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 September 30, 2000
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)
Avonbank
Feeder Road
Bristol
BS2 0TB, UK
(01144) 117 9332000
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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 October 31, 2000
---------- ------------ -------------------
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 and
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 information; accordingly, there can be no
assurance that such indicated results will be realized. These factors include
legislative and regulatory issues; potential business strategies, including
acquisitions or dispositions of assets or businesses 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
filed from time to time by the Company with the SEC.
1
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
For the Three Months Ended September 30,
2000 1999
---- ----
(Note A)
<S> <C> <C> <C>
OPERATING REVENUES (pound) 49 $ 72 (pound) 70
COST OF SALES 6 9 6
------ ------ ------
GROSS MARGIN 43 63 64
------ ------ ------
OPERATING EXPENSES:
Maintenance 9 13 10
Depreciation and amortization 12 18 13
Selling, general, and administrative 3 4 11
Incremental expenses incurred as a direct consequence
of the disposal of the supply business (Note C) - - 1
------ ------ ------
Total operating expenses 24 35 35
------ ------ ------
OPERATING INCOME FROM CONTINUING
OPERATIONS 19 28 29
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated company 5 7 5
Interest expense (14) (20) (13)
Other, net 2 3 3
------ ------ ------
Total other expense (7) (10) (5)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 12 18 24
PROVISION FOR INCOME TAXES (4) (6) (7)
------ ------ ------
NET INCOME FROM CONTINUING OPERATIONS 8 12 17
DISCONTINUED OPERATIONS (NOTE C):
Income from operations of discontinued supply business (less
applicable income taxes of(pound)- ($-), and(pound)3) - - 4
Gain on disposal of supply business (less applicable
income taxes of(pound)1 ($1), and(pound)48) 4 6 124
------ ------ ------
NET INCOME (pound) 12 $ 18 (pound) 145
====== ====== ======
The accompanying notes form an integral part of these condensed consolidated statements.
2
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
For the Six Months Ended September 30,
2000 1999
---- ----
(Note A)
<S> <C> <C> <C>
OPERATING REVENUES (pound) 103 $ 152 (pound) 129
COST OF SALES 12 18 9
------ ------ ------
GROSS MARGIN 91 134 120
------ ------ ------
OPERATING EXPENSES:
Maintenance 17 25 18
Depreciation and amortization 23 34 26
Selling, general, and administrative 6 9 19
Incremental expenses incurred as a direct consequence
of the disposal of the supply business - - 1
------ ------ ------
Total operating expenses 46 68 64
------ ------ ------
OPERATING INCOME FROM CONTINUING
OPERATIONS 45 66 56
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated company 10 15 10
Interest expense (27) (40) (27)
Other, net 4 6 5
------ ------ ------
Total other expense (13) (19) (12)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 32 47 44
PROVISION FOR INCOME TAXES (10) (15) (13)
------ ------ ------
NET INCOME FROM CONTINUING OPERATIONS 22 32 31
DISCONTINUED OPERATIONS (NOTE C):
Income from operations of discontinued supply business
(less applicable income taxes of(pound)- ($-), and(pound)3) - - 4
Gain on disposal of supply business (less applicable
income taxes of(pound)1 ($1), and(pound)48) 4 6 124
------ ------ ------
NET INCOME (pound) 26 $ 38 (pound) 159
------ ------ ------
The accompanying notes form an integral part of these condensed consolidated statements.
3
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
For the Six Months Ended September 30,
2000 1999
---- ----
(Note A)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (pound) 26 $ 38 (pound) 159
Adjustments to reconcile net income to net cash provided by
operating activities from continuing operations:
Income from operations of discontinued supply business - - (4)
Gain on disposal of supply business (Note C) (4) (6) (124)
Depreciation and amortization 23 34 26
Deferred income taxes 3 4 3
Changes in certain current assets and liabilities:
Receivables, net 18 27 (22)
Accounts payable 2 3 35
Accrued income taxes 5 8 16
Other (32) (47) (8)
------ ------ ------
Net cash provided from operating activities of continuing
operations 41 61 81
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (35) (52) (31)
Proceeds from sale of supply business (Note C) - - 160
Proceeds from sale of investments 2 3 4
------ ------ ------
Net cash (used for) provided from investing activities of
continuing operations (33) (49) 133
------ ------ ------
FINANCING ACTIVITIES:
Payments of common stock dividends (15) (22) (24)
Loan to affiliated company (85) (126) -
Repayment of long term debt (1) (1) -
Change in short-term borrowings 93 137 (73)
------ ------ ------
Net cash used for financing activities of continuing operations (8) (12) (97)
------ ------ ------
CASH PROVIDED BY DISCONTINUED OPERATIONS - - 20
------ ------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 137
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 2 3 5
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (pound) 2 $ 3 (pound) 142
------ ------ ------
------ ------ ------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest (pound) 27 $ 40 (pound) 26
Income taxes (pound) 4 $ 6 (pound) (3)
The accompanying notes form an integral part of these condensed consolidated statements.
4
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
At September 30, 2000 At March
(Unaudited) 31, 2000
----------- ----
(Note A)
<S> <C> <C> <C>
PROPERTY, PLANT, AND EQUIPMENT (pound) 1,501 $ 2,220 (pound) 1,467
Less accumulated depreciation 223 330 202
------ ------ ------
Total 1,278 1,890 1,265
------ ------ ------
OTHER ASSETS:
Investments 15 22 16
Prepaid pension cost 154 228 145
Goodwill, net of accumulated amortization of(pound)23 ($34) at
September 30, 2000 and(pound)20 at March 31, 2000 160 237 163
Loans to affiliated company 351 519 351
Premium in respect of loans to affiliated company and related
hedges, net of accumulated amortization of(pound)16 ($24)
at September 30, 2000 and(pound)12 at March 31, 2000 26 38 30
------ ------ ------
Total 706 1,044 705
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 2 3 2
Investments 11 16 13
Receivables:
Customer accounts, less provision for uncollectables of(pound)5 ($7) at
September 30, 2000 and(pound)2 at March 31, 2000 35 52 50
Loan to affiliated company (Note I) 85 126 -
Other 17 25 14
Materials and supplies 2 3 2
Prepayments 15 22 6
------ ------ ------
Total 167 247 87
------ ------ ------
TOTAL ASSETS (pound) 2,151 $ 3,181 (pound) 2,057
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
5
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
At September 30, 2000 At March
(Unaudited) 31, 2000
----------- ----
(Note A)
STOCKHOLDER'S EQUITY:
Common stock, par value(pound)1 per share, 902,128,735 shares
<S> <C> <C> <C>
authorized, issued and outstanding (pound) 902 $ 1,334 (pound) 902
Retained deficit (Note D) (112) (166) (123)
------ ------ ------
Total 790 1,168 779
------ ------ ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SOUTHERN INVESTMENTS UK CAPITAL TRUST I HOLDING
COMPANY JUNIOR SUBORDINATED DEBENTURES 50 74 50
COMMITMENTS AND CONTINGENT MATTERS (NOTES E AND G)
NON-CURRENT LIABILITIES:
Long-term debt 300 444 301
Accumulated deferred income taxes 420 621 417
Miscellaneous 15 22 16
------ ------ ------
Total 735 1,087 734
------ ------ ------
CURRENT LIABILITIES:
Notes payable to banks (Note I) 404 598 311
Notes payable to affiliated company 26 38 26
Other notes payable 5 7 5
Accounts payable 6 9 4
Accrued income taxes 49 73 44
Interest accrued 8 12 8
Miscellaneous 78 115 96
------ ------ ------
Total 576 852 494
------ ------ ------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,151 $ 3,181 (pound) 2,057
====== ======= ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
6
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 $1.4787 = (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 September 30, 2000.
(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 six-month periods
ended September 30, 2000 and 1999. 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.
(C) The Company's principal operating subsidiary is South Western Electricity
plc, which trades as Western Power Distribution ("WPD"). WPD's principal
activity is electricity distribution, which involves the transfer of
electricity from the national transmission system to end user's premises.
WPD previously operated a supply business known as "SWEB" that purchased,
marketed and sold electricity to customers within its service territory
and to competitive customers throughout the United Kingdom. WPD sold that
business, together with the name SWEB, to London Electricity plc
for(pound)160 million and the assumption of certain liabilities. The sale
was effective September 30, 1999. The Company recorded an anticipated
after tax gain on the sale of (pound)124 million during the second
quarter of fiscal year 2000. During the second quarter of fiscal year
2001, issues relating to working capital were resolved and a
further(pound)4 million after tax gain was recorded.
(D) 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 WPD'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"; WPD's liability was assessed at (pound)90
million during fiscal year 1998.
(E) 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 September 30, 2000, 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)34 million.
(ii) Currency swaps expiring between 2001 and 2007 with notional amounts
totaling (pound)350 million, resulted in an unrealized gain of (pound)42
million.
7
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The above excludes swap agreements between the Company and an affiliated
company, WPD Holdings UK.
(F) Financial data for business segments for the periods covered in the Form
10-Q are as follows:
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
(in millions)
Three Months Ended September 30, 2000:
--------------------------------------
<S> <C> <C> <C> <C>
Operating revenues (pound) 48 (pound) 3 (pound) (2) (pound) 49
Segment operating income 18 1 - 19
Six Months Ended September 30, 2000:
------------------------------------
Operating revenues (pound) 99 (pound) 7 (pound) (3) (pound) 103
Segment operating income 42 3 - 45
Total assets at September 30, 2000 (pound)1,596 (pound) 555 (pound) - (pound) 2,151
Three Months Ended September 30, 1999:
--------------------------------------
Operating revenues (pound) 54 (pound) 22 (pound) (6) (pound) 70
Segment operating income 18 11 - 29
Six Months Ended September 30, 1999:
------------------------------------
Operating revenues (pound) 107 (pound) 35 (pound) (13) (pound) 129
Segment operating income 38 18 - 56
Total assets at March 31, 2000 (pound) 1,592 (pound) 465 (pound) - (pound) 2,057
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The "Other" category includes ancillary business activities that
generally support WPD's distribution business, including electricity
generation for standby purposes, property and telecommunications, as well
as corporate items and assets not allocated to specific segments.
Interest and taxes are wholly allocated to "Other" and are disclosed in
the Condensed Consolidated Statements of Income. The values above exclude
discontinued operations.
(G) The Company and WPD 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 WPD 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 April 2001. WPD 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 Financial Accounting Standards
Board ("FASB") Statement No. 87 "Employers' Accounting for Pensions",
there will be no immediate impact to Net Income.
8
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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 FASB
Statement No. 71 "Accounting for the Effects of Certain Types of
Regulation". This pronouncement, under which most US electric
utilities report financial statements, applies to entities which
are subject to cost-based rate regulation. By contrast, WPD is not
subject to rate regulation, but rather, is subject to price cap
regulation and therefore the provisions of FASB Statement No. 71
do not apply. Financial statements presented in accordance with FASB
Statement 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) During the second quarter of fiscal year 2001, WPD made short-term loans
totaling (pound)85 million to WPD Limited. This represents part of the
funding for WPD Limited's purchase of Hyder plc shares. The loans were
funded through an increase to short-term borrowings. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" for
additional information.
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER OF FISCAL YEAR 2001 vs. SECOND QUARTER OF FISCAL YEAR 2000
AND
FISCAL YEAR-TO-DATE 2001 vs. FISCAL YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
The Company is a wholly owned subsidiary of WPD Holdings Limited, which
in turn has been wholly owned by WPD Holdings UK since June 1998. WPD Holdings
UK is indirectly owned by Southern Energy and PPL Corporation ("PPL"). Southern
Energy currently has a 49% economic interest in the WPD Holdings UK group, yet
retain operational and management control with 50.5% of the voting rights.
Southern Energy and PPL have agreed to modify their ownership of WPD
Holdings UK to 50% each so that neither party will have operational or
management control of WPD Holdings UK. This ownership change is expected to
occur during fiscal year 2001.
Earnings
The Company's net income from continuing operations for the second
quarter and year-to-date of fiscal year 2001 was (pound)8 million and (pound)22
million, respectively, compared to (pound)17 million and (pound)31 million for
the corresponding period of fiscal year 2000.
Significant income statement items from continuing operations appropriate
for discussion include the following:
Increase (Decrease)
---------------------------------------------------
Second Quarter Year-To-Date
(in millions) % (in millions) %
<S> <C> <C> <C> <C>
Operating revenues................................... (pound) (21) (30) (pound) (26) (20)
Depreciation and amortization........................ (1) (8) (3) (12)
Selling, general, and administrative expenses........ (8) (73) (13) (68)
Provision for income taxes........................... (3) (43) (3) (23)
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Operating revenues. Within operating revenues, the distribution business segment
decreased by (pound)6 million for the quarter and by (pound)8 million
year-to-date when compared to the same period of fiscal year 2000. This was
principally due to reduced distribution tariffs effective April 1, 2000 as
determined by the Regulator in his recent price review finalized in December
1999. Revenues from ancillary businesses (net of eliminations) for the second
quarter and year-to-date of fiscal year 2001 decreased by (pound)15 million and
(pound)18 million, respectively, compared to the same period of fiscal year 2000
reflecting lower activity in the energy purchasing business following the sale
of the electricity supply business effective September 30, 1999.
Depreciation and amortization. The second quarter and year-to-date decrease is
mainly attributed to a reduction in depreciation expense subsequent to a write
down of assets in fiscal year 2000.
Selling, general, and administrative expenses. The second quarter and
year-to-date decrease is primarily attributed to cost reductions associated with
restructuring after the sale of the electricity supply business, and staff
reductions.
Provision for income taxes. The second quarter and year-to-date decrease is due
to lower income before tax.
9
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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 the impact of current and future regulation.
On August 23, 2000, WPD Limited, a company owned jointly by subsidiaries
of Southern Energy and PPL, made an offer to acquire all of the outstanding
shares of Hyder plc for a total purchase price of approximately (pound)565
million, or 365 pence per Hyder share. On September 15, 2000, WPD Limited
committed unconditionally to purchase any shares of Hyder tendered by Hyder
shareholders.
Under UK company law, WPD Limited is able to compulsory purchase all
Hyder shares if acceptances to its offer from shareholders exceeds 90% of the
shares in issue. On October 25, 2000, acceptances exceeded 90%; WPD Limited has
exercised its right to acquire all shares in issue. During the quarter, WPD made
short-term loans totaling (pound)85 million to WPD Limited. This represents part
of the funding for WPD Limited's purchase of Hyder shares. In addition, WPD
Limited has replaced Hyder's board of directors with employees of WPD, Southern
Energy, and PPL.
Hyder provides water and sewerage, electricity distribution and other
services to customers in Wales. South Wales Electricity is Hyder's electricity
distribution subsidiary. It runs the electricity network in South Wales with
approximately 18,700 kilometers of overhead electricity lines and 14,300
kilometers of underground cable. South Wales Electricity's revenues are
principally derived from charges to electricity suppliers for using the
distribution network. South Wales Electricity's distribution network provides
electricity to approximately 981,000 end users. Once WPD Limited has completed
the acquisition of Hyder, it is expected that the headquarters of South Wales
Electricity will remain in South Wales and that WPD will provide management
oversight for the operations of South Wales Electricity.
WPD's distribution business constitutes an effective regional monopoly
and is subject to control on the prices it can charge and the quality of supply
it must provide.
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.
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.
Distribution businesses must also meet the Guaranteed and Overall
Standards of Performance, which are set by the Regulator to ensure an
appropriate level of quality of supply. If a company fails to provide the level
of service specified, it must make a fixed payment to the end user affected.
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
As part of the most recent price control review, effective April 1, 2000,
the Regulator recognized that further analysis was required to address some of
the weaknesses associated with the existing framework of price regulation. This
included a commitment to an ongoing program of work - the Information and
Incentives Project. A major objective of the Project is to strengthen the
financial incentives on distribution businesses with regard to the quality of
service that they deliver. Although the Guaranteed and Overall Standards of
Performance impose penalty payments for not meeting specific targets, there is
no explicit mechanism whereby distribution businesses are financially rewarded
for improved quality of supply. The Regulator intends to introduce additional
incentive mechanisms relating to quality of supply from April 2002. It will
focus on these measurements: the number of interruptions to supply, the duration
of the interruptions and a measure of customer satisfaction (telephone
response). The financial impact of any additional mechanisms would be limited to
+/-2% of price control revenue during the price control period from April 2002
until the end of March 2005.
In July 2000 the Utilities Bill received Royal Assent. This provides the
Regulator with powers to impose penalties on license holders, subject to a cap
of 10% of turnover, in circumstances where they are in breach of license
conditions and certain other requirements including requirements relating to
specific standards of performance. It also provides for supply and distribution
companies to be held in separate subsidiaries and new supply and distribution
licenses. The Utilities Act provisions will be enacted over the next few months.
The Company continues to analyze the effects of adoption of the rules
promulgated by FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and Statement No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement
No.133". Together these statements establish accounting and reporting standards
for derivative instruments. The provisions of the two Statements are mandatory
for fiscal years beginning after June 15, 2000. Management is currently
assessing the financial statement impact; however, such impact is not
determinable at this time. Adoption of Statements No. 133 and 138 could increase
volatility of earnings and other comprehensive income, but will have no impact
on cash flow during any future period.
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. WPD 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 (G) in the "Notes to the Condensed Consolidated
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.
10
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
A major change in the Company's financial condition during the six months
to September 30, 2000 was the expenditure by WPD of approximately (pound)35
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 WPD'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 WPD's
Authorized Area, in particular, is seasonal, with demand being higher in the
winter months and lower in the summer months. WPD 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 WPD. The Company is
primarily dependent upon dividends from WPD for its cash flow. WPD 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 WPD to allow for reasonable and necessary dividends
from WPD, 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, WPD's
distributable reserves could be eliminated. In addition, 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. WPD 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 September 30, 2000 the
amount unutilized under these facilities was (pound)77 million. WPD enters into
foreign currency contracts to hedge the currency risk associated with the
interest and principal of each utilization under this program.
WPD actively manages its short-term debt, which includes a number of
banklines of credit in addition to the commercial paper program. At September
30, 2000 the Company and WPD together had short-term debt of (pound)435 million
($643 million) outstanding ($407 million from a swingline and revolving credit
facility, and $236 million in other short-term loans).
To meet short-term cash needs and contingencies, the Company and WPD
together had at September 30, 2000 approximately (pound)2 million of cash and
(pound)50 million of unutilized committed lines of credit with banks. Also
available was (pound)77 million of the swingline and revolving credit facility
mentioned above.
During the quarter, WPD made short-term loans totaling (pound)85 million
to WPD Limited. This represents part of the funding for WPD Limited's purchase
of Hyder shares.
Excluding swap agreements between the Company and Holdings UK, at
September 30, 2000, the Company and WPD 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.
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SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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.
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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
By /s/ R. A. Symons
R. A. Symons
Director
By /s/ D. C. S. Oosthuizen
D. C. S. Oostuizen
Director, Chief Financial and Accounting Officer
Date: November 13, 2000