<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-33331 and 333-33331-01
12,000,000 PREFERRED SECURITIES
ENTERGY LONDON CAPITAL
8 5/8% CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES, SERIES A (QUIPSSM)*
(LIQUIDATION PREFERENCE $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS SET FORTH HEREIN, BY
ENTERGY LONDON INVESTMENTS PLC
----------------
The 8 5/8% Cumulative Quarterly Income Preferred Securities, Series A (the
"Preferred Securities"), offered hereby are being issued by, and represent
limited partner interests in, Entergy London Capital, L.P., a special purpose
limited partnership formed under the laws of the State of Delaware ("Entergy
London Capital"). Entergy London Capital was formed for the sole purpose of
issuing its limited partner interests and investing the proceeds thereof and
the capital contribution of Entergy London Investments plc, a public limited
company incorporated under the laws of England and Wales (the "Company") and
the sole General Partner of Entergy London Capital, in 8 5/8% Junior
Subordinated Deferrable Interest Debentures, Series A (the "Perpetual Junior
Subordinated Debentures"), to be issued by the Company under the Indenture for
Unsecured Subordinated Debt Securities relating to Preferred Securities, which
will be qualified under and subject to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Perpetual Junior Subordinated
Debentures will not have a stated maturity date, but will be redeemable, at
the option of the Company, as described herein. The limited partner interests
represented by the Preferred Securities will have a preference with respect to
cash distributions and amounts payable on dissolution, redemption or otherwise
over the General Partner's interest in Entergy London Capital.
(Continued on next page)
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
PROCEEDS TO
ENTERGY
INITIAL PUBLIC UNDERWRITING LONDON
OFFERING PRICE(1) COMMISSION(2) CAPITAL(3)(4)
----------------- ------------- -------------
<S> <C> <C> <C>
Per Preferred Security............ $25.00 (3) $25.00
Total............................. $300,000,000 (3) $300,000,000
</TABLE>
- --------
(1) Plus accumulated Distributions, if any, from the date of original
issuance.
(2) Entergy London Capital and the Company have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting".
(3) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Perpetual Junior Subordinated
Debentures, the Underwriting Agreement provides that the Company will pay
to the Underwriters, as compensation ("Underwriters' Compensation") for
arranging the investment therein of such proceeds, $0.7875 per Preferred
Security; provided, that such compensation will be $0.5000 per Preferred
Security sold to certain institutions. Accordingly, the maximum aggregate
amount of Underwriters' Compensation will be $9,450,000, but the actual
amount of Underwriters' Compensation will be less than such amount to the
extent that the Preferred Securities are sold to such institutions. See
"Underwriting".
(4) Expenses of the offering, which are payable by the Company, are estimated
to be $861,000.
----------------
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that the Preferred Securities will be ready for delivery in book-
entry only form through the facilities of The Depository Trust Company ("DTC")
in New York, New York, on or about November 19, 1997, against payment therefor
in immediately available funds.
- --------
*QUIPS is a servicemark of Goldman, Sachs & Co.
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
----------------
The date of this Prospectus is November 12, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH PREFERRED SECURITIES, AND THE IMPOSITION OF A PENALTY
BID, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING".
----------------
(Continued from previous page)
Holders of the Preferred Securities will be entitled to receive, to the
extent of funds held by Entergy London Capital and available therefor,
periodic cash distributions accumulating from the date of original issuance
and payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing December 31, 1997, at the rate of 8 5/8%
per annum of the liquidation preference of $25 per Preferred Security (the
"Distributions"). The Company has the right to defer indefinitely the payment
of interest on the Perpetual Junior Subordinated Debentures at any time or
from time to time. If interest payments on the Perpetual Junior Subordinated
Debentures are so deferred, Distributions on the Preferred Securities will
also be deferred. Until all deferred interest payments and interest thereon
have been paid in full, interest on the Perpetual Junior Subordinated
Debentures will continue to accrue (and the Preferred Securities will
accumulate additional Distributions thereon) at the rate of 8 5/8% per annum,
compounded quarterly, and the Company will not be permitted, subject to
certain exceptions set forth herein, to declare or pay any cash distributions
with respect to the Company's capital stock or debt securities that rank pari
passu with or junior to the Perpetual Junior Subordinated Debentures, make any
guarantee payments with respect to the foregoing, make any payments in respect
of any of its debt securities held by affiliates or make any loans or advances
to, or make payments on any guarantee of the debt of, any affiliate. See
"Description of the Perpetual Junior Subordinated Debentures--Option to Defer
Payment of Interest".
Under the terms of the Guarantee, the Partnership Agreement, the Indenture
(each as defined herein) and the Perpetual Junior Subordinated Debentures,
taken together, the Company has fully, irrevocably and unconditionally
guaranteed, on a subordinated basis, all of Entergy London Capital's
obligations under the Preferred Securities. The Guarantee guarantees the
payment of Distributions and payments on liquidation of Entergy London Capital
or redemption of the Preferred Securities, but only in each case to the extent
of funds held by Entergy London Capital and available therefor (the
"Guarantee"). If the Company does not make interest payments on the Perpetual
Junior Subordinated Debentures held by Entergy London Capital, Entergy London
Capital will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when Entergy
London Capital does not have sufficient funds to pay such Distributions. See
"Description of the Guarantee". The obligations of the Company under the
Guarantee are subordinate and junior in right of payment to all Senior Debt
(as defined in "Description of the Perpetual Junior Subordinated Debentures--
Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or in
part, upon redemption of the Perpetual Junior Subordinated Debentures in an
amount equal to the amount of Perpetual Junior Subordinated Debentures being
redeemed at a redemption price equal to the aggregate liquidation preference
of such Preferred Securities plus accumulated and unpaid Distributions thereon
to the date of redemption (the "Redemption Price"). See "Description of the
Preferred Securities--Redemptions". The Perpetual Junior Subordinated
Debentures are redeemable at the option of the Company (i) on or after
November 19, 2002, in whole at any time or in part from time to time, at a
redemption price equal to the accrued and unpaid interest on the Perpetual
Junior Subordinated Debentures so redeemed to the date fixed for redemption
plus 100% of the principal amount thereof (the "Debentures Redemption Price"),
(ii) at any time, in whole (but not in part), upon
2
<PAGE>
the occurrence and continuation of a Special Event (as defined herein), at the
Debentures Redemption Price, or (iii) at any time, in whole (but not in part),
in the event that the Company has or will become obligated to pay Additional
Amounts (as defined herein), at the Debentures Redemption Price. See
"Description of the Perpetual Junior Subordinated Debentures--Redemption" and
"--Optional Tax Redemption".
At any time, whether or not a Special Event has occurred, the Company will
have the right to dissolve Entergy London Capital and, after satisfaction of
liabilities to creditors of Entergy London Capital, if any, as provided by
applicable law, cause the Perpetual Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in liquidation of
Entergy London Capital. See "Description of the Preferred Securities--
Redemptions--Special Event Redemption or Distribution of Perpetual Junior
Subordinated Debentures".
The Perpetual Junior Subordinated Debentures are subordinate and junior in
right of payment to all Senior Debt of the Company. As of September 30, 1997,
the Company had approximately (Pounds)1.03 billion ($1.66 billion) of Senior
Debt outstanding. The terms of the Perpetual Junior Subordinated Debentures
place no limitation on the amount of Senior Debt that may be incurred by the
Company. In addition, the Company's obligations under the Guarantee and the
Perpetual Junior Subordinated Debentures will be effectively subordinated to
all existing and future liabilities of its subsidiaries, including London
Electricity plc ("London Electricity"). See "Risk Factors" and "Description of
the Perpetual Junior Subordinated Debentures--Subordination".
In the event of the dissolution and liquidation of Entergy London Capital,
after satisfaction of liabilities to creditors of Entergy London Capital, if
any, as provided by applicable law, the holders of the Preferred Securities
will be entitled to receive a liquidation preference of $25 per Preferred
Security plus accumulated and unpaid Distributions thereon to the date of
payment, which liquidation preference may be in the form of a distribution of
a Like Amount (as defined herein) of Perpetual Junior Subordinated Debentures
in certain circumstances. See "Description of the Preferred Securities--
Liquidation Distribution Upon Dissolution".
The Preferred Securities have been approved for listing, subject to notice
of issuance, on the New York Stock Exchange (the "NYSE") under the symbol "ELO
PrA" and application has been made to list the Perpetual Junior Subordinated
Debentures on the Luxembourg Stock Exchange. If the Perpetual Junior
Subordinated Debentures are distributed to the holders of the Preferred
Securities upon the liquidation of Entergy London Capital, the Company will
use its best efforts to also list the Perpetual Junior Subordinated Debentures
on the NYSE or such other stock exchanges or other organizations, if any, on
which the Preferred Securities are then listed.
The Preferred Securities will be represented by global certificates
registered in the name of a nominee of DTC. Beneficial interests in the
Preferred Securities will be shown on, and transfers thereof will be effected
only through, records maintained by Participants (as defined herein) in DTC.
Except as described under "Description of the Preferred Securities--Book-Entry
Issuance", Preferred Securities in registered certificated form will not be
issued in exchange for the global certificates.
3
<PAGE>
AVAILABLE INFORMATION
Following this offering, the Company will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file reports and other information
with the Securities and Exchange Commission (the "Commission"). Such reports
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material may also be obtained by mail from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission
(http://www.sec.gov).
The Company and Entergy London Capital have filed with the Commission a
registration statement on Form S-1 (herein, together with all amendments and
exhibits thereto, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act'). This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement.
No separate financial statements of Entergy London Capital have been
included herein. The Company and Entergy London Capital do not consider that
such financial statements would be material to holders of the Preferred
Securities because Entergy London Capital is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged
in and does not propose to engage in any activity other than holding as assets
the Perpetual Junior Subordinated Debentures, issuing the Preferred Securities
and engaging in other activities as are necessary, advisable or incidental
thereto. See "Entergy London Capital", "Description of the Preferred
Securities", "Description of the Perpetual Junior Subordinated Debentures",
and "Description of the Guarantee". In addition, the Company does not expect
that Entergy London Capital will file reports, proxy statements and other
information under the Exchange Act with the Commission.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a public limited company incorporated under the laws of
England and Wales. Substantially all the assets of the Company are located
outside the United States of America (the "US"). As a result, it may not be
possible for investors to effect service of process within the US upon the
Company or to enforce against it judgments of US courts predicated upon civil
liabilities under US Federal securities laws. There is doubt as to the
enforceability in England and Wales, in original actions or in actions for
enforcement of judgments of US courts, of civil liabilities predicated upon US
Federal securities laws.
The Partnership Agreement and the Preferred Securities will be governed by,
and construed in accordance with, the laws of the State of Delaware. The
Guarantee, the Indenture and the Perpetual Junior Subordinated Debentures will
be governed by, and will be construed in accordance with, the laws of the
State of New York. The Company has submitted to the non-exclusive jurisdiction
of the Supreme Court of New York, New York County and the United States
District Court for the Southern District of New York and any appellate court
from either thereof for any suit, legal action or proceeding against the
Company or its properties, assets or revenues with respect to its obligations,
liabilities or any other matter arising out of or in connection with the
Guarantee, the Indenture and the
4
<PAGE>
Perpetual Junior Subordinated Debentures. See "Description of the Perpetual
Junior Subordinated Debentures--Governing Law; Submission to Jurisdiction".
The Company accepts responsibility for the information contained in this
document. To the best knowledge and belief of the Company (which has taken all
reasonable care to ensure that such is the case) the information contained in
this document is in accordance with the facts and does not omit anything
likely to affect the import of such information.
PRESENTATION OF CURRENCY AND FINANCIAL INFORMATION
The Company publishes its consolidated financial statements in pounds
sterling. In this Prospectus, references to "pounds sterling" or "(Pounds)"
are to currency of the United Kingdom ("UK") and references to "US dollars",
"US$" or "$" are to US currency. As used herein, "US GAAP" means US generally
accepted accounting principles, and "UK GAAP" means UK generally accepted
accounting principles. For the convenience of the reader, this Prospectus
contains translations of certain pounds sterling amounts into US dollars at
specified rates, or, if not so specified, the noon buying rate in New York
City for cable transfers in pounds sterling as certified for customs purposes
by the Federal Reserve Bank of New York (the "Noon Buying Rate") on September
30, 1997 of $1.6117 = (Pounds)1.00. No representation is made that the pounds
sterling amounts have been, could have been or could be converted into US
dollars at the rates indicated or at any other rates. See "Exchange Rates" for
historical information regarding Noon Buying Rates.
UK SELLING RESTRICTIONS
There are restrictions on the offer and sale of the Preferred Securities in
the UK. All applicable provisions of the Financial Services Act 1986 and the
Public Offers of Securities Regulations 1995 with respect to anything done by
any person in relation to the Preferred Securities, in, from or otherwise
involving the UK must be complied with. See "Underwriting".
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business", "The Electric Utility Industry in Great
Britain" and elsewhere constitute forward looking statements. Such forward
looking statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of the Company or any of its subsidiaries, including London
Electricity, or industry results, to differ materially from any future
results, performance or achievements expressed or implied by such forward
looking statements. Such risks, uncertainties and other important factors
include, among others: general economic and business conditions in the UK, the
London metropolitan area, London Electricity's franchise area and elsewhere;
currency fluctuations; governmental, statutory, regulatory or administrative
initiatives affecting the Company, London Electricity or the UK electric
utility industry; general industry trends; competition; power costs and
availability; changes in business strategy, development plans or vendor
relationships; availability, terms and deployment of capital; availability of
qualified personnel; changes in, or the failure or inability to comply with,
governmental regulation, including, without limitation, environmental
regulations; and other factors referenced in this Prospectus. These forward
looking statements speak only as of the date of this Prospectus. The Company
disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward looking statement contained herein to reflect any
change in the Company's expectations with regard thereto after the date hereof
or any change in events, conditions or circumstances on which any such
statement is based.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed financial and other information contained
elsewhere in this Prospectus.
THE COMPANY
The Company owns all of the outstanding shares of London Electricity, one of
the twelve regional electricity companies ("RECs") in England and Wales. London
Electricity is the Company's sole significant asset. All of the Company's
outstanding shares are owned indirectly by Entergy Corporation ("Entergy", and,
together with its subsidiaries, the "Entergy Company system"), a US holding
company engaged in regulated electric power activities in the US and
competitive electric power and energy activities internationally and throughout
the US. Entergy, through the Company, gained effective control of London
Electricity in February 1997.
LONDON ELECTRICITY
London Electricity's principal businesses are the distribution and supply of
electricity to approximately 2 million customers in the London metropolitan
area. London Electricity's franchise area has a resident population of
approximately 4 million and covers approximately 257 square miles (the
"Franchise Area"). The Franchise Area generally consists of the metropolitan
London area and includes commercial, domestic and industrial customers. The
operations of London Electricity are regulated under its Public Electricity
Supply ("PES") license.
London Electricity's primary business is its distribution business, which in
Pro Forma Fiscal Year 1997 (as defined herein) produced operating income of
(Pounds)92 million ($148 million). Substantially all of the distribution
business is a regulated monopoly. London Electricity's supply business in Pro
Forma Fiscal Year 1997 generated (Pounds)6 million ($10 million) in operating
income. Together these businesses produced substantially all of London
Electricity's operating income of (Pounds)112 million ($181 million) in Pro
Forma Fiscal Year 1997.
London Electricity owns, manages and operates the electricity distribution
network within its Franchise Area. The primary activity of the distribution
business is the receipt of electricity from the national grid transmission
system (the "Grid") and its distribution to end users connected to London
Electricity's power lines. Virtually all electricity supplied (whether by
London Electricity's supply business or by any other suppliers) to consumers
within London Electricity's Franchise Area is transported through London
Electricity's distribution network.
London Electricity's supply business consists of selling electricity to end
users, purchasing such electricity and arranging for its distribution to those
end users. London Electricity has an exclusive right to supply electricity to
customers in its Franchise Area who have demand of not more than 100 kW. This
exclusive right will continue until April 1, 1998, when the supply market for
these customers will become competitive over a six month phase-in period. The
supply business to consumers with demand of 100 kW and above, both inside and
outside of London Electricity's Franchise Area, is already open to competition.
London Electricity, through subsidiaries, also conducts ancillary business
activities, including the ownership and operation of private distribution
networks, power generation and retail gas supply.
6
<PAGE>
ENTERGY LONDON CAPITAL
Entergy London Capital is a newly formed special purpose limited partnership
formed under the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act"). The Company is the sole general partner (the "General
Partner") in Entergy London Capital. Upon issuance of the Preferred Securities,
which securities represent limited partner interests in Entergy London Capital,
the registered holders thereof will become limited partners in Entergy London
Capital. The General Partner has agreed to contribute capital to the extent
required to maintain its capital at 1% of all capital of Entergy London
Capital. All of Entergy London Capital's business and affairs will be conducted
by the General Partner. Entergy London Capital was formed for the sole purpose
of issuing limited partner interests in the form of the Preferred Securities
and investing the proceeds thereof and the capital contributed by the General
Partner in the Perpetual Junior Subordinated Debentures.
THE OFFERING
As used herein, (i) the term "Indenture" means the Indenture for Unsecured
Subordinated Debt Securities relating to Preferred Securities, as the same may
be amended and supplemented from time to time, between the Company and The Bank
of New York, as Debenture Trustee (the "Debenture Trustee"), pursuant to which
the Perpetual Junior Subordinated Debentures will be issued, and (ii) the term
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement, among the Company, as General Partner, and the holders, from time to
time, of the Preferred Securities. Each of the other capitalized terms used in
this Prospectus and not otherwise defined has the meaning set forth in the
Indenture or the Partnership Agreement, as the case may be.
Securities Offered.................. 8 5/8% Cumulative Quarterly Income
Preferred Securities, Series A
(QUIPSSM)* (liquidation preference $25
per preferred security).
Offering Price...................... $25 per Preferred Security.
Distribution Dates.................. March 31, June 30, September 30 and
December 31 of each year, commencing
December 31, 1997.
Deferral of Interest Payments....... The Company has the right to defer
indefinitely the payment of interest on
the Perpetual Junior Subordinated
Debentures at any time or from time to
time. If interest payments on the
Perpetual Junior Subordinated
Debentures are so deferred,
Distributions on the Preferred
Securities will also be deferred. See
"Description of the Perpetual Junior
Subordinated Debentures--Option to
Defer Payment of Interest".
No Stated Maturity.................. The Perpetual Junior Subordinated
Debentures will not have a stated
maturity.
- --------
* QUIPS is a servicemark of Goldman, Sachs & Co.
7
<PAGE>
Ranking............................. The limited partner interests
represented by the Preferred Securities
will have a preference with respect to
cash distributions and amounts payable
on dissolution, redemption or otherwise
over the General Partner's interest in
Entergy London Capital. The Company's
obligations under the Perpetual Junior
Subordinated Debentures and the
Guarantee will constitute unsecured
obligations of the Company and will be
subordinate and junior in right of
payment to all Senior Debt of the
Company to the extent and in the manner
set forth in the Indenture. See
"Description of the Perpetual Junior
Subordinated Debentures--Subordination"
and "Description of the Guarantee".
Redemption.......................... The Preferred Securities will be
subject to mandatory redemption, in
whole or in part, upon redemption of
the Perpetual Junior Subordinated
Debentures in an amount equal to the
amount of Perpetual Junior Subordinated
Debentures being redeemed at the
Redemption Price. The Perpetual Junior
Subordinated Debentures are redeemable
at the option of the Company (i) on or
after November 19, 2002, in whole at
any time or in part from time to time,
(ii) at any time, in whole (but not in
part), upon the occurrence and
continuation of a Special Event, or
(iii) at any time, in whole (but not in
part), in the event that the Company
has or will become obligated to pay
Additional Amounts, in each case at the
Debentures Redemption Price. See
"Description of the Preferred
Securities--Redemptions--Mandatory
Redemption", "--Optional Redemption of
Perpetual Junior Subordinated
Debentures" and "--Special Event
Redemption or Distribution of Perpetual
Junior Subordinated Debentures".
Distribution of Perpetual Junior
Subordinated Debentures............ The Company will have the right at any
time, whether or not a Special Event
has occurred, to dissolve Entergy
London Capital and, after satisfaction
of liabilities to creditors, if any, of
Entergy London Capital, cause the
Perpetual Junior Subordinated
Debentures to be distributed to the
holders of the Preferred Securities in
liquidation of Entergy London Capital.
See "Description of the Preferred
Securities--Redemptions--Special Event
Redemption or Distribution of Perpetual
Junior Subordinated Debentures".
8
<PAGE>
Withholding Tax..................... Payments in respect of the Perpetual
Junior Subordinated Debentures and,
therefore, the Preferred Securities
will be made free and clear of any
present or future UK withholding and
other deductions existing in the UK,
except as set forth under "Description
of the Perpetual Junior Subordinated
Debentures--Additional Amounts".
Subject to certain exceptions, the
Company will pay such additional
amounts (the "Additional Amounts") as
will result in receipt by the holder of
the Perpetual Junior Subordinated
Debentures and, therefore, the holders
of the Preferred Securities of such
amounts as would have been received by
it had no such withholding or deduction
been required. See "Description of the
Perpetual Junior Subordinated
Debentures--Additional Amounts".
Listing............................. The Preferred Securities have been
approved for listing, subject to notice
of issuance, on the NYSE under the
symbol "ELO PrA" and application has
been made to list the Perpetual Junior
Subordinated Debentures on the
Luxembourg Stock Exchange. If the
Perpetual Junior Subordinated
Debentures are distributed to the
holders of the Preferred Securities
upon the liquidation of Entergy London
Capital, the Company will use its best
efforts to also list the Perpetual
Junior Subordinated Debentures on the
NYSE, or such other stock exchanges or
other organizations, if any, on which
the Preferred Securities are then
listed.
Use of Proceeds..................... The proceeds to Entergy London Capital
from the sale of the Preferred
Securities will be invested by Entergy
London Capital in the Perpetual Junior
Subordinated Debentures to be issued by
the Company to Entergy London Capital.
The Company intends to use the net
proceeds from such investment to repay
a portion of indebtedness incurred in
connection with the acquisition of
London Electricity. See "Use of
Proceeds" and "Capitalization".
Governing Law....................... The Partnership Agreement and the
Preferred Securities will be governed
by, and construed in accordance with,
the laws of the State of Delaware. The
Guarantee, the Indenture and the
Perpetual Junior Subordinated
Debentures will be governed by, and
construed in accordance with, the laws
of the State of New York.
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth summary consolidated financial data for
Entergy London Investments plc (the "Successor Company" or the "Company") and
London Electricity (the "Predecessor Company"). For a description of the
financial statements and records from which the following financial data have
been derived, see "Selected Financial Data". This information should be read in
conjunction with "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto of the Successor Company and the Predecessor
Company included elsewhere in this Prospectus. All references to a fiscal year
mean a year ended March 31.
The unaudited pro forma condensed consolidated income statement and other
data presented below for fiscal year 1997 reflect the acquisition by the
Company of London Electricity as if it had occurred as of April 1, 1996 ("Pro
Forma Fiscal Year 1997"). Such unaudited pro forma condensed consolidated
income statement and other data have been prepared by the Successor Company
based upon assumptions deemed proper by it and reflect a preliminary allocation
of the purchase price paid for the Predecessor Company. The unaudited pro forma
condensed consolidated income statement and other data presented herein are
shown for illustrative purposes only and are not necessarily indicative of the
future results of operations of the Successor Company or of the results of
operations of the Successor Company that would have actually occurred had the
transaction occurred as of April 1, 1996. This information should be read in
conjunction with the unaudited pro forma condensed consolidated statement of
income and notes thereto of the Successor Company included elsewhere in this
Prospectus.
10
<PAGE>
PREDECESSOR COMPANY
UK GAAP (1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Turnover.............. (Pounds)1,367 (Pounds)1,309 (Pounds) 1,209 (Pounds)1,188
Operating costs....... (1,215) (1,137) (1,046) (1,115)
------------- ------------- -------------- -------------
Operating profit...... 152 172 163 73
Exceptional item(2)... (20) -- (10) 66
Other income(3)....... 18 20 21 142
Interest, net......... (4) (5) (1) (5)
Tax on profit......... (38) (45) (23) (89)
------------- ------------- -------------- -------------
Profit for financial
period............... (Pounds)108 (Pounds)142 (Pounds)150 (Pounds)187
============= ============= ============== =============
<CAPTION>
MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds)709 (Pounds)769 (Pounds)823 (Pounds)794
Current assets........ 291 453 338 455
Creditors: Amounts
falling due within
one year............. (263) (265) (343) (485)
------------- ------------- -------------- -------------
Total assets less
current liabilities.. 737 957 818 764
Creditors: Amounts
falling due in more
than one year........ (73) (190) (115) (211)
Provisions for
liabilities and
charges.............. (42) (50) (45) (53)
------------- ------------- -------------- -------------
Total shareholders'
funds................ (Pounds)622 (Pounds)717 (Pounds)658 (Pounds)500
============= ============= ============== =============
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds)157 (Pounds)205 (Pounds)187 (Pounds)293
EBITDA(5)............. 189 240 225 334
Cash flow from
operations(6)........ 251 299 155 103
Ratio of earnings to
fixed charges(7)..... 11 10 12 15
</TABLE>
11
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1996 TO
-------------------- JANUARY 31,
1995 1996 1997(8)
------------- --------------------- ----------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues.... (Pounds)1,209 (Pounds)1,188 (Pounds)1,116
Operating income...... 166 102 107
National Grid
transaction.......... -- 450 --
Interest expense, net. (1) (5) (17)
Other, net............ 22 22 4
Provision for income
taxes................ (57) (110) (32)
------------- ------------- -------------
Income before
extraordinary item... 130 459 62
Extraordinary item.... (9) -- --
------------- ------------- -------------
Net income............ (Pounds) 121 (Pounds) 459 (Pounds) 62
============= ============= =============
<CAPTION>
MARCH 31, 1996
---------------------
(AMOUNTS IN MILLIONS)
<S> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds) 784
Total assets.......... 1,349
Total stockholder's
equity............... 448
Long-term debt........ 198
Short-term debt....... 96
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1996 TO
-------------------- JANUARY 31,
1995 1996 1997(8)
------------- --------------------- ----------------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds) 201 (Pounds) 586 (Pounds) 120
EBITDA(5)............. 241 628 159
Cash flow from
operations........... 123 191 102
Ratio of earnings to
fixed charges(7)..... 12.1 30.0 4.3
</TABLE>
12
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- ------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
TURNOVER:
Electricity
distribution......... (Pounds) 361 (Pounds) 367 (Pounds) 379 (Pounds) 357
Electricity supply.... 1,266 1,228 1,114 1,189
National Grid
transaction.......... -- -- -- (91)
Other................. 86 51 44 59
Intra-business(9)..... (346) (337) (328) (326)
------------- ------------- ------------- -------------
Total............... (Pounds)1,367 (Pounds)1,309 (Pounds)1,209 (Pounds)1,188
============= ============= ============= =============
OPERATING PROFIT (LOSS):
Electricity
distribution......... (Pounds) 152 (Pounds) 154 (Pounds) 136 (Pounds) 148
Electricity supply.... 7 6 14 9
National Grid
transaction.......... -- -- -- (97)
Other................. (7) 12 13 15
Intra-business(9)..... -- -- -- (2)
------------- ------------- ------------- -------------
Total............... (Pounds) 152 (Pounds) 172 (Pounds) 163 (Pounds) 73
============= ============= ============= =============
</TABLE>
13
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1996
YEAR ENDED MARCH 31, TO
---------------------------- JANUARY 31,
1995 1996 1997
------------- ------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
OPERATING REVENUE:
Electricity distribution......... (Pounds) 379 (Pounds) 357 (Pounds) 275
Electricity supply............... 1,114 1,098 1,051
Other............................ 44 59 68
Intra-business(9)................ (328) (326) (278)
------------- ------------- -------------
Total.......................... (Pounds)1,209 (Pounds)1,188 (Pounds)1,116
============= ============= =============
OPERATING INCOME:
Electricity distribution......... (Pounds) 141 (Pounds) 158 (Pounds) 101
Electricity supply............... 11 (70) (1)
Other............................ 14 16 7
Intra-business(9)................ -- (2) --
------------- ------------- -------------
Total.......................... (Pounds) 166 (Pounds) 102 (Pounds) 107
============= ============= =============
</TABLE>
14
<PAGE>
SUCCESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PRO FORMA -----------------------------------
PERIOD FROM INCEPTION FISCAL YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(OCTOBER 9, 1996) TO MARCH 31, 1997 1996 1997(12)
MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
---------------------- --------------------- -----------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
------------- ------- ------------- ------ ------------- ------------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues.... (Pounds) 234 $ 377 (Pounds)1,350 $2,176 (Pounds) 617 (Pounds) 548 $ 883
Operating income...... 32 52 112 181 76 61 98
Other income
(expense):
Interest expense,
net................ (13) (21) (93) (150) (8) (55) (88)
Other, net.......... (6) (10) 5 8 3 2 3
Windfall profits
tax................ -- -- -- -- -- (140) (226)
(Provision) benefit
for income taxes..... (5) (8) (8) (13) (19) 36 58
------------- ------- ------------- ------ ------------- ------------ ------
Net income (loss)..... (Pounds) 8 $ 13 (Pounds) 16 $ 26 (Pounds) 52 (Pounds) (96) $ (155)
============= ======= ============= ====== ============= ============ ======
<CAPTION>
SEPTEMBER 30, 1997
MARCH 31, 1997 (UNAUDITED)(12)
---------------------- ---------------------------
(Pounds) $(11) (Pounds) $(11)
------------- ------- ------------- ------------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds)1,347 $ 2,171 (Pounds)1,358 $ 2,189
Total assets.......... 2,669 4,301 2,646 4,264
Total stockholder's
equity............... 248 400 152 245
Long-term debt........ 1,143 1,842 1,228 1,979
Short-term debt....... 162 261 72 116
<CAPTION>
SIX MONTHS ENDED
PRO FORMA -----------------------------------
PERIOD FROM INCEPTION FISCAL YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(OCTOBER 9, 1996) TO MARCH 31, 1997 1996 1997(12)
MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
---------------------- --------------------- -----------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
------------- ------- ------------- ------ ------------- ------------ ------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds) 34 $ 55 (Pounds) 135 $ 218 (Pounds) 87 (Pounds) (77) $ (124)
EBITDA(5)............. 42 68 215 347 110 (38) (61)
Ratio of earnings to
fixed charges(7)(14). 1.6 1.6 1.2 1.2 5.2 -- --
Cash flow from
operations........... 64 103 122 40 64
Cash provided by (used
in) investing
activities........... (1,203) (1,939) (48) (12) (20)
Cash provided by (used
in) financing
activities........... 1,165 1,877 (38) (5) (8)
</TABLE>
15
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
PERIOD FROM INCEPTION PRO FORMA FISCAL YEAR SEPTEMBER 30, SEPTEMBER 30,
OCTOBER 9, 1996 ENDED MARCH 31, 1997 1996 1997
TO MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
----------------------------------------------------------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
-------------- ----------------------- ---------------------- ----------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity
distribution......... (Pounds) 61 $ 98 (Pounds) 336 $ 541 (Pounds)155 (Pounds)151 $ 243
Electricity supply.... 213 343 1,265 2,039 574 501 807
Other................. 11 18 78 126 48 34 55
Intra-business(9)..... (51) (82) (329) (530) (160) (138) (222)
-------------- ------- -------------- ------- ----------- ----------- -----
Total............... (Pounds) 234 $ 377 (Pounds) 1,350 $ 2,176 (Pounds)617 (Pounds)548 $ 883
============== ======= ============== ======= =========== =========== =====
OPERATING INCOME:
Electricity
distribution......... (Pounds) 18 $ 30 (Pounds) 92 $ 148 (Pounds) 65 (Pounds) 44 $ 71
Electricity supply.... 7 11 6 10 3 5 8
Other................. 7 11 14 23 8 12 19
-------------- ------- -------------- ------- ----------- ----------- -----
Total............... (Pounds) 32 $ 52 (Pounds) 112 $ 181 (Pounds) 76 (Pounds) 61 $ 98
============== ======= ============== ======= =========== =========== =====
<CAPTION>
MARCH 31, 1997
-------------------------
(Pounds) $(11)
-------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
ASSETS(15):
Electricity
distribution......... (Pounds) 1,766 $ 2,846
Electricity supply.... 544 877
Other................. 359 578
-------------- -------
Total............... (Pounds)2,669 $ 4,301
============== =======
</TABLE>
- -------
(1) The financial data for the Predecessor Company were derived from financial
statements for the Predecessor Company prepared in accordance with UK GAAP
and US GAAP. The principal differences between the Predecessor Company's
US GAAP and UK GAAP financial statements relate to the treatment of
goodwill, pension costs and deferred taxes and the timing of recognition
of restructuring charges and dividend accruals.
(2) Exceptional items recorded in 1993, 1995 and 1996 were caused primarily by
the following:
1993--Withdrawal from the electrical products retailing business (write-
down of fixed asset and stock values, and provisions for losses and further
costs expected until completely closed)
1995--Restructuring charges recorded for the regulated electricity business
1996--London Electricity's distribution of its ownership interest in The
National Grid Group plc ("NGG") to its shareholders and related
transactions
(3) Other income in 1996 includes (Pounds)144 million of income from London
Electricity's investment in NGG.
(4) EBIT equals income from continuing operations before the sum of interest
expense and income taxes. This information is provided for informational
purposes only and such measure should not be construed as an alternative
to operating income (as determined in accordance with US GAAP) as an
indicator of operating performance, or as an alternative to cash flows
from operating activities (as determined in accordance with US GAAP) as a
measure of liquidity. EBIT is a widely accepted financial indicator of a
company's ability to incur and service debt. However, this measure of EBIT
may not be comparable to similar measures presented by other companies.
(5) EBITDA equals income from continuing operations before the sum of interest
expense, income taxes, depreciation and amortization. This information is
provided for informational purposes only and such measure should not be
construed as an alternative to operating income (as determined in
accordance with US GAAP) as an indicator of operating performance, or as
an alternative to cash flows from operating activities (as determined in
accordance with US GAAP) as a measure of liquidity. EBITDA is a widely
accepted financial indicator of a company's ability to incur and service
debt. However, this measure of EBITDA may not be comparable to similar
measures presented by other companies.
(6) Cash flow from operations increased in fiscal year 1994 primarily as a
result of customers who paid bills in advance in order to avoid paying
value added taxes which were introduced by the British government.
(7) The ratio of earnings to fixed charges is computed as the sum of pretax
income from continuing operations plus fixed charges divided by fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rent expense.
(8) In February 1997, the Successor Company obtained effective control of the
Predecessor Company pursuant to the Successor Company's offer to acquire
the Predecessor Company.
(9) Intra-business eliminations consist primarily of intra-business
transactions between the distribution business and the supply business and
intercompany transactions between ancillary support businesses. Pursuant
to the UK regulatory framework, London Electricity's distribution of
electricity to its supply customers within its own Franchise Area is
billed to London Electricity's supply business, which in turn incorporates
the distribution charge into the bill sent to the final end user.
(10) Pro Forma Fiscal Year 1997 financial information gives effect to the
acquisition of the Predecessor Company by the Successor Company as if it
had occurred on April 1, 1996. See Unaudited Condensed Consolidated
Statement of Operations included elsewhere in this Prospectus.
(11) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on September 30,
1997 of $1.6117=(Pounds)1.00.
(12) Includes effect of windfall profits tax provision of (Pounds)140 million
and the effect of the reduction in the UK statutory income tax rate from
33% to 31%.
(13) The results of operations for the six months ended September 30, 1996
represent the historical amounts of the Predecessor Company. Such results
do not include the effects of acquisition adjustments.
(14) Earnings for the six months ended September 30, 1997 were insufficient to
cover fixed charges by (Pounds)132 million ($213 million).
(15) Includes distribution license, net of amortization, and prepaid pension
costs of (Pounds)830 million and (Pounds)145 million, respectively, at
March 31, 1997 and (Pounds)812 million and (Pounds)146 million,
respectively, at September 30, 1997.
16
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Preferred Securities.
FACTORS RELATING TO THE COMPANY'S BUSINESS
Substantial Leverage
Upon completion of this offering, the Company will continue to have
substantial indebtedness. At September 30, 1997, on a pro forma basis after
giving effect to this offering and the application of the proceeds thereof,
the ratio of the Company's consolidated debt to total capitalization was
approximately 71%. The "windfall profits tax" recently enacted by Parliament
((Pounds)140 million for London Electricity) will result in additional
borrowings by London Electricity or the Company. The degree to which the
Company is leveraged could affect its ability to service its indebtedness, to
make capital investments, to take advantage of certain business opportunities,
to respond to competitive pressures or to obtain additional financing. The
Company believes that following this offering and the restructuring of the
Credit Facilities Agreement (as defined herein), it will be able to make its
principal and interest payments, as and when required, on such indebtedness
and on the Perpetual Junior Subordinated Debentures from funds derived from
the operations of London Electricity and its subsidiaries. See "The Company--
Acquisition Debt Facility".
However, unexpected declines in the Company's and London Electricity's
future business, especially in light of the increasingly competitive
environment in the UK electric utility industry, increases in operating or
capital costs, or the inability to borrow additional funds could impair the
Company's ability to meet its debt service obligations, including with respect
to the Perpetual Junior Subordinated Debentures, and, therefore, could
adversely affect the Company. No assurance can be given that additional
financing will be available when needed, or, if available, will be obtainable
on terms that are favorable to the Company.
The ability of Entergy London Capital to pay amounts due on the Preferred
Securities is solely dependent upon the Company making payments on the
Perpetual Junior Subordinated Debentures as and when required.
Price Regulation of Distribution
The distribution business of London Electricity is regulated under its PES
license, pursuant to which charges by the distribution business to customers
are controlled by the Distribution Price Control Formula (as defined herein).
The Distribution Price Control Formula determines the maximum allowable
average price per unit of electricity (expressed in kilowatt hours, a "unit")
that a PES license holder may charge in any year. The elements used in the
Distribution Price Control Formula are established for a five-year period and
are subject to review by the Director General of Electricity Supply for the
United Kingdom (the "Regulator") at the end of each five-year period and at
other times at the discretion of the Regulator. At each review, the Regulator
can adjust the value of certain elements in the Distribution Price Control
Formula.
Following a review by the Regulator in August 1994, a 14% reduction was set
for London Electricity's allowed distribution revenues, effective April 1,
1995. In July 1995, a further review of allowed distribution revenues was
concluded by the Regulator for fiscal years 1997 to 2000. As a result of this
further review, London Electricity's allowed distribution revenues were
reduced by an additional 11%, effective April 1, 1996, and by a further 3%,
effective April 1 of each of the three following years. In an attempt to
partially offset these, and potentially future, reductions in allowed
distribution revenues, London Electricity plans to pursue a number of cost
efficiency initiatives that are intended to result in operating and capital
cost savings. However, there can be no assurance that any future reviews by
the Regulator will not result in additional price reductions or that London
17
<PAGE>
Electricity's cost efficiency initiatives will yield sufficient savings to
offset any such distribution price reductions. See "The Electric Utility
Industry in Great Britain--Industry Structure--Distribution of Electricity".
Competition in Supply; Supply Price Restraint Proposals
Each PES license holder currently has an exclusive right, subject to
modified price cap regulation, to supply customers in its franchise area with
a maximum demand of not more than 100 kW ("Franchise Supply Customers").
However, the supply market is being progressively opened to full competition.
The market for customers with a maximum demand above 1 MW has been open to
competition for suppliers of electricity since privatization in 1990 while,
for customers with a maximum demand above 100 kW ("Non-Franchise Supply
Customers"), the market became competitive in April 1994. The final stage of
this process is scheduled to take place over a period of six months commencing
April 1, 1998, when competition in supply to Franchise Supply Customers will
be phased in, and the exclusive right of London Electricity to supply
Franchise Supply Customers will cease. London Electricity is in the process of
developing its strategy to meet expanded competition in its supply business,
which will focus on active marketing and customer service to defend its
residential customer base and expanding product offerings to larger business
customers. There can be no assurance that this strategy will be successful in
avoiding significant loss of customers of London Electricity's supply
business. See "Business--Supply Business--Competition in the Supply Business"
and "The Electric Utility Industry in Great Britain--Industry Structure--
Supply of Electricity".
On October 16, 1997, the Regulator published proposals for new supply price
restraints to apply from April 1, 1998. Each PES license holder has one month
in which to decide whether to accept the proposals, failing which the
Regulator has stated he would refer the matter for investigation by the UK
Monopolies and Mergers Commission (the "MMC"). The proposals would, among
other things, implement a price reduction effective April 1, 1998 for London
Electricity's domestic and small business supply customers of 11.8% compared
to the supply price tariff in effect in August 1997. A further 3% reduction is
proposed to be effective on April 1, 1999. The 11.8% price reduction to be
effective on April 1, 1998 would be decreased by the supply tariff reductions
announced by London Electricity on September 29, 1997 and effective from
October 1, 1997, which will return over-recoveries experienced under the
current Supply Price Control Formula. The license modifications that will be
implemented if the Regulator's proposals are accepted would also discontinue
the automatic pass-through of all costs currently passed through to domestic
and small business customers, including purchased power costs from the Pool
(as defined herein). This change will increase the importance to London
Electricity of effective power purchasing and hedging activities. See "--Pool
Purchase Price Volatility", "The Electric Utility Industry in Great Britain--
Industry Structure--Supply Price Restraint Proposals" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Regulatory Policies Affecting the Company's Capital Structure
Certain modifications to London Electricity's PES license following the
Company's acquisition of London Electricity set forth several conditions
designed to assure the continued financial soundness of London Electricity,
including undertakings from Entergy that it will refrain, and cause its
subsidiaries to refrain, from taking any action that would likely result in
London Electricity breaching its obligations under its PES license and the
Electricity Act 1989 (the "Electricity Act") and an undertaking by London
Electricity to use reasonable endeavors to maintain an investment grade rating
of its debt securities. Although such conditions do not constitute explicit
oversight by the Regulator of dividend payments by London Electricity to the
Company, such conditions could have an effect on London Electricity's dividend
policy, which will constitute the principal source of funds for payment of
interest on the Perpetual Junior Subordinated Debentures.
The ability of Entergy to contribute additional equity capital to the
Company is currently subject to regulations of the Commission under the Public
Utility Holding Company Act of 1935, as amended.
18
<PAGE>
Absent specific Commission approval, these regulations limit the aggregate
amount that Entergy may invest in foreign utility companies and exempt
wholesale generators to 50% of consolidated retained earnings at the time an
investment is made. These regulations could delay or limit the making of loans
or the contributions of equity by Entergy to the Company to enable the Company
to meet its obligations, including on the Perpetual Junior Subordinated
Debentures, or to contribute additional equity capital to London Electricity.
Governmental Review of Utility Regulation
On June 30, 1997, the new Labour government announced a comprehensive review
of the regulation of the electric, gas, water and telecommunications
industries to be directed by the Department of Trade and Industry. Generally,
the review will focus on whether the current system of regulation in the
utility industries is designed to facilitate open and predictable regulation,
fairness to consumers and shareholders and the promotion of a competitive
environment. Particularly, the review will examine whether the current system
of price regulation delivers, over time, the greatest benefits to consumers
while maintaining proper incentives for innovation and investment and an
adequate return to shareholders. The review is expected initially to conclude
with a consultation paper to be issued at the end of 1997 as a basis for
possible legislation. In addition, on August 1, 1997, the President of the
Board of Trade referred the proposed acquisition by PacifiCorp of The Energy
Group plc to the MMC. The Company cannot predict the results of the Department
of Trade and Industry's review of regulated industries or its ultimate effects
on the Company.
Pool Purchase Price Volatility
London Electricity's supply business to Non-Franchise Supply Customers
generally involves entering into fixed price contracts to supply electricity.
London Electricity obtains the electricity to satisfy its obligations under
such contracts primarily by purchases from the wholesale trading market for
electricity in England and Wales (the "Pool"). See "The Electric Utility
Industry in Great Britain--The Pool". Because the price of electricity
purchased from the Pool can be volatile, to the extent that London Electricity
purchases electricity from the Pool, London Electricity is exposed to risk
arising from differences between the fixed price at which it sells and the
fluctuating prices at which it purchases electricity unless it can effectively
hedge such exposure. London Electricity's ability to manage such risk at
acceptable levels will depend, in part, on the specifics of the supply
contracts that London Electricity enters into, London Electricity's ability to
implement and manage an appropriate hedging strategy and the development of an
adequate market for hedging instruments. No assurance can be given that this
risk will be effectively mitigated. In addition, under the supply price
restraint proposals published by the Regulator on October 16, 1997, costs of
power purchases from the Pool and related hedging activities which are
currently passed through to domestic and small business customers will no
longer automatically be passed through to such customers. See "Business--
Supply Business".
Currency Risks; Absence of Hedging Transactions
The Company's revenues will be generated primarily in pounds sterling while
the Company's interest and principal payment obligations with respect to the
Perpetual Junior Subordinated Debentures will be payable in US dollars. As a
result, any change in the currency exchange rate that reduces the amount in
pounds sterling obtained upon conversion of the US dollar-based net proceeds
of the Perpetual Junior Subordinated Debentures or that increases the
effective principal and interest payment obligations represented by the
Perpetual Junior Subordinated Debentures upon conversion of pounds sterling-
based revenues into US dollars may, if not appropriately hedged, have a
material adverse effect on the Company or on its ability to make payments on
the Perpetual Junior Subordinated Debentures. See "Exchange Rates" for certain
information concerning the Noon Buying Rate for pounds sterling expressed in
US dollars. Although the Company expects to enter into certain transactions to
hedge risks associated with exchange rate fluctuations, there can be no
assurance that the Company will engage in such transactions or that any such
transaction will be successful in reducing any or all such risks.
19
<PAGE>
Litigation Regarding Electricity Supply Pension Scheme
The Pension Ombudsman (a UK arbitrator appointed by statute) has issued a
"final determination" in favor of complaints made by members of the
Electricity Supply Pension Scheme ("ESPS") relating to another employer's use
of the ESPS surplus to offset such employer's additional costs of early
payment of pensions as a result of reorganization or redundancy, together with
additional contributions required after a valuation. Under that determination
the Pension Ombudsman directed the employer to pay into ESPS the amount of
that use of the surplus plus interest. The Pension Ombudsman's final
determination has been successfully challenged in the courts. At the same time
the courts also considered other areas of uncertainty relating to the uses
made of actuarial surpluses arising in the ESPS including the ability to
reduce or suspend standard employer contributions to reduce such surpluses.
The courts ruled that such reductions were permissible. The final decisions of
the courts are subject to appeal. If any of the decisions are reversed on
appeal they may have an adverse effect on London Electricity, which has made
similar use of its actuarial surplus, but no assurance can be given as to the
extent of that effect.
FACTORS RELATING TO THE PREFERRED SECURITIES AND THE PERPETUAL JUNIOR
SUBORDINATED DEBENTURES
Perpetual Junior Subordinated Debentures and the Guarantee are Unsecured and
Subordinated
The Company's obligations under the Guarantee and the Perpetual Junior
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all Senior Debt of the Company. At September 30, 1997, Senior
Debt of the Company aggregated approximately (Pounds)1.03 billion ($1.66
billion). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". None of the
Indenture, the Guarantee or the Partnership Agreement places any limitation on
the amount of secured or unsecured debt, including Senior Debt, that may be
incurred by the Company.
The Company is a non-operating holding company, conducting substantially all
of its business through London Electricity and its subsidiaries. Except to the
extent that the Company may receive funds in the future from Entergy, the
Company will rely on dividends from London Electricity to meet its obligations
for payment of principal of and interest on its outstanding debt obligations
and corporate expenses. Accordingly, the Company's obligations under the
Guarantee and the Perpetual Junior Subordinated Debentures will be effectively
subordinated to all existing and future indebtedness and liabilities of the
subsidiaries of the Company, including London Electricity. Consequently, the
rights of the Company to receive assets of any such subsidiary (and thus the
ability of the beneficiaries of the Guarantee and the holders of the Perpetual
Junior Subordinated Debentures to benefit indirectly from such assets) are
subject to the prior claims of creditors of that subsidiary. At September 30,
1997, such subsidiaries had (Pounds)247 million ($398 million) of
indebtedness, and such subsidiaries may incur additional indebtedness in the
future. See "Description of the Guarantee--Status of the Guarantee" and
"Description of the Perpetual Junior Subordinated Debentures--Subordination".
Option to Defer Payment of Interest; Potential Market Volatility During
Interest Deferral
So long as no Debenture Event of Default under the Indenture has occurred
and is continuing, the Company has the right under the Indenture to defer
indefinitely the payment of interest on the Perpetual Junior Subordinated
Debentures at any time or from time to time. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities would also be
deferred (but would continue to accumulate additional Distributions thereon)
at the rate of 8 5/8% per annum, compounded quarterly, by Entergy London
Capital until all deferred interest payments, together with interest thereon,
have been paid in full. If interest payments on the Perpetual Junior
Subordinated Debentures are so deferred, the Company will not be permitted,
subject to certain exceptions, to declare or pay any cash distributions with
respect to the Company's capital stock or debt securities that rank pari
20
<PAGE>
passu with or junior to the Perpetual Junior Subordinated Debentures, make any
guarantee with respect to the foregoing, make any payments in respect of any
of its debt securities held by affiliates or make any loans or advances to, or
make payments on any guarantee of the debt of, any affiliate. See "Description
of the Preferred Securities--Distributions" and "Description of the Perpetual
Junior Subordinated Debentures--Option to Defer Payment of Interest".
In the event the Company exercises its right to defer payments of interest
on the Perpetual Junior Subordinated Debentures, the market price of the
Preferred Securities is likely to be affected. A holder that disposes of its
Preferred Securities during such a deferral, therefore, might not receive the
same return on its investment as a holder that continues to hold its Preferred
Securities. In addition, the market price of the Preferred Securities may be
more volatile than the market prices of other securities that are not subject
to such deferrals.
Special Event Redemption; Distribution of Perpetual Junior Subordinated
Debentures
Upon the occurrence and continuation of a Special Event, as described in
"Description of the Preferred Securities--Redemptions--Special Event
Redemption or Distribution of Perpetual Junior Subordinated Debentures", the
Company has the right to redeem the Perpetual Junior Subordinated Debentures
in whole (but not in part), and thereby cause a mandatory redemption of the
Preferred Securities, at the Debentures Redemption Price, within 90 days
following the occurrence of such Special Event. See "Description of the
Preferred Securities--Redemptions--Special Event Redemption or Distribution of
Perpetual Junior Subordinated Debentures".
In addition, at any time, whether or not a Special Event has occurred, the
Company has the right to dissolve Entergy London Capital and, after
satisfaction of liabilities to creditors, if any, of Entergy London Capital as
provided by applicable law, cause the Perpetual Junior Subordinated Debentures
to be distributed to the holders of the Preferred Securities in liquidation of
Entergy London Capital.
There can be no assurance as to the market prices for the Perpetual Junior
Subordinated Debentures that may be distributed in exchange for the Preferred
Securities if a liquidation of Entergy London Capital were to occur.
Accordingly, the Perpetual Junior Subordinated Debentures that a holder of the
Preferred Securities may receive on liquidation of Entergy London Capital,
could trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of the Preferred
Securities may receive the Perpetual Junior Subordinated Debentures if the
Company exercises its right to dissolve Entergy London Capital, prospective
purchasers of the Preferred Securities are also making an investment decision
with regard to the Perpetual Junior Subordinated Debentures and should
carefully review all the information regarding the Perpetual Junior
Subordinated Debentures contained herein. See "Description of the Preferred
Securities--Redemptions--Special Event Redemption or Distribution of Perpetual
Junior Subordinated Debentures" and "Description of the Perpetual Junior
Subordinated Debentures--Distribution of the Perpetual Junior Subordinated
Debentures".
Rights under the Guarantee; Limitation as to Funds Available to Entergy
London Capital
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Bank of New York will act as Guarantee Trustee for the purposes of
compliance with the Trust Indenture Act and will hold the Guarantee for the
benefit of the holders of the Preferred Securities. The Bank of New York will
also act as Debenture Trustee for the Perpetual Junior Subordinated
Debentures. The Guarantee guarantees to the holders of the Preferred
Securities the following payments, to the extent not paid by Entergy London
Capital: (i) any accumulated and unpaid Distributions required to be paid on
the Preferred Securities, to the extent that Entergy London Capital has funds
on hand available therefor, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption to the extent that Entergy London
Capital has funds on hand available therefor, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of Entergy London Capital
(unless the Perpetual Junior Subordinated Debentures are distributed to
holders of the Preferred Securities), the lesser of
21
<PAGE>
(a) the aggregate of the Liquidation Preference Amount (as defined in
"Description of the Preferred Securities--Redemptions") and all accumulated
and unpaid Distributions to the date of payment and (b) the amount of assets
of Entergy London Capital remaining available for distribution to holders of
the Preferred Securities. The holders of a majority in aggregate Liquidation
Preference Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee in respect of the Guarantee or to direct the exercise
of any trust power conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against Entergy London Capital, the
Guarantee Trustee or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Perpetual Junior Subordinated Debentures, Entergy London Capital
would lack funds for the payment of Distributions or amounts payable on
redemption of the Preferred Securities or otherwise, and, in such event,
holders of the Preferred Securities would not be able to rely upon the
Guarantee for payment of such amounts. If the General Partner fails to enforce
Entergy London Capital's rights under the Perpetual Junior Subordinated
Debentures or the Indenture, a holder of the Preferred Securities may
institute a legal proceeding directly against the Company to enforce Entergy
London Capital's rights under the Perpetual Junior Subordinated Debentures or
the Indenture, to the fullest extent permitted by law, without first
instituting any legal proceeding against the General Partner or any other
person or entity. Notwithstanding the foregoing, a holder of the Preferred
Securities may institute a legal proceeding directly against the Company for
enforcement of payment to such holder of principal of or interest on the
Perpetual Junior Subordinated Debentures having a principal amount equal to
the aggregate Liquidation Preference Amount of the Preferred Securities of
such holder on or after the due dates thereof. See "Description of the
Preferred Securities", "Description of the Perpetual Junior Subordinated
Debentures" and "Description of the Guarantee". The Partnership Agreement
provides that each holder of the Preferred Securities, by acceptance thereof,
agrees to the provisions of the Guarantee and the Indenture.
ENTERGY LONDON CAPITAL
Entergy London Capital is a newly formed special purpose limited partnership
formed under the Delaware Act. The Company is the sole General Partner in
Entergy London Capital. Upon issuance of the Preferred Securities, which
securities represent limited partner interests in Entergy London Capital, the
registered holders thereof will become limited partners in Entergy London
Capital. The General Partner has agreed to contribute capital to the extent
required to maintain its capital at 1% of all capital of Entergy London
Capital. All of Entergy London Capital's business and affairs will be
conducted by the General Partner.
Entergy London Capital was formed for the sole purpose of issuing limited
partner interests in the form of the Preferred Securities and investing the
proceeds thereof and the capital contributed by the General Partner in the
Perpetual Junior Subordinated Debentures. The limited partner interests
represented by the Preferred Securities will have a preference with respect to
cash distributions and amounts payable on dissolution, redemption or otherwise
over the General Partner's interest in Entergy London Capital.
The rights and obligations of the Company as General Partner and the holders
of the Preferred Securities will be governed by the Delaware Act and the
Partnership Agreement, a form of which has been filed as an exhibit to the
Registration Statement. The principal executive office of Entergy London
Capital is 639 Loyola Avenue, New Orleans, Louisiana 70113 and its telephone
number is 504-529-5262.
22
<PAGE>
THE COMPANY
GENERAL
The Company, incorporated as a public limited company under the laws of
England and Wales in October 1996, owns all of the outstanding shares of
London Electricity, one of the twelve RECs in England and Wales. London
Electricity is the Company's sole significant asset. All of the Company's
outstanding shares are owned indirectly by Entergy, a US holding company
engaged in regulated electric power activities in Arkansas, Louisiana,
Mississippi, Texas, Australia, Argentina and the UK and competitive electric
power and energy activities internationally and throughout the US. The Entergy
Company system provides energy to approximately 4.8 million customers
worldwide. Entergy, through the Company, gained effective control of London
Electricity in February 1997.
London Electricity's principal businesses are the distribution and supply of
electricity to approximately 2 million customers in the London metropolitan
area. London Electricity's Franchise Area has a resident population of
approximately 4 million and covers approximately 257 square miles. The
Franchise Area generally consists of the metropolitan London area and includes
commercial, domestic and industrial customers.
The operations of London Electricity are regulated under its PES license
pursuant to which charges by the distribution business, and the supply
business to Franchise Supply Customers, are currently subject to a price cap
regulatory framework that provides economic incentives to London Electricity
to improve its efficiency. See "The Electric Utility Industry in Great
Britain".
London Electricity's primary business is its distribution business, which in
Pro Forma Fiscal Year 1997 produced operating income of (Pounds)92 million
($148 million). Substantially all of the distribution business is a regulated
monopoly. London Electricity's supply business in Pro Forma Fiscal Year 1997
generated (Pounds)6 million ($10 million) in operating income. Together these
businesses produced substantially all of London Electricity's operating income
of (Pounds)112 million ($181 million) in Pro Forma Fiscal Year 1997.
London Electricity owns, manages and operates the electricity distribution
network within its Franchise Area. The primary activity of the distribution
business is the receipt of electricity from the Grid and its distribution to
end users connected to London Electricity's power lines. Virtually all
electricity supplied (whether by London Electricity's supply business or by
any other suppliers) to consumers within London Electricity's Franchise Area
is transported through London Electricity's distribution network. See
"Business--Distribution Business".
London Electricity's supply business consists of selling electricity to end
users, purchasing such electricity and arranging for its distribution to those
end users. London Electricity has an exclusive right to supply electricity to
Franchise Supply Customers (those who have demand of less than 100 kW). This
exclusive right will continue until April 1, 1998, when the supply market for
these customers is currently scheduled to become competitive over a six month
phase-in period. The supply business to Non-Franchise Supply Customers (those
who have demand of 100 kW and above), both inside and outside of London
Electricity's Franchise Area, is already open to competition. See "Business--
Supply Business".
London Electricity, through subsidiaries, also conducts ancillary business
activities including the ownership and operation of private distribution
networks such as the Heathrow, Gatwick and Stansted airport networks,
investments in power generation companies, such as Barking Power Limited
("Barking Power") and Thames Valley Power Limited, and retail gas supply. See
"Business--Affiliate Businesses and Other Investments".
The registered office and principal executive offices of the Company and
London Electricity are located at Templar House, 81-87 High Holborn, London
WC1V 6NU, England, telephone number 011-44-171-242-9050.
23
<PAGE>
OWNERSHIP STRUCTURE
The following organizational chart illustrates the ownership structure of
the Company and London Electricity (all ownership interests are 100% unless
otherwise indicated).
LOGO
[CHART APPEARS HERE]
24
<PAGE>
ACQUISITION DEBT FACILITY
Entergy's acquisition of London Electricity was financed with (Pounds)240
million of equity provided by Entergy and debt funded by the Company through
approximately (Pounds)20 million in loan notes issued to certain of London
Electricity's former shareholders and through borrowings under the Company's
(Pounds)1.25 billion Credit Facilities Agreement dated December 17, 1996, as
amended (the "Credit Facilities Agreement"), arranged by ABN AMRO Bank N.V.,
Bank of America International Limited and Union Bank of Switzerland. The
Credit Facilities Agreement is comprised of three parts: Facility A in the
amount of (Pounds)810 million ("Facility A"), Facility B in the amount of
(Pounds)240 million ("Facility B") and Facility C in the amount of (Pounds)200
million ("Facility C"). As of September 30, 1997, the Company had borrowed
(Pounds)790 million under Facility A and (Pounds)240 million under Facility B
to finance the acquisition cost of London Electricity. Facility C currently is
undrawn and is available only to refinance London Electricity's outstanding
debt and for London Electricity's working capital and general corporate
purposes.
The Company plans to restructure the Credit Facilities Agreement in
connection with the issuance of the Preferred Securities. As part of the
restructuring, Facility B will be repaid and terminated. Entergy UK Limited
will become the primary obligor under Facility A of the restructured Credit
Facilities Agreement, and the Company will become a guarantor of all Facility
A borrowings under the restructured Credit Facilities Agreement. The terms of
the restructured facilities will extend the maturity of borrowings under
Facility A to October 31, 2002 and increase London Electricity's permitted
borrowing capacity. The restructured Credit Facilities Agreement will contain
financial covenants and events of default typical for UK acquisition debt
facilities, including the ability of the lenders to declare an event of
default if a material adverse change affecting the Company's ability to meet
its financial covenants and payment obligations under the Credit Facilities
Agreement occurs. Facility C will continue to be available to London
Electricity.
The Company's obligations under the Perpetual Junior Subordinated Debentures
and the Guarantee are subordinate and junior in right of payment to the
Company's obligations under the Credit Facilities Agreement, along with other
Senior Debt of the Company. At September 30, 1997, Senior Debt, including
borrowings outstanding under the Credit Facilities Agreement, of the Company
aggregated approximately (Pounds)1.03 billion ($1.66 billion). Following the
restructuring of the Credit Facilities Agreement, the Company's obligations
thereunder likewise will remain senior to the Company's obligations under the
Perpetual Junior Subordinated Debentures and the Guarantee.
ACCOUNTING TREATMENT
For financial reporting purposes, Entergy London Capital will be treated as
a subsidiary of the Company and, accordingly, the accounts of Entergy London
Capital will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line item in
the consolidated balance sheet of the Company entitled "Company-Obligated
Redeemable Preferred Securities of Subsidiary Holding Solely Junior
Subordinated Deferrable Debentures" and appropriate disclosures about the
Preferred Securities, the Guarantee and the Perpetual Junior Subordinated
Debentures will be included in the notes to the consolidated financial
statements. For financial reporting purposes, the Company will record
Distributions payable on the Preferred Securities as an expense.
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by Entergy London Capital in the Perpetual Junior Subordinated
Debentures. The Company intends to use the net proceeds from the sale of such
Perpetual Junior Subordinated Debentures, together with other funds available
to the Company, to repay all of the borrowings under Facility B. Such
borrowings mature in installments through December 17, 1998 and currently bear
interest at an effective rate of 8.78%.
25
<PAGE>
CAPITALIZATION
The following table sets forth, at September 30, 1997 (i) the actual
consolidated capitalization of the Company, and (ii) the consolidated
capitalization of the Company adjusted to reflect the issuance of the
Preferred Securities and the application of the net proceeds thereof, as
described under "Use of Proceeds". This table should be read in conjunction
with "Selected Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------
ACTUAL AS ADJUSTED
------------------------ ------------------------
(Pounds) $(1) % (Pounds) $(1) %
------------- ------ --- ------------- ------ ---
(AMOUNTS IN MILLIONS, EXCEPT %)
<S> <C> <C> <C> <C> <C> <C>
Capitalization:
Long-term debt:
Eurobonds................ (Pounds) 198 $ 319 14% (Pounds) 198 $ 319 14%
Facility A............... 790 1,273 57 790 1,273 57
Facility B............... 240 387 18 -- -- --
Company-obligated
redeemable preferred
securities of subsidiary
holding solely junior
subordinated deferrable
debentures offered
hereby................... -- -- -- 186 300 14
Shareholder's equity...... 152 245 11 206 332 15
------------- ------ --- ------------- ------ ---
Total Capitalization....... (Pounds)1,380 $2,224 100% (Pounds)1,380 $2,224 100%
============= ====== === ============= ====== ===
Short-term debt and current
portion of long-term debt. (Pounds) 72 $ 116
</TABLE>
- --------
(1) Solely for the convenience of the reader, UK pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on September 30,
1997 of $1.6117 = (Pounds)1.00
EXCHANGE RATES
The following table sets out, for the periods indicated, certain information
concerning the exchange rates between UK pounds sterling and US dollars based
on the Noon Buying Rate in New York City for cable transfers in pounds
sterling as certified for customs purposes by the Federal Reserve Bank of New
York.
<TABLE>
<CAPTION>
FISCAL YEAR PERIOD END AVERAGE(1) HIGH LOW
----------- ---------- ---------- ---- ----
($ PER (Pounds)1.00)
<S> <C> <C> <C> <C>
1993............................................ 1.51 1.68 1.99 1.42
1994............................................ 1.49 1.50 1.57 1.48
1995............................................ 1.62 1.57 1.64 1.51
1996............................................ 1.53 1.56 1.61 1.51
1997............................................ 1.64 1.60 1.71 1.51
1998 through September 30, 1997................. 1.61 1.63 1.69 1.58
</TABLE>
- --------
(1) The average of the Noon Buying Rates in effect on the last business day of
each month during the relevant period.
26
<PAGE>
SELECTED FINANCIAL DATA
The income statement data of the Predecessor Company for each of the fiscal
years ended 1993, 1994, 1995 and 1996, and for the period from April 1, 1996
to January 31, 1997, and the balance sheet data of the Predecessor Company as
of the end of fiscal years 1993, 1994, 1995 and 1996 have been derived from
the audited consolidated financial statements of the Predecessor Company. The
income statement data for the period from October 9, 1996 to March 31, 1997
and the balance sheet data as of March 31, 1997 for the Successor Company have
been derived from the audited consolidated financial statements of the
Successor Company. The unaudited consolidated income statement data for the
six month period ended September 30, 1997 and the balance sheet data as of
September 30, 1997 have been derived from the financial statements of the
Successor Company. In the opinion of the management of the Company, all
adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation of the condensed unaudited consolidated
financial statements present fairly the financial position and the results of
operations for the interim periods presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and notes thereto of the Predecessor Company
and the Successor Company included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated income statement and other
data presented below for Pro Forma Fiscal Year 1997 reflect the acquisition by
the Company of London Electricity as if it had occurred as of April 1, 1996.
Such unaudited pro forma condensed consolidated income statement and other
data have been prepared by the Successor Company based upon assumptions deemed
proper by it and reflect a preliminary allocation of the purchase price paid
for the Predecessor Company. The unaudited pro forma condensed consolidated
income statement and other data presented herein are shown for illustrative
purposes only and are not necessarily indicative of the future results of
operations of the Successor Company or of the results of operations of the
Successor Company that would have actually occurred had the transaction
occurred as of April 1, 1996. This information should be read in conjunction
with the unaudited pro forma condensed consolidated statement of income and
notes thereto of the Successor Company included elsewhere in this Prospectus.
27
<PAGE>
PREDECESSOR COMPANY
UK GAAP (1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Turnover.............. (Pounds)1,367 (Pounds)1,309 (Pounds) 1,209 (Pounds)1,188
Operating costs....... (1,215) (1,137) (1,046) (1,115)
------------- ------------- -------------- -------------
Operating profit...... 152 172 163 73
Exceptional item(2)... (20) -- (10) 66
Other income(3)....... 18 20 21 142
Interest, net......... (4) (5) (1) (5)
Tax on profit......... (38) (45) (23) (89)
------------- ------------- -------------- -------------
Profit for financial
period............... (Pounds)108 (Pounds)142 (Pounds)150 (Pounds)187
============= ============= ============== =============
<CAPTION>
MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds)709 (Pounds)769 (Pounds)823 (Pounds)794
Current assets........ 291 453 338 455
Creditors: Amounts
falling due within
one year............. (263) (265) (343) (485)
------------- ------------- -------------- -------------
Total assets less
current liabilities.. 737 957 818 764
Creditors: Amounts
falling due in more
than one year........ (73) (190) (115) (211)
Provisions for
liabilities and
charges.............. (42) (50) (45) (53)
------------- ------------- -------------- -------------
Total shareholders'
funds................ (Pounds)622 (Pounds)717 (Pounds)658 (Pounds)500
============= ============= ============== =============
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- -------------- -------------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds)157 (Pounds)205 (Pounds)187 (Pounds)293
EBITDA(5)............. 189 240 225 334
Cash flow from
operations(6)........ 251 299 155 103
Ratio of earnings to
fixed charges(7)..... 11 10 12 15
</TABLE>
28
<PAGE>
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1996 TO
-------------------- JANUARY 31,
1995 1996 1997(8)
------------- --------------------- ----------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues.... (Pounds)1,209 (Pounds)1,188 (Pounds)1,116
Operating income...... 166 102 107
National Grid
transaction.......... -- 450 --
Interest expense, net. (1) (5) (17)
Other, net............ 22 22 4
Provision for income
taxes................ (57) (110) (32)
------------- ------------- -------------
Income before
extraordinary item... 130 459 62
Extraordinary item.... (9) -- --
------------- ------------- -------------
Net income............ (Pounds) 121 (Pounds) 459 (Pounds) 62
============= ============= =============
<CAPTION>
MARCH 31, 1996
---------------------
(AMOUNTS IN MILLIONS)
<S> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds) 784
Total assets.......... 1,349
Total stockholder's
equity............... 448
Long-term debt........ 198
Short-term debt....... 96
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 31, APRIL 1, 1996 TO
-------------------- JANUARY 31,
1995 1996 1997(8)
------------- --------------------- ----------------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds) 201 (Pounds) 586 (Pounds) 120
EBITDA(5)............. 241 628 159
Cash flow from
operations........... 123 191 102
Ratio of earnings to
fixed charges(7)..... 12.1 30.0 4.3
</TABLE>
29
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
UK GAAP(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------
1993 1994 1995 1996
------------- ------------- ------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
TURNOVER:
Electricity
distribution......... (Pounds) 361 (Pounds) 367 (Pounds) 379 (Pounds) 357
Electricity supply.... 1,266 1,228 1,114 1,189
National Grid
transaction.......... -- -- -- (91)
Other................. 86 51 44 59
Intra-business(9)..... (346) (337) (328) (326)
------------- ------------- ------------- -------------
Total............... (Pounds)1,367 (Pounds)1,309 (Pounds)1,209 (Pounds)1,188
============= ============= ============= =============
OPERATING PROFIT (LOSS):
Electricity
distribution......... (Pounds) 152 (Pounds) 154 (Pounds) 136 (Pounds) 148
Electricity supply.... 7 6 14 9
National Grid
transaction.......... -- -- -- (97)
Other................. (7) 12 13 15
Intra-business(9)..... -- -- -- (2)
------------- ------------- ------------- -------------
Total............... (Pounds) 152 (Pounds) 172 (Pounds) 163 (Pounds) 73
============= ============= ============= =============
</TABLE>
30
<PAGE>
BUSINESS SEGMENTS
PREDECESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1996
YEAR ENDED MARCH 31, TO
---------------------------- JANUARY 31,
1995 1996 1997
------------- ------------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
OPERATING REVENUE:
Electricity distribution......... (Pounds) 379 (Pounds) 357 (Pounds) 275
Electricity supply............... 1,114 1,098 1,051
Other............................ 44 59 68
Intra-business(9)................ (328) (326) (278)
------------- ------------- -------------
Total.......................... (Pounds)1,209 (Pounds)1,188 (Pounds)1,116
============= ============= =============
OPERATING INCOME:
Electricity distribution......... (Pounds) 141 (Pounds) 158 (Pounds) 101
Electricity supply............... 11 (70) (1)
Other............................ 14 16 7
Intra-business(9)................ -- (2) --
------------- ------------- -------------
Total.......................... (Pounds) 166 (Pounds) 102 (Pounds) 107
============= ============= =============
</TABLE>
31
<PAGE>
SUCCESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PRO FORMA -----------------------------------
PERIOD FROM INCEPTION FISCAL YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(OCTOBER 9, 1996) TO MARCH 31, 1997 1996 1997(12)
MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
---------------------- --------------------- -----------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
------------- ------- ------------- ------ ------------- ------------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Operating revenues.... (Pounds) 234 $ 377 (Pounds)1,350 $2,176 (Pounds) 617 (Pounds) 548 $ 883
Operating income...... 32 52 112 181 76 61 98
Other income
(expense):
Interest expense,
net................ (13) (21) (93) (150) (8) (55) (88)
Other, net.......... (6) (10) 5 8 3 2 3
Windfall profits
tax................ -- -- -- -- -- (140) (226)
(Provision) benefit
for income taxes..... (5) (8) (8) (13) (19) 36 58
------------- ------- ------------- ------ ------------- ------------ ------
Net income (loss)..... (Pounds) 8 $ 13 (Pounds) 16 $ 26 (Pounds) 52 (Pounds) (96) $ (155)
============= ======= ============= ====== ============= ============ ======
<CAPTION>
SEPTEMBER 30, 1997
MARCH 31, 1997 (UNAUDITED)(12)
---------------------- ---------------------------
(Pounds) $(11) (Pounds) $(11)
------------- ------- ------------- ------------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Fixed assets, net..... (Pounds)1,347 $ 2,171 (Pounds)1,358 $ 2,189
Total assets.......... 2,669 4,301 2,646 4,264
Total stockholder's
equity............... 248 400 152 245
Long-term debt........ 1,143 1,842 1,228 1,979
Short-term debt....... 162 261 72 116
<CAPTION>
SIX MONTHS ENDED
PRO FORMA -----------------------------------
PERIOD FROM INCEPTION FISCAL YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
(OCTOBER 9, 1996) TO MARCH 31, 1997 1996 1997(12)
MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
---------------------- --------------------- -----------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
------------- ------- ------------- ------ ------------- ------------ ------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT(4)............... (Pounds) 34 $ 55 (Pounds) 135 $ 218 (Pounds) 87 (Pounds) (77) $ (124)
EBITDA(5)............. 42 68 215 347 110 (38) (61)
Ratio of earnings to
fixed charges(7)(14). 1.6 1.6 1.2 1.2 5.2 -- --
Cash flow from
operations........... 64 103 122 40 64
Cash provided by (used
in) investing
activities........... (1,203) (1,939) (48) (12) (20)
Cash provided by (used
in) financing
activities........... 1,165 1,877 (38) (5) (8)
</TABLE>
32
<PAGE>
BUSINESS SEGMENTS
SUCCESSOR COMPANY
US GAAP(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
PERIOD FROM INCEPTION PRO FORMA FISCAL YEAR SEPTEMBER 30, SEPTEMBER 30,
OCTOBER 9, 1996 ENDED MARCH 31, 1997 1996 1997
TO MARCH 31, 1997(8) (UNAUDITED)(10) (UNAUDITED)
----------------------------------------------------------------------------------
(Pounds) $(11) (Pounds) $(11) (Pounds)(13) (Pounds) $(11)
-------------- ----------------------- ---------------------- ----------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electricity
distribution......... (Pounds) 61 $ 98 (Pounds) 336 $ 541 (Pounds)155 (Pounds)151 $ 243
Electricity supply.... 213 343 1,265 2,039 574 501 807
Other................. 11 18 78 126 48 34 55
Intra-business(9)..... (51) (82) (329) (530) (160) (138) (222)
-------------- ------- -------------- ------- ----------- ----------- -----
Total............... (Pounds) 234 $ 377 (Pounds) 1,350 $ 2,176 (Pounds)617 (Pounds)548 $ 883
============== ======= ============== ======= =========== =========== =====
OPERATING INCOME:
Electricity
distribution......... (Pounds) 18 $ 30 (Pounds) 92 $ 148 (Pounds) 65 (Pounds) 44 $ 71
Electricity supply.... 7 11 6 10 3 5 8
Other................. 7 11 14 23 8 12 19
-------------- ------- -------------- ------- ----------- ----------- -----
Total............... (Pounds) 32 $ 52 (Pounds) 112 $ 181 (Pounds) 76 (Pounds) 61 $ 98
============== ======= ============== ======= =========== =========== =====
<CAPTION>
MARCH 31, 1997
-------------------------
(Pounds) $(11)
-------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
ASSETS(15):
Electricity
distribution......... (Pounds) 1,766 $ 2,846
Electricity supply.... 544 877
Other................. 359 578
-------------- -------
Total............... (Pounds)2,669 $ 4,301
============== =======
</TABLE>
- -------
(1) The financial data for the Predecessor Company were derived from
financial statements for the Predecessor Company prepared in accordance
with UK GAAP and US GAAP. The principal differences between the
Predecessor Company's US GAAP and UK GAAP financial statements relate to
the treatment of goodwill, pension costs and deferred taxes and the
timing of recognition of restructuring charges and dividend accruals.
(2) Exceptional items recorded in 1993, 1995 and 1996 were caused primarily
by the following:
1993--Withdrawal from the electrical products retailing business (write-
down of fixed asset and stock values, and provisions for losses and further
costs expected until completely closed)
1995--Restructuring charges recorded for the regulated electricity business
1996--London Electricity's distribution of its ownership interest in NGG to
its shareholders and related transactions
(3) Other income in 1996 includes (Pounds)144 million of income from London
Electricity's investment in NGG.
(4) EBIT equals income from continuing operations before the sum of interest
expense and income taxes. This information is provided for informational
purposes only and such measure should not be construed as an alternative
to operating income (as determined in accordance with US GAAP) as an
indicator of operating performance, or as an alternative to cash flows
from operating activities (as determined in accordance with US GAAP) as a
measure of liquidity. EBIT is a widely accepted financial indicator of a
company's ability to incur and service debt. However, this measure of
EBIT may not be comparable to similar measures presented by other
companies.
(5) EBITDA equals income from continuing operations before the sum of
interest expense, income taxes, depreciation and amortization. This
information is provided for informational purposes only and such measure
should not be construed as an alternative to operating income (as
determined in accordance with US GAAP) as an indicator of operating
performance, or as an alternative to cash flows from operating activities
(as determined in accordance with US GAAP) as a measure of liquidity.
EBITDA is a widely accepted financial indicator of a company's ability to
incur and service debt. However, this measure of EBITDA may not be
comparable to similar measures presented by other companies.
(6) Cash flow from operations increased in fiscal year 1994 primarily as a
result of customers who paid bills in advance in order to avoid paying
value added taxes which were introduced by the British government.
(7) The ratio of earnings to fixed charges is computed as the sum of pretax
income from continuing operations plus fixed charges divided by fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rent expense.
(8) In February 1997, the Successor Company obtained effective control of the
Predecessor Company pursuant to the Successor Company's offer to acquire
the Predecessor Company.
(9) Intra-business eliminations consist primarily of intra-business
transactions between the distribution business and the supply business
and intercompany transactions between ancillary support businesses.
Pursuant to the UK regulatory framework, London Electricity's
distribution of electricity to its supply customers within its own
Franchise Area is billed to London Electricity's supply business, which
in turn incorporates the distribution charge into the bill sent to the
final end user.
(10) Pro Forma Fiscal Year 1997 financial information gives effect to the
acquisition of the Predecessor Company by the Successor Company as if it
had occurred on April 1, 1996. See Unaudited Condensed Consolidated
Statement of Operations included elsewhere in this Prospectus.
(11) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on September 30,
1997 of $1.6117=(Pounds)1.00.
(12) Includes effect of windfall profits tax provision of (Pounds)140 million
and the effect of the reduction in the UK statutory income tax rate from
33% to 31%.
(13) The results of operations for the six months ended September 30, 1996
represent the historical amounts of the Predecessor Company. Such results
do not include the effects of acquisition adjustments.
(14) Earnings for the six months ended September 30, 1997 were insufficient to
cover fixed charges by (Pounds)132 million ($213 million).
(15) Includes distribution license, net of amortization, and prepaid pension
costs of (Pounds)830 million and (Pounds)145 million, respectively, at
March 31, 1997 and (Pounds)812 million and (Pounds)146 million,
respectively, at September 30, 1997.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
and condensed financial statements and the notes thereto of Entergy London
Investments plc and subsidiaries (the "Company" or "Successor Company") and
with the consolidated and condensed financial statements and the notes thereto
of London Electricity plc and its subsidiaries (the "Predecessor Company" or
"London Electricity") and "Selected Financial Data" included elsewhere in this
Prospectus. The consolidated and condensed financial statements of the
Successor Company and the Predecessor Company discussed in this section are
presented in accordance with US GAAP.
INTRODUCTION
Background
The Company was incorporated as a public limited company under the laws of
England and Wales in October 1996, as a vehicle for the acquisition of London
Electricity. In February 1997, the Company gained effective control of London
Electricity, having acquired over 90% of its shares. The Company subsequently
replaced a portion of London Electricity's board of directors and certain
senior managers with officers and employees of companies from within Entergy.
In May 1997, the Company acquired the remaining shares of London Electricity.
Total consideration for the acquisition was approximately (Pounds)1.3 billion.
The Company's sole significant asset is the stock of London Electricity. The
Company has no operations outside of its investment in London Electricity.
Accounting for the Acquisition
The Company's acquisition of London Electricity effective February 1, 1997
was accounted for as a purchase in accordance with US GAAP. Accordingly, the
results of operations of London Electricity have been consolidated into the
results of operations for the Company beginning on such date. In accordance
with the purchase method of accounting, the Company has allocated the price
paid for London Electricity to London Electricity's assets and liabilities
based on their estimated fair market values with the remainder allocated to
London Electricity's distribution license which represents an other
identifiable intangible asset. The assets and liabilities acquired as of
February 1, 1997 were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Current assets.............................................. (Pounds) 323.4
Network assets.............................................. 1,332.0
Other long term assets...................................... 999.3
Current liabilities......................................... (383.7)
Long term debt.............................................. (208.4)
Other long term liabilities................................. (802.5)
---------------
Total purchase price...................................... (Pounds)1,260.1
===============
</TABLE>
The principal adjustments to London Electricity's historical cost of its
assets and liabilities include: (a) increase in the value of network assets
((Pounds)488.6 million); (b) increase in pension asset for defined benefit
pension plan under US GAAP ((Pounds)67.8 million); (c) recordation of
distribution license ((Pounds)833.7 million); and (d) recordation of liability
for unfavorable long term contracts ((Pounds)99.5 million). Additionally, the
Company provided for the deferred income tax effect of these adjustments at a
rate of 33% which is included in other long term liabilities. The Company is
amortizing the adjustments for network assets and the distribution license
over estimated useful lives of 40 years and the adjustment for unfavorable
long term contracts over their remaining lives ranging from 14 to 18 years.
34
<PAGE>
The Company's asset recorded for the defined benefit pension plan will be
increased or decreased on a prospective basis based on future actuarial
studies of the plan's projected benefit obligation and fair value of pension
plan assets. The liability for unfavorable long term contracts is based on the
estimated fair market value of these contracts over the present value of the
future cash flows under the contracts at the applicable discount rates and
prices. Although amortization of the liability for unfavorable long-term
contracts will reduce the expense related to these contracts, it will not
impact the Company's actual payments or cash flow obligations.
London Electricity has utilized a portion of the pension plan surplus to
increase benefits to members and reduce employer and employee contributions. A
recent court ruling in the UK upheld such uses of pension surplus. However,
the decision is under appeal and should the decision be reversed on appeal,
the Company could be required to repay pension surplus utilized and recompute
the Company's prepaid pension asset which was (Pounds)146 million at September
30, 1997. The recomputation of the prepaid pension asset prior to February
1998 would result in a corresponding increase in the distribution license and
an increase in license amortization expense over its 40-year life. A
recomputation subsequent to February 1998 would be recognized as an expense in
the Company's results of operations in the period in which such recomputation
occurs. Additionally, as of September 30, 1997, a tax valuation of fixed
assets had not yet been prepared. Management expects that this tax valuation
will be completed by December 31, 1997. The outcome of the tax valuation could
result in a reallocation of amounts between the Company's distribution license
and fixed assets. Such reallocation would not have a significant effect on the
Company's liquidity, results of operations or financial condition. The
Company's allocation of purchase price is preliminary pending the outcome of
these matters.
The unaudited pro forma information presented for Pro Forma Fiscal Year 1997
consists of the historical results of operations of the Predecessor Company
prior to the acquisition and the results of operations of the Successor
Company subsequent to the acquisition, both of which have been adjusted for
the effects of the acquisition as though it had taken place on April 1, 1996.
The primary effects of the acquisition that are reflected in Pro Forma Fiscal
Year 1997 include: (a) an increase in depreciation and amortization expense
resulting from applying the purchase method of accounting to the Predecessor
Company's fixed assets and distribution license based on 40-year useful lives,
(b) reduction in other deductions to eliminate the Predecessor Company's
acquisition defense costs, (c) additional interest associated with debt
incurred to purchase the Predecessor Company at an assumed average rate of
7.3%, and (d) recognition of income tax expense based on a 33% UK statutory
income tax rate.
The information for Pro Forma Fiscal Year 1997 has been prepared for
illustrative purposes only and, because of its nature, cannot give a complete
picture of the Company's results of operations for the relevant period had the
transactions been consummated on the date assumed and does not project the
Company's financial position or results of operations for any future date or
period.
National Grid Group Transactions
During fiscal year 1996, London Electricity, as well as each of the other 11
REC businesses in the UK, reorganized their interests in NGG. London
Electricity distributed the majority of its shares in NGG to its shareholders.
As part of this distribution, London Electricity revalued these shares to fair
market value and recognized a gain of approximately (Pounds)266 million and
received special dividends of (Pounds)131 million and rights dividends of
(Pounds)3.0 million from NGG which were also recognized as income.
Additionally, London Electricity received approximately (Pounds)70.1 million
as a result of NGG's sale of its pumped storage business which was also
recognized as a gain in fiscal year 1996. London Electricity has retained
shares of NGG for the purpose of establishing an employee stock ownership plan
("ESOP") for its employees who were participants in London Electricity stock
option and sharesave plans to compensate them for any dimunition in value in
London Electricity shares as a result of NGG
35
<PAGE>
distributions. The cost of such ESOP shares has been reflected as expense of
(Pounds)17.3 million in the fiscal year 1996 results of operations. As a
result of all of the above, London Electricity recognized a total nonrecurring
gain of (Pounds)453 million ((Pounds)366 million after tax effect) in the
fiscal year 1996 results of operations. As part of the agreement among the
shareholders of NGG, each of the RECs agreed to provide a discount to each of
their respective Franchise Supply Customers which, together with the
associated reduction in the Fossil Fuel Levy (as defined in "The Electric
Utility Industry in Great Britain"), produced a credit on each Franchise
Supply Customer's bill of just over (Pounds)50. The cost to London Electricity
of providing this discount amounted to (Pounds)83 million (net of the
reduction in the Fossil Fuel Levy of (Pounds)8 million) which was credited to
customers in the last quarter of fiscal year 1996. The effect of the refund
was to reduce operating revenues, cost of sales, gross profit and net income
by (Pounds)91 million, (Pounds)8 million, (Pounds)83 million and (Pounds)56
million, respectively. The net dividends received from NGG and the net after
tax proceeds from the sale of NGG's pumped storage business were sufficient to
offset the after tax cash cost of providing the (Pounds)50 per customer
discount to its Franchise Supply Customers and taxation cost of distributing
its NGG investment to its shareholders.
SIGNIFICANT FACTORS AND KNOWN TRENDS
Competition and Industry Challenges
On April 1, 1995, 1996 and 1997 certain reductions in allowed distribution
revenues were made by the Regulator. London Electricity's allowed distribution
revenues were reduced by 14% and 11% on April 1, 1995 and April 1, 1996,
respectively, following reviews by the Regulator. On April 1, 1997, London
Electricity's allowed distribution revenues were decreased an additional 3%,
and there will be further annual reductions of 3% on April 1, 1998 and 1999.
London Electricity plans to pursue a number of cost efficiency initiatives
that are intended to result in operating and cost savings in an attempt to
partially offset the expected price decreases and potential future additional
price reductions. Such efficiencies will include voluntary early retirement
programs, work force reductions and labor cost realignment and are expected to
generate substantial costs savings, when fully implemented by fiscal year
2001. The one-time cost of such savings will be approximately (Pounds)35
million, which has been provided in the Company's March 31, 1997 balance
sheet.
The potential exists for additional distribution price reductions based upon
further review by the Regulator. The cost efficiency initiatives may not
result in sufficient savings to offset price reductions. Price reductions are
mitigated by the inclusion of the general index for inflation in the
determination of allowed revenues.
Until April 1, 1998, London Electricity has an exclusive right to supply
electricity to customers in its Franchise Area with demand of less than 100
kW. At that time this segment of the supply business will be open to
competition, subject to a six-month transition period. Although the advent of
competition for all customers in the supply business in 1998 will permit all
RECs to compete on a national level, London Electricity may be more sensitive
to competition from its neighboring RECs due to its high customer
concentration. London Electricity is in the process of developing its strategy
to meet expanded competition in its supply business, which will focus on
active marketing and customer service to defend its residential customer base
and expanding product offerings to larger business customers. Such strategy
may include the development of strategic alliances in the provision of energy
and related services and the increased use of hedging of electricity prices to
mitigate the increased risk from the expansion of competition. There can be no
assurance that this strategy will be successful in avoiding a significant loss
of customers of London Electricity's supply business.
The Company expects to incur approximately (Pounds)30 million (a portion of
which is expected to be capitalized) in fiscal year 1998 for re-engineering
and technology costs to prepare infrastructure services for full competition
in supply from April 1998. The Company, along with the other PES license
36
<PAGE>
holders, petitioned the Regulator to recover such costs from customers. In the
Regulator's supply price restraint proposals published on October 16, 1997,
the Regulator proposed, within the Supply Price Control Formula (as defined
herein), to provide for an annual allowance for each PES license holder over
the 5 years ending March 31, 2003 of (Pounds)4.6 million to cover data
management services set-up costs plus an annual allowance of (Pounds)1 million
plus (Pounds)1 per customer to cover operating costs for the period 1998
through 2000. London Electricity estimates that these proposals will result in
an aggregate allowance for London Electricity of approximately (Pounds)7.64
million per annum for the period 1998 through 2000. London Electricity is
currently in the process of evaluating these proposals and their likely effect
on London Electricity if they are accepted. In fiscal year 1998, London
Electricity will also incur (Pounds)5 million of costs as its contribution to
Pool settlement software designed to interface with RECs' data management
software. These costs are expected to be recouped through Pool settlement
charges.
UK Tax Law Changes
On July 31, 1997, the UK Government enacted certain changes in tax law
including a one-time windfall profits tax on privatized industries and a
reduction in rates of corporation tax on income from 33% to 31%. London
Electricity has estimated the impact of the windfall profits tax at
approximately (Pounds)140 million, which will not be deductible for UK
corporation tax purposes. The tax will be payable in two equal installments on
December 1, 1997 and 1998. London Electricity has also estimated the impact of
the reduction in corporation tax rates which will result in a one-time
reduction in deferred income tax liabilities and a corresponding reduction in
income tax expense of approximately (Pounds)38 million. The liability for the
windfall profits tax (with a corresponding charge against income) and the
reduction in London Electricity's deferred corporation tax liability (with a
corresponding reduction in corporation tax expense) was recorded in the
Company's quarter ended September 30, 1997.
Affiliate Businesses and Other Investments
London Electricity plans to continue to expand its involvement in non-core
businesses. Included in these businesses are the ownership, operation, and
maintenance of private distribution networks at the major London area airports
and at a number of rail facilities and the eventual ownership and operation of
electric distribution assets of the Channel Tunnel Rail Link.
London Electricity's PES license currently limits the extent of the
generation capacity in which London Electricity may hold an interest without
the prior consent of the Regulator to 700 MW. After taking into account London
Electricity's current ownership interest in Barking Power and other generation
assets, London Electricity could make additional generation investment of
approximately 565 MW in capacity. Under the terms of the PES license,
investments made in generating assets in the UK by affiliates of London
Electricity would count toward the own generation limit. London Electricity
has applied to the Regulator for an exception from this license condition for
certain planned investments by other Entergy subsidiaries that would exceed
London Electricity's own generation limit, but cannot predict whether the
application will be granted.
Additional investments by Entergy in the Company and London Electricity are
subject to regulation under the Public Utility Holding Company Act of 1935, as
amended.
Derivative Financial Instruments
Derivative financial instruments are used by the Company on a limited basis.
The Company utilizes such instruments only to mitigate business risks and not
for speculative purposes. See "Long-Term Debt" footnote to the Company's March
31, 1997 consolidated financial statements for additional information on such
instruments.
The Company maintains its cash balances in pounds sterling. However, the
Company's obligations related to the Perpetual Junior Subordinated Debentures
will be due in US Dollars. The Company is not currently engaged in any hedging
of currency risks; however it expects to utilize derivative financial
instruments to hedge a portion of the currency risks associated with this
exposure.
37
<PAGE>
Environmental Factors
The UK Environmental Protection Act 1990 addresses waste management issues
and imposes certain obligations on companies which handle and dispose of
waste. Some of London Electricity's distribution activities produce waste, but
London Electricity believes that it has taken and continues to take measures
to comply with the applicable laws and governmental regulations for the
protection of the environment. There are no material legal or administrative
proceedings pending against London Electricity or the Company with respect to
any environmental matter.
Inflation and Interest Rates
Inflation neither has had a significant impact on London Electricity in the
last three years, nor is expected to do so in the foreseeable future. London
Electricity's revenues from regulated activities are adjusted based on factors
which include an index for inflation in costs of operations.
Changes in interest rates have not had a significant impact on London
Electricity in the last three years. However, the Company has entered into
debt facilities which bear interest at variable rates. To mitigate the effects
of interest rate changes, the Company has entered into interest rate swap
agreements. See "Long-Term Debt" footnote to the Company's March 31, 1997
consolidated financial statements for additional information on such
agreements.
Year 2000 Issues
Like many companies, the Company is currently evaluating its computer
software and databases to determine the extent to which modifications are
required to prevent problems related to the year 2000, and the resources which
will be required to make such modifications. These problems could result in
malfunctions in certain software and databases with respect to dates on or
after January 1, 2000 unless corrected.
RESULTS OF OPERATIONS
Six Months Ended September 30, 1997 Compared with Six Months Ended September
30, 1996
The results of operations for the six months ended September 30, 1996
represent the historical amounts of the Predecessor Company. Such results do
not include the effects of acquisition adjustments described above under
"--Introduction--Accounting for the Acquisition".
Earnings
Income from operations was (Pounds)61 million for the six months ended
September 30, 1997, a decrease of (Pounds)15 million from the six months ended
September 30, 1996. This decrease was due principally to revenues being lower
by (Pounds)69 million during the six months ended September 30, 1997, compared
to the six months ended September 30, 1996. Partially offsetting this decrease
was a decrease of (Pounds)54 million in operating expenses, principally cost
of sales, in the six months ended September 30, 1997, compared to the six
months ended September 30, 1996.
Income from operations by segments for the six months ended September 30,
1997 was (Pounds)44 million, (Pounds)5 million, and (Pounds)12 million for the
distribution, supply, and other segments, respectively. Income from those
segments in the six months ended September 30, 1996 was (Pounds)65 million,
(Pounds)3 million, and (Pounds)8 million, respectively.
Net income decreased by (Pounds)148 million, from (Pounds)52 million in the
six months ended September 30, 1996, to a loss of (Pounds)96 million in the
six months ended September 30, 1997. The net loss for the period ended
September 30, 1997 includes a one-time charge of (Pounds)140 million for the
windfall profits tax enacted by the British government in July 1997. The
windfall profits tax is not deductible for UK corporation tax purposes. This
charge was partially offset by a reduction of (Pounds)38 million in the
Company's deferred income tax liability, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," due to
the government also reducing the UK
38
<PAGE>
corporation tax rate from 33% to 31%, effective April 1, 1997. Acquisition
related adjustments including increased depreciation and amortization of
approximately (Pounds)17 million ((Pounds)12 million after tax effect) and
increased interest expense, principally on acquisition debt, of approximately
(Pounds)45 million ((Pounds)31 million after tax effect) also contributed to
the reduction in net income.
Revenues
Operating revenues decreased by (Pounds)69 million (11%) from (Pounds)617
million in the six months ended September 30, 1996 to (Pounds)548 million
during the six months ended September 30, 1997, as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM SIX MONTHS
ENDED SEPTEMBER 30,
1996 TO SIX MONTHS
ENDED SEPTEMBER 30,
1997
-------------------
((Pounds) MILLIONS)
<S> <C>
Electricity distribution................................. (4)
Electricity supply....................................... (73)
Other.................................................... (14)
Intra-business........................................... 22
---
Total operating revenues............................... (69)
===
</TABLE>
Two principal factors determine the amount of revenues produced by the main
electricity distribution business: the unit price of the electricity
distributed (which is controlled by the Distribution Price Control Formula)
and the number of electricity units distributed which depends on the demand of
London Electricity's customers for electricity within its Franchise Area.
Demand varies based upon weather conditions and economic activity. Following
London Electricity's regulatory distribution price review in 1994, London
Electricity's allowable expected distribution revenues were reduced by 14%,
beginning in fiscal year 1996. Subsequently, the Regulator announced a further
allowed distribution price reduction of 11% beginning at the start of fiscal
year 1997, and an additional 3%, beginning April 1, 1997. These price
reductions have reduced and will continue to reduce London Electricity's
distribution revenues. See "The Electric Utility Industry in Great Britain."
Revenues from the distribution business decreased by (Pounds)4 million (3%)
from (Pounds)155 million for the six months ended September 30, 1996 to
(Pounds)151 million for the six months ended September 30, 1997, principally
due to a decrease in the maximum allowable average price of units distributed
as a result of application of the revised Distribution Price Control Formula.
A 3% increase in sales volume partially offset the average price decrease.
Two principal factors determine the amount of revenues produced by the
supply business: the unit price of the electricity supplied (which, in the
case of the Franchise Supply Customers, is controlled by the Supply Price
Control Formula) and the number of electricity units supplied. London
Electricity is expected to have the exclusive right to supply all Franchise
Supply Customers in its Franchise Area until at least April 1, 1998.
Franchise Supply Customers, who are generally residential and small
commercial customers, comprised 54% of total sales volume for the six months
ended September 30, 1997. The volume of unit sales of electricity for
Franchise Supply Customers is influenced largely by the number of customers in
London Electricity's Franchise Area, weather conditions and prevailing
economic conditions. Unit sales to Non-Franchise Supply Customers, who are
typically large commercial and industrial businesses, constituted 46% of total
sales volume for the six months ended September 30, 1997. Sales to Non-
Franchise Supply Customers are determined primarily by the success of the
supply business in contracting to supply customers with electricity who are
located both inside and outside London Electricity's Franchise Area.
39
<PAGE>
During the six months ended September 30, 1997, the number of electricity
units supplied decreased by 2% and total revenues produced by the supply
business decreased by 13% ((Pounds)73 million) to (Pounds)501 million from
(Pounds)574 million for the six months ended September 30, 1996. Revenues
decreased principally due to lower average unit prices for both Franchise
Supply Customers and Non-Franchise Supply Customers. Reductions in revenue
from Franchise Supply Customers is due primarily to pass-through of reduced
costs of purchased power. Reductions in revenue from Non-Franchise Supply
Customers is due primarily to competitive pressures in this market as
purchased power costs decline.
Other revenues for the six months ended September 30, 1997 were (Pounds)34
million, a decrease of (Pounds)14 million compared to the same period in 1996.
This decrease was due principally to decreased provision of services to the
distribution segment, which are eliminated in the intra-business elimination.
The remaining change in the intra-business elimination was due primarily to a
reduction in distribution revenue charged to the London Electricity supply
business due to increased third party competition in the supply business and
reductions in distribution prices due to the application of the revised
Distribution Price Control Formula.
Operating Expenses
Operating expenses decreased by (Pounds)54 million (10%) from (Pounds)541
million in the six months ended September 30, 1996 to (Pounds)487 million in
the six months ended September 30, 1997. This decrease was due principally to
an approximate (Pounds)72 million reduction in cost of sales due to reductions
of 7% in units supplied to Non-Franchise Supply Customers partially offset by
an increase of 3% in units supplied to Franchise Supply Customers.
Additionally, average cost per unit supplied decreased by approximately 16%,
due primarily to reductions in the cost of the Fossil Fuel Levy. This decrease
was partially offset by an increase in depreciation and amortization expense
of (Pounds)17 million related to the acquisition adjustments for fixed assets
and distribution license based on 40-year useful lives.
Interest Expense, Net
Interest expense, net increased by (Pounds)47 million from (Pounds)8 million
during the six months ended September 30, 1996 to (Pounds)55 million in the
six months ended September 30, 1997, principally as a result of the financing
costs associated with the debt facilities entered into to finance the
acquisition of London Electricity.
Income from Operations
Income from operations decreased by (Pounds)15 million (20%), from
(Pounds)76 million for the six months ended September 30, 1996, to (Pounds)61
million for the same period in 1997. This decrease was comprised of a decrease
of (Pounds)21 million in the distribution segment and increases of (Pounds)2
million and (Pounds)4 million in the supply and other segments, respectively.
The decrease in distribution income for operations was principally due to a
reduction of (Pounds)4 million in distribution revenues and additional
depreciation and amortization expense of (Pounds)17 million attributable to
acquisition adjustments for fixed assets and the distribution license based on
40-year useful lives.
Windfall Profits Tax
The Company recorded a one-time charge of (Pounds)140 million during the six
months ended September 30, 1997 for the windfall profits tax enacted by the
British government in July 1997. This windfall profits tax is not deductible
for UK corporation tax purposes.
40
<PAGE>
Income Taxes
The Company's effective income tax rate was approximately 27% for both the
six months ended September 30, 1997, and 1996. The effective rate in the 1997
period was affected by the non-deductibility, for UK corporation tax purposes,
of the charge of (Pounds)140 million for windfall profits taxes. This impact
was partially offset by the (Pounds)38 million favorable impact of the
reduction in the UK corporation tax rate from 33% to 31%, as discussed above.
The Company's 27% effective income tax rate for the six months ended
September 30, 1996, compared to a statutory rate of 33%, was due principally
to reduced fiscal year March 1997 taxable income projections, based on a lower
statutory rate on dividends received.
Pro Forma Fiscal Year Ended March 31, 1997 Compared with Fiscal Year Ended
March 31, 1996
Earnings
Income from operations was (Pounds)112 million in Pro Forma Fiscal Year
1997, an increase of (Pounds)10 million from fiscal year 1996. The increase
was due principally to customer refunds of (Pounds)83 million in fiscal year
1996 in connection with the NGG demerger. Such customer refunds were partially
offset by (a) a decrease of (Pounds)18 million in gross profit from sales as a
result of increased revenues, offset by increased purchases of electricity
required to supply the increase in unit sales and by higher other costs of
sales, and (b) a (Pounds)54 million increase in operating expenses.
Income from operations by segments for Pro Forma Fiscal Year 1997 was
(Pounds)92 million, (Pounds)6 million, and (Pounds)14 million for the
distribution, supply, and other segments, respectively. Income (loss) from
those segments in fiscal year 1996 was (Pounds)158 million, (Pounds)(70)
million, and (Pounds)16 million, respectively.
Net income decreased by (Pounds)133 million, from (Pounds)149 million in
fiscal year 1996 (excluding the after tax effect of NGG transactions of
(Pounds)310 million) to (Pounds)16 million in Pro Forma Fiscal Year 1997. This
decrease was primarily due to the effects of the various acquisition
adjustments listed above in Pro Forma Fiscal Year 1997 and the reduction in
distribution operating revenues as discussed in "--Revenues" comparing the six
months ended September 30, 1997 with the six months ended September 30, 1996.
Revenues
Operating revenues, excluding the impact of the NGG refund, increased by
(Pounds)71 million (6%) from (Pounds)1,279 million in fiscal year 1996 to
(Pounds)1,350 million in Pro Forma Fiscal Year 1997 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE
(DECREASE) FROM
FISCAL YEAR 1996
TO PRO FORMA
FISCAL YEAR 1997
------------------
((Pounds)
MILLIONS)
<S> <C>
Electricity distribution.................................. (21)
Electricity supply........................................ 76
Other..................................................... 18
Intra-business............................................ (2)
---
Total operating revenues................................ 71
===
</TABLE>
The factors affecting distribution revenues are the same as those described
above in "--Revenues" comparing the six months ended September 30, 1997 with
the six months ended September 30, 1996. Revenues from the distribution
business decreased by (Pounds)21 million (6%) from (Pounds)357 million for
fiscal year 1996 to (Pounds)336 million for Pro Forma Fiscal Year 1997
principally due to a
41
<PAGE>
decrease in the maximum allowable average price of units distributed as a
result of the application of the revised Distribution Price Control Formula. A
3% increase in sales volume partially offset the average price decrease.
Two principal factors determine the amount of revenues produced by the
supply business: the unit price of electricity supplied (which, in the case of
Franchise Supply Customers, is controlled by the Supply Price Control Formula)
and the number of electricity units supplied. London Electricity is expected
to have the exclusive right to supply all Franchise Supply Customers in its
Franchise Area until at least April 1, 1998.
Franchise Supply Customers, who are generally residential and small
commercial customers, comprised 56% of total sales volume in Pro Forma Fiscal
Year 1997. The volume of unit sales of electricity for Franchise Supply
Customers is influenced largely by the number of customers in London
Electricity's Franchise Area, weather conditions and prevailing economic
conditions. Unit sales to Non-Franchise Supply Customers, who are typically
large commercial and industrial businesses, constituted 44% of total sales
volume in Pro Forma Fiscal Year 1997. Volume in this segment is determined
primarily by the success of the supply business in contracting to supply
customers with electricity who are located both inside and outside London
Electricity's Franchise Area.
During Pro Forma Fiscal Year 1997, the number of electricity units supplied
increased by 14% while total revenues produced by the supply business
increased by (Pounds)76 million (6%), to (Pounds)1,265 million from
(Pounds)1,189 million (excluding the impact of the NGG refund of (Pounds)91
million) for the fiscal year 1996. The relatively small revenue increase was
due to a majority of the increase in total units supplied to Non-Franchise
Supply Customers, who are larger energy users, charged at generally lower
average unit prices relative to those charged to Franchise Supply Customers.
This was partially offset by a 2% reduction in revenues from the franchise
supply market which was primarily due to lower average unit prices received as
units supplied increased slightly.
Other revenues in Pro Forma Fiscal Year 1997 totaled (Pounds)78 million, an
increase of (Pounds)19 million over fiscal year 1996. Such increase was
primarily a result of increased electrical contracting services to the
distribution segment by London Electricity Contracting Limited ("LEC"), the
revenues for which were eliminated in intra-business eliminations. Intra-
business eliminations decreased slightly from fiscal year 1996 to Pro Forma
Fiscal Year 1997 notwithstanding the LEC increase due principally to the
reductions in electricity distribution revenues (the majority of which are
charged to the supply segment) as discussed above.
Cost of Sales
Cost of sales increased by (Pounds)89 million (11%) from (Pounds)843 million
(excluding the NGG-related Fossil Fuel Levy reduction of (Pounds)8 million) in
fiscal year 1996 to (Pounds)932 million in Pro Forma Fiscal Year 1997. This
increase was principally the result of an increase in the supply business cost
of sales of (Pounds)77 million reflecting an increase in purchases of
electricity to supply the increase in unit sales as discussed above.
Operating Expenses
Operating expenses increased by (Pounds)54 million (21%) from (Pounds)252
million in fiscal year 1996 to (Pounds)306 million in Pro Forma Fiscal Year
1997. This increase was primarily due to depreciation and amortization expense
being higher by (Pounds)32 million due principally to the purchase method of
accounting to the Predecessor Company's fixed assets and distribution license
based on 40-year useful lives and to (Pounds)20 million in restructuring
charges, (Pounds)12 million of which were incurred by London Electricity prior
to the acquisition.
42
<PAGE>
Income from Operations
Income from operations increased by (Pounds)10 million (10%) from
(Pounds)102 million in fiscal year 1996 to (Pounds)112 million in Pro Forma
Fiscal Year 1997. This increase was comprised of increases (decreases) of
(Pounds)(66) million and (Pounds)76 million in the distribution and supply
segments, respectively. The decrease in distribution operating income of
(Pounds)66 million was principally due to: (i) reductions in distribution
revenue from an 11% allowed distribution revenues reduction announced by the
Regulator effective at the beginning of fiscal year 1997, (ii) an increase in
distribution operating expenses due to a pro forma increase in depreciation
and amortization expense from applying the purchase method of accounting, and
(iii) an increase in distribution operating expenses due to restructuring
charges in Pro Forma Fiscal Year 1997. An increase of 3% in distribution sales
volume partially offset the net decrease in distribution operating income.
The increase in supply operating income of (Pounds)76 million was
principally due to the (Pounds)83 million customer refund (net of the Fossil
Fuel Levy reduction) in 1996 from the NGG transactions and a 14% increase in
number of electricity units supplied. Such increases were partially offset by
a (Pounds)77 million increase in the cost of electricity purchases for the
supply business.
Other Income (Expense)
Other income (expense) decreased by (Pounds)467 million from (Pounds)473
million in fiscal year 1996 to (Pounds)6 million in Pro Forma Fiscal Year
1997. This decrease was primarily attributable to other income of (Pounds)450
million from the NGG transaction in fiscal year 1996. See "--Introduction--
National Grid Group Transactions."
Interest Expense, Net
Interest expense, net increased by (Pounds)88 million from (Pounds)5 million
in fiscal year 1996 to (Pounds)93 million in Pro Forma Fiscal Year 1997,
principally as a result of the financing costs associated with the debt issued
for the acquisition. Interest expense for Pro Forma Fiscal Year 1997 reflects
interest expense recorded in connection with the acquisition as if the
acquisition had occurred on April 1, 1996 and had been financed at an assumed
interest rate of 7.3% per year. Of the increase in interest expense,
(Pounds)64 million was attributable to this pro forma adjustment. The
remaining increase is attributable to the 8 5/8%, (Pounds)100 million Eurobond
issue in October 1995 which was outstanding for five months of fiscal year
1996 and the entire Pro Forma Fiscal Year 1997 and an increase of (Pounds)45
million in short-term borrowings from March 31, 1996 to March 31, 1997.
Income Taxes
The Company's effective income tax rate of 19% in fiscal year 1996 increased
to 33% for Pro Forma Fiscal Year 1997. This increase was due to book/tax
differences from the NGG transaction in fiscal year 1996 and use of an assumed
statutory 33% rate in Pro Forma Fiscal Year 1997.
Fiscal Year 1996 Compared with Fiscal Year 1995
Earnings
Income from operations was (Pounds)102 million in fiscal year 1996, a
decrease of (Pounds)64 million from fiscal year 1995. This decrease was due
principally to the refund (Pounds)(83) million ordered in connection with the
NGG demerger in fiscal year 1996 and a decrease of (Pounds)34 million in gross
profit from sales, principally due to the increase in electricity purchase
costs exceeding the increase in supply revenues. This was partially offset by
a (Pounds)52 million decrease in operating expenses.
Income (loss) from operations by segments for fiscal year 1996 was
(Pounds)158 million, (Pounds)(70) million and (Pounds)16 million for the
distribution, supply and other segments, respectively. Income from those
segments in fiscal year 1995 was (Pounds)141 million, (Pounds)11 million and
(Pounds)14 million, respectively.
43
<PAGE>
Net income increased by (Pounds)28 million, from (Pounds)121 million in
fiscal year 1995 to (Pounds)149 million in fiscal year 1996 (excluding the
effect of NGG transactions of (Pounds)310 million). This increase was
primarily due to a reduction in operating expenses due to a fiscal year 1995
(Pounds)41 million restructuring charge.
Revenues
Operating revenues, excluding the impact of the NGG refund, increased by
(Pounds)70 million (6%) from (Pounds)1,209 million in fiscal year 1995 to
(Pounds)1,279 million in fiscal year 1996 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM FISCAL YEAR 1995
TO FISCAL YEAR 1996
---------------------
((Pounds) MILLIONS)
<S> <C>
Electricity distribution............................... (22)
Electrical supply...................................... 75
Other.................................................. 15
Intra-business......................................... 2
---
Total operating revenues............................. 70
===
</TABLE>
The factors affecting distribution revenues are the same as those described
above in "--Revenues" comparing the six months ended September 30, 1997 with
the six months ended September 30, 1996. Revenues from the distribution
business decreased by (Pounds)22 million (6%) from (Pounds)379 million for
fiscal year 1995 to (Pounds)357 million for fiscal year 1996 principally due
to a decrease in the maximum allowable average price of units distributed as a
result of the application of the revised Distribution Price Control Formula. A
5% increase in sales volume partially offset the average price decrease.
Revenues from the supply business increased by (Pounds)75 million from
(Pounds)1,114 million in fiscal year 1995 to (Pounds)1,189 million (excluding
the impact of the NGG refund) in fiscal year 1996. This increase reflects an
increase of (Pounds)83 million in revenues from the non-franchise supply
market as the result of a 45% increase in unit sales to those customers. Sales
to these customers comprised 36% of the total sales from the supply business.
This was partially offset by a (Pounds)8 million reduction in revenues from
the franchise supply market which was primarily due to lower average unit
prices received as units supplied increased slightly.
Other revenues in fiscal year 1996 totaled (Pounds)59 million, an increase
of (Pounds)15 million over fiscal year 1995. Such increase was principally a
result of increased services to the distribution segment by LEC, the revenues
for which were eliminated in intra-business eliminations. The increase in
intra-business eliminations was offset principally by the reductions in
electricity distribution revenues (the majority of which are charged to the
supply segment) as discussed above.
Cost of Sales
Cost of sales increased by (Pounds)103 million (14%) from (Pounds)740
million in fiscal year 1995 to (Pounds)843 million (excluding NGG-related
Fossil Fuel Levy reduction of (Pounds)8 million) in fiscal year 1996. This
increase is principally the result of an increase in the supply business
electricity purchase costs of (Pounds)100 million reflecting an increase in
purchases of electricity to correspond with the increase in unit sales as
discussed above.
Operating Expenses
Operating expenses decreased by (Pounds)52 million (17%) from (Pounds)304
million in fiscal year 1995 to (Pounds)252 million in fiscal year 1996. The
principal reasons for the decrease were (Pounds)41 million in restructuring
44
<PAGE>
charges incurred in fiscal year 1995 and a (Pounds)10 million decrease in
other operation and maintenance costs as a result of reduced payroll and
benefit expense due to a lower number of employees as a result of
restructuring and reduced pension cost due to use of a portion of defined
benefit plan overfunding.
Income from Operations
Income from operations decreased by (Pounds)64 million (39%) from
(Pounds)166 million in fiscal year 1995 to (Pounds)102 million in fiscal year
1996. This decrease was comprised of increases (decreases) of (Pounds)17
million and (Pounds)(81) million in the distribution and supply segments,
respectively. The increase in distribution operating income of (Pounds)17
million was principally due to: (i) an increase of 5% in distribution sales
volume, (ii) a decrease in distribution operating expenses in 1996 due to
(Pounds)41 million of restructuring charges in fiscal year 1995, (iii)
reductions in payroll and related benefits in fiscal year 1996 due to
reductions in number of employees, and (iv) use of a portion of pension plan
overfunding in fiscal year 1996 to reduce pension cost. Such increases were
partially offset by reductions in distribution revenue from an 11%
distribution price reduction, before an allowed increase for inflation,
announced by the Regulator effective at the beginning of fiscal year 1996.
The decrease in supply operating income of (Pounds)81 million was
principally due to the (Pounds)83 million customer refund (net of the Fossil
Fuel Levy reduction) in 1996 from the NGG transactions, a (Pounds)100 million
increase in the cost of electricity purchases for the supply business and an
(Pounds)8 million reduction in franchise supply customer revenue due to lower
unit prices. Such decreases were partially offset by a 45% increase in unit
sales to Non-Franchise Supply Customers.
Other Income (Expense)
Other income (expense) increased by (Pounds)450 million for fiscal year
1996, to (Pounds)473 million. This increase was due to the gain and dividends
on the NGG transaction, partially offset by a related contribution to the
Employee Stock Ownership Plan. See "--National Grid Group Transactions."
Interest Expense - Net
Interest expense - net increased by (Pounds)4 million from (Pounds)1 million
in fiscal year 1995 to (Pounds)5 million in fiscal year 1996 principally as a
result of substantially more long-term debt outstanding during fiscal year
1996 than during fiscal year 1995. Also contributing to this increase was a
reduction in interest income.
Income Taxes
The Predecessor Company's effective income tax rate decreased from 32% to
19% from fiscal year 1995 to fiscal year 1996. The reduction in the effective
income tax rate was due principally to book/tax differences generated from the
NGG transactions in fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sole investment and only significant asset is the entire share
capital of London Electricity. The Company is therefore dependent upon
dividends from London Electricity for its cash flow. The Company's primary
need for liquidity is to pay interest on its debt, and management believes
that, following this offering and the restructuring of the Credit Facilities
Agreement, it will receive sufficient amounts of dividends from London
Electricity to make such payments. The Company believes that London
Electricity will distribute all cash flow generated which is in excess of the
amounts necessary for London Electricity to conduct its business.
45
<PAGE>
Demand for electricity in the UK and in London Electricity's Franchise Area
is seasonal, with demand being higher in the winter months and lower in the
summer months. London Electricity bills its Franchise Supply Customers on a
staggered quarterly basis while it is generally required to pay related
expenses (principally the cost of purchased electricity) on 28-day terms.
However, approximately 46% of the Franchise Supply Customers settle their
accounts using regular payment plans based on prepayment or spreading of the
cost of their annual bill evenly throughout the year. A majority of London
Electricity's supply revenues are based on a fixed price per unit. The cost of
supply to London Electricity from the Pool, if not covered by hedging
mechanisms, varies throughout the year, generally being higher in winter
months and lower in summer months. London Electricity balances the effect of
these influences on its working capital needs with drawings under its
available credit facilities.
The principal sources of funds of the Successor Company during the six
months ended September 30, 1997 were (Pounds)39.5 million from operations,
(Pounds)85.2 million from the Credit Facilities Agreement and (Pounds)28.2
million from sales of current investments. During this period, the Company
utilized (Pounds)90.3 million of cash for repayment of notes payable,
(Pounds)40.5 million for capital expenditures and increased its cash and cash
equivalents by (Pounds)22.1 million.
The principal sources of funds of the Successor Company during Pro Forma
Fiscal Year 1997 were (Pounds)166 million from operations, (Pounds)945 million
from the Credit Facilities Agreement and (Pounds)240 million of equity
contributions from Entergy. During this period, the Company invested cash of
(Pounds)1,174 million in its acquisition of London Electricity, and
(Pounds)152 million was invested in capital expenditures.
The principal sources of funds of the Predecessor Company during fiscal year
1996 were (Pounds)191 million from operations and (Pounds)99 million from the
proceeds of a Eurobond issuance. During fiscal year 1996, the Predecessor
Company invested (Pounds)111 million in capital expenditures and paid
dividends of (Pounds)260 million which included a special dividend of
(Pounds)199 million.
The principal sources of funds of the Predecessor Company during fiscal year
1995 were (Pounds)123 million from operations, (Pounds)114 million from the
sale of marketable securities, and (Pounds)56 million of net additional short
term borrowings. During fiscal year 1995, the Predecessor Company invested
(Pounds)110 million in capital expenditures and paid dividends of (Pounds)53
million. The Predecessor Company also repaid (Pounds)70 million of government
debt and repurchased common stock totaling (Pounds)149 million.
At September 30, 1997 and March 31, 1997, the Successor Company had negative
working capital of (Pounds)37 million and (Pounds)47 million, respectively,
compared to negative working capital of the Predecessor Company of (Pounds)7
million at March 31, 1996. The increased working capital deficit at September
30, 1997 and March 31, 1997 is primarily the result of the initial financing
structure of the acquisition of London Electricity and increased borrowings
under London Electricity's credit facilities.
To meet short-term cash needs and contingencies, the Successor Company had
approximately (Pounds)47 million and (Pounds)25 million of cash and cash
equivalents at September 30, 1997 and March 31, 1997, respectively.
The Company had several primary sources of liquidity available at March 31,
1997 including: (i) London Electricity's cash from operations which totaled
(Pounds)166 million in Pro Forma Fiscal Year 1997, (ii) the Company's
availability under its Credit Facilities Agreement of approximately
(Pounds)305 million at March 31, 1997 ((Pounds)220 million at September 30,
1997), (iii) London Electricity's several uncommitted loan facilities totaling
(Pounds)200 million provided by banking institutions, and (iv) London
Electricity's (Pounds)150 million commercial paper program. At the end of
fiscal year 1997, a total of (Pounds)141 million ((Pounds)45 million at
September 30, 1997) was borrowed under the London Electricity commercial paper
facility. The Company intends to use availability under existing facilities,
or replacements thereof, to finance its payments of windfall profits taxes in
December 1997 and 1998 which total (Pounds)140 million.
46
<PAGE>
The Credit Facilities Agreement was executed on December 17, 1996. Proceeds
of this facility, which is in three tranches (Facility A for (Pounds)810
million, Facility B for (Pounds)240 million, and Facility C for (Pounds)200
million), have been used to fund the majority of the acquisition of London
Electricity and are available to provide working capital for London
Electricity. As of March 31, 1997, (Pounds)945 million of variable rate
borrowings were outstanding under this credit facility ((Pounds)1.03 billion
at September 30, 1997).
The Company plans to restructure the Credit Facilities Agreement in
connection with the issuance of the Preferred Securities. As part of the
restructuring, Facility B will be repaid and terminated. Entergy UK Limited
will become the primary obligor under Facility A of the restructured Credit
Facilities Agreement, and the Company will become a guarantor of all Facility
A borrowings under the restructured Credit Facilities Agreement. The terms of
the restructured facilities will extend the maturity of borrowings under
Facility A to October 31, 2002, and increase London Electricity's permitted
borrowing capacity. The restructured Credit Facilities Agreement will contain
financial covenants and events of default typical for UK acquisition debt
facilities, including the ability of the lenders to declare an event of
default if a material adverse change affecting the Company's ability to meet
its financial covenants and payment obligations under the Credit Facilities
Agreement occurs. Facility C will continue to be available to London
Electricity. Facility A of the restructured Credit Facilities Agreement will
be collateralized by 65% of the shares of London Electricity.
At the end of fiscal year 1997, London Electricity also had outstanding
(Pounds)200 million of Eurobonds. These bonds mature in two tranches of
(Pounds)100 million each in 2003 and 2005.
London Electricity's capital expenditures are primarily related to the
distribution business and include expenditures for load-related, non-load-
related and non-operational capital assets. Load-related capital expenditures
are largely required by new business growth. Customer contributions are
normally received where capital expenditures are made to extend or upgrade
service to customers (except to the extent that such capital expenditures are
made to enhance London Electricity's distribution network generally). Non-
load-related capital expenditures include asset replacement which is expected
to continue until at least the next decade. Other non-load-related
expenditures include system upgrade work that provides for load growth and has
the additional benefit of improving network security and reliability. Non-
operational capital expenditures are for assets such as fixtures and
equipment. For fiscal years 1995 and 1996, and for Pro Forma Fiscal Year 1997,
capital expenditures were (Pounds)110 million, (Pounds)111 million, and
(Pounds)152 million, respectively. London Electricity is required to file
five-year projections with the Regulator for capital expenditures related to
its regulated distribution network and updates of such projections annually.
The most recent projection was for the five-year period ended March 31, 2000
and was filed in July 1997. This filing indicated London Electricity's current
projection of approximately (Pounds)482 million for the five year period.
Approximately (Pounds)186 million has already been spent in fiscal year 1996
and Pro Forma Fiscal Year 1997 related to this five-year projection.
London Electricity is a member of the London and Continental consortium that
has won the contract to build the Channel Tunnel Rail Link. Assuming
construction of this project proceeds, it will require future additional
capital expenditures of approximately (Pounds)60 - (Pounds)80 million to be
made by London Electricity over the next six years. London Electricity is also
a member of the City of Greenwich Lewisham Rail Link plc which will require
expenditures of approximately (Pounds)6 million in the next two years. London
Electricity maintains the distribution network for the British Airport
Authority of Heathrow, Gatwick, and Stansted airports and expects to spend
approximately (Pounds)36 million on this network over the next six years.
To reduce the impact of interest rate changes, the Company has entered into
several interest rate swaps with total notional amount of (Pounds)600 million
currently outstanding and with maturity dates ranging from March 1999 to
September 2001. The interest rate swaps are from a LIBOR variable rate to an
average fixed rate of approximately 7.5%. See "Long-Term Debt" note to the
Company's consolidated financial statements for further information.
47
<PAGE>
The Company does not have any foreign currency hedging contracts in place;
however, it does intend to swap some or all of the US dollar liabilities
associated with the Perpetual Junior Subordinated Debentures back to pounds
sterling to hedge the currency risk associated therewith.
London Electricity's supply business to Non-Franchise Supply Customers
generally involves entering into fixed price contracts to supply electricity
to its customers. The electricity is obtained primarily by purchases from the
Pool. Because the price of electricity purchased from the Pool can be
volatile, London Electricity is exposed to risk arising from differences
between the fixed price at which it sells electricity and the fluctuating
prices at which it purchases electricity unless it can effectively hedge such
exposure. This risk will be extended to the Franchise Supply market beginning
on April 1, 1998. To mitigate its exposure to volatility, London Electricity
utilizes contracts for differences ("CFDs") and power purchase contracts with
certain UK generators to fix the price of electricity for a contracted
quantity over a specific period of time. At September 30, 1997, the Company
has outstanding CFDs and power purchase contracts for approximately 39,000 GWh
of electricity. These include a long term power purchase contract with an
affiliate which is based on 27.5% of the affiliate's capacity from its 1,000
MW facility through the year 2010. London Electricity's electricity sales
volumes were approximately 15,775 GWh; 18,120 GWh and 20,760 GWh for fiscal
years 1995 and 1996 and Pro Forma Fiscal Year 1997, respectively.
Management believes that cash flow from operations, together with its
existing sources of credit and the proceeds from this offering and the
restructuring of the Credit Facilities Agreement, will provide sufficient
financial resources to meet the Company's projected capital needs and other
expenditure requirements for the foreseeable future. London Electricity has
made a representation to the Regulator, in connection with the acquisition and
its PES license, that it will use all reasonable endeavors to ensure that it
maintains an investment grade rating on its long-term debt.
48
<PAGE>
BUSINESS
INTRODUCTION
London Electricity's principal businesses are the distribution of
electricity and the supply of electricity to approximately 2 million customers
in the London metropolitan area. London Electricity also conducts ancillary
business activities apart from the distribution and supply business that are
not subject to regulation, such as owning and operating private electricity
distribution networks and holding interests in power generation.
DISTRIBUTION BUSINESS
London Electricity's distribution business consists of the ownership,
management and operation of the electricity distribution network within the
Franchise Area. The primary activity of the distribution business is the
receipt of electricity from the national grid transmission system and the
distribution of electricity to end users connected to London Electricity's
power lines. Virtually all electricity supplied (whether by London
Electricity's supply business or by other suppliers) to consumers in the
Franchise Area is transported through its distribution network, thus providing
London Electricity with a stable distribution volume unaffected by customer
choice of supplier. As a holder of a PES license, London Electricity is
subject to a price cap regulatory framework providing economic incentives to
increase the volume of electricity distributed and to operate in a more cost-
effective manner. See "The Electric Utility Industry in Great Britain".
Distribution Business Customers, Units Distributed, Revenues and Operating
Profit
London Electricity combines a substantial commercial sector with a domestic
sector to form a unique customer base among RECs. Approximately 60% of London
Electricity's distribution sales are to the commercial sector. London
Electricity serves the office and retail center of the capital of the UK. The
growth of London as a major financial center has been a significant factor in
increased consumption as the standards of lighting, air conditioning and
computing have improved. London Electricity's domestic (residential) customers
live in a mix of urban and suburban parts of metropolitan London, including
both inner city and more affluent suburban areas.
The following table sets out details of London Electricity's distribution
customers, units distributed, distribution revenues and operating profit.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1995 1996 1997
--------- --------- ---------
NUMBER OF CUSTOMERS CONNECTED AT YEAR END
- -----------------------------------------
<S> <C> <C> <C>
Domestic.......................................... 1,705,898 1,721,123 1,737,547
Commercial........................................ 231,621 231,330 230,904
Industrial........................................ 10,283 9,667 9,155
--------- --------- ---------
Total........................................... 1,947,802 1,962,120 1,977,606
========= ========= =========
<CAPTION>
ELECTRICITY DISTRIBUTED (GWH)
- -----------------------------
<S> <C> <C> <C>
Domestic.......................................... 6,230 6,472 6,696
Commercial........................................ 11,621 12,383 12,816
Industrial........................................ 1,815 1,837 1,882
--------- --------- ---------
Total........................................... 19,666 20,692 21,394
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED
----------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
----------- ----------- ----------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Distribution Revenues....... (Pounds)379 (Pounds)357 (Pounds)336* (Pounds)151
Distribution Operating Prof-
it......................... (Pounds)141 (Pounds)158 (Pounds) 92* (Pounds) 44
</TABLE>
- --------
* Represents amounts for the Pro Forma Fiscal Year ended March 31, 1997. See
the Unaudited Pro Forma Condensed Consolidated Statement of Operations for
explanation of pro forma adjustments.
49
<PAGE>
London Electricity's distribution business has grown in both its customer
base and the number of units distributed, primarily reflecting economic growth
in London. At March 31, 1997, London Electricity had experienced a five year
compound annual growth rate of 0.5% in customers and a five year compound
annual growth rate of 2.3% in units of electricity distributed.
Competition in the Distribution Business
London Electricity has not experienced significant competition in its
distribution business. The Company believes that the cost of providing a
duplicate underground network connected to the Grid would be prohibitive. To
the extent a customer may invest in its own on-site electric generating
plants, such customer would no longer require distribution and related
services from London Electricity except for standby connection to the Grid.
London Electricity has the smallest industrial customer base of all of the
RECs which the Company believes results in a reduced downside risk of loss of
load from cogeneration. The distribution business is subject to marginal loss
of income from related services, such as metering, that will become subject to
competition in the year 2000.
Strategy for the Distribution Business
The principal pressures on the distribution business are the regulatory
price control formula and standards of performance, each established by the
Regulator. Since being acquired by the Company, London Electricity has
reviewed and refined its distribution strategy and established goals of cost
savings and improved customer service.
The distribution business will pursue several cost efficiency initiatives
expected to yield savings in both operating and capital costs. These
initiatives include major process redesign projects within the engineering,
metering, and customer operations activities of the business. In addition, the
Company's asset management philosophy will focus on optimizing the life-cycle
economics of the London Electricity network asset base by controlling the
annual capital spending with respect to such network without prejudicing its
performance.
Improvements in customer service in the distribution business are also part
of London Electricity's strategy to retain Franchise Supply Customers in the
Franchise Area after the introduction of competition on April 1, 1998 and are
expected to enable London Electricity to meet the network performance
standards agreed with the Regulator. London Electricity believes that these
improvements are important both for building customer loyalty to benefit the
supply business by maintaining and improving customer satisfaction and for
maintaining good relations with the Regulator. Improvements in customer
service are being pursued, in part through improvements in system performance,
measured primarily in terms of customer minutes lost and speed of supply
restoration. To that end, London Electricity is pursuing several initiatives,
including (i) installation of remote control facilities at secondary
substations; (ii) implementation of formal control over all activities on the
low voltage network; (iii) implementation of new business processes generally
in the distribution business, and particularly in the emergency services
activity; and (iv) application of asset management techniques to refocus
London Electricity's capital program on improvements in system reliability.
London Electricity is also developing expanded product offerings for its
customers, including services from providers of insurance and
telecommunication products, and is exploring the provision of internet access
and energy management systems to customers.
Distribution Facilities
Electricity is transported across the Grid at 400kV or 275kV to twelve grid
supply points within London Electricity's distribution network, where it is
then transformed by London Electricity to 132kV and transported through London
Electricity's distribution system. Electricity is also transported to six
national grid supply points located in the franchise areas of neighboring
RECs, which are connected to London Electricity's distribution system by
overhead lines and underground cables. Substantially
50
<PAGE>
all electricity which enters London Electricity's distribution system is
received at these eighteen grid supply points.
At March 31, 1997, London Electricity's electricity distribution network
(excluding service connections to consumers) included overhead lines and
underground cables at the operating voltage levels indicated in the table
below:
<TABLE>
<CAPTION>
OVERHEAD LINES UNDERGROUND
(CIRCUIT CABLES
OPERATING VOLTAGE MILES) (CIRCUIT MILES)
----------------- -------------- ---------------
<S> <C> <C>
132kV...................................... 24 301
66kV....................................... 8 354
33kV....................................... 0 387
22kV....................................... 0 173
11kV....................................... 1 4,134
6.6kV...................................... 0 1,062
480 or 415/240V............................ 0 12,175
--- ------
Total...................................... 33 18,586
</TABLE>
In addition to the circuits referred to above, London Electricity's
distribution facilities also include:
<TABLE>
<CAPTION>
AGGREGATE CAPACITY
TRANSFORMERS NUMBER (MEGA VOLT AMPERES)
------------ ------ -------------------
<S> <C> <C>
132kV/lower voltages.......................... 141 6,741
66kV or 33kV/11kV or 6.6kV.................... 252 4,259
11kV or 6.6kV/lower voltages.................. 12,826 7,785
Other......................................... 64 1,170
------ ------
Total......................................... 13,283 19,955
<CAPTION>
AGGREGATE CAPACITY
SUBSTATIONS NUMBER (MEGA VOLT AMPERES)
----------- ------ -------------------
<S> <C> <C>
132kV/33kV.................................... 52 6,741
66kV or 33kV/11kV or 6.6kV.................... 78 4,259
11kV or 6.6kV/415V or 240V.................... 12,725 10,585
Other......................................... 22 1,170
------ ------
Total......................................... 12,877 22,755
</TABLE>
In providing service connections to customers and to street lighting,
traffic lights and other installations from its network, London Electricity
uses underground cables in addition to those referred to above. Electricity is
received by customers at various voltages depending upon their requirements.
At March 31, 1997, London Electricity's distribution system was connected to
approximately 2 million customers.
Operation and control of London Electricity's distribution system are
continuously monitored and coordinated from one central control center located
in Brixton, south London. This control center is responsible for all HV and
EHV networks. A reserve control center is located in Islington, north London.
A system control data acquisition system monitors and controls all 132kV,
66kV, 33kV and 22kV switchgear and selected 11kV and 6.6kV switchgear.
SUPPLY BUSINESS
London Electricity's supply business consists of selling electricity to end
users, purchasing such electricity and arranging for its distribution to those
end users. Under its PES license, London Electricity has an exclusive right to
supply electricity to Franchise Supply Customers (those who have a demand of
not more than 100 kW). This exclusive right is scheduled to continue until at
least
51
<PAGE>
April 1, 1998. The supply business to Non-Franchise Supply Customers (those
who have demand of 100kW and above), both inside and outside London
Electricity's Franchise Area is open to competition.
Supply sales volumes, supply revenues and operating profit are shown in the
table below.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1995 1996 1997
------ ------ ------
SALES VOLUME (GWH)
- ------------------
<S> <C> <C> <C>
100 kW and above......................................... 4,858 7,043 9,428
Under 100 kW............................................. 10,917 11,077 11,332
------ ------ ------
15,775 18,120 20,760
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED
------------------------------------------ SEPTEMBER 30,
1995 1996 1997 1997
------------- ------------- ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Supply Revenues......... (Pounds)1,114 (Pounds)1,189* (Pounds)1,265** (Pounds)501
Supply Operating Profit. (Pounds)11 (Pounds)13* (Pounds)6** (Pounds) 5
</TABLE>
- --------
* Excludes the effect of NGG discount to customers and reduction in Fossil
Fuel Levy which reduced supply revenues and supply operating profit by
(Pounds)91 million and (Pounds)83 million, respectively.
** Represents amounts for the Pro Forma Fiscal Year ended March 31, 1997. See
the Unaudited Pro Forma Condensed Consolidated Statement of Operations for
explanation of pro forma adjustments.
Competition in the Supply Business
The supply business is currently divided between Franchise Supply Customers,
customers with under 100 kW demand within the Franchise Area, and Non-
Franchise Supply Customers, customers with 100 kW and above demand inside or
outside the Franchise Area. The non-franchise threshold was lowered to 100 kW
in April 1994 allowing competition in supply for these customers while
Franchise Supply Customers remained subject to regulation. Competition in
supply to Franchise Supply Customers will be phased in over a six month period
commencing April 1, 1998, and the exclusive right of London Electricity to
supply the Franchise Market will then cease. London Electricity's present
intention is to open its Franchise Market to competition by July 1, 1998. The
Regulator has indicated in his supply price restraint proposals published on
October 16, 1997, that price regulation will continue for smaller consumption
customers for an initial period of two years and until an adequate level of
competition is established. Implementation of the proposals will result in
price reductions for London Electricity of 11.8% effective April 1, 1998 and
3% effective April 1, 1999. The 11.8% price reduction to be effective on April
1, 1998 would be decreased by the supply tariff reductions announced by London
Electricity on September 29, 1997 and effective from October 1, 1997, which
will return over-recoveries experienced under the current Supply Price Control
Formula. The 3% reduction is also subject to review. See "The Electric Utility
Industry in Great Britain--Industry Structure--Supply of Electricity".
In 1994, London Electricity initially had difficulty competing in the 100 kW
and above market which became competitive and lost approximately 40% of its
supply sales in the Franchise Market due to aggressive marketing by its
competitors eager to penetrate the London market. Since implementing a new
strategy focused on sales to Non-Franchise Markets, London Electricity has
more than recovered the sales lost in the Franchise Market by competing on
price and tailoring
52
<PAGE>
contracts to the needs of customers. The profitability in the 100 kW and above
market on a per unit basis is significantly less than in the under 100 kW
market. Accordingly, the loss of any individual major customer would not
threaten overall profitability of London Electricity.
Significant steps have been taken both to reduce the cost base of the supply
business and to invest in marketing, systems and management resources to
compete in the market for the supply of electricity. In 1995 London
Electricity transferred the work of 600 London based staff to a new customer
service facility located in northeastern England in order to reduce
operational costs. As a result, the Company was able to upgrade customer
operations facilities, reduce manpower and recruit high caliber staff in a
lower cost labor market. The benefits of this relocation are now being
realized in terms of high quality customer service combined with lower costs.
In 1997, London Electricity also introduced a new customer database system to
replace its previous billing system.
Strategy for the Supply Business
Since Entergy's acquisition of London Electricity, London Electricity has
commenced a review of the supply market to establish new goals for its supply
business and to update its strategy for achieving those goals. The strategy
reflects the need to differentiate segments of the market. For the largest
business customers, the approach will be to focus on limited volume growth
while improving margin by refining customer mix, offering higher margin
products, and optimizing the contribution from purchasing. For smaller
business customers, the aim will be to retain these profitable accounts with
flexible customer proposals, telesales and direct selling. This strategy will
include proactive defense of London Electricity's residential customer base
within the Franchise Area because management believes that the London market
will be an attractive target for competing RECs.
This strategy includes further steps to reduce the cost base of the supply
business. Consideration is being given to the role which alliances might play
in cost reduction and matching the cost bases of aggressive larger
competitors. Studies are also being undertaken to establish the future role of
dual fuel offerings of electricity and gas.
AFFILIATE BUSINESSES AND OTHER INVESTMENTS
London Electricity's ancillary business activities primarily include, among
other things, owning and operating private electricity distribution networks,
holding interests in power generation, operating an electrical contracting
business and gas retailing.
Private Distribution Networks
London Electricity's wholly-owned subsidiary London Electricity Services
Limited ("LES") owns, operates and maintains electricity distribution networks
other than London Electricity's regulated distribution network. In 1993, a
substantial portion of the electricity distribution networks of Heathrow,
Gatwick and Stansted airports was acquired for (Pounds)90 million from BAA
plc. Under its agreement with BAA plc, LES receives an annual fee for the use
of the networks in the amount of (Pounds)13.5 million for the first year with
increases linked to the UK Retail Price Index and unit growth. Further
investment of (Pounds)20 million with corresponding increased fee income has
occurred in the last three years. At Heathrow this included a (Pounds)10
million project to expand the distribution network and improve reliability and
security of the system as well as to accommodate further developments at the
airport and the construction of the Paddington-Heathrow rail-link. Additional
expansion investment is planned.
In 1996 London & Continental Railways Limited ("LCR") agreed to develop
proposals to design, build and operate a new high speed rail link from London
to the Channel Tunnel at a total expected cost of (Pounds)4 billion with
completion scheduled in the year 2003. Assuming the project is financed,
during construction LCR will be essentially a train-operating company using
existing railtrack
53
<PAGE>
capacity. After completion, LCR will own all the new track and infrastructure
assets. In 1997, London Electricity's wholly-owned subsidiary, London
Electricity Enterprises Limited ("LEE"), provided (Pounds)5 million of equity
to LCR and is committed to providing an additional (Pounds)5 million of equity
in 1998 to fund the development phase of the project.
Furthermore, LES has provided (Pounds)5.6 million to acquire existing
electrical assets at stations and depots and assuming construction proceeds,
will be providing approximately (Pounds)60-80 million in direct electrical
asset investment over the period 1996-2004. LCR will pay to LES an annual
index-linked fee for the availability of the electricity network and any
capital extensions or modifications.
London Electricity is also a member of the City Greenwich Lewisham Rail Link
plc ("CGLR") consortium, responsible for the delivery of the Docklands Light
Railway--Lewisham Extension in London, designed to connect the Docklands area
to south London and beyond. Completion of this project is expected in 2000 at
a projected total construction cost of (Pounds)203 million. Project funding of
(Pounds)268 million has been raised, comprised of (Pounds)195 million in bond
and senior debt, (Pounds)17 million in shareholder funds and (Pounds)56
million in UK Government grants. The London Electricity direct investment will
be approximately (Pounds)6 million to be paid on completion of the system in
1999. London Electricity will receive an annual fee for the availability of
the private network which is linked to both the Retail Price Index and growth
in passenger traffic.
London Electricity from time to time joins consortia bidding for
infrastructure development projects through LEE. Subsequent investments in
such electrical infrastructure assets will be made by LES.
Power Generation
London Electricity's PES license currently enables it and its affiliates to
make investments in up to 700 MW in electricity generation. London Electricity
has, through its wholly-owned subsidiary, The London Power Company Limited
("LPCL"), invested in generation in order to secure longer term energy prices
and at the same time achieve a profitable return on its investment. LPCL's
primary generation investments are Barking Power and Thames Valley Power
Limited ("TVP"). London Electricity has applied to the Regulator for an
exception from this license condition for certain planned investments by other
Entergy subsidiaries that would exceed London Electricity's own generation
limit, but cannot predict whether the application will be granted. Additional
investments by Entergy in the Company and London Electricity are subject to
regulation under the Public Utility Holding Company Act of 1935, as amended.
Barking Power
LPCL has a 13.475% interest in Barking Power, a joint venture company with
two other RECs and Thames Power Limited, a joint venture between CU Power
Generation Limited, one of the ATCO Limited group of companies, and BICC plc,
an international cables and construction group. Barking Power initially
obtained a non-recourse project finance facility of (Pounds)661 million from a
group of commercial banks and the European Investment Bank to finance the
project. The 1,000 MW combined cycle gas fired power station was commissioned
at Barking Reach in East London and commenced operation in 1995. The project
was refinanced in July 1997 to take advantage of lower interest rates. The new
credit facility will total (Pounds)600 million and includes a (Pounds)35
million facility for expansion. Barking Power has negotiated a long term gas
supply contract with Centrica plc. London Electricity has a contract for
differences with Barking Power for 27.5% of the output of the station which
expires in 2010.
TVP
TVP is a 50-50 joint venture formed in March 1995 between LPCL and CU Power
Generation Limited. TVP owns and operates a (Pounds)10 million, 12 MWE
combined heat and power plant at Heathrow Airport. TVP has a gas supply
contract with Total Gas Marketing Limited. To date the plant has operated at
98% efficiency with output rated at 12.8-13 MW.
54
<PAGE>
Electrical Contracting
Through LEC, London Electricity is involved in the electrical contracting
business, which includes a range of installation and maintenance work of
varying complexity and size from work performed for London Electricity's
distribution business or private domestic installations to high voltage
industrial and commercial systems.
Gas Retailing
London Electricity intends to take advantage of the liberalization of
natural gas retailing in the UK. Gas is to be supplied by competing retailers
using the existing pipelines of Transco (formerly British Gas plc). Currently
gas may be sold to customers in the selected regional markets that have been
opened to competition. London Electricity plans to use its energy retailing
and customer service skills and expects to concentrate on the residential and
small commercial sectors complementing its electricity retailing in these
sectors. Experience in the gas market in selected pilot regions has already
been gained by participating in London Total Energy Limited, a joint venture
with Total Gas Marketing Limited.
Metering and Meter Reading
It is expected that metering and meter reading will become open to
competition in the year 2000. In anticipation, London Electricity's
organization structure reflects the need to develop these activities as
separate businesses.
RISK MANAGEMENT
Because London Electricity's distribution business does not involve the
purchase and sale of electricity, London Electricity's risk management efforts
are focused on the supply business which is exposed to Pool price volatility.
Virtually all electricity generated in England and Wales is sold by generators
and bought by suppliers through the Pool.
Regulations governing the franchise supply market at present permit the
pass-through to customers of prudent costs which include the cost of
arrangements such as contracts for differences ("CFDs") to hedge against Pool
price volatility. CFDs are contracts predominantly between generators and
suppliers which fix the price of electricity for a contracted quantity of
electricity over a specific time period. Differences between the actual price
set by the Pool and the agreed prices give rise to difference payments between
the parties to the particular CFD. At the present time, London Electricity's
forecast franchise supply market demand for calendar year 1997 is
substantially hedged through various types of agreements including CFDs.
The most common contracts for supply to Non-Franchise Supply Customers are
for a twelve-month term and contain fixed rates. London Electricity is exposed
to two principal risks associated with such contracts: load shape risk (the
risk associated with a shift in the customer's usage pattern, including
absolute amounts demanded and timing of amounts demanded) and purchase price
risk (the risk associated with fluctuations in the cost of purchased
electricity relative to the price received from the supply customer). London
Electricity employs risk management methods to maximize its return consistent
with an acceptable level of risk. Generally, load shape risk decreases as
London Electricity's portfolio of supply customers in the non-franchise supply
market increases. London Electricity hedges purchasing price risk by employing
a variety of risk management tools, including management of its supply
contract portfolio, hedging contracts and other means which mitigate risk of
future Pool price volatility.
London Electricity's ability to manage its purchase price risk depends, in
part, on the continuing availability of properly priced risk management
mechanisms such as CFDs. No assurance can be given that an adequate,
transparent market for such products will in fact be available.
55
<PAGE>
London Electricity is also investigating whether owning one or more sources
of generation or contracting for such sources would be an appropriate
alternative for partially managing purchase price risk, but no assurance can
be given that this alternative would be available to or economically
appropriate for London Electricity and any further acquisition could be
subject to the own generation limitation in London Electricity's PES license.
UK ENVIRONMENTAL REGULATION
London Electricity's businesses are subject to numerous regulatory
requirements with respect to the protection of the environment. The
Electricity Act obligates the UK Secretary of State for Trade and Industry
(the "Secretary of State") to take into account the effect of electricity
generation, transmission and supply activities upon the physical environment
in approving applications for the construction of generating facilities and
the location of overhead power lines. The Electricity Act requires London
Electricity to have regard to the desirability of preserving natural beauty
and the conservation of natural and man-made features of particular interest,
when it formulates proposals for development in connection with certain of its
activities. The Company mitigates the effects its proposals have on natural
and man-made features and is required to carry out an environmental assessment
when it intends to lay cables, construct overhead lines or carry out any other
development in connection with its licensed activities. London Electricity
also has produced an Environmental Policy Statement which sets out the manner
in which it intends to comply with its obligations under the Electricity Act.
The Environmental Protection Act 1990 addresses waste management issues and
imposes certain obligations and duties on companies which handle and dispose
of waste. Some of London Electricity's distribution activities produce waste,
but London Electricity believes that it is in compliance with the applicable
standards in such regard.
Possible adverse health effects of electromagnetic fields ("EMFs") from
various sources, including transmission and distribution lines, have been the
subject of a number of studies and increasing public discussion. The
scientific research currently is inconclusive as to whether EMFs may cause
adverse health effects. The only UK standards for exposure to power frequency
EMFs are those promulgated by the National Radiological Protection Board and
relate to the levels above which non-reversible physiological effects may be
observed. London Electricity fully complies with these standards. However,
there is the possibility that passage of legislation and change of regulatory
standards would require measures to mitigate EMFs, with resulting increases in
capital and operating costs. In addition, the potential exists for public
liability with respect to lawsuits brought by plaintiffs alleging damages
caused by EMFs.
London Electricity has approximately 677 miles of fluid-filled underground
cables which operate at 33kV and 132kV. These cables generally supply
substantial amounts of electricity to large substations in urban areas and to
large customers. The majority of these cables are between 30 and 50 years old.
London Electricity operates these cables in accordance with the "Environment
Agency and Electricity Companies (in England and Wales) Operating Code on the
Management of Fluid-Filled Cables", monitoring and repairing both gradual and
substantial leaks, which arise through age deterioration and third party
damage. London Electricity has a program to minimize oil leakage and reduce
the possibility of pollution to watercourses and ground water. This involves
establishing a more effective standard procedure for dealing with cable leaks
and implementation of an effective monitoring system. There is also a forward
plan for gradual replacement of these cables with more modern solid cables.
London Electricity believes that the existing monitoring systems and planned
replacement program are sufficient to avoid major environmental incidents or
additional replacement expenditures. London Electricity could incur
significant expenditures if it were required to replace its fluid-filled
cables, other than in the ordinary course of business, pursuant to new or
existing legislation.
56
<PAGE>
London Electricity believes that it has taken, and it intends to continue
taking, measures to comply with the applicable laws and governmental
regulations for the protection of the environment. There are no material legal
or administrative proceedings pending against London Electricity or the
Company with respect to any environmental matter.
UK AND EU COMPETITION LAW
London Electricity's businesses are subject to the competition rules of both
the UK and the European Community.
The UK Restrictive Trade Practices Act 1976 stipulates that failure to
furnish to the Office of Fair Trading an agreement that is registrable under
the Act renders unenforceable certain restrictions contained in the agreement.
Briefly stated, the Fair Trading Act 1973 and the Competition Act 1980 both
regulate the activities of companies with market power. UK competition law,
particularly the law relating to restrictive agreements, is in the process of
reform and is likely to follow the approach of European Community law.
The Treaty of Rome contains provisions which prohibit anti-competitive
agreements and practices, including the abuse of a dominant position within
the European Union ("EU") or a substantial part of it. Penalties for violation
of these provisions include fines, third party damages and infringing
contractual provisions being unenforceable.
In January 1993, the UK implemented the EU Utilities Directive on the
procedures to be followed for the award of supply and works contracts by
utilities companies, including electricity utilities. This directive was
replaced by EU Directive 93/36, which was implemented by the UK in December
1996 and which covers service contracts as well as supply and work contracts.
Those contracts that exceed the relevant financial thresholds have to be
advertised in the Official Journal of the European Communities. Disappointed
suppliers and contractors who believe they have suffered harm from failure to
implement the correct procedure in awarding the contract are able to institute
proceedings in the English High Court. The European Commission also has the
power to intervene prior to the award of a contract. The Company believes that
London Electricity has complied with any obligations it may have under those
regulations but the interpretation and application of those regulations and of
the European Union directives which they implement is not free from doubt and
no assurance can be given that any claim for damages against London
Electricity for breach of the rules would be unsuccessful.
EMPLOYEES
London Electricity had 4,266 employees (3,916 full time equivalent) at the
end of fiscal year 1997. The Company has no employees because it is a holding
company with no operations. Approximately 60% of London Electricity's
employees are represented by labor unions. All London Electricity employees
who are not party to a personal employment contract are subject to a
collective bargaining agreement called The Electricity Business Agreement.
This Agreement may be amended by agreement between London Electricity and the
unions and is terminable with 12 months notice by either side. London
Electricity believes that its relations with its employees are favorable.
PROPERTY
London Electricity occupies approximately 300,000 square feet or 60% of its
principal executive offices on either a freehold basis or on leases where the
remaining term is more than 50 years. A further 200,000 square feet is held
under shorter leases.
Network Land and Buildings
At March 31, 1997, London Electricity had freehold and leasehold interests
in approximately 14,500 network properties, comprising principally substation
sites.
57
<PAGE>
Non-Network Land and Buildings
At March 31, 1997, London Electricity had freehold and leasehold interests
in non-network properties comprising chiefly offices, former retail outlets,
depots, warehouses and workshops.
The number of properties in each category is:
<TABLE>
<CAPTION>
FREEHOLD
OR LONG
LEASEHOLD LEASEHOLD
--------- ---------
<S> <C> <C>
Depot................................................. 1 --
Offices............................................... 21 6
Depot and Office...................................... 5 --
Shops................................................. 6 8
Industrial............................................ 32 2
Residential........................................... 9 0
Other................................................. 2 --
--- ---
Total............................................... 76 16
</TABLE>
LEGAL PROCEEDINGS
London Electricity is routinely party to legal proceedings arising in the
ordinary course of business which are not material, either individually or in
the aggregate. The Company is not a party to any material legal proceedings
nor is it currently aware of any threatened material legal proceedings.
However, as discussed under "Risk Factors--Factors Relating to the Company's
Business--Litigation Regarding Electricity Supply Pension Scheme", litigation
is ongoing with respect to the uses made by other employers of actuarial
surpluses declared in the ESPS. While the courts have ruled in favor of such
employers, such decisions are subject to appeal. If any of the decisions are
reversed on appeal they may have an adverse effect on London Electricity,
which has made similar use of its actuarial surplus, but no assurance can be
given as to the extent of that effect.
THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
GENERAL
The electric utility industry in Great Britain consists of the following
principal activities:
Generation--the production of electricity at power stations;
Transmission--the bulk transfer of electricity across a high voltage
transmission system known as the Grid from generators to RECs;
Distribution--the transfer of electricity from the Grid and its
delivery, across the REC low voltage distribution networks, to end-user
consumers; and
Supply--the bulk purchase of electricity by RECs or other licensed
suppliers and its retail sale to end-user consumers.
INDUSTRY STRUCTURE
Great Britain has two separate but connected markets, each with a different
commercial framework. In England and Wales electricity is produced by
generators, the largest of which are National Power, PowerGen and Nuclear
Electric, a subsidiary of British Energy plc. Electricity is transmitted
through the Grid by NGC and distributed by the twelve RECs in their respective
franchise areas. Most customers are currently supplied with electricity by
their local REC, although there are other suppliers holding second tier supply
licenses, including other generators and RECs, who can compete to supply
larger customers in that REC's franchise area.
In Scotland there are two vertically integrated companies, Scottish Power
and Hydro-Electric, each generating, transmitting, distributing and supplying
electricity within their respective franchise
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areas as well as competing to supply electricity elsewhere. Scottish Nuclear,
another subsidiary of British Energy, sells all the electricity it generates
to Scottish Power and Hydro-Electric.
The interconnection between the two transmission systems, owned by Scottish
Power and NGC, is capable of transferring electricity between Scotland and
England and Wales. There is also an interconnection with France, owned by NGC
and Electricite de France, through which electricity can be transferred
between the transmission systems of France and England and Wales.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. A generator which is a
Pool member and also a licensed supplier must nevertheless sell all the
electricity it generates into the Pool and purchase all the electricity which
it supplies from the Pool. Because Pool prices fluctuate, generators and
suppliers may enter into bilateral arrangements, such as CFDs, to provide a
degree of protection against such fluctuations.
There is no equivalent to the Pool in Scotland, but Scottish Power and
Hydro-Electric are obligated by their licenses to offer electricity for sale
to second tier suppliers. They are also required to provide access to their
transmission and distribution systems on a non-discriminatory basis to
competing suppliers and generators.
Industry Background
The industry structure described above was put in place in March 1990 in
order to introduce competition into the generation and supply of electricity.
At the same time, a licensing regime was introduced for the electricity
industry both in England and Wales as well as in Scotland.
The RECs, which at that time collectively owned NGG, NGC's holding company,
were privatized in December 1990. National Power and PowerGen were privatized
in March 1991 (with the balance of the UK Government's holdings being sold in
March 1995). Scottish Power and Hydro-Electric were privatized in June 1991
and British Energy was privatized in July 1996. By December 1995, most of the
RECs ownership of NGG had been publicly sold, and NGG was listed on the London
Stock Exchange. Since the summer of 1995, 11 of the RECs have been acquired by
other companies. London Electricity was acquired by the Company in February
1997.
In 1990, the vast majority of generating capacity in England and Wales was
owned by three generators. However, since that time competition in generation
has increased as RECs and other new entrant generators have constructed new
plant and as imports through the interconnections with Scotland and France
have grown. In addition, pursuant to undertakings given to the Regulator,
National Power and PowerGen have disposed of an aggregate of 6,000 MW of
generating capacity to Eastern Group plc.
Competition in supply has been progressively introduced both in England and
Wales and in Scotland. The RECs in England and Wales, and Scottish Power and
Hydro-Electric in Scotland, are subject to competition from second tier
suppliers for the supply of electricity to larger customers in their
respective franchise areas. In April 1990, electricity users with demand in
excess of 1 MW became Non-Franchise Customers of a REC and therefore were
allowed to choose their electricity supplier. In April 1994, the Non-Franchise
Customer class was expanded to include users with a demand of 100 kW and
above. Currently, all electricity customers in Great Britain are scheduled to
be able to choose their electricity supplier over a six-month phase-in period
beginning April 1, 1998, according to customers' designated postal codes. The
Regulator has indicated, however, that such phase-in could be delayed, or
customer participation reduced, if the necessary infrastructure services are
not available on April 1, 1998 or the transition were to impose significant
burdens on Pool or supplier information and management systems.
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Distribution of Electricity
Each of the RECs is required to offer terms for connection to its
distribution system to any person, for use of its distribution system to any
authorized electricity operator and for the provision of supplemental and
backup supplies to any person. In providing use of its distribution system, a
REC must not discriminate between its own supply business and that of any
other authorized electricity operator, or between those of other authorized
electricity operators; nor may its charges differ except where justified by
differences in cost. Similar principles apply to the provision of supplemental
and backup supplies of electricity, and in the carrying out of connection
works. Disputes over the terms of offers may be determined by the Regulator.
Distribution charges are controlled by a formula principally based on P x
(1+(RPI-Xd)) where Xd is currently 3% (the "Distribution Price Control
Formula"). Since 1995, this formula has been divided into two components: one
associated with metering and the other associated with the remainder of the
distribution business. P is the previous year's maximum average price per unit
of electricity distributed. Because the maximum average price in any year is
therefore based in part on the maximum average price in the preceding year, a
price reduction in any given year has an ongoing effect on the maximum average
price for all subsequent years. RPI is a measure of inflation, and equals the
percentage change in the UK Retail Price Index between the previous year and
the current year. Because RPI is based on a weighted average of the prices of
goods and services purchased by a typical household, which bear little
resemblance to the inputs contributing to London Electricity's business costs,
the RPI calculation may not accurately reflect the price changes affecting
London Electricity's costs. The Xd factor is established by the Regulator
following review. This formula determines the maximum average price per unit
of electricity distributed (in pence per kilowatt hour) which a REC is
entitled to charge. The Distribution Price Control Formula permits RECs to
partially retain additional revenues due to increased distribution of units
and holds out the prospect of an increase in operating profits for efficient
operations and reduction of expenses.
Upon privatization, the Regulator set different Xd factors for each of the
RECs to permit annual price increases by the RECs of between 0% and 2.5% (0%
for London Electricity) greater than RPI for the five year period ending on
March 31, 1995. Following a scheduled distribution price review by the
Regulator of all twelve RECs in August 1994, the Regulator required an overall
real reduction in regulated distribution prices for Fiscal Year 1996 of
between 11% and 17% (14% for London Electricity) from the previous year, and
set the Xd factor for the subsequent four year period ending on March 31, 2000
of 2% in each such year. Also in connection with the August 1994 distribution
price review, the Regulator (i) halved from 100% to 50% the extent to which
distribution revenues would be allowed to vary with the number of units of
electricity distributed and (ii) determined hypothetical numbers of Franchise
Area customers for each year through and including fiscal year 2000, allowing
distribution revenues to vary by 50% of the predetermined annual change in
such hypothetical numbers. The stated intention of the Regulator in
introducing this change was "to remove any artificial incentive on the
companies to sell more electricity, while retaining a general incentive for
companies to seek out and meet the needs of their customers". In light of
information concerning the financial position of the RECs that emerged during
the course of the unsuccessful bid by Trafalgar House plc for Northern
Electric plc (one of the RECs), the Regulator conducted an unscheduled
distribution price review of all twelve RECs in July 1995. As a result of this
unscheduled review, the Regulator revised regulated distribution prices for
the four year period ending on March 31, 2000, requiring instead an overall
real reduction in regulated distribution prices for fiscal year 1997 of
between 10% and 13% (11% for London Electricity) from the previous year, and
resetting the Xd factor for the remaining three year period ending on March
31, 2000 of 3% in each such year.
The Distribution Price Control Formula is expected to be further reviewed
with effect from April 1, 2000. Following the review, the Regulator will make
a proposal for a revised formula to apply from that date. If a REC does not
agree with the proposal the Regulator may refer the lack of agreement
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to the MMC and, following the MMC's inquiry, the Regulator may make whatever
modifications to the REC's PES license are required.
In setting distribution charges each year, each REC must project the
permitted maximum average charge per unit to be distributed in that year. The
projection will have to take account of forecasts of units distributed,
distribution line losses and the actual change in RPI. Failure to forecast
accurately may result in overcharging or undercharging; this is taken into
account in the following year through a correction factor in the price control
formula. If a REC has overcharged in the previous year, the maximum average
charge per unit distributed is reduced by an amount to reflect the excess
income received, to which is added interest. In the event of undercharging,
the Distribution Price Control Formula allows the licensee to recover the
shortfall in income plus interest.
In certain instances, however, overcharging or undercharging by a REC above
specific percentage thresholds may result in adjustments by the Regulator. If,
in any year, the average charge per unit distributed exceeds the permitted
maximum average charge per unit distributed by more than 3%, then, in the next
following year, the REC may not increase distribution charges unless it has
satisfied the Regulator that the average charge per unit in that next
following year is not likely to exceed the permitted maximum average charge.
If, with respect to any two successive years, the sum of the amounts by which
the average charge per unit distributed has exceeded the permitted maximum
average charge per unit distributed in the second of those years is more than
4% of that permitted maximum average charge, then, in the next following year,
the REC may be required by the Regulator to adjust its charges so that they
fall within the maximum permitted average charge. If, in respect of two
successive years, the licensee undercharges by more than 10% of the maximum
average charge, the Regulator may, by directions to the licensee, limit the
amount by which such undercharging may be recovered.
Supply of Electricity
Subject to minor exceptions, all electricity customers in Great Britain must
be supplied by a licensed supplier. Licensed suppliers purchase electricity
and make open-access use of the transmission and distribution networks to
achieve delivery to customers' premises.
There are two types of licensed suppliers: public electricity (or first
tier) suppliers ("PESs") and second tier suppliers. PESs are the RECs,
Scottish Power and Hydro-Electric each supplying in its respective franchise
area. Second tier suppliers include National Power, PowerGen, Nuclear
Electric, Scottish Power, Hydro-Electric and other PESs (including RECs)
supplying outside their respective franchise areas and a number of independent
second tier suppliers.
At present, a Franchise Supply Customer can only buy electricity from the
REC authorized to supply the relevant franchise area. Franchise Supply
Customers typically include residential and small commercial and industrial
customers. Non-Franchise Supply Customers are not limited to buying
electricity from the local REC and can choose to buy from a second tier
supplier. Such customers are typically larger commercial, agricultural and
industrial electricity users. Second tier suppliers compete with one another
and with the local REC to supply customers in this competitive (or "non-
franchise") sector of the market.
Under the current licensing regime, over a six month period beginning on
April 1, 1998, all customers, including those who are currently Franchise
Supply Customers, will be permitted to choose their electricity supplier. The
present Supply Price Control Formula (discussed immediately below) will no
longer apply. However, the Regulator has indicated in his supply price
restraint proposals published on October 16, 1997, that price regulation for
supply to the smaller Franchise Supply Customers, whose annual demand is under
12,000 kWh, will be extended for an initial period of at least two years and
until an adequate level of competition is established. See "--Supply Price
Restraint Proposals".
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The supply of electricity to Franchise Supply Customers currently remains
subject to price control. The maximum average charge per unit supplied (in
pence per kilowatt hour) is at present controlled by a formula principally
based upon (P x (1 + (RPI-Xs)) + Y (the "Supply Price Control Formula") where
Xs is currently 2%. The initial value of Xs was set at 0 for all the RECs on
March 31, 1990. The Supply Price Control Formula was reviewed by the Regulator
with effect from April 1, 1994, when the Xs factor was set at 2% for all the
RECs. This will apply through the period ending March 31, 1998. P is that part
of the previous year's maximum average price per unit of electricity supplied
(in pence per kilowatt hour) that relates to the REC supply business's own
costs and margin. RPI is a measure of inflation, and equals the percentage
change in the UK Retail Price Index between the previous year and the current
year. Because RPI is based on a weighted average of the prices of goods and
services purchased by a typical household, which bear little resemblance to
the inputs contributing to London Electricity's supply business costs, the RPI
calculation may not accurately reflect the price changes affecting London
Electricity. The Xs factor is established by the Regulator following review.
The Y factor is a pass through of certain costs which are either largely
outside the control of the REC or have been regulated elsewhere. It thus
covers the REC's electricity purchase costs, including both direct Pool
purchase costs and costs of hedging, transmission charges made by NGC, REC
distribution charges and the Fossil Fuel Levy (described below) or amounts
equivalent thereto in respect of the purchase of non-leviable electricity
which are attributable to Franchise Supply Customers. The Supply Price Control
Formula is therefore designed to focus downward pressure on costs and working
capital, which are viewed as being within suppliers' direct control.
As with the Distribution Price Control Formula there is a correction factor
in the Supply Price Control Formula in the event of overcharging or
undercharging. If a REC has overcharged in the previous year, the maximum
average charge per unit supplied is reduced by an amount to reflect the excess
income received, to which is added interest. In the event of undercharging,
the Supply Price Control Formula allows the licensee to recover the shortfall
in income plus interest. In certain instances, however, overcharging or
undercharging by a REC above specific percentage thresholds may result in
adjustment by the Regulator. For example, if, in any year, the average charge
per unit supplied exceeds the permitted maximum average charge per unit
supplied by more than 4%, then, in the next following year, the REC may not
increase supply charges to Franchise Supply Customers unless it has satisfied
the Regulator that the average charge per unit in that next following year is
not likely to exceed the permitted maximum average charge. If, with respect to
any two successive years, the sum of the amounts by which the average charge
per unit supplied has exceeded the permitted maximum average charge per unit
supplied in the second of those years is more than 5% of that permitted
maximum average charge, then, in the next following year, the REC may be
required by the Regulator to adjust its charges so that they fall within the
maximum permitted average charge. If, in respect of two successive years, the
licensee undercharges by more than 10% of the maximum average charge, the
Regulator may, by directions to the licensee, limit the amount by which such
undercharging may be recovered.
Supply Price Restraint Proposals
On October 16, 1997, the Regulator published proposals for new supply price
restraints to apply from April 1, 1998. Each PES license holder has one month
in which to decide whether to accept the proposals, failing which the
Regulator has stated he would refer the matter for investigation by the MMC.
The proposals would, among other things, implement a price reduction for
London Electricity's domestic and small business supply customers of 11.8%
compared to the supply price tariff in effect in August 1997. A further 3%
reduction is proposed to be effective on April 1, 1999. The 11.8% price
reduction to be effective on April 1, 1998 would be decreased by the supply
tariff reductions announced by London Electricity on September 29, 1997 and
effective from October 1, 1997 which will return over-recoveries experienced
under the current Supply Price Control Formula. The license modifications
which will be implemented if the Regulator's proposals are accepted would
discontinue the automatic pass-through of all costs currently passed through
to domestic and small business customers, including purchased power costs from
the Pool.
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The proposals further provide for an allowable charge to cover the
additional cost of providing data management services, comprising an annual
allowance for each PES license holder over the five years ending March 31,
2003 of (Pounds)4.6 million to cover set-up costs plus (Pounds)3.04 million
per annum to cover operating costs for the period 1998 through 2000. The
proposals also provide for restraints on pre-payment meter charges.
The Pool
The Pool was established in April 1990 for bulk trading of electricity in
England and Wales between generators and suppliers. The Pool reflects two
principal characteristics of the physical generation and supply of electricity
from a particular generator to a particular supplier. First, it is not
possible to trace electricity from a particular generator to a particular
supplier. Second, it is not practicable to store electricity in significant
quantities, creating the need for a constant matching of supply and demand.
Subject to certain exceptions, all electricity generated in England and Wales
must be sold and purchased through the Pool. All licensed generators and
suppliers must become signatories to the Pooling and Settlement Agreement,
which governs the constitution and operation of the Pool and the calculation
of payments due to and from generators and suppliers. The Pool also provides
centralized settlement of accounts and clearing. The Pool does not itself buy
or sell electricity.
Prices for electricity are set by the Pool daily for each half hour of the
following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system
stability, security and other costs. Each day, generators inform NGC of the
amount of electricity which each of their generating units will be able to
provide the next day and the price at which they are willing to operate each
such unit. NGC uses this information to construct a "merit order" which ranks
each generating unit in order of increasing price. NGC then schedules the
stations to operate according to such merit order, calling into service the
least expensive generating units first and continuing to call generating units
into service until enough are operating to meet the demand of all suppliers.
Factors which may constrain NGC's ability to order stations into operation in
strict observance of the merit order include transmission system constraints
and the inflexibility of some generating units. A computerized system (the
settlement system) is used to calculate prices and to process metered,
operational and other data and to carry out the other procedures necessary to
calculate the payments due under the Pool trading arrangements. The settlement
system is administered on a day-to-day basis by NGC Settlements Limited, a
subsidiary of NGC, as settlement system administrator.
Fossil Fuel Levy
All the RECs are obligated to obtain a specified amount of generating
capacity from non-fossil fuel sources (the "NFFOs"). Because electricity
generated from non-fossil fuel plants is generally more expensive than
electricity from fossil fuel plants, a levy system (the "Fossil Fuel Levy")
has been instituted to reimburse the generators and the RECs for the extra
costs involved. The Regulator sets the amount of the Fossil Fuel Levy
annually. The current Fossil Fuel Levy is 2.2% of the value of sales of
electricity generated from fossil fuel sources.
REGULATION UNDER THE ELECTRICITY ACT
The Regulator
The principal legislation governing the structure and regulation of the
electricity industry in Great Britain is the Electricity Act. The Electricity
Act established the industry structure described above so
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as to enable privatization to take place. The Electricity Act also created the
institutional framework under which the industry is currently regulated,
including the office of the Regulator, who is appointed by the Secretary of
State. The present Regulator, Professor Stephen Littlechild, was appointed for
a five year term commencing September 1, 1989 and he was reappointed in 1994
for a further five year term ending on August 31, 1999.
The Regulator's functions under the Electricity Act include granting
licenses to generate, transmit, distribute or supply electricity (a function
which he exercises under a general authority from the Secretary of State);
proposing modifications to licenses and making license modification references
to the MMC; enforcing compliance with license conditions; advising the
Secretary of State in respect of the setting of each NFFO; calculating the
Fossil Fuel Levy rate and collecting the levy; determining certain disputes
between electricity licensees and customers; and setting standards of
performance for electricity licensees.
The Regulator exercises concurrently with the Director General of Fair
Trading certain functions relating to monopoly situations under the Fair
Trading Act 1973 and certain functions relating to courses of conduct which
have, or are intended or likely to have, the effect of restricting, distorting
or preventing competition in the generation, transmission or supply of
electricity under the Competition Act 1980.
The Electricity Act requires the Regulator and the Secretary of State to
exercise their functions in the manner each considers is best calculated to:
ensure that all reasonable demands for electricity are satisfied; secure that
license holders are able to finance their licensed activities; and promote
competition in the generation and supply of electricity.
Subject to these duties, the Secretary of State and the Regulator are
required to exercise their functions in the manner which each considers is
best calculated: to protect the interests of consumers of electricity supplied
by licensed suppliers in respect of price, continuity of supply, and the
quality of electricity supply services; to promote efficiency and economy on
the part of licensed electricity suppliers and the efficient use of
electricity supplied to consumers; to promote research and development by
persons authorized by license to generate, transmit or supply electricity; to
protect the public from the dangers arising from the generation, transmission
or supply of electricity; and to secure the establishment of machinery for
promoting the health and safety of workers in the electricity industry. The
Secretary of State and the Regulator also have a duty to take into account the
effect on the physical environment of activities connected with the
generation, transmission, distribution or supply of electricity.
In performing their duties to protect the interests of consumers in respect
of prices and other terms of supply, the Secretary of State and the Regulator
have a duty to take into account in particular the interests of consumers in
rural areas. In performing their duties to protect the interests of consumers
in respect of the quality of electricity supply services, they have a duty to
take into account in particular the interests of those who are disabled or of
pensionable age.
LICENSES
Generation Licenses
Unless covered by an exemption, all electricity generators operating a power
station in Great Britain are required to have a generation license. There are
currently 43 generation license holders in Great Britain. Although generation
is not subject to price control, generators are not permitted to discriminate
between customers or cross-subsidize their licensed activities. The conditions
attached to a generation license in England and Wales require the holder,
among other things, to comply with a grid code, be a member of the Pool and
submit relevant generating sets for central dispatch. The
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conditions attached to a generation license in Scotland require the holder,
among other things, to comply with a grid code. Failure to comply with any of
the generation license conditions may subject the licensee to a variety of
sanctions, including enforcement orders by the Regulator or license revocation
if an enforcement order is not complied with.
PES Licenses
Each of the RECs, Scottish Power and Hydro-Electric has a PES license for
its franchise area and is required, under the Electricity Act, to supply
electricity upon request to any premises in that area, except in specified
circumstances. Each PES license holder is also required not to discriminate
between its own supply business and other users of its distribution system and
the PES license prohibits cross-subsidy between the various regulated
businesses. As described above, PES license holders are subject to separate
price controls on the amounts they may charge for the supply of electricity to
Franchise Supply Customers. The PES licenses also require the licensee to
procure electricity at the best price reasonably obtainable having regard to
the sources available.
The Regulator published on August 15, 1996 further information relating to
the RECs' performance in relation to their distribution price controls and
supply price controls. The publication entitled "Yardstick of Electricity
Purchase Costs" includes information about the generation costs which RECs
pass through to Franchise Supply Customers under the Supply Price Control
Formula. The Regulator has reviewed the supply price controls applicable to
PES license holders and published on October 16, 1997 proposals for new
controls to take effect on April 1, 1998, when the present franchise supply
market will be opened to competition. He issued a consultation paper on this
matter on September 5, 1996 entitled "The Competitive Electricity Market from
1998: Price Restraints". He has since issued four further consultation papers
in January, May, July and August, 1997. The October 16, 1997 proposals are for
maximum price restraints in respect of supply to domestic and small business
customers for a period of at least two years beginning April 1, 1998, which
will discontinue the automatic pass-through of all costs currently passed
through to such customers. See "--Industry Structure--Supply Price Restraint
Proposals".
In England and Wales, each PES license limits the extent of the generation
capacity in which the relevant REC may hold an interest without the prior
consent of the Regulator ("own-generation limits"). These own-generation
limits, expressed in megawatts, currently restrict the participation of a REC
in generation to a level of approximately 15% of the simultaneous maximum
electricity consumption in that REC's franchise area at the time of
privatization. In the case of London Electricity, the own-generation limit is
fixed at 700 MW. After taking into account London Electricity's current
ownership interest in Barking Power, the amount of additional generation
investment which could be made by London Electricity is 565 MW. Under the
terms of the PES license, investments by affiliates of Entergy in generating
assets in the UK would be counted towards the own-generation limit. London
Electricity has applied to the Regulator for an exception from this license
condition for certain planned investments by other Entergy subsidiaries that
would exceed London Electricity's own generation limit, but cannot predict
whether the application will be granted.
The Regulator has stated that it would be reasonable to consider a REC's
request to increase its own-generation limit on the condition that it accepted
explicit restrictions on the contracts it signed with its supply business, and
that at a minimum the REC would be prohibited from selling additional units of
electricity into its franchise supply market. The Regulator considers that an
increase in own-generation limits subject to such restrictions could allow a
REC to contribute more fully to the development of competition in generation
without the allegation that it was exploiting its captive market and local
monopoly position. In June 1996, the Regulator stated that he had indicated to
Eastern Group plc, in the context of its acquisition of 6,000 MW of generating
capacity from National Power and PowerGen, that he would be favorably inclined
to relax the own-generation limits subject
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to the Regulator and Eastern Group plc agreeing to license modifications as
set out in a consultation paper which he had published in August 1995.
As part of the Regulator's October 16, 1997 supply price restraint
proposals, the Regulator has proposed modifications to the 14 PES license
holders in connection with the introduction of competition for franchise
supply customers beginning April 1, 1998. These modifications propose a number
of new obligations to offer services to suppliers. These services are
generally known as data management services, including registration, data
collection and aggregation, meter operation and provision of prepayment meter
infrastructure. The PES license holders are also being required to provide
collectively a data transfer service. See "--Industry Structure--Supply Price
Restraint Proposals".
The RECs are also contributing to a program of work by the Pool to adopt
settlement arrangements for the competitive market in 1998. It has been agreed
that these costs, subject to a cap above which recovery would be partial, will
be recovered from charges to be made to suppliers by the Pool over a five year
period.
Second Tier Supply Licenses
Other than a PES license holder in its franchise area and subject to certain
other exceptions, a supplier of electricity to premises in Great Britain must
possess a second tier supply license. Subject to the restrictions described in
"--Industry Structure--Supply of Electricity" above, second tier licensees may
compete for the supply of electricity with one another and with the PES
license holder in the relevant area. There are currently 39 second tier supply
license holders for England and Wales and 24 for Scotland.
Transmission Licenses
In England and Wales, NGC is the only transmission license holder. The
transmission license imposes on NGC the obligation to operate the merit order
system for the central dispatch of generating units and gives NGC
responsibility for the economic purchasing of ancillary services from
generators and suppliers. The transmission license requires NGC to offer terms
on a non-discriminatory basis for the carrying out of works for connection to,
and use of, the transmission system and for use of the interconnections.
Modifications to Licenses
Subject to a power of veto by the Secretary of State, the Regulator may
modify license conditions with the agreement of the license holder. He must
first publish the proposed modifications and consider representations or
objections made. Following the acquisition of London Electricity by the
Company, the Regulator requested that London Electricity's PES license be
modified, by agreement, to take into account the fact that the PES license is
now held by a subsidiary company. In particular, the Regulator requested that
the license be modified to provide that, with few exceptions, the only
business activities which London Electricity is permitted to undertake
directly are its franchise and second tier supply businesses and its
distribution business. The license modifications also require London
Electricity to ensure that it has sufficient management and financial
resources and facilities to conduct its supply and distribution businesses and
to comply with its statutory and license obligations. The directors of London
Electricity are required to give annual certificates to the Regulator to that
effect. Further, the consent of the Regulator is required for London
Electricity to create security over its assets, to incur indebtedness or to
give guarantees, unless the transaction is on normal commercial and arm's
length terms and for a "permitted purpose" (which refers to the supply,
distribution or generation business, or any business conducted by London
Electricity or its affiliates or subsidiaries prior to the take-over) or the
transaction involves any business whose aggregate revenues in any financial
year does not exceed 5% of the aggregate turnover of the supply,
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second-tier supply and distribution businesses in the previous financial year.
The consent of the Regulator also is required before London Electricity may
transfer assets or make loans to affiliates or subsidiaries unless it is for a
permitted purpose. However, various matters, such as payment of dividends out
of distributable reserves, repayments of capital, and payments on normal
commercial and arm's length terms for goods, services or assets supplied,
would not require the consent of the Regulator. These provisions are subject
to an overriding provision in the PES license which prevents any REC from
disposing of (which would include creating a security interest in)
distribution assets without the Regulator's express prior consent.
Additionally, the license modifications require London Electricity to use
reasonable efforts to maintain the investment grade of its debt rated by
Moody's and Standard & Poor's. Finally, because London Electricity is now
owned by the Company, the Regulator required London Electricity to obtain from
Entergy a legally enforceable agreement to provide information to London
Electricity, as licensee, in order to comply with requirements to the
Regulator. These modifications to the PES license have been agreed to by
London Electricity and took effect during October 1997.
If the Regulator fails to agree to modifications with a license holder, he
may refer a matter relating to generation, transmission or supply of
electricity under a license to the MMC. If the MMC finds that the matter
referred to it has, or may be expected to have, specified effects adverse to
the public interest which could be remedied or prevented by a license
modification, the Regulator is required to make modifications that appear to
him requisite for the purpose of remedying or preventing the adverse effects
identified by the MMC. Modifications to license conditions may also be made by
the Secretary of State as a consequence of monopoly, merger or other
competition references under general UK competition law.
Term and Revocation of Licenses
London Electricity's PES license will continue in effect until at least 2025
unless revoked. Under ordinary circumstances, the license may not be revoked
except on 25 years' prior notice, which notice may not be given until 2000.
Otherwise, the Secretary of State may revoke a PES license by not less than 30
days' notice in writing to the licensee in certain specified circumstances
including any failure to comply with a final order of the Regulator requiring
the license holder to comply with its license conditions or requirements, or
the insolvency of the licensee.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edwin A. Lupberger............. 60 Director, Chairman of the Board and Chief
Executive Officer
Michael B. Bemis............... 50 Director and President
Gerald D. McInvale............. 53 Director, Executive Vice President and
Chief Financial Officer
Terry L. Ogletree.............. 53 Director
Michael G. Thompson............ 56 Senior Vice President and Secretary
William J. Regan............... 51 Treasurer
Louis E. Buck.................. 48 Audit Controller
</TABLE>
Edwin A. Lupberger has been a Director of the Company since March 1997,
Chairman of the Board and Chief Executive Officer of the Company since July
1997, and Chairman of the Board, Chief Executive Officer and Director of
Entergy since 1985. Mr. Lupberger has also served as Chairman of the Board and
Chief Executive Officer of Entergy Arkansas, Inc., Entergy Louisiana, Inc.,
Entergy Mississippi, Inc. and Entergy New Orleans, Inc. since 1993 and of
Entergy Gulf States, Inc. since 1994. He has also served as Chief Executive
Officer of Entergy Power Development Corporation and of Entergy Power
Development International Corporation since 1993 and 1995, respectively.
Michael B. Bemis has been a Director and President of the Company since
March 1997. Mr. Bemis has served as Executive Vice President, International
Retail Operations of Entergy and as President and Chief Executive Officer of
London Electricity since 1997. Mr. Bemis has also served as Executive Vice
President of Entergy Arkansas, Inc., Entergy Louisiana, Inc. and Entergy
Mississippi, Inc. since 1992, and of Entergy Gulf States, Inc. since 1993.
Gerald D. McInvale has been a Director, Executive Vice President, and Chief
Financial Officer of the Company since March 1997. Mr. McInvale has served as
Executive Vice President and Chief Financial Officer of Entergy, Entergy
Arkansas, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., Entergy
New Orleans, Inc., System Energy Resources, Inc., Entergy Services, Entergy
Operations and Entergy Enterprises since 1991, and of Entergy Gulf States,
Inc. since 1993. Mr. McInvale has also served as Senior Vice President,
Treasurer, and Director of Entergy Power Development Corporation and Entergy
Power Development International Corporation since 1993 and 1995, respectively.
Terry L. Ogletree has been a Director of the Company since March 1997 and
Executive Vice President-International of Entergy since 1996. Mr. Ogletree has
served as Chief Operating Officer, President and Director of Entergy Power
Development Corporation, Entergy Power, Inc. and Entergy Richmond Power
Corporation since 1993 and of Entergy Power Development International
Corporation since 1995. From 1989 to 1993, Mr. Ogletree served as President of
Constellation Energy.
Michael G. Thompson has been Senior Vice President and Secretary of the
Company since March 1997. Mr. Thompson has served as Senior Vice President and
General Counsel of Entergy and Entergy Services since 1992. Mr. Thompson has
also served as Senior Vice President, Secretary, and Director of Entergy Power
Development International Corporation since 1995. From 1987 to 1992, Mr.
Thompson served as a Senior Partner at Friday, Eldredge & Clark law firm.
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<PAGE>
William J. Regan has been a Treasurer of the Company since March 1997. Mr.
Regan has served as Vice President and Treasurer of Entergy, Entergy Arkansas,
Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi,
Inc., Entergy New Orleans, Inc., System Energy Resources, Inc., Entergy
Operations, Inc. and Entergy Services, Inc. since 1995. From 1989 to 1995, Mr.
Regan served as Senior Vice President and Corporate Treasurer of United
Services Automobile Association.
Louis E. Buck has been Audit Controller of the Company since July 1997. Mr.
Buck has served as Vice President and Chief Accounting Officer of Entergy,
Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc.,
Entergy Mississippi, Inc., Entergy New Orleans, Inc., System Energy Resources,
Inc., Entergy Operations, Inc., and Entergy Services, Inc. since 1995. From
1992 to 1995, Mr. Buck served as Vice President and Chief Financial Officer of
North Carolina Electric Membership Corporation.
DIRECTOR AND OFFICER COMPENSATION
The officers and directors listed above (each an "Entergy Officer or
Director", as applicable), have received, and will continue to receive,
compensation in respect of services performed by such persons in their
capacities as Entergy Officers and Directors of the Company from either
Entergy Services, Inc., (Entergy Services), or Entergy Enterprises, Inc.
(Entergy Enterprises), their primary employer and both affiliates of the
Company. The Company is charged by Entergy Services and Entergy Enterprises
for the time spent by those Entergy Officers and Directors who do not devote
their full time to the affairs of the Company and for a portion of the
overhead costs associated with each such Entergy Officer and Director. The
salaries of all Entergy Officers and Directors are paid by Entergy Services or
Entergy Enterprises, and Entergy Services and Entergy Enterprises are
reimbursed by the Company. Entergy Officers and Directors receive no cash or
non-cash compensation as a result of these arrangements beyond that which they
would otherwise receive from Entergy Services or Entergy Enterprises for the
services performed by them for Entergy Services or Entergy Enterprises.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company is charged by Entergy Services and Entergy Enterprises for the
time spent by those Entergy Officers and Directors who do not devote their
full time to the affairs of the Company and for a portion of the overhead
costs associated with each such Entergy Officer and Director. The salaries of
all Entergy Officers and Directors are paid by Entergy Services or Entergy
Enterprises, and Entergy Services and Entergy Enterprises are reimbursed by
the Company. Entergy Officers and Directors receive no cash or non-cash
compensation as a result of these arrangements beyond that which they would
otherwise receive from Entergy Services or Entergy Enterprises for the
services performed by them for Entergy Services or Entergy Enterprises.
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<PAGE>
SECURITY OWNERSHIP
The Company is wholly owned indirectly by Entergy. The following table shows
the number of shares of the common stock of Entergy owned by the directors and
executive officers of the Company as of December 31, 1996.
<TABLE>
<CAPTION>
ENTERGY COMMON STOCK
-----------------------
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(A)
-----------------------
SOLE
VOTING AND OTHER
INVESTMENT BENEFICIAL
NAME POWER OWNERSHIP(B)
---- ---------- ------------
<S> <C> <C>
Michael B. Bemis........................................ 11,480 10,000
Gerald D. McInvale...................................... 16,030 10,000
Edwin A. Lupberger...................................... 34,392 41,324(c)
Terry L. Ogletree....................................... 6,741 --
Michael G. Thompson..................................... 13,319 7,500
William J. Regan........................................ 202 --
Louis E. Buck........................................... 80 --
------ ------
All directors and executive officers.................... 82,244 68,824
====== ======
</TABLE>
- --------
(a) Based on information furnished by the respective individuals. Except as
noted, each individual has sole voting and investment power. The amount
owned by each individual and by all directors and executive officers as a
group does not exceed one percent of the outstanding securities of any
class of security so owned.
(b) Includes shares of Entergy common stock in the form of unexercised stock
options awarded pursuant to the Equity Ownership Plan as follows: Michael
B. Bemis, 10,000 shares; Edwin Lupberger, 38,824 shares; Gerald D.
McInvale, 10,000 shares, and Michael G. Thompson, 7,500 shares.
(c) Includes 2,500 shares of Entergy common stock held by Edwin Lupberger's
spouse. Mr. Lupberger disclaims beneficial ownership in these shares.
DESCRIPTION OF THE PREFERRED SECURITIES
Pursuant to the terms of the Partnership Agreement, Entergy London Capital
will issue the Preferred Securities. The Preferred Securities will represent
limited partner interests in Entergy London Capital. This summary of certain
provisions of the Preferred Securities does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Partnership
Agreement, including the definitions therein of certain terms, and the
Delaware Act. Wherever particular defined terms of the Partnership Agreement
are referred to, such defined terms are incorporated herein by reference. The
form of the Partnership Agreement has been filed as an exhibit to the
Registration Statement.
GENERAL
All of the general partner interests in Entergy London Capital at all times
while the Preferred Securities are outstanding will be directly or indirectly
owned by Entergy. The Partnership Agreement authorizes and creates the
Preferred Securities, which represent limited partner interests in Entergy
London Capital and does not authorize the creation of any additional series of
limited partner interests. The limited partner interests represented by the
Preferred Securities will have a preference with respect to cash distributions
and amounts payable on dissolution, redemption or otherwise over
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<PAGE>
the General Partner's interest in Entergy London Capital. The Company has,
through the Guarantee, the Partnership Agreement, the Perpetual Junior
Subordinated Debentures and the Indenture, taken together, fully, irrevocably
and unconditionally guaranteed all of Entergy London Capital's obligations
with respect to the Preferred Securities.
DISTRIBUTIONS
Distributions on each Preferred Security will be payable at the rate of 8
5/8% per annum of the stated Liquidation Preference Amount of $25, payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of
each year. Distributions that are in arrears for more than one quarter will
accumulate additional Distributions thereon at the rate of 8 5/8% per annum
thereof, compounded quarterly ("Additional Distributions"). The term
"Distributions" as used herein includes any Additional Distributions,
Additional Amounts or Additional Interest (as defined herein). Distributions
will accumulate from the date of original issuance of the Preferred
Securities. The first Distribution payment date for the Preferred Securities
will be December 31, 1997. The amount of Distributions payable for any period
will be computed on the basis of a 360-day year of twelve 30-day months.
So long as no Debenture Event of Default under the Indenture has occurred
and is continuing, the Company has the right under the Indenture to defer the
payment of interest indefinitely on the Perpetual Junior Subordinated
Debentures at any time and from time to time. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities would also be
deferred (but would continue to accumulate Additional Distributions thereon at
the rate of 8 5/8% per annum, compounded quarterly) by Entergy London Capital.
Until all deferred interest payments, together with interest thereon, have
been paid in full, the Company may not, directly or indirectly, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of its capital stock, (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any of its debt securities (including other junior subordinated
deferrable interest debentures) that rank pari passu with or junior in
interest to the Perpetual Junior Subordinated Debentures on which payment is
being deferred, (iii) make any guarantee payments with respect to any
guarantee if such guarantee ranks pari passu with or junior in interest to the
Perpetual Junior Subordinated Debentures on which payment is being deferred or
(iv) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any of its debt securities held by any affiliate, or make
any loans or advances to, or make payments on any guarantee of the debt of,
any affiliate, in each case other than (a) dividends or distributions in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, the Company's common stock and exchanges or conversions of common stock of
one class for common stock of another class, (b) payments by the Company under
the Guarantee (or any other guarantee by the Company with respect to any
securities of its subsidiaries, provided that the proceeds from the issuance
of such securities were used to purchase junior subordinated deferrable
interest debentures issued by the Company), and (c) any dividend or payment by
the Company which is applied, directly or indirectly, to the payment of (x)
principal of, or interest or premium, if any, on Acquisition Debt as and when
due in accordance with the terms thereof, or (y) any UK Tax Payments.
"Acquisition Debt" shall mean the borrowings outstanding under the Credit
Facilities Agreement in the maximum principal amount of (Pounds)810 million
and any refinancings, replacements, renewals or refundings thereof that do not
increase the principal amount of such indebtedness in excess of (Pounds)810
million. "UK Tax Payments" shall mean any direct or indirect payment by the
Company to governmental authorities in respect of UK taxes arising from the
operations of the Company and London Electricity as and when such taxes become
due and payable. See "Description of the Perpetual Junior Subordinated
Debentures--Option to Defer Payment of Interest".
The Company currently has no intention of exercising its right to defer
payments of interest on the Perpetual Junior Subordinated Debentures.
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<PAGE>
In the event that any date on which Distributions are payable on the
Preferred Securities is not a Business Day (as defined below), payment of the
Distributions payable on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day is in the next succeeding
calendar year, payment of such Distributions shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date (each date on which Distributions are payable in accordance with
the foregoing, a "Distribution Date"). A "Business Day" shall mean any day
other than a Saturday or a Sunday, or a day on which banking institutions in
The City of New York are authorized or required by law or executive order to
remain closed, or a day on which the corporate trust office of the Debenture
Trustee is closed for business.
It is anticipated that the revenue of Entergy London Capital available for
distribution to holders of the Preferred Securities will be limited to
payments under the Perpetual Junior Subordinated Debentures in which Entergy
London Capital will invest the proceeds from the issuance and sale of the
Preferred Securities and the capital contribution of the General Partner. See
"Description of the Perpetual Junior Subordinated Debentures". If the Company
does not make interest payments on the Perpetual Junior Subordinated
Debentures, Entergy London Capital will not have funds available to pay
Distributions on the Preferred Securities. The payment of Distributions (if
and to the extent Entergy London Capital has funds available for the payment
of such Distributions and cash sufficient to make such payments) is guaranteed
by the Company as set forth herein under "Description of the Guarantee".
Distributions on the Preferred Securities will be payable to the holders of
record as they appear on the books and records of Entergy London Capital at
the close of business on the relevant record dates, which, as long as the
Preferred Securities remain in book-entry form, will be one Business Day prior
to the relevant Distribution Date. In the event that any Preferred Securities
are not in book-entry form, the relevant record date for such Preferred
Securities shall be the date 15 days prior to the relevant Distribution Date.
REDEMPTIONS
Mandatory Redemption. Upon the redemption, in whole or in part, of the
Perpetual Junior Subordinated Debentures, the proceeds from such redemption
will be applied by Entergy London Capital to redeem a Like Amount of Preferred
Securities, upon not less than 30 nor more than 60 days' notice to each holder
of Preferred Securities at its registered address, at the Redemption Price.
Optional Redemption of Perpetual Junior Subordinated Debentures. The Company
will have the right to redeem the Perpetual Junior Subordinated Debentures on
or after November 19, 2002, in whole at any time or in part from time to time,
at the Debentures Redemption Price and thereby cause a mandatory redemption of
a Like Amount of Preferred Securities at the Redemption Price. See
"Description of the Perpetual Junior Subordinated Debentures--Redemption".
The Company will also have the right to redeem the Perpetual Junior
Subordinated Debentures in whole (but not in part), at the Debentures
Redemption Price, if the Company has or will become obligated to pay
Additional Amounts as described under "Description of the Perpetual Junior
Subordinated Debentures--Additional Amounts", and thereby cause a mandatory
redemption of the Preferred Securities in whole (but not in part) at the
Redemption Price. See "Description of the Perpetual Junior Subordinated
Debentures--Optional Tax Redemption".
Special Event Redemption or Distribution of Perpetual Junior Subordinated
Debentures. If a Special Event shall have occurred and be continuing, the
Company shall have the right to redeem the Perpetual Junior Subordinated
Debentures at any time in whole (but not in part) at the Debentures Redemption
Price and thereby cause a mandatory redemption of the Preferred Securities in
whole
72
<PAGE>
(but not in part) at the Redemption Price within 90 days following the
occurrence of such Special Event.
Whether or not a Special Event has occurred, the General Partner has the
right, at any time, to dissolve Entergy London Capital and, after satisfaction
of liabilities to creditors of Entergy London Capital, if any, as provided by
the Delaware Act, to cause a Like Amount of Perpetual Junior Subordinated
Debentures to be distributed to the holders of the Preferred Securities in
liquidation of Entergy London Capital. Under current US Federal income tax
law, provided Entergy London Capital is treated as a partnership at the time
of such distribution, such distribution would not be a taxable event to
holders of the Preferred Securities. See "Certain Income Tax Considerations--
US Income Tax Considerations--Receipt of Perpetual Junior Subordinated
Debentures or Cash in Certain Circumstances".
If a Special Event occurs and the Company does not elect to redeem the
Perpetual Junior Subordinated Debentures or to dissolve Entergy London
Capital, the Preferred Securities will remain outstanding and, if such Special
Event is a Tax Event, Additional Interest (as described under "Description of
the Perpetual Junior Subordinated Debentures--Certain Covenants of the
Company") will be payable on the Perpetual Junior Subordinated Debentures.
"Tax Event" means the receipt by Entergy London Capital or the Company of an
Opinion of Counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change)
in, the laws (or any regulations thereunder) of the US, the UK or any
political subdivision or taxing authority thereof or therein affecting
taxation, or as a result of any official administrative pronouncement or
judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or which pronouncement or decision is
announced on or after the date of this Prospectus, there is more than an
insubstantial risk that (i) Entergy London Capital is, or will be within 90
days of the date thereof, subject to US Federal income tax or UK tax with
respect to income received or accrued on the Perpetual Junior Subordinated
Debentures, (ii) interest payable by the Company on the Perpetual Junior
Subordinated Debentures is treated as a distribution within the meaning of
Section 209 of the Income and Corporation Taxes Act 1988 of the UK or in any
other manner is not, or within 90 days of the date thereof will not be,
deductible by the Company, in whole or in part, for UK corporation tax
purposes, or (iii) Entergy London Capital is, or will be within 90 days of the
date thereof, subject to more than a de minimis amount of other taxes, duties
or other governmental charges.
"Investment Company Event" means the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority
(an "Investment Company Act Change") to the effect that Entergy London Capital
is or will be considered an "investment company" that is required to be
registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), which Investment Company Act Change becomes
effective on or after the date of this Prospectus.
"Special Event" means the occurrence of a Tax Event or an Investment Company
Act Event.
"Like Amount" means (i) with respect to a redemption of any Preferred
Securities, Preferred Securities having a Liquidation Preference Amount equal
to that portion of the principal amount of Perpetual Junior Subordinated
Debentures to be contemporaneously redeemed and the proceeds of which will be
used to pay the Redemption Price of such Preferred Securities, and (ii) with
respect to a distribution of Perpetual Junior Subordinated Debentures to
holders of the Preferred Securities in connection with a dissolution of
Entergy London Capital, Perpetual Junior Subordinated Debentures having a
principal amount equal to the Liquidation Preference Amount of the Preferred
Securities of the holder to whom such Perpetual Junior Subordinated Debentures
are distributed.
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<PAGE>
"Liquidation Preference Amount" means the stated amount of $25 per Preferred
Security.
After the date fixed for any distribution of Perpetual Junior Subordinated
Debentures upon liquidation of Entergy London Capital (i) the Preferred
Securities will no longer be deemed to be outstanding, (ii) DTC or its
nominee, as the record holder of the Preferred Securities, will receive Global
Book-Entry Interests (as defined herein) representing the Perpetual Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Preference Amount of the Preferred Securities, or, if any Preferred Securities
are not held by DTC or its nominee, the certificates representing the
Preferred Securities will be deemed to represent Book-Entry Interests (as
defined herein) representing the Perpetual Junior Subordinated Debentures
having a principal amount equal to the Liquidation Preference Amount of the
Preferred Securities, and bearing accrued and unpaid interest in an amount
equal to the accrued and unpaid Distributions on the Preferred Securities
until such certificates are presented to the Company or its agent for transfer
or reissuance, and (iii) the Company will use its reasonable efforts to list
the Perpetual Junior Subordinated Debentures on the NYSE or such other
exchanges or other organizations, if any, on which the Preferred Securities
are then listed or traded.
There can be no assurance as to the market price for the Perpetual Junior
Subordinated Debentures that may be distributed if a dissolution and
liquidation of Entergy London Capital were to occur. Accordingly, the
Perpetual Junior Subordinated Debentures that the investor may receive upon a
dissolution and liquidation of Entergy London Capital may trade at a discount
to the price that the investor paid to purchase the Preferred Securities
offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Perpetual Junior Subordinated Debentures. Redemptions of the
Preferred Securities shall be made, and the Redemption Price shall be payable,
on each Redemption Date only to the extent that Entergy London Capital has
funds on hand available for the payment of such Redemption Price.
If Entergy London Capital gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the
Redemption Date, to the extent funds are available, Entergy London Capital
will deposit irrevocably with DTC funds sufficient to pay the applicable
Redemption Price and will give DTC irrevocable instructions and authority to
pay the Redemption Price to the holders of such Preferred Securities. See "--
Book-Entry Issuance". If the Preferred Securities are no longer in book-entry
form, Entergy London Capital, to the extent funds are available therefor, will
irrevocably deposit with the paying agent for the Preferred Securities funds
sufficient to pay the applicable Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on
or prior to the Redemption Date for any Preferred Securities called for
redemption shall be payable to the holders of such Preferred Securities as of
the relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon
the date of such deposit, all rights of the holders of such Preferred
Securities so called for redemption will cease, except the right of the
holders of such Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and such Preferred Securities will
cease to be outstanding. In the event that any date fixed for redemption of
Preferred Securities is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next succeeding
calendar year, such payment will be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the Redemption
Date. In the event that payment of the Redemption Price in
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<PAGE>
respect of Preferred Securities called for redemption is improperly withheld
or refused and not paid either by Entergy London Capital or by the Company
pursuant to the Guarantee as described under "Description of the Guarantee",
Distributions on the Preferred Securities will continue to accumulate at the
then applicable rate from the Redemption Date originally established by
Entergy London Capital for such Preferred Securities to the date such
Redemption Price is actually paid, in which case the actual payment date will
be the date fixed for redemption for purposes of calculating the Redemption
Price.
Subject to applicable law (including, without limitation, Rule 14e-1 under
the Exchange Act and any other applicable US Federal securities law), the
Company or its subsidiaries may at any time and from time to time purchase
outstanding Preferred Securities by tender, in the open market or by private
agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Perpetual Junior Subordinated Debentures to holders of
Preferred Securities shall be made to the holders of record as they appear on
the books and records of Entergy London Capital as of the relevant record
date, which, as long as the Preferred Securities remain in book-entry form,
will be one Business Day prior to the relevant Redemption Date or liquidation
date, as applicable; provided, however, that in the event that the Preferred
Securities are not in book-entry form, the relevant record date for the
Preferred Securities shall be the date 15 days prior to the Redemption Date or
liquidation date, as applicable.
If less than all of the Preferred Securities are to be redeemed on a
Redemption Date, the particular Preferred Securities to be redeemed shall be
selected not more than 60 days prior to the Redemption Date by the General
Partner from the outstanding Preferred Securities not previously called for
redemption by lot or by such method as the General Partner shall deem fair and
appropriate, which shall provide for the selection for redemption of portions
(equal to $25 or an integral multiple of $25 in excess thereof) of the
Liquidation Preference Amount of Preferred Securities of a denomination larger
than $25. The General Partner shall promptly notify the registrar and transfer
agent in writing of the Preferred Securities selected for redemption and, in
the case of any Preferred Securities selected for partial redemption, the
aggregate Liquidation Preference Amount thereof to be redeemed.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Partnership Agreement, Entergy London Capital shall be
dissolved on the first to occur of: (i) the delivery of written direction by
the General Partner to dissolve Entergy London Capital (which direction is
optional and wholly within the discretion of the General Partner)
(see "--Redemptions--Special Event Redemption or Distribution of Perpetual
Junior Subordinated Debentures"); (ii) the occurrence of an event which results
in the General Partner ceasing to be a general partner under the Delaware Act,
unless the business of Entergy London Capital is continued in accordance with
the Partnership Agreement and the Delaware Act and (iii) the entry of an order
for the dissolution of Entergy London Capital under the Delaware Act by a court
of competent jurisdiction.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of Entergy London Capital (other than a dissolution described under
"--Redemptions--Special Event Redemption or Distribution of Perpetual Junior
Subordinated Debentures" above) the holders of Preferred Securities at the
time outstanding will be entitled to receive the Liquidation Preference Amount
of the Preferred Securities plus all accumulated and unpaid Distributions to
the date of payment (the "Liquidation Distribution") out of the assets of
Entergy London Capital legally available for distribution to partners, after
satisfaction of liabilities to creditors as required by the Delaware Act,
prior to any distribution of assets by Entergy London Capital to the General
Partner. If such
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<PAGE>
Liquidation Distribution can be paid only in part because Entergy London
Capital has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by Entergy London
Capital on the Preferred Securities shall be paid on a pro rata basis in
proportion to the full Liquidation Distribution for which the Preferred
Securities would be entitled.
MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS
Entergy London Capital may not merge with or into, convert into,
consolidate, amalgamate, be replaced by, or convey, transfer or lease its
properties and assets substantially as an entirety to any corporation or other
person, except as described below or as otherwise permitted or required in the
Partnership Agreement. Entergy London Capital may, without the consent of the
holders of the Preferred Securities, merge with or into, convert into,
consolidate, amalgamate, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a limited partnership,
limited liability company or trust organized as such under the laws of any
jurisdiction; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of Entergy London Capital with respect to the
Preferred Securities or (b) substitutes for the Preferred Securities other
securities (the "Successor Securities") so long as the Successor Securities
rank the same as the Preferred Securities rank in priority with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii)
the Company expressly acknowledges such successor entity as the holder of the
Perpetual Junior Subordinated Debentures, (iii) the Successor Securities are
listed or traded, or any Successor Securities will be listed or traded upon
notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then listed, if any, (iv)
such merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Preferred Securities (including any
Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, (vi)
such successor entity has a purpose substantially identical to that of Entergy
London Capital, (vii) prior to such merger, conversion, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Company has
received an opinion from independent counsel experienced in such matters to
the effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities
(including any Successor Securities) in any material respect, and (b)
following such merger, conversion, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither Entergy London Capital nor such
successor entity will be required to register as an investment company under
the Investment Company Act and (viii) the Company or any permitted successor
or assignee guarantees the obligations of such successor entity under the
Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, Entergy London Capital shall not, except with
the consent of holders of 100% in aggregate Liquidation Preference Amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, convert
into, be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, convert into, or replace it if
such consolidation, amalgamation, merger, conversion or replacement would
cause Entergy London Capital or the successor entity to be classified as other
than a partnership or grantor trust for US Federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF PARTNERSHIP AGREEMENT
Except as provided below and under "Description of the Guarantee--Amendments
and Assignment" and as otherwise required by law and the Partnership
Agreement, the holders of the Preferred Securities will have no voting rights.
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The Partnership Agreement may be amended from time to time by the General
Partner, without the consent of the holders of the Preferred Securities (i) to
cure any ambiguity, to correct or supplement any provisions in the Partnership
Agreement that may be inconsistent with any other provision, or to make any
other provisions with respect to matters or questions arising under the
Partnership Agreement, that shall not be inconsistent with the other
provisions of the Partnership Agreement, or (ii) to modify, eliminate or add
to any provisions of the Partnership Agreement to such extent as shall be
necessary to ensure that Entergy London Capital will be classified for US
Federal income tax purposes as a partnership or a grantor trust at all times
that any Preferred Securities are outstanding or to ensure that Entergy London
Capital will not be required to register as an "investment company" under the
Investment Company Act, provided, however, that except in the case of clause
(ii), such action shall not adversely affect in any material respect the
interests of any holder of Preferred Securities, and, in the case of clause
(i), any such amendments of the Partnership Agreement shall become effective
when notice thereof is given to the holders of Preferred Securities. The
Partnership Agreement may be amended by the General Partner with the consent
of holders representing a majority (based upon aggregate Liquidation
Preference Amount) of the outstanding Preferred Securities and upon receipt by
the General Partner of an opinion from independent counsel to the effect that
such amendment or the exercise of any power granted to the General Partner in
accordance with such amendment will not affect Entergy London Capital's status
as a partnership for US Federal income tax purposes or Entergy London
Capital's exemption from the status as an "investment company" under the
Investment Company Act, provided that without the consent of each holder of
the Preferred Securities, the Partnership Agreement may not be amended to
change the amount or timing of any Distribution on the Preferred Securities or
otherwise adversely affect the amount of any Distribution required to be made
in respect of the Preferred Securities as of a specified date or restrict the
right of holders of the Preferred Securities to institute suit for the
enforcement of any such payment on or after such date as described below.
So long as any Perpetual Junior Subordinated Debentures are held by or for
the benefit of Entergy London Capital, the General Partner shall not (i)
direct the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee, or executing any trust or power conferred
on the Debenture Trustee with respect to such Perpetual Junior Subordinated
Debentures, (ii) waive any past default that is waiveable under Section 813 of
the Indenture, (iii) exercise any right to rescind or annul a declaration that
the principal of all the Perpetual Junior Subordinated Debentures shall be due
and payable or (iv) consent to any amendment, modification or termination of
the Indenture or the Perpetual Junior Subordinated Debentures, where such
consent shall be required, without, in each case, obtaining the prior approval
of the holders of a majority in aggregate Liquidation Preference Amount of all
outstanding Preferred Securities; provided, however, that where a consent
under the Indenture would require the consent of each holder of Perpetual
Junior Subordinated Debentures affected thereby, no such consent shall be
given by the General Partner without the prior written consent of each holder
of the Preferred Securities. The General Partner shall not revoke any action
previously authorized or approved by a vote of the Preferred Securities except
by subsequent vote of not less than 66 2/3% in Liquidation Preference Amount
of the holders of the Preferred Securities. The General Partner shall notify
all holders of Preferred Securities of any notice of default with respect to
the Perpetual Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Preferred Securities, prior to
taking any of the foregoing actions, the General Partner shall obtain an
opinion from independent counsel experienced in such matters to the effect
that the General Partner will be classified as a partnership and not as an
association taxable as a corporation for US Federal income tax purposes on
account of such action.
If the General Partner fails to enforce Entergy London Capital's rights
under the Perpetual Junior Subordinated Debentures or the Indenture, a holder
of Preferred Securities may institute a legal proceeding directly against the
Company to enforce Entergy London Capital's rights with respect to the
Perpetual Junior Subordinated Debentures or the Indenture, to the fullest
extent permitted by law,
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without first instituting any legal proceeding against the General Partner or
any other person. Notwithstanding the foregoing, a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of principal of or interest on the Perpetual Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation
Preference Amount of the Preferred Securities of such holder on or after the
due dates specified in the Perpetual Junior Subordinated Debentures. See
"Description of the Guarantee".
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The General Partner will cause a notice of any
meeting at which holders of Preferred Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be
taken, to be given to each holder of record of Preferred Securities in the
manner set forth in the Partnership Agreement.
No vote or consent of the holders of Preferred Securities will be required
for Entergy London Capital to redeem and cancel the Preferred Securities in
accordance with the Partnership Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, or any affiliate of the Company,
shall, for purposes of such vote or consent, be treated as if they were not
outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of Preferred Securities held by DTC or its nominee shall
be made as described under "--Book-Entry Issuance". If any Preferred
Securities are not held by DTC or its nominee, such payments shall be made by
check mailed to the address of the holder entitled thereto as such address
shall appear on the books and records of Entergy London Capital. The paying
agent for the Preferred Securities shall initially be The Bank of New York.
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for the Preferred Securities. The
Preferred Securities will be issued as fully-registered global securities in
book-entry form registered in the name of Cede & Co. (DTC's partnership
nominee). Two fully-registered global certificates in book-entry form will be
issued for the Preferred Securities, representing the aggregate total number
of the Preferred Securities, and will be deposited with DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with Direct Participants, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Commission.
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Purchases of Preferred Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Preferred
Securities on DTC's records. The ownership interest of each actual purchaser
of each Preferred Security ("Beneficial Owner") is in turn to be recorded on
the Direct and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from DTC of their purchases, but Beneficial
Owners are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which the Beneficial Owners purchased
Preferred Securities. Transfers of ownership interests in the Preferred
Securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in Preferred Securities,
except in the event that use of the book-entry system for the Preferred
Securities is discontinued.
To facilitate subsequent transfers, all of the Preferred Securities
deposited by Participants with DTC are registered in the name of DTC's
partnership nominee, Cede & Co. The deposit of Preferred Securities with DTC
and their registration in the name of Cede & Co. effect no change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the Preferred Securities; DTC's records reflect only the identity of the
Direct Participants to whose accounts such Preferred Securities are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Preferred Securities are being redeemed, DTC's practice is to determine by lot
the amount of the interest of each Direct Participant in the Preferred
Securities to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to Preferred
Securities. Under its usual procedures, DTC mails an omnibus proxy (the
"Omnibus Proxy") to Entergy London Capital as soon as possible after the
record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those Direct Participants to whose accounts such Preferred
Securities are credited on the record date (identified in a listing attached
to the Omnibus Proxy).
Distribution payments on the Preferred Securities will be made to DTC. DTC's
current practice, upon receipt of any payment in respect of securities such as
the Preferred Securities, is to credit Direct Participants' accounts on the
relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payment on such payment date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices and will be
the responsibility of such Participant and not of DTC, Entergy London Capital
or the Company, subject to any statutory or regulatory requirements as may be
in effect from time to time. Payment of Distributions to DTC is the
responsibility of Entergy London Capital, disbursement of such payments to
Direct Participants is the responsibility of DTC, and disbursements of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
If (i) DTC discontinues providing its services as securities depositary with
respect to the Preferred Securities at any time by giving notice to Entergy
London Capital or the Company and a successor securities depositary is not
obtained, (ii) Entergy London Capital decides to discontinue use of the system
of book-entry transfers through DTC (or a successor depositary) or (iii)
Entergy London Capital fails to pay any amounts due and payable in respect of
the Preferred Securities or the Company fails
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to pay any amounts due and payable in respect of the Guarantee, as required by
their respective terms, definitive Preferred Securities certificates will be
printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that Entergy London Capital and the Company
believe to be accurate, but Entergy London Capital and the Company assume no
responsibility for the accuracy thereof. Neither Entergy London Capital nor
the Company has any responsibility for the performance by DTC or its
Participants of their respective obligations as described herein or under the
rules and procedures governing their respective operations.
REGISTRAR AND TRANSFER AGENT
The Bank of New York will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of Entergy London Capital, but upon payment of any tax
or other governmental charges that may be imposed in connection with any
transfer or exchange. Entergy London Capital will not be required to register
or cause to be registered the transfer of Preferred Securities after such
Preferred Securities have been called for redemption.
MISCELLANEOUS
The General Partner is authorized and directed to conduct the affairs of and
to operate Entergy London Capital in such a way that Entergy London Capital
will not be deemed to be an "investment company" required to be registered
under the Investment Company Act or classified other than as a partnership for
US Federal income tax purposes and so that the Perpetual Junior Subordinated
Debentures will be treated as equity for US Federal income tax purposes. In
this connection, the General Partner is authorized to take any action, not
inconsistent with applicable law or the Partnership Agreement, that the
General Partner determines in its discretion to be necessary or desirable for
such purposes, as long as such action does not materially and adversely affect
the interests of the holders of the Preferred Securities.
Holders of the Preferred Securities will have no rights to remove or replace
the General Partner.
DESCRIPTION OF THE GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by Entergy London Capital of the Preferred Securities for
the benefit of the holders from time to time of the Preferred Securities. The
Bank of New York will act as indenture trustee (the "Guarantee Trustee") under
the Guarantee for the purposes of compliance with the Trust Indenture Act, and
the Guarantee will be qualified as an Indenture under the Trust Indenture Act.
This summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee Agreement, including the definitions
therein of certain terms, and the Trust Indenture Act. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The Guarantee Trustee will hold the Guarantee
for the benefit of the holders of the Preferred Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to
the holders of the Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that Entergy London Capital may
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have or assert other than the defense of payment. The following payments with
respect to the Preferred Securities, to the extent not paid by or on behalf of
Entergy London Capital (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accumulated and unpaid Distributions required to be paid on
the Preferred Securities, to the extent that Entergy London Capital has funds
on hand available therefor, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption to the extent that Entergy London
Capital has funds on hand available therefor, or (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of Entergy London Capital
(unless the Perpetual Junior Subordinated Debentures are distributed to
holders of the Preferred Securities), the lesser of (a) the aggregate of the
Liquidation Preference Amount and all accumulated and unpaid Distributions on
the Preferred Securities to the date of payment and (b) the amount of assets
of Entergy London Capital remaining available for distribution to holders of
the Preferred Securities. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to
the holders of the Preferred Securities or by causing Entergy London Capital
to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
Entergy London Capital's obligations under the Preferred Securities, but will
apply only to the extent that Entergy London Capital has funds sufficient to
make such payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Perpetual Junior
Subordinated Debentures held by Entergy London Capital, it is expected that
Entergy London Capital will not pay Distributions on the Preferred Securities
and will not have funds available therefor. The Guarantee will rank
subordinate and junior in right of payment to all Senior Debt. See "--Status
of the Guarantee". The Guarantee will not limit the incurrence or issuance of
other secured or unsecured debt of the Company, whether under the Indenture,
any other indenture that the Company may enter into in the future or
otherwise.
The Company has, through the Guarantee, the Partnership Agreement, the
Perpetual Junior Subordinated Debentures and the Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all of Entergy London
Capital's obligations under the Preferred Securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such a guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of Entergy London Capital's obligations under the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Perpetual Junior Subordinated Debentures and the Guarantee".
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt.
The Guarantee will rank pari passu with all other guarantees issued by the
Company with respect to any preferred securities issued by any trust,
partnership or other entity which is a financing vehicle of the Company. The
Guarantee will constitute a guarantee of payment and not of collection (i.e.,
the guaranteed party may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against any other person or entity). The Guarantee will be
held for the benefit of the holders of the Preferred Securities. The Guarantee
will not be discharged except by payment of the Guarantee Payments in full to
the extent not paid by or on behalf of Entergy London Capital or upon
distribution to the holders of the Preferred Securities of the Perpetual
Junior Subordinated Debentures. The Guarantee does not place a limitation on
the amount of additional Senior Debt that may be incurred by the Company. The
Company expects from time to time to incur additional indebtedness
constituting Senior Debt.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will
be required), the Guarantee may not be amended without the prior approval of
the holders of a majority of the aggregate Liquidation Preference Amount of
the outstanding Preferred Securities. The manner of obtaining any such
approval is set forth under "Description of the Preferred Securities--Voting
Rights; Amendment of Partnership Agreement". All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of a majority in aggregate Liquidation Preference Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against Entergy London Capital, the
Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than prior to the occurrence and after the
curing of a default by the Company in performance of the Guarantee, undertakes
to perform only such duties as are specifically set forth in the Guarantee
and, after default with respect to the Guarantee, must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Notwithstanding this provision, the
Guarantee Trustee is under no obligation to exercise any of the powers vested
in it by the Guarantee at the request of any holder of the Preferred
Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Preferred Securities, upon full payment
of the amounts payable upon liquidation of Entergy London Capital or upon
distribution of the Perpetual Junior Subordinated Debentures to the holders of
the Preferred Securities. The Guarantee will continue to be effective or will
be reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred
Securities or the Guarantee.
GOVERNING LAW; SUBMISSION TO JURISDICTION
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York. Any suit, legal action or proceeding against the
Company or its properties, assets or revenues with respect to its obligations,
liabilities or any other matter arising out of or in connection
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with the Guarantee may be brought in the Supreme Court of New York, New York
County or in the United States District Court for the Southern District of New
York and any appellate court from either thereof. The Company has submitted to
the non-exclusive jurisdiction of such courts for the purposes of any such
proceeding and has irrevocably waived, to the fullest extent it may
effectively do so, any objection to the laying of venue of any such proceeding
in any such court and the defense of an inconvenient forum.
DESCRIPTION OF THE PERPETUAL JUNIOR SUBORDINATED DEBENTURES
The Perpetual Junior Subordinated Debentures are to be issued under the
Indenture with terms corresponding to the terms of the Preferred Securities.
This summary of certain terms and provisions of the Perpetual Junior
Subordinated Debentures and the Indenture does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the
Indenture, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and the Trust Indenture Act.
Whenever particular defined terms of the Indenture (as supplemented or amended
from time to time) are referred to herein, such defined terms are incorporated
herein or therein by reference.
GENERAL
Concurrently with the issuance of the Preferred Securities, Entergy London
Capital will invest the proceeds thereof and the capital contribution of the
General Partner in the Perpetual Junior Subordinated Debentures issued by the
Company. The Perpetual Junior Subordinated Debentures will have no stated
maturity date. The Perpetual Junior Subordinated Debentures will be unsecured
and will rank junior and be subordinate in right of payment to all Senior Debt
of the Company and will rank pari passu with any other series of Indenture
Debentures (as defined below) issued by the Company. Additional series of
debentures (together with the Perpetual Junior Subordinated Debentures, the
"Indenture Debentures") may be issued, without limitation as to amount, under
the Indenture and the Indenture does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, whether under the Indenture,
any other indenture that the Company may enter into in the future or
otherwise. See "--Subordination". Application has been made to list the
Perpetual Junior Subordinated Debentures on the Luxembourg Stock Exchange.
INTEREST
The Perpetual Junior Subordinated Debentures will bear interest at the rate
of 8 5/8% per annum of the principal amount thereof, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year (each,
an "Interest Payment Date"), commencing December 31, 1997, initially, through
a Paying Agent to the Book-Entry Depository (as defined herein), as the holder
of the Global Debenture (as defined herein), and, otherwise, as described
under "--Form, Book-Entry Procedures and Transfer--Payments on the Perpetual
Junior Subordinated Debentures". The amount of interest payable for any period
will be computed on the basis of a 360-day year of twelve 30-day months. In
the event that any Interest Payment Date is not a Business Day, then payment
of the interest payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such Interest Payment Date. Interest that is in arrears for more than one
quarter will bear additional interest (to the extent permitted by law) at the
rate of 8 5/8% per annum thereof, compounded quarterly. The term "interest" as
used herein shall include quarterly interest payments, interest on quarterly
interest payments in arrears and Additional Amounts and Additional Interest,
as applicable.
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OPTION TO DEFER PAYMENT OF INTEREST
So long as no Debenture Event of Default under the Indenture has occurred
and is continuing, the Company has the right under the Indenture during the
term of the Perpetual Junior Subordinated Debentures to defer indefinitely the
payment of interest at any time or from time to time. Until all deferred
interest payments together with interest thereon have been paid in full,
interest will continue to accrue, together with interest thereon at the stated
rate of interest on the Perpetual Junior Subordinated Debentures, to the
extent permitted by law.
In the event that the Company exercises this right, until all deferred
interest payments together with interest thereon have been paid in full, the
Company may not, directly or indirectly, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of its capital stock, (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any of its debt
securities (including other junior subordinated deferrable interest
debentures) that rank pari passu with or junior in interest to the Perpetual
Junior Subordinated Debentures on which payment is being deferred, (iii) make
any guarantee payments with respect to any guarantee if such guarantee ranks
pari passu with or junior in interest to the Perpetual Junior Subordinated
Debentures on which payment is being deferred or (iv) make any payment of
principal, interest or premium, if any, on, or repay, repurchase or redeem any
of its debt securities held by any affiliate, or make any loans or advances
to, or make payments on any guarantee of the debt of, any affiliate, in each
case other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, the Company's
common stock and exchanges or conversions of common stock of one class for
common stock of another class, (b) payments by the Company under the Guarantee
(or any other guarantee by the Company with respect to any securities of any
of its subsidiaries, provided that the proceeds from the issuance of such
securities were used to purchase junior subordinated deferrable interest
debentures issued by the Company), and (c) any dividend or payment by the
Company which is applied, directly or indirectly, to the payment of (x)
principal of, or interest or premium, if any, on Acquisition Debt as and when
due in accordance with the terms thereof, and (y) any UK Tax Payments. The
Company must give Entergy London Capital and the Debenture Trustee notice of
its intention to defer payment of interest at least one Business Day prior to
the earlier of (i) the next succeeding Interest Payment Date and (ii) the date
the Company is required to give notice to the NYSE or other applicable self-
regulatory organization or to holders of the Perpetual Junior Subordinated
Debentures of the record date or Interest Payment Date, but in any event not
less than one Business Day prior to such record date. The General Partner
shall give notice of the Company's intention to defer payment of interest on
the Perpetual Junior Subordinated Debentures to the holders of the Preferred
Securities within five Business Days of the receipt of notice thereof.
REDEMPTION
The Perpetual Junior Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or after November 19, 2002, in
whole at any time or in part from time to time, (ii) at any time, in whole
(but not in part) within 90 days following the occurrence of a Special Event,
or (iii) at any time, in whole (but not in part) if the Company has or will
become obligated to pay Additional Amounts as provided under "--Optional Tax
Redemption", in each case, at the Debentures Redemption Price.
The proceeds of any such redemption will be used by Entergy London Capital
to redeem the Preferred Securities in accordance with their terms. The Company
may not redeem less than all of the Perpetual Junior Subordinated Debentures
unless all accrued and unpaid interest, if any, has been paid in full on all
outstanding Perpetual Junior Subordinated Debentures for all interest periods
terminating on or prior to the Redemption Date.
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Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Perpetual Junior
Subordinated Debentures to be redeemed at such holder's registered address.
Unless, in the case of an unconditional notice of redemption, the Company
defaults in payment of the Debentures Redemption Price, on and after the
Redemption Date interest ceases to accrue on the Perpetual Junior Subordinated
Debentures or portions thereof called for redemption.
ADDITIONAL AMOUNTS
All payments of principal and interest in respect of the Perpetual Junior
Subordinated Debentures shall be made free and clear of, and without
withholding or deduction for or on account of, any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed,
levied, collected, withheld or assessed by or within the UK or by or within
any political subdivision thereof or any authority therein or thereof having
power to tax ("UK taxes"), unless such withholding or deduction is required by
law. In the event of any such withholding or deduction the Company shall pay
to the relevant holder of Perpetual Junior Subordinated Debentures such
Additional Amounts as will result in the payment to each such holder of the
amount that would otherwise have been receivable by such holder in the absence
of such withholding or deduction, except that no such Additional Amounts shall
be payable:
(a) to, or to a person on behalf of, a holder who is liable for such UK
taxes in respect of the Perpetual Junior Subordinated Debentures by reason
of such holder having some connection with the UK (including being a
citizen or resident or national of, or carrying on a business or
maintaining a permanent establishment in, or being physically present in,
the UK) other than the mere holding of a Perpetual Junior Subordinated
Debenture or the receipt of principal and interest in respect thereof;
(b) to, or to a person on behalf of, a holder who presents a Perpetual
Junior Subordinated Debenture (whenever presentation is required) for
payment more than 30 days after the Relevant Date (as defined below) except
to the extent that such holder would have been entitled to such Additional
Amounts on presenting such Perpetual Junior Subordinated Debenture for
payment on the last day of such period of 30 days;
(c) to, or to a person on behalf of, a holder who presents a Perpetual
Junior Subordinated Debenture (where presentation is required) in the UK;
(d) to, or to a person on behalf of, a holder who would not be liable or
subject to the withholding or deduction by making a declaration of non-
residence or similar claim for exemption to the relevant tax authority; or
(e) to, or to a person on behalf of, a holder of a Definitive Registered
Debenture (as defined herein) issued pursuant to the request of owners of
interests representing a majority in outstanding principal amount of the
Perpetual Junior Subordinated Debentures following and during the
continuance of a Debenture Event of Default if such holder (or any
predecessor holder) was one of such owners requesting that Definitive
Registered Debentures be so issued.
Such Additional Amounts will also not be payable where, had the beneficial
owner of the Perpetual Junior Subordinated Debentures (or any interest
therein) been the holder of the Perpetual Junior Subordinated Debentures, he
would not have been entitled to payment of Additional Amounts by reason of any
one or more of the clauses (a) through (e) above. If the Company shall
determine that Additional Amounts will not be payable because of the
immediately preceding sentence, the Company will inform such holder promptly
after making such determination setting forth the reason(s) therefor.
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"Relevant Date" means whichever is the later of (i) the date on which such
payment first becomes due and (ii) if the full amount payable has not been
received in The City of New York by the Debenture Trustee on or prior to such
due date, the date on which, the full amount having been so received, notice
to that effect shall have been given to the holders in accordance with the
Indenture.
OPTIONAL TAX REDEMPTION
If (a) the Company satisfies the Debenture Trustee prior to the giving of a
notice as provided below that it has or will become obligated to pay
Additional Amounts with respect to the Perpetual Junior Subordinated
Debentures as a result of either (x) any change in, or amendment to, the laws
or regulations of the UK or any political subdivision or any authority or
agency thereof or therein having power to tax or levy duties, or any change in
the application or interpretation of such laws or regulations, which change or
amendment becomes effective on or after the date of this Prospectus or (y) the
issuance of Definitive Registered Debentures pursuant to the first sentence or
clause (a) or (b) of the third sentence of "--Form, Book-Entry Procedures and
Transfer--Definitive Perpetual Junior Subordinated Debentures" and (b) such
obligation cannot be avoided by the Company taking reasonable measures
available to it, the Company may, at its option, on giving not more than 60 or
less than 30 days' notice to the holders, redeem, as a whole but not in part,
the Perpetual Junior Subordinated Debentures at the Debentures Redemption
Price provided that no such notice of redemption shall be given earlier than
90 days prior to the earliest date on which the Company would be obligated to
pay such Additional Amounts were a payment in respect of the Perpetual Junior
Subordinated Debentures then due. Prior to the publication of any notice of
redemption pursuant to this paragraph, the Company shall deliver to the
Debenture Trustee a certificate signed by a director of the Company stating
that the obligation referred to in (a) above cannot be avoided by the Company
taking reasonable measures available to it, and the Debenture Trustee shall
accept such certificate as sufficient evidence of the condition precedent set
out in (b) above, in which event it shall be conclusive and binding on the
holders.
In the event that the Global Debenture is redeemed in whole or in part
pursuant to this provision or "-- Redemption" above, the Book-Entry Depository
will redeem, from the amount received by it in respect of the redemption of
the Global Debenture an equal amount of the related Book-Entry Interests. The
redemption price payable in connection with the redemption of such Book-Entry
Interests will be equal to the amount received by the Book-Entry Depository in
connection with the redemption of the Global Debenture.
DISTRIBUTION OF THE PERPETUAL JUNIOR SUBORDINATED DEBENTURES
Whether or not a Special Event has occurred, at any time, the General
Partner has the right at any time to dissolve Entergy London Capital, and, in
such event, cause the Perpetual Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in liquidation of
Entergy London Capital after satisfaction of liabilities to creditors of
Entergy London Capital as provided by the Delaware Act. See "Description of
the Preferred Securities--Redemptions--Special Event Redemption or
Distribution of Perpetual Junior Subordinated Debentures". If distributed to
holders of the Preferred Securities in liquidation, the Perpetual Junior
Subordinated Debentures will initially be issued as described under "--Form,
Book-Entry Procedures and Transfer--General". If the Perpetual Junior
Subordinated Debentures are distributed to the holders of the Preferred
Securities upon the liquidation of Entergy London Capital, the Company will
use its best efforts to list the Perpetual Junior Subordinated Debentures on
the NYSE or such other stock exchanges or other organizations, if any, on
which the Preferred Securities are then listed. There can be no assurance as
to the market price of the Perpetual Junior Subordinated Debentures that may
be distributed to the holders of the Preferred Securities.
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DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to a series of Indenture Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to such
series of Indenture Debentures:
(i) failure for 60 days to pay any interest on such series of Indenture
Debentures when due and payable (subject to the Company's right to defer
such payment) (whether or not payment is prohibited by the subordination
provisions of the Indenture); or
(ii) failure to pay principal of or premium, if any, on such series of
Indenture Debentures when due and payable (whether or not payment is
prohibited by the subordination provisions of the Indenture); or
(iii) failure to perform, or breach of, any covenant or warranty of the
Company contained in the Indenture for 60 days after written notice to the
Company from the Debenture Trustee or to the Company and the Debenture
Trustee by the holders of at least 33% in aggregate principal amount of
such series of outstanding Indenture Debentures as provided in the
Indenture; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company; or
(v) any other Event of Default specified with respect to such series of
Indenture Debentures.
If a Debenture Event of Default due to the default in payment of principal
of, or interest on, any series of Indenture Debentures or due to the default
in the performance or breach of any other covenant or warranty of the Company
applicable to the Indenture Debentures of such series but not applicable to
all series occurs and is continuing, then either the Debenture Trustee or the
holders of not less than 33% in aggregate principal amount of the outstanding
Indenture Debentures of such series may declare the principal of all of the
Indenture Debentures of such series and interest accrued thereon to be due and
payable immediately (subject to the subordination provisions of the Indenture)
and, in the case of the Perpetual Junior Subordinated Debentures, should the
Debenture Trustee or such holders of such Perpetual Junior Subordinated
Debentures fail to make such declaration, the holders of at least 33% in
aggregate Liquidation Preference Amount of the Preferred Securities shall have
such right. If a Debenture Event of Default due to the default in the
performance of any covenants or agreements in the Indenture applicable to all
outstanding Indenture Debentures or due to certain events of bankruptcy,
insolvency or reorganization of the Company has occurred and is continuing,
either the Debenture Trustee or the holders of not less than 33% in aggregate
principal amount of all outstanding Indenture Debentures (or Preferred
Securities, as described above), considered as one class, and not the holders
of the Indenture Debentures (or Preferred Securities) of any one of such
series, may make such declaration of immediate payability (subject to the
subordination provisions of the Indenture).
At any time after such a declaration of immediate payability with respect to
the Indenture Debentures of any series has been made and before a judgment or
decree for payment of the money due has been obtained, the Debenture Event or
Events of Default giving rise to such declaration of immediate payability
will, without further act, be deemed to have been waived, and such declaration
and its consequences will, without further act, be deemed to have been
rescinded and annulled, if
(a) the Company has paid or deposited with the Debenture Trustee a sum
sufficient to pay
(1) all overdue interest on all Indenture Debentures of such series;
(2) the principal of and premium, if any, on any Indenture Debentures of
such series which have become due otherwise than by such declaration of
immediate payability and interest thereon at the rate or rates prescribed
therefor in such Indenture Debentures;
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(3) interest upon overdue interest at the rate or rates prescribed
therefor in such Indenture Debentures, to the extent that payment of such
interest is lawful; and
(4) all amounts due to the Debenture Trustee under the Indenture; and
(b) any other Debenture Event or Events of Default with respect to Indenture
Debentures of such series, other than the nonpayment of the principal of the
Indenture Debentures of such series which has become due solely by such
declaration of immediate payability, have been cured or waived as provided in
the Indenture.
The holders of a majority in aggregate principal amount of the Indenture
Debentures of all series then outstanding may waive compliance by the Company
with certain restrictive provisions of the Indenture. The holders of a
majority in principal amount of the outstanding Indenture Debentures of any
series may, on behalf of the holders of all the Indenture Debentures of such
series, waive any past default under the Indenture with respect to such
series, except a default in the payment of principal or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by declaration of immediate
payability has been deposited with the Debenture Trustee) or a default in
respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each outstanding
Indenture Debenture of such series affected. With respect to the Perpetual
Junior Subordinated Debentures, Entergy London Capital may not waive
compliance by the Company with certain restrictive provisions of the Indenture
or waive any past defaults thereunder without the consent of a majority in
aggregate Liquidation Preference Amount of the outstanding Preferred
Securities.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing as to the
Perpetual Junior Subordinated Debentures, Entergy London Capital will have the
right to declare the principal of and the interest on the Perpetual Junior
Subordinated Debentures and any other amounts payable under the Indenture, to
be immediately due and payable and to enforce its other rights as a creditor
with respect to the Perpetual Junior Subordinated Debentures. If the General
Partner fails to enforce Entergy London Capital's rights with respect to the
Perpetual Junior Subordinated Debentures or the Indenture, a holder of
Preferred Securities may institute a legal proceeding directly against the
Company to enforce Entergy London Capital's rights with respect to the
Perpetual Junior Subordinated Debentures or the Indenture, to the fullest
extent permitted by law, without first instituting any legal proceeding
against the General Partner or any other person. Notwithstanding the
foregoing, a holder of Preferred Securities may directly institute a
proceeding for enforcement of payment to such holder of principal of or
interest on the Perpetual Junior Subordinated Debentures having a principal
amount equal to the aggregate Liquidation Preference Amount of the Preferred
Securities of such holder on or after the due dates thereof. See "Description
of the Preferred Securities--Voting Rights; Amendment of Partnership
Agreement" and "Description of the Guarantee".
MODIFICATION OF INDENTURE
Without the consent of any holder of Indenture Debentures, the Company and
the Debenture Trustee may enter into one or more supplemental indentures for
any of the following purposes: (a) to evidence the succession of another
person to the Company and the assumption by any permitted successor to the
Company of the covenants of the Company in the Indenture and in the Indenture
Debentures; or (b) to add one or more covenants of the Company or other
provisions for the benefit
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of the holders of outstanding Indenture Debentures or to surrender any right
or power conferred upon the Company by the Indenture; or (c) to add any
additional Debenture Events of Default with respect to outstanding Indenture
Debentures; or (d) to change or eliminate any provision of the Indenture or to
add any new provision to the Indenture, provided that if such change,
elimination or addition will adversely affect the interests of the holders of
any series of Indenture Debentures in any material respect, such change,
elimination or addition will become effective with respect to such series only
(1) when the consent of the holders of Indenture Debentures of such series has
been obtained in accordance with the Indenture, or (2) when no Indenture
Debentures of such series remain outstanding under the Indenture; or (e) to
provide collateral security for the Indenture Debentures; or (f) to establish
the form or terms of Indenture Debentures of any other series as permitted by
the Indenture; or (g) to provide for the authentication and delivery of bearer
securities and coupons appertaining thereto representing interest, if any,
thereon and for the procedures for the registration, exchange and replacement
thereof and for the giving of notice to, and the solicitation of the vote or
consent of, the holders thereof, and for any and all other matters incidental
thereto; or (h) to evidence and provide for the acceptance of appointment of a
separate or successor Debenture Trustee under the Indenture with respect to
the Indenture Debentures of one or more series and to add to or change any of
the provisions of the Indenture as shall be necessary to provide for or to
facilitate the administration of the trusts under the Indenture by more than
one trustee; or (i) to provide for the procedures required to permit the
utilization of a non-certificated system of registration for the Indenture
Debentures of all or any series; or (j) to change any place where (1) the
principal of and premium, if any, and interest, if any, on all or any series
of Indenture Debentures shall be payable, (2) all or any series of Indenture
Debentures may be surrendered for registration of transfer or exchange and (3)
notices and demands to or upon the Company in respect of Indenture Debentures
and the Indenture may be served; or (k) to cure any ambiguity or inconsistency
or to add or change any other provisions with respect to matters and questions
arising under the Indenture, provided such changes or additions shall not
adversely affect the interests of the holders of Indenture Debentures of any
series in any material respect. The Indenture contains provisions permitting
the Company and the Debenture Trustee, with the consent of the holders of a
majority in principal amount of each outstanding series of Indenture
Debentures affected, to modify the Indenture in a manner affecting the rights
of the holders of such series of the Indenture Debentures; provided, that no
such modification may (i) change the Stated Maturity, if any, of any series of
Indenture Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon (except such extension
as is contemplated thereby), (ii) reduce the percentage of principal amount of
Indenture Debentures of any series, the holders of which are required to
consent to any such modification of the Indenture, or (iii) modify certain of
the provisions of the Indenture relating to supplemental indentures, waivers
of certain covenants and waivers of past defaults with respect to the
Indenture Debentures of any series, without the consent of the holder of each
outstanding Indenture Debenture affected thereby, provided, that in the case
of the Perpetual Junior Subordinated Debentures, so long as any of the
Preferred Securities remain outstanding, no such modification may be made, and
no termination of the Indenture may occur, and no waiver of any Debenture
Event of Default or compliance with any covenant under the Indenture may be
effective, without the prior consent of the holders of a majority of the
aggregate Liquidation Preference Amount of such Preferred Securities (or, in
the case of changes described in clauses (i), (ii) or (iii) above, all holders
of such Preferred Securities) unless and until the principal of the Perpetual
Junior Subordinated Debentures and all accrued and unpaid interest thereon
have been paid in full and certain other conditions are satisfied.
CERTAIN COVENANTS OF THE COMPANY
The Company will covenant in the Indenture that it will not, directly or
indirectly, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of its
capital stock, (ii) make any payment of principal, interest or premium, if
any, on
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or repay, repurchase, or redeem any of its debt securities (including other
junior subordinated deferrable interest debentures) that rank pari passu with
or junior in interest to the Perpetual Debentures on which payment is being
deferred, (iii) make any guarantee payments with respect to any guarantee if
such guarantee ranks pari passu with or junior in interest to the Perpetual
Debentures on which payment is being deferred or (iv) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
of its debt securities held by any affiliate, or make any loans or advances
to, or guarantee the debt of, any affiliate, in each case other than (a)
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, the Company's common stock and exchanges
or conversions of common stock of one class for common stock of another class,
(b) payments by the Company under the Guarantee (or any other guarantee by the
Company with respect to any securities of any of its subsidiaries, provided
that the proceeds from the issuance of such securities were used to purchase
junior subordinated deferrable interest debentures issued by the Company), and
(c) any dividend or payment by the Company which is applied, directly or
indirectly, to the payment of (x) principal of, or interest or premium, if
any, on Acquisition Debt as and when due in accordance with the terms thereof,
or (y) any UK Tax Payments if at such time (i) there shall have occurred and
be continuing a payment default pursuant to the Indenture (whether before or
after expiration of any period of grace) or a Debenture Event of Default with
respect to any series of Indenture Debentures, (ii) the Company shall be in
default with respect to its payment of any obligations under the Guarantee or
any other such guarantee as described above or (iii) the Company shall have
given notice of its intention to defer payment of interest as provided in the
Indenture with respect to any series of Indenture Debentures, shall not have
rescinded such notice and such deferral shall be continuing until all deferred
interest payments together with interest thereon have been paid in full.
The Company also will covenant that so long as any Preferred Securities
remain outstanding, if Entergy London Capital shall be required to pay, with
respect to its income derived from the interest payments on the Perpetual
Junior Subordinated Debentures, any amounts for or on account of any taxes,
duties, assessments or governmental charges of whatever nature imposed by the
US, the UK or any other taxing authority, then, in any such case, the Company
will pay as interest on the Perpetual Junior Subordinated Debentures such
Additional Interest as may be necessary in order that the net amounts received
and retained by Entergy London Capital after the payment of such taxes,
duties, assessments or governmental charges shall result in Entergy London
Capital having such funds as it would have had in the absence of the payment
of such taxes, duties, assessments or governmental charges.
The Company will also covenant, (i) to maintain directly or indirectly 100%
ownership of all of the general partner interests in Entergy London Capital,
provided that certain successors which are permitted pursuant to the Indenture
may succeed to the Company's ownership of such general partner interests, (ii)
not to voluntarily (to the extent permitted by law) dissolve, wind-up or
liquidate Entergy London Capital, except (a) in connection with a distribution
of Perpetual Junior Subordinated Debentures to the holders of the Preferred
Securities in liquidation of Entergy London Capital, or (b) in connection with
certain mergers, conversions, consolidations or amalgamations permitted by the
Partnership Agreement, (iii) to timely perform in all material respects all of
its duties as General Partner (including the duty to pay Distributions and the
duty to pay all costs and expenses of Entergy London Capital), provided that
certain successors which are permitted pursuant to the Indenture may directly
or indirectly succeed to its duties as General Partner and (iv) to use its
reasonable efforts, consistent with the terms and provisions of the
Partnership Agreement, to cause Entergy London Capital to remain a limited
partnership and otherwise continue to be treated as a partnership for US
Federal income tax purposes.
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CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other corporation or convey, transfer or lease its properties and
assets substantially as an entirety to any person, unless (i) in case the
Company consolidates with or merges into another corporation or conveys or
transfers its properties and assets substantially as an entirety to any
person, the successor corporation expressly assumes the Company's obligations
on all Indenture Debentures; (ii) immediately after giving effect thereto, no
Debenture Event of Default, and no event which, after notice or lapse of time
or both, would become a Debenture Event of Default, shall have occurred and be
continuing; and (iii) certain other conditions as prescribed in the Indenture
are met.
In the event that any such successor entity is organized under the laws of a
country located outside of the UK and withholding or deduction is required by
law for or on account of any present or future taxes, duties, assessments or
governmental charges of whatever nature imposed, levied, collected, withheld
or assessed by or within such country in which the successor entity is
organized or by or within any political subdivision thereof or any authority
therein or thereof having power to tax, the successor entity shall pay to the
relevant holder of the Global Debenture or to the relevant holders of the
Definitive Registered Debentures, as the case may be, such Additional Amounts,
under the same circumstances and subject to the same limitations as are
specified for "UK taxes," as is set forth under "--Additional Amounts" above,
but substituting for the UK in each place the name of the country under the
laws of which such successor entity is organized. In addition, such successor
entity shall be entitled to effect an optional tax redemption of the Perpetual
Junior Subordinated Debentures under the same circumstances and subject to the
same limitations as are set forth under "--Optional Tax Redemption" above, but
substituting for the UK in each place the name of the country under the laws
of which such successor entity is organized.
The general provisions of the Indenture do not afford holders of the
Perpetual Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Perpetual Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The principal amount of Perpetual Junior Subordinated Debentures will be
deemed to have been paid for purposes of the Indenture and the entire
indebtedness of the Company in respect thereof will be deemed to have been
satisfied and discharged, if there shall have been irrevocably deposited with
the Debenture Trustee or any Paying Agent, in trust: (a) money in an amount
which will be sufficient, or (b) Government Obligations (as defined herein),
which do not contain provisions permitting the redemption or other prepayment
thereof at the option of the issuer thereof, the principal of and the interest
on which when due, without any regard to reinvestment thereof, will provide
moneys which, together with the money, if any, deposited with or held by the
Debenture Trustee, will be sufficient, or (c) a combination of (a) and (b)
which will be sufficient, to pay when due the principal of and premium, if
any, and interest, if any, due and to become due on the Perpetual Junior
Subordinated Debentures that are outstanding. For this purpose, Government
Obligations include direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the US and entitled to
the benefit of the full faith and credit thereof and certificates, depositary
receipts or other instruments which evidence a direct ownership interest in
such obligations or in any specific interest or principal payments due in
respect thereof.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Indenture
Debentures issued thereunder will be subordinate and junior in right of
payment to all Senior Debt to the extent provided in the Indenture. Upon any
payment or distribution of assets to creditors upon any liquidation,
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dissolution, winding-up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Debt will first be
entitled to receive payment in full of principal of, premium, if any, and
interest, if any, on such Senior Debt before the holders of Indenture
Debentures will be entitled to receive or retain any payment in respect of the
principal of, premium, if any, or interest, if any, on the Indenture
Debentures.
In the event of the declaration of immediate payability of any Indenture
Debentures, the holders of all Senior Debt outstanding at the time of such
declaration will be entitled to receive payment in full of all amounts due
thereon (including any amounts due upon such declaration) before the holders
of Indenture Debentures will be entitled to receive any payment upon the
principal of, premium, if any, or interest, if any, on the Indenture
Debentures.
No payments on account of principal, premium, if any, or interest, if any,
in respect of any Indenture Debentures may be made if there shall have
occurred and be continuing a default in any payment with respect to Senior
Debt, or an event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof remaining uncured.
The term Senior Debt is defined in the Indenture to mean all obligations
(other than non-recourse obligations and the indebtedness issued under the
Indenture) of, or guaranteed or assumed by, the Company for borrowed money,
including both senior and subordinated indebtedness for borrowed money (other
than Indenture Debentures), or for the payment of money relating to any lease
which is capitalized on the consolidated balance sheet of the Company and its
subsidiaries in accordance with generally accepted accounting principles as in
effect from time to time, or evidenced by bonds, debentures, notes or other
similar instruments, and in each case, amendments, renewals, extensions,
modifications and refundings of any such indebtedness or obligations, whether
existing as of the date of the Indenture or subsequently incurred by the
Company unless, in the case of any particular indebtedness, amendment,
renewal, extension, modification or refunding, the instrument creating or
evidencing the same or the assumption or guarantee of the same expressly
provides that such indebtedness, amendment, renewal, extension, modification
or refunding is not superior in right of payment to or is pari passu with the
Indenture Debentures; provided that the Company's obligations under the
Guarantee and all other guarantees issued by the Company with respect to any
preferred securities issued by any trust, partnership or other entity which is
a financing vehicle of the Company shall not be deemed to be Senior Debt.
The Indenture places no limitation on the amount of additional Senior Debt
that may be incurred by the Company. The Company expects from time to time to
incur additional indebtedness constituting Senior Debt.
FORM, BOOK-ENTRY PROCEDURES AND TRANSFER
General
The Perpetual Junior Subordinated Debentures will be issued initially only
as a global debenture in bearer form (the "Global Debenture") and will be
payable only in US dollars. Title to such Global Debenture will pass by
delivery. The Global Debenture will be deposited on issue with The Bank of New
York, as book-entry depository (the "Book-Entry Depository"), which will hold
the Global Debenture for the benefit of Entergy London Capital pursuant to the
terms of the deposit agreement (the "Deposit Agreement") dated as of November
1, 1997 among the Company, the Book-Entry Depository and the holders and
beneficial owners from time to time of interests in the Book-Entry Interests.
Pursuant to the Deposit Agreement, the Book-Entry Depository will issue one or
more certificateless depository interests (the "Book-Entry Interests"), which
together will represent a 100% interest in the Global Debenture. Such Book-
Entry Interests will initially be issued to Entergy London Capital.
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If Book-Entry Interests are distributed to holders of Preferred Securities
in liquidation of such holders' interests in Entergy London Capital, the
Global Debenture held by the Book-Entry Depository and representing all of the
Perpetual Junior Subordinated Debentures will cease to be held for the benefit
of Entergy London Capital and will, for all purposes under the Indenture and
the Deposit Agreement, be held by the Book-Entry Depository for the benefit of
DTC and its Participants, and all of the Book-Entry Interests in the Global
Debenture will be transferred by Entergy London Capital to DTC, which will
operate a book-entry system for interests in the Book-Entry Interests in
global form (the "Global Book-Entry Interests"). DTC will initially credit
Direct Participants holding Preferred Securities with interests in the Global
Book-Entry Interests (pro rata to their holding of Preferred Securities)
registered in the name of DTC or its nominee. Unless and until the Global
Debenture is exchanged in whole for Definitive Registered Debentures, Global
Book-Entry Interests held by DTC may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC or by DTC or any such nominee to a successor of DTC or a nominee of such
successor. For a description of DTC and its book-entry system, see
"Description of the Preferred Securities--Book-Entry Issuance". As of the date
of this Prospectus, the description herein of DTC's book-entry system and
DTC's practices as they relate to purchases, transfers, notices and payments
with respect to the Preferred Securities will apply in all material respects
to any Global Book-Entry Interests registered in the name of and held by DTC
or its nominee. The Company may appoint a successor to DTC or any successor
depository in the event DTC or such successor depository is unable or
unwilling to continue as depository for the Global Book-Entry Interests.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in the Global Book-Entry
Interests.
So long as the Book-Entry Depository, or its nominee, is the holder of the
Global Debenture, the Book-Entry Depository or such nominee, as the case may
be, will be considered the sole holder of the Global Debenture (and the
Perpetual Junior Subordinated Debentures) for all purposes under the
Indenture. Except as set forth below with respect to the issuance of
Definitive Registered Debentures, if the Perpetual Junior Subordinated
Debentures (represented by Global Book-Entry Interests) are held through the
facilities of DTC, Direct Participants or Indirect Participants will not be
entitled to have Perpetual Junior Subordinated Debentures registered in their
names, will not receive or be entitled to receive physical delivery of
Perpetual Junior Subordinated Debentures in definitive bearer or registered
form and will not be considered the owners or holders thereof under the
Indenture or the Deposit Agreement. Accordingly, if the Perpetual Junior
Subordinated Debentures (represented by Global Book-Entry Interests) are held
through the facilities of DTC, each person owning an interest in the Global
Book-Entry Interests must rely on the procedures of the Book-Entry Depository
and DTC and, if such person is not a Direct Participant in DTC, on the
procedures of the Direct Participant through which such person owns its
interest, to exercise any rights and obligations of a holder under the
Indenture or the Deposit Agreement.
In addition to a Paying Agent in the Borough of Manhattan, The City of New
York, the Company will, so long as Perpetual Junior Subordinated Debentures
are listed on the Luxembourg Stock Exchange and the rules of such stock
exchange so require, maintain a Paying Agent in Luxembourg.
Neither the Company nor any agent of the Company will have any
responsibility or liability for any aspect relating to payments made or to be
made by the Book-Entry Depository to the persons entitled thereto in respect
of the Perpetual Junior Subordinated Debentures or the Book-Entry Interests.
None of the Company, the Debenture Trustee, the Book-Entry Depository or any
agent of any of the foregoing will have any responsibility or liability for
any aspect relating to payments made or to be made by DTC on account of a
Direct Participant's or Indirect Participant's ownership of an interest in the
Global Book-Entry Interests or for maintaining, supervising or reviewing any
records relating to a Direct Participant's or Indirect Participant's interests
in the Global Book-Entry Interests.
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Payments on the Perpetual Junior Subordinated Debentures
Payments of any amounts in respect of the Global Debenture will be made
through a Paying Agent to the Book-Entry Depository, as the holder thereof. The
Book-Entry Depository will pay an amount equal to each such payment to Entergy
London Capital as the initial holder of the Book-Entry Interests. If the Global
Book-Entry Interests representing the Perpetual Junior Subordinated Debentures
are held through the facilities of DTC, such payments will be made by the Book-
Entry Depository to DTC, as the holder of the Global Book-Entry Interests,
which will distribute such payments to its Direct Participants.
If any Definitive Registered Debenture has been issued, the interest payable
on such Definitive Registered Debenture other than at maturity will be paid to
the holder in whose name such Definitive Registered Debenture is registered at
the close of business on the fifteenth day (whether or not a Business Day)
immediately preceding the relevant Interest Payment Date (each a "Record
Date"). The principal amount of a Definitive Registered Debenture will be
payable to the person in whose name such Definitive Registered Debenture is
registered at the close of business on the immediately preceding Record Date
upon surrendering such Definitive Registered Debenture at the Debenture
Trustee's office in The City of New York. Interest payable at maturity will be
payable to the person to whom principal is payable.
If any Definitive Registered Debenture has been issued, payments of interest
on such Definitive Registered Debenture to be paid other than at maturity will
be made by check to the person entitled thereto at such person's address
appearing on the Security Register. Payments of any interest on the Definitive
Registered Debentures may also be made, in the case of a holder of at least US
$1,000,000 aggregate principal amount of Perpetual Junior Subordinated
Debentures by wire transfer to a US Dollar account maintained by the payee with
a bank in the US; provided that such holder elects payment by wire transfer by
giving written notice to the Debenture Trustee or a Paying Agent to such effect
designating such account no later than 15 days immediately preceding the
relevant due date for payment (or such other date as the Debenture Trustee may
accept in its discretion).
Any monies paid by the Company to the Debenture Trustee or any Paying Agent,
or held by the Company in trust, or the payments of the principal of or any
interest or Additional Amounts on any Perpetual Junior Subordinated Debentures
and remaining unclaimed at the end of two years after such principal, interest
or Additional Amounts become due and payable will be repaid to the Company, or
released from the trust, upon its written request, and upon such repayment or
release all liability of the Company, the Debenture Trustee and such Paying
Agent with respect thereto will cease.
All payments to the Book-Entry Depository in respect of the Global Debenture,
and all payments to the holders of the Definitive Registered Debentures, if
issued, will be made without deduction or withholding for any UK taxes or other
governmental charges, or if any such deduction or withholding is required to be
made under the provisions of any applicable UK law or regulation, except as
described under "--Additional Amounts", such Additional Amounts will be paid as
may be necessary in order that the net amounts received by any holder of the
Global Debenture or of any Definitive Registered Debenture, after such
deduction or withholding, will equal the amounts that such holder would have
otherwise received in respect of the Global Debenture or of such Definitive
Registered Debenture absent such deduction or withholding.
If the due date for payment of principal or any interest installments or any
Additional Amount in respect of any Perpetual Junior Subordinated Debenture is
not a Business Day, the holder thereof will not be entitled to payment of the
amount due until the next succeeding Business Day and will not be entitled to
any further interest or other payment in respect of any such delay.
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Redemption
In the event the Global Debenture (or a portion thereof) is redeemed, the
Book-Entry Depository will deliver all amounts received by it in respect of the
redemption of the Global Debenture to the persons entitled thereto and (in the
case of redemption in full) surrender the Global Debenture to the Debenture
Trustee for cancellation. The redemption price payable in connection with the
redemption of interests in a Book-Entry Interest will be equal to the amount
received by the Book-Entry Depository in connection with the redemption of the
Global Debenture (or a portion thereof). For any redemption of the Global
Debenture in part, if the Perpetual Junior Subordinated Debentures are held
through the facilities of DTC, selection of interests in the related Global
Book-Entry Interests to be redeemed will be made in accordance with the
procedures of DTC. Once redeemed in part, a new Global Debenture in the
principal amount equal to the unredeemed portion thereof will be issued and
delivered to the Book-Entry Depository.
Action by Holders of Perpetual Junior Subordinated Debentures
As soon as practicable after receipt by the Book-Entry Depository of notice
of any solicitation of consents or request for a waiver or other action by the
holders of Perpetual Junior Subordinated Debentures, the Book-Entry Depository
will mail to Entergy London Capital (or, if the Perpetual Junior Subordinated
Debentures (represented by Global Book-Entry Interests) are then held through
the facilities of DTC, to DTC) a notice containing (a) such information as is
contained in such notice, (b) a statement that at the close of business on a
specified record date Entergy London Capital (or DTC, as applicable) will be
entitled, subject to the provisions of the Indenture, to instruct the Book-
Entry Depository as to the consent, waiver or other action, if any, pertaining
to the Perpetual Junior Subordinated Debentures and (c) a statement as to the
manner in which such instructions may be given. Upon the written request of the
General Partner (or DTC, as applicable), the Book-Entry Depository shall
endeavor insofar as practicable to take such action regarding the requested
consent, waiver or other action in respect of the Perpetual Junior Subordinated
Debentures in accordance with any instructions set forth in such request. DTC
is expected to follow procedures described under "Description of the Preferred
Securities--Book-Entry Issuance" with respect to soliciting instructions from
Participants. The Book-Entry Depository will not exercise any discretion in the
granting of consents or waivers or the taking of any other action relating to
the Deposit Agreement or the Indenture.
Meetings of Holders of Perpetual Junior Subordinated Debentures
A meeting of the holders of Perpetual Junior Subordinated Debentures may be
called at any time from time to time pursuant to the Indenture to make, give or
take any request, demand, authorization, direction, notice, consent, waiver or
other action provided by the Indenture be made, given or taken by holders of
the Perpetual Junior Subordinated Debentures.
To be entitled to vote at any meeting of holders of Perpetual Junior
Subordinated Debentures, a person shall be (a) a holder of Perpetual Junior
Subordinated Debentures or (b) a person appointed by an instrument in writing
as proxy for a holder or holders of Perpetual Junior Subordinated Debentures by
such holder or holders. The only persons who shall be entitled to attend any
meeting of holders of Perpetual Junior Subordinated Debentures shall be the
persons entitled to vote at such meeting and their counsel, any representatives
of the Debenture Trustee and its counsel, and any representatives of the
Company and its counsel.
At any meeting of holders of Perpetual Junior Subordinated Debentures, the
persons holding or representing Perpetual Junior Subordinated Debentures in an
aggregate principal amount sufficient under the appropriate provision of the
Indenture to take action upon the business for the transaction of which such
meeting was called shall constitute a quorum. No action at a meeting of holders
shall
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be effective unless approved by persons holding or representing Perpetual
Junior Subordinated Debentures in the aggregate principal amount required by
the provision of the Indenture pursuant to which such action is being taken. At
any meeting of holders of Perpetual Junior Subordinated Debentures, each holder
or proxy shall be entitled to one vote for each $1 principal amount of
outstanding Perpetual Junior Subordinated Debentures held or represented.
Until such time as written instruments shall have been delivered to the
Debenture Trustee, evidencing the taking of any action at a meeting of holders
by the holders of the percentage in aggregate principal amount of the Perpetual
Junior Subordinated Debentures specified in the Indenture in connection with
such action, any holder of a Perpetual Junior Subordinated Debenture the serial
number of which is included in the Perpetual Junior Subordinated Debentures the
holders of which have consented to such action may, by filing written notice
with the Debenture Trustee at its principal corporate trust office and upon
proof of holding as provided in the Indenture, revoke such consent so far as
concerns such Perpetual Junior Subordinated Debentures. Except as aforesaid any
such consent given by the holder of any Perpetual Junior Subordinated
Debentures shall be conclusive and binding upon such holder and upon all future
holders and owners of such Perpetual Junior Subordinated Debentures and of any
securities issued in exchange therefor, in lieu thereof or upon transfer
thereof, irrespective of whether or not any notation in regard thereto is made
upon such securities. Any action taken by the holders of the percentage in
aggregate principal amount of the holders specified in the Indenture in
connection with such action shall be conclusively binding upon the Company, the
Debenture Trustee and the holders of all the Perpetual Junior Subordinated
Debentures.
Reports and Notices
So long as the Perpetual Junior Subordinated Debentures are listed on the
Luxembourg Stock Exchange and the rules of such Stock Exchange so require,
notice to holders of the Perpetual Junior Subordinated Debentures will be
published in a leading newspaper having general circulation in Luxembourg
(which is expected to be the Luxembourg Wort) in addition to notifying the
Book-Entry Depository and any registered holders of the Perpetual Junior
Subordinated Debentures. If any Perpetual Junior Subordinated Debentures
(represented by Global Book-Entry Interests) have been distributed to holders
of Preferred Securities, the Book-Entry Depository will immediately send to DTC
a copy of any notices, reports and other communications received by it relating
to the Company or the Perpetual Junior Subordinated Debentures. In the case of
Definitive Registered Debentures, all notices regarding the Perpetual Junior
Subordinated Debentures will, in addition to publication as referred to above,
be mailed to holders by first-class mail at their respective addresses as they
appear on the registration books of the registrar.
Amendment and Termination
The Deposit Agreement may be amended by agreement between the Company and the
Book-Entry Depository, and the consent of Entergy London Capital or DTC, as
applicable, shall not be required in connection with any amendment to the
Deposit Agreement (i) to cure any formal defect, omission, inconsistency or
ambiguity in the Deposit Agreement, (ii) to add to the covenants and agreements
of the Company or the Book-Entry Depository, (iii) to effect the assignment of
the Book-Entry Depository's rights and duties to a qualified successor, (iv) to
comply with the Securities Act, the Exchange Act, or the Investment Company
Act, or any other applicable securities laws, (v) to modify the Deposit
Agreement in connection with an amendment of the Indenture that does not
require the consent of the holders of Perpetual Junior Subordinated Debentures
or (vi) to modify, alter, amend or supplement the Deposit Agreement in any
other respect not inconsistent with such agreement which, in the opinion of
counsel acceptable to the Company, is not materially adverse to Entergy London
Capital or DTC (if any Perpetual Junior Subordinated Debentures (represented by
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Global Book-Entry Interests) are then held through the facilities of DTC) or
the beneficial owners of the interests in the Book-Entry Interests. No
amendment that materially adversely affects any holder or beneficial owner of
an interest in the Book-Entry Interests may be made to the Deposit Agreement
without the consent of such holder or beneficial owner.
If Definitive Registered Debentures are issued by the Company in exchange for
the entire Global Debenture, the Book-Entry Depository, as holder of the Global
Debenture, will surrender the Global Debenture against receipt of the
Definitive Registered Debentures and distribute the Definitive Registered
Debentures to the holders of Book-Entry Interests (or such other persons as the
Book-Entry Depository becomes aware are entitled thereto), whereupon the
Deposit Agreement will terminate. The Deposit Agreement may also be terminated
upon the resignation of the Book-Entry Depository if no successor has been
appointed within 120 days.
Resignation of Book-Entry Depository
The Book-Entry Depository may at any time resign as Book-Entry Depository
with respect to the Global Debenture. If a successor depository meeting the
requirements specified in the Deposit Agreement has agreed to enter into
arrangements with the same effect as the Deposit Agreement, the Book-Entry
Depository shall deliver the Global Debenture to that successor. If no such
successor has so agreed within 120 days, the terms of the Deposit Agreement
will oblige the Book-Entry Depository to request the Company to issue
Definitive Registered Debentures with respect to the Global Debenture. On
receipt of such Definitive Registered Debentures, the Book-Entry Depository
will surrender the Global Debenture and distribute such Definitive Registered
Debentures to the persons entitled thereto. The Deposit Agreement will then
terminate.
Obligation of Book-Entry Depository
The Book-Entry Depository will assume no obligation or liability under the
Deposit Agreement other than to act in good faith without negligence or willful
misconduct in the performance of its duties thereunder.
Definitive Perpetual Junior Subordinated Debentures
Owners of beneficial interests in a Book-Entry Interest will be entitled to
receive definitive Perpetual Junior Subordinated Debentures in registered form
("Definitive Registered Debentures") in respect of such interest only if a
Debenture Event of Default has occurred and is continuing with respect to the
Perpetual Junior Subordinated Debentures and the holder (which initially shall
be the Book-Entry Depository), in such circumstance, upon instructions from
owners of beneficial interests representing a majority in outstanding principal
amount of such Book-Entry Interests shall have requested in writing that the
Global Debenture be exchanged, in whole, for one or more Definitive Registered
Debentures. In addition, Definitive Registered Debentures shall be issued if at
any time (a) DTC notifies the Company and the Book-Entry Depository that it is
unwilling to or unable to continue to hold the Global Book-Entry Interests or
if any time it ceases to be a "clearing agency" registered under the Exchange
Act and, in either case, a successor is not appointed by the Company within 120
days, (b) the Book-Entry Depository notifies the Company that it is unwilling
or unable to continue as Book-Entry Depository with respect to the Global
Debenture and no successor is appointed by the Company within 120 days or (c)
the Company in its sole discretion determines that Definitive Registered
Debentures shall be issued and executes and delivers to the Debenture Trustee
an officer's certificate providing that the Global Debenture shall be so
exchanged. Definitive Registered Debentures so issued will be issued in
denominations of $25 or integral multiples thereof and will be issued in
registered form only, without coupons. Such Definitive Registered Debentures
shall be registered in the name or names of such person or persons as the Book-
Entry Depository shall notify the Debenture Trustee. If the Perpetual Junior
Subordinated Debentures (represented by Global
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Book-Entry Interests) are then held through the facilities of DTC, it is
expected that such instructions may be based upon directions received by DTC
from its Participants with respect to ownership of beneficial interests in the
Global Book-Entry Interests. See "Certain Income Tax Considerations--UK Income
Tax Considerations".
In the event that Definitive Registered Debentures are issued, a holder may
transfer or exchange the Definitive Registered Debentures in accordance with
the Indenture. The Debenture Trustee may require a holder, among other things,
to furnish appropriate endorsements and transfer documents, and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Perpetual
Junior Subordinated Debentures selected for redemption or for a period of 15
days before a selection of Perpetual Junior Subordinated Debentures to be
redeemed. Upon the issuance of Definitive Registered Debentures, holders will
be able to transfer and exchange Definitive Registered Debentures at the
offices of the Debenture Trustee; provided, that all transfers and exchanges
must be effected in accordance with the terms of the Indenture and, among other
things, be recorded in the register maintained by the registrar.
GOVERNING LAW; SUBMISSION TO JURISDICTION
The Indenture and the Perpetual Junior Subordinated Debentures will be
governed by and construed in accordance with the laws of the State of New York.
Any suit, legal action or proceeding against the Company or its properties,
assets or revenues with respect to its obligations, liabilities or any other
matter arising out of or in connection with the Indenture or a Perpetual Junior
Subordinated Debenture may be brought in the Supreme Court of New York, New
York County or in the United States District Court for the Southern District of
New York and any appellate court from either thereof. The Company has submitted
to the non-exclusive jurisdiction of such courts for the purposes of any such
proceeding and has irrevocably waived, to the fullest extent it may effectively
do so, any objection to the laying of venue of any such proceeding in any such
court and the defense of an inconvenient forum.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have, and shall be subject to, all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Perpetual Junior Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Debenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Debenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE PERPETUAL JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
As long as payments of interest and other payments are made when due on the
Perpetual Junior Subordinated Debentures, such payments will be sufficient to
cover Distributions and other payments due on the Preferred Securities,
primarily because (i) the aggregate principal amount of the Perpetual Junior
Subordinated Debentures will be equal to the sum of the aggregate Liquidation
Preference Amount of the Preferred Securities and the capital contribution of
the General Partner; (ii) the interest rate and interest and other payment
dates on the Perpetual Junior Subordinated Debentures will match the
Distribution rate and Distribution and other payment dates for the Preferred
Securities; (iii) the Partnership Agreement provides that the General Partner
shall pay for all and any costs, expenses and liabilities of Entergy London
Capital except Entergy London Capital's obligations to holders of the
Preferred Securities under such Preferred Securities; and (iv) the Partnership
Agreement further provides that Entergy London Capital will not engage in any
activity that is not consistent with the limited purposes of Entergy London
Capital.
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent Entergy London Capital has funds available for the payment of
such Distributions) are irrevocably guaranteed by the Company as and to the
extent set forth under "Description of the Guarantee". Taken together, the
Company's obligations under the Perpetual Junior Subordinated Debentures, the
Indenture, the Partnership Agreement, and the Guarantee provide a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of Entergy London Capital's obligations under the
Preferred Securities. If and to the extent that the Company does not make
payments on the Perpetual Junior Subordinated Debentures, Entergy London
Capital will not pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of Distributions when Entergy
London Capital does not have sufficient funds to pay such Distributions. In
such event, the remedies of holders of the Preferred Securities are as
described above under "Description of the Perpetual Junior Subordinated
Debentures--Debenture Events of Default" and "Description of the Preferred
Securities--Voting Rights; Amendment of Partnership Agreement". The
obligations of the Company under the Guarantee are subordinate and junior in
right of payment to all Senior Debt of the Company.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
A holder of any Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the General
Partner or any other person or entity.
The Preferred Securities evidence the rights of the holders thereof in
Entergy London Capital and Entergy London Capital exists for the sole purpose
of issuing the Preferred Securities and investing the proceeds thereof in the
Perpetual Junior Subordinated Debentures. A principal difference between the
rights of a holder of a Preferred Security and the rights of a holder of a
Perpetual Junior Subordinated Debenture is that a holder of a Perpetual Junior
Subordinated Debenture is entitled to receive the principal amount of and
interest accrued on Perpetual Junior Subordinated Debentures held, if and when
due, while a holder of Preferred Securities is entitled to receive
Distributions only from Entergy London Capital (or from the Company under the
Guarantee) if and to the extent Entergy London Capital has funds available for
the payment of such Distributions.
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Upon any voluntary or involuntary dissolution, winding-up or liquidation of
Entergy London Capital not involving the distribution of the Perpetual Junior
Subordinated Debentures, after satisfaction of creditors of Entergy London
Capital, if any, as provided by the Delaware Act, the holders of Preferred
Securities will be entitled to receive, out of assets held by Entergy London
Capital, the Liquidation Distribution in cash. See "Description of the
Preferred Securities--Liquidation Distribution upon Dissolution". Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, Entergy
London Capital, as holder of the Perpetual Junior Subordinated Debentures,
would be a subordinated creditor of the Company, subordinated in right of
payment to all Senior Debt, but entitled to receive payment in full of
principal and interest, before any stockholders of the Company receive
payments or distributions. Since the Company is the guarantor under the
Guarantee and has agreed to pay all costs, expenses and liabilities of Entergy
London Capital (other than Entergy London Capital's obligations to the holders
of the Preferred Securities), the positions of a holder of Preferred
Securities and a holder of Perpetual Junior Subordinated Debentures relative
to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company would be substantially the same.
A default or event of default under any Senior Debt would not constitute a
default or Debenture Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior Debt, the subordination provisions
of the Indenture provide that no payments may be made in respect of the
Perpetual Junior Subordinated Debentures until such Senior Debt has been paid
in full or any payment default thereunder has been cured or waived. Failure to
make required payments on any Perpetual Junior Subordinated Debentures would
constitute a Debenture Event of Default.
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CERTAIN INCOME TAX CONSIDERATIONS
THIS SUMMARY IS OF A GENERAL NATURE AND IS INCLUDED SOLELY FOR INFORMATIONAL
PURPOSES. IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR
TAX ADVICE. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF STATE, LOCAL OR
FOREIGN LAWS, INCLUDING UK TAX LAWS, TO WHICH THEY MAY BE SUBJECT.
UK INCOME TAX CONSIDERATIONS
The comments below are of a general nature based on current UK law and UK
Inland Revenue practice and represent the opinion of Linklaters & Paines,
special UK counsel to the Company, so far as such comments relate to matters
of law or legal conclusions. They relate only to holders of Perpetual Junior
Subordinated Debentures who are the absolute beneficial owners thereof and
related interest and may not apply to certain classes of persons such as
dealers. Any prospective holders of Preferred Securities who are in any doubt
as to the tax position should consult their professional advisers.
Payments on the Perpetual Junior Subordinated Debentures
For UK tax purposes, while the Perpetual Junior Subordinated Debentures
remain represented by the Global Debenture in bearer form and continue to be
listed on the Luxembourg Stock Exchange or some other stock exchange
recognized by the UK Inland Revenue, payments of interest to Entergy London
Capital or any other holder may be made without withholding or deduction for
or on account of UK income tax for so long as the Company's paying agent, the
Book-Entry Depository, and Entergy London Capital are outside the UK.
In other cases, and in particular if Definitive Registered Debentures are
issued, interest will be paid after deduction of UK income tax (currently at
the rate of 20%). A US holder of Perpetual Junior Subordinated Debentures may
be eligible to recover in full any UK tax withheld from payments of interest
to which such holder is beneficially entitled by making a claim under the
US/UK Double Tax Treaty on the appropriate form. Alternatively, a claim may be
made by a US holder in advance of a payment of interest. If the claim is
accepted by the UK Inland Revenue, they will authorize subsequent payments to
that US holder to be made without withholding of UK income tax. Claims for
repayment must be made within six years of the end of the UK year of
assessment (generally April 5 in each year) to which the interest relates and
must be accompanied by the original statement provided by the Company when the
interest payment was made showing the amount of UK income tax deducted.
Because a claim is not considered until the UK tax authorities receive the
appropriate form from the Internal Revenue Service (the "IRS"), forms should
be sent to the IRS, in the case of an advance claim, well before the relevant
interest payment date or, in the case of a claim for the repayment of the tax,
well before the end of the appropriate limitation period.
Holders of Perpetual Junior Subordinated Debentures in other jurisdictions
may be entitled to a refund of all or part of any UK income tax deducted or
withheld or to make a claim for interest on the Perpetual Junior Subordinated
Debentures to be paid without, or subject to a reduced rate of, deduction or
withholding under the provisions of an applicable double tax treaty.
A refund of all or part of any UK income tax deducted or withheld may,
depending on individual circumstances, be available to a holder of Perpetual
Junior Subordinated Debentures who is resident in the UK or who carries on a
trade, profession or vocation in the UK through a branch or agency to which
the Preferred Securities are attributable, or who falls within certain other
categories.
101
<PAGE>
Holders of Preferred Securities should be aware that under current UK tax
law upon the issuance of Definitive Registered Debentures the interest payable
on such Definitive Registered Debentures will (subject to any entitlement to
make a claim under the provisions of an applicable double tax treaty as
described above) become subject to UK withholding tax, currently at the rate
of 20%. Such holders will be entitled to the payment of Additional Amounts in
respect of the tax withheld, except as set forth under "Description of the
Perpetual Junior Subordinated Debentures--Additional Amounts" and under
"Description of the Perpetual Junior Subordinated Debentures--Form, Book-Entry
Procedures and Transfer--Definitive Subordinated Debentures", and then subject
to the right of the Company in certain circumstances to redeem the Perpetual
Junior Subordinated Debentures. See "Description of the Perpetual Junior
Subordinated Debentures--Optional Tax Redemption".
Interest on the Perpetual Junior Subordinated Debentures constitutes UK
source income and, as such, may be subject to UK income tax by direct
assessment even where paid without deduction or withholding. However, UK tax
chargeable on interest from a UK source beneficially owned by persons not
regarded as resident in the UK for tax purposes will normally be limited to
the tax, if any, deducted at source on payment of such interest. This will not
apply if interest is beneficially owned by a person who is not resident for
tax purposes in the UK if that person carries on a trade, profession or
vocation in the UK through a UK branch or agency in connection with which the
interest is received or to which the Perpetual Junior Subordinated Debentures
are attributable. There are exemptions for interest received by certain
categories of agent (such as some brokers and investment managers).
US INCOME TAX CONSIDERATIONS
This section is a summary of the material US Federal income tax
considerations that may be relevant to prospective purchasers of Preferred
Securities and represents the opinion of Reid & Priest LLP, special counsel to
the Company and Entergy London Capital, insofar as it relates to matters of
law and legal conclusions. This section is based upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Subsequent changes may cause
tax consequences to vary substantially from the consequences described below.
No attempt has been made in the following discussion to comment on all US
Federal income tax matters affecting purchasers of Preferred Securities.
Moreover, the discussion focuses solely on holders of Preferred Securities who
are individual citizens or residents of the US ("US Holder") that hold the
Preferred Securities as a capital asset and has only limited application to
corporations, estates, trusts, non-resident aliens or foreign corporations.
Accordingly, each prospective purchaser of Preferred Securities should
consult, and should depend on, his or her own tax advisor in analyzing the
Federal, state, local and foreign tax consequences of the purchase, ownership
or disposition of Preferred Securities.
Income from Preferred Securities
In the opinion of Reid & Priest LLP, for US Federal income tax purposes, (i)
Entergy London Capital will be treated as a partnership and (ii) the Perpetual
Junior Subordinated Debentures will be treated as equity.
Each holder of Preferred Securities (a "Preferred Securityholder") will be
required to include in gross income the Preferred Securityholder's
distributive share of the net income of Entergy London Capital, which
generally will not exceed the distributions received on the Preferred
Securities. Such income will be ordinary income that will not be eligible for
the dividends received deduction. For that purpose, interest income and the
Additional Amounts will generally be treated as foreign source "passive" or,
in the case of certain Preferred Securityholders, "financial services" income
for foreign tax credit purposes. The rules relating to foreign tax credits are
extremely complex, and US Holders
102
<PAGE>
should consult their own tax advisors regarding the availability of a foreign
tax credit and the application of the foreign tax credit to their particular
situation.
Disposition of Preferred Securities
Gain or loss will be recognized on a sale of Preferred Securities, including
a redemption for cash, equal to the difference between the amount realized and
the Preferred Securityholder's tax basis for the Preferred Securities sold.
Gain or loss recognized by a Preferred Securityholder on the sale or exchange
of Preferred Securities held for more than one year will generally be taxable
as long-term capital gain or loss. The maximum effective US Federal income tax
rate applicable to gains resulting from the sale of capital assets held by
individuals for longer than one year but less than 18 months is 28%. The
maximum effective tax rate on long-term capital gain will decrease to 20% if
the Preferred Securities are held for more than 18 months. Beginning in the
year 2006, capital assets held for more than five years will qualify for a
maximum 18% effective tax rate.
Receipt of Perpetual Junior Subordinated Debentures or Cash In Certain
Circumstances
The General Partner has the right, at any time, to dissolve Entergy London
Capital and to cause Perpetual Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in liquidation of
Entergy London Capital. Such liquidating distribution will generally be tax-
free to each holder and will result in each holder of Preferred Securities
receiving an aggregate tax basis in its Perpetual Junior Subordinated
Debentures equal to such holder's aggregate tax basis in its Preferred
Securities. A holder's holding period in the Perpetual Junior Subordinated
Debentures will include the holding period for which the Preferred Securities
were held by each holder. If a liquidation of Entergy London Capital occurs
following a determination that due to a change in law, Entergy London Capital
is subject to US Federal income tax with respect to the amounts received on
the Perpetual Junior Subordinated Debentures, then such liquidation will be
taxable to the holders of the Preferred Securities. Gain or loss will be
recognized in the amount measured by the difference between the fair market
value of the Perpetual Junior Subordinated Debentures received in the
liquidation and the holder's aggregate tax basis in its Preferred Securities.
In such cases the holding period for the Perpetual Junior Subordinated
Debentures received in the liquidation will not include the period during
which the Preferred Securities were held.
The Perpetual Junior Subordinated Debentures may be redeemed for cash and
the proceeds of such redemption distributed to holders in redemption of their
Preferred Securities. Such redemption of the Preferred Securities would, for
US Federal income tax purposes, constitute a taxable disposition of the
redeemed Preferred Securities and a holder would recognize gain or loss as if
it had sold such redeemed Preferred Securities for cash. See "--Disposition of
Preferred Securities".
Entergy London Capital Information Returns and Audit Procedures
The General Partner will furnish each Preferred Securityholder with an
income information statement each year setting forth such Preferred
Securityholder's allocable share of income for the prior calendar year. The
General Partner is required to furnish this statement as soon as practicable
following the end of the year, but in any event prior to March 31.
Any person who holds Preferred Securities as a nominee for another person is
required to furnish to Entergy London Capital (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
information as to whether the beneficial owner is (i) a person that is not a
US person, (ii) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing, or (iii) a
tax-exempt entity; (c) the amount and description of Preferred Securities
held, acquired or transferred for the beneficial owner; and (d) certain
information including the dates of acquisitions and transfers, means of
acquisitions and transfers and acquisition
103
<PAGE>
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are US persons and certain information on Preferred
Securities they acquire, hold or transfer for their own accounts. A penalty of
$50 per failure (up to a maximum of $100,000 per calendar year) is imposed by
the Code for failure to report such information to Entergy London Capital. The
nominee is required to supply the beneficial owners of the Preferred
Securities with the information furnished to Entergy London Capital.
The General Partner, as the tax matters partner, will be responsible for
representing the Preferred Securityholders in any dispute with the IRS. The
Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years since the
later of the filing or the last date for filing of the partnership information
return. Any adverse determination following an audit of the return of Entergy
London Capital by the appropriate tax authorities could result in an
adjustment of the returns of the Preferred Securityholders, and, under certain
circumstances, a Preferred Securityholder may be precluded from separately
litigating a proposed adjustment to the items of Entergy London Capital. An
adjustment could also result in an audit of a Preferred Securityholder's
return and adjustments of items not related to the income and losses of
Entergy London Capital.
104
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the Company
and Entergy London Capital have agreed that Entergy London Capital will sell
to each of the Underwriters named below, and each of such Underwriters, for
whom Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Prudential Securities Incorporated and Smith Barney Inc. are
acting as representatives, has severally agreed to purchase from Entergy
London Capital the respective number of Preferred Securities set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED
UNDERWRITER SECURITIES
----------- ----------
<S> <C>
Goldman, Sachs & Co. ............................................. 1,300,000
Bear, Stearns & Co. Inc. ......................................... 1,295,000
Lehman Brothers Inc............................................... 1,295,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 1,295,000
Morgan Stanley & Co. Incorporated................................. 1,295,000
Prudential Securities Incorporated................................ 1,295,000
Smith Barney Inc.................................................. 1,295,000
ABN AMRO Chicago Corporation...................................... 125,000
Advest, Inc....................................................... 60,000
Robert W. Baird & Co. Incorporated................................ 60,000
J.C. Bradford & Co................................................ 60,000
BT Alex. Brown Incorporated....................................... 125,000
Cowen & Company................................................... 60,000
Crowell, Weedon & Co.............................................. 60,000
Dain Bosworth Incorporated........................................ 60,000
SBC Warburg Dillon Read Inc....................................... 125,000
Doley Securities, Inc............................................. 60,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 125,000
A.G. Edwards & Sons, Inc.......................................... 125,000
EVEREN Securities, Inc............................................ 125,000
Fahnestock & Co. Inc.............................................. 60,000
J.J.B. Hilliard, W.L. Lyons, Inc.................................. 60,000
Interstate/Johnson Lane Corporation............................... 60,000
Janney Montgomery Scott Inc....................................... 60,000
Legg Mason Wood Walker, Incorporated.............................. 125,000
McDonald & Company Securities, Inc................................ 60,000
McGinn, Smith & Co., Inc.......................................... 60,000
Morgan Keegan & Company, Inc...................................... 125,000
The Ohio Company.................................................. 60,000
CIBC Oppenheimer Corp............................................. 125,000
Piper Jaffray Inc................................................. 60,000
Principal Financial Securities, Inc............................... 60,000
Pryor, McClendon, Counts & Co., Inc............................... 60,000
Rauscher Pierce Refsnes, Inc...................................... 60,000
Raymond James & Associates, Inc................................... 60,000
The Robinson-Humphrey Company, LLC................................ 60,000
Roney & Co., L.L.C................................................ 60,000
Stephens Inc...................................................... 125,000
Sterne, Agee & Leach, Inc......................................... 60,000
Sutro & Co. Incorporated.......................................... 60,000
Trilon International Inc.......................................... 60,000
Tucker Anthony Incorporated....................................... 60,000
U.S. Clearing Corp................................................ 60,000
Wedbush Morgan Securities Inc..................................... 60,000
Wheat, First Securities, Inc...................................... 60,000
----------
Total........................................................... 12,000,000
==========
</TABLE>
105
<PAGE>
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Underwriters are committed to take and pay for all such Preferred
Securities offered hereby, if any are taken, provided, that under certain
circumstances involving a default of one or more Underwriters, less than all
of the Preferred Securities may be purchased. Default by one Underwriter would
not relieve any non-defaulting Underwriter from its several obligation, and in
the event of such a default, the non-defaulting Underwriters may be required
by the Company to purchase the Preferred Securities that they have severally
agreed to purchase and, in addition, to purchase the Preferred Securities that
the defaulting Underwriter or Underwriters shall have failed to purchase up to
an amount equal to one-ninth of the Preferred Securities that such non-
defaulting Underwriter or Underwriters have otherwise agreed to purchase.
The Underwriters propose to offer the Preferred Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price
less a concession of not to exceed $0.50 per Preferred Security ($0.30 per
Preferred Security sold to certain institutions). The Underwriters may allow,
and such dealers may reallow, a concession of not to exceed $0.40 per
Preferred Security ($0.30 per Preferred Security sold to certain institutions)
to certain brokers and dealers. After the Preferred Securities are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the representatives.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Perpetual Junior Subordinated
Debentures, the Underwriting Agreement provides that the Company will pay as
Underwriters' Compensation for the Underwriters arranging the investment
therein of such proceeds an amount of $0.7875 per Preferred Security ($0.5000
per Preferred Security sold to certain institutions) for the accounts of the
several Underwriters.
The Company and Entergy London Capital have agreed that, during the period
beginning from the date of the Underwriting Agreement and continuing to and
including the earlier of (i) the termination of trading restrictions on the
Preferred Securities, as determined by the Underwriters, and (ii) 30 days
after the closing date, they will not offer, sell, contract to sell or
otherwise dispose of any limited partner interests in Entergy London Capital,
or any preferred stock or any other securities of Entergy London Capital or
the Company that are substantially similar to the Preferred Securities,
including any guarantee of such securities, or any securities convertible into
or exchangeable for or that represent the right to receive limited partner
interests, preferred stock or any such substantially similar securities of
Entergy London Capital or the Company, without the prior written consent of
the representatives, except for the Preferred Securities and the Guarantee.
Prior to this offering, there has been no public market for the Preferred
Securities. The Preferred Securities have been approved for listing, subject
to notice of issuance, on the NYSE under the symbol "ELO PrA". In order to
meet one of the requirements for listing the Preferred Securities on the NYSE,
the Underwriters will undertake to sell lots of 100 or more Preferred
Securities to a minimum of 400 beneficial holders. Trading of the Preferred
Securities on the NYSE is expected to commence within a thirty-day period
after the initial delivery of the Preferred Securities. The representatives
have advised the Company that they intend to make a market in the Preferred
Securities prior to commencement of trading on the NYSE, but are not obligated
to do so and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the
Preferred Securities.
In connection with the offering, the Underwriters may purchase and sell the
Preferred Securities in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities; and short positions created by the
106
<PAGE>
Underwriters involve the sale by the Underwriters of a greater number of
Preferred Securities than they are required to purchase from Entergy London
Capital in the offering. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to broker-dealers in respect of the
Preferred Securities sold in the offering may be reclaimed by the Underwriters
in stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Preferred Securities,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be effected in the over-the-counter market or
otherwise.
Each Underwriter has also agreed that (a) it has not offered or sold and
prior to the date six months after the date of issuance of the Preferred
Securities will not offer or sell any Preferred Securities to persons in the
UK except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the UK within the
meaning of the Public Offers of Securities Regulations 1995, (b) it has
complied, and will comply, with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Preferred Securities in, from or otherwise involving the UK, and (c) it has
only issued or passed on and will only issue or pass on in the UK any document
received by it in connection with the issuance of the Preferred Securities to
a person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom the document may otherwise lawfully be issued or passed on.
The Company and Entergy London Capital have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to the Company and its affiliates, for which such Underwriters or
their affiliates have received or will receive customary fees and commissions.
EXPERTS
The consolidated balance sheet of Entergy London Investments plc (formerly
Entergy Power UK plc) as of March 31, 1997, and consolidated statements of
operations, cash flows and changes in shareholder's equity and related
financial statement schedule for the period from October 9, 1996 (date of
inception) to March 31, 1997, and the consolidated balance sheet of London
Electricity plc as of March 31, 1996, and consolidated statements of
operations, cash flows and changes in shareholders' equity and related
financial statement schedule for the period from April 1, 1996 to January 31,
1997 and the years ended March 31, 1996 and 1995, included in this prospectus,
have been included herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
LEGAL OPINIONS
Certain matters of Delaware law relating to the validity of the Preferred
Securities will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and Entergy London Capital. Certain legal matters
relating to English law, including taxation, corporate matters and the binding
nature of the Perpetual Junior Subordinated Debentures and agreements related
thereto, will be passed upon for the Company by Linklaters & Paines, London,
England. Certain matters relating to the Perpetual Junior Subordinated
Debentures and the Guarantee and US Federal income tax considerations will be
passed upon by Reid & Priest LLP, New York, New York, special counsel to the
Company and Entergy London Capital. Certain legal matters will be passed upon
for the Underwriters by Winthrop, Stimson, Putnam & Roberts, New York, New
York.
107
<PAGE>
NATURE OF FINANCIAL INFORMATION
The financial information in respect of the Company and the Predecessor
Company set forth in "Summary Financial Information", "Capitalization",
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein does not constitute
statutory accounts under Section 240 of the Companies Act 1985. Statutory
accounts for the fiscal year 1997 to which such financial information relates
have been, and for the nine months ended December 31, 1997 will be, delivered
to the Registrar of Companies in England and Wales. The auditors of the
Company and the Predecessor Company have made a report under Section 236 of
the Companies Act 1985 on the statutory accounts for each such fiscal year
which was not qualified within the meaning of Section 262 of the Companies Act
1985 and did not contain a statement made under Section 237(2) or 237(5) of
that Act.
108
<PAGE>
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ENTERGY LONDON INVESTMENTS plc AND SUBSIDIARIES (Successor Company)
Report of the Independent Accountants...................................... F-2
Financial Statements:
Consolidated balance sheet as of March 31, 1997.......................... F-3
Consolidated statement of operations for the period from October 9, 1996
(date of inception) to March 31, 1997................................... F-4
Consolidated statement of changes in shareholder's equity for the period
from October 9, 1996 (date of inception) to March 31, 1997.............. F-5
Consolidated statement of cash flows for the period from October 9, 1996
(date of inception) to March 31, 1997................................... F-6
Notes to consolidated financial statements............................... F-7
LONDON ELECTRICITY plc AND SUBSIDIARIES (Predecessor Company)
Report of Independent Accountants.......................................... F-17
Financial Statements:
Consolidated balance sheet as of March 31, 1996.......................... F-18
Consolidated statements of operations for the period from April 1, 1996
to January 31, 1997 and the years ended March 31, 1996 and 1995......... F-19
Consolidated statements of changes in shareholders' equity for the period
from April 1, 1996 to January 31, 1997 and the years ended March 31,
1996 and 1995........................................................... F-20
Consolidated statements of cash flows for the period from April 1, 1996
to January 31, 1997 and the years ended March 31, 1996 and 1995......... F-21
Notes to consolidated financial statements............................... F-22
ENTERGY LONDON INVESTMENTS plc AND SUBSIDIARIES (Successor Company) and
LONDON ELECTRICITY plc AND SUBSIDIARIES (Predecessor Company)
Financial Statements:
Unaudited condensed consolidated balance sheet as of September 30, 1997
and March 31, 1997...................................................... F-33
Unaudited condensed consolidated statements of operations for the six
month periods ended September 30, 1997 and 1996......................... F-34
Unaudited condensed consolidated statements of cash flows for the six
month periods ended September 30, 1997 and 1996......................... F-35
Notes to unaudited condensed consolidated financial statements........... F-36
Unaudited Pro Forma Financial Statement:
Unaudited pro forma condensed consolidated statement of operations for
the year ended March 31, 1997 with related notes...................... F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Entergy London Investments plc:
We have audited the accompanying consolidated balance sheet of Entergy
London Investments plc (formerly Entergy Power UK plc) as of March 31, 1997,
and the related consolidated statements of operations, cash flows and changes
in shareholder's equity for the period from October 9, 1996 (date of
inception) to March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Entergy
London Investments plc as of March 31, 1997, and the results of its operations
and its cash flows for the period from October 9, 1996 to March 31, 1997 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
July 31, 1997
F-2
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ (Pounds) 25.1 $ 40.5
Accounts receivable:
Customer receivable net of reserve of (Pounds)11.8
($19.0)............................................... 104.8 168.9
Unbilled revenue....................................... 102.4 165.0
Deferred income tax asset ............................... 16.0 25.8
Income tax receivable.................................... 13.1 21.1
Other receivables........................................ 20.3 32.7
Prepayments and other.................................... 5.3 8.5
Inventory................................................ 8.5 13.7
Investments.............................................. 28.2 45.5
--------------- --------
Total current assets................................. 323.7 521.7
--------------- --------
Property, plant and equipment, net of accumulated deprecia-
tion of (Pounds)9.6 ($15.5)............................... 1,265.7 2,039.9
Construction work in progress.............................. 80.9 130.4
Distribution license, net of accumulated amortization of
(Pounds)3.3 ($5.3)........................................ 830.4 1,338.4
Investments, long-term..................................... 10.3 16.6
Long-term receivables...................................... 12.3 19.8
Prepaid pension asset...................................... 145.3 234.2
--------------- --------
Total assets............................................... (Pounds)2,668.6 $4,301.0
=============== ========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt..................... (Pounds) 20.4 $ 32.9
Notes payable............................................ 141.7 228.4
Accounts payable......................................... 125.4 202.1
Income taxes payable..................................... 34.3 55.3
Deferred revenue......................................... 29.6 47.7
Other liabilities........................................ 19.2 30.9
--------------- --------
Total current liabilities............................ 370.6 597.3
Long-term debt............................................. 1,142.9 1,842.0
Deferred income tax liability.............................. 644.4 1,038.6
Other non-current liabilities.............................. 262.4 422.9
--------------- --------
Total liabilities.................................... 2,420.3 3,900.8
--------------- --------
<CAPTION>
Commitments and Contingencies
<S> <C> <C>
Shareholder's equity:
Common stock, (Pounds)1 ($1.61) par value per share,
50,000 shares authorized, issued and outstanding........ 0.1 0.2
Additional paid-in capital............................... 239.9 386.6
Retained earnings........................................ 8.3 13.4
--------------- --------
Total shareholder's equity........................... 248.3 400.2
--------------- --------
Total liabilities and shareholder's equity................. (Pounds)2,668.6 $4,301.0
=============== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 9, 1996 TO MARCH 31, 1997
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM OCTOBER
9, 1996
TO MARCH 31, 1997
--------------------
<S> <C> <C>
Operating revenues........................................ (Pounds)233.6 $376.5
Cost of sales............................................. 163.6 263.7
------------- ------
Gross profit.............................................. 70.0 112.8
Depreciation and amortization expense..................... 12.9 20.8
Property taxes............................................ 3.5 5.6
Restructuring charges..................................... 8.0 12.9
Selling, general and administrative expenses.............. 13.6 21.9
------------- ------
Income from operations................................ 32.0 51.6
Other expenses, net....................................... 6.5 10.5
Interest expense, net..................................... 12.7 20.5
------------- ------
Income before income taxes............................ 12.8 20.6
Income taxes.............................................. 4.5 7.2
------------- ------
Net income............................................ (Pounds) 8.3 $ 13.4
============= ======
Earnings per average common share......................... (Pounds) 166 $ 268
------------- ------
Average number of common shares outstanding............... 50,000 50,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM OCTOBER 9, 1996 TO MARCH 31, 1997
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
SHARES ADDITIONAL PAID-IN
AMOUNT CAPITAL RETAINED EARNINGS SHAREHOLDER'S EQUITY
------ ------------------ ---------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 9,
1996................... -- (Pounds) -- $ -- (Pounds) -- $ -- (Pounds) -- $ -- (Pounds) -- $ --
Common stock issued..... 50,000 0.1 0.2 239.9 386.6 -- -- 240.0 386.8
Net income.............. -- -- -- 8.3 13.4 8.3 13.4
------ ------------ ----- -------------- ------- ------------ ------ ------------- ------
Balance, March 31, 1997. 50,000 (Pounds) 0.1 $ 0.2 (Pounds) 239.9 $ 386.6 (Pounds) 8.3 $ 13.4 (Pounds)248.3 $400.2
====== ============ ===== ============== ======= ============ ====== ============= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 9, 1996 TO MARCH 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... (Pounds) 8.3 $ 13.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 12.9 20.8
Deferred income taxes............................. 3.5 5.6
Change in assets and liabilities:
Inventory....................................... 0.9 1.5
Accounts receivable and unbilled revenue........ (3.1) (5.0)
Long-term receivables and other................. (35.1) (56.5)
Accounts payable................................ (18.2) (29.3)
Income taxes payable............................ 7.0 11.3
Other current assets and liabilities............ 21.2 34.2
Other long-term liabilities..................... 66.4 107.0
------------ ---------
Net cash provided by operating activities..... 63.8 103.0
Cash flows from investing activities:
Capital expenditures ............................... (35.9) (57.9)
Acquisition of London Electricity................... (1,174.3) (1,892.6)
Receipt of consumer contributions................... 6.9 11.1
------------ ---------
Net cash used in investing activities......... (1,203.3) (1,939.4)
Cash flows from financing activities:
Proceeds from issuance of debt...................... 945.0 1,523.0
Proceeds from issuance of common stock.............. 240.0 386.8
Net repayments from available lines of credit....... (20.4) (32.9)
------------ ---------
Net cash provided by financing activities..... 1,164.6 1,876.9
------------ ---------
Increase in cash and cash equivalents................. 25.1 40.5
Beginning of period cash and cash equivalents......... -- --
------------ ---------
End of period cash and cash equivalents............... (Pounds)25.1 $ 40.5
============ =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.............................. (Pounds) 8.2 $ 13.2
============ =========
Cash paid for income taxes.......................... (Pounds) 1.0 $ 1.6
============ =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Entergy London Investments plc (formerly Entergy Power UK plc and referred
to herein as "the Company") is an indirect wholly-owned subsidiary of Entergy
Corporation formed on October 9, 1996 (date of inception) for the purpose of
acquiring London Electricity plc ("London Electricity"). London Electricity is
one of twelve regional electricity companies ("RECs") in England and Wales
licensed to supply, distribute and, to a limited extent, generate electricity.
The RECs were created as a result of the privatization of the United Kingdom
("UK") electric industry in 1990 after the state-owned low voltage
distribution networks were allocated to the then existing twelve regional
boards. London Electricity's main business, the distribution and supply of
electricity to customers in London, England, is regulated under the terms of
London Electricity's Public Electricity Supply License ("PES license") by the
Office of Electricity Regulation (the "Regulator").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The financial statements of the Company are presented in pounds sterling
((Pounds)) and in conformity with accounting principles generally accepted in
the United States ("US GAAP"). The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-owned
subsidiaries and have been prepared from records maintained by the Company in
the UK. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company is not subject to rate regulation,
but rather is subject to price cap regulation and, therefore, the provisions
of Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" ("SFAS 71") do not apply.
These financial statements are presented in pounds sterling ((Pounds)) and
in US dollars ($), solely for the convenience of the reader, at the exchange
rate of (Pounds)1=US $1.6117, 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, 1997 in accordance with Securities
and Exchange Commission Regulation S-X Rule 3-20. This presentation has not
been translated in accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation." No representation is made that the
pounds sterling amounts have been, could have been, or could be converted into
US Dollars at that or any other rate of exchange.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's financial statements, in conformity with
generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Adjustments to
the reported amounts of assets and liabilities may be necessary in the future
to the extent that future estimates or actual results are different from the
estimates used in the financial statements.
Revenue Recognition
London Electricity distributes electricity to commercial, residential and
industrial customers within the London area. The Company records revenue net
of value added tax ("VAT") and accrues revenue for services provided but
unbilled at the end of each reporting period. London Electricity purchases
power primarily from the wholesale trading market for electricity in England
and Wales (the "Pool"). The Pool monitors supply and demand between generators
and suppliers, sets prices for generation and provides centralized settlement
of amounts due between generators and suppliers.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash and cash equivalents.
F-7
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes
materials, labor and appropriate overhead costs. The Company is entitled,
under certain conditions, to collect cash contributions from consumers to fund
improvements to the Company's distribution networks. Consumer contributions
are credited against the historical cost of the asset.
Depreciation is computed by the straight-line method at rates based on the
estimated service lives of each of the various classes of property. Consumer
contributions are amortized into income at a rate of 2.5%. Depreciation rates
on average depreciable property are shown below:
<TABLE>
<CAPTION>
<S> <C>
Distribution network assets................................... 2.5%--5.0%
Buildings..................................................... 2.5%
Vehicles and mobile plant..................................... 10%--20%
Furniture and equipment, including computer hardware and soft-
ware......................................................... 20%--33%
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This standard requires that deferred income taxes be recorded for all
temporary differences between the financial statement basis and tax basis of
assets and liabilities and loss carryforwards and that deferred tax balances
be based on enacted tax laws at rates that are expected to be in effect when
the temporary differences reverse.
Distribution License
Distribution license represents the value attributed by the Company to the
license to serve London Electricity customers within its franchise area
acquired in conjunction with the acquisition of London Electricity by the
Company. The license is being amortized over forty years using the straight-
line method.
Financial Instruments
The Company enters into interest rate swaps as a part of its overall risk
management strategy and does not hold or issue material amounts of derivative
financial instruments for trading purposes. The Company accounts for its
interest rate swaps in accordance with the concepts established in Statement
of Financial Accounting Standards No. 80, "Accounting for Futures Contracts"
("SFAS 80") and various Emerging Issue Task Force pronouncements. If the
interest rate swaps were to be sold or terminated, any gain or loss would be
deferred and amortized over the remaining life of the debt instrument being
hedged by the interest rate swap. If the debt instrument being hedged by the
interest rate swaps were to be extinguished, any gain or loss attributable to
the swap would be recognized in the period of the transaction.
The Company considers the carrying amounts of financial instruments
classified as current assets and liabilities to be a reasonable estimate of
their fair value because of the short maturity of these instruments.
Price Control
Charges for distribution of electricity and supply to customers with a
maximum demand under 100Kw are subject to a price control formula set out in
London Electricity's PES license which allows a maximum charge per unit of
electricity. Differences in the charges, or in the purchase cost of
electricity, can result in the under or overrecovery of revenues in a
particular year.
F-8
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Where there is an overrecovery of supply or distribution business revenues
against the regulated maximum allowable amount, revenues are deferred in an
amount equivalent to the overrecovered amount. The deferred amount is deducted
from operating revenues and included in other liabilities. Where there is an
underrecovery, no anticipation of any potential future recovery is made.
The Company enters into contracts for differences ("CFDs") primarily to
hedge its supply business against the price risk of electricity purchases from
the Pool. Use of these CFDs is carried out within the framework of the
Company's purchasing strategy and hedging guidelines. Risk of loss is
monitored through establishment of approved counterparties and maximum
counterparty limits and minimum credit ratings. The Company recognizes gains
(losses) on CFDs when settlement is made. Gains (losses) on CFDs are
recognized as a decrease (increase) to cost of sales based upon the difference
between fixed prices in the CFD compared to variable prices paid to the Pool
for the period. Gains (losses) based upon the difference between fixed prices
in the CFD compared to variable prices paid to the Pool for future electricity
purchases are not recognized until the period of such settlements.
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" ("SFAS 121") the Company periodically reviews its long-lived
assets whenever events or changes in circumstances indicate that
recoverability of these assets is uncertain. Generally, the determination of
recoverability is based on the undiscounted net cash flows expected to result
from such assets. Projected undiscounted net cash flows depend on the future
operating costs associated with the assets and future market prices over the
remaining life of the assets. Based on current estimates of future
undiscounted cash flows as prescribed under SFAS 121, management anticipates
that future revenues from such assets will fully recover all related costs.
3. REGULATORY MATTERS:
The distribution business of London Electricity is regulated under its PES
license, pursuant to which revenue of the distribution business is controlled
by the Distribution Price Control Formula ("DPCF"). The DPCF determines the
maximum average price per unit of electricity (expressed in kilowatt hours, a
"unit") that a REC may charge. The elements used in the DPCF are established
for a five-year period and are subject to review by the Regulator at the end
of each five-year period and at other times at the discretion of the
Regulator. At each review the Regulator can adjust the value of certain
elements in the DPCF. Following a review by the Regulator in August 1994, a
14% price reduction was set for London Electricity, effective April 1, 1995.
In July 1995, a further review of distribution prices was concluded by the
Regulator for fiscal years 1997 to 2000. As a result of this further review,
London Electricity's distribution prices were reduced an additional 11%,
effective April 1, 1996, 3% effective April 1, 1997 and will be reduced by a
further 3% on both April 1, 1998 and 1999.
The supply business of London Electricity is also regulated by the
Regulator, and prices are established based upon the Supply Price Control
Formula which is similar to the DPCF; however, it currently allows full pass
through for all properly incurred costs and is set for a four-year period by
the Regulator.
The non-franchise supply market, which typically includes larger commercial
and industrial customers was opened to competition for all customers with
usage above 1Mw upon privatization of the industry in 1990. The non-franchise
supply markets of 100 kW or more were opened to full competition starting in
April 1994.
F-9
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Currently London Electricity, under its PES license, has the exclusive right
to supply residential and small industrial and commercial customers within its
franchise area. It is anticipated that the supply market for customers will be
fully competitive over a six month period starting in April 1998.
4. INVESTMENTS:
The Company accounts for investments whose fair market values are readily
determinable in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Investments for Certain Debt and Equity Securities"
("SFAS 115"). These securities are considered available-for-sale securities
under SFAS 115 and their fair values approximate cost. Other securities whose
fair market values are not readily determinable and in which the Company does
not have a significant interest are recorded at cost.
Investments in companies in which the Company's ownership interests range
from 20% to 50% or investments which are less than 20% owned but over which
the Company exercises significant influence over operating and financial
policies are accounted for using the equity method. The following are the
Company's equity method investments as of March 31, 1997:
<TABLE>
<CAPTION>
INVESTMENT PERCENTAGE OWNERSHIP
---------- --------------------
<S> <C>
London Total Gas Ltd................................. 50%
Thames Valley Power Ltd.............................. 50%
London Total Energy Ltd.............................. 50%
Barking Power Limited................................ 13.5%
</TABLE>
Equity in earnings from these investments was (Pounds)1.3 million ($2.1
million) for the period from October 9, 1996 to March 31, 1997 which is
included in "Other expenses, net" in the consolidated statement of operations.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost, consists of the following (in
millions):
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
<S> <C> <C>
Distribution network assets................... (Pounds)1,322.3 $2,131.2
Land and buildings............................ 61.2 98.6
Vehicles and mobile plant..................... 5.8 9.3
Furniture, fixtures and equipment, including
computer hardware and software............... 51.2 82.5
Consumer contributions to construction........ (165.2) (266.2)
--------------- --------
1,275.3 2,055.4
Less accumulated depreciation and
amortization................................. (9.6) (15.5)
--------------- --------
(Pounds)1,265.7 $2,039.9
=============== ========
</TABLE>
6. INCOME TAXES:
The Company's income tax expense for the period from October 9, 1996 to
March 31, 1997 consists of the following (in millions):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 9, 1996
TO MARCH 31, 1997
-----------------
<S> <C> <C>
Current............................................... (Pounds) 1.0 $ 1.6
Deferred.............................................. 3.5 5.6
------------ -----
Total income tax expense............................ (Pounds) 4.5 $ 7.2
============ =====
</TABLE>
F-10
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's total effective income tax rate of 35% differs from the
Company's statutory rate of 33% primarily due to permanent differences and tax
credits utilized in the Company's income tax return.
Significant components of the Company's net deferred tax liability as of
March 31, 1997 are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax liability
Property-related basis differences.............. (Pounds)352.9 $ 568.8
Prepaid pension asset........................... 47.9 77.2
Distribution license............................ 274.0 441.6
------------- --------
Total......................................... 674.8 1,087.6
Deferred tax asset
Reserves and other timing differences........... 46.4 74.8
------------- --------
Net deferred tax liability.................... (Pounds)628.4 $1,012.8
============= ========
</TABLE>
As a result of Parliamentary elections held on May 1, 1997, the Labor Party
gained control of the British government. On July 31, 1997, legislation
establishing a windfall profits tax, which affects regulated companies
privatized since 1979 including London Electricity, was enacted. In accordance
with SFAS 109 under US GAAP, the Company will record a charge to income for
the windfall profits tax during the quarter ending September 30, 1997. A
change in the UK statutory rate from 33% to 31% was also included in the
legislation. The impact of such changes in the quarter ending September 30,
1997 will be recognition of the (Pounds)140 million ($226 million) expense for
the windfall profits tax and approximately (Pounds)38 million ($61.2 million)
of income tax benefit as a result of the change in the UK statutory income tax
rate in the Company's results of operations.
The tax years since fiscal year 1990 are currently under review by the
Inland Revenue in the UK. The Company believes that there is no additional
liability related to the tax years under review.
7. LONG-TERM DEBT:
The long-term debt of the Company is summarized as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
8% Eurobonds repayable March 28, 2003............ (Pounds) 98.9 $ 159.4
8 5/8% Eurobonds repayable October 26, 2005...... 99.0 159.6
Loan notes due March 31, 2003.................... 20.4 32.9
Revolving bank debt facility:
Facility A..................................... 705.0 1,136.2
Facility B..................................... 240.0 386.8
--------------- --------
Total............................................ 1,163.3 1,874.9
Less current maturities.......................... 20.4 32.9
--------------- --------
Long-term debt, net of current maturities........ (Pounds)1,142.9 $1,842.0
=============== ========
</TABLE>
The 8% and 8 5/8% Eurobonds may become due prior to their stated maturity
only upon the occurrence of certain events including default, liquidation or
bankruptcy of London Electricity. The Company does not anticipate default
under these agreements.
Certain shareholders of London Electricity elected to receive Loan Notes
issued by the Company in exchange for their London Electricity shares in
conjunction with its acquisition by the Company. Such Loan Notes are included
as current maturities of long-term debt based on the option of holders to
redeem such notes on March 31 of each year until their final maturity on March
31, 2003. The Loan Notes bear interest at LIBOR (6.69% at March 31, 1997) less
1% which is adjusted annually on April 1.
F-11
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the acquisition of London Electricity, the Company
entered into a revolving loan facility with a consortium of banks that is
collateralized by the stock of London Electricity. This revolving loan
consists of three parts which are Facility A for (Pounds)810 million ($1.3
billion), Facility B for (Pounds)240 million ($387 million) and Facility C for
(Pounds)200 million ($322 million). Facility B requires additional guarantees
or repayment by December 17, 1997, to avoid an increase in the variable
interest rates on all three facilities ranging from .5% to 1%. The Company
intends to repay Facility B through a combination of issuing quarterly income
preferred securities and additional equity or loans from the Company's parent.
The revolving loan contains certain restrictive covenants, the most
restrictive of which are maximum capitalization ratios and restrictions on
disposals of assets. Failure to meet the capitalization ratio targets in the
agreement results in increases in the interest rate on the outstanding
facilities and acceleration of repayment schedules. Facilities A and C can be
repaid and reborrowed during the five year term of this agreement which ends
in December 2001 provided certain capitalization ratios are achieved. The
interest rates on the three facilities are based on LIBOR, plus a margin which
ranges from .25% to 1.5% based on capitalization ratios, plus a defined margin
which is computed based on a bank cost of funds. The interest rate at March
31, 1997 was 7.43% on Facilities A, B and C.
London Electricity entered into an interest rate swap agreement to reduce
the impact of interest rate changes on its outstanding debt. The interest rate
swap agreement involves the exchange of a fixed interest rate for a floating
interest rate periodically over the life of the agreement. If the counterparty
to the agreement was to default on contractual payments, the Company could be
exposed to increased cost related to replacing the original agreement.
However, the Company does not anticipate non-performance. Through July 31,
1997, the Company has entered into additional interest rate swaps with a
notional amount of (Pounds)600 million ($967 million), fair value of
(Pounds)(2.4) million ($(3.9) million) and maturity dates through the year
2001.
8. NOTES PAYABLE:
Other facilities available to London Electricity are short-term unsecured,
uncommitted facilities of (Pounds)208 million ($335 million) and a (Pounds)150
million ($242 million) Sterling Commercial Paper Program ("Sterling Program").
Uncommitted facilities are unsecured facilities which are available at the
Company's request, however there is no obligation by the bank counterparty to
make funds available to the Company. The Sterling Program is a negotiable
promissory note with short term maturities (up to 364 days) and issued at a
discount to face value. The Company had an outstanding balance of
(Pounds)141.7 million ($228.4 million) on all of these facilities as of March
31, 1997. The weighted average interest rate incurred on these borrowings was
6.2% for the period from October 9, 1996 to March 31, 1997.
9. COMMITMENTS AND CONTINGENCIES:
The Company has entered into operating lease agreements for the use of
buildings and vehicles. Minimum future rental payments under all operating
leases as of March 31, 1997 are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
1998....................................................... (Pounds) 7.4 $ 11.9
1999....................................................... 6.9 11.1
2000....................................................... 6.0 9.7
2001....................................................... 5.8 9.4
2002....................................................... 5.7 9.2
Thereafter................................................. 72.0 116.0
------------- ------
Total.................................................... (Pounds)103.8 $167.3
============= ======
</TABLE>
F-12
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental expense incurred under these lease agreements was (Pounds)1.3 million
($2.1 million) for the period from October 9, 1996 to March 31, 1997.
The Company is subject to an agreement whereby the UK government is entitled
to a proportion of certain property gains accruing to the Company as a result
of disposals or events treated as disposals occurring after March 31, 1990, of
properties held at that date. This commitment is effective until March 31,
2000.
The Company has recorded approximately (Pounds)100 million ($161 million) in
reserves as of March 31, 1997, related to unfavorable long-term contracts.
These reserves will be amortized over the remaining lives of the contracts
which range from 14 to 18 years. The reserves recorded are based on the excess
of estimated fair market value of these contracts over the present value of
the future cash flows under the contracts at the applicable discount rate and
prices.
London Electricity is required to file five-year projections with the
Regulator for capital expenditures related to its regulated distribution
network and updates of such projections annually. The most recent updated
projection was for the five-year period ended March 31, 2000 and was filed in
July 1997. This filing indicated London Electricity's current projection of
approximately (Pounds)482 million ($777 million) for the five year period.
Approximately (Pounds)186 million ($300 million) has been spent in fiscal
years 1996 and 1997 related to this five-year projection.
London Electricity uses CFDs and power purchase contracts with certain UK
generators to fix the price of electricity for a contracted quantity over a
specific period of time. At March 31, 1997 the Company has outstanding CFDs
and power purchase contracts for approximately 46,000 GWh of electricity.
These include a long term power purchase contract with an affiliate which is
based on 27.5% of the affiliate's capacity from its 1000 MW facility through
the year 2010. London Electricity's sales volumes were approximately 20,800
GWh, 18,100 GWh and 15,800 GWh in pro forma fiscal year 1997, and fiscal years
ended March 31, 1996 and 1995, respectively. Management's estimate of the fair
value of CFDs outstanding at March 31, 1997 is a net liability of
approximately (Pounds)40 million ($64.5 million). This estimate is based on
management's projections of future prices of electricity. The majority of this
net liability will be recovered through generation costs passed through to
franchise customers.
The UK Environmental Protection Act 1990 addresses waste management issues
and imposes certain obligations on companies which handle and dispose of
waste. Some of London Electricity's distribution activities produce waste but
London Electricity believes that it has taken and continues to take measures
to comply with the applicable laws and governmental regulations for the
protection of the environment. There are no material legal or administrative
proceedings pending against London Electricity with respect to any
environmental matter.
11. PENSION BENEFITS:
The Company participates in a defined benefit pension plan, which provides
pension and other related defined benefits, based on final pensionable pay, to
substantially all employees throughout the electricity supply industry in the
UK. The Company made no contributions to the plan for the period from October
9, 1996 to March 31, 1997.
The Company uses the projected unit credit actuarial method for accounting
purposes. Amounts funded to the pension are primarily invested in equity and
fixed income securities.
F-13
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at March 31, 1997 (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Accumulated benefit obligation:
Vested.......................................... (Pounds)611.6 $ 985.7
============= ========
Projected benefit obligation...................... 705.7 1,137.4
Plan assets at fair value......................... 851.0 1,371.6
------------- --------
Prepaid pension asset......................... (Pounds)145.3 $ 234.2
============= ========
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation, and the expected long-term rate of return on
assets were 9%, 6.5% and 9% for the period October 9, 1996 to March 31, 1997.
The components of the plan's net pension income during the periods are shown
below (in millions):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 9, 1996
TO MARCH 31, 1997
--------------------
<S> <C> <C>
Service cost (benefits earned during the period)... (Pounds) 2.5 $ 4.0
Interest cost on projected benefit obligation...... 14.9 24.0
Expected return on plan assets..................... (18.0) (29.0)
------------ ------
Net pension income............................... (Pounds)(0.6) $ (1.0)
============ ======
</TABLE>
12. EMPLOYEE OPTIONS:
Prior to the acquisition of London Electricity by the Company, certain
employees of London Electricity were eligible to participate in either the
Employee Sharesave or Executive Sharesave plans. In conjunction with the
purchase of London Electricity, the holders of any outstanding options were
given the opportunity to exercise their options and sell their shares to the
Company at a price of (Pounds)7.05 ($11.36) per share which then entitled the
owners of the shares to the interim dividend of (Pounds).179 ($0.29) per
share. If the holders of the options did not exercise their options, such
options were canceled and the holders were paid (Pounds)7.05 ($11.36) per
share. There were 5,103,416 options outstanding, which were all exercised or
canceled subsequent to year-end as of March 31, 1997.
13. ACQUISITION OF LONDON ELECTRICITY:
Effective February 1, 1997, the Company acquired London Electricity in a
transaction accounted for as a purchase. Accordingly, the results of
operations of London Electricity have been consolidated into the results of
operations of the Company from February 1, 1997 to March 31, 1997. The Company
has no operations outside of its investment in London Electricity. Based on
the purchase method of accounting, the Company has allocated the purchase
price for London Electricity to London Electricity assets and liabilities
based on their estimated fair market value with the remainder allocated to
London Electricity's distribution license which is an identifiable intangible
asset.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and London Electricity as if the acquisition
occurred at the beginning of each of the
F-14
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respective fiscal years presented. Appropriate adjustments have been made to
reflect the accounting basis used in recording the acquisition. This pro forma
information has been prepared for comparative purposes only and does not
purport to be indicative of the results of operations that would have resulted
had the combination been in effect on the dates indicated, that have resulted
since the date of acquisition or that may result in the future.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED
MARCH 31,
----------------------------------------------------
(IN MILLIONS, EXCEPT
SHARE AND PER SHARE 1997 1996
AMOUNTS) ------------------------ ---------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................. (Pounds)1,349.8 $2,175.5 (Pounds)1,187.7 $1,914.2
Net income............... 16.3 26.3 308.1(a) 496.6
Net income per share..... 326.0 525.4 6,162.0 9,931.3
Weighted average common
shares outstanding...... 50,000 50,000
</TABLE>
- --------
(a) Includes gain on revaluation of National Grid Holding Company plc, sale of
pumped storage business, special dividends, rights dividends, contribution
to ESOP and net customer refund of (Pounds)266.2 million ($429 million),
(Pounds)70.1 million ($113 million), (Pounds)131 million ($211.1 million)
, (Pounds)3 million ($4.8 million) , (Pounds)17.3 million ($27.9 million)
and (Pounds)82.6 million ($133.1 million), respectively. The net after tax
effect of the above was to increase net income by (Pounds)248 million
($399.7 million).
The assets and liabilities acquired as of February 1, 1997 and the cash used
for acquisition are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets............................... (Pounds) 323.4 $ 521.2
Network assets............................... 1,332.0 2,146.8
Other long-term assets....................... 999.3 1,610.6
Current liabilities.......................... (383.7) (618.4)
Long-term debt............................... (208.4) (335.9)
Other long-term liabilities.................. (802.5) (1,293.4)
--------------- ---------
Total purchase price....................... 1,260.1 2,030.9
Less: Loan Notes and liability to
shareholders................................ (76.7) (123.6)
Cash acquired in acquisition................. (9.1) (14.7)
--------------- ---------
Cash used for acquisition.................... (Pounds)1,174.3 $ 1,892.6
=============== =========
</TABLE>
Certain shareholders of London Electricity elected to receive Loan Notes
issued by the Company in exchange for their shares as permitted by the terms
of the Company's tender offer. Such debt instruments are included in long-term
debt in the above analysis. Additionally, as of March 31, 1997, certain London
Electricity shareholders had not yet tendered their shares as required by both
the terms of the tender offer and applicable law. Due to the Company's
unconditional commitment to purchase such shares, the purchase price for such
shares has been included in other long-term liabilities in the above analysis.
London Electricity has utilized a portion of the pension plan surplus to
increase benefits to members and reduce employer and employee contributions. A
recent court ruling in the UK upheld such uses of pension surplus. However,
the decision is under appeal and should the decision be reversed on appeal,
the Company could be required to repay pension surplus utilized and recompute
the Company's prepaid pension asset which was (Pounds)145.3 million ($234.2
million) at March 31, 1997. Additionally, as of March 31, 1997, a tax
valuation of fixed assets had not yet been prepared. Management expects that
this tax valuation will be completed by December 31, 1997. Should an
F-15
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
unfavorable outcome result from appeals on the pension matter subsequent to
February 1, 1998, results of operations may be unfavorably impacted. The
Company's allocation of purchase price is preliminary pending the outcome of
these matters.
14. SEGMENT INFORMATION:
The Company is engaged in two electric industry segments: distribution,
which involves the transfer and delivery of electricity across its network to
its customers, and supply, which involves bulk purchases of electricity from
the Pool for delivery to the distribution networks. Other consists principally
of the Company's investment in private distribution networks, electricity
contracting services and investments in generating assets. Information about
the Company's operations in these individual segments during the period from
date of inception to March 31, 1997 is as follows (in millions):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM OCTOBER 9, 1996 TO MARCH 31, 1997
--------------------------------------------------------------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
--------------------- -------------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues....... (Pounds)60.8 $ 98.0 (Pounds)213.3 $343.8 (Pounds)10.2 $ 16.4 (Pounds)(50.7) $(81.7) (Pounds)233.6 $ 376.5
Operating
income......... 18.1 29.2 6.6 10.6 7.3 11.8 (Pounds) -- 32.0 51.6
Depreciation and
amortization... 13.9 22.4 0.8 1.3 (1.8) (2.9) (Pounds) -- 12.9 20.8
Total assets
employed at
period end..... 1,765.9 2,846.1 543.8 876.5 358.9 578.4 (Pounds) -- 2,668.6 4,301.0
Capital
expenditures... 25.3 40.8 2.6 4.2 8.0 12.9 (Pounds) -- 35.9 57.9
</TABLE>
15. RESTRUCTURING CHARGES:
In 1995 and 1996, London Electricity implemented a restructuring program to
reduce the number of employees in the Network Services, Customer Services,
Corporate and Information Technology groups. An initial plan was approved by
the Board of Directors of the Company in September of 1994 and was based on a
business plan developed subsequent to the 1994 Regulatory Review of
Distribution (the "Distribution Review").
Following the reopening of the Distribution Review during 1995, a further
plan was proposed leading to further reduction of employees in the same areas.
This plan was approved by the Board of Directors in May of 1996. The balance
as of March 31, 1997 for restructuring charges is shown below along with the
actual termination benefits paid under the program for the period from date of
inception to March 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
Provision for restructuring as of January 31, 1997........ (Pounds)25.9 $41.7
Adjustments to restructuring provision in period from date
of inception to March 31, 1997........................... 8.0 12.9
Payments made in period from date of inception to March
31, 1997................................................. (3.1) (5.0)
------------ -----
Balance March 31, 1997.................................. (Pounds)30.8 $49.6
============ =====
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of London Electricity plc:
We have audited the accompanying consolidated balance sheet of London
Electricity plc as of March 31, 1996 and the related consolidated statements
of operations, cash flows and changes in shareholders' equity for the period
from April 1, 1996 to January 31, 1997, and the years ended March 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of London
Electricity plc as of March 31, 1996 and the results of its operations and its
cash flows for the period from April 1, 1996 to January 31, 1997 and the years
ended March 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
July 31, 1997
F-17
<PAGE>
LONDON ELECTRICITY PLC
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents.................................... (Pounds) 13.0
Accounts receivable:
Customer receivable net of reserve of (Pounds)8.7........... 113.5
Unbilled revenue............................................ 77.2
Deferred income tax asset.................................... 15.8
Income tax receivable........................................ 125.1
Other receivables............................................ 53.9
Prepayments and other........................................ 8.1
Inventory.................................................... 7.4
Investments.................................................. 16.7
---------------
Total current assets....................................... 430.7
---------------
Property, plant and equipment, net of accumulated depreciation
of (Pounds)465.3.............................................. 701.3
Construction work in progress.................................. 82.3
Goodwill, net of accumulated amortization of (Pounds)2.2....... 41.3
Investments, long-term......................................... 10.6
Long-term receivables.......................................... 10.0
Prepaid pension asset.......................................... 73.1
---------------
Total assets................................................... (Pounds)1,349.3
===============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Notes payable................................................ (Pounds) 96.1
Accounts payable............................................. 117.5
Income taxes payable......................................... 155.1
Deferred revenue............................................. 20.1
Other liabilities............................................ 48.5
---------------
Total current liabilities.................................. 437.3
---------------
Long-term debt................................................. 197.7
Deferred income tax liability.................................. 208.1
Other.......................................................... 58.7
---------------
Total liabilities.......................................... 901.8
---------------
Commitments and Contingencies
Shareholders' equity:
Common stock, (Pounds).583 par value per share, 257,142,857
shares authorized, 174,290,836 shares issued and
outstanding................................................. 101.7
Additional paid-in capital................................... 9.6
Retained earnings............................................ 336.2
---------------
Total shareholders' equity................................. 447.5
---------------
Total liabilities and shareholders' equity..................... (Pounds)1,349.3
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
LONDON ELECTRICITY PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1996 TO JANUARY 31, 1997 AND THE YEARS ENDED MARCH
31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1996 YEARS ENDED MARCH 31,
TO JANUARY 31, --------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating revenues.......... (Pounds)1,116.2 (Pounds)1,187.7 (Pounds)1,209.4
Cost of sales............... 768.4 834.5 740.1
--------------- --------------- ---------------
Gross profit................ 347.8 353.2 469.3
Depreciation and amortiza-
tion....................... 39.3 42.2 39.5
Property taxes.............. 19.4 20.3 24.8
Restructuring charges....... 11.7 -- 40.5
Selling, general and admin-
istrative.................. 134.0 146.8 146.3
Other operation and mainte-
nance costs................ 36.7 42.3 52.4
--------------- --------------- ---------------
Income from
operations........... 106.7 101.6 165.8
Other income:
National Grid Transaction
Gain on revaluation of
National Grid
investment............. -- 266.2 --
Gain on sale of pumped
storage business....... -- 70.1 --
Special dividends....... -- 131.0 --
Contribution to Employee
Stock Ownership Plan... -- (17.3) --
Dividend income........... 3.8 24.8 20.6
Equity in earnings (loss)
of affiliate............. 2.4 (2.2) (0.7)
Other, net................ (1.6) .1 2.6
--------------- --------------- ---------------
Total other income.... 4.6 472.7 22.5
Interest expense, net....... 17.1 4.9 1.1
--------------- --------------- ---------------
Income before income
taxes and
extraordinary item... 94.2 569.4 187.2
Extraordinary loss on extin-
guishment of debt.......... -- -- 9.5
--------------- --------------- ---------------
Income before income
taxes................ 94.2 569.4 177.7
Income taxes................ 32.1 110.0 57.2
--------------- --------------- ---------------
Net income............ (Pounds) 62.1 (Pounds) 459.4 (Pounds) 120.5
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
LONDON ELECTRICITY PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM APRIL 1, 1996 TO JANUARY 31, 1997 AND THE YEARS ENDED MARCH
31, 1996 AND 1995
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK ADDITIONAL AVAILABLE FOR
-------------------------- PAID-IN RETAINED SALE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS EQUITY
----------- ------------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1994.. 219,082,592 (Pounds)109.5 (Pounds)2.0 (Pounds)559.6 (Pounds) -- (Pounds)671.1
Common stock issued..... 513,399 0.3 0.9 -- -- 1.2
Treasury shares
acquired............... (21,900,292) (11.0) -- (139.4) -- (150.4)
Net Income.............. -- -- -- 120.5 -- 120.5
Dividends declared...... -- -- -- (52.5) -- (52.5)
----------- ------------- ----------- ------------- -------------- -------------
Balance, March 31, 1995. 197,695,699 (Pounds) 98.8 (Pounds)2.9 (Pounds)488.2 (Pounds) -- (Pounds)589.9
Common stock issued..... 4,956,992 2.9 6.7 -- -- 9.6
Reduction in shares from
reverse stock split.... (27,522,282) -- -- -- -- --
Treasury shares
acquired............... (839,573) -- -- (0.8) -- (0.8)
Revaluation of National
Grid investment........ -- -- -- -- 178.4 178.4
Realized gain on
distribution of
National Grid
investment............. -- -- -- -- (178.4) (178.4)
Net income.............. -- -- -- 459.4 -- 459.4
Dividends declared:
Cash dividends........ -- -- -- (260.2) -- (260.2)
National Grid
Distribution......... -- -- -- (350.4) -- (350.4)
----------- ------------- ----------- ------------- -------------- -------------
Balance, March 31, 1996. 174,290,836 (Pounds)101.7 (Pounds)9.6 (Pounds)336.2 (Pounds) -- (Pounds)447.5
Common stock issued..... 390,712 0.1 -- 1.0 -- 1.1
Net income.............. -- -- -- 62.1 -- 62.1
Dividends declared...... -- -- -- (72.8) -- (72.8)
----------- ------------- ----------- ------------- -------------- -------------
Balance, January 31,
1997................... 174,681,548 (Pounds)101.8 (Pounds)9.6 (Pounds)326.5 (Pounds) -- (Pounds)437.9
=========== ============= =========== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
LONDON ELECTRICITY PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1996 TO JANUARY 31, 1997 AND THE YEARS ENDED MARCH
31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD FROM MARCH 31,
APRIL 1, 1996 TO ----------------------------
JANUARY 31, 1997 1996 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activ-
ities:
Net income.................... (Pounds) 62.1 (Pounds)459.4 (Pounds)120.5
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............... 39.3 42.2 39.5
Deferred income taxes....... 14.4 17.4 26.8
Gain on revaluation of
National Grid investment... -- (266.2) --
Change in assets and
liabilities:
Inventory................. (2.0) (3.1) 0.3
Accounts receivable and
unbilled revenue......... (13.5) (15.8) (20.3)
Income tax receivable..... 115.1 (79.3) (34.2)
Other receivables......... 3.1 (32.4) (4.6)
Prepayments and other..... 2.0 (4.4) 0.9
Long-term receivables and
other.................... (6.0) (17.4) (19.6)
Accounts payable.......... 26.0 5.4 (0.6)
Income taxes payable...... (126.5) 75.0 15.8
Deferred revenue and other
current liabilities...... (10.9) 15.1 14.5
Other long-term
liabilities.............. (1.4) (4.9) (15.9)
------------- ------------- -------------
Net cash provided by
operating activities... 101.7 191.0 123.1
Cash flows from investing activ-
ities:
Capital expenditures.......... (115.6) (110.6) (110.4)
Proceeds from sale of fixed
assets....................... 0.5 1.2 3.8
Receipt of consumer
contributions................ 16.8 14.9 14.6
Purchase of investments....... (3.9) (23.7) (4.3)
Sales of investments.......... 6.5 36.9 118.5
------------- ------------- -------------
Net cash provided by
(used in) investing
activities............. (95.7) (81.3) 22.2
Cash flows from financing activ-
ities:
Proceeds from bond issue...... 0.2 99.1 --
Proceeds from issuance of
common stock................. 1.2 9.6 --
Repayments on bond issue...... -- -- (69.8)
Net proceeds from available
lines of credit.............. 66.2 36.9 56.3
Dividends paid................ (64.3) (260.2) (52.5)
Repurchase of common stock.... -- (0.8) (149.2)
------------- ------------- -------------
Net cash provided by
(used in) financing
activities............. 3.3 (115.4) (215.2)
------------- ------------- -------------
Increase (decrease) in cash and
cash equivalents............... 9.3 (5.7) (69.9)
Beginning of period cash and
cash equivalents............... 13.0 18.7 88.6
------------- ------------- -------------
End of period cash and cash
equivalents.................... (Pounds) 22.3 (Pounds) 13.0 (Pounds) 18.7
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest........ (Pounds) 28.0 (Pounds) 12.4 (Pounds) 13.8
============= ============= =============
Cash paid for income taxes.... (Pounds)169.0 (Pounds) 77.0 (Pounds) 43.0
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
London Electricity plc ("London Electricity") is one of the twelve regional
electricity companies ("RECs") in England and Wales licensed to supply,
distribute, and, to a limited extent, generate electricity. The RECs were
created as a result of the privatization of the United Kingdom ("UK") electric
industry in 1990 after the state-owned low voltage distribution networks were
allocated to the then existing twelve regional boards. London Electricity's
main business, the distribution and supply of electricity to customers in
London, England, is regulated under the terms of London Electricity's Public
Electricity Supply License ("PES license") by the Office of Electricity
Regulation (the "Regulator").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements of London Electricity are presented in pounds
sterling ((Pounds)) and in conformity with accounting principles generally
accepted in the United States ("US GAAP"). The consolidated financial
statements include the accounts of London Electricity and its wholly-owned and
majority-owned subsidiaries and have been prepared from records maintained by
London Electricity in the UK. All significant intercompany accounts and
transactions have been eliminated in consolidation. London Electricity is not
subject to rate regulation, but rather, is subject to price cap regulation
and, therefore, the provisions of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS
71") do not apply.
London Electricity was acquired by Entergy Power UK plc on February 1, 1997.
The financial statements include the results of operations of London
Electricity through the date of acquisition.
Use of Estimates in the Preparation of Financial Statements
The preparation of London Electricity's financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period.
Adjustments to the reported amounts of assets and liabilities may be necessary
in the future to the extent that future estimates or actual results are
different from the estimates used in the financial statements.
Revenue Recognition
London Electricity distributes electricity to commercial, residential and
industrial customers within the London area. London Electricity records
revenue net of value added tax ("VAT") and accrues revenue for services
provided but unbilled at the end of each reporting period. London Electricity
purchases power primarily from the wholesale trading market for electricity in
England and Wales (the "Pool"). The Pool monitors supply and demand between
generators and suppliers, sets prices for generation and provides centralized
settlement of amounts due between generators and suppliers.
Cash and Cash Equivalents
London Electricity considers all short-term investments with an original
maturity of three months or less to be cash and cash equivalents.
Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes
materials, labor and appropriate overhead costs. London Electricity is
entitled, under certain conditions, to collect cash
F-22
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions from consumers to fund improvements to London Electricity's
distribution networks. These consumer contributions are credited against the
historical cost of the asset.
Depreciation is computed by the straight-line method at rates based on the
estimated service lives of each of the various classes of property. Consumer
contributions are amortized into income at a rate of 2.5%. Depreciation rates
on average depreciable property are shown below:
<TABLE>
<CAPTION>
<S> <C>
Distribution network assets.......................................... 2.5%
Buildings............................................................ 1.7%
Vehicles and mobile plant............................................ 10%-20%
Furniture and equipment, including computer hardware and software.... 20%-33%
</TABLE>
Income Taxes
London Electricity accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This standard requires that deferred income taxes be recorded for all
temporary differences between the financial statement basis and tax basis of
assets and liabilities and loss carryforwards, and that deferred tax balances
be based on enacted tax laws at rates that are expected to be in effect when
the temporary differences reverse.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired and is being amortized over forty years using the straight-line
method.
Financial Instruments
London Electricity enters into interest rate swaps as a part of its overall
risk management strategy and does not hold or issue material amounts of
derivative financial instruments for trading purposes. London Electricity
accounts for its interest rate swaps in accordance with the concepts
established in Statement of Financial Accounting Standards No. 80, "Accounting
for Futures Contracts" ("SFAS 80") and various Emerging Issue Task Force
pronouncements. If the interest rate swaps were to be sold or terminated, any
gain or loss would be deferred and amortized over the remaining life of the
debt instrument being hedged by the interest rate swap. If the debt instrument
being hedged by the interest rate swaps were to be extinguished, any gain or
loss attributable to the swap would be recognized in the period of the
transaction.
London Electricity considers the carrying amounts of financial instruments
classified as current assets and liabilities to be a reasonable estimate of
their fair value because of the short maturity of these instruments.
Price Control
Charges for distribution of electricity and supply to customers with a
maximum demand under 100kW are subject to a price control formula set out in
London Electricity's PES license which allows a maximum charge per unit of
electricity.
Differences in the charges, or in the purchase cost of electricity, can
result in the under or overrecovery of revenues in a particular year.
Where there is an overrecovery of supply of distribution business revenues
against the regulated maximum allowable amount, revenues are deferred in an
amount equivalent to the overrecovered amount. The deferred amount is deducted
from operating revenues and included in other liabilities. Where there is an
underrecovery, no anticipation of any potential future recovery is made.
F-23
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
London Electricity enters into contracts for differences ("CFDs") primarily
to hedge its supply business against the price risk of electricity purchases
from the Pool. Use of these CFDs is carried out within the framework of London
Electricity's purchasing strategy and hedging guidelines. Risk of loss is
monitored through establishment of approved counterparties and maximum
counterparty limits and minimum credit ratings. London Electricity recognizes
gains (losses) on CFDs when settlement is made. Gains (losses) on CFDs are
recognized as a decrease (increase) to cost of sales based upon the difference
between fixed prices in the CFD compared to variable prices paid to the Pool
for the period. Gains (losses) based upon the difference between fixed prices
in the CFD compared to variable prices paid to the Pool for future electricity
purchases are not recognized until the period of such settlements.
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" ("SFAS 121") the Company periodically reviews its long-lived
assets whenever events or changes in circumstances indicate that
recoverability of these assets is uncertain. Generally, the determination of
recoverability is based on the undiscounted net cash flows expected to result
from such assets. Projected undiscounted net cash flows depend on the future
operating costs associated with the assets and future market prices over the
remaining life of the assets. Based on current estimates of future
undiscounted cash flows as prescribed under SFAS 121, management anticipates
that future revenues from such assets will fully recover all related costs.
3. REGULATORY MATTERS:
The distribution business of London Electricity is regulated under its PES
license, pursuant to which revenue of the distribution business is controlled
by the Distribution Price Control Formula (DPCF). The DPCF determines the
maximum average price per unit of electricity (expressed in kilowatt hours, a
"unit") that a REC may charge. The elements used in the DPCF are established
for a five-year period and are subject to review by the Regulator at the end
of each five-year period and at other times at the discretion of the
Regulator. At each review the Regulator can adjust the value of certain
elements in the DPCF. Following a review by the Regulator in August 1994, a
14% price reduction was set for London Electricity, effective April 1, 1995.
In July 1995, a further review of distribution prices was concluded by the
Regulator for fiscal years 1997 to 2000. As a result of this further review,
London Electricity's distribution prices were reduced an additional 11%,
effective April 1, 1996, 3% effective April 1, 1997 and will be reduced by a
further 3% on both April 1, 1998 and 1999.
The supply business of London Electricity is also regulated by the Regulator
and prices are established based upon the Supply Price Control Formula which
is similar to the DPCF; however, it allows full pass through for all properly
incurred costs and is set for a four-year period by the Regulator.
The non-franchise supply market, which typically includes larger commercial
and industrial customers was opened to competition for all customers with
usage above 1Mw upon privatization of the industry in 1990. The non-franchise
supply markets of 100 kW or more were opened to full competition starting in
April 1994.
Currently London Electricity, under its PES license, has the exclusive right
to supply residential and small industrial and commercial customers within its
franchise area. It is anticipated that the supply market will be fully
competitive over a six month period starting in April 1998.
4. INVESTMENTS:
London Electricity accounts for investments whose fair market value is
readily determinable in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Investments
F-24
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for Certain Debt and Equity Securities" ("SFAS 115"). These securities are
considered available-for-sale securities under SFAS 115 and their fair values
approximate cost. Other securities whose fair market values are not readily
determinable and in which London Electricity does not have a significant
interest are recorded at cost.
Investments in companies in which London Electricity's ownership interests
range from 20% to 50% and investments in which London Electricity's ownership
is less than 20% but over which London Electricity exercises significant
influence over operating and financial policies are accounted for using the
equity method. The following are London Electricity's equity method
investments as of March 31, 1996:
<TABLE>
<CAPTION>
INVESTMENT PERCENTAGE OWNERSHIP
- ---------- ---------------------------
<S> <C>
London Total Gas Ltd................................ 50%
Combined Power Systems Ltd.......................... 32% combined ownership in
common and preferred shares
Thames Valley Power Ltd............................. 50%
London Total Energy Ltd............................. 50%
Barking Power Ltd................................... 13.5%
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost, consists of the following (in
millions):
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------
<S> <C>
Distribution network assets................................... (Pounds)1,159.1
Land and buildings............................................ 77.0
Vehicles and mobile plant..................................... 15.9
Furniture, fixtures and equipment, including computer hardware
and software................................................. 118.8
Consumer contributions to construction........................ (204.2)
---------------
1,166.6
Less accumulated depreciation and amortization................ (465.3)
---------------
(Pounds) 701.3
===============
</TABLE>
6. INCOME TAXES:
London Electricity's income tax expense for the period from April 1, 1996 to
January 31, 1997, and the years ended March 31, 1996 and 1995, consists of the
following (in millions):
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED MARCH 31,
APRIL 1, 1996 TO ---------------------------
JANUARY 31, 1987 1996 1995
---------------- ------------- ------------
<S> <C> <C> <C>
Current........................... (Pounds)17.7 (Pounds) 41.0 (Pounds)30.4
Deferred.......................... 14.4 17.4 26.8
Current taxes on National Grid
transactions:
Tax on special dividend......... -- 22.8 --
Tax on distribution in kind..... -- 59.7 --
Tax on ESOP contribution........ -- (3.6) --
Tax reduction related to
customer discount.............. -- (27.3) --
------------ ------------- ------------
Total......................... (Pounds)32.1 (Pounds)110.0 (Pounds)57.2
============ ============= ============
</TABLE>
F-25
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
London Electricity's total income taxes differ from the amounts computed by
applying the statutory income tax rate to income before taxes. The reasons for
the differences in the period from April 1, 1996 to January 31, 1997 and the
years ended March 31, 1996 and 1995 are (in millions):
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED MARCH 31,
APRIL 1, 1996 TO ----------------------------
JANUARY 31, 1987 1996 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Pre-tax income.................. (Pounds)94.2 (Pounds)569.4 (Pounds)177.7
============ ============= =============
Income taxes computed at statu-
tory rate...................... 31.1 187.9 58.6
National Grid transactions:
Revaluation of investment
excluded from taxable income. -- (28.1) --
Gain on sale of pumped storage
business excluded from
taxable income............... -- (23.1) --
Tax credit on contribution to
ESOP......................... -- (3.6) --
Special dividends not taxable. -- (6.9) --
Effect of difference between
statutory rate (33%) and rate
on dividends received (20%).... (0.5) (19.9) (2.6)
Amortization of goodwill........ 0.3 0.4 0.4
Loss on extinguishment of debt.. -- 3.1
Other........................... 1.2 3.3 (2.3)
------------ ------------- -------------
Total income tax expense.... (Pounds)32.1 (Pounds)110.0 (Pounds) 57.2
============ ============= =============
</TABLE>
Significant components of London Electricity's net deferred tax liability as
of March 31, 1996 are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liability
Property-related basis differences....................... (Pounds)(184.0)
Prepaid pension asset.................................... (24.1)
--------------
Total.................................................. (208.1)
Deferred tax asset
Restructuring and other provisions....................... 15.8
--------------
Net deferred tax liability............................. (Pounds)(192.3)
==============
</TABLE>
As a result of Parliamentary elections held on May 1, 1997, the Labor Party
gained control of the British government. On July 31, 1997 legislation
establishing a windfall profits tax, which affects regulated companies
privatized since 1979 including London Electricity, was enacted. In accordance
with SFAS 109 under US GAAP, London Electricity will record a charge to income
for the windfall profits tax during the quarter ending September 30, 1997. A
change in the UK statutory rate from 33% to 31% was also included in the
legislation. The impact of such changes will be recognition in the quarter
ending September 30, 1997 of the (Pounds)140 million expense for the windfall
profits tax and approximately (Pounds)38 million of income tax benefit as a
result of the change in the UK statutory income tax rate in the Company's
results of operations.
The tax years since fiscal year 1990 are currently under review by the
Inland Revenue in the UK. The Company believes that there is no additional
liability related to the tax years under review.
F-26
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT:
The long-term debt of London Electricity as of March 31, 1996 consists of
the following (in millions):
<TABLE>
<CAPTION>
<S> <C>
8% Eurobonds repayable March 28, 2003...................... (Pounds) 98.9
8 5/8% Eurobonds repayable October 26, 2005................ 98.8
-------------
Total.................................................... (Pounds)197.7
=============
</TABLE>
The 8% and 8 5/8% Eurobonds may become due prior to their stated maturity
only upon the occurrence of certain events including default, liquidation or
bankruptcy of London Electricity. The Company does not anticipate default
under the agreements.
London Electricity entered into an interest rate swap agreement to reduce
the impact of interest rate changes on its outstanding debt. The interest rate
swap agreement involves the exchange of a fixed interest rate for a floating
interest rate periodically over the life of the agreement. If the counterparty
to the interest rate swap was to default on contractual payments, London
Electricity could be exposed to increased cost related to replacing the
original agreement. However, London Electricity does not anticipate non-
performance. At March 31, 1996, London Electricity was party to a notional
amount of (Pounds)8 million for an interest rate swap agreement with a
maturity date of May 6, 2003.
In August 1994, London Electricity retired approximately (Pounds)70 million
of 12.66% bonds due in 1999. The debt was retired using proceeds from
borrowings under London Electricity's available lines of credit. The cash paid
to retire the debt exceeded the carrying value of the debt by approximately
(Pounds)9.5 million, which is recorded as an extraordinary loss on the
extinguishment of debt.
8. COMMON STOCK:
During 1996, London Electricity effected a reverse stock split of six for
every seven shares of common stock held. This reduced by approximately 28
million, the number of common shares outstanding and increased the par value
of the stock from (Pounds)0.50 to (Pounds)0.583 per share.
9. NOTES PAYABLE:
Other facilities available to London Electricity are short-term unsecured,
uncommitted facilities of (Pounds)228 million and a (Pounds)150 million
Sterling Commercial Paper Program ("Sterling Program"). Uncommitted facilities
are unsecured facilities which are available at London Electricity's request,
however there is no obligation by the bank counterparty to make funds
available to London Electricity. The Sterling Program is a negotiable
promissory note with short term maturities (up to 364 days) issued at a
discount to face value. London Electricity had an outstanding balance of
(Pounds)96.1 million on all of these facilities as of March 31, 1996. The
weighted average interest rate incurred on these borrowings was 6.3%, 6.1% and
6.4% for the period from April 1, 1996 to January 31, 1997 and for the years
ended March 31, 1996 and 1995, respectively.
F-27
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
London Electricity has entered into operating lease agreements for the use
of buildings and vehicles. Minimum future rental payments under all operating
leases as of March 31, 1996 are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ (Pounds) 7.1
1998........................................................ 6.9
1999........................................................ 6.6
2000........................................................ 6.6
2001........................................................ 6.4
Thereafter.................................................. 83.7
-------------
Total..................................................... (Pounds)117.3
=============
</TABLE>
Rental expense incurred under these lease agreements was (Pounds)6.7 million
, (Pounds)7.9 million and (Pounds)7.2 million for the period from April 1,
1996 to January 31, 1997 and for the years ended March 31, 1996 and March 31,
1995, respectively.
London Electricity is subject to an agreement whereby the UK government is
entitled to a proportion of certain property gains accruing to London
Electricity as a result of disposals or events treated as disposals occurring
after March 31, 1990 of properties held at that date. This commitment is
effective until March 31, 2000.
London Electricity has utilized a portion of the pension plan surplus to
increase benefits to members and reduce employer and employee contributions. A
recent court ruling in the UK upheld such uses of pension surpluses. However,
should the decision be reversed on appeal, London Electricity could be
required to repay pension surpluses utilized. Management is unable to predict
the likely outcome of this matter at this time.
The UK Environmental Protection Act 1990 addresses waste management issues
and imposes certain obligations on companies which handle and dispose of
waste. Some of London Electricity's distribution activities produce waste but
London Electricity believes that it has taken and continues to take measures
to comply with the applicable laws and governmental regulations for the
protection of the environment. There are no material legal or administrative
proceedings pending against London Electricity with respect to any
environmental matter.
London Electricity is required to file five-year projections with the
Regulator for capital expenditures related to its regulated distribution
network and updates of such projections annually. The most recent updated
projection was for the five-year period ended March 31, 2000 and was filed in
July 1997. This filing indicated London Electricity's current projection of
approximately (Pounds)482 million for the five-year period. Approximately
(Pounds)186 million has already been spent in fiscal years 1996 and 1997
related to this five-year projection.
London Electricity uses CFDs and power purchase contracts with certain UK
generators to fix the price of electricity for a contracted quantity over a
specific period of time. At March 31, 1996, the Company has outstanding CFDs
and power purchase contracts for approximately 52,000 GWh of electricity.
These include a long term power purchase contract with an affiliate which is
based on 27.5% of the affiliate's capacity from its 1000 MW facility through
the year 2010. London Electricity's sales volumes were approximately 17,000
GWh, 18,000 GWh and 16,000 GWh in the period from April 1, 1996 to January 31,
1997, and the years ended March 31, 1996 and 1995, respectively.
F-28
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. PENSION BENEFITS:
London Electricity participates in a defined benefit pension plan, which
provides pension and other related defined benefits, based on final
pensionable pay, to substantially all employees throughout the electric supply
industry in the UK. Contributions to the plan by London Electricity on behalf
of its employees were (Pounds)10.2 million and (Pounds)10.9 million for the
years ended March 31, 1996 and 1995, respectively. London Electricity made no
contributions to the plan during the period April 1, 1996 to January 31, 1997.
London Electricity uses the projected unit credit actuarial method for
funding purposes. Amounts funded to the pension are primarily invested in
equity and fixed income securities.
Statement of Financial Accounting Standards No. 87 "Employees Accounting for
Pensions" ("SFAS 87") was issued in 1988 and is effective for fiscal years
beginning after December 15, 1988. The provisions of SFAS 87 were initially
adopted by London Electricity on April 1, 1994. Accordingly, the unrecognized
net transition asset at the date of initial application of SFAS 87 is being
amortized over 15 years beginning April 1, 1989. The amount of the
unrecognized net transition asset credited to equity on April 1, 1994 was
(Pounds)29.2 million.
The following table sets forth the plan's funded status and amounts
recognized in London Electricity's balance sheet at March 31, 1996 (in
millions):
<TABLE>
<CAPTION>
<S> <C>
Accumulated benefit obligation:
Vested................................................... (Pounds)589.8
=============
Projected benefit obligation............................... 674.5
Plan assets at fair value.................................. 806.7
-------------
Assets in excess of projected benefit obligation........... 132.2
Unrecognized net gain...................................... (12.3)
Unrecognized net transition asset.......................... (46.8)
-------------
Prepaid pension asset.................................. (Pounds) 73.1
=============
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation, and the expected long-term rate of return on
assets was 9%, 6.5% and 9%, respectively, for the period from April 1, 1996 to
January 31, 1997 and for the years ended March 31, 1996 and 1995.
The components of the plan's net pension income during the periods are shown
below (in millions):
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED MARCH 31,
APRIL 1, 1996 TO --------------------------
JANUARY 31, 1997 1996 1995
---------------- ------------ ------------
<S> <C> <C> <C>
Service cost (benefits earned dur-
ing the period).................. (Pounds) 6.6 (Pounds) 8.5 (Pounds) 7.6
Interest cost on projected
benefit obligations............ 44.4 54.5 54.1
Actual return on plan assets.... (58.4) (145.1) (5.6)
Net amortization and deferral... 2.5 73.6 (63.6)
------------ ------------ ------------
Net pension benefit .......... (Pounds)(4.9) (Pounds)(8.5) (Pounds)(7.5)
============ ============ ============
</TABLE>
F-29
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. DISTRIBUTION OF NATIONAL GRID INVESTMENT:
In December 1995, each of the RECs distributed their investments in the
National Grid Holding Company plc ("National Grid"). London Electricity
distributed its ownership shares in National Grid to its shareholders. Prior
to the distribution, the National Grid shares were listed on the London Stock
Exchange and revalued to reflect the market value of the common stock of
National Grid, whose shares had not previously been publicly traded and for
which there was no readily determinable fair market value. London Electricity
recorded a gain on the revaluation of (Pounds)266.2 million in the Statement
of Operations for the year ended March 31, 1996. National Grid also effected a
rights issue at (Pounds)2.04 per share to raise additional equity capital.
London Electricity invested an additional (Pounds)18 million in National Grid
as a result of the rights issue. Approximately 96% of the total National Grid
shares owned by London Electricity were then distributed in kind to the
shareholders of London Electricity.
The remaining shares owned by London Electricity were retained to establish
an Employee Stock Ownership Plan ("ESOP") to compensate participants of the
Employee and Executive Sharesave Plans (employee stock option plans) for any
diminution in value of London Electricity shares as a result of the demerger.
Approximately 5.1 million shares of National Grid were reserved for
contributions to the ESOP. The actual shares will be contributed to the ESOP
upon exercise of options under the employee stock option plans. The
contributed shares related to the establishment of the ESOP plus expenses and
cash contributions due to the ESOP to compensate the participants for taxes
payable related to this distribution were charged to expense during the fiscal
year ended March 31, 1996. The difference between actual National Grid shares
contributed and the total amount charged to expense is included in other
liabilities in London Electricity's balance sheet as of March 31, 1996.
National Grid also distributed to London Electricity its ownership shares in
PSB Holding Limited ("PSB"), the holding company of First Hydro Limited which
had been transferred to National Grid in 1990. As part of the demerger, PSB
was sold to Mission Energy and the Company recorded a (Pounds)70.1 million
gain on the sale.
Finally, as part of the demerger, the Regulator ordered a (Pounds)50 refund
to each of London Electricity's supply customers which was offset by a
reduction in the fossil fuel levy charged to the Company. The effect of the
refund, which was recorded in the year ended March 31, 1996, was to reduce
operating revenues, cost of sales and gross profit by (Pounds)90.9 million ,
(Pounds)8.3 million and (Pounds)82.6 million, respectively.
The investment in National Grid has been accounted for by London Electricity
as a cost method investment. The consolidated results of operations of London
Electricity therefore do not include any of the results of operations of
National Grid.
13. EMPLOYEE OPTIONS:
London Electricity was acquired by Entergy Power UK plc on February 1, 1997.
In conjunction with the purchase of London Electricity, the holders of any
outstanding options under the employee option plans were given the opportunity
to exercise their options and sell their shares to Entergy Power UK plc at a
price of (Pounds)7.05 per share which then entitled the owner of the shares to
the interim dividend of (Pounds).179 per share. If the holders of the options
did not exercise their options, such options were cash canceled and the
holders were paid (Pounds)7.05 per share.
Under the Employee Sharesave Plan, London Electricity was authorized to
issue shares of common stock pursuant to stock options granted to officers,
key employees and directors. Under the
F-30
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Executive Sharesave Plan, London Electricity was authorized to issue shares of
common stock pursuant to stock options granted to directors.
The stock options had an exercise price equal to the fair market value of
the common stock on the date of grant and a contractual term of 10 years. The
stock options became exercisable on the third anniversary of the date of grant
under the Executive Sharesave Plan.
A summary of the status of London Electricity's stock options for the period
from April 1, 1996 to January 31, 1997 and for the years ended March 31, 1996
and March 31, 1995 and the changes during the years ended on such dates is
presented below:
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED MARCH 31,
APRIL 1, 1996 TO -------------------------------------------------
JANUARY 31, 1997 1996 1995
------------------------ ------------------------ ------------------------
# SHARES # SHARES # SHARES
OF OF OF
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,873,505 (Pounds)3.56 6,985,705 (Pounds)2.26 7,731,474 (Pounds)2.23
Granted................. 3,625,911 4.82 89,628 5.94 -- 5.92
Exercised............... (390,712) 3.33 (4,956,992) 1.89 (513,399) 2.32
Forfeited............... -- -- (244,836) 2.09 (232,370) 2.05
Expired................. -- -- -- -- -- --
--------- ---------- ---------
Outstanding at end of
year................... 5,108,704 1,873,505 6,985,705
========= ========== =========
</TABLE>
14. RESTRUCTURING CHARGES:
In 1995 and 1996, London Electricity implemented a restructuring program to
reduce the number of employees in the Network Services, Customer Services,
Corporate and Information Technology groups. An initial plan was approved by
the Board of Directors of London Electricity in September 1994 and was based
on a business plan developed subsequent to the 1994 Regulatory Review of
Distribution (the "Distribution Review"). Approximately (Pounds)40.5 million
was recorded for the year ended March 31, 1995 related to this program.
Following the reopening of the Distribution Review during 1995, a further
plan was proposed leading to a further reduction of employees in the same
areas. This plan was approved by the Board of Directors in May 1996, and
approximately (Pounds)11.7 million in restructuring charges was recorded for
the period from April 1, 1996 to January 31, 1997. The balances for
restructuring charges and the actual termination benefits paid under the
program for the period from April 1, 1996 to January 31, 1997 and the years
ended March 31, 1996 and 1995 are as follows (in millions of pounds sterling):
<TABLE>
<CAPTION>
<S> <C>
Provision for restructuring as of March 31, 1994............ (Pounds) --
------------
Restructuring charges in 1995............................... 40.5
Payments made in 1995....................................... (21.8)
------------
Provision for restructuring as of March 31, 1995............ 18.7
Restructuring charges in 1996............................... --
Payments made in 1996....................................... --
------------
Balance March 31, 1996...................................... 18.7
Restructuring charges in 1997............................... 11.7
Payments made in 1997....................................... (10.5)
------------
Provision for restructuring as of January 31, 1997.......... (Pounds)19.9
============
</TABLE>
F-31
<PAGE>
LONDON ELECTRICITY PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The number of employees terminated under these plans was 250, 308, and 586
for the period from April 1, 1996 to January 31, 1997 and the years ended
March 31, 1996 and 1995, respectively.
15. SEGMENT INFORMATION:
London Electricity is engaged in two electric industry segments:
distribution, which involves the transfer and delivery of electricity across
London Electricity's network to its customers, and supply, which involves bulk
purchases of electricity from the Pool for delivery of supply to the
distribution networks. Other consists principally of London Electricity's
investment in private distribution networks, electricity contracting services
and investments in generating assets. Information about London Electricity's
operations in these individual segments during the period from April 1, 1996
to January 31, 1997 and for the years ended March 31, 1996 and 1995 is as
follows (in millions):
<TABLE>
<CAPTION>
PERIOD FROM APRIL 1, 1996 TO JANUARY 31, 1997
------------------------------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues...... (Pounds)275.3 (Pounds)1,051.2 (Pounds)67.5 (Pounds)(277.8) (Pounds)1,116.2
Operating income........ 100.6 (0.8) 6.9 -- 106.7
Depreciation and amorti-
zation................. 32.3 4.1 2.9 -- 39.3
Total assets employed at
period end............. 850.7 278.7 179.4 -- 1,308.8
Capital expenditures.... 96.8 9.5 9.3 -- 115.6
<CAPTION>
YEAR ENDED MARCH 31, 1996
------------------------------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues...... (Pounds)357.1 (Pounds)1,098.0 (a) (Pounds)59.1 (Pounds)(326.5) (Pounds)1,187.7
Operating income........ 158.0 (70.4)(b) 15.5 (1.5) 101.6
Depreciation and amorti-
zation................. 35.1 2.5 4.6 -- 42.2
Total assets employed at
period end............. 793.6 246.7 309.0 -- 1,349.3
Capital expenditures.... 96.8 4.5 9.3 -- 110.6
<CAPTION>
YEAR ENDED MARCH 31, 1995
------------------------------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues...... (Pounds)379.1 (Pounds)1,113.6 (Pounds)44.4 (Pounds)(327.7) (Pounds)1,209.4
Operating income........ 141.2 11.1 13.5 -- 165.8
Depreciation and amorti-
zation................. 31.8 2.4 5.3 -- 39.5
Total assets employed at
period end............. 726.0 207.3 304.3 -- 1,237.6
Capital expenditures.... 98.3 6.8 5.3 -- 110.4
</TABLE>
- --------
(a) Includes (Pounds)90.9 million refund to customers related to National Grid
transaction.
(b) Includes net effect of (Pounds)90.9 million refund and (Pounds)8.3
reduction of fossil fuel levy related to National Grid transaction.
F-32
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1997 MARCH 31, 1997
------ ------------------------ ---------------
<S> <C> <C> <C>
Current assets........................ (Pounds) 311.5 $ 502.1 (Pounds) 323.7
Fixed assets, net..................... 1,357.9 2,188.5 1,346.6
Distribution license, net............. 811.7 1,308.2 830.4
Other long term assets................ 164.7 265.4 167.9
--------------- -------- ---------------
Total Assets........................ (Pounds)2,645.8 $4,264.2 (Pounds)2,668.6
=============== ======== ===============
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities................... (Pounds) 348.2 $ 561.2 (Pounds) 370.6
Long term liabilities................. 313.7 505.6 262.4
Deferred income taxes................. 603.6 972.8 644.4
Long term debt........................ 1,228.1 1,979.3 1,142.9
Common shareholder's equity........... 152.2 245.3 248.3
--------------- -------- ---------------
Total Liabilities and Shareholder's
Equity............................. (Pounds)2,645.8 $4,264.2 (Pounds)2,668.6
=============== ======== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-33
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996(a)
----------------------- -------------
<S> <C> <C> <C>
Operating revenues...................... (Pounds) 547.5 $ 882.4 (Pounds)617.1
Operating expenses:
Cost of sales......................... 349.8 563.8 421.4
Other................................. 137.1 220.9 119.8
-------------- ------- -------------
486.9 784.7 541.2
-------------- ------- -------------
Operating income........................ 60.6 97.7 75.9
Other income (expense)
Interest expense, net................. (54.8) (88.3) (8.1)
Investment income..................... 2.3 3.7 3.4
Windfall profits tax.................. (140.0) (225.6) --
-------------- ------- -------------
Income (loss) before income taxes....... (131.9) (212.5) 71.2
Income tax expense (benefit)............ (35.9) (57.8) 19.5
-------------- ------- -------------
Net income (loss)....................... (Pounds) (96.0) $(154.7) (Pounds) 51.7
============== ======= =============
Net income (loss) per share............. (Pounds)(1,920) $(3,094)
============== =======
Weighted average shares outstanding..... 50,000 50,000
============== =======
</TABLE>
- --------
(a) Represents historical results of operations of London Electricity plc as
predecessor to Entergy London Investments plc. Excludes the effects of
purchase accounting adjustments.
See accompanying notes to condensed consolidated financial statements
F-34
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996(a)
---------------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... (Pounds)(96.0) $(154.7) (Pounds)51.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 39.2 63.2 22.3
Deferred income taxes................. (40.8) (65.8) 5.1
Change in assets and liabilities:
Current assets, excluding cash and
equivalents and current investments. 6.1 9.8 125.9
Other long term assets............... 3.2 5.2 (4.0)
Current liabilities, excluding notes
payable............................. 76.5 123.3 (83.5)
Long term liabilities................ 51.3 82.7 4.0
------------- ------- ------------
Net cash provided by operations.... 39.5 63.7 121.5
------------- ------- ------------
Cash flows from investing activities:
Capital expenditures................... (40.5) (65.3) (60.3)
Sales of current investments........... 28.2 45.5 12.7
------------- ------- ------------
Net cash used in investing
activities........................ (12.3) (19.8) (47.6)
------------- ------- ------------
Cash flows from financing activities:
Net change in notes payable............ (90.3) (145.5) 8.3
Issuance of long term debt............. 85.2 137.3 --
Issuance of common stock............... -- -- 0.9
Dividends paid......................... -- -- (47.3)
------------- ------- ------------
Net cash provided by (used in)
financing activities.............. (5.1) (8.2) (38.1)
------------- ------- ------------
Increase in cash and cash equivalents.... 22.1 35.7 35.8
Beginning of period cash and cash
equivalents............................. 25.1 40.4 13.0
------------- ------- ------------
End of period cash and cash equivalents.. (Pounds) 47.2 $ 76.1 (Pounds)48.8
============= ======= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................. (Pounds) 57.1 $ 92.0 (Pounds) 7.7
============= ======= ============
Cash paid for income taxes............. (Pounds) -- $ -- (Pounds) 9.3
============= ======= ============
</TABLE>
- --------
(a) Represents historical cash flows of London Electricity plc as predecessor
to Entergy London Investments plc.
See accompanying notes to condensed consolidated financial statements
F-35
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Effective February 1, 1997, Entergy London Investments plc ("Successor" or
"the Company") (formerly Entergy Power UK plc) acquired London Electricity plc
("Predecessor" or "London Electricity") in a transaction accounted for as a
purchase. London Electricity is one of the twelve regional electricity
companies ("RECs") in England and Wales licensed to supply, distribute and to
a limited extent, generate electricity. The RECs were created as a result of
the privatization of the UK electricity industry in 1990 after the state owned
low voltage distribution networks were allocated to the then existing twelve
regional boards. London Electricity's main business, the distribution and
supply of electricity to customers in London, England, is regulated under the
terms of London Electricity's Public Electricity Supply License by the Office
of Electricity Regulation. The Company does not have any operations outside
its investment in London Electricity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Comparability:
The financial statements of the Company and London Electricity are presented
in pounds sterling ("(Pounds)") and in US Dollars ("$"). The US Dollar
statements are presented solely for the convenience of the reader at the
exchange rate of (Pounds)1= US $1.6117 which is based on 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, 1997
in accordance with Securities and Exchange Commission Regulation S-X Rule 3-
20. This presentation has not been translated in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation." No
representation is made that the pounds sterling amounts have been, could have
been, or could be converted into US Dollars at that or any other rate of
exchange.
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States ("U.S. GAAP"). London
Electricity's financial statements are presented based on its historical costs
and do not reflect purchase accounting adjustments applied by the Company at
the time of its acquisition of London Electricity. Such adjustments include
the Company's assignment of fair values at date of acquisition to the assets
and liabilities of London Electricity with the excess assigned to London
Electricity's distribution license and issuance of debt to finance the
acquisition. This distribution license represents an other identifiable
intangible which is being amortized over a useful life of 40 years.
The accompanying financial statements have not been prepared in accordance
with the policies of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71")
since London Electricity's regulated business is based on price cap regulation
rather than cost based regulation.
The unaudited condensed consolidated financial statements include the
accounts of the Predecessor and Successor and their wholly-owned and majority-
owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. In the opinion of management of the
Company, the financial statements of the Company and London Electricity
reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for fair presentation of their financial position and
results of operations for the periods presented. Such unaudited interim
financial statements should be read in conjunction with the audited financial
statements of the Company and London Electricity contained elsewhere in this
registration statement.
F-36
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Use of Estimates in the Preparation of Financial Statements
The preparation of the financial statements of the Company and London
Electricity, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Adjustments to the reported amounts of assets and
liabilities may be necessary in the future to the extent that future estimates
or actual results are different from the estimates used in the financial
statements.
3. COMMITMENTS AND CONTINGENCIES:
London Electricity owns a 13.5% interest in a joint venture, Barking Power,
Ltd ("Barking"), which owns and operates a gas fired power station.
Additionally, London Electricity has certain other private investments which
require it to contribute additional equity contributions over the next several
years. The largest is its investment in London & Continental Railways Limited
which won the concession to design, build, finance and operate the high speed
rail link from London to the Channel Tunnel Rail Link.
London Electricity is required to file five-year projections with the
Regulator for capital expenditures related to its regulated distribution
network and updates of such projections annually. The most recent projection
was for the five-year period ended March 31, 2000 and was filed in July 1997.
The filing indicated London Electricity's current projection of approximately
(Pounds)482 million for the five year period. Approximately (Pounds)186
million have already been spent in fiscal year 1996 and fiscal year 1997
related to this five-year projection.
London Electricity is subject to an agreement whereby the UK government is
entitled to a proportion of certain property gains accruing to London
Electricity as a result of disposals or events treated as disposals occurring
after March 31, 1990 of properties held at that date. This commitment is
effective until March 31, 2000.
London Electricity participates in a defined benefit pension plan which
applies to substantially all employees throughout the electricity industry in
the United Kingdom. London Electricity has utilized a portion of the pension
plan surplus to increase benefits to members and reduce employer and employee
contributions. A recent court ruling in the UK upheld such uses of pension
surplus. However, the decision is under appeal and should the decision be
reversed on appeal, the Company could be required to repay pension surplus
utilized and recompute the Company's prepaid pension asset which was
(Pounds)146 million at September 30, 1997. Additionally, as of September 30,
1997, a tax valuation of fixed assets had not yet been prepared. Management
expects that this tax valuation will be completed by December 31, 1997. Should
an unfavorable outcome result from appeals on the pension matter subsequent to
February 1, 1998, results of operations may be unfavorably impacted. The
Company's allocation of purchase price is preliminary pending the outcome of
these matters.
London Electricity utilizes contracts for differences ("'CFD's") and power
purchase contracts with certain UK generators to fix the price of electricity
for a contracted quantity over a specific period of time. At September 30,
1997, the Company has outstanding CFD's and power purchase contracts for
approximately 39,000 GWh of electricity. These include a long term power
purchase contract with an affiliate which is based on 27.5% of the affiliate's
capacity from its 1,000 MW facility through the year 2010. London
Electricity's electricity sales volumes were approximately 15,771 GWh; 18,117
GWh and 20,758 GWh for fiscal years 1995, 1996 and fiscal year 1997,
respectively.
F-37
<PAGE>
4. TAX LAW CHANGES:
On July 31, 1997, legislation establishing a windfall profits tax which
affects regulated companies privatized since 1979 including London Electricity
was enacted. In accordance with SFAS 109, the Company recorded a charge to
income for the windfall profits tax during the six months ended September 30,
1997. A change in the UK statutory income tax rate from 33% to 31% was also
included in this legislation. The impact of such changes in the six months
ended September 30, 1997 financial statements was recognition of the
(Pounds)140 million expense for the windfall profits tax and approximately
(Pounds)38 million of income tax benefit as a result of the change in the UK
statutory income tax rate in London Electricity's results of operations.
F-38
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying unaudited pro forma condensed consolidated statement of
operations has been prepared in accordance with generally accepted accounting
principles in the United States. Amounts are expressed in either British
Pounds Sterling ("(Pounds)") or US Dollars ("$"). The purchase price
allocation for London Electricity plc ("Predecessor") is based on preliminary
information. The unaudited pro forma condensed consolidated statement of
operations should be read in conjunction with the related notes thereto.
The accompanying unaudited pro forma condensed consolidated statements of
operations for the year ended March 31, 1997 has been prepared assuming that
the acquisition of London Electricity plc by Entergy London Investments
(formerly Entergy Power UK plc and referred to herein as the "Successor")
occurred on April 1, 1996.
The pro forma condensed consolidated statement of operations has been
prepared for comparative purposes only and does not purport to be indicative
of the results of operations had the combination been in effect on the date
indicated, that have resulted since the date of acquisition or that may result
in the future.
F-39
<PAGE>
ENTERGY LONDON INVESTMENTS PLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
SUCCESSOR PREDECESSOR
INCEPTION- APRIL 1, 1996- SUCCESSOR PRO FORMA YEAR
MARCH 31, JANUARY 31, ENDED
1997 1997 ADJUSTMENTS MARCH 31, 1997
------------- --------------- ------------ ------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues...... (Pounds)233.6 (Pounds)1,116.2 (Pounds)1,349.8 $2,175.4
Cost of Sales and
Operating Expenses..... 201.6 1,009.5 (Pounds)26.5 (a) 1,237.6 1,994.6
------------- --------------- --------------- --------
Income from
Operations........... 32.0 106.7 112.2 180.8
Other Income
(Deductions)......... (6.5) 4.6 7.5 (b) 5.6 9.0
Interest Expense, net. 12.7 17.1 63.6 (c) 93.4 150.5
------------- --------------- --------------- --------
Income Before Income
Taxes................ 12.8 94.2 24.4 39.3
Income Taxes.......... 4.5 32.1 (28.5)(d) 8.1 13.0
------------- --------------- --------------- --------
Net Income............ (Pounds) 8.3 (Pounds) 62.1 (Pounds) 16.3 $ 26.3
============= =============== =============== ========
</TABLE>
1. Effective February 1, 1997, Entergy London Investments plc acquired
London Electricity plc for approximately (Pounds)1.3 billion. The Successor
has accounted for this acquisition using the purchase method of accounting
whereby the purchase price is allocated to assets and liabilities based on
fair market value, with the remainder allocated to the distribution license of
the Successor which is an identifiable intangible asset.
2. The Successor's historical results of operations presented above include
the Predecessor's post acquisition results of operations for the period from
February 1, 1997 (date of acquisition) until March 31, 1997. The Successor had
no operations prior to the date of acquisition.
3. The pro forma condensed consolidated statement of income reflects the
following adjustments in order to present the historical results of operations
of the Predecessor for the period prior to its inclusion in the Successor's
consolidated financial statements:
a. Primarily an increase in depreciation and amortization expense
resulting from applying the purchase method of accounting to the
Predecessor fixed assets and distribution license based on 40 year useful
lives;
b. Adjustments to other deductions to eliminate Predecessor's acquisition
defense costs;
c. Primarily additional interest associated with debt incurred to
purchase the Predecessor at an assumed average rate of 7.3%. The impact of
a change of .125% in the assumed average rate of interest would change
income before income taxes by (Pounds)1.3 million annually; and
d. Adjustment to income tax expense to provide for a 33% United Kingdom
statutory income tax rate for the twelve months ended March 31, 1997.
4. The US Dollar column above is presented solely for the convenience of the
reader. British Pound Sterling amounts have been converted to US Dollars based
on the Noon Buying Rate in New York City for cable transfers in British Pounds
Sterling as certified for customs purposes by the Federal Reserve Bank of New
York on September 30, 1997 of $1.6117 = (Pounds)1.00.
F-40
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DE-
SCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITA-
TION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR ENTERGY LONDON CAPITAL
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 4
Enforceability of Civil Liabilities....................................... 4
Presentation of Currency and Financial Information........................ 5
UK Selling Restrictions................................................... 5
Forward Looking Statements................................................ 5
Summary................................................................... 6
Risk Factors.............................................................. 17
Entergy London Capital.................................................... 22
The Company............................................................... 23
Accounting Treatment...................................................... 25
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Exchange Rates............................................................ 26
Selected Financial Data................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 34
Business.................................................................. 49
The Electric Utility Industry in Great Britain............................ 58
Management................................................................ 68
Certain Relationships and Related Transactions............................ 69
Security Ownership........................................................ 70
Description of the Preferred Securities................................... 70
Description of the Guarantee.............................................. 80
Description of the Perpetual Junior Subordinated Debentures............... 83
Relationship Among the Preferred Securities, the Perpetual Junior
Subordinated Debentures and the Guarantee................................ 99
Certain Income Tax Considerations......................................... 101
Underwriting.............................................................. 105
Experts................................................................... 107
Legal Opinions............................................................ 107
Nature of Financial Information........................................... 108
Index to the Consolidated Financial Statements............................ F-1
</TABLE>
THROUGH AND INCLUDING DECEMBER 7, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE PREFERRED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,000,000 PREFERRED SECURITIES
ENTERGY LONDON CAPITAL
8 5/8% CUMULATIVE QUARTERLY
INCOME PREFERRED SECURITIES,
SERIES A (QUIPSSM)
(LIQUIDATION PREFERENCE $25 PERPREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
AS SET FORTH HEREIN, BY
ENTERGY LONDON INVESTMENTS PLC
---------------
PROSPECTUS
---------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
