SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
For the transition period from ________________ to _____________
Commission file number 0-23451
Independent Energy Holdings PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Radcliff House, Blenheim Court, Solihull, West Midlands, U.K. B91 2AA
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares representing Ordinary Shares
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
26,273,027 Ordinary Shares
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes _X_ No ___
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 _X_ Item 18 ___
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i
TABLE OF CONTENTS
<TABLE>
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Item Item Caption Page
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<S> <C>
TABLE OF CONTENTS.................................................................................................i
GLOSSARY..........................................................................................................1
PRESENTATION OF INFORMATION.......................................................................................3
EXCHANGE RATES....................................................................................................3
FORWARD LOOKING STATEMENTS........................................................................................4
PART I............................................................................................................5
Item 4. Control of Registrant..........................................................................14
Item 5. Nature of Trading Markets......................................................................15
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.............................16
Item 7. Taxation.......................................................................................16
Item 8. Selected Financial Data........................................................................19
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations..........20
Item 9A. Quantitative and Qualitative Disclosure About Market Risk......................................25
Item 10. Directors and Officers of Registrant...........................................................26
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.................................28
Item 13. Interest of Management in Certain Transactions.................................................28
PART II..........................................................................................................29
Item 14. Description of Securities to be Registered.....................................................29
PART III.........................................................................................................30
Item 15. Defaults upon Senior Securities................................................................30
Item 16. Changes in Securities and Changes in Security for Registered Securities........................30
PART IV..........................................................................................................30
Item 17. Financial Statements...........................................................................30
Item 18.* Financial Statements and Exhibits..............................................................30
Item 19. Financial Statements and Exhibits............................................................F-26
*Not applicable or the answer is negative.
</TABLE>
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GLOSSARY
Unless the context indicates otherwise, the following terms have the
meanings shown below:
Bcf--a billion cubic feet of gas at standard conditions.
Consumer--an end-user of electricity whose usage is recorded by one meter.
CFD--a contract for difference, a hedging instrument.
Crude oil or oil--crude oil, including condensate and natural gas liquids.
Electricity Act--U.K. Electricity Act 1989.
Gas or natural gas--any hydrocarbons or mixture of hydrocarbons and other
gases consisting primarily of methane which at normal operating conditions are
in a gaseous state.
Generator--a producer of electricity.
GW--Gigawatt, 1,000 MW.
GWh--Gigawatthour, 1,000 MWh.
kW--kilowatt, the unit measurement of the rate at which electricity is
consumed or generated. It is a measurement of power or capacity. One kW is
approximately the power absorbed by 0.8 horsepower.
kwh--a unit of electricity equal to one kW produced or consumed for one
hour.
Mcf--a thousand cubic feet of gas at standard conditions.
MW--Megawatt, 1,000 kW.
MWh--Megawatthour, 1,000 kWh.
NETA--New Electricity Trading Arrangements.
NGC--National Grid Company PLC.
OFGEM--U.K. Office of Gas and Electricity Markets.
Peaking plant--an electricity generating facility that generates
electricity to be sold when the "peak" demand (and hence price) for electricity
makes it advantageous to generate marginal or higher cost electricity.
PES--primary electricity supplier.
Proved developed reserves--the oil and gas reserves expected to be produced
through existing wells and existing equipment and operating methods (additional
oil and gas reserves expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery are included only after testing a
pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved).
Proved reserves--the estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recovered in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made. Prices include
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consideration of changes in existing prices provided only by contractual
agreements, but not escalations based upon future conditions.
Proved undeveloped reserves--the oil and gas reserves expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for completion, but not including
reserves attributable to any acreage for which an application of fluid injection
or other improved recovery technique is contemplated, unless such techniques
have been proved effective by actual tests in the area and in the same reservoir
(reserves on undrilled acreage are limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled; proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing formation).
REC--regional electricity company.
Second tier direct sales--a system where a supplier of electricity holding
a second tier license uses the distribution system of a third party to transport
power to an end user and pays a fee for the use of the distribution system.
Second tier license--a license issued by the regulator enabling the holder
to be a supplier of electricity.
Supplier--the entity that provides and charges the user (customer) for
electricity. The supplier may generate the electricity or purchase it from the
Pool.
The Electricity Pool--the Electricity Pool of England and Wales, a trading
mechanism where the physical trading of electricity between generators and
suppliers occurs.
TWh--Terawatthour, 1,000 GWh.
2
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PRESENTATION OF INFORMATION
Independent Energy Holdings PLC is a public limited company incorporated in
England and Wales, which conducts its operations through subsidiaries. The term
"Independent Energy" or the "Company" as used in this Annual Report on Form 20-F
(the "Annual Report") refers to Independent Energy Holdings PLC and/or its
subsidiaries as appropriate.
The audited consolidated financial statements of the Company as of June 30,
1998 and 1999 and for the fiscal years ended June 30, 1997, 1998 and 1999
contained elsewhere in this Report are presented in conformity with generally
accepted accounting principles in the United Kingdom ("U.K. GAAP") together with
a reconciliation of net income (loss) and shareholders' equity to generally
accepted accounting principles in the United States ("U.S. GAAP").
The Company publishes its financial statements in pounds sterling ("pounds"
or "(pound)"). One pound consists of one hundred pence (100p). In this Report,
currency amounts are expressed in pounds or in United States dollars ("dollars"
or "$"). For the convenience of the reader, this Report presents translations
into dollars of some pound amounts. These translations should not be construed
as representations that the pound amounts actually represent those dollar
amounts or could be converted into dollars at the rates indicated or at any
other rate. Unless otherwise specified herein, these translations have been made
at the noon buying rate in New York City for cable transfers in pounds as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on the dates specified herein.
The principal office of the Company is located at Radcliff House, Blenheim
Court, Solihull, West Midlands, U.K. B91 2AA and its telephone number is
011-44-121-705-1111.
EXCHANGE RATES
The table below sets forth, for the periods and dates indicated, the
exchange rate for the dollar against the pound based on the Noon Buying Rate,
expressed in dollars per pound. These rates are not used by the Company in the
preparation of its consolidated financial statements and the notes thereto
included elsewhere in this Report.
Dollar/Pound Exchange Rates
(dollar per pound)
-----------------------------------------
At End Average
Year End December 31, of Period Rate (1) High Low
1993............................... 1.48 1.50 1.59 1.42
1994............................... 1.57 1.54 1.64 1.46
1995............................... 1.55 1.58 1.64 1.53
1996............................... 1.71 1.57 1.71 1.49
1997............................... 1.64 1.64 1.70 1.58
1998 .............................. 1.66 1.66 1.71 1.61
1999 (through June 30) (2)......... 1.58 1.62 1.66 1.57
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(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
(2) On November 29, 1999, the Noon Buying Rate was $1.60 to (pound)1.00.
3
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FORWARD LOOKING STATEMENTS
This Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's expected future
financial position, results of operations, cash flows, financing plans, business
strategy, budgets, projected costs and capital expenditures, competitive
positions, growth opportunities, plans and objectives of management for future
operations and words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions are forward-looking statements.
These forward-looking statements are inherently uncertain, and actual future
results and trends for the Company may differ materially depending on a variety
of factors. Factors that may affect the plans or results of the Company include,
without limitation, (i) success in implementing the Company's business
strategies, (ii) the cost of electricity purchases, (iii) the nature and extent
of future competition and (iv) the changes in the general economic condition in
the U.K. and/or in the markets in which the Company competes. Many of such
factors are beyond the control of the Company and its management.
4
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PART I
Item 1. Description of Business
Overview
Independent Energy is the largest independent marketer of electricity in
the United Kingdom -- a company not a part of the government-owned electricity
industry at the time of its privatization in 1990. We were founded to capitalize
on the market opportunities created by the deregulation of the United Kingdom
energy markets and have assembled a core management team with extensive industry
experience from a number of leading U.K. energy firms. Since commencing
electricity sales in April 1996, we have established Independent Energy as a
reputable, reliable alternative provider of electricity. In February 1999, we
also began marketing natural gas in the U.K., primarily to our target market of
light industrial, commercial and public sector customers, many of which
currently purchase our electricity. In addition, we are evaluating opportunities
created by the deregulation of continental European energy markets in which we
believe our business model may be replicated.
We have experienced rapid growth over the past year in revenue, sales
volumes and customers:
o Our revenue increased by over 300% to (pound)246.9 million ($390.0
million) for the fiscal year ended June 30, 1999 from (pound)58.0
million ($91.6 million) for the fiscal year ended June 30, 1998.
o Our sales volumes also increased by over 300% from 1,410 GWh in fiscal
1998 to 5,940 GWh in fiscal 1999.
o As of June 30, 1999, we had over 83,400 electricity customers and 130
natural gas customers, compared to approximately 1,350 electricity
customers as of June 30, 1998. As of September 1, 1999, we had over
140,000 electricity customers and 180 natural gas customers.
o At September 1, 1999, we had annualized sales contracts in place for
the sale of electricity of approximately (pound)767 million ($1.2
billion) up from approximately (pound)170 million ($268 million) at
August of last year. The value of annualized sales contracts is based
on our estimate of annual revenue from our sales contracts in place at
September 1, 1999, without regard to the renewal dates of these
contracts.
o In fiscal 1999, only our third full year of marketing electricity, we
reported net income of(pound)4.0 million ($6.3 million), compared to
net loss of(pound)185,000 ($292,300) for fiscal 1998.
U.K. Energy Market
The structure of the U.K. energy industry has undergone a period of rapid
and dramatic change over the past decade. The U.K. Government began deregulating
the U.K. energy markets to introduce competition into the generation and supply
of electricity and the supply of natural gas. This deregulation was carried out
in phases with the final phase of electricity deregulation being completed in
May 1999 resulting in full competition in the retail supply of electricity.
Since May 1998, the natural gas supply market has been fully deregulated. As a
result, all industrial, commercial and residential consumers are able to choose
their electricity and natural gas suppliers. As a licensed supplier of both
electricity and natural gas, we are able to supply electricity and natural gas
to industrial, commercial, public sector and domestic, or residential, customers
in direct competition with other energy suppliers.
According to industry publications, the U.K. electricity market consists of
approximately 2.2 million commercial, industrial and public sector consumers and
24.0 million residential consumers with aggregate annual expenditures of
approximately (pound)15.6 billion ($24.6 billion). The U.K. natural gas market
is comprised of approximately 900,000 industrial and commercial users and 19.0
million residential consumers with aggregate annual expenditures of
approximately (pound)7.2 billion ($11.4 billion), according to industry
publications. We principally target small to mid-sized commercial and light
industrial consumers with predictable usage patterns. We also target selected
residential customers. We estimate that consumers in our target U.K. electricity
market and U.K. natural gas
5
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market have aggregate annual electricity expenditures of approximately
(pound)7.9 billion ($12.5 billion) and approximately (pound)3.5 billion ($5.5
billion), respectively.
The U.K. Electricity Market
The U.K. electricity market is comprised of approximately 2.2 million
commercial, industrial and public sector consumers and 24.0 million residential
consumers, with aggregate annual expenditures of approximately (pound)15.6
billion ($24.6 billion). The following table sets forth a breakdown of the U.K.
electricity market by consumer category and size, annual electricity volumes
sold and annual expenditures.
U.K. ELECTRICITY MARKET
<TABLE>
<CAPTION>
Estimated
Annual Annual
Number of Electricity Expenditures
Consumers Volumes (pounds in
Consumer Size (peak usage) (in thousands)(1) (in TWh)(1) billions)(2)
<S> <C> <C> <C>
>1 MW(3) .......................... 5 86.9 (pound) 2.68
100 kW-1 MW(3) .................... 55 57.9 2.29
20-100 kW ......................... 1,247 37.7 1.74
10-20 kW(4) ....................... 901 6.6 0.41
Residential(5) .................... 23,935 100.5 8.46
------ ----- -----
Totals ....................... 26,143 289.7 (pound)15.58
====== ===== =====
</TABLE>
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Source: U.K. Office of Gas and Electricity Markets's Supply Price Review, June
1999, and MarketLine International ( "MarketLine "), Industrial Electricity
1998.
(1) Figures obtained from either OFGEM or MarketLine as detailed below.
(2) Figures obtained by multiplying annual electricity volumes (in
terawatthours) by average nominal cost of electricity (in pence per kWh)
for 1995/1996. These figures are estimates only. Actual annual expenditures
may vary depending on the average nominal cost of electricity.
(3) Marketline UK Industrial Electricity 1998.
(4) Marketline UK Electricity Domestic and Commercial 1996.
(5) OFGEM Review & Domestic and Small Business Electricity Supply Price
Regulation June 1999, Table 1.
Within the U.K. electricity market, we target consumers at the lower end of
the >1 MW range and all of the 100 kW-1 MW range. We also selectively target
approximately 400,000 commercial consumers with peak demand usage of 20 kW to
100 kW and approximately 16.5 million residential and commercial consumers with
peak demand usage of less than 20 kW. We estimate that these markets have
aggregate annual electricity expenditures of approximately (pound)7.9 billion
($12.5 billion).
The U.K. Natural Gas Market
The U.K. natural gas market is comprised of approximately 900,000
industrial and commercial consumers and 19.0 million residential consumers,
representing 711,300 GWh of annual consumption, and aggregate annual
expenditures of approximately (pound)7.2 billion ($11.4 billion). The following
table sets forth a breakdown of the U.K. natural gas market by consumer category
and size, annual consumption and annual expenditures.
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U.K. NATURAL GAS MARKET
<TABLE>
<CAPTION>
Estimated
Annual
Number of Total Expenditures
Consumers Consumption (pounds in
Consumer Size (peak usage) (in thousands) (in TWh) billions)(1)
<S> <C> <C> <C>
Business (> 732 MWh) ................................ 46 285.5 (pound) 1.76
Small Business (73.2--732 MWh) ...................... 349 65.5 0.69
Residential and Very Small Business (< 73.2 MWh) .... 19,705 360.3 4.79
------ ----- -----
Totals ......................................... 20,100 711.3 (pound) 7.24
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</TABLE>
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Source: Marketline International, UK Domestic and Commercial Gas Market Survey,
1999, and UK Domestic Gas Market Survey, 1999.
(1) Figures obtained from Marketline UK Industrial and Commercial Gas Report,
1999, and UK Domestic Gas Report, 1999.
(2) Figures obtained by multiplying annual gas volumes (in TWh) by average
nominal cost of natural gas (in pence per kWh). For domestic and very small
business consumers, 1999 prices determined from Marketline UK Domestic Gas
Report, 1999, average of Normal Pay and Direct Debit prices charged by
independent suppliers. For business consumers, October 1997 prices
determined from OFGAS Competitive Market Review, May 1998.
We specifically target natural gas consumers at the lower end of the > 732
MWh range and all of the 73.2-732 MWh range. We estimate this market includes
approximately 850,000 non-residential consumers. We also intend to selectively
target approximately 13.5 million residential consumers with usage of < 73.2
MWh. We estimate that these markets have aggregate annual natural gas
expenditures of approximately (pound)3.5 billion ($5.5 billion).
Continental European Energy Markets
We believe that significant opportunities exist to market and supply
electricity and natural gas in continental Europe. The European Union has
required each of its member countries to deregulate its proposed electricity and
natural gas markets. As of January 1999, each member country had legislation in
place to enable deregulation, as required by the European Union. Only a few
member countries, however, are actively implementing a plan to deregulate their
energy markets. Of such countries, Spain and Holland are rapidly moving toward
full deregulation in a similar manner to the U.K. and we intend to compete in
those markets.
In January 1999, the Spanish government commenced deregulation of the
Spanish electricity and natural gas supply markets, permitting certain large
industrial consumers to select their electricity supplier. The next phase of
deregulation is expected to commence in October 1999, and will allow consumers
with annual consumption in excess of 1.0 GWh to choose their electricity
supplier. These two initial categories of electricity consumers represents over
40% of the market, with annual consumption of approximately 74 GWh and aggregate
annual expenditures of approximately (pound)2.5 billion ($4.0 billion). All
remaining electricity consumers will be able to choose their supplier by January
1, 2007. Likewise, the Spanish government is in the process of deregulating
Spain's natural gas market. This deregulation will be completed over a ten-year
period based on the consumption level of the consumer, with full competition in
place by January 1, 2008. It is our belief that by entering the Spanish market
we will be well placed to take advantage of the emerging gas market based on our
dual fuel experience in the U.K.
Electricity and Natural Gas Supply and Sales
Generally, we sell electricity and natural gas at fixed prices pursuant to
contracts with a stated term, typically one or two years. Neither we nor our
customers may terminate these contracts during their term absent extraordinary
circumstances, such as our losing a supply license. However, we may renegotiate
the pricing terms of contracts if a customer's demand and pattern usage changes
significantly during the term of a contract. We may, under these contracts, pass
through to customers increases in transportation and metering costs. Sales of
electricity constituted substantially all of our energy sales for fiscal year
1999, as we only began sales of natural gas in February 1999.
7
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We have two main sources of electricity: (1) the U.K. Electricity Pool and
(2) our own generating plants. In the fiscal year ended June 30, 1999, we
purchased approximately 97% of our electricity from the Electricity Pool. We
purchase electricity from the Electricity Pool at fluctuating market prices.
Electricity Pool electricity is priced in half-hour increments. Generally,
Electricity Pool prices are higher during the daytime than at night and are
higher in winter months than in summer months.
The Electricity Pool purchases electricity from generators at a certain
price and resells electricity at a higher price. The differential is to cover
transmission losses, standby purchases of electricity, and other ancillary
services. Accordingly, our internally generated electricity provides a number of
cost advantages in that we avoid the Electricity Pool price as well as certain
transportation costs. In addition, the Electricity Pool credits us for supplying
electricity to customers within a local distribution area and for reductions in
power losses on the local network.
The Electricity Pool maintains a settlement system that monitors usage by
all consumers. Customers in the >100 kW market have meters that measure usage by
the half-hour. For those other customers whose usage is measured by a meter,
such meter is read on a monthly, quarterly or annual basis. Each sub 100 kW
consumer has an assigned usage profile which estimates their pattern of use
throughout each day over a month. The Electricity Pool requires all suppliers to
pay for all electricity consumed by their customers 28 days following the date
of purchase. However, we bill our customers monthly and receive payments on
average approximately 25 days later. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Proposed changes to the wholesale trading mechanisms for electricity in
England and Wales are scheduled to be implemented in 2000, subject to the
relevant changes in statutory legislation being made in Parliament. When
implemented, the changes will replace the Electricity Pool with a direct market
whereby suppliers will be required to contract directly with generators for
their required physical electricity volumes. The proposal also includes a
forward market and a short term/day ahead exchange (both of which are expected
to evolve based on the activity of current players and traders in the market).
The New Electricity Trading Arrangements, or NETA, will include the development
of a balancing market (where the long and short position of generators,
suppliers and traders will be closed out) and the system operator for this
balancing market will be the National Grid Company, which will retain its
obligation to ensure supply security standards are met.
We cannot presently predict with any certainty what effect the
implementation of a firm contracts market will have on our business. Contracting
directly with generators under long-term agreements will impose additional
risks. The inability of a generator to fulfill its obligations timely, or at
all, under a contract could affect the cost of meeting our customer demand. In a
contracts market, we will generally be required to fix the price at which we
purchase energy from generators for the period of the contract. Depending upon
current market conditions, the fixed purchase price may exceed the price at
which we can resell electricity to our customers. Moreover, in a firm contracts
market, we would be required to contract directly with a number of generating
facilities, some of which are affiliated with electricity suppliers with whom we
directly compete.
While this will be a new electricity wholesale trading environment for
Independent Energy to operate within, we believe there are significant parallels
with the current UK gas trading market. This market operates with the purchase
of physical gas on a forwards and futures market, with daily "tuning" of
purchase volumes to sales volumes. Also, while currently there are relatively
few players offering the contracts for differences and other hedging mechanisms
which we apply to avoid the volatility of the Electricity Pool, the NETA
structure is being specifically designed to facilitate competition and the new
entry of traders who will take contractual positions without the need for owning
or operating generating plant.
We believe that these changes will result in increased liquidity and
transparency in the market and thereby give greater opportunity to develop
innovative and attractive supply terms to more customers. Much has been done to
facilitate demand side participation in the new market, rather than the current
arrangements, which are generator dominated. We believe our experiences in
trading in the gas market will provide a sound footing for the new electricity
arrangements.
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<PAGE>
With respect to our natural gas supply, since we use our existing natural
gas reserves in electricity generation, we must purchase all of the natural gas
that we supply to our customers. To meet our contractual obligations, we
purchase natural gas either directly from producers or on the spot market.
We have adopted a number of risk management practices to reduce the risk of
fluctuating electricity and natural gas prices incurred in connection with our
customer contracts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management Activities."
Marketing and Customers
We have established Independent Energy as a reputable, reliable alternative
provider of electricity in the U.K. market. Recently, we entered the U.K.
natural gas supply market with the goal of achieving a similar status in the
natural gas market. We believe we can offer consumers better pricing and service
than they would receive from their regional electricity companies or other
suppliers.
We intend to continue to capitalize on the relationships and marketing
channels of our strategic marketing partners to offer electricity as part of a
jointly packaged range of products, including the marketing of electricity with
natural gas from established natural gas suppliers--a "dual fuel" product. In
addition, we utilize focused marketing efforts which include direct selling,
targeted mailing and e-commerce.
Currently, we utilize sales agencies whose agents personally call on
prospective customers. We have identified these target customers based on their
usage profiles and creditworthiness. Currently, we have engaged approximately
500 independent agents to market electricity, natural gas and a "dual fuel"
product.
We pay the sales agencies a commission based on the estimated sales volume
for the customer over the life of the contract. We pay fifty percent of the
commission upon the execution of the sales contract and the balance following
the expiration of the applicable sales contract. In addition to independent
sales agents, we also utilize the services of telemarketers who solicit
prospective customers.
To support these sales activities, we use radio and newspaper advertising.
We also conduct press relations to create awareness for the Independent Energy
brand name as well as to educate consumers about the deregulated electricity and
natural gas markets. We also utilize direct mail to target prospective customers
in advance of direct sales calls and telemarketing efforts.
Administrative Operations
We employ information systems and computerized links to the Electricity
Pool's settlement system. All of our current above 100kW customers have meters
which measure usage on a half-hourly basis. This information is electronically
communicated from the Electricity Pool's system to us each day. We maintain our
own billing system and bill our customers monthly. We also maintain our own call
center to handle inquiries and other communications with our customers.
In connection with the completion of the electricity industry's
deregulation and our entry into the natural gas market, we have taken steps to
increase our ability to handle inquiries from customers, and to upgrade our
billing, payment collection and debt management systems. In addition, the OFGEM
requires separate Codes of Conduct and Codes of Practice to protect residential
and very small business electricity and natural gas customers. These regulations
are wide-ranging and include provisions governing payment arrangements, debt
collection and marketing practices.
Operating in this consumer market requires sophisticated systems that can
manage, control and transmit vast quantities of electronic data in a
cost-effective manner. We decided to outsource such functions for customers in
the small business and residential, or sub 100 kW, market. We outsource such
services as (1) handling customer inquiries and other communications, (2)
billing, (3) payment collection, (4) debt management and (5) related operations.
Accordingly, in August 1998, we entered into a five-year contract with a
third-party service provider, Vertex Data Science Limited, to provide all of
these services as they relate to such customers. Pursuant to the terms of this
contract, we obtained a bank guarantee, currently (pound)6.5 million, to secure
our obligations to Vertex. See
9
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" on page 20.
Competition
Independent Energy is the largest independent marketer of electricity in
the United Kingdom--a company not a part of the government-owned electricity
industry at the time of its privatization in 1990. Since commencing electricity
sales in April 1996, we have experienced rapid growth and currently have
annualized sales contracts in place of approximately (pound)767 million ($1.2
billion), representing approximately 4.9% of the total estimated U.K.
electricity market. We added new electricity customers at an average weekly rate
of over 7,000 for the period June 1, 1999 to September 1, 1999. As a result of
our competitive pricing, customer service and marketing efforts, we have been
able to establish Independent Energy as a reputable, reliable provider of
electricity in the U.K. market.
Our competition in the U.K. electricity market consists primarily of the
twelve regional electricity companies, the Scottish integrated companies,
Scottish Power and Scottish Hydro, and the national generators, National Power,
PowerGen, British Energy and Centrica.
We are a new entrant in the U.K. natural gas supply market, having began
marketing natural gas in February 1999. Our current competition in the natural
gas supply market is comprised of Centrica and a number of independent natural
gas suppliers. Centrica currently has approximately 39% of the industrial and
commercial natural gas supply market and approximately 77% of the residential
natural gas supply market and will likely continue to have significant market
share for the foreseeable future.
We compete on the basis of service and price, and, as a result, typically
win contracts based on competitive bids. Our competitors may be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to markets than us. We cannot
be sure that we will be able to compete successfully against current or future
competitors.
Environmental Regulation
Our operations are subject to regulatory requirements relating to
environmental matters and health and safety. U.K. legislation and policy
regarding environmental matters and health and safety are evolving in a manner
which has resulted in stricter standards and enforcement, and in more stringent
fines and penalties for non-compliance. Compliance with such regulatory
requirements relating to existing and proposed projects carries a heightened
degree of responsibility for companies and their directors, officers and
employees.
The cost of compliance associated with changes in environmental and health
and safety laws and regulations could require significant expenditures. Breaches
of such laws and regulations may result in the imposition of fines and
penalties, which may be material or result in our operations halting. In
addition, environmental and health and safety laws and regulations can increase
the cost of planning, designing, installing and operating generating plants. We
cannot be sure that these costs or the costs of complying with environmental and
health and safety laws and regulations will not have a materially adverse effect
on our financial condition or results of operations in the future.
To date, the costs of complying with environmental and health and safety
laws and regulations have not had a material adverse effect on our operations.
However, we are aware of some contamination resulting from the activities of
past owners or past uses of the properties that we, or any of the joint ventures
in which we have an ownership interest, currently or may in the future own,
occupy or use for the purposes of gas exploration and development and/or
electricity generation. Although we are not aware of any current requirement to
clean up such properties, we cannot be sure that we, as current owner, occupier
or user of such properties, or such joint venture will not be liable for the
cost of cleanup at such properties in the future and that such costs will not
have a material adverse effect on our financial condition or results of
operations or will not exceed the amount of our investment in any such joint
venture.
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Employees
As of June 30, 1999, we had approximately 80 employees and consultants and
utilized the services of approximately 500 independent commission-based sales
agents. None of our employees are represented by unions or subject to collective
bargaining agreements. We consider our relations with our employees to be
satisfactory.
Item 2. Description of Property
Electricity Generation
As of June 30, 1999, we were operating eight generating plants, which
generated approximately 3% of our electricity requirements for the fiscal year
ended June 30, 1999. We currently have 62MW of generating plant capacity, with
an additional 45MW under construction and 28MW planned for completion by March
2000. We estimate that our total capital expenditure requirements for the plants
under construction or planned are (pound)40.0 million. Our goal is to install
between 10 MW and 20 MW of generating plants in each of the twelve local
distribution systems in England and Wales.
Our electricity generation plants are comprised predominately of 3,000 to
4,000 horsepower natural gas-fired internal combustion engines turning
generators. Electricity connections are made with the local distribution network
providing a source of distribution to our customers. Since the plants are
reasonably transportable, we can relocate them at the time of economic depletion
of natural gas reserves at the generation site. In some cases, we can operate
plants in the proximity to the regional natural gas network utilizing purchased
natural gas.
The table below sets forth our existing and certain proposed generating
facilities.
PROJECTS IN OPERATION
<TABLE>
<CAPTION>
Facility
Acquisition/Start Net Ownership
Plant Date Fuel Source Capacity Location Interest
- ----- ---- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Elswick................ June 1996 Independent Energy 1MW Elswick, Lancashire 100%
natural gas
Caythorpe............... December 1997 Independent Energy 9MW Caythorpe, Yorkshire 100%
natural gas
Trumfleet............... February 1998 Independent Energy 8MW Trumfleet, Yorkshire 100%
natural gas
Knypersley............. October 1998 Independent Energy and 8MW Knypersley, Staffordshire 100%
third party natural gas
Steetley................ February 1999 Third-party natural gas 6MW Steetley, Nottinghamshire 100%
Holditch................ March 1999 Third-party natural gas 10.5MW Newcastle Under Lyme, 100%
Staffordshire
Milford Haven........... March 1999 Third-party natural gas 10.5MW Dyfed, Pembrokeshire 50%
Pye Bridge.............. June 1999 Third-party natural gas 9MW Pye Bridge, Derbyshire 100%
---
Total capacity........................................ 62MW
=====
</TABLE>
11
<PAGE>
PROJECTS UNDER CONSTRUCTION
<TABLE>
<CAPTION>
Facility
Projected Operations Net Ownership
Plant Date Fuel Source Capacity Location Interest
- ----- ---- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Chelwood Brick......... August 1999 Third-party natural gas 1.6MW Chelwood Brick, Surrey 100%
Wight Salads
Phase I............. September 1999 Third-party natural gas 16MW(1) Wight Salads, Isle of Wight 100%
Shirebrook............. November 1999 Third-party natural gas 10MW Shirebrook, Nottinghamshire 100%
Phase II............ January 2000 Third-party natural gas 18MW(1) Wight Salads, Isle of Wight 100%
-------
Total capacity.................................. 44.6MW
======
</TABLE>
- ---------
(1) Comprised of multiple inter-connected sub 10MW sites.
PLANNED PROJECTS
<TABLE>
<CAPTION>
Facility
Projected Operations Net Ownership
Plant Date Fuel Source Capacity Location Interest
- ----- ---- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Valley Grown Salads.... February 2000 Third-party natural gas 10MW Valley Grown Salads, Hertfordshire 100%
Coronation Nursery..... February 2000 Third-party natural gas 5.4MW Coronation Nursery, Essex 100%
Merthyr Tydfil......... April 2000 Third-party natural gas 6MW Merthyr Tydfil, Mid Glamorgan 100%
Undetermined Site...... March 2000 Undetermined 6MW Undetermined 100%
-----
Total capacity.............................. 27.4MW
======
</TABLE>
Self-generation is an important component of our overall strategy. There
are several advantages to owning generating plants which are embedded in the
local distribution networks, such as:
o fixing a portion of the cost of our electricity needs;
o lowering our cost of service by avoiding
o Electricity Pool expenses
o National Grid Company transportation tariffs; and
o transmission power losses.
In addition, the National Grid Company offsets the amount that we owe for
electricity against the amount of self-generated electricity that we supplied
directly to our customers within local distribution areas (because such
electricity does not enter the national grid). An additional benefit to our
self-generation is that it results in reductions in power losses on the local
distribution networks.
In most of our plants, we further reduce our cost of service by either
owning the natural gas reserves which fire the plants or by obtaining access to
natural gas which is not generally of a commercial grade and is thus less
expensive than natural gas purchased from the national gas supply system.
In our Wight Salads project, we are developing 34MW of generating capacity
which will both generate electricity and use waste heat and carbon dioxide for
use by salad growers on the Isle of Wight. This innovative cogeneration project
has created the opportunity for a similar project at Valley Grown Salads
expected to be completed in February 2000.
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<PAGE>
Natural Gas Reserves
Supply
Currently, we use all of our natural gas production in our electricity
generation plants. As a result, we must purchase all of the natural gas that we
supply to our customers. We purchase natural gas on the spot market or directly
from producers.
Estimated Proved Reserves and Future Net Cash Flows
As of June 30, 1999, the Company's net proved reserves of natural gas were
approximately 5.4 billion cubic feet ("Bcf"), of which 1.8 Bcf were proved
developed reserves and 3.6 Bcf were proved undeveloped reserves. Gaffney, Cline
& Associates Ltd., an independent petroleum engineering firm, prepared such
estimates. All of our proved reserves are attributable to our onshore properties
in the U.K.
The present value, discounted at 10% per annum, of estimated future net
cash flows from such proved reserves as of June 30, 1999 was (pound)3.4 million
($5.4 million) before applicable U.K. income taxes. The estimated proved
reserves and future net cash flows have been calculated in accordance with
Commission definitions.
There are numerous uncertainties inherent in estimating quantities of
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretations and judgment. As a result, estimates
of different engineers often vary.
In addition, results of drilling, testing and production subsequent to the
date of an estimate may justify revision of such estimates. Accordingly, reserve
estimates at a specific time are often different from the quantities of oil and
natural gas that are ultimately recovered. Predictions about future prices,
costs and production levels of oil and natural gas are subject to great
uncertainty. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based.
The reserve value estimate reflects the present value, discounted at 10%
per annum, of estimated future net cash flows from the production and sale of
our estimated proved reserves. The estimated future net cash flows are computed
after giving effect to estimated future development and production costs, based
on year-end costs and assuming the continuation of existing economic conditions.
The calculation does not take into account the effect of delay in commencement
of production, various cash outlays, including general and administrative costs
and interest expense (except for those interest charges associated with ongoing
generation plant lease costs) and U.K. income tax expense.
Gaffney, Cline & Associates Ltd. used a price to calculate the present
value of estimated future net cash flows from the Company's estimated net proved
reserves based on the Electricity Pool price of electricity at June 30, 1999
after giving effect to the location of our reserves and our increased operating
margins in generating our own electricity. As an example, based on applicable
Electricity Pool prices, the realized power price for the Caythorpe project
equates to an equivalent natural gas price of (pound)3.12 per thousand cubic
feet ("Mcf") ($4.93 per Mcf).
In computing the present value of the estimated future net cash flows, a
discount rate of 10% per annum was used pursuant to SEC regulations to reflect
the timing of those net cash flows. Present value, regardless of the discount
rate used, is materially affected by assumptions about timing of future
production, which may prove to have been inaccurate. The reserve value
information represents an estimate only, which is subject to uncertainty for
numerous reasons.
Petroleum Licenses
Currently, we hold 16 licenses covering an aggregate 887,000 net acres (net
to our interest) for the exploration and development of oil and natural gas
properties onshore U.K. All of our licenses are located in the U.K. Landward
13
<PAGE>
Areas. Fourteen of our licenses are Petroleum Exploration and Development
Licenses ("PEDLs") as defined in The Petroleum (Production) (Landward Areas)
Regulations 1995.
PEDLs have an initial term of eleven years; however, after the first six
years there is a mandatory relinquishment of 50% of the original license area.
We, however, determine the acreage to be released. The license, for purposes of
development and production activities, continues for a further period of 20
years after the initial eleven year term. Thereafter, a further period may be
agreed to ensure maximum recovery of petroleum. The U.K. Government conveys to
the licensee the exclusive right to explore for, to appraise, to develop, and to
produce petroleum. The produced petroleum belongs to the licensee.
Drilling Program
In January 1999, we entered into a farm-out arrangement with Archean Energy
(U.K.) Limited, ISO (U.K.) Limited and Vulcan Energy Limited pursuant to which
they agreed to fund a drilling program in exchange for working interests in our
exploration properties. We have retained a 42% working interest in these
properties. Pursuant to this arrangement, this drilling program is being
conducted at no cost to Independent Energy. As of June 30, 1999, two wells had
been drilled, however, no commercially available reserves were discovered.
Facilities
Our headquarters are located in Solihull, West Midlands where we lease
20,600 square feet of office space for approximately (pound)44,184 per month.
This lease expires in December 2008. We also lease 1,750 square feet of office
space in Maidenhead for our resource offices for (pound)26,250 annually. This
lease will remain in effect until April 2001. Both of these leases may be
extended at our option. For a description of our generating plants, see
"--Electricity Generation."
Item 3. Litigation
We are not a party to any pending litigation, the result of which would
have a material adverse effect on us or our operations.
Item 4. Control of Registrant
The following table sets forth information concerning beneficial ownership
of ordinary shares as of June 30, 1999 by: (1) each person (or group within the
meaning of Section 13(d)(3) of the Exchange Act) known by the Company to own
more than 5% of the outstanding ordinary shares; (2) each director of the
Company; (3) each executive officer; and (4) all directors and executive
officers of the Company as a group. Except as otherwise noted, the named
beneficial holder has sole voting and investment power.
Shares Beneficially Owned
Number Percent(1)
Burt H. Keenan(2)..................................... 2,364,125 8.9%
Putnam Investment Management, Inc.(3)................. 2,058,700 7.8
John L. Sulley (4).................................... 420,000 1.6
Ian Stewart........................................... 1,000 *
William E. Evans(5)................................... 450,800 1.7
Robert E. Jones(6).................................... 364,200 1.4
Roy W. Deakin(7)...................................... 50,000 *
Jerry W. Jarrell(8)................................... 360,100 1.4
David O. May(9)....................................... 130,000 *
Herbert L. Oakes...................................... -- *
All officers and directors as a group (9 persons)(10). 4,140,225 14.8
- ----------
* Less than 1%
14
<PAGE>
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of, a security) and includes the
ownership of a security through corporate, partnership, or trust entities.
In addition, for purposes of this table, a person is deemed, as of any
date, to have "beneficial ownership" of any security that such person has
the right to acquire within 60 days after such date.
(2) Includes 245,400 shares issuable upon exercise of options held by Mr.
Keenan. Mr. Keenan's address is 17571 Red Oak Drive, Houston, Texas 77090.
(3) The address of Putnam Investment Management, Inc. is One Post Office
Square, Boston, Massachusetts 02109. Putnam Investment Management, Inc.
holds the ADSs on behalf of certain of its clients.
(4) Includes 360,000 shares issuable upon exercise of options held by Mr.
Sulley.
(5) Includes 445,200 shares and 195,800 shares issuable upon exercise of
options held by Mr. Evans.
(6) Includes 300,000 shares issuable upon exercise of options held by Dr.
Jones.
(7) Includes 50,000 shares issuable upon exercise of options held by Mr.
Deakin.
(8) Includes 222,800 shares issuable upon exercise of options held by Mr.
Jarrell.
Item 5. Nature of Trading Markets
We completed our initial public offering in the U.S. of ADSs in July 1998.
Since July 24, 1998, the ADSs have been traded on the Nasdaq National Market.
Our ordinary shares began trading on the U.K. Alternative Investment Market, or
AIM, on May 31, 1996. In November 1999, our ordinary shares began trading on the
Official List of the London Stock Exchange.
The following table reflects the high and low sales price per ordinary
share, as reported on AIM from May 31, 1996 to July 23, 1998, and high and low
sales price per ADS as reported on the Nasdaq National Market since July 24,
1998.
British Pence U.S. Dollars(1)
High Low High Low
1996
Second quarter............. 115.0p 106.0p $1.75 $1.63
Third quarter.............. 108.0 83.5 1.68 1.30
Fourth quarter............. 89.5 57.5 1.40 0.98
1997
First quarter.............. 69.5 57.5 1.14 0.97
Second quarter............. 92.5 72.5 1.54 1.18
Third quarter.............. 124.5 87.5 2.00 1.48
Fourth quarter............. 144.5 119.5 2.41 1.95
1998
First quarter.............. 385.0 136.5 6.46 2.26
Second quarter............. 627.5 325.0 10.51 5.44
Third quarter.............. 508.8 282.6 8.31 4.75
Fourth quarter............. 612.3 278.0 10.25 4.75
1999
First quarter.............. 756.2 534.2 12.38 8.81
Second quarter............. 374.3 558.7 13.75 9.00
- ----------
(1) The reported high and low prices for the ordinary shares on AIM expressed
in pence have been translated into dollars for the period from May 31, 1996
to July 23, 1998 by converting that amount at the Noon Buying Rate on the
dates of such respective high and low prices. The reported high and low
prices for the ADSs on Nasdaq
15
<PAGE>
expressed in dollars have been translated into pence for the period since
July 24, 1998 by converting that amount at the Noon Buying Rate on the
dates of such respective high and low prices.
As of June 30, 1999, there were approximately 242 record holders of
ordinary shares. Persons with United States and Canadian addresses held of
record 74.0% of the outstanding ordinary shares.
The average daily trading volume for the ordinary shares for the years
ended December 31, 1996, 1997 and 1998 and for the six months ended June 30,
1999 was 14,959, 18,872, 70,071 and 38,802 respectively.
Dividend Policy
We have never declared or paid any dividends on the ordinary shares.
Currently, we plan to retain all future earnings to finance future operations.
Moreover, under the Companies Act 1985, dividends may only be paid out of our
profits legally available for distribution.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are currently no U.K. foreign exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Company's
operations.
There are no limitations either under the laws of England or under the
Memorandum and Articles of Association of the Company restricting the right of
persons not resident in the U.K., as such, to hold or vote Ordinary Shares.
Item 7. Taxation
The following generally summarizes the principal U.S. federal and U.K. tax
consequences of the purchase, ownership and disposition of ADSs evidenced by
ADRs and, except as provided explicitly below, ordinary shares, to beneficial
owners that, for U.S. federal income tax purposes, are citizens or residents of
the U.S. (who are not also resident or, in the case of the individuals,
ordinarily resident in the U.K. for U.K. tax purposes), corporations or
partnerships created or organized under the laws of the United States or any
state thereof, estates the income of which is subject to U.S. federal income
taxation regardless of its source or a trust if a court within the United States
is able to exercise primary supervision over the administration and control of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust (collectively "U.S. Holders").
The statements regarding the U.S. and U.K. tax laws set out below (i) are
based on the laws in force and as interpreted by the relevant taxation
authorities as of the date of this Registration Statement and are subject to any
changes (possibly retroactively) in the U.S. or the U.K. law, or on the
interpretation thereof by the relevant taxation authorities or in the double
taxation conventions between the United States and the United Kingdom (the
"Conventions"), occurring after such date, (ii) are based in part, on
representations of the depositary, and (iii) assume that each obligation in the
deposit agreement and any related agreement will be performed in accordance with
its terms.
The summary is of a general nature only and does not discuss all aspects of
U.S. and U.K. taxation that may be relevant to a particular investor. For
example, this summary deals only with ADRs or ordinary shares held as capital
assets and does not address special classes of purchasers, such as dealers in
securities. U.S. Holders whose functional currency is not the U.S. dollar,
insurance companies, tax exempt organizations, financial institutions and
persons subject to the alternative minimum tax that may be subject to special
rules are not discussed below. Neither does the following summary address the
tax treatment of U.S. Holders who own, directly or by attribution, 10% or more
of Independent Energy's outstanding voting share capital. Except as otherwise
expressly provided herein, this summary does not discuss foreign, state, local,
estate or gift tax consequences to owners of ADSs and ordinary shares. Since its
purpose is limited to brief consideration of the more commonly relevant
provisions, in no case should this summary be taken as constituting advice to an
investor as to how he will or will not be taxed in any jurisdiction and in no
circumstances is it to substitute for professional advice.
16
<PAGE>
For purposes of the Conventions and the United States Internal Revenue Code
of 1986, as amended (the "Code"), U.S. Holders of ADSs will be treated as the
owners of the ordinary shares represented by ADSs evidenced by ADRs.
Taxation of Dividends
Under current U.K. law, Independent Energy is not required to withhold tax
when paying a dividend in respect of the ordinary shares. Dividends paid on or
after April 6, 1999, will carry an associated tax credit of one-ninth of the
cash dividend or 10% of the aggregate of the cash dividend and the associated
tax credit. Individual shareholders resident in the U.K. receiving such
dividends will be liable to income tax (if at all) on the aggregate of the
dividend and the tax credit at the Schedule F ordinary rate (10%) or the
Schedule F upper rate (32.5%). Individuals who are only taxable at either the
basic or lower rate will have no further income tax liability. Individuals who
are subject to higher rate income tax will be liable to pay additional tax on
the gross income at the reduced rate of 32.5%. Individuals who do not pay income
tax or whose tax liability is less than the attached tax credit are no longer
entitled to reclaim the tax credit.
Since April 6, 1999, U.K. resident trustees of discretionary trusts liable
to income account for tax at the rate applicable to trusts, being 34% on the
trust's income but at a special Schedule F trust rate of 25% on dividends from
companies.
A U.K. resident corporate shareholder would generally not be liable for
U.K. corporation tax on any dividend received from Independent Energy.
Under current U.K. law, an Eligible U.S. Holder (as defined below) who
receives as beneficial owner a dividend from Independent Energy will not be
entitled under the Income Tax Convention between the United States and the
United Kingdom (the "Income Tax Convention") to receive any payment or refund
from Inland Revenue in addition to the base dividend. An Eligible U.S. Holder
that received a dividend payment of $90 from Independent Energy would be
entitled to a tax credit amount of $10 reduced by the tax credit amount (i.e.,
$10) (the "U.K. Tax Credit Amount") resulting in a total receipt (before
applicable U.S. taxes) of $90 (i.e., the base dividend).
Under the United States federal income tax laws, Eligible U.S. Holders will
include in gross income the gross amount of any dividend paid (before reduction
for the U.K. Tax Credit Amount) by Independent Energy out of its current or
accumulated earnings and profits (as determined for United States federal income
tax purposes) as ordinary income when the dividend is actually or constructively
received by the Eligible U.S. Holder. No dividends received deduction will be
allowed with respect to dividends paid by Independent Energy. Distributions in
excess of current and accumulated earnings and profits, as determined for U.S.
federal income tax purposes, will be treated as a return of capital to the
extent of the Eligible U.S. Holder's basis in the ADSs or ordinary shares, and
thereafter as capital gain.
Subject to certain limitations and restrictions, the U.K. Tax Credit Amount
(which, pursuant to the Income Tax Convention, is treated as a U.K. income tax
imposed on the Eligible U.S. Holder) may be eligible for credit against the
Eligible U.S. Holder's U.S. federal income tax. For foreign tax credit
limitation purposes, dividends distributed by Independent Energy will generally
constitute "passive income" or, in the case of certain Eligible U.S. Holders,
"financial services income." Prospective investors should consult their tax
advisors to determine whether and to what extent a credit would be available.
For purposes of this Registration Statement, the term "Eligible U.S.
Holder" means a U.S. Holder that is a beneficial owner of an ADS or ordinary
share and of the cash dividend paid thereon and that satisfies the following
conditions: the U.S. Holder (i) is an individual or a corporation resident in
the U.S. for the purposes of the Income Tax Convention (and, in the case of a
corporation, is not also resident in the U.K. for U.K. tax purposes), (ii) holds
the ADSs in a manner which is not effectively connected with a permanent
establishment in the U.K. through which such U.S. Holder carries on business or
with a fixed base in the U.K. from which such U.S. Holder performs independent
personal services, (iii) under certain circumstances, is not an investment or
holding company 25% or more of the capital of which is owned, directly or
indirectly, by persons that are not individuals resident in, and are not
nationals of the U.S., and (iv) under certain circumstances, is not exempt from
federal income tax on dividend
17
<PAGE>
income in the U.S. Special rules apply to a corporation which owns or, alone or
together with one or more associated corporations, controls, directly or
indirectly, 10% or more of the voting shares of Independent Energy.
Taxation of Capital Gains
A U.S. Holder who is not resident or ordinarily resident in the U.K. for
U.K. tax purposes will not be liable for U.K. tax on capital gains realized on
the disposal of ADSs or ordinary shares unless, at the time of disposal, the
U.S. Holder is carrying on a trade, profession or vocation in the U.K. through a
branch or agency which constitutes a permanent establishment or fixed base, and
the ADSs or ordinary shares are or have been used, held or acquired for the
purposes of such trade, profession or vocation of such branch or agency.
Upon the sale or other disposition of an ADS or an ordinary share , a U.S.
Holder will generally recognize gain or loss for U.S. federal income tax
purposes in an amount equal to the difference between the amount realized on
such sale or disposition and the U.S. Holder's adjusted tax basis in the ADS or
ordinary shares. Except as described below under "Passive Foreign Investment
Company Status," such gain or loss will be capital gain or loss if the U.S.
Holder holds its ADS or ordinary share as a capital asset. Prospective investors
should consult their tax advisors regarding the U.S. federal income tax
treatment of capital gains (which may be taxed at lower rates than ordinary
shares income for certain taxpayers who are individuals) and losses (the
deductibility of which is subject to limitations).
A U.S. Holder that is liable for both U.K. and U.S. tax on a gain on the
disposal of the ADSs or the ordinary shares will generally be entitled, subject
to certain limitations and pursuant to the Income Tax Convention, to credit the
amount of U.K. capital gains or corporation tax, as the case may be, paid in
respect of such gain against such U.S. Holder's U.S. federal income tax
liability in respect of such gain. U.S. Holders should seek professional tax
advice to determine their entitlement to credit U.K. tax against their U.S.
federal income tax liability.
Passive Foreign Investment Company Status
PFIC Classification
Special U.S. taxation rules are applicable to U.S. persons owning shares in
a "passive foreign investment company" ("PFIC"). Investors that are not subject
to U.S. taxation in respect of income on the ADSs or the ordinary shares or that
are not U.S. persons generally will not be affected by the PFIC rules. A foreign
corporation will be classified as a PFIC for any taxable year during which
either (i) 75% or more of its gross income (including the pro rata share of the
gross income of any corporation (U.S. or foreign) in which the foreign
corporation is considered to own 25% or more of the shares by value) for the
taxable year is passive income or (ii) 50% or more of the average quarterly
value of all of its assets (including the pro rata share of the assets of any
corporation in which the foreign corporation is considered to own 25% or more of
the shares by value) produce, or are held for the production of, passive income.
For this purpose, passive income generally includes dividends, interest,
royalties, rents (other than rents and royalties derived in the active conduct
of a trade or business), annuities and gains from assets that produce passive
income. Because Independent Energy will have a relatively large amount of
passive assets, such as cash and marketable securities (including cash derived
from the issuance of ADSs in the offering), pending investment of such assets in
its business, it is possible that Independent Energy may be or could become a
PFIC in any year. Although Independent Energy will attempt to conduct its
business so as to avoid PFIC status, Independent Energy can provide no
assurances that it will not be a PFIC in respect of its current or any future
taxable year.
Consequences of PFIC Status
If Independent Energy were to be classified as a PFIC, a U.S. Holder
generally would be subject to special tax rules with respect to gain realized on
the sale or any other disposition of such ADSs or ordinary shares, and any
"excess distribution" by Independent Energy to the U.S. Holder with respect to
ADSs or ordinary shares held for more than one taxable year. In general, excess
distributions are any distributions (including return of capital distributions)
received by the U.S. Holder in a taxable year that are greater than 125% of the
average annual distributions received by the U.S. Holder in the three preceding
taxable years (or the U.S. Holder's holding period, if shorter). Under these
rules (i) the gain or excess distribution would be allocated ratably over the
U.S. Holder's holding period for the ADSs or ordinary shares, (ii) the amount
allocated to the current taxable year would be treated
18
<PAGE>
as ordinary shares income, (iii) the amount allocated to each prior year would
be subject to tax at the highest rate in effect for that year and (iv) the
interest charge generally applicable to underpayments of tax would be imposed
with respect to the resulting tax attributable to each such prior year. For
purposes of the foregoing rules, a U.S. Holder who uses such ADSs or ordinary
shares as security for a loan will be treated as having disposed of such ADSs or
ordinary shares.
For tax years beginning after 1997, a U.S. Holder of stock in a PFIC that
are treated as "marketable stock" may make a "mark-to-market" election. A
shareholder making the "mark-to-market" election will not be subject to the PFIC
rules described above. Instead, in general, an electing shareholder will include
in each year as ordinary shares income the excess, if any, of the fair market
value of the stock at the end of the taxable year over their adjusted basis and
will be permitted an ordinary shares loss in respect of the excess, if any, of
the adjusted basis of the ADSs or the ordinary shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount
of previously included income as a result of the "mark-to-market" election). The
electing U.S. Holder's basis in the stock will be adjusted to reflect any such
income or loss amounts. Pursuant to the Proposed Treasury Regulations (the
"Proposed Regulations"), the ADSs or the ordinary shares would be treated as
"marketable stock," but there is no assurance that the Proposed Regulations will
be finalized as proposed. Shareholders of a PFIC can elect to apply the Proposed
Regulations to any taxable year beginning after December 31, 1997 for stock in a
PFIC which has a taxable year ending with or within the shareholder's taxable
year.
If Independent Energy is a PFIC in any year, a U.S. Holder who beneficially
owns ADSs or the ordinary shares during such year must file an annual return on
IRS Form 8621 that describes its interest in Independent Energy, the
distributions received from Independent Energy and any gain realized on the
disposition of ADSs or ordinary shares.
U.K. Stamp Duty and U.K. Stamp Duty Reserve Tax
The Stamp Duty Reserve Tax ("SDRT"), at the then applicable rate, arises
upon the issue to and deposit with the depositary of the ordinary shares. The
current rate of the SDRT on the issue and deposit of the ordinary shares is
1.5%. Although not contemplated, if a Stamp Duty were to be charged, the current
rate is (pound)1.50 per (pound)100 (or part thereof). The amount of SDRT payable
would be reduced by any Stamp Duty paid in connection with the same transaction.
The SDRT will be payable by the depositary in the first instance, and reimbursed
by Independent Energy or the selling shareholders, as the case may be. Persons
to whom ADSs/ADRs are issued upon subsequent deposits of shares will be
responsible for payment of the SDRT, currently at the rate of 1.5%.
The Stamp Duty will not be payable in connection with subsequent
transactions in ADSs provided that no written contract of sale or instrument of
transfer is executed or brought into the United Kingdom, and provided that no
register of those securities is maintained within the United Kingdom (which is
expected to be the case). The SDRT will not be payable in connection with
subsequent transactions in ADSs provided that the ADSs do not constitute
"chargeable securities", i.e. they are not issued or raised by a company
incorporated in the U.K., they are not registered on a register kept in the U.K.
and they are not paired with shares issued by a U.K. incorporated company. It is
not contemplated that ADSs will be "chargeable securities".
Depending upon the relevant transfer of ordinary shares by the depository
or its nominee to the relevant ADR holder, Stamp Duty at the rate of (pound)0.50
per transfer or at the rate of (pound)l.50 per (pound)100 (or part thereof) may
be imposed.
Except in the case of certain transfers (for example, by way of gift),
transfers of ordinary shares will normally give rise to a Stamp Duty at the rate
of (pound)0.50 per (pound)100 (or part thereof) on the price payable or value of
the ordinary shares, depending upon the circumstances then prevailing. The Stamp
Duty is usually the liability of the purchaser.
Item 8. Selected Financial Data
The following tables present selected consolidated financial data for the
Company. The selected consolidated financial data as of and for the fiscal years
ended June 30, 1997, 1998 and 1999 have been derived from the audited
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Report. The selected consolidated financial data as of and for
the year ended December 31, 1995 as of and for the six months ended June 30,
1996, have been derived from the audited consolidated financial statements of
the Company which are not included in this Report.
19
<PAGE>
The Company's consolidated financial statements have been prepared in
accordance with U.K. GAAP which differ in certain significant respects from U.S.
GAAP. Notes 26 and 27 to the Company's consolidated financial statements
describe the principal differences between U.K. GAAP and U.S. GAAP as they
relate to the Company and provide a reconciliation to U.S. GAAP of net profit or
loss and shareholders' equity. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Fiscal Year Ended June 30,
December 31, June 31, ---------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
Statement of Operations Data: (in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C>
U.K. GAAP
Revenue ..................................... (pound) 5 (pound)174 (pound)11,127 (pound)57,989 (pound)246,856 $390,032
Cost of sales ................................ -- 171 10,872 55,457 234,387 370,331
Administrative expenses ...................... 90 492 1,363 1,696 4,530 7,157
Depreciation and amortization ................ 3 6 142 626 1,650 2,607
-------- -------- -------- -------- -------- --------
Operating income (loss) ...................... (88) (495) (1,250) 210 6,289 9,937
Exceptional Items ............................ -- (461) -- -- -- --
Interest income (expense), net ............... 24 65 (69) (395) (1,353) (2,138)
Income tax expense ........................... (5) -- -- -- 929 1,468
-------- -------- -------- -------- -------- --------
Net income (loss) ............................ (59) (891) (1,182) (185) 4,007 6,331
Income (loss) per share --Basic ... (176.8)p (9.9)p (9.0)p (1.1)p 15.7p $ 0.25
--Diluted . (176.8)p (9.9)p (7.4)p (1.0)p 14.2p $ 0.22
Weighted average shares outstanding--Basic ... 34 8,981 13,130 17,191 25,465 25,465
--Diluted . 34 8,981 15,908 19,318 28,255 28,255
U.S. GAAP
Revenue (pound)5 (pound)174 (pound)11,127 (pound)57,989 (pound)246,856 $390,032
Net income (loss)............................. (59) (891) (1,370) (321) 3,933 6,214
Income (loss) per share --Basic.... (176.8)p (9.9)p (10.4)p (1.9)p 15.4p $ 0.24
--Diluted.. (176.8)p (9.9)p (8.6)p (1.7)p 13.9p $ 0.22
Weighted average shares outstanding--Basic.... 34 8,981 13,130 17,191 25,465 25,465
--Diluted.. 34 8,981 15,908 19,318 28,255 28,255
Operating Data:
Electricity and natural gas sales (GWh)....... -- -- 256 1,410 6,117 6,117
Customer sites (at end of period)............. -- -- 324 1,350 83,630 83,630
</TABLE>
<TABLE>
<CAPTION>
June 30,
December 31, ----------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
U.K. GAAP
Total assets.................... (pound) 3,053 (pound)7,995 (pound)16,852 (pound)40,712 (pound)137,541 $217,315
Long-term liabilities........... -- 830 5,938 10,671 19,220 30,368
Shareholders' equity............ 2,984 6,787 6,958 9,453 48,879 77,229
U.S. GAAP
Total assets.................... (pound) 3,143 (pound)8,333 (pound)17,227 (pound)40,712 (pound)137,943 $217,950
Long-term liabilities........... 90 1,279 6,612 11,461 20,056 31,688
Shareholders' equity............ 2,984 6,676 6,659 9,056 48,445 76,543
</TABLE>
- ----------
(1) Translations into dollars in this table are solely for convenience and are
computed at the Noon Buying Rate on June 30, 1999 of $1.58 per (pound)l.
(2) Assumes all of the ordinary shares are sold in the form of ADSs.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is intended to assist you in understanding our
financial position as of June 30, 1999 and for the three fiscal years in the
period ended June 30, 1999. You should refer to our consolidated financial
20
<PAGE>
statements and notes included elsewhere in this prospectus which contain
additional information to be read in conjunction with this discussion.
Our financial statements have been prepared in accordance with U.K. GAAP,
which differs in certain significant respects from U.S. GAAP. Notes 26 and 27 to
the consolidated financial statements provide a description of the principal
differences between U.K. GAAP and U.S. GAAP as they relate to Independent
Energy, and a reconciliation of U.S. GAAP of net income (loss) and shareholders'
equity.
Overview
The final phase of deregulation of the supply segment of the U.K.
electricity market was completed in May 1999. Due primarily to delays in the
ability of the regional electricity companies to process the registration of
consumers that contracted to switch suppliers, we were not able to bring on
stream a substantial portion of the small business and residential customers
that contracted for our electricity as early in the fiscal year as planned. The
intervention of the U.K. regulatory authority, OFFER, the predecessor of OFGEM,
was necessary to resolve the problem and to get this market fully open by June
1999. Accordingly, only approximately 8% of our revenue for the fiscal year
ended June 30, 1999 consisted of electricity sales to small business and
residential customers, although we expect this segment of our target market to
grow as a percentage of total revenue.
In February 1999, we also began sales of natural gas to customers. For the
year ended June 30, 1999, however, sales of natural gas constituted less than 1%
of our revenue. We expect natural gas sales to constitute a greater portion of
our revenue in the future.
We recognize revenue from the sale of electricity and natural gas on a
monthly basis based on the volume of electricity consumed by our customers as
determined by month-end meter readings and the contract prices associated with
such volume. Customers are billed monthly, generally at a fixed price for usage.
Because the cost of electricity and natural gas purchased from the spot market
fluctuates throughout the term of sales contracts, we recognize gross profit
related to electricity and natural gas sales on a pro rata basis throughout the
term of sales contracts based on an estimated gross profit margin for all sales
contracts.
The estimated gross profit margin is based on an estimate of the cost of
sales, which includes (1) the estimated cost of electricity and natural gas, (2)
the effects of hedging contracts designed to mitigate energy cost fluctuations,
(3) transmission and distribution costs, (4) commissions and (5) all other costs
of sales in supplying the energy. The difference between the cash cost of the
energy and the estimated cost of sales is accounted for as either an accrual
for, or a deferral of, the cost of energy and recorded on the balance sheet
within current assets or current liabilities, as the case may be. We reconcile
the difference between actual gross profit and estimated gross profit on a
quarterly basis. See "--Liquidity and Capital Resources" beginning on page 20,
and "Risk Factors-- Commodity price fluctuations may adversely affect our
profitability" beginning on page 8."
Because we generally sell electricity and natural gas at fixed prices and
purchase most of our energy at fluctuating prices, we are exposed to risk
arising from the difference between these prices. Our risk management practices
are comprised of three material elements:
o targeting customers that have relatively predictable demand and
pattern usage profiles;
o entering into contracts for differences to effectively fix the price
of a significant portion of our energy requirements purchased on the
spot market; and
o owning gas reserves and generating a portion of the electricity that
we supply to customers.
Results of Operations
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Revenue. Revenue for the fiscal year ended June 30, 1999 increased
(pound)188.9 million, or 325%, to (pound)246.9 million from (pound)58.0 million
for the fiscal year ended June 30, 1998. This increase
21
<PAGE>
reflected a substantial increase in the Company's sales volume of energy to
5,940 GWh in fiscal 1999 from 1,410 GWh in fiscal 1998, a 321% increase,
primarily as a result of our increased marketing efforts.
Gross profit. Gross profit for the fiscal year ended June 30, 1999
increased (pound)10.0 million, or 400%, to (pound)12.5 million from (pound)2.5
million for the fiscal year ended June 30, 1998. As a percentage of revenue,
gross profit for fiscal 1999 was 5% compared to 4% for the fiscal 1998. This
increase was primarily due to our realizing higher gross margins because our
cost of electricity decreased by 4%.
Administrative expenses. Administrative expenses for the fiscal year ended
June 30, 1999 increased (pound)2.8 million, or 164%, to (pound)4.5 million from
(pound)1.7 million for the fiscal year ended June 30, 1998. However, as a
percentage of revenue, administrative expenses for fiscal 1999 were 2% compared
to 3% in fiscal 1998. This decrease resulted as our increase in revenue
substantially exceeded the increase in our administrative costs because we
outsource a substantial portion of our sales efforts and transaction processing.
Depreciation and amortization. Depreciation and amortization for the fiscal
year ended June 30, 1999 increased (pound)1.0 million, or 160%, to (pound)1.6
million from (pound)626,000 for the fiscal year ended June 30, 1998. The
increase was attributable to depreciation related to five new generating plants
that were put into service in fiscal 1999.
Operating profit. Operating profit for the fiscal year ended June 30, 1999
increased (pound)6.1 million, to (pound)6.3 million compared to (pound)210,000
for the fiscal year ended June 30, 1998. The increase was due to increased sales
volumes, increased gross profit and reduced administrative expenses as a
percentage of revenue as described above.
Interest expense, net. Net interest expense was (pound)1.4 million for the
fiscal year ended June 30, 1999 compared to (pound)395,000 for the fiscal year
ended June 30, 1998. The increase in net interest expense for fiscal 1999 was
primarily attributable to increased interest expense associated with the
financing of new generating plants and increased interest expense associated
with having higher outstanding balances under our working capital facility as a
result of increased sales.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Revenue. Revenue for the fiscal year ended June 30, 1998 increased
(pound)46.9 million, or 423%, to (pound)58.0 million from (pound)11.1 million
for the fiscal year ended June 30, 1997. The increase reflected a substantial
increase in our sales volume of electricity to 1,410 GWh in fiscal 1998 from 257
GWh in fiscal 1997, a 449% increase, primarily as a result of increased
marketing efforts.
Gross profit. Gross profit for the fiscal year ended June 30, 1998
increased (pound)2.3 million to (pound)2.5 million from (pound)255,000 for the
fiscal year ended June 30, 1997. As a percentage of revenue, gross profit for
fiscal 1998 was 4% compared to 2% in fiscal 1997. This increase was primarily
due to the increase in electricity sales derived from our generated electricity,
which generally have higher margins. In fiscal 1998, we generated 58.5 GWh of
electricity compared to 7.1 GWh in fiscal 1997. In addition, the additional
electricity we generated in fiscal 1998 was from new larger plants at Trumfleet
and Caythorpe that produce electricity at lower costs, thereby further
increasing margins.
Administrative expenses. Administrative expenses for the fiscal year ended
June 30, 1998 increased (pound)300,000, or 24%, to (pound)1.7 million from
(pound)1.4 million for the fiscal year ended June 30, 1997. As a percentage of
revenue, administrative expenses for fiscal 1998 were 3% compared to 12% in
fiscal 1997 as our administrative expenses in fiscal 1997 reflected primarily
fixed costs which did not increase materially in fiscal 1998.
Depreciation and amortization. Depreciation and amortization expense for
the fiscal year ended June 30, 1998 was (pound)626,000 compared to
(pound)142,000 for the fiscal year ended June 30, 1997. The increase was
primarily the result of depreciation related to two new generation plants that
commenced operations in fiscal 1998, one in December 1997 and one in March 1998.
Operating profit (loss). The operating profit for the fiscal year ended
June 30, 1998 was (pound)210,000 compared to an operating loss of (pound)1.3
million for the fiscal year ended June 30, 1997. The reduction in the loss for
fiscal 1998
22
<PAGE>
was due to increased sales volumes, increased gross profit and reduced operating
expenses as a percentage of revenue as described above.
Interest income (expense). The Company had net interest expense of
(pound)395,000 for the fiscal year ended June 30, 1998 compared to net interest
income of (pound)69,000 for the fiscal year ended June 30, 1997. The change was
primarily due to increased interest expense associated with debt financing used
for two new generating plants in fiscal 1998.
Liquidity and Capital Resources
Our principal uses of funds have been to:
o fund operating losses associated with being a development stage
company;
o fund working capital requirements; and
o fund capital expenditures, primarily the acquisition and installation
of gas-fired generating plants.
For the fiscal years 1997, 1998 and 1999, these activities utilized funds
of (pound)6.0 million, (pound)11.8 million and (pound)48.3 million,
respectively.
We have financed our funding requirements through a combination of equity
issuances, capital lease financings and bank borrowings. In July 1998, we raised
(pound)35.0 million in net proceeds in our initial public offering of ADSs in
the U.S.
In July 1999, we entered into a new one-year credit facility with a
syndicate of banks led by Barclays Bank PLC, which provides for aggregate
borrowings and letters of credit of (pound)80.0 million. This credit facility
provides for:
o (pound)45.0 million in the aggregate comprised of (a) a revolving
credit facility that bears interest at a base rate or LIBOR plus 1.2%
(6.3% at June 30, 1999), and (b) letters of credit to secure
obligations under contracts for differences; and
o (pound)35.0 million in the form of letters of credit to secure energy
purchase obligations.
In addition, we have a (pound)9.5 million construction facility with
Barclays Bank that is payable in quarterly installments of (pound)250,000 plus
interest at LIBOR plus 2.5% (7.5% at June 30, 1999) over five years starting in
1997. Barclays Bank also provides us with an additional (pound)2.0 million for
miscellaneous letters of credit that we may require and has issued a bank
guarantee, currently in the amount of (pound)6.5 million, to secure our
obligations under a contract with a third-party service provider. We are
required to provide, and have provided, full cash collateral to secure this bank
guarantee.
As of June 30, 1999, our outstanding borrowings were (pound)22.0 million
under the revolving credit facility (and were approximately (pound)32 million as
of September 3, 1999) and (pound)8.7 million under the construction facility. We
had also utilized commitments to issue letters of credit in the aggregate amount
of (pound)21.2 million.
During our three years of supplying electricity in the medium-sized
business (over 100 kW) market, which represented 92% of our revenue in fiscal
1999, we have established a solid track record with respect to timely billing of
customers and collection of customer accounts. However, in fiscal 1999, we
experienced delays billing our existing small business, public authority, and
residential customers, in part due to third-party computer software problems. A
plan has been put in place to address this billing problem, through which we
believe the problem is in the process of being corrected. However, we cannot be
sure that additional computer system problems will not resurface. As a result of
this billing problem, our cash flow did not reflect approximately (pound)20
million of revenue that we recognized for the fiscal year ended June 30, 1999.
Any further problems of this nature could have a material adverse effect on our
operations or financial condition.
23
<PAGE>
We have financed our generating plants primarily through capital leases. As
of June 30, 1999, our obligations under capital leases related to our generating
assets totaled (pound)13.1 million, of which (pound)1.6 million is payable
within one year and (pound)7.5 million comes due between one and five years
after June 30, 1999. These capital leases are secured by the assets comprising
the associated generating facility.
We estimate that we will need approximately (pound)40.0 million to fund the
acquisition or installation of generating plants currently under construction or
planned through March 2000. Equity financing represents approximately only 7% to
10% of our aggregate financing requirements for such generating plants. In
addition, we will continue to assess other opportunities to acquire or build
additional generating facilities.
We currently purchase substantially all of our electricity from the
Electricity Pool. The Electricity Pool requires that we pay them 28 days from
purchase. We bill our customers monthly, however, and receive payments on
average approximately 25 days later. As a result of these timing differences, we
must have significant working capital available. Unlike the current electricity
market, gas purchases (and transportation) are not settled on a daily, but
rather, monthly basis. Payment terms for purchases are generally reflected in
the gas supply agreements and therefore working capital requirements for this
sector are less onerous, being mainly affected by customers' payment records
rather than contract obligation.
In addition, during the colder months in the U.K. (October through April),
our energy prices are generally higher than the average annual prices. As a
result, during these months, our working capital needs increase to cover the
increased cost of energy. We have taken a number of measures to reduce our
working capital need during this time, including (1) encouraging customers to
adopt shorter billing and collection cycles and (2) utilizing direct debit as a
means of payment. As we expand our base of operations, we expect our working
capital needs to increase significantly.
Reconciliation of U.K. GAAP to U.S. GAAP
Our consolidated financial statements are prepared in accordance with U.K.
GAAP. There are significant differences between U.K. GAAP and U.S. GAAP.
The principal difference between U.K. GAAP and U.S. GAAP relevant to
Independent Energy occurs with respect to accounting for variable employee share
options under our option program. Although we do not have a formal option plan,
we have granted options to acquire ordinary shares to substantially all of our
employees. Under U.K. GAAP, we do not recognize compensation cost related to the
option program as described below.
Under Accounting Principles Board ("APB") No. 25, compensation for services
received as consideration for Ordinary shares issued pursuant to the exercise of
options are recognized as the difference between the quoted market price of the
number of ordinary shares issuable pursuant to options at the measurement date
less the aggregate exercise price for ordinary shares issuable pursuant to such
options. Compensation cost related to the option program as determined under
U.S. GAAP would have been (pound)188,000, (pound)136,000 and (pound)74,000 for
the fiscal years ended June 30, 1997, 1998 and 1999, respectively.
Our net profit (losses) for the fiscal years ended 1997, 1998 and 1999
under U.K. GAAP were (pound)(1.2 million), (pound)(185,000) and (pound)4.0
million, respectively. Under U.S. GAAP, we would have reported net losses of
(pound)l.4 million and (pound)321,000 for fiscal 1997 and 1998, respectively,
and net income of (pound)3.9 million for fiscal 1999.
You should read Notes 26 and 27 to the consolidated financial statements
for a description of these and other differences between U.K. GAAP and U.S.
GAAP.
The Financial Accounting Standards Board periodically issues statements of
financial accounting standards. In August 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which applies to all entities, requires derivative instruments to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. The statement, as amended by SFAS No. 137 is effective for fiscal
years beginning after June 15, 2000 with earlier application encouraged but
permitted only as of the beginning of any fiscal quarter
24
<PAGE>
beginning after June 1998. Retroactive application is prohibited. We do not
believe this statement will have a material effect on our financial condition or
results of operations.
In April 1998, The Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities" which requires all start-up and organizational costs to be expensed
as incurred. It also requires all remaining historically capitalized amounts to
these costs existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. SOP 98-5 is effective
for all fiscal years beginning after December 31, 1998. The Company believes
that the adoption of SOP 98-5 for U.S. GAAP reporting purposes will not have a
material effect on its financial statements.
Item 9A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to two principal risks associated with customer contracts:
o "load shape" risk--the risk associated with a shift in the customer's
usage pattern, including absolute amounts demanded and the timing of
amounts demanded; and
o "purchase" price risk--the cost of purchased energy relative to the
price received from the supply customer.
Generally, load shape risk is managed by targeting customers with
predictable usage patterns, and the risk decreases as our portfolio of supply
customers in the supply market increases. We manage the energy price risk by
employing a variety of risk management tools, including (1) entering into
hedging instruments and (2) operating generating plants to produce a portion of
our required supply of electricity.
As part of our risk management strategy, we enter into hedging instruments
primarily, contracts for differences. These are contracts between generators or
traders and suppliers that have the effect of fixing the price of electricity or
natural gas for a contracted quantity of energy over a specific time period.
Differences between the actual prices on the spot market and the agreed prices
give rise to payments between the parties to the particular contract for
differences. Our ability to manage purchase price risk depends, in part, on the
future availability of properly priced risk management mechanisms, such as
contracts for differences.
As of June 30, 1999 (assuming no renewal of contracts that will expire
during the period), we had sales contracts in place to supply an estimated 7,943
GWh of electricity through June 30, 2000 and we had contracts for differences in
place for the purchase of 2,679 GWh. Our aggregate commitment under contracts
for differences was (pound)68.6 million. As of September 1, 1999, we had sales
contracts in place for 11,360 GWh of electricity through June 30, 2000, and we
had contracts for differences in place for the purchase of 3,597 GWh for the
period of September 1, 1999 to June 30, 2000. Our aggregate commitment under
such contracts for differences was (pound)108.6 million, and represented 32% of
our estimated energy requirements through fiscal 2000.
We have a normal policy of hedging a significant proportion of our total
sales, based on our estimate of electricity volumes from actual sales contracts
then in place. For the period from April to September 1999, our Board or
Directors agreed to relax this hedging policy in order to take advantage of the
traditionally lower, less volatile, energy prices during the summer months. We
intend to hedge a significant portion of our electricity costs by reinitiating
our normal policy with respect to hedging for the period beginning October 1999
through the remainder of the fiscal year.
Our generation of electricity also provides a hedge against electricity
price fluctuations since we are able to anticipate the cost of our self-produced
electricity and its cost has historically been less than our sales prices. We
estimate that our eight existing generating plants, and the three plants under
construction expected to be operating by the end of 1999, will provide us with
the capacity to produce up to 720 GWh of electricity for the fiscal year ending
June 30, 2000.
25
<PAGE>
Item 10. Directors and Officers of Registrant
Executive Officers and Directors
Certain information concerning the executive officers and directors of
Independent Energy is set forth below.
Name Age Position
John L. Sulley............... 48 Chief Executive Officer and Director
Ian Stewart.................. 47 Executive Director--Finance
William E. Evans............. 63 Executive Director--Resources
Robert E. Jones.............. 53 Executive Director--Operations
Herbert L. Oakes............. 53 Non-Executive Chairman
Roy W. Deakin................ 67 Non-Executive Director
Jerry W. Jarrell............. 57 Non-Executive Director
Burt H. Keenan............... 60 Non-Executive Director
David O. May................. 63 Non-Executive Director
John L. Sulley joined Independent Energy in October 1995 and served as
Managing Director until August 1999. In August 1999, he became Chief Executive
Officer and Director of Independent Energy. Mr. Sulley has over 30 years of
experience in the U.K. power industry, including experience in engineering,
operations, finance and marketing operations. From April 1994 to October 1995,
he was general commercial manager for the Supply Division of Scottish Power PLC,
where he was responsible for financial operations, strategic and business
planning for the Supply Division and for the electricity trading Operations.
From March 1989 to April 1994, Mr. Sulley was responsible for starting and
managing the direct sales and co-generation sales operations at National Power
PLC. Mr. Sulley holds an MBA from Glasgow University, a Masters degree in
engineering from UMIST and a BSc. in engineering from Aston University.
Ian Stewart joined Independent Energy as Executive Director--Finance in May
1998. From April 1996 to May 1998, Mr. Stewart served as Group Financial
Controller for the North of Scotland Water Authority. From January 1992 to March
1996, he served as Head of Finance for the Energy Trading Division of Scottish
Power PLC, which marketed electricity to large industrial and commercial
businesses in the early phases of deregulation in the U.K. During this same
period, he also served as Finance Director of Caledonian Gas, an affiliate of
Scottish Power PLC. Mr. Stewart received his professional accountancy
qualification from Caledonian University.
William E. Evans, Executive Director--Resources, joined Independent Energy
in April 1992. He is a consultant geologist-geophysicist with broad managerial
experience in exploration, having specialized in the U.K. onshore oil industry
over the past 25 years. He became chief geologist of the consulting firm
Seabrooke & Associates (later Simon Horizon) and a founder of Energy Resource
Consultants. He holds a BSc. in geology from Bristol University and a DIC in oil
technology from Imperial College, London, where he held a lectureship in
petroleum geology for three academic years.
Robert E. Jones joined Independent Energy in April 1996 and is currently
Executive Director--Operations. Dr. Jones is a petroleum engineer with 26 years
of experience in drilling, field development and production operations, with
particular emphasis on operations in the U.K. From September 1993 to April 1996,
Dr. Jones was development manager for Perenco Group (formerly Kelt) where he was
responsible for drilling and completion operations and field development. Before
joining Perenco, Dr. Jones was operations manager for Taylor Woodrow Energy
Limited with specific responsibility for drilling and production operations
onshore U.K. Dr. Jones holds both a Ph.D. and a BSc. in mining engineering from
Nottingham University.
Herbert L. Oakes became a non-executive Director in January 1999 and
non-executive Chairman in October 1999. He is a director of Oakes Fitzwilliam &
Co. Limited, a position he has held for more than 20 years. Mr. Oakes also
serves as a director for 27 other companies, including some in the energy and
utility industries. Oakes, Fitzwilliam & Co. provides financial advisory
services to Independent Energy from time to time.
26
<PAGE>
Roy W. Deakin has been a non-executive director of Independent Energy since
October 1992. He is Chairman of Southern Geophysical Consultants, a U.K. company
which has provided a geophysical service function to the petroleum exploration
industry over the past 25 years. Mr. Deakin was formerly the non-executive
Chairman of Blackland Oil PLC. Mr. Deakin is a member of the Audit and
Remuneration Committees of the Board of Directors.
Jerry W. Jarrell became a non-executive director of Independent Energy in
May 1998. From April 1991 to May 1998, he served as Executive Director--Finance
of Independent Energy. He is also a private consultant to several public and
private companies. From 1977 to 1990, he served as Chief Financial Officer for
the Woodson Companies, an oil field construction company. From 1971 to 1977, he
was Secretary, Treasurer and Controller of Offshore Logistics, Inc., a
Nasdaq-traded marine and aviation oil and gas service company. From 1966 to
1971, he was a certified public accountant with Arthur Andersen & Company. He
holds a BS degree in accounting from Louisiana Tech University. Mr. Jarrell is
the Chairman of the Audit Committee and a member of the Remuneration Committee
of the Board of Directors.
Burt H. Keenan served as Executive Chairman from Independent Energy's
inception in April 1991 to August 1999. From August 1999 to October 1999, he
served as non-executive Chairman of the Board of Directors. In October 1999, Mr.
Keenan, for personal reasons, stepped down as Chairman but continues to serve as
a director of Independent Energy. Since 1987, he has been an associate of Chaffe
& Associates, Inc., an investment banking firm located in New Orleans,
Louisiana. From 1969 to 1986, Mr. Keenan was the founder, Chairman and Chief
Executive Officer of Offshore Logistics, Inc., a Nasdaq-traded marine and
aviation oil and gas service company. He is also a director of a number of
companies, including Telescan Incorporated, a Nasdaq-traded interactive online
information business, and Halter Marine, Inc., an American Stock Exchange listed
company engaged in shipbuilding in the U.S. Mr. Keenan holds bachelors and
masters degrees in business administration from Tulane University.
David O. May has been a non-executive director since December 1995. He is a
specialist in venture capital companies and currently holds seven other
directorships covering a wide range of business interests. He is currently
chairman of the Berthon group of companies which was a leader in marina
development in the U.K. He is a university graduate, a qualified marine engineer
and a naval architect. Mr. May is the Chairman of the Remuneration Committee and
a member of the Audit Committee of the Board of Directors.
Term of Office of Directors and Executive Officers
With the exception of the Chairman and Managing Director, one-third of the
Directors, or if their number is not three or any multiple of three, then the
number nearest to and less than one-third, retire by rotation at each Annual
General Meeting. In addition, any Director appointed since the latest Annual
General Meeting shall retire at the next Annual General Meeting but is eligible
for re-election. Accordingly, the terms of office expire at the next Annual
General meeting and, being eligible, such Directors may seek re-election.
Item 11. Compensation of Directors and Executive Officers
In the fiscal year ended June 30, 1999, the Company paid (pound)412,000 in
compensation to all directors and executive officers as a group, for services in
all capacities. The Company has a bonus and profit sharing plan. However, no
compensation was paid in fiscal 1999 under this plan. In fiscal 1999, the
Company accrued (pound)31,000 for pension, retirement or similar benefits for
its executive officers and directors. See Note 4 to the consolidated financial
statements of the Company included elsewhere in this Report.
Employment Contracts
Independent Energy has entered into the following agreements with its
executive officers.
Mr. Sulley and Dr. Jones have each entered into service agreements with
Independent Energy for an initial term of two years. After the initial term
which expired in May 1998, Independent Energy has the right to terminate either
agreement with 24 months prior notice. Mr. Sulley and Dr. Jones receive annual
salaries of(pound)66,000 and(pound)60,000, respectively, as well as
profit-related bonuses and other benefits.
27
<PAGE>
Each of Messrs. Evans, Keenan and Jarrell have entered into consulting
agreements through entities controlled by each such person with Independent
Energy for an initial term of two years. After the initial term, either party to
the agreements may terminate the applicable agreement with 24 months prior
notice. Messrs. Evans, Keenan and Jarrell receive annual salaries of
(pound)45,000, (pound)40,000 and (pound)25,000, respectively.
Each of Messrs. Deakin and May have entered into agreements to provide
their services as non-executive directors to Independent Energy with Independent
Energy. Such contracts are terminable by either party with three months' notice.
Each of Messrs. Deakin and May receive an annual fee of (pound)8,000 and an
attendance fee of (pound)650 per board meeting.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
Options to Purchase Ordinary Shares
The following table sets forth the options to purchase Ordinary Shares held
by each executive officer and director as of June 30, 1999.
<TABLE>
<CAPTION>
Exercise
Number of Shares Price Exercisable Dates
Founders Staff
<S> <C> <C> <C> <C>
B H Keenan 45,400 31.25p 1st Jan 1997 to 1st Jan 2001
200,000 100.00p 21st Oct 1997 to 28th April 2003
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J L Sulley 60,000 50.00p 1st Jan 1997 to 1st Jan 2001
300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
I Stewart 170,000 122.50p 5th Nov 2000 to 5th Nov 2002
W E Evans 295,200 1.00p 28th May 1996 to 1st Jan 2001
150,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
R E Jones 300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J W Jarrell 22,800 31.25p 1st Jan 1997 to 1st Jan 2001
100,000 100.00p 21st Oct 1997 to 28th April 2003
100,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
D O May 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
15,000 122.50p 5th Nov 2000 to 5th Nov 2002
R W Deakin 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
H L Oakes 70,000 597.50p 20th Jan 2002 to 20th Jan 2004
------------- ------------
Total 1,673,400 505,000
------------- ------------
</TABLE>
No granted options have been exercised nor have any expired.
The market price of the shares at 30th June 1999 was 845.0p (Nasdaq
$13.625) and the range during 1998-99 was 287.5p to 845.0p (Nasdaq $4.75
to $13.75).
Item 13. Interest of Management in Certain Transactions
Mr. Evans, through Altwood Petroleum Limited ("Altwood"), a corporation
controlled by him, has a 4% carried interest in the Company's oil and gas
licenses (except for the Caythorpe license). Altwood acquired this 4% interest
as compensation for Mr. Evans's agreement in April 1992 to the assignments of
the ongoing Elswick ventures and other forthcoming projects to Eukan, a former
affiliate of the Company.
28
<PAGE>
PART II
Item 14. Description of Securities to be Registered
Not applicable.
29
<PAGE>
PART III
Item 15. Defaults upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered Securities
None.
PART IV
Item 17. Financial Statements
See page F-1.
Item 18. Financial Statements and Exhibits
Not applicable.
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Statement of Directors' Responsibilities.....................................F-2
Report of Independent Public Accountants.....................................F-3
Consolidated Statements of Operations for the years
ended June 30, 1999, 1998 and 1997 .....................................F-4
Consolidated Balance Sheet as of June 30 1999 and 1998.......................F-5
Consolidated Cash Flow Statements for the years
ended June 30, 1999, 1998 and 1997 .....................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The following statement, which should be read in conjunction with the report of
Independent Public Accountants set out on page F-3, is made with a view to
distinguishing for shareholders the respective responsibilities of the Directors
and of the auditors in relation to the consolidated financial statements.
The Directors are required by UK company law to prepare financial statements for
each fiscal period that give a true and fair view of the state of affairs of the
company and its subsidiaries as at the end of the fiscal period and of the
profit or loss and cash flows for that period.
The Directors confirm that suitable accounting policies have been used and
applied consistently, and that reasonable and prudent judgments and estimates
have been made in the preparation of the financial statements. The Directors
also confirm that applicable accounting standards have been followed and that
the financial statements have been prepared on a going concern basis.
The Directors are responsible for keeping proper accounting records, for
safeguarding the assets of the company and subsidiaries and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
F-2
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Independent Energy Holdings PLC:
We have audited the consolidated balance sheets of Independent Energy Holdings
PLC and subsidiaries, as defined in Note 2 to these financial statements, as of
30 June 1999 and 1998, and the related consolidated statements of operations and
cash flows for the years ended 30 June 1999, 1998 and 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom, which are substantially the same as auditing standards
generally accepted in the United States. 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 also 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 our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Independent Energy Holdings PLC and
subsidiaries as of June 30, 1999 and 1998, and the years ended 30 June 1999,
1998 and 1997 in accordance with generally accepted accounting principles in the
United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
respects from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of net results,
shareholders' funds and cash flows for the years ended 30 June 1999,1998 and
1997 to the extent summarized in Notes 26 and 27 to the consolidated financial
statements.
Nottingham, England Pannell Kerr Forster
19th August 1999 Chartered Accountants and Registered Auditors
F-3
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts stated in thousands of pounds sterling)
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Turnover (revenue)................................ 3 (f) (pound)246,856 (pound)57,989 (pound)11,127
Cost of sales..................................... (234,387) (55,457) 10,872
Gross profit................................ 12,469 2,532 255
Depreciation and amortisation..................... (1,650) (626) (142)
Administrative expenses........................... (4,530) (1,696) (1,364)
------------- --------------- --------------
Operating profit............................ 6,289 210 (1,251)
Interest receivable and similar income............ 6 (a) 838 105 189
Interest payable and similar charges.............. 6 (b) (2,191) (500) (120)
------------- --------------- --------------
Profit/(loss) on ordinary activities before taxation 7 4,936 (185) (1,182)
Taxation.......................................... 9 (929) -- --
------------- --------------- --------------
Retained profit/(loss) for the year............... 20 (pound)4,007 (pound)(185) (pound)(1,182)
------------- --------------- --------------
Basic earnings/(losses) per share................. 8 15.7p (1.1)p (9.0)p
Diluted earnings/(losses) per share............... 8 14.2p (1.0)p (7.4)p
</TABLE>
Movements on reserves are set out in note 20.
There are no material differences between results calculated on an historical
cost basis and those reported above.
The results for the year reflect all recognized gains and losses.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended June 30,
Note 1999 1998
---- --------------- ---------------
<S> <C> <C> <C>
Fixed assets
Intangible assets............................... 10 (pound)9,316 (pound)6,221
Tangible assets................................. 11 33,750 18,531
Investments..................................... 12 2,776 --
--------------- ---------------
45,842 24,752
Current assets
Debtors......................................... 13 84,383 15,340
Cash at bank and in hand........................ 578 621
Security deposits............................... 6,738 --
--------------- ---------------
91,699 15,961
Creditors
Amounts falling due within one year............. 14 (68,513) (20,589)
--------------- ---------------
Net current assets/(liabilities)................ 23,186 (4,628)
Total assets less current liabilities........... 69,028 20,124
Creditors
Amounts falling due after more than one year.... 14 (19,220) (10,671)
Provisions for liabilities and charges.......... 15 (929) --
--------------- ---------------
Net assets...................................... 48,879 9,453
--------------- ---------------
Capital and reserves............................
Called up share capital......................... 19 263 179
Share premium account........................... 20 46,030 10,695
Profit and loss account......................... 20 2,586 (1,421)
--------------- ---------------
Shareholders' funds............................. 21 48,879 9,453
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
Year Ended June 30,
Note 1999 1998 1997
---------- -------------- ------------- --------------
<S> <C> <C> <C>
Reconciliation of operating profit to net cash (outflow) from
operating activities
Operating profit (pound)6,289 (pound)210 (pound)(1,250)
Depreciation and amortization 1,650 626 147
Increase in debtors (69,043) (10,459) (3,931)
Increase in creditors 29,377 7,484 2,695
-------------- ------------- --------------
Net cash (outflow) from operating activities (31,727) (2,139) (2,339)
Returns on investments and servicing of finance
Interest received 827 105 189
Interest element of finance lease payments (762) (426) --
Interest paid (1,836) (648) (81)
-------------- ------------- --------------
(1,771) (969) 108
Capital expenditure and financial investment
Payments to acquire investments (2,715) (6,775) --
Payments to acquire tangible fixed assets (8,566) (1,930) (3,760)
Payments to acquire intangible fixed assets (3,564) -- --
-------------- ------------- --------------
(14,845) (8,705) (3,760)
Management of liquid resources
Sale of commercial paper -- -- 4,300
-------------- ------------- --------------
4,300
Financing
Proceeds from exercised share warrants 43 54 --
Proceeds from exercised share options 280 199 --
Issue of ordinary share capital 36,359 2,500 1,352
Share issue costs (1,263) (73) --
-------------- ------------- --------------
35,419 2,680 1,352
Issue of loan notes 1,400
New loans due within one year -- 5,000 --
New loans due in over one year 5,172 4,000 --
Loan repayments (6,400) (500) --
Capital element of finance lease repayments (1,189) (694) (440)
-------------- ------------- --------------
(2,417) 7,806 960
Net financing proceeds 33,002 10,486 2,312
Net cash (decrease) (15,341) (1,327) 621
Net effect of exchange rate movements 20 3 (39)
-------------- ------------- --------------
(Decrease)/increase in cash 22 & 23 (pound)(15,321) (pound)(1,324) (pound)582
-------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANISATION
Independent Energy Holdings PLC and subsidiary undertakings (the "Company")
generates and markets electricity, currently only operating in the United
Kingdom.
2. BASIS OF PRESENTATION
The consolidated financial statements include Independent Energy Holdings
PLC and its wholly-owned subsidiary, Independent Energy UK Limited.
All amounts throughout this document are stated in pounds sterling.
3. ACCOUNTING POLICIES
These financial statements are prepared under the historical cost
convention and in accordance with applicable accounting standards and
generally accepted accounting principles in the United Kingdom ("UK GAAP").
A summary of the more important accounting policies, which have been
applied consistently, is set out below.
The most significant differences between the accounting principles followed
by the Company and generally accepted accounting principles in the United
States ("US GAAP") are described in notes 26 and 27.
a) Basis of Consolidation
The financial statements consolidate the accounts of Independent Energy
Holdings PLC and its subsidiary undertakings and the acquisition method of
accounting has been adopted. Under this method, the results of subsidiary
undertakings acquired in the year are included in the consolidated profit
and loss account from the date of acquisition.
Undertakings, other than subsidiary undertakings, in which the Group has an
interest comprising not less than 20% of the voting capital and over which
it exerts significant influence are treated as joint ventures. The
consolidated profit and loss account includes the appropriate share of
these undertakings' profits less losses.
In accordance with Section 230 (4) of the Companies Act 1985, Independent
Energy Holdings PLC is exempt from the requirement to present its own
profit and loss account. The amount of the loss for the year dealt with in
the financial statements of Independent Energy Holdings PLC is (pound)1,000
(1998: profit (pound)1,000).
b) Development
Expenditure on development of production facilities is capitalised to be
matched against future revenue.
The cost incurred relates to the development of natural gas fields to
facilitate commercial production of proven reserves which are used as the
fuel source for generation plants producing electricity and are included as
intangible assets.
F-7
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. ACCOUNTING POLICIES
The Company follows the full cost method of accounting for gas properties.
Accordingly, all costs associated with the acquisition, exploration, and
development of gas reserves, including directly related overhead costs, are
capitalised. All capitalised costs of gas properties are amortised on the
unit-of-production method using estimates of proven reserves. Investments
in unproven properties and major development projects are not amortised
until proven reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicated that the
properties are impaired, the amount of the impairment is added to the
capitalised cost to be amortised. In addition, the capitalised costs are
subject to a "ceiling" test, which basically limits such costs to the
aggregate of the "estimated present value", discounted at a 10 percent
interest rate of future net revenues from proven reserves, based on current
economic and operating conditions, plus the lower of cost or fair market
value of unproven properties.
Sales of proven and unproven gas properties are accounted for as
adjustments of capitalised costs with no gain or loss recognised, unless
such adjustments would significantly alter the relationship between
capitalised costs and proven reserves in gas, in which case the gain or
loss is recognised in income. Abandonments of properties are accounted for
as adjustments of capitalised costs with no loss recognised.
The Company capitalises interest on expenditures made in connection with
exploration and development projects not subject to current amortisation.
Interest is capitalised only for the period that activities are in progress
to bring these projects to their intended use.
c) Depreciation and Amortisation
Tangible fixed assets are written off over their estimated useful lives on
a straight line basis at the following annual rates:
Plant and machinery 5% on cost
Office equipment 33% on cost
Assets in the course of construction are the generation plants including
the generators, well development and related piping and cable connections
which are depreciated over their estimated useful lives from the date of
completion.
Development of natural gas fields are amortised on a unit-of-production
basis using estimates based on proven reserves.
Customer service agreement costs are released to the profit and loss
account in proportion to the average number of customers in each period
over the life of the contract.
The Company periodically assesses whether any events or changes in
circumstances have occurred that would indicate that the carrying amount of
long-lived assets may not be recoverable.
d) Market Entry Costs
Entry costs in the newly deregulated electricity market have been
capitalised within prepayments and accrued income and will be released to
the profit and loss account in proportion to the average number of
customers in each period over four years.
e) Leasing
Assets acquired under finance leases are capitalised and depreciated over
their estimated useful lives. The interest element of finance lease rental
payments is charged to the profit and loss account over the life of the
lease, in proportion to the capital balance outstanding.
Rentals payable under operating leases are charged to the profit and loss
account as incurred.
F-8
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. ACCOUNTING POLICIES
f) Turnover
Turnover represents sales less allowances, trade discounts, and Value Added
Tax and is attributable to one class of business.
g) Financial Instruments
The Company uses Contracts for Differences (CfDs) to minimise exposure to
Pool price variations. The cost or the income attributable to CfDs is
recorded in the accounting records when settlement is made. Where delivery
under the CfD has taken place prior to each month end, adjustments are made
to account for the known differences between the contract strike price and
the Pool price on the date of delivery.
h) Prepaid Energy Cost
The cost of electricity purchased from the Pool fluctuates throughout the
term of sales contracts. The Company recognises gross profit related to
electricity sales on a pro rata basis throughout the term of sales
contracts based on an estimated gross profit margin for all sales
contracts. Pool prices tend to be higher in the colder months than in the
warmer months. The estimated gross profit margin considers the estimated
cost of electricity, the effects of hedging contracts entered into by the
Company to mitigate Pool price exposure, transmission and distribution
costs, commissions and all other costs of sales in supplying the
electricity. The difference between the cash cost of the electricity and
the estimated cost of sales based on the estimated gross profit margin is
accounted for as either an accrual for, or a deferral of, the cost of
electricity and recorded on the balance sheet within current assets or
current liabilities. The Company reviews the difference between actual
gross profit and estimated gross profit on a quarterly basis.
i) Accounting for Sales
Sales for each monthly period for over 100kW customers can be accurately
determined as meters are read by telemetry every half an hour. For the
under 100kW customers meters are read monthly or quarterly. Consequently,
sales in this market for the period are determined by utilising information
from actual sales billed and a calculation of the unbilled element of sales
to the period end. The unbilled calculation is derived from known invoiced
Pool consumption, plus an estimation of the consumption still to be
invoiced by the Pool.
j) Deferred Taxation
Tax deferred or accelerated is accounted for in respect of all material
timing differences to the extent that it is probable that a liability or
asset will be realised. The amount of such tax is based on expected
effective tax rates, and future changes in tax laws and rules are not
anticipated for this purpose.
k) Foreign Currency Translation
The translation of foreign currency transactions is dealt with as follows:
(i) non-monetary assets and liabilities at the balance sheet date are
translated at the rate ruling on the date on which the transaction
occurred;
(ii) monetary assets and liabilities at the balance sheet date are
translated at the rate ruling at that date;
(iii) transactions regarding turnover and operating expenses occurring
during the period, settling in sterling, are translated at the rate
ruling on the date which the transaction occurred; and
(iv) transactions regarding turnover and operating expenses occurring
during the period, settled in foreign currency, are translated at the
average rate.
F-9
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
l) Pensions
The Company does not have a company pension scheme but pays contributions
to individual pension plans for all full time permanent staff. Costs are
therefore expensed in the year incurred.
4. DIRECTORS
Directors' Remuneration
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ -----------------
<S> <C> <C> <C>
Salaries, fees and consultancy services............ (pound)349 (pound)265 (pound)258
Benefits........................................... 32 20 18
Pension contributions.............................. 31 20 19
--------------- -------------------- -----------------
412 305 295
--------------- -------------------- -----------------
Highest paid director.............................. 103 82 82
--------------- -------------------- -----------------
</TABLE>
No directors were members of a company pension scheme (1998: nil).
Further details of the directors' remuneration are given in the report of
the Remuneration Committee.
Directors' Interests in Share Options
The directors' interests in share options as of 30th June 1999 are as
follows:
<TABLE>
<CAPTION>
Exercise
Number of Shares Price Exercisable Dates
Founders Staff
<S> <C> <C> <C> <C>
B H Keenan 45,400 31.25p 1st Jan 1997 to 1st Jan 2001
200,000 100.00p 21st Oct 1997 to 28th April 2003
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J L Sulley 60,000 50.00p 1st Jan 1997 to 1st Jan 2001
300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
I Stewart 170,000 122.50p 5th Nov 2000 to 5th Nov 2002
W E Evans 295,200 1.00p 28th May 1996 to 1st Jan 2001
150,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
R E Jones 300,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
J W Jarrell 22,800 31.25p 1st Jan 1997 to 1st Jan 2001
100,000 100.00p 21st Oct 1997 to 28th April 2003
100,000 100.00p 1st Jan 1999 to 1st Jan 2001
50,000 122.50p 5th Nov 2000 to 5th Nov 2002
D O May 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
15,000 122.50p 5th Nov 2000 to 5th Nov 2002
R W Deakin 50,000 100.00p 1st Jan 1997 to 1st Jan 2001
H L Oakes 70,000 597.50p 20th Jan 2002 to 20th Jan 2004
------------- ------------
Total 1,673,400 505,000
------------- ------------
</TABLE>
No granted options have been exercised nor have any expired.
The market price of the shares at 30th June 1999 was 845.0p (Nasdaq
$13.625) and the range during 1998-99 was 287.5p to 845.0p (Nasdaq $4.75 to
$13.75).
F-10
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. EMPLOYEES
a) Employment costs (including executive directors) consist of:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ ----------------
<S> <C> <C> <C>
Salaries and wages................................. (pound)1,749 (pound)859 (pound)503
Social security costs.............................. 175 80 50
Other pension costs................................ 215 105 66
------------------------------------ ----------------
2,139 1,044 619
------------------------------------ ----------------
</TABLE>
b) The average number employed during the year was:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ ----------------
<S> <C> <C> <C>
Sales and Marketing................................ (pound)34 (pound)12 (pound) 7
Operations and Development......................... 16 7 3
Management, Finance and Administration............. 16 6 5
------------------------------------ ----------------
66 25 15
------------------------------------ ----------------
</TABLE>
6. INTEREST RECEIVABLE AND PAYABLE AND SIMILAR INCOME AND EXPENSE
a) Interest Receivable and Similar Income:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ ----------------
<S> <C> <C> <C>
Interest receivable................................ (pound)838 (pound)98 (pound)186
Gain on currency conversion........................ -- 4 --
Other.............................................. -- 3 3
------------------------------------ ----------------
(pound)838 (pound)105 (pound) 189
------------------------------------ ----------------
</TABLE>
b) Interest Payable and Similar Expense:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ ----------------
<S> <C> <C> <C>
Interest payable- bank borrowing .................. (pound)1,533 (pound)716 (pound) 34
- finance leases................... 687 426 70
Letters of credit.................................. 250 43 --
Other interest charges............................. 86 17 10
Loss on currency conversion........................ 11 -- 40
------------------------------------ ----------------
2,567 1,202 154
Less: interest capitalised (notes 10,11 & 12)...... (376) (702) (34)
------------------------------------ ----------------
2,191 500 120
------------------------------------ ----------------
</TABLE>
7. PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------------------------
<S> <C> <C> <C>
Amortisation...................................... (pound)447 (pound)276 (pound)38
Release of deferred costs......................... 44 -- --
Depreciation - owned............................. 712 167 33
- held under finance leases......... 447 183 71
Auditors' remuneration - audit fee.............. 36 18 11
- other.................. 41 11 4
Operating lease rentals - land and buildings .... 252 78 52
- plant and machinery.... 175 61 57
</TABLE>
8. EARNINGS/(LOSSES) PER SHARE
Earnings/(losses) per share have been calculated in accordance with FRS 14
'Earnings per share' for both years by dividing the profit/(loss) for the
financial year by the weighted average number of ordinary shares in issue
during the financial year, based on the following information.
F-11
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Profit/(loss) for the financial year ((pound)000).. (pound)4,007 (pound) (185) (pound) 1,182
Basic weighted average share capital
(number of shares, thousand)....................... 25,465 17,191 13,130
Diluted weighted average share capital
(number of shares, thousand)....................... 28,255 19,318 15,908
</TABLE>
The difference between the basic and the diluted weighted average share
capital is mainly attributable to unexercised share options.
9. TAXATION
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ -----------------
<S> <C> <C> <C>
Corporate tax at 30% (1998: 31%)............. (pound)-- (pound)-- (pound)--
Deferred taxation............................ 929 -- --
----------------- ------------------ -----------------
929 -- --
</TABLE>
No charge for corporation tax arises due to the availability of capital
allowances. The tax charge for the year is (pound)552,000 lower than might
be expected as a result of reducing the current year profit by the net
operating losses brought forward.
10. FIXED ASSETS - INTANGIBLE
Intangible fixed assets consists of:
a) The expenditures related to the acquisition and development of natural
gas fields including the applicable interest and overhead costs. The
gas produced is used to fuel the generation plants producing
electricity and not sold as natural gas. The cost is amortised over
the estimated productive life of the producing property based on
proven reserves.
b) Advance costs to service customers in the newly deregulated
electricity market. These costs will be released to the profit and
loss account in proportion to the average number of customers in each
period over the life of the contract.
<TABLE>
<CAPTION>
Customer
Natural Gas Service
Fields Agreement Total
<S> <C> <C> <C>
Group
Cost
At 1st July 1998 (pound)3,535 (pound)3,000 (pound)6,535
Additions 1,451 2,135 3,586
---------------- ---------------- ---------------
At 30th June 1999 4,986 5,135 10,121
---------------- ---------------- ---------------
Accumulated amortisation
At 1st July 1998 314 -- 314
Charge for the year 447 -- 447
Release of deferred cost -- 44 44
---------------- ---------------- ---------------
At 30th June 1999 761 44 805
---------------- ---------------- ---------------
Net book value
30th June 1998 3,221 3,000 6,221
30th June 1999 4,225 5,091 9,316
---------------- ---------------- ---------------
</TABLE>
Interest capitalised during the years ending 30th June 1999 and 1998 was
(pound)22,000 and (pound)nil respectively.
F-12
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. FIXED ASSETS - TANGIBLE
<TABLE>
<CAPTION>
Assets in the
Office Course of Plant and
Equipment Construction Equipment Total
<S> <C> <C> <C> <C>
Group
Cost
At 1st July 1998 (pound)354 (pound)5,384 (pound)13,254 (pound)18,992
Additions in the year 1,304 14,970 104 16,378
Transferred in the year -- (13,778) 13,778 --
---------------- ------------------ ---------------- --------------
At 30th June 1999 1,658 6,576 27,136 35,370
---------------- ------------------ ---------------- --------------
Accumulated depreciation
At 1st July 1998 96 -- 365 461
Charge for the year 194 -- 965 1,159
---------------- ------------------ ---------------- --------------
At 30th June 1999 290 -- 1,330 1,620
---------------- ------------------ ---------------- --------------
Net book value
At 30th June 1998 258 5,384 12,889 18,531
At 30th June 1999 1,368 6,576 25,806 33,750
---------------- ------------------ ---------------- --------------
</TABLE>
Interest capitalised during the years ending 30th June 1999 and 1998 was
(pound)293,000 and (pound)702,000 respectively.
The net book value of the assets held under finance leases included above
were:
1999 1998
Assets in the course of construction (pound)-- (pound)3,518
Plant and equipment 14,820 4,476
------------- ------------
14,820 7,994
------------- ------------
Capital commitments
The Group has capital commitments of:
1999 1998
Authorised but not contracted (pound)8,000 (pound)6,100
Contracted but not provided 20,600 4,407
------------- ------------
12. FIXED ASSETS - INVESTMENTS
Group Company
Shares in
Joint Subsidiary
Venture Undertakings
At 1st July 1998 (pound)-- (pound)2,148
Additions in the year 2,776 --
------------- ------------------
At 30th June 1999 2,776 2,148
------------- ------------------
On 31st December 1998, the Group acquired a 50% holding in the ordinary
issued share capital of Petroplus Energy Park Milford Haven Limited, a
company incorporated in England on 22nd July 1998 and whose accounting
reference date is 31st December.
F-13
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The principal activity of the joint venture is to generate and supply
electricity.
As at the date of these financial statements, the joint venture has not
traded whilst commissioning of the plant is being completed. These
commissioning costs are being incurred entirely by the other joint venture
partner, Petroplus International NV. Consequently the first results to be
recognised by the Group under FRS9, Associates and Joint Ventures, will be
for the year ended 30th June 2000. The cost of acquisition includes
capitalised interest of (pound)61,000.
The subsidiary undertakings of the Company, all of which have an accounting
reference date of 30th June, are as follows:
<TABLE>
<CAPTION>
Country of
Incorporation Percentage Shareholdings
OPERATING
<S> <C> <C>
Independent Energy UK Limited England Ordinary Shares 100%
DORMANT
I E (Caythorpe) Limited England Ordinary Shares 100%
Independent Energy Generation Limited England Ordinary Shares 100%
Independent Services Limited England Ordinary Shares 100%
Independent Energy Limited England Ordinary Shares 100%
Independent Energy Resources Limited England Ordinary Shares 100%
</TABLE>
13. DEBTORS
<TABLE>
<CAPTION>
Group Company
1999 1998 1999 1998
<S> <C> <C>
Trade debtors (pound)57,663 (pound)10,905 (pound)-- (pound)--
Sundry debtors 3,393 866 -- --
Other taxation and social security 400 781 -- --
Prepayments and accrued income 22,927 2,788 -- --
Amounts owed by subsidiary undertaking
-- -- 44,144 8,729
------------- ----------- ------------- ------------
84,383 15,340 44,144 8,729
------------- ----------- ------------- ------------
</TABLE>
Included within prepayments and accrued income are costs of
(pound)6,787,000 which will be released to the profit and loss account
after more than one year.
Amounts owed by subsidiary undertaking are also due after more than one
year.
14. CREDITORS:
AMOUNTS FALLING DUE WITHIN ONE YEAR
1999 1998
Trade creditors (pound)12,650 (pound)6,455
Bank loan -- 4,000
Bank loan - construction facility 1,000 1,000
Bank overdraft 22,038 22
Other taxation and social security 73 39
Corporation tax -- --
Obligations under finance lease contracts 1,560 1,052
Accruals and deferred income 31,192 8,021
------------- -----------
68,513 20,589
------------- -----------
F-14
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The bank overdraft is secured by a debenture on all the Group assets other
than assets subject to other security arrangements.
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1999 1998
Bank loan - construction facility (pound)7,672 (pound)3,500
Unsecured loan notes -- 1,400
Obligations under finance lease contracts 11,548 5,771
------------- -----------
19,220 10,671
------------- -----------
Bank loan
The bank loan, which is part of a revolving construction facility of
(pound)9.5m (1998: (pound)8.0m), is secured by a debenture on all the Group
assets other than assets subject to other security arrangements. The loan
bears interest based on London inter bank rates (LIBOR), and is repayable
as follows:
1999 1998
Within one year (pound)1,000 (pound)1,000
Between one and two years 1,000 1,000
Between two and five years 6,672 2,500
------------- -----------
8,672 4,500
------------- -----------
Finance leases
Obligations under finance leases fall due as follows:
1999 1998
Within one year (pound)1,560 (pound)1,052
Between one and five years 7,500 4,728
Over five years 4,048 1,043
------------- -----------
13,108 6,823
------------- -----------
The finance leases are secured on the assets concerned.
15. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation
Group
At 1st July 1998 (pound)--
Charged to profit and loss 929
------------
At 30th June 1999 929
------------
Deferred tax is analysed as follows:
1999 1998
Capital allowances (pound)929 (pound)850
Losses offset -- (850)
------------- ------------
929 --
------------- ------------
F-15
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
There are no unprovided amounts.
16. COMMITMENTS
The Company has entered into a five year Service Agreement with a leading
business operations outsourcing company, Vertex, for the provision of call
centre facilities, billing and transactional processing, to support
participation in the sub 100 kW electricity supply market.
A key component of this outsourcing arrangement is the provision of a
scalable system. Under the terms of the agreement there are obligations and
penalties for non performance on the parties.
17. OBLIGATIONS UNDER OPERATING LEASES
Annual commitments under operating leases fall due as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expiring within one year -- land and buildings (pound)41 (pound)--
-- plant and machinery 18 --
Expiring within two to five years -- land and buildings 42 203
-- plant and machinery 157 67
Expiring in more than five years -- land and buildings 169 --
-- plant and machinery -- --
</TABLE>
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group's financial instruments comprise borrowings including lease
financing, equity shares, cash and liquid resources, and trade debtors and
trade creditors, that arise directly from its operations. The main purpose
of these financial instruments is to raise finance for the Group's
operations.
Details of equity shares issued in the year are contained in note 19. These
included the issue of 8 million ordinary shares which on 29th July 1998
were sold in the form of American Depository Shares at US$ 8.00 per share
to raise US$ 64 million before expenses. These shares commenced trading on
the United States Nasdaq Stock Market in July 1998.
The main risks arising from the Group's financial instruments are Pool
price risk and interest rate risk. The Board reviews and agrees policies
for managing each of these risks and they are summarised below. These
policies have remained unchanged throughout the year. The Group does not
believe that it has a significant exchange rate risk arising from its
transactions in US Dollars.
a) Pool price risk
(i) Managing Price Risk for Electricity and Gas
The Company is primarily involved in retailing both electricity and gas to
business and domestic users. These sales are typically made under fixed
price contracts for durations of one or two years. The Company purchases
both electricity and gas from the wholesale markets in the UK and manages
the price risks between its purchase costs and its sales revenues by a
number of activities and mechanisms. These hedging activities involve the
development of the Company's own generating facilities, Contracts for
Differences (CfDs) purchased from third parties, the purchase of physical
gas from the UK wholesale market and, in the future, production of gas from
the Company's fields. The hedging instruments with third parties are
typically established to run for no more than one or two years to be
consistent with the exposure created by its sales contracts.
F-16
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The electricity to supply customers under these contracts is primarily
purchased from the Pool at fluctuating spot market prices. The Company is
exposed to two principal risks associated with such contract: "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 cost of purchased electricity relative to the
price received from the supply customer). The Company employs risk
management methods to maximise its return consistent with an acceptable
level of risk.
Generally, load shape risk decreases as the Company's portfolio of supply
customers in the supply market increases. The Company hedges purchase price
risk by employing a variety of risk management tools, including entering
into hedging instruments, known as contracts for differences (CfDs),
management of its supply contract portfolio, and through the ownership of
generating facilities to produce a portion of its required supply of
electricity.
(ii) Contracts for Differences (CfDs)
CfDs are contracts generally between generators and suppliers that have the
effect of fixing 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 different payments
between the parties to the particular CfD.
Given the variability of Pool prices, Independent Energy's policy is to
enter into CfDs, which effectively fix the cost of most of the electricity
that it sells to its numerous customers. The Company procures these CfDs
from a broad range of market participants to avoid concentration of
purchasing. It also strives to achieve a mix of types of hedging instrument
which, in aggregate, match the majority of its contracted electricity sales
volumes at different times during the year.
(iii) Potential Liabilities
As at 30th June 1999 the Company has in place CfDs with third parties
covering the period from 30th June 1999 to 3rd October 2000 for 2,679 GWhs
of electricity that have a value of (pound)68.6 m. The CfDs are settled
either monthly or daily in accordance with the contracts.
As at 1st July 1999 the Company has no energy purchase contracts or CfDs
with third parties that extend beyond the summer of the year 2001. As all
of these contracts are more than covered by suitably priced sales
commitments, and are also at prices similar to current market values, the
Company does not feel the need to make any adjustments to the accounts in
relation to these future commitments.
b) Interest rate risk
The Group's exposure to interest rate fluctuations on its borrowings
including lease financing is managed by a combination of fixed or floating
rate facilities. Certain floating rate facilities can be converted to fixed
rate at short notice.
c) Financial Instruments
(i) Analyses by instrument
1999 1998
Bank overdraft (pound)22,038 (pound)22
Bank loan -- 4,000
Construction loan 8,672 4,500
Unsecured loan notes -- 1,400
Finance leases 13,108 6,823
------------- ------------
43,818 16,745
------------- ------------
F-17
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
All amounts are payable in sterling except for one finance lease which is
payable in US dollars. The sterling equivalent amount outstanding on this
lease is (pound)640,000 (1998: (pound)696,000).
(ii) Maturity analyses
1999 1998
Repayments fall due as follows:
Within one year (pound)24,598 (pound)6,074
After more than one year 19,220 10,671
------------- ------------
43,818 16,745
------------- ------------
Repayments after more than one year
are as follows:
Between one and two years 2,560 3,452
Between two and five years 8,940 6,176
More than five years 7,720 1,043
------------- ------------
19,220 10,671
------------- ------------
(iii) Interest Rate analyses
1999 1998
Fixed rate borrowings (pound)5,802 (pound)8,223
Floating rate borrowings 38,016 8,522
------------- ------------
43,818 16,745
------------- ------------
The weighted average interest rate for the fixed rate liabilities was
9.58%, with a weighted average period of 5.1 years for which the rate is
fixed. Floating rate borrowings bear interest rates based on LIBOR.
F-18
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
(iv) Borrowing facilities
The Group has the following undrawn committed borrowing facilities at 30th
June 1999 in respect of which all conditions precedent had been met:
<TABLE>
<CAPTION>
Fixed Floating rate Total Total
rate
1999 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expiring within one year (pound)3,758 (pound)13,171(pound)16,929 (pound)5,978
Expiring after more than one year -- 827 827 3,500
----------- ---------------- ------------- ------------
3,758 13,998 17,756 9,478
----------- ---------------- ------------- ------------
</TABLE>
The fair value of all financial assets and liabilities are equal to their
carrying values.
As permitted by FRS 13, the analyses of financial instruments in this note
do not include short-term debtors and creditors.
19. SHARE CAPITAL
Company
1999
Authorised:
50,000,000 ordinary shares of 1p each (pound)500
On 2nd July 1998, the number of authorised shares were
increased from 28,000,000 to 50,000,000.
Issued and fully paid - ordinary shares of 1p each
At 1st July 1998 179
Issued in the year 84
------------
At 30th June 1999 263
------------
The Company issued 8,000,000 ordinary shares and on 29th July 1998
concluded the sale of these in the form of American Depository Shares at US
$8.00 per share to raise US $64,000,000 before expenses. These shares were
traded on the United States Nasdaq Stock Market. The proceeds were used to
fund the acquisition and installation of additional generating plants,
repay certain outstanding indebtedness and provide working capital for the
expansion of the Company's operations.
Other issues were the exercise of:
Exercise
Price Number
Share options (pound)1.00 280,000
Share warrants (pound)0.75 57,500
Share option plan
The Company has a share option plan which provides for grants of options to
its employees to acquire the Company's shares. As at 30th June 1999 there
are outstanding options for the issue of 4,075,400 ordinary shares of 1p
each.
F-19
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19. SHARE CAPITAL (Continued)
A summary of the share options granted and the changes during the periods
is presented below. The share options granted include 250,000 share options
in aggregate to the Company's nominated broker and financial advisor
granted on 31st May 1996, of which 180,000 share options were exercised in
1997/98, the remainder of which were exercised in August and November 1998
at an exercise price of 100 pence.
During the year 250,000 share options were granted to the Company's
Investment Bankers in lieu of fees.
<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
Average Number of Average Number of
Exercise Price Shares Exercise Price Shares
<S> <C> <C> <C> <C>
At beginning of the year 93p 3,463,400 82p 2,778,400
Granted in the year 568p 912,000 122.5p 925,000
Cancelled in the year 360p (20,000) -- --
Exercised in the year 100p (280,000) 83p (240,000)
----------------- ------------------ ------------------ ---------------
At end of the year 197p 4,075,400 93p 3,463,000
----------------- ------------------ ------------------ ---------------
</TABLE>
The following table summarises information regarding share options at 30th
June 1999:
<TABLE>
<CAPTION>
Weighted
Average Years
Number Remaining Number
Exercise Price Effective Grant Date Outstanding Contract life Exercisable
<S> <C> <C> <C> <C>
1p 28th May 1996 295,200 1.50 295,200
31.25p 28th May 1996 193,200 1.50 193,200
50p 28th May 1996 60,000 1.50 60,000
100p 28th May 1996 1,710,000 2.29 1,710,000
122.5p 5th November 1997 915,000 3.35 --
402.5p 3rd November 1998 45,000 4.34 --
450p 20th August 1998 127,000 4.14 --
576p 20th January 1999 250,000 6.55 250,000
597p 20th January 1999 385,000 4.55 --
652.5p 4th May 1999 70,000 4.83 --
667.5p 3rd March 1999 25,000 4.67 --
------------------ ------------------ ---------------
4,075,400 3.04 2,508,400
------------------ ------------------ ---------------
</TABLE>
The option price range at each year end was as follows:
30th June 1999 1p to 667.5p
30th June 1998 1p to 122.5p
30th June 1997 1p to 100.0p
Details of the directors' options which are included in the above figures
are shown in note 4 to the financial statements.
Share warrants
On 30th June 1997 share warrants for 140,000 ordinary shares were granted
in association with the issue of Loan Notes of (pound)1,400,000; the
warrants are exercisable at a price of 75p at anytime until their
expiration on 31st March 2002. During the year 1998/99 a further 57,500 of
the share warrants were exercised, leaving 10,000 unexercised.
F-20
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20. RESERVES AND OTHER SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Group and
Company Share Group Company
Premium Profit and Profit and
Account Loss Account Loss Account
<S> <C> <C> <C>
At 1st July 1998 (pound)10,695 (pound) (1,421) (pound)3
Share premium arising on offering 36,278 -- --
Expenses arising on offering (1,263) -- --
Share premium arising on exercise of stock options and
warrants 320 -- --
Retained profit/(loss) for the year -- 4,007 (1)
---------------- ---------------- --------------
At 30th June 1999 46,030 2,586 2
---------------- ---------------- --------------
</TABLE>
21. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Group Company
1999 1998 1999 1998
<S> <C> <C> <C> <C>
At 1st July 1998 (pound)9,453 (pound) 6,958 (pound)10,877 8,195
Profit/(loss) for the year 4,007 (185) (1) 2
Shares issued 84 30 84 30
Share premium arising on offering 35,015 2,400 35,015 2,400
Share premium arising on exercise of stock
options and warrants 320 250 320 250
---------------- ----------- ------------ ------------
At 30th June 1999 48,879 9,453 46,295 10,877
---------------- ----------- ------------ ------------
</TABLE>
22. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
At Beginning Other At End of
of Year Cash Flows Changes Year
<S> <C> <C> <C> <C>
Year Ended 30th June 1998
Cash at bank and in hand (pound)621 (43) -- 578
Security deposits -- 6,738 -- 6,738
Bank overdraft (22) (22,016) -- (22,038)
-------------- ------------- ------------- ------------
599 (15,321) -- (14,722)
Leases due within one year (1,052) 1,189 (1,697) (1,560)
Leases due after more than one year (5,771) -- (5,777) (11,548)
-------------- ------------- ------------- ------------
(6,823) 1,189 (7,474) (13,108)
Loans due within one year (5,000) 4,000 -- (1,000)
Loans due after more than one year (4,900) (2,772) -- (7,672)
-------------- ------------- ------------- ------------
(9,900) 1,228 -- (8,672)
-------------- ------------- ------------- ------------
Total (16,124) (12,904) (7,474) (36,502)
-------------- ------------- ------------- ------------
</TABLE>
F-21
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
23. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
Year Ended 30th June 1999
Decrease in cash in the year (pound)(15,321)
Cash outflow from decrease in loan financing 1,228
Cash outflow from decrease in lease financing 1,189
New finance leases (7,474)
-------------
Movement in net debt (pound)(20,378)
Net debt at 30th June 1998 (16,124)
------------
Net debt at 30th June 1999 (36,502)
------------
24. MAJOR NON-CASH TRANSACTIONS
During the year the Company entered into finance leases in respect of
assets with a total capital value at the inception of the lease of
(pound)7,474,000.
25. POST BALANCE SHEET EVENT
On 8th July 1999, the Group was granted a twelve month (pound)80m Revolving
Credit and Letters of Credit facility by a syndicate of six banks led by
Barclays Bank PLC. The facility is secured on Group receivables.
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Financial Statements
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom. Such
principles differ in certain respects from US GAAP. A summary of the most
significant differences applicable to the Company is set out below.
Accounting Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of contingent
assets and liabilities and disclosure in conformity with generally accepted
accounting principles of contingent assets and liabilities at the date of
the financial statements and their reported amounts of revenues and
expenses during the reported period. Accounting estimates have been
employed in these financial statements to determine reported amounts,
including realisability, useful lives of assets and income taxes. Actual
results could differ from those estimates.
The principle differences between UK GAAP and US GAAP are disclosed below:
a) Statement of Operation Differences
<TABLE>
<CAPTION>
Note 1999 1998 1997
<S> <C> <C> <C>
Profit/(loss) on ordinary activities
after taxation under UK GAAP (pound)4,007 (pound)(185) (pound)(1,181)
US GAAP adjustments: (188)
Stock based compensation -
Employee Share Option Scheme (c) (74) (136) (188)
Total US GAAP adjustments (74) (136) (188)
Net effect of US GAAP adjustments (74) (136) (188)
Net profit/(loss) under US GAAP 3,933 (321) (1,369)
----------------- ------------ -------------
Primary earnings/(loss)
per ordinary share under US GAAP 15.4p (1.9)p (10.4)p
Diluted earnings/(loss)
per ordinary share under US GAAP 13.9p
</TABLE>
F-22
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
b) Equity Reconciliation
<TABLE>
<CAPTION>
Note 1999 1998 1997
<S> <C> <C> <C>
Equity under UK GAAP (pound)48,879 (pound)9,453 (pound)9,958
Stock based compensation (c) (434) (397) (299)
------------ ------------ ------------
Net effect of US GAAP adjustments (434) (397) (299)
------------ ------------ ------------
Equity under US GAAP (d) 48,445 9,056 6,659
------------ ------------ ------------
</TABLE>
c) Employee Share Option Scheme
Under UK GAAP no compensation cost is recognized under Employee Share
Option Schemes. Under US GAAP compensation for services that are received
as consideration for shares issued through the Employee Share Option Scheme
are recognized as the difference between the quoted market price of the
stock at the measurement date less the amount the employee is required to
pay (option exercise price). Compensation costs, as determined above, are
charged to expense over the vesting period.
The vesting period has been assumed to be the period from the date of grant
of the share option to the date the option first becomes exercisable.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation expenses been
determined as provided in SFAS 123 for stock options using the
Black-Scholes option pricing model, the pro forma effect would have been:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C>
Net profit/(loss) applicable to ordinary shares - as (pound) reported 3,933 (pound) (321)
Net profit/(loss) applicable to ordinary shares - pro forma 1,998 (428)
Primary net earnings/(loss) per ordinary share - as reported 15.4p (1.9)p
Primary net earnings/(loss) per ordinary share - pro forma 7.8p (2.5)p
</TABLE>
The company has issued a range of options from commencement of trade to the
year ended 30th June 1999. A summary of the options granted and weighted
average assumptions used in the calculation of Black-Scholes are as
follows:
Date of Grants Expected life Interest rate Volatility
28th May 1996 3.42 6.00% 10.58%
11 November 1997 2.0 6.70% 22.38%
20th August 1998 2.0 6.87% 186.03%
3rd November 1998 2.0 6.65% 163.85%
20th January 1999 (a) 2.0 6.49% 140.59%
20th January 1999 (b) 6.0 5.97% 140.59%
3rd March 1999 2.0 6.60% 138.22%
4th May 1999 2.0 6.64% 124.09%
The options granted on 20th January 1999 denoted (b) were issued at a
discount of 21.5p from market price.
All other options granted in the current year were issued at market price.
The weighted average fair values at date of grant during 1999 and 1998
respectively were (pound)4.50 and (pound)0.23
F-23
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
26. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)(Continued)
d) US GAAP Equity Roll Forward
Shareholders equity roll forward in accordance with US GAAP:
1999 1998 1997
Balance at beginning of year (pound)9,056 (pound)6,659 (pound)6,676
Other gains 35,456 2,718 1,352
Net profit/(loss) 3,933 (321) (1,369)
------------- -------------- -------------
Balance at end of year 48,445 9,056 6,659
------------- -------------- -------------
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS
a) Cash flow information
The consolidated cash flow statements are prepared in conformity with UK
GAAP. The principal differences between these statements and cash flow
statements prepared under US GAAP are as follows:
(i) Under UK GAAP, net cash flow from operating activities is determined
before considering cash flows from returns on investments and
servicing of finance and taxes paid. Under US GAAP, net cash flow from
operating activities is determined after these items.
A summary of the Company's operating, investing and financial
activities classified in accordance with US GAAP is presented below.
For purposes of this summary, cash and cash equivalents consist of
cash deposits with banks and security deposits.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash (used in) operating activities (pound) (33,498) (pound) (3,108) (pound) (2,231)
Cash provided by financing activities 33,022 10,489 2,273
Cash (used in) by investing activities (14,845) (8,705) 540
-------------- --------------- --------------
Net (decrease) in cash and deposits with banks (15,321) (1,324) 582
Balance at beginning of year 599 1,923 1,341
-------------- --------------- --------------
Balance at end of year (14,722) 599 1,923
-------------- --------------- --------------
</TABLE>
(ii) The amount of taxes and interest paid, net of capitalized interest,
during the year is:
1999 1998 1997
Interest, net of capitalization (pound)2,598 (pound)1,074 (pound)81
Stamp duty reserve tax 579
------------- -------------- ------------
F-24
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS (Continued)
b) Other disclosures
Total liabilities, stockholders' equity and total assets were as follows:
30th June 1999 (pound)137,541
30th June 1998 40,712
Total assets prepared in accordance with US GAAP were as follows:
30th June 1999 137,943
30th June 1998 41,105
Long term liabilities prepared in accordance with US GAAP were as follows:
30th June 1999 20,056
30th June 1998 11,461
c) Commitments under operating leases
The Group's future minimum payments under operating leases as at 30th June
1999 are as follows:
Years ending 30th June
2000 (pound)725
2001 740
2002 624
2003 546
2004 516
Thereafter 3,079
------------
6,230
------------
d) Reconciliation of tax charge to statutory rate on losses
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Profit/(loss) on ordinary activities before taxation (pound)4,936 (pound) (185)
Expected tax charge at the statutory rate 1,518 (57)
Increase in deferred tax liability (929) (390)
------------- ------------
Difference to reconcile 589 (447)
------------- ------------
Deferred tax not recognised 317 (802)
Intangible asset tax allowances 460 457
Inadmissible expenditure (188) (102)
------------- ------------
589 (447)
------------- ------------
</TABLE>
The Group has accumulated losses and capital allowances to be carried
forward and relieved in the future at the following year end of:
30th June 1999 (pound)7,788
30th June 1998 7,710
F-25
<PAGE>
Item 19. Financial Statements and Exhibits
Exhibit
No. Description
3** Memorandum and Articles of Association, as amended, of
Independent Energy.
4.1** Form of Deposit Agreement among Independent Energy Holdings plc,
The Bank of New York, as Depositary, and the holders from time to
time of American Depositary Receipts evidencing American
Depositary Shares representing Ordinary Shares.
4.2** Form of American Depositary Receipt evidencing American
Depositary Shares representing Ordinary Shares (included in
Exhibit 4.1).
10.1** Accession Agreement to the Pooling an Settlement Agreement.
10.2** Carried Interest Agreement between Independent Energy UK Limited
and Altwood Petroleum Limited dated May 21, 1996.
10.3** Hive-up Agreement dated May 14, 1996 between Eukan Energy Limited
and Independent Energy UK Limited.
10.4** Hive-up Agreement dated May 14, 1996 between Elswick Petroleum
Limited and Independent Energy UK Limited.
10.5** Second Tier License to Supply Electricity for Independent Energy
UK Limited dated March 7, 1996.
10.6** Loan Note Instrument dated June 30, 1997 by Independent Energy
Holdings plc with respect to (pound)1,400,000 10% unsecured Notes
due 2002.
10.7** Warrant Instrument dated June 30, 1997 by Independent Energy
Holdings PLC with respect to 140,000 Warrants to purchase
ordinary shares.
10.8** Credit Agreement dated September 5, 1997 between Independent
Energy Holdings PLC, Independent Energy UK Limited Barclays Bank
PLC and several lenders.
10.9*** Letter Agreement regarding Amendment to Credit Agreement dated
June 4, 1998 between Independent Energy Holdings PLC, Independent
Energy UK Limited, Barclays Bank PLC and several lenders.
10.10*** Letter of Variation dated July 15, 1998 between Independent
Energy Holdings PLC, Independent Energy UK Limited and Barclays
Bank PLC.
10.11** Master Equipment Lease Agreement dated April 19, 1996 between
Machinery Acceptance Corporation and Independent Energy UK
Limited.
10.12*** Master Finance Lease Agreement dated June 17, 1997 between Debis
Financial Services Limited and Independent Energy UK Limited.
10.13*** Lease Master Agreement dated October 30, 1997 between ING Lease
(UK) Limited and Independent Energy UK Limited.
10.14* Agreement, dated July 8, 1999, for a Revolving Advance and Letter
of Credit Facility between Independent Energy UK Limited,
Independent Energy Holdings plc, Barclays Capital, Barclays Bank
PLC and the financial institutions party thereto.
F-26
<PAGE>
10.15* License Farmout Agreement, dated January 11, 1999, between
Independent Energy UK Limited, ISO (U.K.) Limited, Archean Energy
(U.K.) Limited and Altwood Petroleum Limited.
10.16* License Buy-in Agreement, dated February 23, 1999, between
Independent Energy UK Limited and Vulcan Energy Limited.
21* List of Subsidiaries.
23.1 Consent of Pannell Kerr Forster.
23.2* Consent of Gaffney, Cline & Associates Ltd.
99* Reserve Report of Gaffney, Cline & Associates Ltd., dated August
10, 1999.
F-27
- --------------
* Incorporated by reference from the Registration Statement on Form F-3 (File
No. 333-85719) filed by Independent Energy with the Commission.
** Incorporated by reference from the Registration Statement on Form 20-F
(File No. 0-23451) filed by Independent Energy with the Commission.
*** Incorporated by reference from the Registration Statement on Form F-1 (File
No. 333-56223) filed by Independent Energy with the Commission.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INDEPENDENT ENERGY HOLDINGS
/s/ JOHN L. SULLEY
----------------------------------
John L. Sulley
Chief Executive Officer
December 20, 1999
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our report dated 19 August 1999 on the
financial statements of Independent Energy Holdings PLC as of 30 June 1999 and
1998, and for each of the three years in the period ended 30 June 1999 in the
Annual Report on Form 20-F of Independent Energy Holdings PLC.
/S/ PANNELL KERR FORSTER
----------------------------------------------
Pannell Kerr Forster
Chartered Accountants and Registered Auditors
Nottingham, England
20 December 1999
