<PAGE>
As filed with the Securities and Exchange Commission on September 8, 1999
Registration Statement No. 333-85719
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM F-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
INDEPENDENT ENERGY HOLDINGS PLC
(Exact name of Registrant as specified in the charter)
----------------
England 4911 Not Applicable
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number)Identification Number)
corporation or
organization) ----------------
Radcliffe House
Blenheim Court
Solihull, West Midlands
United Kingdom B91 2AA
011-44-121-705-1111
(Address, including zip code, and telephone number, including area code of
Registrant's principal executive offices)
----------------
CT Corporation System
1633 Broadway
New York, NY 10019
(212) 664-1666
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies of communications to:
Richard J. Wilkie Keith Kearney
Akn, Gump, Strauss, Hauer & Feld, L.L.P.i Davis Polk & Wardwell
711 Louisiana, Suite 1900 One Fredrick's Place
Houston, Texas 77002 London EC2R 8AB
(713) 220-5800 United Kingdom
44-171-418-1300
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to made pursuant to Rule 434,
please check the following box: [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--SEPTEMBER 8, 1999
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- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
[Independent Energy Logo]
8,815,000 American Depositary Shares
Representing 8,815,000 Ordinary Shares
- --------------------------------------------------------------------------------
The Company: The Offering:
. Each ADS
. We are the represents one of
largest our ordinary
independent shares.
marketer of
electricity in
the United . There is an
Kingdom--a existing trading
company not a market for the
part of the ADSs. The last
government-owned reported sale
electricity price on Nasdaq
industry at the on September 7,
time of its 1999 was $13 5/8
privatization in per ADS.
1990.
. Independent . We are offering
Energy Holdings 7,000,000 ADSs
PLC and selling
Radcliffe House shareholders are
Blenheim Court offering
Solihull, West 1,815,000 ADSs
Midlands for resale. You
United Kingdom B91 may also purchase
2AA ordinary shares
44-121-705-1111 in lieu of ADSs.
Nasdaq Symbol: . We will not
receive any
. INDYY proceeds from the
sale of ADSs by
the selling
shareholders.
. We have granted
the underwriters
an option to
purchase an
additional
1,322,250 ADSs to
cover over-
allotments.
. We plan to use
the proceeds from
this offering for
general corporate
purposes,
including working
capital, the
expansion of our
operations and
sales and
marketing
capabilities,
investment in
risk management
assets, and
possible
acquisition of
other
complementary
businesses.
. Closing: ,
1999.
---------------------------------------------
<TABLE>
<CAPTION>
Per ADS Total
-----------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Independent Energy:
Proceeds to selling shareholders:
-----------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 6.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Prudential Securities
Johnson Rice & Company L.L.C.
<PAGE>
Description of Inside Front Cover
[LOGO OF INDEPENDENT ENERGY]
INDEPENDENT ENERGY
[MONTAGE OF PHOTOGRAPHS INCLUDING A CONTROL PANEL OPERATING GAS PRODUCTION
EQUIPMENT, GAS WELLHEADS, ELECTRICITY GENERATORS, CONTROL EQUIPMENT USED TO
OPERATE GENERATORS AND ELECTRICITY CONSUMERS.]
THE POWER TO CHOOSE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Service of Process and Enforcement of Liabilities.......................... i
Where You Can Find More Information........................................ i
Forward-Looking Statements................................................. ii
Presentation of Information................................................ iii
Prospectus Summary......................................................... 1
Risk Factors............................................................... 6
Use of Proceeds............................................................ 14
Exchange Rates............................................................. 15
Nature of Trading Market and Market Information............................ 16
Dividend Policy............................................................ 17
Capitalization............................................................. 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business and Properties................................................... 26
Management................................................................ 37
Principal and Selling Shareholders........................................ 39
Description of Share Capital.............................................. 40
Description of American Depositary Receipts............................... 45
Taxation.................................................................. 54
Underwriting.............................................................. 59
Legal Matters............................................................. 62
Experts................................................................... 62
</TABLE>
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are registered and exist under the laws of England and Wales. All but two
of our directors and certain of our named experts are residents of the United
Kingdom or otherwise reside outside the United States. In addition, all or a
substantial portion of our directors' and experts' assets and all or
substantially all of our assets are located outside the U.S.
We have appointed an agent for service of process in the U.S., but it may be
difficult for investors to effect service within the U.S. upon those directors,
officers and experts who are not residents of the U.S. Moreover, it may be
difficult to enforce against our directors, officers and experts judgments of
U.S. courts predicated upon our or their civil liability under the U.S. federal
securities laws. Our English solicitors, Masons, have advised us that there is
doubt as to the enforceability in England, whether by means of original action
or an action for the enforcement of a U.S. court's judgment, of civil
liabilities based upon U.S. federal securities laws.
We have appointed CT Corporation System, 1633 Broadway, New York, New York
10019, as our agent for service of process in the U.S. in respect of any
investigation or administrative proceeding conducted by the Commission and any
civil suit or action brought against or involving us in a U.S. court arising
out of or related to or concerning the offering of ADSs or ordinary shares
under this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the Securities and Exchange
Commission. These reports and other information about us and our business can
be read and copied at the SEC's public reference room located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the SEC: New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our filings are also
available to the public over the Internet at the SEC's web site at
http://www.sec.gov.
i
<PAGE>
We can "incorporate by reference" the information we file with the SEC,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus. We are incorporating by reference our Annual Report
on Form 20-F for the fiscal year ended June 30, 1998 (File No. 0-23451) that
was filed with the SEC pursuant to the Securities Exchange Act of 1934.
In addition, we are also incorporating by reference any reports on Form
20-F, including any amendments thereto, that will be filed with the SEC and
certain reports that we designate on any Form 6-K that may be furnished to the
SEC prior to the completion of this offering. Any such reports will be
considered part of this prospectus and will automatically update and supersede
the information contained herein.
You may request a copy of any document incorporated by reference, at no
cost, by writing or telephoning us at Independent Energy Holding plc, Radcliffe
House, Blenheim Court, Solihull, West Midlands, United Kingdom B91 2AA, 011-44-
121-705-1111.
In addition, we will furnish annual reports to The Bank of New York, a New
York banking corporation which has its principal office located in New York,
New York, as depositary for the ADRs. These annual reports will contain:
. a review of operations;
. annual audited consolidated financial statements;
. our independent chartered accountants' opinion about those statements;
and
. a reconciliation of net income (loss) and shareholders' equity to
earnings per ordinary share.
We will also furnish the depositary with quarterly reports for the first
three quarters of each fiscal year. These quarterly reports will include
unaudited interim consolidated financial information. The depositary will
arrange for the mailing of all reports to all record holders of ADSs. We will
also furnish to the depositary copies of all notices of shareholders' meetings
and other reports and communications that are distributed generally to our
shareholders. The depositary will arrange for the mailing of such notices,
reports and communications to all record holders of ADSs. See "Description of
American Depositary Receipts" beginning on page 45.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements regarding our 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. Such forward-looking statements are inherently uncertain, and
prospective purchasers of ADSs must recognize that actual results may differ
from our expectations.
ii
<PAGE>
PRESENTATION OF INFORMATION
Our audited consolidated financial information as of June 30, 1998 and 1999
and for the fiscal years ended June 30, 1997, 1998 and 1999 contained elsewhere
in this prospectus is presented in conformity with generally accepted
accounting principles in the U.K., or U.K. GAAP, together with a reconciliation
of net income (loss) and shareholders' equity to generally accepted accounting
principles in the U.S., or U.S. GAAP.
We publish our financial statements in British pounds sterling ("(Pounds)"
or "pound"). One pound consists of one hundred pence (100p). In this
prospectus, we express currency amounts in pounds or in U.S. dollars ("$"). For
your convenience, we have included translations of certain pound amounts into
dollars. These translations are not representations that the pound amounts
actually represent such dollar amounts or could be converted into dollars at
the rates indicated or at any other rate. Unless otherwise indicated, all
translations have been made at the rate of $1.58 per (Pounds)1, 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 on June 30, 1999. The Noon
Buying Rate on September 3, 1999 was $1.60 per (Pounds)l. See "Exchange Rates"
on page 15.
In this prospectus, "Independent Energy," "we," "us" and "our" refer to
Independent Energy Holdings plc, a corporation organized and existing under the
laws of England and Wales, and our consolidated subsidiaries, unless the
context indicates otherwise.
iii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information from this prospectus and may
not contain all of the information that is important to you. You should read
carefully this entire prospectus and the documents to which we refer you.
The Company
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 we can replicate our
business model.
We have experienced rapid growth over the past year in revenue, sales
volumes and customers:
. Our revenue increased by over 300% to (Pounds)246.9 million ($390.0
million) for the fiscal year ended June 30, 1999 from (Pounds)58.0
million ($91.6 million) for the fiscal year ended June 30, 1998.
. Our sales volumes also increased by over 300% from 1,410 GWh in fiscal
1998 to 5,940 GWh in fiscal 1999.
. 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.
. At September 1, 1999, we had annualized sales contracts in place for the
sale of electricity of approximately (Pounds)767 million ($1.2 billion)
up from approximately (Pounds)170 million ($268 million) at August of
last year. The amount 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.
. In fiscal 1999, only our third full year of marketing electricity, we
reported net income of (Pounds)4.0 million ($6.3 million), compared to a
net loss of (Pounds)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 consumers are able to
<PAGE>
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 and industrial consumers and 24.0 million
residential consumers with aggregate annual expenditures of approximately
(Pounds)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
(Pounds)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 market have aggregate annual expenditures of approximately
(Pounds)7.9 billion ($12.5 billion) and approximately (Pounds)3.5 billion ($5.5
billion), respectively.
Business Strategy
Our objectives are to expand our revenue base and to increase our operating
margins. We are pursuing these objectives through a business strategy comprised
of the following elements:
Expand Presence in U.K. We intend to further increase our presence in the
U.K. energy market by (1) selectively targeting new electricity and natural gas
customers and (2) cross-selling natural gas to our existing customer base.
. Electricity. We intend to continue to expand our customer base through
increased penetration of our targeted markets where we believe that we
can effectively compete on the basis of price and quality of service. We
have established Independent Energy as a reliable provider of electricity
in the U.K. and estimate that we currently have approximately 4.9% of
this market (based on revenues estimated from our annualized sales
contracts (as defined above) as a percentage of the total estimated U.K.
electricity market).
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. Through focused marketing efforts, including direct
selling, targeted mailing and e-commerce, we expect to continue to
increase our customer base. We added new electricity customers at the
weekly average rate of over 7,000 new customers during the period June
1, 1999 to September 1, 1999.
. Natural Gas and Utility or Other Complementary Services. We believe that
significant opportunities exist to cost-effectively market additional
energy products and utility or complementary services to our electricity
customer base. To that end, we began sales of natural gas to our existing
customer base in February 1999, although such sales do not currently
constitute a significant portion of our total sales. We also believe that
there are additional opportunities to capitalize on the Independent
Energy brand name by offering utility or complementary services to
customers seeking to outsource their energy-related
2
<PAGE>
facilities management or other utility or complementary services. We may
pursue these objectives through acquisitions, joint ventures or other
such alliances.
Maintain Prudent Risk Management Practices. We generally enter into fixed
price sales contracts with customers for a stated period, typically one or two
years. However, most of our energy requirements are purchased on the spot
market at fluctuating prices. Therefore, we employ several mechanisms to reduce
our overall risk associated with fluctuating energy prices. Our risk management
practices include: (1) selectively targeting customers with relatively
predictable usage profiles; (2) entering into financial hedges, such as
contracts for differences, to effectively fix the cost of a significant portion
of our energy requirements; (3) self-generating a portion of electricity
requirements; (4) securing natural gas reserves; and (5) acquiring interests in
large generation facilities. By utilizing such risk management practices, we
believe we can balance our objective of profit maximization with acceptable
levels of risk.
As described above, our risk management practices include the internal
generation of a portion of our electricity requirements, either through
ownership of a series of small embedded generating plants, or through
investment in larger scale assets. We currently operate eight small embedded
generating plants with a capacity of 62 MW, with a further 45 MW currently
under construction. Our objective is to install generating facilities with
approximately 10 MW to 20 MW of aggregate capacity in each of the twelve local
distribution areas in England and Wales. By owning generating plants each with
less than 10 MW of capacity and selling the output directly to consumers within
the local distribution areas, we obtain certain cost advantages, including
avoidance of some Electricity Pool expenses, grid transportation charges and
distribution and transmission power losses. In addition, we intend to make
investments in some larger scale gas and/or generation facilities as part of an
enhanced risk management program.
Replicate Business Model in Selected Continental European Markets. The
European Union has required that each of its member countries deregulate its
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 plans to
deregulate their energy markets. Our business model is based upon operational
flexibility, which includes outsourcing a substantial amount of our sales and
transaction processing functions. We believe that we can replicate our business
model in selected deregulated European markets.
We are currently considering opportunities to compete in Spain and Holland,
as these countries are expected to be the first to deregulate in continental
Europe in a similar manner to the U.K. The first phase of deregulation of the
Spanish electricity market commenced in January 1999, and allowed certain large
industrial consumers to select their electricity supplier. The next phase of
the Spanish electricity market's deregulation is expected to commence in
October 1999, and will open up to competition approximately 40% of the total
Spanish electricity market.
Leverage Management Expertise. We have built a management team with
extensive experience in the U.K. energy industry. Prior to joining Independent
Energy, Mr. John L. Sulley, Chief Executive of Independent Energy, held senior
management positions with National Power where he established its electricity
marketing and co-generation sales operations. Mr. Sulley also worked for
Scottish Power where he was responsible for the financial, strategic and
business planning for supply and electricity trading operations. In addition,
other members of management have held senior positions with Scottish Power,
National Power, Scottish Hydro, Midlands Electricity, BP Amoco and Total.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
The Offering:
By Independent Energy... 7,000,000 ADSs or ordinary shares
By the selling
shareholders........... 1,815,000 ADSs or ordinary shares
Ordinary shares to be
outstanding after this
offering................. 33,517,427(1)(2)
Voting Rights............. The holders of ADRs, acting through the
depositary, are entitled to the same voting rights
as holders of ordinary shares. See "Description of
American Depositary Receipts--Voting of Deposited
Securities" on page 49.
Use of Proceeds........... We will use the net proceeds from the offering for
general corporate purposes, including working
capital, expansion of our operations and sales and
marketing capabilities, investment in risk
management assets and possible acquisitions of
complementary businesses. We will not receive any
proceeds from the sales of the ADSs by the selling
shareholders. See "Use of Proceeds" on page 14.
Delivery of ADSs or
ordinary shares.......... A purchaser can take delivery of one ordinary
share in lieu of each ADS by notification to the
underwriters at the time of sale. See
"Underwriting" on page 59 and "Description of
American Depositary Receipt" on page 45. Delivery
of ordinary shares in lieu of ADSs is expected to
be made in book-entry form through Lloyds Bank
Registrars or in the United Kingdom on or about
, 1999. Purchasers who choose to receive
ordinary shares in lieu of ADSs should consult
with their United Kingdom broker, selling agent or
counsel prior to undertaking any transaction to
dispose of ordinary shares prior to delivery of
such ordinary shares. See "Description of Share
Capital" on page 40 and "Taxation" on page 54.
Listing of ADSs........... The ADSs are listed on the Nasdaq National Market.
Nasdaq National Market
Symbol................... INDYY
</TABLE>
- --------------------
(1) Assumes no exercise of the underwriters' over-allotment option.
(2) Excludes 3,831,000 ordinary shares issuable pursuant to outstanding options
on June 30, 1999 that will not be exercised in connection with this
offering, and 10,000 ordinary shares issuable pursuant to outstanding
warrants on June 30, 1999. Also excludes up to 500,000 ordinary shares
issuable pursuant to options that the Board of Directors intends to grant
to senior management on or about the date of the offering. These options
will be exercisable at the offering price.
4
<PAGE>
Summary Consolidated Financial and Operating Data
The summary historical consolidated financial data for the three fiscal
years ended and as of June 30, 1999 are derived from our audited consolidated
financial statements included elsewhere in this prospectus. Our accountants
have audited these historical consolidated financial statements in accordance
with U.K. GAAP. U.K. GAAP differs in significant respects from U.S. GAAP. Notes
26 and 27 to our consolidated financial statements describe the principal
differences between U.K. GAAP and U.S. GAAP as they relate to us and provide a
reconciliation to U.S. GAAP of net income (loss) and total shareholders'
equity. The as adjusted balance sheet data have been adjusted to reflect our
sale of 7,000,000 ordinary shares in the form of ADSs at an estimated $13.50
per share and the application of the estimated net proceeds of this offering.
You should read the summary financial data in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------
1997 1998 1999 1999(1)
(in thousands, except per share and
operating data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
U.K. GAAP
Revenue................. (Pounds) 11,127 (Pounds) 57,989 (Pounds) 246,856 $ 390,032
Cost of sales........... 10,872 55,457 234,387 370,331
Administrative expenses. 1,363 1,696 4,530 7,157
Depreciation and
amortization........... 142 626 1,650 2,607
--------------- --------------- ---------------- ---------
Operating income (loss). (1,250) 210 6,289 9,937
Interest income
(expense), net......... (69) (395) (1,353) (2,138)
Income tax expense...... -- -- 929 1,468
--------------- --------------- ---------------- ---------
Net income (loss)....... (1,182) (185) 4,007 6,331
Income (loss) per
share--Basic........... (9.0)p (1.1)p 15.7p $ 0.25
- --Diluted............... (7.4)p (1.0)p 14.2p $ 0.22
Weighted average shares
outstanding--Basic..... 13,130 17,191 25,465 25,465
- --Diluted............... 15,908 19,318 28,255 28,255
U.S. GAAP
Revenue................. (Pounds) 11,127 (Pounds) 57,989 (Pounds) 246,856 $ 390,032
Net income (loss)....... (1,370) (321) 3,933 6,214
Income (loss) per
share--Basic........... (10.4)p (1.9)p 15.4p $ 0.24
- --Diluted............... (8.6)p (1.7)p 13.9p $ 0.22
Weighted average shares
outstanding--Basic..... 13,130 17,191 25,465 25,465
- --Diluted............... 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, 1999
--------------------------------------------------------
Actual Actual(1) As Adjusted As Adjusted(1)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
U.K. GAAP
Working capital....... (Pounds) 23,186 $ 36,634 (Pounds)78,602 $ 124,191
Total assets.......... 137,541 217,315 170,919 270,052
Long-term liabilities. 19,220 30,368 19,220 30,368
Shareholders' equity.. 48,879 77,229 104,295 164,786
U.S. GAAP
Working capital....... (Pounds) 23,186 $ 36,634 (Pounds)78,602 $ 124,191
Total assets.......... 137,943 217,950 171,321 270,687
Long-term liabilities. 20,056 31,688 20,056 31,688
Shareholders' equity.. 48,445 76,543 103,861 164,100
</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 (Pounds)l.
5
<PAGE>
RISK FACTORS
You should carefully read this entire prospectus and, in particular, the
information in this section. Certain factors may negatively affect our plans or
projected results. Such factors are:
. success in implementing our business strategy;
. increases in our costs of energy;
. nature and extent of new competition; and
. changes in conditions in which we compete.
Many of such factors are beyond our control and our management.
We have a limited history of operating in the U.K. electricity and natural gas
supply markets and may not be successful in these markets.
We have a limited operating history in the U.K. supply market, having
commenced sales of electricity in April 1996 and natural gas sales in February
1999. Sales of natural gas do not currently comprise a material portion of our
revenue. Although initial consumer acceptance of our services has been
encouraging, we are unable to predict with certainty how consumer demand for
our services may develop over time.
Our future profitability depends on several factors:
. consumer acceptance of Independent Energy as an alternative supplier of
electricity and natural gas;
. our ability to supply electricity and natural gas at a reasonable cost;
. our ability to price our services competitively; and
. our ability to achieve necessary profit margins.
We may not be able to compete effectively because most of our competitors are
larger, well-capitalized and have better brand name recognition than
Independent Energy.
Our current competition in the electricity supply market consists of twelve
U.K. regional electricity companies, two Scottish integrated electricity
companies, three electricity generating companies, Centrica plc and a number of
independent suppliers. Many of these competitors have more experience, greater
financial and management resources and better name recognition than we do.
Centrica, a successor to a portion of the business formerly operated by BG plc,
has entered the electricity market in the past year. By taking advantage of its
relationship with its natural gas customers and the trade name British Gas,
Centrica has been able to acquire a sizable residential electricity customer
base and will continue to be a formidable competitor in the electricity market.
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. All of our
6
<PAGE>
competitors have more experience, greater financial and management resources
and better name recognition in the natural gas market than we do.
We expect competition in the continental European markets that we plan to
enter to be strong. Consumers in these markets have not previously had a choice
in electricity or natural gas providers and may not be interested in changing
suppliers. We will face competition from large well-capitalized utilities and
energy companies, a number of which (1) have supplied these markets for
decades, (2) have established brand name recognition and (3) know the market
well. We also may face prejudices being a foreign competitor in these markets.
Furthermore, the number of suppliers in the markets in which we compete is
expected to increase. We cannot predict the extent to which new participants
will enter the markets in which we compete. Our business, financial condition
and results of operations could be materially and adversely affected if
additional competitors with greater resources than we have enter the industry.
Our operations are subject to government regulation which may adversely affect
us.
Our activities are subject to extensive laws and regulations regarding the
generation and supply of electricity and the supply of natural gas in the U.K.,
primarily by the U.K. Office of Gas and Electricity Markets, or OFGEM. These
laws and regulations and their interpretation and enforcement are subject to
change. Any change in the laws or regulations governing our business could
adversely affect our operations and profitability.
Since we own generating facilities, we are subject to OFGEM's regulations
affecting generating facilities. OFGEM requires that all facilities that exceed
100 MW sell their output to the Electricity Pool of England and Wales, or the
Electricity Pool, thereby reducing some of the cost efficiencies associated
with self-generation. If OFGEM were to extend that requirement to smaller
generating facilities such as ours, our operations and financial condition
could be adversely affected. Additionally, no new gas-fired generating plants
with capacities exceeding 10 MW may be constructed and operated in the U.K.,
absent special governmental approval. Our existing generating plants could face
additional or more stringent requirements in the future. If we fail to comply
with such laws and regulations, we could incur fines, or lose required permits.
Any such event could have a material adverse effect on us.
We cannot predict the effect of the proposed elimination of the Electricity
Pool on our business.
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. Settlement will also be
carried out based on the average bid or offer prices received by the system
operator for each (half
7
<PAGE>
hour) trading period for short, or long, volumes as appropriate. The "gate
closure" for the balancing market will initially be four hours ahead, but this
is anticipated to reduce over time as the system becomes more efficient.
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 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.
We may not be able to successfully manage our growth.
Since we commenced electricity sales in April 1996, we have experienced
rapid revenue growth. We expect to continue to rapidly grow and develop in a
relatively short period of time. The development of our operations will depend
on, among other things, our ability to expand our customer base in the U.K.
electricity and natural gas markets and to enter new continental European
deregulated markets in a timely manner at reasonable costs. In addition, we
anticipate that our staff will grow to accommodate our increased customer base.
Increased staff may require continued development of our operating and
financial controls and may place additional stress on our management and
operational resources. If we are unable to manage this expected rapid growth
and development successfully, our operating results and financial condition
could be materially adversely affected. In order to handle this expected growth
in customers, we have outsourced a number of important functions, including
much of our billing processing and marketing efforts. We cannot be sure that we
will be able to control the quality and cost-efficiency of these services.
We may not be able to sustain our rapid growth rate.
Over the three years since we commenced sales of electricity, we have
experienced rapid growth in revenue and sales volumes. Although we are
expanding our product offerings and continue to increase our customer base, we
may not be able to increase our revenue and sales volumes at rates comparable
to the rates of growth that we experienced over the last three years.
Commodity price fluctuations may adversely affect our profitability.
Our business, generally, involves entering into fixed price contracts to
supply electricity and, to a lesser extent, natural gas to customers. We obtain
the electricity and natural gas to satisfy our obligations under such contracts
primarily by purchases from the U.K. spot market for these commodities. The
price of electricity and natural gas that we purchase can be volatile.
Accordingly, we are exposed to risk arising from differences between the fixed
price at which we sell electricity and natural gas to our customers and the
fluctuating prices at which we purchase these commodities.
8
<PAGE>
In order to mitigate this risk, we must effectively hedge such exposure. Our
ability to manage this risk at acceptable levels will depend, in part, on:
. targeting customers with predictable usage patterns and volumes;
. implementing and managing an appropriate financial hedging strategy; and
. physically hedging our energy requirements by controlling gas reserves
and generating a portion of the electricity we market.
Because our sales have been growing rapidly, a significant portion of our
sales contracts at any one time may not be protected by hedging contracts. Our
policy is to hedge a significant portion of our forecasted energy requirements.
Since the market for hedging instruments is currently not well-developed and is
relatively inefficient, hedging is very expensive. Further, during the warmer
months (May to September), prices of electricity and natural gas decrease and
are less volatile than in the colder months (October to April). As a result,
for the period from April to September 1999, our Board of Directors agreed to
relax our normal hedging policy during the warmer months when we believe we are
less exposed to increases in energy prices. We intend to reinstate our hedging
policy and thereby hedge a significant portion of our electricity costs
beginning October 1999 through the remainder of the fiscal year. If the spot
market prices of electricity or natural gas rises significantly, we could
sustain significant losses and our financial condition could be materially
adversely affected.
We recognize revenue from the sale of electricity and natural gas on a
monthly basis based on the volumes consumed by our customers and the contract
prices associated with such volumes. Customers are billed monthly, generally at
a fixed price for usage. Because the cost of electricity or natural gas
purchased from the spot market or third parties fluctuates throughout the term
of our sales contracts, we recognize gross profit related to sales on a pro
rata basis throughout the term of sales contracts based on our estimate of
gross profit margin for all sales contracts. The difference between the cash
cost of the electricity and natural gas and the estimated cost of sales is
accounted for as either an accrual for, or a deferral of, the cost of
electricity or natural gas and recorded on the balance sheet within current
assets or current liabilities, as the case may be. We review this estimate of
gross profit on a quarterly basis. Accordingly, to the extent we have not
adequately hedged our electricity or natural gas purchase requirements, such
reviews could reveal an operating loss that could have a material adverse
effect on our results of operations or financial condition.
Our proposed continental European operations may be expensive and unsuccessful.
As part of our business strategy, we intend to enter deregulated continental
European markets, such as Spain and Holland. We have no experience competing in
these markets as they are currently in the process of being deregulated.
Development of the skills necessary to compete in these markets may be more
difficult or take longer than we anticipate, especially due to language
barriers, currency exchange risks and the fact that the deregulation process
and infrastructure needed to deregulate energy markets is undeveloped. We will
also need to devote significant existing management resources to our
international expansion which could harm our operations in the U.K. Although we
outsource a number of our operating functions, we nevertheless expect to expend
a substantial amount of capital to open international offices and hire
international management, sales, marketing and support personnel. Accordingly,
if we are not successful in these markets, our operations and financial
condition could be adversely affected.
Moreover, international operations are subject to a variety of additional
risks that could harm our financial condition and operating results. These
risks include the following:
9
<PAGE>
. the inability of continental European countries to successfully
deregulate their energy markets;
. the impact of adverse economic conditions in European Union countries;
. fluctuations in currency exchange rates; and
. substantial regulation of these markets by the European Union, its member
countries and local authorities, even in a competitive deregulated
environment.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute shareholder value and adversely affect our operating results.
We may acquire other businesses in the future, which may complicate our
management tasks. These acquisitions may be in utility services or other
business areas that, although complementary to our business, may be in areas in
which we currently do not compete and may not have prior management or
operating experience. We may need to integrate entirely new operations and
distinct corporate cultures. Such integration efforts may not succeed or may
distract our management from operating our existing business. Our failure to
manage future acquisitions successfully could seriously harm our operating
results. Further, our shareholders would be diluted if we finance the
acquisitions by issuing equity securities.
We will likely have significant additional financing requirements.
To date, we have financed our operations through (1) sales of equity
securities, (2) capital lease financing and (3) bank financing. Because we plan
to expand our U.K. market presence and to enter new markets in continental
Europe, we will likely require significant additional capital to expand our
marketing organization, increase our marketing efforts and install additional
electricity generating plants. We are not sure whether we can obtain those
funds on acceptable terms. Our inability to raise such funds would have an
adverse effect on our operations. If capital for planned expansion is not
available, we will have to reduce or eliminate our planned expansion. We may
also undertake additional equity offerings which could result in your ownership
in Independent Energy being diluted and a decrease in the value of your ADSs.
In July 1999, we entered into a new (Pounds)80 million one-year credit
facility with a syndicate of banks led by Barclays Bank PLC. However, we have
not satisfied all conditions precedent to borrowing under this facility. These
conditions precedent consist principally of restructuring our corporate
organization and transferring certain of our generation and resource assets and
liabilities to newly-formed wholly-owned subsidiaries. In the meantime,
Barclays Bank is underwriting our borrowings on an ad hoc basis. Although we
anticipate satisfying these conditions in September 1999, we cannot provide
assurance that we will meet this schedule or that the new credit facility will
become effective. If we are not able to obtain sufficient credit to finance our
working capital needs, our financial condition and operations would be
adversely affected.
We depend on our and third-party computer systems to process transactions with
our customers.
Operating in the energy supply business requires sophisticated computer
systems that can manage, control and transmit vast quantities of electronic
data in a cost-effective and reliable manner. Substantially all of our internal
computer systems are located at a single leased facility in Solihull, West
Midlands. Our systems and operations are vulnerable to damage and interruption
from fire,
10
<PAGE>
flood, power loss, telecommunications failure, vandalism, physical or
electronic break-ins, computer viruses, year 2000 issues or other disruptions
that could lead to delays in billing, loss of data or other events that could
harm our business and adversely affect our financial condition. In addition,
our systems are relatively new and may not be able to efficiently or
effectively handle our needs if our business continues to grow at a high rate.
For the small business and residential markets, we outsource to a third-
party service provider functions such as (1) handling customer inquiries and
other communications, (2) billing, (3) payment collection, (4) debt management
and (5) related operations. The systems of our service provider are subject to
all of the risks to our internal systems as described above. In addition, these
systems are largely outside our control.
In fiscal 1999, we experienced delays in registering new small business,
public authority, and residential customers and billing our existing small
business, public authority, and residential customers, in part due to third-
party computer software problems. The problem related to registering new
customers has been corrected. A plan has been put in place to address the
billing problem, through which we believe the billing 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 (Pounds)20 million of revenue that we recognized
for the fiscal year ended June 30, 1999. Any such problems could have a
material adverse effect on our operations or financial condition.
Our business could be affected by Year 2000 issues.
Year 2000 issues may adversely affect our business. Many currently installed
computer systems and software products are coded to accept only two-digit year
entries in the date code field.
Consequently, on or about January 1, 2000, many of these systems could fail
or malfunction because they may not be able to distinguish 21st century dates
from 20th century dates. As a result, computer systems and software used by
many companies, including us, our customers, our third-party service providers
and other participants in the energy markets that provide the infrastructure
required to deliver energy to consumers, may need to be upgraded to comply with
such Year 2000 requirements. Any failure on the part of our principal internal
systems or the systems on which we rely could seriously harm our business,
financial condition and operating results. For a more detailed description of
our Year 2000 assessment, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness" on page 24.
We depend on key personnel that we may not be able to replace if they leave our
company.
Our continued success is highly dependent on the personal efforts and
abilities of our executive officers. We have entered into an employment
agreement with each of our executive officers and have obtained key man life
insurance for Messrs. Sulley, Keenan and Jones. Our operations and financial
condition could be adversely affected if any of our executive officers become
unable to continue in or devote adequate time to their present roles, or if we
are unable to attract and retain other skilled management personnel.
We are subject to significant environmental regulation that may adversely
affect our operations.
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
11
<PAGE>
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 or
will not exceed the amount of our investment in any joint ventures.
Operating generating plants involves many risks.
Our operation of generating plants involves many risks, including the
breakdown or failure of (1) power generation equipment, (2) pipelines, (3)
transmission lines or (4) other equipment or processes, fuel interruption and
performance below expected levels of output or efficiency. For the fiscal year
ended June 30, 1999, our generating plants produced 152 GWh, only 60% of our
budgeted output for the year. This shortfall was attributable in part to
mechanical failures of our generating equipment.
There are many risks associated with exploring for and producing natural gas.
Our natural gas operations are subject to all of the risks generally
relating to the exploration for and production of natural gas. These risks
include blowouts, fires and equipment failure. In addition, there are related
risks which can result in personal injuries, loss of life and property and
environmental damage.
We believe that we maintain adequate insurance with respect to our natural
gas operations in accordance with industry practice. However, in certain
circumstances, our insurance may not cover or be adequate to cover the
consequences of some events. The occurrence of an event that is not fully
covered by insurance could have a material adverse effect on our financial
position and results of operations. Moreover, we cannot be sure that we will be
able to maintain adequate insurance in the future at reasonable rates.
Exchange rate fluctuations and limited market liquidity could adversely affect
the price of your ADSs.
Fluctuations in the exchange rate between the pound and the dollar are
likely to affect the market price of your ADSs. Such fluctuations will also
affect the dollar conversion value of any cash dividends paid in pounds to the
depositary.
You should note that past performance of the market price of the ADSs is not
an indication of how the market price for the ADSs will perform in the future.
Furthermore, the market price of the ADSs could be subject to significant
fluctuations in response to various factors and events, including, among other
things, (1) the depth and liquidity of the trading market, (2) variations in
our operating results and (3) the difference between actual results and the
results expected by investors and
12
<PAGE>
analysts. In addition, the stock markets in recent years have experienced broad
price fluctuations that have often been unrelated to the operating performances
of companies. These broad market fluctuations also may adversely affect the
market price of the ADSs in the future.
Future preemptive rights may not be available to ADS holders.
The United Kingdom Companies Act 1985, or Companies Act 1985, requires us,
whenever we issue new ordinary shares for cash, subject to limited exceptions,
to grant preemptive rights to all of our shareholders. These rights give our
shareholders the right to purchase a sufficient number of ordinary shares to
maintain their existing ownership percentage. Pursuant to shareholder approval,
any ordinary shares that we issue up to July 1, 2003, however, will not have
any preemptive rights attached to them.
In any event, we may not be able to offer preemptive rights to you if you
are a U.S. resident unless we file a registration statement under the
Securities Act registering the rights and underlying ordinary shares, or we can
rely on an exemption from the registration requirements of the Securities Act.
At the time of any rights offering, we will evaluate the costs and potential
liabilities associated with such registration statement. We will also consider
the indirect benefits of enabling you if you are a U.S. resident to exercise
any preemptive rights you may have. Prior to making the decision of whether to
file a registration statement, we will consider any other appropriate factor.
We cannot be sure that (1) we will file any registration statement, (2) the SEC
will declare such registration statement effective or (3) we will have an
exemption from registration.
To the extent you are unable to exercise such rights, the depositary will
attempt to sell your preemptive rights and distribute the net proceeds of the
sale to you. We cannot be sure that a secondary market for such rights will
exist or that the depositary can sell your rights at a net profit. A secondary
market for the sale of preemptive rights may develop if the subscription price
of the ordinary shares upon exercise of the rights is below the prevailing
market price of the ordinary shares. However, there can be no assurance both
that a secondary market in preemptive rights will develop in connection with
any future issuance of ordinary shares or, if such market does develop, a
premium will be recognized on such sale. If your rights cannot be sold, your
rights will expire and you will not realize any value from the grant of such
preemptive rights. In either case, your equity interests would be diluted
proportionately.
Shares becoming available for sale could adversely affect our stock price.
Sales of substantial amounts of ADSs or ordinary shares in the public market
following the offering, or the perception that such sales may occur, could have
an adverse effect on the market price of the ADSs. Upon completion of this
offering, 33,517,427 ordinary shares will be outstanding and 3,831,000 will be
issuable pursuant to the exercise of outstanding options and warrants.
Moreover, we may issue additional shares and options and warrants to purchase
additional shares up to our maximum authorized capital of 50,000,000 ordinary
shares. Subject to an agreement that restricts the sale of ordinary shares by
our directors and the selling shareholders without the prior approval of
Donaldson, Lufkin & Jenrette Securities Corporation for 120 days following the
date of this Prospectus, all of the outstanding ordinary shares will be
eligible for public sale. Moreover, our Board of Directors has authority to
issue additional options to purchase ordinary shares without shareholder
approval.
13
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds to Independent Energy from the offering will be
$87.6 million ($104.5 million if the underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions as
well as other fees and expenses of the offering. We will use the net proceeds
from the offering for general corporate purposes, including working capital,
expansion of our operations and sales and marketing capabilities, investment in
risk management assets and possible acquisitions of complementary businesses.
We will not receive any proceeds from the sale of ADSs by the selling
shareholders.
We intend to use approximately (Pounds)22.0 million ($34.8 million) of the
net proceeds to repay a portion of the outstanding borrowings under our
revolving credit facility, which we use to fund our working capital
requirements. Borrowings under our revolving credit facility currently accrue
interest at LIBOR plus 1.2% (6.3% at August 18, 1999) and are due on demand.
We will maintain the remainder of the net proceeds in interest-bearing bank
accounts or invest the proceeds in short-term, investment grade securities
until we use them as described.
14
<PAGE>
EXCHANGE RATES
Our financial statements are prepared in pounds sterling. Fluctuation in the
exchange rates between the pound and the dollar will affect the dollar
equivalent of the pound prices of the ordinary shares traded on the U.K.
Alternative Investment Market, or AIM. Such fluctuations are likely to affect
the U.S. market price of the ADSs. Although we do not intend to pay cash
dividends in the foreseeable future, fluctuations in the exchange rate between
the pound and the dollar will also affect the dollar amounts you receive on the
depositary's conversion of cash dividends paid in pounds on the ordinary shares
represented by the ADSs. See "Description of American Depositary Receipts" on
page 45.
We have included, solely for your benefit, translations of certain pound
amounts into dollars at specified rates, or, if unspecified, at the Noon Buying
Rate in New York City for cable transfers on June 30, 1999 of $1.58 to
(Pounds)1. However, we are not representing that the pound amounts could have
been or could be converted into dollars at the indicated rate. On September 3,
1999, the Noon Buying Rate was $1.60 per (Pounds)1.
There are currently no U.K. foreign exchange control restrictions on the
payment of dividends on the ordinary shares.
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. We did not use these rates in the preparation
of our consolidated financial statements and notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Dollar/Pound Exchange Rates
(dollar per pound)
---------------------------
At End Average
Year Ended December 31, of Period Rate(1) High Low
<S> <C> <C> <C> <C>
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)....................... 1.58 1.62 1.66 1.57
</TABLE>
- ---------------------
(1) The average of the Noon Buying Rates on the last business day of each full
month during the relevant period.
15
<PAGE>
NATURE OF TRADING MARKET AND MARKET INFORMATION
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 and continue to trade on AIM currently. AIM is a market
designed primarily for emerging or smaller companies and facilitates capital
raising by such companies. Although regulated by the London Stock Exchange, the
rules for AIM companies differ from, and are generally less demanding than,
those of the Official List of the London Stock Exchange. We intend to seek
listing of our ordinary shares on the Official List of the London Stock
Exchange in the near future, although there can be no assurance that such
application for listing will be accepted.
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.
<TABLE>
<CAPTION>
British U.S.
Pence Dollars(1)
------------ -----------
High Low High Low
<S> <C> <C> <C> <C>
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
Third quarter (through September 3).......... 972.7 824.2 15.56 13.25
</TABLE>
- ---------------------
(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 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.
On September 7, 1999, the last reported sales price on Nasdaq for the ADSs
was $13 5/8 per ADS and the AIM closing bid price for the ordinary shares was
860.0 per share.
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.
16
<PAGE>
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. See "Description of Share Capital"
beginning on page 40.
CAPITALIZATION
The following table sets forth as of June 30, 1999 (1) the actual
consolidated capitalization of Independent Energy and (2) the consolidated
capitalization of Independent Energy as adjusted to give effect to the offering
and the application of estimated net proceeds of $87.6 million ((Pounds)55.4
million). You should read this table in conjunction with the "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------
(in thousands)
As
Actual As Adjusted Adjusted(1)
<S> <C> <C> <C>
Cash and cash equivalents(2)....... (Pounds) 7,316 (Pounds) 40,694 $ 64,296
=============== =============== ========
Long-term debt (including current
portion):
Revolving credit facility(3)..... (Pounds) 22,038 (Pounds) -- $ --
Construction facility............ 8,672 8,672 13,702
Capital leases................... 13,108 13,108 20,711
--------------- --------------- --------
Total long-term debt........... 43,818 21,780 34,413
Shareholders' equity(4)
Ordinary shares, nominal value 1p
per share, 50,000,000 shares
authorized, 26,273,027 shares
issued and outstanding.......... 263 333 526
Additional paid-in capital....... 46,030 101,376 160,174
Retained earnings................ 2,586 2,586 4,086
--------------- --------------- --------
Total shareholders' equity......... (Pounds) 48,879 (Pounds)104,295 $164,786
--------------- --------------- --------
Total capitalization............... (Pounds) 92,697 (Pounds)126,075 $199,198
=============== =============== ========
</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 (Pounds)l.
The Noon Buying Rate on September 3, 1999 was $1.60 per (Pounds)l.
(2) Includes (Pounds)6.7 million ($10.6 million) of restricted cash used to
secure a bank guarantee issued for our benefit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" beginning on page 21.
(3) As of September 3, 1999, total borrowings under the revolving credit
facility were approximately (Pounds)32 million ($58.5 million). This
increase is the result of additional working capital requirements due to
the computer system problems affecting billing. See "Risk Factors--We
depend on our and third-party computer systems to process transactions with
our customers" on page 10.
(4) Excludes 4,075,400 ordinary shares issuable pursuant to outstanding options
as of June 30, 1999 and 10,000 ordinary shares issuable pursuant to
outstanding warrants on June 30, 1999. Also excludes up to 500,000 ordinary
shares issuable pursuant to options that the Board of Directors intends to
grant to senior management on or about the date of the offering. These
options will be exercisable at the offering price.
17
<PAGE>
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
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
Independent Energy is the largest independent marketer of electricity in the
United Kingdom as measured by volume of electricity sold and revenues. Since
commencing electricity sales in April 1996, we have established Independent
Energy as a reputable, reliable alternative provider of electricity. By
increasing our marketing efforts, we were able to substantially increase our
revenue and customer base. We increased our revenue from (Pounds)58.0 million
($91.6 million) for the fiscal year ended June 30, 1998 to (Pounds)246.9
million ($390.0 million) for the fiscal year ended June 30, 1999.
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
18
<PAGE>
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" begining 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:
. targeting customers that have relatively predictable demand and pattern
usage profiles;
. entering into contracts for differences to effectively fix the price of a
significant portion of our energy requirements purchased on the spot
market; and
. owning gas reserves and generating a portion of the electricity that we
supply to customers.
See "--Risk Management Activities" on page 20 and "Risk Factors--Commodity
price fluctuations may adversely affect our profitability" beginning on page 8
and "--We cannot predict the effect of the proposed elimination of the
Electricity Pool on our business" on page 7.
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
(Pounds)188.9 million, or 325%, to (Pounds)246.9 million from (Pounds)58.0
million for the fiscal year ended June 30, 1998. This increase 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
(Pounds)10.0 million, or 400%, to (Pounds)12.5 million from (Pounds)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 (Pounds)2.8 million, or 164%, to (Pounds)4.5 million
from (Pounds)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 (Pounds)1.0 million, or 160%, to (Pounds)1.6
million from (Pounds)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 (Pounds)6.1 million, to (Pounds)6.3 million compared to
(Pounds)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.
19
<PAGE>
Interest expense, net. Net interest expense was (Pounds)1.4 million for the
fiscal year ended June 30, 1999 compared to (Pounds)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
(Pounds)46.9 million, or 423%, to (Pounds)58.0 million from (Pounds)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
(Pounds)2.3 million to (Pounds)2.5 million from (Pounds)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 (Pounds)300,000, or 24%, to (Pounds)1.7 million from
(Pounds)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 (Pounds)626,000 compared to (Pounds)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 (Pounds)210,000 compared to an operating loss of (Pounds)1.3
million for the fiscal year ended June 30, 1997. The reduction in the loss for
fiscal 1998 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
(Pounds)395,000 for the fiscal year ended June 30, 1998 compared to net
interest income of (Pounds)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:
. fund operating losses associated with being a development stage company;
20
<PAGE>
. fund working capital requirements; and
. 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
(Pounds)6.0 million, (Pounds)11.8 million and (Pounds)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 (Pounds)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 (Pounds)80.0 million. However, we have not
satisfied all conditions precedent to borrowing under this facility. These
conditions precedent consist principally of restructuring our corporate
organization and transferring certain of our generation and resource assets and
liabilities to newly-formed wholly-owned subsidiaries. In the meantime,
Barclays Bank is underwriting our borrowings on an ad hoc basis. Although we
anticipate satisfying these conditions in September 1999, we cannot provide
assurance that we will meet this schedule or that the new credit facility will
become effective. This credit facility provides for:
. (Pounds)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
. (Pounds)35.0 million in the form of letters of credit to secure energy
purchase obligations.
In addition, we have a (Pounds)9.5 million construction facility with
Barclays Bank that is payable in quarterly installments of (Pounds)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 (Pounds)2.0 million for
miscellaneous letters of credit that we may require and has issued a bank
guarantee, currently in the amount of (Pounds)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 (Pounds)22.0 million
under the revolving credit facility (and were approximately (Pounds)32 million
as of September 3, 1999) and (Pounds)8.7 million under the construction
facility. We had also utilized commitments to issue letters of credit in the
aggregate amount of (Pounds)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 (Pounds)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.
21
<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 (Pounds)13.1 million, of which (Pounds)1.6 million is
payable within one year and (Pounds)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 (Pounds)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.
We believe that the net proceeds from this offering, our credit facilities,
capital leases and debt financings of generating plants and cash generated from
our operations will be adequate to fund capital expenditure requirements and
working capital needs related to the expansion of our operations through at
least June 30, 2000.
Risk Management Activities
We are exposed to two principal risks associated with customer contracts:
. ""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
. ""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.
22
<PAGE>
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 (Pounds)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 (Pounds)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.
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 (Pounds)188,000, (Pounds)136,000 and
(Pounds)74,000 for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively.
23
<PAGE>
Our net profit (losses) for the fiscal years ended 1997, 1998 and 1999 under
U.K. GAAP were (Pounds)(1.2 million), (Pounds)(185,000) and (Pounds)4.0
million, respectively. Under U.S. GAAP, we would have reported net losses of
(Pounds)l.4 million and (Pounds)321,000 for fiscal 1997 and 1998, respectively,
and net income of (Pounds)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 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.
Year 2000 Readiness
Potential computer problems associated with the Year 2000 date change are an
issue for users of computer systems throughout the world, including systems
with embedded chips. We are dependent on our own systems and on those of our
key suppliers and customers. We do not believe that we face greater risks from
Year 2000 issues than other utility companies in the U.K.
We established a Year 2000 program in 1997 to manage the effects that Year
2000 issues may have on our operations. In addition to purchasing certain
diagnostic software, we hired an external computer consulting group to aid us
in the compliance process. The scope of our program covers all aspects of our
business.
Our approach concentrates on the following three main areas:
. working on and testing our internal systems through gathering inventory,
assessing criticality, prioritization and planning, testing and
remediation;
. understanding the Year 2000 readiness of our key suppliers and major
customers; and
24
<PAGE>
. modifying and developing contingency processes to reduce residual risk.
Our program focuses on IT systems, both corporate and desktop, non-IT
systems (embedded chip systems) including process monitoring and control,
business processes and business partners. We believe that we have identified
all hardware and software that is not Year 2000 compliant, and that we have
replaced all non-compliant hardware. We are currently reviewing contingency
plans, operational procedures, staffing issues and "worst case" scenarios. We
are currently finalizing compliance work on our systems, and this work is
planned to be completed well in advance of the end of 1999.
Our systems and operations are also dependent on products and services
provided by others. Our interdependence with other utilities are being reviewed
through the U.K. Y2K Utilities Forum and other forums and one-to-one meetings.
All other suppliers are being treated in accordance to our reliance on them.
Where appropriate, alternative suppliers may be appointed.
Our Year 2000 program has been carried out using our internal resources
where possible, supplier resources where appropriate and specialist contractors
where considered necessary. As of June 30, 1999, we had spent approximately
(Pounds)75,000 on our Year 2000 program. We estimate that the total cost of our
Year 2000 program will be approximately (Pounds)100,000.
We believe that our work on our own systems and equipment and review of our
critical suppliers means that we are taking all reasonable steps to minimize
the risks associated with Year 2000 issues. Based on our current knowledge, we
believe that, because of the anticipated short-term nature of any potential
interruptions, it is unlikely that Year 2000 issues will have a material impact
on our financial condition or operations. We cannot, however, be sure that (1)
the steps that we have taken will successfully minimize vulnerabilities of our
software and systems, or those of our suppliers, to the problems associated
with the transition to the Year 2000, (2) that disruptions to our business will
not occur or (3) that the costs associated with the advent of the Year 2000
will not be greater than anticipated.
25
<PAGE>
BUSINESS AND PROPERTIES
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:
. Our revenue increased by over 300% to (Pounds)246.9 million ($390.0
million) for the fiscal year ended June 30, 1999 from (Pounds)58.0
million ($91.6 million) for the fiscal year ended June 30, 1998.
. Our sales volumes also increased by over 300% from 1,410 GWh in fiscal
1998 to 5,940 GWh in fiscal 1999.
. 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.
. At September 1, 1999, we had annualized sales contracts in place for the
sale of electricity of approximately (Pounds)767 million ($1.2 billion)
up from approximately (Pounds)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.
. In fiscal 1999, only our third full year of marketing electricity, we
reported net income of (Pounds)4.0 million ($6.3 million), compared to
net loss of (Pounds)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.
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<PAGE>
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 (Pounds)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 (Pounds)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 market have aggregate annual
electricity expenditures of approximately (Pounds)7.9 billion ($12.5 billion)
and approximately (Pounds)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 (Pounds)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 (Pounds) 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 (Pounds)15.58
====== ===== =============
</TABLE>
- ---------------------
Source: U.K. Office of Gas and Electricity Markets' 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 (Pounds)7.9 billion
($12.5 billion).
- -------------
* greater than
27
<PAGE>
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 (Pounds)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.
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 (Pounds)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 (Pounds)7.24
====== ===== ============
</TABLE>
- ---------------------
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 (Pounds)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.
- ---------------
* greater than
** less than
28
<PAGE>
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 (Pounds)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.
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 <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" on page 20.
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
29
<PAGE>
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.
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.
30
<PAGE>
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 (Pounds)6.5 million,
to secure our obligations to Vertex. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" on page 20.
31
<PAGE>
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 (Pounds)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 Elwick, 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>
PROJECTS UNDER CONSTRUCTION
<TABLE>
<CAPTION>
Projected Facility
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%
Wight Salads
Phase II............... January 2000 Third-party natural gas 18MW(1) Wight Salads, Isle of Wight 100%
------
Total capacity............................................. 44.6MW
======
- ---------------------
(1) Comprised of multiple inter-connected sub 10MW sites.
</TABLE>
32
<PAGE>
<TABLE>
PLANNED PROJECTS
<CAPTION>
Projected Facility
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:
. fixing a portion of the cost of our electricity needs;
. lowering our cost of service by avoiding
. Electricity Pool expenses
. National Grid Company transportation tariffs; and
. 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.
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.
33
<PAGE>
The present value, discounted at 10% per annum, of estimated future net cash
flows from such proved reserves as of June 30, 1999 was (Pounds)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 (Pounds)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
Areas. Fourteen of our licenses are Petroleum Exploration and
34
<PAGE>
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.
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 (Pounds)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.
35
<PAGE>
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.
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.
Facilities
Our headquarters are located in Solihull, West Midlands where we lease
20,600 square feet of office space for approximately (Pounds)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 (Pounds)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."
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.
36
<PAGE>
MANAGEMENT
Executive Officers and Directors
Certain information concerning the executive officers and directors of
Independent Energy is set forth below.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Burt H. Keenan................... 60 Chairman
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
Roy W. Deakin.................... 67 Non-Executive Director
Jerry W. Jarrell................. 57 Non-Executive Director
David O. May..................... 63 Non-Executive Director
Herbert L. Oakes................. 53 Non-Executive Director
</TABLE>
Burt H. Keenan served as Executive Chairman from Independent Energy's
inception in April 1991 to August 1999. Since August 1999, he has served as
non-executive Chairman of the Board of Directors. 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.
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.
37
<PAGE>
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.
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.
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.
Herbert L. Oakes became a non-executive Director in January 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.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
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 selling shareholder;
(3) each director of the Company; (4) each executive officer; and (5) 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.
<TABLE>
<CAPTION>
Number of
Beneficial Percent Shares to Beneficial Percent
Ownership Owned be Sold Ownership Owned
Prior to Prior to in the After After
Offering(1) Offering Offering Offering(1) Offering
<S> <C> <C> <C> <C> <C>
Burt H. Keenan(2).......... 2,364,125 8.9% 1,200,000 1,164,125 3.4%
Putnam Investment
Management, Inc.(3)....... 2,058,700 7.8 -- 2,058,700 6.1
John L. Sulley (4)......... 420,000 1.6 -- 420,000 1.2
Ian Stewart................ 1,000 * -- 1,000 *
William E. Evans(5)........ 450,800 1.7 250,000 200,800 *
Robert E. Jones(6)......... 364,200 1.4 -- 364,200 1.1
Roy W. Deakin(7)........... 50,000 * -- 50,000 *
Jerry W. Jarrell(8)........ 360,100 1.4 125,000 235,100 *
David O. May(9)............ 130,000 * -- 130,000 *
Herbert L. Oakes........... -- * -- -- *
Kristen Cook Keenan Trust,
Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
Lucille Baker Keenan Trust,
Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
Michael Crawford Keenan
Trust, Jerry W. Jarrell,
Trustee (10).............. 180,000 * 80,000 100,000 *
All officers and directors
as a group (9
persons)(11).............. 4,140,225 14.8 1,575,000 2,565,225 7.3
</TABLE>
- ---------------------
* Less than 1%
(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 (before this offering) and 200,800 shares (after
this offering) 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.
(9) Includes 50,000 shares issuable upon exercise of options held by Mr. May
and 30,000 shares held in a self-administered pension fund trust in which
Mr. May has a potential interest.
(10) Includes 100,000 shares issuable upon exercise of options held by this
shareholder. Such options were originally issued to Mr. Burt H. Keenan and
subsequently assigned to this shareholder.
(11) Includes 1,673,400 shares (before this offering) and 1,429,000 shares
(after this offering) issuable upon exercise of options held by the named
executive officers and directors.
39
<PAGE>
DESCRIPTION OF SHARE CAPITAL
The following contains summary information concerning Independent Energy's
capital structure and related summary information concerning certain provisions
of our Memorandum and Articles of Association (Charter) and applicable English
law.
General
Our authorized share capital is (Pounds)500,000 divided into 50,000,000
ordinary shares of 1p nominal value each, of which 26,273,027 ordinary shares
were issued and outstanding as of June 30, 1999. In addition, as of June 30,
1999, there were 4,075,400 ordinary shares issuable pursuant to outstanding
options and 10,000 ordinary shares issuable pursuant to outstanding warrants.
From time to time, the Board of Directors may issue additional options to
purchase ordinary shares by resolution. The Board of Directors intends to issue
options to purchase up to 500,000 ordinary shares to members of senior
management on or about the date of this offering. Such options will be
exercisable at the offering price to investors.
Independent Energy's share capital may be increased, consolidated and
divided into shares of larger amounts than the ordinary shares, subdivided into
shares of smaller amount than the ordinary shares, and unissued ordinary shares
may be canceled by an ordinary resolution of shareholders in a general meeting.
The share capital may be reduced by special resolution of shareholders in a
general meeting and confirmation by the English courts. We may, with the prior
approval of an ordinary resolution of shareholders at a general meeting,
purchase our own shares.
Description of Ordinary Shares
All of the issued and outstanding ordinary shares are duly authorized,
validly issued and fully paid.
Dividend Rights
Holders of ordinary shares are entitled to receive such dividends as may be
recommended by the Board of Directors and declared by Independent Energy in a
general meeting. Independent Energy may declare a dividend smaller than the
dividend recommended by the Board of Directors, but, may not declare a dividend
larger than the dividend recommended by the Board of Directors. Subject to the
provisions of the Companies Act 1985, the Directors of Independent Energy may
pay interim dividends if it appears to them that they are justified based on
the profits of Independent Energy available for distribution. The Directors of
Independent Energy have the power, based on a prior ordinary resolution of
shareholders, to offer to the holders of ordinary shares the option to receive
new ordinary shares credited as fully paid or to invest the net cash amount due
to them in subscribing for ordinary shares payable in full or by installments.
If dividends are returned to Independent Energy uncashed on two consecutive
occasions, Independent Energy will not be obliged to send further payments in
respect of such ordinary shares until the relevant shareholder has notified
Independent Energy of an address for this purpose.
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<PAGE>
Independent Energy or the Board of Directors may fix a date, whether or not
it is before or after the date on which the declaration is made, as the record
date by reference to which a dividend on the ordinary shares will be declared
or paid. Any dividend on the ordinary shares unclaimed for a period of twelve
years from its date of payment shall be forfeited and shall revert to
Independent Energy. No dividend on an ordinary shares share will bear interest.
Rights in Liquidation
Subject to the rights attached to any shares issued on special terms and
conditions, upon any liquidation or winding up of Independent Energy, after all
our debts and liabilities and the expenses of the liquidation have been
discharged, any surplus assets will be divided among the holders of ordinary
shares in proportion to their holdings after deducting any amounts remaining
unpaid in respect of such shares.
Notification of Interest in Ordinary Shares
Section 198 of the Companies Act 1985 obliges any person (subject to
exception but including a company and other legal entities) who acquires an
interest of 3% or more of any class of shares (including through ADRs) that
comprise part of Independent Energy's "relevant share capital" (i.e. its issued
share capital carrying the right to vote in all circumstances at a general
meeting) to notify Independent Energy of his interest within two business days
following the day on which the obligation to notify arises. Once someone
acquires 3% or more of the ordinary shares, he must give us notice of any whole
percentage increases or decreases, rounded down to the next whole number, in
his ownership. For the purposes of the notification obligation, the interest of
a person in the shares means any kind of interest in shares (subject to certain
exceptions) including any shares
. in which his spouse or his child or stepchild, is interested,
. in which a corporate body is interested where either that corporate body
or its directors are accustomed to act in accordance with that person's
directions or instructions, or that person controls one third or more of
the voting power of that corporation body, or
. in which another party is interested where the person and that other
party are parties to a "concert party" agreement under Section 204 of the
Companies Act 1985 and any interest in shares is in fact acquired by any
one of the parties pursuant to the agreement.
A "concert party" agreement is an agreement which provides for one or more
parties to it to acquire interests in shares of a particular company and
imposes obligations or restriction s on any one or more of the parties as to
the use, retention or disposal of such interests.
In addition, Section 212 of the Companies Act 1985 enables us, by notice in
writing, to require a person whom we know is or have reasonable cause to
believe to be, or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in shares to
confirm that fact or (as the case may be) to indicate whether or not that is
the case, and where he holds or has during this relevant time held an interest
in the shares, to give such further information as may be required relating to
his interest and any other interest in the shares of which he is aware.
41
<PAGE>
In addition to the restrictions on the rights attaching to shares imposed by
the Companies Act 1985 for noncompliance with Section 212 of that act, our
Articles of Association apply additional restrictions. The restrictions imposed
or applied can potentially include disenfranchisement, loss of entitlement to
dividends and other payments and restrictions on transferability.
A person who fails to fulfill the obligations imposed by Sections 198 and
212 of the Companies Act 1985 described above is subject to criminal penalties.
Shareholders Meetings and Voting Rights
Under English law, there are two types of general meeting of shareholders,
annual general meetings and extraordinary general meetings. An annual general
meeting must be held at least once in each calendar year and not later than 15
months from the previous annual general meeting. At the annual general meeting
matters such as the election of directors, appointment of auditors and the
fixing of their remuneration, approval of the annual accounts and the
directors' report and declaration of the final dividend are dealt with. Any
other general meeting is known as an extraordinary general meeting.
Directors may convene an extraordinary general meeting and must convene one
if demanded by holders of not less than 10% of the paid-up shares. An annual
general meeting and an extraordinary general meeting called to pass a special
resolution shall be called by at least 21 days' notice specifying the place,
day and time of the meeting and the general nature of the business to be
transacted. No business may be transacted at any general meeting unless a
quorum of two persons entitled to vote on the business to be transacted is
present in person or by proxy.
At a general meeting, a simple majority of the votes cast is sufficient to
pass an ordinary resolution. A special resolution requires a majority of not
less than 75% of the votes of those shareholders as (being entitled to do so)
vote in person or by proxy on the resolution in question. A small number of
matters relating to variation of the rights attaching to different classes of
shares and proceedings in a winding-up require the authority of an
extraordinary resolution, which requires the same majority as a special
resolution.
Subject to the restrictions referred to in the following paragraph, at a
meeting of shareholders every holder of shares who (being an individual) is
present in person or (being a corporation) is present by a representative or
proxy not being himself a member shall have one vote on a show of hands, and on
a poll (which can be demanded by the chairman of the meeting, not less than
three shareholders present in person or by proxy having the right to vote at
the meeting, a holder or holders of shares or his or their proxy representing
not less than 10% of the total voting rights of all shareholders having the
right to attend and vote at the meeting or by a holder or holders of shares or
his or their proxy conferring a right to attend and vote at the meeting on
which an aggregate sum has been paid up equal to not less than one tenth of the
total sum paid up on all shares conferring that right), every holder of shares
present in person or by proxy shall have one vote for every share held.
A holder of shares may not be entitled (save as a proxy for another member)
to be present or vote at any general meeting:
42
<PAGE>
. in respect of any shares held by him in relation to which he or any other
person appearing to be interested in those shares has been served with a
notice under Section 212 of the Companies Act 1985, requiring him to
provide information in accordance with that section and containing a
statement that upon failure to supply such information before he
expiration period specified in the notice (which may not be less than 28
days) the registered holder of the share is not entitled to vote in
respect of those shares, and the person on whom such notice was served
fails to supply the information within the specified period; or
. unless all amounts presently payable by him in respect of such shares
have been paid.
All or any of the rights or privileges attached to the shares may, subject
to certain provisions of the Companies Act 1985, be varied either with the
consent in writing of the holders of not less than 75% in nominal value of the
issued shares or with the sanction of an extraordinary shares resolution passed
at a separate meeting of the holders of shares, but not otherwise.
Transfer of Shares
The instrument of transfer of a share may be in any usual form or in any
other form of which the directors approve and shall be executed by or on behalf
of the transferor and, unless the share is fully paid, by or on behalf of the
transferee. The directors may, in their absolute discretion without giving any
reason therefor, refuse to register the transfer of a share which is not fully
paid provided that any such refusal will not prevent dealings in the shares
from taking place on an open and proper basis. The directors may decline to
register a transfer to person known to be a minor, bankrupt or person who is
mentally disordered at a patient for the purpose of any statute relating to
mental health.
Pursuant to the Articles, the Board of Directors may also decline to
register a transfer of ordinary shares if a restriction notice has been served
on the shareholder, subject to certain exceptions.
Subject to the above restrictions, the Articles of Association contain
restrictions on the registration of transfers of fully paid shares provided
that all payable stamp duty has been paid and the transfers are accompanied by
any certificate for the shares and such other evidence (if any) as the
directors may require to prove the title of the intending transferor or his
right to transfer the shares, any instrument of transfer is in respect of one
class of shares and in the case of a transfer to joint holders, to no more than
four such joint holders and, if applicable, are in accordance with the
regulations relating to CREST. The register of members may be closed at such
times and for such periods as the directors may determine not exceeding thirty
days in each year. Independent Energy has resolved that title to any ordinary
shares may be transferred by means of CREST being a relevant system for the
purposes of the Uncertified Securities Regulations 1995.
Issue of Additional Shares
Subject to the provisions of the Companies Act 1985, the authorized but
unissued shares are at the disposal of the directors who may issue, grant
options over or otherwise dispose of them to such persons and on such terms as
they deem appropriate.
43
<PAGE>
By virtue of Section 80 of the Companies Act 1985, the directors may not,
subject to limited exceptions in respect of employee share schemes, exercise
any power to issue shares (or grant any right to subscribe for or convert other
securities into shares) unless they have been authorized to do so by an
ordinary resolution. Any such authority must state the maximum amount of shares
which may be issued under it and the date on which it will expire, which must
not be more than five years from the date the resolution is passed. On July 2,
1998, a special resolution was passed authorizing the Directors pursuant to
Section 80 of the Companies Act 1985 to exercise all the powers of the Company
to issue shares up to a nominal amount of (Pounds)320,644.73, being the
authorized but unissued share capital, for a period of five years.
If ordinary shares are to be issued for cash, Section 89 of the Companies
Act 1985, requires, subject to limited exceptions in respect of employee share
schemes, such shares first be offered to existing holders of shares in
proportion to their holdings. However, Section 95 of the Companies Act 1985
provides that in certain circumstances the directors of a company may by
special resolution be given power to issue shares as if Section 89 did not
apply. On July 2, 1998, a special resolution was passed disapplying the
provisions of Section 89 in respect of the issue of shares in connection with a
rights issue and otherwise in respect of the issue of shares up to an aggregate
nominal amount of (Pounds)320,644.73, such authority to expire five years from
the date of passing of that resolution.
Registrar and Transfer Agent
The registrar and transfer agent for the ordinary shares is Lloyds Bank
Registrars, The Causeway, Worthing, West Sussex BN99 6DA England, United
Kingdom.
Shareholders Resident Outside the United Kingdom
There are no restrictions under our Memorandum and Articles of Association
or under English Law that limit the rights of persons not resident in the
United Kingdom, as such, to hold or to vote shares. No shareholder having an
address outside the United Kingdom shall be entitled to have notice served upon
him unless such shareholder has given to Independent Energy an address within
the United Kingdom to which such notices shall be served.
44
<PAGE>
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following is a summary of the material provisions of the deposit
agreement among Independent Energy, the depositary and all persons in whose
name an American Depositary Receipt is registered on the books of the
depositary and any person owning any beneficial interest in the ADSs evidenced
by any ADR, and who may or may not be the owner of such ADR from time to time
of the ADRs issued thereunder. Copies of the deposit agreement are available
for inspection at the principal office of the depositary in New York, which is
presently located at 101 Barclay Street, New York, New York 10286.
ADSs evidenced by ADRs are issuable by the depositary pursuant to the terms
of the deposit agreement. Each ADS represents, as of the date of this
prospectus, the right to receive one ordinary share deposited under the Deposit
Agreement (together with any additional shares deposited hereunder and all
other securities, property and cash received and held thereunder at any time in
respect of or in lieu of such deposited ordinary shares, the "Depositary
Securities") with the custodian, currently the London office of The Bank of New
York. An ADR may evidence any number of ADSs. We and the depositary will only
treat those persons in whose names ADRs are registered on the books of the
depositary as owners.
Deposit, Transfer and Withdrawal
In connection with the deposit of ordinary shares under the deposit
agreement, the depositary or the custodian may require the following in form
satisfactory to it:
. a written order directing the depositary to execute and deliver to, or
upon the written order of, the person or persons designated in such order
an ADR or ADRs evidencing the number of ADSs representing such deposited
ordinary shares;
. proper endorsements or duly executed instruments of transfer in respect
of such deposited ordinary shares;
. instruments assigning to the custodian or its nominee any distribution on
or in respect of such deposited ordinary shares or indemnity therefor;
and,
. proxies entitling the custodian to vote such deposited ordinary shares
until the shares are registered in the name of the custodian or its
nominee.
As soon as practicable after the custodian receives the ordinary shares
pursuant to any such deposit or pursuant to the form of ADR, the custodian
shall present the ordinary shares for registration of transfer into the name of
the depositary or its nominee or the custodian or its nominee, to the extent
such registration is practicable, at the cost and expense of the person making
such deposit (or for whose benefit such deposit is made) and shall obtain
evidence satisfactory to it of such registration. The ordinary shares, and any
property or cash received in lieu of shares, must be held by the custodian for
the account and to the order of the depositary at such place or places and in
such manner as the depositary shall determine. Deposited Securities may be
delivered by the custodian to any person only under the circumstances expressly
contemplated in the deposit agreement.
45
<PAGE>
After any such deposit of ordinary shares, the custodian must notify the
depositary of the deposit and of the information contained in any related
delivery order by letter, first class airmail postage prepaid, or, at the
request, risk and expense of the person making the deposit, by cable, telex or
facsimile transmission. After receiving such notice from the custodian, the
depositary, subject to the terms and conditions of the deposit agreement, shall
execute and deliver at the transfer office, which is presently located at the
principal New York office, to or upon the order of any person named in such
notice, an ADR or ADRs registered as requested and evidencing the aggregate
ADSs to which such person is entitled.
Subject to the terms and conditions of the deposit agreement, the depositary
may issue ADRs for delivery at the transfer office only against deposit with
the custodian of (A) ordinary shares in form satisfactory to the custodian; (B)
rights to receive ordinary shares from Independent Energy or any registrar,
transfer agent, clearing agent or other entity recording share ownership or
transactions; or, (C) other rights to receive ordinary shares (until such
ordinary shares are actually deposited pursuant to (A) or (B) above, "Pre-
released ADRs") only if (a) Pre-released ADRs are fully collateralized (marked
to market daily) with cash or U.S. government securities held by the depositary
for the benefit of owners (but such collateral shall not constitute "Deposited
Securities"), (b) each recipient of Prereleased ADRs agrees in writing with the
depositary that such recipient (1) owns such ordinary shares, (2) assigns all
beneficial right, title and interest therein to the depositary, (3) holds such
ordinary shares for the account of the depositary and (4) will deliver such
ordinary shares to the custodian as soon as practicable and promptly upon
demand therefor and (c) all Pre-released ADRs evidence not more than 30% of all
such ADSs. The depositary may retain for its own account any earnings or
collateral for Pre-released ADRs and its charges for issuance thereof. At the
request, risk and expense of the person depositing ordinary shares, the
depositary may accept deposits together with other specified instruments for
forwarding to the custodian and may deliver ADRs at a place other than its
office. Every person depositing ordinary shares under the Deposit Agreement
represents and warrants that such ordinary shares are validly issued and
outstanding, fully paid, nonassessable and free of preemptive rights, that the
person making such deposit is duly authorized so to do and that such shares are
not "restricted securities" as such term is defined in Rule 144 under the
Securities Act. Such representations and warranties shall survive the deposit
of ordinary shares and issuance of ADRs.
Subject to the terms and conditions of the deposit agreement, upon surrender
of an ADR in form satisfactory to the depositary at its office the owner is
entitled to delivery at the custodian's office of the Deposited Securities at
the time represented by the ADSs evidenced by such ADR at the request, risk and
expense of the owner, the depositary may deliver such Deposited Securities at
such other place as may have been requested by the owner.
Distributions on Deposited Securities
Subject to the terms and conditions of the deposit agreement, to the extent
practicable, the depositary will distribute by mail to each owner entitled on
the record date set by the depositary at such owner's address shown on the ADR
Register, in proportion to the number of Deposited Securities (on which the
following distributions on Deposited Securities are received by the custodian)
represented by ADSs evidenced by such owner's ADRs:
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<PAGE>
. Cash. Any dollars available to the depositary resulting from a cash
dividend or other cash distribution or the net proceeds of sales of any
other distribution or portion thereof authorized in the deposit
agreement, on an averaged or other practicable basis, subject to
appropriate adjustments for taxes withheld and deduction of the
depositary's expenses in
. converting any foreign currency to dollars by sale or in such other
manner as the depositary may determine to the extent that it
determines that such conversion may be made on a reasonable basis,
. transferring foreign currency or dollars to the U.S. by such means as
the depositary may determine to the extent that it determines that
such transfer may be made on a reasonable basis,
. obtaining any approval or license of any governmental authority
required for such conversion or transfer, which is obtainable at a
reasonable cost and within a reasonable time and
. making any sale by public or private means in any commercially
reasonable manner;
. Ordinary shares. Additional ADRs evidencing whole ADSs representing any
ordinary shares available to the depositary resulting from a dividend or
free distribution on Deposited Securities consisting of ordinary shares
(a "Share Distribution") and dollars available to it resulting from the
net proceeds of sales of ordinary shares received in a Share
Distribution, which ordinary shares would give rise to fractional ADSs if
additional ADRs were issued therefor, as in the case of cash;
. Rights. (1) Warrants or other instruments in the discretion of the
depositary representing rights to acquire additional ADSs evidenced by
ADRs in respect of any rights to subscribe for additional ordinary shares
or rights of any nature available to the depositary as a result of a
distribution on Deposited Securities ("Rights"), to the extent that
Independent Energy timely furnishes to the depositary evidence
satisfactory to the depositary that the depositary may lawfully
distribute same (Independent Energy has no obligation to so furnish such
evidence), or (2) to the extent Independent Energy does not so furnish
such evidence and sales of Rights are practicable any dollars available
to the depositary from the net proceeds of sales of Rights as in the case
of cash, or (3) to the extent Independent Energy does not so furnish such
evidence and such sales cannot practicably be accomplished by reason of
the nontransferability of the Rights, limited markets therefor, their
short duration or otherwise, nothing (and any Rights may lapse); and
. Other Distributions. (1) Securities or property available to the
depositary resulting from any distribution on Deposited Securities other
than cash, Share Distributions and Rights ("Other Distributions"), by any
means that the depositary may deem equitable and practicable, or (2) to
the extent the depositary deems distribution of such securities or
property not to be equitable and practicable, any dollars available to
the depositary from the net proceeds of sales of Other Distributions as
in the case of cash.
Such dollars available will be distributed by checks drawn on a bank in the
U.S. for whole dollars and round fractional amounts to the nearest whole cent
(any fractional cents being withheld without liability for interest and added
to future cash distributions).
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<PAGE>
To the extent that the depositary determines in its discretion that any
distribution is not practicable with respect to any owner, the depositary may
make such distribution as it so determines is practicable, including the
distribution of foreign currency, securities or property (or appropriate
documents evidencing the right to receive foreign currency, securities or
property) or the retention thereof as Deposited Securities with respect to such
owner's ADRs (without liability for interest thereon or the investment
thereof).
There can be no assurance that the depositary will be able to effect any
currency conversion or to sell or otherwise dispose of any distributed or
offered property, subscription or other rights, ordinary shares or other
securities in a timely manner or at a specified rate or price, as the case may
be.
Disclosure of Interests
To the extent that the provisions of or governing any disposed securities
may require disclosure of or impose limits on beneficial or other ownership of
Deposited Securities, other ordinary shares and other securities and may
provide for blocking transfer, voting or other rights to enforce such
disclosure or limits, owners and all persons holding ADRs agree to comply with
all such disclosure requirements and ownership limitations and to cooperate
with the depositary in the depositary's compliance with any of our instructions
in respect thereof, and, in the deposit agreement, the depositary has agreed to
use reasonable efforts to comply with such instructions.
Notwithstanding any provision of the deposit agreement, by being an owner of
an ADR, each such owner agrees to provide such information as Independent
Energy may request in a disclosure notice given pursuant to the United Kingdom
Companies Act 1985, as amended from time to time and including any statutory
modification or reenactment thereof, or the Articles of Association of
Independent Energy. In the deposit agreement each owner acknowledges that it
understands that failure to comply with a disclosure notice may result in the
imposition of sanctions against the owner of the ordinary shares in respect of
which the non-complying person is or was, or appears to be or has been,
interested as provided in the Companies Act 1985 and the Articles of
Association which currently include, the withdrawal of the voting rights of
such ordinary shares and the imposition of restrictions on the rights to
receive dividends on and to transfer such ordinary shares. In addition, in the
deposit agreement each owner agrees to comply with the provisions of the
Companies Act 1985 with regard to the notification to Independent Energy of
interests in ordinary shares, which currently provide, inter alia, that any
owner who is or becomes directly or indirectly interested (within the meaning
of the Companies Act) in 3% or more of the outstanding ordinary shares, or is
aware that another person for whom it holds such ADRs is so interested, must
within two business days after becoming so interested or so aware (and
thereafter in certain circumstances upon any change to the particulars
previously notified) notify us as required by the Companies Act 1985.
Record Dates
The depositary may fix a record date which shall be as near as practicable
to any corresponding record date set by Independent Energy for the
determination of the owners who shall be entitled to receive any distribution
on or in respect of Deposited Securities, to give instructions for the exercise
of any voting rights, to receive any notice or to act in respect of other
matters and only such owners shall be so entitled.
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Voting of Deposited Securities
As soon as practicable after receipt from Independent Energy of notice of
any meeting or solicitation of consents or proxies of owners of ordinary shares
or other Deposited Securities, the depositary shall mail to owners a notice
stating:
. such information as is contained in such notice and any solicitation
materials;
. that each owner on the record date set by the depositary therefor will be
entitled to instruct the depositary as to the exercise of the voting
rights, if any, pertaining to the Deposited Securities represented by the
ADSs evidenced by such owner's ADRs; and
. the manner in which such instruction may be given, including instructions
to give a discretionary proxy to a person designated by the Company.
Upon receipt of instructions of an owner on such record date in the manner and
on or before the date established by the depositary for such purpose, the
depositary shall endeavor insofar as practicable and permitted under the
provisions of or governing Deposited Securities to vote or cause to be voted
(or to grant a discretionary proxy to a person designated by Independent Energy
to vote) the Deposited Securities represented by the ADSs evidenced by such
owner's ADRs in accordance with such instructions. The depositary will not
itself exercise any voting discretion in respect of any Deposited Securities.
Inspection of Transfer Books
The deposit agreement provides that the depositary will keep books at its
transfer office for the registration, registration of transfer, combination and
split-up of ADRs, which at all reasonable times will be open for inspection by
the owners and Independent Energy for the purpose of communication with owners
in the interest our business of or a matter related to the deposit agreement.
Reports and Other Communications
The depositary shall make available for inspection by owners at the transfer
office reports and communications received us which are both received by the
depositary as the holder of the Deposited Securities and) made generally
available to the holders of such Deposited Securities by Independent Energy.
The depositary shall also send to the owners copies of such reports when
furnished by Independent Energy. We must furnish any such reports and
communications to the depositary in English.
On or before the first date on which Independent Energy makes any
communication available to holders of Deposited Securities or any securities
regulatory authority or stock exchange, by publication or otherwise, the
Company shall transmit to the depositary and the custodian a copy of the notice
thereof (in English) in the form given or to be given to holders of ordinary
shares or other Deposited Securities. The depositary will, at our expense,
arrange for the prompt mailing of copies thereof to all owners. In connection
with any registration statement under the Securities Act relating to the ADRs
or with any undertaking contained therein, we and the depositary shall each
furnish to the other and to the SEC or any successor governmental agency such
information as shall be required to make such filings or comply with such
undertakings.
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We have delivered to the depositary, the custodian and any transfer office,
a copy of all provisions of or governing the ordinary shares and any other
Deposited Securities issued by Independent Energy or any affiliate of
Independent Energy and, promptly upon any change thereto, we will deliver to
the depositary, the custodian and any Transfer Office, a copy of such
provisions as so changed. The depositary and its agents may rely upon our
delivery thereof for all purposes of the deposit agreement.
Changes Affecting Deposited Securities
Subject to the terms and conditions of the deposit agreement, the depositary
may, in its discretion, amend the form of ADR or distribute additional or
amended ADRs (with or without calling the ADRs for exchange) or cash,
securities or property on the record date set by the depositary therefor to
reflect any change in par value, split-up, consolidation, cancellation or other
reclassification of Deposited Securities, any share distribution or other
distribution not distributed to owners or any cash, securities or property
available to the depositary in respect of Deposited Securities from (and, in
the deposit agreement, the depositary is authorized to surrender any Deposited
Securities to any person and to sell by public or private sale any property
received in connection with) any recapitalization, reorganization, merger,
consolidation, liquidation, receivership, bankruptcy or sale of all or
substantially all of our assets, and to the extent the depositary does not so
amend the ADR or make a distribution to owners to reflect any of the foregoing,
or the net proceeds thereof, whatever cash, securities or property results from
any of the foregoing shall constitute Deposited Securities and each ADS shall
automatically represent its pro-rata interest in the Deposited Securities as
then constituted.
Amendment and Termination of Deposit Agreement
We and the depositary may amend the ADRs and the deposit agreement, provided
that any amendment that imposes or increases any fees or charges (other than
stock transfer or other taxes and other governmental charges, transfer or
registration fees, cable, telex or facsimile transmission costs, delivery costs
or other such expenses), or that shall otherwise prejudice any substantial
existing right of owners, shall become effective 30 days after notice of such
amendment shall have been given to the owners. Every owner of an ADR at the
time any amendment to the deposit agreement so becomes effective shall be
deemed, by continuing to hold such ADR, to consent and agree to such amendment
and to be bound by the deposit agreement as amended thereby. In no event shall
any amendment impair the right of the owner of any ADR to surrender such ADR
and receive the Deposited Securities represented hereby, except in order to
comply with mandatory provisions of applicable law.
The depositary may, and shall at our written direction, terminate the
deposit agreement and the ADRs by mailing notice of such termination to the
owners at least 90 days prior to the date fixed in such notice for such
termination. After the date so fixed for termination, the depositary and its
agents will perform no further acts under the deposit agreement and the ADRs,
except to advise owners of such termination, receive and hold (or sell)
distributions on Deposited Securities and deliver Deposited Securities as soon
as practicable after the expiration of one year from the date so fixed for
termination. The depositary shall sell the Deposited Securities and shall
thereafter (as long as it may lawfully do so) hold in a segregated account the
net proceeds of such sales, together with any other
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cash then held by it under the Deposit Agreement, without liability for
interest, in trust for the pro rata benefit of the owners not theretofore
surrendered. After making such sale, the depositary shall be discharged from
all obligations in respect of the deposit agreement and the ADRs, except to
account for such net proceeds and other cash. After the date so fixed for
termination, we will be discharged from all obligations under the deposit
agreement except for our obligations to the depositary and its agents.
Charges of Depositary
The depositary may charge each person to whom ADRs are issued against
deposits of Ordinary shares, including deposits in respect of share
distributions, rights and other distributions and each person surrendering ADRs
for withdrawal of Deposited Securities, $5.00 for each 100 ADSs (or portion
thereof) evidenced by the ADRs delivered or surrendered, and a fee of $.02 or
less per ADS (or portion thereof) for any cash distribution made pursuant to
the deposit agreement. We will pay all other charges and expenses of the
depositary and any agent of the depositary (except the custodian) pursuant to
agreements from time to time between us and the depositary, except:
. stock transfer or other taxes and other governmental charges (which are
payable by owners or persons depositing ordinary shares),
. cable, telex and facsimile transmission and delivery charges incurred at
the request of persons depositing, or owners delivering, ordinary shares,
ADRs or Deposited Securities (which are payable by such persons or
owners),
. transfer or registration fees for the registration of transfer of
Deposited Securities on any applicable register in connection with the
deposit or withdrawal of Deposited Securities (which are payable by
persons depositing ordinary shares or owners withdrawing Deposited
Securities; there are no such fees in respect of the ordinary shares as
of the date of the deposit agreement) and
. expenses of the depositary in connection with the conversion of foreign
currency into dollars (which are paid out of such foreign currency).
Liability of Owners for Taxes
If any tax or other governmental charge shall become payable by or on behalf
of the custodian or the depositary with respect to the ADRs, any Deposited
Securities represented by the ADSs evidenced thereby or any distribution
thereon, such tax or other governmental charge shall be paid by the owner to
the depositary. The depositary may refuse to effect any registration,
registration of transfer, split-up or combination thereof or, subject to the
terms and conditions of the deposit agreement, any withdrawal of such Deposited
Securities until such payment is made. The depositary may so deduct from any
distributions on or in respect of Deposited Securities, or may sell by public
or private sale for the account of the owner any party or all of such Deposited
Securities (after attempting by reasonable means to notify the owner prior to
such sale), and may apply such deduction or the proceeds of any such sale in
payment of such tax or other governmental charge, the owner remaining liable
for any deficiency, and shall reduce the number of ADSs evidenced by the ADR to
reflect any such sales of Deposited Securities. In connection with any
distribution to owners, we will remit to the appropriate governmental authority
or agency all amounts (if any) required to be
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withheld and owing to such author to or agency by us; and the depositary and
the custodian will remit to the appropriate governmental authority or agency
all amounts (if any) required to be withheld and owing to such authority or
agency by the depositary or the custodian. If the depositary determines that
any distribution in property other than cash (including ordinary shares or
rights) on Deposited Securities is subject to any tax that the depositary or
the custodian is obligated to withhold, the depositary may dispose of all or a
portion of such property in such amounts and in such manner as the depositary
deems necessary and practicable to pay such taxes, by public or private sale,
and the depositary shall distribute the net proceeds of any such sale or the
balance of any such property after deduction of such taxes to the owners
entitled thereto.
General Limitations
The ADRs provide that the depositary, Independent Energy, their agents and
each of them will: (i) incur no liability (a) if any present or future law,
regulation or any country or of any governmental or regulatory authority or
stock exchange, the provisions of or governing any Deposited Security, act of
God, war or other circumstance beyond its control shall prevent, delay or
subject to any civil or criminal penalty any act which the deposit agreement or
the ADRs provides shall be done or performed by it, or (b) by reason of any
exercise or failure to exercise any discretion given it in the deposit
agreement or the ADRs; (ii) assume no liability except to perform its
obligations to the extent they are specifically set forth in the ADRs and the
deposit agreement without gross negligence or bad faith; (iii) be under no
obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect of any Deposited Securities or the ADR; or (iv) not be
liable for any action or inaction by it in reliance upon the advice of or
information from legal counsel, accountants, any person presenting ordinary
shares for deposit, any owner, or any other person believed by it to be
competent to give such advice or information. The depositary, its agents and
Independent Energy may rely and shall be protected in acting upon any written
notice, request, direction or other document believed by them to be genuine and
to have been signed or presented by the proper party or parties. The depositary
and its agents will not be responsible for any failure to carry out any
instructions to vote any of the Deposited Securities, for the manner in which
any such vote is cast or for the effect of any such vote. The depositary and
its agents may own and deal in any class of securities of Independent Energy
and its affiliates and in ADRs. Independent Energy has agreed to indemnify the
depositary and its agents under certain circumstances and the depositary has
agreed to indemnify Independent Energy against losses incurred by Independent
Energy to the extent such losses are due to the negligence or bad faith of the
depositary. Notwithstanding the foregoing, no disclaimer of liability under the
Securities Act is intended by any provision of the ADRs.
Prior to the issue, registration, registration or transfer, split-up or
combination of any ADR, the delivery of any distribution in respect thereof,
or, subject to the terms and conditions of the deposit agreement, the
withdrawal of any Deposited Securities, Independent Energy, the depositary or
the custodian may require: (i) payment with respect thereto of (a) any stock
transfer or other tax or other governmental charge, (b) any stock transfer or
registration fees in effect for the registration of transfers of ordinary
shares or other Deposited Securities upon any applicable register, and (c) any
applicable charges as provided in the deposit agreement; (ii) the production of
proof satisfactory to it of (a) the identity and genuineness of any signature
and (b) such other information, including without limitation, information as to
citizenship, residence, exchange control approval, beneficial ownership
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of any securities, compliance with applicable law, regulations, provisions of
or governing Deposited Securities and terms of the deposit agreement and the
ADRs, as it may deem necessary or proper; and (iii) compliance with such
regulations as the depositary may establish consistent with the deposit
agreement. The issuance of ADRs, the acceptance of deposits of ordinary shares,
the registration, registration of transfer, split-up or combination of ADRs or,
subject to the terms of the deposit agreement, the withdrawal of Deposited
Securities may be suspended, generally or in particular instances, when the ADR
register for Deposited Securities is closed or when any such action is deemed
advisable by the depositary or Independent Energy.
Governing Law
The deposit agreement is governed by and shall be construed in accordance
with the laws of the State of New York.
The Depositary
The depositary is The Bank of New York, a New York banking corporation,
which has its principal office located in New York, New York. The Bank of New
York is a commercial bank offering a wide range of banking and trust services
to its customers in the New York metropolitan area, throughout the United
States and around the world.
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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 discussion of U.S. tax consequences is based on the advice of
Akin, Gump, Strauss, Hauer & Feld, L.L.P. and the discussion of U.K. tax
consequences is based on the advice of Masons.
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.
PROSPECTIVE PURCHASERS OF ADSs OR ORDINARY SHARES ARE STRONGLY ADVISED TO
CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE CONTENTS OF THIS
SUMMARY AND THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, THE U.K. TAX
CONSEQUENCES AND TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE OWNERSHIP OF
ADSs (AND THE SHARES REPRESENTED THEREBY) OR ORDINARY SHARES AS APPLICABLE IN
THEIR PARTICULAR TAX SITUATIONS.
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.
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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 UK 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
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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 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
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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 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
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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 (Pounds)1.50 per (Pounds)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 (Pounds)0.50
per transfer or at the rate of (Pounds)l.50 per (Pounds)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 (Pounds)0.50 per (Pounds)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.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, Prudential Securities Incorporated
and Johnson Rice & Company L.L.C., have severally agreed to purchase an
aggregate of 7,000,000 ADSs from us and an aggregate of 1,815,000 ADSs from the
selling shareholders. The respective number of ADSs that each underwriter has
agreed to purchase is set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriters ADSs
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Prudential Securities Incorporated..............................
Johnson Rice & Company L.L.C....................................
---------
Total......................................................... 8,815,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the ADSs included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the ADSs (other than those ADSs covered by the over-
allotment option described below) if they purchase any of the ADSs.
The underwriters initially propose to offer some of the ADSs directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the ADSs to certain dealers at the public offering price
less a concession not in excess of $ per share. The underwriters may allow,
and such dealers may re-allow, a concession not in excess of $ per share on
sales to certain other dealers. After the initial offering of the ADSs to the
public, the representatives may change the public offering price and such
concessions at any time without notice.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase, from time to time, in whole or in
part, up to 1,322,250 additional ADSs at the public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase a number of additional
ADSs approximately proportionate to such underwriter's initial purchase
commitment.
The following table shows the underwriting fees to be paid to the
underwriters by us and the selling shareholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional ADSs.
<TABLE>
<CAPTION>
Paid by Paid by
Independent Energy Selling Shareholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
<S> <C> <C> <C> <C>
Per ADS..................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
59
<PAGE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
We, our executive officers and directors and the selling shareholders have
agreed that, for a period of 120 days from the date of this prospectus, they
will not, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation: (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any ordinary shares or ADSs or any securities
convertible into or exercisable or exchangeable for ordinary shares or ADSs; or
(2) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any ordinary shares
or ADSs (regardless of whether any of the transactions described in clause (1)
or (2) is to be settled by the delivery of ordinary shares or ADSs, or such
other securities, in cash or otherwise). In addition, during such period, we
have also agreed not to file any registration statement with respect to, and
each of our executive officers, directors and the selling shareholders has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any ordinary shares or ADSs or any securities convertible into
or exercisable or exchangeable for ordinary shares or ADSs without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The ADSs are listed on the Nasdaq National Market under the symbol "INDYY."
Other than in the United States, no action has been taken by us, the selling
shareholders or the underwriters that would permit a public offering of the
ADSs included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering and the distribution of this prospectus. This prospectus is not an
offer to sell or a solicitation of an offer to buy any ADSs included in this
offering in any jurisdiction where that would not be permitted or legal.
In order to facilitate the offering of the ADSs, certain underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the ADSs. Specifically, the underwriters may overallot in connection with
this offering, creating a syndicate short position in the ADSs for their own
account. In addition, the underwriters may bid for, and purchase, ADSs in the
open market to cover such syndicate short position or to stabilize the price of
the ADSs. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the ADSs in the
offering, if the syndicate repurchases previously distributed ADSs in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market
price of the ADSs above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Under the SEC's rules, market makers in the ADSs who are also underwriters
or prospective underwriters in this offering may, subject to certain
limitations, make bids for purchases of ADSs as
60
<PAGE>
a "passive market maker" during the period when Rule 101 of Regulation M would
otherwise prohibit such activity. Passive marker making activity may take place
so long as no stabilizing bid for ADSs is in effect and the following
conditions are met:
. The passive market marker's net daily purchases of the ADSs may not
exceed the greater of (a) 30% of its average daily trading volume in the
ADSs for the two full consecutive calendar months immediately preceding
the filing date of the registration statement relating to this offering,
which was August 20, 1999, or (b) 200 shares;
. The passive market maker may not effect transactions in, or display bids
for, the ADSs at a price that exceeds the highest independent bid for the
ADSs by persons who are not passive market makers; and
. The passive market maker must identify its bid as a passive market making
bid and the bid must not exceed the amount the passive market maker could
buy under the limitations described above.
Each underwriter has undertaken to us that (i) it has not offered or sold
and prior to the date six months after their date of issue will not offer or
sell any ADSs to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which do not constitute an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied with and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the ADSs offered hereby in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document received by it in connection with
the offering to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisement)(Exemptions) Order 1996
or is a person to whom the document may otherwise lawfully be issued or passed
on.
Donaldson, Lufkin & Jenrette International, an affiliate of Donaldson,
Lufkin & Jenrette Securities Corporation, acts as financial advisor to
Independent Energy from time to time.
61
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the offering are being passed upon
for Independent Energy by Akin, Gump, Strauss, Hauer & Feld, L.L.P., our
special U.S. counsel, and Masons, our English counsel. Certain legal matters in
connection with this offering are being passed upon for the underwriters by
Davis Polk & Wardwell, counsel for the underwriters. The validity of the
ordinary shares represented by the ADSs and certain other legal matters will be
passed upon by Masons. Akin, Gump, Strauss, Hauer & Feld, L.L.P. and Davis Polk
& Wardwell may rely upon Masons with respect to matters of English law.
EXPERTS
The financial statements as of June 30, 1998 and 1999 and for each of the
three fiscal years in the period ended June 30, 1999 have been included in this
prospectus in reliance upon the audit report of Pannell Kerr Forster, chartered
accountants, given on the authority of such firm as experts in accounting and
auditing.
The estimates of net proved reserves of natural gas of Independent Energy as
of June 30, 1999 included in this prospectus have been included in reliance on
the report of Gaffney, Cline & Associates Ltd., an independent petroleum
engineering firm, given on the authority of such firm as experts in estimating
petroleum reserves.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
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 subsidiary 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 subsidiary 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 subsidiary, 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 30 June 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 STATEMENTS OF OPERATIONS
(All amounts stated in thousands of pounds sterling, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Turnover (revenue)...... 3(f) (Pounds) 246,856 (Pounds) 57,989 (Pounds)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) (1,363)
---------------- --------------- --------------
Operating profit/(loss). 6,289 210 (1,250)
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) (1,181)
Taxation................ 9 (929) -- --
---------------- --------------- --------------
Retained profit/(loss)
for the year........... 20 (Pounds)4,007 (Pounds)(185) (Pounds)(1,181)
---------------- --------------- --------------
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 each year reflect all recognised gains and losses.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
(All amounts stated in thousands of pounds sterling)
<TABLE>
<CAPTION>
June 30,
----------------------------
Note 1999 1998
<S> <C> <C> <C>
Fixed assets
Intangible assets........................... 10 (Pounds)9,316 (Pounds)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
(All amounts stated in thousands of pounds sterling)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Reconciliation of
operating profit to net
cash (outflow) from
operating activities
Operating
profit/(loss)........ (Pounds) 6,289 (Pounds) 210 (Pounds) (1,250)
Depreciation and
amortisation......... 1,650 626 142
Increase in debtors... (69,043) (10,459) (3,926)
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)/increase.... (15,341) (1,327) 621
Net effect of exchange
rate movements....... 20 3 (39)
--------------- -------------- ---------------
(Decrease)/increase in
cash................... 22 & 23 (Pounds)(15,321) (Pounds)(1,324) (Pounds) 582
--------------- -------------- ---------------
</TABLE>
The accompanying notes are an internal part of these financial statements.
F-6
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANISATION
Independent Energy Holdings PLC (the "Company"), together with its
subsidiary undertakings (the "Group") 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 thousands pounds
sterling, unless otherwise stated.
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 (Pounds)1,000 (1998:
profit (Pounds)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 (Continued)
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:
<TABLE>
<S> <C>
Plant and machinery.............. 5% on cost
Office equipment................. 33% on cost
</TABLE>
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.
F-8
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTING POLICIES (Continued)
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) Turnover
Turnover from the sale of electricity is recognized by the Company on a
monthly basis exclusive of Value Added Tax and is attributable to one class of
business. Sales for each monthly period for over 100kW customers can be
accurately determined as meters are read by telementry 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 utilizing 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.
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
F-9
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTING POLICIES (Continued)
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) 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.
j) 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, settled 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.
k) 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>
Year Ended June 30,
-----------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Salaries, fees and consultancy services..... (Pounds)349 (Pounds)265 (Pounds)258
Benefits.................................... 32 20 18
Pension contributions....................... 31 20 19
----------- ----------- -----------
(Pounds)412 (Pounds)305 (Pounds)295
----------- ----------- -----------
Highest paid director....................... (Pounds)103 (Pounds) 82 (Pounds) 82
----------- ----------- -----------
</TABLE>
No directors were members of a company pension scheme (1998: nil).
F-10
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. DIRECTORS (Continued)
Directors' Interests in Share Options
The directors' interests in share options as of 30th June 1999 are as
follows:
<TABLE>
<CAPTION>
Number of Shares
----------------- Exercise
Founders Staff Price Exercisable Dates
<S> <C> <C> <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).
5. EMPLOYEES
a) Employment costs (including executive directors) consist of:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Salaries and wages................... (Pounds)1,749 (Pounds) 859 (Pounds)503
Social security costs................ 175 80 50
Other pension costs.................. 215 105 66
------------- ------------- -----------
(Pounds)2,139 (Pounds)1,044 (Pounds)619
------------- ------------- -----------
</TABLE>
F-11
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except employee data)
5. EMPLOYEES (Continued)
b) The average number employed during the year was:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Sales and Marketing.................................. 34 12 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.................... (Pounds)838 (Pounds) 98 (Pounds)186
Gain on currency conversion............ -- 4 --
Other.................................. -- 3 3
----------- ----------- -----------
(Pounds)838 (Pounds)105 (Pounds)189
----------- ----------- -----------
</TABLE>
b) Interest Payable and Similar Expense:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest payable--bank borrowing.. (Pounds)1,533 (Pounds)716 (Pounds) 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)
------------- ----------- -----------
(Pounds)2,191 (Pounds)500 (Pounds)120
------------- ----------- -----------
</TABLE>
7. PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED AFTER
CHARGING:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Amortisation............................ (Pounds)447 (Pounds)276 (Pounds)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>
F-12
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
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.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Profit/(loss) for the
financial year............. (Pounds) 4,007 (Pounds) (185) (Pounds) (1,181)
Basic weighted average share
capital (number of shares). 25,465 17,191 13,130
Diluted weighted average
share capital
(number of shares)......... 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>
Year Ended June 30,
---------------------
1999 1998 1997
<S> <C> <C> <C>
Corporation tax at 30% (1998: 31%)..................... -- -- --
Deferred taxation...................................... (Pounds)929 -- --
----------- --- ---
Tax charge............................................ (Pounds)929 -- --
----------- --- ---
</TABLE>
No charge for corporation tax arises due to the availability of capital
allowances. The tax charge for the year is (Pounds)552 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.
F-13
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
10. FIXED ASSETS INTANGIBLE (Continued)
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
Group Cost Fields Agreement Total
<S> <C> <C> <C>
At 1st July 1998................. (Pounds)3,535 (Pounds)3,000 (Pounds)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................ (Pounds) 761 (Pounds) 44 (Pounds) 805
------------- ------------- --------------
Net book value
30th June 1998................... (Pounds)3,221 (Pounds)3,000 (Pounds) 6,221
------------- ------------- --------------
30th June 1999................... (Pounds)4,225 (Pounds)5,091 (Pounds) 9,316
------------- ------------- --------------
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was
(Pounds)22 and (Pounds)nil respectively.
11. FIXED ASSETS TANGIBLE
<TABLE>
<CAPTION>
Assets in the
Office Course of Plant and
Group Cost Equipment Construction Equipment Total
<S> <C> <C> <C> <C>
At 1st July 1998........ (Pounds) 354 (Pounds) 5,384 (Pounds)13,254 (Pounds)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....... (Pounds)1,658 (Pounds) 6,576 (Pounds)27,136 (Pounds)35,370
------------- --------------- -------------- --------------
Accumulated depreciation
At 1st July 1998........ (Pounds) 96 -- (Pounds) 365 (Pounds) 461
Charge for the year..... 194 -- 965 1,159
------------- --------------- -------------- --------------
At 30th June 1999....... (Pounds) 290 -- (Pounds) 1,330 (Pounds) 1,620
------------- --------------- -------------- --------------
Net book value
At 30th June 1998....... (Pounds) 258 (Pounds) 5,384 (Pounds)12,889 (Pounds)18,531
------------- --------------- -------------- --------------
At 30th June 1999....... (Pounds)1,368 (Pounds) 6,576 (Pounds)25,806 (Pounds)33,750
------------- --------------- -------------- --------------
</TABLE>
Interest capitalised during the years ended 30th June 1999 and 1998 was
(Pounds)293 and (Pounds)702 respectively.
F-14
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
11. FIXED ASSETS TANGIBLE (Continued)
The net book value of the assets held under finance leases included above
were:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Assets in the course of construction........... (Pounds) -- (Pounds)3,518
Plant and equipment............................ 14,820 4,476
-------------- -------------
(Pounds)14,820 (Pounds)7,994
-------------- -------------
</TABLE>
Capital commitments
The Group has capital commitments of:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Authorised but not contracted.................. (Pounds) 8,000 (Pounds)6,100
-------------- -------------
Contracted but not provided.................... (Pounds)20,600 (Pounds)4,407
-------------- -------------
</TABLE>
12. FIXED ASSETS INVESTMENTS
<TABLE>
<CAPTION>
Group Joint
Venture
<S> <C>
At 1st July 1998............................................... --
Additions in the year.......................................... (Pounds)2,776
-------------
At 30th June 1999.............................................. (Pounds)2,776
-------------
</TABLE>
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.
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 ending 30th June 2000. The cost of acquisition includes capitalised
interest of (Pounds)61.
F-15
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
12. FIXED ASSETS INVESTMENTS (Continued)
The subsidiary undertakings of the Company, all of which have an accounting
reference date of 30th June, are as follows:
<TABLE>
<CAPTION>
Country of Percentage
Incorporation Shareholdings
<S> <C> <C>
OPERATING
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>
June 30
-----------------------------
1999 1998
<S> <C> <C>
Trade debtors................................. (Pounds)57,663 (Pounds)10,905
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........ -- --
-------------- --------------
(Pounds)84,383 (Pounds)15,340
-------------- --------------
</TABLE>
Included within prepayments and accrued income are costs of (Pounds)6,787
which will be released to the profit and loss account after more than one year.
14. CREDITORS:
AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Trade creditors................................ (Pounds)12,650 (Pounds)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
-------------- --------------
(Pounds)68,513 (Pounds)20,589
</TABLE>
The bank overdraft is secured by a debenture on all the Group assets other
than assets subject to other security arrangements.
<TABLE>
<S> <C> <C>
--- ---
</TABLE>
F-16
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
14. CREDITORS: (Continued)
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Bank loan construction facility................ (Pounds) 7,672 (Pounds) 3,500
Unsecured loan notes........................... -- 1,400
Obligations under finance lease contracts...... 11,548 5,771
-------------- --------------
(Pounds)19,220 (Pounds)10,671
-------------- --------------
</TABLE>
Bank loan
The bank loan, which is part of a revolving construction facility of
(Pounds)9.5m (1998: (Pounds)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:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
<S> <C> <C>
Within one year................................. (Pounds)1,000 (Pounds)1,000
Between one and two years....................... 1,000 1,000
Between two and five years...................... 6,672 2,500
------------- -------------
(Pounds)8,672 (Pounds)4,500
------------- -------------
</TABLE>
Finance leases
Obligations under finance leases fall due as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
<S> <C> <C>
Within one year................................. (Pounds) 1,560 (Pounds)1,052
Between one and five years...................... 7,500 4,728
Over five years................................. 4,048 1,043
-------------- -------------
(Pounds)13,108 (Pounds)6,823
-------------- -------------
</TABLE>
The finance leases are secured on the assets concerned.
15. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation
Group
<TABLE>
<S> <C> <C>
At 1st July 1998............................................. --
Charged to profit and loss................................... (Pounds)929
--- -----------
At 30th June 1999............................................ (Pounds)929
--- -----------
</TABLE>
F-17
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
15. PROVISIONS FOR LIABILITIES AND CHARGES (Continued)
Deferred tax is analysed as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
<S> <C> <C>
Capital allowances.................................. (Pounds)929 (Pounds)850
Losses offset....................................... -- (850)
----------- -----------
(Pounds)929 --
----------- -----------
</TABLE>
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>
June 30,
----------------------
1999 1998
<S> <C> <C>
Expiring within one year--land and buildings......... (Pounds)41 --
--plant and machinery................................ 18 --
Expiring within two to five years--land and
buildings........................................... 42 (Pounds)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.
F-18
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
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.
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, the Company'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
F-19
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
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 (Pounds)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 Company'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
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Bank overdraft................................. (Pounds)22,038 (Pounds) 22
Bank loan...................................... -- 4,000
Construction loan.............................. 8,672 4,500
Unsecured loan notes........................... -- 1,400
Finance leases................................. 13,108 6,823
-------------- --------------
(Pounds)43,818 (Pounds)16,745
-------------- --------------
</TABLE>
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 (Pounds)640 (1998: (Pounds)696).
F-20
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
18. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued)
(ii) Maturity analyses
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Repayments fall due as follows:
Within one year.............................. (Pounds)24,598 (Pounds) 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
-------------- --------------
(Pounds)19,220 (Pounds)10,671
-------------- --------------
</TABLE>
(iii) Interest Rate analyses
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
<S> <C> <C>
Fixed rate borrowings.......................... (Pounds) 5,802 (Pounds) 8,223
Floating rate borrowings....................... 38,016 8,522
-------------- --------------
(Pounds)43,818 (Pounds)16,745
-------------- --------------
</TABLE>
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.
(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 rate Floating rate
1999 1999 Total 1999 Total 1998
<S> <C> <C> <C> <C>
Expiring within one
year................... (Pounds)3,758 (Pounds)13,171 (Pounds)16,929 (Pounds)5,978
Expiring after more than
one year............... -- 827 827 3,500
------------- -------------- -------------- -------------
(Pounds)3,758 (Pounds)13,998 (Pounds)17,756 (Pounds)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.
F-21
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SHARE CAPITAL
<TABLE>
<CAPTION>
June 30,
-----------------------
1999 1998
<S> <C> <C>
Authorised:
50,000,000 ordinary shares of 1p each (1998:
28,000,000)........................................ (Pounds)500 (Pounds)280
----------- -----------
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...................................... 179 150
Issued in the year.................................. 84 29
----------- -----------
At 30th June 1999................................... (Pounds)263 (Pounds)179
----------- -----------
</TABLE>
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 million 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:
<TABLE>
<CAPTION>
Exercise
Price Number
<S> <C> <C>
Share options........................................... (Pounds)1.00 280,000
Share warrants.......................................... (Pounds)0.75 57,500
</TABLE>
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.
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.
F-22
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SHARE CAPITAL (Continued)
During the year 250,000 share options were granted to the Company's
Investment Bankers in lieu of fees.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998
------------------ ------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares 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 3,463,400
========= =========
</TABLE>
The following table summarises information regarding share options at 30th
June 1999:
<TABLE>
<CAPTION>
Weighted
Average
Years
Remaining
Effective Grant Number Contract Number
Exercise Price Date Outstanding 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:
<TABLE>
<S> <C>
30th June 1999.................................................. 1p to 667.5p
30th June 1998.................................................. 1p to 122.5p
30th June 1997.................................................. 1p to 100.0p
</TABLE>
Details of the directors' options which are included in the above figures
are shown in note 4 to the financial statements.
F-23
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands, except per share data)
19. SHARE CAPITAL (Continued)
Share warrants
On 30th June 1997 share warrants for 140,000 ordinary shares were granted in
association with the issue of Loan Notes of (Pounds)1,400; 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.
20. RESERVES AND OTHER SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Share Premium Profit and
Account Loss Account
<S> <C> <C>
At 1st July 1998............................ (Pounds)10,695 (Pounds)(1,421)
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
-------------- --------------
At 30th June 1999........................... (Pounds)46,030 (Pounds) 2,586
-------------- --------------
</TABLE>
21. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Ordinary shares issued........ (Pounds) 263 (Pounds) 179 (Pounds) 150
Share premium on offering..... 45,710 10,445 8,044
Share premium on exercise of
stock options and warrants... 320 250 --
Profit/(Loss) for year........ 4,007 (185) (1,181)
Loss at start of year......... (1,421) (1,236) (56)
-------------- ------------- -------------
Balance at end of year........ (Pounds)48,879 (Pounds)9,453 (Pounds)6,957
-------------- ------------- -------------
</TABLE>
F-24
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
22. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
At Beginning of
Year Cash Flows Other Changes At End of Year
<S> <C> <C> <C> <C>
Year Ended 30th June
1999
Cash at bank and in
hand................... (Pounds) 621 (Pounds) (43) -- (Pounds) 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 (Pounds)(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................... (Pounds)(16,124) (Pounds)(12,904) (Pounds)(7,474) (Pounds)(36,502)
--------------- --------------- -------------- ---------------
</TABLE>
23. RECONCILIATION OF NET CASH FLOWS TO MOVEMENT IN NET DEBT
<TABLE>
<S> <C> <C>
Year Ended 30th June 1999
Decrease in cash in the year.............. (Pounds)(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...................... (Pounds)(20,378)
Net debt at 30th June 1998................ (16,124)
---------------
Net debt at 30th June 1999................ (Pounds)(36,502)
---------------
</TABLE>
24. MAJOR NON-CASH TRANSACTIONS
During the years ended 30 June 1999, 1998 and 1997, the Company entered into
finance leases in respect of assets with a total capital value at the inception
of the lease of (Pounds)7,474, (Pounds)2,666 and (Pounds)4,383, respectively.
25. POST BALANCE SHEET EVENT
On 8th July 1999, the Group was granted a twelve month (Pounds)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.
F-25
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
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>
Year Ended June 30,
--------------------------------------------
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Profit/(loss) on ordinary
activities after taxation
under UK GAAP............. (Pounds)4,007 (Pounds)(185) (Pounds)(1,181)
US GAAP adjustments:
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>
b) Equity Reconciliation
<TABLE>
<CAPTION>
Note 1999 1998 1997
<S> <C> <C> <C> <C>
Equity under UK GAAP..... (Pounds)48,879 (Pounds)9,453 (Pounds)6,958
Stock based compensation. (c) (434) (397) (299)
Net effect of US GAAP
adjustments............. (434) (397) (299)
-------------- ------------- -------------
Equity under US GAAP..... (d) (Pounds)48,445 (Pounds)9,056 (Pounds)6,659
-------------- ------------- -------------
</TABLE>
The diluted earnings per share for the years ended 30 June 1998 and 1997 are
not disclosed as the effect of the employee share options is anti-dilutive.
F-26
<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)
c) Employee Share Option Scheme
Under UK GAAP no compensation cost is recognised 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
recognised 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>
Year Ended June 30,
-------------------------------------------
1999 1998 1997
(amounts in thousands)
<S> <C> <C> <C>
Net profit/(loss) applicable to
ordinary shares as reported..... (Pounds)3,933 (Pounds)(321) (Pounds)(1,369)
Net profit/(loss) applicable to
ordinary shares pro forma....... 1,998 (428) (1,461)
Primary net earnings/(loss) per
ordinary share as reported...... 15.4p (1.9)p (10.4)p
Primary net earnings/(loss) per
ordinary share pro forma........ 7.8p (2.5)p (11.1)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:
<TABLE>
<CAPTION>
Expected Interest
Date of Grants life rate Volatility
<S> <C> <C> <C>
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%
</TABLE>
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 (Pounds)4.50 and (Pounds)0.23.
F-27
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
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:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year...... (Pounds) 9,056 (Pounds)6,659 (Pounds) 6,676
Other gains....................... 35,456 2,718 1,352
Net profit/(loss)................. 3,933 (321) (1,369)
-------------- ------------- --------------
Balance at end of year............ (Pounds)48,445 (Pounds)9,056 (Pounds) 6,659
-------------- ------------- --------------
</TABLE>
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>
Year Ended June 30,
-------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash (used in) operating
activities................. (Pounds) (33,498) (Pounds) (3,108) (Pounds)(2,231)
Cash provided by financing
activities................. 33,022 10,489 2,273
Cash provided by (used in)
by investing activities.... (14,845) (8,705) 540
---------------- --------------- --------------
Net (decrease) in cash and
deposits with banks........ (15,321) (1,324) 1,923
Balance at beginning of
year....................... 599 1,923 --
---------------- --------------- --------------
Balance at end of year...... (Pounds)(14,722) (Pounds) 599 (Pounds) 1,923
---------------- --------------- --------------
</TABLE>
(ii) The amount of taxes and interest paid, net of capitalised interest,
during the year is:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Interest, net of capitalisation.......... (Pounds)2,598 (Pounds)1,074 (Pounds)81
Stamp duty reserve tax................... 579 -- --
------------- ------------- ----------
</TABLE>
F-28
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS (Continued)
b) Other disclosures
Total liabilities and stockholders' equity and, Total assets, in accordance
with UK GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999............................................... (Pounds)137,541
30th June 1998............................................... 40,712
</TABLE>
Total assets prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999....................................................... 137,943
30th June 1998....................................................... 41,105
</TABLE>
Long term liabilities prepared in accordance with US GAAP were as follows:
<TABLE>
<S> <C>
30th June 1999........................................................ 20,056
30th June 1998........................................................ 11,461
</TABLE>
c) Commitments under operating leases
The Group's future minimum payments under operating leases as at 30th June
1999 are as follows:
<TABLE>
<S> <C>
Years ending 30th June
2000........................................................... (Pounds) 725
2001........................................................... 740
2002........................................................... 624
2003........................................................... 546
2004........................................................... 516
Thereafter..................................................... 3,079
-------------
(Pounds)6,230
-------------
</TABLE>
d) Reconciliation of tax charge to statutory rate on losses
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Profit/(loss) on ordinary
activities before taxation...... (Pounds)4,936 (Pounds) (185) (Pounds)(1,181)
------------- ------------- --------------
Expected tax charge at the
statutory rate.................. 1,518 (57) (367)
Increase in deferred tax
liability....................... (929) (390) (394)
------------- ------------- --------------
Difference to reconcile.......... 589 (447) (761)
------------- ------------- --------------
Deferred tax not recognised...... 317 (802) (958)
Intangible asset tax allowances.. 460 457 212
Inadmissible expenditure......... (188) (102) (15)
------------- ------------- --------------
589 (447) (761)
------------- ------------- --------------
</TABLE>
F-29
<PAGE>
INDEPENDENT ENERGY HOLDINGS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(amounts in thousands)
27. ADDITIONAL US GAAP DISCLOSURE REQUIREMENTS (Continued)
The Group has accumulated losses and capital allowances to be carried
forward and relieved in the future at the following year end of:
<TABLE>
<S> <C>
30th June 1999................................................. (Pounds)7,788
30th June 1998................................................. 7,710
30th June 1997................................................. 5,100
</TABLE>
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 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.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
, 1999
[Independent Energy Logo]
8,815,000 American Depositary Shares
Representing 8,815,000 Ordinary Shares
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Prudential Securities
Johnson Rice & Company L.L.C.
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than the offering memorandum or to make
representations as to matters not stated in this offering memorandum. You must
not rely on unauthorized information. This offering memorandum is not an offer
to sell these securities or our solicitation of your offer to buy the
securities in any jurisdiction where that would not be permitted or legal.
Neither the delivery of this offering memorandum nor any sales made hereunder
after date of this offering memorandum shall create an implication that the
information contained herein or the affairs of the company have not changed
since the date hereof.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS.
Item 13. Other Expenses of Issuance and Distribution
The following are estimated expenses, other than underwriting commissions,
expected to be incurred by Independent Energy in connection with the issuance
and distribution of the securities registered under this Registration
Statement.
TO BE PAID BY REGISTRANT
<TABLE>
<S> <C> <C>
Securities and Exchange Commission
registration fee........................ $ 41,920
NASD fees and expenses................... $ 15,580
Printing and engraving expenses.......... $ 200,000
Legal fees and expenses.................. $ 200,000
Accounting fees and expenses............. $ 95,000
Nasdaq listing fees...................... $ 17,500
Engineering fees......................... $ 75,000
Stamp duty expenses...................... $1,425,000
Miscellaneous............................ $ 30,000
----------
Total................................... $2,100,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Except as hereinafter set forth, there is no provision of Independent
Energy's Memorandum and Articles of Association or any contract, arrangement or
statute under which any director or officer of Independent Energy is insured or
indemnified in any manner against any liability that he may incur in his
capacity as such.
The Memorandum and Articles of Association of Independent Energy provide
that, subject to the provisions of the Companies Act 1985, but without
prejudice to any indemnity to which a director or officer might otherwise be
entitled, every director or officer of Independent Energy shall be indemnified
out of the assets of Independent Energy against any liability, loss or
expenditure incurred by him in defending any proceedings, whether civil or
criminal, which relate to anything done or omitted to be done or alleged to
have been done or omitted to be done by him as an officer or auditor of
Independent Energy and in which judgment is given in his favor or in which he
is acquitted, or incurred in connection with any application in which relief is
granted to him by the court from liability in respect of any such act or
omission or from liability to pay any amount in respect of any such act or
omission or from liability to pay any amount in respect of shares acquired by a
nominee of Independent Energy.
II-1
<PAGE>
Section 310 of the Companies Act 1985 (as amended by the Companies Act
1989) provides as follows:
"310. Provisions Exempting Officers and Auditors from Liability
This section applies to any provision, whether contained in a company's
articles or in any contract with the Company or otherwise, for exempting any
officer of the Company or any person (whether an officer or not) employed by
the Company as auditor from, or indemnifying him against any liability which
by virtue of any rule of law would otherwise attach to him in respect of any
negligence, default, breach of duty or breach of trust of which he may be
guilty in relation to the Company.
I. Except as provided by the following subsection, any such provision is
void.
II. This section does not prevent a company--
A. from purchasing and maintaining for any such officer or auditor
insurance against any such liability, or
B. from indemnifying any such officer or auditor against any liability
incurred by him--
1. in defending any proceedings (whether civil or criminal) in which
judgment is given in his favor or he is acquitted, or
2. in connection with any application under Section 144(3) or (4)
(acquisition of shares by innocent nominee) or Section 727 (general
power to grant relief in case of honest and reasonable conduct) in
which relief is granted to him by the court."
The Underwriters will each agree, severally, to indemnify Independent
Energy's directors, Independent Energy's officers who sign the Registration
Statement and Independent Energy's authorized representative in the U.S. from
and against certain liabilities based on information relating to such
Underwriter furnished in writing by such Underwriter expressly for use herein.
Independent Energy has obtained directors' and officers' insurance
coverage, which, subject to policy terms and limitations, includes coverage to
reimburse Independent Energy for amounts that it may be required or permitted
by law to pay directors or officers of Independent Energy.
Item 15. Recent Sales of Unregistered Securities
In June 1997, Independent Energy sold 1,866,648 ordinary shares in the U.S.
at a price of 75p per share and 140,000 ordinary shares issuable upon the
exercise of warrants in the U.K. at a price of 75p per share. In September
1997, Independent Energy sold 1,437,329 ordinary shares in the U.S. and
1,194,329 ordinary shares in the U.K. at a price of 95p per Share. All
ordinary shares sold in the U.S. were offered and sold pursuant to an
exemption for registration under Section 4(2) of the Securities Act and all
ordinary shares sold in the U.K. were offered and sold pursuant to an
exemption under Regulation S under the Securities Act.
In November 1998, Independent Energy agreed to issue options to purchase
250,000 ordinary shares at the then market price of $9.50 per share to
Donaldson, Lufkin & Jenrette International in exchange for financial advisory
services. Such options were issued pursuant to an exemption for registration
under Section 4(2) of the Securities Act.
II-2
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <C>
1 Form of Underwriting Agreement.
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).
5 Opinion of Masons as to the legality of the Ordinary Shares.
8.1 Opinion of Masons as to U.K. tax matters relative to the Ordinary Shares (included
in the Prospectus relating to the Ordinary Shares under "Taxation" with a
confirmation included in Exhibit 5).
8.2 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to U.S. tax matters relative
to the Ordinary Shares (included in the Prospectus relating to the Ordinary Shares
under "Taxation" with a confirmation included in this Exhibit).
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 (Pounds)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 (incorporated by
reference to Registration Statement No. 333-56223).
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 (incorporated by reference to Registration Statement No. 333-
56223).
</TABLE>
- ---------------------
* Filed previously.
** 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.
+ To be filed by amendment.
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
10.10*** Letter of Variation dated July 15, 1998 between Independent Energy
Holdings PLC, Independent Energy UK Limited and Barclays Bank PLC
(incorporated by reference to Registration Statement No. 333-56223).
10.11** Master Equipment Lease Agreement dated April 19, 1996 between
Machinery Acceptance Corporation and Independent Energy UK Limited
(incorporated by reference to Registration Statement No. 333-56223).
10.12*** Master Finance Lease Agreement dated June 17, 1997 between Debis
Financial Services Limited and Independent Energy UK Limited
(incorporated by reference to Registration Statement No. 333-56223).
10.13*** Lease Master Agreement dated October 30, 1997 between ING Lease (UK)
Limited and Independent Energy UK Limited (incorporated by reference
to Registration Statement No. 333-56223).
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.
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 Masons (included in Exhibit 5).
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibit 8.2).
23.3 Consent of Pannell Kerr Forster.
23.4* Consent of Gaffney, Cline & Associates Ltd.
24* Powers of Attorney (included on the signature pages hereof)
99 Reserve Report of Gaffney, Cline & Associates Ltd., dated August 10,
1999.
</TABLE>
- ---------------------
* Filed previously.
** 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.
+ To be filed by amendment.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
II-4
<PAGE>
(2) Insofar as indemnifications for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933 each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized on September 8, 1999.
INDEPENDENT ENERGY HOLDINGS PLC
(Registrant)
/s/ Burt H. Keenan
By:___________________________________
Burt H. Keenan
Chairman
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on the dates indicated.
<TABLE>
<S> <C> <C>
</TABLE>
Signature Title Date
/s/ Burt H. Kennan Chairman
- ---------------------------------- September 8, 1999
Burt H. Keenan
Chief Executive
* Officer and September 8, 1999
- ---------------------------------- Director
John L. Sulley (Principal
Executive Officer)
Executive Director--
* Finance (Principal September 8, 1999
- ---------------------------------- Financial and
Ian Stewart Accounting Officer)
Executive Director--
* Resources September 8, 1999
- ----------------------------------
William E. Evans
Executive
* Director-- September 8, 1999
- ---------------------------------- Operations
Robert E. Jones
Non-executive
* Director September 8, 1999
- ----------------------------------
Roy W. Deakin
Non-executive
* Director and September 8, 1999
- ---------------------------------- Authorized
Jerry W. Jarrell Representative in
the United States
Non-executive
* Director September 8, 1999
- ----------------------------------
David O. May
Non-executive
* Director September 8, 1999
- ----------------------------------
Herbert L. Oakes
*By: /s/ Burt H. Keenan
______________________________
Burt H. Keenan
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 1
8,815,000 AMERICAN DEPOSITARY SHARES
EACH REPRESENTING ONE ORDINARY SHARE
INDEPENDENT ENERGY HOLDINGS PLC
UNDERWRITING AGREEMENT
September __, 1999
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Independent Energy Holdings plc, an English public limited company (the
"COMPANY"), proposes to issue and sell, and certain stockholders of the Company
named in Schedule II hereto (the "SELLING STOCKHOLDERS") severally propose to
sell, an aggregate of 8,815,000 ordinary shares, nominal value 1 p per share
("ORDINARY SHARES"), of the Company to The Bank of New York, as depositary
("DEPOSITARY"), of which 7,000,000 shares are to be issued and sold by the
Company and 1,815,000 shares are to be sold by the Selling Stockholders, each
Selling Stockholder selling the amount set forth opposite such Selling
Stockholder's name in Schedule II hereto. Upon deposit of the Ordinary Shares,
and upon appropriate instructions, the Depositary proposes to issue 8,815,000
American Depositary Receipts ("FIRM ADRS") evidencing American Depositary Shares
which represent the 8,815,000 Ordinary Shares, to the several underwriters named
in Schedule I hereto (the "UNDERWRITERS"). The 8,815,000 American Depositary
Shares are hereinafter called the "FIRM ADSS" and the 8,815,000 Ordinary Shares
underlying the Firm ADSs are referred to herein as "FIRM
<PAGE>
SHARES". The Firm Shares to be sold by William E. Evans will be issued upon the
exercise of the options (the "OPTIONS") outstanding under the Company's stock-
based incentive compensation plan which exercise will occur immediately prior to
the purchase of such Firm Shares by the Underwriters on the Closing Date. The
Company also proposes to issue to the Depositary not more than an additional
1,322,250 Ordinary Shares (the "ADDITIONAL SHARES"), and upon appropriate
instructions, the Depositary proposes to issue 1,322,250 additional ADRs (the
"ADDITIONAL ADRS," and together with the Firm ADRs, the "ADRS") evidencing not
more than an additional 1,322,250 American Depositary Shares (the "ADDITIONAL
ADSS") to the Underwriters, if requested by the Underwriters as provided in
Section 2 hereof. The Firm ADSs and the Additional ADSs are hereinafter referred
to collectively as the "ADSS". The Firm Shares and the Additional Shares are
hereinafter referred to as the "SHARES". The Company and the Selling
Stockholders are hereinafter sometimes referred to collectively as the
"SELLERS."
The ADRs are issuable in accordance with a Deposit Agreement dated as of
April 17, 1998 (the "DEPOSIT AGREEMENT") among the Company, the Depositary and
all holders from time to time of the ADRs. The ADRs will be issued by the
Depositary to the Underwriters upon deposit of the Shares underlying the ADSs
with the Depositary. Unless the context otherwise requires, references herein
to the ADSs shall include the ADRs evidencing the ADSs.
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form F-3, including a
prospectus, relating to the ADSs. The registration statement, as amended at the
time it became effective, including the information (if any) deemed to be part
of the registration statement at the time of effectiveness pursuant to Rule 430A
under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and
the prospectus in the form first used to confirm sales of ADSs is hereinafter
referred to as the "PROSPECTUS" (including, in the case of all references to the
Registration Statement and the Prospectus, documents incorporated therein by
reference). If the Company has filed or is required pursuant to the terms
hereof to file a registration statement pursuant to Rule 462(b) under the Act
registering additional Ordinary Shares (a "RULE 462(B) REGISTRATION STATEMENT"),
then, unless otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
The Company has also filed with the Commission in accordance with the provisions
of the Act a registration statement on Form F-6, as amended (the "ADS
REGISTRATION STATEMENT") relating to the ADSs. Unless the context otherwise
requires, any
2
<PAGE>
reference herein to the "REGISTRATION STATEMENT" shall include the ADS
Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
7,000,000 Firm Shares to the Depositary, (ii) each Selling Stockholder agrees,
severally and not jointly, to sell the number of Firm Shares set forth opposite
such Selling Stockholder's name in Schedule II hereto to the Depositary so that,
in each case under foregoing clauses (i) and (ii), the Depositary, upon
appropriate instructions, may issue ADRs evidencing the Firm ADSs to the
Underwriters, and (iii) each Underwriter agrees, severally and not jointly, to
purchase from each Seller at a price per ADS of $______ (the "PURCHASE PRICE")
the number of Firm ADSs (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Firm Shares to be sold by such Seller as the number of Firm ADSs set forth
opposite the name of such Underwriter in Schedules I hereto bears to the total
number of Firm ADSs.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
the Additional ADSs to the Depositary so that the Depositary, upon appropriate
instructions, may issue ADRs evidencing the Additional ADSs to the Underwriters
and the Underwriters shall have the right to purchase, severally and not
jointly, up to 1,322,250 Additional ADSs from the Company at the Purchase Price.
Additional ADSs may be purchased solely for the purpose of covering over-
allotments made in connection with the offering of the Firm ADSs. The
Underwriters may exercise their right to purchase Additional ADSs in whole or in
part from time to time by giving written notice thereof to the Company within 30
days after the date of this Agreement. You shall give any such notice on behalf
of the Underwriters and such notice shall specify the aggregate number of
Additional ADSs to be purchased pursuant to such exercise and the date for
payment and delivery thereof, which date shall be a business day (i) no earlier
than two business days after such notice has been given (and, in any event, no
earlier than the Closing Date (as hereinafter defined)) and (ii) no later than
ten business days after such notice has been given. If any Additional ADSs are
to be purchased, each Underwriter, severally and not jointly, agrees to purchase
from the Company the number of Additional ADSs (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional ADSs to be purchased from the
Company as the number of Firm ADSs set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm ADSs.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant
3
<PAGE>
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any Ordinary Shares, ADSs or ADRs or any securities
convertible into or exercisable or exchangeable for Ordinary Shares, ADSs or
ADRs or (ii) enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of any
Ordinary Shares, ADSs or ADRs (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Ordinary
shares, ADSs or ADRs, or such other securities, in cash or otherwise), except to
the Underwriters pursuant to this Agreement, for a period of 120 days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period the Company may issue Ordinary Shares upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and may
grant stock options to purchase Ordinary Shares to employees and consultants of
the Company and its subsidiaries; provided, however, that such options do not
vest within 180 days after the date of the Prospectus. The Company also agrees
not to file any registration statement with respect to any shares of Ordinary
Shares, ADSs or ADRs or any securities convertible into or exercisable or
exchangeable for Ordinary Shares, ADSs or ADRs for a period of 120 days after
the date of the Prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation; provided, however, that the Company
may file and cause to become effective under the Act one or more registration
statements on Form S-8 or similar form available for use by foreign private
issuers relating to the offer, sale and delivery of Ordinary Shares pursuant to
stock options or other employee benefit plans. In addition, each Selling
Stockholder agrees that, for a period of 120 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, it will not make any demand for, or exercise any right
with respect to, the registration of any shares of Ordinary Shares, ADSs or ADRs
or any securities convertible into or exercisable or exchangeable for Ordinary
Shares, ADSs or ADRs. The Company shall, prior to or concurrently with the
execution of this Agreement, deliver an agreement executed by each of the
directors and officers of the Company who is not a Selling Stockholder to the
effect that such person will not, during the period commencing on the date such
person signs such agreement and ending 120 days after the date of the
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Corporation, (A) engage in any of the transactions described in the first
sentence of this paragraph or (B) make any demand for, or exercise any right
with respect to, the registration of any shares of Ordinary Shares, ADSs or ADRs
or any securities convertible into or exercisable or exchangeable for Ordinary
Shares, ADSs or ADRs.
Section 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the ADSs as soon after the execution and delivery of this Agreement
as in your
4
<PAGE>
judgment is advisable and (ii) initially to offer the ADSs upon the terms set
forth in the Prospectus.
Section 4. Delivery and Payment. Payment for the ADSs shall be made by
Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the several
Underwriters in U.S. dollars to the Sellers (such payment being received by the
Sellers in satisfaction for the purchase price of the Shares) by wire transfer
in same day funds on the Closing Date or the applicable Option Closing Date, as
the case may be, against deposit of the Ordinary Shares underlying such ADSs
with the London office of The Bank of New York, as custodian for the Depositary
(the "CUSTODIAN"), instruction by the Custodian to the Depositary to issue such
ADSs and delivery of ADRs evidencing all such ADSs. The ADRs shall be in
definitive form and shall be in such names and in such denominations as
Donaldson, Lufkin & Jenrette Securities Corporation shall request not later than
two business days prior to the Closing Date or the applicable Option Closing
Date (as defined below), with any stamp duty or stamp duty reserve tax payable
in connection with the deposit by the Company of the Shares with the Depositary
or the Custodian against the issuance of ADRs evidencing ADSs duly paid. The
certificates for the ADRs will be made available for inspection and packaging
not later than 8:00 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be. The
time and date of delivery of the ADSs shall be 8:00 A.M., New York City time, on
September __, 1999 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree
in writing. The time and date of delivery and payment for the ADSs are
hereinafter referred to as the "CLOSING DATE." The time and date of delivery
and payment for any Additional ADSs to be purchased by the Underwriters shall be
8:00 A.M., New York City time, on the date specified in the applicable exercise
notice given to you pursuant to Section 2 hereof or such other time on the same
or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and
the Company shall agree in writing. The time and date of delivery and payment
for any Additional ADSs are hereinafter referred to as an "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York 10017.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) of any request by the Commission for amendments
to the Registration Statement or the ADS Registration Statement or
amendments or supplements to the Prospectus or for
5
<PAGE>
additional information, (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the ADS
Registration Statement or of the suspension of qualification of the ADSs
for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purposes, (iii) when any amendment to the Registration
Statement or the ADS Registration Statement becomes effective, (iv) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, when the Rule 462(b) Registration
Statement has become effective and (v) of the happening of any event during
the period referred to in Section 5(d) below which makes any statement of a
material fact made in the Registration Statement or the ADS Registration
Statement or the Prospectus untrue or which requires any additions to or
changes in the Registration Statement or the ADS Registration Statement or
the Prospectus in order to make the statements therein not misleading. If
at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish to you four signed copies of the Registration
Statement and the ADS Registration Statement as first filed with the
Commission and of each amendment to it, including all exhibits and four
conformed copies of the documents incorporated by reference thereto, and to
furnish to you and each Underwriter designated by you such number of
conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which
shall be satisfactory to you, and to file the Prospectus in such form with
the Commission within the applicable period specified in Rule 424(b) under
the Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and the ADS Registration
Statement and not to make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall
reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement and the ADS
Registration Statement or amendment or supplement to the Prospectus which
may be necessary or advisable in connection with the distribution of the
ADSs by you, and to use its best efforts to cause any such amendment to the
Registration Statement and the ADS Registration Statement to become
promptly effective.
6
<PAGE>
(d) Promptly after the execution of this Agreement and from time to
time thereafter for such period as in the opinion of counsel for the
Underwriters a prospectus is required by law to be delivered in connection
with sales by an Underwriter or a dealer, to furnish in New York City to
each Underwriter and any dealer as many copies of the Prospectus (and of
any amendment or supplement to the Prospectus) as such Underwriter or
dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, forthwith to prepare and file with the Commission an appropriate
amendment or supplement to the Prospectus so that the statements in the
Prospectus, as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the ADSs, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the ADSs for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the ADSs
and to file such consents to service of process or other documents as may
be necessary in order to effect such registration or qualification;
provided, however, that the Company shall not be required in connection
therewith to qualify as a foreign corporation in any jurisdiction in which
it is not now so qualified or to take any action that would subject it to
general consent to service of process or taxation other than as to matters
and transactions relating to the Prospectus, the Registration Statement,
the ADS Registration Statement, any preliminary prospectus or the offering
or sale of the ADSs, in any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as
soon as practicable an earnings statement covering the twelve-month period
beginning after the effective date of the Registration Statement that shall
satisfy the provisions of Section 11(a) of the Act, and to advise you in
writing when such statement has been so made available.
7
<PAGE>
(h) Prior to the Closing Date or the Option Closing Date, as the
case may be, to make Ordinary Shares available to the Depositary in
accordance with the provisions of the Deposit Agreement, and otherwise to
comply with the Deposit Agreement so that ADRs evidencing ADSs will be
executed (and, if applicable, countersigned) and issued by the Depositary
against receipt of such Ordinary Shares and delivered to the Underwriters
at such Closing Date.
(i) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Ordinary Shares or
furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed
(including the Alternative Investment Market of the London Stock Exchange)
and such other publicly available information concerning the Company and
its subsidiaries as you may reasonably request.
(j) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of the Sellers' obligations under
this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel, the Company's accountants and any Selling Stockholder's
counsel (in addition to the Company's counsel) in connection with the
registration and delivery of the Shares and the ADSs under the Act and all
other fees and expenses in connection with the preparation, printing,
filing and distribution of the Registration Statement (including financial
statements and exhibits), the ADS Registration Statement, any preliminary
prospectus, the Prospectus and all amendments and supplements to any of the
foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs
and expenses related to the transfer and delivery of the ADSs to the
Underwriters, including any transfer or other taxes payable thereon, (iii)
all costs of printing or producing this Agreement and any other agreements
or documents in connection with the offering, purchase, sale or delivery of
the ADSs, (iv) all expenses, if any, in connection with the registration or
qualification of the Shares and the ADSs for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing
or producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and fees and disbursements
of counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review
and clearance of the offering
8
<PAGE>
of the ADSs by the National Association of Securities Dealers, Inc., (vi)
all costs and expenses incident to the supplemental listing of the ADSs on
the Nasdaq National Market, (vii) the cost of printing ADR certificates
representing the ADSs, (viii) the costs and charges if any of depositing
Ordinary Shares under the Deposit Agreement against issuance of ADRs
evidencing the ADSs, (ix) the fees and expenses (including fees and
disbursements of counsel), if any, of the Depositary and any custodian
appointed under the Deposit Agreement, (x) the cost and charges of any
transfer agent or registrar, (xi) all stamp duty or stamp duty reserve tax
arising as a result of the deposit of the Shares with the Depositary, (xii)
the costs and expenses of the Company relating to investor presentations on
any "road show" undertaken in connection with the marketing of the offering
of the ADSs, and (xiii) all other costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders
hereunder for which provision is not otherwise made in this Section 5(j).
The provisions of this section shall not supercede or otherwise affect any
agreement that the Company and the Selling Stockholders may otherwise have
for allocation of such expenses among themselves. Except as expressly
otherwise provided in this Section 5 or in Section 8 of this Agreement, the
Underwriters shall pay all of their own costs, expenses, fees and taxes
incurred in connection with the offer, sale and delivery of the ADSs,
including the costs and expenses of the Underwriters relating to investor
presentations on the "road show" described in the preceding sentence, the
fees and expenses of their counsel and any advertising expenses incurred by
them; provided, however, that the cost of any aircraft chartered in
connection with the "road show" shall be paid one-half by the Company and
one-half by the Underwriters.
(k) To use its best efforts to list for quotation, subject to
notice of issuance, the ADSs on the Nasdaq National Market and to maintain
the listing of the ADSs on the Nasdaq National Market for a period of three
years after the date of this Agreement.
(l) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or any Option Closing Date, as the case may be,
and to satisfy all conditions precedent to the delivery of the ADSs.
(m) To designate CT Corporation Systems, New York, New York, a
Delaware corporation, as the Company's authorized agent for service of
process, upon which process may be served in any action, suit or proceeding
which may be instituted in any state or federal court in the State of New
York by the Underwriters or person controlling the Underwriters asserting a
claim for indemnification or contribution under
9
<PAGE>
or pursuant to Section 8 hereof, and the Company will accept the
jurisdiction of such court in such action, and waive, to the fullest extent
permitted by applicable law, any defense based upon lack of personal
jurisdiction or venue. A copy of any such process shall be sent or given to
the Company at the address for notices specified in Section 12 hereof.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) Each of the Registration Statement and the ADS Registration
Statement has become effective and no stop order suspending the
effectiveness of the Registration Statement or the ADS Registration
Statement is in effect, and no proceedings for such purpose are pending
before or, to the knowledge of the Company, threatened by the Commission.
(b) (i) Each document filed or to be filed pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in the Prospectus complied or will comply when so
filed in all material respects with the Exchange Act and the applicable
rules and regulations thereunder, (ii) each of the Registration Statement
and the ADS Registration Statement, when it became effective, did not
contain and, as amended, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (iii) each of the Registration Statement, the ADS Registration
Statement and the Prospectus comply as to form and, as amended or
supplemented, if applicable, will comply as to form in all material
respects with the Act and (iv) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement, the ADS Registration Statement or
the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances
10
<PAGE>
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in any preliminary prospectus based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a limited company under the laws of
England and Wales, with the corporate power and authority to carry on its
business and to own, lease and operate its properties as described in the
Prospectus and each is duly qualified as a foreign corporation authorized
to do business and is in good standing in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole.
(e) The authorized share capital of the Company conforms as to
legal matters in all material respects to the description thereof set forth
in the Registration Statement and the Prospectus, and all of the issued and
outstanding shares of capital stock of the Company (including the Shares to
be sold by the Selling Stockholders) have been duly authorized and validly
issued, and are fully-paid and not subject to calls for further funds and
are not subject to any pre-emptive or similar rights; and, except as
described in the Prospectus, there are no outstanding rights (including,
without limitation, preemptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital
stock or other equity interest in the Company or any of its subsidiaries,
or any contract, commitment, agreement, understanding or arrangement of any
kind relating to the issuance of any capital stock of the Company or any
such subsidiary, any such convertible or exchangeable securities or any
such rights, warrants or option.
(f) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been authorized and validly issued and are
fully paid and not subject to calls for further funds, and are owned by the
Company, directly or indirectly through one or more subsidiaries, free and
clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature, except for liens existing pursuant to the Company's
outstanding credit facility with Barclys Bank plc and [list any other debt
financing facilities].
(g) The Shares to be sold by the Company have been duly authorized,
and, when delivered to and paid for by the Underwriters in
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accordance with the terms of this Agreement, will be duly issued and fully
paid and not subject to calls for further funds and will conform in all
material respects to the descriptions thereof in the Prospectus, and the
issuance of such Shares is not subject to any preemptive or similar right
that has not been duly and validly waived.
(h) The Shares to be issued upon the exercise of the Options by
William E. Evans have been duly authorized and, when issued upon exercise
of and full payment of the applicable exercise price for the options and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) Upon the deposit of the Shares to be sold by the Company with
the Custodian pursuant to the Deposit Agreement against issuance of the
ADRs evidencing the ADSs, all right, title and interest in such Shares,
subject to the Deposit Agreement, will be transferred to the Depositary
free and clear of all liens, encumbrances or claims.
(j) Upon the sale and delivery of the Shares to be sold by the
Company and payment therefor against deposit thereof with the Custodian and
delivery of ADRs evidencing all such ADSs by the Depositary as contemplated
by this Agreement and in accordance with the terms of the Deposit
Agreement, good and valid title to the ADSs representing such Shares, free
and clear of all liens, encumbrances or claims, will be transferred to the
Underwriters and the ADSs to be delivered hereunder will be freely
transferable to or for the account of the several Underwriters; upon
delivery by the Depositary of the ADRs evidencing the ADSs against deposit
of the Shares in accordance with the Deposit Agreement, the ADSs will be
duly and validly issued; the ADSs and the ADRs conform as to legal matters
in all material respects to the description thereof set forth in the
Registration Statement and the Prospectus.
(k) Neither the Company nor any of its subsidiaries is in violation
of its respective Memorandum or Articles of Association or in default in
the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound.
(l) The execution, delivery and performance of this Agreement and
the Deposit Agreement by the Company, the compliance by the
12
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Company with all the provisions hereof and of the Deposit Agreement and the
consummation of the transactions contemplated hereby and thereby will not
(i) require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except orders
of the Commission declaring the Registration Statement and the ADS
Registration Statement effective under the Act and such as may be required
under the securities or Blue Sky laws of the various states), (ii) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the Memorandum or Articles of Association of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (iv)
result in the suspension, termination or revocation of any Authorization
(as defined below) of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Authorization.
(m) The information underlying the estimates of the net proved
reserves of natural gas of the Company as of June 30, 1999 and the present
value of the future net cash flows therefrom, which was supplied by the
Company to Gaffney, Cline & Associates, independent petroleum consultants,
for purposes of preparing the reserve reports and estimates of the Company
described in the Prospectus, was supplied in accordance with customary
industry practices; Gaffney, Cline & Associates were, as of the date of the
reserve report, and are, as of the date hereof, independent petroleum
consultants with respect to the Company; other than as set forth or
contemplated in the Prospectus, the Company is not aware of any facts or
circumstances that would result in a material adverse change in the
reserves or the present value of future net cash flows therefrom as
described in the Prospectus and as reflected in the reserve report.
(n) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened to which the Company or any of its
subsidiaries is or could be a party or to which any of their respective
property is or could be subject that are required to be described in the
Registration Statement, the ADS Registration Statement or the Prospectus
and are not so described; nor are there any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement, the ADS Registration Statement or the Prospectus
13
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or to be filed as exhibits to the Registration Statement that are not so
described or filed as required.
(o) Neither the Company nor any of its subsidiaries has violated
any foreign, federal, state or local law or regulation relating to the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), the protection of human health and
safety, or the U.S. Foreign Corrupt Practices Act, as amended (the "FCPA")
or the rules and regulations promulgated thereunder, except for such
violations which, singly or in the aggregate, would not have a material
adverse effect on the business, prospects, financial condition or results
of operation of the Company and its subsidiaries, taken as a whole.
(p) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other
approvals (each, an "AUTHORIZATION") of, and has made all filings with and
notices to, all governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to
make any such filing or notice would not, singly or in the aggregate, have
a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole. Each such Authorization is valid and in full force and effect and
each of the Company and its subsidiaries is in compliance with all the
terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows or, after
notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse
of time or both, would result in any other impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be
in compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(q) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or
14
<PAGE>
compliance with Environmental Laws or any Authorization, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(r) This Agreement has been duly authorized, executed and delivered
by the Company.
(s) The Deposit Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid and legally binding
agreement of the Company, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(t) Pannell Kerr Forster, chartered accountants, are independent
public accountants with respect to the Company and its subsidiaries as
required by the Act.
(u) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles in the U.K.
consistently applied and reconciled to the generally accepted accounting
principles in the United States; the supporting schedules, if any, included
in the Registration Statement present fairly in accordance with generally
accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment
or supplement thereto) are, in all material respects, accurately presented
and prepared.
(v) The Company is not and, after immediately giving effect to the
offering and sale of the ADSs and the application of the proceeds thereof
as described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.
15
<PAGE>
(w) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares and ADSs registered pursuant to the Registration
Statement.
(x) Since the respective dates as of which information is given in
the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement), (i) there has not occurred any
material adverse change or any development involving a prospective material
adverse change in the condition, financial or otherwise, or the results of
operations, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material
adverse change or any development involving a prospective material adverse
change in the capital stock or in the long-term debt of the Company or any
of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries has incurred any material liability or obligation, direct or
contingent, except for the contracts for differences dated as of August 10,
1999 and [list any other specific agreements].
(y) The Company has filed a supplemental application to list the
ADSs on the Nasdaq National Market.
(z) The form of certificate for the Shares conforms to the
requirements of U.K. law and the Memorandum and Articles of Association of
the Company and the ADSs and the ADRs conform to the requirements of the
Deposit Agreement and the Nasdaq National Market.
(aa) Other than as set forth or contemplated in the Prospectus, no
ad valorem stamp duty, stamp duty reserve tax or issue, documentary,
certification or other similar tax imposed by any government department or
other taxing authority of or in the U.K. is payable in connection with (A)
the deposit with the Depositary or the Custodian of the Shares to be sold
by the Company against the issuance of the ADRs evidencing ADSs in
accordance with the Deposit Agreement, (B) the issue of the ADRs evidencing
ADSs by the Depositary to or for the respective accounts of the
Underwriters, in accordance with the terms of this Agreement or (C) the
sale by the Underwriters of the ADSs to the initial purchasers thereof, in
accordance with the terms of this Agreement and in the manner contemplated
in the Prospectus.
(bb) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
16
<PAGE>
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(cc) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with UK GAAP and
to maintain asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific authorization and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(dd) Neither the Company nor any of its subsidiaries nor any person
acting on its or their behalf has taken, directly or indirectly, any action
which caused or resulted, or was designed or might reasonably be expected
to cause or result in, the stabilization or manipulation of the price of
the Ordinary Shares to facilitate the sale or resale of the Shares or ADSs.
Section 7. Representations and Warranties of the Selling Stockholders .
Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Except for the Shares to be sold by William E. Evans upon the
exercise of the Options which is expected to occur immediately prior to the
purchase of the Firm Shares by the Underwriters on the Closing Date, such
Selling Stockholder is the lawful owner of the Shares to be sold by such
Selling Stockholder pursuant to this Agreement and has, and on the Closing
Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities
and claims whatsoever; and, on the Closing Date, after giving effect to the
exercise of the Options, William E. Evans will be the lawful owner of the
Shares to be sold by him pursuant to this Agreement and will have good and
clear title to such Shares, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have been
duly authorized and, except for the Shares to be sold by William E. Evans
upon the exercise of the Options, are validly issued, fully paid and not
subject to calls for further funds; and, upon the exercise of the Options
on the Closing Date, the Shares to be sold by William E. Evans will be
validly issued, fully paid and not subject to calls for further funds.
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<PAGE>
(c) Such Selling Stockholder has, and on the Closing Date will
have, full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement signed by such Selling Stockholder and [The Bank of New York,] as
Custodian, relating to the deposit of the Shares to be sold by such Selling
Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such
Selling Stockholder appointing certain individuals as such Selling
Stockholder's attorneys-in-fact (the "ATTORNEYS") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY")
and to sell, assign, transfer and deliver the Shares to be sold by such
Selling Stockholder in the manner provided herein and therein.
(d) This Agreement has been duly authorized, executed and delivered
by or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms.
(f) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a
valid and binding instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Stockholder has, among other things, authorized the Attorneys, or
any one of them, to execute and deliver on such Selling Stockholder's
behalf this Agreement and any other document that they, or any one of them,
may deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold by
such Selling Stockholder pursuant to this Agreement.
(g) Upon the deposit of the Shares to be sold by each of the
Selling Shareholders with the Custodian pursuant to the Deposit Agreement
against issuance of the ADRs evidencing the ADSs, all right, title and
interest in such Shares, subject to the Deposit Agreement, will be
transferred to the Depositary free and clear of all liens, encumbrances or
claims.
(h) Upon the sale and delivery of the Shares to be sold by each of
the Selling Shareholders and payment therefor against deposit thereof with
the Custodian and delivery of ADRs evidencing all such ADSs by the
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<PAGE>
Depositary as contemplated by this Agreement and in accordance with the
terms of the Deposit Agreement, good and valid title to the ADSs
representing such Shares, free and clear of all liens, encumbrances or
claims, will be transferred to the Underwriters and the ADSs to be
delivered by each of the Selling Shareholders will be freely transferable
to or for the account of the several Underwriters.
(i) The execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of such Selling Stockholder by
or on behalf of such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the consummation
of the transactions contemplated hereby and thereby will not (i) require
any consent, approval, authorization or other order of, or qualification
with, any court or governmental body or agency (except such as may be
required under the securities or Blue Sky laws of the various states), (ii)
conflict with or constitute a breach of any of the terms or provisions of,
or a default under, the organizational documents of such Selling
Stockholder, if such Selling Stockholder is not an individual, or any
indenture, loan agreement, mortgage, lease or other agreement or instrument
to which such Selling Stockholder is a party or by which such Selling
Stockholder or any property of such Selling Stockholder is bound or (iii)
violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency
having jurisdiction over such Selling Stockholder or any property of such
Selling Stockholder.
(j) The information in the Registration Statement under the caption
"Principal and Selling Shareholders" which specifically relates to such
Selling Stockholder does not, and will not on the Closing Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(k) At any time during the period described in Section 5(d), if
there is any change in the information referred to in Section 7(j), such
Selling Stockholder will immediately notify you of such change.
(l) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Stockholder to the Underwriters as to the matters covered thereby.
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<PAGE>
(m) Other than as set forth or contemplated in the Prospectus, no
ad valorem stamp duty, stamp duty reserve tax or issue, documentary,
certification or other similar tax imposed by any government department or
other taxing authority of or in the U.K. is payable in connection with (A)
the deposit with the Depositary or the Custodian of the Shares to be sold
by each of the Selling Shareholders against the issuance of the ADRs
evidencing ADSs in accordance with the Deposit Agreement, (B) the issue of
the ADRs evidencing ADSs by the Depositary to or for the respective
accounts of the Underwriters, in accordance with the terms of this
Agreement or (C) the sale by the Underwriters of the ADSs to the initial
purchasers thereof, in accordance with the terms of this Agreement and in
the manner contemplated in the Prospectus.
Section 8. Indemnification. (a) The Sellers, jointly and severally, agree
to indemnify and hold harmless each Underwriter, its directors, its officers and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus (as then
amended or supplemented, provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages
and liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and such Prospectus was required by law to
be delivered at or prior to the written confirmation of sale to such person.
Notwithstanding the
20
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foregoing, the aggregate liability of any Selling Stockholder pursuant to this
Section 8(a) shall be limited to an amount equal to the total proceeds (before
deducting underwriting discounts and commissions and expenses) received by such
Selling Stockholder from the Underwriters for the sale of the ADSs sold by such
Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in
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connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for (i) the reasonable fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Underwriters, their officers and directors and all persons, if any, who control
any Underwriter within the meaning of either Section 15 of the Act or Section 20
of the Exchange Act, (ii) the fees and expenses of more than one separate firm
of attorneys (in addition to any local counsel) for the Company, its directors,
its officers who sign the Registration Statement and all persons, if any, who
control the Company within the meaning of either such Section and (iii) the fees
and expenses of more than one separate firm of attorneys (in addition to any
local counsel) for all Selling Stockholders and all persons, if any, who control
any Selling Stockholder within the meaning of either such Section, and all such
fees and expenses shall be reimbursed as they are incurred. In the case of any
such separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such control
persons of any Selling Stockholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying
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party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand from the offering of the ADSs or
(ii) if the allocation provided by clause 8(d)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8(d)(i) above but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the ADSs, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the ADSs underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to
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contribute pursuant to this Section 8(d) are several in proportion to the
respective number of ADSs purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
Section 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the ADSs under this Agreement are
subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not
later than 5:00 P.M., New York City time, on the date of this Agreement or
at such later date and time as you may approve; and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been commenced or
shall be pending before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Mr. Burt Keenan and Mr. John Sulley, in their
capacities as the Non-Executive Chairman and Chief Executive Officer of the
Company, confirming the matters set forth in Sections 6(u), 6(w), 9(a) and
9(b) and that the Company has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be
complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in
the Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or otherwise, or
the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there shall not have been any change
or any development involving a prospective change in the capital stock or
in the long-term debt of the Company or any of its subsidiaries and (iii)
neither the Company nor any of its subsidiaries shall have incurred any
liability or obligation, direct or contingent, the effect of which, in any
such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your
judgment, is material and adverse and, in your judgment, makes it
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impracticable to market the ADSs on the terms and in the manner
contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the
Closing Date and you shall have received on the Closing Date a certificate
dated the Closing Date from each Selling Stockholder to such effect and to
the effect that such Selling Stockholder has complied with all of the
agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by such Selling Stockholder on or
prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Masons, English counsel for the Company, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a public limited company, in
the case of the Company, and a limited company, in the case of its
subsidiaries, under the laws of England and Wales and has the power
under its Memorandum and Articles of Association to carry on its
business and to own, lease and operate its properties as described in
the Prospectus;
(ii all the issued shares of the Company (including the
shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid and not subject to
calls for further funds, or subject to any preemptive or similar
rights under the Company's Memorandum or Articles of Association or
English law, and no partner of Masons has any actual knowledge of any
agreement or contract entered into by the Company which may subject
the issued shares to any such preemptive or similar rights;
(iii the Shares to be sold by the Company have been duly
authorized, and, when delivered to and paid for by the Underwriters,
in accordance with the terms of this Agreement, will be duly issued
and fully paid and not subject to calls for further funds and will
conform to the description thereof in the Prospectus; and the issuance
and transfer of such Shares is not subject to any preemptive or
similar right that has not been duly and validly waived;
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(iv upon the deposit of the Shares to be sold by the
Company with the Custodian and the registration in the register of
members of the Company of the Shares underlying the ADSs in the name
of the Custodian pursuant to the Deposit Agreement, all right, title
and interest in such Shares, subject to the Deposit Agreement, will be
transferred to the Depositary free and clear of all liens,
encumbrances or claims;
(v upon the sale and delivery of the Shares (including the
Shares to be sold by the Selling Stockholders) and payment therefore
against deposit thereof with the Depositary, pursuant to the Deposit
Agreement, and delivery of the ADRs evidencing the ADSs as
contemplated by this Agreement and the Deposit Agreement, insofar as
English law is concerned, good and valid title to the ADSs
representing such shares, free and clear of all liens, encumbrances or
claims, will be transferred to the Underwriters;
(vi all of the issued shares of each of the Company's
subsidiaries have been duly authorized and validly issued and are
fully paid, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of a
security nature other than [liens pursuant to the Company's debt
financing facilities and] security in favor of Barclays Bank plc and
Barclays Commercial Services Ltd. granted by the Company over its
assets;
(vii this Agreement has been duly authorized, executed and
delivered by the Company;
(viii the Deposit Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and
binding agreement of the Company enforceable in accordance with its
terms except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights
generally, (ii) the availability of equitable remedies may be limited
by equitable principles of general applicability and (iii) claims may
be barred by relevant limitations relating to effluxion of time or may
be subject to defenses of set off or counterclaim;
(ix the authorized share capital of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
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(x the statements (A) in the Prospectus under the captions
"Description of Share Capital" and "Taxation" and identified in the
attached extracted sections from the Prospectus and (B) Item 14 of
Part II of the Registration Statement, in each case insofar as such
statements are of English law or the Memorandum and Articles of
Association of the Company, are accurate;
(xi no partner of Masons has actual knowledge of the
Company or any of its subsidiaries being in violation of its
respective Memorandum or Articles of Association, except that such
counsel expresses no opinion with respect to Article 107 of the
Articles of Association of the Company and, Masons has received a
certificate from the Company, attached hereto as Exhibit A, stating
that neither the Company nor any of its subsidiaries is in default in
the performance of any agreement that is filed as an exhibit to the
Registration Statement;
(xii the execution, delivery and performance of this
Agreement and the Deposit Agreement by the Company, the compliance by
the Company with all the provisions hereof and of the Deposit
Agreement and the consummation of the transactions contemplated hereby
and thereby will not (A) require any consent, approval, authorization
or other order of, or qualification with, any U.K. court or
governmental body or agency, (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the
Memorandum or Articles of Association of the Company or any of its
subsidiaries or any agreement that is filed as an exhibit to the
Registration Statement, or (C) violate or conflict with any applicable
law affecting the Company, any of its subsidiaries or their respective
property;
(xiii no partner of Masons has actual knowledge of any
legal or governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is or could be a party or to which
any of their respective property is or could be subject which, if
determined adversely to the Company or any such subsidiary could
individually or in the aggregate be expected to have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(xiv in order to ensure the legality, validity,
enforceability or admissibility in evidence of this Agreement and the
Deposit Agreement in England, it is not necessary that any document be
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filed, recorded or enrolled with any public authority, governmental
agency or governmental department of England;
(xv the Company has the power to submit and has taken all
necessary corporate action to submit, to the non-exclusive
jurisdiction of any United States Federal or state court in the County
of New York, State of New York and to appoint CT Corporation System as
the authorized agent of the Company, in each case with respect to
legal proceedings in the United States; and there is no provision of
English law which would render service of process invalid with respect
to legal proceedings in the United States;
(xvi the Company can sue and be sued under its own name in
England and Wales;
(xvii under the laws of England and under current practice
of courts in England, (A) the Underwriters would be permitted to
commence proceedings against the Company in English courts based on
actions under this Agreement, (B) the Depositary would be permitted to
commence proceedings against the Company in English courts based on
actions under the Deposit Agreement, (C) the owners of ADSs issued
under the Deposit Agreement would be permitted to commence proceedings
against the Company in English courts based on actions under the
Deposit Agreement and (D0 such courts in England would accept
jurisdiction over any such action or proceedings, subject to any
application being made by the Company to stay proceedings on the
grounds of forum non-conveniens;
(xviii under the laws of England, the choice of the law of
the State of New York as the law expressed to govern this Agreement
and the Deposit Agreement is valid and binding on the Company and the
courts of England will give effect to each such choice of law upon
proof of the relevant provisions of such foreign laws, subject,
however, to the qualification that foreign laws will not be applied to
the extent contrary to English public policy; any judgment obtained in
a New York court arising out of or based upon this Agreement that is
for a definite sum of money, is given on the merits and is recognized
as final and conclusive would be enforceable against the Company in
the courts of England, provided that: (A) the judgment was not
obtained by fraud, (B) recognition or enforcement of the judgment is
not contrary to English public policy or in breach of the rules of
natural justice,
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and is not contrary to the provisions of the Protection of Trading
Interests Act 1980, (C) the judgment does not cover matters which
relate to issues raised in proceedings in England or which have
previously been determined by an English court, and (D) the judgment
does not determine the proprietary or possessory rights in immovable
property situated outside the State of New York.
(xix except as may be described in the Prospectus under the
heading "Taxation", under the laws of England, cash dividends and
other distributions declared and payable in English sterling may be
converted into any other convertible currency in England and may be
transferred from England, and all such dividends made to holders of
the ADSs who are non-residents of England may be made without the
necessity of obtaining any consents, approvals, authorizations, orders
or clearances from or registering with any English governmental agency
or body or any stock exchange authority;
(xx other than as set forth or contemplated in the
Prospectus, no ad valorem stamp duty, stamp duty reserve tax or issue,
documentary, certification or other similar tax imposed by any
government department or other taxing authority of or in the U.K. is
payable in connection with (A) the deposit with the Depositary or the
Custodian of the Shares against the issuance of the ADRs evidencing
ADSs in accordance with the Deposit Agreement, (B) the issue of the
ADRs evidencing ADSs by the Depositary to or for the account of the
Underwriters in accordance with the terms of this Agreement or (C) the
sale by the Underwriters of the ADSs to the initial purchasers thereof
in accordance with the terms of this Agreement and in the manner
contemplated in the Prospectus.
In giving such opinion, such counsel will state that it has not
investigated the laws of any jurisdiction other than England and the European
Union as it applies in the U.K. as they stand and have been interpreted in
published case law of the courts in England and of the European Union as of the
date of such opinion, and that it does not express or imply an opinion on the
laws of any other jurisdiction.
(g The Underwriters shall have received on the Closing Date an
opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., U.S. counsel for the
Company, dated the Closing Date, substantially in the form attached hereto
as Exhibit A.
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(h You shall have received an opinion on the Closing Date, dated
the Closing Date, of Akin, Gump, Strauss, Hauer & Feld, L.L.P., U.S.
counsel for the Selling Stockholders to the effect set forth below:
(i this Agreement has been duly authorized, executed and
delivered by the Kristen Cook Keenan Trust, Lucille Baker Keenan Trust
and Michael Crawford Keenan Trust (collectively, the "TRUSTS"), and
duly executed and delivered by each of the other Selling Stockholders;
(ii each Selling Stockholder is the record holder of the
Shares to be sold by such Selling Stockholder pursuant to this
Agreement and has good and clear title to such Shares;
(iii each of the Trusts has full trust power and authority,
and each of the other Selling Stockholders has the legal right, to
enter into this Agreement and the Custody Agreement and the Power of
Attorney of each such Selling Stockholder and to sell, assign,
transfer and deliver the Shares to be sold by each such Selling
Stockholder in the manner provided herein and therein;
(iv the Custody Agreement of each of the Selling
Stockholders has been duly executed and delivered by such Selling
Stockholder (and duly authorized in the case of the Trusts) and is a
valid and binding agreement of each such Selling Stockholder,
enforceable in accordance with its terms;
(v the Power of Attorney of each of the Selling
Stockholders has been duly executed and delivered by such Selling
Stockholder (and duly authorized in the case of the Trusts) and is a
valid and binding instrument of each such Selling Stockholder,
enforceable in accordance with its terms, and, pursuant to such Power
of Attorney, each such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and deliver
on such Selling Stockholder's behalf this Agreement and any other
document they, or any one of them, may deem necessary or desirable in
connection with the transactions contemplated hereby and thereby and
to deliver the Shares to be sold by such Selling Stockholder pursuant
to this Agreement;
(vi upon the deposit of the Shares to be sold by the
Selling Stockholders (other than William E. Evans) with the Custodian
pursuant to the Deposit Agreement, all right, title and
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<PAGE>
interest in such Shares, subject to the Deposit Agreement, will be
transferred to the Depositary free and clear of all liens,
encumbrances or claims; and
(vii the execution, delivery and performance of this
Agreement and the Custody Agreement and Power of Attorney of each
Selling Stockholder by such Selling Stockholder, the compliance by
such Selling Stockholder with all the provisions hereof and thereof
and the consummation of the transactions contemplated hereby and
thereby will not (A) require any consent, approval, authorization or
other order of, or qualification with, any court or governmental body
or agency of the United States federal government or the government of
the State of New York (except such as may be required under the
securities or Blue Sky laws of the various states), (B) conflict with
or constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling
Stockholder, if such Selling Stockholder is not an individual, or any
indenture, loan agreement, mortgage, lease or other agreement or
instrument to which such Selling Stockholder is a party or by which
any property of such Selling Stockholder is bound or (C) violate or
conflict with any applicable law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency of the
United States federal government or the government of the State of New
York.
(viii Under the laws of the State of New York relating to
submission of personal jurisdiction, each Selling Stockholder who is
not a resident of the United States, pursuant to Section 11 of the
Agreement, has validly and irrevocably submitted to the personal
jurisdiction of any state or federal court in the County of New York,
the State of New York, in any action arising out of or based upon the
Agreement or the transactions contemplated thereby, has validly and
irrevocably waived any objection to the venue of a proceeding in any
such court and any immunity to jurisdiction of any such court, to
which it may be or become entitled, and has validly and irrevocably
appointed CT Corporation System as its authorized agent for the
purposes described in Section 11 of the Agreement.
With respect to Section 9(h) above, Akin, Gump, Strauss, Hauer & Feld,
L.L.P., may rely upon an opinion or opinions of counsel for any Selling
Shareholders; provided that (A) each such counsel for the Selling Shareholders
is satisfactory to your counsel, (B) a copy of each opinion so relied upon is
delivered to you and is in form and substance satisfactory to your counsel and
(C) Akin,
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Gump, Strauss, Hauer & Feld, L.L.P., shall state in their opinions that they are
justified in relying on each such other opinion.
(i You shall have received an opinion on the Closing Date, dated
the Closing Date, of Masons, English counsel for the Selling Stockholders
to the effect set forth below:
(i upon the deposit of the Shares to be sold by the William
E. Evans with the Custodian pursuant to the Deposit Agreement, all
right, title and interest in such Shares, subject to the Deposit
Agreement, will be transferred to the Depositary free and clear of all
liens, encumbrances or claims
(ii each Selling Stockholder who is a resident of the
United Kingdom has the power to submit and has taken all necessary
corporate action to submit, to the non-exclusive jurisdiction of any
United States Federal or state court in the County of New York, State
of New York and to appoint CT Corporation System as the authorized
agent of such Selling Stockholder, in each case with respect to legal
proceedings in the United States; and there is no provision of English
law which would render service of process invalid with respect to
legal proceedings in the United States;
(iii under the laws of England and under current practice
of courts in England, (A) the Underwriters would be permitted to
commence proceedings against each Selling Stockholder who is a
resident of the United Kingdom in English courts based on actions
under this Agreement, (B) the Depositary would be permitted to
commence proceedings against each such Selling Stockholder in English
courts based on actions under the Deposit Agreement, (C) the owners of
ADSs issued under the Deposit Agreement would be permitted to commence
proceedings against each such Selling Stockholder in English courts
based on actions under the Deposit Agreement and (D) such courts in
England would accept jurisdiction over any such action or proceedings,
subject to any application being made by any such Selling Stockholder
to stay proceedings on the grounds of forum non-conveniens;
(iv under the laws of England, the choice of the law of the
State of New York as the law expressed to govern this Agreement, the
Deposit Agreement, the Custody Agreement and the Power of Attorney of
each Selling Stockholder is valid and binding on each Selling
Stockholder and the courts of England will
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give effect to each such choice of law upon proof of the relevant
provisions of such foreign laws, subject, however, to the
qualification that foreign laws will not be applied to the extent
contrary to English public policy; any judgment obtained in a New York
court arising out of or based upon this Agreement that is for a
definite sum of money, is given on the merits and is recognized as
final and conclusive would be enforceable against each such Selling
Stockholder in the courts of England, provided that: (A) the judgment
was not obtained by fraud, (B) recognition or enforcement of the
judgment is not contrary to English public policy or in breach of the
rules of natural justice, and is not contrary to the provisions of the
Protection of Trading Interests Act 1980, (C) the judgment does not
cover matters which relate to issues raised in proceedings in England
or which have previously been determined by an English court, and (D)
the judgment does not determine the proprietary or possessory rights
in immovable property situated outside the State of New York.
(j You shall have received on the Closing Date an opinion, dated
the Closing Date, of Davis Polk & Wardwell, counsel for the Underwriters,
in such form as is reasonably satisfactory to you.
(k Emmet, Marvin & Martin, LLP, counsel for the Depositary and the
Custodian, shall have furnished to you their written opinion, dated such
Closing Date, in form and substance satisfactory to you, substantially to
the effect that:
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(i The Deposit Agreement has been duly authorized, executed
and delivered by the Depositary and, assuming due authorization,
execution and delivery by the Company and further assuming that the
Deposit Agreement is a valid and binding agreement of the Company,
constitutes a valid and legally binding obligation of the Depositary;
(ii The Custody Agreement of each Selling Stockholder has
been duly authorized, executed and delivered by the Custodian
34
<PAGE>
and, assuming due authorization, execution and delivery by each
Selling Stockholder and further assuming that each Custody Agreement
is a valid and binding agreement of the relevant Selling Stockholder,
constitutes a valid and legally binding obligation of the Custodian;
(iii Upon the issuance by the Depositary of ADRs evidencing
ADSs against the deposit of the Shares in accordance with the
provisions of the Deposit Agreement (assuming such Ordinary Shares
were, at the time of such deposit, (a) duly authorized and validly
issued, fully paid and non-assessable and (b) registered in compliance
with the Act), such ADRs will be duly and validly issued and will
entitle the holders thereof to the rights specified therein and in the
Deposit Agreement; and
(iv The ADS Registration Statement has been filed on Form
F-6 and has been declared effective under the Act and, to the best of
such counsel's knowledge, no stop order suspending the effectiveness
of the ADS Registration Statement or any part thereof has been issued
and no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and the ADS Registration
Statement, and each amendment as of their respective effective dates,
complied as to form and in all material respects with the requirements
of the Act and the rules and regulations thereunder.
(l You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Pannell Kerr
Forster, chartered public accountants, containing the information and
statements of the type ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus.
(m The Company shall have delivered to you the agreements
specified in Section 2 hereof which agreements shall be in full force and
effect on the Closing Date.
(n The ADSs shall have been duly listed for quotation, subject to
notice of issuance, on the Nasdaq National Market.
(o The Depositary shall have furnished or caused to be furnished
to you on the Closing Date evidence satisfactory to you evidencing the
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<PAGE>
deposit with it of the Ordinary Shares being so deposited against issuance
of ADRs evidencing the ADSs at the Closing Date, and the execution,
countersignature (if applicable), issuance and delivery of ADRs evidencing
such ADSs pursuant to the Deposit Agreement.
(p The Company and the Selling Stockholders shall not have failed
on or prior to the Closing Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with
by the Company or the Selling Stockholders on or prior to the Closing Date.
(q Any preemptive or other such rights granted to the Company's
shareholders shall be duly and validly waived by such shareholders in
accordance with all applicable law in order to complete the offering, sale
and delivery of the ADSs contemplated hereby.
(r You shall have received on the Closing Date, a certificate of
each Selling Stockholder who is not a U.S. Person (as defined under
applicable U.S. federal tax legislation) to the effect that such Selling
Stockholder is not a U.S. Person, which certificate may be in the form of a
properly completed and executed United States Treasury Department Form W-8
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
ADSs.
Section 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
ADSs on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options
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Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the
Nasdaq National Market, the London Stock Exchange or limitation on prices for
securities or other instruments on any such exchange or trading system, (iii)
the suspension of trading of any securities of the Company on any exchange or in
the over-the-counter market or trading system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in your opinion
materially and adversely affects, or will materially and adversely affect, the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, (v) the declaration of a banking
moratorium by either federal or New York State or English authorities or (vi)
the taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States or the U.K..
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
ADSs or Additional ADSs, as the case may be, which it has or they have agreed to
purchase hereunder on such date and the aggregate number of Firm ADSs or
Additional ADSs, as the case may be, which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the total number of Firm ADSs or Additional ADSs, as the case may be, to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm ADSs
set forth opposite its name in Schedule I bears to the total number of Firm ADSs
which all the non-defaulting Underwriters have agreed to purchase, or in such
other proportion as you may specify, to purchase the Firm ADSs or Additional
ADSs, as the case may be, which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date; provided that in no event
shall the number of Firm ADSs or Additional ADSs, as the case may be, which any
Underwriter has agreed to purchase pursuant to Section 2 hereof be increased
pursuant to this Section 10 by an amount in excess of one-ninth of such number
of Firm ADSs or Additional ADSs, as the case may be, without the written consent
of such Underwriter. If on the Closing Date any Underwriter or Underwriters
shall fail or refuse to purchase Firm ADSs and the aggregate number of Firm ADSs
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm ADSs to be purchased by all Underwriters and
arrangements satisfactory to you, the Company and the Selling Stockholders for
purchase of such Firm ADSs are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter, the Company or the Selling Stockholders. In any such case which
does not result in termination of this Agreement, either you or the Sellers
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus
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<PAGE>
or any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional ADSs and the aggregate number of Additional ADSs with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional ADSs to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional ADSs or (ii) purchase not less than the number of Additional
ADSs that such non-defaulting Underwriters would have been obligated to purchase
on such date in the absence of such default. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any default of any such Underwriter under this Agreement.
Section 11. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Stockholder to the Underwriters.
(b To do and perform all things to be done and performed by such
Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold
by such Selling Stockholder pursuant to this Agreement.
(c Each Selling Stockholder hereby designates CT Corporation
Systems, New York, New York, a Delaware corporation, as its authorized
agent, upon which process may be served in any action which may be
instituted in any state or federal court in the State of New York by any
Underwriter, any director or officer of any Underwriter or any person
controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to Section 8 hereof, and each Selling
Stockholder will accept the jurisdiction of such court in such action, and
waives, to the fullest extent permitted by applicable law, any defense
based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Stockholder, at the address
for notices specified in Section 12 hereof.
Section 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
Independent Energy Holdings plc, Dominion Court, 43 Station Road, Solihull, West
Midlands B91 3RT, (ii) if to the Selling Stockholders, to [NAME OF ATTORNEY-IN-
FACT] c/o [ADDRESS OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to
you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention:
38
<PAGE>
Syndicate Department, or in any case to such other address as the person to be
notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the ADS, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the ADS and payment for them hereunder and (iii)
termination of this Agreement.
If for any reason the ADSs are not delivered by or on behalf of any Seller
as provided herein (other than as a result of any termination of this Agreement
pursuant to Section 10), the Sellers agree, jointly and severally, to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(j) hereof. The Sellers also agree, jointly and
severally, to reimburse the several Underwriters, their directors and officers
and any persons controlling any of the Underwriters for any and all fees and
expenses (including, without limitation, the fees disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
Each party to this Agreement hereby irrevocably agrees that any legal suit,
action or proceeding brought by any Underwriter or by any person controlling any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended, arising out of or
based upon this Agreement or the transactions contemplated hereby may be
instituted in any state or federal court in the County of New York, the State of
New York, United States of America, and irrevocably waives, to the fullest
extent
39
<PAGE>
permitted by law, any objection which such party may now or hereafter have to
the laying of the venue in such courts of any such suit, action or proceeding,
and irrevocably submits to the non-exclusive jurisdiction of any such court in
any such suit, action or proceeding. Each party waives any immunity to
jurisdiction to which such party may otherwise be entitled or become entitled
(including immunity to pre-judgment attachment and execution) in any legal suit,
action or proceeding against such party arising out of this Agreement or the
transactions contemplated hereby which is instituted in any state or federal
court in the County of New York, the State of New York, United States of
America, or in any foreign court. To the extent permitted by law, each party
hereby waives any objection to the enforcement by any competent foreign court of
any judgment validly obtained in any such proceeding. Each party hereby
designates and appoints CT Corporation System, 1633 Broadway, New York, NY 10001
as the authorized agent of such party (the "AUTHORIZED AGENT") to accept and
acknowledge on behalf of such party service of any and all process which may be
served in any such suit, action or proceeding in any such court. Such
appointments shall be irrevocable subject to the appointment of a successor
agent in the United States on terms substantially similar to those contained in
this Section 11 as reasonably satisfactory to DLJ. Each party agrees that
service of process upon the Authorized Agent of such party at such address (or
such other address in the United States as the parties may designate by written
notice to the Representatives) and written notice of such service to such party
shall be deemed in every respect effective service of process upon such party.
Each party represents and warrants that the Authorized Agent of such party has
agreed to act as said agent for service of process and agrees to take all action
that may be necessary to continue such appointment (or the appointment of a
successor agent in the United States). Notwithstanding the foregoing, any action
arising out of or based on this Agreement or the transactions contemplated
hereby may be instituted by any Underwriter or by any person controlling any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act in any competent foreign court.
Each Underwriter has undertaken to the Company that it (i) has not offered
or sold and prior to the date six months after their date of issue will not
offer or sell any ADSs to persons in the U.K. except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which do not constitute an offer to the public in the
U.K. within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied with and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the ADSs offered hereby in, from or otherwise involving the U.K.; and (iii) it
has only issued or passed on and will only issue or pass on in the U.K. any
document received by it in connection with the offering to a person who is of a
kind described in Article 11(3) of the
40
<PAGE>
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom the document may otherwise lawfully be issued or passed
on.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
41
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
INDEPENDENT ENERGY HOLDINGS plc
By:
----------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE II HERETO, ACTING
SEVERALLY
By:
-----------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JOHNSON RICE & COMPANY L.L.C.
PRUDENTIAL SECURITIES INCORPORATED
Acting severally on behalf of themselves and the
several Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------
Name:
Title:
42
<PAGE>
SCHEDULE I
UNDERWRITERS NUMBER OF FIRM SHARES
TO BE PURCHASED
Donaldson, Lufkin & Jenrette Securities
Corporation
Prudential Securities Incorporated
Johnson Rice & Company L.L.C.
Total
43
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
NAME NUMBER OF FIRM
SHARES BEING SOLD
Burt H. Keenan 1,200,000
William E. Evans 250,000
Jerry W. Jarrell 125,000
Kristen Cook Keenan Trust 80,000
Lucille Baker Keenan Trust 80,000
Michael Crawford Keenan Trust 80,000
Total 1,815,000
44
<PAGE>
EXHIBIT A
FORM OF AKIN GUMP OPINION
1. Assuming the Agreement has been duly authorized, executed and delivered
by the Company under the laws of all applicable jurisdictions (except that no
assumption is made as to the federal laws of the United States or the laws of
the State of New York), this Agreement has been duly executed and delivered by
the Company.
2. Assuming the Deposit Agreement has been duly authorized, executed and
delivered by the Company under the laws of all applicable jurisdictions (except
that no such assumption is made as to the federal laws of the United States or
the laws of the State of New York), the Deposit Agreement has been duly executed
and delivered by the Company and, assuming that the Depositary and the Company
have taken all action required by them under applicable law to make the Deposit
Agreement a valid and binding obligation (except that no such assumption is made
as to the Company regarding the federal laws of the United States or the laws of
the State of New York), the Deposit Agreement constitutes a valid and binding
agreement of the Company enforceable against the Company in according with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and to general equity principles, including, without limitation, principles of
commercial reasonableness, good faith and fair dealing (whether enforcement is
sought in law or equity) and the discretion of the court before which any
proceedings therefor may be brought; provided, however, we do not express any
opinion with respect to any provisions contained in the Deposit Agreement
providing for indemnification against liabilities under the United States
federal or state securities or Blue Sky laws contained therein or public policy
relating thereto.
3. The issue and sale of the Shares and ADSs and the performance by the
Company of its other obligations under the Agreement and the Deposit Agreement,
will not conflict with or result in a breach of any of the terms or provisions
of any agreement filed as an exhibit to the Registration Statement (assuming, in
the case of any agreement that is not governed by the laws of a United States
jurisdiction that such agreement were so governed), nor will any such action
result in any violation of any applicable United States federal or New York or
Texas state law or, to our knowledge, any statute or any order, rule or
regulation of any United States federal or New York or Texas state court or
governmental agency or body having jurisdiction over the Company, its
<PAGE>
Page 2
subsidiaries or any of their respective properties; provided, however, we do not
express any opinion with respect to the Securities Act or the Exchange Act
(which are addressed in B.4 below) or any United States state securities or Blue
Sky laws.
4. No consent, approval, authorization, order, registration or
qualification of or with any New York state or United States federal
governmental agency or body is required for the issue and sale of the Shares and
ADSs by the Company or the performance by the Company of its other obligations
under the Agreement and the Deposit Agreement, except such consents, approvals,
authorizations, registrations or qualifications as have been obtained under the
Securities Act and the Exchange Act and except as may be required under United
States state securities or Blue Sky laws (as to which we express no opinion).
5. Upon delivery by the Depositary, in accordance with the Deposit
Agreement, of the American Depositary Receipts ("ADRs") evidencing the ADSs
against the deposit of duly authorized, validly issued, fully paid and non-
assessable Shares, the preemptive rights, if any, with respect to which have
been validly waived or exercised, the ADSs will be duly and validly issued and
the persons in whose names such ADRs are registered will be entitled to the
rights specified therein and in the Deposit Agreement, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general equity
principles, including, without limitation, principles of commercial
reasonableness, good faith and fair dealing (whether enforcement is sought in
law or equity), and to the discretion of the court before which any proceedings
therefor may be brought.
6. Under the laws of the State of New York relating to submission of
personal jurisdiction, the Company, pursuant to Section 5 of the Agreement, has
validly and irrevocably submitted to the personal jurisdiction of any state or
federal court in the County of New York, the State of New York, in any action
arising out of or based upon the Agreement or the transactions contemplated
thereby, has validly and irrevocably waived any objection to the venue of a
proceeding in any such court and any immunity to jurisdiction of any such court,
to which it may be or become entitled, and has validly and irrevocably appointed
CT Corporation System as its authorized agent for the purposes described in
Section 5 of the Agreement.
2
<PAGE>
Page 3
7. The statements in the Prospectus under the captions "Description of
American Depositary Receipts," insofar as such statements summarize the
agreements referred to therein, fairly summarize agreements in all material
respects.
8. The statements in Item 15 of Part II of the Registration Statement,
insofar as such statements summarize the Federal laws of the United States,
fairly summarize such laws.
9. The statements in the Prospectus under the caption "Taxation," insofar
as such statements pertain to United States federal income tax matters currently
applicable to U.S. Holders (as such term is defined in the Prospectus) of ADRs
evidencing ADSs or Shares, accurately summarize the principal tax consequences
referred to therein.
10. To our knowledge, there are no (i) legal or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries is a party
or to which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described or (ii) contracts or other documents that
are required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are not described or
filed as required.
11. The Company is not, and immediately after giving effect to the
offering and sale of ADSs and the use of proceeds thereof as described in the
Prospectus will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
12. (a) Each document filed pursuant to the Exchange Act and incorporated
by reference in the Prospectus and the Registration Statement (other than in
each instance, the financial statements and notes thereto and the other
financial information and oil and gas reserve and other geological data
contained therein, if any, as to which we express no opinion) complied when so
filed as to form in all material respects with the Exchange Act and applicable
rules and regulations thereunder.
3
<PAGE>
Page 4
(b) The Registration Statement and the ADS Registration Statement,
each as of its effective date, and the Prospectus, as of its date (other than,
in each instance, the financial statements and notes thereto and the other
financial information and oil and gas reserve and other geological data
contained therein as to which we express no opinion) comply as to form in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
13. To the best of our knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company or to require the Company to include
such securities with the Ordinary Shares and the ADSs registered pursuant to the
Registration Statement.
4
<PAGE>
EXHIBIT 5
[Letterhead of Masons Solicitors]
8 September 1999
Independent Energy Holdings PLC
Radcliffe House
Blenheim Court
Solihull, West Midlands B91 2AA
Dear Sirs:
We have acted as solicitors in England to Independent Energy Holdings PLC (the
"Company") and the selling shareholders and have been requested by such parties
to give this opinion in connection with the Registration Statement on Form F-3
filed with the United States Securities and Exchange Commission by the Company
for the purposes of registering under the United States Securities Act of 1933
(the "Securities Act") Ordinary Shares of 1p each. For the purposes of this
opinion, words and phrases used but not defined herein shall have the same
meaning as those contained in the Prospectus. We are of the opinion that: (a)
the Ordinary Shares to be offered and sold by the Company, once allotted and
issued by the Company and fully paid for by the Underwriters, and the Ordinary
Shares to be offered and sold by the selling shareholders, once issued and fully
paid by the selling shareholders, if not previously issued, will be duly
authorized and validly issued and fully paid and will not be subject to calls
for further funds; (b) the statement in the section of the Prospectus headed
"Service of Process and Enforcement of Liabilities" in relation to advice
provided by this firm as to the enforceability in the United Kingdom is correct;
(c) the statements in the Prospectus under the heading "Taxation" (in respect
only of UK taxation), in each case so far as such statements constitute
summaries of the legal matters, documents or proceedings referred to therein,
fairly represent the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to therein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the captions
"Enforcement of Liabilities" and "Legal Matters" contained in the Prospectus.
Yours truly,
Masons Solicitors
<PAGE>
EXHIBIT 8.2
[Letterhead of Akin, Gump, Strauss, Hauer & Feld, L.L.P.]
September 8, 1999
Independent Energy Holdings plc
Radcliffe House
Blenheim Court
Solihull, West Midlands B91 2AA
United Kingdom
Dear Sirs:
We are acting as United States counsel to Independent Energy Holdings PLC (the
"Company") in connection with the Registration Statement on Form F-3 (the
"Registration Statement") filed with the United States Securities and Exchange
Commission by Independent Energy for the purpose of registering under the United
States Securities Act of 1933, as amended (the "Act"), the offer and sale of the
Company's ordinary shares, nominal value 1p per share (the "Ordinary Shares") of
the Company, in connection with an offering by the Company and certain selling
shareholders of American Depositary Shares representing Ordinary Shares or
Ordinary Shares. We hereby confirm, in all material respects, our advice with
respect to United States federal tax laws contained in the Prospectus included
in the Registration Statement under the caption "Taxation." We hereby consent to
the use of our name under the caption "Taxation" and "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
letter as an exhibit to the Registration Statement. In giving such consent we do
not admit that we come within the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 10.15
INDEPENDENT ENERGY UK LIMITED (1)
-and-
ISO (U.K.) LIMITED AND
ARCHEAN ENERGY (U.K.) LIMITED (2)
-AND-
ALTWOOD PETROLEUM LIMITED (3)
___________________________________
FARMOUT AGREEMENT RELATING TO THE
UK LANDWARD EXPLORATION LICENCES
OF INDEPENDENT ENERGY UK LIMITED
___________________________________
<PAGE>
LICENCE FARMOUT AGREEMENT
-------------------------
THIS FARMOUT AGREEMENT is made the 11th day of January 1999
BETWEEN
(1) INDEPENDENT ENERGY UK LIMITED whose registered office is at 30 Aylesbury
Street, London EC1R 0ER (hereinafter called the "Farmor"); and
(2) ISO (U.K.) LIMITED whose registered office is at 4 & 5 North Hill,
Colchester, Essex CO1 1EB ("ISO"); and
ARCHEAN ENERGY (U.K.) LIMITED whose registered office is at 4 & 5 North
Hill, Colchester, Essex CO1 1EB ("Archean")
(the parties of the second part being hereinafter referred to as the
"Farmee"); and
(3) ALTWOOD PETROLEUM LIMITED whose registered office is at Chenies House,
Altwood Close, Maidenhead, Berkshire, SL6 4PP, UK ("Altwood").
The Farmor and the Farmee being hereinafter collectively referred to as the
"Parties".
WHEREAS:-
(A) The Farmor and Altwood are together the beneficial owners of the entire
undivided interest in the Licence Areas.
(B) The Farmor holds a ninety six percent (96%) interest in the Farmin Areas
and Option Areas contained within the Licence Areas.
(C) The Farmee has been assigned the rights and liabilities of the Discovery
International Group (DIG) in the Letter Agreement by the Assignment
Agreement included as Schedule 11 hereto.
(D) The Farmee wishes to earn an interest in the Farmin Areas and an option
over the Option Areas by performing the Farmin Works as provided herein.
(E) By a Deed of Cross Indemnity in the form attached hereto as Schedule 9 of
even date with the Assignment of Percentage Interests, the Parties have
given certain undertakings with respect to the fulfilment of their
obligations as Licensees in so far as such obligations affect the Farmin
Areas.
<PAGE>
(F) The Secretary's confirmation that he has no objection in principle to the
arrangements contemplated by this Agreement has been obtained in the letter
of 9th December 1998 from the Department of Trade and Industry.
NOW THEREFORE, in consideration of the mutual covenants and undertakings herein
expressed the Parties agree as follows:-
1. DEFINITIONS AND INTERPRETATIONS
1.1 Definitions
In this Agreement including the recitals, the following terms and
expressions shall have the following respective meanings:
"Abandon" - or any derivative of the word "Abandon" means:
(a) properly plugging and abandoning a Well in
compliance with all applicable Regulations;
(b) site restoration of the Wellsite to the
satisfaction of the terms of the planning
consent, and of any governmental body having
jurisdiction with respect thereto, and;
(c) the furnishing by the Farmee to the Farmor of
satisfactory evidence of compliance with the
foregoing requirements;
"Abandonment Costs" - means all costs and expenses incurred in or
incidental to the Abandonment of a Well and the
restoration of a Wellsite;
"Affiliate" - means, with respect to a Party, a person,
corporation, company or other legal entity or
partnership which controls, is controlled by or is
under common control with that Party and, for the
purposes of this definition, "control" means the
direct or indirect ownership of, or other ability
to direct, more than 50% of the voting rights in a
corporation, company or other legal entity or
partnership;
<PAGE>
"Area" - means both a Farmin Area and an Option Area;
"Business Day" - means any day on which banks in London, England are
open to transact commercial business generally,
excluding any Saturday, Sunday or bank holidays in
England and Wales;
"Buy-in Agreement" - means the "Licence Buy-in Agreement" under which
the Farmor has arranged to sell a percentage
interest in the Farmin Areas and the right to buy
an interest in the Option Areas to the Buy-in
Party;
"Buy-in Party" - means Vulcan Energy Limited;
"Capping and - means to install production casing or liner
Suspension" and to shut-in the Well and suspend
operations in accordance with good oilfield
practice, and to secure the wellhead in a lockable
cage, and a security fenced area with lockable
gate, and the site enclosed by stock proof fencing;
"Capping Costs" - means all costs and expenses incurred in or
incidental to the Capping and Suspending of a Well
and Wellsite;
"Complete" - or any derivative of the word "Complete" means the
acquisition and installation of all tubing, all
subsurface equipment necessary to conduct
production testing and production, including pump
and sufficient tankage, if initially required, to
production test the Well, and all other equipment,
all procedures and all material necessary for the
permanent preparation of a Well for the taking of
production up to and including the outlet valve on
the wellhead;
"Completion Costs" - means all costs and expenses incurred in or
incidental to the Completion of a Well;
"Condensate" - means a mixture of mainly pentanes and heavier
hydrocarbons that may be contaminated with sulphur
compounds, that is recovered or is recoverable at a
Well from an underground reservoir and that may be
gaseous in its virgin reservoir state but is
<PAGE>
liquid at the conditions under which its volume is
measured or estimated;
"Contract Depth" - means the lesser of:
a) the depth sufficient to evaluate to the
reasonable satisfaction of Farmor all zones
comprised in each of the respective Farmin
Areas, down to and including the geological
formations set forth in Schedule 3 hereto, and;
- b) the depths given in Schedule 3 hereto.
"Contract Operator" - means Archean;
"Crude Oil" - means a mixture mainly of pentanes and heavier
hydrocarbons that may be contaminated with sulphur
compounds, that is recovered or is recoverable from
a Well and that is liquid at the conditions under
which its volume is measured or estimated and
includes all other hydrocarbon mixtures so
recovered or recoverable except raw gas and
Condensate;
"Drill" - or any derivative of the word "Drill" means the
drilling, coring, logging, wireline and drill stem
testing of a well to explore for and produce
Petroleum;
"Drilling Costs" - means all costs and expenses incurred in or
incidental to the Drilling of a Well and, in the
case of a Well that is not Capped for the
subsequent taking of production, includes the
Abandonment Cost of the Well;
"Effective Date" - means the date hereof;
"Equip" - or any derivative of the word "Equip" means the
installation of equipment required to produce
Petroleum from a Well including, without
limitation, a pump or other artificial lift
equipment, the installation of flowlines on the
Wellsite and production tankage serving such Well,
where necessary a heater, dehydrator, separator,
compression facilities or other facility for the
initial treatment of the Petroleum produced from
such Well, in order to treat or prepare such
production for
<PAGE>
transport to market, but excluding costs incurred
beyond the point of entry into a gathering system,
plant or other common facility;
"Equipping Costs" - means all costs and expenses incurred in or
incidental to the Equipping of a Well;
"Farmin Account" - is the joint bank account holding monies to be
used for the conduct of the Farmin Works;
"Farmin Areas" - are the seven (7) carve-out areas from the Farmin
Licences, Farmin Percentage interests in which are
to be earned by the Farmee by drilling the Farmin
Wells. Such areas are detailed by the National Grid
References in Schedule 2;
"Farmin Licences" - means the UK Landward Petroleum Licences containing
the Farmin Areas, as set forth in Schedule 1
hereto;
"Farmin Percentage" - has the meaning attributed to it in Clause 4.1;
"Farmin Procedure" - means the procedure set forth in Schedule 12
hereto;
"Farmin Period" - is the period of time from the Effective Date until
the fulfilment of the Farmin Works in accordance
with this Agreement;
"Farmin Well" - is any one of the seven (7) wells to be drilled by
the Farmee upon the Farmin Areas and constituting
part of the Farmin Works, as applicable;
"Farmin Works" - means all work performed by the Farmee in the
Drilling to Contract Depth, Capping and Suspension
or Abandoning, as the case may be, of a Farmin Well
on each of the seven Farmin Areas, including
shooting and the processing of at least 150
kilometres of 2D seismic data over the Option
Areas;
"Farmin Works - are the costs, and expenses of executing the Farmin
Costs" Works. Such costs to be inclusive of but not
restricted to the costs of seismic permitting,
access, damages, the
<PAGE>
seismic survey contract, the drilling site
construction and access, the drilling contractor,
waste disposal, drilling supplies and fuel, all
well evaluation surveys, wireline and drill stem
testing, casing, cementing, Capping and Suspension
or Abandonment;
"Finishing Date" - is the date upon which any one of the Farmin Wells
has been Capped and Suspended or Abandoned in
accordance with this Agreement and to the
satisfaction of the HSE/DTI;
"GAAP" - means generally accepted accounting principles for
the United Kingdom;
"Gross Proceeds" - means the total amount payable by the purchaser of
Petroleum at the Gross Sales Price;
"Gross Revenue" - means the difference between Gross Proceeds and the
transportation costs incurred or allocated in
connection with the applicable Petroleum produced
from a Well from the well site to the point of
sale, treatment costs to render Crude Oil and
Condensate saleable and, if sales of Crude Oil and
Condensate are not made at the outlet of the on-
site tankage for the particular Well, the
transportation of such Crude Oil and Condensate to
the point of sale, and for Natural Gas, the actual
costs payable to third parties to gather, compress,
treat, process and transport such Natural Gas up to
the point of sale or, if such gathering,
compressing, treatment, processing or
transportation facilities owned by the Farmee are
used to gather, compress, treat, process or
transport such Natural Gas, a reasonable fee,
comprised of both operating and return on capital
components, for the use of such facilities;
"Gross Revenue - has the meaning attributed to it in Clause 8.4 and
Interest" as set forth in Clause 7.1;
"Gross Sales Price" - is the price obtained for the sale of Petroleum
produced from the Areas at the point of sale, to a
non-Affiliated Company, or else as an arms length
transaction at a price
<PAGE>
which shall never be less than the Market Price, as
agreed by the Joint Venture and Gross Revenue
Interest Parties or subject to determination by a
third party expert acceptable to the Farmor and the
Farmee, to be ascertained and funded in accordance
with the same procedure provided for in Clause 4.1;
"HSE/DTI" - are the two governmental organisations responsible
for granting operational consents and having
control over petroleum reservoir matters (the
Health and Safety Executive's Offshore Safety
Division, and the Department of Trade & Industry's
Oil and Gas Division);
"Joint Operating - is an agreement controlling the conduct of
Agreement" the Joint Venture and joint operations on the
(JOA) Farmin Areas, the principles of which are given
in Schedule 7 and the Accounting Procedure in
Schedule 8 hereto;
"Joint Venture" - means the joint venture between the Parties
pursuant to the Joint Operating Agreement;
"Joint Venture - a bank account holding all monies of the Joint
Account" Venture;
"Letter Agreement" - is the letter of the 27th August 1998, from the
Farmor to DIG, signed by Mr W E Evans for the
Farmor, and countersigned by Mr John Gunton for the
Farmee, and included as Schedule 10 hereto;
"LIBOR" - means the rate announced from time to time as the
London Inter-Bank Offering Rate by the main branch
of the Licence Operator's principal bank in London,
England;
"Licence" - means either or both a Farmin Licence or Option
Licence as the context requires;
"Licence Areas" - the areas subject to the UK Landward Petroleum
licences held by the Farmor and Altwood at the
effective date of this Agreement, as described in
Schedule 1 hereto;
<PAGE>
"Licence Operator" - is the licensee approved by the Department of Trade
& Industry (DTI) to operate the Licence Areas,
subject to change under the rules of the Joint
Operating Agreement and with the approval of the
DTI;
"Market Price" - means the price at which Petroleum is sold or
deemed to have been sold which is not unreasonable,
having regard to all market conditions applicable
to similar kinds, quantities and quality of
Petroleum in arm's length transactions at the time
of the sale or deemed sale of such Petroleum;
"Natural Gas" - means Petroleum other than Crude Oil and
Condensate;
"Operate" - or any derivative of the word "Operate" means to
carry out functions and duties of the operator
pursuant to the Joint Operating Agreement, together
with duties imposed by this Agreement;
"Operating Costs" - means all direct and indirect costs and expenses
incurred in or incidental to Operating a Well,
exclusive of Drilling Costs, Completion Costs and
Equipping Costs pursuant to this Agreement and the
Joint Operating Agreement;
"Option Areas" - mean the Areas covered by the option rights of the
Farmee and Buy-in Party, such Areas being detailed
in Schedule 4 hereto, and Clause 11.1(b) hereof;
"Option Licences" - means the UK Landward Petroleum Licences of the
Farmor containing the Option Areas, as set forth in
Schedule 4, and Clause 11.1(b) hereof;
"Option Well" - means a Well Drilled by the Farmee on an Option
Area;
"Option Work - means all work performed by the Farmee in the
Programme" Drilling, Capping and Suspension or Abandoning,
as the case may be, on all Option Wells on any of
the Option Areas;
"Option Work - means the costs and expenses of executing
Programme Costs" the Option Work Programme;
<PAGE>
"Party" - means a Party to this Agreement and "Parties"
means all of them;
"Paying Interest" - means, for each operation, a Party's proportionate
share (expressed as a percentage) of all the costs
and expenses incurred or payable in respect to the
applicable operation as set forth in Clause 7.1;
"Payout" - means:
a) in respect to the Farmin Works, that the
Farmee has received out of its share of the
Gross Revenue from the Farmin Wells all Farmin
Works Costs, and Operating Costs incurred in
respect of all Farmin Wells up to that time,
and;
b) in respect to the Option Work Programme, that
the Farmee has received out of its share of
the Gross Revenue from the Option Wells, the
Option Work Programme Costs and Operating
Costs incurred in respect to such Option Work
Programme up to that time;
"Payout Date" - the date of the full Payout from the Gross Revenue
from one or more Petroleum discoveries made within
the Farmin Areas, or the Option Areas, as the case
may be.
"Permitted - means:
Encumbrances"
a) liens for taxes, assessments or governmental
charges which are not due or delinquent;
b) liens incurred or created in the ordinary course
of business as security in favour of any other
person who is conducting the development or
operation of the property to which such liens
relate for the party's share of the costs and
expenses of such development or operation which
are not due or delinquent;
<PAGE>
c) mechanics', builders' or materialmen's liens in
respect of services rendered or goods supplied
for which payment is not due;
d) easements, rights of way, servitude's or other
similar rights in land (including, without
limitation, rights of way and servitude's for
railways, sewers; drains; gas and oil pipelines;
gas and water mains; and electric light, power,
telephone, telegraph and cable television
conduits, poles, wires and cables);
e) the right reserved to or vested in any
municipality or governmental or other public
authority by terms of any lease, licence,
franchise, grant or permit or by any statutory
provision, to terminate any such lease, licence,
franchise, grant or permit or to require annual
or other periodic payments as a condition of the
continuance thereof;
f) governmental requirements of general
application, including, without limitation,
those respecting production rates or other
operational matters;
g) the terms and conditions of the Licences;
"Petroleum" - shall have the meaning set out in the 1934
Petroleum (Production) Act;
"Regulations" - means all statutes, laws, rules, orders,
regulations or directives in effect from time to
time and made by any governmental authority having
jurisdiction over the Parties, the Licenses, the
surface rights, and the operations to be conducted
thereon;
"Replacement Farmin - has the meaning attributed to it in Clause 10;
Well"
"Secretary" - means the Secretary of State for Trade and Industry
of the United Kingdom;
"Spud" - means that a drilling rig of adequate capacity to
drill the Farmin Well or Option
<PAGE>
Well to Contract Depth, as the case may be, is
rigged upon the well site and a drilling bit has
penetrated the surface;
"Substitute Farmin - has the meaning attributed to it in Clause 2.2;
Well"
"Well" - means the well or wells Drilled or to be Drilled by
Farmee pursuant to the provisions of this
Agreement; and ;
"Wilful Default" - has the meaning given in Clause xiv(b) of Schedule
7; and
"Working Interest" - means a Party's interest, expressed as a
percentage, in the Licences, Areas and the
Petroleum produced from the applicable Wells.
1.2 Interpretations
a) References to documents in the form of those contained in Schedules 5 and 6
shall be construed as references to such documents subject to such
amendments as may be requested by the Secretary and as are approved by the
Parties, such approval not to be unreasonably withheld.
b) Except as the context otherwise requires, references in this Agreement to
Clauses, sub-Clauses, Recitals or Schedules are to clauses, sub-clauses,
recitals or the Schedules to this Agreement.
c) The headings in this Agreement are for convenience only and shall not affect
the construction, interpretation or validity of this Agreement.
d) Reference to the singular includes a reference to the plural and vice versa.
1.3 The following Schedules are attached to and made part of this Agreement:
Schedule 1 UK Landward Area Licence Interests of Independent Energy UK
Limited
Schedule 2 Carve-out Areas for the Farmin Areas
Schedule 3 Farmin Wells - The Well Depths and Bottom Hole Geological
Formations
<PAGE>
Schedule 4 Carve-out Areas for the Exploration Leads of the Seismic
Option Areas
Schedule 5 Deed of Assignment of the Licence
Schedule 6 Assignment of Percentage Interest
Schedule 7 Principles of Joint Operating Agreement
Schedule 8 Accounting Procedure
Schedule 9 Deed of Cross Indemnity
Schedule 10 Letter Agreement of 27th August 1998
Schedule 11 Assignment Agreement
(DIG to Archean/ISO)
Schedule 12 Farmin Procedure
Schedule 13 Farmor's Existing and Planned Production Projects
1.4 Precedence
(a) If a term or provision contained in the Body of this Agreement conflicts
with a term or provision contained in any Schedule, the term or provision
in the Body of this Agreement shall prevail. Schedules 10 and 11 are for
information purposes only and shall not affect the construction,
interpretation or validity of this Agreement.
(b) If a term or provision contained in the Licences conflicts with a term or
provision of this Agreement, the term or provision in the Licenses shall
prevail.
1.5 No Partnership
Nothing herein contained shall be construed as creating a partnership or
association of any similar kind or as imposing upon any Party any
partnership duty, obligation or liability to any other Party.
1.6 Currency
All reference to monetary amounts in this Agreement shall be in the lawful
currency of England and Wales unless specified otherwise.
<PAGE>
1.7 Computation of Time
Except where expressly provided otherwise herein, the reference in this
Agreement to a period of time from a specific day to a later specific or
defined day shall not count the day on which such period commenced and
shall include up to 4:00pm on the day on which such period ends, provided
that, if any such period would otherwise end on a day which is not a
Business Day, then such period shall be extended to 4:00pm on the first
Business Day after the day on which such period would have otherwise ended.
1.8 References to Time
Except where expressly provided otherwise herein, all references to any
time of day shall refer to local time in LONDON, ENGLAND.
1.9 Liability of Farmee
(a) Where the terms "Farmee", "ISO" and "Archean" are used in this Agreement,
the applicable obligations and liabilities shall be the several, and not
joint nor joint and several obligations and liabilities, of ISO and
Archean. ISO and Archean shall bear and assume all obligations of the
Farmee under this Agreement as to ninety (90) percent for ISO and ten (10)
percent for Archean.
(b) The Farmor shall be entitled to deal solely with Archean, as representative
of the Farmee, whose decisions will be binding on the Farmee, in respect of
all matters, operations or elections arising under this Agreement. The
Farmee may change the Party so nominated to ISO by written notice to the
Farmor and with the written consent of Farmor, which shall not be
unreasonably withheld, provided that, the Farmor shall not be obligated to
deal with more than one Party.
2 FARMEE'S OBLIGATIONS
2.1 The Farmee hereby undertakes to the Farmor, Altwood and the Buy-in Party,
that subject as hereinafter set forth, the Farmee shall conduct the Farmin
Works, and with the benefit of all funds deposited in the Farmin Account,
bear and hold harmless and indemnify the Farmor and the Buy-in Party.,
against one hundred percent (100%) of the Farmin Works Costs, to the extent
of the indemnity set forth in Clause 18;
<PAGE>
2.2 If necessary, because of mechanical problems or bad hole conditions of
whatever kind with the Drilling, other than impenetrable geological
formations, the Farmee shall undertake the re-Spudding and re-Drilling of
any such Farmin Well ("Substitute Farmin Well").
3 EXECUTION OF THE FARMIN WORKS
3.1 The 150 km of 2D seismic programme shall be of mutually agreed suitable
technical specification for the requirements of each Option Area, and shall
commence as soon as practicable following:
(a) the execution of this Agreement and;
(b) the deposit by the Farmee of the second payment of nine hundred and
twenty two thousand five hundred and twenty eight pounds and forty one
pence Sterling (Pounds)922,528.41 into the Farmin Account, as set
forth in Clause 6.
3.2 The Farmin Wells drilling programme shall, unless otherwise agreed with the
Farmor, or as may be required by the Regulations, be conducted by the
Farmee as a continuous drilling programme. The Farmin Wells drilling
programme is based upon the Farmee using one (1) drilling rig and shall be
a continuous programme which shall commence with the three Weald Basin
wells, and then progress from Fenwick in the East Midlands to the drilling
of the three Lancashire Plain Prospects as the last of the Farmin Wells.
The Farmee may elect to use more than one (1) drilling rig thereby
increasing the pace and changing the order of the drilling programme, as
long as the Mythop and Plumpton prospects on the Lancashire Plain are the
last of the Farmin Wells to be Drilled.
3.3 The Spudding of the first of the Farmin Wells shall be within ninety (90)
days of the Effective Date of this the Buy-in Agreement, unless otherwise
agreed by the Farmor, or as may be required by the Regulations. If any of
the Farmin Works are delayed as may be required by the Regulations, the
Farmee's obligation to conduct the delayed portion of the Farmin Works
shall be suspended for such period of delay.
4 EARNING OF FARMIN PERCENTAGE
4.1 Upon a Farmin Well being Drilled to its Contract Depth and after Capping
and Suspension or Abandonment, the Farmor shall assign a thirty two percent
(32% of 100%) interest out of its Working Interest in the particular Farmin
Area to the Farmee ("the Farmin Percentages"). If a Farmin Well encounters
an impenetrable geological formation as agreed by the Farmor and Farmee,
the Farmee shall be deemed to
<PAGE>
have drilled such Farmin Well to its Contract Depth. If the Farmor and
Farmee are unable to agree, then the presence of an impenetrable geological
formation shall be determined by an independent drilling engineering
consultant whose fees would be charged to the Joint Venture Account. If the
Parties are unable to agree upon the choice of such independent expert
within forty eight (48) hours, they shall forthwith request the President
of the Institute of Petroleum, London, to forthwith appoint the same, and
such appointment shall be binding upon the Parties.
4.2 If the Spudding or Drilling of a Substitute Farmin Well becomes necessary,
the Parties shall in good faith use their reasonable endeavours to agree
unanimously on a new location for the drilling thereof if impracticable
from the same surface site.
4.3 The obligations of the Farmee with respect to a Farmin Well shall apply
mutatis mutandis to any Substitute Farmin Well drilled in substitution
therefor including, without limitation, its obligations to contribute to
the Farmin Account for the Farmin Works Costs in accordance with Clause 2.1
above, and Clause 6.
5 ACTION BEFORE FINISHING DATE
Until the Finishing Date of each Farmin Well the Farmee shall use all
reasonable endeavours to ensure that the Farmor shall receive all technical
data and information relating to the Farmin Works on the Farmin Areas.
6 THE FARMIN ACCOUNT
The Farmee hereby consents to the setting up of the Farmin Account by the
Farmor and the Farmee, into which the Farmee has deposited the
(Pounds)202,471.59 initially held in trust by the Farmor's solicitors. The
Farmor has agreed to deposit (Pounds)2,250,000.00 in the Farmin Account
upon concluding the Buy-in Agreement. The Farmee shall make a further
deposit of (Pounds)922,528.41 into the Farmin Account. Such deposits shall
be made within four (4) Business Days of the Farmor notifying the Farmee of
the execution of the Buy-in Agreement. Such funds to be used for the
conduct of the Farmin Works, whether of a Drilling or seismic surveying
nature. Any withdrawals of monies from such account shall require the
approvals and signatures of the Farmee and the Farmor. The Farmee may use
any or all of the Farmin Account to carry out the Farmin Works, and shall
add to the Farmin Account whatever additional funds may be required for the
completion of the Farmin Works. Any funds remaining in the Farmin Account
after the satisfactory completion of the Farmin Works in accordance with
this
<PAGE>
Agreement, shall be paid to the Farmee, and may be used for any purpose the
Farmee may determine, in its sole discretion.
7 FARMIN PERCENTAGES
7.1 The Farmee
In consideration of the Farmee fulfilling its obligations hereunder and
subject to the necessary consents and approvals of the Secretary, the
Farmor shall, as each Farmin Well is Capped and Suspended or Abandoned,
grant and assign to the Farmee the Farmin Percentage in the Farmin Area on
which the said Farmin Well was Drilled and solicit the consent and approval
of the Secretary to a Deed of Assignment of Licence for the appropriate
Licence in respect thereof, and shall grant and assign to the Farmee the
Farmin Percentages so that before and after the Payout Date the Paying and
Working Interests in the Farmin Area in and under the particular Licence
and the Joint Operating Agreement shall be:-
<TABLE>
<CAPTION>
PARTY PERCENTAGE INTERESTS
- ---------------------------------------------------------------------------------------------------
BEFORE PAYOUT AFTER PAYOUT
- ---------------------------------------------------------------------------------------------------
PAYING WORKING GROSS PAYING WORKING
REVENUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ISO 90.0 45.0 ) * - 28.8 28.8
Archean 10.0 5.0 ) 3.2 3.2
(less (Pounds)2.25M)
- ---------------------------------------------------------------------------------------------------
Buy-in Party (Pounds)2.25M 50.0* - 24.5 22.5
- ---------------------------------------------------------------------------------------------------
Farmor 0.0 0.0 13.0 43.5 41.5
- ---------------------------------------------------------------------------------------------------
Altwood 0.0 0.0 2.0 0.0 4.0
- ---------------------------------------------------------------------------------------------------
TOTALS 100.0 100.0 15.0 100.0 100.0
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Subject to one half of the 15% GRI.
7.2 The Buy-In Party
(a) Notwithstanding the provisions of Clause 21 below, the Farmee acknowledges
that the Farmor has designated the Buy-In Party as the person who will be
entitled to acquire an interest in the Licences and Areas by the payment of
(Pounds)2.25 million upon execution of the Buy-in Agreement. The Parties
agree that it shall be a condition to the assignment, transfer and
conveyance of the applicable interests in the Licences and the Areas that
the Buy-in Party become a party to the applicable Joint Operating
Agreements and to pay its Paying Interest share of operations after the
applicable Finishing Date. If the Buy-in Party opts not to acquire an
interest in any Option Area as provided herein, the interests allocated to
the Buy-in Party shall be made available to ISO and Archean on a 90%/10%
basis for the further earning of
<PAGE>
those interests by ISO and Archean, in accordance with Clause 11.4(a).
(b) If the Buy-in Party fails to carry out its (Pounds)2.25 million payment
obligation as indicated in Clause 7.2 (a) above, for whatever reason, then
the Farmee shall have a ninety (90) day period to elect to take up the Buy-
in Party's interests and financial obligations. Such 90 day period to
commence from the date of the notice of such failure given by the Farmor to
the Farmee and the Buy-in Party. Farmee's obligation to conduct the Farmin
Works shall be suspended for such ninety (90) day period. If Farmee does
not elect to take up the Buy-in Party's interests and obligations, the
Farmee may withdraw from this Agreement, have returned to it any funds it
deposited into the Farmin Account and shall be released from all
liabilities and obligations in connection with this Agreement".
8 GROSS REVENUE INTERESTS AND PAYOUT
8.1 If Petroleum is produced from the Farmin Areas, the Farmee shall until
Payout of the Farmin Works Costs receive fifty percent (50%) of the Gross
Revenue thereof.
8.2 The Farmor and/or Altwood shall, at their option, continue to hold the
Gross Revenue Interests until the Payout Date, or until the end of the
production of Petroleum from the Farmin Areas.
8.3 The Farmor and Altwood shall, with respect to any Farmin Area, have the
option to continue on the basis of their Gross Revenue Interests or, in
accordance with the provisions of Clauses 8.4, 8.5 and 8.6 below, to
convert such Gross Revenue Interests to the after Payout Paying and Working
Interests, as set out in Clause 7.1.
8.4 The Gross Revenue Interests shall provide for the payments by the Farmee to
the Farmor and Altwood of six and a half (6.5) percent and one (1) percent
respectively of Gross Proceeds. Such payments shall be subject only to the
deduction from the Gross Proceeds attributable thereto, of the
transportation costs of the Petroleum and/or other substances produced.
8.5 The Farmor and Altwood shall each have the right to exercise such option to
convert to an after Payout Paying and Working Interest with
<PAGE>
respect to each and any discovery made on the Farmin Areas. Such options
shall with respect to each Farmin Area be separately exercisable at any
time from the date of the decision pursuant to the relevant Joint Operating
Agreement to appraise and/or develop any discovery arising from the
execution of the Farmin Works until the Payout Date. If the Payout Date
precedes the date of the decision to appraise and/or develop any of the
Petroleum discoveries, then the date on which the said option may be
exercised shall be on or before the date of such decision.
8.6 Election by the Farmor and/or Altwood pursuant to Clause 8.5 to convert to
after Payout Paying and Working Interests at the Payout Date, shall cause
the Farmor to refund to the Farmee, within 30 Business Days after the date
of such election the proportionate part of its capital expenditure to
provide equipment and facilities for Petroleum production beyond those
provided by the Farmin Works as though the Farmor and/or Altwood had
elected to convert to a Working Interest at the time of the agreement to
appraise and/or develop that Petroleum discovery. Upon written request by
the Farmor the Farmee shall supply the Farmor with full details of such
capital expenditures prior to the Farmor making such election. If such
election takes place before the Payout Date, then the Farmor and Altwood
shall continue to receive only their Gross Revenue Interest payments until
the Payout Date.
9 ASSIGNMENT DOCUMENTATION AND JOINT OPERATING AGREEMENT
9.1 Promptly following the Finishing Date of each Farmin Well and subject only
to the necessary consent and approval of the Secretary, the relevant
Parties shall, in respect of the relevant Farmin Area, execute a Deed of
Assignment of the Licence, and an Assignment of Percentage Interest, each
substantially in the forms set out in Schedule 5 and 6 hereto respectively,
subject only to any amendments required by the Secretary.
9.2 Prior to the Spud of each Farmin Well the Parties shall be subject to and
execute a Joint Operating Agreement in a form providing, inter alia, for
the principles set out in Schedule 7 to provide for the conduct of joint
operations in respect of the relevant Farmin Area. If a Joint Operating
Agreement is not signed prior to the Spud Date of each Farmin Well, the
Farmees shall have the right to delay the Spud Date until the Joint
Operating Agreement is signed by the Parties, and the Farmee's obligation
to conduct the Farmin Works shall be suspended until such Joint Operating
Agreement is fully signed.
9.3 In the event of a conflict with respect to the matters herein provided
between the provisions of this Agreement and the Joint Operating Agreement
the provisions of this Agreement shall prevail.
<PAGE>
10 REPLACEMENT WELLS
If it is agreed by the Farmor and Farmee that extenuating circumstances
such as the failure to obtain planning consent even upon appeal or from an
alternate surface site prevent the Drilling of any of the Farmin Wells, a
Replacement Farmin Well may be proposed by the Farmee for the approval of
the Farmor, such approval not to be unreasonably withheld. Such
replacement well shall be selected from amongst the ten (10) Option Areas
or from any other exploration leads or prospects identified on the Licence
Areas as set forth in Clauses 11.1 and 11.2 below.
11 SEISMIC OPTION AND FURTHER OPTIONS
11.1 In consideration of the fulfilment by the Farmee of its obligations under
this Agreement the Farmor hereby grants to the Farmee the following option
rights and offers of participation:-
(a) an option to earn an interest in respect of each of the ten (10) areas
within the Option Areas under the farmout percentage terms provided in
Clauses 11.3 and 11.4; and
(b) the continuing option to earn into further areas located within the
remainder of the Farmor's current Licence Areas, with the exception of
the Farmor's existing producing and planned production projects, in
and under the Licences, as set out in Schedule 13. Such option shall
be exercised upon the same farmout percentage terms, provided in
Clauses 11.3 and 11.4. Such continuing option rights may be exercised
by the Farmee until the 31st December 2000. All Option Wells that the
Farmee subsequently elects to drill hereunder and under Clause 11.1(a)
shall be spudded before 31st December 2001, unless otherwise agreed by
the Farmor, such agreement not to be unreasonably withheld, or as may
be delayed by the Regulations. The Farmee or Buy-in Party shall not be
required to drill any of the Option Areas of Clause 11.1(a) to
exercise its rights under this Clause 11.1(b).
(c) If the Farmor should offer any farmin or buy-in opportunity involving
its current or future production projects on lands excluded from this
Agreement, as listed and described in Schedule 13, then the Farmee
shall be granted the initial but non-exclusive opportunity to evaluate
and earn an interest in the same.
<PAGE>
11.2 The Drilling of an Option Well upon any further option area under Clause
11.1(b) shall provide for the Farmee and Buy-in Party, having elected to
participate in such activity, an interest as provided in Clauses 11.3 and
11.4, in an area enclosing the maximum area of closure of the drillable
prospect or an area of twenty (20) square kilometres, whichever is the
larger. If in any Petroleum discovery made by such Drilling the field
limits, as defined in the field development plan application to the
Department of Trade and Industry, shall extend beyond the initial earned
area, then such area shall be extended to include the full field area as
defined by the Department, as long as such extended area is included in
Petroleum rights under licence to the Farmor.
11.3 The Farmee, and the Buy-in Party would have the right to participate
together in the Option Areas and Licence Areas on the same terms as set
forth in this Agreement. For the avoidance of doubt such funding shall be
on the part of the Buy-in Party the provision of no more than 50 percent
of the deemed cost of the Option Work Programme to acquire an after Payout
22.5 percent Working Interest and a 24.5 percent Paying Interest in the
applicable Option Areas and Licence Areas and on the part of the Farmee
the provision of the remainder of the required funding to finish the
Option Work Programme to earn an after Payout 32 percent Working Interest
and Paying Interest in the applicable Option Areas and Licence Areas. The
deemed cost of the Option Well programme shall be agreed by the Farmee and
Farmor. If the Parties cannot agree upon the deemed cost of the Option
Work Programme, such cost shall be determined by an independent drilling
engineer appointed by mutual agreement of the Parties, whose fees would be
charged to the Joint Venture Account. If the Parties are unable to agree
upon the choice of such drilling engineer by forty-five (45) days prior to
the date upon which the option is to be exercised, they shall forthwith
request the President of the Institute of Petroleum, London, to forthwith
appoint the same, and such appointment shall be binding upon the Parties.
11.4 In the event that the Buy-in Party or Farmee opts not to participate in
one or more of the Option Areas, then either of such Parties would have
the right to proceed alone by:-
a) the Farmee funding the full actual cost of the applicable Option Wells
to earn an after Payout 56.5 percent Paying Interest and a 54.5
percent Working Interest in the applicable Option Areas; and
b) the Buy-in Party funding the full deemed cost of the applicable Option
Wells to earn an after Payout 47 percent Paying Interest and a 45
percent Working Interest in the applicable Option
<PAGE>
Areas, provided that the Farmor agrees to bear the risk of any actual
costs in excess of the deemed full cost of such Option Wells.
11.5 The Farmor, using the seismic data acquired under the Farmin Works,
together with other previous seismic and well data, shall interpret the
same and make a proposal to the Farmee and the Buy-in Party of those
Option Areas worthy of Drilling by further Farmin and Buy-in Party
funding. The Farmor would subsequently make a further proposal or
proposals concerning Drilling under the further option rights of the
Farmee and Buy-in Party as under Clause 11.1(b). Any other such seismic
reprocessing and interpretational work carried out by the Farmee on its
own behalf, or jointly with the Buy-in Party, shall be for its own
account, and such work, its results and conclusions shall be supplied to
the Farmor as soon as it shall be available to the Farmee.
11.6 If the Farmee's obligation to conduct the Farmin Works or Option Work
Programme are suspended in accordance with the terms of this Agreement,
such period of suspension shall give an equal period of extension of the
final Option Well Spud date given in Clause 11.2(b), provided that such
extension period shall be no longer than twelve (12) months.
12 OPERATORSHIP
12.1 The Farmin Works, with the exception of those activities detailed in
Clause 12.2 below, shall be operated by Archean on behalf of the Farmees
the Buy-in Party and the Farmor, in accordance with the Farmin Procedure
of Schedule 12. Such performance by Archean shall be as a Contract
Operator on behalf of the Farmor, the Licence Operator. Archean shall
obtain and maintain in full force and effect throughout the Farmin Period
the appropriate insurance cover for the operation of the Farmin Works, to
be paid for out of the Farmin Account. Such Insurance to include without
limitation, third party liability and pollution clean-up insurance,
automobile liability, comprehensive general liability, aircraft liability
and well control insurance, as further detailed in Schedule 12.
12.2 During the Farmin Period, the Farmor shall continue to operate on behalf
of and with the approval of the Farmee, all geological, geophysical and
lands aspects of the Farmin Works including:-
a) wellsite geological control and reporting;
b) preparation of the after well report books;
<PAGE>
c) geological/geophysical evaluation of the well results of the Farmin
Works and the consequences for further activities. This and items a)
and b) above to be for the Joint Venture Account, and paid in
accordance with the After Payout Paying Interests in Clause 7.1;
d) preparation for and the supervision of the 150 kms of mutually agreed
technically suitable 2D seismic survey work. In this the Farmor shall
solicit contractor's bids and select the contractor with the approval
of the Farmee, acting reasonably, so that possible cost savings may be
made consistent with obtaining seismic data of acceptable quality as
appropriate to the seismic acquisition problems of each survey area.
Such costs to be for the Farmin Account; and
e) lands/legal work in order to secure the planning consents and site
lease agreements with landowners for the Farmin Wells. Such activities
shall be for the sole cost and expense of the Farmor and shall include
the site lease costs to the Finishing Date of each Farmin Well.
Thereafter such reasonable costs shall be for the Joint Venture
Account.
12.3 Archean shall continue to carry out the function of Contract Operator
for any drilling activities on the Areas covering any Petroleum discovery
resulting from the Farmin Works. In addition, Archean shall be Contract
Operator for any Crude Oil production operations on such Areas.
12.4 The Farmor shall be the Operator for any Natural Gas and Condensate
production operations on the Areas.
13 Technical Data
The Farmor shall as soon as is reasonably practicable, provide the Farmee
with copies of all relevant well and seismic data covering the Farmin
Areas, Option Areas and Licence Areas in whatever form currently available
to the Farmor at the reproduction cost. The provision of such technical
data shall be for the Farmee's sole use in evaluation of the Farmin Areas,
Option Areas and Licence Areas, and shall not convey any proprietary
rights in such to the Farmee. Proprietary rights in technical data
acquired in the performance of the Farmin Works shall be held pro-rata to
the after Payout Working Interest percentage shown in the table set out in
Clause 7.1 above.
14 FARMOR'S REPRESENTATION AND WARRANTIES
<PAGE>
14.1 The Farmor represents and warrants to the Farmee that, as at the date
hereof:-
(i) the Licences are valid and subsisting and in full force and effect;
(ii) subject to the provisions of the Licences, the Joint Operating
Agreement and this Agreement and any Permitted Encumbrances, the
Licences are not subject to any lien, charge or other subsisting
encumbrance;
(iii) all Licence work programmes have been fulfilled in a timely
fashion, or the consent of the Department of Trade & Industry has
been obtained for any delay in such fulfilment, and the Licences
are not subject to cancellation, reduction, relinquishment or
termination within the next 12 months, other than EXL 269, and EXL
288, which undergo the mandatory fifty (50) percent relinquishment
at the end of their first term as Petroleum Exploration and
Development Licences.
(iv) any royalty payments (or delivery of Petroleum in lieu of
royalties) and licence rentals which it is required to make to the
Secretary have been properly made;
(v) all returns required in respect of the Licences to be made to the
Secretary have been properly made;
(vi) it is not involved in, or aware of any threat of, any proceedings,
claims or arbitration or other matter which could lead to the
Licences being revoked;
(vii) it has all requisite corporate powers to execute this Agreement and
to perform its obligations hereunder and such execution and
performance has been duly authorised by all appropriate corporate
action and will not constitute a breach of any arrangement or
agreement to which it is a party;
(viii) it has obtained all relevant rights including Wellsite lease
agreements from owners or occupiers of land to Drill upon the
Wellsites for the conduct of the Farmin Works as provided
for herein, with the current exceptions of the Lingfield and
Preesall Wellsites still under ongoing negotiations with the
landowners;
(ix) it has obtained all relevant local authority planning consents to
permit the conduct of the Farmin Works as provided for herein;
(x) it has obtained all relevant approvals from environmental control
authorities to permit the conduct of the Farmin Works, and that to
the best of its knowledge and belief there is no administrative
action or procedure pending or planned to revoke or modify the
same. The Farmor is not aware of any material environmental
<PAGE>
damage or non-compliance with environmental laws or regulations
related to the Areas.
(xi) It has good and marketable title to the Licences and the site
leases in respect of the Areas, except the site leases for the
Lingfield and Preesall Well sites for which it will make reasonable
efforts to obtain.
14.2 Altwood represents and warrants to the Farmee that, as at the date hereof,
it has all requisite corporate powers to execute this Agreement and to
perform its obligations hereunder and such execution and performance has
been duly authorised by all appropriate corporation action and will not
constitute a breach of any arrangement or agreement to which it is a
party.
15 FARMEE'S REPRESENTATION AND WARRANTIES
Each of ISO and Archean represents and warrants that, as at the date
hereof, with respect to itself only, it has all requisite corporate powers
to execute this Agreement and to perform its obligations hereunder and
such execution and performance has been duly authorised by all appropriate
corporate action and will not constitute a breach of any arrangement or
agreement to which it is a party.
16 PARENT COMPANY GUARANTEES
Each of the Farmor, ISO and Archean shall procure the issue by its parent
company of a guarantee ("Parent Company Guarantee") guaranteeing the due
performance of all their respective responsibilities and obligations under
this Agreement. Failure or inability of the Farmee or Farmor to provide
such Parent Company guarantee shall entitle the Farmor or Farmee as the
case may be to terminate this Agreement forthwith without prejudice to any
rights or remedies available to the Farmor or the Buy-in Party or Farmee
as the case may be arising as a result of such failure or inability by a
Party to provide such Parent Company Guarantee.
17 TITLE AND ENCUMBRANCES
Maintaining Title - Earning Phase
For the period from the Effective Date until the Farmee has earned an
interest in the Farmin Areas and/or the Option Areas pursuant to
the Agreement or its right to do so ceases or the Agreement is terminated,
whichever occurs first, the Farmor shall not grant any interests in the
Farmin Areas or Option Areas and shall do all things necessary to
<PAGE>
maintain the relevant Licence, and not do or cause to be done any act or
omission whereby the same shall become encumbered, terminated or forfeited,
unless termination shall be according to the terms and conditions of the
relevant Licence.
18 LIABILITY AND INDEMNITY
18.1 Farmee Indemnity
The Farmee shall:
(a) be liable to the Farmor for all losses, costs, damages and expenses
whatsoever (whether contractual or tortious) which the Farmor may
suffer, sustain, pay or incur;
(b) indemnify and hold harmless the Farmor and its directors, officers,
agents and employees against all actions, causes of action,
proceedings, claims, demands, losses, costs, damages and expenses
whatsoever which may be brought against or suffered by the Farmor, its
directors, officers, agents and employees or which they may sustain,
pay or incur; and
insofar as such matters are either a direct result of any act or omission
of Wilful Default of the Farmee with respect to the Farmin Works or the
Option Works Programme, as the case may be, provided that, the Farmee shall
not be liable to, or be required to indemnify and hold harmless, the Farmor
and its directors, officers, agents and employees to the extent that the
particular act or omission was done or was omitted to be done in accordance
with the instructions of or the concurrence of the Farmor.
18.2 Farmor's Indemnity
Where the Farmor conducts operations or activities with respect to the
Areas, the provisions of Clause 18.1 shall apply mutatis mutandis for the
benefit of the Farmee.
18.3 Limitation
(a) No Party shall be liable hereunder for any indirect, consequential or
punitive damages or for any loss of profit, loss of product or loss of use
or other business interruption.
<PAGE>
(b) Farmee shall have no liability hereunder for losses, costs, damages and
expenses that result from Farmor's failure to obtain and maintain all
relevant Licences, surface leases, planning consents and approvals that are
required to conduct the Farmin Works.
19 DEFAULT
19.1 Farmor's Remedies In The Event Of Default
(a) If the Farmee defaults in any of its obligations hereunder, subject
to Clause 18.3(b) and this Clause 19, the Farmor may give the Farmee
notice stating the nature of that default. If the Farmee fails to
commence to remedy that default within 30 days after receipt of such
notice or fails to continue to remedy that default with all due
diligence thereafter, the Farmor may, by notice to the Farmee,
terminate all or any interest of the Farmee acquired, pursuant to
this Agreement, in the Farm-in Area to which the default applies.
(b) If the Farmee fails to carry out the Farmin Works and such failure by
the Farmee is not caused by a breach of any provision of this
Agreement by the Farmor, then, subject to the same notice and remedy
provisions as those of Clause 19.1(a), the Farmee shall forfeit any
rights to any monies remaining in the Farmin Account and the Farmor
shall have a ninety (90) day period in which to elect to take up such
interest and obligations of the Farmee in any unDrilled Farmin Areas,
or to return any funds remaining in the Farmin Account to the Buy-in
Party.
(c) If the default is with respect to conditions subsequent to the Farmee
earning an interest in the Farm-in Areas, no such termination shall
apply to any portion of the applicable Farm-in Licences in which the
Farmee had earned an interest pursuant to the Agreement prior to the
default.
(d) Nothing in this Clause shall release the Farmee from any obligations
to indemnify or to be liable to the Farmor or the Buy-in Party
pursuant to the terms of this Agreement, to pay any amount owing to
the Farmor or the Buy-in Party to maintain information confidential
or, if applicable, to finish Abandoning any Farm-in Well.
(e) Nothing in this Clause shall release the Farmor from any obligations
to indemnify or to be liable to the Farmee pursuant to the terms of
this Agreement.
<PAGE>
19.2 Clause Does Not Affect Rights At Law
The rights granted to the Farmor in this Clause 19 shall be in addition
to, and not in substitution for, any other right or remedy which the
Farmor may have hereunder and specifically, the existence or the exercise
of those rights shall not deprive the Farmor either wholly or partially of
any other right or remedy at law or in equity.
19.3 Right To Charge Interest For Financial Default
If a Party fails to pay or advance within the time period prescribed any
amount as provided hereunder, such Party shall pay to the applicable Party
interest with respect to that unpaid amount from the day such payment is
due until the day it is paid, at the rate of LIBOR plus 3.0%, regardless
of whether the payee Party has notified the payor Party in advance of its
intention to charge interest with respect to that unpaid amount. The
obligation to pay interest is to apply until such default is rectified and
shall not merge into a judgement for principal and interest, or either of
them. The parties waive the application of any Regulations to the
contrary, insofar as such waiver is permitted by the Regulations.
20 CONFIDENTIALITY AND ANNOUNCEMENTS
20.1 Confidentiality Requirement
Each Party entitled to information obtained hereunder may use such
information for its sole benefit. Such Parties shall take such measures
with respect to operations and internal security as appropriate in the
circumstances to keep confidential from and prevent disclosure to third
persons all such information, except information which the Parties have
expressly agreed among themselves to release, and information disclosed by
a Party:
(a) when and to the extent required by the Regulations and securities
laws applicable to such Party, provided that such Party shall invoke
any confidentiality protection permitted by such Regulations and
securities laws;
(b) to an Affiliate, provided that, such Party shall be deemed to have
required such Affiliate to maintain the confidential status of the
disclosed information and that such Affiliate shall be deemed to have
accepted such obligation and that such Party shall be liable for any
loss suffered by the other Parties, or any of them, because of the
failure of such Affiliate to maintain such information confidential;
<PAGE>
(c) to a third person to which such Party has been permitted to assign a
portion of its interest hereunder, provided that a binding covenant
is obtained from such third person prior to disclosure which provides
that none of such information shall be disclosed by it to any other
third person; and
(d) to the legal, technical, financial or other professional consultants
of such Party which require such information to provide their
services to such Party or to a bank or other financial institution
from which such Party is attempting to obtain financing, provided
that a binding covenant is obtained from such consultant or
financier, as the case may be, prior to such disclosure, which
provides, inter alia, that none of such information shall be
disclosed by it to any other third person or used for the purposes
other than advising such Party or providing financing to such Party,
as the case may be.
The confidentiality and non-disclosure obligations in this Clause 20.1
shall not extend to information to the extent it is in the public domain,
provided that, specific items of information shall not be considered to be
in the public domain merely because such items are embraced by more
general information in the public domain.
20.2 Confidentiality Requirement To Continue
Any Party which otherwise ceases to be bound by the provisions of this
Agreement shall remain bound by the provisions of this Clause 20 with
respect to information obtained hereunder or under the Buy-in Agreement
until and to the extent that such information is in the public domain.
20.3 Announcements
This Agreement shall remain confidential and no Party shall make any
public announcement or statement with respect thereto without the consent
of the other Parties other than as may be required by law or
the Regulations or the rules of any recognised Stock Exchange on which
their respective shares are listed or to relevant government departments.
21 ASSIGNMENT
21.1 Except as provided in Clause 21.2 below, the respective rights and duties
of the Farmee hereunder shall not be assigned without the prior written
consent of the Farmor.
<PAGE>
21.2 Should the Farmee or Farmor desire or elect to sell or assign all or any
part of its interests under this Agreement or its rights and interests in
the Licences or Areas, such Party shall promptly give written notice to
the other Party, with full information concerning its proposed sale or
assignment, which notice shall include the name and address of the
prospective purchaser or assignee (who must be ready, willing and able to
purchase), the purchase price and all other terms of the offer. The Party
receiving such notice shall then have an optional prior right for a period
of thirty (30) days after receipt of the notice, to purchase on the same
terms and conditions the interest which the Party providing such notice
proposes to sell; provided, however, Party receiving such notice shall
have no preferential right to purchase in those cases where the Party
providing such notice wishes to mortgage all or part of its interests or
create lien rights on all or part of its interests, or to dispose of all
or part of its interests by merger, reorganisation, consolidation or to
sell all or substantially all of its assets or to dispose of all or part
of its interest to a subsidiary, Affiliate or parent company or to a
subsidiary of a parent company, or to any company or entity in which the
Party providing such notice owns a minimum of a 25% economic interest. Any
such sale or assignment shall be subject to the provisions of this
agreement.
21.3 The provisions of this Agreement shall enure for the benefit of and be
binding on the successors in title and permitted assignees of the Parties.
22 FORCE MAJEURE
22.1 Definition of Force Majeure
In this Clause 22 "Force Majeure" means an occurrence beyond the
reasonable control of the Party claiming suspension of an obligation
hereunder, and includes, without limiting the generality of the foregoing,
an act of God, war, revolution, insurrection, blockade, riot, strike, a
lockout or other industrial disturbance, fire, lightning, unusually severe
weather, storms, floods, explosion, accident, shortage of labour or
materials or government restraint, action, delay or inaction.
22.2 Suspension of Obligations Due to Force Majeure
If any Party is prevented by Force Majeure from fulfilling any obligation
hereunder, the obligation so affected shall be suspended to the extent
that the Party is prevented from performing such obligation for so long as
the Force Majeure prevents the performance of such obligation and for such
time thereafter as that Party may reasonably require to commence to fulfil
such obligation. A Party prevented from fulfilling any obligation by Force
Majeure shall promptly give the other Parties
<PAGE>
notice of the Force Majeure and the affected obligations, including
reasonably full particulars thereof.
22.3 Obligation to Remedy
The Party claiming suspension for an obligation by reason of Force Majeure
shall promptly use all reasonable efforts to remedy the cause and effect
of the applicable Force Majeure and such Party shall promptly give the
other Parties notice when the Force Majeure ceases to prevent the
performance of the applicable obligation. The term of settlement of any
strike, lockout or other industrial disturbance shall be wholly in the
discretion of that Party, and that Party shall not be required to accede
to the demands of its opponents in any strike, lockout or industrial
disturbance solely to remedy promptly the event of Force Majeure.
22.4 No Exception for Lack of Finances
Notwithstanding anything else in this Clause 22, lack of finances shall
not be considered an event of Force Majeure, nor shall any Force Majeure
suspend any obligation for the payment of money due hereunder.
22.5 Surface Access Difficulties
Notwithstanding any provision to the contrary contained herein, to the
extent that surface conditions do not enable the Farmee to have access to
the Farm-in Areas within the time period specified for the commencement
and/or completion of an operation thereon, the Farmee shall give notice of
same to the Farmor. If the Farmor consents, with such consent not
unreasonably withheld, that operation may be postponed until such time as
surface conditions permit access to the location of such operation, at
which time the Farmee shall move the requisite equipment thereto in a
timely manner.
23 MISCELLANEOUS
23.1 Further Acts and Documents
Each Party undertakes to do or procure to be done all such acts (including
the execution of any appropriate documents) as may be necessary to
consummate the transactions contemplated hereby or fully to give effect to
the intent and purpose of this Agreement.
23.2 Notices
<PAGE>
Any notice pursuant to this Agreement shall be given in accordance with the
following provisions:
Notice to the Farmor shall be given to:
Independent Energy UK Limited
Second Floor Park House
Park Street
Maidenhead
Berkshire
SL6 1SL
UK
Attention : Mr W E Evans
Fax : 01628 671976
Notices to the Farmees shall be given to:
1. Archean Energy (U.K.) Limited
c/o Suite 1000
Home Oil Tower
324 - 8th Avenue S.W.,
Calgary
Alberta
T2P 2Z2
Canada
Attention: Mr L J Parks
Fax: 00 1 403 237 0765
2. ISO (U.K.) Limited
c/o Suite 1000
Home Oil Tower
324 - 8th Avenue S.W.,
Calgary
Alberta
T2P 2Z2
Canada
Attention: Mr L J Parks
Fax: 00 1 403 237 0765
Notices to Altwood shall be given to:
Altwood Petroleum Limited
Chenies House
Altwood Close
Maidenhead
Berkshire
<PAGE>
SL6 4PP
UK
Attention: Mr W E Evans
Fax: 01628 635601
23.3 Liability to Stamp Duty
It is agreed that in the event that any stamp duty becomes chargeable on
this Agreement or any implementation documentation executed pursuant to
and in performance of this Agreement it shall be dealt with in accordance
with the Stamp Duty Agreement of even date herewith.
23.4 Costs and Expenses
Each Party shall bear its own legal costs and expenses in connection with
the preparation and execution of this Agreement.
23.5 Entirety of Agreement and Prior Agreements
This Agreement and the instruments referred to herein constitute the
entire agreement and understanding of the Parties in relation to the
matters contained herein and supersedes any and all prior negotiations,
proposals, statements of intent, correspondence and representations made
by either or both of the Parties with respect thereto.
23.6 Amendment and Agreement
This agreement may only be altered, varied or amended by a written
instrument executed by the Parties.
24 GOVERNING LAW
This Agreement is governed by and shall be construed in accordance with
the Law of England and Wales and each of the Parties hereby irrevocably
submit to the exclusive jurisdiction of the High Court of England and
Wales.
25 EFFECTIVE DATE
<PAGE>
This Agreement shall take effect on the Effective Date.
IN WITNESS whereof this Agreement has been signed for and on behalf of the
Parties.
_______________________
SIGNED for and on behalf of
INDEPENDENT ENERGY UK LIMITED
_______________________
SIGNED for and on behalf of
ISO (U.K.) LIMITED
_______________________
SIGNED for and on behalf of
ARCHEAN ENERGY (U.K.) LIMITED
_______________________
SIGNED for and on behalf of
ALTWOOD PETROLEUM LIMITED
<PAGE>
EXHIBIT 10.16
INDEPENDENT ENERGY (UK) LIMITED (1)
-and-
VULCAN ENERGY LIMITED (2)
___________________________________
Buy-in Agreement relating to the
UK LANDWARD EXPLORATION LICENCES
OF INDEPENDENT ENERGY UK LIMITED
___________________________________
<PAGE>
LICENCE BUY-IN AGREEMENT
------------------------
THIS BUY-IN AGREEMENT is made the ( ) day of ( ) 1999
BETWEEN
(1) INDEPENDENT ENERGY UK LIMITED whose registered office is at 30 Aylesbury
Street, London EC1R 0ER (hereinafter called the "Seller"); and
(2) VULCAN ENERGY LIMITED whose registered office is at 1 Mitchell Lane,
Bristol, BS1 6BU (hereinafter called the "Buyer");
The Seller and the Buyer being hereinafter collectively referred to as the
"Parties".
WHEREAS:-
(A) The Seller and Altwood Petroleum Limited ("Altwood") are together the
beneficial owners of the entire undivided interest in United Kingdom
Landward Exploration Licences as described in Schedule 1 hereto ("the
Licence Areas").
(B) The Seller holds a ninety six percent (96%) interest in the carve-out
areas contained within the Licence Areas, the former being the subject of
this Agreement ("the Buy-in Areas") and are detailed by National Grid
References in Schedule 2 hereto.
(C) The Buyer accepted a half interest in the original offer of participation
in the 1998 Exploration Programme of Independent Energy UK Limited, as
offered by Mr Burt H Keenan. That offered for sale for the capped sum of
four million five hundred thousand pounds Sterling (Pounds)4.5 million) a
Working Interest of forty five percent (45%) and a Participating (Paying)
interest of forty nine percent (49%), to be conveyed out of the interest of
the Seller in the seven petroleum prospects covered by the carve-out areas
detailed in Schedule 2 hereto, and an option to farmin or buy-in to the ten
exploration leads covered by the carve-out areas detailed in Schedule 4
hereto, all such carve-out areas contained within the UK Landward Licence
holdings of Independent Energy UK Limited.
(D) Subject to the terms and conditions of this Agreement the Buyer desires to
pay towards the cost of the Farmin Works, two million two hundred and fifty
thousand pounds Sterling (Pounds)2.25 million) to earn a twenty two and a
half percent (22.5%) Working Interest and a twenty four and a half percent
(24.5%) Participating (Paying) Interest over the Buy-in Areas, and an
option over the Option Areas.
<PAGE>
(E) Subject to the terms and conditions of the Farmin Agreement (Schedule 10
hereto), the Farmee has agreed to pay on behalf of itself and the Farmor
(the Seller of this Agreement), one hundred percent (100%) of the costs of
the Farmin Works (less (Pounds)2.25 million) to earn a thirty two percent
(32%) interest over the Farmin Areas. In this way the Farmin Works will be
executed no matter what the actual cost may be, and the Buyer's capped
investment will assist in achieving the objectives of the 1998 Exploration
Programme.
(F) By a Deed of Cross Indemnity of even date in the form attached hereto as
Schedule 9 the Parties have given certain undertakings with respect to the
fulfilment of their obligations as Licensees in so far as such obligations
affect the Buy-in Areas.
(G) The Secretary's confirmation that he has no objection in principle to the
arrangements contemplated by this Agreement has been sought and this
Agreement shall be subject to such confirmation.
NOW THEREFORE, in consideration of the mutual covenants and undertakings herein
expressed the Parties agree as follows:-
1. DEFINITIONS AND INTERPRETATIONS
1.1 "Abandon" - or any derivative of the word "Abandon" means:
(a) properly plugging and abandoning a Well in
compliance with all applicable Regulations;
(b) site restoration of the Wellsite to the
satisfaction of the terms of the planning
consent, and of any governmental body having
jurisdiction with respect thereto and to the
reasonable satisfaction of the owner or
occupier of the surface, and ;
(c) furnishing satisfactory evidence of compliance
with the foregoing requirements;
"Abandonment Costs" - means all costs and expenses incurred in or
incidental to Abandon a Well and restore a
Wellsite;
"Affiliate" - means, with respect to a Party, a person,
corporation, company or other legal entity or
partnership which controls, is controlled by
<PAGE>
or is under common control with that party and, for
the purposes of this definition, "control" means
the direct or indirect ownership of, or other
ability to direct, more than 50% of the voting
rights in a corporation, company or other legal
entity or partnership;
"Area" - means either or both a Farmin Area or an Option
Area as the context requires ;
"Business Day" - means any day on which banks in London, England
are open to transact commercial business
generally, excluding any Saturday, Sunday or bank
holidays in England and Wales;
"Buy-in Areas" - are the seven (7) carve-out areas from the
Seller's Licence Areas to be purchased by the Buyer
as set out in Clause 2 and 3 hereof;
"Capping and - means to install production casing or liner,
Suspension" and to shut-in the Well and suspend operations in
accordance with good oilfield practice, and to
secure the wellhead in a lockable cage and a
security fenced area with lockable gate, and the
site enclosed by stock proof fencing;
"Capping Costs" - means all costs and expenses incurred in or
incidental to the Capping and Suspending of a Well
or Wellsite;
"Complete" - or any derivative of the word "Complete" means the
acquisition and installation of all tubing, all
subsurface equipment necessary to conduct
production testing and production, including pump
and sufficient tankage, if initially required, to
production test the Well, and all other equipment,
all procedures and all material necessary for the
permanent preparation of a Well for the taking of
production up to and including the outlet valve on
the wellhead;
"Completion Costs" - means all costs and expenses incurred in or
incidental to the Completion of a Well;
<PAGE>
"Condensate" - means a mixture of mainly pentanes and heavier
hydrocarbons that may be contaminated with sulphur
compounds, that is recovered or is recoverable at a
Well from an underground reservoir and that may be
gaseous in its virgin reservoir state but is liquid
at the conditions under which its volume is
measured or estimated;
"Contract Depth" - means the lesser of:
a) the depth sufficient to evaluate to the
reasonable satisfaction of Farmor all zones
comprised in each of the respective Farmin
Areas, down to and including the geological
formations set forth in Schedule 2 hereto, and;
b) the depths given in Schedule 2 hereto;
"Contract Operator" - is to be initially the Farmee acting on behalf of
the Farmor to carry out the Farmin Works, this
relationship being further detailed in Clause 12.1
of the Farmout Agreement;
"Crude Oil" - means a mixture mainly of pentanes and heavier
hydrocarbons that may be contaminated with sulphur
compounds, that is recovered or is recoverable from
a Well that is liquid at the conditions under which
its volume is measured or estimated and includes
all other hydrocarbon mixtures so recovered or
recoverable except raw gas and Condensate:
"Drill" - or any derivative of the word "Drill" means the
drilling, coring, logging and flow testing of a
well to explore for and produce Petroleum;
"Drilling Costs" - means all costs and expenses incurred in or
incidental to the Drilling of a Well and, in the
case of a Well that is not Capped for the
subsequent taking of production, includes the cost
of Abandoning the Well;
"Effective Date" - means the date hereof:-
"Equip" - or any derivative of the word "Equip" means the
installation of equipment required to
<PAGE>
produce Petroleum from a Well including, without
limitation, a pump or other artificial lift
equipment, the installation of flowlines on the
Wellsite and production tankage serving such Well,
where necessary a heater, dehydrator, separator
compression facilities or other facility for the
initial treatment of the Petroleum produced from
such Well, in order to treat or prepare such
production for transport to market, but excluding
costs incurred beyond the point of entry into a
gathering system, plant or other common facility;
"Equipping Costs" - means all costs and expenses incurred in or
incidental to the Equipping of a Well;
"Farmee and Farmor" - are parties to the Farmout Agreement, with the
Farmor being Independent Energy UK Limited, and the
Farmee being Archean Energy (U.K.) Limited and ISO
(U.K.) Limited;
"Farmin Account" - is the joint bank account holding monies to be used
for the conduct of the Farmin Works;
"Farmout Agreement" - is the agreement under which Independent Energy UK
Limited has arranged to farmout a percentage
interest in the Buy-in Areas and the Seismic Option
Areas, and is included herein as Schedule 10;
"Farmin Areas" - are the seven (7) carve-out areas from the Farmin
Licences, Farmin Percentage interests in which are
to be earned by the Farmee by drilling the Farmin
Wells. Such areas are detailed by the National Grid
References in Schedule 2, and are the same as the
Buy-in Areas;
"Farmin Licences" - means the UK Landward Petroleum Licences containing
the Farmin Areas, as set forth in Schedule 1
hereto;
"Farmin Percentage" - has the meaning attributed to it in Clause 4.1 of
the Farmout Agreement and Clause 4.3 herein;
<PAGE>
"Farmin Procedure" - means the procedure set forth in Schedule 12 of the
Farmout Agreement;
"Farmin Period" - is the period of time from the effective date of
the Farmout Agreement until the fulfilment of the
Farmin Works in accordance with that Agreement;
"Farmin Well" - is any one of the seven (7) wells to be drilled by
the Farmee upon the Farmin Areas and constituting
part of the Farmin Works;
"Farmin Works" - means all work performed by the Farmee in the
Drilling to Contract Depth, Capping and Suspension
or Abandoning, as the case may be, of a Farmin Well
on each of the seven Farmin Areas, including
shooting and the processing of at least 150
kilometres of seismic data over the Option Areas ;
"Farmin Works - are the costs, liabilities and expenses of
Costs" executing the Farmin Works. Such costs to be
inclusive but not restricted to the costs of
seismic permitting, access, damages, the seismic
survey contract, the drilling site construction and
access, the drilling contractor, waste disposal,
drilling supplies and fuel, all well evaluation
surveys, wireline and drill stem testing, casing,
cementing, Capping and Suspension or Abandonment ;
"Finishing Date" - is the date upon which any one of the Farmin Wells
has been Capped and Suspended or Abandoned in
accordance with this Agreement and to the
satisfaction of the HSE/DTI;
"GAAP" - means generally accepted accounting principles for
the United Kingdom;
"Gross Proceeds" - means the total amount payable by the purchaser of
Petroleum at the Gross Sales Price;
"Gross Revenue" - means the difference between Gross Proceeds and the
transportation costs incurred or allocated in
connection with the applicable Petroleum produced
from a Well from the well site to the point of
sale, treatment costs to render Crude Oil and
<PAGE>
Condensate saleable and, if sales of Crude Oil and
Condensate are not made at the outlet of the on-
site tankage for the particular Well, the
transportation of such Crude Oil and Condensate to
the point of sale, and for Natural Gas, the actual
costs payable to third parties to gather, compress,
treat, process and transport such Natural Gas up to
the point of sale or, if such gathering,
compressing, treatment, processing or
transportation facilities owned by the Farmee are
used to gather, compress, treat, process or
transport such Natural Gas, a reasonable fee,
comprised of both operating and return on capital
components, for the use of such facilities ;
"Gross Revenue - has the meaning attributed to it in Clause
Interest" 4.4;
"Gross Sales Price" - is the price obtained for the sale of Petroleum
produced from the Areas at the point of sale, to a
non-Affiliated Company, or else as an arms length
transaction at a price which shall never be less
than the Market Price, as agreed by the Joint
Venture and Gross Revenue Interest Parties or
subject to determination by a third party expert
acceptable to the Seller and the Buyer, but such
price not to be less than the fair market value;
"HSE/DTI" - are to two governmental organisations responsible
for granting operational consents and having
control over petroleum reservoir matters (the
Health and Safety Executive's Offshore Safety
Division, and the Department of Trade and
Industry's Oil and Gas Division);
"Joint Operating - is an agreement controlling the conduct
Agreement" (JOA) of the Joint Venture and joint operations on the
Areas, the principle of which are given in Schedule
7 hereto;
"Joint Venture" - means a venture in which the Farmee, Seller, Buyer
and Altwood shall jointly participate in further
activities upon any Petroleum discoveries made with
respect to the Areas;
<PAGE>
"Joint Venture - a bank account holding all monies of the
Account" Joint Venture;
"Letter Agreement" - is the letter of the 27th August 1998, from
Independent Energy to DIG, signed by Mr W E Evans
for the Farmor, and countersigned by Mr John Gunton
for the Farmee;
"LIBOR" - means the rate announced from time to time as the
London Inter-Bank Offering Rate by the main branch
of the Licence Operator's principal bank in London,
England;
"Licence" - means either or both a Farmout Licence or Option
Licence as the context requires;
"Licence Areas" - the areas subject to the UK Landward petroleum
licences held by the Farmor and Altwood at the
effective date of this Agreement, as set forth in
Schedule 1 hereto;
"Licence Operator" - is the licensee approved by the Department of Trade
& Industry (DTI) to operate the Licence Areas,
subject to change under the rules of the JOA and
with the approval of the DTI.
"Market Price" - means the price at which Petroleum is sold or
deemed to have been sold which is not unreasonable,
having regard to all market conditions applicable
to similar kinds, quantities and quality of
Petroleum in arm's length transactions at the time
of the sale or deemed sale of such Petroleum;
"Natural Gas" - means Petroleum other than Crude Oil and
Condensate;
"Operate" - or any derivative of the word "Operate" means to
carry out functions and duties of the operator
pursuant to the Joint Operating Agreement, together
with duties imposed by this Agreement;
"Operating Costs" - means all direct and indirect costs and expenses
incurred in or incidental to Operating a Well,
exclusive of Drilling Costs, Completion Costs and
Equipping Costs pursuant to this Agreement and the
JOA;
<PAGE>
"Option Areas" - mean the ten (10) Areas covered by the option
rights of the Farmee and Buyer, such Areas being
detailed in Schedule 4 hereto;
"Option Licences" - means the UK Landward Petroleum Licences of the
Seller containing the Option Areas as set forth in
Schedule 4;
"Option Well" - means a Well drilled by the Farmee on an Option
Area;
"Option Work - means all work performed by the Farmee in
Programme" the Drilling, Capping and Suspension or Abandoning,
as the case may be, on all Option Wells on any of
the Option Areas;
"Option Work - means the costs and expenses of executing
Programme Costs" the Option Work Programme";
"Party" - means a Party to this Agreement and "Parties" means
any two or more of them;
"Paying Interest" - means, for each operation, a Party's proportionate
share (expressed as a percentage) of all the costs
and expenses incurred or payable in respect to the
applicable operation, as set forth in the table of
Clause 4.3 hereto;
"Payout" - means:
a) in respect to the Farmin Works, that the Buyer
has received out of its share of the Gross
Revenue from the Farmin Wells, all of its share
of the Farmin Works Costs, the Gross Revenue
Interest payments and Operating Costs incurred
in respect of all Farmin Wells up to that time,
which recovery by Buyer shall be limited to two
million two hundred and fifty thousand pounds
Sterling (Pounds)2.25 million);
b) in respect to the Option Work Programme, that
the Buyer and Farmee have received out of their
respective share of the Gross Revenue from the
Option Wells, the Option Work
<PAGE>
Programme Costs, the Gross Revenue Interest
payments and Operating Costs incurred by Buyer
or Farmee, as the case may be, in respect of
such Option Work Programme up to that time;
"Payout Date" - the date of the full Payout from the Gross Revenue
from one or more Petroleum discoveries made within
the Farmin Areas, or the Option Areas, as the case
may be.
"Permitted - means:
Encumbrances"
a) liens for taxes, assessments or governmental
charges which are not due or delinquent;
b) liens incurred or created in the ordinary
course of business as security in favour of any
other person who is conducting the development
or operation of the property to which such
liens relate for the Party's share of the costs
and expenses of such development or operation
which are not due or delinquent;
c) mechanics', builders' or materialmen's liens in
respect of services rendered or goods supplied
for which payment is not due ;
d) easements, rights of way, servitude's or other
similar rights in land (including, without
limitation, rights of way and servitude's for
railways, sewers, drains, gas and oil
pipelines, gas and water mains, and electric
light, power, telephone, telegraph and cable
television conduits, poles, wires and cables);
e) the right reserved or vested in any
municipality or governmental or other public
authority by terms of any lease, licence,
franchise, grant or permit or by any statutory
provision, to terminate any such lease,
licence, franchise, grant or permit or to
require annual or other
<PAGE>
periodic payments as a condition of the
continuance thereof;
f) governmental requirements of general
application, including, without limitation,
those respecting production rates or other
operational matters;
g) the encumbrances specifically described in
Schedules 1, 2 and 4, and;
h) the terms and conditions of the Licences;
"Petroleum" - shall have the meaning of the 1934 Petroleum
(Production) Act ;
"Regulations" - means all statutes, laws, rules, orders,
regulations or directives in effect from time to
time and made by any governmental authority having
jurisdiction over the Parties, the Licenses, the
surface rights, and the operations to be conducted
thereon;
"Replacement Farmin - has the meaning attributed to it in Clause
Well" 7.6;
"Secretary" - means the Secretary of State for Trade and Industry
of the United Kingdom;
"Seismic Option - are the areas to be further evaluated by
Areas" the seismic survey work and/or other work, and to
be the subject of further drilling at the Option of
the Buyer and Farmee, as set out in Clause 7.1(i)
hereof;
"Spud" - means that a drilling rig of adequate capacity to
drill the Farmin Well or Option Well to Contract
Depth, as the case may be, is rigged upon the well
site and a drilling bit has penetrated the surface;
"Substitute Farmin - has the meaning attributed to it in Clause
Well" 6.2;
"Well" - means the well or wells Drilled or to be Drilled by
Farmee pursuant to the provisions of this
Agreement, and;
<PAGE>
"Working Interest" - means a Party's interest, expressed as a
percentage, in the Licences, Areas and the
Petroleum produced from the applicable Wells .
1.2 Interpretations
a) References to documents in the form of those contained in Schedules 5,
6 and 8 shall be construed as references to such documents subject to
such amendments as may be requested by the Secretary and as are
approved by the Parties, such approval not to be unreasonably withheld.
b) Except as the context otherwise requires, references in this Agreement
to Clauses, sub-Clauses, Recitals or Schedules are to clauses or sub-
clauses of or recitals or the Schedules to this Agreement.
c) The headings in this Agreement are for convenience only and shall not
affect the construction, interpretation or validity of this Agreement.
d) Reference to the singular includes a reference to the plural and vice
versa.
1.3 The following Schedules are attached to and made part of this Agreement:
Schedule 1 UK Landward Area Licence Interests of Independent Energy UK
Limited
Schedule 2 Carve-out Areas for the Farmin Areas
Schedule 3 Farmin Wells - The Well Depths and Bottom Hole Geological
Formations
Schedule 4 Carve-out Areas for the Exploration Leads of the Seismic
Option Areas
Schedule 5 Deed of Assignment of the Licence
Schedule 6 Assignment of Percentage Interest
Schedule 7 Principles of Joint Operating Agreement
Schedule 8 Accounting Procedure
Schedule 9 Deed of Cross Indemnity
<PAGE>
Schedule 10 Farmout Agreement
Schedule 11 Seller's Existing and Planned Production Projects
1.4 Precedence
(a) If a term or provision contained in the Body of this Agreement
conflicts with a term or provision contained in any Schedule, the term
or provision in the Body of this Agreement shall prevail .
(b) If a term or provision contained in the Licences conflicts with a term
or provision of this Agreement, the term provision in the Licenses
shall prevail.
1.5 No Partnership
Nothing herein contained shall be construed as creating a partnership or
association or any similar kind or as imposing upon any Party any
partnership duty, obligation or liability to any other Party.
1.6 Currency
All reference to monetary amounts in this Agreement shall be in the lawful
currency of England and Wales unless specified otherwise.
1.7 Computation Time
Except where expressly provided otherwise herein, the reference in this
Agreement to a period of time from a specific day to a later specific or
defined day shall not count the day on which such period commenced and
shall include up to 4;00pm on the day on which such period ends, provided
that, if any such period would otherwise end on a day which is not a
Business Day, then such period shall be extended to 4:00pm on the first
Business Day after the day on which such period would have otherwise ended.
1.8 Reference to Time
Except where expressly provided otherwise herein, all references to any
time of day shall refer to local time in LONDON, ENGLAND.
<PAGE>
2 BUYER'S OBLIGATIONS
In consideration of the Assignment by the Seller to the Buyer on the terms
and subject to the conditions of this Agreement of a 22.5% Working Interest
and a 24.5% Participating Interest in respect of the Buy-in Areas, together
with options for the Buyer's further Buy-in to a 22.5% Working Interest and
a 24.5% Participating Interest in respect of the Option Areas, and in
consideration of the general obligations of the Seller undertaken to the
Buyer in this Agreement, the Buyer hereby agrees to pay to the Seller the
sum of (Pounds)2.25 million, being the total amount of the Buyer's
contribution to the costs of the Farmin Works and the Seller hereby
undertakes to the Buyer to apply the sum of (Pounds)2.25 million paid to it
in accordance with this sub-clause 2.1 towards the costs of the Farmin
Works.
2.2 If the Secretary's consent and approval to this Agreement, or the Farmout
Agreement not be obtained then such payment shall be refunded by the Seller
to the Buyer.
3 ASSIGNMENT OF BUY-IN PERCENTAGE
3.1 The Seller undertakes to use its reasonable endeavours to procure the
consent and approval of the Secretary to this Agreement, the Farmout
Agreement, and to the Deeds of Assignment of the Licence, for each of the
Farmout Licences, and the Assignment of Percentage Interest, as set out in
Clause 2 and Clause 4.3, for each of the Farmout Areas. Should such consent
and approval of the Secretary not be obtained within 60 days of the
execution of this Agreement, then
a) the payment under Clause 2 shall be refunded by the Seller to the Buyer
within a further seven Business Days; and
b) this Agreement shall terminate and the Buyer be entitled to treat this
Agreement as rescinded.
3.2 Such assignments by the Seller to the Buyer shall be substantially in the
form set out in Schedule 5 and 6 hereto, subject only to any amendments
required by the Secretary.
4 GROSS REVENUE INTERESTS AND PAYOUT
4.1 In the event that any Petroleum should be discovered and produced from the
Buy-in Areas on long term test or under a field development plan, the Buyer
shall until Payout of its (Pounds)2.25 million portion of the Farmin Works
Costs receive fifty percent (50%) of the Gross Revenue thereof.
<PAGE>
4.2 The Seller and/or Altwood shall, at their option, continue to hold the
Gross Revenue Interests until the Payout Date, or until the end of the
production of petroleum from the Buy-in Areas.
4.3 The Seller and Altwood shall with respect to any Buy-in Area have the
option to continue on the basis of their Gross Revenue Interests or to
convert such Gross Revenue Interests to the Paying and Working Interests,
as shown in the table below: -
PARTY PERCENTAGE INTERESTS
- --------------------------------------------------------------------------------
BEFORE PAYOUT AFTER PAYOUT
- --------------------------------------------------------------------------------
Paying WORKING GROSS PAYING WORKING
REVENUE
- --------------------------------------------------------------------------------
Farmee 100.0 50.0* - 32.0 32.0
(less (Pounds)2.25M)
- --------------------------------------------------------------------------------
Buyer (Pounds)2.25M 50.0* - 24.5 22.5
- --------------------------------------------------------------------------------
IE 0.0 0.0 13.0 43.5 41.5
- --------------------------------------------------------------------------------
AP 0.0 0.0 2.0 0.0 4.0
- --------------------------------------------------------------------------------
TOTALS 100.0 100.0 15.0 100.0 100.0
- --------------------------------------------------------------------------------
* Subject to one half of the 15% GRI.
4.4 The Gross Revenue Interests to be paid by the Buyer to the Seller and
Altwood shall be six and a half (6.5) percent and one (1) percent
respectively. Such payments shall be subject only to the deduction from the
Gross Proceeds thereof of the transportation costs of the Petroleum or
other substances produced.
4.5 The Seller and Altwood shall be able to exercise such option to convert to
a Working Interest with respect to each and any discovery made on the Buy-
in Areas. Such independent options to be exercisable at any time from the
date of the decision, pursuant to the relevant Joint Operating Agreement to
appraise and/or develop any discovery arising from the execution of the
Farmin Works until the Payout Date. Irrespective of the point in time upon
which such option decision is taken, in no circumstances shall the method
of payments to the Seller and Altwood by the Buyer vary from that of Gross
Revenue Interest until the Payout Date. If the Payout Date precedes the
date of the decision to appraise and/or develop any of the Petroleum
discoveries, then the date on which the said option may be exercised shall
be on or before the date of such decision.
4.6 Election by the Seller and/or Altwood to convert to Paying and Working
Interests at the Payout Date, shall cause the Seller to refund to the
Buyer, within 30 days after the date of election, the proportionate part of
its capital expenditure to provide facilities for Petroleum production
<PAGE>
as though the Seller and/or Altwood had elected to convert to a Working
Interest at the time of the agreement to appraise and/or develop that
Petroleum discovery. Such refund shall not in any way affect the Buyer's
Payout of the Farmin Works Costs as provided under Clause 4.1.
5 JOINT OPERATING AGREEMENT
5.1 After the Finishing Date of each Well of the Farmin Works the Parties
shall, together with the Farmee and Altwood, be subject to and execute a
Joint Operating Agreement in customary form providing, inter alia, for the
principles set out in Schedule 7 to provide for the conduct of joint
operations in respect of the relevant Buy-in Area.
5.2 In the event of a conflict between the provisions of this Agreement and the
Joint Operating Agreement the provisions of this Agreement shall prevail.
6 FARMEE'S OBLIGATIONS AND REFUNDING OF PAYMENT TO BUYER
6.1 The Farmee has undertaken to the Seller and Altwood and the Buyer, that as
set forth in Clause 2.1 of the Farmout Agreement, the Farmee shall conduct
the Farmin Works, and with the benefit of all funds deposited in the Farmin
Account, bear and hold harmless and indemnify the Seller and the Buyer
against one hundred percent (100%) of the Farmin Works Costs.
6.2 If necessary, because of mechanical problems or bad hole conditions of
whatever kind with the Drilling, other than impenetrable geological
formations, the Farmee shall undertake the re-Spudding and re-Drilling of
any such Farmin Wells ( "Substitute Farmin Well"); and
6.3 In the event that the Farmee partly or completely fails to carry out its
obligations under the Farmout Agreement, for whatever reason, then the
Farmee shall forfeit any rights to any monies remaining in the Farmin
Account, and the Farmor shall have a further ninety (90) day period in
which to elect to take up such interest and obligation of the Farmee in any
un-Drilled Farmin Areas, or to return any funds remaining in the Farmin
Account to the Buyer.
6.4 The Seller shall be obligated to refund to the Buyer an amount equal to all
or the proportionate amount of the funds remaining in the Farmin Account,
having been deposited therein under Clause 2, in the event that the default
takes place by the Farmee, and its parent company as
<PAGE>
guarantor, as under Clause 19 of the Farmout Agreement. Such refund to be
made by the Seller to the Buyer within ninety days of the Farmor's notice
to the Farmee of the termination of the Farmee's interest in one or more of
the Buy-in Areas.
6.5 The Seller shall be obligated to refund to the Buyer the proportionate
amount of the funds deposited in the Farmin Account under Clause 2, if
following the Finishing Date of each Farmin Well, and after having used all
reasonable endeavours, the Farmor shall have failed to obtain the consent
and approval of the Secretary as required hereunder. The proportionate
amount to be refunded shall be equal to the amount of the Farmin Works
Costs incurred with respect to any such Farmin Well.
6.6 Despite the provisions of Clause 6.4 the Seller may as an alternative to
making a refund to the Buyer, opt to remedy the default of the Farmee and
complete the Farmin Works.
6.7 The rights granted to the Buyer in this Clause 6 shall be in addition to,
and not in substitution for, any other right or remedy which the Buyer may
have hereunder or in the Farmout Agreement, and specifically, the existence
or the exercise of those rights shall not deprive the Buyer either wholly
or partially of any other right or remedy at law or in equity.
7 SEISMIC OPTION AND FURTHER OPTIONS
7.1 The Buyer to be given by the Seller the following option rights and offers
of participation:-
(i) the option to Buy-in to one or more of a further 10 Option Areas under the
same Buy-in percentage terms to those of the Buy-in Areas hereunder; and
(ii) the continuing option to earn into further areas located within the
remainder of the Seller's current Licence Areas, with the exception of the
Seller's existing producing and planned production projects, in and under
the Licences, as set out in Schedule 11. Such option shall be exercised
upon the same Buy-in percentage terms.provided in Clauses 4.1 and 4.3.
Such continuing option rights may be exercised by the Buyer until the 31st
December 2000. All Option Wells that the Buyer subsequently elects to
drill hereunder and under Clause 7.1(ii) shall be spudded before 31st
December 2001, unless otherwise agreed by the Seller, such agreement not to
be unreasonably withheld, or as may be delayed by the Regulations. The
Farmee or Buyer shall notbe required to drill any of the Option Areas of
Clause 7.1(I) to exercise its rights under this Clause 7.1(ii).
<PAGE>
7.2 In the event that the Seller should offer any farmin or buy-in opportunity
involving its current or future production projects on lands not included
in this Agreement, then the Buyer together with the Farmee shall be given
the initial but non-exclusive opportunity to evaluate and accept the same.
7.3 The Farmee, and the Buyer, would have the right to participate together in
the Option Areas after giving written notice to the Seller, on the same
terms as set forth in this Agreement and the Farmout Agreement. For the
avoidance of doubt such funding shall be on the part of the Buyer the
provision of no more than 50 percent of the deemed cost of the Option Work
Programme to acquire an after Payout 22.5 percent Working Interest and a
24.5 percent Paying Interest in the applicable Option Areas; and on the
part of the Farmee the provision of the remainder of the required funding
to finish the Option Well programme to earn an after Payout 32 percent
Working Interest and Paying Interest in the applicable Option Areas. The
deemed cost of the Option Well programme to be agreed by the Farmee and
Seller. If the Farmee and Seller are unable to agree, the deemed cost
shall be determined by an independent drilling engineering consultant whose
fee would be charged to the Joint Venture Account.
7.4 In the event that the Buyer or Farmee opts not to participate in one or
more of the Option Areas by notice in writing to the Seller, then either of
such Parties would have the right to proceed alone by:-
a) the Farmee funding the full actual cost of the applicable Option Wells
to earn an after Payout 56.5 percent Paying Interest and a 54.5 percent
Working Interest in the applicable Option Areas.
b) the Buyer funding the full deemed cost of the applicable Option Wells
to earn an after Payout 47 percent Paying Interest and a 45 percent
Working Interest in the applicable Option Areas, provided that the
Farmor agrees to bear the risk of any actual costs in excess of the
deemed full cost of such Option Wells.
7.5 The Seller, using the seismic data acquired under the Farmin Works,
together other previous seismic and well data, shall interpret the same and
make a proposal to the Farmee and the Buyer of those Option Areas worthy of
Drilling by Farmin and Buyer funding. The Farmor would subsequently make a
further proposal or proposals concerning Drilling under the further option
rights of the Farmee and Buyer as under Clause 7.1 (ii). Any other such
seismic reprocessing and interpretational work carried out by the Farmee on
its own behalf, or jointly with the Buyer, shall be for its own account,
and such work, its results and conclusions shall be supplied to the Farmor
as soon as it shall be available to the Farmee or Buyer.
<PAGE>
7.6 In the event that it is agreed by the Farmor that extenuating circumstances
such as the failure to obtain planning consent even upon appeal or from an
alternate surface site make the drilling of any of the seven Farmin Wells
impossible, a Replacement Farmin Well may be proposed by the Farmee and or
the Buyer for the approval of the Farmor. Such replacement well to be
selected from amongst the ten (10) exploration leads or from any other
exploration leads or prospects identified on the Farmor's licence areas as
indicated in Clauses 7.1 and 7.2.
7.7 If the Farmee's obligation to conduct the Farmin Works or Option Work
Programme are suspended in accordance with the terms of the Farmout
Agreement, such period of suspension shall give an equal period of
extension of the final Option Well Spud date given in Clause 7.1(ii)
herein, provided that such extension period shall be no longer than twelve
(12) months.
8 OPERATORSHIP
8.1 It has been agreed in the Farmout Agreement that the Farmin Works, with the
exception of those activities detailed in Clause 12.2 therein, shall be
operated by the Farmee on behalf of the Buy-in Party and the Farnor, in
accordance with the Farmin Procedure of Schedule 12 of the Farmout
Agreement. Such performance by the Farmee shall be as a Contract Operator
on behalf of the Farmor, the Licence Operator. Thje Farmee shall obtain and
maintain in full force and effect throughout the Farmin Period the
appropriate insurance cover for the operation of the Farmin Works, to be
paid for out of the Farmin Account. Such Insurance to include without
limitation, third party liability and pollution clean-up insurance,
automobile liability, comprehensive general liability, aircraft liability
and well control insurance, as further detailed in Schedule 12 of the
Farmout Agreement.
8.2 During the Farmin Period, the Farmor shall continue to operate on behalf of
and with the approval of the Farmee, all geological, geophysical and lands
aspects of the Farmin Works including:-
a) wellsite geological control and reporting;
b) preparation of the after well report books;
c) geological/geophysical evaluation of the well results of the Farmin
Works and the consequences for further activities. This and items a)
and b) above to be for the Joint Venture Account;
d) preparation for and the supervision of the 150 kms of technically
suitable seismic survey work. In this the Farmor shall solicit
<PAGE>
contractor's bids and select the contractor with the approval of the
Farmee acting reasonably, so that all possible cost savings may be made
consistent with obtaining seismic data of acceptable quality as
appropriate to the seismic acquisition problems of each survey area.
Such costs to be for the Farmin Account; and
e) lands/legal work in the securing of the planning consents and site
lease agreements with landowners, for the seven Farmin Wells. Such
activities to be for the sole cost and expense of the Seller, and to
include the site lease costs to the Finishing Date of each Farmin Well.
Thereafter such costs shall be for the Joint Venture Account .
8.3 The Farmee shall continue to carry out the function of Contractor Operator
for any drilling activities on the Areas covering any Petroleum discovery
resulting from the Farmin Works. In addition, the Farmee shall be Contract
Operator for any Crude Oil production operations on such Areas.
8.4 The Seller shall be the Operator for any Natural Gas and Condensate
production operations on the Areas.
9 TECHNICAL DATA
Proprietary rights to technical data acquired in the performance of the
Farmin Works including seismic data would be held pro-rata to the after
Payout Working Interest percentages shown in the table set out in Clause
4.3 above. However, the Buyer and its bona fide representatives would have
the right to review all such data relative to the Areas.
10 ORDER OF EXECUTION OF THE FARMIN WORKS
10.1 The 150 km of 2D seismic programme shall be of suitable technical
specification for the requirements of each Option Area and shall commence
as soon as practicable following:
(a) the execution of this Agreement and the Farmout Agreement;
(b) the deposit by the Farmee of the second payment of nine hundred and
twenty five thousand pounds Sterling (Pounds)925,000) into the Farmin
Account, as required by the Farmout Agreement.
<PAGE>
10.2 The Farmin Wells drilling programme shall, unless otherwise agreed with
the Farmor, be conducted by the Farmee as a continuous drilling programme.
The Farmin Wells drilling programme is based upon the Farmee using one (1)
drilling rig and shall commence with the three Weald Basin wells, and then
progress from Fenwick in the East Midlands to the drilling of the three
Lancashire Plain Prospects as the last of the Farmin Wells. The Farmee may
elect to use more than one (1) drilling rig thereby increasing the pace
and changing the order of the drilling programme, as long as the Mythop
and Plumpton prospects on the Lancashire Plain are the last of the Farmin
Wells to be Drilled.
10.3 The Spudding of the first of the Farmin Wells shall be within ninety (90)
days of the Effective Date of the Farmin Agreement, unless otherwise
agreed by the Farmor .
11 SELLER'S REPRESENTATION AND WARRANTIES
The Seller represents and warrants to the Buyer that, as at the date
hereof:-
(i) the Licences are valid and subsisting and in full force and effect;
(ii) subject to the provisions of the Licences, the Operating Agreement and
this Agreement or to any matters arising by operation of law, the
Licences are not subject to any lien, charge or other subsisting
encumbrance;
(iii) all Licence work programmes have been fulfilled in a timely fashion,
or the consent of the Department of Trade & Industry has been obtained
for any delay in such fulfilment, and the Licences are not subject to
cancellation, reduction, relinquishment or termination within the next
12 months, other than EXL 269, and EXL 288, which undergo the
mandatory fifty (50) percent relinquishment at the end of their first
term as Petroleum Exploration and Development Licences.
(iv) any royalty payments (or delivery of petroleum in lieu of royalties)
and licence rentals which it is required to make to the Secretary have
been made ;
(v) all returns required in respect of the Licence to be made to the
Secretary have been made; and
(vi) it is not involved in, or aware of any threat of, any proceedings,
claims or arbitration or other matter which could lead the Licences
being revoked;
<PAGE>
(vii) it has all requisite corporate powers to execute this Agreement and to
perform its obligations hereunder and such execution and performance
has been duly authorised by all appropriate corporate action and will
not constitute a breach of any arrangement or agreement such as the
conditions and obligations of the Licences containing the Areas, to
which it is a party;
(viii) it has obtained all relevant rights from owners or occupiers of land
to Drill upon the Wellsites, with the current exceptions of the
Plumpton, Lingfield and Preesall Wellsites still under ongoing
negotiations with the landowners;
(ix) it has obtained all relevant local authority planning consents to
permit the conduct of the conduct of the Farmin Works as provided
herein;
(x) it has obtained all relevant approvals from environmental control
authorities to permit the conduct of the Farmin Works, and that to the
best of its knowledge and belief there is no administrative action or
procedure pending or planned to revoke or modify the same. The Farmor
is not aware of any material environmental damage or non-compliance
with environmental laws or regulations related to the Areas;
(xi) it has good and marketable title to the Licences and the site leases
in respect of the Areas, except the site leases for the Lingfield and
Preesall Well sites for which it will make reasonable efforts to
obtain.
(xii) it shall not require the Buyer to undertake any further expenditure
than the payment under Clause 2 in respect of activities under the
Areas.
12 Buyers Representations and Warranties
The Buyer represents and warranties that, as at the date hereof, it has all
requisite corporate powers to execute this Agreement and to perform its
obligations hereunder and such execution and performance has been duly
authorised by all appropriate corporate action and will not constitute a
breach of any arrangement or agreement to which it is a party.
<PAGE>
13 CONFIDENTIALITY AND ANNOUNCEMENTS
13.1 Confidentiality Requirement
Each Party entitled to information obtained hereunder or under the Farmout
Agreement may use such information for its sole benefit. Such Parties
shall take such measures with respect to operations and internal security
as appropriate in the circumstances to keep confidential from and prevent
disclosure to third persons all such information, except information which
the Parties have expressly agreed among themselves to release the
information disclosed by a Party:
(a) when and to the extent required by the Regulations and securities laws
applicable to such Party, provided that such Party shall invoke any
confidentiality protection permitted by such Regulations and
securities laws;
(b) to an Affiliate, provided that, such Party shall be deemed to have
required such Affiliate to maintain the confidential status of the
disclosed information and that such affiliate shall be deemed to have
accepted such obligation and that such Party shall be liable for any
loss suffered by the other Parties, or any of them, because of the
failure of such affiliate to maintain such information confidential;
(c) to a third person to which such Party has been permitted to assign a
portion of its interest hereunder, provided that a binding covenant is
obtained from such third person prior to disclosure which provides
that none of such information shall be disclosed by it to any other
third person; and
(d) to the legal, technical, financial or other professional consultants
of such Party which require such information to provide their services
to such Party or to a bank or other financial institution from which
such Party is attempting to obtain financing, provided that a binding
covenant is obtained from such consultant or financier, as the case
may be, prior to such disclosure, which provides, inter alia, that
none of such information shall be disclosed by it to any other third
person or used for the purposes other than advising such Party or
providing financing to such Party, as the case may be.
The confidentiality and non-disclosure obligations in this Clause 13.1
shall not extend to information to the extent it is in the public domain,
provided that, specific items of information shall not be considered to be
in the public domain merely because such items are embraced by more general
information in the public domain.
<PAGE>
13.2 Confidentiality Requirement To Continue
Any Party which otherwise ceases to be bound by the provisions of this
Agreement shall remain bound by the provisions of this Clause with respect
to information obtained hereunder or under this Agreement or under the
Farmout Agreement until and to the extent that such information is in the
public domain.
13.3 Announcements
This Agreement shall remain confidential and no Party shall make any public
announcement or statement with respect thereto without the consent of the
other Party other than as may be required by law or the Regulations or the
rules of any recognised Stock Exchange on which their respective shares are
listed or to relevant government departments.
14 ASSIGNMENT
14.1 Except as provided in Clause 14.2 below, the respective rights and duties
of the Buyer hereunder shall not be assigned without the prior written
consent of the Seller, and the Seller shall have a pre-emption right over
any such sale or assignment.
14.2 Should the Buyer desire or elect to sell or assign all or any part of its
interests under this Agreement or its rights and interests in the Licence
or Licence areas, Buyer shall promptly give written notice to Seller, with
full information concerning its proposed sale or assignment, which notice
shall include the name and address of the prospective purchaser or assignee
(who must be ready, willing and able to purchase), the purchase price and
all other terms of the offer. The seller shall then have an optional prior
right for a period of thirty (30) days after receipt of the notice, to
purchase on the same terms and conditions the interest which Buyer proposes
to sell; provided, however, Seller shall have no preferential right to
purchase in those cases where Buyer wishes to mortgage all or part of its
interests or create lien rights on all or part of its interests, or to
dispose of all or part of its interests by merger, reorganisation,
consolidation or to sell all or substantially all of its assets or to
dispose of all or part of its interest to a subsidiary, Affiliate or parent
company or to a subsidiary of a parent company, or to any company or entity
in which Buyer owns a minimum of a 25% economic interest. Any such sale or
assignment shall be subject to the provisions of this agreement.
<PAGE>
14.3 The provisions of this Agreement shall enure for the benefit of and be
binding on the successors in title and permitted assignees of the Parties.
15 FORCE MAJEURE
15.1 Definition of Force Majeure
In this Clause 15 "Force Majeure" means an occurrence beyond the reasonable
control of the Party claiming suspension of an obligation hereunder, and
includes, without limiting the generality of the foregoing, an act of God,
war, revolution, insurrection, blockade, riot, strike, a lockout or other
industrial disturbance, fire, lightning, unusually severe weather, storms,
floods, explosion, accident, shortage of labour or materials or government
restraint, action, delay or inaction.
15.2 Suspension of Obligations Due to Force Majeure
If any Party is prevented by Force Majeure from fulfilling any obligation
hereunder, the obligation so affected shall be suspended to the extent that
the Party is prevented from performing such obligation for so long as the
Force Majeure prevents the performance of such obligation and for such time
thereafter as that Party may reasonably require to commence to fulfil such
obligation. A Party prevented from fulfilling any obligation by Force
Majeure shall promptly give the other Parties notice of the Force Majeure
and the affected obligations, including reasonably full particulars
thereof.
15.3 Obligation to Remedy
The Party claiming suspension for an obligation by reason of Force Majeure
shall promptly use all reasonable efforts to remedy the cause and effect of
the applicable Force Majeure and such Party shall promptly give the other
Parties notice when the force Majeure ceases to prevent the performance of
the applicable obligation. The term of settlement of any strike, lockout
or other industrial disturbance shall be wholly in the discretion of that
Party, and that Party shall not be required to accede to the demands of its
opponents in any strike, lockout or industrial disturbance solely to remedy
promptly the event of Force Majeure.
15.4 No Exception for Lack of Finances
Notwithstanding anything else in this Clause 15, lack of finances shall not
be considered an event of Force Majeure, nor shall any Force
<PAGE>
Majeure suspend any obligation for the payment of money due hereunder.
15.5 Surface Access Difficulties
Notwithstanding any provision to the contrary contained herein, to the
extent that surface conditions do not enable the Farmee to have access to
the Farm-in Areas within the time period specified for the commencement
and/or completion of an operation thereon, the Farmee shall give notice of
same to the Farmor. If the Farmor consents, with such consent not
unreasonably withheld, that operation may be postponed until such time as
surface conditions permit access to the location of such operation, at
which time the Farmee shall move the requisite equipment thereto in a
timely manner.
16 MISCELLANEOUS
16.1 Relationship between the Parties
This Agreement is not intended nor shall be deemed to constitute a
partnership or association or any kind between the Parties.
16.2 Further Acts and Documents
Each Party undertakes to do or procure to be done all such acts (including
the execution of any appropriate documents) as may be necessary to
consummate the transactions contemplated hereby or fully to give effect to
the intent and purpose of this Agreement.
16.3 Notices
Any notice pursuant to this Agreement shall be given in accordance with the
following provisions:
Notice to the Seller shall be given to:
Independent Energy UK Limited
Second Floor Park House
Park Street
Maidenhead
Berkshire
SL6 1SL
United Kingdom
Attention : Mr W E Evans
Telephone : 01628 789062
<PAGE>
Facsimile : 01628 671976
Notice to the Buyer shall be given to:
Vulcan Energy Limited
c/o Vulcan Ventures Inc
Suite 550
110 - 110th Avenue N.W.
Bellevue
Washington
98004
USA
Attention : Mr William D Savoy
Telephone : + 425 453 1940
Facsimile : + 425 453 1985
16.4 Liability to Stamp Duty
It is agreed that in the event that any stamp duty becomes chargeable on
this Agreement or any implementation documentation executed pursuant to and
in performance of this Agreement it shall be dealt with in accordance with
the Stamp Duty Agreement of even date herewith.
16.5 Costs and Expenses
Each Party shall bear its own legal costs and expenses in connection with
the preparation and execution of this Agreement.
16.6 Entirety of Agreement and Prior Agreements
This Agreement and the instruments referred to herein constitute the entire
agreement and understanding of the Parties in relation to the matters
contained herein and supersedes any and all prior negotiations, proposals,
statements of intent, correspondence and representations made by either or
both of the Parties with respect thereto.
16.7 Amendment and Agreement
This agreement may only be altered, varied or amended by a written
instrument executed by the Parties.
<PAGE>
17 GOVERNING LAW
This Agreement is governed by and shall be construed in accordance with the
Law of England and Wales and each of the Parties hereby irrevocably submit
to the exclusive jurisdiction of the High Court of England and Wales.
18 ARBITRATION
Any dispute or difference arising out of or in connection with this
Agreement, including any question regarding its existence, validity or
termination shall be referred to final and binding arbitration before a
single arbitrator under the provisions of the London Court of International
Arbitration, and may be confirmed and enforced by the High Court of England
and Wales.
19 EFFECTIVE DATE
This Agreement shall take effect on the Effective Date.
IN WITNESS whereof this Agreement has been signed for and on behalf of the
Parties
_______________________
SIGNED for and on behalf of
INDEPENDENT ENERGY UK LIMITED
_________________________
SIGNED for and on behalf of
VULCAN ENERGY LIMITED
<PAGE>
EXHIBIT 21
Direct and indirect subsidiaries of Independent Energy Holdings PLC
Name Ownership
- ---- ---------
Independent Energy UK Limited 100%
Independent Energy Generation Limited 100%
Independent Energy Resources Limited 100%
Independent Energy Limited 100%
Independent Energy Services Limited 100%
Independent Energy (Pye Bridge) Limited 100% owned by Independent
Energy UK Limited
Falmouth Energy Limited 100%
Petroplus Energy Park Milford Haven Limited 50% owned by Independent
Energy UK Limited
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants, we hereby consent to the inclusion in this
Amendment No. 1 to the Registration Statement on Form F-3 of our report dated
19 August 1999 relating to the financial statements of Independent Energy
Holdings PLC as of 30 June 1998 and 1999 and for each of the fiscal years in
the three-year period ended 30 June 1999 and to all references to our firm
included in this Form F-3.
Nottingham, England /s/ Pannell Kerr Forster
Pannell Kerr Forster, Chartered
Accountants and
8 September 1999 Registered Auditors
<PAGE>
EXHIBIT 99
Mr. R. Jones,
Independent Energy UK Limited,
6th Floor,
Radcliffe House,
Blenheim Court,
Solihull,
West Midlands,
B91 2AA.
Dear Sir,
PROVED GAS RESERVES IN FIELD WITH INTERESTS ATTRIBUTABLE
TO INDEPENDENT ENERGY (UK) LIMITED
AT 30th JUNE, 1999
In 1998 Gaffney, Cline & Associates Ltd. (GCA) was requested by Independent
Energy UK Limited (IEUKL) to carry out an independent assessment of the latter's
proved gas reserves in certain United Kingdom (UK) onshore blocks. In addition,
GCA was instructed to derive the pre-tax Net Present Values (NPVs) attributable
to IEUKL resulting from their use of the gas in generation of electricity to be
sold to local customers via the relevant regional electricity company
distribution system. GCA has now been requested by IEUKL to provide an updated
assessment of the proved gas reserves and NPVs for the same fields.
This letter summarizes the results of this independent reserves
determination. GCA has completed an assessment of the three developed and three
undeveloped gas fields that are operated by IEUKL which are located in various
licence areas onshore UK (see Figure 1). Assessment of the fields is somewhat
unusual, in that the gas produced is monetized by its use, or planned use, for
locally-based power generation. In addition, where gas production is
insufficient to maintain power generation from suitably-sized generation units,
IEUKL purchases natural gas from third parties via pipeline connections to the
UK's National or Regional Gas Transmission System. Two such power generation
units have been installed and supplied with third party gas in the last year on
two of the undeveloped fields. Overall, GCA's assessment for each field is
based on the ongoing production of gas as part of individual, integrated
power/gas projects. The reserves estimation and NPVs quoted are as at an
effective date of June 30th, 1999, and are based upon information available to
GCA as at 9th August, 1999.
The following estimates of recoverable oil and gas reserve volumes have
been prepared in accordance with the oil and gas reserves definitions set out in
Rule 4-10 of the Securities and Exchange Commission (SEC) Regulation S-X
(Appendix I - attached).
In carrying out this assessment, GCA has relied on information provided by
IEUKL. This comprised base data, interpreted data, technical reports,
development plans, economic parameters and details of the licence interests held
in each licence area. The reserves reported here are for gas only, as the
volumes of associated condensate are estimated to be very small-to-negligible.
1
<PAGE>
DEVELOPED FIELDS
CAYTHORPE
Caythorpe Gas field is located in Licence area PL 234 in Yorkshire and is
held 100% by IEUKL. The Licence expires in 2017. Two wells have been drilled
to date to define a single geological structure with fault-dip closure. The
first well (C-1) was drilled by the original operator, Kelt UK Limited (Kelt),
in 1987 on the edge of the accumulation. The second (C-2) was also drilled by
Kelt in 1989 from the same surface location, but the well-bore was deviated up
to 44(degrees) to a crestal location to the west of C-1. Two gas bearing
reservoirs have been tested: one in the Kirkham Abbey Dolomite formation (KAD)
at 5,735 ft ss; and the other in the Rotliegendes sandstone formation at 6,000
ft ss. The Rotliegendes is a regionally-extensive formation and it is the main
producing reservoir in many of the offshore gas fields in the southern sector of
the UK North Sea. A total of more than 100 ft of core was collected from the
Rotliegendes in wells C-1 and C-2 and this has provided a detailed description
of the reservoir characteristics. The reservoir consists of two sections, with
the upper part having the better reservoir properties (permeability more than
100 md) than the lower section (20 md). No core was collected from the KAD
formation.
Hydrocarbon columns were confirmed in both reservoirs from the
interpretation of electric well logs, RFT pressure surveys, and well-tests. The
gross column and it was estimated at 155 ft in the KAD based on a lowest known
gas (LKG) and at 88 ft in the Rotliegendes. The initial reservoir pressures
were determined from the RFT data with values for the Rotliegendes of 2,969
psia, and 2,835 psia for the KAD. The KAD was tested for 30 hours in well C-2
at up to 8 Million Standard Cubic Feet per Day (MMscfd) from a 42 ft interval.
The reservoir is a tight Dolomite formation with production from a natural
fracture system. The gas had an H2S content of around 5 parts per million
(ppm). Two separate production tests were completed in the Rotliegendes in well
C-2. A lower section near the gas water contact (GWC) was tested at 1.0 MMscfd
for 4 hours from a 10 ft interval. The section near the top of the reservoir
was subsequently put on extended test from a 10 ft interval at rates up to 10
MMscfd. The Rotliegendes gas has no reported H2S content. Well log
interpretation and core analysis indicates an average porosity of 15% for the
KAD and 18% for the Rotliegendes and average water saturation of 40% for the KAD
and 31% for the Rotliegendes.
The Rotliegendes has an original GWC at 6,135 ft ss, and the KAD has a LKG
at 5,890 ft ss. The mapped closure is approximately 213 acres for the
Rotliegendes. The KAD has not been mapped, but a material balance analysis of
the extended well test has been used to determine the size of the gas
accumulation. GCA estimates the proved original gas in-place (OGIP) for the
Rotliegendes as 7.46 billion cubic feet (BCF), and for the KAD as 3.0 BCF.
The field was originally explored, developed and produced by Kelt from 1983
to February, 1997. Gas production has been from the Rotliegendes reservoir
alone, with well C-2 being the only producing well in the field. The KAD
reservoir is isolated by the well completion. The well produced at rates up to
10 MMscfd manly during the winter months. It has required two sand clean-out
jobs to assist production performance, no other production problem issues being
reported. Produced condensate has averaged around 5 Bbl/MMscf. The cumulative
field production when IEUKL assumed operatorship in February, 1997 was 4.6 BCF
2
<PAGE>
and 26,000 Bbls. During the earlier period, a number of bottom hole pressure
surveys were undertaken to monitor the average reservoir pressure performance.
GCA has been able to verify that these data confirm (by material balance
analysis) that the reservoir recovery process is not affected by any external
fluid influx and, consequently, a high gas recovery (92%) can be achieved.
The field was shut-in from March, 1996 until November, 1997, during which
time IEUKL secured the transfer of the Licence and then obtained local planning
and DTI approval for revisions to the development plan to allow onsite power
generation. That plan includes producing the reservoirs to a lower abandonment
pressure than proposed originally due to the new surface production
configuration that can operate to a lower pressure (60 psig versus 295 psig).
The project approval covers power generation operations up to 2009. IEUKL has
operated and produced the field at rates up to l.78 MMscfd since December, 1997
with flowing wellhead pressures between 400 and 980 psig. The cumulative field
gas production at end-June, 1999 was 5.55 BCF.
GCA estimates, by material balance, the remaining economic proved developed
gas reserves in the Rotliegendes reservoir to be 1.27 BCF as at 30th June, 1999.
For the KAD reservoir, GCA estimates the proved developed gas reserves to be
0.45 BCF as at 30th June, 1999. In the absence of any extensive production from
the KAD, a recovery factor of 15% is considered proven based on a regional
analogy of similar reservoir performance (where water influx was an issue),
IEUKL planned to stimulate the KAD formation by acidisation of the well during
1998, the plan being to commingle production from the Rotliegendes and the KAD
reservoirs. However, IEUKL has now suspended this work indefinitely.
ELSWICK
The Elswick gas field is located in Licence area EXL 269 in Lancashire and
is held 96% by IEUKL. The Licence expires in 2024. One well (E-1) was drilled
by British Gas (the original operator) in 1990 and discovered a single faulted
anticlinal geological structure. The reservoir in the Collyhurst sandstone was
mapped at around 3,330 ft ss. The hydrocarbon column of 120 ft was confirmed by
interpretation of electric well logs (based on a LKG) and well tests. A total
of 120 ft of core was collected. The initial reservoir pressure was 1,685 psia
at 3,419 ft measured wireline depth. Initial well testing showed that the
reservoir is in a tight zone with an average permeability of less than 1 md.
Eukan Energy Limited, which acquired the Licence in 1993, retested the well
after a special reservoir stimulation treatment. It was tested for 80 hours at
0.2 MMscfd from a 96 ft interval. Well log interpretation indicates an average
porosity of 5.6% and water saturation of 60%.
The Collyhurst reservoir has a LKG at 3,443 ft ss, which has been used to
limit the proved volume, with a possible GWC at 3,750 ft ss, within which the
total mapped closure is 997 acres. The mapped proved area is 114 acres. GCA
has now estimated the proved OGIP by material balance to be 1.11 BCF. The OGIP
estimate has doubled since April 1998, based on the results from a recent
pressure build up test. The test indicates higher reservoir pressures and
better overall reservoir performance than previously anticipated, which GCA
considers supports a higher overall recovery factor.
3
<PAGE>
The field has been operated by IEUKL since January, 1996. It has been on
production as part of Phase I of a development program since June, 1996 at a
rate of around 0.2 MMscfd and flowing wellhead pressures of 260-600 psig. The
produced water rate has declined from an initial value of 5 Barrels of water per
Day (Bwpd) to 1.5 Bwpd. The cumulative gas production at end-June, 1999 is
236.4 MMscf. The field monitoring plans include annual bottom hole pressure
surveys to assess reservoir pressure performance.
GCA estimates the remaining proved developed gas reserves to be 0.46 BCF as
at 30th June, 1999, based on a recovery factor of 63% determined from
consideration of material balance analysis and a minimum flowing wellhead
pressure of 60 psig.
TRUMFLEET
The Trumfleet gas field is located in Licence area EXL 288 in Yorkshire and
is held 96% by IEUKL. The Licence expires in 2024. A total of 5 exploration
and appraisal wells have been drilled on a single faulted anticlinal geological
structure. The discovery well (T-1) was drilled by British Petroleum (BP) in
1957 and a successful appraisal well (T-3) was drilled in 1962. Two reservoirs
have been mapped at the T-3 location the Rough Rocks (RR) at 2,984 ft ss and the
Beacon Hill Flags (BHF) at 3,215 ft ss. A total of 40 ft of core was collected
from the two reservoirs from well T-1. During 1998, IEUKL shot approximately 22
km, ten lines, of 2D seismic over the Trumfleet structure. The new
interpretation has confirmed that the proven production is restricted to a small
fault block containing wells T-3 and T4 and, in addition, has increased
confidence in the structural interpretation, the new structure being more highly
faulted and smaller than that indicated by the previous mapping.
Hydrocarbon columns were confirmed in both reservoirs by interpretation of
electric well logs and well tests and amounted to 36 ft in the RR and 42 ft in
the BHF (based on a LKG). The initial reservoir pressure in the BHF reservoir
was 1,608 psia and for the RR it was 1,495 psia. Well T-1 was tested in the BHF
at 0.2 MMscfd, while well T-3 was tested successfully at 1.0 Mmscfd from a 10 ft
section also in the BHF (with an estimated absolute open flow potential (AOFP)
of 7.8 MMscfd). The RR reservoir was also tested in T-3 at 0.25 MMscfd. The
well log interpretation indicates an average porosity of 12.7% for RR and 15.4%
for BHF and average water saturation of 50% for RR and 50% for BHF. Both zones
have reported permeability in the range of 0.1-15 md but the BHF reservoir is
considered to have better characteristics than the RR based on the well test
performance.
The RR reservoir has a LKG at 3.144 ft ss and that for the BHF reservoir is
3,344 ft ss. The new structural interpretation has reduced the total mapped
closure; as a consequence, areas at the LKG contours are 345 and 341 acres for
the RR and BHF respectively. The mapped proved areas for the RR and the BHF
reservoirs are 42 and 31 acres respectively. GCA estimates the proved OGIP by
volumetrics for the RR reservoir to be 0.26 BCF, and for the BHF reservoir to be
1.35 BCF.
The field has been operated by IEUKL since January, 1996. Well T-4 was
drilled in April/May, 1997 as Phase I of a development program and the two
reservoirs tested. The field has been produced from the BHF since March, 1998
at an initial rate of 1.78 MMscfd, with flowing wellhead pressures in the range
160 - 1,400 psig. Subsequently, field production levels
4
<PAGE>
have declined. There has been no reported liquid production to date. The
cumulative gas production at end-June, 1999 is 402.6 MMscf. This well is
considered to drain a smaller fault block than previously mapped. IEUKL has
remapped the field and a new well, T-6, will be drilled on the T-1 fault block
(a proved undeveloped area in the BHF reservoir) in August, 1999 to maintain the
field gas production profile. Production was taken from the RR reservoir in well
T-4 whenever such gas supply was required. The field monitoring plans include
annual bottom hole pressure surveys to assess the reservoir pressure
performance. A PLT survey has been run in the T-4 well during 1998. The full
results of this were not made available for GCA's review. However, from the
conclusions of this survey, which were provided by IEUKL it is believed that 80%
of current production is coming from the BHF formation.
GCA estimates the remaining proved developed gas reserves as at 30th June,
1999 for the RR reservoir to be 0.05 BCF, and 0.002 BCF for the BHF reservoir.
These estimates are based on a recovery factor of 66% for each reservoir
(volumetric depletion from an isolated fault block) and a minimum flowing
wellhead pressure of 60 psig. GCA also estimates the proved economic
undeveloped gas reserves in the T-1 fault block for the BHF reservoir to be 0.74
BCF as at 30th June, 1999; no proved undeveloped gas reserves are estimated for
the RR reservoir in this area. There are plans to drill well T-6 in the T-1
fault block region to recover the undeveloped reserves from the BHF reservoir.
Drilling will commence by mid-August, 1999, and the well is expected to come
onstream by October of the same year. The field production rate is expected to
increase to 1.78 MMscfd as a result of the T-6 well. There are no plans for
further wells to be drilled at this time.
UNDEVELOPED FIELDS
IRONVILLE
The Ironville gas field is located in Licence area EXL 290 in Derbyshire
and is held 96% by IEUKL. The Licence expires in 2024. Five wells have been
drilled and have located several simple geological structures. The discovery
was drilled by BP in 1957. A single reservoir, the Ashover sandstone, has been
mapped at 1,253 ft ss. The hydrocarbon column has been confirmed by the
interpretation of well logs and well-tests and is 82 ft thick. The initial
reservoir pressure was 692 psia. The well was tested for 34 hours at rates up
to 0.5 MMscfd. The test program included a stimulation treatment to improve
reservoir deliverability after evidence of possible severe formation damage from
drilling operations. Well log interpretations indicate an average porosity of
13% and average water saturation of 50%. A total of 70 ft of core was collected
from well 1-3 and confirms a tight formation with a permeability of less than 10
md.
The Ashover reservoir has LKG at 1,312 ft ss, with a mapped closure of 344
acres at this level. The proved area has been limited to 160 acres, based on
consideration of the field geology and well test performance. GCA estimates the
proved OGIP by volumetrics to be 1.29 BCF.
The field has been operated by IEUKL since January, 1996. The phased
development plans are that a new well will be drilled as a replacement for well
1-3 in the second half of 1999 as part of Phase I. The field production will
commence at a rate of 0.44 MMscfd from the Ashover reservoir. Plans include
commingling production from other known reservoir sections not yet tested.
There are no estimated proved volumes for these other zones in this report.
5
<PAGE>
IEUKL has installed a power generation set already at the nearby Pye Bridge
site and, since June, 1999, has taken gas from the UK grid to generate power.
This will continue until the gasfield itself is on production (estimated
currently at October, 1999), from which time a portion of the purchased gas used
at Pye Bridge will be replaced by Ironville gas.
GCA estimates the proved undeveloped gas reserves for the Ashover formation
to be 0.56 BCF at as 30th June, 1999. These estimates are based on a recovery
factor of 44% and a minimum flowing wellhead pressure of 60 psig.
NOOKS FARM
Nooks Farm gas field is located in Licence area EXL 289 in Staffordshire.
The Licence expires in 2024. Two wells (NF-1 and NF-1A) have been drilled on a
single, heavily faulted, geological structure. The discovery was drilled by
Shell in 1983, the NF-1A well effectively being a twin of NF-1. A single
reservoir, the Onecote sandstone, has been mapped at 424 ft ss. The hydrocarbon
column has been confirmed by interpretation of electric well logs and well tests
and is 124 ft. The initial reservoir pressure was 475 psia. Well NF-1A was
tested for 14 hours at rates up to 1.4 MMscfd. The test program included
several acid wash treatments to improve well deliverability. Well log
interpretations indicate an average porosity of 13% and average water saturation
of 51%. A total of 122 ft of core was collected from well NF-1A. Core analysis
indicates a permeability of less than 5 md, whereas well test analysis indicates
a value of 38 md, probably representing the effect of some wellbore fracturing.
The Onecote reservoir has a LKG at 652 ft ss, with mapped closure of 696
acres at this level. The proved area within the NF-1A well fault block has a
closure of 65 acres. GCA estimates the proved OGIP by volumetrics to be 0.63
BCF.
The field has been operated by IEUKL since January, 1996. The phased
development plans are that a new well will be drilled in the second half of 1999
as part of Phase I with a high angle well-bore through the reservoir. The
wellbore is expected to extend into an adjacent fault block to the north that is
not part of the proven area. The field production is anticipated to commence at
a rate of 1.0 MMscfd.
IEUKL has already installed a power generation set at the nearby Knypersley
site, which began power generation in October, 1998 utilising gas purchased from
the Transco system. This will continue until the gasfield itself is put on
production, estimated currently for November, 1999. As with Ironville, at this
time a portion of the purchased gas will then be "substituted" by Nooks Farm
gas.
GCA estimates the proved undeveloped gas reserves to be 0.37 BCF as at 30th
June, 1999. This estimate is based on a recovery factor of 59% (volumetric
depletion from a low pressured gas in an isolated fault block) and a minimum
flowing wellhead pressure of 60 psig.
GODLEY BRIDGE
Godley Bridge gas field is located in Licence area EXL 291 in Surrey and is
held 96% by IEUKL. The Licence expires in 2024. Conoco, the original operator,
drilled three wells on the Licence in the early 1980s that tested three separate
geological structures, with several reservoir
6
<PAGE>
targets in each. Godley Bridge-1 (GB-1) drilled in late 1982 tested successfully
a Portland sandstone reservoir (the primary target) at 2,923 ft ss. The
hydrocarbon column was confirmed by interpretation of the well logs and the
well-tests and is 30 ft thick. The initial reservoir pressure was 1,397 psia.
The reservoir was tested for 21 hours at rates up to 1.4 MMscfd. The test
reported an H2S content of approximately 30 ppm in the gas but this has yet to
be verified by properly controlled sampling. Well log interpretations indicate
an average porosity of 17.3% and average water saturation of 37%. A total of 30
ft of core was collected from GB-1. Pressure build-up data show a rapid return
to initial pressure conditions, indicating a high permeability, well connected
reservoir.
During 1998, a detailed analysis of seismic velocities was completed by a
consultant for IEUKL and a new depth conversion and depth structure map
produced. This revised mapping better honours the data and confirms the
presence of three separate accumulations. The GB-1 accumulation is now smaller
and separate from the Dunsfold dome to the east.
The Portland sandstone in GB-1 has a GWC at 2,950 ft ss. Total mapped
closure for the GB-1 structure is 272 acres at this GWC. The proved area is
limited to 272 acres, based on consideration of the field geology and well test
performance. GCA estimates the proved OGIP by volumetrics to be 2.21 BCF.
The field has been operated by IEUKL since January, 1996. The phased
development plans were that GB-1 would be re-entered in 1999 as part of Phase I
and a sidetrack drilled at high angle towards the crest of the structure, some
2,500 ft from the present surface location. This program has been deferred for
a year by IEUKL. The produced gas will be utilised completely by the gas
engine-driven generators; hence no special plant is required to remove any H2S
which may be present. The field production is now expected to commence in
October, 2000 at a rate of 1.74 MMscfd.
GCA estimates the proved undeveloped gas reserves to be 1.94 BCF as at 30th
June, 1999. These estimates are based on a recovery factor of 88%, derived from
volumetric depletion of a high permeability reservoir and a minimum flowing
wellhead pressure of 60 psig.
ECONOMIC ANALYSIS
An economic analysis of the development of the proved developed and
undeveloped reserves was performed for each field using electricity sales prices
and other associated economic parameters as at June 30th, 1999 on an unescalated
basis. Future capital and operating costs were derived from the development
program forecasts prepared by IEUKL using a 1999 cost basis, uninflated. The
total pre-tax (i.e. pre UK/US Income Taxes) NPV at 10% discount factor for the
net reserves attributable to IEUKL for these six projects was derived as
(Pounds)3.37 million. Table 1 summarizes the Net Gas Reserves and associated
pre-tax NPV at 10% attributable to IEUKL at 30th June, 1999. Appendix II
includes maps for each of the fields, plus a summary of key technical parameters
referred to in the individual field comments above.
In effecting this economic analysis, IEUKL's business of utilising on-site
or nearby power generating facilities to monetize its reserves of natural gas
required GCA to back-calculate an `effective' gas price to facilitate
calculation of the cash flow revenue stream. This
7
<PAGE>
was necessary as no actual gas price is paid, with electricity sales providing
the revenue stream. The effective gas price utilised for each field's economic
analysis was derived from the value of the electricity generated from each
individual gas field. In turn, this electricity value was built up from the
effective average UK power pool selling price for 30th June, 1999 by adding a
number of benefits which accrue to IEUKL by being an embedded power generator
(i.e. benefits which result from, amongst other things, not having to transport
its generated power via the UK's national power transmission grid). Once each
field's electricity revenue had been calculated, GCA then derived the effective
equivalent natural gas price received by IEUKL based on the thermal efficiency
of the power generation units being employed and the net heating value of each
respective field's gas. As an example, a summary of the Calculation process
adopted for the Caythorpe gas field is given in the Appendix for a 24-hour
generation operation. (It is to be noted that in this example GCA has utilised
data for the location benefits, sales margin, generator efficiency and gas
calorific value effects as provided by IEUKL. The Average Pool Selling Price and
associated Transmission Uplift Price are those for June 30th, 1999 as stated in
the `Financial Times' dated July 28th, 1999 (and agreed with IEUKL)).
Additionally, in line with IEUKL's development program, GCA's economic
analysis gives due recognition to the purchase of natural gas from third parties
to allow full generation of power once each field's own gas supplies begin to
decline. This is the case for all fields except Trumfleet and Elswick where no
plans exist currently to utilize purchased gas. As a consequence, for the
former, gas production find power generation is possible until (and including)
July, 2003, while for Elswick, the current operation of running the generator
from 6 a.m. each Monday morning through to midnight on each Friday will continue
up to October, 1999 (inclusive). This will be followed by 16-hour, 7-day
operation through to the end of May, 2006.
For Caythorpe, where power production already takes place utilizing the
field's own gas reserves, the use of purchased gas will be necessary from late
1999/early 2000 to maintain full generator operation. Here, where both produced
and purchased gas are utilised, operating costs applicable to the Caythorpe gas
are calculated on a pro rata basis according to gas throughput quantities. In
the case of Nooks Farm and Ironville, IEUKL has already begun power generation
utilising purchased gas. The same is intended for Godley Bridge. A portion of
the purchased gas will then subsequently be substituted by each field's
respective own production until such time when production decline occurs, when
the proportion of purchased gas will once again become greater and eventually
again be the only source of gas to each respective generation unit.
The reserves reported above are estimates based upon professional
engineering judgement and they are subject to future revisions, upwards or
downwards, as a result of future operations and/or as additional information
becomes available. In addition, commercial viability and ongoing production of
the reserves will remain dependent on IEUKL's ability to sell electricity
economically using gas purchased from the UK National Transmission System.
GCA has acted as an independent reserves estimator for IEUKL. The
company's senior partners, directors and employees have no financial interest in
IEUKL. GCA's remuneration was not in any way contingent upon the reported
reserve estimates. This report has been prepared for IEUKL and should not be
used for purposes other than those for which it is intended.
8
<PAGE>
Yours faithfully,
GAFFNEY, CLINE & ASSOCIATES LTD
R. W. Poole
Projects Director
9
<PAGE>
TABLE 1
<TABLE>
<CAPTION>
SUMMARY
GROSS FIELD GAS RESERVES AND ASSOCIATED NPV @ 10% ATTRIBUTABLE TO
INDEPENDENT ENERGY UK LIMITED
AT 30TH JUNE 1999
- --------------------------------------------------------------------------------------------------------------
FIELD PROVED PROVED TOTAL 10% PRE-TAX
DEVELOPED UNDEVELOPED PROVED NPV
(BCF) (BCF) (BCF) (POUNDS)MILLION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Caythorpe 1.27 0.00 1.27 2.46
- --------------------------------------------------------------------------------------------------------------
Elswick* 0.46 - 0.46 0.31
- --------------------------------------------------------------------------------------------------------------
Trumfleet* 0.05 0.74 0.79 (0.07)
- --------------------------------------------------------------------------------------------------------------
Godley Bridge* - 1.94 1.94 1.14
- --------------------------------------------------------------------------------------------------------------
Nooks Farm* - 0.37 0.37 (0.21)
- --------------------------------------------------------------------------------------------------------------
Ironville* - 0.56 0.56 (0.26)
- --------------------------------------------------------------------------------------------------------------
SUB TOTALS 1.78 3.61 5.39 3.37
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Note: * The analysis is net of a 4% net-revenue interest that exists over each
Licence interest except Caythorpe where no other interests apply.
Checked: Approved:
<PAGE>
APPENDIX I
<PAGE>
SEC DEFINITIONS FOR OIL AND GAS RESERVES
PROVED OIL AND GAS RESERVES
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable 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 consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation tests.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering
data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included
in the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project
or program was based.
(iii) Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs, but is classified
separately as "indicated additional reserves"; (B) crude oil,
natural gas and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors: (C) crude oil,
natural gas and natural gas liquids that may occur in undrilled
prospects; and (D) crude oil, natural gas and natural gas liquids
that may be recovered from oil shales, coal, gilsonite and other
such sources.
PROVED DEVELOPED OIL AND GAS RESERVES
Proved developed oil and gas reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms or primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
<PAGE>
PROVED UNDEVELOPED RESERVES
Proved undeveloped oil and gas reserves are reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves or
undrilled acreage shall be 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 productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be 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.
<PAGE>
APPENDIX II
<PAGE>
GASFIELD TECHNICAL SUMMARY DATA
(PAGE 1 OF 2)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FIELD CAYTHORPE TRUMFLEET
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reservoir (Name) Rotliegendes KAD Rough Rock Beacon Hill Flags
- ------------------------------------------------------------------------------------------------------------------------------
Reservoir (Type) Sandstone Dolomite Sandstone Sandstone
- ------------------------------------------------------------------------------------------------------------------------------
Depth (ft ss) 6,000 5,735 2,984 3,215
- ------------------------------------------------------------------------------------------------------------------------------
Initial Reservoir Pressure (psia) 2,969 2,835 1,495 1,808
- ------------------------------------------------------------------------------------------------------------------------------
Initial S.I. Wellhead (psig) 2,480 2,363 1,239 1,328
- ------------------------------------------------------------------------------------------------------------------------------
Temperature ((degrees)F) 147 143 107 110
- ------------------------------------------------------------------------------------------------------------------------------
Porosity ((O))(%) 18 15 12.7 15.4
- ------------------------------------------------------------------------------------------------------------------------------
Gas Saturation (%) 69 60 50 50
- ------------------------------------------------------------------------------------------------------------------------------
Net to Gross (%) (greater than)90 100 90 73
- ------------------------------------------------------------------------------------------------------------------------------
Permeability (md) 22-120 Fractures 0.1-15 0.1-15
- ------------------------------------------------------------------------------------------------------------------------------
Formation Thickness (ft) 88 155 36 46
- ------------------------------------------------------------------------------------------------------------------------------
Gas Water Contact (ft ss) 6,135 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Lowest Known Gas (LKG) (ft ss) - 5,890 3,144 3,344
- ------------------------------------------------------------------------------------------------------------------------------
Proved Area (acres) 213 - 42 32
- ------------------------------------------------------------------------------------------------------------------------------
Total Closure (acres) 213 No map 641 537
- ------------------------------------------------------------------------------------------------------------------------------
Gas Gravity 0.64 0.61 0.62 0.62
- ------------------------------------------------------------------------------------------------------------------------------
Gas FVF (SCF/ft/3/) 201 190 109 118
- ------------------------------------------------------------------------------------------------------------------------------
OGIP (BCF) 7.46 3.00 0.23 1.14
- ------------------------------------------------------------------------------------------------------------------------------
Test Rate (MMSCFD) 10.0 8.0 0.25 1.0
- ------------------------------------------------------------------------------------------------------------------------------
Test Duration (hrs) Extended 30 No known Not known
- ------------------------------------------------------------------------------------------------------------------------------
Stimulation Treatment - y - -
- ------------------------------------------------------------------------------------------------------------------------------
Production History Y - - y
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative Production (BCF) 5.55 - 0.17 0.23
- ------------------------------------------------------------------------------------------------------------------------------
Pressure Surveys Y - - -
- ------------------------------------------------------------------------------------------------------------------------------
Production Logging - - y y
- ------------------------------------------------------------------------------------------------------------------------------
Production Issues Sand H\2\S - -
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GASFIELD TECHNICAL SUMMARY DATA
(PAGE 2 OF 2)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FIELD ELSWICK IRONVILLE NOOKS FARM GODLEY BRIDGE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reservoir (Name) Collyhurst Ashover Onecote Portland
- -------------------------------------------------------------------------------------------------------------------------------
Reservoir (Type) Sandstone Sandstone Sandstone Sandstone
- -------------------------------------------------------------------------------------------------------------------------------
Depth (ft ss) 3,330 1,253 424 2,923
- -------------------------------------------------------------------------------------------------------------------------------
Initial Reservoir Pressure (psia) 1,685 692 475 1,397
- -------------------------------------------------------------------------------------------------------------------------------
Initial S.I. Wellhead (psig) 1,410 650 453 1,023
- -------------------------------------------------------------------------------------------------------------------------------
Temperature ((degrees)F) 83 86 121 106
- -------------------------------------------------------------------------------------------------------------------------------
Porosity ((O))(%) 10 13 12.5 18
- -------------------------------------------------------------------------------------------------------------------------------
Gas Saturation (%) 63 50 49 60.1
- -------------------------------------------------------------------------------------------------------------------------------
Net to Gross (%) 32 90 55 77
- -------------------------------------------------------------------------------------------------------------------------------
Permeability (md) (less than)1 (less than)10 (less than)5 (core) 38 (test) 70
- -------------------------------------------------------------------------------------------------------------------------------
Formation Thickness (ft) 113 82 124 30
- -------------------------------------------------------------------------------------------------------------------------------
Gas Water Contact (ft ss) - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Lowest Known Gas (LKG) (ft ss) 3,443 1,312 652 2,950
- -------------------------------------------------------------------------------------------------------------------------------
Proved Area (acres) 114.2 160 64.7 160
- -------------------------------------------------------------------------------------------------------------------------------
Total Closure (acres) 997 344 696 1,808
- -------------------------------------------------------------------------------------------------------------------------------
Gas Gravity 0.62 0.60 0.65 0.66
- -------------------------------------------------------------------------------------------------------------------------------
Gas FVF (SCF/ft/3/ 125 48 31 108
- -------------------------------------------------------------------------------------------------------------------------------
OGIP (BCF) 1.11 1.29 .063 2.6
- -------------------------------------------------------------------------------------------------------------------------------
Test Rate (MMSCFD) 0.2 0.5 1.45 1.4
- -------------------------------------------------------------------------------------------------------------------------------
Test Duration (hrs) Extended 34 Extended 21
- -------------------------------------------------------------------------------------------------------------------------------
Stimulation Treatment y y y -
- -------------------------------------------------------------------------------------------------------------------------------
Production History y - - -
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative Production (BCF) 0.24 - - -
- -------------------------------------------------------------------------------------------------------------------------------
Pressure Surveys y - - -
- -------------------------------------------------------------------------------------------------------------------------------
Production Logging
- -------------------------------------------------------------------------------------------------------------------------------
Production Issues - - - H\2\S
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
CAYTHORPE GASFIELD
EXAMPLE GAS PRICE CALCULATION
<TABLE>
<S> <C>
Power Pool Selling Price (& Transmission Uplift) 2.520 pence/kWh
- ------------------------------------------------------------------------------------------------
Location Benefits 0.154 pence/kWh
- ------------------------------------------------------------------------------------------------
Sales Margin 0.067 pence/kWh
- ------------------------------------------------------------------------------------------------
Generated Electricity Value 2.741 pence/kWh
- ------------------------------------------------------------------------------------------------
Generator Efficiency 40.5%
- ------------------------------------------------------------------------------------------------
Net Calorific Value of Gas 957.36 BTU/SCF
- ------------------------------------------------------------------------------------------------
Required Gas Input 8.8 SCF/kWh Output
- ------------------------------------------------------------------------------------------------
Equivalent Gas Price 3.12 (Pounds)/MSCF
- ------------------------------------------------------------------------------------------------
</TABLE>
