (18) (29) (29)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 71 115 57
INCOME TAXES:
Customary (22) (36) (18)
Release of income tax accruals - - 7
Effect of change in tax rate (Note L) - - 11
------ ------ ------
INCOME FROM CONTINUING OPERATIONS 49 79 57
DISCONTINUED OPERATIONS:
Income from operations of discontinued supply business
(less applicable income taxes of(pound)2 ($3), and(pound)1) 4 6 1
Gain on disposal of supply business (less applicable
income taxes of(pound)49 ($79)) (Note E) 125 202 -
------ ------ ------
NET INCOME (pound) 178 $ 287 (pound) 58
====== ====== ======
The accompanying notes form an integral part of these condensed consolidated statements
3
</TABLE>
<PAGE>
<TABLE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
<CAPTION>
For the Nine Months Ended December 31,
--------------------------------------
1999 1998
---- ----
(Note A)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (pound) 178 $ 287 (pound) 58
Adjustments to reconcile net income to net cash provided by
operating activities from continuing operations:
Income from operations of discontinued supply business (4) (6) (1)
Gain on disposal of supply business (Note E) (125) (202) -
Depreciation and amortization 44 71 38
Write down of meters (Note D) 22 36 -
Deferred income taxes 3 5 (4)
Gain on sale of assets - - (7)
Changes in certain current assets and liabilities:
Receivables, net (57) (92) 9
Accounts payable 46 74 5
Accrued income taxes 21 34 (39)
Other (35) (57) (11)
------ ------ ------
Net cash provided from operating activities of continuing operations 93 150 48
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (52) (84) (58)
Proceeds from sale of supply business (Note E) 160 259 -
Proceeds from sale of assets - - 10
Proceeds from sale of investments 5 8 -
------ ------ ------
Net cash provided from (used for) investing activities of continuing
operations 113 183 (48)
------ ------ ------
FINANCING ACTIVITIES:
Payments of common stock dividends (177) (286) (20)
Change in short-term borrowings (36) (58) (4)
Issue of share capital - - 402
Loans to affiliated company - - (351)
Payment of premium in respect of loans to affiliated company and
related hedges - - (51)
------ ------ ------
Net cash used for financing activities of continuing operations (213) (344) (24)
------ ------ ------
CASH PROVIDED BY DISCONTINUED OPERATIONS 20 32 22
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13 21 (2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5 8 5
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (pound) 18 $ 29 (pound) 3
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest (pound) 36 $ 58 (pound) 36
Cash paid during the period for income taxes:
Customary (pound) - $ - (pound) -
Windfall levy (pound) - $ - (pound) 45
The accompanying notes form an integral part of these condensed consolidated statements.
</TABLE>
4
<PAGE>
<TABLE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
<CAPTION>
At December 31, 1999 At March 31,
-------------------- ------------
(Unaudited) 1999
----------- ----
(Note A)
<S> <C> <C> <C>
PROPERTY, PLANT, AND EQUIPMENT (pound) 1,447 $ 2,337 (pound) 1,452
Less accumulated depreciation 186 301 151
------ ------ ------
Total 1,261 2,036 1,301
------ ------ ------
OTHER ASSETS:
Investments 15 24 16
Prepaid pension cost 138 223 134
Goodwill, net of accumulated amortization of(pound)19 ($31) at
December 31, 1999 and(pound)16 at March 31, 1999 164 265 167
Loans to affiliated company 351 567 351
Premium in respect of loans to affiliated company and related
hedges, net of accumulated amortization of(pound)9 ($15) at December
31, 1999 and(pound)3 at March 31, 1999 33 53 39
------ ------ ------
Total 701 1,132 707
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 18 29 5
Investments 13 21 15
Receivables:
Customer accounts, less provision for uncollectables of(pound)2 ($3) at
December 31, 1999 and(pound)10 at March 31, 1999 54 87 80
Other 17 28 17
Materials and supplies 2 3 3
Prepayments 14 23 11
------ ------ ------
Total 118 191 131
------ ------ ------
TOTAL ASSETS (pound) 2,080 $ 3,359 (pound) 2,139
======= ======= ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
</TABLE>
5
<PAGE>
<TABLE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
<CAPTION>
At December 31, 1999 At March
-------------------- --------
(Unaudited) 31, 1999
----------- -------
(Note A)
STOCKHOLDER'S EQUITY:
<S> <C> <C> <C>
Common stock, par value(pound)1 per share, 902,128,735 shares
authorized, issued and outstanding (pound) 902 $ 1,457 (pound) 902
Retained deficit (Note F) (145) (234) (146)
------ ------ ------
Total 757 1,223 756
------ ------ ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SOUTHERN INVESTMENTS
UK CAPITAL TRUST I HOLDING COMPANY JUNIOR
SUBORDINATED DEBENTURES 50 81 50
COMMITMENTS AND CONTINGENT MATTERS (NOTES H
AND J)
NON-CURRENT LIABILITIES:
Long-term debt 301 486 301
Accumulated deferred income taxes 419 676 363
Provision for loss contracts (Note G) - - 69
Miscellaneous 14 23 36
------ ------ ------
Total 734 1,185 769
------ ------ ------
CURRENT LIABILITIES:
Commercial paper - - 94
Notes payable to banks 332 536 273
Notes payable to affiliated company 26 42 25
Other notes payable 5 8 7
Accounts payable 3 5 44
Accrued income taxes 65 105 48
Interest accrued 14 23 9
Miscellaneous 94 151 64
------ ------ ------
Total 539 870 564
------ ------ ------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,080 $ 3,359 (pound) 2,139
====== ======= ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
6
</TABLE>
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 $1.6150 = (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, 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 and nine-month periods ended December
31, 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) The UK electricity Regulator is introducing competition in metering
activities, namely meter fixing (meter provision, installation,
certification, and repair) and meter reading. Meter fixing must be
undertaken by licensed providers, of which SWE is one. Based on the
anticipated regulation, the current carrying value of metering assets
will be impaired. As a result, the Company has recorded an anticipated
impairment loss of (pound)22 million to reflect the amount by which the
carrying value of metering assets exceeds their fair value. The fair
value is assessed by reference to the present value of estimated future
cash flows to be generated by the assets, using a discount rate
commensurate with the risks involved.
(E) The Company holds the entire share capital of South Western Electricity
plc ("SWE").
On September 30, 1999, SWE completed the sale of its supply business (and
certain related activities) to London Electricity plc ("LE"). Under the
terms of the agreement, SWE received cash consideration of (pound)160
million, and transferred certain liabilities to LE.
Prior to the sale, SWE was primarily engaged in two distinct electricity
businesses, distribution, which involves the transfer of electricity from
the high voltage transmission system, and its delivery, across lower
voltage distribution systems, to consumers; and supply, which involves a
wholesale energy procurement function and a retail energy sales, service
and billing function.
SWE's operating income is predominantly from the distribution business
and this will continue now that the sale of the supply business has been
completed.
SWE will brand its distribution business as Western Power Distribution as
the SWEB name has transferred to LE.
7
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
There are certain incremental costs relating to the ongoing business
which are a direct consequence of the sale of the supply business and
related activities to LE. These costs total (pound)3 million and
principally involve the establishment of a new computer environment and
data migration.
(F) 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 SWE'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"; SWE's liability was assessed at (pound)90 million
during fiscal year 1998.
(G) SWE 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
set escalating electricity purchase prices at predetermined levels. The
Company 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. Under the terms of the
supply sale agreement, LE assumed SWE's obligations under the contract
and therefore the accrual was released and is included within the gain on
sale.
(H) 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 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 December 31, 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)30 million.
(ii) Currency swaps expiring between 2001 and 2007 with notional amounts
totaling (pound)350 million, resulted in an unrealized loss of (pound)2
million.
The above excludes swap agreements between the Company and an affiliated
company, Holdings UK.
8
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(I) 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)
Three Months Ended December 31, 1999:
------------------------------------
<S> <C> <C> <C> <C>
Operating revenues (pound) 71 (pound) 7 (pound) (4) (pound) 74
Segment operating income 28 5 - 33
Nine Months Ended December 31, 1999:
-----------------------------------
Operating revenues (pound) 178 (pound) 42 (pound)(17) (pound) 203
Segment operating income 66 23 - 89
Total assets at December 31, 1999 (pound) 1,596 (pound) 484 (pound) - (pound) 2,080
Three Months Ended December 31, 1998:
------------------------------------
Operating revenues (pound) 68 (pound) 9 (pound) (9) (pound) 68
Segment operating income 34 (2) - 32
Nine Months Ended December 31, 1998:
-----------------------------------
Operating revenues (pound) 178 (pound) 37 (pound) (27) (pound) 188
Segment operating income 80 6 - 86
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 SWE'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 Condensed Consolidated Statements of
Income. With the exception of total assets at March 31, 1999, the values
above exclude discontinued operations.
(J) The Company and SWE 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 SWE 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 the
use by another employer, The National Grid Company plc ("NGC"), of ESPS
surplus to offset that employer's costs of providing early pensions on
redundancies and certain other items. NGC, together with National Power
PLC, have now initiated appeals in the House of Lords. NGC and National
Power PLC have executed deeds of amendment which purport to cancel their
accrued contribution obligations arising from the Court of Appeal's
judgment. The House of Lords is unlikely to rule whether such amendments
are effective before December 2000. SWE is considering whether to execute
similar amendments. Based on the Company's assessment of the current
legal position, it anticipates that a payment into the ESPS of (pound)
24 million will ultimately be required. Under the FASB 87 "Employers'
Accounting for Pensions" there will be no immediate impact to Net Income.
9
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(K) 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,
SWE 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.
(L) The UK government's 1998 Finance Act included a reduction in the rate of
UK corporation tax from 31% to 30% effective April 1999. The decrease
resulted in a reduction to SWE's provision for deferred income taxes and
a corresponding decrease in income tax expense of approximately (pound)11
million.
10
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER OF FISCAL YEAR 2000 vs. THIRD QUARTER OF FISCAL YEAR 1999
AND
FISCAL YEAR-TO-DATE 2000 vs. FISCAL YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
On September 30, 1999, SWE completed the sale of its supply business (and
certain related activities) to LE. Reference is made to Note E 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. Net income from discontinued
operations for fiscal year 2000 includes an anticipated gain on the sale of
(pound)125 million; certain items are subject to finalization including the
value of working capital and pension asset to be transferred.
The Company's net income from continuing operations for the third quarter
and year-to-date of fiscal year 2000 was (pound)18 million and (pound)49
million, respectively, compared to (pound)22 million and (pound)57 million for
the corresponding period of fiscal year 1999. This is explained below.
Excluding the effect of a change in the tax rate on deferred income taxes
(Note L), significant income statement items from continuing operations
appropriate for discussion include the following:
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------------------------
Third Quarter Year-To-Date
(in millions) % (in millions) %
<S> <C> <C> <C> <C>
Operating revenues................................... (pound) 6 9 (pound) 15 8
Depreciation and amortization........................ 6 50 7 19
Selling, general, and administrative expenses........ (23) (287) (22) (85)
Write down of meters ................................ 22 - 22 -
Incremental supply disposal expenses................. 2 - 3 -
Interest income from affiliated Company.............. 4 400 14 1400
Gain on sale of assets............................... - - (7) (100)
Income taxes - customary............................. 2 29 4 22
</TABLE>
Operating revenues. Within operating revenues, the distribution business segment
increased by (pound)3 million for the quarter when compared to the same period
of fiscal year 1999. Revenues from ancillary businesses (net of eliminations)
for the third quarter and year-to-date of fiscal year 2000 increased by (pound)3
million and (pound)15 million respectively, compared to the same period of
fiscal year 1999.
Depreciation and amortization. The third quarter and year-to-date increase is
directly related to the write down of certain short life network assets. This is
largely a consequence of the supply sale, which has resulted in certain assets
being replaced sooner than anticipated.
Selling, general, and administrative expenses. The third quarter and year-to-
date decrease is primarily attributed to the finalization of certain liabilities
relating to the completion of the sale of the supply business and the outcome
of the current distribution price review, published in December 1999. These
include severance related liabilities and costs associated with implementing the
Regulator's final proposals.
Write down of meters. The UK electricity Regulator is introducing competition
in metering activities, namely meter fixing (meter provision, installation,
certification, and repair) and meter reading. As a result, the Company has
recorded an anticipated impairment loss of (pound)22 million to reflect the
amount by which the carrying value of metering assets exceeds their fair value.
See Note D.
11
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Incremental expenses incurred as a direct consequence of the disposal of the
supply business. There are certain incremental costs relating to the ongoing
business, which are a direct consequence of the sale of the supply business and
related activities to LE. These costs total (pound)3 million and principally
involve the establishment of a new computer environment and data migration.
Interest income from affiliated company. The third quarter and year-to-date
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 year-to-date 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 third quarter and year-to-date increase is primarily
attributed to higher income before tax, partly offset by a reduction in the UK
corporation tax rate from 31% in fiscal year 1999 to 30% in fiscal year 2000.
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, the impact of the current distribution
price review, and the outcome of future distribution price reviews.
The largest portion of SWE'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. SWE 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 SWE'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 SWE. 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.
In December 1999, the Regulator published final price proposals following
his review of the DPCF for the 14 regional electricity distribution businesses.
For SWE, these proposals represent a 20% reduction to distribution prices from
April 1, 2000, followed by a reduction in real terms of 3% each year from April
1, 2001. This price control is scheduled to operate until March 2005. The
previous announcement by the Regulator, in October, suggested a price reduction
of 19%. However, this excluded a separate proposal to reduce revenues by a
further 1% in respect of the recovery of costs for the opening up of the
competitive supply market. This latter reduction was included in the final total
reduction of 20%. In response, management plans to maximise efficiency and
customer service as a focussed distribution company. The implementation of the
plans has necessitated an overall reduction in staffing levels by approximately
10%. The reductions are focussed on administrative and corporate functions, with
minimal impact on field staff, ensuring customer service is not affected.
Management are evaluating further opportunities to reduce ongoing operating
costs.
12
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of Form 10-K for details of the Regulator's proposals and
consultation on the regulation of the water, electricity, gas and
telecommunications utilities within the UK. As these papers 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.
The FASB issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which was originally to be adopted by the Year 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In June 1999, the FASB issued Statement
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", which amends FASB
Statement No. 133 to be effective for all fiscal years beginning after June 15,
2000. The Company has not yet quantified the impact of adopting this statement
on its financial statements; however, 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. SWE has assessed changes 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 Note (J) 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.
YEAR 2000 CHALLENGE
The work undertaken by the Company to ensure all critical computer
systems and other date sensitive devices would function correctly in the Year
2000 was highly successful. There were no material incidents reported and no
disruption of electric service within the service area. There were no reports of
significant events regarding third parties that impacted revenues or expenses.
Final projected costs of SWE's Year 2000 program are (pound)13 million.
These costs include labor necessary to identify, test, and renovate affected
devices and systems. From its inception through December 31, 1999, the Year 2000
program costs amounted to (pound)13 million.
13
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
The major change in the Company's financial condition during the nine
months to December 31, 1999 related to the sale of the supply business as
discussed elsewhere in this document. In addition SWE expended approximately
(pound)52 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 SWE'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 SWE's
Authorized Area, in particular, is seasonal, with demand being higher in the
winter months and lower in the summer months. SWE balances the effect of this
and other cyclical influences on its working capital needs with drawings under
its available credit facilities.
The Company holds the entire share capital of SWE. The Company is
primarily dependent upon dividends from SWE for its cash flow. SWE 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 distribution business as required by its regulatory
license. The Company believes that currently sufficient distributable reserves
will continue to exist at SWE to allow for reasonable and necessary dividends
from SWE, 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, SWE's
distributable reserves could be eliminated. In addition, in September 1999, the
Regulator varied the licenses under which all RECs (including SWE) 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. SWE 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 December 31, 1999 the
amount unutilized under these facilities was $24 million. SWE enters into
foreign currency contracts to hedge the currency risk associated with the
interest and principal of each utilization under this program.
SWE 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,
1999 the Company and SWE together had short-term debt of (pound)363 million
($586 million) outstanding ($496 million from a swingline and revolving credit
facility, and $90 million in other short-term loans).
To meet short-term cash needs and contingencies, the Company and SWE
together had at December 31, 1999 approximately (pound)2 million of cash and
(pound)105 million of unutilized committed lines of credit with banks. Also
available was $24 million of the swingline and revolving credit facility
mentioned above. It also had (pound)16 million on short term cash deposit being
part of the contingency plan for funding over the Millennium period. SWE
extended its borrowing over the Millennium due to the uncertainty and volatility
of short term borrowing rates and availability.
14
<PAGE>
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Excluding swap agreements between the Company and Holdings UK, at
December 31, 1999, the Company and SWE 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.
15
<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.
--------------------
No report on Form 8-K was filed by the Company during the quarter for
which this report is being filed.
16
<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: February 14, 2000
17
Exhibit 15
ARTHUR ANDERSEN
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, 1999, and the related condensed consolidated statements of income
for the three-month and nine-month periods ended December 31, 1999 and 1998, and
the condensed consolidated statements of cash flows for the nine-month periods
ended December 31, 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
February 10, 2000
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<LEGEND>
This schedule contains summary financial information extracted from Southern
Investments UK plc Form 10-Q for the nine months ended December 31, 1999, and is
qualified in its entirety by reference to such financial statements. Values are
in (pound) sterling.
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