<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------------
AZURIX CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
4941
DELAWARE 4952 76-0589114
(State or Other Jurisdiction
of Incorporation or (Primary Standard Industrial (IRS Employer
Organization) Classification Code Number) Identification No.)
</TABLE>
RODNEY L. GRAY
VICE CHAIRMAN
AZURIX CORP.
333 CLAY STREET, SUITE 1000
HOUSTON, TEXAS 77002-7361
(713) 646-6001
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices and Agent for Service)
Copies to:
<TABLE>
<S> <C> <C>
JOHN C. ALE SHELLEY A. BARBER JAMES M. PRINCE
EXECUTIVE DIRECTOR VINSON & ELKINS L.L.P. ANDREWS & KURTH LLP
AND GENERAL COUNSEL 2300 FIRST CITY TOWER 4200 CHASE TOWER
AZURIX CORP. 1001 FANNIN 600 TRAVIS
34 PARK STREET HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002
LONDON W1Y 3PF, ENGLAND (713) 758-3813 (713) 220-4486
(44) 171-970-7763 FAX: (713) 615-5511 FAX: (713) 238-7110
FAX: (44) 171-970-7791
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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 be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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- --------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common stock, $0.01 par value........................... $862,500,000 $239,775
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with an underwritten offering in the United States and
Canada, and one to be used in a concurrent international offering, of common
stock, par value $0.01 per share, of Azurix Corp. The U.S. prospectus for the
offering in the United States and Canada follows immediately after this
explanatory note. After the U.S. prospectus are the alternate pages for the
international prospectus. A copy of the complete U.S. prospectus and
international prospectus in the exact forms in which they are to be used after
effectiveness will be filed with the Securities and Exchange Commission pursuant
to Rule 424(b) under the Securities Act.
<PAGE> 3
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 15, 1999
PROSPECTUS
- ----------------
SHARES
[AZURIX LOGO]
COMMON STOCK
----------------------
This is Azurix Corp.'s initial public offering of common stock. Azurix is
offering and selling shares and Atlantic Water Trust, the selling
stockholder, is offering and selling shares of common stock under this
prospectus.
The U.S. underwriters will offer shares in the United States and
Canada and the international managers will offer shares outside the
United States and Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. We are applying to
list the common stock on the New York Stock Exchange under the trading symbol
"AZX."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to Azurix....................... $ $
Proceeds, before expenses, to the Selling Stockholder...... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional
shares from the selling stockholder at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments, if any. The international managers may similarly purchase up to
an aggregate of an additional shares from the selling stockholder.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
----------------------
MERRILL LYNCH & CO.
----------------------
The date of this prospectus is , 1999.
<PAGE> 4
ART/DIAGRAMS
[EDGAR VERSION ONLY] Two to three pictures of company facilities will be
shown.
In addition, a diagram will depict the three areas of the global water
industry in which we will pursue our business strategy. They include:
Asset ownership and management, which we will pursue through acquisitions
and concessions of water and wastewater assets and building, owning and
transferring water and wastewater assets.
Services, which include operating and managing water and wastewater assets
for municipal and industrial customers, providing residuals management services
(managing the residual byproducts from wastewater) and providing infrastructure
development and maintenance services for underground water and wastewater
assets.
Resource management, which includes extracting, transporting and storing
water and wastewater.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Cautionary Statements Regarding Forward-Looking
Statements................................................ 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Dilution.................................................... 17
Capitalization.............................................. 18
Selected Historical and Unaudited Pro Forma Consolidated
Financial Data............................................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Government Outsourcing Through Privatization................ 32
Business.................................................... 35
Regulatory Matters.......................................... 55
Management.................................................. 64
Certain Transactions........................................ 70
Principal and Selling Stockholders.......................... 72
Description of Capital Stock................................ 74
Description of Indebtedness................................. 77
Shares Eligible for Future Sale............................. 81
Material United States Federal Tax Consequences to
Non-United States Holders of Common Stock................. 82
Underwriting................................................ 85
Legal Matters............................................... 88
Experts..................................................... 88
Where You Can Find More Information......................... 89
Index to Financial Statements............................... F-1
</TABLE>
----------------------
In this prospectus, references to "U.S. dollars," "dollars," "U.S.$" and
"$" are to currency of the United States of America and references to "pounds
sterling," "L," "sterling," "pence" and "p" are to currency of the United
Kingdom. Certain balance sheet information included in this prospectus has been
translated from the applicable foreign currencies to U.S. dollars using the
current exchange rates in effect at the balance sheet date. Certain income
statement information included in this prospectus has been translated from the
applicable foreign currencies to U.S. dollars using the weighted average
exchange rate during the period or, where known or determinable, at the rate on
the date of the transaction for significant items. Certain pounds sterling
amounts stated herein have been translated into U.S. dollars at an assumed rate
solely for the convenience of the reader and should not be construed as
representations that such U.S. dollar amounts actually represent such pounds
sterling amounts or vice versa, or that such pounds sterling amounts could be or
could have been converted into U.S. dollars at the rate indicated or at any
other rate. Except as described above, and unless otherwise stated in this
prospectus, certain pounds sterling amounts have been translated from the
corresponding pounds sterling amounts at the noon buying rate in The City of New
York for cable transfers in pounds sterling as certified for customs purposes by
the Federal Reserve Bank of New York on December 31, 1998, which was $1.66 per
L1.00.
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the selling stockholder and the underwriters have not, authorized
any person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We are
not, and the selling stockholder and the underwriters are not, making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including our financial data and
related notes, before making an investment decision. The terms "Azurix," "our
company" and "we," when used in this prospectus, refer to Azurix Corp. and its
subsidiaries, including Wessex Water Ltd, as a combined entity, except where it
is made clear that such term means only the parent company. The term "Wessex,"
when used in this prospectus, refers to Wessex Water Ltd (formerly named Wessex
Water Plc) and its subsidiaries, including Wessex Water Services Ltd, its
primary operating subsidiary, as a combined entity, except where it is made
clear that such term means only Wessex Water Ltd. The term "Enron," when used in
this prospectus, refers to Enron Corp. and its subsidiaries as a combined
entity, except where it is made clear that such term means only the parent
company. Unless we indicate otherwise, the information contained in this
prospectus gives effect to the 100,000-for-1 common stock split effective
February 2, 1999.
OUR COMPANY
Azurix is a global water company engaged in the business of acquiring,
owning, operating and managing water and wastewater assets, providing water and
wastewater related services and developing and managing water resources. Azurix
estimates that the global water industry has total annual revenues of
approximately $300 billion. In addition, the World Bank and other sources have
estimated that over $600 billion will be spent on worldwide water and wastewater
infrastructure over the next decade. We believe that much of that capital will
come from the private sector.
Enron, one of the world's leading integrated natural gas and electricity
companies, formed Azurix in 1998 to pursue opportunities in the global water
industry. Our first significant step was to acquire Wessex, a water and
wastewater company based in southwestern England, for $2.4 billion in order to
give us the operating experience necessary to compete successfully for business
around the world. Wessex's operating expertise is evidenced by the industry
regulator's recognition of Wessex as the most efficiently operated water and
wastewater company in England and Wales. Our asset portfolio also includes an
interest in a long-term water concession in the Province of Mendoza, Argentina.
In addition, we have agreed to acquire an interest in a long-term water
concession in Cancun, Mexico. On a pro forma basis, we had revenues of $464.2
million, EBITDA of $298.1 million and net income of $87.2 million for the year
ended December 31, 1998 and total assets of $3,358.3 million as of December 31,
1998.
We are now building on our asset base by aggressively pursuing additional
concessions, outsourcing contracts and other water and wastewater projects. We
are evaluating announced privatizations, including many of the approximately 70
upcoming privatizations identified in this prospectus, as well as various
privately negotiated transactions. These potential transactions are in Europe,
the United States, Latin America, the Middle East, Africa, Asia and the Pacific
Rim.
Our experienced management team consists of senior executives from Enron,
Wessex and other water and wastewater systems, and multinational companies. We
will transfer the skills that Enron has successfully applied in developing,
financing, operating and managing the risks of energy infrastructure projects to
our water business around the world. In addition, we will apply to our water
business the operating, management and technical skills that our executives from
Wessex and other companies have successfully used in operating and managing
water and wastewater assets. This management team will competitively position us
to identify, evaluate, acquire, develop and finance water and wastewater
projects and services worldwide.
OUR INDUSTRY
The global water industry includes the collection, treatment, storage and
supply of drinking water, and the collection, treatment and disposal of
wastewater and its by-products. Public (municipal and other governmental) and
private (non-governmental) water companies serve industrial, commercial and
residential customers.
1
<PAGE> 7
FACTORS CREATING WATER BUSINESS OPPORTUNITIES. We believe that significant
business opportunities exist for private sector participation in the global
water industry. Some of the factors creating these opportunities include the
following:
- Ownership of water and wastewater assets is highly concentrated in the
public sector.
- Governments and multinational agencies are promoting higher standards of
water and wastewater quality and environmental protection.
- Major capital investment and efficiency improvements are necessary to
meet these increasing requirements, to connect growing populations to
water and wastewater systems and to replace aging water and wastewater
infrastructure.
- Management of water resources and storage and transportation of water are
becoming increasingly important, especially in areas where water is
scarce.
- Governments frequently face budgetary constraints and often lack the
technical expertise to address these issues effectively.
- Governments and industrial companies are recognizing that transferring
ownership, operation or management of water and wastewater assets to
experienced private parties, called outsourcing, is often more efficient
and cost-effective than owning or operating these assets themselves.
BUSINESS OPPORTUNITIES. The business opportunities for participation in the
global water industry for companies like ours include:
- GOVERNMENT OUTSOURCING OF OWNERSHIP, OPERATION AND MANAGEMENT OF WATER
AND WASTEWATER ASSETS. Following the successful trend of international
electricity, gas and telecommunication privatizations, many governments
are turning to the private sector to own, operate and manage their water
and wastewater assets and services. Governments in Argentina, Chile,
Colombia, France, Germany, Indonesia, Malaysia, Mexico, the Philippines
and the United Kingdom have privatized water and wastewater assets. As of
October 1998, according to Public Works Financing statistics, there were
approximately 380 planned, funded or completed water and wastewater
projects with private sector participation worldwide for a total
estimated cost of approximately $74 billion. Governments in Europe, the
United States, Latin America, the Middle East, Africa, Asia and the
Pacific Rim have announced public tenders for water and wastewater
concessions or projects.
- MUNICIPAL AND INDUSTRIAL OUTSOURCING OF WATER AND WASTEWATER RELATED
SERVICES. We believe that municipalities and industrial companies in
North America and Western Europe, in particular, will increasingly seek
to outsource the management of their water and wastewater systems to
private parties, while retaining ownership of their assets. They will
seek companies with the operating experience and capital necessary to
provide reliable water supply and wastewater treatment services, to meet
higher water quality standards, to comply with increasingly stringent
environmental regulations and to reduce operational and financial
uncertainty.
Services provided to these municipal and industrial customers include:
-- Operations, management and engineering -- services to design, build,
operate or maintain water and wastewater assets
-- Residuals management -- services to dispose of wastewater and biosolids
that result from wastewater treatment
-- Underground infrastructure remediation and development -- services to
repair and replace water and wastewater distribution and collection
systems
Industrial customers with large water supply and wastewater treatment
requirements include the chemical, refining, pharmaceutical, high
technology, food and beverage, paper and pulp, steel, automobile and
energy industries.
- WATER RESOURCE DEVELOPMENT AND MANAGEMENT. Increasing demand for water
resources is focusing efforts on means of extracting, managing, storing
and transporting water resources as efficiently as possible. Governments,
which historically have been responsible for developing and managing
water
2
<PAGE> 8
resources, are now seeking private sector assistance to address their
water resource issues due to the technical, operational and financial
expertise required to build, operate and fund these capital intensive
projects.
Significant barriers to entry limit the number of companies capable of
competing globally in the markets for water and wastewater privatization,
municipal and industrial outsourcing of services and resource development and
management. Participants must have an ability to:
- Obtain and demonstrate the requisite operating experience and management
depth to qualify for bidding on international privatizations or
concessions
- Identify and evaluate transactions, including the appropriate assessment
and mitigation of operational, political and regulatory risks
- Access adequate capital at cost effective levels
- Develop and manage international infrastructure projects
We believe that we have the necessary skills and experience necessary to
enable us to compete successfully in the global marketplace.
OUR COMPETITIVE STRENGTHS
We have several competitive strengths that should enable us to become a
leading and profitable participant in the global water industry:
- EXPERIENCED MANAGEMENT AND BUSINESS DEVELOPMENT TEAM. Our executives come
from Enron, Wessex and other water and wastewater systems and
multinational companies and bring with them extensive experience in both
the development and the operation of infrastructure projects worldwide,
including water and wastewater operations. Many of our executives were
actively involved in developing and managing projects for Enron in the
United States and around the world. Rebecca Mark, chairman and chief
executive officer of Azurix and a vice chairman of Enron, leads the
Azurix team in implementing its global water strategy. During her tenure
at Enron, Ms. Mark was responsible for the successful development of
natural gas and power projects worldwide. Beginning with Enron's first
international power project in Teesside, England in 1989, Ms. Mark led
the team that developed gas and power projects around the world with
total estimated capital costs exceeding $10 billion. Four other senior
executives give the management team collectively 80 years of experience
in managing water companies in the United States and the United Kingdom.
In addition, our management team has infrastructure development
experience in Europe, the United States, Latin America, the Middle East,
Africa, Asia and the Pacific Rim. They lead a group of experienced
business developers who identify opportunities in the global water
industry. In pursuing global water projects, we apply the extensive
experience of our management team and business developers in evaluating
and securing projects, acquisitions and financings.
- WESSEX OPERATING EXPERIENCE AND TECHNICAL EXPERTISE. From Wessex, we have
obtained the operating experience, research skills and technical
expertise necessary to evaluate potential water projects, to qualify for
bidding on water projects in many countries throughout the world, to
build transition and operating teams for new acquisitions and to manage
existing and new water assets. We intend to transfer to our global water
business the operating efficiency, advanced technology, capital
expenditure and operational cost management and regulatory management
skills used successfully by Wessex in operating and managing its water
and wastewater assets.
- REGULATORY AND GOVERNMENT AFFAIRS EXPERTISE. Our management team has
extensive experience in working with regulators and other governmental
agencies and has knowledge of the regulatory framework and privatization
processes in many of the countries in which we intend to pursue water and
wastewater opportunities. This experience and knowledge will allow us to
assess more successfully the regulatory risk and opportunity presented by
those projects we evaluate.
- FINANCING EXPERTISE. Members of our management team have experience using
sophisticated financing and capital raising techniques, in both global
and local markets, to lower the cost of
3
<PAGE> 9
capital for the financing of projects and acquisitions. As our portfolio
grows and matures, we intend to enhance our equity returns and reduce
overall risk exposure through opportunistic sales of all or a portion of
individual assets or investments that have appreciated in value.
OUR BUSINESS STRATEGY
Our business strategy is focused on three complementary areas in the global
water industry:
- ACQUIRING, OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS. We
intend to build a diversified portfolio of water and wastewater assets,
including both established businesses with stable returns and concessions
and projects in emerging markets with significant development
requirements and potential for growth and enhanced returns. We also
intend to consider acquisitions of privately owned water and wastewater
assets with predictable contractual or regulated revenue streams.
-- Acquiring water and wastewater assets. We intend to acquire water and
wastewater assets through participation in public tenders and privately
negotiated transactions throughout the world, including Europe, the
United States, Latin America, the Middle East, Africa, Asia and the
Pacific Rim. In evaluating potential acquisitions, we plan to follow a
disciplined approach focused on identifying the potential for increased
returns, analyzing future regulatory and rate case changes and
assessing the engineering, operational, regulatory, financing,
economic, structuring, insurance, tax, environmental, legal and
accounting risks related to each transaction.
-- Owning, operating and managing water and wastewater assets. Following
an acquisition of water or wastewater assets, we plan to increase
revenues by optimizing the applicable tariff structure, expanding
customer bases and improving the accuracy and timing of billing and
collection procedures. In addition, we intend to increase operating
income by improving quality, extending services, reducing operating
costs, rationalizing capital expenditures, increasing efficiency and
applying, where appropriate, sophisticated financing techniques.
- PROVIDING WATER AND WASTEWATER RELATED SERVICES. Through innovative
technological, environmental and financial solutions, we intend to
provide a broad range of services to municipal and industrial owners of
water and wastewater systems around the world. These services will
include operations, management and engineering, residuals management and
underground infrastructure remediation and development services. In
evaluating potential services transactions, we plan to follow a
disciplined approach similar to that used in evaluating acquisitions.
- DEVELOPING AND MANAGING WATER RESOURCES. We believe the growing demand
for drinking water has generated a need for better management of water
resources. We believe there are significant capital, technical and
operational needs in this area of the water industry and that governments
are increasingly turning to the private sector to meet these needs.
Although this is not currently a significant portion of our business, we
intend to pursue opportunities in resource management as they arise.
By applying our expertise in these three areas, we plan to offer the full
spectrum of services required to meet our public and private customers' water
and wastewater needs. We expect that our ability to evaluate potential
investments will allow us to identify and compete successfully for those water
and wastewater projects offering attractive rates of return.
Our principal executive offices are located at 333 Clay Street, Houston,
Texas 77002 (telephone number (713) 646-6001) and 34 Park Street, London W1Y
3PF, England (telephone number (44) 171-970-7763).
4
<PAGE> 10
THE OFFERING
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Common stock offered by Azurix:
U.S. offering..................................... shares
International offering............................ shares
------
Total..................................... shares
======
Common stock offered by the selling stockholder:
U.S. offering..................................... shares
International offering............................ shares
------
Total..................................... shares
======
Common stock outstanding after the U.S. and
international offerings........................... shares(1)
Use of proceeds..................................... We expect the proceeds to Azurix from this sale
of common stock to be approximately $350 million,
before deducting underwriting discounts and
commissions and estimated expenses. Azurix will
not receive any proceeds from the sale of common
stock by the selling stockholder. We intend to
use the net proceeds that we receive for general
corporate purposes, including working capital and
the expansion of our business through strategic
acquisitions as opportunities arise.
Risk factors........................................ See "Risk Factors" for a discussion of factors
you should carefully consider before deciding to
invest in shares of the common stock.
Proposed New York Stock Exchange symbol............. "AZX"
</TABLE>
- ---------------
(1) Excludes approximately 7.8 million shares of common stock reserved for
issuance pursuant to outstanding stock options. This number also assumes
that the over-allotment options are not exercised. If the over-allotment
options are exercised in full, the selling stockholder will sell an
additional shares.
5
<PAGE> 11
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present summary historical and unaudited pro forma
consolidated financial data for Azurix and for Wessex, the predecessor of
Azurix, for the periods and dates indicated. The unaudited pro forma financial
data for Azurix are derived from the unaudited condensed consolidated pro forma
financial data included elsewhere in this prospectus. The unaudited pro forma
financial data give effect to the acquisition of Wessex, the redemption and
elimination of Wessex's preference shares for an aggregate price of $249.8
million and the sale by Wessex of its interest in UK Waste for $337.9 million,
as though each occurred on January 1, 1998. The unaudited pro forma financial
data presented below is not necessarily indicative of the financial results that
would have occurred had the acquisition of Wessex, the redemption and
elimination of Wessex's preference shares and the sale by Wessex of its interest
in UK Waste occurred on January 1, 1998 and should not be viewed as indicative
of operations in future periods. See "Selected Historical and Unaudited Pro
Forma Consolidated Financial Data" for more information regarding the
historical, the unaudited pro forma consolidated and the other financial data.
<TABLE>
<CAPTION>
AZURIX
WESSEX (PREDECESSOR COMPANY) PRO FORMA
YEAR ENDED MARCH 31, YEAR ENDED
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.................. $356.3 $376.8 $403.1 $436.6 $464.2
Operations and maintenance
expense.......................... 106.7 106.6 102.4 110.9 120.9
General and administrative
expense.......................... 33.3 27.4 32.2 29.1 44.4
Depreciation and amortization....... 48.5 53.7 58.0 64.3 88.3
Operating income.................... 167.8 189.1 210.5 232.3 210.6
Net income.......................... 123.7 140.4 153.0 16.7(1) 87.2
Basic earnings per common
share(2)......................... 0.87
Diluted earnings per common
share(2)......................... 0.87
OTHER FINANCIAL DATA:
EBITDA(3)(unaudited)................ $227.3 $256.9 $283.2 $309.9 $298.1
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------
AZURIX AS ADJUSTED(4)
------------ --------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 5.3 $
Working capital........................................... (129.6)
Total assets.............................................. 3,358.3
Note payable-affiliate.................................... 121.4 121.4
Long-term debt (excluding current maturities)............. 912.1 912.1
Other long-term liabilities (including deferred taxes).... 417.9 417.9
Stockholders' equity...................................... 1,645.5
</TABLE>
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(1) The year ended March 31, 1998 includes a windfall tax on privatized
utilities in the United Kingdom of $162.3 million, which has been described
by the U.K. government as a one-time tax. Excluding the effect of this tax,
for the year ended March 31, 1998, Wessex's net income would have been
$179.0 million.
(2) Basic and diluted earnings per common share for Wessex are not meaningful on
a comparative basis to Azurix and, therefore, are not presented.
(3) EBITDA for any relevant period presented above is defined as net income
before net interest (income) expense, income tax, utility tax, depreciation
and amortization. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating profit, as an indicator of liquidity or as a
substitute for net cash provided by operating activities.
(4) As adjusted to reflect the application of the net proceeds to Azurix from
the offering.
6
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RISK FACTORS
Investing in the common stock will provide you with an equity ownership
interest in Azurix. As an Azurix stockholder, you will be subject to risks
inherent in our business. The performance of your shares will reflect the
performance of our business relative to, among other things, competition, market
conditions and general economic and industry conditions. The value of your
investment may increase or decline and could result in a loss. You should
carefully consider the following factors as well as other information contained
in this prospectus before deciding to invest in shares of the common stock.
WE HAVE A LIMITED OPERATING HISTORY
We are a new company with a limited operating history. Our limited
operating history and the unpredictable results of our acquisition strategy make
it difficult to forecast our future operating results. We expect to experience
significant competition in bidding and negotiating for water projects. Our
limited operating history may create significant impediments to our qualifying
for bidding on some projects or, if qualified, being successful in bidding.
Our consolidated revenues will be derived almost exclusively from the
operations of Wessex until such time as our other investments begin to generate
revenue. Revenue from Wessex may not be available for distribution to Azurix due
to operating and financing requirements of Wessex, financing requirements of
intermediate companies, regulatory developments affecting the rates Wessex may
charge its customers and other regulatory or other restrictions on its ability
to pay dividends to its shareholders.
OUR SUCCESS IS HIGHLY DEPENDENT ON COMPLETING ACQUISITIONS AND DEVELOPING
PROJECTS
There is a risk that we may not be able to successfully complete
acquisitions of water and wastewater assets and develop projects because these
transactions involve many complexities. Such complexities include, among other
things, negotiation of satisfactory water supply and wastewater treatment
services agreements with local governments and receipt of required governmental
consents and permits. In addition, in evaluating and negotiating water projects,
water companies typically encounter difficulties in determining the status and
condition of existing systems or developing accurate forecasts of material
factors such as the rate of population growth, particularly in developing
countries. In privatization transactions, we may be unable to predict with
certainty the timing of a privatization or the commitment level of a government
to completing a privatization. In addition, most privatizations are
competitively bid, and there is no assurance as to what proportion of the
projects on which we bid will be acquired by us. Because part of our business
strategy is to grow through acquisitions and development projects, we have
recently put in place a significant business development effort with associated
general, administrative and operating expenses. To the extent we are not
successful in completing acquisitions and development projects, these expenses
will not be absorbed by revenues associated with those acquisitions and
development projects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook."
WATER AND WASTEWATER COMPANIES FACE PRICE REGULATION THAT COULD ADVERSELY AFFECT
OUR FINANCIAL RESULTS
Governments generally regulate the prices that water and wastewater
companies may charge their customers. The regulatory regimes vary from country
to country and at times can give great discretion to the regulatory authority.
In the case of Wessex, the U.K. Director General of Water Services is currently
conducting a periodic review of the price limits for water and wastewater
companies in England and Wales that is expected to result in new price limits
for the period from April 1, 2000 through 2005 that will be lower than current
price limits. In setting prices, the Director must ensure that water companies
are able to finance the proper carrying out of their functions, in particular,
by securing a reasonable return on their capital. The actual rates of return
achieved by these companies can vary significantly from the projected rates of
return applied by the Director in setting prices, depending on performance.
Historically, Wessex has exceeded projected rates of return, although there can
be no assurance that it will continue to do so.
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Although we are unable to predict the precise outcome of the current U.K. rate
review, it is likely to reduce significantly Wessex's revenues and earnings.
FAILURE TO ACCURATELY IDENTIFY AND ASSESS THE RISKS RELATED TO AN ACQUISITION OR
PROJECT COULD ADVERSELY AFFECT OUR OPERATING RESULTS
In evaluating potential transactions, we make assumptions and projections
based on the potential for increased returns, future regulatory and rate case
changes and the engineering, operations, financing, economic structuring,
insurance, tax, environmental, legal and accounting risks relating to each
transaction. Forecasts, estimates and information provided by local governments
and other sources used to bid for public tenders can prove to be materially
inaccurate or incomplete, resulting in projections for capital expenditures to
improve or build water systems that are substantially below what is ultimately
required. If the assumptions on which we base our decision to acquire assets or
develop a project prove to be incorrect in any material respect, either because
of inaccurate or incomplete information provided by the other party or parties
to the transaction or because of a failure by us to accurately identify or
assess the risks or capital requirements related to a proposed acquisition or
project, then our operating results could be materially adversely affected.
While we attempt to identify all risks associated with any given transaction, no
assurance can be given that we will identify all risks related to a transaction.
OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL EXPENDITURES AND WE COULD HAVE
DIFFICULTY FINANCING OUR OPERATIONS, ACQUISITIONS AND PROJECTS
The water assets and projects in which we plan to invest may require
substantial capital expenditures, especially early in the life of our
investments. We intend to finance our investments and projects using various
techniques and instruments such as debt financing, off-balance sheet financing
and equity investments. There is a risk that we may engage in significantly
leveraged transactions and that we may pledge all or substantially all of our
assets. For example, the capital stock of Wessex, our most significant
subsidiary, is pledged as security for the senior credit facility of Azurix
Europe Ltd, Wessex's holding company. In addition, there is a risk that
financing may not be readily available to acquire water and wastewater assets or
develop projects. Our ability to arrange financing will be affected by general
economic and capital market conditions, credit availability from banks or other
lenders and the risks inherent in particular concessions, projects or countries.
In particular projects, we may have a co-owner with limited resources or that
may default on its obligations to contribute capital to the project. Enron is
not obligated to provide additional financial support to Azurix for any capital
expenditures or investments or any other purpose.
LACK OF OPERATIONAL CONTROL IN CERTAIN PROJECTS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
We may invest in water and wastewater projects and assets in which we do
not own a majority of the project or assets. In addition, we may invest in or
own projects and assets with partners, co-venturers and other parties, including
governmental entities. Some jurisdictions require participation of employees or
other stakeholders in company management. In these cases, decisions with respect
to certain significant matters may require the consent of other equity owners or
stakeholders.
We may also invest in projects and assets where we do not serve as
operator. For example, we do not have operational control in our Mendoza,
Argentina concession. In these cases, our ability to direct the outcome of
matters with respect to the operations of the project or assets could be
limited. A lack of operational control in certain projects could materially and
adversely affect our interest in these projects and, as a result, our financial
condition and results of operations.
WE COULD HAVE DIFFICULTY MANAGING OUR GROWTH AND INTEGRATING ACQUISITIONS
We cannot assure you that our current management, personnel and other
corporate infrastructure will be adequate to manage our growth. In addition, to
the extent the success of our strategy is contingent on
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making acquisitions of water and wastewater assets, we cannot assure you that we
will be able to integrate such acquisitions successfully without substantial
costs, delays or other operational or financial problems.
ENVIRONMENTAL FACTORS AND CHANGES IN REGULATIONS COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS
There is a risk that changes in regulations applying to the water supply or
wastewater treatment services industry or new, revised or inconsistent
interpretations of these regulations may adversely affect our financial
condition and results of operations. Water companies are subject to water
quality risks related to contamination of drinking water supplies or
environmental danger from effluent discharges. The occurrence of these or other
risks could have a material adverse effect on our financial position and results
of operations.
In addition, certain countries in which we plan to do business have
recently developed, or are in the process of developing, new regulatory and
legal structures that regulate the delivery of drinking water and wastewater
services and accommodate private and foreign-owned water businesses. In some
instances, these regulatory and legal structures and their interpretation and
application by administrative agencies are relatively new and incomplete. The
interpretation of existing rules can be expected to evolve over time and may
have an unpredictable impact on our business. We anticipate future changes in,
or decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.
We may handle hazardous substances in our industrial services business in
addition to biological waste. Stringent environmental laws provide for serious
penalties and sometimes impose strict liability on those who handle these
substances or find them on their property. Accordingly, if we handle hazardous
substances in our industrial services business in the future, there is a risk
that we will incur liabilities and expenses related to the handling of hazardous
substances. Although we maintain insurance against many of these risks, we
cannot be certain that insurance proceeds received under our policies would
adequately cover all liabilities we might incur.
WATER SUPPLY CONTAMINATION COULD ADVERSELY AFFECT OUR BUSINESS
Where we supply water to end-users, our business is subject to risks of
contamination of the water supply, which could result in disease or even death
or otherwise endanger the public health. As a result of contamination, we could
be subject to civil or criminal enforcement actions, private suits and cleanup
obligations, which could have a material adverse effect on our financial
condition and results of operations. Drinking water contamination can be caused
by, among other things, wastewater effluent, stormwater runoff from farms and
industrial sites, materials used in the construction or rehabilitation of water
supply pipes, harmful nitrates attributable to modern farming practices and
various other pathogens from a variety of sources entering the drinking water
supply. Accordingly, there can be no assurance that our water supply will not
become contaminated. Although we maintain insurance against many of these risks,
we cannot be certain that insurance proceeds received under our policies would
adequately cover all liabilities we might incur.
POLITICAL AND ECONOMIC CHANGES COULD ADVERSELY AFFECT OUR OPERATING RESULTS
The success of our strategy in many countries will depend on a political
and economic environment that will accommodate foreign investment and project
development. Our operations will be subject to political and economic risks,
including risks of war, terrorism, expropriation, nationalization, renegotiation
or nullification of existing contracts, changes in rates and methods of taxation
and foreign exchange controls or governmental restrictions on the repatriation
of hard currency. You should be aware that we will operate in countries whose
economies differ in many respects from the economies of the United States,
Canada and most Western European countries, including their structure, levels of
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. In many of
these countries, the government retains significant control over the economy.
Thus, there is a risk that future government actions, especially with respect to
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nationally important facilities such as water systems, could have a material
adverse effect on our financial condition and results of operations.
OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY WORK STOPPAGES AND OTHER
LABOR RELATIONS MATTERS
We are subject to a risk of work stoppages and other labor relations
matters because we have invested and will invest in the future in assets and
projects utilizing a workforce that in many cases will be unionized. In
addition, our ability to obtain an adequate return on an investment will often
depend on our success in optimizing the labor force through voluntary and
sometimes involuntary staff reductions. There is a risk that layoffs, where
implemented, could trigger community or union problems. We cannot assure you
that issues with our labor forces will be resolved favorably to us in the future
or that we will not experience significant work stoppages in future years.
CHANGES IN CURRENCY EXCHANGE RATES AND LIMITATIONS ON REMITTANCE OF FUNDS COULD
ADVERSELY AFFECT OUR FINANCIAL RESULTS
Because a significant portion of our operations will be conducted outside
the United States, limitations on the right to convert currency or to take it
out of a foreign country, changes in exchange rates and the capacity of currency
exchange markets may adversely affect our ability to repatriate profits, which
could have a material adverse effect on our financial condition and results of
operations. Legal restrictions or shortages in currencies in certain countries
may prevent us from converting sufficient local currency to enable us to comply
with our currency payment obligations not denominated in local currency or to
meet our operating needs and debt service requirements.
OPERATING IN COUNTRIES WITHOUT ADEQUATE REVENUE COLLECTION SYSTEMS COULD
ADVERSELY AFFECT OUR REVENUES
There is a risk that we will operate in countries whose legal systems do
not have established or well-enforced collection mechanisms for their water
supply and wastewater treatment services. Also, customers in such countries may
not be able or willing to pay for water services. This could have a material
adverse effect on our financial condition and results of operations. There can
be no assurance that government subsidies or taxes and other concessions will
sufficiently compensate private parties that provide these services for the
economic consequences of such conditions. Where initially available, there is a
risk that such subsidies and concessions could be reduced or eliminated before
reliable revenue sources and collection mechanisms can be established.
INTERACTION OF DIFFERENT COUNTRIES' TAX LAWS COULD LOWER OUR RETURNS
Tax laws in various countries treat differently the taxability of various
aspects of income and gain and the deductibility of expenses and losses. Income
earned in one jurisdiction also may be taxable in another, including the United
States. Although in many instances U.S. tax laws will permit us to credit
amounts paid in taxes in other countries against our U.S. tax obligations, the
rules allowing credits are complex and do not allow credits in many
circumstances. Moreover, if we incur expenses in one jurisdiction that benefit a
project in another, they may not be deductible against income in the
jurisdiction where the expenses were incurred. This could occur, in particular,
in the United States, if our revenues from future U.S. operations do not exceed
the expenses we incur in the United States in supporting our worldwide
operations.
OPERATING IN COUNTRIES WITH UNDEVELOPED LEGAL SYSTEMS COULD ADVERSELY AFFECT OUR
BUSINESS
Certain countries in which we may pursue opportunities do not have
well-established legal systems and lack a well-developed, consolidated body of
laws governing foreign investment enterprises. The uncertainty of the legal
environment in these countries could make it difficult for us to enforce our
rights, or those of our operating companies, under agreements relating to our
operations. In addition, the
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administration of laws and regulations by government agencies in such countries
may be subject to considerable discretion or prejudice against foreigners or
private investors. As these legal systems develop, foreign investors may be
adversely affected by new laws and changes to existing laws. In addition, in
countries where adequate laws and well-developed legal systems do exist, it may
not be possible to obtain swift and equitable enforcement of such laws.
RESTRICTIONS IN DEBT AGREEMENTS COULD RESTRICT AZURIX'S OPERATIONS
We conduct substantially all of our operations through subsidiaries, and
substantially all of our assets consist of equity in our subsidiaries. Some of
the debt financing arrangements to which our subsidiaries are a party impose
restrictions on their business operations, which may affect our business
operations. The covenants contained in the credit agreements to which Azurix
Europe and Wessex are parties will have several restrictive effects on our
future operations. For example, the covenants contained in the existing senior
credit facility for Azurix Europe require Wessex to meet certain financial tests
and limit Wessex's ability to borrow additional funds or dispose of assets.
These covenants could hinder our flexibility in planning for, and reacting to,
changes in our business. In addition, our ability to obtain additional financing
for working capital, capital expenditures, acquisitions, general corporate and
other purposes at the Azurix level may be limited by the fact that the capital
stock of Wessex is pledged as security for Azurix Europe's senior credit
facility. Additionally, covenants contained in the senior credit facility
restrict Wessex from paying dividends to Azurix except in certain circumstances.
This could limit our ability to pay dividends on our common stock.
Under the senior credit facility, Enron is required to hold at least 20% of
the legal and beneficial ownership of the ordinary share capital of Azurix
Europe, and no person, directly or indirectly, may hold a greater percentage
than Enron or its significant subsidiaries. In addition, at least 50% of the
directors of Azurix Europe, or directors having at least 50% of the voting
rights in respect of Azurix Europe's board of directors, must also be directors
or senior officers of Enron or its significant subsidiaries. Therefore, if, for
example, as a result of equity offerings by Azurix or other transactions
involving Azurix, Enron's ownership of Azurix and Azurix Europe is significantly
diluted, a further sale of Azurix equity by Azurix or Atlantic Water Trust could
trigger an event of default under the senior credit facility. See "Description
of Indebtedness."
FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE YEAR 2000 COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS
Year 2000 problems could result from computer hardware and software using
two digits rather than four digits to define the applicable year. These problems
include operational inefficiencies, systems failures, business disruptions and
lost revenues attributable to the inability of these two digit systems to
recognize the Year 2000. We intend to implement Enron's Year 2000 plan to
identify and remediate our Year 2000 problems. However, because we have not
completed our analysis of our Year 2000 readiness or the Year 2000 readiness of
parties on whom we rely, we cannot ensure that this will be the case.
Our preliminary assessment of our Year 2000 issues has not demonstrated a
need to incur material Year 2000 costs. However, the following factors could
result in actual Year 2000 costs being higher than anticipated:
- We intend to engage in future acquisitions and could acquire a business
with significant Year 2000 problems.
- We depend on third parties, including customers, suppliers and service
providers, who may fail to address adequately their Year 2000 problems.
- We rely on automated plant systems, computerized billing procedures and
other embedded chip technologies that could necessitate expensive
corrective actions.
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For a more detailed discussion of the state of our Year 2000 readiness, the
costs we anticipate incurring to become Year 2000 ready and our Year 2000
contingency plans, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
WE DEPEND ON CERTAIN KEY EXECUTIVES
We depend on the continued employment of key management personnel we have
brought in from Enron, Wessex and other multinational companies. We have entered
into employment agreements with these executives. If these officers resign or
become unable to continue in their present role and are not adequately replaced,
our business could be materially adversely affected. See "Management."
WE RELY ON ENRON FOR SERVICES
We will have an agreement with Enron pursuant to which Enron provides
various corporate staff and support services to us. These include services such
as information technology, building maintenance, security and other office
services as well as certain employee-related services such as employee
development and training, and maintenance of certain compensation and other
benefits programs. We also may utilize Enron's regulatory affairs, marketing
affairs, treasury and risk assessment and control departments. In addition,
Azurix will participate in Enron's corporate insurance program. The agreement
will provide that we may use the international offices of Enron and its
affiliates for certain projects, subject to our mutual agreement with Enron or
its affiliates on a project-by-project basis. Due to prior commitments that
Enron or its affiliates may have in a particular office or due to other reasons,
there is a risk that Enron or its affiliates may not permit Azurix to use a
particular international office for a particular project. The agreement will be
for an indefinite term, but it may be terminated by either party with 180 days'
notice. If the agreement is terminated, we may not be able to obtain similar
regulatory or other services on equivalent terms from third parties.
ENRON AND ITS AFFILIATES MAY COMPETE WITH AZURIX IN CERTAIN ACTIVITIES; AZURIX
MAY ONLY ENGAGE IN ACTIVITIES GENERALLY IDENTIFIED IN THIS PROSPECTUS,
INCIDENTAL ACTIVITIES AND OTHER ACTIVITIES AS ENRON MAY APPROVE
Enron and Azurix will enter into an agreement that limits the scope of
Azurix's business and provides that certain activities in which Enron and its
affiliates may engage are permitted, even if those activities have a competitive
impact on Azurix. In general, Enron will be permitted to engage in any business
whatsoever, including water, wastewater and other businesses competing with
Azurix, and may compete in public tenders against Azurix, provided the business
is conducted and opportunities are identified and developed through Enron's own
personnel and not through Azurix. If an opportunity in the water industry is
presented to a person who is an officer or director of both Enron and Azurix,
the opportunity must first be offered to Azurix, unless water constitutes a
minority of the fair market value of the opportunity, as determined by that
officer or director in good faith based on information available at the time.
Azurix will indemnify Enron and its officers, directors and employees against
all claims brought on account of Enron competing with Azurix, provided Enron has
followed the rules just described.
The agreement will require Azurix to limit its purpose, in its certificate
of incorporation, to the businesses generally identified in this prospectus,
activities incidental to those businesses, and such other businesses as Enron
may approve in its sole discretion. The agreement will restrict both Enron and
Azurix from taking action to restrict each others' businesses or to subject them
to certain forms of regulation. The agreement will expire the first date on
which neither Enron nor Atlantic Water Trust directly or indirectly owns or has
the power to vote at least 35% of the shares of Azurix ordinarily entitled to
vote for the election of directors or otherwise controls Azurix. See "Certain
Transactions -- Agreement Regarding Business Opportunities and Related Matters."
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ENRON'S INFLUENCE OVER US MAY CREATE CONFLICTS OF INTEREST
Atlantic Water Trust currently owns all of Azurix's outstanding common
stock. Following completion of the offering, Atlantic Water Trust will own
approximately % of our outstanding common stock ( % if the
underwriters' over-allotment option is exercised in full). Each of Enron and
Marlin Water Trust, a Delaware business trust created in connection with the
formation of Atlantic Water Trust, owns a 50% voting interest in Atlantic Water
Trust. To date, Enron has appointed all of the directors of Atlantic Water Trust
and Azurix, although Marlin Water Trust at any time has the right to replace
half of the directors of Atlantic Water Trust and currently, and in certain
cases following the offering, up to half of the Azurix directors. As a result,
following the offering, Enron and Marlin Water Trust will continue to exert
significant influence over the policies, management and affairs of Azurix and
the outcome of most corporate actions requiring stockholder approval, including
the approval of transactions involving a change in control of Azurix. Some
individuals who serve as officers and directors of Enron also serve as directors
of Azurix. The directors and officers of Enron have fiduciary duties to manage
Enron, including its investments in subsidiaries and affiliates such as Azurix,
in a manner beneficial to Enron and its stockholders. Similarly, the directors
and officers of Azurix have fiduciary duties to manage Azurix in a manner
beneficial to Azurix and its stockholders. In some circumstances, the duties of
these directors and officers of Enron may conflict with their duties as
directors of Azurix. In addition, certain other conflicts of interest exist and
may arise in the future as a result of the extensive relationships between Enron
and Azurix. Enron and Azurix have agreed that conflicts of interest between
Enron and Azurix may be resolved through approval by a majority of the directors
of Azurix not associated with Enron. See "Certain Transactions" and "Principal
and Selling Stockholders."
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
The market price of our common stock could drop due to sales of a large
number of shares of our common stock in the market after the offering or the
perception that such sales could occur. These factors could also make it more
difficult to raise funds through future offerings of common stock. See "Shares
Eligible for Future Sale."
After the offering, shares of common stock will be outstanding.
Of these shares, the shares to be sold in the offering will be freely
tradable without restriction under the Securities Act, except for any shares
acquired by an "affiliate" of Azurix as defined in Rule 144 under the Securities
Act. In connection with the offering, Azurix and the selling stockholder
(holding shares of common stock post-offering) have agreed, subject to
certain exceptions, not to sell any shares of common stock for a period of 180
days after the date of this prospectus without the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the underwriters. Upon
expiration of the lockup period, shares may be sold at any time
subject to compliance with the volume limitations and other restrictions of Rule
144. Options to purchase approximately 7.8 million shares of common stock will
also be outstanding after the offering. Such options generally provide for
vesting over a three to five year period. In addition, more options may be
granted in the future. See "Management -- Stock Plan."
After the offering, we intend to file a registration statement covering the
sale of approximately 7.8 million shares of common stock reserved for issuance
under our stock plan. In addition, Atlantic Water Trust has registration rights
for all of its shares of common stock. See "Certain Transactions" and "Shares
Eligible for Future Sale."
Subject to certain limitations, Marlin Water Trust, or the trustee under
its senior notes indenture, may cause the sale of Atlantic Water Trust's
interest in Azurix if certain events occur unless the senior notes are repaid
from other sources. See "Principal and Selling Stockholders."
LACK OF A SPECIFIC USE OF PROCEEDS COULD RESULT IN AN INADEQUATE RETURN
We have not designated any specific use for the net proceeds to us from
this sale of common stock, and there is a risk that we will not be able to
deploy the proceeds of the offering to obtain an adequate return on capital. We
intend to use the net proceeds primarily for general corporate purposes,
including
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working capital and the expansion of our business through strategic acquisitions
as opportunities arise. Accordingly, management will have significant
flexibility in applying the net proceeds of the offering. Although part of our
business strategy is to pursue acquisitions of water and wastewater assets,
there can be no assurance that we will find strategic acquisition opportunities
at favorable prices or that we will have sufficient capital resources to finance
our acquisition strategy. See "Use of Proceeds."
YOU WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the net tangible book value per share of our common stock after
the offering. We calculate net tangible book value per share by dividing the net
tangible assets (total assets less liabilities and net intangible assets) by the
number of shares of common stock outstanding before the offering. You will incur
an immediate increase in pro forma net tangible book value of $ per share
and an immediate dilution of $ per share. In addition, you will incur
additional dilution upon the exercise of outstanding stock options. See
"Dilution."
WE WILL NOT PAY DIVIDENDS
We do not currently anticipate paying any cash dividends. See "Dividend
Policy."
OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD DISCOURAGE A
TAKEOVER
Our certificate of incorporation authorizes our Board of Directors to issue
preferred stock without stockholder approval. If our Board of Directors elects
to issue preferred stock, it could be more difficult for a third party to
acquire us. In addition, certain provisions of the certificate of incorporation
could make it more difficult for a third party to acquire control of us, even if
such change of control would be beneficial to stockholders. See "Description of
Capital Stock."
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND OUR STOCK PRICE
MAY FLUCTUATE
There has not been a public market for our common stock. We will list the
common stock for trading on the New York Stock Exchange. We do not know the
extent to which investor interest in Azurix will lead to the development of a
trading market for the common stock or how the common stock will trade in the
future. The initial public offering price will be determined by negotiations
among us, Atlantic Water Trust, Enron and the underwriters. Investors may not be
able to resell their shares at or above the initial public offering price. See
"Underwriting."
The price at which the common stock will trade depends upon a number of
factors, including our historical and anticipated operating results and general
market and economic conditions, some of which are beyond our ability to control.
Factors such as quarterly fluctuations in our financial and operating results,
developments affecting us, our customers, the water markets in which we compete
or the water industry, including the factors listed below under "Cautionary
Statements Regarding Forward-Looking Statements," also could cause the market
price of the common stock to fluctuate substantially. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations.
These broad market fluctuations may adversely affect the market price of the
common stock.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. Although we believe our expectations reflected
in these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements include, among other
things:
- Political developments in foreign countries
- The ability to enter new water and wastewater markets in the United
States and in other jurisdictions
- The timing and extent of deregulation of water and wastewater markets in
the United States and in other countries
- Regulatory developments in the United States and in other countries,
including tax legislation and regulations
- The extent of efforts by governments to privatize water and wastewater
industries
- The timing and extent of changes in non-U.S. currencies and interest
rates
- The extent of success in acquiring water and wastewater assets and
developing and managing water resources, including the ability to qualify
for and win bids for water and wastewater projects
- The timing and success of efforts to develop international water and
wastewater infrastructure projects
- The ability of counterparties to financial risk management instruments
and other contracts with us to meet their financial commitments to us
- Our success in implementing our Year 2000 plan, the effectiveness of our
Year 2000 plan and the Year 2000 readiness of third parties
- Our ability to access the debt and equity markets during the periods
covered by the forward-looking statements, which will depend on general
market conditions and our credit ratings for our debt obligations
We undertake no obligation to update or revise our forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
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USE OF PROCEEDS
We expect the proceeds to Azurix from this sale of common stock to be
approximately $350 million, before deducting underwriting discounts and
commissions and estimated expenses. Azurix will not receive any proceeds from
the sale of common stock by the selling stockholder. We intend to use the net
proceeds that we receive for general corporate purposes, including working
capital and the expansion of our business through strategic acquisitions as
opportunities arise.
DIVIDEND POLICY
We have not paid any dividends on our common stock and we do not currently
anticipate paying any dividends on our common stock. We currently intend to
retain all future earnings to fund the development and growth of our business.
The payment of any future dividends will be at the discretion of our Board of
Directors and will depend on our results of operations, financial condition,
capital requirements and other factors deemed relevant by our Board of
Directors.
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the net tangible book value per share of our common stock after
the offering. We calculate net book value per share by dividing the net assets
(total assets less liabilities) by the number of shares outstanding before the
offering. We calculate net tangible book value per share by dividing the net
tangible assets (total assets less liabilities and net intangible assets) by the
number of shares of common stock outstanding before the offering.
The net book value and net tangible book value of Azurix as of December 31,
1998 were approximately $16.46 and $7.57 per share, respectively. Without taking
into account any changes in net book value or net tangible book value after
December 31, 1998, other than to give effect to the offering and the application
of the estimated net proceeds from the offering, the pro forma net book value of
the common stock as of December 31, 1998 would have been approximately $
million, or $ per share, and the pro forma net tangible book value of the
common stock as of such date would have been approximately $ million, or
$ per share. Assuming the offering had occurred at December 31, 1998, an
immediate increase in net book value of $ per share and an immediate
dilution of $ per share to new investors would have occurred. The following
table shows the effect of the offering as if the offering had occurred at
December 31, 1998 and illustrates the immediate increase in net tangible book
value of $ per share and an immediate dilution of $ per share to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of December 31,
1998................................................... $ 7.57
Increase in net tangible book value per share attributable
to the offering........................................
-------
Pro forma net tangible book value per share as of December
31, 1998 after giving effect to the offering..............
-------
Dilution in net tangible book value per share to new
investors................................................. $
=======
</TABLE>
The following table shows on a pro forma as adjusted basis at December 31,
1998, the number of shares of common stock purchased from us, the total
consideration (including subsequent capital contributions) paid to us and the
average price paid per share by the existing stockholder and by new investors
purchasing common stock in the offering:
<TABLE>
<CAPTION>
SHARES PURCHASED
--------------------- TOTAL AVERAGE PRICE
NUMBER PERCENT CONSIDERATION PER SHARE
----------- ------- -------------- -------------
(IN
MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Existing stockholder(1)..................... % $ $
New investors(1)............................
----------- ----- --------------
Total................................ 100.0% $
=========== ===== ==============
</TABLE>
- ---------------
(1) If the underwriters' over-allotment option is exercised in full, sales by
the selling stockholder in the offering will reduce the number of shares of
common stock held by the existing stockholder to approximately % of the
total shares of common stock outstanding after the offering and will
increase the number of shares held by new investors to , or
approximately % of the total shares of common stock outstanding after the
offering. See "Underwriting."
The foregoing table excludes outstanding employee stock options of Azurix
to purchase approximately 7.8 million shares of common stock. The terms of the
options provide for vesting, generally over a three to five year period.
However, assuming all options are exercised, additional dilution to new
stockholders would be approximately $ per share.
17
<PAGE> 23
CAPITALIZATION
The following table sets forth the cash and capitalization of Azurix as of
December 31, 1998, and as adjusted to give effect to the issuance of
shares of common stock offered by Azurix by this prospectus and the net proceeds
from the offering, assuming the offering occurred on December 31, 1998. The
table should be read in conjunction with the Consolidated Financial Statements
of Azurix and related notes thereto and other financial data included elsewhere
in this prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $ 5.3 $
======== ========
Current maturities of long-term debt........................ $ 27.0 $ 27.0
-------- --------
Note payable -- affiliate(1)................................ 121.4 121.4
-------- --------
Long-term debt:
Amounts reclassified from short-term debt(2).............. 424.0 424.0
Senior credit facility.................................... 219.5 219.5
Acquisition loan notes.................................... 117.2 117.2
European Investment Bank credit facilities................ 63.3 63.3
Capital lease obligation.................................. 88.1 88.1
-------- --------
Total long-term debt.............................. 912.1 912.1
-------- --------
Stockholders' equity(3):
Common stock, $0.01 par value; 500,000,000 shares
authorized; 100,000,000 shares issued and outstanding;
shares issued and outstanding, as adjusted...... 1.0
Additional paid-in capital................................ 1,671.0
Retained earnings......................................... 10.2 10.2
Cumulative foreign currency translation adjustment........ (36.7) (36.7)
-------- --------
Total stockholders' equity........................ 1,645.5
-------- --------
Total capitalization.............................. $2,706.0 $
======== ========
</TABLE>
- ---------------
(1) Amounts outstanding under the loan to Azurix Europe from Bristol Water
Trust, a wholly owned subsidiary of Atlantic Water Trust.
(2) Reflects bank borrowings due within one year that have been reclassified to
long-term debt because Azurix has the ability, through existing long-term
credit facilities, to refinance such bank borrowings on a long-term basis.
However, Azurix intends to refinance such bank borrowings under a new
facility to be entered into in April 1999.
(3) Outstanding shares do not include shares of common stock reserved for
issuance under our stock plan. As of February 28, 1999, there were
outstanding options to purchase approximately 7.8 million shares of common
stock.
18
<PAGE> 24
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The following tables present selected historical consolidated financial
data for Azurix and for Wessex, the predecessor of Azurix, for the periods and
dates indicated. In addition, the tables present selected unaudited pro forma
consolidated financial data for Azurix for the year ended December 31, 1998.
The historical financial data for Azurix are derived from Azurix's audited
consolidated financial statements included elsewhere in this prospectus and
includes the impact of the Wessex acquisition from the date of acquisition.
Substantially all of Azurix's results of operations occurred in the fourth
quarter of 1998, subsequent to the acquisition of Wessex. The historical
financial data for Wessex as of March 31, 1998 and for the years ended March 31,
1997 and 1998 and for the six months ended October 2, 1998 are derived from
Wessex's audited consolidated financial statements included elsewhere in this
prospectus. The historical financial data for Wessex as of March 31, 1995, 1996
and 1997 and for the years ended March 31, 1995 and 1996 are derived from
unaudited financial statements prepared in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") that were derived from Wessex's
audited financial statements prepared in accordance with U.K. generally accepted
accounting principles ("U.K. GAAP").
The unaudited pro forma financial data for Azurix are derived from the
unaudited condensed consolidated pro forma financial information included
elsewhere in this prospectus. The unaudited pro forma financial data give effect
to the acquisition of Wessex, the redemption and elimination of Wessex's
preference shares for an aggregate price of $249.8 million and the sale by
Wessex of its interest in UK Waste for $337.9 million, as though each occurred
on January 1, 1998. The unaudited pro forma financial data presented below is
not necessarily indicative of the financial results that would have occurred had
the acquisition of Wessex, the redemption and elimination of Wessex's preference
shares and the sale by Wessex of its interest in UK Waste occurred on January 1,
1998 and should not be viewed as indicative of operations in future periods.
This information should be read in conjunction with "Capitalization,"
"Unaudited Condensed Consolidated Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Azurix and Wessex and
related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
WESSEX (PREDECESSOR COMPANY) AZURIX
--------------------------------------------------------------- ---------------------------
SIX MONTHS JANUARY 29, PRO FORMA
YEAR ENDED MARCH 31, ENDED 1998 TO YEAR ENDED
------------------------------------------------- OCTOBER 2, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1998 1998 1998 1998
----------- ----------- --------- --------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.............. $356.3 $376.8 $403.1 $436.6 $233.8 $119.7 $464.2
Operations and maintenance
expense....................... 106.7 106.6 102.4 110.9 61.7 31.6 120.9
General and administrative
expense....................... 33.3 27.4 32.2 29.1 36.4 20.3 44.4
Depreciation and amortization... 48.5 53.7 58.0 64.3 35.2 22.2 88.3
Operating income................ 167.8 189.1 210.5 232.3 100.5 45.6 210.6
Equity in earnings (loss) of
affiliates(1)................. 11.0 14.1 14.7 13.3 5.8 (0.8) (0.8)
Net interest (income) expense... (13.8) (16.9) (10.2) 8.6 6.1 15.1 66.1
Other expense................... -- -- -- -- -- 1.2 --
Income before income tax and
utility tax................... 192.6 220.1 235.4 237.0 100.2 28.5 143.7
Income tax expense.............. 68.9 79.7 82.4 58.0 28.4 18.3 56.5
Utility tax expense(2).......... -- -- -- 162.3 -- -- --
Net income...................... 123.7 140.4 153.0 16.7 71.8 10.2 87.2
Preference share dividends...... -- 8.0 13.5 15.1 7.7 -- --
Net income available to common
stockholders.................. 123.7 132.4 139.5 1.6 64.1 10.2 87.2
Basic earnings per common
share(3)...................... 0.49 0.62 0.65 0.01 0.30 0.10 0.87
Diluted earnings per common
share(3)...................... 0.40 0.51 0.55 0.01 0.30 0.10 0.87
Dividends declared per common
share(4)...................... 0.19 0.25 0.26 0.31 0.23 -- --
OTHER FINANCIAL DATA:
EBITDA(5) (unaudited)........... $227.3 $256.9 $283.2 $309.9 $141.5 $ 65.8 $298.1
</TABLE>
(continued on following page)
19
<PAGE> 25
<TABLE>
<CAPTION>
WESSEX (PREDECESSOR COMPANY) AT MARCH 31, AZURIX AT
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 250.1 $ 228.3 $ (95.5) $ (307.0) $ (129.6)
Total assets...................................... 2,239.9 2,252.7 2,258.0 2,372.3 3,358.3
Long-term liabilities............................. 466.3 473.3 483.4 482.3 1,451.4
Redeemable preference shares...................... -- 235.3 254.7 259.0 --
Stockholders' equity.............................. 1,598.7 1,354.4 1,251.5 1,229.5 1,645.5
</TABLE>
- ---------------
(1) Equity in earnings of affiliates for all periods presented for Wessex is
related primarily to Wessex's interest in UK Waste.
(2) The year ended March 31, 1998 includes a windfall tax on privatized
utilities in the United Kingdom of $162.3 million, which has been described
by the U.K. government as a one-time tax. Excluding the effect of this tax,
for the year ended March 31, 1998, Wessex's net income, basic earnings per
common share and diluted earnings per common share would have been $179.0
million, $0.78 per common share and $0.77 per common share, respectively.
(3) The basic and diluted earnings per share amounts for Wessex are based on the
historical average ordinary shares of Wessex and average ordinary shares of
Wessex plus the share effect of the potential conversion to ordinary shares
of its dilutive securities, respectively.
(4) Wessex stockholders were given the option to elect dividends declared to be
paid in cash or the issuance of additional ordinary shares. Of the dividends
declared per share for the years ended March 31, 1995, 1996, 1997, 1998 and
the six months ended October 2, 1998, stockholders elected stock dividends
equal to $0.02, $0.01, $0.02, $0.05 and $0.18 per share, respectively.
(5) EBITDA for any relevant period presented above is defined as net income
before net interest (income) expense, income tax, utility tax, depreciation
and amortization. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating profit, as an indicator of liquidity or as a
substitute for net cash provided by operating activities.
20
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Consolidated Financial Statements of Azurix and
Wessex and related notes thereto and the Unaudited Condensed Consolidated Pro
Forma Financial Information of Azurix and related notes thereto included
elsewhere in this prospectus.
OVERVIEW
In December 1998, Enron contributed Azurix to Atlantic Water Trust and
Atlantic Water Trust sold a 50% voting interest in Atlantic Water Trust to
Marlin Water Trust, with Enron retaining a 50% voting interest. During 1998,
Azurix indirectly acquired all of the outstanding ordinary share capital of
Wessex, and Enron contributed to Azurix the outstanding common stock of a
subsidiary that in June 1998, indirectly, acquired a 32.1% ownership interest in
Obras Sanitarias Mendoza S.A. ("OSM"). Wessex and OSM provide water and
wastewater treatment services in southwestern England and the Province of
Mendoza, Argentina, respectively.
Azurix was incorporated on January 29, 1998, and as a result, its results
of operations and cash flows discussed in this prospectus are from the date of
incorporation to December 31, 1998. However, substantially all of Azurix's
results of operations and cash flows occurred during the fourth quarter of 1998,
subsequent to the Wessex acquisition.
BUSINESS ACQUISITION
On October 2, 1998, Azurix, through its indirect wholly owned subsidiary,
Azurix Europe, acquired over 90% of the outstanding ordinary share capital of
Wessex. On that same date, Azurix Europe issued notices to the remaining Wessex
ordinary stockholders, informing them that it intended to exercise its rights
under the English Companies Act to acquire compulsorily all of the outstanding
ordinary shares not held by Azurix Europe. The compulsory share acquisition was
completed in November 1998. The total cost of the Wessex acquisition, including
transaction costs, was $2.4 billion, plus the assumption of $481.5 million of
existing Wessex debt. Wessex had cumulative mandatorily redeemable preference
shares outstanding when it was acquired. These were redeemed by Wessex in
December 1998.
SALE OF INVESTMENT IN UNCONSOLIDATED AFFILIATE
On November 30, 1998, Wessex sold its interest in Wessex Waste Management
Ltd, a joint venture with Waste Management International Plc that does business
as UK Waste, for $337.9 million. Azurix recorded no gain or loss from the sale.
RECENT DEVELOPMENTS
Azurix entered into an agreement on December 19, 1998 to purchase 49.9% of
an entity whose principal asset is the water concession for the city of Cancun,
Mexico. This agreement was not binding until certain material conditions were
met, and these conditions were met subsequent to December 31, 1998. The purchase
price is $13.5 million and Azurix has agreed to provide up to $25.0 million in
debt financing. The acquisition is subject to certain governmental approvals and
is scheduled to close in March 1999.
RESULTS OF OPERATIONS
The functional currency of Wessex is U.K. pounds sterling. Accordingly, its
results of operations, translated into U.S. dollars, are affected by the change
in currency exchange rates when comparing periods. The actual average exchange
rates for each applicable period used in translating the U.K. pounds sterling
functional results to U.S. dollars, in accordance with U.S. GAAP, are $1.66 per
L1.00 for the year
21
<PAGE> 27
ended December 31, 1998, $1.65 per L1.00 for the six months ended October 2,
1998, $1.64 per L1.00 for the year ended March 31, 1998 and $1.59 per L1.00 for
the year ended March 31, 1997.
For purposes of the discussion below, the results of operations for the
periods being compared are translated using the actual average exchange rate of
the most recent period ("Constant Rate Results"), thereby eliminating the effect
of changes in currency exchange rates. Tables shown below present the condensed
results of operations and highlight the impact of changes in currency exchange
rates by displaying for the earlier period in each presentation, both the
historical results and Constant Rate Results.
AZURIX UNAUDITED PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO
WESSEX (PREDECESSOR COMPANY) FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
WESSEX
(PREDECESSOR COMPANY)
YEAR ENDED MARCH 31, 1998 AZURIX
-------------------------- PRO FORMA
HISTORICAL CONSTANT RATE YEAR ENDED
RESULTS RESULTS DECEMBER 31, 1998
---------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Operating revenues..................................... $436.6 $440.9 $464.2
------ ------ ------
Operations and maintenance expense..................... 110.9 112.0 120.9
General and administrative expense..................... 29.1 29.4 44.4
Depreciation and amortization.......................... 64.3 64.9 88.3
------ ------ ------
Operating income....................................... 232.3 234.6 210.6
Equity earnings (loss) of affiliates................... 13.3 13.4 (0.8)
Net interest expense................................... 8.6 8.7 66.1
------ ------ ------
Income before income tax and utility tax expense....... 237.0 239.3 143.7
Income tax and utility tax expense..................... 220.3 222.4 56.5
------ ------ ------
Net income............................................. $ 16.7 $ 16.9 $ 87.2
====== ====== ======
</TABLE>
Operating revenues increased 5.3% for the pro forma year ended December 31,
1998, as compared to the year ended March 31, 1998, as a result of the pricing
formula in the Wessex license and higher revenues due to increased sales from SC
Technology AG, Wessex's subsidiary that manufactures, sells and operates
biosolid drying equipment.
Operations and maintenance expense increased by $8.9 million, or 7.9%, for
the pro forma year ended December 31, 1998, as compared to the year ended March
31, 1998, primarily due to an increase in the operating costs of SC Technology.
General and administrative expense increased by $15.0 million for the pro
forma year ended December 31, 1998, as compared to the year ended March 31,
1998, primarily from Azurix corporate activities incurred during the fourth
quarter of 1998 in pursuit of acquisitions. See "-- Outlook."
Depreciation and amortization increased by $23.4 million, or 36.1%, for the
pro forma year ended December 31, 1998, as compared to the year ended March 31,
1998. This increase is a result of the amortization of goodwill related to the
acquisition of Wessex, the increase in depreciation on fixed assets arising from
property additions in the capital expenditure program and the effect of the
Wessex purchase price allocation, which increased the depreciable value of the
fixed assets.
Equity earnings of affiliates declined from $13.4 million in the year ended
March 31, 1998 to a loss of $0.8 million in the pro forma year ended December
31, 1998. This decrease is the result of the sale of UK Waste. The pro forma
results reflect the sale as if it occurred on January 1, 1998.
Net interest expense was $8.7 million for the year ended March 31, 1998,
compared to $66.1 million for the pro forma year ended December 31, 1998. The
pro forma results assume the acquisition of Wessex occurred on January 1, 1998,
and, therefore, assume an interest charge on the debt incurred to purchase
Wessex from that date, less the proceeds from the sale of UK Waste.
22
<PAGE> 28
Income tax and utility tax expense of $56.5 million for the pro forma year
ended December 31, 1998 was $165.9 million lower than the year ended March 31,
1998, primarily due to a one-time utility tax levied in calendar year 1997 on
privatized utilities, which was paid in two installments, one in December 1997
and one in December 1998.
AZURIX -- DATE OF INCEPTION TO DECEMBER 31, 1998
Azurix was incorporated on January 29, 1998. Substantially all of its
results of operations occurred in the fourth quarter of 1998 following the
Wessex acquisition. Azurix's operating revenues, operations and maintenance
expense and depreciation and amortization expense were all substantially related
to the consolidation of the Wessex results of operations for the period after
the Wessex acquisition.
Azurix's general and administrative expenses were related to Wessex's
operations and the pursuit of acquisition activities primarily during the fourth
quarter.
Interest expense is related to the Wessex acquisition financing, existing
Wessex debt and funds borrowed in the fourth quarter to redeem the outstanding
preference shares.
The effective tax rate for the period was 64.1%. The difference between the
effective tax rate and the U.S. statutory rate of 35% (U.K. statutory rate of
31%) is primarily related to (1) a valuation allowance recognized on a U.S.
deferred tax asset generated from general and administrative expense incurred in
the United States; (2) a valuation allowance recognized on a U.K. deferred tax
asset relating to non-deductible interest expense prior to achieving a
consolidated tax position; and (3) non-deductible amortization of goodwill
resulting from the acquisition of Wessex.
WESSEX (PREDECESSOR COMPANY) SIX MONTHS ENDED OCTOBER 2, 1998 COMPARED TO THE
YEAR ENDED
MARCH 31, 1998
The following table compares revenues and expenses for the six months ended
October 2, 1998 to the year ended March 31, 1998. However, revenues and expenses
for the six months ended October 2, 1998 will be annualized for discussion
purposes. The annualized revenues and expenses are not necessarily indicative of
the actual results of operations for a full year.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
-------------------------- SIX MONTHS
HISTORICAL CONSTANT RATE ENDED
RESULTS RESULTS OCTOBER 2, 1998
---------- ------------- ---------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Operating revenues.............................. $436.6 $439.9 $233.8
------ ------ ------
Operations and maintenance expense.............. 110.9 111.7 61.7
General and administrative expense.............. 29.1 29.3 36.4
Depreciation and amortization................... 64.3 64.8 35.2
------ ------ ------
Operating income................................ 232.3 234.1 100.5
Equity earnings of affiliates................... 13.3 13.4 5.8
Net interest expense............................ 8.6 8.7 6.1
------ ------ ------
Income before income tax and utility tax
expense....................................... 237.0 238.8 100.2
Income tax and utility tax expense.............. 220.3 222.0 28.4
------ ------ ------
Net income...................................... $ 16.7 $ 16.8 $ 71.8
====== ====== ======
</TABLE>
23
<PAGE> 29
Operating Revenues. The table below presents operating revenues for the
following periods:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1998 SIX MONTHS
CONSTANT RATE ENDED
RESULTS OCTOBER 2, 1998
-------------- ---------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Regulated revenue......................................... $407.3 $213.6
Unregulated revenue....................................... 32.6 20.2
------ ------
Total operating revenues........................ $439.9 $233.8
====== ======
</TABLE>
Regulated operating revenues, on an annualized basis, for the six months
ended October 2, 1998 increased 4.9% compared to the year ended March 31, 1998,
primarily as a result of the pricing formula in the Wessex license.
Unregulated revenues, on an annualized basis, of $40.4 million for the six
months ended October 2, 1998 compares to $32.6 million for the year ended March
31, 1998. The primary reason for the increase is higher revenues from SC
Technology.
Operating Expenses. On an annualized basis, operations and maintenance
expense increased by 10.5% for the six months ended October 2, 1998, as compared
to the year ended March 31, 1998. This increase is primarily attributable to
increased activity from SC Technology.
General and administrative expense increased by 148.5% for the six months
ended October 2, 1998, on an annualized basis, when compared to the year ended
March 31, 1998. This increase is primarily attributable to the expense incurred
by Wessex directly related to its acquisition by Azurix. These expenses were
incurred prior to the consummation of the acquisition.
The increase in depreciation and amortization for the six months ended
October 2, 1998, on an annualized basis, when compared to the year ended March
31, 1998, is primarily due to property additions resulting from Wessex's capital
expenditure program.
Equity earnings of affiliates for the six months ended October 2, 1998
decreased by 13.4%, or $1.8 million, when annualized and compared to the year
ended March 31, 1998. This decrease was primarily associated with higher
operating expenses at UK Waste.
Net interest expense increased in the six months ended October 2, 1998 on
an annualized basis, as compared to the year ended March 31, 1998, by 40.2% or
$3.5 million. This was primarily due to a reduction in the average cash and cash
equivalent position in the current period resulting from the payment of the
first installment of the one-time utility tax in December 1997 and the
preference share redemption and elimination in 1998.
Tax expense was $165.2 million lower in the annualized six month period
ended October 2, 1998, as compared to the year ended March 31, 1998. This
decrease was primarily due to a one-time tax levied on privatized utilities in
the year ended March 31, 1998.
24
<PAGE> 30
WESSEX (PREDECESSOR COMPANY) YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR
ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
--------------------------
HISTORICAL CONSTANT RATE YEAR ENDED
RESULTS RESULTS MARCH 31, 1998
---------- ------------- --------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Operating revenues............................... $403.1 $417.3 $436.6
------ ------ ------
Operations and maintenance expense............... 102.4 106.0 110.9
General and administrative expense............... 32.2 33.3 29.1
Depreciation and amortization.................... 58.0 60.0 64.3
------ ------ ------
Operating income................................. 210.5 218.0 232.3
Equity earnings of affiliates.................... 14.7 15.2 13.3
Net interest (income) expense.................... (10.2) (10.5) 8.6
------ ------ ------
Income before income tax and utility tax
expense........................................ 235.4 243.7 237.0
Income tax and utility tax expense............... 82.4 85.3 220.3
------ ------ ------
Net income....................................... $153.0 $158.4 $ 16.7
====== ====== ======
</TABLE>
Operating Revenues. The table below presents regulated operating revenues
for the following periods:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-----------------------------
1997 1998
------------- -------------
CONSTANT RATE
RESULTS
-------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Regulated revenue......................................... $389.0 $404.3
Unregulated revenue....................................... 28.3 32.3
------ ------
Total operating revenues........................ $417.3 $436.6
====== ======
</TABLE>
Regulated operating revenues increased 3.9% for the year ended March 31,
1998, as compared to the year ended March 31, 1997, primarily as a result of the
pricing formula in the Wessex license.
Unregulated revenues of $32.3 million for the year ended March 31, 1998
were $4.0 million, or 14.1% higher than the prior year primarily due to higher
revenue from SC Technology.
Operating Expenses. Operations and maintenance expense increased 4.6%
primarily due to higher operating expenses from SC Technology.
General and administrative expense decreased 12.6% for the year ended March
31, 1998, as compared to the prior year, due to cost reduction measures
implemented by Wessex and costs incurred in the year ended March 31, 1997
related to an unsuccessful acquisition attempt.
Depreciation and amortization increased 7.2% for the year ended March 31,
1998 as compared to the prior year primarily due to property additions resulting
from Wessex's capital expenditure program.
Net interest expense was $8.6 million for the year ended March 31, 1998,
compared to net interest income of $10.5 million for the year ended March 31,
1997, primarily due to a reduction in the cash and cash equivalent position
related to the buy-back of its "B" and "C" classes of ordinary shares in
February 1997.
Equity earnings of affiliates for the year ended March 31, 1998 decreased
by 12.5%, or $1.9 million, compared to the prior year. An affiliate, UK Waste,
was sold in November 1998.
25
<PAGE> 31
Income tax and utility tax expense was $135.0 million higher in the year
ended March 31, 1998 when compared to the prior year. This increase was
primarily due to a one-time tax levied on privatized utilities in the year ended
March 31, 1998 of $162.3 million. The effect of the utility tax was partially
offset by the effect of a change in the U.K. statutory tax rate from 33% to 31%.
OUTLOOK
Several developments may significantly affect Azurix's future results of
operations.
Azurix has a business strategy consisting of growth through acquisitions
and development projects. We have recently put in place a significant business
development effort with associated general, administrative and operating
expenses. These expenses currently approximate $15 million pretax on a quarterly
basis. These expenses are in addition to the existing general, administrative
and operating expenses of Wessex. Our future financial results, therefore, will
depend significantly on the success of our acquisition and development
activities, which are difficult to predict. To the extent we are not successful
in completing acquisitions and development projects, these expenses will not be
absorbed by revenues associated with those acquisitions and development
projects.
A substantial portion of our revenues are subject to governmental
regulation of the rates that we may charge to our customers. The U.K. government
is currently conducting a periodic review of the price limits for water and
wastewater companies in England and Wales that is expected to result in new
price limits for the period from April 1, 2000 through 2005 that will be lower
than current price limits. Although we are unable to predict the precise outcome
of the current U.K. rate review, it is likely to reduce significantly Wessex's
revenues and earnings, but should not have a material adverse effect on Azurix's
financial position.
On February 2, 1999, we granted options to purchase approximately 7.8
million shares of our common stock through an employee stock option plan.
Assuming an initial public offering price of $ per share, we will incur a
non-cash expense of approximately $ million ($ million after-tax)
per year related to these options, which will be charged to income over the
average vesting period of four years.
It is anticipated that we will refinance a portion of our existing debt in
April 1999 potentially resulting in a one-time non-cash charge of $
million ($ million after-tax) in the second quarter due to the write-off
of deferred financing costs and the incurrence of approximately $ million in
deferred financing costs related to the proposed new financing.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of Azurix's cash flows for the period from January 29,
1998 to December 31, 1998 occurred in the fourth quarter, subsequent to the
Wessex acquisition. Cash flow from operations totaled $4.4 million during the
period from January 29, 1998 to December 31, 1998. Relating to its investment
activities, Azurix used $2,270.8 million (in addition to the issuance of $119.8
million of acquisition loan notes) to acquire ordinary shares of Wessex and
$63.2 million for capital expenditures incurred by Wessex. In addition, Azurix
received $337.9 million in proceeds from the sale of UK Waste. Cash provided by
financing activities during the period totaled $1,977.5 million, primarily
comprised of $1,600.2 million from the issuance of common stock and capital
contributions and a net increase in borrowings of $485.4 million, partially
offset by the redemption of the Wessex preference shares of $106.4 million.
At December 31, 1998, Azurix had a working capital deficit of $129.6
million. Of this deficit, $71.0 million represents deferred income, relating to
customer billings in advance of providing water and wastewater services, which
does not require the future use of cash. At December 31, 1998, Azurix had
available capacity, under its credit facilities described below, to provide
$91.5 million of working capital. Management believes that cash flows from
operations and the available capacity under these credit facilities is
sufficient to fund the working capital deficit.
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Azurix, through Wessex, maintains an ongoing asset replacement program
throughout its customer service areas based on an expenditure plan submitted to
the U.K. industry regulator. Wessex expects that its projected capital
expenditures of approximately $230 million for 1999 will be financed with
internally generated funds and from proceeds under long-term and short-term
borrowing arrangements.
At December 31, 1998, Azurix, through Azurix Europe, had in place a senior
credit facility consisting of a term loan facility of $322.6 million and a
revolving credit facility of $575.3 million. The amounts outstanding at December
31, 1998 were $211.2 million under the term loan facility and $8.3 million under
the revolving credit facility. As a result, Azurix has total availability under
the senior credit facility of $678.4 million, consisting of $567.0 million under
the revolving credit facility and $111.4 million under the term loan facility.
Of the $567.0 million under the revolving credit facility, $475.5 million is
permitted, if necessary, to refinance certain borrowings discussed below and
$91.5 million is permitted, if necessary, to fund the working capital deficit
discussed above. The term loan capacity of $111.4 million is used to secure a
substantial portion of the acquisition loan notes issued to Wessex shareholders
in lieu of cash consideration for their shares. The acquisition loan notes are
redeemable, at the option of the holder, semi-annually beginning September 30,
1999, with final redemption occurring September 30, 2005. The term loan facility
requires repayment of $199.5 million by July 24, 2000 and repayment of any
remaining outstanding amount under the term loan in July 2003. The revolving
credit facility terminates in July 2003.
Azurix, through Wessex, is a borrower under committed credit facilities
with six major banks that provide an aggregate $399.1 million for general
corporate purposes. As of December 31, 1998, these bank facilities were
completely drawn down by Wessex. The bank facilities mature in April 1999.
Wessex also has $24.9 million of short-term uncommitted bank borrowings that
mature in April 1999. It is anticipated that Azurix will refinance these
short-term borrowings with long-term borrowings prior to maturity. If the
proposed refinancing is not consummated prior to the maturity of the short-term
borrowings, Azurix will utilize available capacity of $475.5 million under the
senior credit facility to refinance these borrowings. In addition to the
refinancing of its short-term borrowings on a long-term basis, Azurix
anticipates such refinancing will provide borrowing capacity of approximately
$400 million. This borrowing capacity, combined with additional borrowing
capacity generated from the cash flows of specific projects acquired, will be
used by Azurix in funding acquisitions and privatizations.
Azurix has contractual commitments for capital expenditures to be incurred
after December 31, 1998 of $130.2 million.
FINANCIAL RISK MANAGEMENT
Azurix is exposed to market risks, particularly changes in U.S. and
international interest rates and changes in currency exchange rates as measured
against the functional currencies in which it operates. Interest rate risk is a
consequence of having variable rate debt obligations, as changing interest rates
impact the discounted value of future cash flows. Azurix utilizes swap contracts
to minimize its interest rate risk. Currency exchange rate risk is the result of
transactions that are denominated in a currency other than the functional
currency. The primary purpose of Azurix's foreign currency hedging activities is
to protect against the volatility associated with currency exchange rates. It
attempts to reduce these risks by utilizing derivative financial instruments for
non-trading purposes. Azurix's accounting policies for derivative financial
instruments are described in Note 1 to the Consolidated Financial Statements.
Azurix engages in hedging programs aimed at limiting the impact of such
significant and sudden fluctuations, but there can be no assurance that such an
approach will be successful. Factors that could impact the effectiveness of its
hedging programs include the accuracy of revenue forecasts, volatility of the
currency and interest rate markets, and the availability of hedging instruments.
All currency or interest rate contracts that are entered into by Azurix are
entered into for the sole purpose of hedging an existing or anticipated
exposure, not for speculation.
Azurix uses J.P. Morgan's RiskMetrics(TM) system to estimate the
value-at-risk of its financial instruments. Value-at-risk is a statistical
estimate of the loss that would result from adverse market movements. It is
based on volatility and correlation data provided by J.P. Morgan, Azurix's
choice of a
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<PAGE> 33
statistical confidence level and its estimate of the time period required to
liquidate the positions in the various financial instruments in the event of an
adverse market movement. The value-at-risk estimate was based on normal market
conditions, a 95% confidence level and a liquidation period between 30 days and
60 months, depending on the type of financial instrument. At December 31, 1998,
the value-at-risk estimate for foreign currency and interest rate exposure was
$0.7 million and $0.9 million, respectively. The value-at-risk estimate includes
only the risk related to the financial instruments that serve as hedges and does
not include the related underlying hedged item. Judgment is required in
interpreting market data and the use of different market assumptions or
estimation methodologies that will affect the estimated value-at-risk amount.
YEAR 2000
The Year 2000 problem results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
The use of two digits was a common practice for decades when computer storage
and processing was much more expensive than it is today. When computer systems
process dates both before and after January 1, 2000, two-digit year "fields" may
create processing ambiguities that can cause errors and system failures. For
example, computer programs that have date sensitive features may recognize a
date represented by "00" as the year 1900, instead of 2000. These errors or
failures may have limited effects, or the effects may be widespread, depending
on the computer chip, system or software, and its location and function.
The effects of the Year 2000 problem are exacerbated because of the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence applies to Azurix and Azurix's
suppliers, trading partners and customers and to governments of countries where
Azurix does business. This interdependence also applies to Enron, on which
Azurix relies for certain services as described under "Certain Transactions."
State of Readiness
We intend to follow Enron's Year 2000 plan, which covers all of Enron's
business units. The aim of the Enron plan is to take reasonable steps to prevent
Enron's mission-critical business functions from being impaired due to the Year
2000 problem. As used in this prospectus, "mission-critical" functions refer to
the critical functions whose loss would cause significant injury to persons or
tangible property, or an immediate stoppage of or significant impairment to
business areas of material importance. Enron intends to modify its plan as
events warrant. In addition, we intend to adapt the Enron plan to our
operations. Among other things, we intend to conform Wessex's Year 2000 efforts
to the Enron plan and to introduce this plan to our operations in Cancun.
Under the Enron plan, Wessex will continue to:
- Inventory its mission-critical computer hardware and software systems and
embedded chips, i.e., computer chips with date related functions,
contained in a wide variety of devices, that in turn are installed in a
wide variety of equipment and that may fail to function or may function
improperly before, on or after January 1, 2000
- Assess the effects of Year 2000 problems on its mission-critical
functions
- Remedy to the maximum extent practicable material disruptions or other
material adverse effects on its mission-critical functions, processes and
systems
- Verify and test the mission-critical systems to which remediation efforts
have been applied
- Attempt to limit the adverse effect of Year 2000 problems that cannot
reasonably be remediated by January 1, 2000, including developing
contingency plans to minimize Year 2000 problems that have not been
identified or fixed by January 1, 2000
We are pursuing additional concessions, outsourcing contracts and other
water and wastewater projects. We expect that we will adapt the Enron plan to
cover our additional operations.
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The Enron plan recognizes that the computer, telecommunications and other
systems of outside entities have the potential to adversely affect the conduct
of our business. We do not have control of these outside entities or outside
systems. However, the Enron plan includes an ongoing process of contacting
outside entities whose systems have, or may have, a substantial effect on the
ability of each of the relevant businesses to continue to conduct its
mission-critical functions without disruption from Year 2000 problems. The Enron
plan envisions attempting to inventory and assess the extent to which these
outside systems may not be "Year 2000 ready" or "Year 2000 compatible." This
refers to the ability of a system to process data reliably, both before and
after January 1, 2000, without disruption due to an inability to process date
information reliably. This is distinguished from "Year 2000 compliant," which
implies that a system will work properly, both before and after January 1, 2000,
even if outside systems fail to operate properly. In implementing the Enron
plan, we will attempt to coordinate our efforts to prepare for the Year 2000
problem with outside entities.
As of March 15, 1999, Wessex had substantially finished identifying and
assessing its mission-critical central information systems and devices with
embedded chips. Wessex is continuing to analyze, convert and test its
mission-critical central information systems and devices with embedded chips.
We do not have operational control of the Mendoza concession. Therefore, we
will consult with SAUR, the operator, to develop an understanding of SAUR's Year
2000 efforts at Mendoza.
We have been able to conduct only a limited assessment of the Cancun
concession in which we have agreed to acquire an interest. After we complete the
Cancun acquisition, we will inventory, assess, analyze, convert and test the
Cancun systems for Year 2000 readiness. We will develop Year 2000 contingency
plans to minimize Year 2000 problems that have not manifested themselves or have
not been corrected by January 1, 2000. We plan to conduct a further assessment
during April 1999.
In formulating and implementing the Enron plan, we expect to engage
independent consultants, technicians and other external resources for purposes
that may include verification and validation of certain of our mission-critical
facilities and functions. These consultants may participate in various aspects
of the plan, including the inventory, assessment and testing phases, as well as
the development of contingency planning.
We do not yet know enough about our Year 2000 problems to be able to
estimate the exact amount of time required to remediate our Year 2000 problems.
As we progress further in the plan, we will be able to better estimate the time
required for remediation, testing, validation and contingency planning.
Costs to Address Year 2000 Issues
As of March 15, 1999, we have not incurred material costs for Year 2000
issues, and we do not anticipate incurring material costs in implementing the
plan or preparing Year 2000 contingency plans. However, there can be no
assurance that the actual costs of implementing the plan will not exceed our
estimates or that our business will not be materially adversely affected by Year
2000 issues.
Year 2000 Risk Factors
We plan to satisfy applicable regulatory requirements with respect to Year
2000 readiness. However, failure to comply with such requirements may cause a
regulatory authority to order the cessation of our operations, which could have
a material adverse affect on our business.
As the Year 2000 approaches, there will be increased competition for people
with the technical skills necessary to deal with Year 2000 problems. While we
intend to recruit and retain a sufficient number of people with those skills,
the shortages of skilled personnel could prevent us from doing so. In addition,
we may face shortages of other resources, such as Year 2000 ready computer chips
or components. These shortages might delay or otherwise impair our ability to
assure that our mission-critical systems are Year 2000 ready.
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We will rely on Enron for services that involve computer processing. Enron
believes that its mission-critical systems will be Year 2000 ready substantially
before January 1, 2000. In addition, we believe that Wessex's mission-critical
systems will be Year 2000 ready substantially before January 1, 2000. However,
unforeseen circumstances could arise during the implementation of the Enron plan
that could adversely affect Enron's or Wessex's mission-critical functions,
thereby disrupting or materially adversely affecting Azurix's business.
Azurix is not able to estimate the full extent of Year 2000 readiness of
the systems located at the Mendoza and Cancun concessions at this time. However,
we intend to evaluate the Year 2000 readiness of these systems before the end of
April 1999.
We are taking reasonable steps to identify, assess, and where necessary,
replace devices containing embedded chips. Despite these efforts, we anticipate
that we will not be able to find and replace all the devices with embedded chips
or embedded chips in our systems. Further, we anticipate that outside entities
on which we depend will also not be able to find and replace all devices with
embedded chips or embedded chips in their systems. Some of the embedded chips
that fail to operate or that produce improper results may create system
disruptions or failures. Some of these disruptions or failures may spread from
the systems in which they are located to other systems. These failures may have
adverse effects upon our ability to maintain safe operations and may also have
adverse effects upon our ability to serve our customers, to comply with
environmental statutes and regulations, and to otherwise fulfill certain
contractual and other legal obligations. The embedded chip problem is widely
recognized as one of the more difficult aspects of the Year 2000 problem.
Therefore, the possible adverse impact of the embedded chip problem is not, and
will not be, unique to Azurix.
We cannot assure that suppliers upon which we depend for essential goods
and services will test their mission-critical systems in a timely manner.
Failure or delay by all or some of these entities, including U.S. and foreign
governments or governmental authorities, to assess their Year 2000 readiness
could create substantial disruptions having a material adverse effect on our
business.
We have reviewed the most reasonably likely worst case Year 2000 scenarios
we may face. Analysis of these scenarios has led us to contemplate the following
possibilities that, although unlikely, could conceivably occur:
- Widespread failure of electrical, gas and other utilities serving us
domestically and internationally
- Widespread disruption of communications
- Disruption of transportation services for us and our employees,
contractors, suppliers and customers
- Disruption to our ability to gain access to, and remain working in,
office buildings and other facilities
- The failure of substantial numbers of our mission-critical information
systems, including both hardware and software necessary to control
operational facilities such as water and wastewater treatment facilities
and distribution and collection systems
We could face substantial claims by governments, governmental authorities
or customers, as well as loss of revenues, due to service interruptions,
violations of environmental regulations, inability to fulfill contractual
obligations, inability to account for certain obligations and increased expenses
associated with litigation, harm to persons or to tangible property, violation
of environmental regulations, stabilization of operations following system
failures and the execution of contingency plans. We could also experience an
inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. In addition, we could face claims of damage to persons
or property as the result of improperly treated water or wastewater. Under these
circumstances, there would be a material adverse effect on revenues and
operations. However, this effect can not be quantified at this time. Also, the
cumulative effect of Year 2000 failures in the United States and internationally
could have a substantial adverse effect on the domestic and worldwide economy.
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We will continue to monitor business conditions in order to assess and
quantify any material adverse effects that may result from Year 2000 problems.
Contingency Plans
As part of the Enron plan, we will develop contingency plans in case we
have not satisfactorily remediated all our internal mission-critical systems and
in case outside systems are not Year 2000 ready. Our contingency plans will be
designed to minimize the disruptions or other adverse effects resulting from
Year 2000 incompatibilities with respect to our mission-critical functions and
systems and to facilitate the early identification and remediation of Year 2000
problems that first manifest themselves after January 1, 2000.
Our contingency plans will include an assessment of our mission-critical
internal information technology systems and our internal operational systems
that use computer-based controls. The contingency planning will begin in 1999
and will continue as necessary. As we implement our contingency plans, we will
assess any mission-critical disruptions due to external Year 2000 failures.
These assessments will be conducted for both our U.S. and non-U.S. operations.
In assessing Year 2000 failures, we will monitor mission-critical services such
as electrical power and telecommunications services. The contingency plans will
also cover events such as failure of the delivery of chemicals for water and
wastewater treatment or events of sabotage.
Our contingency plans will include the creation of response teams that will
be standing by and prepared to respond rapidly to Year 2000 problems. The
composition of these teams will vary according to the nature, importance and
location of the problem. We will also station response teams at our non-U.S.
operations as necessary.
Outlook
The extent and magnitude of the effects of Year 2000 on us, both before and
after January 1, 2000, are difficult to predict or quantify for a number of
reasons including:
- Difficulty of locating chips embedded in computer hardware and in devices
used in mission-critical systems such as process or flow control,
environmental, transportation, access and communications
- Difficulty in evaluating and testing outside systems connected to our
computer, telecommunications, plant or other mission-critical systems or
on which our mission-critical systems depend, such as electrical
utilities or telecommunications carriers
- Difficulty locating mission-critical internal software that is not Year
2000 compatible
- The possible unavailability of trained hardware and software engineers,
technicians, and other personnel to perform remediation, validation, and
testing of mission-critical systems
Year 2000 costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, the impact of tests of
outside systems and similar events. For example, there can be no assurance that
all outside systems that are mission-critical to us, or are mission-critical to
the Enron systems on which we depend, will be adequately remediated so that they
are Year 2000 ready by January 1, 2000. If there are Year 2000 failures that
create substantial disruptions to our business or to Enron's business, the
adverse impact on our business could be material. Moreover, the estimated costs
of implementing the Enron plan do not take into account the costs, if any, that
might result from Year 2000 failures that occur despite our implementation of
the Enron plan.
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GOVERNMENT OUTSOURCING THROUGH PRIVATIZATION
Governments around the world are increasingly outsourcing the ownership,
operation and management of their water and wastewater assets and services to
the private sector. For many projects, there is a lead-time of several years
while the government, with the help of its international financial and legal
advisors, works on the concept of privatization and gains consensus among
various interest groups. The decision to privatize is generally authorized by
legislation. Different approaches are used by various governments. Many
governments choose a public tender process to ensure that privatizations occur
at market rates. In some parts of the world, particularly Latin America, an
auction format has been used successfully. In other places, notably China,
private parties often negotiate directly with the government with no formal
invitation to bid.
If a tendering process is used, rules are published. These rules generally
require some form of qualification for bidders, where parties submit financial
and operational credentials and the government accepts only qualified parties as
bidders. Qualification for bidding has heavily emphasized prior experience in
operating water and wastewater systems or individual treatment plants that are
of a size at least comparable to the system or facility being privatized or
built. The potential bidders submit extensive documentation to qualify for
bidding and often must form entities within the country through which to submit
their bids. In addition, governments often consider the financial strength of
the potential bidders and may require substantial bid bonds or letters of credit
to be provided as part of the bid.
COMMON FORMS OF OUTSOURCING
- SALE OF WATER ASSETS. A government may incorporate a water and wastewater
system and sell all or part of it to private parties. The water company
is given a monopoly license to operate in a specified service territory.
The license may be subject to revocation for non-performance or another
breach of its terms and to renewal periodically, typically every 20 to 30
years. For example, the United Kingdom privatized the ten regional water
and wastewater authorities in England and Wales through public offerings
of shares in 1989, and Berlin, Germany is in the process of selling a
49.9% interest in its water and wastewater system.
- CONCESSIONS. Short of an outright sale of water assets, a government may
grant a private party the right to operate a water and wastewater system
for a fixed term, retaining title to the underlying assets. The holder of
a concession takes on the financial risks of managing the assets during
the term of the concession, often 20 to 30 years but in some cases
extending much longer. The concession agreement often mandates
improvements to the water and wastewater system, sets standards of water
quality that must be achieved and establishes a timeframe for realizing
these objectives. At the end of the concession, control of the assets
reverts to the government, which may renew the concession with the
existing holder or another party. Many of the water and wastewater
opportunities around the world take the form of concessions. See
"Business -- The Global Water Industry -- Trend Toward Government
Outsourcing Through Private Sector Participation."
- CONSTRUCTION AND OPERATION OF A SINGLE ASSET. Sometimes a government will
ask a private sector participant to construct and operate a particular
facility that serves its water or wastewater system. Frequent examples
are water and wastewater treatment plants, pipelines and aqueducts. Two
typical transaction structures are a build-own-operate ("BOO") or
build-own-transfer ("BOT") project. In both a BOO and a BOT, the private
party builds, owns and operates the asset. In the case of a BOT, the
private party then transfers the asset back to the government after a
fixed term, usually 15 to 25 years but often longer. The BOO or BOT
contract describes the project and its services, as well as the revenues
the private party will receive for the services the asset provides.
- LEASES. Under a lease, a government turns over control of the system for
a fixed period but, unlike in a concession, the government retains much
of the economic risk. In France, most municipalities use a type of lease
called an affermage, which is also used in many former French colonies.
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- OPERATIONS AND MANAGEMENT CONTRACTS. Sometimes a government will ask a
private party to operate its system on a day-to-day basis, but will keep
most of the economic risk relating to the system. The term of the typical
operations and management ("O&M") contract is five to ten years. These
contracts are common in the United States. See "Business -- The Global
Water Industry--Trend Toward Government Outsourcing Through Private
Sector Participation -- United States."
- OUTSOURCING PARTICULAR SERVICES. A government also may ask private
parties to provide specific services to a government operated water or
wastewater system. Examples of these services include billing,
construction projects and residuals management. The service provider
typically takes no risk for the system as a whole, only for the
particular services it provides. See "Business -- The Global Water
Industry -- Outsourcing Opportunities in the Municipal and Industrial
Services Markets."
SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS
The following is a list of certain selected water and wastewater
privatizations in Europe, the United States, Latin America, Asia and the Pacific
Rim that have been awarded during the past several years. The majority of these
privatizations have been in the form of concessions, BOTs or leases, except in
the United States, where private parties have primarily entered into O&M
contracts. Except as otherwise indicated in the notes to the following table,
the estimated size of these awarded privatizations is taken from the October
1998 edition of Public Works Financing. The estimated size for O&M contracts
represents aggregated fees over the term of the contract. The estimated size for
BOTs represents construction costs. The estimated size for concessions
represents total project costs.
SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS
<TABLE>
<CAPTION>
LOCATION YEAR PROJECT ESTIMATED SIZE
-------- ---- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
EUROPE:
Germany............... 1992 25-year concession for water supply and wastewater $ 528
treatment plant in Rostock
Germany............... 1997 Sale of 49% stake and 20-year management contract for water 139
and wastewater system for Potsdam
Hungary............... 1998 Sale of minority interest in water company serving Budapest 340
Turkey................ 1995 15-year BOT dam and wastewater works near Izmit and 800
pipeline supplying Istanbul
United Kingdom........ 1989 Stock offerings of 10 regional water and wastewater 8,640(1)
companies in England and Wales
UNITED STATES:
Georgia............... 1998 20-year O&M contract for water system in Atlanta $ 400
Indiana............... 1998 10-year O&M contract for wastewater treatment plants in 225
Indianapolis
Michigan.............. 1998 7-year design, build and maintain water treatment plant in 260
Detroit
New Jersey............ 1996 20-year full service O&M contract for water and wastewater 200
collection in North Brunswick
Oklahoma.............. 1997 25-year contract to operate three wastewater plants in 250
Oklahoma City
Puerto Rico........... 1995 6-year O&M contract for water and wastewater plants 600
Wisconsin............. 1998 10-year O&M contract for wastewater system in Milwaukee 350
</TABLE>
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SELECTED AWARDED WATER AND WASTEWATER PRIVATIZATIONS (CONTINUED)
<TABLE>
<CAPTION>
LOCATION YEAR PROJECT ESTIMATED SIZE
-------- ---- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
LATIN AMERICA:
Argentina............. 1993 30-year concession for water and wastewater system for $4,000
the "Capitale Federale" of Buenos Aires
Argentina............. 1995 30-year O&M contract for water and wastewater system for 1,200
Santa Fe, Rosario and surrounding area
Argentina............. 1997 30-year concession for water system in Cordoba 495
Argentina............. 1998 95-year concession and sale of shares for water and 150(2)
wastewater system for Province of Mendoza
Bolivia............... 1997 30-year concession for water and wastewater system in 360
both La Paz and El Alto
Chile................. 1998 35-year concession and sale of shares for water and 138(3)
wastewater system for Valparaiso and surrounding region
Colombia.............. 1997 30-year BOT for wastewater treatment plant in Bogota 130
Mexico................ 1993 Four 7-year contracts to upgrade Mexico City's water 1,000
distribution program
Mexico................ 1993 25-year concession for water and wastewater system for 70
city of Cancun and surrounding area
Mexico................ 1996 12-year BOT concessions for treatment facilities at five 200
Pemex refineries
ASIA AND THE PACIFIC RIM:
Australia............. 1993 25-year BOT for wastewater treatment plant in Sydney $ 200
Australia............. 1995 15-year O&M contract for water and wastewater services in 1,100
Adelaide
China................. 1996 49% stake in 13 water plants in Jiangsu Province 162
China................. 1998 18-year BOT for water supply for Chengdu 120
Indonesia............. 1997 Two 25-year concessions for water systems in Jakarta 1,750
Malaysia.............. 1992 20-year BOT for water treatment facilities at Sungai 290
Layang
Malaysia.............. 1995 25-year contracts to operate 26 water systems around 312
Kuala Lampur
Malaysia.............. 1995 26-year upgrade and O&M concession for water treatment 800
facilities in Selangor
Philippines........... 1997 Privatization of the Metro Manila water and wastewater 5,700
system
</TABLE>
- ---------------
(1) Information is from HM Government Perspective.
(2) Information is from Azurix internal sources.
(3) Information is from December 23, 1998 Financial Times.
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BUSINESS
Azurix is a global water company engaged in the business of acquiring,
owning, operating and managing water and wastewater assets, providing water and
wastewater related services and developing and managing water resources. Azurix
estimates that the global water industry has total annual revenues of
approximately $300 billion. In addition, the World Bank and other sources have
estimated that over $600 billion will be spent on worldwide water and wastewater
infrastructure over the next decade. We believe that much of that capital will
come from the private sector.
Enron, one of the world's leading integrated natural gas and electricity
companies, formed Azurix in 1998 to pursue opportunities in the global water
industry. Our first significant step was to acquire Wessex, a water and
wastewater company based in southwestern England, for $2.4 billion in order to
give us the operating experience necessary to compete successfully for business
around the world. Wessex's operating expertise is evidenced by the industry
regulator's recognition of Wessex as the most efficiently operated water and
wastewater company in England and Wales. Our asset portfolio also includes an
interest in a long-term water concession in the Province of Mendoza, Argentina.
In addition, we have agreed to acquire an interest in a long-term water
concession in Cancun, Mexico. On a pro forma basis, we had revenues of $464.2
million, EBITDA of $298.1 million and net income of $87.2 million for the year
ended December 31, 1998 and total assets of $3,358.3 million as of December 31,
1998.
We are now building on our asset base by aggressively pursuing additional
concessions, outsourcing contracts and other water and wastewater projects. We
are evaluating announced privatizations, including many of the approximately 70
upcoming privatizations identified in this prospectus, as well as various
privately negotiated transactions. These potential transactions are in Europe,
the United States, Latin America, the Middle East, Africa, Asia and the Pacific
Rim.
Our experienced management team consists of senior executives from Enron,
Wessex and other water supply and wastewater systems, and multinational
companies. We will transfer the skills that Enron has successfully applied in
developing, financing, operating and managing the risks of energy infrastructure
projects to our water business around the world. In addition, we will apply to
our water business the operating, management and technical skills that our
executives from Wessex and other companies have successfully used in operating
and managing water and wastewater assets. This management team will
competitively position us to identify, evaluate, acquire, develop and finance
water and wastewater projects and services worldwide.
THE GLOBAL WATER INDUSTRY
The global water industry includes the businesses of collecting, treating,
storing and supplying drinking water, and of collecting, treating and disposing
of wastewater and wastewater by-products. Public and private water companies
serve industrial, commercial and residential customers.
The ownership of water assets and the provision of water and wastewater
services around the world remains highly concentrated in the public sector,
typically at the municipal or community level. Major capital investment and
increased efficiencies in the water sector are required by (1) increasingly
stringent standards for water quality, wastewater services and environmental
protection, (2) the need to provide growing urban populations with safe drinking
water supply and wastewater treatment systems and (3) the aging of existing
water and wastewater infrastructure. Governments throughout the world frequently
face budgetary constraints and often lack the technical and operational skills
of private sector participants to address these issues efficiently. As a result,
governments are increasingly turning to the private sector to address their
water and wastewater infrastructure needs.
Industrial companies also must comply with increasingly stringent standards
for water quality, wastewater services and environmental protection. To meet the
additional expense of complying with these standards and to reduce uncertainty
in financing their operations, many industrial companies are beginning to
outsource their water supply and wastewater requirements to third parties with
the expertise to construct and operate their systems and provide services on a
more efficient and cost effective basis. The ability to
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manage water resources and efficiently transport water to areas where water is
scarce, including the delivery of drinking water to growing urban centers, is
becoming increasingly important as well.
As a result, we believe that significant opportunities exist for private
sector participation in the water and wastewater industry. These opportunities
include taking part in water and wastewater privatizations, providing water and
wastewater related services to municipal and industrial water markets and
developing and managing water resources.
TREND TOWARD GOVERNMENT OUTSOURCING THROUGH PRIVATE SECTOR PARTICIPATION
Following the trend of private sector participation in the natural gas,
electricity and telecommunication industries, governments around the world are
increasingly turning to the private sector to own, operate and manage their
water and wastewater assets and services. According to World Bank statistics,
between 1984 and 1990, developing countries awarded contracts for only eight
water and wastewater projects to private companies, amounting to a total of $297
million. According to these same statistics, by the end of 1997, the cumulative
level of private sector investment had increased to $25 billion. As of October
1998, according to Public Works Financing statistics, there were approximately
380 planned, funded or completed water and wastewater projects with private
sector participation worldwide for a total estimated cost of approximately $74
billion.
The following discussion summarizes some of the water and wastewater
outsourcing arrangements that have been awarded to date and are expected to be
upcoming in various regions of the world. For a more detailed description of the
outsourcing arrangements that have been awarded to date, see "Government
Outsourcing Through Privatization."
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EUROPE. The United Kingdom has privatized large portions of its water
sector. French municipalities have long turned to the private sector to operate
their water and wastewater systems. Several other European water and wastewater
service providers are scheduled to offer major concessions or BOT or BOO
projects in 1999 and 2000. We believe that the pace of privatization may
increase once these additional privatizations have occurred in Europe and the
benefits of privatization are recognized. In addition, European Union directives
are imposing higher water and wastewater standards on member countries and are
requiring significant capital investment for compliance throughout the region.
We believe that these countries will rely on the private sector to help fund
these capital requirements. The following is a list of selected upcoming water
and wastewater privatizations expected to be awarded in Europe.
SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- EUROPE
<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>
Bulgaria............................. Sale of stock and concession for water and wastewater
for Sophia
Czech Republic....................... Sale of stock and concession for water and wastewater
for Prague
Germany.............................. Sale of stock in a holding company which holds an
interest in the water and wastewater company serving
Berlin
Greece............................... Concession for water and wastewater for Athens
Hungary.............................. Upgrade for water treatment and disposal plant in
Dunavarsany
Italy................................ Sale of stock for water and wastewater for Rome
Italy................................ Privatization of water and wastewater in Frosinone
Italy................................ Privatization of water and wastewater for Puglia
Region
Italy................................ BOT for wastewater facility at Porto Marghera outside
Venice
Italy................................ Privatization of water and wastewater for the area of
Lazio
Poland............................... Concession for water and wastewater for Poznan
Portugal............................. Concession for water and wastewater for Cascais
Romania.............................. Sale of stock and concession for water and wastewater
for Bucharest
Spain................................ Design and build water treatment plant at Palma,
Majorca
Turkey............................... O&M contract for wastewater services for Cesme-Alacaty
Turkey............................... Construction of wastewater treatment plants in Seyhan
and Yuregic
</TABLE>
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UNITED STATES. In the United States, approximately 80% of the population is
currently served by approximately 24,000 government owned and operated water and
wastewater authorities. Although the U.S. market shows significant potential for
concessions or asset sales because so small a percentage of the population is
served by private water companies, few municipalities have used these
approaches. Municipalities are reluctant to give up ownership of their water and
wastewater systems and access to tax exempt financing. Thus, in the U.S. market,
governments typically enter into public/private partnerships in which private
parties make equity investments in partnership with local water and wastewater
companies or provide lower-cost outside capital sources to fund infrastructure
requirements and growth opportunities. Governments are also outsourcing the
operation of their water and wastewater assets to private parties.
The key factors contributing to these outsourcing decisions are:
- Increased regulatory and environmental requirements contained in the Safe
Drinking Water Act and the Clean Water Act
- Deteriorating water and wastewater infrastructures within the nation's
largest urban areas
- New technologies designed to improve water and wastewater solutions with
a minimal environmental impact
- Significant capital requirements to meet these needs, estimated by the
U.S. Environmental Protection Agency to be approximately $140 billion for
water infrastructure over the next 20 years
The following is a list of selected upcoming water and wastewater
privatizations expected to be awarded in the United States.
SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- UNITED STATES
<TABLE>
<CAPTION>
STATE PROJECT
- ----- -------
<S> <C>
Illinois............................. BOO for biosolids processing facility in Chicago
New York............................. Privatization of wastewater in Buffalo
New York............................. Privatization by Army Corps of Engineers of water and
wastewater at Ft. Hamilton
Tennessee............................ Municipal takeover and private contract for water
operation in Chattanooga
Texas................................ Design, build and operate water treatment plant in
Houston
Washington, D.C...................... Privatization of city aqueduct
</TABLE>
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LATIN AMERICA. The pace of infrastructure privatizations in Latin America
has accelerated since the first electricity privatizations took place in Chile
during 1982. Since then, privatizations of electricity, natural gas and
telecommunications assets have occurred in parts of Argentina, Brazil, Chile,
Colombia, the Dominican Republic, El Salvador, Guatemala, Panama and Peru, among
other countries. To date, privatizations of water and wastewater systems have
occurred in Argentina, Brazil, Bolivia, Chile, Colombia and Mexico and are
scheduled in many other countries, including the Dominican Republic, Ecuador,
Panama and Venezuela. The following is a list of selected upcoming water and
wastewater privatizations expected to be awarded in Latin America.
SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- LATIN AMERICA
<TABLE>
<CAPTION>
COUNTRY PROJECT
------- -------
<S> <C>
Argentina............ Concession for water and wastewater in the Province of
Buenos Aires
Argentina............ Concession for water and wastewater for Province of Misiones
Argentina............ Construction of aqueduct in Cordoba
Argentina............ Concession for water and wastewater in Tucaman Province
Bolivia.............. Concession for water for Cochambamba
Brazil............... Privatizations of state water and wastewater systems in each
of the following states: Panama, Sao Paulo, Rio Grande do
Sul, Bahia, Mato Grosso do Sul, Amazones, Rio de Janeiro,
Santa Catarina and Espirtu Santu
Chile................ Sequential sale of controlling stakes in 11 remaining
regional water and wastewater systems including capital city
of Santiago
Colombia............. Concession for water and wastewater for Monteria
Dominican Republic... Institutional strengthening and rehabilitation for country's
three principal water and wastewater service providers
Ecuador.............. Water and wastewater concession for city of Guayaquil
Guatemala............ BOT for water supply wells in Guatemala City
Panama............... Concession for countrywide water and wastewater system
Peru................. Construction of wastewater treatment plant in Lima
Venezuela............ Rehabilitation of Caracas water system
Venezuela............ Privatization of Fajardo water system in Miranda State
Venezuela............ Concession for water and wastewater in Margarita Island
</TABLE>
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MIDDLE EAST AND AFRICA. Many Middle Eastern and African countries are faced
with acute water shortages. As a result, several Middle Eastern countries are
seeking private development of major transportation or treatment projects which
may include BOT projects for pipelines, canals and treatment plants. Although
privatization is not widespread in Africa, there are exceptions. Cote d'Ivoire,
while still a French colony, granted a long-term concession to a French-owned
company. A majority of the concessionaire is now owned by public stockholders.
The following is a list of selected upcoming water and wastewater privatizations
expected to be awarded in the Middle East and Africa.
SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- MIDDLE EAST AND AFRICA
<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>
Egypt................... BOT for water system for city of Suez
Israel.................. Tender for wastewater treatment plants in Beersheeva
Municipality
Jordan.................. BOT for water pipeline to Amman
Kuwait.................. BOT for wastewater treatment plant for Sulaibiya
Lebanon................. BOT for water pipeline and water treatment plant for Beirut
as part of the national plan for water privatization
Morocco................. Concession for water and wastewater system for Tangiers
Tunisia................. National plan for water privatization in advanced stages;
each city is able to independently arrange for privatization
and is actively doing so
</TABLE>
ASIA AND THE PACIFIC RIM. In Asia, the recent financial crisis and ongoing
economic uncertainty may be limiting private investment in the water sector.
Prior to the economic downturn in Asia, water concessions had been granted in
Indonesia, Malaysia and the Philippines. In China, municipal water agencies have
entered into BOT arrangements with Western companies for water or wastewater
treatment plants through auctions and negotiation. The following is a list of
selected upcoming water and wastewater privatizations expected to be awarded in
Asia and the Pacific Rim.
SELECTED UPCOMING WATER AND WASTEWATER PRIVATIZATIONS -- ASIA AND THE PACIFIC
RIM
<TABLE>
<CAPTION>
COUNTRY PROJECT
- ------- -------
<S> <C>
Armenia................. O&M contract for water and wastewater for Yerevan
China................... Joint venture for Beijing No. 10 water treatment plant
China................... BOT or joint venture for water and wastewater system for
Xunchang, Sichuan Province
Georgia................. Concession for water and wastewater for Tblisi
India................... BOT for water treatment plant in Haldia
India................... Privatization of water treatment plant for Delhi
India................... Design and build water supply projects in large and medium
towns in state of Orissa
Nepal................... O&M contract for water supply and wastewater collection
services to Kathmandu Valley
</TABLE>
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OUTSOURCING OPPORTUNITIES IN THE MUNICIPAL AND INDUSTRIAL SERVICES MARKETS
We believe that municipal governments and industrial companies in North
America and Western Europe, in particular, will increasingly seek to outsource
the management of their water and wastewater systems to private parties with the
operating experience and capital to provide reliable services, to comply with
more stringent regulatory requirements for water quality and environmental
protection and to reduce uncertainty in financing these operations. Industry
sources report that approximately 40% of U.S. municipal water and wastewater
systems currently outsource some of their operations to the private sector. We
expect that outsourcing by U.S. municipalities will increase for several
reasons. To comply with stricter environmental and drinking water quality
standards, municipalities will incur increased labor costs for treatment, higher
monitoring and equipment maintenance costs and increased costs of disposing of
biosolids. Federal funding grants to help municipalities meet their financial
needs have declined over time, leaving municipal wastewater authorities facing
serious budgetary challenges. Private sector outsourcing can include any
combination of design, financing, construction, ownership or operation of a
facility; administrative services such as metering, billing, collection or
maintenance; and applying process engineering technologies such as biosolids
filtration, clarification, purification, separation, drying and disposal.
Industrial companies are also experiencing rising costs related to their
water and wastewater needs. The chemical, refining, pharmaceutical, high
technology, food and beverage, paper and pulp, steel, automobile and energy
industries have large water supply and wastewater treatment requirements. These
industries require pure water for their operations and produce effluents that
must be treated before being released into normal wastewater systems or being
discharged directly into the environment. Most industrial wastewater needs to be
pre-treated and environmental laws prohibit the direct discharge of wastewater
into the environment without a permit. Many industries treat and dispose of
their own wastewater because the relatively concentrated wastes from these
industries frequently cannot be discharged into the public sewer system and
on-site treatment is usually less expensive.
These industrial companies must invest significant capital in their water
and wastewater treatment and distribution assets. By outsourcing the management
of these assets to third parties, these companies may reduce the uncertainty
associated with expenditures required by changes in water quality standards and
environmental regulations. Obtaining landfill, storage and incineration capacity
to dispose of the residue from the wastewater treatment process is a significant
component of providing industrial wastewater services, and may involve procuring
long-term capacity of specially lined or hazardous waste landfills.
The services to be provided to municipal and industrial customers generally
fall into three main categories:
OPERATIONS, MANAGEMENT AND ENGINEERING. Over the past few years, large
cities and industrial companies have reduced costs by outsourcing the design,
construction, operation or maintenance of their water and wastewater assets to
private sector service providers. Many of these service providers have
consolidated and the market is much less fragmented than either the residuals
management or the underground infrastructure markets. Consequently, competition
for major contracts for the largest cities in the United States has been
significant. Although some companies have focused on providing services to small
to medium sized municipalities and large industrial firms, many of these
companies lack the financial capacity or risk management capability to purchase
water and wastewater assets from their industrial customers or to qualify on
their own as the operators and managers of their customers' facilities.
According to industry sources, the fees associated with providing contract
operations and consulting, design, engineering and management services to
customers in the municipal and industrial markets in the United States are
estimated to have exceeded $5.5 billion for 1997, and are expected to continue
to grow.
RESIDUALS MANAGEMENT. Managing the biosolids that result from municipal and
industrial wastewater represents a large component of the cost of wastewater
treatment. Increasingly stringent effluent discharge standards are resulting in
a significant increase in the quantity of residuals. At the same time,
environmental regulations are limiting waste disposal options. For example,
ocean dumping of biosolids has been banned in the United States and the European
Union, increasing costs for managing residuals in
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these regions. In addition, environmental regulations are requiring firms to
provide beneficial reuse solutions. Incineration, landfilling, land application
and producing compost are becoming the only available disposal options in many
countries and have inspired a number of new disposal and reuse technologies.
Certain applications can turn biosolids from waste into a substance that can be
sold as soil conditioner or that can be burned as fuel. These technologies
create a product with market value and provide an environmentally attractive
alternative to the increasingly expensive and scarce disposal options of
incineration and landfilling.
Residuals management companies provide services to local and state
agencies, municipalities and private companies. Specific services include the
transportation, treatment, site monitoring, disposal and environmental
regulatory compliance services associated with biosolids and wastewater
disposal. These companies provide a variety of residuals management options to
prospective customers who seek alternative methods of biosolid treatment. Not
all methods can be profitably and practically applied in all geographic areas
due to the specific nature of the terrain and agriculture in the region and the
local biosolid content.
In the United States, in excess of five million dry tons of biosolids are
produced annually, and approximately 55% is recycled. Industry experts
anticipate that recycling of biosolids will continue to grow over the next
decade. As recycled uses of biosolids continue to increase, we believe that
larger and more sophisticated companies will have opportunities to create value
through economies of scale and scope by providing new solutions to these
problems.
UNDERGROUND INFRASTRUCTURE REMEDIATION AND DEVELOPMENT. Industry sources
estimate that nearly 60% of the assets in the water and wastewater industry
consist of underground distribution networks and that over half of the
approximately $140 billion of capital that the EPA estimates will be spent in
the United States during the next 20 years will be spent on repairing, replacing
and developing the nation's underground water infrastructure.
Much of the cost associated with the repair, replacement and development of
underground infrastructure is attributable to the lost revenues resulting from
the disruption of service associated with open cut excavation. During the past
decade, advances in the oil and natural gas industry have been used in the water
industry, enabling the repair of underground infrastructure without open cut
excavation. Trenchless technologies such as horizontal drilling, tunneling,
grouting and pipe lining enable the repair and replacement of water
infrastructure with a fraction of the disruption associated with traditional
open cut excavation.
Currently, small local civil engineering firms and contractors perform most
of the trenchless underground infrastructure work. As the size of these projects
grows and the capital requirements and sophistication of these newer
technologies increase, we believe larger, better capitalized and more
sophisticated firms who hold experience in the oil and gas industry will have a
competitive advantage in obtaining this business. Industry sources have
estimated that the underground water and wastewater infrastructure market for
the municipal market alone in the United States currently has annual revenues of
approximately $6.4 billion, and this market is expected to continue to grow
during the next decade.
WATER RESOURCE DEVELOPMENT AND MANAGEMENT
We believe that the management of aquifers and other water resources and
the storage and transportation of water offer important opportunities for
business development. In many regions of the world, such as parts of North and
South America, the Middle East and many island nations, lack of abundant water
resources is a critical issue. Governments, which historically have been
responsible for developing and managing water resources, are now seeking private
sector assistance to address their water resource issues due to the operational,
technical and financial expertise required to operate, build and fund these
capital intensive projects.
In many countries, including the United States and China, water consumption
is mainly driven by patterns of population movements and industrial and urban
development. In parts of the United States,
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<PAGE> 48
increases in water demand resulting from large population shifts to the sunbelt,
multi-year droughts and irrigation-intensive agriculture have resulted in
consumption that exceeds the natural rate of replenishment. This has led to
large scale diversions of surface water through dams and reservoirs and to
diminished groundwater supply. In China, rapid economic growth in the Southern
provinces (primarily the Guandong and Shanghai areas) has significantly
increased demand for water. Drinking-quality water now used in agriculture may
need to be diverted to population centers.
In light of these factors, industry participants are focusing new efforts
on means of extracting, managing, storing and transporting water resources as
efficiently as possible. The large amount of capital required and the inability
of local governments to fund these needs compound the difficulties in developing
and managing water resources. Transporting water over long distances to urban
areas requires canals, aqueducts, underground pipelines and/or pumping stations.
These are typically large infrastructure projects requiring significant
development, construction, operational and financial expertise.
COMPETITION
Participants in the global water market face significant challenges,
including qualifying for the bidding process, obtaining and demonstrating
operating experience and management depth, accessing capital, obtaining and
demonstrating expertise in managing international infrastructure projects,
identifying and evaluating transactions and assessing and mitigating risks,
especially operational, political and regulatory risks. As a result, only a
small number of companies currently compete globally in the water and wastewater
privatization market.
Two French companies, Suez Lyonnaise des Eaux and Compagnie Generale des
Eaux, a subsidiary of Vivendi, currently are recognized as the major competitors
in the international water market. These two companies are significantly larger
than the next group of international competitors. These smaller competitors
include privatized water and wastewater companies from the United Kingdom and
some smaller French and Spanish companies. Some construction companies also bid
on water and wastewater projects, more often on BOT projects than on
concessions.
In the United States, the water and wastewater industry is highly
fragmented, with over 55,000 public and private water entities serving
approximately 90% of the nation's population. Of this number, nearly half are
investor owned and the rest are publicly owned, generally by local
municipalities. Most of these entities serve only a single community or region.
There are only 17 publicly traded water and wastewater companies among the
nation's approximately 30,000 investor owned companies, and only three of these
companies have a market capitalization of over $500 million. Several of these
publicly traded companies have become active consolidators by acquiring the
small private and public investor owned utilities that operate in markets
contiguous to or near their own. Of the three largest consolidators, none has
more than a 3% market share in the United States, and these three combined serve
only 6% of the nation's customers. In addition, certain electric utilities have
begun to acquire municipally owned water distribution companies in the United
States. Many companies compete in the United States for municipal service
contracts and industrial outsourcing opportunities, including subsidiaries of
the French and U.K. water companies.
OUR COMPETITIVE STRENGTHS
We have several competitive strengths that should enable us to become a
leading and profitable participant in the global water industry.
EXPERIENCED MANAGEMENT AND BUSINESS DEVELOPMENT TEAM
Our executives come from Enron, Wessex and other water and wastewater
systems and multinational companies and bring with them extensive experience in
both the development and the operation of infrastructure projects worldwide,
including water and wastewater operations. Many of our executives were actively
involved in developing and managing projects for Enron in the United States and
around the world. Enron is one of the world's leading integrated natural gas and
electricity companies with a market
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capitalization of approximately $25 billion. Rebecca Mark, chairman and chief
executive officer of Azurix and a vice chairman of Enron, leads the Azurix team
in implementing its global water strategy. During her tenure at Enron, Ms. Mark
was responsible for the successful development of natural gas and power projects
worldwide. Beginning with Enron's first international power project in Teesside,
England in 1989, Ms. Mark led the team that developed gas and power projects
around the world with total estimated capital costs exceeding $10 billion. Four
other senior executives give the management team collectively 80 years of
experience in managing water companies in the United States and the United
Kingdom. In addition, our management team has infrastructure development
experience in Europe, the United States, Latin America, the Middle East, Africa,
Asia and the Pacific Rim. They lead a group of experienced business developers
who identify opportunities in the global water industry. In pursuing global
water projects, we apply the extensive experience of our management team and
business developers in evaluating and securing projects, acquisitions and
financings.
Our management team will build upon its extensive experience and knowledge
from Enron, other water systems and other multinational companies to provide us
with the necessary skills to compete effectively in the global water industry.
Through its subsidiaries, Enron is actively involved in the development,
acquisition, financing, promotion and operation of natural gas and power
projects worldwide. Azurix management has the proven ability to:
- Mobilize the array of resources needed to enter competitive bids for
concessions tendered in privatizations
- Develop projects requiring construction of new facilities in developed
and emerging countries
- Meet the challenges of "fast-track" projects to be brought on-line within
12 to 18 months
- Execute major acquisitions
- Operate regulated companies, including managing their tariff and other
regulatory issues
- Apply innovative financing and risk-management strategies in markets
worldwide
We expect to apply many of the same disciplined techniques to analyze
projects and mitigate risks that Enron has developed in its own worldwide
activities. In identifying and quantifying the risks and value of a transaction,
these processes require an analysis of the engineering, operational, regulatory,
financial, economic, structural, legal, insurance, tax and accounting
implications of the transaction. These analytical skills will competitively
position us in the identification, evaluation, development, financing and
acquisition of worldwide water and wastewater projects and in the provision of
associated services.
WESSEX OPERATING EXPERIENCE AND TECHNICAL EXPERTISE
From Wessex, we have obtained the operating experience, research skills and
technical expertise necessary to evaluate potential water projects, to qualify
for bidding on water projects in many countries throughout the world, to build
transition and operating teams for new acquisitions and to manage existing and
new water assets. Wessex supplies approximately 400 million liters of water per
day to a population of approximately 1.1 million and treats on average 484
million liters of wastewater per day from a population of approximately 2.5
million. In April 1998, the water industry regulator for England and Wales rated
Wessex the most efficient of the privatized water and wastewater companies.
Wessex's management team has been in place since the privatization of the U.K.
water industry in 1989. For a discussion of Wessex, see "-- Existing Azurix
Assets -- Wessex."
Wessex uses advanced treatment techniques, increased automation of
operations and services and state-of-the-art control and monitoring systems that
are designed to ensure consistently high standards at low cost. Since its
privatization, Wessex has improved levels of quality and standards of service,
providing reliable water supplies without requiring any water usage
restrictions. It has delivered this high quality service while reducing
operating costs and delivering capital improvements below budgeted amounts. In
addition, Wessex has developed extensive performance data that will be used for
benchmarking purposes in Azurix operations around the world.
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We will also benefit from Wessex's experience with meeting mandated capital
expenditure targets through the use of standard designs, the cost-effective
management of major projects and in-house process and concept design. In
addition, the use of local contractors and detail designers as well as
appropriate technology and efficient procurement are key factors in capital
expenditure management that have benefited Wessex in the past. During the 1990s,
Wessex successfully managed a $2.0 billion investment program on time and below
the price allowed by regulation. Current regulatory reports show Wessex as
having among the lowest unit costs and the second highest operating margins in
the U.K. water and wastewater industry.
We will apply Wessex's operational and capital expenditure management
skills in our global water business. We believe many of these skills are
transferable to other water and wastewater assets or services we will acquire or
manage.
REGULATORY AND GOVERNMENT AFFAIRS EXPERTISE
Our management team has extensive experience in working with regulators and
other governmental agencies. Our executives understand how the regulatory
framework and the privatization process work in the countries where they may
have previously pursued infrastructure projects. In these countries, the same
political leadership with whom they have previously worked may make decisions
regarding water and wastewater privatizations. In many cases, the regulatory
framework and sometimes complex pricing regimes are the same as those in the gas
or electricity industries with which our management has experience. This
understanding of the regulatory framework and pricing regime allows us to
understand better how we can optimize value through tariff management and
deliver a better service to our customers.
FINANCING EXPERTISE
Access to capital is essential in the global water business due to its
significant financial requirements. We plan to employ sophisticated financing
techniques and instruments similar to those successfully used by members of our
management team in other infrastructure-intensive businesses. Our executives
have experience in raising large amounts of capital through a wide array of
capital market instruments and innovative off-balance sheet financing
structures, as well as attracting and leveraging private equity. In financing a
project through debt, we may enhance returns by placing a portion of the debt at
the level of the holding company created to own a particular concession or
facility. As our portfolio grows and matures, we also intend to enhance our
equity returns and reduce overall risk exposure through opportunistic sales of
all or a portion of individual assets or investments that have appreciated in
value. In addition, our management has experience in applying financing
techniques familiar to the domestic infrastructure market, such as leveraged
leases, to international markets.
Many of our executives have developed extensive contacts and experience in
the global financial market. We intend to work in partnership with multilateral
agencies such as the World Bank, International Finance Corporation, the
Inter-American Development Bank, the European Bank for Reconstruction and
Development and the Overseas Private Investment Corporation.
We intend to apply our financial expertise and skills to the global water
industry to lower the cost of capital for our projects and acquisitions.
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OUR BUSINESS STRATEGY
Our business strategy is focused on three complementary areas in the global
water industry:
- Acquiring, owning, operating and managing water and wastewater assets
- Providing water and wastewater related services, including operations,
management and engineering, residuals management, and underground
infrastructure development and remediation services
- Developing and managing water resources
Our participation in each of these areas should allow us to satisfy the
needs of a full spectrum of water and wastewater customers. The particular
characteristics of each market as well as customer needs that vary by region and
market will drive our approach to developing these business lines and providing
creative solutions to water and wastewater needs in those markets.
ACQUIRING, OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS
ACQUIRING WATER AND WASTEWATER ASSETS. We intend to build a diversified
portfolio of water and wastewater assets, including both established businesses
with stable returns and concessions and projects in emerging markets with
significant development requirements and potential for growth and enhanced
returns. We also intend to consider acquisitions of privately owned water and
wastewater assets throughout the world with predictable contractual or regulated
revenue streams that will complement our portfolio and strengthen our
competitive position in the global water industry.
We intend to acquire water and wastewater assets through participation in
public tenders and privately negotiated transactions throughout the world,
including Europe, the United States, Latin America, the Middle East, Africa,
Asia and the Pacific Rim. As the trend toward privatization continues, we expect
new opportunities to materialize around the world. See "-- The Global Water
Industry -- Trend Toward Government Outsourcing Through Private Sector
Privatization."
We intend to target opportunities where there is potential for increased
returns and where we can draw on the significant experience of our management
team in regulatory and rate case analysis, political risk assessment,
country-specific project development and water infrastructure operation. In some
instances, we may join with other parties, including local entities, in
acquiring or bidding on assets. We will evaluate potential projects and
acquisitions based on a variety of financial, strategic, regulatory and
operational factors and utilize our sophisticated financial, legal and tax
analysis capabilities to determine the appropriate acquisition and ownership
structure designed to minimize risks. From inception, the analysis of potential
acquisitions will be staffed by our employees with assistance from affiliated
companies and external experts as needed. We expect to work with Enron's
extensive network of offices and businesses around the world in identifying and
pursuing potential water and wastewater and service opportunities.
We carefully evaluate each project to assess its value. First, we conduct a
due diligence review, identifying and quantifying the specific risks of the
transaction. We then measure and manage these risks by preparing a detailed
financial projection containing elements that we believe may affect the project
materially throughout its economic life. We forecast inflation rates and, where
applicable, changes in foreign exchange rates. We test projections for debt
capacity, terms and rates along with an evaluation of local and world financial
markets to assure the accuracy of our assumptions relating to capital costs. We
quantify all other assumptions from the internal and external team of experts to
forecast costs and revenues in the transaction. We then run multiple
simulations, testing for various sensitivities and producing an analysis of the
return on capital, adjusted for the risk of the specific project.
OWNING, OPERATING AND MANAGING WATER AND WASTEWATER ASSETS. To ensure a
smooth transition and to introduce more efficient working practices in the
concessions and businesses we acquire and the start-up of new facilities we
construct, we will send specialist transition teams of experienced staff with a
full range of skills. Existing employees of Wessex, including over 300
engineers, scientists and other specialists, will be made available to operate
our assets, especially during critical periods of takeover or start-up. We
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intend to use the systems and working methods that Wessex successfully employed
to increase productivity and reduce costs.
Following an acquisition of a water or wastewater asset, we intend to:
- Enhance income by extending services and optimizing revenues
- Reduce operating costs and capital expenditures through better management
and procurement strategy
- Increase efficiency through the use of technology and management
information systems
- Apply innovative financing techniques and sound financial and risk
management techniques
Revenue Enhancements. Water and wastewater systems offer many opportunities
to increase revenues. For example, we might expand the number of customers
connected, while optimizing the capital expenditures required to serve them. New
customers could result from inherent population growth or migration to urban
areas in the service territory. Another revenue enhancement is the effective use
of water meters. Many water systems around the world do not use water meters. By
installing meters where appropriate, we could track water demand more
effectively and allocate water resources and service teams more efficiently.
Where permitted, we will shorten billing periods, which expedites receipt of
revenues and increases their collectibility. We will also apply more
sophisticated billing technology to assure that customers are being billed and
delinquent accounts are being pursued. Through improved service and better
community relations, we expect to reduce uncollectibles. Finally, we will
optimize tariffs by applying our experience in managing regulated assets and
providing better service.
Cost Containment Strategies. Our experience at Wessex helps us identify
ways to control expenditures in operating our water and wastewater systems and
facilities worldwide. These techniques are highly transferable from one location
to another. In particular, we intend to:
- Use sophisticated tracking and monitoring equipment to reduce water
losses from leakage and theft
- Reorganize the workforce to improve productivity
- Procure equipment, chemicals and ancillary services more cost effectively
- Shorten construction periods
We expect that these value-added strategies will allow us to realize
attractive returns on our global water industry investments. Whether responding
to a tender or negotiating a contract directly, we expect to combine our
experience from the concessions and projects we already have with our financing
skills to offer a highly competitive price and, once we acquire an asset, to
serve our customers efficiently and effectively.
PROVIDING MUNICIPAL AND INDUSTRIAL SERVICES
We intend to provide a broad range of cost-effective services to owners of
water and wastewater systems in governmental, commercial, industrial and
agricultural markets around the world through innovative technological,
environmental and financial solutions.
Our water related services business will target municipal and industrial
customers, initially in the United States and Europe, that are seeking to
outsource the management of their systems. These customers generally desire a
service provider with the operating experience and capital to provide reliable
water supply and wastewater treatment services and the ability to comply with
more stringent regulatory requirements for water quality and environmental
protection. The current market has few operators that manage a large number of
diverse assets and thus have the skills to compete effectively. By consolidating
contracts for operation and management of treatment facilities and management of
biosolids disposal or reuse through acquisition and growth, we can achieve
economies of scale and operational efficiencies in this business that will allow
us to compete more effectively.
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Furthermore, by offering operations, management and engineering, residuals
management and underground infrastructure remediation and development services,
we believe that we will position ourselves to capitalize on privatizations as
they occur in certain municipalities. Providing a full range of services
represents our primary method for consolidating municipal outsourcing
activities, promotes access to a full range of governmental clients and allows
municipalities to explore all their options from outsourcing certain services to
full privatization of their systems. Working with municipal clients will also
allow us to understand local markets and identify attractive systems for
acquisition.
DEVELOPING AND MANAGING WATER RESOURCES
We believe the growing demand for drinking water has generated a need for
better management of water resources. We believe that there are significant
capital, technical and operational needs for this area of the water industry and
that governments are increasingly turning to the private sector to manage and
meet these needs. Wessex has recently commenced a trial of aquifer storage and
recovery, which involves injecting drinking water into deep aquifers that act as
natural underground reservoirs. Water put into the aquifer at times of low
demand can be stored for months or years, to be used when demand is high. In
addition, we are pursuing BOT projects for long-distance pipelines, aqueducts
and reservoirs in the Middle East and another project to extract water in Latin
America. Although this is not currently a significant portion of our business,
we intend to pursue opportunities in water resource development and management
as they arise.
EXISTING AZURIX ASSETS
WESSEX
Wessex's principal business is providing water supply and wastewater
services in southwestern England through Wessex Water Services Ltd., a wholly
owned subsidiary. In April 1998, the Office of Water Services ("Ofwat"), the
industry regulator for England and Wales, published its assessment of relative
operating efficiency, which showed Wessex as the most efficient water and
wastewater company under its supervision. Ofwat also has recognized Wessex for
providing among the highest overall standards of service of water and wastewater
companies in the industry. Independent research shows that over 90% of customers
consistently rate its service as "excellent" or "good." During the 1990s, Wessex
successfully managed a $2 billion investment program on time and below the price
allowed by regulation. Wessex's other principal subsidiary is SC Technology,
which conducts business as Swiss Combi and designs, sells and operates biosolid
drying plants.
Much of Wessex's success in delivering high standards efficiently is due to
the investment in and application of the latest technology. Sophisticated
control and planning systems have largely eliminated the need for Wessex's 2,500
installations to be permanently manned. Instead, water supply and wastewater
treatment collection and distribution systems can all be monitored from one
central base. Regular maintenance and response to customer requests or
emergencies are handled through an integrated planning and management system
that ensures rapid response in the most efficient manner.
WESSEX WATER SERVICES Through Wessex Water Services, Wessex provides water
supply and wastewater services in southwestern England. Wessex has a virtual
monopoly over water supply and wastewater services in its region, with the
exception of the cities of Bristol and Bournemouth, where two companies provide
only water and Wessex provides wastewater services.
The Wessex region covers approximately 10,000 square kilometers and is
predominantly rural. There are two major urban areas in the region, with Bristol
and Bath in the north and Bournemouth and Poole in the south. The largest town
for which Wessex provides water is Poole with a population of approximately
140,000, and the largest town for which Wessex provides wastewater services is
Bristol, with a population of approximately 400,000 (approximately 800,000
including the surrounding area). The region's economy,
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which is one of the fastest growing in the United Kingdom, is based on
agriculture, financial services, aerospace, defense establishments and
specialist manufacturing.
Water Supply Services. Wessex supplies approximately 400 million liters of
water per day to a population of approximately 1.1 million using its water
infrastructure. The system includes approximately 138 water sources, 128 water
treatment plants, 320 pumping stations, 360 storage reservoirs and 11,000
kilometers of water mains. Wessex serves approximately 500,000 domestic and
commercial locations. Wessex's customer base is approximately 56% residential
and 44% commercial by volume of supply.
Wessex withdraws 78% of its water from underground sources and the
remainder from reservoirs (19%) and rivers (3%). Wessex has a comprehensive
network of storage reservoirs (interlinked by a regional grid), which facilitate
water management during periods of low rainfall. As a result of its strong water
resources, internal grid network and water management, Wessex has not enforced
any restrictions on water usage in the past 22 years. Ofwat has ranked Wessex as
having fewer than average unplanned interruptions to water supply.
Wessex is strengthening its water resources through reductions in leakage
and trials in the use of aquifer storage and recovery. Although Wessex has
reduced leakage by 20% since 1993, its leakage rates remain above average for
the U.K. industry. Ofwat sets mandatory targets to reduce leakage from both
company and customer pipes. These targets are reviewed annually and failure to
meet the targets could result in enforcement action. Wessex intends to reduce
leakage by optimizing pressure in its pipes, improving its response time for
repairing leaks and replacing pipes and joints.
The flow in some rivers in Wessex's region is being affected by water being
withdrawn from underground aquifers by Wessex. This problem resulted from the
granting of water withdrawal rights to Wessex's predecessors prior to
privatization. Wessex has taken measures to reduce withdrawals of water and has
given a commitment, subject to available funding, to eliminate low river flows
caused by withdrawals of water by 2010. Wessex may need to develop additional
water resources.
Wessex has invested approximately $589 million in capital projects related
to improvements in its water infrastructure since privatization in 1989, of
which approximately $430 million has been invested since 1993. Wessex's water
supply network continues to require further investment.
Wessex takes an integrated approach to water quality, based on effective
control and monitoring of treatment and distribution systems. All water
treatment works have continuous automated operation and quality monitors. Wessex
also monitors water quality through a program of regular sampling and analysis.
During the year ended December 31, 1997, Wessex tested approximately 160,000
drinking water samples and achieved 99.9% compliance with the strict United
Kingdom and European Union standards. Ofwat has ranked Wessex as above average
for the provision of water supplies overall.
Wastewater Services. Wessex treats on average 484 million liters of
wastewater per day from a population of approximately 2.5 million through its
infrastructure of approximately 360 wastewater treatment plants, 1,300 pumping
stations and 15,000 kilometers of sewers. Residential customers account for
approximately 76% of wastewater turnover and commercial customers account for
24%.
Wastewater is collected in the wastewater system and pumped or gravitated
to wastewater treatment plants where the wastewater passes through processes
designed to remove biosolids and purify the wastewater. Following further
processes, Wessex disposes of 83% of its biosolids to agricultural land, uses
12% in landscaping and land reclamation work and disposes of 5% in landfills.
Approximately 20% of biosolids are subjected to advanced treatment at Wessex's
thermal biodrier at its major wastewater treatment facility at Avonmouth, near
Bristol. Wessex is currently installing biodriers at Bournemouth and
Weston-super-Mare. A second plant is also planned for construction in 1999 at
Avonmouth.
Wessex has invested approximately $1.1 billion in capital projects related
to improvements in its wastewater infrastructure since privatization, of which
approximately $785 million has been invested since 1993. Wessex has been
upgrading many of its wastewater treatment plants to comply with European Union
legislation. At some of its treatment facilities, Wessex has introduced advanced
membrane technology,
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ultraviolet disinfection and fully enclosed underground plants in connection
with the treatment of wastewater. Wessex's new wastewater treatment plant at
Porlock is the largest operational plant in Europe to use membrane technology to
produce a high quality effluent which is virtually bacteria and virus free.
Wessex is building a similar system at Swanage in Dorset.
Wessex's wastewater treatment plants perform well above industry standards.
During the year ended March 31, 1998, Wessex's wastewater treatment plants were
in substantial compliance with applicable discharge standards and 99% of these
plants were in 100% compliance with applicable discharge standards. Wessex is
committed to providing full treatment for all continuous coastal discharges
which impact on recreational waters. Full compliance with European Union bathing
water quality standards in the Wessex region during the period from April to
September 1998 was 91%, and the instances of noncompliance were due primarily to
agricultural runoff and industrial discharges, not Wessex's treatment
operations.
Properties. Wessex manages over 2,500 installations. These include
approximately 138 water sources, 128 water treatment plants, 320 clean water
pumping stations, 360 storage reservoirs, 1,300 wastewater pumping stations and
361 wastewater treatment plants. The following is a list of the five largest
water treatment plants operated by Wessex:
<TABLE>
<CAPTION>
LOCATION CAPACITY
- -------- ------------------------
(MILLION LITERS PER DAY)
<S> <C>
Maundown.................................................... 72.0
Upton Scudamore............................................. 36.4
Corfe Mullen................................................ 33.0
Sturminster Marshall........................................ 30.0
Durleigh.................................................... 30.0
</TABLE>
The following is a list of the five largest wastewater treatment plants
operated by Wessex:
<TABLE>
<CAPTION>
ESTIMATED EQUIVALENT
LOCATION POPULATION SERVED
- -------- --------------------
<S> <C>
Bristol (Avonmouth)......................................... 897,000
Holdenhurst................................................. 180,000
Poole....................................................... 159,000
Bath (Saltford)............................................. 109,000
Bridgwater.................................................. 107,000
</TABLE>
Customer Charges. Ofwat sets limits on the rates Wessex may charge for its
regulated water supply and wastewater treatment businesses, including the extent
of annual rate increases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Outlook."
Charges for water supply and wastewater services are calculated separately
based on the average costs of providing each service for each class of
customers. Currently approximately 82% of household bills are calculated in part
on the basis of the ratable value of the property, a valuation which was used by
local governments to set municipal charges until April 1, 1990, rather than
their usage. The remaining 18% of household customers pay based on metered water
usage. Where a customer receives a metered water supply, wastewater services
charges are based on the volume of water supplied. Wessex offers free meter
installation service to all its customers and, as a result, the level of
metering in Wessex's territory is above the industry average in the United
Kingdom. New properties will be subject to metering.
Charges are generally set on a standard tariff basis. Charges for bulk
supplies of water are usually determined on an individual basis, as are charges
for some larger commercial water supplies and some trade effluent. The charging
basis for bulk supplies in some cases provides for annual recalculation by
reference to the expenditure associated with the supply. Trade effluent from
industrial users is normally charged on a formula basis taking account of the
volume of effluent, its strength and costs of removal and treatment.
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In March 1998, the U.K. government issued new proposals for water charging.
These proposals include:
- Permitting those who currently pay for water on an unmeasured basis and
use water only for essential domestic purposes to continue to do so in
their present home
- Eliminating the threat of disconnection for domestic customers
- Providing domestic customers the choice of a meter, free of charge, if it
suits their needs
- Providing assistance to customers with special needs
A review of the customer charges of Wessex is in process and new price
limits will apply from April 1, 2000. See "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Outlook" and "Regulatory Matters."
Competition. Despite an absence of regulatory restrictions on entry into
the U.K. water industry, 98% population coverage and high infrastructure costs
deter potential new entrants. There is some limited direct competition in the
industrial market. For example, other companies may be granted the right through
"inset appointments" to supply water and wastewater services to Wessex's
customers using in excess of 250 megaliters of water per year. Inset
appointments may also be granted for "greenfield sites," which are areas
previously not served by existing companies, or where an incumbent water company
consents to change its boundary to allow part of its area to be transferred to
another company or potential company.
SC TECHNOLOGY. In 1996, Wessex acquired SC Technology, which does business
under the name of Swiss Combi. Based in Switzerland, SC Technology is one of the
leading biosolid drying companies in the world. SC Technology designs, sells and
operates environmentally sound biosolid drying processes and markets recycled
biosolids for agriculture and land reclamation. SC Technology currently has
approximately 40 plants completed or under construction, located in more than
ten countries, primarily in Western Europe.
Volumes of biosolids are increasing worldwide. Historically, these
biosolids were supplied to farmers or disposed of at sea. Wessex believes that
the ban imposed on disposal of biosolids at sea, together with concerns from
food retailers about the recycling of untreated biosolids over agricultural land
and air pollution problems resulting from the incineration of biosolids, make
the biosolid drying process an attractive method of biosolid disposal for the
future. The Swiss Combi process uses a closed loop drying system to produce
pasteurized dried granules which are odor free and easy to handle and transport.
The granules, known as biogran, have a much lower bacterial count than digested
biosolids and can be safely sold as a soil conditioner. They also may be sold as
fuel.
MENDOZA, ARGENTINA
In May 1998, Enron, in a consortium co-led by SAUR, a French water company,
successfully bid to acquire a controlling interest in Obras Sanitarias Mendoza
S.A., a privatized company that holds a 95-year exclusive concession to provide
water and wastewater services to the majority of the Province of Mendoza,
Argentina. Mendoza is one of Argentina's fastest growing provinces. Enron has
contributed to Azurix its 32.1% interest in OSM. SAUR owns a 32.1% interest in
OSM, local private investors own a 3.3% interest, Italgas owns a 2.5% interest,
employees own a 10.0% interest and the Province of Mendoza owns the remaining
20.0%. Although SAUR is the operator, certain decisions regarding OSM require
the approval of both Azurix and SAUR.
The concession is located in the desert bordering Chile at the base of the
Andes mountains. Its service territory covers six municipalities. The Mendoza
area has a strong economy. Per capita revenue is among the highest in Argentina
due to the petroleum and mining industry activity in the area, and per capita
water usage is among the highest in the hemisphere.
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The concession holder is charged with operating, maintaining and upgrading
OSM's ten drinking water plants, 17 wastewater treatment plants as well as
associated distribution and collection networks to Mendoza. OSM serves over one
million water customers and has 285,000 water connections. OSM provides
wastewater services to 883,000 people and has 210,000 wastewater connections.
The concession contract requires OSM to expand the water and wastewater
connections in concession area over the next 10 to 15 years. OSM's assets
include raw water transportation pipelines and aqueducts, drinking water
treatment plants and other general assets.
Water supply comes primarily from the regional river, Rio Mendoza. The
surface water feeds by gravity to treatment plants. The remaining groundwater
comes from approximately 160 wells. OSM uses four large lagoon systems to
provide the majority of wastewater treatment within the concession area. Average
billing is approximately $30 bi-monthly for water and wastewater.
OSM is required to meet standards of service established by the special
purpose regulatory body known as Ente Provincial de Agua y Saneamiento ("EPAS")
and to make appropriate arrangements for the improvement and extension of
service. The standards of service include quality and availability requirements,
which are initially set by the concession contract. Each year, the operator must
submit an annual report that will specify, among other things, the company's
progress with respect to its plan of operation and expansion.
OSM must pay the Province a yearly royalty based on operating revenue. This
royalty is equal to 3.85% in the first five years of the concession and 9.98%
thereafter.
The concession may be terminated for fault of the concession holder under
certain circumstances, including: repeated failure to provide service as
required by the concession contract; repeated violation of applicable EPAS
regulations; unjustified delays in completion of the then-current plan of
operation and expansion; willful withholding of information from EPAS; failure
to maintain adequate performance bonds; and any change in the corporate
structure of OSM or the operator without the prior approval of the Province.
The Province can undertake the partial or complete termination of the
concession for noncompliance with the terms of this contract or for public
interest reasons. In that event of a termination for public interest reasons,
the Province must compensate OSM for its lost investment. OSM believes it is in
compliance with the concession contract in all material respects.
CANCUN, MEXICO
We have entered into an agreement to acquire a 49.9% economic interest in
and to manage and operate the water and wastewater treatment concession for
Cancun and Isla Mujeres, Mexico. Desarrollos Hidraulicos de Cancun, S.A. de C.V.
("DHC") is the concessionaire that holds the concession. Affiliates of one of
the current shareholders, Grupo Mexicano de Desarrollo, S.A. ("GMD"), will
retain an aggregate 50.1% economic interest in DHC. We will pay the sellers
$13.5 million in cash for our 49.9% interest. We will also lend DHC up to $25
million to permit DHC to retire certain indebtedness and to initiate certain
improvements in the wastewater treatment system. The first funds for the loan
were advanced in February 1999, and we will purchase the equity interest on
receipt of certain governmental approvals to the investment, expected in March
1999.
The concession was initially granted to DHC on the condition that it would
invest a specified amount of capital in projects to provide services under the
concession. As a result of the devaluation of the Mexican peso in 1994, DHC was
unable to meet some of its investment obligations and the government of the
State of Quintana Roo in August 1996 designated the state regulatory authority
to operate the concession. In February 1997, GMD and DHC agreed with the state
government that, as a condition to reassuming operation of and retaining the
concession, DHC would make the necessary investments and form an association
with an experienced operator of water concessions.
The concession extends to October 2023. Based on figures available at the
date of acquisition, the concessionaire serves a population of approximately
350,000 through 67,000 connections. An estimated
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70% of the concession's revenues are derived from the supply of drinking water
to tourist hotels, whose revenues are primarily U.S. dollar based. The water
tariff paid by the hotels is adjusted quarterly according to the change in
Mexico's consumer price index as published by the Mexican government. In
addition, the concession provides that the rate paid by the hotels will be
increased in the event of a variation of the Mexican peso/U.S. dollar exchange
rate in excess of 15% due to a short-term event. The remainder of revenues come
from residential drinking water supply and from wastewater services. Residential
drinking water rates are adjusted with changes in the Mexican minimum wage
established by the minimum wage commission. Currently, less than 40% of the
wastewater in the Cancun urban zone that is collected is being treated.
FONATUR, the Mexican tourism board, currently owns three wastewater
treatment plants that process 72% of wastewater from the hotel zone and the
Cancun urban zones. We intend to pursue investment or ownership opportunities in
all three of these facilities. The remaining 28% of wastewater is treated by
DHC.
We will have three seats on the board of directors of DHC, while the 50.1%
shareholders will have two. We will have the right to appoint the chief
executive officer, the chief financial officer and the chief operating officer
of DHC. GMD will appoint the chairman of DHC's board and the non-voting board
secretary. Resolutions concerning certain corporate actions and governance
issues will require supermajority approval.
SUPPLIERS
We intend to achieve economies of scale in buying goods and services. In
addition, we expect to centralize purchasing arrangements to reduce costs and
improve quality. Wessex's key suppliers provide energy (representing
approximately 10% of operational costs), pipes and infrastructure goods. The
majority of Wessex's energy requirements are supplied by three companies. Terms
with strategic suppliers are negotiated to derive the best overall terms
incorporating continuity of supply and payment terms.
RESEARCH AND DEVELOPMENT
Since our formation, we have established a link with the Water Research
Centre, which is conducting a U.K. industry-wide research and development
program that currently invests approximately $6.6 million each year in research
programs. The Water Research Centre is internationally renowned as the market
leader in water and wastewater technology. We will have a research department
based within the Water Research Centre at Swindon in the United Kingdom. The
Water Research Centre will also provide us with a service to monitor the
development of water and wastewater technologies across the world and with the
opportunity to access, and, when appropriate, invest in new technologies. Wessex
contributes approximately $160,000 per year to this program.
Wessex carries out its own research and development to improve the
reliability and effectiveness of its treatment systems. In-house research and
development projects include development of a mobile filter for wastewater
treatment and disinfection and membrane technology. Wessex has spent
approximately $1.6 million on these two project areas in the last three years. A
third major project area is pasteurization of wastewater biosolids using the
Swiss Combi thermal drying technique. Wessex has spent approximately $640,000
over the last three years in this area.
EMPLOYEES
As of February 28, 1999, we had approximately 145 employees, excluding
employees of Wessex. As of February 28, 1999, Wessex had approximately 1,440
employees. As part of its efforts to improve operating efficiencies, Wessex has
reduced the number of its employees by approximately 500 employees since March
31, 1993, primarily through attrition and voluntary retirement packages. As of
February 28, 1999, SC Technology had approximately 50 employees.
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INSURANCE
We believe that our insurance arrangements, including self-insurance, are
customary for the industry and are adequate. Wessex, Mendoza and Cancun have
separate locally underwritten insurance policies covering employers liability,
public and products liability, excess public and products liability and their
motor fleets. Enron's corporate insurance program covers the direct exposures of
Azurix and the indirect exposures of Azurix's less than wholly owned
subsidiaries, to the extent of Azurix's interest in the subsidiary. Following
the offering, Azurix will continue to participate in Enron's corporate insurance
program. In the future, Azurix may establish a separate program for Azurix and
Azurix's subsidiaries.
LEGAL PROCEEDINGS
There are no legal or arbitration proceedings, including any that are
pending or threatened, of which we are aware that if adversely determined would
have a material adverse effect on our financial position, liquidity or results
of operations.
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REGULATORY MATTERS
The following is a summary of regulatory matters relating to water and
wastewater operations in the United Kingdom, Argentina and Mexico. In addition,
the following summarizes regulatory matters in the United States, where we
intend to operate water and wastewater assets in the future.
In general, most countries where we have invested, or intend to consider
investments, have drinking water quality and environmental laws and regulations.
We intend to invest in companies or projects that operate in material compliance
with drinking water quality and environmental laws and regulations. However, we
cannot guarantee that the due diligence we perform in advance of investing in an
entity will identify any or all noncompliance with environmental laws and
regulations by such entities.
Because the supply of clean drinking water and the treatment of wastewater
are essential societal needs, we anticipate that these activities will be
subject to at least some form of regulation wherever we do business. The nature
and extent of environmental laws and regulations vary from country to country
and there may be wide disparities in the requirements from one part of the world
where we do business to another. Generally speaking, compliance with these laws
and regulations is mandatory and penalties, as well as injunctive and other
relief, are usually available in the event of noncompliance. Moreover, these law
and regulations may require improvements to water and wastewater systems that
will require additional capital and operating costs for us to remain in
compliance.
Changes in the nature of these laws and regulations, or in the level of
their enforcement, also have the potential to impact adversely our financial
results during the relevant period. In certain cases, these adverse impacts
could cause our actual financial results to differ materially from those we
project, forecast, estimate or budget. Moreover, changes in these laws and
regulations may require improvements in order to remain in compliance that can
result in additional capital and operating costs.
Where we operate water or wastewater companies serving end-users, we can
expect to be subject to regulation on the rates we may charge. The regulatory
regime will vary from jurisdiction to jurisdiction, but can be expected to
resemble in some respects the regime in place in the United Kingdom, Argentina
or Mexico.
Wessex has established a comprehensive environmental auditing program that
is designed to provide early identification of potential environmental problems
associated with its activities and to provide reasonable assurance that all
identified problems are properly and promptly addressed. We expect to use the
environmental auditing capabilities already established within Wessex to
evaluate potential environmental and other regulatory risks that may be
associated with water and wastewater systems, companies and concessions in which
we may invest. We will also use these capabilities to monitor environmental and
other regulatory compliance in all water and wastewater systems, companies and
concessions in which Azurix or one of its subsidiaries takes an active
management role. Despite the demonstrated effectiveness of this environmental
auditing program with respect to Wessex's operations, however, there can be no
assurance that this approach will be adequate to address and manage all such
risks associated with our business.
U.K. REGULATORY MATTERS
The economic aspects of the water industry in England and Wales are
principally regulated under the provisions of the Water Industry Act 1991.
Following privatization of the U.K. water industry, each of the water and
wastewater companies became regulated through a license and the regulatory
provisions of the Water Industry Act 1991 and regulations and orders thereunder.
The license designates the relevant company as a water and/or wastewater
undertaker in its own area and provides for the monitoring of the company's
performance by the Director General for Water Services and the Secretary of
State for the Environment.
In setting prices, the Director is currently required to allow water and
wastewater companies a projected rate of return sufficient to finance their
operations and attract the capital necessary for investments in infrastructures
required to meet environmental and other regulatory standards. The actual rates
of return achieved by individual companies can vary significantly from the
projected rates of return
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assumed by the Director in setting prices. Historically, Wessex has exceeded
these rates of return, although there can be no assurance it will continue to do
so.
Each water company is under a general duty to develop and maintain an
efficient and economical system of water supply within its license area. Each
wastewater company is under a general duty to provide, improve and extend a
system of public sewers and to maintain those sewers to ensure that its sewerage
region is effectively drained. In addition, discharges from wastewater treatment
plants must be licensed by the Environment Agency, and wastewater companies are
responsible for regulating discharges of industrial effluent into sewers.
Contamination caused by effluent discharged from a treatment plant may subject
the wastewater company to liability, including clean up costs.
The Director is responsible for ensuring that water and wastewater
companies comply with their license conditions. Conditions may be modified with
the consent of the licensee after the giving of public notice and consideration
of comments and objections. In the absence of consent, the only means by which
the Director can secure a modification is following a modification reference by
him to the U.K. Monopolies and Mergers Commission. The Commission is required to
investigate and report on whether matters specified in the reference may be
expected to operate against the public interest and, if so, whether the adverse
public interest effect of those matters could be remedied by modification of the
conditions of the license. If the Commission makes adverse findings, the
Director must then modify the license accordingly.
A license may also be revoked or transferred to another company in certain
circumstances specified under law or in the license. These circumstances include
the failure to comply with an enforcement order made by the Secretary of State
for the Environment or the Director or the inability of the relevant water and
wastewater company to pay its debts.
WESSEX WATER SERVICES' LICENSE
Wessex Water Services' license continues until 2014 and is subject to
renewal. The license requires it to publish separate accounts, including on a
current cost accounting basis showing its regulated business separately from all
other businesses and activities. Regulated businesses, such as Wessex, are
subject to business practices limitations, such as restrictions on
cross-subsidies, that restrict affiliate dealings and promote competitive
contracting.
The license is being modified as a condition of regulatory clearance of
Azurix's acquisition of Wessex to address regulatory concerns arising out of the
acquisition. In particular, the modification will strengthen the financial
independence of Wessex Water Services' regulated business, providing of water
supply and wastewater services, by imposing restrictions on transfers of assets,
guarantees, intercompany loans and loans containing cross-default provisions, a
requirement that transactions with associated companies must be entered into on
an arm's length basis at market rates and a requirement to maintain an
investment grade rating for corporate debt of Wessex Water Services.
The license as modified will also require a dividend policy to be agreed
with the Director that ensures that Wessex Water Services retains sufficient
funds to finance its core activities and will require Wessex Water Services to
conduct its regulated business as if a separate public limited company. Enron
gave a holding company undertaking that requires, among other things, that Enron
and its affiliates to give Wessex Water Services all information necessary for
it to carry out its obligations and to refrain from action that would cause
Wessex Water Services to breach its obligations. This undertaking also provides
that the board of Wessex Water Services must include at least three independent
non-executive directors of standing and relevant experience.
TARIFF RATES
The Director regulates prices and service levels. Price controls applicable
to each water and wastewater company are subject to review by the Director every
five years, but both the Director and the individual company may seek an interim
determination to adjust price limits between the periodic reviews in certain
limited circumstances.
Unlike "rate of return" economic regulation, such as exists for many U.S.
industries, regulation in the United Kingdom generally uses forms of "price
limitation." This is intended to reward companies for
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efficiency and quality of service to customers. The U.K. regulatory system
allows companies to retain for a period of five years any savings attributable
to efficiencies that they are able to achieve. In the case of water, the main
instrument of economic regulation is a price limitation formula set out in each
company's license. This formula limits charges made by water and wastewater
companies for a basket of principal regulated services. The limit is expressed
as a percentage change by reference to the retail price index. This adjustment
can be positive, zero or negative and is determined in light of past operational
efficiencies, assumed future operational efficiencies, investments to meet water
quality standards, expenditures to enhance security of supply and service levels
and an appropriate return on capital.
During the prior periodic review, completed in July 1994, the Director
developed a structure for determining adjustment factors based on a matrix of
purpose and cost categories. The purpose categories comprised of base service
provisions, the maintenance of existing levels of service, as well as enhanced
service levels, the water supply/demand balance and obligatory quality
enhancements. The limits on Wessex's real price changes, i.e., in addition to
the retail price index, resulting from the 1994 periodic review were +1.5% for
each year until March 31, 2000.
The Director is currently conducting a periodic review, to conclude in
November 1999 when he will set new price limits for the period from April 1,
2000 to March 31, 2005. As part of the current review process, on October 29,
1998, the Director published a consultation paper setting out proposed ranges
for bills for the period from 2000 to 2005. The Director has confirmed that, on
the basis of past efficiencies achieved by water companies and evolving views
about the cost of capital, he expects substantial price reductions in April
2000. However, the U.K. Government has recently proposed a five-year program of
mandatory capital expenditures by the water companies aimed at quality and
environmental improvements. This program is estimated to cost the industry $13.3
billion in the aggregate over the five years. In setting the new price
adjustment factor, the Director will make an allowance for the investment needed
to meet new quality and environmental obligations.
The Director estimated, in the case of Wessex, that expected average
household bills, in real terms, could be over 17.5% lower in 2000-2001 than in
the previous year, but that bills overall would rise, by 2004-2005, to a level
exhibiting only a small reduction compared with the expected 1999-2000 bill.
This would constitute a material increase in prices following the one-time
reduction in 2000-2001. The Director's estimates did not take into account the
recent capital expenditure proposals of the U.K. Government. The Director has
invited views on whether the one-time reduction is appropriate or whether the
initial reduction could be modified so that bills could be broadly stable over
the five year period. The Director's estimates for future bills assume that the
scope for efficiency savings across the industry in operating costs could vary
between 2% and 4% a year, and that for capital expenditure the average overall
scope for efficiency is between 10% and 15% over the five year period. They also
assume a post-tax cost of capital of 5.25% for all but the smaller companies.
The Director held formal meetings with each of the water and wastewater
companies during January and February 1999 to discuss the issues raised by a
proposed price reduction including the responses of the public. Each company is
to draw up a business plan for submission to the Director in April 1999. In July
1999, the Director will publish his draft determination of new price limits to
run from 2000 to 2005, and his final decisions will be made in November 1999. If
companies disagree with the Director's price determination, they may challenge
his decision by requesting a reference to the Monopolies and Mergers Commission.
Although we are unable to predict the precise outcome of the current U.K. rate
review, it is likely to reduce significantly Wessex's revenues and earnings, but
should not have a material adverse effect on Azurix's financial position. At the
time of the acquisition of Wessex, we took into consideration the pending rate
review in our valuation of Wessex.
CHANGE TO REGULATORY REGIME
On June 30, 1997, the U.K. Government launched a review of the framework
for the regulation of all utilities, and in March 1998 set out its proposals in
a consultation paper.
In July 1998, following the consultation, the U.K. Government published its
response. Among other things, it suggested that consumer protection should be
the Director's primary duty achieved wherever possible and appropriate through
promoting effective competition, but also taking into account the need to
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ensure that regulated companies are able to finance the carrying out of their
functions; that there should be consumer representative bodies to promote
consumer interests; that a clearer link should be made between the prices
utilities can charge and the customer service standards they achieve; that full
information should be available on companies' performance on customer service
standards and on the links between this performance and the remuneration of
directors; and that Ministers should issue statutory guidance on social and
environmental objectives. On publishing the response, the Secretary of State for
Trade and Industry stated an intention to introduce legislation to implement the
proposals as soon as parliamentary time permits. In his March 1999 Budget
Speech, the Chancellor of the Exchequer announced that the Deputy Prime Minister
will review competition in the water industry.
DRINKING WATER QUALITY AND ENVIRONMENTAL REGULATION
The water and wastewater industries in England and Wales are subject to
numerous environmental regulatory requirements under the Water Industry Act
1991, the Water Resources Act 1991 and the Environment Act 1995. The Water
Industry Act 1991 established a new, more extensive and more stringent quality
regime for the water and wastewater industry through the creation of the
National Rivers Authority, since replaced by the Environment Agency, and the
Drinking Water Inspectorate.
The Drinking Water Inspectorate is responsible for ensuring that water
supplies meet the standards set out in the U.K. Water Quality Regulations. The
licensed Inspectorate conducts technical audits to assess annually the quality
of the drinking water supplied by the licensed companies. If any company fails
to meet the relevant water quality standards, the Inspectorate may require it to
take any necessary remedial action.
Under the Water Resources Act, the Environment Agency may require persons
to take precautions against pollution, may prohibit or restrict certain
activities likely to cause pollution in areas designated by the Secretary of
State for the Environment, and may issue consents to discharge matter from a
drain or sewer. When reviewing existing consents and issuing new ones, the
stated practice of the Environment Agency is to seek to set conditions at the
level required to at least maintain and, where appropriate, improve the quality
of the receiving waters.
The activities of the U.K. water and wastewater companies are also affected
by the requirements of European Union directives, including the Drinking Water
Directive, the Bathing Waters Directive and the Urban Wastewater Treatment
Directive, each of which has been brought into force in the United Kingdom. The
environmental systems which Wessex has in place are designed to comply with EU
and U.K. requirements.
In May 1997, the Secretary of State for the Environment announced a review
to examine ways in which environmentally damaging abstractions can be equitably
curtailed. The review will consider arrangements to reduce abstractions under
existing licenses and for revoking licenses in areas where pumping causes
significant environmental damage. He has also announced that the Director will
be setting mandatory targets to reduce leaks from water supplies, which will be
reviewed annually. Failure to meet the targets would carry penalties and could
ultimately lead to a water and wastewater company being put into the hands of an
administrator appointed by the Director.
In view of the age and history of many sites owned by Wessex, Wessex may
incur liability for sites that are found to be contaminated, resulting in
increased costs of managing or cleaning up such sites. Environmental legislation
requires the polluter (or if the polluter cannot be found, the owner or
occupant) of contaminated land to clean up any contamination which causes, or is
likely to cause, significant harm to the environment. Polluters are also
required to clean up any pollution of water courses. Other proposals which may
impose strict liability for environmental damage are also under consideration by
the European Union. Wessex expects that the direction of future changes will be
towards further tightening of controls. However, Wessex does not believe that
any liability which it may incur under environmental legislation or published
European Union directives will have a materially adverse effect on its results
of operations, financial position or liquidity.
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ARGENTINE REGULATORY MATTERS
GENERAL REGULATION OF WATER
Argentina has a federal system of government that grants significant
regulatory powers to the provinces. Under the Argentine Constitution, each
province has jurisdiction over its own natural resources, including water, and
the legal power to create standards to protect such resources.
Federal laws apply to areas within national jurisdiction, such as the
federal capital, and to matters which affect the nation as a whole and not
merely one province. At the national level, the Secretariat of Natural Resources
and Sustainable Development is principally responsible for the protection of the
environment, and the Ministry of Health and Social Action is principally
responsible for the protection of public health. The Secretariat of Natural
Resources and Sustainable Development also is responsible for the development
and implementation of national water policy and for establishing priorities of
uses for multiple-use water resources.
Under the Argentine Constitution, the provision of water services at the
local level generally is within the authority of the provinces and
municipalities. In the Province of Mendoza, for example, the Ministry of Public
Works and the Environment ("MOP") is granted general authority over all
non-agricultural water services, and environmental regulation. Concessions for
the provision of water services are granted by the provincial government by
statute and decree, with oversight vested in MOP and in a special purpose
regulatory body known as EPAS. Decisions of EPAS may be reviewed by the Minister
of MOP and the Governor of the Province.
REGULATION OF WATER SERVICE AND TARIFF RATES
In Argentina, provision of local water service and tariff rates are
generally controlled by provincial regulatory authorities, through a framework
established by statute and concession contracts. Governmental acts are subject
to judicial review in Argentine courts, but there is no right to appeal
provincial decisions setting tariffs to the Argentine federal government. Where
a water service concession is held by a company substantially owned by a U.S.
company, however, recourse may be available through international arbitration
under the Bilateral Investment Treaty between the United States and Argentina,
which provides for fair and nondiscriminatory treatment of investments.
The province of Mendoza provides an example of the process of granting
concessions and setting tariffs on a provincial level in Argentina. In Mendoza,
the basic regulatory framework is established by provincial statutes and
decrees. Within that framework, EPAS and MOP regulate the provision of service
and the setting of tariffs.
TARIFFS. In Mendoza, tariffs are proposed by the local regulatory agency,
EPAS, and then submitted to the Minister of MOP, the provincial legislature and
Governor for approval. EPAS must recommend rate regimes with an aim to reflect
efficient costs of operation, maintenance and expansion and renewal of the water
system, including debt service. EPAS also strives to promote rational and
efficient use of services and resources leading to a balance of supply and
demand, and to address sanitation and social objectives. EPAS is authorized to
establish tariff rates that require some users to pay rates that subsidize the
cost of providing service to other users. Argentine law provides that in setting
tariffs, EPAS must take into account costs of operations, maintenance,
amortization of services and a "reasonable" rate of return for OSM in the
context of an efficient level of operation. The basic tariff regime is to be
reviewed every five years.
The current tariff schedule imposes a fixed monthly charge per customer,
based on a formula which takes into account the customer's land area, types and
size of structures and uses of the land, that normally will remain unchanged
until the new tariff regime is implemented. Changes in current tariffs are
allowed for several enumerated reasons, including if operating costs increase or
decrease by 4% as reflected in official national indices, if there is a change
in the national "convertibility law" which establishes a 1:1 exchange rate of
the peso with the dollar, if there are changes in the capital program due to
government or regulatory reasons, or if there are changes in taxes, other than
income taxes.
A new tariff regime is to be implemented in Mendoza within the next several
years based on a metered charge per liter of water used. The concession contract
contains assurances that OSM will receive
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the same level of revenue as under the prior regime, thus allowing OSM to retain
efficiency gains and pass through changes in costs. The contract contains no
provision for direct pass through for inflation or revisions in tariffs for
capital expenditures. OSM may request adjustments to the new tariff if (1) the
new tariff lowers consumption significantly, (2) OSM shows that the new tariff
does not promote rational use of the assets and capital employed for the
operations of the company or does not allow it to carry out the obligations of
the company, or (3) OSM shows that most of the benefits of cost reductions are
inuring to consumers.
ENVIRONMENTAL MATTERS
Beginning in the early 1990s, Argentina began addressing environmental
matters systematically at the federal level. For instance, in 1991, the
Argentine government enacted a law establishing the Secretariat of the
Environment and calling for a balancing of economic development with the
conservation of natural resources, the improvement of the environment and the
prevention and amelioration of the effects of pollution. In August 1994, the
Argentine Constitution was amended to assure the right of all residents of
Argentina to a healthy environment and granted the Argentine government
authority to establish minimum standards of environmental protection which are
to be implemented by the provinces. The 1994 amendments to the Constitution also
provide that damage to the environment must be repaired immediately in
accordance with applicable law, and prohibit the importation of actually or
potentially toxic or radioactive waste. In 1995, the Argentine government
initiated a program to protect the environment by promulgating rules regarding
water, land, air and noise pollution and hazardous substances.
Throughout Argentina, the provinces take the lead in regulating discharges
of pollutants into waterways. These provinces typically set permissible
standards for pollutant levels in the discharges, issue permits and enforce
them. In Mendoza, wastewater discharges are regulated at the provincial level by
the MOP, which has adopted laws respecting water quality. Like most provinces in
Argentina, the MOP issues permits and regulates discharges of pollutants into
water bodies. In addition, OSM is required to comply with the drinking water
quality standards set by the concession contract and enforced by EPAS. The
Argentine government can enforce the provisions of the Argentine Civil and
Criminal Codes against OSM.
Most provinces in Argentina have also adopted their own regulations for air
and waste as well. The various provincial laws establish different compliance
and enforcement requirements.
MEXICAN REGULATORY MATTERS
WATER PROVISION ISSUES
Article 27 of the Mexican Constitution reserves water resources to the
nation. Article 115 of the Mexican Constitution places responsibility for
providing public services, including water and wastewater treatment, on the
municipalities with the participation of the State when required by law. The
Ministry of Environment, Natural Resources and Fisheries, through the National
Water Commission ("CNA"), is responsible for:
- Assigning water rights and discharge rights to users and assessing the
relevant fees
- Enforcing water-related environmental regulations
- Planning the efficient development of water resources
- Developing regulatory, legal and financial structures for water
concessions at the municipal level with an emphasis on private
participation
- Providing technical assistance to local water authorities and advising on
project feasibility
- Providing financial support for priority water projects, particularly in
low-income areas
The states and municipalities are responsible for setting conditions for
concessions and for establishing a tariff structure for all customer groups,
collecting payments from customers and paying CNA for use of water rights. The
Cancun/Isla Mujeres concession is regulated by Concession Integral de los
Servicos de Agua Potable, Alcantarillado Sanitario y Saneamiento ("CAPA"), an
agency of the State of Quintana Roo. One of the requirements of the concession
is that the concessionaire achieve and maintain a 95%
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connection rate for water and wastewater for the population. Changes to the
connection rate requirement will be subject to the mutual consent of both CAPA
and the concessionaire.
The Governor of the State of Quintana Roo appoints the members of CAPA. If
the Governor is not supportive of the concessionaire, CAPA may be less inclined
to approve concessionaire initiatives and less understanding of problems it
encounters. Azurix believes DHC has good relations with the state's governor
elect.
TARIFF RATES
The tariff rates are set by CAPA and are based on the principal of full
recovery of operations and maintenance costs and can be revised to maintain the
economic equilibrium of the concession. There is no provision that tariffs
should provide a return on equity or permit the concessionaire to earn a profit.
Initial tariffs were set when DHC was first awarded the concession in
October 1993. At current levels, the tariffs are sufficient to cover cost of
operations, capital expenditures required under the concession and return on
investment. These expenditures should not necessitate a real tariff increase
over the term of the concession. However, should significant, unexpected capital
expenditures be required, DHC can propose to CAPA a tariff increase.
CAPA has indicated that it intends to change the tariff rate in the near
term to eliminate the cross-subsidy between water and wastewater. Currently,
wastewater service is charged a flat rate of 20% of the water bill, regardless
of actual usage. This would have the effect of increasing wastewater rates and
reducing water rates. If the concessionaire wants to increase rates in real
terms, it will be required to submit a rate case to CAPA, with supporting
economic and financial documents explaining the reason for the increase. In all
cases, the real rate for the residential and communal customer classes shall not
exceed the combined operation and maintenance cost of supplying those customers.
The concession will be evaluated every five years to determine whether real
tariff increases are justified. However, the concessionaire may propose real
increases at any time, though CAPA is still obligated to approve them.
Under the terms of the concession amendments, the concessionaire is
permitted to disconnect a customer for non-payment.
ENVIRONMENTAL MATTERS
DHC has represented to Azurix that it is and has been in compliance with
all state and federal environmental standards associated with the operation of
the concession and that there are no outstanding non-compliant environmental
issues with the state and federal agencies associated with the concession's
operation.
The wastewater plants operated by DHC are designed to discharge an effluent
containing no more than 30 mg/l of total suspended solids and biochemical oxygen
demand. The Mexican federal quality criterion for the saltwater injection
discharge that is operated by DHC is 70 mg/l of total suspended solids and
biochemical oxygen demand. With the completion of the plants under construction,
the existing biosolid management system will need to be modified or expanded to
manage the disposal of the additional volume of biosolids that will be produced,
and other environmental systems will need to be reevaluated for ongoing
operations. The majority of the planned capital expenditures is dedicated to the
improvement of the wastewater collection and treatment system, and we believe
that the amounts planned are sufficient to meet treatment goals and
environmental regulations.
U.S. REGULATORY MATTERS
The business sectors in which we intend to operate in the United States are
generally highly regulated by national, state and local laws and regulations.
Compliance with these regulations will likely be a significant aspect of our
operations.
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TARIFF RATES
In the United States, the rates for water and wastewater services are
generally subject to state and local laws and regulation. Although the system is
highly fragmented among jurisdictions, most jurisdictions in the United States
utilize "rate of return" economic regulation in setting water and wastewater
rates. Under rate of return economic regulation, the service provider is allowed
to recover its reasonable and necessary operations and maintenance expenses, and
a recovery of and a reasonable return on its invested capital. In most
jurisdictions, a water or wastewater service provider is required to keep a
current set of tariffs on file with the governing regulatory authority. A
service provider generally can charge less than the approved tariffs. Typically,
a service provider cannot change its rates without the approval of the governing
regulatory authority. We can give no assurance regarding our ability to obtain
approvals for rate changes, given the vast number of regulatory authorities with
jurisdiction over water and wastewater service in the United States, and the
fact that decisions regarding rate changes are often subject to political, as
well as economic, factors.
DRINKING WATER QUALITY
The Safe Drinking Water Act directs the EPA to set drinking water standards
for the approximately 55,000 community water supply systems in the United
States. The Safe Drinking Water Act Amendments of 1996 bring substantial changes
to the regulation and financing of water systems. The amendments have several
potentially significant regulatory initiatives, which include the following:
- Recent adoption of two rules that may require more sophisticated
treatment. First, the disinfectants and disinfection by-products rule,
establishes maximum residual disinfectant levels for chlorination and
maximum contaminant level goals for potentially harmful disinfection
by-products. Second, the enhanced surface water treatment rule focuses on
treatment requirements for waterborne pathogens, particularly
cryptosporidium.
- A requirement that the EPA list 30 previously unregulated contaminants
for monitoring, risk assessment, and potential regulation at least once
every five years. The new Act also specifies that the EPA shall study
radon, arsenic and sulfates and propose rulemakings in 1999, 2000 and
2001, respectively, if the EPA determines that these chemicals threaten
the public health. Such a program poses the risk of additional
contaminants being regulated as the EPA implements this research, with
the attendant risks of potentially increased capital and operational
costs.
- Adoption of regulations to reduce lead and copper in drinking water.
Water providers that exceed certain specified levels of lead and copper
in drinking water may be required to perform additional monitoring and
develop measures to reduce the lead and copper content.
The EPA has other long-term plans to develop regulations governing the
treatment of drinking water, such as the recycling of filter backwash into
influent streams at public utilities and additional groundwater disinfection. It
is unclear what precise form these and other regulations will take, so potential
regulatory risks and costs of compliance cannot be evaluated at this time. As is
true for any drinking water provider, if we operate water assets in the United
States, we will face the risk that water we will provide could be contaminated,
including for reasons outside our control and such contamination could expose us
to regulatory sanctions and potential liability for injury to persons and
property.
ENVIRONMENTAL MATTERS
Among other things, environmental laws and regulations in the United States
generally set requirements for:
- The quality of the discharges from treatment facilities
- The handling and disposal of biosolids from treatment facilities
- The management of associated materials and wastes
- Good housekeeping practices for the management and monitoring of the
operations
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We intend to invest in companies or projects that operate in material
compliance with environmental laws and regulations. It is impossible, however,
to predict how the precise regulatory framework governing companies in which we
will invest will operate.
Changes in environmental laws and regulations, or in the level of their
enforcement, may adversely impact our financial results. In certain cases, these
adverse impacts could cause our actual financial results to differ materially
from those we project, forecast, estimate or budget. Moreover, changes in these
laws and regulations may require improvements in order to remain in compliance
that can result in additional capital and operating costs. Environmental
protection statutes in the United States typically provide for the imposition of
substantial civil and criminal penalties, as well as the possibility of permit
revocation and corrective action orders, for violations of their requirements.
These laws may also provide for retroactive, strict liability without regard to
a party's negligence or fault.
The Federal Water Pollution Control Act, known as the "Clean Water Act,"
establishes a system of standards, permits and enforcement procedures for the
discharge of pollutants from industrial and municipal wastewater sources. The
law requires permits for discharges from water treatment facilities and sets
treatment standards for industries and wastewater treatment plants. Discharge
permits issued under the Clean Water Act are subject to renewal once every five
years. When discharge permits are renewed and reissued, it is customary for the
EPA or the state agency issuing the permit to impose more stringent discharge
limitations in the new permit. In addition, the EPA and the states have been
establishing new standards for bodies of water that receive wastewater treatment
plant discharges and these new standards may result in the imposition of more
stringent effluent limitations as discharge permits are renewed. Compliance with
these requirements is monitored closely and the Clean Water Act provides the EPA
with an array of enforcement mechanisms for companies that fail to comply,
including penalties and injunctive relief. Additionally, the EPA has recently
published regulations of the use and disposal of biosolids when they are applied
to land or incinerated. Although controls on biosolid disposal may be tightened,
we believe it unlikely that the EPA would take drastic measures such as banning
the land application of biosolids. Although we cannot predict the nature of
these and other regulations under the Clean Water Act, we do not believe that
such regulations will materially harm our business.
Other U.S. environmental laws and regulations may also impact Azurix. These
include the Clean Air Act, the Resource Conservation and Recovery Act, and the
Comprehensive Environmental Response, Compensation and Liability Act. Generally
speaking, responsibility for implementing and enforcing the regulations
promulgated by the EPA under the Clean Air Act and RCRA rests with individual
states, whereas CERCLA is administered by the EPA itself. In some instances,
state regulations have established standards that are more demanding than the
federal standards. Although we anticipate that Azurix's industrial wastewater
treatment services business will focus primarily on the operation and management
of on-site wastewater treatment facilities, Azurix may also operate and manage
facilities that receive and treat third party industrial wastewater that is
generated at an off-site location. Biosolids and other residues resulting from
the treatment of industrial wastewater, particularly wastewater from third party
off-site generators, may be subject to classification as "hazardous waste" under
RCRA and consequently become subject to more stringent handling and disposal
requirements imposed under RCRA.
We believe that Azurix possesses the expertise necessary to comply with all
U.S. environmental laws applicable to Azurix's operations. We also expect that
our U.S. operations will be subject to a comprehensive environmental auditing
program similar to the program that Wessex has implemented for operations in the
United Kingdom that is designed to provide early identification of potential
environmental problems and to provide reasonable assurance that identified
problems are properly and promptly addressed. Nevertheless, there can be no
assurance that our operations will comply with all environmental laws at all
times.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding our executive officers
and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rebecca P. Mark...................... 44 Director, Chairman and Chief Executive Officer
Rodney L. Gray....................... 46 Director and Vice Chairman, Finance, Risk
Management and Investments and Chief Financial
Officer
W. Nicholas Hood..................... 62 Director and Vice Chairman
John C. Ale.......................... 44 Executive Director and General Counsel
Alex Kulpecz......................... 45 Executive Director, Europe, Middle East, Asia,
Africa
Amanda K. Martin..................... 38 Executive Director, Americas
Edward N. Robinson................... 53 Executive Director, Strategy and Corporate
Development
Colin F. Skellett.................... 53 Executive Director, Technical and Operating,
Environmental and Safety Services
John H. Duncan....................... 71 Director
Kenneth L. Lay....................... 56 Director
Jeffrey K. Skilling.................. 45 Director
Joseph W. Sutton..................... 51 Director
John Wakeham......................... 66 Director
</TABLE>
Rebecca P. Mark has served as Director, Chairman and Chief Executive
Officer of Azurix since its founding in July 1998. Ms. Mark has served as Vice
Chairman of Enron since May 1998, and, until recently was Chairman of Enron
International Inc. since January 1996 and Chairman and Chief Executive Officer
of Enron Development Corp. since July 1991. She was also Chief Executive Officer
of Enron International from January 1996 to May 1998 and Vice President and
Chief Development Officer of Enron Power Corp. from July 1990 to July 1991.
Enron International Inc., Enron Development Corp. and Enron Power Corp. are
wholly owned subsidiaries of Enron. Ms. Mark is also a Director of Brunswick
Corp.
Rodney L. Gray has served as Director of Azurix since July 1998, as Vice
Chairman, Finance, Risk Management and Investments and Chief Financial Officer
of Azurix since November 1998 and Executive Director, Finance, Risk Management
and Investments of Azurix from October 1998 until November 1998. Mr. Gray was
Executive Vice President, Finance of Enron International from January 1997 until
he joined Azurix. In addition, Mr. Gray was Chairman and Chief Executive Officer
of Enron Global Power & Pipelines L.L.C. from June 1995 until November 1997 and
was also President of Enron Global Power & Pipelines L.L.C. from November 1995
to November 1997. Mr. Gray also served as a Managing Director of Enron
Development Corp. from August 1995 through December 1996, as Chairman and Chief
Executive Officer of Enron International from June 1993 to December 1995, and as
Senior Vice President, Finance & Treasurer of Enron from October 1992 through
June 1993. Mr. Gray is also a Director of Harmon Industries Inc.
W. Nicholas Hood has served as Director and Vice Chairman of Azurix since
October 1998 and as Chairman of Wessex since September 1989. From 1987 to 1989,
Mr. Hood served as Chairman of Wessex Water Authority, Wessex's predecessor. He
is Chairman of MHIT plc and is a Non-executive Director of Winterthur Life U.K.
Ltd. and Commercial Union Environment Trust plc, President of the International
Water Services Association and a Member of the Water Training Council. Mr. Hood
is Deputy Chairman of Business in the Community, a Member of The Prince's
Council, Chairman of @Bristol and a Director of the Harbourside Foundation and
of the Harbourside Center.
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<PAGE> 70
John C. Ale has served as Executive Director and General Counsel of Azurix
since December 1998. Prior to joining Azurix, Mr. Ale was with the law firm of
Vinson & Elkins L.L.P. for more than 17 years, and was a partner for more than
12 years. From December 1996 to October 1998, Mr. Ale served as managing partner
of the London office of Vinson & Elkins. From July 1993 to October 1998, he was
chairman of Vinson & Elkins' project finance and development practice. Prior to
joining Vinson & Elkins, Mr. Ale served as law clerk to the Honorable Warren E.
Burger, then Chief Justice of the United States.
Alex Kulpecz has served as Executive Director, Europe, Middle East, Asia,
Africa of Azurix since September 1998. From October 1995 to September 1998, Mr.
Kulpecz served as Director of Development for Russia, Central/Eastern Europe,
Latin America and Africa for Shell International Gas & Power. Prior to that
time, he led the reorganization teams for Shell International's exploration and
production business in The Hague, acted as Senior Management Liaison for Shell
International's oil and gas production business in Europe and the United Kingdom
and held management positions in the Middle East and the United Kingdom.
Amanda K. Martin has served as Executive Director, Americas of Azurix since
September 1998. Commencing in 1991, Ms. Martin served in various positions with
Enron Capital & Trade Resources Corp., including President of Energy and Finance
Services from January 1998 to September 1998, Managing Director and Vice
President of Business Ventures and Asset Management from September 1996 to
January 1998, Vice President of Business Ventures and Asset Management from
April 1994 to September 1996, and Senior Counsel from March 1993 to April 1994.
Edward N. Robinson has served as Executive Director, Strategy and Corporate
Development of Azurix since November 1998. Prior to joining Azurix, Mr. Robinson
served as Member of the Executive Committee from 1992 to 1998, Executive Vice
President and Manager, The Private Bank, from 1995 to 1998 and Executive Vice
President and Manager, Investment Banking from 1992 to 1994 of Chase Bank of
Texas, formerly Texas Commerce Bank. Mr. Robinson also served as Vice President
and then Director from 1983 to 1989 and Managing Director from 1989 to 1992 of
The First Boston Corporation.
Colin F. Skellett has served as Executive Director, Technical and
Operating, Environmental and Safety Services of Azurix since October 1998 and as
Chief Executive of Wessex since January 1995. Mr. Skellett served as Managing
Director of Wessex from September 1989 to January 1995. Mr. Skellett is also
Chairman of Wessex Water Services Ltd. and is the U.K. representative on EUREAU.
John H. Duncan has served as Director of Azurix since March 1999. Mr.
Duncan's principal occupation has been investments since 1990. Mr. Duncan is
also a Director of Enron, EOTT Energy Corp., the general partner of EOTT Energy
Partners, L.P., Enron Oil & Gas Company, Chase Bank of Texas, National
Association and Group 1 Automotive Inc.
Kenneth L. Lay has served as Director of Azurix since November 1998. Mr.
Lay has been a Director of Enron since 1985 and a Director of Enron Oil & Gas
Company since 1985. For over five years, Mr. Lay has been Chairman of the Board
and Chief Executive Officer of Enron. Mr. Lay is also a Director of Eli Lilly
and Company, Compaq Computer Corporation, EOTT Energy Corp. and Trust Company of
the West.
Jeffrey K. Skilling has served as Director of Azurix since November 1998.
Mr. Skilling has been a Director of Enron since 1997. Since January 1, 1997, Mr.
Skilling has served as President and Chief Operating Officer of Enron. From June
1995 until December 1996, he served as Chief Executive Officer and Managing
Director of Enron Capital & Trade Resources Corp. From August 1990 until June
1995, Mr. Skilling served Enron Capital & Trade Resources Corp. in a variety of
senior managerial positions.
Joseph W. Sutton has served as Director of Azurix since March 1999. Mr.
Sutton has served as President of Enron International, Inc. since January 1996
and its Chief Executive Officer since May 1998. From January 1996 to May 1998,
he also served as Enron International's Chief Operating Officer. From 1995 to
January 1996, Mr. Sutton served as President and Chief Operating Officer and
from 1992 to 1995 was a Vice President of Enron Development Corp. Before joining
Enron Development Corp., Mr. Sutton served as a career officer in the U.S. Army.
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<PAGE> 71
John Wakeham has served as a Director of Azurix since March 1999. Lord
Wakeham has been a Director of Enron since 1994. Lord Wakeham is a retired
former U.K. Secretary of State for Energy and Leader of the Houses of Commons
and Lords. He served as a Member of Parliament from 1974 until his retirement
from the House of Commons in April 1992. Prior to his government service, Lord
Wakeham managed a large private practice as a chartered accountant. In the U.K.,
he is currently Chairman of the Press Complaints Commission and Chairman or
Director of a number of publicly traded U.K. companies.
BOARD OF DIRECTORS
Our Board of Directors will be divided into three classes serving staggered
terms. Directors in each class will be elected to serve for three-year terms and
until their successors are elected and qualified. Each year, the directors of
one class will stand for election as their terms of office expire. We expect
that, after the offering, and will be designated
as Class I directors, with their terms of office expiring in 2000; ,
and will be designated as Class II directors, with their
terms of office expiring in 2001; and , and will
be designated as Class III directors, with their terms of office expiring in
2002.
Following the offering, we will appoint two individuals independent of
Azurix, Enron, Marlin Water Trust and Atlantic Water Trust to serve on our Board
of Directors.
The Board of Directors expects to establish an Audit Committee and a
Compensation Committee. The Audit Committee of the Board of Directors will
include at least two independent directors. The Audit Committee will review and
report to the Board of Directors with respect to the selection, retention,
termination and terms of engagement of our independent public accountants, and
maintain communications among the Board of Directors, the independent public
accountants and our internal accounting staff with respect to accounting and
audit procedures. The Audit Committee will also review, with management and our
independent auditors, our annual financial statements, the adequacy of our
internal accounting and control procedures and policies and related matters. The
Compensation Committee will consist of at least two persons who are outside
directors within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The Compensation Committee will be responsible for making
decisions with respect to the compensation of our executive officers and key
executives. The Board of Directors has established the Stock Plan Committee to
administer our stock plan. Rebecca P. Mark, Kenneth L. Lay and Jeffrey K.
Skilling currently serve on the Stock Plan Committee. The Board of Directors
may, from time to time, establish other committees of the Board of Directors.
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<PAGE> 72
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the year ended
December 31, 1998 for the Chairman and Chief Executive Officer and each of the
four other most highly compensated executive officers of Azurix. These five
individuals are referred to in this prospectus as the "Named Executive
Officers." Because each of these individuals joined Azurix during 1998, the
amounts shown in the table below represent amounts attributable to Azurix after
each individual joined Azurix.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rebecca P. Mark(1)..................... 1998 $247,812 $656,250 -- --
Chairman and Chief Executive Officer
Rodney L. Gray(1)...................... 1998 $151,875 $151,875 -- --
Vice Chairman, Finance, Risk
Management and Investments and Chief
Financial Officer
Amanda K. Martin(1).................... 1998 $133,333 $241,667 -- $150,000(2)
Executive Director, Americas
Alex Kulpecz(3)........................ 1998 $177,172 $200,000 $188,613(4) $250,000(5)
Executive Director, Europe, Middle
East, Asia, Africa
Colin F. Skellett(6)................... 1998 $ 78,158 $ 46,980 -- --
Executive Director, Technical and
Operating, Environmental and Safety
Services
</TABLE>
- ---------------
(1) Rebecca P. Mark, Rodney L. Gray and Amanda K. Martin began receiving
compensation from Azurix in August 1998, August 1998 and September 1998,
respectively. These individuals were compensated by Enron and/or its
affiliates for the entire year. The amounts shown in the table represent pro
rata amounts of their total compensation received from Enron for the portion
of 1998 after they joined Azurix.
(2) Represents a portion of the $350,000 bonus paid to Ms. Martin in connection
with her transfer from Enron to Azurix.
(3) Alex Kulpecz joined Azurix during September 1998.
(4) Includes $127,533 for payment of U.K. income taxes.
(5) Represents a sign-on bonus.
(6) Colin F. Skellett joined Azurix in October 1998 in conjunction with the
acquisition of Wessex. The amounts shown in the table represent a pro rata
amount of his total compensation received from Azurix and Wessex for the
portion of 1998 after he joined Azurix.
EMPLOYMENT AGREEMENTS
Rebecca P. Mark entered into an employment agreement with Enron and Azurix
which runs through December 31, 2001 and entitles Ms. Mark to an annual salary
of $710,000. The agreement provides that Ms. Mark will participate in an annual
incentive plan with a bonus determined at the discretion of the Board of
Directors. If Ms. Mark is involuntarily terminated, which includes a termination
without cause, then she will receive a monthly severance payment equal to 100%
of her monthly salary until the end of the term of the agreement as if she had
not been terminated, annual bonus payments through the term of the agreement and
will become fully vested in all long-term incentive grants and awards except for
options to purchase shares of Azurix common stock granted on February 2, 1999.
The agreement prohibits
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Ms. Mark from competing with Enron until December 31, 2001. The agreement also
contains other customary benefits and perquisites.
Rodney L. Gray entered into an employment agreement with Azurix which runs
through February 15, 2004 and entitles Mr. Gray to an annual salary of $430,000.
The agreement provides that Mr. Gray will participate in an annual incentive
plan with a bonus target of 100% of his annual base salary. If Mr. Gray is
involuntarily terminated, which includes a termination by Azurix without cause,
then he will receive a monthly severance payment equal to 100% of his monthly
salary and annual bonus payments until the end of the term of the agreement as
if he had not been terminated. The agreement prohibits Mr. Gray from competing
with Azurix until February 15, 2004. The agreement also contains other customary
benefits and perquisites.
Amanda K. Martin entered into an employment agreement with Enron Capital &
Trade Resources which was assigned to Azurix. The agreement runs through August
31, 2003 and entitles Ms. Martin to an annual salary of $400,000. In connection
with the transfer of her agreement to Azurix, Ms. Martin received a bonus of
$350,000. The agreement provides that Ms. Martin will participate in an annual
incentive plan with a bonus target of between 100% and 200% of her annual base
salary. If Ms. Martin is involuntarily terminated, which includes a termination
by Azurix without cause, then she will receive a monthly severance payment equal
to 100% of her monthly salary and unpaid annual bonuses until the end of the
term of the agreement as if she had not been terminated. In order to receive
these payments, Ms. Martin may not compete with Azurix during the term of the
agreement following an involuntary termination. The agreement also prohibits Ms.
Martin from competing with Azurix until six months after the term of the
agreement. The agreement also contains other customary benefits and perquisites.
Alex Kulpecz entered into an employment agreement with Azurix which runs
through September 14, 2001 and entitles Mr. Kulpecz to an annual salary of
$492,000. In connection with his agreement, Mr. Kulpecz received a sign-on bonus
of $250,000. The agreement provides that Mr. Kulpecz will participate in an
annual incentive plan with a bonus target of 100% of his annual base salary. If
Mr. Kulpecz is involuntarily terminated, which includes a termination by Azurix
without cause, then he will receive a monthly severance payment equal to 100% of
his monthly salary until the end of the term of the agreement as if he had not
been terminated plus a pro rata portion of his bonus earned for the year of
termination. In addition, in the case of involuntary termination except if he
has failed to meet certain performance objectives, Mr. Kulpecz will be entitled
to a payment so that the value of the equity in Enron and Azurix which he has
received pursuant to his employment agreement plus the payment equals one
million dollars. The agreement prohibits Mr. Kulpecz from competing with Azurix
until the later of September 14, 2001 or one year following termination of
employment. The agreement also contains other customary benefits and
perquisites.
Colin F. Skellett entered into an employment agreement with Wessex, which
entitles Mr. Skellett to an annual salary of $423,300. The employment agreement
may be terminated by either Wessex or Mr. Skellett upon 12 months' notice. The
agreement otherwise terminates on Mr. Skellett's 60th birthday. The agreement
provides that Mr. Skellett will participate in an annual bonus plan. The
agreement prohibits Mr. Skellett from competing with Wessex for one year
following termination of employment.
STOCK PLAN
We have adopted a stock incentive plan. Grants of incentive stock options
and nonqualified stock options and awards of restricted stock may be made
pursuant to the stock plan. At any particular time, the number of shares of
common stock issued under the plan plus the number of shares of common stock
issuable upon the exercise of all outstanding stock options under the plan may
not exceed 15% of the total number of shares of common stock then outstanding,
assuming the exercise of all outstanding options. The stock plan will be
administered by the Stock Plan Committee, which consists of Rebecca P. Mark,
Kenneth L. Lay and Jeffrey K. Skilling. The exercise price for an option granted
under the stock plan will be determined by the Stock Plan Committee and will be
no less than the fair market value of the common
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stock on the date that the option is granted. If our outstanding common stock is
adjusted because of a recapitalization, stock split, combination of shares,
reclassification, stock dividend or other similar change, the Stock Plan
Committee will make appropriate adjustments to the total number of shares
covered by the plan and the exercise price and number of shares covered by each
outstanding option or restricted stock award.
As long as Enron owns 30% or more of our common stock, if there is a change
in control of Enron, then each outstanding restricted stock award or option,
regardless of vesting, will be surrendered and canceled and each grantee will
receive a cash payment from Azurix. If there is a change in control of Azurix,
then each outstanding restricted stock award or option, regardless of vesting,
will be surrendered and canceled and each grantee will receive a cash payment
from Azurix. In either case, the cash payment for restricted stock awards will
equal the fair market value of a share of our common stock on the date of
cancellation multiplied by the number of shares subject to the restricted stock
award. In either case, the cash payment for canceled options will equal the
difference between the fair market value of a share of our common stock on the
date of cancellation minus the exercise price of the canceled options multiplied
by the number of shares covered by the canceled options. In the case of a change
in control of Azurix by means of a merger, sale or other business combination or
a tender offer, the fair market value of our common stock for purposes of the
calculation set forth in the previous sentence will be the per share price
offered to our stockholders in such transaction.
STOCK OPTION GRANTS
On February 2, 1999, Azurix issued options to purchase shares of common
stock at $16.72 per share to the Named Executive Officers. Rebecca P. Mark
received 2,000,000 options which will vest 25% per year over a four-year period.
Rodney L. Gray received 1,000,000 options which will vest 20% per year over a
five-year period. Amanda K. Martin received 1,000,000 options which will vest
25% per year over a four-year period. Alex Kulpecz received 1,000,000 options
which will vest 20% per year over a five-year period. Colin F. Skellett received
600,000 options which will vest 33 1/3% per year over a three-year period. In
addition, on February 2, 1999, Azurix issued an aggregate of 2,199,850 options
to purchase shares of common stock at $16.72 per share for other employees with
vesting schedules ranging from three to five years. All of these options expire
ten years after the grant date.
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CERTAIN TRANSACTIONS
AGREEMENT REGARDING BUSINESS OPPORTUNITIES AND RELATED MATTERS
Enron and Azurix will enter into an agreement that addresses the scope of
Azurix's business and provides that certain activities in which Enron and its
affiliates may engage are permitted, even if those activities have a competitive
impact on Azurix. In general, Enron will be permitted to engage in any business
whatsoever, including water, wastewater and other businesses competing with
Azurix, and may compete in public tenders against Azurix, provided the business
is conducted and opportunities are identified and developed through Enron's own
personnel and not through Azurix. If an opportunity in the water industry is
presented to a person who is an officer or director of both Enron and Azurix,
the opportunity must first be offered to Azurix, unless water constitutes a
minority of the fair market value of the opportunity, as determined by that
officer or director in good faith based on information available at the time.
Azurix will indemnify Enron and its officers, directors and employees against
all claims brought on account of Enron's pursuing activities competitive with
Azurix, provided Enron has followed the rules just described.
The agreement will require Azurix to limit its purpose, in its certificate
of incorporation, to the businesses generally identified in this prospectus,
activities incidental to those businesses, and such other businesses as Enron
may approve in its sole discretion. The agreement will restrict both Enron and
Azurix from taking action to restrict each others' businesses or to subject them
to certain forms of regulation.
The agreement will expire the first date on which neither Enron nor
Atlantic Water Trust directly or indirectly owns or has the power to vote at
least 35% of the shares of Azurix ordinarily entitled to vote for the election
of directors or otherwise controls Azurix. Disputes under the agreement are to
be resolved through arbitration. The agreement also permits conflicts of
interest between Enron and Azurix to be resolved through approval by a majority
of the directors of Azurix not associated with Enron.
SERVICES AGREEMENT WITH ENRON
We will have an agreement with Enron pursuant to which Enron provides
various corporate staff and support services to us. These include services such
as information technology, building maintenance, security and other office
services as well as certain employee-related services such as employee
development and training and maintenance of certain compensation and other
benefits programs. We also may utilize Enron's regulatory affairs, marketing
affairs, treasury and risk assessment and control departments. In addition,
Azurix will participate in Enron's corporate insurance program. The agreement
will provide that we may utilize the international offices of Enron and its
affiliates for certain projects. This is subject to our mutual agreement with
Enron or its affiliates on a project-by-project basis. Our agreement will
provide that we will reimburse Enron for the direct charges related to the Enron
services which we use. We will also be allocated and be liable to Enron for an
amount of overhead charges related to Enron corporate staff and support services
which we utilize. The agreement will be for an indefinite term, but it may be
terminated by either party with 180 days' notice.
UNDERTAKINGS
In connection with regulatory clearance of the acquisition of Wessex, Enron
and Wessex's immediate parent, Azurix Europe, agreed to make certain
undertakings regarding the modification of Wessex Water Services' license as a
provider of water and wastewater services. The objective of the modifications
was to allow Wessex to operate as if it is a stand-alone organization and to
ensure that Wessex has sufficient financial and managerial resources.
CONFLICTS OF INTEREST
Atlantic Water Trust currently owns all of Azurix's outstanding common
stock. Following completion of the offering, Atlantic Water Trust will own
approximately % of our outstanding common stock ( % if the underwriters'
over-allotment option is exercised in full). Each of Enron and Marlin Water
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Trust owns a 50% voting interest in Atlantic Water Trust. To date, Enron has
appointed all the directors of Atlantic Water Trust and Azurix, although Marlin
Water Trust at any time has the right to replace half of the directors of
Atlantic Water Trust and currently, and in certain cases following the offering,
up to half of the Azurix directors. As a result, following the offering, Enron
and Marlin Water Trust will continue to exert significant influence over the
policies, management and affairs of Azurix and the outcome of most corporate
actions requiring stockholder approval, including the approval of transactions
involving a change in control of Azurix.
Some individuals who serve as officers and directors of Enron also serve as
directors of Azurix. The directors and officers of Enron have fiduciary duties
to manage Enron, including its investments in subsidiaries and affiliates such
as Azurix, in a manner beneficial to Enron and its stockholders. Similarly, the
directors and officers of Azurix have fiduciary duties to manage Azurix in a
manner beneficial to Azurix and its stockholders. In some circumstances, the
duties of these directors and officers of Enron may conflict with their duties
as directors of Azurix. In addition, certain other conflicts of interest exist
and may arise in the future as a result of the extensive relationships between
Enron and Azurix. Enron and Azurix have agreed that conflicts of interest
between Enron and Azurix may be resolved through approval by a majority of the
directors of Azurix not associated with Enron. See "Principal and Selling
Stockholders."
REGISTRATION RIGHTS AGREEMENT
We will enter into an agreement with Atlantic Water Trust to provide
Atlantic Water Trust with certain registration rights relating to the shares of
our common stock. The registration rights agreement will provide that Atlantic
Water Trust may request registration under the Securities Act of all or any
portion of Azurix shares covered by the registration rights agreement, and
Azurix will be obligated to register such shares as requested by Atlantic Water
Trust. Atlantic Water Trust will also have the right to include shares of our
common stock held by it in other registrations of common equity securities of
Azurix initiated by Azurix on its own behalf or on behalf of its other
stockholders. The rights of Atlantic Water Trust under the registration rights
agreement will be transferable by Atlantic Water Trust. See "Risk
Factors -- Marlin Water Trust May Cause Atlantic Water Trust to Sell Azurix
Stock."
LICENSE AGREEMENT
Enron will license to Azurix the non-exclusive right to use the phrase "an
Enron Company" and its logo in identifying Azurix as part of the Enron
enterprise for use in its businesses permitted under the business opportunities
agreement described above. Either Enron or Azurix may terminate the license at
any time, whereupon Azurix must cease using the phrase and the logo within 90
days, except for existing supplies of materials. Enron may terminate the license
earlier, however, only on account of Azurix's failure to cure a violation of the
agreement following notice of default or if the percentage of Enron's or
Atlantic Water Trust's ownership of Azurix falls below 35%. The license is
royalty free.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 28, 1999, and as adjusted to
reflect the sale of the common stock offered hereby, by (1) the selling
stockholder, (2) all persons known by Azurix to own beneficially more than 5% of
the common stock, (3) each director of Azurix, (4) the Chief Executive Officer
and each of the other Named Executive Officers and (5) all directors and
executive officers as a group. Unless otherwise stated in the notes to the
table, each of the stockholders has sole voting and investment power with
respect to the shares of common stock beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER THE OFFERING
-------------------------- SHARES BEING --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- ------------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Atlantic Water Trust(1)(2)..........
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Enron Corp.(2)(3)................... 100,000,000 100%
1400 Smith Street
Houston, Texas 77002
Marlin Water Trust(2)(4)............
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Rebecca P. Mark..................... -- -- -- -- --
Rodney L. Gray...................... -- -- -- -- --
Amanda K. Martin.................... -- -- -- -- --
Alex Kulpecz........................ -- -- -- -- --
Colin F. Skellett................... -- -- -- -- --
John H. Duncan...................... -- -- -- -- --
W. Nicholas Hood.................... -- -- -- -- --
Kenneth L. Lay(5)................... -- -- -- -- --
Jeffrey K. Skilling(5).............. -- -- -- -- --
Joseph W. Sutton.................... -- -- -- -- --
John Wakeham........................ -- -- -- -- --
All directors and executive officers
as a group (13 persons)........... -- -- -- -- --
</TABLE>
- ---------------
(1) Atlantic Water Trust is a Delaware business trust. Atlantic Water Trust
holds 100% of the common stock. Atlantic Water Trust is also the selling
stockholder.
(2) Each of Enron Corp. and Marlin Water Trust has a 50% voting interest in
Atlantic Water Trust, and each may be deemed to beneficially own all of the
Azurix shares owned by Atlantic Water Trust because of certain shared voting
and dispositive power. See " -- Atlantic Water Trust."
(3) Enron Corp. is an Oregon corporation.
(4) Marlin Water Trust is a Delaware business trust.
(5) Does not include 100,000,000 shares owned by Atlantic Water Trust with
respect to which Enron has shared voting and dispositive power. Messrs. Lay
and Skilling in their capacities as Chairman of the Board and Chief
Executive Officer and as President and Chief Operating Officer,
respectively, of Enron may be deemed to beneficially own such shares as a
result of their positions with Enron.
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ATLANTIC WATER TRUST
In December 1998, Enron contributed Azurix to Atlantic Water Trust, a
Delaware business trust. Marlin Water Trust acquired a 50% voting interest in
Atlantic Water Trust, with Enron retaining a 50% voting interest. Marlin Water
Trust financed the acquisition of its interest in Atlantic Water Trust by
issuing trust certificates and senior notes, that mature December 15, 2001, for
a total of $1.149 billion. Marlin Water Trust used the proceeds from the
issuance of the senior notes and the trust certificates to purchase a beneficial
interest in Atlantic Water Trust. Currently, five institutional investors and
their affiliates hold the trust certificates of Marlin Water Trust.
Each of Marlin Water Trust and Enron has the right and power at all times
to appoint up to 50% of the members of the board of directors of Atlantic Water
Trust. Marlin Water Trust's certificateholders are entitled to exercise Marlin
Water Trust's appointment rights. If the Marlin Water Trust certificateholders
defer exercising their appointment rights, Enron will have the right to appoint
such members, but Marlin Water Trust will have the right, at any time, without
cause, to remove any such members. To date, Enron has appointed all of the
directors of Atlantic Water Trust.
As long as Atlantic Water Trust owns a majority of our outstanding common
stock, Marlin Water Trust has the right to direct Atlantic Water Trust to elect
or replace a percentage of Azurix's directors equal to 50% minus the percentage
of outstanding common stock held by persons other than Atlantic Water Trust.
Furthermore, Marlin Water Trust, with the consent of the holders of a majority
of our outstanding common stock held by persons other than Atlantic Water Trust,
Enron and its affiliates, has the right to direct Atlantic Water Trust to elect
or replace half of Azurix's directors. Enron has the right to direct Atlantic
Water Trust to elect or replace the other half of Azurix's directors. In all
other circumstances, the board of directors of Atlantic Water Trust will direct
the voting of Atlantic Water Trust's Azurix shares. Under the terms of the
Atlantic Water Trust agreement, Enron can be prevented from appointing more than
half of Azurix's directors at any time.
Subject to certain limitations, Marlin Water Trust, or the trustee under
its senior notes indenture, may cause the sale of Atlantic Water Trust's
interest in Azurix if certain events occur unless the senior notes are repaid
from other sources. Such events include defaults under certain of Azurix's,
Enron's or Marlin Water Trust's debt obligations or a downgrading of Enron
senior debt to below "Baa3" by Moody's Investors Service, Inc., "BBB-" by
Standard & Poor's Ratings Services or "BBB-" by Duff & Phelps Credit Rating Co.
and a decline in Enron's common stock price below $37.84. The last sale price of
Enron common stock, as reported by the New York Stock Exchange, on March 12,
1999 was $68.88.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Azurix consists of 500,000,000 shares of
common stock, par value $0.01 per share, and 50,000,000 shares of preferred
stock, par value $0.01 per share. Prior to the offering, 100,000,000 shares of
common stock were outstanding. No shares of preferred stock have been issued.
The following is a summary of certain provisions of our certificate of
incorporation and bylaws. Our certificate of incorporation and bylaws have been
filed as exhibits to this registration statement, and you should read the
certificate of incorporation and bylaws for any terms that may be important to
you.
COMMON STOCK
Following the offering, shares of common stock will be issued and
outstanding. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Because holders of common stock do
not have cumulative voting rights, the holders of a majority of the shares of
common stock can elect all of the members of the board of directors standing for
election. Subject to preferences of any preferred stock that may be issued in
the future, the holders of common stock are entitled to receive such dividends
as may be declared by the board of directors. The common stock is entitled to
receive pro rata all of the assets of Azurix available for distribution to its
stockholders. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
Subject to the provisions of the certificate of incorporation and
limitations prescribed by law, the board of directors has the authority to issue
up to 50,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rates, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, which may be superior to those of
the common stock, without further vote or action by the stockholders. There will
be no shares of preferred stock outstanding upon the closing of the offering and
Azurix has no present plans to issue any preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an attempt to
obtain control of Azurix by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of Azurix's management. The
issuance of shares of the preferred stock pursuant to the board of directors'
authority described above may adversely affect the rights of the holders of
common stock. For example, preferred stock issued by Azurix may rank prior to
the common stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of common
stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the common stock or may otherwise adversely affect the market price of
the common stock.
CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
In addition to our board of directors' right to issue preferred stock, our
certificate of incorporation and bylaws contain certain provisions that could
make a hostile takeover difficult.
CLASSIFIED BOARD OF DIRECTORS AND LIMITATIONS ON REMOVAL OF DIRECTORS
Our board of directors is divided into three classes. The directors of each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of the stockholders. Until such time, called the "Trigger Date," as
neither Atlantic Water Trust nor Enron together with its subsidiaries owns a
majority of the outstanding voting stock of Azurix, the holders of a majority of
our outstanding voting stock may remove a director with or without cause.
Thereafter, stockholders may remove a director only for cause and to do so, at
least 66 2/3% of the
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voting power of the outstanding shares of common stock must vote for removal. In
general, after the Trigger Date the board of directors, not the stockholders,
will have the right to appoint persons to fill vacancies on the board of
directors.
NO WRITTEN CONSENT OF STOCKHOLDERS
Our certificate of incorporation provides that prior to the Trigger Date
any action required or permitted to be taken by our stockholders may be taken at
a duly called meeting of stockholders or by written consent of stockholders
owning the minimum number of shares required to approve such action. Special
meetings of the stockholders may be called only by the board of directors.
BUSINESS COMBINATIONS UNDER DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 generally provides that certain persons who, together with
affiliates and associates owns, or within three years did own, 15% or more of
the outstanding voting stock of a corporation may not engage in certain business
combinations with the corporation for a period of three years after the date on
which the person became an interested stockholder. Atlantic Water Trust and
Enron are not subject to the restrictions of Section 203. Section 203 defines
the term "business combination" to encompass a wide variety of transactions with
or caused by an interested stockholder including mergers, asset sales and other
transactions in which the interested stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders.
ADVANCE NOTICE PROCEDURE FOR STOCKHOLDER PROPOSALS
Our bylaws establish an advance notice procedure for the nomination of
candidates for election as directors as well as for stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director must be delivered to or mailed and received at our principal
executive offices (1) with respect to an election to be held at the annual
meeting of stockholders, 120 days prior to the anniversary date of the proxy
statement for the immediately preceding annual meeting of stockholders, and (2)
with respect to an election to be held at a special meeting of stockholders for
the election of directors, not later than the close of business of the 10th day
following the day on which such notice of the date of the meeting was mailed or
public disclosure of the date of the meeting was made, whichever first occurs,
and must contain certain specified information concerning the person to be
nominated. Notice of stockholders' intent to raise business at an annual meeting
must be delivered to or mailed and received at our principal executive offices
not less than 120 days prior to the anniversary date of the proxy statement for
the preceding annual meeting of stockholders. These procedures may operate to
limit the ability of stockholders to bring business before a stockholders
meeting, including with respect to the nomination of directors of considering
any transaction that could result in a change of control. These advance notice
procedures are not applicable prior to the Trigger Date.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that no director shall be
personally liable to Azurix or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to Azurix or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of laws, (3) under Section 174 of the Delaware General Corporation Law
or (4) for any transaction from which the director derived an improper personal
benefit. The effect of these provisions is to eliminate the rights of Azurix and
its stockholders, through stockholders' derivative suits on behalf of Azurix, to
recover monetary damages against a director for breach of fiduciary duty as a
director, including breaches resulting from grossly negligent behavior, except
in the situations described above.
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TRANSFER AGENT AND REGISTRATION
The Transfer Agent and Registrar for the common stock is
.
LISTING
We are applying to list the common stock on the New York Stock Exchange
under the symbol "AZX."
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DESCRIPTION OF INDEBTEDNESS
INDEBTEDNESS OF AZURIX EUROPE LTD.
SENIOR CREDIT FACILITY
Azurix Europe, an indirect, wholly owned subsidiary of Azurix and the
holding company for Wessex, has a senior credit facility with a group of banks.
The senior credit facility was initially entered into on August 18, 1998 with
Greenwich NatWest and Barclays Capital, as arrangers, and National Westminster
Bank PLC, as agent. The senior credit facility consists of a term loan facility
of L194 ($322.6) million and a revolving credit facility of L346 ($575.3)
million. Amounts outstanding under the senior credit facility bear interest at a
rate based on the London interbank offered rate. As of February 28, 1999, L127
($211.2) million in principal was outstanding under the term loan facility and
L5 ($8.3) million in principal was outstanding under the revolving credit
facility.
Loans made under the term loan facility were used to finance the
acquisition of Wessex. Loans made under the revolving credit facility may be
used to refinance Wessex's credit facilities or for general corporate purposes
up to L60 ($99.8) million outstanding at any time.
Azurix Europe is required to repay L120 ($199.5) million of term loans by
July 24, 2000 and to repay any remaining outstanding amount under the term loan
by July 24, 2003. Generally, amounts repaid under the revolving credit facility
may be re-borrowed. The senior credit facility is a secured facility, and Azurix
Europe has pledged all its existing assets, including all the ordinary shares of
Wessex.
CERTAIN COVENANTS. Subject to certain exceptions, Azurix Europe and its
subsidiaries have agreed not to create or permit to exist any other security
interest on any of their assets. Azurix Europe will not sell, transfer or
otherwise dispose of any of the ordinary shares of Wessex. No borrower under the
senior credit facility will sell, transfer, grant or lease or otherwise dispose
of all or any part of its assets. Certain arm's length disposals are allowed.
Azurix Europe will not make any substantial change to the general nature or
scope of its business as a water and wastewater company in the United Kingdom.
Azurix Europe will only conduct business as a holding company. Subject to
certain exceptions, no borrower under the senior credit facility will enter into
any amalgamation, demerger, merger or reconstruction. Subject to certain
exceptions, no borrower will acquire any assets or business or make any
investment if the assets, business or investment is substantial in relation to
Azurix Europe. Azurix Europe may not declare, recommend, make or pay any
dividend, distribution or payment to any of its shareholders or make any payment
in respect of any subordinated debt until after August 18, 1999 but only as long
as no default under the senior credit facility is then outstanding or will
result from the relevant dividend, distribution or payment and the ratio of
consolidated EBITDA, as defined in the senior credit facility, to consolidated
total interest payable is not less than 2.75:1 as of the latest date on which
that ratio has been tested. The senior credit facility also places certain
restrictions on the aggregate borrowings plus liabilities for borrowings of
Wessex that Azurix Europe and its subsidiaries may have outstanding at any time.
In addition, the senior credit facility requires that while any acquisition loan
notes, as described below, are outstanding, there must be undrawn capacity under
the term loan facility at least equal to 95% of the aggregate principal amount
of acquisition loan notes outstanding.
FINANCIAL COVENANTS. Azurix Europe is required to maintain the following
financial ratios on a quarterly and annual basis (1) the ratio of consolidated
EBITDA to consolidated net interest payable will be no less than 2.5:1 and (2)
the ratio of debt to total capitalization will not, as of each date on which it
is tested, exceed 50%.
DEFAULT. Each of the following events, among others, is an event of default
under the senior credit facility:
- A borrower not paying any amount which is due and payable by it within
three business days after notice of non-payment
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- Azurix Europe failing to comply with certain of its covenants, or a
borrower not complying with any provision of a finance document or a
representation, warranty or statement made or repeated in any finance
document being materially incorrect and not remedied within 28 days
- A cross-default related to any financial indebtedness of Azurix Europe or
its subsidiaries occurring, subject to certain exceptions, including when
the aggregate amount of financial indebtedness is less than L15 ($24.9)
million
- Certain events of insolvency or bankruptcy of a borrower or a material
subsidiary occurring
- Subject to certain exceptions, any attachment, or execution affecting any
assets of a borrower or a material subsidiary having an aggregate value
of L15 ($24.9) million that is not discharged within 14 days
- The legal and beneficial ownership of the ordinary share capital of
Azurix Europe held by Enron being less than 20%, and any bank, insurance
company, investment or pension fund or other financial investor owning,
directly or indirectly, or any other person owning, whether directly or
indirectly, more of the legal and beneficial ownership of Azurix Europe
than Enron
- At any time less than 50% of the directors of Azurix Europe are also
directors or senior officers of Enron or any significant operating
subsidiary of Enron
- At any time, any person or persons other than Enron acting in concert
acquiring control of Azurix Europe
- Wessex's license as a water and wastewater company being revoked or
surrendered or ceasing to be held by Wessex Water Ltd or a wholly owned
subsidiary of Wessex Water Ltd or Azurix Europe, subject to certain
exceptions
- Wessex's license or the rights or obligations under the license being
materially modified in any manner that, in the reasonable opinion of a
majority in interest of the lenders, has a material adverse effect on
Azurix Europe
- Any event or series of events occurring that, in the reasonable opinion
of a majority in interest of the lenders, has a material adverse effect
on the ability of the borrowers or Azurix Europe to perform their or its
payment obligations under the finance documents
ACQUISITION LOAN NOTES
In connection with the acquisition of Wessex, Azurix Europe issued U.K.
pound denominated loan notes in a principal amount of L70.5 ($117.2) million to
Wessex shareholders in lieu of cash consideration for the ordinary shares of
Wessex. The acquisition loan notes are redeemable, at the option of the holder,
semi-annually beginning September 30, 1999, with final redemption occurring
September 30, 2005. Interest on the acquisition loan notes accrues at the London
interbank offered rate and is payable semi-annually. Holders of acquisition loan
notes can require a redemption of their notes at par plus accrued interest in
certain insolvency situations and if any principal or interest payment is not
paid within 30 days of its due date.
SENIOR LOAN AGREEMENT -- AFFILIATE NOTE
Bristol Water Trust entered into a L73 ($121.4) million senior loan
agreement with Azurix Europe in December 1998. Bristol Water Trust is a wholly
owned subsidiary of Atlantic Water Trust. The interest rate on this loan is
6.25% per annum payable semi-annually. Repayment of this loan is due three
business days prior to December 15, 2001.
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CERTAIN COVENANTS. In addition to agreeing to provide Bristol Water Trust
with certain financial information regarding its business and with notice of
defaults or changes in its accounting principles, Azurix Europe has agreed not
to:
- Sell, transfer or otherwise dispose or cease to control the ordinary
shares of Wessex Water Ltd.
- Make any substantial change to the general nature or scope of its
business as a water and wastewater company in the U.K.
- Declare, recommend, make or pay any dividend, distribution or payment to
any of its shareholders or make any payment in respect of any
subordinated debt unless no default is then outstanding or will result
from the relevant dividend, distribution or payment
- Amend or replace its articles of association or by-laws in any way which
would materially adversely affect the interests of Bristol Water Trust
FINANCIAL COVENANTS. Azurix Europe has agreed to maintain on a quarterly
and annual basis, the following financial ratios:
- Consolidated EBITDA to consolidated net interest payable of at least
1.75:1
- A ratio of debt to total capitalization equal to or less than 60%
DEFAULT. Each of the following events, among others, is an event of default
under this loan agreement:
- Azurix Europe failing to pay any principal amount which is due and
payable by it within three business days after notice of non-payment
- Azurix Europe failing to comply with its covenants or a representation,
warranty or statement made by it being materially incorrect and not
remedied within 28 days
- The debt under the senior secured credit facility or any replacement
facility becoming prematurely due and payable as a result of an event of
default under the relevant credit agreement
- Certain events of insolvency
- Wessex's license being revoked or surrendered or ceasing to be held by
Wessex Water Ltd, a wholly owned subsidiary of Wessex Water Ltd or Azurix
Europe, subject to certain exceptions
- Wessex's license or the rights or obligations under the license being
materially modified in any manner that, in the reasonable opinion of
Bristol Water Trust has a material adverse effect on Azurix Europe
- Any person other than Wessex Water Ltd or one of its subsidiaries being
authorized to be a water or wastewater company in the area covered by
Wessex's license such that there would be a material adverse effect on
Azurix Europe
If a default occurs, Bristol Water Trust will have the right, by notice to
Azurix Europe at least three business days following the occurrence of the event
of default, to accelerate the payment of all outstanding principal and interest
under this loan agreement. If during this three business day period Bristol
Water Trust receives a cash offer to purchase the outstanding note in an amount
at least equal to the outstanding principal balance plus all accrued and unpaid
interest, then Bristol Water Trust will not be able to accelerate payment and
must accept the cash offer.
INDEBTEDNESS OF WESSEX
Wessex and Wessex Water Services are borrowers under bank facilities with
six major banks that provide an aggregate of approximately L240 ($399.1) million
of availability for general corporate purposes. As of February 28, 1999, L240
($399.1) million was outstanding under these bank facilities. These bank
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facilities mature in April 1999 and accrue interest at the LIBOR rate plus a
specified margin. In addition, as of February 28, 1999, L37.5 ($62.4) million
was outstanding under uncommitted credit facilities.
Wessex Water Services is a borrower under facilities provided by the
European Investment Bank for purposes of financing its capital investment
program. These facilities currently consist of two separate loans with an
aggregate principal balance outstanding as of February 28, 1999 of L41.3 million
($68.7 million, including the effect of currency swap contracts in place) as
follows (1) a U.S. dollar denominated floating rate loan of $49.9 million
repayable in full in October 2001, and (2) a 25.0 billion Italian lire ($18.8
million) fixed rate loan repayable in ten semi-annual installments through June
2002. Wessex guarantees the obligations of Wessex Water Services under these
facilities.
Wessex Water Services is the lessee under a finance lease agreement
pursuant to which L66 ($109.7) million of capital lease obligations (excluding
interest on such obligations) were outstanding as of February 28, 1999. Fixed
rate interest is included in the periodic rental payments to the lessor.
Payments are made in installments payable semi-annually through September 2002.
The lessor under this finance lease has a lien on the property that has been
acquired in connection with the leases.
Each of Wessex's outstanding financing agreements contain certain
restrictive covenants, including among other things, limitations on borrowings
and the maintenance of financial ratios, such as interest coverage, net worth
and debt to equity and undertakings to perform or refrain from undertaking
certain acts. The financing agreements include standard events of default,
including non-payment, cross-defaults, insolvency, status of Wessex Water
Services as a subsidiary of Wessex and loss of Wessex's license as a water and
wastewater company.
Wessex Water Services intends to launch an offering of L300 ($498.8)
million in 10-year bonds through its wholly owned subsidiary, Wessex Water
Services Finance Plc. Wessex Water Services anticipates issuing the bonds in
April 1999. The bonds will bear interest payable annually on the anniversary of
their issue at a rate to be determined taking into account market conditions at
the time of issue. All principal will be due on the tenth anniversary of the
issue date. Wessex Water Services intends to use the proceeds of the sale of the
bonds for refinancing existing indebtedness and for general corporate purposes.
Bondholders will have the right to require Wessex to buy back their bonds
prior to maturity at a price equal to the principal amount of the bond plus all
accrued but unpaid interest in the following instances:
- Wessex's license as a water and wastewater company is terminated
- Wessex Water Services Finance Plc ceases to be a subsidiary of Wessex
Water Services
- Certain material changes occur to the rights or benefits of Wessex's
license or legislation is enacted which materially changes the duties or
powers of the Secretary of State for the Environment or the Director
General of Water Services and the rating on the bonds is downgraded below
investment grade
In addition, the bonds could become immediately due and payable if an event
of default occurs. These events include a cross-default by Wessex Water Services
or its subsidiaries under other debt instruments and certain events of
insolvency.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock in the market after the offering or the
perception that such sales could occur. These factors could also make it more
difficult to raise funds through future offerings of common stock.
After the offering, shares of common stock will be outstanding.
Of these shares, the shares to be sold in the offering will be freely
tradable without restriction under the Securities Act, except for any shares
acquired by an "affiliate" of Azurix as defined in Rule 144 under the Securities
Act. The remaining shares of common stock outstanding will be
"restricted securities," as that term is defined in Rule 144, and may be sold in
the future without registration under the Securities Act to the extent permitted
by Rule 144 or any applicable exemption under the Securities Act. In connection
with the offering, Azurix and the selling stockholder have agreed, with certain
exceptions, not to directly or indirectly (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 for the sale of, lend or otherwise
dispose of or transfer any shares of common stock or securities convertible into
or exchangeable or exercisable for or repayable with common stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
relating to any shares of common stock or (2) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock whether any such swap or transaction is to be settled
by delivery of common stock or other securities, in cash or otherwise, without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
on behalf of the underwriters for a period of 180 days after the date of this
prospectus. Upon expiration of the lockup period, shares may be sold
at any time subject to compliance with the volume limitations and other
restrictions of Rule 144. Options to purchase approximately 7.8 million shares
of common stock will also be outstanding after the offering. Such options
generally provide for vesting over a three to five year period. In addition,
more options may be granted in the future. See "Management -- Stock Plan."
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
"restricted securities" for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(1) 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after the offering or (2) the
average weekly trading volume of the common stock on the New York Stock Exchange
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale with the SEC. Sales under Rule 144 are also subject to
certain other requirements regarding the manner of sale, notice and availability
of current public information about Azurix. Under Rule 144(k), a person who is
not deemed to have been an affiliate of Azurix at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner except
an affiliate, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
After the offering, we intend to file a registration statement covering the
sale of approximately 7.8 million shares of common stock reserved for issuance
under our stock plan. In addition, Atlantic Water Trust has registration rights
for all of its shares of common stock. See "Certain Transactions."
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of material U.S. federal income and estate tax
consequences expected to result under current law from the purchase, ownership
and taxable disposition of common stock by non-U.S. holders of common stock. A
"non-U.S. holder" is any person or entity other than:
- A citizen or resident of the United States
- A corporation, partnership or other entity created or organized in or
under the laws of the United States or any state thereof
- An estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source
- A trust whose administration is subject to the primary supervision of a
United States court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust
This summary is for general information only and does not address all of
the U.S. federal income and estate tax considerations that may be relevant to
non-U.S. holders in light of their particular circumstances or to non-U.S.
holders that may be subject to special treatment under United States federal
income tax laws. This summary does not discuss any aspect of state, local or
foreign taxation. This summary is based on current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations, judicial opinions,
published positions of the U.S. Internal Revenue Service and other applicable
authorities, all of which are subject to change, possibly with retroactive
effect. In this prospectus, the Internal Revenue Code of 1986, as amended, is
called the "Code." Prospective purchasers of common stock are advised to consult
their tax advisors regarding the U.S. federal, state and local, and non-U.S.
income and other tax consequences of acquiring, holding and disposing of common
stock.
DIVIDENDS
Azurix does not currently anticipate paying any dividends. Any dividends
paid to a non-U.S. holder on shares of common stock will be subject to
withholding of U.S. federal income tax at a rate of 30%, unless a lower rate is
prescribed under an applicable tax treaty. U.S. federal income tax withholding
will not be required, however, if the dividends are effectively connected with
the conduct of a trade or business of the non-U.S. holder within the United
States or, in the case of an applicable tax treaty, are attributable to a U.S.
permanent establishment maintained by the non-U.S. holder. Dividends that are
effectively connected with the conduct of a trade or business within the United
States, or are attributable to a U.S. permanent establishment will be subject to
U.S. federal income tax on a net income basis which is not collected by
withholding provided the non-U.S. holder files the appropriate certification
with Azurix or its agent. Any dividends received by a foreign corporation that
are effectively connected with the conduct of a trade or business within the
United States may also be subject to a "branch profits tax" at a rate of 30% or
such lower rate as may be specified by an applicable tax treaty.
For purposes of the withholding tax rules discussed above and for purposes
of determining the applicability of a tax treaty rate under current U.S.
Treasury Regulations, dividends paid to an address outside the United States
will be presumed to be paid to a resident of the country of address, unless the
payor has knowledge to the contrary. Under recently issued U.S. Treasury
Regulations (referred to as "final regulations") that are effective for payments
made after December 31, 1999, a non-U.S. holder of common stock who wishes to
claim the benefit of a tax treaty rate would be required to satisfy applicable
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certification and other requirements. In addition, under the final regulations,
in the case of common stock held by a foreign partnership:
- The certification requirement generally would be applied to the partners
of the partnership.
- The partnership would be required to provide certain information,
including a U.S. taxpayer identification number.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. federal income tax withholding pursuant to a tax treaty may obtain a refund
of any excess amounts currently withheld by filing an appropriate claim for
refund with the Internal Revenue Service.
SALE OR DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of any gain recognized on the sale or other taxable disposition of
common stock so long as:
- The gain is not effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States nor under an
applicable tax treaty, is attributable to a U.S. permanent establishment
maintained by the non-U.S. holder.
- In the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, either:
-- Such holder is not present in the United States for 183 or more days
during the taxable year of the disposition.
-- Such holder does not have a "tax home" in the United States for U.S.
federal income tax purposes nor does such holder maintain an office
or other fixed place of business in the United States to which such
gain is attributable.
- Such non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain U.S. expatriates.
- The common stock continues to be "regularly traded on an established
securities market" for U.S. federal income tax purposes and the non-U.S.
holder has not held, directly or indirectly, at any time during the
five-year period ending on the date of disposition (or, if shorter, the
non-U.S. holder's holding period) more than five percent of the
outstanding common stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Azurix must report annually to the Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to, and the tax withheld with
respect to, each non-U.S. holder. These reporting requirements apply regardless
of whether withholding was reduced by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a treaty
or information exchange agreement with the tax authorities in the country in
which the non-U.S. holder resides or is established. Under current law, U.S.
backup withholding tax, which is a withholding tax currently imposed at the rate
of 31% on certain payments to persons who fail to furnish the information
required under U.S. information reporting requirements, generally will not apply
to dividends paid on common stock to a non-U.S. holder at an address outside the
United States unless the payor has knowledge that the payee is a U.S. person.
However, under the final regulations, dividends paid on common stock after
December 31, 1999 may be subject to backup withholding unless applicable
certification requirements are satisfied.
Payment of the proceeds from a sale of common stock to or through a U.S.
office of a broker will be subject to information reporting and backup
withholding unless the owner certifies as to its status as a non-U.S. holder
under penalties of perjury or otherwise establishes an exemption. Payment of the
proceeds
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from a sale of common stock to or through a non-U.S. office of a broker
generally will not be subject to information reporting or backup withholding.
However, if such broker is a U.S. person, a "controlled foreign corporation" or
a foreign person that derives 50% or more of its gross income from the conduct
of a trade or business in the United States, such payment will be subject to
information reporting, but currently not backup withholding, unless such broker
has documentary evidence in its records that the owner is a non-U.S. holder and
certain other conditions are met or the owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules will be credited
against the non-U.S. holder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the Internal Revenue Service.
ESTATE TAX
The fair market value of common stock owned, or treated as owned, by an
individual at the time of his death will be includible in his gross estate for
U.S. federal estate tax purposes and thus may be subject to U.S. estate tax,
even though the individual at the time of death is neither a citizen of nor
domiciled in the United States, unless an applicable estate tax treaty provides
otherwise.
84
<PAGE> 90
UNDERWRITING
GENERAL
We intend to offer our common stock in the United States and Canada through
a number of U.S. underwriters and elsewhere through international managers.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, , and
are acting as U.S. representatives of each of the U.S. underwriters
named below. Subject to the terms and conditions set forth in a U.S. purchase
agreement among Azurix, the selling stockholder, Enron and the U.S.
underwriters, and concurrently with the sale of shares of common stock
to certain international managers, Azurix and the selling stockholder have
agreed to sell to the U.S. underwriters, and each of the U.S. underwriters
severally and not jointly has agreed to purchase from Azurix and the selling
stockholder, the number of shares of common stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- ---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
--------
Total..........................................
========
</TABLE>
Azurix, the selling stockholder and Enron have also entered into an
international purchase agreement with certain international managers outside the
United States and Canada for whom Merrill Lynch International, ,
and are acting as lead managers. Subject to the terms and
conditions set forth in the international purchase agreement, and concurrently
with the sale of shares of common stock to the U.S. underwriters
pursuant to the U.S. purchase agreement, Azurix and the selling stockholder have
agreed to sell to the international managers, and the international managers
severally have agreed to purchase from Azurix and the selling stockholder, an
aggregate of shares of common stock. The initial public offering price
per share and the total underwriting discount per share of common stock are
identical under the U.S. purchase agreement and the international purchase
agreement.
In the U.S. purchase agreement and the international purchase agreement,
the several U.S. underwriters and the several international managers,
respectively, have agreed, subject to the terms and conditions set forth in
those agreements, to purchase all of the shares of common stock being sold under
the terms of each such agreement if any of the shares of common stock being sold
under the terms of that agreement are purchased. In the event of a default by an
underwriter, the U.S. purchase agreement and the international purchase
agreement provide that, in certain circumstances, the purchase commitments of
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings with respect to the sale of shares of common stock to
be purchased by the U.S. underwriters and the international managers are
conditioned upon one another.
Azurix and Enron have agreed to indemnify the U.S. underwriters and the
international managers against certain liabilities, including certain
liabilities under the Securities Act, or to contribute to payments which the
U.S. underwriters and the international managers may be required to make in
respect of those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offers and to reject orders in whole or in part.
85
<PAGE> 91
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised Azurix and the selling stockholder
that the U.S. underwriters propose initially to offer the shares of common stock
to the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of common stock. The U.S. underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of common stock
to certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by Azurix and the selling stockholder to
the U.S. underwriters and the international managers and the proceeds before
expenses to Azurix and the selling stockholder. This information is presented
assuming either no exercise or full exercise by the U.S. underwriters and the
international managers of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- -------- --------
<S> <C> <C> <C>
Public Offering Price............................... $ $ $
Underwriting Discount............................... $ $ $
Proceeds, before expenses, to Azurix................ $ $ $
Proceeds, before expenses, to the selling
stockholder....................................... $ $ $
</TABLE>
The expenses of these offerings, exclusive of underwriting discounts, are
estimated at $ and are payable by Azurix and the selling stockholder.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of common stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the intersyndicate
agreement, the U.S. underwriters and any dealer to whom they sell shares of our
common stock will not offer to sell or sell shares of common stock to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, and the
international managers and any dealer to whom they sell shares of common stock
will not offer to sell or sell shares of common stock to U.S. persons or to
Canadian persons or to persons they believe intend to resell to U.S. persons or
Canadian persons, except in the case of transactions under the terms of the
intersyndicate agreement.
OVER-ALLOTMENT OPTION
The selling stockholder has granted an option to the U.S. underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of additional shares of our common stock at the public
offering price set forth on the cover page of this prospectus, less the
underwriting discount. The U.S. underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of our common stock offered
hereby. To the extent that the U.S. underwriters exercise this option, each U.S.
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of our common stock proportionate to such U.S.
underwriter's initial amount reflected in the foregoing table.
The selling stockholder also has granted an option to the international
managers, exercisable for 30 days after the date of this prospectus, to purchase
up to an aggregate of additional shares of common stock to cover
over-allotments, if any, on terms similar to those granted to the U.S.
underwriters.
86
<PAGE> 92
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered hereby to be sold
to some of our directors, officers, employees, customers and other persons with
whom we have an existing relationship who have expressed an interest in
purchasing our common stock, including certain employees, officers and directors
of Enron and its affiliated companies, business associates and related persons.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent that those persons purchase the reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
NO SALES OF SIMILAR SECURITIES
Azurix and the selling stockholder have agreed, with certain exceptions,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus, not to directly or
indirectly:
- 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 for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file a registration statement under
the Securities Act relating to any shares of our common stock
- Enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise
NEW YORK STOCK EXCHANGE LISTING
Azurix is applying to list the common stock on the New York Stock Exchange
under the symbol "AZX."
Before these offerings, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among Azurix, the selling stockholder, Enron, the U.S. representatives and the
lead managers. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, are the valuation
multiples of publicly traded companies that the U.S. representatives and the
lead managers believe to be comparable to us, including adjusted market value to
EBITDA multiples, price to book value multiples and price to earnings multiples,
certain of our financial information, the history of, and the prospects for, our
company and the industry in which we compete, an assessment of our management,
our past and present operations, the prospects for and timing of our future
revenues, the present state of our development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to ours. There can be no assurance that an active
trading market will develop for the common stock or that the common stock will
trade in the public market subsequent to these offerings at or above the initial
public offering price.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase our common stock. As an exception to these rules, the U.S.
representatives and the lead managers are permitted to engage in certain
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
87
<PAGE> 93
If the underwriters create a short position in our common stock in
connection with these offerings, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the U.S.
representatives and the lead managers may reduce that short position by
purchasing common stock in the open market. The U.S. representatives and the
lead managers may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The U.S. representatives and the lead managers may also impose a penalty
bid on underwriters and selling group members. This means that if the U.S.
representatives or the lead managers purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the price
of our common stock, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
None of Azurix, the selling stockholder, or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of our common stock.
In addition, none of Azurix, the selling stockholder, or any of the underwriters
makes any representation that the U.S. representatives or the lead managers will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
OTHER RELATIONSHIPS
Certain of the underwriters and their affiliates engage in transactions
with, and perform services for, our company, Enron and Enron's affiliates in the
ordinary course of business and have engaged, and may in the future engage, in
commercial banking and investment banking transactions and services with our
company, Enron and Enron's affiliates, for which they have received customary
compensation.
STAMP TAXES
Purchasers of the shares of common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
LEGAL MATTERS
Certain legal matters in connection with the common stock offered hereby
are being passed upon for Azurix by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters will be passed upon for the U.S. underwriters and the
international managers by Andrews & Kurth LLP, Houston, Texas.
EXPERTS
The consolidated financial statements and schedule for Azurix Corp. and
subsidiaries as of December 31, 1998 and for the period from January 29, 1998
(Date of Inception) to December 31, 1998, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements for Wessex Water Plc (now renamed
Wessex Water Ltd) (predecessor company) as of March 31, 1998 and for the years
ended March 31, 1998 and 1997, included in this prospectus, have been audited by
PricewaterhouseCoopers, independent accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
that firm as experts in giving said report.
88
<PAGE> 94
The consolidated statements of income, changes in stockholders' equity and
cash flows for Wessex Water Plc (now renamed Wessex Water Ltd) (predecessor
company) for the period from April 1, 1998 to October 2, 1998 included in this
prospectus have been audited by Arthur Andersen, independent accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, under the Securities Act and the rules and regulations
thereunder, for the registration of the common stock offered hereby. This
prospectus, which forms a part of the registration statement, does not contain
all the information set forth in the registration statement, certain parts of
which have been omitted as permitted by SEC rules and regulations. For further
information with respect to Azurix and the common stock offered hereby, you
should refer to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete. Where any contract or other document is an
exhibit to the registration statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is hereby made.
The registration statement can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Section by calling the SEC at (800) 732-0330. In addition, the
registration statement is publicly available through the SEC's site on the
internet, located at http://www.sec.gov.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill our obligations with respect to these requirements by filing periodic
reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
89
<PAGE> 95
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AZURIX CORP. -- UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION:
Unaudited Condensed Consolidated Pro Forma Financial
Information............................................ F-2
Unaudited Condensed Consolidated Pro Forma Statement of
Income for the Year Ended December 31, 1998............ F-3
Notes to Unaudited Condensed Consolidated Pro Forma
Statement of Income.................................... F-4
AZURIX CORP. -- CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................. F-5
Consolidated Statement of Income for the period from
January 29, 1998 (Date of Inception) to December 31,
1998................................................... F-6
Consolidated Statement of Comprehensive Income (Loss) for
the period from January 29, 1998 (Date of Inception) to
December 31, 1998...................................... F-7
Consolidated Balance Sheet as of December 31, 1998........ F-8
Consolidated Statement of Cash Flows for the period from
January 29, 1998 (Date of Inception) to December 31,
1998................................................... F-9
Consolidated Statement of Changes in Stockholder's Equity
for the period from January 29, 1998 (Date of
Inception) to December 31, 1998........................ F-10
Notes to Consolidated Financial Statements................ F-11
WESSEX WATER PLC (NOW RENAMED WESSEX WATER LTD) (PREDECESSOR
COMPANY) -- CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Accountants........................ F-25
Consolidated Statements of Income for the Six Months Ended
October 2, 1998 and the Years Ended March 31, 1998 and
1997................................................... F-27
Consolidated Balance Sheet at March 31, 1998.............. F-28
Consolidated Statements of Cash Flows for the Six Months
Ended October 2, 1998 and the Years Ended March 31,
1998 and 1997.......................................... F-29
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended October 2, 1998 and the Years
Ended March 31, 1998 and 1997.......................... F-30
Notes to the Consolidated Financial Statements............ F-31
</TABLE>
F-1
<PAGE> 96
AZURIX CORP.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma statement of
income for the year ended December 31, 1998 gives effect to the October 2, 1998
acquisition of Wessex by Azurix ("Wessex Acquisition") and the related
redemption of the preference shares of Wessex and sale of its interest in Wessex
Waste Management Ltd, a joint venture with Waste Management International Plc,
as though each occurred on January 1, 1998. The unaudited condensed consolidated
pro forma statement of income includes the 1998 results of operations from
Azurix's investment in Obras Sanitarias Mendoza S.A. from the date it was
acquired, and does not include any pro forma or historical effect from Azurix's
potential investment in a water concession for the city of Cancun, Mexico.
The unaudited condensed consolidated pro forma statement of income has been
prepared based upon the Azurix and Wessex consolidated statements of income
included elsewhere in this prospectus and has been prepared based upon available
information and certain assumptions that the management of Azurix believes are
reasonable. The unaudited condensed consolidated pro forma statement of income
is for informational purposes only, and does not purport to represent what
Azurix's actual results of operations would actually have been had the Wessex
Acquisition, and the related redemption of the preference shares of Wessex and
sale of its interest in Wessex Waste Management Ltd, a joint venture with Waste
Management International Plc, occurred on January 1, 1998. In addition, the
unaudited condensed consolidated pro forma statement of income is not
necessarily indicative of future results of operations of Azurix and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of Azurix and Wessex and the related notes thereto included elsewhere in this
prospectus.
F-2
<PAGE> 97
AZURIX CORP.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Operating revenues.......................................... $119.7 $344.5(a) $464.2
Operating expenses:
Operations and maintenance................................ 31.6 89.3(a) 120.9
General and administrative................................ 20.3 24.1(b) 44.4
Depreciation and amortization............................. 22.2 66.1(c) 88.3
------ ------ ------
Total operating expenses.......................... 74.1 179.5 253.6
------ ------ ------
Operating income............................................ 45.6 165.0 210.6
------ ------ ------
Other income (expense):
Equity in loss of unconsolidated affiliates............... (0.8) -- (0.8)
Interest income........................................... 1.3 0.2(a) 1.5
Interest expense, net..................................... (16.4) (51.2)(d) (67.6)
Other expense............................................. (1.2) 1.2(e) --
------ ------ ------
Income before income taxes.................................. 28.5 115.2 143.7
------ ------ ------
Income tax expense.......................................... 18.3 38.2(f) 56.5
------ ------ ------
Net income.................................................. $ 10.2 $ 77.0 $ 87.2
====== ====== ======
Earnings per share of common stock -- basic and diluted..... $ 0.10 $ 0.87
====== ======
Weighted average shares outstanding -- basic and diluted.... 100.0 100.0
====== ======
</TABLE>
The accompanying notes are an integral part of this unaudited condensed
consolidated pro forma financial statement.
F-3
<PAGE> 98
AZURIX CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
STATEMENT OF INCOME
The following pro forma adjustments give effect to the Wessex Acquisition,
and the related redemption of the preference shares of Wessex and sale of its
interest in Wessex Waste Management Ltd, a joint venture with Waste Management
International Plc, as though each occurred on January 1, 1998. The unaudited
condensed consolidated pro forma statement of income includes the 1998 results
of operations from Azurix's investment in Obras Sanitarias Mendoza S.A. from the
date it was acquired, and does not include any pro forma or historical effect
from Azurix's potential investment in a water concession for the city of Cancun,
Mexico.
The cost of the Wessex Acquisition, including transaction costs, was $2.4
billion. The pro forma adjustments are based on a preliminary purchase price
allocation because Azurix is in the process of finalizing its assessment of the
related fair values. This preliminary purchase price allocation includes
tangible assets of $2.7 billion, goodwill of $0.9 billion, liabilities assumed
of $1.1 billion and redeemable preferred stock of $0.1 billion. Azurix does not
believe the final evaluation of these assessments will materially affect the
allocation of the purchase price.
The historical results of operations for Azurix are for the period from
January 29, 1998 (Date of Inception) to December 31, 1998. However,
substantially all of Azurix's results of operations occurred during the fourth
quarter of 1998, subsequent to the Wessex Acquisition.
(a) To record the historical results of Wessex for the period during 1998
prior to the Wessex Acquisition.
(b) To record the historical general and administrative expense of Wessex,
excluding $20.7 million of costs incurred by Wessex prior to the Wessex
Acquisition, but directly related to the Wessex Acquisition.
(c) To record depreciation of tangible assets and amortization of goodwill
acquired in the Wessex Acquisition for the period during 1998 prior to the
Wessex Acquisition. The amount of depreciation and amortization recorded was
based on a preliminary purchase price allocation. Goodwill is being amortized
over 40 years.
(d) To record the following:
(1) Historical interest expense of Wessex for the period during 1998
prior to the Wessex Acquisition of $9.4 million;
(2) Interest expense of $41.8 million for the period during 1998 prior
to the Wessex Acquisition on funds borrowed to fund the Wessex Acquisition
and to redeem the Wessex preference shares, less funds received from the
sale of its interest in Wessex Waste Management Ltd, a joint venture with
Waste Management International Plc, that were used to reduce such
borrowings.
(e) To reflect the reduction in dividends related to the redemption of the
Wessex preference shares.
(f) To record the tax impact of the pro forma adjustments described above
at the U.K. statutory rate of 31%, excluding non-deductible goodwill
amortization.
F-4
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Azurix Corp.:
We have audited the accompanying consolidated balance sheet of Azurix Corp.
(a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statements of income, comprehensive income (loss), cash
flows and changes in stockholder's equity for the period from January 29, 1998
(Date of Inception) to December 31, 1998. These financial statements are the
responsibility of Azurix Corp.'s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Azurix Corp. and
subsidiaries as of December 31, 1998, and the results of their operations, cash
flows and changes in stockholder's equity for the period from January 29, 1998
(Date of Inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
February 22, 1999
F-5
<PAGE> 100
AZURIX CORP.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Operating revenues.......................................... $119.7
Operating expenses:
Operations and maintenance................................ 31.6
General and administrative................................ 20.3
Depreciation and amortization............................. 22.2
------
Total operating expenses.......................... 74.1
------
Operating income............................................ 45.6
------
Other income (expense):
Equity in loss of unconsolidated affiliates............... (0.8)
Interest income........................................... 1.3
Interest expense, net..................................... (16.4)
Other expense............................................. (1.2)
------
Income before income taxes.................................. 28.5
------
Income tax expense.......................................... 18.3
------
Net income.................................................. $ 10.2
======
Earnings per share of common stock -- basic and diluted..... $ 0.10
======
Weighted average shares outstanding -- basic and diluted.... 100.0
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 101
AZURIX CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Net income.................................................. $ 10.2
Other comprehensive income:
Foreign currency translation adjustment................... (36.7)
------
Comprehensive income (loss)................................. $(26.5)
======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 102
AZURIX CORP.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 5.3
Trade receivables (net of allowance for doubtful accounts
of $6.3)............................................... 63.7
Unbilled receivables...................................... 24.3
Other..................................................... 38.5
--------
Total current assets.............................. 131.8
--------
Property, plant and equipment, at cost...................... 2,271.1
Less accumulated depreciation............................... (16.7)
--------
Property, plant and equipment, net........................ 2,254.4
--------
Investments in unconsolidated affiliates.................... 74.3
Goodwill, net............................................... 877.6
Other assets................................................ 20.2
--------
Total Assets...................................... $3,358.3
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable -- affiliates............................ $ 20.0
Accounts payable and accruals............................. 101.8
Deferred income........................................... 71.0
Accrued taxes............................................. 31.8
Accrued interest.......................................... 9.8
Current maturities of long-term debt...................... 27.0
--------
Total current liabilities......................... 261.4
--------
Note payable -- affiliate................................... 121.4
Long-term debt.............................................. 912.1
Deferred taxes.............................................. 404.4
Other long-term liabilities................................. 13.5
--------
Total liabilities................................. 1,712.8
--------
Commitments and contingencies (Note 15)
Stockholder's equity:
Common stock, $0.01 par value, 500,000,000 shares
authorized, 100,000,000 shares issued and
outstanding............................................ 1.0
Additional paid-in capital................................ 1,671.0
Retained earnings......................................... 10.2
Cumulative foreign currency translation adjustment........ (36.7)
--------
Total stockholder's equity........................ 1,645.5
--------
Total Liabilities and Stockholder's Equity........ $3,358.3
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 103
AZURIX CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Operating Activities:
Net income................................................ $ 10.2
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 22.2
Amortization of deferred financing cost................ 0.6
Deferred income taxes.................................. 13.4
Equity in loss of unconsolidated affiliates............ 0.8
Changes in operating assets and liabilities:
Increase in trade receivables and other current
assets.............................................. (17.1)
Decrease in accounts payable and accruals............ (25.7)
Increase in other assets............................. (2.5)
Increase in other long-term liabilities.............. 1.3
Other................................................ 1.2
---------
Net cash provided by operating activities................... 4.4
---------
Investing Activities:
Capital expenditures...................................... (63.2)
Business acquisition, net of cash acquired................ (2,270.8)
Proceeds from the sale of equity investment............... 337.9
Other..................................................... 13.5
---------
Net cash used in investing activities....................... (1,982.6)
---------
Financing Activities:
Proceeds from short-term borrowings, net of repayments.... 160.8
Proceeds from long-term borrowings........................ 550.8
Repayments of long-term borrowings........................ (226.2)
Issuance of common stock and capital contributed.......... 1,600.2
Redemption of subsidiary preference shares................ (106.4)
Dividends paid on subsidiary preference shares............ (1.7)
---------
Net cash provided by financing activities................... 1,977.5
---------
Effect of exchange rate changes on cash..................... 6.0
---------
Change in cash and cash equivalents......................... 5.3
---------
Cash and cash equivalents, January 29, 1998 (Date of
Inception)................................................ --
---------
Cash and cash equivalents, December 31, 1998................ $ 5.3
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 104
AZURIX CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
ADDITIONAL FOREIGN CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ---------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 29, 1998 (Date of
Inception)........................... $ -- $ -- $ -- $ -- $ --
Issuance of 100,000,000 shares of
common stock...................... 1.0 -- -- -- 1.0
Capital contributions................ -- 1,599.2 -- -- 1,599.2
Subsidiary stock contributed......... -- 71.8 -- -- 71.8
Foreign currency translation
adjustment........................ -- -- -- (36.7) (36.7)
Net income........................... -- -- 10.2 -- 10.2
---- -------- ----- ------ --------
Balance at December 31, 1998........... $1.0 $1,671.0 $10.2 $(36.7) $1,645.5
==== ======== ===== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 105
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Azurix Corp. was formed by Enron Corp. ("Enron") on January 29, 1998 ("Date
of Inception"). Azurix Corp. and its consolidated subsidiaries (collectively
"Azurix") are engaged in the business of acquiring, owning, operating and
managing water and wastewater assets, providing water and wastewater related
services and managing and developing resources in the global water industry.
Azurix is a wholly owned subsidiary of Atlantic Water Trust ("Atlantic Water")
in which Enron and Marlin Water Trust each hold a 50% voting interest. During
1998, Azurix indirectly acquired all of the outstanding ordinary share capital
of Wessex Water Plc ("Wessex") (see Note 2) and Enron contributed to Azurix the
outstanding common stock of a subsidiary that in June 1998 acquired a 32.1%
ownership interest in Obras Sanitarias Mendoza S.A. ("OSM"). Wessex and OSM
provide water and wastewater treatment services in southwestern England and the
Province of Mendoza, Argentina, respectively.
Azurix entered into an agreement on December 19, 1998 to purchase 49.9% of
an entity whose principal asset is the water concession for the city of Cancun,
Mexico ("Cancun"). This agreement was not binding until certain material
conditions were met, and these conditions were met subsequent to December 31,
1998. The purchase price is $13.5 million and Azurix has agreed to provide up to
$25.0 million in debt financing. The acquisition is subject to certain
governmental approvals and is scheduled to close in March 1999.
Azurix Corp. was incorporated on January 29, 1998, and as a result, the
Consolidated Statement of Income, Consolidated Statement of Comprehensive Income
(Loss), Consolidated Statement of Cash Flows and Consolidated Statement of
Changes in Stockholder's Equity are from the Date of Inception to December 31,
1998. However, substantially all of Azurix's results of operations, cash flows
and equity transactions occurred during the fourth quarter of 1998, subsequent
to the Wessex acquisition.
CONSOLIDATION POLICY AND USE OF ESTIMATES
The consolidated financial statements include the accounts of all
majority-owned subsidiaries and are prepared in accordance with generally
accepted accounting principles in the United States ("U.S."). All significant
intercompany balances and transactions have been eliminated in consolidation.
Azurix uses the equity method of accounting for all investments where it owns
less than a majority of the voting stock but is able to exercise significant
influence over the operating and financial policies of the investee.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Operating revenue represents income earned in the ordinary course of
business, excluding value added tax. In addition, Azurix accrues revenue for the
estimated amount of water sold but not billed as of the balance sheet date.
DERIVATIVE FINANCIAL INSTRUMENTS
Azurix utilizes derivative financial instrument contracts for non-trading
purposes to manage exposure to fluctuations in interest rates and foreign
currency exchange rates. Hedge accounting is utilized in non-trading activities
where there is a high correlation of price movements in the derivative and the
contract is
F-11
<PAGE> 106
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designated as a hedge. In instances where the anticipated correlation of price
movements no longer exists, hedge accounting is terminated and future changes in
the value of the derivative financial instruments are recognized as gains or
losses to net income.
Interest rate swaps involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of the
contract without an exchange of the notional amount upon which payments are
based. The difference to be received or paid is recognized in income over the
life of the contracts as adjustments to interest expense.
Currency swap contracts are denominated in one foreign currency and are to
be repaid in another currency. These contracts are designated as hedges of firm
commitments to pay interest and principal on debt, which would otherwise expose
Azurix to foreign currency risk.
The fair values of the swap contracts are not recognized in the financial
statements. The income and cash flow impact of financial instruments is
reflected as an adjustment of the hedged item. Gains and losses on terminations
of interest rate and currency swap contracts are deferred as an adjustment to
the carrying amount of the outstanding obligation and amortized as an adjustment
to interest expense related to the obligation over the remaining term of the
original contract life of the terminated swap contract. In the event of early
extinguishment of the obligation, any realized or unrealized gain or loss from
the swap would be recognized in net income at the time of extinguishment.
INCOME TAXES
Azurix accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. For U.S. tax purposes, Azurix is
presently a member of Enron's consolidated group and is included in Enron's
consolidated federal income tax return. Members of the consolidated group are
charged with the amount of income tax expense (benefit) determined as if they
filed separate federal income tax returns. There is no formal tax sharing
arrangement between Enron and Azurix.
EARNINGS PER COMMON SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of earnings
per common share and earnings per common share assuming dilution on the face of
the income statement. Basic earnings per share is computed by dividing the net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per common share is
computed by adjusting basic earnings per share for the net income and share
effect of the potential conversion to common shares of all dilutive securities.
For the year ending December 31, 1998, Azurix did not have any securities
outstanding that could have been potentially converted into common shares,
therefore, basic and diluted earnings per share are the same.
CASH EQUIVALENTS
Azurix considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Cost of acquired property,
plant and equipment includes an allocation of the purchase price based on the
asset's fair market value. Cost of property, plant
F-12
<PAGE> 107
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and equipment placed in service includes direct charges for material, labor and
services and indirect charges related to construction, such as engineering,
supervision, payroll taxes and employee benefits. The October 1998 acquisition
of Wessex represents substantially all of the property, plant and equipment as
of December 31, 1998 (see Note 2). Additions, replacements, modifications and
enhancements to units of property are capitalized. Major improvements to
leasehold properties are amortized over the shorter of the asset life or the
life of the respective lease. Repairs, maintenance and minor replacements are
charged to operations and maintenance expense as incurred. Interest capitalized
is based on the average value of construction work in progress at Azurix's
average borrowing rate during the period. The amount of interest capitalized
during 1998 was approximately $2.3 million.
Azurix's infrastructure assets comprise a network of systems of mains and
sewers, impounding and pumped raw water storage reservoirs, dams, sludge
pipelines and infrastructure investigations and studies.
The cost of property, plant and equipment is charged to depreciation using
the straight-line method over the estimated useful lives of the assets.
Depreciation is computed based on estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings and operational structures........................ 15 to 80
Infrastructure.............................................. 115
Plant machinery and vehicles................................ 3 to 30
Other assets................................................ 4 to 15
</TABLE>
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets held and used by Azurix are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability, a test is
performed comparing the estimated future undiscounted cash flows associated with
the asset to the asset's carrying amount, including allocated goodwill, to
determine if a write-down to market value or discounted cash flow value is
required.
GOODWILL
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net assets of businesses acquired (see Note 2). Goodwill
is amortized on a straight-line basis over the estimated useful life, not to
exceed 40 years. Accumulated amortization of goodwill at December 31, 1998 was
$5.5 million.
OTHER ASSETS
Other assets consist primarily of deferred charges, such as financing costs
and external costs of acquisition activities. Deferred financing charges are
amortized to interest expense over the lives of the related debt issuances and
external acquisition costs are capitalized as a cost of successful acquisitions
or expensed during the period in which it is determined that the project is
unsuccessful or the pursuit is terminated.
DEFERRED INCOME
Azurix bills certain customers in advance of providing water and wastewater
services and classifies these amounts as "Deferred income" on the Consolidated
Balance Sheet until earned.
F-13
<PAGE> 108
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS
The pension plans maintained by Wessex (see Note 12) are of the defined
benefit type, and are valued by an independent actuary. Current service costs
for the plans are accrued in the period to which they relate. Prior service
costs and actuarial gains and losses, if any, relating to amendments to the
plans, are recognized on a basis designed to spread the costs over the remaining
average service lives of employees.
FOREIGN CURRENCY TRANSLATION
The functional currency for Azurix's foreign operations is the applicable
local currency. The translation from the applicable foreign currencies to U.S.
dollars is performed for balance sheet accounts using the current exchange rates
in effect at the balance sheet date and for revenue and expense accounts, using
the weighted average exchange rate during the period or, where known or
determinable, at the rate on the date of the transaction for significant items.
The resulting translation adjustments are recorded in comprehensive income as a
component of stockholder's equity and are included in income only upon the sale
or liquidation of the underlying investments.
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed
as incurred. Expenditures providing a future benefit are capitalized as
appropriate. Remediation costs that relate to an existing condition caused by
past operations are accrued when it is probable that these costs will be
incurred and can be reasonably estimated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Azurix is currently evaluating and has not yet
determined the effect that the adoption of SFAS No. 133 will have on its
financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs for start-up activities and organization
costs be expensed as incurred and not capitalized as had previously been
allowed. SOP 98-5 is applicable to all financial statements for fiscal years
beginning after December 15, 1998 and initial adoption is required to be
reflected as a cumulative effect of accounting change. Azurix adopted the
treatment prescribed by SOP 98-5 in 1998, the year of Azurix's inception, and
therefore there is no cumulative effect.
SEGMENT, GEOGRAPHIC AND QUARTERLY REPORTING
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for fiscal years beginning after
December 31, 1997, and establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports. Operating
segments are defined as components of an enterprise about which separate
financial information is available and evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
F-14
<PAGE> 109
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resources and in assessing performance. The operating subsidiaries of Azurix in
1998 operate in one segment and were substantially located in one geographic
region. In addition, Azurix's operations began in the fourth quarter of 1998 and
therefore separate quarterly disclosures have been omitted.
NOTE 2 -- BUSINESS ACQUISITION
On October 2, 1998 ("Wessex Acquisition Date"), Azurix, through its
indirect wholly owned subsidiary Azurix Europe Ltd ("Azurix Europe"), acquired
over 90% of the outstanding ordinary share capital of Wessex. On that same date,
Azurix Europe issued notices to the remaining Wessex ordinary shareholders,
informing them that it intended to exercise its rights under the English
Companies Act to acquire compulsorily all of the outstanding ordinary shares.
The compulsory share acquisition was completed in November 1998. The cost of the
Wessex acquisition, including transaction costs was $2.4 billion. The cost
included a combination of cash consideration paid to Wessex shareholders, net of
$1.7 million cash acquired, and the issuance of loan notes to Wessex
shareholders in the face amount of $119.8 million (see Note 7). On October 2,
1998, Wessex had cumulative mandatorily redeemable preference shares
outstanding. These were redeemed by Wessex in December 1998.
The purchase method of accounting was utilized, and accordingly, the assets
and liabilities of Wessex have been recorded at their estimated fair values on
the date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired has been recorded as goodwill, and is being amortized
on the straight-line basis over 40 years. The results of operations of Wessex
have been included in the consolidated financial statements since the date of
acquisition. Assets acquired, liabilities assumed, debt issued and consideration
paid (which includes proceeds from borrowings by Azurix Europe), as a result of
the Wessex acquisition are detailed below. The allocation of the purchase price
to the net assets acquired is preliminary because Azurix is in the process of
finalizing its assessment of the related fair values. Azurix does not believe
the final evaluation of these assessments will materially affect the allocation
of the purchase price. The preliminary allocation of the purchase price is as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Fair value of assets acquired............................... $ 2,738.7
Goodwill.................................................... 903.9
Fair value of liabilities assumed........................... (1,141.0)
Mandatorily redeemable preferred stock assumed.............. (109.3)
---------
Total purchase price.............................. $ 2,392.3
=========
</TABLE>
The following unaudited pro forma information presents summarized
consolidated results of operations of Azurix as if the Wessex acquisition had
occurred on January 1, 1998:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT
PER SHARE DATA)
--------------------
<S> <C>
Revenues.................................................... $464.2
Net income.................................................. 87.2
Basic and diluted earnings per share........................ 0.87
</TABLE>
These unaudited pro forma results of operations have been prepared for
illustrative purposes only and include certain adjustments in addition to the
pre-acquisition historical results of Wessex, such as additional amortization
expense as a result of goodwill, increased depreciation expense resulting from
allocation of fair market value to fixed assets acquired, increased interest
expense on acquisition debt and preference share redemption and the sale of
Wessex's interest in UK Waste (see Note 3). The unaudited pro forma financial
information is not necessarily indicative of the results of operations that
would have
F-15
<PAGE> 110
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occurred had the Wessex acquisition occurred on the date indicated, and should
not be viewed as indicative of operations in future periods.
NOTE 3 -- SALE OF ACQUIRED EQUITY INVESTMENT
On November 30, 1998, Azurix, sold its interest in Wessex Waste Management
Ltd, a joint venture with Waste Management International Plc ("WMI") that does
business as UK Waste, to WMI for $337.9 million. Azurix's interest in UK Waste
was acquired in the Wessex acquisition (see Note 2). UK Waste provides solid
waste collection, treatment and recycling services throughout the United Kingdom
("U.K.").
The value allocated to the equity investment in purchase accounting was
based on the cash flows during the period UK Waste was owned by Azurix,
including incremental debt costs incurred during the holding period. Azurix's
results of operations do not reflect the equity earnings of UK Waste during the
ownership period of $2.5 million and no adjustments to the carrying amount of
the investment were necessary. Accordingly, Azurix recorded no gain or loss from
the sale.
NOTE 4 -- OTHER CURRENT ASSETS
Other current assets at December 31, 1998 is comprised of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Prepayments................................................. $18.6
Other receivables........................................... 11.7
Other....................................................... 8.2
-----
$38.5
=====
</TABLE>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 is comprised of the
following:
<TABLE>
<CAPTION>
PROPERTY, PLANT
ACCUMULATED AND EQUIPMENT,
HISTORICAL COST DEPRECIATION NET
--------------- ------------ ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Buildings and operational structures......... $ 494.2 $ (2.6) $ 491.6
Infrastructure............................... 1,184.9 (2.7) 1,182.2
Plant machinery and vehicles................. 412.3 (9.7) 402.6
Construction work-in-progress................ 154.7 -- 154.7
Other assets................................. 25.0 (1.7) 23.3
-------- ------ --------
Total.............................. $2,271.1 $(16.7) $2,254.4
======== ====== ========
</TABLE>
NOTE 6 -- SHORT-TERM DEBT
As of December 31, 1998, Azurix had $424.0 million outstanding from credit
facilities with major commercial banks. Of this amount, $399.1 million relates
to committed credit facilities and the remaining $24.9 million relates to credit
facilities that are on an uncommitted basis. Interest accrues on the committed
credit facilities and the uncommitted facilities based on LIBOR plus 0.18% and
LIBOR plus a negotiated margin, respectively. The weighted average interest rate
on short-term bank borrowings outstanding as of December 31, 1998 was 6.66%.
Azurix pays commitment fees of 0.09% on the unused portion of committed lines of
credit. The facilities expire in April 1999. Azurix intends to refinance the
$424.0 million of short-term bank borrowings with long-term debt. If the
refinancing is not completed, Azurix will use amounts available under the Senior
Credit Facility (see Note 7) to refinance the short-
F-16
<PAGE> 111
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
term bank borrowings on a long-term basis and accordingly, has reclassified its
short-term bank borrowings as long-term debt.
NOTE 7 -- LONG-TERM DEBT AND AFFILIATE NOTE PAYABLE
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
FACE VALUE AND
CARRYING AMOUNT
---------------
(IN MILLIONS)
<S> <C>
Amounts reclassified from short-term debt (see Note 6)...... $424.0
Senior Credit Facility...................................... 219.5
Loan Notes.................................................. 117.2
EIB credit facilities....................................... 68.7
Capital lease obligation.................................... 109.7
------
939.1
Less current maturities..................................... (27.0)
------
Total long-term debt.............................. $912.1
======
</TABLE>
Azurix entered into a United Kingdom pounds sterling ("U.K. Pounds
Sterling") denominated senior secured bank credit facility in August 1998, as
amended ("Senior Credit Facility"). At December 31, 1998, it consisted of a term
loan facility of $322.6 million and a revolving credit facility of $575.3
million bearing interest at a rate of LIBOR plus 0.625%, which was 6.9% at
December 31, 1998. The amounts outstanding at December 31, 1998 were $211.2
million and $8.3 million, under the term loan facility and the revolving credit
facility, respectively. The remaining term loan capacity of $111.4 million is
used to secure a substantial portion of the Loan Notes, described below. The
term loan facility requires repayment of $199.5 million by July 24, 2000, and
repayment of any remaining outstanding term loans in July 2003. The revolving
credit facility terminates in July 2003. Azurix may borrow up to $99.8 million
of the revolving credit facility balance available for general corporate
purposes. Azurix has pledged all of a subsidiary's existing assets, including
all of the ordinary shares of Wessex, under this facility. The unused borrowing
capacity under the revolving credit facility at December 31, 1998 was $567.0
million. Azurix incurs commitment fees of 0.3125% on the unused portion of this
facility, which are recorded as interest expense.
Azurix issued U.K. Pounds Sterling denominated loan notes of $117.2 million
face value, as of December 31, 1998, to Wessex shareholders in lieu of cash
consideration for the ordinary shares purchased in the Wessex acquisition ("Loan
Notes") (see Note 2). The notes are redeemable, at the option of the holder,
semi-annually beginning September 30, 1999, with final redemption occurring
September 30, 2005. The Loan Notes may be redeemed at the holders' option within
one year, and therefore, are potential current obligations. If redeemed by the
holders' prior to maturity, Azurix will utilize available capacity on the Senior
Credit Facility to refinance the Loan Notes on a long-term basis, and
accordingly, the Loan Notes are classified as long-term debt. Interest on the
Loan Notes accrues at LIBOR and is payable semi-annually. The LIBOR rate for the
period the Loan Notes were outstanding during 1998 was 7.125%.
The European Investment Bank ("EIB") credit facilities consist of two
separate loans, one of which has a floating interest rate based on LIBOR less
0.25%, and the other has a fixed interest rate of 11.6%. The floating rate
obligation, due October 2001, has an outstanding balance of $49.9 million at
December 31, 1998 and is U.S. dollar denominated. The fixed rate loan,
denominated in Italian lire, has an outstanding balance of $18.8 million at
December 31, 1998 and is payable in semi-annual installments through June 2002.
F-17
<PAGE> 112
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The U.K. Pounds Sterling denominated capital lease obligation provides for
semi-annual payments. At December 31, 1998, future minimum lease payments total
$129.1 million, including $19.4 million representing interest. Currently, $158.3
million of historical cost and $21.5 of related accumulated amortization is
recorded under a capital lease and included in property, plant and equipment.
Each of these financing agreements contains certain restrictive covenants,
including among other things, limitations on borrowings, the maintenance of
certain financial ratios such as interest coverage, net worth and debt to equity
and contracts to perform or refrain from undertaking certain acts. The financing
contracts include standard events of default, including non-payment,
cross-defaults and insolvency. Azurix is currently in compliance with these
covenants.
Long-term borrowing and capital lease obligation maturities over the next
five years are $27.0 million in 1999, $230.0 million in 2000, $84.6 million in
2001, $36.3 million in 2002 and $561.2 million in 2003.
Azurix has executed interest rate and currency swap contracts related to
its outstanding debt (see Note 8).
Azurix has an affiliate note payable of $121.4 million outstanding at
December 31, 1998 (see Note 11).
NOTE 8 -- FINANCIAL INSTRUMENTS
Azurix uses derivative financial instruments in the normal course of its
business for purposes other than trading. These financial instruments include
interest rate and currency swap contracts. Azurix has U.K. Pounds Sterling ("L")
interest rate swap contracts having a total notional principal amount of $833.6
million. Interest rate swap contracts relating to notional principal amounts of
$665.1 million, $149.7 million and $18.8 million terminate in 2000, 2001 and
2002, respectively. Azurix also has cross-currency swap contracts to exchange
U.S. dollars of $49.9 million to U.K. Pounds Sterling of L30 million, which
expires in 2001, and Italian lire of 25.0 billion to U.K. Pounds Sterling of
L11.3 million, which expires in 2002.
The carrying amount of cash and cash equivalents, trade accounts receivable
(net of an allowance for doubtful accounts) and accounts payable and accruals
approximates their fair value due to their short-term nature. The fair value of
long-term debt and affiliate long-term debt is based on the quoted market prices
for the same or similar issues or on the current rates offered to Azurix for
debt of the same remaining maturities. The fair value of currency swap and
interest rate swap contracts was determined based on a model which estimates the
fair value of these swap contracts using market rates at December 31, 1998 or
was based on quoted market prices for similar instruments with similar
maturities. Judgment is necessarily required in interpreting market data and the
use of different market assumptions or estimation methodologies may affect the
estimated fair value amounts. The comparison of estimated fair value and
carrying amount are as follows:
<TABLE>
<CAPTION>
ESTIMATED
FAIR CARRYING
VALUE AMOUNT
--------- --------
(IN MILLIONS)
<S> <C> <C>
Note payable -- affiliate................................... $121.9 $121.4
Long-term debt(1)........................................... 960.9 936.5
Derivatives:
Interest rate swaps....................................... (9.1) --
Currency swaps............................................ 7.2 2.6
</TABLE>
- ---------------
(1) The sum of the carrying amount for long-term debt and the currency swaps, as
indicated above, equals long-term debt including current maturities (see
Note 7).
F-18
<PAGE> 113
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Azurix is exposed to certain risks due to the nature of derivative
financial instruments. In the event of non-performance by third parties, the
amounts of interest rate and currency swap contracts are potentially subject to
credit risk. Third parties to these contracts are major commercial banks with
high-quality credit ratings. Accordingly, Azurix does not anticipate
non-performance by any of these counterparties on these financial instruments.
Azurix is exposed to market risk in the form of foreign exchange rate and
interest rate risks. Several variable and fixed rate loans in foreign currencies
are hedged through a combination of cross-currency swaps and interest rate
swaps.
NOTE 9 -- INCOME TAXES
The components of income before income taxes from Date of Inception through
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
United States............................................... $(14.7)
Foreign..................................................... 43.2
------
$ 28.5
======
</TABLE>
Total income tax expense (benefit) from Date of Inception through December
31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Current tax expense (benefit):
Federal................................................... $ --
State..................................................... --
Foreign................................................... 4.9
-----
4.9
-----
Deferred tax expense (benefit):
Federal................................................... --
State..................................................... --
Foreign................................................... 13.4
-----
13.4
-----
Total income tax expense (benefit)................ $18.3
=====
</TABLE>
The differences between taxes computed at the U.S. federal statutory tax
rate and Azurix's effective income tax rate from Date of Inception through
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------- -------
(IN MILLIONS)
<S> <C> <C>
Statutory federal income tax provision...................... $10.0 35.0%
U.S. loss not benefited..................................... 5.1 17.8
U.K. subsidiary company loss not benefited.................. 2.4 8.4
Nondeductible goodwill amortization......................... 1.7 6.0
Consolidated foreign earnings taxed at other than the U.S.
rate...................................................... (1.8) (6.3)
Equity loss of foreign investment........................... 0.4 1.4
Other....................................................... 0.5 1.8
----- ----
$18.3 64.1%
===== ====
</TABLE>
F-19
<PAGE> 114
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal components of Azurix's net deferred income tax liability at
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Deferred income tax assets:
U.K. Advance Corporation Tax ("ACT") receivable........... $ 83.1
U.S. net operating loss carryforward...................... 5.1
U.K. net operating loss carryforward...................... 3.5
Other..................................................... 5.9
Valuation allowance....................................... (8.6)
-------
Total deferred tax assets......................... 89.0
-------
Deferred income tax liabilities:
Depreciation, depletion and amortization.................. (490.6)
Pension plan differences.................................. (1.8)
Other..................................................... (1.0)
-------
Total deferred tax liabilities.................... (493.4)
-------
Net deferred tax assets (liabilities)............. $(404.4)
=======
</TABLE>
Azurix has U.K. ACT credit carryforwards at December 31, 1998 of
approximately $83.1 million that can be used to offset U.K. taxes payable in
future years. At December 31, 1998, the U.K. ACT credit has an indefinite
carryforward period. At December 31, 1998, Azurix has a U.S. tax loss
carryforward of approximately $14.7 million that will expire in 2018. Due to
restrictions on the use of such loss carryforwards the benefits have not been
reflected in Azurix's results of operations. At December 31, 1998, Azurix has
U.K. subsidiary company loss carryforwards of approximately $11.8 million that
can be carried forward for an indefinite period. However, due to restrictions on
the use of such loss carryforwards, the benefits have not been reflected in
Azurix's results of operations.
U.S. and foreign income taxes have been provided for earnings of foreign
subsidiary and affiliate companies that are expected to be remitted to the U.S.
Foreign subsidiaries' and affiliates' cumulative undistributed earnings of
approximately $43.2 million are considered to be indefinitely reinvested outside
the U.S. and, accordingly, no U.S. income taxes have been provided thereon. In
the event of a distribution of those earnings in the form of dividends, Azurix
may be subject to both foreign withholding taxes and U.S. income taxes net of
allowable foreign tax credits.
NOTE 10 -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for taxes and interest expense is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Utility taxes(1)............................................ $81.7
Interest (net of amounts capitalized)....................... 9.6
</TABLE>
- ---------------
(1) One-time tax levied on private utilities by the U.K. government. This amount
was recorded to Wessex's net income in 1997.
NON-CASH TRANSACTIONS
During 1998, Azurix issued debt in the form of the Loan Notes in connection
with the Wessex acquisition (see Note 7). During 1998, Azurix received a capital
contribution from Enron of the
F-20
<PAGE> 115
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding stock of a subsidiary that holds an interest in OSM. The transfer
was recorded at the book value of Enron of $71.8 million.
NOTE 11 -- RELATED PARTY TRANSACTIONS
During 1998, Azurix entered into a U.K. Pounds Sterling denominated loan
with Enron for $119.7 million. Interest of $2.1 million accrued during the
period the loan was outstanding at LIBOR plus 0.8%. The principal and accrued
interest were repaid to Enron in 1998.
Enron will exert influence over the policies, management and affairs of
Azurix. Certain individuals who serve as officers and directors of Enron also
serve as directors of Azurix. The directors and officers of Enron have fiduciary
duties to manage Enron, including its investments in subsidiaries and affiliates
in a manner beneficial to Enron and its stockholders. Similarly, the directors
and officers of Azurix have fiduciary duties to manage Azurix in a manner
beneficial to Azurix and its stockholders.
Enron and Azurix propose to enter into an agreement that addresses the
scope of Azurix's business and it is anticipated that it will provide that
certain activities in which Enron and its affiliates may engage are permitted,
even if those activities have a competitive impact on Azurix. In general, it is
anticipated that Enron will be permitted to engage in any business whatsoever,
including water, wastewater and other businesses competing with Azurix, and may
compete in public tenders against Azurix, provided the business is conducted and
opportunities are identified and developed through Enron's own personnel and not
through Azurix. The agreement is expected to contain other provisions regarding
the activities to be performed by Azurix and Enron's involvement in those
activities.
Enron provides office space (see Note 15) to Azurix and various services
such as computer hardware and software and support services such as risk
management, accounts payable, payroll and information technology services. Costs
are allocated to Azurix based upon usage, or where no direct method can be
efficiently applied due to administrative burden, upon factors such as
annualized payroll or employee headcount.
Employees, other than Wessex employees, are covered by various employee
benefit plans of Enron such as retirement, stock option, medical, dental, life
insurance and other benefit plans. These costs are allocated to Azurix based
upon Enron's costs of administering and providing the benefit plans. During 1998
the expense recorded under the plan arrangements was approximately $1.4 million.
During 1998, Enron advanced to Azurix $17.7 million related to office space
and other services provided by Enron and cost of various benefit plans for
certain employees, each described above. This amount is reported in the
Consolidated Balance Sheet as a component of "Accounts payable -- affiliates."
Management believes the above allocation methods and costs are reasonable.
A director of a subsidiary of Wessex owns certain assets utilized in the
subsidiary's operations. The subsidiary was charged $0.1 million for the use of
those assets during the period Azurix owned Wessex.
BRISTOL WATER TRUST
During 1998, Azurix entered into a U.K. Pounds Sterling denominated senior
loan agreement with Bristol Water Trust, as amended and restated, an affiliate
company wholly owned by Atlantic Water. The note accrues interest at 6.25% per
annum and is payable semi-annually, beginning June 1999. Under the note
agreement maturing December 2001, prepayment is allowed in whole or part at any
time. The principal balance outstanding at December 31, 1998 was $121.4 million.
Interest expense recorded for 1998 was $1.9 million.
F-21
<PAGE> 116
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- PENSION BENEFITS
Wessex maintains three defined benefit pension plans that cover
substantially all of its employees. The assets are held in separate trustee
administered funds. The pension cost charged to the consolidated statement of
income has been determined on the advice of independent qualified actuaries and
is accrued over the service lives of the employees expected to be eligible to
receive such benefits.
The following weighted average assumptions were used in determining the
funded status and pension charge for the period October 2, 1998 through December
31, 1998:
<TABLE>
<CAPTION>
PERCENT
-------
<S> <C>
Discount rate............................................... 5.8%
Expected return on plan assets.............................. 6.8%
Rate of compensation increase............................... 4.3%
Pension increases........................................... 2.5%
</TABLE>
The plan's funded status and related pension accrual as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Change in benefit obligation:
Benefit obligation at Wessex Acquisition Date............. $231.5
Service cost........................................... 1.5
Interest cost.......................................... 3.4
Plan participants' contributions....................... 0.5
Actuarial loss......................................... 16.7
Benefits paid.......................................... (2.2)
Exchange difference.................................... (5.2)
------
Benefit obligation at end of period............... $246.2
======
Change in plan assets:
Fair value of plan assets at Wessex Acquisition Date...... $237.3
Actual return on plan assets........................... 27.7
Employer contribution.................................. 1.3
Plan participants' contribution........................ 0.5
Benefits paid.......................................... (2.2)
Exchange difference.................................... (5.4)
------
Fair value of plan assets at end of period........ $259.2
======
Funded status:
Fair value of plan assets.............................. $259.2
Projected benefit obligation........................... 246.2
------
Funded status.......................................... 13.0
Unrecognized net actuarial loss........................ (6.9)
------
Prepaid benefit cost.............................. $ 6.1
======
</TABLE>
F-22
<PAGE> 117
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic benefit cost includes the following components:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Service cost.............................................. $ 1.5
Interest cost............................................. 3.4
Expected return on plan assets............................ (4.0)
------
Net periodic benefit cost................................. $ 0.9
======
</TABLE>
Two of the three pension plans have an aggregate prepaid benefit cost of
$7.6 million that is included in "Other assets" on the Consolidated Balance
Sheet and the remaining plan has an accrued benefit obligation of $1.5 million
that is included in "Other long-term liabilities" on the Consolidated Balance
Sheet.
NOTE 13 -- STOCKHOLDER'S EQUITY
COMMON STOCK
During 1998, Azurix issued 1,000 shares of $1.00 par value common stock. On
February 2, 1999, Azurix effected a 100,000-for-one stock split and restated the
par value to $0.01 that resulted in 100 million shares issued and outstanding.
Share and per share data for 1998 presented herein has been adjusted to give
effect to this split as if it had occurred on the Date of Inception.
ADDITIONAL PAID-IN CAPITAL
During 1998, Azurix received cash contributions of approximately $1.6
billion. In addition, Azurix received a capital contribution from Enron of the
outstanding stock of a subsidiary that holds a 32.1% ownership interest in OSM.
The transfer was recorded at Enron's book value of $71.8 million.
STOCK INCENTIVE PLAN
In February 1999, Azurix established a stock incentive plan (the "Plan")
which provides for the granting or awarding of stock options and restricted
stock to directors, officers and key employees of Azurix. At any particular
time, the number of shares of common stock issued under the Plan may not exceed
15% of the total number of shares of common stock outstanding. Under the Plan,
Azurix granted options to purchase 7.8 million shares of its common stock, at an
exercise price per share of $16.72. The options vest from three to five years
after the grant date and expire ten years after the grant date.
NOTE 14 -- RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain subsidiaries of Azurix Corp. have governmental and regulatory
restrictions or approvals required in order to pay dividends or make
intercompany loans and advances to it. The amount of restricted net assets of
Azurix Corp. subsidiaries at December 31, 1998 is approximately $1.5 billion.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Azurix leases office space from Enron under a lease obligating only Enron
and specific subsidiaries and affiliates (see Note 11). Azurix has no
contractual obligation under these office lease agreements but pays to Enron the
amount determined in the lease or the contract rate applied to square footage
occupied. Azurix accrued rent expense to Enron for office space totaling $0.3
million in 1998.
F-23
<PAGE> 118
AZURIX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Azurix leases property under various operating leases. Future minimum
operating lease payments as of December 31, 1998, in the aggregate and for each
of the five succeeding fiscal years, are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1999........................................................ $0.7
2000........................................................ 0.5
2001........................................................ 0.5
2002........................................................ 0.3
2003........................................................ 0.8
----
Total minimum lease payments................................ $2.8
====
</TABLE>
Azurix has contractual commitments for capital expenditures to be incurred
after December 31, 1998 of $130.2 million.
Azurix is involved in various claims and lawsuits incidental to its
business. Although no assurances can be given, Azurix believes that the ultimate
resolution of such items will not have a material effect on its results of
operations or financial position.
Azurix is subject to extensive federal, foreign, state and local
environmental laws and regulations. We anticipate future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.
A substantial portion of Azurix's revenues are subject to governmental
regulation of the rates that it may charge to its customers. The U.K. government
is currently conducting a periodic review of the price limits for water and
sewerage companies in England and Wales that is expected to result in new price
limits for the period from April 1, 2000 through 2005 that will be lower than
current price limits. Although we are unable to predict the precise outcome of
the current U.K. rate review, it is likely to significantly reduce Wessex's
revenues and earnings, but should not have a material adverse effect on Azurix's
financial position.
NOTE 16 -- EVENT SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
In March 1999, Azurix filed a registration statement with the Securities
and Exchange Commission for an underwritten initial public offering of shares of
common stock.
F-24
<PAGE> 119
REPORT OF INDEPENDENT ACCOUNTANTS
To the stockholder of Wessex Water Ltd (formerly Wessex Water Plc):
We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of Wessex Water Plc (now renamed Wessex
Water Ltd) (predecessor company) (the "Company") and subsidiaries for the period
from April 1, 1998 to October 2, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, cash flows and changes in
stockholders' equity of Wessex Water Plc (now renamed Wessex Water Ltd)
(predecessor company) and subsidiaries for the period from April 1, 1998 to
October 2, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen
London, England
March 12, 1999
F-25
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the stockholder of Wessex Water Ltd (formerly Wessex Water Plc)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Wessex Water Plc
(now renamed Wessex Water Ltd) and its subsidiaries (the "Company") at March 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS
CHARTERED ACCOUNTANTS
Bristol, England
March 12, 1999
F-26
<PAGE> 121
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, --------------------
1998 1998 1997
---------- ------- -------
IN MILLIONS USD
(EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues.......................................... $233.8 $436.6 $403.1
Operating expenses:
Operations and maintenance................................ 61.7 110.9 102.4
General and administrative................................ 36.4 29.1 32.2
Depreciation and amortization............................. 35.2 64.3 58.0
------ ------ ------
Operating income............................................ 100.5 232.3 210.5
------ ------ ------
Other income (expense):
Interest income........................................... 0.2 4.4 23.0
Interest expense.......................................... (6.3) (13.0) (12.8)
Equity earnings........................................... 5.8 13.3 14.7
------ ------ ------
Income before taxes......................................... 100.2 237.0 235.4
------ ------ ------
Taxation on ordinary activities............................. 28.4 58.0 82.4
Utility tax................................................. -- 162.3 --
------ ------ ------
Net income.................................................. 71.8 16.7 153.0
Dividends on preference shares.............................. 7.7 15.1 13.5
------ ------ ------
Net income attributable to common stockholders.............. $ 64.1 $ 1.6 $139.5
====== ====== ======
Basic earnings per share.................................... $ 0.30 $ 0.01 $ 0.65
====== ====== ======
Diluted earnings per share.................................. $ 0.30 $ 0.01 $ 0.55
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 122
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1998
(TRANSLATED INTO USD -- SEE NOTE 1)
<TABLE>
<CAPTION>
MARCH 31,
1998
-------------
IN MILLIONS
USD, EXCEPT
SHARE AMOUNTS
-------------
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 1.8
Trade receivables (net of allowance for doubtful accounts
of $5.9)................................................ 43.5
Unbilled receivables...................................... 29.7
Other current assets...................................... 19.5
--------
Total current assets............................... 94.5
--------
Property, Plant and Equipment
Cost...................................................... 2,487.4
Less-accumulated depreciation............................. (549.9)
--------
Property, plant and equipment, net........................ 1,937.5
--------
Investments and Other Assets
Investment in equity method investee...................... 311.2
Goodwill, net of accumulated amortization................. 21.6
Other..................................................... 7.5
--------
Total Assets....................................... $2,372.3
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings from banks..................................... $ 82.7
Current portion of long-term debt......................... 38.3
Accounts payable and accruals............................. 227.5
Amounts due to equity method investee..................... 6.2
Advances from customers................................... 23.7
Proposed dividend......................................... 23.1
--------
Total current liabilities.......................... 401.5
--------
Long-Term Debt.............................................. 169.7
Deferred Credits and Other Liabilities
Deferred income taxes..................................... 306.5
Other..................................................... 6.1
--------
Total long-term liabilities........................ 482.3
--------
Commitments and Contingent Liabilities (Note 18)
Redeemable Preference Shares (Authorized -- 310,000,000;
issued and paid 308,984,402 shares of 50p each, redeemable
at par)................................................... 259.0
--------
Stockholders' Equity:
Common stock (Authorized: 346,666,670; issued and paid:
212,677,552 shares of 60p).............................. 188.3
Additional paid-in capital................................ 80.6
Accumulated other comprehensive income.................... 182.0
Retained earnings......................................... 778.6
--------
Total stockholders' equity......................... 1,229.5
--------
Total Liabilities and Stockholders' Equity......... $2,372.3
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 123
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- --------- --------
IN MILLIONS USD
----------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 71.8 $ 16.7 $153.0
Adjustments required to reflect cash flows from operating
activities:
Income and expense items not involving cash flows:
Share in profits of equity method investee, net of related
taxes.................................................. (3.1) (6.7) (9.5)
Depreciation and amortization............................. 35.2 64.3 58.0
Deferred taxes............................................ 23.2 24.9 (2.1)
Loss on disposal of fixed assets.......................... 0.8 2.5 1.3
Other..................................................... 0.1 0.5 (1.8)
------- ------- ------
128.0 102.2 198.9
------- ------- ------
Changes in operating asset and liability items:
(Increase) decrease in trade accounts receivable.......... 6.9 (4.8) 2.2
(Increase) in prepayments................................. (0.3) (0.8) (6.5)
(Increase) decrease in other current assets............... (8.3) 22.3 3.6
Increase (decrease) in advances from customers............ 2.5 1.1 (3.0)
Increase in accounts payable and accruals................. 3.4 5.0 51.1
------- ------- ------
4.2 22.8 47.4
------- ------- ------
Net cash provided by operating activities................... 132.2 125.0 246.3
------- ------- ------
Investing Activities:
Purchase of fixed assets.................................. (108.9) (198.6) (149.1)
Decrease in short-term investments........................ -- -- 49.6
Other..................................................... 0.5 3.6 1.7
------- ------- ------
Net cash used in investing activities....................... (108.4) (195.0) (97.8)
------- ------- ------
Financing Activities:
Repurchase of ordinary shares............................. -- -- (300.8)
Repurchase of preference shares........................... (143.4) -- --
Short-term loans received................................. 177.5 80.7 --
Repayment of lease obligations............................ (8.7) (15.6) (12.8)
Dividends paid............................................ (51.4) (65.7) (62.9)
Other..................................................... 2.4 7.4 3.5
------- ------- ------
Net cash (used in) provided by financing activities......... (23.6) 6.8 (373.0)
------- ------- ------
Effect of exchange rate changes on cash balances............ (0.3) (1.3) 19.1
------- ------- ------
Decrease in cash and cash equivalents....................... (0.1) (64.5) (205.4)
Balance of cash and cash equivalents at beginning of
period.................................................... 1.8 66.3 271.7
------- ------- ------
Balance of cash and cash equivalents at end of period....... $ 1.7 $ 1.8 $ 66.3
======= ======= ======
Supplemental Cash Flow Items:
Interest paid (net of amounts capitalized)................ $ 8.6 $ 12.3 $ 12.5
Income taxes paid......................................... 5.3 86.5 21.6
Utility tax paid.......................................... -- 83.1 --
Non-Cash Investing and Financing Activities:
Scrip dividends........................................... 37.4 9.8 4.4
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 124
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 2, 1998 AND THE YEARS ENDED MARCH 31, 1998 AND
1997
(TRANSLATED INTO USD -- SEE NOTE 1)
(IN MILLIONS USD)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
STOCK CAPITAL INCOME EARNINGS TOTAL INCOME
------ ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996.................. $228.3 $ 13.8 $ 54.1 $1,058.2 $1,354.4
Net income............................... 153.0 153.0 $153.0
Other comprehensive income:
Translation differences............... 104.3 104.3 104.3
Unrealized gain on listed
investment.......................... (0.3) (0.3) (0.3)
------
Total comprehensive income....... $257.0
======
Shares issued............................ 2.4 6.8 9.2
Repurchase of shares..................... (45.5) (255.3) (300.8)
Amount transferred to capital reserve.... 45.5 (45.5) --
Dividends................................ (68.3) (68.3)
------ ------ ------ -------- --------
Balance at March 31, 1997.................. 185.2 66.1 158.1 842.1 1,251.5
Net income............................... 16.7 16.7 $ 16.7
Other comprehensive income:
Translation differences............... 22.8 22.8 22.8
Unrealized gain on listed
investment.......................... 1.1 1.1 1.1
------
Total comprehensive income....... $ 40.6
======
Shares issued............................ 3.1 14.5 17.6
Dividends................................ (80.2) (80.2)
------ ------ ------ -------- --------
Balance at March 31, 1998.................. 188.3 80.6 182.0 778.6 1,229.5
Net income............................... 71.8 71.8 $ 71.8
Other comprehensive income:
Translation differences............... 18.8 18.8 18.8
Unrealized gain on listed
investment.......................... (0.2) (0.2) (0.2)
------
Total comprehensive income....... $ 90.4
======
Shares issued............................ 5.1 33.8 38.9
Dividends................................ (57.1) (57.1)
------ ------ ------ -------- --------
Balance at October 2, 1998................. $193.4 $114.4 $200.6 $ 793.3 $1,301.7
====== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 125
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the operations
of Wessex Water Plc (now renamed Wessex Water Ltd) and its subsidiaries
("Wessex"). On October 2, 1998, Wessex was purchased by Azurix Europe Ltd, a
wholly owned subsidiary of Azurix Corp. ("Azurix"). The financial statements of
Wessex have been prepared for the purpose of presenting the financial statements
of the predecessor company of Azurix.
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("US GAAP"). The functional
currency of Wessex is pounds sterling ("GBP"). These accounts have been
presented using US dollars ("USD") as the reporting currency by translating the
functional currency financial statements using the current rate methodology
described in the Statement of Financial Accounting Standard ("SFAS") 52,
"Foreign Currency Translation."
The period from April 1 to October 2, 1998 will hereafter be referred to as
the "six months ended October 2, 1998."
NATURE OF OPERATIONS
Wessex Water Plc was incorporated on April 1, 1989. On September 1, 1989,
Wessex Water Plc acquired the entire issued share capital of Wessex Water
Services Ltd, a company formed to continue the business of Wessex Water
Authority, as a result of the privatization by the UK government of the water
industry in England and Wales. The acquisition was effected through the issue of
49,998 Wessex shares to the Secretary of State for the Environment which were
credited as fully paid. The assets and liabilities acquired by Wessex were
recorded at book value as Wessex was owned by the UK government at the date of
the transfer making the transaction an exchange between entities under common
control. Wessex's principal activity is the provision of water supply and
wastewater services in southwestern England through its wholly owned subsidiary,
Wessex Water Services Ltd. Wessex's other business activities include SC
Technology AG ("SC Technology"), which does business as Swiss Combi and sells
and operates sludge drying plants.
Wessex Water Services Ltd is licensed to operate as a water and sewerage
company in its region, subject to regulation of its water supply and wastewater
treatment services by government agencies including the Office of Water Services
and the Drinking Water Inspectorate. Wessex is subject to regulation of the
rates it may charge for its regulated water supply and wastewater treatment
businesses.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Wessex Water Plc and all its majority owned and controlled subsidiaries. All
inter-company transactions are eliminated as part of the consolidation process.
Investments in companies in which Wessex owns 20 percent to 50 percent of
the voting stock and has significant influence are accounted for using the
equity method with Wessex's share of profits and losses included in the
consolidated income statement. Wessex's share of post-acquisition retained
profits/losses is added to/deducted from the cost of the investee in the
consolidated balance sheet.
F-31
<PAGE> 126
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCIES
On consolidation, assets and liabilities of subsidiaries denominated in
foreign currencies, where the local currency is the functional currency, have
been translated at year-end rates. Income and expense items are translated using
the annual weighted average rates of exchange or, where known or determinable,
at the rate on the date of the transaction for significant items. Adjustments
arising from the translation have been recorded in other comprehensive income
and are included in income only upon sale or liquidation of the underlying
investments.
Transactions in currencies other than the functional currency are recorded
at the rate of exchange at the date of the transaction. Assets and liabilities
in currencies other than the functional currency are translated at year-end
rates. Any resulting exchange differences are taken to the consolidated income
statement.
The exchange rates used to translate the GBP functional currency financial
statements to USD were:
<TABLE>
<CAPTION>
USD PER GBP
-----------
<S> <C> <C>
Period from April 1 to October 2, 1998...................... Average 1.6536
As of March 31, 1998........................................ Year end 1.6765
Year ended March 31, 1998................................... Average 1.6413
Year ended March 31, 1997................................... Average 1.5853
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short-term highly liquid
investments with original maturities of three months or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment assets are stated at historical cost, less
accumulated depreciation. Depreciation is charged on a straight-line basis over
the estimated useful lives of the respective assets, based on the following
useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and operational structures........................ 15 - 80
Infrastructure assets....................................... 85
Plant, machinery and vehicles............................... 3 - 30
Other assets................................................ 4 - 15
</TABLE>
Major improvements to leasehold properties are amortized over the shorter
of the asset life and the life of the respective lease.
F-32
<PAGE> 127
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest is capitalized on qualifying assets during the time required to
prepare the assets for their intended use using Wessex's weighted average
borrowing rate. The capitalized interest is amortized over the life of the
assets.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of the
identifiable assets acquired less the liabilities assumed of the acquired
company. Goodwill is capitalized and amortized over its estimated useful life
which ranges from twenty years (SC Technology) to forty years (Wessex Waste
Management Ltd.).
LEASES
Assets held under finance lease agreements are treated as tangible assets
and the present value of the related lease payments is recorded as a liability.
Costs for operating leases are charged to the income statement in the period
incurred.
LONG-LIVED ASSETS
Wessex evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the estimated undiscounted cash flow from such an asset
is less than its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the estimated fair market value
of the long-lived asset. Fair market value is determined primarily using the
estimated cash flows discounted at a rate commensurate with the risk involved.
TAXATION
Provision is made for all taxes payable in respect of profit earned in the
year. Deferred income tax is provided using the liability method for all
temporary differences arising between the tax basis of assets and liabilities
and their carrying value for financial reporting purposes, using the enacted tax
rate. Deferred tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that all or part of the asset will not be
realized. No deferred tax liability has been recognized for undistributed
earnings of domestic subsidiaries since such earnings can be transferred to the
parent company without tax consequences.
REVENUE RECOGNITION
For metered customers, Wessex recognizes revenue based on actual usage and
accrues revenue for the estimated amount of water sold but not billed as of the
balance sheet date. The revenue for non-metered customers, who pay an annual
fixed charge based on the rateable value of their property, is recognized
uniformly over the year.
PENSIONS
Current service costs for defined benefit plans are accrued in the period
to which they relate. Prior service costs, if any, relating to amendments of the
plans, are recognized over the remaining average service lives of those
employees. The pension schemes are of the defined benefit type, which are
externally funded and valued by an independent actuary.
F-33
<PAGE> 128
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS IN EQUITY SECURITIES
Available-for-sale securities are reported at fair value and individual
securities are classified as a current or non-current asset, as appropriate.
Unrealized holding gains and losses for all available-for-sale securities are
reported net, as a separate component of other comprehensive income, a part of
stockholders' equity, until the gains and losses are realized.
DERIVATIVE FINANCIAL INSTRUMENTS
Wessex uses cross-currency and interest rate swaps for the purpose of
hedging specific exposures as part of its risk management program and holds all
derivatives for purposes other than trading. Deferral (hedge) accounting is
applied only if the derivative reduces the risk of the underlying hedged item
and is designated at inception as a hedge with respect to the underlying hedged
item. Additionally, the derivative must result in cash flows that are expected
to be inversely correlated to those of the underlying hedged item. Under hedge
accounting, the changes in market value of the derivatives and the hedged assets
or liabilities are deferred and recognized in net income in the same period. If
Wessex's use of derivatives did not qualify for hedge accounting treatment, the
derivative would be recorded at fair value with changes in fair value recognized
in net income.
EARNINGS PER SHARE
Basic earnings per share is based on the earnings from continuing
operations available to common stockholders divided by the weighted average
number of shares outstanding during each period. Diluted earnings per share is
calculated in the same manner as basic earnings per share except that the
numerator is increased by the amount of dividends payable to the holders of
convertible securities and the denominator is increased, using the treasury
stock method, to include the number of additional ordinary shares that would
have been outstanding, assuming the exercise of all employee stock options and
the conversion of all convertible securities that would have had a dilutive
effect on basic earnings per share.
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed.
Expenditures providing a future benefit are capitalized as appropriate.
Remediation costs that relate to an existing condition caused by past operations
are accrued when it is probable that these costs will be incurred and can be
reasonably estimated.
STOCK-BASED COMPENSATION
Wessex follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for its employee stock options. Under APB 25, compensation expense is recorded
when the exercise price of employee stock options is less than the fair value of
the underlying stock on the measurement date.
ACCOUNTING STANDARDS ISSUED
In June 1998, the FASB issued SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after
F-34
<PAGE> 129
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 15, 1999. Wessex is currently evaluating, and has not yet determined, the
effect that the adoption of SFAS 133 will have on its financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires that costs for start-up activities and
organization costs be expensed as incurred and not capitalized as had previously
been allowed. SOP 98-5 is applicable to all financial statements for fiscal
years beginning after December 15, 1998 and initial adoption is required to be
reflected as a cumulative effect of an accounting change. The adoption of SOP
98-5 is not expected to have a material effect on Wessex's financial position or
results of operations.
NOTE 2 -- INTEREST EXPENSE
<TABLE>
<CAPTION>
SIX
MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
----------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Gross interest expense...................................... $11.3 $21.4 $18.7
Interest capitalized........................................ (5.0) (8.4) (5.9)
----- ----- -----
Net interest expense........................................ $ 6.3 $13.0 $12.8
===== ===== =====
</TABLE>
NOTE 3 -- OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Other receivables........................................... $ 8.0
Available-for-sale securities............................... 4.7
Prepayments................................................. 3.5
Other....................................................... 3.3
-----
$19.5
=====
</TABLE>
F-35
<PAGE> 130
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
BUILDINGS PLANT TOTAL
AND MACHINERY PROPERTY,
OPERATIONAL INFRASTRUCTURE AND OTHER CONSTRUCTION- PLANT &
STRUCTURES ASSETS VEHICLES ASSETS IN-PROGRESS EQUIPMENT
----------- -------------- --------- ------ ------------- ---------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cost:
March 31, 1997............. $573.5 $ 961.2 $ 594.1 $42.9 $ 87.7 $2,259.4
Additions.................. 25.6 61.0 39.4 3.8 82.9 212.7
Transfers.................. 0.7 26.9 12.8 6.9 (47.3) --
Disposals.................. (0.5) -- (26.3) (5.5) -- (32.3)
Translation differences.... 11.6 20.5 12.0 1.0 2.5 47.6
------ -------- ------- ----- ------ --------
March 31, 1998............... $610.9 $1,069.6 $ 632.0 $49.1 $125.8 $2,487.4
====== ======== ======= ===== ====== ========
Accumulated depreciation:
March 31, 1997............. $ 96.4 $ 169.4 $ 214.5 $24.7 $ -- $ 505.0
Additions.................. 10.5 11.8 34.6 6.1 -- 63.0
Disposals.................. (0.2) -- (22.8) (5.6) -- (28.6)
Translation differences.... 2.1 3.5 4.5 0.4 -- 10.5
------ -------- ------- ----- ------ --------
March 31, 1998............... $108.8 $ 184.7 $ 230.8 $25.6 $ -- $ 549.9
====== ======== ======= ===== ====== ========
Net book value:
March 31, 1998............. $502.1 $ 884.9 $ 401.2 $23.5 $125.8 $1,937.5
====== ======== ======= ===== ====== ========
</TABLE>
Included in property, plant and equipment are the following amounts
relating to capital leases:
<TABLE>
<CAPTION>
BUILDINGS PLANT TOTAL
AND MACHINERY PROPERTY,
OPERATIONAL INFRASTRUCTURE AND OTHER CONSTRUCTION- PLANT &
STRUCTURES ASSETS VEHICLES ASSETS IN-PROGRESS EQUIPMENT
----------- -------------- --------- ------ ------------- ---------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cost......................... $ 40.1 $ 73.1 $ 45.2 $ 1.2 $ -- $ 159.6
Accumulated depreciation..... (3.9) -- (14.6) (0.8) -- (19.3)
------ -------- ------- ----- ------ --------
Net.......................... $ 36.2 $ 73.1 $ 30.6 $ 0.4 $ -- $ 140.3
====== ======== ======= ===== ====== ========
</TABLE>
The net book value of property, plant and equipment as of March 31, 1998
includes interest capitalized of $62.5 million.
NOTE 5 -- GOODWILL
Goodwill arising on the acquisition of SC Technology on January 3, 1996 was
$24.3 million, with an annual amortization charge of $1.2 million. Accumulated
amortization as of March 31, 1998 is $2.7 million.
F-36
<PAGE> 131
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INVESTMENT IN EQUITY METHOD INVESTEE
At March 31, 1998, Wessex had a 50.0% share of Wessex Waste Management Ltd,
holding Class B shares of L1 each. Wessex Waste Management Ltd trades as UK
Waste through its wholly owned subsidiaries. UK Waste collects, recycles and
disposes of waste from commercial and domestic customers.
<TABLE>
<CAPTION>
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Investment at cost, April 1, 1997
Share in net identifiable assets acquired................... $ 48.3
Goodwill.................................................... 225.2
------
Cost........................................................ 273.5
Less: Accumulated amortization of goodwill.................. (30.9)
Share of retained profit.................................... 63.3
Translation difference...................................... 5.3
------
Book value at March 31, 1998................................ $311.2
======
</TABLE>
Summarized financial information for Wessex Waste Management Ltd is
presented below. At March 31, 1998, Wessex's share of earnings and of the net
assets of Wessex Waste Management Ltd was 50.0%.
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Current assets.............................................. $ 89.9
Non-current assets.......................................... 643.3
------
Total assets...................................... $733.2
======
Current liabilities......................................... $ 74.3
Non-current liabilities..................................... 36.5
Stockholders' equity........................................ 622.4
------
Total liabilities and stockholders' equity........ $733.2
======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
---------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Revenues................................................. $145.2 $285.1 $237.8
Operating profit......................................... 10.6 25.1 28.7
Net income before tax.................................... 11.6 26.6 29.4
</TABLE>
F-37
<PAGE> 132
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- ACCOUNTS PAYABLE AND ACCRUALS
<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Trade accounts payable...................................... $ 8.4
Capital expenditure accruals................................ 56.0
Corporation tax............................................. 16.8
Advance corporation tax..................................... 19.3
Utility tax................................................. 83.0
Accruals.................................................... 42.7
Other....................................................... 1.3
------
Total............................................. $227.5
======
</TABLE>
NOTE 8 -- BORROWINGS FROM BANKS
<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Bank overnight credit facility.............................. $24.0
Revolving line of credit.................................... 58.7
-----
Total............................................. $82.7
=====
</TABLE>
Wessex has an overnight overdraft facility with two banks. In addition,
Wessex maintains a credit agreement with a syndicate of banks which provides
$402 million, denominated in GBP, of committed lines of credit which expire on
April 21, 1999. The interest rate on draw-downs is LIBOR plus 0.18%. Wessex pays
commitment fees of 0.09% on the unused portion of the lines of credit. The
weighted average effective interest rate at March 31, 1998 on short-term
borrowings is 7.75%.
NOTE 9 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
1998
----------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
European Investment Bank ("EIB") loan #1 -- USD, variable
interest rate of 6 month LIBOR minus 0.25% due October
2001...................................................... $ 50.3
EIB loan #2 -- Italian lire, fixed interest rate of 11.6%
due June 2002............................................. 24.5
EIB loan #3 -- Ecu, fixed interest rate of 5.7% due December
1998...................................................... 12.7
Capital lease, fixed interest rate of 8.06% due September
2002...................................................... 120.0
Other long-term debt........................................ 0.5
------
208.0
Less: Current portion included in current liabilities....... (38.3)
------
Total............................................. $169.7
======
</TABLE>
F-38
<PAGE> 133
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum annual principal payments due on long-term debt are as follows:
<TABLE>
<S> <C>
Year ending March 31:
1999...................................................... $ 38.3
2000...................................................... 29.0
2001...................................................... 32.9
2002...................................................... 87.5
2003...................................................... 20.3
------
Total............................................. $208.0
======
</TABLE>
The three EIB currency term loans which are due and payable from 1998
through June 2002 have both fixed and variable interest rates in their
respective currencies with semi-annual interest payments. Using a combination of
interest rate swaps and currency swaps these rates are changed to variable and
fixed GBP interest rates.
Wessex's term loans and credit facilities are subject to certain financial
covenants, including the maintenance of minimum interest cover, maximum gearing
levels and minimum net worth.
NOTE 10 -- FINANCIAL INSTRUMENTS
Wessex uses a variety of financial instruments denominated in foreign
currencies, at both floating and fixed interest rates, to finance its
operations. Wessex manages the risk arising on these instruments by entering
into cross-currency and interest rate swaps.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of short-term financial instruments including cash and
cash equivalents, accounts receivable, accounts payable, and all other
short-term financial assets and liabilities, including bank debt, approximates
fair value due to the short maturity of those instruments.
The fair value of preference shares with mandatory redemption requirements
and long-term debt are estimated using discounted cash flow analyses based on
Wessex's current incremental financing rates for similar types of securities.
The fair value of currency swaps and interest rate swaps was determined based on
a model which estimates the fair value of these swap contracts using market
rates at March 31, 1998 or was based on quoted market prices for similar
instruments with similar maturities. A comparison of the carrying value and fair
value of these instruments is included below:
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ESTIMATED CARRYING
FAIR VALUE AMOUNT
---------- --------
(IN MILLIONS OF
US DOLLARS)
<S> <C> <C>
Long-term debt (including current portion).................. $ 79.2 $ 78.4
Preference shares with mandatory redemption................. 272.2 259.0
Derivatives:
Interest rate swaps....................................... (9.0) --
Currency swaps............................................ 14.2 9.6
</TABLE>
F-39
<PAGE> 134
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CERTAIN RISKS AND CONCENTRATIONS
Wessex's cash equivalents consist primarily of short-term money market
deposits. Wessex has deposited its cash equivalents with reputable financial
institutions and believes the risk of loss to be remote. Wessex has accounts
receivable from customers concentrated in southwestern England with no single
customer accounting for more than 10% of sales.
Wessex is exposed to credit risk in the event of non-performance by
counterparties to interest rate and cross-currency swap contracts. However,
because Wessex deals only with major commercial banks with high-quality credit
ratings, it does not anticipate non-performance by any of these counterparties.
Wessex is exposed to market risk in the form of foreign exchange rate and
interest rate risks. Wessex has one consolidated foreign subsidiary, which has a
functional currency of Swiss francs. On consolidation the functional currency
accounts are translated to the reporting currency with translation gains and
losses recorded in other comprehensive income. Wessex has several variable and
fixed rate loans in foreign currencies which are fully hedged through a
combination of cross-currency swaps and interest rate swaps. In addition, Wessex
is subject to foreign currency risk on translation from its functional currency
(GBP) to the reporting currency (USD).
NOTE 11 -- STOCKHOLDERS' EQUITY
ORDINARY SHARES
As of March 31, 1996, there were 214,417,242 issued and paid ordinary
shares of 60p each. During fiscal 1997, Wessex repurchased 722,771 ordinary
shares at L3.55 per share and 6,675,068 shares at L3.80 per share. Also during
fiscal 1997, 783,967 shares were issued to existing stockholders in lieu of a
cash dividend, 1,510,118 shares were issued under the stock-based compensation
plans and 193,756 shares were issued under the profit-sharing scheme.
During fiscal 1998, 1,359,267 shares were issued to existing stockholders
in lieu of a cash dividend, 1,673,643 shares were issued under the stock-based
compensation plans and 137,398 shares were issued under the profit-sharing
scheme.
CLASS B AND C ORDINARY SHARES
As of March 31, 1996 there were 30,225,106 issued and paid B ordinary
shares of 60p each and 13,285,088 C ordinary shares of 60p each. During fiscal
1997 Wessex repurchased all issued B and C ordinary shares at L3.55 per share.
On September 10, 1997, the authorized but unissued B and C ordinary shares were
redesignated as authorized ordinary shares of 60p each.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Other comprehensive income at March 31, 1998 comprises the foreign currency
translation reserve of $178.8 million and unrealized gains on available-for-sale
securities of $3.2 million. The majority of the foreign currency translation
reserve is generated by the translation of the GBP functional currency financial
statements into the USD reporting currency.
PROFIT-SHARING STOCK PLAN
Wessex operates a profit-sharing stock plan whereby employees can apply for
free shares and also purchase shares. If the employee purchases shares, Wessex
matches the number of shares purchased up to a set limit. The fair market value
of the free and matching shares on the grant date is written off to the
F-40
<PAGE> 135
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income statement in the year of issue. Employees are entitled to all dividends
on these shares when issued. At March 31, 1998, 452,623 ordinary shares were
held by Wessex Water Trustee Company Ltd on behalf of employees who were
beneficially entitled to the shares under this plan. The market value of these
shares at March 31, 1998 was $3.9 million.
STOCK OPTIONS
Wessex applies APB 25 in accounting for its stock-based compensation plans
("share option plans"). Accordingly, compensation expense of $0.2 million, $0.2
million and $0.3 million was recorded for the six months ended October 2, 1998
and for the years ended March 31, 1998 and 1997, respectively.
Wessex has two share option plans. The first is a savings-related share
option plan, based on save-as-you-earn contracts, under which options were
granted between August 1991 and August 1997 at prices between L1.47 and L3.58
per share. At March 31, 1998, there were options outstanding in respect of
2,367,465 shares, exercisable between April 1, 1998 and February 28, 2005. The
second share option plan is an executive share option plan whereby options
outstanding in respect of 762,116 ordinary shares were granted at prices between
L1.85 and L3.16 per share. These options are exercisable between April 1, 1998
and August 1, 2004.
Details of the share option plans are summarized in the table below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
OPTIONS SHARES (IN GBP)
- ------- ---------- --------------
<S> <C> <C>
Outstanding at March 31, 1996............................... 5,678,630 2.20
Granted..................................................... 509,463 2.80
Exercised................................................... (1,531,156) 1.66
Forfeited................................................... (126,011) 2.20
---------- ----
Outstanding at March 31, 1997............................... 4,530,926 2.46
---------- ----
Granted..................................................... 477,003 3.58
Exercised................................................... (1,673,259) 2.36
Forfeited................................................... (205,089) 2.49
---------- ----
Outstanding at March 31, 1998............................... 3,129,581 2.68
---------- ----
Granted..................................................... 371,597 3.64
Exercised................................................... (320,197) 2.62
Forfeited................................................... (24,688) 2.73
---------- ----
Outstanding at October 2, 1998.............................. 3,156,293 2.80
---------- ----
Exercisable at March 31, 1997............................... 1,061,306 2.46
Exercisable at March 31, 1998............................... 762,116 3.11
Exercisable at October 2, 1998.............................. 629,674 3.10
</TABLE>
The exercise price of the savings-related share options granted was 20%
below market price.
F-41
<PAGE> 136
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding as at
March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
NUMBER LIFE NUMBER
RANGE OF EXERCISE PRICES (GBP) OUTSTANDING (YEARS) EXERCISABLE
- ------------------------------ ----------- ------------ -----------
<S> <C> <C> <C>
1.00 - 1.49......................................... 235,152 0.50 --
1.50 - 1.99......................................... 248,246 1.62 13,372
2.00 - 2.49......................................... 1,003,938 2.17 4,772
2.50 - 2.99......................................... 430,808 3.29 --
3.00 - 3.49......................................... 743,972 5.94 743,972
3.50 - 3.99......................................... 467,465 4.22 --
</TABLE>
If Wessex had elected to recognize compensation expense based on the fair
value of the stock options at the grant date in accordance with SFAS 123,
"Accounting for Stock Based Compensation," compensation expense of $0.3 million,
$0.5 million, and $0.3 million would have been recorded for the six months ended
October 2, 1998 and for the years ended March 31, 1998 and 1997, respectively.
Net income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ----- ------
(IN MILLIONS OF US DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported............................................... $71.8 $16.7 $153.0
Pro forma................................................. 71.7 16.4 153.0
Basic earnings per share:
As reported............................................... $0.30 $0.01 $ 0.65
Pro forma................................................. 0.30 0.01 0.65
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants for the six months ended October 2, 1998 and for the years ended March
31, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Dividend yield.............................................. 4.1% 3.3% 4.4%
Expected volatility......................................... 21% 22% 23%
Risk-free interest rate..................................... 6.3% 7.1% 7.2%
Expected lives.............................................. 4.9 years 4.8 years 4.8 years
Weighted average option price (GBP)......................... 3.64 3.58 2.80
Weighted average fair market value at date of grant (GBP)... 1.24 1.42 1.03
</TABLE>
NOTE 12 -- REDEEMABLE PREFERENCE SHARES
On September 7, 1995, a bonus issue of 308,984,402 fully paid 50p
cumulative redeemable preference shares was made to holders of record as of
August 31, 1995 of B and C ordinary shares on a one-for-one
F-42
<PAGE> 137
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis; 310,000,000 of these shares were authorized. The preference shares were
originally redeemable at par in four equal tranches on the dividend payment date
in each of the years 1998, 1999, 2000 and 2001. The preference dividend is paid
annually in arrears at a gross dividend rate, fixed in advance, of 12 month
LIBOR plus 0.5%. Preference shares have priority on winding up, but are
non-voting unless a resolution is passed to vary their rights.
Beginning in September 1998, Wessex redeemed all of its 308,984,402
cumulative redeemable preference shares at the par value of 50p per share. This
was pursuant to resolutions passed by its stockholders on July 29, 1998 and
November 23, 1998 to cancel the preference shares by repaying capital to the
preference stockholders.
NOTE 13 -- EARNINGS PER SHARE
Reconciliation of the numerator and denominator as used in the calculation
of earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
NUMERATOR (IN MILLIONS OF US DOLLARS) 1998 1998 1997
- ------------------------------------- ---------- ------ ------
<S> <C> <C> <C>
Basic
Net income attributable to ordinary stockholders....... $ 64.1 $ 1.6 $139.5
Dividends paid to convertible stockholders............. -- -- 0.6
------ ------ ------
Diluted
Net income available to ordinary and convertible
stockholders........................................ $ 64.1 $ 1.6 $140.1
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DENOMINATOR (IN MILLIONS)
- -------------------------
<S> <C> <C> <C>
Basic
Weighted average shares outstanding during year........ 213.0 211.3 214.7
Effect of dilutive securities:
Stock options....................................... 1.5 1.4 2.0
Convertible securities.............................. -- -- 38.0
------ ------ ------
Diluted.................................................. 214.5 212.7 254.7
====== ====== ======
</TABLE>
The UK Finance (No. 2) Act 1997 required the payment of utility tax, which
for Wessex Water Plc was $162.3 million, and was charged in full in the results
for the year ended March 31, 1998. The adjusted earnings per share adding back
this utility tax would have been:
<TABLE>
<CAPTION>
YEAR
ENDED
MARCH 31,
1998
---------
<S> <C>
Basic....................................................... $0.78
Diluted..................................................... 0.77
</TABLE>
F-43
<PAGE> 138
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- INCOME TAXES
Total income tax expense is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ------ -----
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Current tax............................................... $ 3.0 $ 26.5 $79.3
Deferred tax.............................................. 23.2 24.9 (2.1)
Share of tax of equity method investee.................... 2.2 6.6 5.2
Utility tax............................................... -- 162.3 --
----- ------ -----
Total income tax expense........................ $28.4 $220.3 $82.4
===== ====== =====
</TABLE>
The differences between taxes computed at the statutory tax rate and
Wessex's effective income tax rate are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, --------------
1998 1998 1997
---------- ------ -----
(IN MILLIONS OF US DOLLARS
EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Tax at statutory tax rate 31% (1997: 33%)................ $ 31.1 $ 73.5 $77.7
Change in tax rate....................................... (12.7) (22.6) --
Non-deductible expenses.................................. 7.9 1.6 1.6
Equity investee.......................................... 0.5 2.5 0.4
Other.................................................... 1.6 3.0 2.7
------ ------ -----
Total before utility tax....................... 28.4 58.0 82.4
------ ------ -----
Utility tax.............................................. -- 162.3 --
------ ------ -----
Total.......................................... $ 28.4 $220.3 $82.4
====== ====== =====
Effective rate before utility tax........................ 28% 24% 35%
Effective rate after utility tax......................... 28% 93% 35%
</TABLE>
The change in tax rate from 33% to 31% effective from April 1, 1997 was
enacted on July 31, 1997. The subsequent reduction in the tax rate from 31% to
30% effective from April 1, 1999 was enacted on July 31, 1998.
F-44
<PAGE> 139
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal components of Wessex's net deferred liability are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
(IN MILLIONS
OF US DOLLARS)
<S> <C>
Deferred tax assets:
Advance corporation tax recoverable....................... $114.2
Other temporary differences............................... 7.7
------
Total deferred tax asset.......................... 121.9
------
Deferred tax liabilities:
Accelerated capital allowances............................ 371.5
Other temporary differences............................... 56.9
------
Total deferred tax liability...................... 428.4
------
Net deferred tax liability.................................. $306.5
======
</TABLE>
NOTE 15 -- PENSIONS
The defined benefit schemes which cover the majority of staff are the
Wessex Water Pension Scheme ("WWPS"), the Wessex Water Mirror Image Pension
Scheme ("WWMIS") and the Wessex Water Executive Pension Scheme ("WWEPS"). The
assets are held in separate trustee-administered funds. The pension cost charged
to the income statement has been determined on the advice of independent
qualified actuaries and is accrued over the service lives of the employees
expected to be eligible to receive such benefits.
The following assumptions were used in determining the funded status and
pension charge for each period, and are determined as of the beginning of the
period:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, -----------
1998 1998 1997
---------- ---- ----
<S> <C> <C> <C>
Discount rate............................................... 6.5% 8.3% 9.0%
Yield on government bonds................................... 6.0 7.6 8.5
Expected return on plan assets.............................. 7.5 8.5 9.0
Rate of compensation increase............................... 5.0 6.0 6.5
Pension increases after April 5, 1997....................... 3.0 4.0 4.5
</TABLE>
F-45
<PAGE> 140
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plan's funded status and related pension accrual at March 31, 1998 are
as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
Change in benefit obligation
Benefit obligation at beginning of year................... $ 186.8
Service cost.............................................. 4.6
Interest cost............................................. 15.4
Plan participants' contributions.......................... 2.1
Termination costs......................................... 1.3
Actuarial losses.......................................... 25.9
Benefits paid............................................. (9.4)
Exchange movement......................................... 4.6
-------
Benefit obligation at end of year......................... $ 231.3
=======
Change in plan assets
Fair value of plan assets at beginning of year............ $ 211.6
Actual return on plan assets.............................. 44.8
Employer's contribution................................... 3.6
Plan participants' contribution........................... 2.1
Benefits paid............................................. (9.4)
Exchange difference....................................... 5.0
-------
Fair value of plan assets at end of year.................. $ 257.7
=======
Fair value of plan assets................................. $ 257.7
Projected benefit obligation.............................. (231.3)
-------
Funded status............................................. 26.4
Unrecognized transition asset............................. (6.2)
Unrecognized net actuarial gain........................... (16.6)
Unrecognized prior service cost........................... 7.8
-------
Prepaid benefit cost...................................... $ 11.4
=======
</TABLE>
Net periodic benefit cost includes the following components:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED MARCH 31,
OCTOBER 2, ---------------
1998 1998 1997
---------- ------ ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Service cost............................................. $ 3.1 $ 4.6 $ 4.4
Interest cost............................................ 7.4 15.4 14.3
Expected return on plan assets........................... (9.4) (17.9) (16.9)
Recognition of transition asset.......................... (0.5) (1.0) (1.0)
Amortization of prior service cost....................... 0.3 0.7 0.6
Recognized actuarial gain................................ -- -- (0.3)
Curtailments............................................. -- 1.3 1.6
----- ------ ------
Net periodic benefit cost................................ $ 0.9 $ 3.1 $ 2.7
===== ====== ======
</TABLE>
F-46
<PAGE> 141
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The prepaid benefit accrual is included within other non-current assets in
the balance sheet. The net periodic benefit cost is included within operating
expenses in the income statement.
NOTE 16 -- SEGMENT AND GEOGRAPHIC INFORMATION
Wessex's principal business is the provision of water supply and wastewater
services in southwestern England. For management reporting purposes the
operations are divided into three service categories: regulated water services,
unregulated water services and SC Technology. Regulated water services accounted
for approximately 91%, 93% and 93% of revenues for the six months ended October
2, 1998, and for the years ended March 31, 1998 and 1997, respectively. Wessex's
management regularly reviews financial information relating to these three
service categories. The financial information provided to and reviewed by the
chief operating decision maker does not include balance sheet information by
segment. The financial management information is prepared using UK generally
accepted accounting principles which differ in certain significant respects from
US generally accepted accounting principles.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 2, 1998 MARCH 31, 1998 MARCH 31, 1997
-------------------------- -------------------------- --------------------------
REGULATED REGULATED REGULATED
WATER WATER WATER
SERVICES OTHER TOTAL SERVICES OTHER TOTAL SERVICES OTHER TOTAL
--------- ----- ------ --------- ----- ------ --------- ----- ------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External revenue................ $213.6 $20.2 $233.8 $404.3 $32.3 $436.6 $375.7 $27.4 $403.1
Intersegment revenue............ -- 2.1 2.1 -- -- -- -- -- --
------ ----- ------ ------ ----- ------ ------ ----- ------
Total revenue................... 213.6 22.3 235.9 404.3 32.3 436.6 375.7 27.4 403.1
Segment result.................. 95.2 5.3 100.5 221.1 10.3 231.4 204.5 8.7 213.2
Depreciation.................... 27.4 0.5 27.9 51.4 0.5 51.9 45.6 0.5 46.1
</TABLE>
Reconciliation of segment results to income before taxes:
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR ENDED MARCH 31,
OCTOBER 2, ---------------------
1998 1998 1997
---------- -------- --------
(IN MILLIONS OF US DOLLARS)
<S> <C> <C> <C>
Total segment result for reportable segments........... $100.5 $231.4 $213.2
Intersegment profit.................................. (0.3) -- --
Head office charges.................................. (2.8) (5.1) (7.6)
US GAAP adjustments:
Infrastructure renewals charge.................... 8.3 16.2 15.2
Depreciation on infrastructure assets............. (6.3) (11.8) (10.5)
Other............................................. 1.1 1.6 0.2
------ ------ ------
US GAAP operating profit............................. 100.5 232.3 210.5
Share in results of equity method investee........... 5.8 13.3 14.7
Net interest income (expense)........................ (6.1) (8.6) 10.2
------ ------ ------
Income before tax.................................... $100.2 $237.0 $235.4
====== ====== ======
</TABLE>
F-47
<PAGE> 142
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- RELATED PARTY TRANSACTIONS
At March 31, 1998,Wessex had a 50.0% interest in Wessex Waste Management
Ltd. This investment is further described in Note 6. Waste Management (UK)
Holdings Ltd, a subsidiary of Waste Management International, is the other 50.0%
owner of Wessex Waste Management Ltd. Related party transactions with Wessex
Waste Management Ltd and Waste Management International group companies for the
six months ended October 2, 1998 and for the years ended March 31, 1998 and 1997
were as follows:
(a) In fiscal 1997, Wessex stock options granted to UK Waste
Management Holdings in respect of 10,605,303 ordinary shares were
cancelled.
(b) Also in fiscal 1997, Wessex repurchased 722,771 ordinary shares,
30,225,106 B ordinary shares and 13,285,088 C ordinary shares from UK Waste
Management Holdings at a total cost of $254.3 million.
(c) At March 31, 1998, a loan of $6.2 million had been received by
Wessex from Wessex Waste Management Ltd.
(d) Wessex provided guarantees on loans issued by Wessex Waste
Management Ltd. The maximum liability as of March 31, 1998 was $7.0
million.
Other related party transactions are as follows:
(e) A director of SC Technology owns certain of the assets at the
company's operation in Biel, Switzerland, for which a charge was made to SC
Technology of $0.2 million, $0.3 million and $0.5 million for the six
months ended October 2, 1998 and for the years ended March 31, 1998 and
1997, respectively.
NOTE 18 -- COMMITMENTS AND CONTINGENCIES
LEASES
Wessex leases certain property, plant and equipment. Commitments for
minimum rentals under non-cancelable leases as at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------------
(IN MILLIONS OF
US DOLLARS)
<S> <C>
For the years ending March 31:
1999........................................................ $0.7
2000........................................................ 0.5
2001........................................................ 0.5
2002........................................................ 0.5
2003........................................................ 0.3
Thereafter.................................................. 0.9
----
Total minimum lease payments................................ $3.4
====
</TABLE>
Rent expense amounted to approximately $0.3 million, $0.5 million and $0.5
million for the six months ended October 2, 1998 and for the years ended March
31, 1998 and 1997, respectively.
F-48
<PAGE> 143
WESSEX WATER PLC
(NOW RENAMED WESSEX WATER LTD)
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL EXPENDITURES
Capital expenditure contracted but not provided at March 31, 1998 was $79.1
million.
GUARANTEES
Wessex Water Plc has acted as guarantor for certain borrowing facilities
made available to Wessex Water Services Ltd. As part of the banking
arrangements, Wessex Water Plc has entered into a cross-undertaking with Wessex
Water Services Ltd in relation to the latter's overdraft and related facilities.
At March 31, 1998, Wessex Water Plc had provided guarantees on loans issued
by Wessex Waste Management Ltd, the maximum liability at March 31, 1998 being
$7.0 million.
Wessex Water Plc has provided performance guarantees on behalf SC
Technology on the tendering of contracts. The maximum liability as of March 31,
1998 was $4.9 million.
NOTE 19 -- SUBSEQUENT EVENTS
On Friday July 24, 1998 Enron Corp. ("Enron") of Houston, Texas, United
States, made a cash offer of 630p per share for the shares of Wessex. This offer
was recommended to the stockholders by the Board of Directors of Wessex. The
offer ran to August 28, 1998, but was extended to September 18, 1998 to allow
the Secretary of State for Trade and Industry to consider if there should be an
investigation by the Monopolies and Mergers Commission ("MMC"). On September 10,
1998 it was announced that there would be no reference to the MMC. On September
21, 1998 Enron announced that the offer had become unconditional, having
received by September 18, 1998 acceptances representing 87.2 percent of all
ordinary shares.
On October 2, 1998 Enron announced that it had received acceptances
representing more than 90 percent of all ordinary shares. On that same date
notices were issued to the remaining Wessex ordinary shareholders, informing
them that Enron intended to exercise its rights under Section 429 of the
Companies Act 1985 to acquire compulsorily all of the outstanding ordinary
shares. The compulsory share acquisition was completed in November 1998. Offer
documents were also sent to the stock option holders in the Savings-Related
Share Option Scheme. The options outstanding under this scheme and the Executive
Share Option Scheme were either exercised and the shares acquired by Enron, or
compensation was paid to settle the liabilities under the schemes. All stock
option schemes are now closed.
On November 30, 1998, Wessex sold its interest in Wessex Waste Management
Ltd to Waste Management International for $337.9 million.
In December 1998, all of the remaining 128,339,909 redeemable preference
shares were redeemed and Wessex Water Plc changed its name to Wessex Water Ltd.
F-49
<PAGE> 144
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[AZURIX LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 145
[ALTERNATE PAGES OF INTERNATIONAL PROSPECTUS]
<PAGE> 146
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE COVER FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 15, 1999
PROSPECTUS
- ----------------
SHARES
[AZURIX LOGO]
COMMON STOCK
----------------------
This is Azurix Corp.'s initial public offering of common stock. Azurix is
offering and selling shares and Atlantic Water Trust, the selling
stockholder, is offering and selling shares of common stock under this
prospectus.
The international managers will offer shares outside the United
States and Canada and the U.S. underwriters will offer shares in the
United States and Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. We are applying to
list the common stock on the New York Stock Exchange under the trading symbol
"AZX."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to Azurix....................... $ $
Proceeds, before expenses, to the Selling Stockholder...... $ $
</TABLE>
The international managers may also purchase up to an additional
shares from the selling stockholder at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments, if any. The U.S. underwriters may similarly purchase up to an
aggregate of an additional shares from the selling stockholder.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
----------------------
MERRILL LYNCH INTERNATIONAL
----------------------
The date of this prospectus is , 1999.
<PAGE> 147
[ALTERNATE PAGES FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
GENERAL
We intend to offer our common stock outside of the United States and Canada
through a number of international managers and elsewhere through U.S.
underwriters. Merrill Lynch International, , and
are acting as lead managers of each of the international managers named below.
Subject to the terms and conditions set forth in an international purchase
agreement among Azurix, the selling stockholder, Enron and the international
managers, and concurrently with the sale of shares of common stock to
certain U.S. underwriters, Azurix and the selling stockholder have agreed to
sell to the international managers, and each of the international managers
severally and not jointly has agreed to purchase from Azurix and the selling
stockholder, the number of shares of common stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
<S> <C>
Merrill Lynch International.................................
--------
Total..........................................
========
</TABLE>
Azurix, the selling stockholder and Enron have also entered into a U.S.
purchase agreement with certain U.S. underwriters in the United States and
Canada for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, ,
and are acting as U.S. representatives. Subject to the terms
and conditions set forth in the U.S. purchase agreement, and concurrently with
the sale of shares of common stock to the international managers
pursuant to the international purchase agreement, Azurix and the selling
stockholder have agreed to sell to the U.S. underwriters, and each of the U.S.
underwriters severally and not jointly has agreed to purchase from Azurix and
the selling stockholder, an aggregate of shares of common stock. The
initial public offering price per share and the total underwriting discount per
share of common stock are identical under the international purchase agreement
and the U.S. purchase agreement.
In the international purchase agreement and the U.S. purchase agreement,
the several international managers and the several U.S. underwriters,
respectively, have agreed, subject to the terms and conditions set forth in
those agreements, to purchase all of the shares of common stock being sold under
the terms of each such agreement if any of the shares of common stock being sold
under the terms of that agreement are purchased. In the event of a default by an
underwriter, the international purchase agreement and the U.S. purchase
agreement provide that, in certain circumstances, the purchase commitments of
nondefaulting underwriters may be increased or the purchase agreements may be
terminated. The closings with respect to the sale of shares of common stock to
be purchased by the international managers and the U.S. underwriters are
conditioned upon one another.
Azurix and Enron have agreed to indemnify the international managers and
the U.S. underwriters against certain liabilities, including certain liabilities
under the Securities Act, or to contribute to payments which the international
managers and the U.S. underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offers and to reject orders in whole or in part.
<PAGE> 148
COMMISSIONS AND DISCOUNTS
The lead managers have advised Azurix and the selling stockholder that the
international managers propose initially to offer the shares of common stock to
the public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of common stock. The international managers may allow, and
such dealers may reallow, a discount not in excess of $ per share of common
stock to certain other dealers. After the initial public offering, the public
offering price, concession and discount may change.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by Azurix and the selling stockholder to
the international managers and the U.S. underwriters and the proceeds before
expenses to Azurix and the selling stockholder. This information is presented
assuming either no exercise or full exercise by the international managers and
the U.S. underwriters of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- -------- --------
<S> <C> <C> <C>
Public Offering Price............................... $ $ $
Underwriting Discount............................... $ $ $
Proceeds, before expenses, to Azurix................ $ $ $
Proceeds, before expenses, to the selling
stockholder....................................... $ $ $
</TABLE>
The expenses of these offerings, exclusive of underwriting discounts, are
estimated at $ and are payable by Azurix and the selling stockholder.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the international managers and
the U.S. underwriters are permitted to sell shares of common stock to each other
for purposes of resale at the public offering price, less an amount not greater
than the selling concession. Under the terms of the intersyndicate agreement,
the U.S. underwriters and any dealer to whom they sell shares of our common
stock will not offer to sell or sell shares of common stock to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, and the international managers
and any dealer to whom they sell shares of common stock will not offer to sell
or sell shares of common stock to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. persons or Canadian persons,
except in the case of transactions under the terms of the intersyndicate
agreement.
OVER-ALLOTMENT OPTION
The selling stockholder has granted an option to the international
managers, exercisable for 30 days after the date of this prospectus, to purchase
up to an aggregate of additional shares of our common stock at the
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The international managers may exercise this option
solely to cover over-allotments, if any, made on the sale of our common stock
offered hereby. To the extent that the international managers exercise this
option, each international manager will be obligated, subject to certain
conditions, to purchase a number of additional shares of our common stock
proportionate to such international manager's initial amount reflected in the
foregoing table.
The selling stockholder also has granted an option to the U.S.
underwriters, exercisable for 30 days after the date of this prospectus, to
purchase up to an aggregate of additional shares of common stock to
cover over-allotments, if any, on terms similar to those granted to the
international managers.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares offered hereby to be sold
to some of our directors, officers, employees, customers
<PAGE> 149
and other persons with whom we have an existing relationship who have expressed
an interest in purchasing our common stock, including certain employees,
officers and directors of Enron and its affiliated companies, business
associates and related persons. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of the offering will
be offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
Azurix and the selling stockholder have agreed, with certain exceptions,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus, not to directly or
indirectly:
- 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 for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file a registration statement under
the Securities Act relating to any shares of our common stock
- Enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of our common
stock or other securities, in cash or otherwise
NEW YORK STOCK EXCHANGE LISTING
Azurix is applying to list the common stock on the New York Stock Exchange
under the symbol "AZX."
Before these offerings, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
among Azurix, the selling stockholder, Enron, the lead managers and the U.S.
representatives. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, are the valuation
multiples of publicly traded companies that the lead managers and the U.S.
representatives believe to be comparable to us, including adjusted market value
to EBITDA multiples, price to book value multiples and price to earnings
multiples, certain of our financial information, the history of, and the
prospects for, our company and the industry in which we compete, an assessment
of our management, our past and present operations, the prospects for and timing
of our future revenues, the present state of our development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to ours. There can be no assurance that
an active trading market will develop for the common stock or that the common
stock will trade in the public market subsequent to these offerings at or above
the initial public offering price.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase our common stock. As an exception to these rules, the lead
managers and the U.S. representatives are permitted to engage in certain
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
If the underwriters create a short position in our common stock in
connection with these offerings, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the lead managers and
the U.S. representatives may reduce that short position by purchasing common
stock in the open market. The lead managers and the U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above.
<PAGE> 150
The lead managers and the U.S. representatives may also impose a penalty
bid on underwriters and selling group members. This means that if the lead
managers or the U.S. representatives purchase shares of our common stock in the
open market to reduce the underwriters' short position or to stabilize the price
of our common stock, they may reclaim the amount of the selling concession from
the underwriters and selling group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
None of Azurix, the selling stockholder, or any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of our common stock.
In addition, none of Azurix, the selling stockholder, or any of the underwriters
makes any representation that the lead managers or the U.S. representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
OTHER RELATIONSHIPS
Certain of the underwriters and their affiliates engage in transactions
with, and perform services for, our company, Enron and Enron's affiliates in the
ordinary course of business and have engaged, and may in the future engage, in
commercial banking and investment banking transactions and services with our
company, Enron and Enron's affiliates, for which they have received customary
compensation.
STAMP TAXES
Purchasers of the shares of common stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
LEGAL MATTERS
Certain legal matters in connection with the common stock offered hereby
are being passed upon for Azurix by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters will be passed upon for the international managers and the
U.S. underwriters by Andrews & Kurth LLP, Houston, Texas.
EXPERTS
The consolidated financial statements and schedule for Azurix Corp. and
subsidiaries as of December 31, 1998 and for the period from January 29, 1998
(Date of Inception) to December 31, 1998, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements for Wessex Water Plc (now renamed
Wessex Water Ltd) (predecessor company) as of March 31, 1998 and for the years
ended March 31, 1998 and 1997, included in this prospectus, have been audited by
PricewaterhouseCoopers, independent accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
that firm as experts in giving said report.
The consolidated statements of income, changes in stockholders' equity and
cash flows for Wessex Water Plc (now renamed Wessex Water Ltd) (predecessor
company) for the period from April 1, 1998 to October 2, 1998 included in this
prospectus have been audited by Arthur Andersen, independent accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
<PAGE> 151
[ALTERNATE BACK COVER FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[AZURIX LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 152
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth fees payable to the Securities and Exchange
Commission and the New York Stock Exchange, and other estimated expenses
expected to be incurred in connection with issuance and distribution of
securities being registered. All such fees and expenses shall be paid by Azurix
and the selling stockholder.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $239,775
NYSE Fee....................................................
NASD Fee.................................................... 30,500
Transfer Agent Fees and Expenses............................
Printing Fees and Expenses..................................
Legal Fees and Expenses.....................................
Accounting Fees and Expenses................................
Miscellaneous...............................................
--------
Total............................................. $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Azurix's certificate of incorporation and bylaws provide that
indemnification shall be to the fullest extent permitted by the DGCL for all
current or former directors or officers of the company.
As permitted by the DGCL, the certificate of incorporation provides that
directors of Azurix shall have no personal liability to Azurix or its
stockholders for monetary damages for breach of fiduciary duty
II-1
<PAGE> 153
as a director, except (1) for any breach of the director's duty of loyalty to
Azurix or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law, (3) under Section
174 of the DGCL or (4) for any transaction from which a director derived an
improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 29, 1998, Azurix issued 1,000 shares to Enron in an exempt
transaction pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. See the Exhibit Index following the signature pages to this
Registration Statement.
(b) Financial Statement Schedule. See Report of Independent Public
Accountants included herein on Page S-1 and Schedule I -- Condensed Financial
Information of Registrant included herein beginning on Page S-2.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described
in Item 14, 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.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriter(s) to permit prompt delivery
to each purchaser.
(c) For purpose 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
the 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.
(d) 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-2
<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston, in
the State of Texas, on March 15, 1999.
AZURIX CORP.
By: /s/ REBECCA P. MARK
----------------------------------
Name: Rebecca P. Mark
Title: Director, Chairman and Chief
Executive Officer
POWER OF ATTORNEY
The undersigned directors and officers of Azurix Corp. ("Azurix") do hereby
constitute and appoint Rodney L. Gray, Edward N. Robinson and John C. Ale, and
each of them, with full power of substitution, our true and lawful
attorneys-in-fact and agents to do any and all acts and things in our name and
behalf in our capacities as directors and officers, and to execute any and all
instruments for us and in our names in the capacities indicated below which such
person may deem necessary or advisable to enable Azurix to comply with the
Securities Act of 1933, as amended (the "Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Registration Statement, including specifically, but not limited to, power and
authority to sign for us, or any of us, in the capacities indicated below and
any and all amendments (including pre-effective and post-effective amendments or
any other registration statement filed pursuant to the provisions of Rule 462(b)
under the Act) hereto; and we do hereby ratify and confirm all that such person
or persons shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Act, this Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ REBECCA P. MARK Director, Chairman and Chief March 15, 1999
- ----------------------------------------------------- Executive Officer
Rebecca P. Mark (Principal Executive Officer)
/s/ RODNEY L. GRAY Director and Vice Chairman, March 15, 1999
- ----------------------------------------------------- Finance, Risk Management
Rodney L. Gray and Investments and
Chief Financial Officer
(Principal Financial Officer)
/s/ RODNEY L. FALDYN Chief Accounting Officer March 15, 1999
- ----------------------------------------------------- (Principal Accounting Officer)
Rodney L. Faldyn
/s/ JOHN H. DUNCAN Director March 15, 1999
- -----------------------------------------------------
John H. Duncan
/s/ W. NICHOLAS HOOD Director March 15, 1999
- -----------------------------------------------------
W. Nicholas Hood
/s/ KENNETH L. LAY Director March 15, 1999
- -----------------------------------------------------
Kenneth L. Lay
/s/ JEFFREY K. SKILLING Director March 15, 1999
- -----------------------------------------------------
Jeffrey K. Skilling
</TABLE>
II-3
<PAGE> 155
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOSEPH W. SUTTON Director March 15, 1999
- -----------------------------------------------------
Joseph W. Sutton
/s/ JOHN WAKEHAM Director March 15, 1999
- -----------------------------------------------------
John Wakeham
</TABLE>
II-4
<PAGE> 156
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the stockholder of Azurix Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Azurix Corp. and subsidiaries as of
December 31, 1998 and for the period from January 29, 1998 (Date of Inception)
to December 31, 1998 included in this registration statement and have issued our
report thereon dated February 22, 1999. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 16(b) is the responsibility of Azurix Corp.'s management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Houston, Texas
February 22, 1999
S-1
<PAGE> 157
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AZURIX CORP.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
---------------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C>
Operating revenues.......................................... $ --
---------
Operating expenses:
Operations and maintenance................................ 2.3
General and administrative................................ 12.3
Depreciation and amortization............................. 0.1
---------
Total operating expenses.......................... 14.7
---------
Equity in earnings of consolidated affiliates............... 26.0
Other....................................................... (1.1)
---------
Net income.................................................. $ 10.2
=========
Earnings per share of common stock -- basic and diluted..... $ 0.10
=========
Weighted average shares outstanding -- basic and diluted.... 100.0
=========
</TABLE>
The accompanying note is an integral part of these condensed financial
statements.
S-2
<PAGE> 158
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AZURIX CORP.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
<S> <C>
ASSETS
Investment in subsidiary.................................... $1,630.0
Investment in unconsolidated affiliates..................... 73.5
Other non-current assets.................................... 4.2
--------
Total Assets...................................... $1,707.7
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable -- affiliates.............................. $ 18.0
Accounts payable and accruals............................... 7.5
Stockholder's equity:
Additional paid-in capital................................ 1,671.0
Other..................................................... 11.2
--------
Total stockholder's equity............................. 1,682.2
--------
Total Liabilities and Stockholder's Equity........ $1,707.7
========
</TABLE>
The accompanying note is an integral part of these condensed financial
statements.
S-3
<PAGE> 159
SCHEDULE I
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AZURIX CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 29, 1998
(DATE OF INCEPTION)
TO DECEMBER 31,
1998
---------------------
(IN MILLIONS)
<S> <C>
Cash provided by operating activities....................... $ --
Investing Activities:
Investment in subsidiary.................................. (1,600.2)
---------
Net cash used in investing activities....................... (1,600.2)
---------
Financing Activities:
Issuance of common stock and capital contributed.......... 1,600.2
---------
Net cash provided by financing activities................... 1,600.2
---------
Change in cash and cash equivalents......................... --
Cash and cash equivalents, January 29, 1998 (Date of
Inception)................................................ --
---------
Cash and cash equivalents, December 31, 1998................ $ --
=========
</TABLE>
The accompanying note is an integral part of these condensed financial
statements.
S-4
<PAGE> 160
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO FINANCIAL STATEMENTS
These condensed financial statements of Azurix Corp. reflect parent company
only financial information and should be read in conjunction with the
consolidated financial statements of Azurix Corp. presented elsewhere in this
document.
Azurix Corp., as the parent company, has no material contingencies,
long-term obligations or guarantees and has not received any cash dividends from
its consolidated subsidiaries or unconsolidated affiliates since its date of
inception on January 29, 1998.
S-5
<PAGE> 161
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
------- ------------------------
<C> <S>
*1.1 -- Form of U.S. Purchase Agreement
*1.2 -- Form of International Purchase Agreement
*3.1 -- Form of Amended and Restated Certificate of Incorporation
*3.2 -- Form of Amended and Restated ByLaws
*5.1 -- Opinion of Vinson & Elkins L.L.P.
**10.1 -- Instrument of Appointment as a Water and Sewerage
Undertaker, dated August 1989, as amended, of Wessex
Water Services Limited
*10.2 -- L736,000,000 Credit Facility, dated August 18, 1998, as
amended on September 29, 1998, and December 7, 1998, for
Enron Water (Europe) Plc arranged by Greenwich Natwest
and Barclays Capital with National Westminster Bank Plc,
as Agent
**10.3 -- L73,000,000 Amended and Restated Credit Facility
Agreement, dated December 17, 1998, for Azurix Europe
Ltd. and Bristol Water Trust
*10.4 -- Azurix Corp. 1999 Stock Plan, dated February 2, 1999
*10.5 -- Registration Rights Agreement
*10.6 -- Business Opportunity Agreement
*10.7 -- Services Agreement
*10.8 -- License Agreement
*10.9 -- Employment Agreement of Rebecca P. Mark, effective May 4,
1998, with Enron Corp. and First Amendment, effective
February 1, 1999, with Enron Corp. and Azurix
*10.10 -- Employment Agreement of Rodney L. Gray, effective
February 16, 1999, with Azurix
*10.11 -- Employment Agreement of Amanda K. Martin, effective
January 1, 1998, with Enron Capital & Trade Resources
Corp., First Amendment, dated October 29, 1998, with
Enron Capital & Trade Resources Corp. and Azurix and
Second Amendment, dated March 15, 1999, with Azurix
*10.12 -- Employment Agreement of Alex Kulpecz, effective September
15, 1998, and First Amendment, dated March 11, 1999, with
Azurix
*10.13 -- Employment Agreement of Colin F. Skellett, dated February
24, 1995, and First Amendment, dated December 9, 1998,
with Wessex Water Plc
**21 -- Subsidiaries of Azurix
**23.1 -- Consent of Arthur Andersen LLP (independent public
accountants)
**23.2 -- Consent of Arthur Andersen (independent accountants)
**23.3 -- Consent of PricewaterhouseCoopers (independent
accountants)
*23.4 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
5.1)
**24 -- Power of Attorney (contained on the signature page
hereto)
**27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 10.1
WESSEX WATER SERVICES LIMITED
INSTRUMENT OF APPOINTMENT AS A WATER
AND SEWERAGE UNDERTAKER
1. Instrument of Appointment August 1989
Amendments
2. Condition C: Infrastructure Charges 1 April 1991
3. Condition F: Accounts & Accounting 4 March 1993
Information
4. Condition B: Charges - Interim 1 April 1991
determinations and provision of information
to director
5. Condition K: Ring Fencing and disposals of 1 April 1996
land
6. Condition Q: Payments for supply 19 April 1997
interruptions in drought conditions
7. Condition F9.3: Regulatory Accounts: 8 May 1997
Reporting Requirements
8. Tidworth Inset 1 September 1998
Amendments Pending
9. Wessex Water & Enron Corp. (Notice of October 1998
proposed modifications)
10. Condition B: Large User Amendment and 1 April 2000
Five Year Periodic Reviews
1
<PAGE> 2
DEPARTMENT OF THE ENVIRONMENT
Instrument of Appointment by
The Secretary of State for the Environment
Of Wessex Water Services Limited
as a water and sewerage undertaker under the Water Act 1989
Department of the Environment
August 1989
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Appointments
The Appointments to be a water and sewerage undertaker 1
Schedule 1: Area for which the Appointments are made
1. The Water Supply Area 2
2. The Sewerage Services Area 3
3. Interpretation and Construction of Schedule I 3
Appendix:
Part I, which lists premises comprised
in the Water Supply Area 5
Part II, which lists premises not comprised
in the Water Supply Area 5
Schedule 2: Conditions Of the Appointments
Condition A: Interpretation and Construction
1 & 2. General provisions as to interpretation and construction 6
3. Defined terms used in the Conditions 6
4. References to the Water Authority to include references to the
Water Authority's predecessors in title in certain circumstances 9
5. Notifications 9
6. Principles of construction which are to apply when one
Appointment only is terminated 9
7. References to the Director of questions arising as to the extent
of the Water Supply Area and the Sewerage Services Area 10
Condition B: Charges
Part I. Explanatory Provisions
1. Introduction 11
2. Defined terms which apply for the purposes of all Parts of
Condition B 12
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
3. References to the Appointee to include references to the Water
Authority in certain circumstances 19
Part II. Restriction of Standard Charges for Basket Items
4. The Charges Limited (RPI + K) 19
5. Matters Affecting the Charges Limit and the calculation
of the Weighted Average Charges Increase 20
6. Verification of compliance with the Charges Limit 21
7. Transitional Provisions 23
Part III. Periodic Reviews
8. Periodic Reviews of the Appointed Business initiated by
the Director at Five-yearly Intervals 23
9. Periodic Reviews of the Appointed Business at regular 24
Ten-yearly intervals
10. Periodic Reviews of the Appointed Business initiated by
the Appointee at Five-yearly Intervals 25
11. Periodic Reviews of the Appointed Business where a
Termination Notice has been given 25
12. Effect of termination of the Appointments (or either of
them) on Periodic Reviews 26
Part IV. Interim determinations
13. Matters of Interpretation and construction which apply for
the purposes of Part IV 26
14. References to the Director relating to Notified Items and Relevant
Changes of Circumstance and circumstances having a substantial
adverse effect on the Appointed Business 42
15. Changes to the Adjustment Factor initiated by the Director
relating to Notified Items and Relevant Changes of Circumstance 48
Part V. References to the Monopolies Commission and Modification
Of Condition B
16. References to the Monopolies Commission 49
17. Modification of Condition B following Periodic Reviews and
references to the Director or the Monopolies Commission 50
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
Part VI. Provision Of Information to the Director
18. Information required to be furnished by the Appointee to
the Director 50
Condition C: Infrastructure Chines
1. Interpretation and Construction 55
2. Restriction of Infrastructure Charges 55
3. Changes to the Infrastructure Charge Limits 57
4. References to the Monopolies Commission 60
5. Modification of Condition C 61
Condition D: Charges Schemes
1. Interpretation and Construction 62
2 & 3 Requirement to have in effect a charges scheme 62 and 63
4. Provisions required to be included in charges schemes
relating to Infrastructure Charges 63
5. Disclosure of Information relating to charges schemes 63
6. Section 75 agreements 63
Condition E: Prohibition on Undue Discrimination and Undue
Preference and Information on charges
1. Charges to which Condition E applies 64
2. Prohibition of undue preference and undue discrimination
in relation to classes of customer 64
3. Prohibition of undue preference and undue discrimination
in relation to individual customer 64
4. Requirement to provide Information to the Director about
compliance with the Condition 64
5. Requirement to provide Information to the Director about
supplies, services and functions to which the Condition
applies 64
6. Matters to which the Condition does not apply 64
7. Transitional Provisions 65
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C>
Condition F: Accounts and accounting information
1. Introduction 67
2. Interpretation and Construction 67
3. Accounting Records 69
4. Accounting Statements 69
5. Segmental Information 70
6. Transactions entered into by the Appointee and the Appointed
Business with or for the benefit of Associated Companies or
Other businesses or activities of the Appointee 73
7. Basis of allocations and apportionments 74
8. Current Cost Accounting Statements 75
9. Audit and publication of accounting statements 76
10. References to the Monopolies Commission 77
Appendix, which lists information to be disclosed under 6 78
Condition G: Code of Practice for Customers and relations with the
Customer Service Committee
1. Scope of Code of Practice 80
2. Review of Code of Practice 80
3. Consultation with the Customer Service Committee 81
4. Director's approval of revised Code of Practice 81
5. Modifications to Code of Practice required by the Director 81
6. Publicity 81
7. Complaints procedure 82
8. Identification of personnel 82
9 - 11 Meetings with the Customer Service Committee 82
Condition H: Code or Practice and Procedure on Disconnection
1. Scope of Code of Practice 83
2. Review of Code of Practice 83
3. Consultation with the Customer Service Committee 83
4. Director's approval of revised Code of Practice 83
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
5. Modifications to Code of Practice required by the Director 83
6. Publicity 84
7. Disconnection procedure 84
8. Information about disconnections to be provided to the
Customer Service Committee 86
Condition I: Code of Practice and Procedure on Leakage
1. Definition of "supply pipe" 87
2. Scope of Code of Practice 87
3. Review of Code of Practice 87
4. Consultation with the Customer Service Committee 87
5. Director's approval of revised Code of Practice 87
6. Modifications to Code of Practice required by the Director 87
7. Publicity 88
8. Procedure for adjusting charges where there is an unidentified
leak 88
Condition J: Levels of Service Information and Service Targets
Part I: Levels of Service Information
1. Provision of Information 89
2. Report, certificates etc. 90
Part II. Service Targets
3. Setting of Service Targets by the Appointee 91
4. Monitoring of Service Targets 91
5. Reporting on Service Targets 92
6. Measures to achieve Service Targets 93
Part III. Certification and Verification of Information
7. Auditors' Certificate 94
8 - 12. Director's investigations 94-96
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C>
Part IV. Publication of Information
13. Publication of Levels of Service Information and Service
Target Reports 96
Condition K: "Ring Fencing" Disposals of Land and Changes of Use of Land
1. Introduction 97
2. Interpretation and Construction 97
3. "Ring Fencing" 100
4. Disposals of protected land other than disposals by
auction or formal tender or to Associated Companies 101
5. Disposals of protected land by anction or formal tender 106
6. Disposals of protected land to Associated Companies 107
7. Changes of use of protected land 109
8. Disclosure of Information to Valuers 112
Condition L: Underground Asset Management Plans
1. Interpretation and Contraction 113
2. Duty to furnish Information 114
3. Information Systems 117
4. Reports 118
5. General 120
Condition M: Provision of Information to the Director
1. Requirement to furnish Information to the Director 122
2. Form etc. in which Information to be furnished 122
3-6. Restrictions on scope of Information which the Appointee
can be required to furnish under Condition M 122
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Condition N: Fees
1. Interpretation and Construction 123
2. Fees 123
3. Limit on renewal fee and special fee 124
4. Retail Prices Index 126
Condition O: Circumstances in which a replacement appointment
may be made
Requirement to give at least 10 years notice, expiring not earlier
than 25 years after the transfer date, to terminate either
Appointment 127
Guide to Defined Terms 128
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Table of Contents Page
- ----------------- ----
<S> <C>
The Appointments 1
Schedule 1: Area for which the Appointments are made 2
Schedule 2: Conditions of the Appointments 6
A. Interpretation and Construction 6
B. Charges 11
C. Infrastructure Charges 54
D. Charges Schemes 61
E. Prohibition on Undue Discrimination and Undue
Preference and Information on charges 63
F. Accounts and accounting information 67
G. Code of Practice for Customers and relations
With the Customer Service Committee 80
H. Code of Practice and Procedure on Disconnection 83
I. Code of Practice and Procedure on Leakage 87
J. Levels of Service Information and Service Targets 90
K. "Ring Fencing", Disposals of Land and Changes of Use of Land 98
L. Underground Asset Management Plans 114
M. Provision of Information to the Director 123
N. Fees 124
O. Circumstances in which a replacement appointment may be made 128
Guide to Defined Terms 129
</TABLE>
10
<PAGE> 11
THE APPOINTMENTS
1. The Secretary of State, in exercise of the powers conferred on him by
sections 11 and 14 the Water Act 1989 ("the Act"), hereby appoints
Wessex Water Service: Limited ("the Appointee") to be the water
undertaker for the area described in paragraph 1 of Schedule 1 and to
be the sewerage undertaker for the area described in paragraph 2 of
Schedule 1, subject to the Conditions set out in Schedule 2.
2. The appointments contained in this instrument ("the Appointments")
shall come into force on the day appointed as the transfer date under
section 4 of the Act.
Authorized by the /s/ R. S. DUDDING
Secretary of State to ----------------------------
sign in that behalf R. S. DUDDING
An Assistant Secretary in the
Department of the Environment
24 August 1989
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<PAGE> 12
SCHEDULE 1: Area for which the Appointments are made
1. The Water Supply Area
1.1 The area for which the Appointee is appointed to be the water undertaker
("the Water Supply Area") comprises:
(1) the area the boundaries of which (other than the seaward boundary) are
more particularly delineated by the line shaded pink in the Water
Supply Area Map and the seaward boundary of which is as described in
sub-paragraph 1.2, the area described in this sub-paragraph (1) being
shown for identification only in the map entitled "the Water Supply
Area: Map Sheet Identification Map" accompanying and forming part of
this instrument;
(2) those islands (if any) comprised in the area which immediately before
the transfer date was the area as respects which the Water Authority
exercised its water supply functions under the 1973 Act and which are
not comprised in the area for which any appointment has been made
under section 11(4)(a) or the Act; and
(3) the premises listed in Part I of the Appendix to this Schedule
but excludes the premises listed in Part II of the Appendix to this
Schedule.
1.2 The seaward boundary of the area described in sub-paragraph 1.1(1) and of
the islands referred to in sub-paragraph 1.1(2) is the seaward boundary of
the Water Authority's area immediately before the transfer date for
purposes of the 1973 Act but excluding therefrom so much of that area for
which any appointment has been made under section 11(4)(a) of the Act.
2
<PAGE> 13
2. The Sewerage Services Area
2.1 The area for which the Appointee is appointed to be the sewerage
undertaker ("the Sewerage Services Area") comprises:
(1) the area the boundaries of which (other than the seaward boundary) are
more particularly delineated by the line shaded pink in the Sewerage
Services Area Map and the seaward boundary of which is as described in
sub-paragraph 2.2. the area described in this sub-paragraph (1) being
shown for identification only in the map entitled "the Sewerage
Services Area: Map Sheet Identification Map" accompanying and forming
part of this instrument;
(2) those islands (if any) comprised in the area which immediately before
the transfer date was the Water Authority's area for the purposes of
section 14 of the 1973 Act; and
(3) Steep Holm.
2.2 The seaward boundary of the area described in sub-paragraph 2.1(1) and of
the islands referred to in sub-paragraph 2.1(2) is the boundary which was
the seaward boundary for the purposes of Section 14 or the 1973 Act of the
area which immediately before the transfer date is the Water Authority' s
area for those purposes.
2.3 The seaward boundary or Steep Holm is the low water mark.
3. Interpretation and Construction
In this Schedule:
"the 1973 Act" means the Water Act 1973;
"the Sewerage Services Area Map" means the maps signed on behalf or
the Secretary of State accompanying and forming part of this
instrument numbered 8 S 1 - 8 S 8 inclusive;
3
<PAGE> 14
"the Water Authority" means the Water Authority of which the Appointee
is the successor company under the Act;
"the Water Supply Area Map" means the maps signed an behalf of the
Secretary of State accompanying and forming part or this instrument
numbered 8 W 1 - 8 W 6 inclusive 8 W 6a and 8 W 6b, and 8 W 7 - 8 W 12
inclusive;
words and expressions used in this Schedule shall have the same
meaning as in any provision or the 1973 Act.
4
<PAGE> 15
APPENDIX
Part:I: Additional premises outside the boundary of the Water Supply Area Map
but comprised in the Water Supply Area
<TABLE>
<CAPTION>
GRID REFERENCE
<S> <C>
Hawtrys School, Hawtrys, SU2463
Savernake Forest,
Marlborough, Wiltshire
Callow Hill Farm, Wootton SU036844
Bassett, Wiltshire
The Knotts, Common Road, SU040893
Minety
</TABLE>
Part II: Premises inside the boundary of the Water Supply Area Map but not
comprised in the Water Supply Area
<TABLE>
<CAPTION>
GRID REFERENCE
<S> <C>
Old Farm, Lyneham, Wiltshire SU0077
Penn Cross Farm, Wootton SY347944
Fitzpaine, Charmouth;
Dorset
</TABLE>
5
<PAGE> 16
SCHEDULE: Conditions of the Appointments
Condition A: Interpretation and Construction
1. Unless the contrary intention appears:
(1) words and expressions used in these Conditions and references in these
Conditions to enactments shall be construed as if they were in an Act
of Parliament and the Interpretation Act 1973 applied to them;
(2) references in these Conditions to enactments shall include any
statutory modification thereof after the transfer date;
(3) words and expressions used in these Conditions shall have the same
meaning as in any provision of the Act;
(4) references in these Conditions to sections and Schedules are
references to sections of, and Schedule: to, the Act; and
(5) references in these Conditions to paragraphs are references to
paragraphs of the Condition in which the reference appears and
references to sub-paragraphs are references to sub-paragraphs of the
paragraph in which the reference appears.
2. In construing these Conditions:
(1) the heading or title of any Condition or of any paragraph of any
Condition shall be disregarded; and
(2) any description of the purposes of a Condition shall be construed
subject to the provisions of the rest of the Condition in which that
description appears.
3. Unless the context otherwise requires, in these Conditions:
"the 1937 Act" means the Public Health (Drainage of Trade Premises) Act
1937;
6
<PAGE> 17
"the 1985 Act" means the Companies Act 1985;
"the Appointed Business" means the business consisting of the carrying
out by the Appointee of the Regulated Activities;
"the Area" means the area for which for the time being the Appointee holds
the appointment as water undertaker or, as the case may be, sewerage
undertaker;
"Associated Company" means any Group Company or Related Company;
"the Auditors" means the Appointee's auditors for the time being appointed
in accordance with the 1985 Act;
"books and records" means any and all books, records, files, maps, plans,
documents, papers, accounts, estimates, returns and other data of
whatsoever nature and whether or not created recorded or maintained in
a document;
"Charging Years" means a year commencing on 1st April;
"the Customer Service Committee" means the customer service committee to
which the Appointee is allocated under section 6;
"domestic customer" means the occupier of domestic premises;
"domestic premises" means any premises used wholly or partly as a dwelling
or intended for such use;
"financial year" means a financial year of the Appointee beginning and
ending on the respective dates referred to in section 227(2) of the
1985 Act;
"Group Company" means any subsidiary or holding company or the Appointee
and any subsidiary of any holding company of the Appointee (other than
the Appointee);
"Information" means information which is in the possession of the person
required to furnish it or which it can reasonably obtain or which it
can
7
<PAGE> 18
reasonably prepare from information which is in its possession or
which it can reasonably obtain, and information which is required to
be furnished under any of these Conditions shall be furnished, subject
to an provisions of the Condition under which that information is
required to be furnished, in such form and manner as the Director may
reasonably require;
"Periodic Review" means a review of the Appointed Business carried out
under paragraph 8, 9, 10 or 11 of Condition B, but so that references
in Part IV & Condition B to a Periodic Review shall exclude any review
carried out under paragraph 11 of that Condition and shall include the
determination by the Monopolies Commission of the relevant questions
or, as the case may be, the disputed determination referred to it
under paragraph 16 of Condition B following the giving of a Review
Notice under paragraph 8 or the giving of Information to the Director
in accordance with Paragraph 9 or a reference under paragraph 10;
"Prior Year" means the year commencing 1st April immediately prior to the
relevant Charging Year;
"Reference Notice" means a notice given to the Director under paragraph
10, 11 or l4 of Condition B;
"the Regulated Activities" means the functions of a water undertaker or as
the case may be, a sewerage undertaker and, for the avoidance of
doubt, references to the functions of a water undertaker or, as the
case may be, a sewerage undenaker shall include references to the
duties imposed on water undertaker or, as the case may be, a sewerage
undertaker;
"Related Company" means any company in relation to which the Appointee or
any Group Company is a Related company within the meaning of paragraph
92 of Schedule 4 to the 1985 Act or which is such a Related company in
relation to the Appointee or any Group Company;
"Relevant Premises" means any office premises occupied by the Appointee in
relation to the Appointed Business and to which members of the public
have access;
8
<PAGE> 19
"the Retail Price Index" means the General Index of Retail Prices
published by the Department of Employment each month in respect of all
items or, if the said index for the month of November is not published
by 31st December next following such index for such month as the
Director may not later than 7th January next following determine to be
appropriate in the circumstances, after such consultation with the
Appointee as is reasonably practicable, and in such a case references
to the Retail Prices Index shall bc construed for the purpose of all
subsequent calculations for which the value of the Retail Prices Index
for that year is relevant as references to that other index;
"Review Charging Year" means the first of the Charging Years in respect of
which any Periodic Review is carried out;
"the Review Notice Date" means the first day of January which is fifteen
months before the first day of the Review Charging Year;
"Sewerage Infrastrucure Charge" means such a charge as is described in
section79(2)(b);
"trade effluent" has the same meaning as in the 1937 Act;
"the Water Autbority" means the Water Authority of which the Appointee is
the successor company;
"Water Infrastructure Charge" means such a charge as is described in
section 79(2)(a).
4. In the definition of "Excluded Charges" and "Standard Charges" in
Condition B and in Condition E, references to the Water Authority shall
include references to the Water Authority's predecessors in title.
5. Any notification required or permitted to be given under any Condition
shall be given in writing and cognate expressions shall be construed
accordingly.
6. Where one only of the Appointments is terminated, so much of the
provisions at thest Conditions as applies or is relevant exclusively to
the Appointment which has been so terminated or to the activities of an
undertaker holding an
9
<PAGE> 20
appointment of the kind which has been so terminated shall cease to have
effect as from the date on which the termination of that Appointment takes
effect.
7. The Appointee may refer to the Director for determination by him (having
considered any representations by the Appointee and any other water
undertaker or, as the case may be, sewerage undertaker) any question
arising as to whether any area, island, premises or installation is, or,
as the case may be, are, comprised within the Water Supply Area or, as the
case may be; the Sewerage Services Area, as those expressions are defined
in Schedule 1 to this instrument.
10
<PAGE> 21
Condition B: Charges
Part I. Explanatory Provisions
1. Introduction
The purposes of this Condition are set out in the following
sub-paragraphs.
1.1 To limit increases in standard charges made by the Appointee for the
supply of water, the provision of sewerage services and the reception,
treatment and disposal of trade effluent. The weighted average increase is
limited to the sum of the movement in the Retail Prices Index and an
Adjustment Factor, called K.
Changes in metered charges are calculated by reference to actual
consumption in a Weighting Year (a financial year of the Appointee).
Changes in unmetered charges are calculated by reference to caanges in
average revenue per chargeable supply calculated on the customer base as
at the preceding 1st December. Changes are weighted in proportion to the
contribution which each type of charge makes to total revenue in the
Weighting Year.
These matters are dealt with in Part II under the heading "Restriction of
Standard Charges for Basket Items".
1.2 To provide for a review of the Appointed Business to be carried out by the
Director at 5 or 10 yearly intervals so that the Director can determine
whether the Adjustment Factor should he changed. Except as expressly
provided in this Condition all reviews will cover periods of ten
consecutive years. This is dealt with in Part III under the heading
"Periodic Reviews".
1.3 To enable the Appointee:
(1) to refer to the Director for determination at 5 yearly intervals the
question whether the Adjustment Factor should be changed;
(2) to refer to the Director for determination from time to time the
question or changing the Adjustment Factor to allow for Notified Items
and Relevant Changes of Circumstance;
11
<PAGE> 22
(3) to refer to the Director for determination at any time the question of
changing the Adjustment Factor where circumstances have a substantial
adverse effect on the Appointed Business; and
(4) where notice to terminate either or both of the Appointments has been
given, to refer to the Director for determination the question what
the Adjustment Factor should be in the future, on the assumption that
the relevant Appointment or, as the case may be, the Appointments were
to continue in force, for the purpose of facilitating consideration of
the terms on which a new appointee could accept transfers of property,
rights and liabilities from the Appointee, as provided in section
12(4).
These matters are dealt with in part IV under the heading "Interim
Determinations".
1.4 To provide for the Director to initiate changes to the Adjustment Factor
to allow for Notified Items and Relevant Changes of Circumstance. This is
also dealt with in Part IV.
1.5 To enable the Appointee to require the Director to refer to the Monopolies
Commission matters arising out of determinations by the Director referred
to in sub-paragraphs 1.2 and 1.4 and references referred to in
sub-paragraph 1.3. These matters are dealt with in Part V under the
heading "References to the Monopolies Commission and Modification of this
Condition".
1.6 To require the Appointee to give Information to the Director to enable him
to make determinations under this Condition. This is dealt with in Part VI
under the heading "Provision of Information to the Director".
2. Defined terms which apply for the purposes of all Parts of this Condition
In this Condition:
references to "the Appointed Business" shall be construed as if the
Appointed Business included the management and holding by the
Appointee of any protected land for so long as it is ndt transferred
under paragraph 7 of Condition K;
12
<PAGE> 23
"Average Charge Per Chargeable Supply" means in respect or a specified
Unmeasured Basket Item for a specified year, the amount R where
-
N
R is the annual revenue (exclusive of VAT which would accrue to the
Appointee in respect of the specified Unmeasured Basket Item if all
Standard Charges (other than Excluded Charges) made or to be made in
respect of that Unmeasured Basket Item in the specified year were applied
to all Chargeable Supplies of the Appointee which would have been subject
to those Standard Charges as at 1st December preceding the specified year
N is the number of Chargeable Supplies as at such 1st December for which
the Appointee would have been entitled to make those Standard Charges;
"Basket Items" are
(1) unmeasured water supply.
(2) unmeasured sewerage services,
(3) measured water supply,
(4) measured sewerage services, and
(5) reception, treatment and disposal of trade effluent
where
(a) a measured supply or service is one where all or some or the charges
for that supply or service are based on measured quantities of volume
and an unmeasured supply or service is any other; and
(b) sewerage services includes sewage treatment and disposal and excludes
reception, treatment and disposal of trade effluent;
"Chargeable Supply" means any supply of water or any provision of sewerage
services for which charges are payable;
13
<PAGE> 24
"Excluded Charges" unless and until otherwise agreed between the Director
and the Appointee, are
(1) amounts payable in respect of an unmeasured supply of water by means of
stand-pipes or water tanks and in respect of the erection or maintenance
of stand-pipes or water tanks;
(2) charges for a supply of water provided by the Appointee under section 48,
(3) charges for the reception and disposal by the Appointee, or other person
specified by the Appointee or, as the case may be, the Water Authority, of
matter delivered to the Appointee or such other person by a collection
authority in pursuance of section 14(9) of the Control of Pollution Act
1974;
(4) charges for unmeasured supplies of water to cattle troughs.;
(5) charges for unmeasured building water supplies;
(6) amounts payable in respect of an unmeasured supply of water by means of
bowsers or water tankers; and
(7) charges for unmeasured supplies of water to farm taps and other
agricultural water points
AND, for the avoidance of doubt, but without prejudice to the meaning of
Standard Charges in respect of Basket Items, shall also include
(8) charges payable for any such connection as is described in section 79(2);
(9) charges for a supply of water in bulk to another water undertaker;
(10) amounts payable under any such agreement as is described in section
126(1)(b) (including any such agreement entered into by the Water
Authority under section 81 of the Water Resources Act 1963 with respect to
any of the matters referred to in sections 8l(l)(b) and 81(1)(d) of that
Act as, by virtue or paragraph 29(1) of Schedule 26,
14
<PAGE> 25
has effect on and after the transfer date as a thing done by the
Appointee); and
(11) charges payable under any agreement for any unmeasured supply of water or
unmeasured sewerage services which are calculated by reference to the
rateable value of hereditaments, occupied by the person to whom the supply
or services are provided, fixed in accordance with section 32, 33 or, as
the case may be, 34 of the General Rate Act 1967 or, as the case may be,
fixed in accordance with section 54 of the Local Government Finance Act
1988
but so that where this Condition requires reference to be made to Excluded
Charges in a Charging Year prior to that stating on 1st April 1990 the
expression "Excluded Charges" shall be read and construed as though:
(a) there were added to sub-paragraph (2) of this definition the words "and
charges for a supply of water provided by the Water Authority under
section 37 of Schedule 3 to the 1945 Act";
(b) there were added to sub-paragraph (3) of this definition the words "and
charges for the reception and disposal by the Water Authority, or other
person specified by the Water Authority, of matter delivered to the Water
Authority or such other person by a collection authority in pursuance of
section 14(9) of the Control of Pollution Act 1974"; and
(c) there were added to sub-paragraph (10) of this dermition the words "and
any agreement entered into by the Water Authority under section 81 af the
Water Resources Act 1963 with respect to any of the matters referred to in
sections 81(1)(b) and 81(1)(d) of that Act";
"Measured Basket Items" means items (3), (4) and (5) in the definition of
Basket Items;
"Non-volumetric Charge" is a charge which is not based on measured quantities
of volume;
"the Relevant Charging Year" means a Charging Year starting on 1st April
1995 or on the fifth anniversary of the first day of the first of the
15
<PAGE> 26
Charging Years in respect of which the last Periodic Review was carried
out;
"Standard Charges" means
(1) charges fixed under any such charges scheme as is referred to in
section 76;
(2) charges payable under any such agreement as is referred to in section
75 (including any such agreement made or entered into by the Water
Authority under section 30 of the 1973 Act as, in accordance with a
scheme under Schedule 2, is transferred to the Appointee) under or for
which all the charges payable are in accordance with standard charges
published or fixed by the Appointee or, as the case may be, the Water
Authority;
(3) charges payable where a discharge is made in pursuance of a consent
given by the Appointee for the purposes of the 1937 Act under or for
which all the charges payable are in accordance with standard charges
published or fixed by the Appointee;
(4) charges determined by agreement in respect of a supply of water
provided by the Appointee for non-domestic purposes where all the
charges so determined in respect of that supply are in accordance with
standard charges published or fixed by the Appointee;
(5) charges fixed under any such charges scheme made by the Water
Authority under section 31 of the 1973 Act as, by virtue of paragraph
16(1) of Schedule 26, has effect on and after the transfer date as if
it were a charges scheme made under section 76 by the Appointee;
(6) charges payable under any such consent or agreement under the 1937 Act
as, by virtue of paragraph 13 of Schedule 26, has effect on and after
the transfer date as if it were given or entered into by the Appointee
under which all the charges payable are in accordance with standard
charges published or fixed by the Water Authority or, as the case may
be, the Appointee; and
(7) charges in respect of any such supply which the Water Authority was
under a duty to make under section 27 of the 1945 Act as, by virtue of
paragraph 8 of Schedule 26, is a supply which the Appointee is under a
duty to make on and after the transfer date where all charges in
respect of such supply are in accordance
16
<PAGE> 27
with standard charges published or fixed by the Water Anthony or, as
the case may be, the Appointee
but so that where this Condition requires reference to be made to Standard
Charges in a Charging Year prior to that starting on 1st April 1990 the
expression "Standard Charges" shall be read and construed as though:
(a) there were added to sub-paragraph (5) of this definition the words "and
any charges scheme made by the Water Authority under section 31 of the
1973 Act";
(b) there were added to sub-paragraph (6) of this definition the words 11 and
any consent or agreement given or entered into by the Water Authority
under the 1937 Act under which all the charges payable were in accordance
with standard charges published or fixed by the Water Authority",
(c) there were added to sub-paragraph (7) of this definition the words "and
any such supply which the Water Authority was under a duty to make under
section 27 of the 1945 Act, where all the charges in respect of such
supply were in accordance with standard charges published or fixed by the
Water Authority"; and
(d) there were added a further sub-paragraph, (8), as follows: "charges
payable under any consent, agreement, scheme or other instrument given,
made or entered into by the Water Authority under any enactment or
subordinate legislation under which it is empowered to make charges under
which all the charges payable were in accordance with standard charges
published or fixed by the Water Authority".
In this definition references to standard charges published or fixed by the
Appointee or the Water Authority are to such charges, whether published or fixed
under a charges scheme or otherwise;
"Termination Notice" means a notice given in accordance with Condition O;
"Unmeasured Basket Items" means items (1) and (2) in the definition of Basket
Items,
17
<PAGE> 28
"Weighted Average Charges Increase" means the sum calculated as follows:
W(t) = [E]i A(t)(i) + [E]j B(t)(j)
--------- .r(i) --------- .r(j) -1
A(t-1)(i) B(t-1)(j)
Where
W(t) is the Weighted Average Charges Increase for the Charging Year
i is an index identifying the two Unmeasured Basket Items
j is an index identifying the three Measured Basket Items
[E]i requires summation over the two Unmeasured Basket Items
[E]j requires summation over the three Measured Basket Items
A(t)(i) is the Average Charge Per Chargeable Supply in respect of Unmeasured
Basket Item i for the Charging Year
A(t-1)(i) is the Average Charge per Chargeable Supply in respect of Unmeasured
Basket Item i for the Prior Year.
B(t)(j) is the Weighting Year Revenue in respect of Measured Basket Item j for
the Charging Year.
B(t-1)(j) is the Weighing Year Revenue in respect of Measured Basket Item j for
the Prior Year.
r(i) or r(j) is the revenue (exclusive of VAT) which accrued to the Appointee in
the Weighting Year from all Standard Charges other than Excluded Charges
(including, in the case of Measured Basket Items, any Non-volumetric Charge) in
respect of Unmeasured Basket Item i or Measured Basket Item j (as the case may
be), divided by the aggregate of such revenues for all five Basket Items;
"Weighting Year" means the financial year of the Appointee ended last
before 7th October in the Prior Year;
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<PAGE> 29
"Weighting Year Revenue" means the revenue (exclusive of VAT) which would
have accrued to the Appointee in the Weighting Year in respect of the
specified Measured Basket Item, if all Standard Charges other than
Excluded Charges (including any Non-volumetric Charge) made or to be made
in respect of that Measured Basket Item in the Charging Year or, as the
case may be, the Prior Year had applied.
3. Where the calculation of the Weighted Average Charges Increase requires
reference to be made to circumstances existing at any ume or during any
period prior to the transfer date. references to the Appointee shall
include references to the Water Authority.
Part II. Restriction of Standard Charges for Basket Items
4. The Charges Limit
4.1 The Appointee shall ensure that the Weighted Average Charges Increase in
any Charging Year (beginning with the Charging Year starting on 1st April
1990) when expressed as a percentage does not exceed the Charges Limit.
4.2 The Charges Limit is the percentage calculated as RPI + K, where
RPI is the percentage change (expressed, in the case of an increase,
as a positive number, in the case of a decrease, as a negative number
and, in the case of no change, as zero) in the Retail Prices Index
between that published for the month of November in the Prior Year
and that published for the immediately preceding November
K is the Adjustment Factor.
4.3 The Adjustment Factor is:
(1) for each Charging Year starting on 1st April in the year specified in
Column (1) of the table below, the number set opposite that Charging
Year in Column (2) of the said table (or such other number, which may
be a positive or negative number or zero, as shall from time to time
be determined under this Condition):
19
<PAGE> 30
<TABLE>
<CAPTION>
(1) (2)
<S> <C>
1990 4.5
1991 4.5
1992 4.5
1993 4.5
1994 4.5
1995 4.5
1996 4.5
1997 4.5
1998 4.5
1999 4.5
</TABLE>
(2) for each subsequent Charging Year, such number (which may be a
different number for any Charging Year and may be a positive or
negative number or zero) as Shall from time to time bave been
determined under this Condidon or, if none, zero.
4.4 If the Weighted Average Charges Increase in any Charging Year is less than
the Charges Limit then the Charges Umit for the following Charging Year
shall be increased by the amount of such deficiency.
4.5 The Charges Umit for the Charging Year starting on 1st April 1992 and each
subsequent Charging Year gall only be increased by virtue of sub-paragraph
4.4 to the extent that such deficiency is not attributable to any Charging
Year ended three or more years previously.
5. Matters Affecting the Charies Limit and the calculation of the Weighted
Average Charges Increase
5.1 Where the Appointee determines:
(1) to make a material change (other than one which relates solely to the
amount of a charge) to the basis on which it makes or calculates any
Standard Charge, or Standard Charges taken as a whole, (other than
Excluded Charges) for the supply of water or the provision or
sewerage services or the reception, treatment and disposal of trade
effluent;
20
<PAGE> 31
(2) to make a material change to the scope of any such scheme, agreement
or consent as is referred to in the definition of "Standard Charges"
(insofar as such change relates to charges, other than Excluded
Charges, for the supply of water or the provision of sewerage
services or the reception, treatment and disposal of trade effluent);
or
(3) to change the basis on which the Appointee treats supplies of water
or provisions of sewerage services as separate supplies or provisions
for the purpose of making Standard Charges (other than Excluded
Charges) which affects the calculation of Average Charge Per
Chargeable Supply
it shall:
(a) notify the Director; and
(b) furnish to the Director such explanations and Information relating to
such change as the Director considers requisite or expedient having
regard to the purposes of this Condition.
5.2 Where there is a material change to the basis of compiling the Retail
Prices Index this Condition, insofar as it relates to that part of the
calculation of the Charges Limit to which the Retail Prices Index is
relevant, shall be modified in such manner as the Director, after prior
consultation with the Appointee, may determine to be appropriate to take
account of such change.
6. Verification of compliance with the Charges Limit
6.1 Statements
The Appointee shall deliver to the Director the following statements:
(1) not later than two months before the start of each Charging Year a
statement in writing (a "Principal Statement") of:
(a) the revenue which accrued in the Weighting Year from all
Standard Charges (including, in the case of Measured Basket
Items, any Non-volumetric Charge), other than Excluded Charges,
in respect of each Unmeasured Basket Item i and each Measured
Basket Item j;
21
<PAGE> 32
(b) the aggregate revenue which accrued in the Weighting Year from
all such Standard Charges; and
(c) the amount of each and every type or category of charge for the
supply of water; the provision of sewerage services or the
reception, treatment or disposal of trade effluent which the
Appointee proposes to make of a kind specified in the definition
of "Standard Charges" as at the commencement of that Charging
Year which are not Excluded Charges (and for this purpose where
the Appointee proposes to charge different prices per cubic
metre of water supplied depending upon the volume of water
supplied or the time of supply or the category of customer or
any other variable factor then each such price shall be treated
as a different type or Category of charge);
(2) not later than two months, or such later date as the Director may
allow, before the date during any Charging Year as from which the
Appointee proposes to make or fix a new Standard Charge (which is not
an Excluded Charge) for the supply of water or the provision of
sewerage services or the reception, treatment or disposal of trade
effluent or to increase or decresse the amount of any such charge a
statement in writing (a "Supplemental Statement") of the new charge
or the amount by which the Appointee proposes to increase or decrease
the amount of that charge.
Any Principal Statement or Supplemental Statement shall be accompanied by
the information necessary to calculate At(i) and At-i(i) and Bt(j) and
Bt-1(j) in the definition of Weighted Average Charges Increase and a
written statement of those calculations.
6.2 Auditors' Report
Any Principal Statement shall be accompanied by a report by the Auditors
as to whether, in their opinion, the information included in that
Principal Statement under sub-paragraphs 6.l(l)(a) and (b) has been
properly extracted from the relevant accounting statements prepared and
delivered by the Appointee under paragraph 4 of Condition F and from the
Appointee's accounting records and such other records of the Appointee as
the Auditors consider relevant for the purpose of making their report and
as to whether, in their opinion, the calculations delivered by the
Appointee with that
22
<PAGE> 33
Principal Statement are in accordance with this Condition and with the
Appointee's accounting and such other relevant: records.
7. Transitional Provisions
7.1 Save with the prior written approval of the Director or as permitted under
the terms of any agreement or arrangement entered into or made by the
Water Authority before the transfer date, the Appointee shall not increase
the amount of any Standard Charge (other than an Excluded Charge) for any
supply of water provided, or provision of sewerage services made, or
reception, treatment and disposal of trade effluent which takes place, at
any time before 1st April 1990 or in respect of, any period ending before
that date from the amount of such Standard Charge as at the transfer date.
7.2 The Director, after consultation with the Appointee, may modify this
Condition by prior notice to the Appointee at any time and from time to
time while the Appointee is wholly owned by the Crown by changing the
Adjustment Factor. Any such modification shall have effect from the date
and in respect of the Charging Years specified in the relevant notice, not
being a Charging Year starting before the Director gives such notice.
Part III. Periodic Reviews
8 Periodic Reviews of the Appointed Business initiated by the Director at
Five-yearly Intervals
8.1 Where the Director so requires by notice to the Appointee (a "REVIEW
NOTICE") given at any time on or before,: the Review Notice Date the
Appointee shall furnish to the Director such Information as the Director
may reasonably require to enable him to carry out a Periodic Review for
the purpose of determining the question whether having regard to all the
circumstances which are relevant in the light of the principles which
apply by virtue of Part I of the Act in relation to the Director's
determination, including, without limitation, any change in, circumstance
which has occurred since the transfer date or, as the case may be, the
last Periodic Review or which is to occur) the Adjustment Factor should be
changed (and if so what change should be made to the Adjustment Factor)
for the ten consecutive Charging Years starting on 1st April 1995 or any
such later date specified in the relevant Review Notice which is the fifth
anniversary of:
23
<PAGE> 34
(1) 1st April 1995; or
(2) the first day of the first of the Charging Years in respect of which
the last Periodic Review was carried out.
8.2 The Appointee shall furnish to the Director not later than 31st March
immediately following the Review Notice Date such information as the
Director may reasonably require in the Review Notice to enable him to
carry out the Periodic Review. The Appointee shall also furnish to the
Director, as soon as reasonably practicable, such further Information as
the Director may from time to time by notice to the Appointee reasonably
require to enable trim to carry out the Periodic Review.
8.3 The Appointee shall also furnish to the Director from time to time when so
requested by the Director such Information as the Director may reasonably
require to decide whether or not to give a Review Notice.
9. Periodic Reviews of the Appointed Business at regular Ten-yearly
Intervals
9.1 The Appointee shall furnish to the Director such Information as the
Director may reasonably require to enable him to carry out a Periodic
Review for the purpose of determining the question whether (having regard
to all the circumstances which are relevant in the light of the principles
which apply by virtue of Part I of the Act in relation to the Director's
determination, including, without limitation, any change in circumstance
which has occurred since the transfer date or, as the case may be, the
last Periodic Review or which is to occur) the Adjustment Factor should be
changed (and if so what change should be made to the Adjustment Factor)
for:
(1) the ten consecutive Charging Years starting on 1st April 2000 or if a
Periodic Review has been carried out for any period starting prior to
1st April 2000, then the first day of April immediately following the
end of that period; and
(2) each period of ten consecutive Charging Years stating on the tenth
anniversary of the first day of the period in respect of which the
immediately preceding Periodic Review was carried out.
24
<PAGE> 35
9.2 The Appointee shall furnish to the Director not later than 31st March
immediately following the Review Notice Date such Information as the
Director may reasonably require by notice to the Appointee on or before
the Review Notice Date to enabic him to carry out the Periodic Review and.
as soon as reasonably practicable, such further Information as the
Director may from time to time by notice to the Appointee reasonably
require to enable him to carry out the Periodic Review.
10. Periodic Reviews of the Annointed Business initiated by the Appointee at
Five-yearly Intervals
10.1 Subject to sub-paragraph 10.2, the Appointee may refer to the Director for
determination by him the question whether having regard to all the
circumstances which are relevant in the light of the principles which
apply by virtue of Part I of the Act in relation to the Director's
determination, including, without limitation, any change in circumstance
which has occurred since the transfer date or, as the case may be, the
last Periodic Review or which is to occur) the Adjustment Factor should be
changed (and if so what change should be made to the Adjustment Factor)
for the ten consecutive Charging Years starting with the Relevant Charging
Year.
10.2 No reference may be made under sub-paragraph 10.1 if the Director shall
have given a Review Notice to the Appointee under sub-paragraph 8.1 in
respect of the period of ten consecutive Charging Years beginning with the
next Relevant Charging Year.
10.3 A reference to the Director under this paragraph 10 given to the Director
not earlier than 14th January immediately following the Review Notice
Date.
11. Periodic Reviews of the Appointed Business where a Termination Notice has
been given
11.1 Where a Termination Notice has been given by the Secretary of State to the
Appointee, the Appointee may refer to the Director for determination by
him the question whether, on the assumption that such a Termination Notice
had not been given, (but subject thereto, having regard to all the
circumstances which are relevant in the light of the principles which
apply by virtue of Part I of the Act in relation to the Director's
determination, including,
25
<PAGE> 36
without limitation, any change in circumstance which has occurred since
the transfer date or, as the case may be the last Periodic Review or which
is to occur) the Adjustment Factor should be changed (and if so what
change should be made to the Adjustment Factor) for the ten consecutive
Charging Years starting with the charging Year starting 1st April last
before the Termination Notice is to expire.
11.2 A reference to the Director under this paragraph 11 shall be made by
notice given to the Director not earlier than 1st July and not later than
14th July in the Charging Year next but one before that commencing on the
said 1st April.
12. Effect of termination of the Appointments (or either of them) on Periodic
Reviews
Subject to paragraph 11, if the Secretary of State shall have served a
Termination Notice on the Appointee then this Condition shall have effect
as though, in the case of the Appointment in respect of which the
Termination Notice has been given, references to a Periodic Review being
carried out in respect of a period of ten consecutive Charging Years were
references to a Periodic Review being carried out in respect of the
relevant Appointment in respect of a period of that number of consecutive
Charging Years which is the lesser of:
(1) ten; and
(2) the number of consecutive Charging Years (including that in which the
day on which the Termination Notice is to take effect falls) in the
periodic starting on the first day of the first of the Charging Years
in respect of which that Periodic Review is to be carried out and
ending on the day on which the Termination Notice is to expire.
Part IV. Interim Determinations
13. Matters of interpretation and construction which apply for the purposes of
this Part IV
13.1 In this Part of this Condition:
26
<PAGE> 37
"the Appropriate Discount Rate" means such rate or return as, at the time
at which the Appropriate Discount Rate falls to be applied from time to
time under this Condition, investors and creditors would reasonably expect
of a properly managed company holding the Appointments whose sole business
consists of being a water undertaker and a sewerage undertaker and,
without excluding other considerations which may also be relevant, having
its equity share capital listed on The International Stock Exchange of the
United Kingdom and the Republic of Ireland Limited, and the same
Appropriate Discount Rate shall be applied for all purposes in determining
questions the subject of the same reference (including questions
determined by the Director under paragraph 15 when be determines questions
referred to him by the Appointee under paragraph 14);
"equity share capital" has the same meaning as in the 1985 Act;
"Interim Determination" means the determination by the Director of the
relevant questions the subject of a reference by the Appointee under
paragraph 14 or pursuant to paragraph 15 or, as the case may be, the
determination by the Monopolies Commission of the relevant questions or of
the disputed determinations the subject of a reference to it pursuant to
sub-paragraph 16(2) or 16(3), which relates to a reference by the
Appointee under paragraph 14 or a determination pursuant to paragraph 15;
"Key Indicators" means key indicators of financial position and performance,
including:
(1) earnings per share,
(2) dividend per share,
(3) dividend cover,
(4) interest cover,
(5) operating profits,
(6) return on capital employed,
(7) net cash flow, and
(8) debt/equity ratio
as measured both by their level in any one year and by trends in those
levels over time;
27
<PAGE> 38
"Net Present Value" means the net present value calculated as at 30th
September in the year in which the relevant Reference Notice is given or,
where in any year no Reference Notice is given under paragraph 14 but the
Director gives a notice to the Appointee under paragraph 15, as at 30th
September in the year in which the Director gives that notice, by
discounting subsequent cash flows and inflating earlier cash flows at the
Appropriate Discount Rate, assuming all cash flows in any Charging Year
occur on 30th September in that Charging Year:
a "Notified Item" is any of the following:
(1) any item notified by the Secretary of State to the Water Authority or
the Appointee as not having been allowed for by him (either in full
or at all) in determining the Adjustment Factor; and
(2) any item notified by the Director to the Appointee as not having been
allowed for (either in full or at all) in determining, in carrying
out the most recent Periodic Review and making any subsequent Interim
Determination (or, where there has been no Periodic Review, in making
any Interim Determination), whether the Adjustment Factor should be
changed (and if so what change should be made to the Adjustment
Factor)
and for the purpose of this definition:
(a) where any such item was not allowed for in full then it shall only be
a Notified Item to the extent that it was not allowed for; and
(b) where, in determining whether the Adjustment Factor should be changed
(and if so what change should be made to the Adjustment Factor), the
Director, or, as the case may be, the Monopolies Commission, allows
for any such item as was previously so notified by the Secretary of
State or the Director then references in this Condition to Notified
Items and Relevant Items shall be taken, for the purposes of any
subsequent Interim Determination, to exclude such item to the extent
that the Director, or, as
28
<PAGE> 39
the case may be, the Monopolies Commission, allowed for it as
aforesaid;
a "Relevant Change of Circumstance" is any of the following:
(1) (a) any change to the basis of calculating non-domestic rates in
respect of hereditaments used in the Appointed Business;
(b) any change in the amount of such non-domestic rates, to the
extent that such changes are attributable to the determination
or the rateable value of such hereditaments under the Local
Government Finance Act 1988 in relation to the financial year
starting on 1st April 1990; and
(c) the effect of any provision made under the Local Government
Finance Act 1988 for the transitional implementation of the new
rating Systems created by the said Act which applies in relation
to any financial year falling within the period starting on 1st
April 1990 and ending on 31st March 1995
(and words and expressions used in this sub-paragraph (1) shall have
the same meaning as in the Local Government Finance Act 1988);
(2) any change to the basis on which the Appointee charges customers for
water supply or sewerage services which the Appointee determines to
make so as to comply with any legal requirement;
(3) (a) the application to the Appointee of any legal requirement; and
(b) any change to any legal requirement which applies to the
Appointee including any legal requirement ceasing to apply,
being withdrawn or not being renewed);
(4) where the amount of Relevant Grants received or expected to be
received by the Appointee in respect of any item which has been
allowed for:
29
<PAGE> 40
(a) in determining the Adjustment Factor; or
(b) in determining, in carrying out the most recent Periodic Review
and making any subsequent Interim Determination (or, where there
has been no periodic Review, in making any Interim
Determination), whether the Adjustment Factor should be changed
(and if so what change should be made to the Adjustment Factor)
is different from the amount of Relevant Grants in respect of that
item which the Secretary of State, or, as the case may be, the
Director, notified the Water Authority or, as the case may be, the
Appointee was the amount which it had been assumed, for the purpose
of allowing for the item as aforesaid, would be received by the
Appointee in respect of that item.
For the purposes of this sub-paragraph (4):
(i) where the Director has notified an amount in the circumstances
described above, for which, in the circumstances described
above, the Secretary of State or the Director has previously
notified an amount then the amount last notified by the Director
in the circumstances described above shall be relevant for the
purposes or this sub-paragraph (4) to the exclusion of any
amount previously so notified by the Secretary of State or the
Director; and
(ii) "Relevant Grants" means any grant or state aid made or granted
by any governmental authority or agency of the United Kingdom or
by the Council, Commission or other authority or agency of the
European Communities;
AND WHICH, in the case of a Relevant Change of Circumstance falling
within sub-paragraphs (1) to (3), takes effect, or, in the case of a
Relevant Change of Circumstance falling within sub-paragraph (4),
becomes apparent, after the later of the transfer date and the
determination, in carrying out the most recent Periodic Review, of
30
<PAGE> 41
whether the Adjustment Factor should be changed (and if so what change
should be made to the Adjustment Factor), but so that where the Appointee
requires the Director to make a reference to the Monopolies Commission in
either or the cases referred to in sub-paragraphs 16(1) and 16(3) this
provision shall not apply so as to exclude from the definition of a
Relevant Change of Circumstance any matter falling within sub-paragraphs
(1) to (4) above which took effect, or, as the case may be, became
apparent, after the Director made such reference to the Monopolies
Commission;
(5) either of the following circumstances for any Charging Year in
respect of which the Secretary of State, or, as the case may be, the
Director, notified the Water Authority or, as the case may be, the
Appointee that variations in value received or expected to be
received from Relevant Disposals of Land shall constitute a Relevant
Change of Circumstance:
(a) where for any Charging Year the value received or expected to be
received from a Relevant Disposal of any Identified Land is, or
is expected to be, different from the value which the Secretary
of State, or, as the case may be, the Director, notified the
Water Authority or, as the case may be, the Appointee was the
value attributable to a Relevant Disposal of that Identified
Land for that Charging Year which had been allowed for in
determining the Adjustment Factor or whether the Adjustment
Factor should be changed (and if so what change should be made
to the Adjustment Factor); or
(b) where for any Charging Year, and to the extent not taken into
account under (a) above, the aggregate value received or
expected to be received from Relevant Disposals of
Non-identified Land is, or is expected to be, different from the
value which the Secretary of State, or, as the case may be, the
Director, notified the Water Authority or, as the case may be,
the Appointee was the value attributable to Relevant Disposals
of Non-identified Land for that Charging Year which had been
allowed for in determining the Adjustment Factor or whether the
Adjustment Factor
31
<PAGE> 42
should be changed (and if so what change should be made to the
Adjustment Factor)
and so that any notification by the Director for the purposes of this
sub-paragraph (5) shall be relevant for the purposes of this
sub-paragraph (5) to the exclusion of any earlier notification by the
Secretary of State or the Director for the purposes of this
sub-paragraph (5) to the extent that the first-mentioned notification
is made in respect of matters in respect of which that earlier
notification was made.
For the purposes of this sub-paragraph (5):
(i) "Identitied Land" means any piece or parcel or protected land
identified in any such notification referred to in (a) above as
is relevant for the time being for the purposes of this
sub-paragraph (5) as being included in that notification, not
being, or being part of, a piece or parcel of land which has
previously been the subject of a transfer under paragraph 7 of
Condition K;
(ii) "land" includes any interest or right in or over land;
(iii) "Non-identified Land" means any piece or parcel of protected
land, not being, or being part of:
(A) a piece or parcel of protected land identified in any such
notification referred to in (a) above as is relevant for
the time being for the purposes of this sub-paragraph (5);
or
(B) a piece or parcel of protected land which has previously
been the subject of a transfer under paragraph 7 of
Condition K:
(iv) "protected land" and "disposal" have the meanings respectively
given to them in section 189,
32
<PAGE> 43
(v) a "Relevant Disposal" means and includes any disposal by the
Appointee and any transfer under paragraph 7 of Condition K;
(vi) a "Relevant Disposal of Land" means and includes a Relevant
Disposal or Identified Land and a Relevant Disposal of
Non-identified Land;
(vii) "value" includes value of any kind including, without
limitation, cash, the value of real or personal property or
any interest in such property, the value of any right or
benefit (actual or prospective) and the value of any release;
in whole or in part, of any obligation or claim provided that
to the extent that any property, right or benefit shall
consist of a right to receive cash or any other asset then no
value shall be attributed to that property, right or benefit
but the cash or other asset the subject thereof shall be
included and treated as value received or expected to be
received in the Charging Year in which it is received or
expected to be received;
(viii) references to "value received or expected to be received"
shall be construed so as to include receipts by, and grants
to, the Appointee, any Associated Company or any other
business in which either the Appointee or any Associated
Company has a material direct or indirect interest;
(ix) for the purpose of computing "value received or expected to be
received" in respect of a Relevant Disposal of Land which
consists of a transfer made under paragraph 7 of Condition K
the "value received or expected to be received" shall be the
value for which that transfer is made under that paragraph 7,
but so that where that value includes a right to receive cash
or any other asset then, for the purpose of this
sub-paragraph, no value shall be attributed to that right but:
the cash or other asset the subject thereof shall be included
and treated as value received or expected to be received in
the Charging Year in which it is received or expected to be
received;
33
<PAGE> 44
(x) in the case of a right or benefit, but subject to the proviso
to (vii) above, value shall be deemed to have been received at
the dme the right is granted or the benefit arises;
(6) where:
(a) in determining the Adjustment Factor or in determining, in
carrying out the most recent Periodic Review and making any
subsequent Interim Determination (or, where there has been no
Periodic Review, in making any Interim Determination), whether
the Adjustment Factor should be changed (and if so what change
should be made to the Adjustment Factor) an amount has been
allowed for on account of capital expenditure to be incurred by
the Appointee; and
(b) for the Charging Year last ended before the making of the
relevant reference under paragraph 14, or, as the case may be,
the giving of the relevant notice under paragraph 15, the
Notified Index is at a different level from that which the
Secretary of State, or, as the case may be, the Director,
notified the Water Authority or, as the case way be, the
Appointee was the level which it had been assumed would pertain
in that same Charging Year, being a Charging Year in which it
was assumed for the purpose of assessing the amount allowed for
as aforesaid that capital expenditure would be incurred by the
Appointee, provided that:
(i) where, in respect of an amount being allowed for on account of
capital expenditure in the circumstances described in (a) above,
the Director has notified a level for a Charging Year in the
circumstances described in (b) above, for which, in respect of
an amount being allowed for on account of that same capital
expenditure in the circumstances described in (a) above, the
Secretary of State or the Director has
34
<PAGE> 45
previously notified a level m the circumstances described in (b)
above, then the level last notified by the Director in respect
of that amount being allowed for as aforesaid shall be relevant
for the purposes of this sub-paragraph (6) to the exclusion of
any level previously so notified for that Charging Year by the
Secretary of State or the Director in respect of that amount
being allowed for as aforesaid; and
(ii) where the Appointee has made a reference under paragraph 14, or,
as the case may be, a notice has been given under paragraph 15,
in respect of such a difference as is mentioned in (b) above in
respect of any charging Year but no change to the Adjustment
Factor is made in respect of the Relevant Changes of
Circumstance and Notified Items the subject of that reference
or, as the case may be, that notice by reason that the answer to
the question set out in sub-paragraph 14.2(7) in respect thereof
is negative, then nothing in this sub-paragraph (6) shall
prevent the Appointee from subsequently making a reference under
paragraph 14, or the Director from giving a notice under
paragraph 15, in respect of that same difference and in such a
case references in b,) above to the Charging Year last ended
before the making of the relevant reference or, as the case may
be, the giving of the relevant notice shall be to the Charging
Year last ended before the making of the first reference or, as
the case may be, the giving of the first notice in respect of
that difference.
For the purposes of this sub-paragraph (6) and sub-paragraph 14.2:
(A) "the Notified Index" means such index of national construction costs
notified by the Secretary of State, or, as the case may be, the Director,
to the Water Authority or, as the case may be, the Appointee as the
Secretary of State, or, as the case may be, the
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Director, considers appropriate and reasonable for the purposes of this
Condition as being the index which is to apply for the purposes of the
relevant Charging Year
(B) where:
(x) the Notified Index is not available by 1st September in any year:
(y) there is a material change to the basis of compiling the Notified
Index; or
(z) the level of the Notified Index is revised after the determination of
the questions in respect of a Relevant Change of Circumstance falling
within this sub-paragraph (6)
then the question as to how changes in construction costs in the relevant
Charging Year should be allowed for as a Relevant Change or Circumstance
shall be determined by the Director in such manner as the Director, after
prior consultation with the Appointee, determines to be appropriate and
this Condition shall be modified accordingly; and
(C) "the indexed Capital Costs Amount" is the amount found by multiplying A by
B, where
A is the aggregate amount of capital expenditure which, for the purpose of
assessing the amount allowed for as described in (a) above, it was assumed
would be incurred by the Appointee in the relevant Charging Year
B is the percentage difference between the level of the Notified Index for
the relevant Charging Year and the level notified for that same Charging
Year by the Secretary of State, or, as the case may be, the Director, as
described in (b) above;
(7) where, in determining the Adjustment Factor or in determining, in carrying
out the most recent Periodic Review and making any
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subsequent Interim Determination (or where there has been no Periodic
Review, in making any Interim Determination), whether the Adjustment
Factor should be changed (and if so what change should be made to the
Adjustment Factor) an amount has been allowed for:
(a) on account of steps taken or to be taken for the purpose of securing or
facilitating compliance with a legal requirement (not being one m respect
of which an amount has been allowed for as described under (b) below) or
achieving a service standard adopted or to be adopted by the Appointee; or
(b) on account of making a change which the Water Authority or the Appointee
has determined to make for any such purpose as is referred to in
sub-paragraph (2) of this definition (a "Relevant Change of Circumstance")
AND
(i) in any such case as is described in (a) above the Appointee has not taken
(by the date by which it was assumed for the purposes of assessing the
amount allowed for as aforesaid it would take those steps) any or all of
those steps which, for the purpose of assessing the amount allowed for as
aforesaid, it was assumed it would take; and
(A) as a result, the amount allowed for as aforesaid is substantially
greater than the costs (if any) actually incurred by the Appointee
for the relevant purpose specified in (a) above; and
(B) that purpose has not been otherwise achieved; or
(ii) in any such case as is described in (b) above, either:
(A) the Appointee has not done (by the date by which it was assumed for
the purposes of assessing the
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amount allowed for as aforesaid it would do those things) any or all
of the things to make that change which, for the purpose of assessing
the amount allowed for as aforesaid, it was assumed it would do; and
(x) as a result, the amount allowed for as aforesaid is
substantially greater than the costs (if any) actually incurred
by the Appointee on account of complying with the same legal
requirement for the purposes of compliance with which the
Appointee had determined to make the change on account of which
that amount was allowed for as aforesaid; and
(y) the change which the Water Authority or the Appointee determined
to make, on account of which that amount was allowed for as
aforesaid, has not been made to the extent assumed; or
(B) for reasons which are or would be outside the control of a prudently
managed and efficient company holding the Appointments there has
been, or will be, a substantial change in the costs required to be
incurred in order to make that change; and
(8) where, for reasons which are or would be outside the control of a
prudently managed and efficient company holding the Appointments, the
costs required to be incurred:
(a) in order to secure or facilitate compliance with a legal requirement;
or
(b) to achieve a service standard adopted or to be adopted by the
Appointee
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are substantially different from the costs (if any) which it was
assumed:
(i) in determining the Adjustment Factor; or
(ii) in determining, in carrying out the most recent Periodic Review
and making any subsequent Interim Determination (or, where
there has been no Periodic Review, in making any Interim
Determination), whether the Adjustment Factor should be changed
(and if so what change should be made to the Adjustment Factor)
were or would be required to be incurred for that purpose to
the extent that such difference:
(A) has not been taken into account as a Relevant Change of
Circumstance falling within sub-paragraph (6) of this
definition; and
(B) is not attributable to any such assumption having been based on
any estimate or other Information furnished by the Water
Authority or, as the case may be, the Appointee which the Water
Authority or, as the case may be, the Appointee knew, or which,
by reference to the circumstances which were known or ought
reasonably to have been known to the Water Authority or, as the
case may be, the Appointee at the time when that estimate or
other Information was furnished, the Water Authority or, as the
case may be, the Appointee should reasonably have known, was
materially inaccurate;
a "Relevant Item" is any of the following:
(1) a Relevant Change of Circumstance (other than a Relevant Change of
Circumstance falling within sub-paragraph (5) of the definition);
(2) a Notified Item; and
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(3) a Relevant Disposal of Land
and references to a Relevant Item are to a Relevant Change of
Circumstance (other than a Relevant Change of Circumstance falling
within sub-paragraph (5) of the definition), a Notified Item or a
Relevant Disposal of Land as the context may require.
13.2 In the definition of a "Relevant Change of Circumstance" and for the
purpose of that definition:
(1) a "legal requirement" is any of the following:
(a) any enactment or subordinate legislation to the extent that it
applies to the Appointee in its capacity as a water undertaker
or sewerage undertaker (and for this purpose, but without
prejudice to the generality of the foregoing, "subordinate
legislation" includes any order made under section 20 and any
authorisation granted, approval given, or prohibition imposed,
by the Secretary of State under The Water Supply (Water Quality)
Regulations 1989):
(b) any regulation made by the Council or the Commission of the
European Communities to the extent that it applies to the
Appointee in its capacity as a water undertaker or sewerage
undertaker, or decision taken by the said Commission which is
binding on the Appointee in its capacity as a water undertaker
or sewerage undertaker and to the extent that it is so binding;
(c) any licence, consent or authorisation given or to be given by
the Secretary of State, the Authority or other body or competent
jurisdiction to the Appointee for the purpose of carrying on any
or the functions of a water undertaker or sewerage undertaker;
(d) any undertaking given by the Appointee to, and accepted by, the
Secretary of State or, as the case may be, the Director for the
purposes of section 20(5)(b);
(e) other than any such undertaking as is referred to in (d), any
undertaking given by the Appointee to any enforcement authority,
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and accepted by that enforcement authority, to take all such steps:
(i) as are specified by that enforcement authority to be necessary
or appropriate for the Appointee to take for the purpose of
securing or facilitating compliance with any legal requirement
in relation to which that enforcement authority is the
enforcement authority: or
(ii) the taking of which is specified by that enforcement authority
to be a condition or requirement of granting or renewing any
such license, consent or authorization as is referred to in (c)
or agreeing not to withdraw the same;
(f) the Conditions of these Appointments; and
(g) any interpretation of law, or finding, contained in any judgment
given by a court of tribunal of competent jurisdiction in respect of
which the period for making an appeal has expired which requires any
legal requirement failing within (a) to (f) above to have effect in a
way:
(i) different to that in which it previously had effect; or
(ii) different to that in which it was taken to have effect:
(A) for the purpose of determining the Adjustment Factor;
or, as the case may be,
(B) in determining whether the Adjustment Factor should be
changed (and if so what change should be made to the
Adjustment Factor)
but so that nothing in sub-paragraphs (a) to (g) above shall apply so as
to include:
(i) any such legal requirement as is referred to in section 113
or 129; or
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(ii) those sections
to the extent in either case that they require the Appointee to pay fees
or charges to the relevant enforcement authority; and
(2) "enforcement authority" means any person or body having jurisdiction to
enforce or to take action under or in respect of the relevant legal
requirement.
13.3 in paragraph 14 and in the definition of a "Relevant Change of
Circumstance":
(1) references to costs include references to expenditure and loss or
revenue and references to costs being incurred include references to
expenditure being made and loss of revenue being suffered; and
(2) references to receipts include references to receipts, cash or other
assets of any sort, whether of a capital or revenue nature and
including receipts of grants, contributions, gifts and loans.
3.4 For the purpose of section 15(5)(b), the provisions of this Condition, to
the extent that they relate to a Relevant Change of Circumstance falling
within sub-paragraph (5) of that definition, are provisions of the
Appointments which cannot be modified. This sub-paragraph shall cease to
have effect if, but only if, this Condition ceases to contain any
provision relating to changes to the Adjustment Factor to allow for
Notified Items and Relevant Changes or Circumstance.
14. References to the Director relating to Notified Treats and Relevant
Charges of Circumstance and circumstances having a substantial adverse
effect on the Appointed Business
14.1 The Appointee may from time to time refer to the Director for
determination by him having considered the proposals of the Appointee) the
questions set out in sub-paragraph 14.2 or, as the case may be,
sub-paragraph 14.3. Such reference shall be made by notice given to the
Director, which, in the case of the questions set out in sub-paragraph
14.2, shall be given in accordance with sub-paragraph 14.4. For the
purposes of sub-paragraph 14.2 a single reference may be made in respect
of any number or Notified Items and Relevant Changes of Circumstance and
sub-paragraph 14.2 shall be construed accordingly.
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14.2 In the case of a Notified Item or where there has been or is to be a
Relevant Change of Circumstance all of the following:
(1) what are, or are likely to be, the costs, receipts and savings
reasonably attributable to the Relevant Item and also, in the case of
a Relevant Change of Circumstance falling within sub-paragraph (5) of
the definition, the costs, receipts and savings reasonably connected
with the Relevant Disposal of Land. For this purpose the costs
reasonably attributable to a Relevant Change of Circumstance falling
within sub-paragraph (6) of the definition shall be taken to be equal
to the indexed Capital Costs Amount;
(2) except in the case of a Relevant Change of Circumstance falling
within sub-paragraph (5) of the definition, to what extent:
(a) are the costs determined under (1) reasonably recoverable
through charges for services provided, functions carried out by,
and other activities of, the Appointee in its capacity as a
water undertaker or sewerage undertaker which are not Standard
Charges for Basket Items (not being Excluded Charges);
(b) in the case or receipts and savings, is the Relevant Item
relevant to services provided, functions carried out by, and
other activities of, the Appointee as a water undertaker or
sewerage undertaker which are not Basket Items in respect of
which the Appointee makes Standard Charges (not being Excluded
Charges)
and where it is determined that such costs are reasonably recoverable
as aforesaid or, as the case may be, that the Relevant Item is
relevant as aforesaid, either in full or to an extent, then
references hereafter to costs, receipts and savings reasonably
attributable to a Relevant Item are to those costs, receipts and
savings except to that extent;
(3) both of the following:
(a) what costs reasonably attributable to, or connected with, the
Relevant Item as determined under (1) and what timing of
incurring of such costs are appropriate and reasonable for the
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Appointee in all the circumstances to incur and programme, or,
as the case may be, to have incurred and programmed, by reason
of the Relevant Item; and
(b) what receipts and savings reasonably attributable to, or
connected with, the Relevant Item as determined under (1) and
what timing of such receipts and savings is appropriate and
reasonable for the Appointee in all the circumstances to achieve
and programme or, as the case may be, to have achieved and
programmed, by reason of the Relevant Item
and for the purpose of determining the separate amounts under (a) and
(b), but without prejudice to the generality of the foregoing:
(i) no account shall be taken of:
(A) any trivial amounts;
(B) any costs, to the extent that they would have been, or
would be, avoided by prudent management action taken since
the transfer date (and for this purpose what constitutes
"prudent management action" shall be assessed by reference
to the circumstances which were known or which ought
reasonably to have been known to the Appointee at the
relevant time);
(C) any savings achieved by management action taken since the
transfer date over and above those which would have been
achieved by prudent management action (and for this purpose
what constitutes "prudent management action" shall be
assessed by reference to the circumstances at the relevant
time); or
(D) any amounts attributable to matters allowed for in
determining the Adjustment Factor or in determining, in
carrying out the most recent Periodic Review and making any
subsequent Interim Determination (or, where there has been
no Periodic Review, in making any Interim Determination),
whether the Adjustment Factor should be changed (and if so
what change should be made to the Adjustment Factor),
except to
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the extent that such amounts otherwise fall to be taken
into account as amounts reasonably attributable to, or
connected with, the Relevant Item under this sub-paragraph
(3) and sub-paragraph (1) by virtue of the definition of a
Notified Item and a Relevant Change or Circumstance; and
(ii) in the case of a Relevant Change of Circumstance falling within
sub-paragraph (2) of the definition, regard shall be had to the
desirability of obtaining information from metering trials and
to any information available to the Director or the Appointee
from metering trials as well as to the fact that the prohibition
on charging by ratable value contained in section 80 applies to
charges in respect or services provided after, but not before,
the end of 31st March 2000;
(4) having determined under (3) the separate amounts of costs and or
receipts and savings in respect of each Relevant Item, what are the
annual cash flows thereof (costs being netted off against the amount
of receipts and savings for this purpose) over each Charging Year
included in the timing determined under (3) (those annual cash flows
being hereinafter referred to as "the Base Cash Flows");
(5) what is the annual aggregate of:
(a) one half of the Base Cash Flows in respect of Relevant Changes
of Circumstance falling within sub-paragraph (5) of that
definition; and
(b) the Base Cash Flows in respect of all other Relevant Changes of
Circumstance and Notified Items
in both cases the subject of the notice or notices under subparagraph
14.4 or paragraph 15;
(6) what is the Net Present Value or the amounts determined under (5)
calculated up to the start of the first of the Charging Years for
which the next Periodic Review falls to be carried out (having regard
to any
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Review Notice or Reference Notice which has been given at the
time when the reference is made) and what is the aggregate of
those Net Present Values ("the Materiality Amount");
(7) is the Materiality Amount equal to or does it exceed ten per cent of
the turnover attributable to the Appointed Business in the latest
financial year for which accounting statements have been prepared and
delivered to the Director under Condition F, as shown by those
accounting statements, and for this purpose where the Materiality
Amount is a negative figure it shall be treated as though it were a
positive figure:
(8) if so, what is the Net Present Value or the aggregate Base Cash Flows
determined under (5) calculated up to the latest date in the timing
determined under (3) ("the Allowable Amount"); and
(9) what change, if any, to the Adjustment Factor over the period until
the first of the Charging Years for which the next Periodic Review
under paragraph 9 falls, or would (but for any Review Notice or
Reference Notice which has been given at the time when the reference
is made) fall, to be carried out ("the Relevant Period"), not being
or including a change to the Adjustment Factor applying in respect of
the Charging Year starting on 1st April 1990, is most likely to
allow, or, as the case may be, require, the Appointee to make such
charges, whether over the Relevant Period or otherwise, ("Adjusted
Charges") as are likely to ensure that the effect of the Allowable
Amount on its financial position and performance over the Relevant
Period will, so far as reasonably practicable, be the Same as if the
Allowable Amount had been allowed for in determining the Adjustment
Factor or, as the case may be, in determining, in carrying out the
most recent Periodic Review, whether the Adjustment Factor should be
changed.
For the purpose of determining what that effect should be it shall be
assumed that the Allowable Amount would have been allowed for in that
determination in such a manner as to secure:
(a) that the Net Present Value of the change in revenue attributable
to the making of Adjusted Charges would be equal to the
Allowable Amount; and
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(b) that the timing of the effect on revenue attributable to the making
of Adjusted Charges over the Relevant Period would be such that taken
as a whole, Key Indicators would be appropriate to the financial
position and performance which investors and creditors would
reasonably expect of a properly managed company holding the
Appointments, whose sole business consists of being a water
undertaker and a sewerage undertaker and, without excluding other
considerations which may also be relevant, having its equity share
capital listed on The International Stock Exchange of the United
Kingdom and the Republic of Ireland Limited
but so that:
(i) the appropriateness of Key Indicators shall be assessed by reference
to the financial position and performance which investors and
creditors would reasonably expect at the time at which the relevant
Interim Determination is made; and
(ii) where costs have been allowed for in determining the Allowable Amount
it shall be further assumed, where the relevant Interim Determination
is made within five years of the transfer date, that those costs will
be financed other than by the proceeds of an issue of equity share
capital.
14.3 Both of the following:
(1) whether any circumstance which has a substantial adverse effect on
the Appointed Business or on its assets, liabilities, financial
position, or profits or losses, has occurred, not being one which
would have been avoided by prudent management action taken since the
transfer date; and
(2) if so, what change should be made to the Adjustment Factor.
For this purpose what constitutes "prudent management action" shall be
assessed by reference to the circumstances which were known or which ought
reasonably to have been known to the Appointee at the relevant time.
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14.4 A Reference Notice given to the Director in respect of sub-paragraph 14.2
shall contain or be accompanied by reasonable details of the Relevant Item
in respect of which the Reference Notice is given and, unless the Director
otherwise consents, shall be given not later than:
(1) the first day of October immediately preceding the first of the
Charging Years in respect of which the Appointee wishes the change to
the Adjustment Factor to take effect; or
(2) if later, where the Director has given a notice to the Appointee
under paragraph 15 in respect of the same Charging Year, within
fourteen days from the receipt by the Appointee of that notice.
15. Changes to the Adjustment Factor initiated by the Director relating to
Notified Items and Relevant Changes of Circumstance
In the case of a Notified Item or where any Relevant Change of
Circumstance has occurred or is to occur, the Director may, having given
notice to the Appointee specifying the Notified Item or, as the case may
be, the Relevant Change of Circumstance, of his intention so to do not
later than:
(1) the first day of October immediately preceding the first of the
Charging Years in respect of which he proposes the change to the
Adjustment Factor to take effect; or
(2) if later, where the Appointee has given a Reference Notice to the
Director in respect of sub-paragraph 14.2 in respect of the same
Charging Year, within fourteen days from the receipt of the Director
of that Reference Notice
determine the questions set out in sub-paragraph 14.2 in respect of that
Notified Item or, as the case may be, that Relevant Change of
Circumstance. A single notice may be given under this paragraph 15 in
respect of any number of Notified Items and Relevant Changes of
Circumstances and subparagraph 14.2 shall be construed accordingly. Where
sub-paragraph 14.2(2) or 15(2) applies, the questions set out in (5) to
(9) inclusive of sub-paragraph 14.2 shall be determined in respect of all
Notified Items and Relevant
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Changes of Circumstance in respect of which the Appointee and the Director
have given notice, taken as a whole.
Part V. References to the Monopolies Commission and Modification of this
Condition
16. References to the Monopolies Commission
Where:
(1) following the giving of a Review Notice under paragraph 8 or the giving of
Information to the Director in accordance with paragraph 9 or a reference
under paragraph 10 or 11, the Director has not given notice to the
Appointee of his determination within 1 year from the Review Notice Date
or, in the case of a reference under paragraph 11, within 1 year from the
date of the relevant Reference Notice;
(2) following a reference under paragraph 14, the Director has not given
notice to the Appointee of determinations (including any determinations
under paragraph 15 which fall to be taken into account in determining the
questions the subject of the reference under paragraph 14) within 3 months
from the date of the relevant Reference Notice; or
(3) the Appointee disputes any determination made by the Director under Part
III or Part IV of this Condition
the Appointee may, by notice given to the Director within:
(a) 13 months from the Review Notice Date or, in the case of a reference
under paragraph 11, from the date of the relevant Reference Notice
(in the cases referred to in sub-paragraph (1));
(b) 4 months from the date of the relevant Reference Notice (in the case
referred to in sub-paragraph (2)); or
(c) 2 months from the date on which the Director gives notice of his
determination to the Appointee (in the case referred to in
subparagraph (3))
require the Director to refer to the Monopolies Commission for
determination by it:
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(i) in any case referred to in sub-paragraph (1) or (2), the relevant
question or questions (including, where relevant, the. questions in
respect of any Notified Item or Relevant Change of Circumstance the
subject of a notice under paragraph 15); or
(ii) in any case referred to in sub-paragraph (3), the disputed
determination.
17. Modification of this Condition following Periodic Reviews and references
to the Director or the Monopolies Commission
17.1 Except in the case of a Periodic Review carried out under paragraph 11,
this Condition shall be modified by the change if any) to the Adjustment
Factor (which may be a different number for any Charging Year and may be a
positive or negative number, or zero) necessary to give effect to any
determination made by the Director or the Monopolies Commission under, or,
as the case may be, following a reference under, part III, Part IV or Part
V of this Condition.
17.2 Where the Appointee requires the Director to make a reference to the
Monopolies Commission under paragraph 16 in the case referred to in
sub-paragraph (3) of that paragraph this Condition shall be modified by
the change (if any) to the Adjustment Factor necessary to give effect to
the Director's determination but so that sub-paragraph 17.1 shall then
apply to the determination made by the Monopolies Commission following
such reference.
Part VI. Provision of Information to the Director
18.1 The Appointee shall furnish to the Director:
(1) not later than 31st March immediately following the date of the
relevant Reference Notice (in the case of a reference under paragraph
10);
(2) not later than 30th September immediately following the date of the
Reference Notice (in the case of a reference under paragraph 11);
(3) at the time when it gives the relevant Reference Notice to the
Director (in the case of a reference under paragraph 14);
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(4) as soon as reasonably practicable and in any event not later than the
expiry or one month from the date of the Director's notice to the
Appointee under paragraph 15
such Information as the Appointee reasonably believes is necessary or, as
the case may be, as the Director may reasonably require in his said
notice, to enable the Director to make his determination. The Appointee
shall also furnish to the Director as soon as reasonably practicable such
further Information as the Director may from time to time by notice to the
Appointee reasonably require to make his determination.
18.2 The Appointee shall also furnish to the Director from time to time when so
requested by the Director such Information as the Director may reasonably
require to decide whether or not to make determinations under paragraph
15.
18.3 Any Information furnished to the Director under this paragraph 18 or under
paragraph 8 or 9 shall, if the Director so requires to make his
determination, be reported on by a person appointed by the Appointee and
approved by the Director (such approval not to be unreasonably withheld)
("the Reporter").
18.4 The Appointee shall enter into a written contract of engagement with the
Reporter which shall.
(1) where such a report is required by the Director under sub-paragraph
18.3, require the Reporter to prepare and furnish to the Director,
and separately to the Appointee, a written report addressed jointly
to the Director and the Appointee in form and substance such as may
be specified by, or consistent with any guidelines specified by, the
Director at the time when he requires the report to be furnished, the
matters so specified being reasonably appropriate to enable the
Director to make his determination (to the extent that the
Information in respect of which that report is required to be
prepared and furnished is relevant to that determination); and
(2) include a term that the Reporter will provide such further
explanation or clarification of his report as the Director may
reasonably require and such further Information in respect of, or
verification of, the matters which are the subject of his report as
the Director may reasonably require.
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The contract of engagement may also include provisions requiring the
Reporter, his employees and agents to keep confidential and not to
disclose, except to the Director or as required by law, any Information
which the Reporter obtains in the course of preparing his report.
18.5 The Appointee shall cooperate fully with the Reporter to enable him to
prepare his report, including without limitation, so far as is necessary
for that purpose:
(1) subject to reasonable prior notice to the Appointee, giving to the
Reporter access at reasonable hours to any Relevant Plant and to any
premises occupied by the Appointee in relation to the Appointed
Business; and
(2) subject to reasonable prior notice to the Appointee, allowing the
Reporter at reasonable hours:
(a) to inspect and make photocopies of, and take extracts from, any
books and records of the Appointee maintained in relation to the
Appointed Business;
(b) to carry out inspections, measurements and tests relation to any
such premises or Relevant Plant; and
(c) to take on to such premises or on to or in to any Relevant Plant
such other persons and such equipment as may be necessary for
the purposes of preparing and completing his report.
18.6 Nothing in sub-paragraph 18.5 shall require the Appointee:
(1) to do anything which is outside its reasonable control; or
(2) to do, or to allow the Reporter to do, anything which would
materially disrupt the Appointee's business (unless it is essential
that that thing be done to enable the Reporter to prepare his
report).
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18.7 In sub-paragraphs 18.4 and 18.5:
(1) references to the Reporter include references to his employees and
agents; and
(2) "Relevant Plant" means any plant used by the Appointee for the
purpose of carrying out the Regulated Activities including, without
limitation, water mains, sewers and other pipes and their
accessories.
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RIDER
"Related Amount" means any amount paid or agreed to be paid to the Water
Authority or, as the case may be, the Appointee in respect of works which have
been allowed for in determining the Water Infrastructure Charge Limit or, as the
case may be, the Sewerage Infrastrucutre Charge Limit from time to time;
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Condition C: Infrastructure Charges
1. Interpretation and Construction
In this Condition:
"Infrastructure Charges" means Water Infrastructure Charges and Sewerage
Infrastructure charges:
"the Infrastructure Charge Limits" means the Water Infrastructure Charge
Limit and the Sewerage Infrastructure Charge Limit, as expressions
are defined in paragraph 2;
"the Pre-agreed Amount" means any amount paid or agreed to be paid to
Water Authority or, as the case may be, the Appointee prior to April
1990 in respect of the relevant connection or connections;
"Sewerage Connection" means such a connection as is described in section
79(2)(b);
"Water Connection" means such a connection as is described in section
79(2)(a).
2. Restriction of Infrastructure Charges
1.1 The Appointee shall ensure that the amount of any Water Infrastructure
Charge fixed, demanded or recovered by it in respect of any Water
Connection made in any Charging Year (beginning with the Charging Year
starting on 1st April 1990) does not exceed the greater of:
(1) the Water Infrastructure Charge Limit; and
(2) the Pre-agreed Amount.
2.2 The Water Infrastructure Charge Limit is:
(1) in respect of the Charging Year starting on 1st April 1990,
(pound)551 ("the Initial Water Infrastructure Charge Limit");
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(2) in respect of any Charging Year starting on or after 1st April 1991,
the Initial Water Infrastructure Charge Limit increased or decreased
by the percentage increase or decrease, as the case may be, (if any)
in the Retail Prices Index between that published for the month of
November in the Prior Year and that published for November 1989.
2.3 The Appointee shall ensure that the amount of any Sewerage Infrastructure
Charge fixed, demanded or recovered by it in respect of any Sewerage
Connection made in any Charging Year (beginning with the Charging Year
starting on 1st April 1990) does not exceed the greater of:
(1) the Sewerage Infrastructure Charge Limit, and
(2) the Pre-agreed Amount.
2.4 The Sewerage Infrastructure Charge Limit is:
(1) in respect of the Charging Year starting on 1st April 1990, (pound)
983 ("the Initial Sewerage Infrastructure Charge Limit");
(2) in respect of any Charging Year starting on or after 1st April 1991,
the Initial Sewerage Infrastructure Charge Limit increased or
decreased by the percentage increase or decrease, as the case may be,
(if any) in the Retail Prices Index between that published for the
month of November in the Prior Year and that published for November
1989.
2.5 Where a Water Connection or, as the case may be, a Sewerage Connection has
previously been made at any time during the period of five years
immediately preceding the start of the relevant Charging Year referred to
below in respect of any site, the Appointee shall be treated as being in
breach of sub-paragraph 2.1 or; as the case may be, sub-paragraph 2.3 if
the aggregate amount or Water Infrastructure Charges or, as the case may
be, Sewerage Infrastructure charges fixed, demanded or recovered by the
Appointee in respect or Water Connections or, as the case may be, Sewerage
Connections made in any Charging Year in respect of the same site exceeds
the greater of:
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(1) the Water Infrastructure Charge Limit less any Related Amount or, as
the case may be, the Sewerage Infrastructure Charge Limit less any
Related Amount multiplied in each case by the increase during that
Charging Year in the number of houses or other separately connected
premises comprised in that site; and
(2) the Pre-agreed Amount.
2.6 Neither sub-paragraph 2.1 nor sub-paragraph 2.3 shall apply to so much of
any Water Infrastructure Charge or Sewerage Infrastructure Charge as
consists of interest calculated as provided in the definition of "the
Installment Amount" in paragraph 1 of Condition D.
2.7 Where the Appointee makes a Water Connection it shall as soon as
reasonably practicable inform any sewerage which provides services to the
Premises in respect of which the Water Connection has been made of that
fact, of the number of Water Connections made in respect of those premises
and of the date or dates on which those Water Connections were made, and
of the address of the premises in respect of which those Water Connections
have been made.
3. Changes to the Infrastructure Charge Limits
3.1 Where the Director has given notice to the Appointee referring to this
sub-paragraph:
(1) not later than the Review Notice Date, in the case of a Periodic
Review carried out under paragraph 8 or 9 of Condition B; or
(2) within fourteen days after receipt by him of a Reference Notice, in
the case of a Periodic Review carried out under paragraph 10 of
Condition B
the Appointee shall furnish to the Director not later than 31st March
immediately following the Review Notice Date such Information as the
Director may reasonably require in his notice under this sub-paragraph to
enable him to determine the question whether the Water Infrastructure
Charge Limit or, as the case may be, the Sewerage Infrastructure Charge
Limit should be changed (and if so what change should be made to the Water
Infrastructure Charge Limit or, as the case may be, the Sewerage
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Infrastructure Charge Limit). The Appointee shall also furnish to the
Director as soon as reasonably practicable such further Information as the
Director may from time to dine by notice to the Appointee reasonably
require to make his determination.
3.2 The Appointee may, by notice given to the Director not later than the
relevant date specified below, refer to the Director for determination by
him the question whether the Water Infrastructure Charge Limit or, as the
case may be, the Sewerage Infrastructure Charge Limit should be changed
(and if so what change should be made to the Water Infrastructure Charge
Limit or, as the case may be, the Sewerage Infrastructure Charge Limit) in
the following circumstances:
(1) where the Director has given a Review Notice under paragraph 8 of
Condition B, not later than 31st March immediately following the
Review Notice Date;
(2) where the Appointee serves a Reference Notice under paragraph 10 of
Condition B, at the same time as that Reference Notice; and
(3) in the case of a Periodic Review carried out under paragraph 9 of
Condition B, not later than 31st March immediately following the
Review Notice Date.
3.3 The Appointee shall furnish to the Director at the time when it gives the
relevant notice to the Director under sub-paragraph 3.2 such Information
as the Appointee reasonably believes is necessary to enable the director
make his determination. The Appointee shall also furnish to the Director
as soon as reasonably practicable such further Information as the Director
may by notice to the Appointee from time to time reasonably require to
make his determination.
3.4 The Appointee shall also furnish to the Director from time to time when so
requested by the Director such Information as the Director may reasonably
require to decide whether or not to give a notice to the Appointee under
sub-paragraph 3.1.
3.5 Any Information furnished. to the Director under this paragraph shall, if
the Director so requires to make his determination, be reported on by a
person
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appointed by the Appointee and approved by the Director (such approval not
to be unreasonably withheld) ("the Reporter").
3.6 The Appointee shall enter into a written contact of engagement with the
Reporter which shall:
(1) where such a report is required by the Director under sub-paragraph
3.5 require the Reporter to prepare and furnish to the Director, and
separately to the appointee, a written report addressed jointly to
the Director and to Appointee in form and substance such as may be
specified by, or consistent with any guidelines specified by, the
Director at the time when he requires the report to be furnished, the
matters so specified being reasonably appropriate to enable to
Director to make his determination (to the extent that the
information in respect of which that report is required to be
prepared and furnished is relevant to that determination); and
(2) include a term that the Reporter will provide such further
explanation or clarification of his report as the Director may
reasonably require and such further information in respect of, or
verification of, the matters which and the subject of his report as
the Director may reasonably require.
The contract of engagement may also include provisions requiring the
Reporter, his employees and agents to keep confidential and not to
disclose, except to the Director or as required by law, any Information
which the Reporter obtains in the course of preparing his report.
3.7 The Appointee shall cooperate fully with the Reporter to enable him to
prepare his report including without limitation, so far as is necessary
for that purpose and subject to reasonable prior notice to the Appointee,
allowing the Reporter at reasonable hours to inspect and make photocopies
of and take extracts from, any books and records of the Appointee
maintained in relation to the Appointed Business.
3.8 Nothing in sub-paragraph 3.7 shall require the Appointee:
(1) to do anything which is outside its reasonable control; or
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(2) to do, or to allow the Reporter to do, anything which would
materially disrupt the Appointee's business (unless it is essential
that that thing be done to enable the Reporter to prepare his
report).
3.9 In sub-paragraphs 3.7 and 3.8 references to the Reporter include
references to his employees and agents.
4. References to the Monopolies Commission
Where:
(1) following the giving of a notice under sub-paragraph 3.1 or 3.2, the
Director has not given notice to the Appointee of his determination
within 1 year from the Review Notice Date; or
(2) the Appointee disputes any determination made by the Director under
this Condition
the Appointee may, by notice given to the Director within:
(a) 13 months from the Review Notice Date (in the cases referred to in
sub-paragraph (1)); or
(b) 2 months from the date on which the Director gives notice of his
determination to the Appointee (in the case referred to in
sub-paragraph (2)
require the Director to refer to the Monopolies Commission for determination by
it:
(i) in any case referred to in sub-paragraph (1), the relevant question;
or
(ii) in the case referred to in sub-paragraph (2), the disputed
determination.
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5. Modification of this Condition
5.1 This Condition shall be modified by the change (if any) to the Water
Infrastructure Charge Limit or, as the case may be, the Sewerage
Infrastructure Charge Limit necessary to give effect to any determination
made by the Director or the Monopolies Commission under, or, as the case
may be, following a reference under, this Condition.
5.2 Where the Appointee requires the Director to make a reference to the
Monopolies Commission under paragraph 4 this Condition shall be modified
by the change (if any) to the Water Infrastructure Charge Limit or, as the
case may be, the Sewerage Infrastructure Charge Limit necessary to give
effect to the Director's determination but so that sub-paragraph 5.1 shall
then apply to the determination made by the Monopolies Commission
following such reference.
5.3 The provisions of sub-paragraph 5.2 of Condition B, shall apply mutatis
mutandis to this Condition.
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Condition D: Charges Schemes
1. In this Condition:
"the Instalment Amount" means the aggregate amount which would fall
to be paid in the relevant year by way of payments of interest and
repayments of capital if an amount equal to the Water Infrastructure
Charge or, as the case may be, the Sewerage Infrastructure Charge
payable for the relevant connection had been borrowed by the
Appointee on terms:
(1) requiring interest to be paid and capital to be repaid in
twelve equal annual installments; and
(2) providing for the amount of the interest to be calculated
at such rate, and in accordance with such other provision,
as may have been determined either by the Appointee with
the approval of the Director or, in default of such a
determination, by the Director;
the reference to domestic purposes in relation to the drainage of
premises is reference to the purposes specified in section
71(2)(a)(i), (ii) and (iii).
2.1 It shall be the duty of the Appointee to ensure that at all times on and
after the relevant date specified in sub-paragraph 2.2 there is in effect
a charges scheme in accordance with section 76 by which:
(1) it fixes the charges to be paid for supplies of water for
domestic purposes and for the drainage for domestic purposes of
premises except. where such charges are determined by or in
accordance with such an agreement as is referred to in section 75
(including any such agreement made or entered into by the Water
Authority under section 30 of the 1973 Act as, in accordance with
a scheme under Schedule 2, is transferred to the Appointee); and
(2) it fixes the charges to be paid for such connections as are
described in section 79(2).
2.2 The relevant date for the purpose of sub-paragraph 2.1(1) is the transfer
date and for the purpose of sub-paragraph 2.1(2) is 1st April 1990.
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3. For the purposes of paragraph 2 so much or any such charges scheme made by
the Water Authority under section 31 of the 1973 Act as by virtue of
paragraph 16(1) of Schedule 26 has effect on and after the transfer date
as if it were a scheme made under section 76 by the Appointee shall be
treated as a charges scheme in accordance with section 76.
4. Any such charges scheme as is required to be in effect by virtue of
sub-paragraph 2.1(2) shall provide that in the case of a connection to a
water supply or, as the case may be, to a public sewer of a building or
part of a building which is occupied as a dwelling house immediately
before the connection is made:
(1) the relevant charges shall be paid in full, within a reasonable
period specified by the Appointee after the connection in respect of
which those charges are payable is made; or, at the option of the
person liable to pay the relevant charges,
(2) an amount equal to the Installment Amount shall be paid in each of
the twelve years following the relevant connection being made subject
only to that person giving such undertakings to that effect as the
Appointee may reasonably require.
5. The Appointee shall:
(1) inform persons who inquire about charges for such connections as are
described in section 79(2) that it is required to have in effect a
charges scheme in respect of such charges and or the provisions
required to be included in that charges scheme by virtue of paragraph
4;
(2) make a copy of any such charges scheme as is required to be in effect
by virtue of paragraph 2 in its latest form available for inspection
at each Relevant Premises; and
(3) send a copy of any such scheme in its latest form free or charge to
any person requesting it.
7. Nothing in this Condition shall prevent the Appointee from entering
into such an agreement as is referred to in section 75.
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Condition E: Prohibition on Undue Discrimination and Undue Preference and
Information on charges
1. This Condition applies in relation to charges:
(1) fixed by the Appointee under any such charges scheme as is referred
to in section 76 by which the Appointee fixes the charges to be paid:
(a) for any water supply or sewerage services provided by the
Appointee in the course of carrying out its functions; or
(b) in any of the cases described in section 76(1)(b);
(2) for any water supply or sewerage services provided by the Appointee
in the course of carrying out its function or in connection with the
carrying out of the Appointee's trade effluent functions payable
under any such agreement as is referred to in section 75 (including
any such agreement made or entered into by the Water Authority under
section 30 of the 1973 Act as, in accordance, with a scheme under
Schedule 2, is transferred to the Appointee) which are in 'accordance
with standard charges published or fixed by the Appointee;
(3) payable where a discharge is made in pursuance of a consent given by
the Appointee or, as the case may be, the Water Authority for the
purposes of the 1937 Act which are in accordance with standard
charges published or fixed by the Appointee;
(4) determined by agreement in respect of a supply of water for
non-domestic purposes which are in accordance with standard charges
published or fixed by the Appointee:
(5) for any water supply or sewerage services provided by the Appointee
fixed under any such charges scheme made by the Water. Authority
under section 31 of the 1973 Act as by virtue of paragraph 16(1) of
Schedule 26 has effect on and after the transfer date as if it were a
charges scheme made under section 76 by the Appointee;
(6) for any water supply or sewerage services provided by the Appointee
in the course of carrying out its functions or in connection with the
carrying out of the Appointee's trade effluent functions payable
under any such agreement as is referred to in section 75 which are
not in accordance with standard charges published or fixed by the
Appointee;
(7) payable where a discharge is made in. pursuance of a consent given by
the Appointee or as the case may be, the Water Authority for the
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purposes of the 1937 Act which are not in accordance with standard
charges published or fixed by the Appointee; and
(8) determined by agreement in respect of a supply of water for
non-domestic purposes which are not in accordance with standard
charges published or fixed by the Appointee.
In this paragraph references to standard charges published or fixed by the
Appointee are to such charges, whether published or fixed under a charges scheme
or otherwise.
2. It shall be the duty of the Appointee in fixing or agreeing charges
falling within any of sub-paragraphs 1(1) to 1(5) inclusive to ensure that
no undue preference is shown to, and that there is no undue discrimination
against any class of customers or potential customer:
3. It shall be the duty of the Appointee in fixing or agreeing charges
falling within any of sub-paragraph: 1(1) to 1(5) inclusive to ensure that
no undue preference is shown to, and that there is no undue discrimination
against, any customer or potential customers but so that nothing in this
paragraph shall require the Appointee to have regard to any charges or
agreed by the Water Authority prior to the transfer date.
4. The Appointee shall provide to the Director such Information as the
Director may reasonably request in order to satisfy himself that the
Appointee is complying with this Condition, it being acknowledged that
Information with which the Director is furnished from time to time under
Condition F may not be sufficient or relevant of itself for this purpose.
5. Thc Appointee shall provide to the Director such Information as the
Director may from time to time reasonably request about the nature of any
supply, Service or trade effluent function made, provided or carried out
under any such agreement or consent as is referred to in sub-paragraphs
1(6), 1(7) and 1(8) and the terms and conditions on which that supply,
service or trade effluent function is made, provided or carried out.
6. This Condition shall not apply:
(1) to any such metering trial scheme as was made by the Water Authority
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in accordance with section 4 of the Public Utility Transfers and
Water Charges Act 1983 before the transfer date and which:
(a) was either in force immediately before the transfer date or is
due to come into force after the transfer date; and
(b) continues in force, in accordance with paragraph 16 or Schedule
26, as a scheme made by the Appointee under section 76;
(2) to so much of any such scheme as is made by the Appointee under
section 76 which is approved under the said section 4 and amends any
such scheme as is referred to in sub-paragraph (1);
(3) so as to require the Appointee to contravene any local statutory
provision:
(4) to:
(a) any such terms or conditions as are determined by the Director
or by the Secretary of State (or by a person appointed by either
of them) under section 46 or, as the case may be, under section
27 of the 1945 Act;
(b) any such conditions as are imposed by the Secretary of State or,
as the case may be, the Director under section 61 of the Public
Health Act 1961 in respect of any appeal under section 3 of the
1937 Act; or
(c) the provisions included in any notice served by the Secretary of
State under paragraph 3(2) of Schedule 9 or anything required to
be done by the Appointee under paragraph 4 of Schedule 9 so as
to secure compliance with those provisions or so as to require
the Appointee to have regard to any such terms, conditions or
provisions;
(5) to any Water Infrastructure Charge or Sewerage Infrastructure Charge
the amount of which does not exceed the relevant amount specified in
Condition C which applies from time to time for the purposes of that
Condition; or
(6) to any terms and conditions on which any supply of water in bulk is
given by the Appointee to another water undertaker.
7. The Appointee shall not be treated as having fixed or agreed charges for
the purposes of paragraph 2 or 3 solely by reason that:
(1) any charges scheme made by the Water Authority under section 31 of
the 1973 Act has effect on and after the transfer date by virtue of
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paragraph 16(1) of Schedule 26 as if. it were a charges scheme made
under section 76 by the Appointee; or
(3) any agreement made or entered into by the Water Authority is
transferred to the Appointee in accordance with a scheme under
Schedule 2.
Condition F: Accounts and accounting information
1. Introduction
The purposes of this Condition are to ensure that:
(1) the financial affairs of the Appointed Business can be assessed and
reported on separately from other businesses and activities or the
Appointee;
(2) information on revenue, costs, assets and liabilities attributable to
specified activities of the Appointed Business can be provided and
reported on;
(3) transactions between the Appointee and/or the Appointed Business and
any other business or activity of the Appointee and/or any Associated
Company can be assessed and reported on; and
(4) the Director is furnished with regular compare the position and
performance (including, without limitation, costs) of the Appointed
Business and of so much of the respective businesses and activities
of all other undertakers holding appointments made under Chapter I of
Part II of the Act as consists of the carrying out of the Regulated
Activities.
2. Interpretation and Construction
2.1 In this Condition and for the purposes of this Condition:
reference: to "the Appointed Business" shall be construed as if the
Appointed Business included the management and holding by the
Appointee of any protected land for so long as it is not transferred
under paragraph 7 or Condition K;
"infrastructure assets" means
(1) Network Assets, as determined in paragraph 1 of Condition L; and
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(2) all of the following:
(a) valves and hydrants forming part of the water and trunk
main systems:
(b) impounding and pumped raw water storage reservoirs;
(c) dams,
(d) sludge pipe lines; and
(e) outfall pipes and other pipes for the conveyance of
effluent from any sewage disposal works or the Appointee
which discharge directly into the sea or coastal waters;
"infrastructure renewals expenditure" means expenditure on maintaining or
restoring the original operating capability, qualitative performance and
condition of infrastructure assets, other than expenditure which is capitalized
and routine day to day maintenance expenditure which is charged as an operating
cost to the profit and 1oss account:
"Principal Services" means
(1) water supply; and
(2) sewerage services
and references to a Principal Service are to either and each of water supply and
sewerage services;
"sewerage services" includes sewage treatment and disposal and reception,
treatment and disposal of trade effluent.
2.2 Except where otherwise expressly provided, references in this Condition to
costs or liabilities Shari be construed as including taxation, and
references to any profit and loss account shall be construed accordingly.
2.3 For the purposes of this Condition:
(1) all forms of property shall be assets, whether situated in the United
Kingdom or not, including:
(a) options, debts and incorporeal property generally; and
(b) any currency including sterling;
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(2) references to the supply of a service include references to anything
(including the services of any employee) being made available: and
(3) references to a transfer of an asset or liability include references
to a part transfer of an asset or liability and, without limitation,
there is a part transfer of an asset where an interest or right in or
over the asset is created.
3. Accounting Records
The Appointee shall keep proper accounting records in a form which enables
the revenues, costs, assets and liabilities of, or reasonably attributable
to, the respective businesses and activities of the Appointee described in
this Condition and the other matters mentioned in this Condition to be
separately identified, having regard to the terms of any guidelines
notified from time to time by the Director to the Appointee under
paragraph 5,7 or 8.
4. Accounting Statements
4.1 The Appointee shall prepare on a consistent basis in respect of each year
ending after the transfer date accounting statements which shill comprise,
and show separately in respect of each of:
(1) the Appointed Business;
(2) on an aggregated basis, all businesses and activities of the
Appointee other than the Appointed Business; and
(3) on an aggregated basis, all businesses and activities of the
Appointee including the Appointed Business
a profit and loss account, a statement of assets and liabilities and a
statement of source and application of funds, together with notes thereto,
setting out the revenue, costs (including depreciation, where charged),
assets and liabilities thereof, or reasonably attributable thereto.
4.2 Accounting statements prepared under sub-paragraph 4.1 shall:
(1) so far as reasonably practicable having regard to the purposes of
this Condition, have the same content as the annual accounts of the
Appointee prepared under the 1985 Act and be prepared in accordance
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with the formats and the accounting policies and principles which apply to
those annual accounts; and
(2) state the principal accounting policies applied.
5. Segmental Information
5.1 Accounting statements prepared under paragraph 4 shall show or disclose
separately:
(1) an analysis or total operating cost: (excluding interest and taxation) of
the Appointed Business showing separately for each Principal Service:
manpower costs,
other costs of employment,
power,
local authority rates,
water charges (including abstraction charges and amounts payable
for taking supplies of water in bulk)
local authority sewerage agencies
materials and consumables,
hired and contracted services,
charges for bad and doubtful debts,
depreciation and amorization (where charged),
intangible assets written off,
infrastructure renewals expenditure,
exceptional items, and
on an aggrregated basis, all other operating costs.
The analysis shall include the details reasonably necessary to reconcile the
operating costs shown in it with the total operating costs (excluding interest
and taxation) of the Appointee shown in the accounting statements "prepared
under paragraph 4 in respect of the same period;
(2) an analysis of total turnover of the Appointed Business showing separately
turnover attributable to:
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(a) water supply and, separately on an aggregated basis, sewerage and sewage
treatment and disposal (excluding reception, treatment and disposal of
trade effluent), distinguishing in each case between the provision of
those services on a measured and unmeasured basis respectively;
(b) on an aggregated basis, reception, treatment and disposal of trade
effluent;
(c) grants; and
(d) on an aggregated basis, all other sources;
(3) analysis of total tangible fixed assets attributable to the Appointed
Business showing separately:
(a) for each of the items included in the annual accounts of the
Appointee prepared under the 1985 Act required to be disclosed under
Section 3 of Part I of Schedule 4 to the 1935 Act; or
(b) for each of the items included in such other analysis of tangible
fixed assets by asset type as is disclosed in those annual accounts;
and
(c) if not separately disclosed in those annual accounts, for
infrastructure assets
amounts attributable to each Principal Service, and, as a separate
category, on an aggregated basis tangible fixed assets which are not
attributable to either Principal Service.
The analysis shall include:
(i) the details reasonably necessary to reconcile the tangible fixed
assets shown in it with the tangible fixed assets shown in the
analysis prepared under this sub-paragraph in respect of the
immediately preceding financial year (including details of grants);
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(ii) a statement of any assets which have been re-classified as current
assets during the relevant financial year; and
(iii) to the extent that information is required to be given in respect of
any of the items included in the annual accounts or the Appointee
prepared under the 1985 Act referred to in this sub-paragraph 5.1(3)
by virtue of Part III of Schedule 4 to the 1985 Act, the same
information in respect of those items.
In the case of the first analysis prepared under this sub-paragraph the
reconciliation required to be included under or above shall be with the
analysis prepared by the Water Authority in respect of the financial year
ended last before the transfer date; and
(4) details necessary to reconcile expenditure made or incurred in
relation to infrastructure assets with the expenditure made or
incurred in relation to Network Assets during the same financial year
as shown in the statement required to be delivered to the Director
under sub-paragraph 5.3 of Condition L.
5.2 Accounting statements prepared under paragraph 4 shall show separately for
each item relating to sewerage services included in the analyses under
sub-paragraphs 5.1(1) (operating costs) and 5.1(3) (tangible fixed assets)
an analysis between amounts which are attributable to sewerage (including
reception of trade effluent) and sewage treatment and disposal (including
treatment and disposal of trade effluent).
5.3 The Director may, after consulting with such bodies as are reasonably
representative of undertakers holding appointments made under Chapter I of
Part II of the Act or, if none, the Appointee, from time to time by
reasonable notice to the Appointee specify in such guidelines as are
reasonable and appropriate for the purpose set out in sub-paragraph 1(4)
variations of:
(1) the matters required to be shown or disclosed under sub-paragraph 5.1
(1) (but not so as to require separate analyses or matters comprised
within any or the items listed in that sub-paragraph); and
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(2) the items in respect of which the analysis of total fixed assets is
to be prepared under sub-paragraph 5.1(3)
and thereafter the Appointee shall show or disclose information under
sub-paragraph 5.1.(1) in respect of those matters or, as the case may be,
shall prepare the analysis under sub-paragraph 5.1(3) in respect. of those
items, in each case as so varied from time to time.
6. Transactions entered into by the Appointee or the Appointed Business with
or for the benefit of Associated Companies or other businesses or
activities of the Appointee
6.1 Accounting statements prepared under paragraph 4 shall disclose in
relation to each transaction of a description specified in the first
column of the Appendix to this Condition which took place during the
financial year to which those statements relate, the company or, as the
case may be, the business or activity which was party to the transaction
with the Appointee or, as the case may be, the Appointed Business or which
otherwise benefited from the transaction and the information in relation
to that transaction specified in the second column of that Appendix.
6.2 Any amount to be disclosed in relation to a transaction specified in
paragraph 3, 4, 5 or 6 of the Appendix may be aggregated with any amount
relating to any other transaction falling within the same paragraph with
the same company or other business or activity of the Appointee.
6.3 Nothing in sub-paragraph 6.1 shall require the disclosure of any
information if the aggregate of any amounts required to be disclosed under
paragraphs 3, 4, 5 and 6 of the Appendix relating to transactions with the
same company or other business or activity of the Appointee is not
material to the Appointed Business as a whole. For the avoidance of doubt,
if the aggregate of such amounts is material to the Appointed Business as
a whole then information shall be disclosed in accordance with this
paragraph and the Appendix in relation to each such transaction (subject
always to sub-paragraph 6.2). For the purpose of this sub-paragraph the
question whether an amount is material to the Appointed Business as a
whole shall be determined by the Auditors by reference to whichever is the
greater of
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(1) the book value of the asset or liability the subject of, or affected
by, the transaction; and
(2) the consideration or other charge given, paid or waived.
6.4 Nothing in this paragraph 6 or the Appendix shall require the disclosure
of information which relates solely to a transaction wholly unconnected
with the Appointed Business.
7. Basis of allocations and apportionments
7.1 The analyses of operating costs and tangible fixed assets prepared
under sub-paragraphs 5.1(1), 5.1(3) and 5.2 shall give a description
of the bases of any apportionments or allocations of costs and assets
and shall be prepared in accordance with any guidelines which may be
issued from time to time by the Director under sub-paragraph 7.3.
7.2 Accounting statements prepared under paragraph 4 shall:
(1) describe the basis of any apportionment or allocation of
revenues, costs, assets and liabilities between the Appointed
Business and any other business or activity of the Appointee or
between the Appointee and any Associated Company;
(2) specify the nature of the revenue:, costs, assets or liabilities
which have been so apportioned or allocated; and
(3) specify between which business, activity or Associated Company
the revenues, costs, assets or liabilities have been so
apportioned or allocated.
7.3 The Director may, after consulting such bodies as are reasonably
representative of undertakers holding appointments made under Chapter I of
Part II of the Act, or, if none, the Appointee, from time to time by
reasonable notice to the Appointee issue such guidelines as are reasonable
and appropriate for the purpose set out in sub-paragraph 1(4) as to the
bases of allocations and apportionments to be adopted in preparing the
analyses required under sub-paragraphs 5.1(1), 5.1(3) and 5.2 and in
making the allocations and apportionments referred to in sub-paragraph
7.2(1) and
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thereafter the Appointee shall prepare the analyses and make the
allocations and apportionments in accordance with such guidelines as may
apply from time to time.
8. Current Cost Accounting Statements
8.1 In addition to preparing accounting statements under paragraph 4, the
Appointee Shall prepare accounting statements on the current cost basis in
respect of the same period in accordance with such guidelines as are
reasonable and appropriate for the purposes of this Condition as the
Director may from time to time, after consulting with such bodies as are
reasonably representative of undertakers holding appointments made under
Chapter I of Part II of the Act or, if none, the Appointee, notify to the
Appointee for the purposes of this paragraph.
8.2 Guidelines notified by the Director to the Appointee under sub-paragraph
8.1 may:
(1) specify the form and content of current cost accounting
statements. including information on specified types of revenue,
cost, asset or liability and information on the revenues, costs,
assets and liabilities attributable to specified activities,
provided that the guidelines may not require the Appointee to
disclose information in such current cost accounting statements
in respect of items in respect of which the Appointee is not
required to give information in accounting statements prepared
under paragraph 4 from time to time;
(2) require any reconciliation that may be required with the annual
accounts of the Appointee prepared under the 1985 Act;
(3) specify the accounting principles and the bases of valuation to
be used in preparing current cost accounting statements; and
(4) specify the nature of the report by the Auditors required to be
given in respect of accounting statements.
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9. Audit and publication of accounting statements
9.1 The Appointee shall procure the following reports by the Auditors
addressed to the Director:
(1) in respect of each set of accounting statements prepared under
this Condition, a report stating whether in their opinion:
(a) proper accounting records have been kept by the Appointee
as required by paragraph 3; and
(b) that set of accounting statements (including the information
required to be shown or disclosed under paragraphs 5, 6 and 7)
is in agreement with the Appointee's accounting records and
complies with the relevant paragraphs including any relevant
guidelines) or, in the case of accounting statements prepared
under paragraph 8, complies with the relevant guidelines;
(2) in respect of each set of accounting statements prepared under
paragraph 4, a report stating whether in their opinion that set of
accounting statements represents a true and fair view of the
revenues, costs, assets and liabilities of, or reasonably
attributable to, the businesses and activities mentioned in paragraph
4; and
(3) in respect of each set of accounting statement prepared under
paragraph 8, a statement of opinion as to such other matters as may
be specified in the guidelines applying to those accounting
statements.
9.2 The Appointee shall enter into a contract of appointment with the Auditors
which shall include a term that the Auditors will provide such further
explanation or clarification of their reports, and such further
Information in respect of the matters which are the subject of their
reports, as the Director may reasonably require.
9.3 The Appointee shall deliver to the Director a copy of each set of
accounting statements prepared under this Condition and of each report
referred to in sub-paragraph 9.1 as soon as reasonably practicable and in
any event not later than six months after the end of the financial year to
which they relate.
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9.4 Accounting statements prepared under this Condition (excluding the
information required to be disclosed under sub-paragraphs 5.1(4) and 5.2,
paragraph 6 and sub-paragraphs 7.1 and 7.2 and any information exempted
from this sub-paragraph from time to time by the Director by notice to the
Appointee), together with the Auditors' report delivered to the Director
under subparagraph 9.3 in respect of those accounting statements (but
excluding any part of any such report to the extent that it relates
specifically to any information excluded or exempted from this
sub-paragraph as aforesaid) shall be published with the annual accounts of
the Appointee prepared under the 1985 Act or, at the Appointee's option,
with the annual accounts of its holding company prepared under the 1985
Act and copies thereof made available upon request to customers.
10. References to the Monopolies Commission
10.1 The Appointee may, by notice given to the Director within 1 month of the
date of any such notice or notification as is referred to in paragraphs 5,
7 and 8, require the Director to refer to the Monopolies Commission for
determination by it the question whether the guidelines the subject of the
relevant notice or notification arc appropriate and reasonable for the
purposes specified in the relevant paragraph.
10.2 Where the Appointee requires the Director to make a reference to the
Monopolies Commission under sub-paragraph 10.1 any guidelines issued by
the Director which are the subject of that reference shall not apply
unless and until the Monopolies Commission determines that they shall
apply.
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APPENDIX
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2
<S> <C> <C> <C>
1. Any borrowings or sums lent: 1. The principal of the amount
borrowed or lent, the date on which
(a) by or to the Appointed Business to or by or the dates between which
any other business or activity of the repayment is to be made and the rate
Appointee; or of interest
payable.
(b) by or to the Appointee to or by any
Associated Company.
2. The giving of any guarantee or any 2. The form of the guarantee or other
other form of security by the security given, the assets the subject
Appointee for or in respect of any of the security, the amount of the
obligations of any Associated obligation (including where relevant
Company. the rate of interest payable) and the
date of maturity of the
obligation.
3. The transfer of any asset or liability: 3. The asset or liability the subject of
the transfer, the amount of the
(a) to or by the Appointee by or to an consideration for the transfer and the
Associated Company; or value attributable to the asset or
liability in the accounting records
(b) to or by the Appointed Business by kept by the Appointee.
or to any other business or activity
of the Appointee.
4. The supply of any service by or to the 4. The nature of the service supplied,
Appoinee to or by an Associated the terms on which it was supplied
Company or by or to the Appointed and the total charge made for the
Business to or by any other business service.
or activity of the Appointee.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
5. The omission by the Appointee or any 5. The Company omitting to exercise the
Associated Company to exercise a right as a right and the amount by which the value* of
result of which the value* of the aggregate the net assets of the Appointee is decreased.
assets less the aggregate liabilities ("net
assets") of the Appointee is decreased.
6. The waiver by the Appointee or the 6. The amount of the consideration,
Appointed Business of any consideration, renumeration or payment waived.
renumeration or other payment owed to it by
any Associated Company or other business or
activity of the Appointee.
</TABLE>
*For this purpose the value shall be taken to be the value attributed to the
relevant items in the accounting records kept by the Appointee or, in the case
of an interest in land or buildings which is affected by the omission, the open
market value of that interest or, where under Condition K, a certificate as to
the best price of that interest has been furnished to the Director, that best
price.
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Condition G: Code of Practice for Customers and relations with the Customer
Service Committee
1. The Appointee shall within two months after the transfer date prepare
and submit to the Director for his approval a Code of Practice:
(1) describing the nature of the services to domestic customers
provided by the Appointee in the course of the Appointed
Business;
(2) describing the tariffs charged to domestic customers and such
other terms on which those services are provided as the
Appointee considers appropriate for inclusion;
(3) describing arrangements for the payment of bills by domestic
customers including information about payment by installments
and budget plans;
(4) describing the procedure for handling complaints from domestic
customers established by the Appointee under paragraph 7;
(5) setting out information as to the availability of, facilities
for and any amount payable in respect of, the testing of
meters and describing the method of proof and effect of a
meter reading, liability for charges after ceasing to occupy
metered premises and the offences referred to in paragraph 3
of Schedule 10 (Offenses of tampering with meters etc.)
(6) informing customers what they should do in cases of emergency
and when enquiries of the Appointee; and
(7) describing the functions of the Customer Service Committee
under the Act and informing customers where they can contact
the Customer Service Committee.
2. The Appointee shall, not less frequently than once every three years
and if and whenever requested to do so by the Director but not more
frequently than once a year. review the Code and the manner in which it
has operated, with a view to determining whether any modification
should be made to it or to the manner of its operation.
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3. In carrying out any review of, or making any substantive revision of
the Code or its operation (whether under paragraph 2 or otherwise) the
Appointee shall consult the Customer Service Committee and shall
consider any representations made by it about the Code or the manner in
which it is likely to be or as the case may be, has been operated.
4. The Appointee shall submit to the Director for his approval any
revision of the Code which, after consulting the Customer Service
Committee if so required under paragraph 3, it wishes to make.
5. The Appointee shall make such modifications to the Code and any
revision or the Code as the Director, after prior consultation with the
Appointee, may specify within two months after the date on which the
Code or, as the case may be, the relevant revision is submitted to him
under paragraph 1 or, as the case may be, under paragraph 4 as a
condition of approving the Code under paragraph 1 or, as the case may
be, approving any revision of the Code under paragraph 4, being such
notifications as in the Director's opinion are necessary to ensure that
the Code complies with the requirements specified in paragraph 1. The
Director's approval shall be deemed to have been given if, within the
said period of two months, he shall not have specified any such
modifications to the Code or, as the case may be, the relevant
revision.
6. The Appointee shall:
(1) send a copy of the Code and each revision of it (in each case
in the form approved, or deemed approved, by the Director) to
the Customer Service Committee;
(2) draw the attention of domestic customers to the existence of
the Code and each substantive revision of it and how they may
inspect or obtain a copy of the Code in its latest form;
(3) make a copy of the Code in its latest form available for
inspection at each Relevant Premises,
(4) send a copy of the Code in its latest form free of charge to
any person requesting it; and
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(5) provide the information referred to in sub-paragraph (5) of
paragraph 1 with every demand for payment of charges which are
fixed by reference to metered volume.
7. The Appointee shall establish within two months after the transfer date
a procedure for handling complaints from customers about the manner in
which the Appointee carries out the Appointed Business, which shall
include particulars of the training to be given to staff in the
handling of complaints.
8. The Appointee shall provide special means of identifying officers
authorized by the Appointee when they visit customers' premises.
9. Subject to paragraph 10, the Appointee shall at the request of the
Customer Service Committee meet the Customer Service Committee not less
frequently than once in each Charging Year and an such other occasions
as the Customer Service Committee may reasonably request.
10. The Appointee shall not be required to meet the Customer Service
Committee under this Condition before the expiry of three months after
the transfer date.
11. At not less than one meeting in each Charging Year held pursuant to
paragraph 9 the Appointee shall be represented by at least one director
of the Appointee.
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Condition H: Code of Practice and Procedure on Disconnection
1. The Appointee shall within two months after the transfer date prepare
and submit to the Director for his approval a Code of Practice which
shall:
(1) give guidance to domestic customers who have difficulty in
paying their bills:
(2) describe the procedure adopted by the Appointee in accordance
with paragraph 7 which the Appointee will follow before it
disconnects a supply of water to any domestic premises; and
(3) contain such other information as the Appointee considers
appropriate.
2. The Appointee shall, not less frequently than once every three years
and if and whenever requested to do so by the Director but not more
frequently than once a year, review the Code and the manner in which it
has been operated, with a view to determining whether any modification
should be made to it or to the manner of its operation.
3. In carrying out any review of, or making any substantive revision of,
the Code or its operation (whether under paragraph 2 or otherwise) the
Appointee shall consult the Customer Service Committee and shall
consider any representations made by it about the Code or the manner in
which it is likely to be or, as the case may be, has been operated.
4. The Appointee shall submit to the Director for his approval any
revision of the Code which, after consulting the Customer Service
Committee if so required under paragraph 3, it wishes to make.
5. The Appointee shall make such modifications to the Code and any
revision of the Code as the Director, after prior consultation with the
Appointee, may specify within two months after the date on which the
Code or, as the case may be, the relevant revision is submitted to him
under paragraph 1 or as the case may be, paragraph 4 as a condition of
approving the Code under paragraph 1 or, as the case may be, approving
any revision of the Code under paragraph 4, being such modifications as
in the Director's opinion are necessary to ensure that the Code
complies with the requirements specified in
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sub-paragraph, 1(1) and 1(2). The Director's approval shall be deemed
to have been given if, within the said period of two months, he shall
not have specified any such modifications to the Code or as the case
may be, the relevant revision.
6. The Appointee shall:
(1) send a copy of the Code and each revision of it (in each case,
in the form approved, or deemed approved, by the Director) to
the Customer Service Committee;
(2) with every demand for payment of charges, draw the attention
of domestic customer to the existence of the Code in its
latest form and how they may inspect or obtain a copy;
(3) make a copy of the Code in its latest form available for
inspection at each Relevant Premises; and
(4) send a copy of the Code in its latest form free of charge to
any person requesting it.
7.1 The Appointee shall adopt a procedure in relation to disconnections of
water supply to domestic premises for non-payment of charges due to the
Appointee or, as the case may be, the Water Authority in respect of the
supply of water to those premises ("Relevant Charges") which and be
consistent with the provisions of section 49 and with the principles
set out in sub-paragraphs 7.2 to 7.5.
7.2 A supply of water to domestic premises should not be disconnected if
the occupier of those premises has been served with notice requiring
him to pay Relevant Charges and within seven days beginning with the
day after which the notice was served serves a notice on the Appointee
stating that he disputes his liability to pay those Relevant Charges
except where:
(1) the Appointee or, as the case may be, the Water Authority, has
obtained an enforceable judgment against him for the payment
of those Relevant Charges but they remain unpaid for any
reason (other than by virtue of compliance with the terms of
the judgment); or
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<PAGE> 95
(2) he is in breach of a payment agreement for the payment or
those Relevant Charges entered into with the Appointee since
the service of his notice.
and in either of the cases mentioned in (1) and (2) except at a time when the
person liable to pay those Relevant Charges is the occupier of the premises.
7.3 A supply of water to domestic premises should not be disconnected:
(1) if the person liable to pay Relevant Charges informs the
Appointee that he is applying for help to the Social Security
Office or local Social Services Department for so long as that
Office or Department asks the Appointee to delay
disconnection; or
(2) for so long as the person liable to pay those Relevant Charges
complies with an agreement entered into with the Appointee or,
as the case may be, the Water Authority, for the payment of
those Relevant Charges.
7.4 Where neither sub-paragraph 7.2 nor sub-paragraph 7.3 applies a supply
of water to domestic premises should not be disconnected:
(1) except at a time when the person liable to pay Relevant
Charges is the occupier of these premises; and
(2) except where the Appointee or, as the case may be, the Water
Authority, has obtained an enforceable judgment against him
for the payment of those Relevant Charges but they remain
unpaid for any reason (other than by virtue of compliance with
the term: of the judgment)
but so that if prior to the date of the bill in respect of the Relevant
Charges an order for payment of charges due in respect of a supply of
water has been made by a court of competent jurisdiction against the
occupier of those Premises in proceedings brought against that person
by any water undertaker but the charges remain unpaid for any reason
(other than by virtue of compliance with the terms of that order)
sub-paragraph (2) shall not apply and the supply of water to those
premises may be disconnected without court proceedings being taken.
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7.5 Before a supply of water to domestic premises is disconnected in
accordance with the procedure adopted by the Appointee under this
paragraph the Appointee should make reasonable attempts to contact the
occupier with a view to agreeing a payment arrangement, failing which
arrangement the Appointee should give notice of disconnection.
7.6 In this paragraph references to a supply of water being disconnected
include references to the disconnection of a service pipe which for the
purposes of providing a supply of water to the premises in question is
connected with any water main of the Appointee and to a supply of water
to those premises being otherwise cut off.
7.7 For the purposes of this paragraph "notice" means a notice served in
accordance with section 187.
8. The Appointee shall inform the Customer Service Committee of the number
or domestic premises in respect of which the supply of water has been
disconnected for non-payment of choices during each consecutive period
of six months commencing with the period of six months starting on the
transfer date. Such information shall be provided within one month of
the expiry of the period to which it relates and shall show separately
the number of such premises in each part of the Area which is
administered by the Appointee as an operating division, or equivalent,
of the Appointed Business.
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Condition 1: Code of Practice and Procedure on Leakage
1. In this Condition "supply pipe" means that part or the service pipe for
which the owner is responsible.
2. The Appointee shall within two months after the transfer date prepare
and submit to the Director for his approval a Code of Practice
concerning liability for charges of domestic customers occupying
metered premises where there is an unidentified leak on the supply
pipe. The Code shall contain Information as to the procedures described
in paragraph 8 and such other information as the Appointee considers
appropriate.
3. The Appointee shall not less frequently than once every three years and
if and whenever requested to do so by the Director but not more
frequently than once a year, review the Code and the manner in which it
has been operated, with a view to determining whether any modification
should be made to it or the manner of its operation.
4. In carrying out any review of, or making any substantive revision of,
the Code or in operation (whether under paragraph 3 or otherwise) the
Appointee shall consult the Customer Service Committee and shall
consider any representations made by it about the Code or the manner
in which it is likely to be or, as the case may be, has been operated.
5. The Appointee shall submit to the Director for his approval any
revision of the Code which, after consulting the Customer Service
Committee if so required under paragraph 4, it wishes to make.
6. The Appointee shall make such modifications to the Code and any
revision of the Code as the Director, after prior consultation with the
Appointee, may specify within two months of the date on which the Code
or, as the case may be, the relevant revision is submitted to him under
paragraph 2 or, as the case may be, under paragraph 5 as a condition of
approving the Code under paragraph 2, or as the case may be, approving
any revision of the Code under paragraph 5, being such modifications as
in the Director's opinion are necessary to ensure that the Code
contains the information required by paragraph 2. The Director's
approval shall be deemed to have been given if,
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within the said period of two months, he shall not have specified any
such modifications to the Code or, as the case may be, the relevant
revision.
7. The Appointee shall:
(1) send a copy of the Code and each revision of it (in each case
in the form approved, or deemed approved, by the Director) to
the Customer Service Committee;
(2) with every demand for payment of charges which are fixed by
reference to volume, draw the attention of domestic customers
to the existence of the Code in its latest form and how they
may inspect or obtain a copy:
(3) make a copy of the Code in its latest form available for
inspection at each Relevant Premises; and
(4) send a copy of the Code in its latest form free of charge to
any person requesting it.
8.1 The Appointee shall follow the procedures described in this paragraph.
8.2 At the time when a meter is installed, the Appointee shall check the
supply pipe between the meter and the customer's tap to establish if
there are significant leaks in that pipe. Where as a result of that
check a leak is detected in the supply pipe which can be repaired
without additional excavation at the time the meter is installed the
Appointee shall repair the leak at the Appointee's expense. Where as a
result of that check a leak is detected which cannot be repaired
without additional excavation, the Appointee shall notify the customer
of the leak and ask the customer to repair it at the customer's
expense. if the customer then fails to repair the leak, the Appointee
shall be entitled to treat any subsequent loss of water as consumption
by the customer and to charge the customer accordingly.
8.3 Subject to sub-paragraph 8.2. where after a meter has been installed, a
subsequent meter reading indicates that a customer has an abnormally
high consumption which could be due to an undetected leak in the supply
pipe, then if a leak is subsequently discovered the Appointee shall
make an adjustment to the customer's measured charges provided that the
customer (or the owner responsible for the supply pipe) carries out the
necessary remedial work at the customer's, or as the case may be, the
owner's direction and expense within a reasonable period of time
specified by the Appointee. The Appointee shall not be required to make
such an adjustment in the event or a subsequent leak or where a leak
has been caused through the negligence of the customer (or the owner
responsible for the supply pipe) or their respective agents or when the
customer knew or ought to have known that there was a leak and failed
to repair it.
8.4 Where the Appointee is required to make an adjustment to the customer's
measured charges under sub-paragraph 8.3, the adjustment shall be based
upon the customer's past normal consumption. Where there is no record
of past consumption the adjustment shall be based upon typical usage
for property of a similar type and the customer's measured charges
shall be further adjusted if the customer's subsequent accrual usage is
significantly different.
8.5 Where the Appointee is required to make an adjustment to a customer's
measured charges for water supply under this paragraph it shall make a
similar adjustment to the customer's measured charges for sewerage
services, provided that where sewerage services are provided in
relation to the same premises by a different undertaker then the
Appointee shall inform that undertaker as soon as reasonably
practicable that the Appointee is required to make such an adjustment
to the customer's measured charges for water supply and of the basis on
which the adjustment has been, or will be, made.
8.6 Where the Appointee is informed by any water undertaker that it is
required to make an adjustment to a customer's measured charges for a
supply or water to any premises in relation to which the Appointee
provides sewerage services the Appointee shall make an adjustment to
the customer's measured charges for sewerage services on a basis
similar to that made by that water undertaker.
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Condition J: Levels of Service Information and Service Targets
Part I. Levels of Service Information
1. Provision of Information
1.1 The Appointee shall in respect of each Charging Year, starting with the
Charging Year commencing on lst April 1990, furnish Information to the
Director once in each Charging Year in respect of the matters specified
in and otherwise in accordance with, Appendix A to the letter entitled
"Levels of Service dated 21st August 1989 from the Secretary or State
to the Water Authority ("the Levels of Service Letter").
1.2 Where the Director is satisfied that the provision of Information in
respect of the matter specified in Appendix A to the Levels of Service
Letter is inadequate to enable him properly to keep the quality of the
services provided by the Appointee in the course of the Appointed
Business ("Services") under review the Director may subject to prior
consultation with the Appointee specified in that Appendix in respect
of which information is to be furnished under sub-paragraph 1.1 in a
manner which is reasonable having regard to the Director's duties under
sub-sections (1) and (2) of section 26 and thereafter the Appointee
shall in respect of each Charging Year furnish information to the
Director in respect of those matters as so varied. The Director may
subject as aforesaid make variations from time to time under this
sub-paragraph and references in this sub-paragraph to the matters in
Appendix A to the Levels of Service Letter Shall be read and construed
as though they were references to the matters specified in Appendix A
as varied from time to time.
1.3 Where the Director considers it requisite or expedient for the purpose
of deciding whether to make an application to the Secretary of State
under section 38 or 68 (and, if so, what provisions should be set out
in the application) or to require the Appointee to notify a Service
Target under sub-paragraph 3.2 the Appointee shall furnish to the
Director:
(1) such further Information as the Director reasonably requires
in respect of the quality of Services; and
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(2) Information in respect of the quality of Services in respect
of any reasonable period other than a Charging Year and/or
more frequently than once in a Charging Year (but not more
frequently than is reasonable) as may be specified by the
Director. Such Information at the Appointee's option, may
consist of updating Information previously furnished to the
Director under sub-paragraph 1.1, 1.2 or 1.3(1).
1.4 In this Condition references to the quality of Services shall include
references to the manner in which the Appointee carries out the
Regulated Activities.
2. Reports, certificates etc.
Information furnished to the Director by the Appointee under paragraph
1 (other than under sub-paragraph 1.3) and, where the Director so
requires Information furnished to him by the Appointee under that
sub-paragraph, ("Levels of Service Information") shall be accompanied
by:
(1) a report, signed by or on basis of the Appointee, containing
such information as the Director may reasonably specify as to
the methods used, and the steps taken, by the Appointee for
the purpose of monitoring, assessing and reporting on the
matters in respect of which Levels of Service Information has
been furnished; and
(2) a statement, signed by or on behalf of the Appointee, of the
reasons why, and the extent to which, (if such be the case)
the quality of any Services shall have been such that any
standard by reference to which Levels of Service Information
has been furnished shall not have been met. The statement
shall include, without limitation, information as to the
categories of persons to whom those Services have been so
provided or who have been affected by the carrying on of the
Appointed Business in that manner and their geographical
distribution.
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Part II. Service Targets
3. Setting of Service Targets by the Appointee
3.1 The Appointee shall once in each Charging Year starting with the
Charging Year commencing on 1st April 1990, notify the Director of its
intentions as to the quality of such Services as are specified in
Appendix B to the Levels of Service Letter in respect of each Charging
Year falling within the period beginning at the start of the Charging
Year in which the notification falls to be given and ending on the
expiry of such number of Charging Years as is specified in that
Appendix and otherwise in accordance with the procedures specified in
that Appendix.
3.2 Where the Director considers it requisite or expedient for the purpose
of enabling him properly to keep the quality of Services under review
the Director may require the Appointee to notify him of its intentions
as to the quality of such other Services in accordance with such
requirements as the Director may reasonably specify.
3.3 The Appointee's intentions shall be expressed in any notification under
sub-paragraph 3.1 or 3.2 as a target (a "Service Target") for
achievement by such date or over such period or at such times during
such period as may be specified in Appendix B to the Levels of Service
Letter or, as the case may be, as the Director may have specified when
he requires the Appointee to notify him of it intentions under
sub-paragraph 3.2 and in respect of the whole or such part of the Area
as may be specified in the said Appendix B or, as the case may be, as
the Director may have so specified and so as to be capable of
verification in accordance with this Condition.
4. Monitoring of Service Targets
The Appointee shall keep under review during each Charging Year the
quality of Service: as compared with any relevant Service Target
notified by it to the Director under paragraph 3 as a target for
achievement during that Charging Year or by a date or at a time during
that Charging Year or over a period including that Charging Year. For
this purpose the Appointee shall take such steps to monitor and assess
the quality of Services as may be necessary to enable such comparison
to be made and to enable the Appointee to make the report referred to
in paragraph 5.
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5. Reporting on Service Targets
5.1 The Appointee shall furnish to the Director a. written report (a
"Service Target") as to the quality of Services as compared with any
relevant Service Target.
5.2 A Service Target Report shall include:
(1) all such Information as in the opinion of the Appointee is
necessary to provide a proper explanation of the Report and of
the quality of Services as compared with any relevant Service
Target;
(2) a statement of the methods used by the Appointee to keep the
quality at Services under review in accordance with paragraph
4 and the steps taken by it to monitor and assess the quality
of Services in accordance with that paragraph: and
(3) if a Service Target in respect of foul flooding has been
notified by the Appointee to the Director relating to the
Charging Year in respect of which the relevant service Target
Report is furnished, a statement as to the Appointee's
practice in dealing with claims arising ant of loss or damage
alleged to have been caused by foul flooding.
5.3 Without prejudice to the generality of subparagraph 5.2, a Service
Target Report may include a statement of:
(1) any matters which, in the opinion of the Appointee, will or
may result in the Appointee being unable to achieve any
Service Target or which hive resulted in the Appointee being
unable to achieve any Service Target to the extent that it was
expressed in the notification to the Director under paragraph
4 to be a target for achievement during the relevant Charging
Year or by a date or at a time during that Charging Year:
(2) any matters which have made it impossible for the Appointee to
ascertain, either at all or with reasonable accuracy whether
or not any Service Target has been, or is likely to be,
achieved; and
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(3) any exceptional matters or matters out of the ordinary course
and in each case outside the reasonable control of the
Appointee which have effected the quality or any Services and
which could fairly be said to render or to have rendered the
achievement of any Service Target substantially more onerous.
5.4 The Appointee may also specify in a Service Target Report any revision
of any Service Target which the Appointee has determined to make having
regard to any matters included in that Service Target Report, including
without limitation, such matters as are referred to in sub-paragraph
5.3, such revision may be, without limitation, as to the date by, or
the period over, or the times at, which during any period the relevant
Service Target was intended to be achieved, or the part of the Area in
respect of which the relevant Service Target was intended to be
achieved. Any such revised Service Target is hereinafter referred to as
a "Revised Service Targets" Paragraphs 4, 5 (including this
sub-paragraph) and 6 to 13 inclusive shall apply mutatis mutandis to
any Revised Service Target.
5.5 The Appointee shall once in each Charging Year furnish a Service Target
Report to the Director in respect of that Charging Year, provided that,
if the Director considers it requisite or expedient for the purpose of
deciding whether to make an application to the Secretary of State under
section 38 or 68 (and, if so, what provisions should be set out in the
application) the Appointee shall furnish a Service Target Report more
frequently (but not more frequently than is reasonable).
6. Measures to achieve Service Targets
Where, following receipt by the Director of any Service Target Report,
he considers it requisite or expedient for the purpose of deciding
whether to make an application to the Secretary of State under section
33 or 68 (and, if so, what provisions should be set out in the
application), the Appointee shall furnish to the Director in writing
within such reasonable period as the Director may specify such further
Information as the Director may reasonably require, including, but not
limited to, Information as to:
(1) the respective measures required to be taken to achieve any
Service Target and the respective costs of such measures.
(and, where more than one measure is available, whether or not
subject to the
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expenditure of money, the Appointee shall give details of the
alternative measures); and
(2) the measures being taken or proposed to be taken to achieve
any Service Target.
Part III. Certification and Verification of Information
7. Levels of Service Information and Service Target Reports required to be
furnished once in each Charging Year shall be accompanied by a
certificate signed by the Auditors (or by such other person as the
Director may approve such approval not to be unreasonably withheld)
stating whether, in their opinion, the relevant Levels of Service
Information and Information contained in the relevant Service Target
Report has been ascertained by the use of the methods and the taking of
the steps which the Appointee has informed the Director it has used and
taken and whether, in there are on, the methods used and the steps
taken an adequate for the purpose of ascertaining that Levels of
Service Information and the Information contained in that Service
Target Report To the extent that Levels of Service Information and a
Service Target Report contain the same Information and are furnished at
the same time only one certificate need be provided under this
paragraph. Levels of Service Information and Service Target Reports
furnished in accordance with any requirement of the Director under
sub-paragraph 1.3 or sub-paragraph 5.5 shall also be accompanied by a
like certificate if the Director so requires.
8. The Appointee shall cooperate fully with the Director in any
investigation of:
(1) the accuracy and sufficiency of any Information furnished by
the Appointee to the Director under this Condition;
(2) the methods used and steps taken by the Appointee to ascertain
any such Information; and
(3) whether any Service Target has been achieved
which the Director may carry out for the purpose of deciding whether to make an
application to the Secretary of State under section 38 or 68.
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9. Such cooperation shall include, without limitation:
(1) subject to reasonable prior notice to the Appointee, giving to
the Director access at reasonable hours to any Relevant Plant
and to any premises occupied by the Appointee in relation to
carrying out the Regulated Activities; and
(2) subject to reasonable prior notice to the Appointee, allowing
the Director at reasonable hours:
(a) to inspect and make photocopies of, and take extracts
from, any books and records of the Appointee
maintained in relation to the Appointed Business;
(b) to carry out inspections, measurements and tests on
or in relation to any such premises or Relevant Plan;
and
(c) to take on to or in to any such premises or Relevant
Plan such other persons and such equipment as may be
necessary for the purpose of such investigation.
10. Nothing in paragraphs 8 and 9 shall require the Appointee:
(1) to do anything which is outside its reasonable control; or
a) to do or to allow the Director to do anything which would
materially disrupt the Appointee's business (unless it is
essential for the purposes of the investigation that that
thing be done).
11. The Appointee shall not be liable to the Director for any loss or
damage to persons or property which arises out of the Director having
such access or doing any such thing as is mentioned in paragraphs 8 and
9 except to the extent that loch loss or damage is caused by the
Appointee's negligence or willful default.
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12. In paragraphs 9, 10 and 11:
(1) references to the Director include references to his employees
and agents; and
(2) "Relevant Plant" means any plant used by the Appointee for the
purpose of the Appointed Business including, without
limitation, water mains, sewers and other pipes and their
accessories.
Part IV. Publication of Information
13. Unless the Director otherwise consents in writing (such consent not to
be unreasonably withheld) pursuant to a application to him in that
behalf by the Appointee when the relevant Information and Reports are
furnished to the Director under this Condition the Appointee shall:
(1) draw the attention of customers to the existence of Levels of
Service Information (excluding any report or statement
furnished under paragraph 2) and Service Target Reports
furnished to the Director under this Condition in respect of a
Charging Year;
(2) make a copy of the most recent Levels or Service Information
(excluding any report or statement furnished under paragraph
2) and Service Target Report available for inspection at each
Relevant Premises; and
(3) send a copy of the most recent Levels of Service Information
(excluding any report or statement furnished under paragraph
2) and Service Target Report to any person requesting it.
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Condition K: "Ring Fencing", Disposals of Land and Changes of Use of Land
1. Introduction
The purposes of this Condition are to ensure:
(1) that the Appointee retains sufficient rights and assets for
the purpose described in sub-paragraph 3.1; and
(2) that the best price is received from disposals of land to
which this Condition applies so as to secure benefits to
customers through the application of the proceeds of such
disposals to reduce charges as provided in, and subject to the
provisions of, Condition B.
2. Interpretation and Construction
2.1 In this Condition and for the purposes of this Condition:
references in paragraph 7 to the "Appointed Business" shall be
construed as if the Appointed Business included the management and
holding by the Appointee of any protected land for so long as it is not
transferred under that paragraph;
"the Consent Limit" for the purpose of any disposal of land in the
respective areas specified in Column (1) of the table in the definition
of the "Materiality Amount" is:
(1) such amount as is found by multiplying by 10 the figure in
Column (2) of that table set opposite the relevant area (or
such greater amount as may from time to time be the relevant
Materiality Amount for the purpose of any disposal of land in
the relevant area); or
(2) such greater amount as may from time to time be determined by
the Director and approved by the Secretary of State;
a "Disposal Certificate" means a certificate signed by all the
directors of the Appointee for the time being or approved by a duly
convened meeting
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of the board of directors of the Appointee for the time being and
signed by a director or the secretary of the Appointee confirming that
it has been so approved and having attached to it a certified copy of
an extract of the minutes of the relevant meeting containing the
resolution to approve the certificate;
"formal tender" means a tender, acceptance of which creates a binding
obligation to purchase;
"an Interim Use" means, in relation to any protected land a use to
which the land may be put which does not:
(1) require any material works to be carried out to implement that
use; or
(2) in the reasonable opinion of the Appointee, taking account of
proper professional advice obtained by the Appointee for that
purpose, materially reduce the value of the land on cessation
of such use;
"land" includes any interest or right in or over any land;
"the Materiality Amount" for the purpose of any disposal of land in the
respective areas specified in Column (1) of the table below is the
amount set opposite those areas in Column (2) of that table
(1) (2)
(pound)
Greater London 250,000
Bedfordshire, Berkshire, 200,000
Buckinghamshire, East
Sussex, Essex,
Hertfordshire, Isle of
Wight, Kent,
Oxfordshire, Surrey,
West Sussex
Any other area not 150,000
listed above
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or such greater amount as may from time to time be determined by the
Director so as to allow for movements in the Retail Prices Index or as
may from time to time otherwise be determined by the Director and
approved by the Secretary of State:
"nominee" of any person includes any person acting it the direction of,
or in concert with, that first-mentioned person or pursuant to any
agreement or understanding with that first-mentioned person:
a "proposed disposal" is any such disposal to which paragraph 4, 5 or 6
applies;
"protected land" and "disposal" have the meanings respectively given to
them in section 189 and cognate expressions shall be construed
accordingly;
"Short-term Disposal" means a disposal which consists of the creation
of any interest or right in or over protected land which the Appointee
has an unconditional right to terminate without penalty at any time and
from time to time by not more than thirty months' notice or which
expires or otherwise ceases in accordance with its terms within thirty
months of the date of its creation without any other interest or right
arising on such expiry or cessation;
"value" includes value of any kind including, without limitation; cash,
the value of real or personal property or any interest in such property
and the value of any right or benefit, actual or prospective, and the
value of any release, in whole or in part, of any obligation or claim.
2.2 For the purpose of calculating "best price":
(1) for the purpose of any valuer's certificate required to be
furnished under sub-paragraph 4.6(1)(a)(i), 5.1(1)(b) or
7.3(1)(b):
(a) no reduction shall be made on account of the method.
terms and timing of the proposed disposal (if
relevant) in respect of which the relevant
certificate is required to be furnished, but "best
price" shall be calculated on the basis of a disposal
of the land in question, the method, terms and tiling
of which are most likely to secure that the best
price is obtained; and
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(b) where the proposed disposal or, as the case may be,
the change of use is related to, or connected or
interdependent with, any other proposed disposal
then, subject to sub-paragraph (a), no account shall
be taken of that fact; and
(2) for any purpose under this Condition, 'best price" shall
include value of any kind as "value" is determined in
sub-paragraph 2.1.
3. "Ring Fencing"
3.1 The Appointee shall at all times ensure, so far as reasonably
practicable, that if a special administration order were made in
respect of the Appointee the Appointee would have available to it
sufficient rights and assets (other than financial resources) to enable
the special administrator so to manage the affairs, business and
property of the Appointee that the purposes of such order could be
achieved, provided that this paragraph shall not require the Appointee
to seek to re-negotiate the terms of any contract or obligation which,
in accordance with a scheme under Schedule 2, is transferred to the
Appointee.
3.2 The Appointee shall publish with its audited accounts for each
financial year a statement. as to whether the Appointee was in
compliance with sub-paragraph 3.1 as at the end of that financial year.
3.3 Where any such rights and assets as are mentioned in sub-paragraph 3.1
are provided or made available by any Group Company, the Appointee's
obligations under sub-paragraph 3.1 in respect of such rights and
assets shall be such as they would be if the words "so far as
reasonably practicable" and the proviso were omitted from that
sub-paragraph.
3.4 The state, condition and capacity of assets used: by the Appointee in
the Appointed Business are the subject of Conditions J and L and
accordingly sub-paragraph 3.1 shall not apply thereto.
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4. Disposals of protected land other than disposals by auction or formal
tender or to Associated Companies
4.1 Subject to sub-paragraph 4.2, the Appointee shall not make any disposal
of any protected land, not being land which has previously been the
subject of a transfer under paragraph 7, unless the Appointee shall
have complied with the provisions of sub-paragraph 4.3.
4.2 Sub-paragraph 4.1 shall not apply:
(1) to any Short-term Disposal;
(2) to any disposal of my protected land the value of which, when
aggregated with:
(a) the value of any other protected land which affects
or might affect the value of such protected land or
the value of which is or might be affected by such
protected land; and
(b) to the extend not taken into account under (a), the
value of any other protected land the subject of any
other disposal which has taken place, is proposed or
contemplated and which in the honestly held and
reasonable opinion of the Appointee is or might be
related to or connected or interdependent with, the
first-mentioned disposal does not exceed the
Materiality Amount;
(3) to any such disposal of protected land as is referred to in
paragraphs 5 and 6;
(4) to any disposal of any protected land made in accordance with
any such provision as is referred to in section 152(5)(a) to
the relevant person referred to in that section; or
(5) to any disposal of any protected land made pursuant to any
obligation entered into by the Water Authority prior to the
transfer date.
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4.3 Subject to sub-paragraph 4.6 the Appointee shall:
(1) not less than 10 working days prior to the Appointee entering
into an obligation (whether unconditional or subject to
conditions) which requires or might require it to make the
proposed disposal, furnish to the Director a Disposal
Certificate which:
(a) identifies the protected land the subject of the
proposed disposal both by written description and by
a plan showing:
(i) such protected land; and
(ii) all other land contiguous or adjacent to
such protected land in or over which the
Appointee or, to the best of the knowledge,
information and belief of the Appointee,
having made due and careful enquiry, any
Associated Company has any interest or right
and which affects or might affect the value
of such protected land or the value of which
is or might be affected by such protected
land;
(b) describes the interest or right in or over the
protected land to be disposed of;
(c) sets out the terms of the proposed disposal;
(d) describes:
(i) the consideration to be received or expected
to be received; and
(ii) separately, any other value which, in the
reasonable opinion of the Appointee, is to
be received or derived or expected to be
received or derived in each case from or in
connection with the proposed disposal by the
Appointee and the timing or the receipt or
derivation thereof;
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(e) sets out details as required by (a) to (d) inclusive
above in respect of any other disposal of protected
land which has taken place, is proposed or
contemplated and which in the honestly held and
reasonable opinion of the Appointee is or might be
related to, or connected or interdependent with, the
proposed disposal or, if none, a statement to that
effect;
(f) confirms that the protected land the subject of the
proposed disposal is, or at the time the Appointee is
required to give vacant possession will be, no longer
required for carrying out the Regulated Activities
and will not be so required in the foreseeable
future:
(g) confirms:
(i) that the proposed disposal is an arms length
transaction:
(ii) that the consideration and other value (if
any) certified under (d) above to be
received or derived, or expected to be
received or derived, by the Appointee from
or in connection therewith is the total
value to be received or derived, or expected
to be received or derived, from the proposed
disposal, whether by the Appointee or any
other person:
(iii) except where a certificate is furnished
under sub-paragraph 4.5, that in the
honestly held and reasonable opinion of the
Appointee, taking account of proper
professional advice obtained by the
Appointee for that purpose, the
consideration certified under (ii) is the
best price that could reasonably be obtained
for the protected land in question, having
regard to all the circumstances at the time
when the certificate is given (including,
but without limitation, any reasonable
prospect of planning permissions being
obtained); and
(iv) that neither the Appointee nor, to the best
of the knowledge, information and belief of
the Appointee, having made due and careful
enquiry, any Associated
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Company or any company or business in which
the Appointee, or, to the best of the
knowledge, information and belief of the
Appointee, having made due and careful
enquiry, any Associated Company, has a
material direct or indirect interest, shall,
following the proposed disposal, have,
either as a result of the proposed disposal
or any other transaction, a continuing
interest whether direct or indirect in the
protected land the subject of the proposed
disposal or in any development involving or
connected with that protected land: and
(2) prior to entering into the relevant obligation, furnish to the
Director in writing such further Information regarding the
proposed disposal which the Director may reasonably request.
4.4 For the purpose of sub-paragraph 4.3(1)(g)(iv), "interest" includes an
entitlement to a share of profits or participation in assets, rights or
benefits but excludes any interest which consists solely of an
entitlement to receive installments of consideration which as to amount
and timing are certain or variable only by reference to the grant of
planning permissions.
4.5 The Appointee may, instead of giving the confirmation required by
subparagraph 4.3(1)(g)(iii), furnish to the Director a certificate by a
valuer appointed by the Appointee ("the Valuer") addressed to the
Director which states that in the opinion of the Valuer the
consideration certified under sub-paragraph 4.3(1)(g)(ii) is the best
price that could reasonably be obtained for the protected land in
question, having regard to all the circumstances at the time when the
certificate is given (including, but without limitation, any reasonable
prospect of planning permissions being obtained).
4.6 where the Appointee proposes to make any such disposal as is mentioned
in sub-paragraph 4.1 and the terms or circumstances of the proposed
disposal are such that a Disposal Certificate giving the full
confirmation required by (f) or (g) of sub-paragraph 4.3(1) (including,
where relevant, such a certificate as is referred to in sub-paragraph
4.5) cannot properly be given, the Appointee shall not enter into any
obligation (whether conditional or subject to conditions) which
requires or might require it to make that proposed disposal unless:
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(l) in any case where the full confirmation required by (g) of
sub-paragraph 4.3(1) including, where relevant, such a certificate as
is referred to in sub-paragraph 4.5) cannot properly be given:
(a) either:
(i) not less than 10 working days prior to the Appointee
entering into the relevant obligation, the Appointee
has furnished to the Director a Disposal Certificate
as required by sub-paragraph 4.3 including such of
the matters specified in (g) as can properly be
certified and a by a valuer appointed by the
Appointee and approved by the Director for the
purpose of this sub-paragraph ("the Valuer")
addressed to the Director which states:
(A) that in the opinion of the Valuer the
consideration to be received by the
Appointee from the proposed disposal is the
best price likely to be obtained for the
land in question, having regard to all the
circumstances at the time when the
certificate is given (including, but without
limitation, any reasonable prospect of
planning permissions being obtained); and
(B) the amount of the consideration to be
received or expected to be received by the
Appointee from the proposed disposal
expressed in cash according to when that
consideration is to be, or is expected to
be, received; or
(ii) the Director gives his prior written consent to the
proposed disposal, such consent not to be
unreasonably withheld or delayed; and
(b) prior to entering into the relevant obligation, the Appointee
shall have furnished to the Director in writing such further
Information regarding the proposed disposal which the Director
may reasonably request; and
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(c) where the amount. stated pursuant to sub-paragraph
(1)(a)(i)(A) above exceeds the Consent Limit, the prior
written consent of the Director to the proposed disposal has
been obtained, such consent not to be unreasonably withheld or
delayed:
(2) in any case where the full confirmation required by (f) of
sub-paragraph 4.3(1) cannot properly be given, the prior written
consent of the Director to the proposed disposal has been obtained,
such consent not to be unreasonably withheld or delayed.
5. Disposals of protected land by auction or formal tender
5.1 Where the Appointee proposes to dispose by auction or formal tender of
any protected land, the value of which (when aggregated with the value
of any other such protected land as is described in sub-paragraphs
4.2(2) (a) and (b)) exceeds the Materiality Amount, it shall:
(1) not less than 10 working days prior to the date of the auction
or the invitation to tender:
(a) furnish to the Director a Disposal Certificate which:
(i) contains the information and confirmations
required to be contained in a Disposal
Certificate furnished under sub-paragraph
4.3(1) under items (a), (b), (c), (d), (e),
(f) and (g)(iv) of that sub-paragraph (but
so that for this purpose references in the
said item (e) to items (a) to (c) inclusive;
(ii) sets out the reserve price (if any); and
(iii) confirms that the auction will be conducted
on the basis that bids will be accepted only
on condition that they are not made by an
Associated Company or any nominee of any
Associated Company or, as the case may be,
that it will be a term of the invitation to
tender that it is not capable
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of acceptance by an Associated Company or
any nominee of any Associated Company;
(b) furnish to the Director a certificate by a valuer
appointed by the Appointee ("the Valuer") addressed
to the Director which states that in the opinion of
the Valuer the disposal of the protected land by
auction or, as the case may be, formal tender and the
timing of the proposed disposal are respectively the
method and timing of disposal most likely to secure
that the best price is obtained for the land in
question;
(2) prior to the date of the auction or the invitation to tender,
furnish to the Director in writing such further Information
regarding the proposed disposal which the Director may
reasonably request.
5.2 In any case where the full confirmation required by sub-paragraph
5.1(1)(a)(i) or (iii) cannot properly be given, the Appointee shall not
proceed with the proposed disposal without the prior written consent of
the Director.
6. Disposals of protected land to Associated Companies
6.1 The Appointee shall not make any disposal (other than a Short-term
Disposal) of protected land to any Associated Company, not being land
which has previously been the subject of a transfer under paragraph 7,
unless:
(1) prior to the Appointee entering into any obligation (whether
conditional or subject to conditions) which requires or might
require it to make that proposed disposal (a "relevant
obligation") it notifies the Director in writing that it
proposes to make the proposed disposal; and
(2) either:
(a) not later than such date prior to the Appointee
entering into a relevant obligation as may reasonably
be specified by the Director, having regard to the
aggregate number of proposed disposals by the
Appointee to Associated Companies and of any other
proposed disposals of protected land by other
undertakers holding appointments made under Chapter I
of Part II of the Act to companies which are
Associated Companies of those
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undertakers which the Director has under
consideration at the time of the Appointee's
notification under sub-paragraph (1), the Appointee
has furnished to the Director:
(i) a Disposal Certificate, which contains the
information and conformations required to be
contained in a Disposal Certificate
furnished under sub-paragraph 4.3(1),
including such of the matters filed in (g)
as can properly be certified; and
(ii) a certificate by a valuer appointed by the
Appointee and approved by the Director for
the purpose of this sub-paragraph ("the
Valuer") addressed to the Director which
states:
(A) that in the opinion of the Valuer
the consideration to be received by
the Appointee from the proposed
disposal is the best price likely
to be obtained from a disposal of
the land in question to an
unconnected third party, having
regard to all the circumstances at
the time when the certificate is
given (including, but without
limitation, any reasonable prospect
of planning permissions being
obtained); and
(B) the amount of the consideration to
be received or expected to be
received by the Appointee from the
proposed disposal, expressed in
cash according to when that
consideration is to be, or is
expected to be, received; or
(b) the Director gives his prior written consent to the
proposed disposal such consent not to be unreasonably
withheld or delayed having regard, inter alia, but
without prejudice to the generality of the foregoing,
to the matters referred to in sub-paragraph (2)(a));
and
(3) prior to entering into a relevant obligation, the Appointee
shall have furnished to the Director in writing such further
Information regarding the proposed disposal which the Director
may reasonably request; and
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(4) the terms on which the proposed disposal is made are in
accordance with any terms, which may have been signed by the
Director, either in relation to disposals of protected land to
Associated Companies generally or in relation to the
particular proposed disposal being such terms as the Director
considers appropriate to such that the Appointee receives such
share of any value to be derived or expected to be derived by
the Associated Company from the land in question as the
Director considers appropriate, having regard to the duty
imposed on the Director under section 7(3)(c); and
(5) where the amount stated pursuant to sub-paragraph (2)(a)(i)
exceeds the Consent Limit the prior written consent of the
Director to the proposed disposal has been obtained, such
consent not to be unreasonably withheld or delayed.
6.2 In any case where the full confirmation required by (f) of
sub-paragraph 4.3(1) cannot properly be given, the Appointee shall not
enter into a relevant obligation unless the prior written consent of
the Director to the proposed disposal has been obtained, such consent
not to be unreasonably withheld or delayed having regard, inter alia,
but without prejudice to the generality of the foregoing, to the
matters referred to in sub-paragraph 6.1(2)(a)).
7. Changes of use of protected land
7.1 Where the Appointee changes the use of any protected land to a use
which consists of being held or used for some purpose other than for
purposes connected with carrying out the Regulated Activities the
Appointee shall comply with the provisions of sub-paragraph 7.3.
7.2 For the purposes of sub-paragraph 7.1:
(1) the mere fact of the Appointee ceasing to hold or we protected
land for purposes connected with carrying out the Regulated
Activities shall not be regarded as a change of use of that
protected land:
(2) any Interim Use of any protected land shall be disregarded,
but so that subparagraph 7.1 shall apply to any change of use
from an Interim Use (other than a cessation thereof or a
change to another Interim Use)
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and any extension, intensification or other modification of a
use which prior to such extension, intensification or
modification was an Interim Use shall constitute a change of
use; and
(3) the commencement of material works to implement a proposed
change of USC shall be deemed to be a change of use.
7.3 The Appointee shall:
(1) within 28 days of any inch change of use to which
sub-paragraph 7.1 applies:
(a) furnish to the Director a Disposal Certificate which:
(i) identifies the protected land the subject of
the change of use, both by written
description and by a plan showing:
(A) such protected land; and
(B) all other land comignous or
adjacent to such protected land in
or over which the Appointee or, to
the best of the knowledge,
information and belief of the
Appointee, having made due and
careful enquiry, any Associated
Company has any interest or right
and which affect or might affect
the value of such protected land or
the value of which is or might be
affected by such protected land;
(ii) describes the changed use of the protected
land ("the New Use");
(iii) describes:
(A) the consideration (if any) to be
received or expected to be
received; and
(B) separately, any other value which,
in the reasonable opinion of the
Appointee, is to be received or
derived, or expected to be received
or derived
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in each case from or in connection
with the New Use by the Appointee
and the timing of the receipt or
derivation thereof;
(iv) confirms that the protected land the subject
of the New Use is no longer required for
carrying out the Regulated Activities and
will not be so required in the foreseeable
future; and
(b) furnish to the Director a certificate by a valuer
appointed by the Appointee and approved by the
Director for the purpose of this sub-paragraph ("the
Value") as to the best price which, in the opinion of
the Valuer is likely to be obtained from a disposal
of the land in question to an unconnected third
party, having regard to all the circumstances at the
time when the certificate is given (including, but
without limitation, any reasonable prospect of
planning permissions being obtained); and
(2) unless the Director otherwise consents or the Appointee
disposes of the protected land in question in accordance with
paragraph 4 or 5 transfer the protected land in question from
the Appointed Business to another business or activity of the
Appointee within twelve months from the date of the Valuer's
certificate for the value certified by the Valuer to be the
best price under sub-paragraph 7.3(1)(b) or for such other
value as may subsequently be certified by the Valuer, acting
at the request of the Director, to be the best price likely to
be obtained from a disposal of the land in question to an
unconnected thirty party, having regard to all the
circumstances at the time when the certificate is given
(including, but without limitation, any reasonable prospect of
planning permissions being obtained), provided that where the
Valuer subsequently certifies a different value as aforesaid
the Appointee shall not be required to make the transfer
before the expiry of 12 months from the date of that
subsequent certificate and, at the expiry of that period of 12
months, the provisions of this sub-paragraph. including this
proviso, shall apply mutatis mutandis.
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8. Disclosure of Information to Valuers
The Appointee shall disclose to the Valuer appointed for the purpose of
any provision of this Condition all Information which, in the
reasonable opinion of the Appointee has or is likely to have a material
bearing on the Valuer's certificate to be given under provision and
such other information as the Valuer may reasonably require to enable
him to give his certificate.
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Condition L: Underground Asset Management Plans
1. Interpretation and Construction
In this Condition:
"the Appointment Obligations" means the Appointee's obligations under
the Appointments and for this purpose and for this purpose only the
Appointee shall be deemed to be subject to an obligation under the
Appointments to achieve any Service Target or Revised Service Target
notified to the Director by the Appointee under Condition 3;
"Network Assets" means
(1) in respect of a water undertaker:
(a) water mains and trunk mains (other than any pumps, valves
and hydrants);
(b) resource mains and discharge pipes; and
(c) so much of any service pipe as is vested in the water
undertaker; and
(2) in respect of a sewerage undertaker:
(a) public sewers (other than any pumps);
(b) any outfall pipe or other pipe for the conveyance of
effluent from any sewage disposal works of the sewerage
undertaker; and
(c) any pipe vested in the sewerage undertaker and used for
the drainage of one building or of any buildings or yards
appurtenant to buildings within the same curtilage
but excluding any pipe which discharges directly into the sea or
coastal waters;
"Network Expenditure" means expenditure in relation to any Network
Assets (whether having regard to the respective purposes referred to in
sub-paragraph 2.1, such expenditure is to be made or incurred in or in
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relation to creating, acquiring, renewing, repairing. maintaining or
improving any Network Assets or executing works or procuring the
execution of works by other persons in relation to any Network Assets
or otherwise);
"the Plan Period" means such period as the Appointee shall specify,
being a period of not less than fifteen years commencing on:
(1) in the case of the Underground Asset Management Plan required
to be furnished under sub-paragraph 2.1,1st April 1990;
(2) in the case of any revised Underground Asset Management Plan
required to be furnished under sub-paragraph 2.4, the date of
such revised Underground Asset Management Plan or, in the case
of a revised Underground Asset Management Plan prepared for
the Purposes of a Periodic Review, the start of the relevant
Review Charging Year;
a "Review Date" means the first date specified in the relevant
paragraphs of Condition B by which the Appointee is required to furnish
Information to the Director for the purpose of any Periodic Review.
2. Duty to furnish Information
2.1 The Appointee shall prepare and furnish to the Director an underground
asset management plan (an "Underground Asset Management Plan") showing
separately:
(1) an estimate and other Information in respect of Network
Expenditure required to be made or incurred by the Appointee
in each year during the Plan Period for the purposes of
ensuring:
(a) that Network Assets used by the Appointee as at the
transfer date (or, in the case of a revised
Underground Asset Management Plan, as at the date of
that revised Underground Asset Management Plan) are,
and will throughout the Plan Period be, maintained in
such a state or condition as is necessary for the
purposes described in sub-paragraph 2.2 ("the
Relevant
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Purpose) insofar as Network Assets are necessary for,
or relevant to, the Relevant Purposes; and
(b) that the capacity of the system of water supply or as
the case may be, of public sewers comprising solely
those Network Asset (but not including any other part
of the Appointee's system of water supply or, as the
case may be, of public sewers) is maintained
and the estimate and other Information shall show expenditure
to be capitalised and, separately, expenditure to be expensed;
and
(2) an estimate and other Information in respect of Network
Expenditure required to be made or incurred by the Appointee
in each year during the Plan Period for the purpose of
ensuring that, taking into account the expenditure to be made
or incurred for the purposes referred to in sub-paragraph
2.1(1):
(a) the Appointee will at all times and from time to time
have available to it for use all Network Assets (and
in such a state or condition) as are necessary for
the Relevant Purposes, in so far as Network Assets
are necessary for, or relevant to, the Relevant
Purposes; and
(b) the Capacity of the system of water supply or, as the
case may be, of public sewers comprising solely those
Network Assets (but not including any other part of
the Appointee's system of water supply or, as the
case may be, of public sewers) is and will be inch as
is necessary for the Relevant Purposes.
2.2 The Relevant Purpose referred to in sub-paragraph 2.1 are:
(1) to enable the Appointee to carry out the Regulated Activities
in respect of the whole of the Area in accordance with the
provisions of the Act and of any other enactment or
subordinate legislation relating to the Regulated Activities
and in accordance with any service objectives which the
Appointee has set itself in preparing the Underground Asset
Management Plan and to carry out the Regulated Activities in
such manner economically and efficiently; and
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(2) to enable the Appointee to perform the Appointment Obligations
in respect of the whole of the Area (or, in the case of a
Service Target or a Revised Service Target which applies only
to part of the Area, then in respect of that part)
but so that, unless the context otherwise requires references in this
Condition to the Relevant Purposes shall be read and construed subject
to any assumptions as may be specified by the Appointee in the
Underground Asset Management Plan as to the nature and scope of the
Regulated Activities or, as the case may be, the Appointment
Obligations and as to the effect of any provision of the Act or any
other enactment or subordinate legislation relating to the Regulated
Activities.
2.3 Where the Appointee has specified any such assumptions as are referred
to in sub-paragraph 2.2, the Appointee shall also furnish an estimate
and other Information as described in sub-paragraphs 2.1(1) and (2) on
the basis of such other assumptions as to the matters referred to in
sub-paragraph 2.2 as may be signed by the Director.
2.4 The Appointee shall keep the Underground Asset Management Plan prepared
under sub-paragraph 2.1 under review and shall prepare a revised
Underground Asset Management Plan in respect of the Plan Period from
time to time and in any event by each Review Date, to the extent that
such revision is necessary having regard to the Relevant purposes. this
Condition and Condition B and shall furnish to the Director any such
revised Underground Asset Management Plan. Sub-paragraph 2.3 shall apply
to any such revised Underground Asset Management Plan and references in
this Condition to a revised Underground Asset Management Plan shall
include references to any estimate and other Information which the
Appointee is required to furnish under sub-paragraph 2.3 in respect of
that revised Underground Asset Management Plan.
2.5 For the purposes of sub-paragraphs 2.1 and 2.4:
(1) due allowance shall be made for Network Assets
ceasing to be required for the Relevant Purposes
during the Plan Period;
(2) the Appointee shall include in any Underground Asset
Management Plan furnished to the Director under this
paragraph a description of any
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agreement or arrangement under which the Appointee
uses Network Assets which an owned by or used in
conjunction with, another water undertaker or
sewerage undertaker (including, without limitation, a
description of any arrangements, as between the
Appointee and the other undertaker, for the repair,
renewal, maintenance and improvement or any such
Network Assets) and an estimate and other information
in respect of any expenditure required to be made or
incurred by the Appointee during the Plan Period in
respect of such Network Assets for the Relevant
Purposes; and
(3) there shall be taken into account any changes in the
name of the Regulated Activities and the Appointment
Obligations which the Appointee knows have occurred
or will occur or which the Appointee reasonably
believes will, or are likely to, occur (including
without limitation, any change in demand for the
provision by the Appointee of any services provided
by it in the course of carrying out the Regulated
Activities).
(3) Information Systems
3.1 The Appointee shall establish and maintain methods and procedures for
the purposes of:
(1) keeping under review, collecting information in respect of,
and carrying out surveys of, the state, condition, capacity
and performance of Network Assets: and
(2) preparing, keeping under review and revising from time to time
the Underground Asset Management Plan for the purposes of:
(a) providing Information to the Director in accordance
with Condition B to enable him to carry out Periodic
Reviews; and
(b) providing Information to the Director in accordance
with paragraph 18 of Condition B.
3.2 The Appointee shall furnish to the Director a written description of
such methods and procedures. The Appointee shall keep under review and
shall revise such methods and procedures from time to time to the
extent necessary
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having regard to the purposes for which such systems and procedure are
intended to be used, this Condition and Condition B and Shall furnish
to the Director a written description of any revision of such methods
and procedures.
4. Reports
4.1 Any revised Underground Asset Management Plan and any revision of the
methods and procedures referred to in paragraph 3 (which in the
reasonable opinion of the Director is material having regard to the
purposes for which the Underground Asset Management Plan and such
methods and procedure are intended, to this Condition and to Condition
B) shall, if so required by the Director, be reported on by a person
appointed by the Appointee and approved by the Director (such approval
not to be unreasonably withheld) ("the Assessor").
4.2 The Appointee shall enter into a written contract of engagement with
the Assessor which shall:
(1) where such a report is required by the Director under
sub-paragraph 4.1, require the Assessor to prepare and furnish
to the Director, and. separately to the Appointee, a written
report addressed jointly to the Director and the Appointee:
(a) in the case of a revised Underground Asset Management
Plan, stating whether, in his opinion, the estimate
included in the revised Underground Asset Management
Plan has been prepared in accordance with the methods
and procedures established and maintained by the
Appointee under sub-paragraph 3.1 at the date at
which the revised Underground Asset Management Plan
has been prepared and if the action to be taken as
described in the other Information included in the
Underground Asset Management Plan were taken it would
be sufficient for the Relevant Purposes, in so far as
Network Assets are necessary for, or relevant to, the
Relevant Purposes (both on the basis of any
assumptions specified by the Appointee and on the
basis of any assumptions specified by the Director)
and, if not, what other action would need to be
taken; and
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(b) in the case of a revision of the methods and
procedures referred to in paragraph 3 stating
whether, in his opinion, the methods and procedures
(as so revised) are sufficient for the purposes
described in sub-paragraph 3.1 and if not, what
changes would need to be made to those methods and
procedures so that they were sufficient for those
purposes; and
(2) include a term that the Assessor will provide such further
explanation or clarification of his report as the Director may
reasonably required and that where, by reason of anything in
the Assessor's report it appears to the Director:
(a) that the state or condition or capacity of Network
Assets is such that they are or may be materially
inadequate for the Relevant Purposes, in so far as
Network Assets are necessary far, or relevant to, the
Relevant Purposes, (either on the basis of the
assumptions by the Appointee or on the basis of the
assumptions specified by the Director, if any); or
(b) that the methods and procedures are insufficient for
the purposes described in sub-paragraph 3.1 and that
as a result information as to the state, condition,
capacity or performance of Network Assets is or may
be materially inaccurate or incomplete
the Assessor will provide such further Information in respect
of, or verification of, the matters which are the subject of
his report as the Director may reasonably require.
The contract of engagement may also include provisions requiring the Assessor,
his employees and agents to keep confidential and not to disclose, except to the
Director or as required by law, any Information which the Assessor obtains in
the course of preparing his report.
4.3 The Appointee shall cooperate fully with the Assessor to enable him to
prepare his report, including without limitation, so far as is
necessary for that purpose:
(1) subject to reasonable prior notice to the Appointee, giving to
the Assessor access at reasonable hours to any Network Assets
used by the
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Appointee and to any premises occupied by the Appointee in
relation to the carrying out of the Regulated Activities; and
(2) subject to reasonable prior notice to the Appointee, allowing the
Assessor at reasonable hours:
(a) to inspect and make photocopies of, and take extracts from,
any books and records of the Appointee maintained in relation
to the carrying out of the Regulated Activities;
(b) to carry out inspections, measurements and tests relation to
any such premises or Network Assets; and
(c) to take on to such premises or on to or in to any Network
Assets inch other persons and such equipment as may be
necessary for the purposes or preparing and completing his
report.
4.4 Nothing in sub-paragraph 4.3 shall require the Appointee:
(1) to do anything which is outside its reasonable control; or
(2) to do, or to allow the Assessor to do, anything which would
materially disrupt the Appointee's business (unless it is
essential that that thing be done to enable the Assessor to
prepare his report).
4.5 In sub-paragraphs 4.3 and 4.4 references to the Assessor include
references to his employees and agents.
5. General
5.1 The provision by the Water Authority to the Secretary of State of the
estimate and other information enclosed with the letter entitled
"Underground Asset Management Plan" dated 10th August 1989 and the
description in the Underground Asset Management Plan of the Appointee's
relevant methods and procedures shall be deemed to have been furnished
to the Director by the Appointee under sub-paragraphs 2.1 and 3.2 and
to satisfy the obligations of the Appointee under those sub-paragraphs
(insofar as sub-paragraph 3.2
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require the Appointee to furnish a written description of the methods
and procedures established by it).
5.2.1 Any other Information required to be furnished by the Appointee to the
Director under this Condition shall be furnished within three months of
the revision which gives rise to the requirement to furnish
Information.
5.2.2 The Appointee shall deliver to the Director at the same time as it
delivers to him accounting statements in respect of a financial year
prepared under paragraph 4 of Condidon F, a statement of the
expenditure made or incurred in relation to Network Assets during that
financial year distinguishing between amounts which have been expensed
and amounts which have been capitalized, together with the details
necessary to explain any difference between that expenditure and the
expenditure which the Appointee had informed the Secretary of State or,
as the case may be, the Director under this Condition it intended to
make or incur in relation to Network Assets during that financial year.
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Condition M: Provision of Information to the Director
1. Subject to paragraphs 3, 4 and 5 the Appointee shall furnish the
Director with such Information as the Director may reasonably require
for the purpose of carrying out any of his functions under the Act.
2. Information required to be furnished under this Condition shall be
furnished in such form and manner and at such times and be accompanied
or supplemented by such explanations as the Director may reasonably
require.
3. This Condition shall not require the Appointee to furnish the Director
with Information in respect of any function of the Director under
sections 16, 26 and 34 but the Appointee shall, if requested by the
Director, give reasoned comments on the accuracy and text of any
information or advice which the Director proposes to publish pursuant
to section 34 and, subject always to section 174, nothing in this
paragraph shall prevent the Director from using or disclosing any
Information with which he has been furnished under this Condition or
any other Condition of these Appointments for the purpose of carrying
out his functions under the Act (including, without prejudice to the
generality, under sections 16, 26 and 34).
4. Neither this Condition nor any other Condition of these Appointments
shall require the Appointee to furnish any Information for any such
purpose as is referred to in section 33 which it could not be compelled
to produce or furnish under that section.
5. Neither this Condition nor any other Condition of these Appointments
shall require the Appointee to furnish any Information which it would
be entitled to refuse to disclose or produce on grounds of legal
professional privilege in proceedings in the High Court.
6. Where, under any other Condition of these Appointments the Appointee is
or can be required to furnish Information to the Director there shall
be a presumption that the furnishing of that Information in accordance
with that Condition is sufficient for the relevant purposes of that
Condition but this presumption shall be rebutted, and shall not limit
the right of the Director to call for further Information under
paragraph 1, if he states in writing that in his opinion such
Information is or is likely to be necessary for the purpose of carrying
out any of his functions under the Act.
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Condition N: Fees
1. Interpretation and Construction
In this Condition a "Periodic Review Year" means the Charging Year
starting on 1st April immediately preceding the start of a Review
Charging Year.
2. Fees
The Appointee shall render the following payments so the Secretary of
State at the times stated:
(1) on the making of the Appointments the amount of(pound)155,560;
(2) on 1st April 1990 and at the start of each subsequent Charging
Year an amount equal to the costs estimated by the Director in
consultation wit the Monopolies Commission) as having been
incurred in the preceding Charging Year by the Monopolies
Commission following:
(a) references under Section 16 which mention
the Appointments (or either of them) only;
and
(b) references under Condition B or Condition C;
(3) on 1st April 1990 and at the start of each subsequent Charging
Year an amount, which shall represent a fair proportion, to be
determined each year by the Director according to a method
which has been disclosed in writing to the Appointee, of the
costs estimated by the Director (in consultation with the
Monopolies Commission) as having been incurred in the
preceding Charging Year by the Monopolies Commission following
any reference under section 16 which mentions both the
Appointments (or either of them) and also any other
appointment made under Chapter I or Part II of the Act;
(4) within thirty days of the date on which the Director notifies
the Appointee of the amount payable under this sub-paragraph,
an amount equal to the, costs determined by the Director as
having been or likely to be incurred by him in respect of any
reference by the Appointee under paragraph 14 of Condition B
and any determination by the Director under paragraph 15 of
Condition B made in the Charging Year
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in which the Director's notification for the purposes or this
sub-paragraph is given;
(5) on 1st April 1990 and at the start of each subsequent Charging
Year a renewal fee, which shall represent a fair proportion to
be determined each year by the Director according to a method
which has been disclosed in writing to the Appointee, of the
costs estimated by the Director as being likely to be incurred
in that Charging Year by him in the regulation and enforcement
of appointments made under Chapter 1 of Part if of the Act
(including the Appointments) and in the carrying ant of his
other functions under the Act, including payments made by him
under Schedule 4; and
(6) where the Director so determines, on 1st January 1991 and on
each anniversary of that date a special fee, which shall
represent a fair proportion to be determined each year by the
Director according to a method which has been disclosed;
writing to the Appointee, of the amount, if any, by which the
aggregate of the costs estimated by the Director to have been
already incurred in that Charging Year and to be incurred in
the remainder of that Charging Year by the Director in the
regulation and enforcement of appointments made under Chapter
I of Part II of the Act (including the Appointments) and in
the carrying out of his other functions under the Act,
including payments made by him under Schedule 4, exceeds the
aggregate of:
(a) all renewal fees payable at the start of that
charging Year under the Appointments and all other
appointments made under the said Chapter I; and
(b) all amounts (if any) payable in that Charging Year
under sub-paragraph 2(4) and the equivalent
provisions in other appointments made under the said
Chapter I in respect of references and determinations
of the kind described in sub-paragraph 2(4).
3. Limit on renewal fee and special fee
3.1 The aggregate of the renewal fee payable on 1st April 1990 and any
special fee payable on 1st January 1991 shall not exceed(pound)221,280.
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3.2 The aggregate of the renewal fee payable in respect of any Charging
Year starting on or after 1st April 1991 (other than a Periodic Review
Year) and any special fee payable in the same Charging Year shall not
exceed (pound)291,100 increased by the percentage increase (if any) in
the Retail Prices index between that published for the month of
September 1989 and that published for the month at November immediately
preceding the start of the Charging Year in which that renewal fee and
special fee are payable.
3.3 The aggregate of the renewal fee and any special fee payable in any
Periodic Review Year shall not exceed 0.3 per cent of the turnover of
the Appointee attributable to the Appointed Business as shown in the
accounting statements prepared by the Appointee under paragraph 4 of
Condition F for the last financial year before the start of the
Periodic Review Year in respect of which accounting statements have
been prepared and delivered under that Condition.
3.4 Where:
(1) a Review Notice has been given under paragraph 8 of Condition
B;
(2) a Periodic Review falls to be carried out under paragraph 9 of
Condition B; or
(3) a Reference Notice has been given under paragraph 10 of
Condition B
the Director may, by notice to the Secretary of State, refer to the Secretary of
State for determination by him not later than twelve months after the date which
is the Review Notice Date for the purpose of the relevant Periodic Review, the
question whether the limit on the aggregate of the renewal fee and the special
fee specified in sub-paragraph 3.2 or 3.3 payable in respect of any Charging
Year starting on or after 1st April 2000 should be changed (and if so what
change should be made to that limit).
3.5 This Condition shall be modified by the change or changes (if any) to
the said limits necessary to give effect to any determination made by
the Secretary of State following a reference under sub-paragraph 3.4.
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4. Retail Prices Index
The provisions of sub-paragraph 5.2 of Condition B shall apply mutatis
mutandis to this Condition.
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Condition 0: Circumstances in which a replacement appointment may be made
For the purposes of paragraph (c) of section 12(2), the only circumstances in
which an appointment or variation to which section 12 applies may be made in
relation to the area for which the Appointee holds the Appointment as water
undertaker or as the case may be, sewerage undertaker under this instrument are
where the Secretary of State has given the Appointee at least 10 years notice
expiring not earlier than 25 years after the transfer date, to terminate the
relevant Appointment in relation to the whole of its area and the said period of
notice has expired.
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Guide to Defined Terms
1. The words and expressions set out in Column (1) below, which are used
principally in the Conditions referred to in Column (2) below, are
defined in the provision referred to in Column (3) below:
<TABLE>
<S> <C> <C>
(1) (2) (3)
the Appointed Business throughout Condition A
the Appointee throughout The Appointments
the Appointments throughout The Appointments
the Auditors B and F Condition A
Basket Items B Condition B, Part I
Charging Year throughout Condition A
The Customer Service G, H and I Condition A
Committee
Excluded Charges B Condition B
Information throughout Condition A
legal requirement B Condition B, Part IV
Measured Basket Items B Condition B, Part I
Notified Item B Condition B, Part IV
Periodic Review B, C, L, N Condition A
Prior Year B Condition A
the Regulated Activities B, F, J and L Condition A
Relevant Change of B Condition B, Part IV
Circumstance
the Relevant Charging B Condition B, Part I
Year
Relevant Premises D, G, H and J Condition A
</TABLE>
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<TABLE>
<S> <C> <C>
(1) (2) (3)
the Retail Prices Index B, C and N Condition A
Review Charging Year B and N Condition A
Standard Charges B Condition B, Part I
Unmeasured Basket B Condition B, Part I
Items
the Water Authority B, C, D, E, F, J and L Condition A
Weighted Average B Condition B, Part I
Charges Increase
</TABLE>
The definitions of other words and expressions used in the Conditions
may be found either in this instrument or, by virtue of paragraph 1 of
Condition A, in the Act or in the Interpretation Act 1978. The words
and expressions set out in Column (1) below, which are used principally
in the Conditions referred to in Column (2) below, are defined in the
provision of the Act or of the Interpretation Act 1978 referred to in
Column (3)(A) or, as the case may be, Column (3)(B) below:
<TABLE>
<S> <C> <C> <C>
(1) (2) (3)(A) (3)(B)
Relevant Relevant
provision of the provision of the
Act Interpretation
Act 1978
accessories B and J s.189(1)
customer or E s.189(1)
potential
customer
Director throughout s.189(1)
discharge pipe L s.165(8) and
Schedule 19
functions A, B and E s.188 and 189(1)
holding company A and F s.189
information A s.189(1)
Monopolies A, B, C, F and N s.189(1)
new appointee B s.12(6)
notice throughout s.189(1)
public sewer L s.189(1)
</TABLE>
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<TABLE>
<S> <C> <C> <C>
(1) (2) (3)(A) (3)(B)
records A s.189(1)
resource main L s.165(8); 167 and
Schedule 19,
Paragraph 1
Service pipe H, I and L s.189(1) and
189(4)
sewerage services E and I s.189(I)
sewerage throughout s.11 and 189(1)
undertaker
special K Schedule 6
administrator paragraph 12(2)
special K s.25(6), Schedule
administration 5, paragraph 1(4)
order Schedule 6,
paragraph 12(2)
subordinate B and L s.189(1) s.21(1)
legislation
subsidiary A s.189(1)
successor company A s.189(1)
transfer date throughout s.189(1)
trunk main F and L s.189(1)
water mains B, J and L s.189(1)
water undertaker throughout s.11 and 189(1)
writing B, J, M and N s.5 and Schedule 1
</TABLE>
3. The lists of words and expressions used in the Conditions in paragraphs
1 and 2 above are not exhaustive lists of all the words and expressions used in
the Conditions which are defined in this instrument, the Act or the
Interpretation Act 1978.
4. This guide to defined terms is for ease of reference only and shall not
affect the construction of any provision of this instrument.
130
<PAGE> 141
WATER ACT 1989 S.15(1)
MODIFICATION OF CONDITIONS OF APPOINTMENT OF
ALL WATER AND WATER AND SEWERAGE COMPANIES
IN ENGLAND AND WALES
MADE ON 27TH FEBRUARY 1991
COMING INTO EFFECT ON 1ST APRIL 1991
CONDITION C: INFRASTRUCTURE CHARGE
1. Interpretation
In this Condition:
1.1 "INFRASTRUCTURE CHARGE" means a Water Infrastructure Charge or a
Sewerage Infrastructure Charge;
1.2 "HOUSE" means any building or part of a building which is occupied as a
private dwelling house or which, if unoccupied, is likely to be so
occupied and, accordingly, includes a flat;
1.3 "COMMON BILLING AGREEMENT" means an agreement between the Appointee and
any other person under which that person has undertaken to pay, on
terms agreed between them, charges for water supply or sewerage
services, or both, in respect of two or more Houses which have a common
Supply Pipe and which, in any case where that agreement relates to one
of those services only, are also subject to a similar agreement for
common billing between that person and the undertaker providing the
other service;
1.4 "RELEVANT MULTIPLIER" means a number (which may be one or more or less
than one) calculated in the manner set out in the Appendix to this
Condition;
1.5 "STANDARD AMOUNT" in relation to any Infrastructure charge, means the
amount of that charge specified in sub-paragraph 2.1.3, as adjusted
pursuant to sub-paragraph 2.2 (in respect of any Charging Year starting
on or after 1st April 1992);
1.6 "SUPPLY PIPE", means any part of a service pipe which a water
undertaker could not be, or have been required to lay under section 42
of the Act; and
1.7 references to a connection are to such a connections as is mentioned in
section 792)(a) or (b) of the Act [and references to the Appointee
include, where appropriate, references to the Water Authority].
Note: the words in square brackets are omitted from the Water only
Licence.
2. LEVEL OF INFRASTRUCTURE CHARGES
2.1 Subject to the following provisions of this Condition, in respect of
each Charging Year starting on or after 1st April 1991, the amount of
any Infrastructure Charge shall be
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2.1.1 in the case of a House subject to a Common Billing Agreement, the
Standard Amount multiplied by the Relevant Multiplier for that house;
2.1.2 in the case of premises which do not consist in a House or Houses and
to which water is provided by a Supply Pipe with an internal diameter
larger than the standard size for the time being adopted by the
Appointee for new connections of Houses, the Standard Amount multiplied
by the Relevant Multiplier for those premises; and
2.1.3 in the case of any other premises -
Water Infrastructure Charge (pound)X
Sewerage Infrastructure Charge (pound)Y
for details of charges see Schedule
2.2 In respect of each Charging Year starting on or after 1st April 1992-
2.2.1 the amounts specified in sub-paragraph 2.1.3 shall be adjusted by the
percentage of any change in the Retail Prices Index between that
published for the month of November in the Prior Year and that
published for November 1990; and
2.2.2 sub-paragraph 4/5.2 of Condition B shall apply to this Condition as if
the reference in it to the Charges Limit were a reference to the
Standard Amount.
Note: 4.2 in Water only License, 5.2 in Water and Sewerage Licence.
3.1 Subject to sub-paragraph 3.2, where an amount has been paid or agreed
to be paid to the Appointee on account of works which have been allowed
for in determining the limits on Infrastructure Charges under the
Appointment, that amount shall, to the extent that it is actually paid
and is referable to a connection, count towards the level of charge for
that connection under paragraph 2.
3.2 Where any such amount referable to a connection is greater than the
level of charge for that connection under paragraph 2, nothing in this
Condition shall preclude the Appointee from retaining or recovering the
greater amount.
1. Where, prior to 1st April 1990 the Appointee has entered into an
agreement under which a person has agreed to pay an amount in respect
of works referable to a connection and that amount is greater than the
amount which would otherwise be charged pursuant to paragraph 2,
nothing in this Condition shall preclude the Appointee from recovering
the greater amount. Note: the previous reference, in brackets, to
statutory provisions are now dealt with at 6.2.
5.1 Subject to sub-paragraph 5.2, where a site is developed or redeveloped
(including by means of conversion of a building or buildings on it) the
total amount of Water Infrastructure Charges or, as the case may be,
Sewerage Infrastructure Charges which may be recovered in respect of
Houses and other premises on the site resulting from the development or
re-development shall not exceed the Standard Amount multiplied by X,
where X equals -
(1) the aggregate of the Relevant Multipliers for all those
premises less
(2) the maximum number of premises with water or, as the case may
be, sewerage connections on the site at any time in the period
of 5 years before the development or redevelopment began.
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<PAGE> 143
5.2 For the purpose of calculating the amount of the limit imposed by this
paragraph
(a) each premises to which sub-paragraph 2.1.3 applies shall be
deemed to have a Relevant Multiplier of 1; and
(b) where, by virtue of paragraph 3 or 4 of this Condition, the
Appointee would be permitted to charge more in respect of any
premises resulting from the development or redevelopment than
the level otherwise applying under paragraph 2, the limit
shall be increased by the amount of the excess.
6.1 Subject to subparagraph 6.2, where
(a) a person who has received a demand, or undertaken, to pay
Infrastructure Charges in respect of 2 or more Houses subject
to a Common Billing Agreement fails to pay them, or any part
of them, within 14 days of the date of connection; or
(b) a Common Billing Agreement is terminated otherwise than in
accordance with its terms by the person who has undertaken to
pay charges under it,
nothing in this Condition shall preclude the Appointee from recovering,
whether from that person or from the occupier of each House subject to
the Infrastructure Charges in respect of that House at the Standard
Amount.
6.2 whenever it takes advantage of sub-paragraph 6.1, the Appointee shall
give credit for any amount already paid by way of Infrastructure
Charges in respect of that House for the connection concerned.
7. Paragraph 2 does not apply to the interest element of any Installment
Amount payable in accordance with Condition D.
8.1 Nothing in this Condition precludes the Appointee from charging less in
any particular case than the level of Infrastructure Charge applying
under paragraph 2.
8.2 Nothing in this Condition restricts the recovery or amount of any
expenses or charges recoverable otherwise than under section 79 of the
Act or (except if and to the extent that sub-paragraph 3.1 applies to
the amount) restricts the recovery or level of any Infrastructure
Charge by reference to any such amount.
9. Notification to Sewerage Undertakers
Where the Appointee makes a connection or connections to premises in
respect of water supply services, it Shall as soon as reasonably
practicable inform any sewerage undertaker which provides services to
those premises of the number of premises connected, the date or dates
of connection, the address(es) of the premises, the name and address of
the person(s) responsible for payment of charges for the supply of
water to the premises and (if different) of the person(s) responsible
for payment of Infrastructure Charges in respect of the premises and
(where appropriate) the Relevant Multiplier(s) for the premises.
10 Arbitration
If, in any case to which a adevant Multiplier applies, there is any
dispute between the Appointee and the person on whom any Infrastructure
Charge has been levied about the calculation of the Relevant
Multiplier, or the number or type of fittings on which that calculation
is based, it may be referred by either party for determination by the
Director.
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<PAGE> 144
11. Periodic Review of Level of Infrastructure Charges
11.1 Where a Periodic Review is to be carried out under paragraph 8, 9 or 10
of Condition B, the Appointee may, by notice given to the Director in
relation to water or sewerage connections or both, refer to the
Director, for determination by him the question whether any (and if so,
what) change to the Standard Amount or the manner of calculation of any
Relevant Multiplier should be made for the 10 consecutive Charging
Years to which that review relates.
11.2 Where a Periodic Review is to be carried out under paragraph 8, 9 or 10
of Condition B, the Director may, after giving notice to the Appointee
in relation to water or sewerage connections or both, determine the
question specified in sub-paragraph 11.1.
11.3 Notice under sub-paragraph 11.1 or 11.2 shall be given not later than
30 days after the Review Notice Date for the Periodic Review concerned.
12. Interim Review of Level of Infrastructure Charges
12.1 The Appointee may, by notice given to the Director in relation to water
or sewerage connections or both, refer to the Director, for
determination by him, the question whether any (and if so, what) change
to the Standard Amount or the manner of calculation of any Relevant
Mutliplier should be made, in respect of the Subsequent Period, in
order to ensure that -
(a) in each Charging Year in that period, the aggregate number of
water, or as the case may be, sewerage connections made by the
Appointee bears the same proportion to its aggregate revenue
from Water Infrastructure Charges or, as the case may be,
Sewerage Infrastructure Charges as the aggregate number of
such connections assumed by the Secretary of State for that
year in setting the initial level of those charges under this
Condition bears to the aggregate revenue so assumed by him;
and
(b) over the Subsequent Period any shortfall in (or excess of)
revenue from Infrastructure Charges in any Charging Year in
the Prior Period, compared with the revenue so assumed for
that year, is recovered (or, as the case may be, carried
forward as a credit) to the extent attributable to any
difference in those proportions in respect of that year.
12.2 In sub-paragraph 12.1 "the Subsequent Period" means the period from 1st
April immediately following the Charging Year in which the reference is
made under 31st March 1995 (or, if there is no Periodic Review at the
first 5-yearly interval, 31st March 2000) and "the Prior Period" means
the period from 1st April 1991 until the end of the Charging Year in
which the reference is made.
12.3 The Director may, after giving notice to the Appointee in relation to
water or sewerage connections or both, determine the question specified
in sub-paragraph 12.1.
12.4 Notice under sub-paragraph 12.1 or 12.3 may be given not more than once
in any Charging Year and not later than 31st December.
4
<PAGE> 145
13. Information
13.1 The Appointee shall furnish to the Director, at the time when it gives
notice to him under sub-paragraph 11.1 or 12.1, such Information as the
Appointee reasonably believes is necessary to enable the Director to
make his determination The Appointee shall also furnish to the
Director, after receipt by it of notice given under sub-paragraph 11.2
or 12.3 or this sub-paragraph, such further Information, specified in
the notice, as the Director may reasonably require to make his
determination.
13.2 The Appointee shall also furnish to the Director from time to time,
when so requested by him, such Information as he may reasonably
require, to decide whether or not to give notice under sub-paragraph
11.2 or 12.3.
13.3 Any Information furnished to the Director under this paragraph shall,
if the Director so required to make his determination, be reported on
by a person ("the Reporter") appointed by the Appointee and approved by
the Director (such approval not to be unreasonably) withheld). The
provisions of sub-paragraphs 17/18.4, 17/18.5(2), 17/18.6 and
17/18.7(1) of Condition B shall apply to the engagement and terms of
reference of each Reporter appointed pursuant to this Condition as they
apply to those of each Reporter appointed pursuant to that Condition,
save that the reference in sub-paragraph 17/18.4(1) to sub-paragraph
17/18.3 of that Condition shall be taken as a reference to this
sub-paragraph. Note: 17 in Water only License, 18, in Water and
Sewerage License.
13. References to the Monopolies Commission
Where-
(1) following the giving of notice under sub-paragraph 11.1 or
11.2, the Director has not notified the Appointee of his
determination within 1 year from the Review Notice Date; or
(2) following the giving of notice under sub-paragraph 12.1 or
12.3, the Director has not notified the Appointee of his
determination within 1 month from the date on which the notice
under that sub-paragraph is given; or
(3) the Appointee disputes any determination made by the Director
under this Condition the Appointee may, by notice given to the
Director within-
(a) 13 months from the Review Notice Date (in the cases
referred to in (1) above); or
(b) 2 months from the date on which the notice under
sub-paragraph 12.1 or 12.3 is given (in the cases
referrred to in (2) above);or
(c) 2 months from the date on which the Director gives
notice of his determination to the Appointee (in the
cases referred to in (3) above)
require the Director to refer to the Monopolies Commission, for determination by
it
(i) in any case referred to in (1) or (2) above, the relevant
question; or
(ii) in the case referred to in (3) above, the disputed
determination.
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<PAGE> 146
15. Modification of this Condition
12.1 This Condition shall be modified by the change (if any) to the Standard
Amount or the manner of calculation of any Relevant Multiplier,
necessary to give effect to any determination made by the Director or
the Monopolies Commission under, or, as the case may be, following a
reference under, this Condition.
12.2 Where the Appointee requires the Director to make a reference to the
Monopolies Commission under paragraph 14, this Condition shall be
modified by the change (if any) to the Standard Amount or the manner of
calculation of any Relevant Multiplier, necessary to give effect to the
Director's determination, but so that sub-paragraph 15.1 shall then
apply to the determination made by the Monopolies Commission following
that reference:
15.3 In this paragraph "this Condition" includes the Appendix to it.
6
<PAGE> 147
APPENDIX
CALULATION OF RELEVANT MULTIPLIER
1. To calculate the Relevant Multiplier for a House to which
sub-paragraph 2.1.1 of Condition C applies:
1.1 ascertain in respect of all the Houses subject to the Common
Billing Agreement in question (eg all the flats in a block to
which such an agreement applies) and all communal facilities
shared by all or any of them, the total number of water
fittings in all the categories specified in column 1 of the
Table below;
1.2 calculate by reference to column 2 of the Table the aggregate
loading units attributable to that total number of water
fittings (and increase the aggregate, where necessary, to take
account of the minimum for domestic appliances);
1.3 divide that number of loading units by 24 and divide the
resulting figure by the number of Houses subject to the Common
Billing Agreement;
1.4 the resulting number, will be the Relevant Multiplier.
2. To calculate the Relevant Multiplier for premises to which
sub-paragraph 2.1.2 of Condition C applies, ascertain in respect of the
premises the total number of water fittings in all the categories
specified in column 1 of the Table below; calculate by reference to
column 2 of the Table the aggregate loading units attributable to that
total number of water fittings; divide the aggregate loading units by
24; and the resulting number will be the Relevant Multiplier, provided
that if the resulting number is less than 1, the Relevant Multiplier
will be 1.
TABLE
<TABLE>
<CAPTION>
Column I Column 2
Water Fitting (note 1) Loading Units
<S> <C>
WC flushing cistern 2
Wash basin in a House 1.5
Wash basin elsewhere 3
Bath (tap nominal size 3/4in 20 mm) (note 2) 10
Bath (tap nominal size larger than 3/4in 20 mm (note 2) 22
Shower 3
Sink (tap nominal size 1/2 in/15 mm) 3
Sink (tap nominal size larger than 1/2 in 15 mm) 5
Spray tap 0.5
Bidet 1.5
Domestic appliance (subject to a minimum of 6 L.U. 's per House
---notes 3 and 4) 3
Communal or commercial appliance (note 3) 10
Any other water fitting or outlet (including a tap but excluding a
urinal or water softener) 3
</TABLE>
7
<PAGE> 148
Notes to be read with the Table:
1. Reference to any fitting includes reference to any plumbing, outlet,
dedicated space or planning or other provision for that fitting;
2. "Bath" includes a whirlpool bath and a jacuzzi;
3. "Domestic appliance" means an appliance (including a dishwasher, a
washing machine and waste disposal unit) in a House and "communal or
commercial appliance" means an appliance (including a dishwasher, a
washing machine and a waste disposal unit) elsewhere than in a House
(including a communal facilities);
4. In any calculation under paragraph 1, a minimum of six loading units
shall be included, in respect of each House, for domestic appliances
(whether or not the House has any such appliances) except, in the case
of any House, where neither a washing machine nor a dishwasher can be
provided (and there is no plumbing, outlet, dedicated space or planning
or other provision for either appliance) in the House;
5. In the case of any premises with a sewerage only connection and no
water fittings, the Relevant Multiplier will be one.
8
<PAGE> 149
STANDARD INFRASTRUCTURE CHARGES 1991/92
<TABLE>
<CAPTION>
INFRASTRUCTURE CHARGE STANDARD CHARGE
1990/91 1991/92
Water Sewerage Water Sewerage
<S> <C> <C> <C> <C>
Water and Sewerage Companies (pound) (pound) (pound) (pound)
Anglian Water Services Ltd 479 597 503 629
Dwr Cymru/Welsh Water 259 332 275 351
Northhumbrian Water Ltd 111 240 120 247
North West Water lid 198 338 212 362
Severn Trent Water Services Ltd 498 356 532 380
Southern Water Services Ltd 365 485 378 492
South West Water Services Ltd 654 557 705 599
Thames Water Utilities Ltd 403 337 382 314
Wessex Water Services Ltd 551 983 611 1090
Yorkshire Water Services Ltd 529 626 534 632
</TABLE>
<TABLE>
<CAPTION>
Standard Charge
1990/91 1991/92
Water Water
(pound) (pound)
<S> <C> <C>
Water Companies
Bournernouth and District Water Co 1000 1093
Bristol Waterworks Co 439 509
Cambridge Water Co 1000 1097
Chester Waterworks Co 758 751
Cholderton and District Water Co Ltd 201 220
Colne Valley Water plc 435 401
East Surrey Water plc 251 304
East Worcestershire Waterworks Co 576 632
Eastbourne Water Co 1000 1098
Essex Water Co 404 413
Folkestone and District Water Co 998 1119
Hartlepool Water Co 252 276
Lee Valley Water plc 808 846
Mid Kent Water Co 1000 1092
Mid Southern Water Co 700 772
Mid Sussex Water Co 392 428
Newcastle and Gatesbead Water plc 216 215
North Surrey Water Co 392 423
Portsmouth Water plc 358 368
Rickmansworth Water plc 395 401
South Staffordshire Water Co 606 665
Suffolk Water plc 1000 1059
Sunderfand and South Shields Water plc 485 483
Sutton District Water plc 254 290
Tenting Hundred Waterworks Co 1000 1097
West Hampshire Water Co 868 933
West Kent Water Co 834 958
Wrexham and East Denbighsbire Water Co 390 436
York Waterworks plc 222 224
</TABLE>
RPI = 9.7%
9
<PAGE> 150
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10
<PAGE> 151
CONDITION C: INFRASTRUCURE CHARGES
Explanatory Note
(This note does not form part of the Condition and does not affect the
interpretation of it)
1. Section 79(2) of the 1989 Water Act introduced a power whereby water
and sewerage undertakers could levy a charge for the initial connection
of premises to a water supply or to a public sewer for domestic
purposes. These charges, which were first levied from 1st April 1990,
are termed "infrastructure charges". They relate to the additional
capital expenditure costs incurred by undertakers in extending the
network of reservoirs, mains, sewers and treatment works, and
developing other resources, to provide capacity for new customers.
2. This Condition places limits (which are different for each company) on
the amount of the infrastructure charges for each water or sewerage
connection. It also contains provisions for adjusting charges. The
Condition is structured as follows:
- Paragraph 1 deals with matters of intepretation and contains
definitions of terms used in this Condition. (Definitions of
terms common to all Conditions are included in Condition A);
- Paragraphs 2 to 8 deal with the level of infrastructure
charges, and paragraphs 11, 12 and 14 contain general
provisions for reviewing the levels of charges;
- Paragraphs 9 and 13 are concerned with the provision of
information;
- Paragraph 10 provides for arbitration in specified
circumstances.
The Condition applies only to charges under s.79(2), and does not apply
for example, to amounts recoverable under sections 41, 42 or 72 of the
1989 Act, or s.36 of the Public Health Act 1936, or any local
enactment.
3. The intention of the Condition, in placing a limit on infrastructure
charges levied in different situations, is to reflect broadly and
expected additional load placed on the system by different categories
of property. In the case of house and flats with a common supply pipe
and subject to a common billing agreement for water supply and sewerage
services, and in the case of properties (other than house and flats)
served by pipes larger than the standard size, the standard charge set
out in paragraph 2 is increased by a multiplier reflecting estimated
loadings. The basis on which these loadings are to be calculated is set
out in the Appendix to the Condition. Paragraph 2 also provides for the
levels of charge to be adjusted annually by the change in the retail
prices index.
4. Paragraphs 3 and 4 deal with cases where an amount has been agreed to
paid in respect of a connection which meets (wholly or in part) the
cost of infrastructure related to the connection.
5. Where a site is redeveloped or a building is converted paragraph 5
provides that credit shall be given for the number of premises on the
site in the five years beforehand, in calculating the limit on
infrastructure charges.
6. Paragraph 6 provides that, where infrastructure charges are calculated
on the basis of the multiplier in cases where a common billing
agreement exists, and either they are not paid in full within 14 days
of the date of connection, or the agreement is terminated prematurely
by the customer, charges can be recovered at the standard rate.
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<PAGE> 152
7. Under Paragraph 11 the levels of infrastructure charge can be reviewed
at the same time that the K factor specified in Condition B is
reviewed. Paragraph 12 provides for interim determinations up to the
first periodic review, to ensure that the average charge per connection
remains at the level originally intended, taking account of fresh
information about the mix of connections and their relative loading.
8. Paragraph 10 provides for arbitration by the Director General where
there is a dispute about the calculation of the multiplier in cases
where one applies.
9. The revised Condition (and especially the three possible bases for
calculating charges - see Paragraph 3 above) will have the effect that
individual charges should more nearly reflect the differing estimates
of additional demand, for new capacity upon the undertakers systems,
which arise from the domestic element of various types of development.
In order to assess the extent to which this is achieved, the Director
General will collect, from each undertaker, information about numbers
and types of connections in each category.
12
<PAGE> 153
WATER INDUSTRY ACT 1991, s.13(1)
Modification or Conditions of Appointment or all Water and Water and Sewerage
Companies in England and Wales
Made on 3 March 1993
Coming into effect on 4 March 1993
CONDITION F: ACCOUNTS AND ACCOUNTING INFORMATION
1. Introduction
The purposes of this Condition are to ensure that:
(1) the financial affairs of the Appointed Business can be
assessed and reported on separately from other businesses and
activities of the Appointee, as if its sole business consisted
of being a water undertaker and/or sewerage undertaker, having
its equity share capital listed on the International Stock
Exchange of United Kingdom and Republic of Ireland Ltd;
(2) information on revenues, costs, assets and liabilities
attributable to specified activities of the Appointed Business
can be provided and reported on;
(3) transactions between the Appointed Business and any other
business or activity of the Appointee or any Associated
Company can be assessed and reported on;
(4) there is no cross-subsidy between the Appointed Business and
any other business of the Appointee or between the Appointed
Business and any Associated Company;
(5) the Director is furnished with regular accounting and other
information to enable him to compare the financial position
and performance (including, without limitation, costs) of the
Appointed Business and of so much of the respective businesses
and activities of all other undertakers holding appointments
made under Chapter I of Part II of the Act as consists of the
carrying out of the Regulated Activities; and
(6) the Appointee has at its disposal sufficient financial and
managerial resources to carry out the
Regulated Activities (including the investment programme necessary to
fulfil its obligation under the Appointment(s)).
13
<PAGE> 154
2. Interpretation and Construction
2.1 In this Condition and for the purposes of this Condition:
references to "the Appointed Business" shall be construed as
if the Appointed Business included the management and holding
by the Appointee of any protected land for so long as it is
not transferred under paragraph 7 of Condition K.
"infrastructure assets" means
(1) Network Assets, as defined in paragraph 1 of
Condition L; and
(2) all of the following:
(a) valves and hydrants forming part of the water and
trunk main systems;
(b) impounding and pumped raw water storage reservoirs;
(c) dams;
(d) sludge pipe lines; and
(e) outfall pipes and other pipes for the conveyance of
effluent from any sewage disposal works of the
Appointee which discharge directly into the sea or
coastal waters;
"infrastructure renewals expenditure" means expenditure on
maintaining or restoring the original operating capability,
qualitative performance arid condition of infrastructure
assets, other than expenditure which is capitalised and
routine day to day maintenance expenditure which is charged as
an operating cost to the profit and loss account;
"Principal Services" means
(1) water supply; and
(2) sewerage services
and references to a Principal Service are to either and each
of water supply and sewerage services;
"sewerage services" includes sewage treatment and disposal and
reception treatment and disposal of trade effluent.
2.2 Except where otherwise expressly provided, references in this
Condition to costs or liabilities shall be construed as
including taxation, and references to any profit and loss
account shall be construed accordingly.
2.3 For the purposes of this Condition:
14
<PAGE> 155
(1) all forms of property shall be assets, whether
situated in the United Kingdom or not, including:
(a) options, debts and incorporeal property
generally; and
(b) any currency including sterling;
(2) references to the supply of a service include
references to anything (including the services of any
employee) being made available; and
(3) references to a transfer of an asset or liability
include references to a part transfer of an asset or
liability and, without limitation there is a part
transfer of an asset where an interest or right in or
over the asset is created.
3. Accounting Records
The Appointee shall keep proper accounting records in a form which
enables the revenues, costs, assets and liabilities of, or reasonably
attributable to, the respective businesses and activities of the
Appointee described in this Condition and the other matters mentioned
in this Condition to be separately identified, having regard to the
terms of any guidelines notified from time to time by the Director to
the Appointee under paragraph 5, 6, 7 or 8.
4. Accounting Statements
4.1 The Appointee shall prepare on a consistent basis in respect
of each financial year ending after the transfer date
accounting statements which shall comprise, and show
separately in respect of each of:
(1) the Appointed Business;
(2) on an aggregated basis, all businesses and activities
of the Appointee other than the Appointed Business;
and
(3) on an aggregated basis, all businesses and activities
of the Appointee including the Appointed Business
a profit and loss account, a statement of assets and
liabilities and a statement of source and application of
funds, together with notes thereto, setting out the revenues,
costs (including depreciation, where charged), assets and
liabilities thereof, or reasonably attributable thereto.
4.2 Accounting statements prepared under sub-paragraph 4.1 shall:
(1) so far as reasonably practicable having regard to the
purposes of this Condition, have the same content as
the annual accounts of the Appointee prepared under
the 1985 Act and be prepared in accordance with the
formats
15
<PAGE> 156
and the accounting policies and principles which
apply to those accounts: and
(2) state the principal accounting policies applied.
5. Segmental Information
5.1 Accounting statements prepared under paragraph 4 shall show or
disclose separately:
(1) an analysis of total operating costs (excluding
interest and taxation) of the Appointed Business
showing separately for each Principal Service:
manpower costs,
other costs of employment,
power,
local authority rates,
water charges (including abstraction charges and
amounts payable for taking supplies of water in
bulk),
local authority sewerage agencies,
materials and consumables,
hired and contracted services,
charges for bad and doubtful debts,
depreciation and amortisation (where charged),
intangible assets written off,
infrastructure renewals expenditure,
exceptional items,
and on an aggregated basis,
all other operating costs.
The analysis shall include the details reasonably necessary to
reconcile the operating costs shown in it with the total
operating costs (excluding interest and taxation) of the
Appointee shown in the accounting statements prepared under
paragraph 4 in respect of the same period;
(2) an analysis of total turnover of the Appointed Business
showing separately turnover attributable to:
(a) water supply and, separately on an aggregated basis,
sewerage and sewage treatment and disposal (excluding
reception, treatment and disposal of trade effluent),
distinguishing in each case between the provision of
those services on a measured and unmeasured basis
respectively;
(b) on an aggregated basis, reception, treatment and
disposal of trade effluent;
(c) grants; and
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(d) on an aggregated basis, all other sources;
(3) an analysis of total tangible fixed assets attributable to the
Appointed Business showing separately:
(a) for each of the items included in the annual accounts
of the Appointee prepared under the 1985 Act required
to be disclosed under Section B of Part I of Schedule
4 to the 1985 Act; or
(b) for each of the items included in such other analysis
of tangible fixed assets by asset type as is
disclosed in those annual accounts; and
(c) if not separately disclosed in those annual accounts,
for infrastructure assets
amounts attributable to each Principal Service, and, as a separate
category, on an aggregated basis tangible fixed assets which are not
attributable to either Principal Service.
The analysis shall include:
(i) the details reasonably necessary to reconcile the tangible
fixed assets shown in it with the tangible fixed assets shown
in the analysis prepared under this sub-paragraph in respect
of the immediately preceding financial year (including
details of grants);
(ii) a statement of any assets which have been re-classified as
current assets during the relevant financial year; and
(iii) to the extent that information is required to be given in
respect of any of the items included in the annual accounts
of the Appointee prepared under the 1985 Act referred to in
this sub-paragraph 5.1C3) by virtue of Part III of Schedule 4
to the 1985 Act, the same information in respect of those
items. In the case of the first analysis prepared under this
sub-paragraph the reconciliation required to be included
under (i) above shall be with the analysis prepared by the
Water Authority in respect of the financial year ended last
before the transfer date; and
(4) details necessary to reconcile expenditure made or incurred in
relation to infrastructure assets with the expenditure made or
incurred in relation to Network Assets during the same financial year
as shown in the statement required to be delivered to the Director
under sub-paragraph 5.3 of Condition L.
5.2 Accounting statements prepared under paragraph 4 shall show separately
for each item relating to sewerage services included in the analyses
under sub-paragraphs 5.1(1) (operating costs) and 5.1(3) (tangible
fixed assets) an analysis between amounts which are attributable to
sewerage (including reception of trade effluent) and sewage treatment
and disposal (including treatment and disposal of trade effluent).
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5.3 The Director may, after consulting with such bodies as are reasonably
representative of undertakers holding appointments made under Chapter I
or Part II of the Act or, if none, the Appointee, from time to time by
reasonable notice to the Appointee specify in such guidelines as are
reasonable and appropriate for the purpose set out in sub-paragraph
1(5), variations of:
(1) the matters required to be shown or disclosed under
sub-paragraph 5.1(1) (but not so as to require separate
analyses of matters comprised within any of the items listed
in that sub-paragraph); and
(2) the items in respect of which the analysis of total fixed
assets is to be prepared under sub-paragraph 5.1(3)
and thereafter the Appointee shall show or disclose information under
sub-paragraph 5.1(1) in respect of those matters or, as the case may
be, shall prepare the analysis under sub-paragraph 5.1(3) in respect of
those items, in each case as so varied from time to time.
6. Transactions entered into by the Appointee or the Appointed Business
with or for the benefit of Associated Companies or other businesses or
activities of the Appointee
6.1 The Appointee shall ensure that every transaction between the Appointed
Business and any Associated Company (or between the Appointed Business
and any other business or activity of the Appointee) is at arm's
length so that neither gives to nor receives from the other any
cross-subsidy.
6.2 Subject to sub-paragraphs 6.3 to 6.7, accounting statements prepared
under paragraph 4 shall disclose in relation to each transaction of a
description specified in the first column of the Appendix to this
Condition which took place during the financial year to which those
statements relate, the company or, as the case may be, the business or
activity which was party to the transaction with the Appointee or, as
the case may be, the Appointed Business or which otherwise benefitted
from the transaction and the information in relation to that
transaction specified in the second column of that Appendix.
6.3 Subject to sub-paragraph 6.4, any amount required to be disclosed in
relation to a transaction specified in paragraph 3, 4, 5 or 6 of the
Appendix may be aggregated with any amount relating to any other
transaction fallina within the same paragraph with the same company or
other business or activity of the Appointee.
6.4 Subject to sub-paragraph 6.7 if the amount to be disclosed under
sub-paragraph 6.2 in respect of any single transaction between the
Appointee and any Associated Company (or between the Appointed Business
and any other business or activity of the Appointee) exceeds 0.5% of
the turnover of the Appointed Business, or (pound)100,000, whichever is
the greater, then that transaction shall not be aggregated under
sub-paragraph 6.3 and the Appointee shall include in any accounting
statement prepared under paragraph 4 the information about that
transaction which is specified in the Appendix in relation to a
transaction of that kind and which complies with any guidelines issued
by the Director for this purpose.
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6.5 The Appointee shall, when submitting accounting statements prepared
under paragraph 4 to the Director, report to him the turnover of any
Associated Company with which the Appointed Business has undertaken any
transaction of any kind specified in the Appendix.
6.6 Nothing in sub-paragraph 6.2 shall require the disclosure of any
information if the aggregate of any amounts required to be disclosed
under paragraphs 3, 4, 5 and 6 of the Appendix relating to transactions
with the same company or other business or activity of the Appointee is
not material to the Appointed Business as a whole. For the avoidance of
doubt, if the aggregate of such amounts is material to the Appointed
Business as a whole then information shall be disclosed in accordance
with this paragraph and the Appendix in relation to each such
transaction (subject always to sub-paragraph 6.3). For the purpose of
this sub-paragraph the question whether an amount is material to the
Appointed Business as a whole shall be determined by the Auditors by
reference to whichever is the greater of:
(1) the book value of the asset or liability the subject of, or
affected by, the transaction; and
(2) the consideration or other charge given, paid or waived.
6.7 Nothing in this paragraph 6 or the Appendix shall require the
disclosure of information which relates solely to a transaction wholly
unconnected with the Appointed Business.
Financial Ring-Fencing
6A.1 The Appointee shall at all times act in the manner best calculated to
ensure that it has adequate -
(a) financial resources and facilities and
(b) management resources
to enable it to carry out the Regulated Activities (including the
investment programme necessary to fulfil its obligations under the
Appointment(s)).
6A.2 The Appointee shall, at the same time as it complies with
sub-paragraph 9.3 (submission of accounting statements) submit to the
Director a Certificate in the following terms:-
"(1) that in the opinion of the Directors, the Appointee
will have available to it sufficient financial
resources and facilities to enable it to carry out,
for at least the next 12 months, the Regulated
Activities (including the investment programme
necessary to fulfil the Appointee's obligations under
the Appointment(s)); and
(2) that in the Opinion of the Directors the Appointee
will, for at least the next 12 months, have available
to it management resources which are sufficient to
enable it to carry out those functions."
6A.3 (1) Whenever the Directors become aware that the Appointee or any
Group Company that sub-paragraph, they shall as soon as is
practicable, having regard to the purposes of this condition,
notify the Director about that proposal.
6A.3 (2) Not later than 14 days after the Directors become aware that
the Appointee or any Group Company has embarked upon any
activity to which sub-paragraph 6A.3(1) applies, they shall
submit to the Director a Certificate in the terms specified in
sub-paragraph 6A.2.
6A.4 Each Certificate under sub-paragraph 6A.2 or 6A.3 shall be either -
(1) signed by all the Directors of the Appointee for the time
being, or
(2) approved by a duly - convened meeting of the board of
Directors of the Appointee for the time being, signed (in
confirmation or that approval) by a Director or the Secretary
of the Appointee and have attached to it a certified copy of
an extract of the minutes of the relevant meeting containing
the resolution to approve it.
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7. Basis of allocations and appointments
7.1 The analyses of operating costs and tangible fixed assets prepared
under sub-paragraphs 5.1(1), 5.1(3) and 5.2 shall give a description of
the bases of any apportionments or allocations of costs and assets and
shall be prepared in accordance with any guidelines which may be issued
from time to time by the Director under sub-paragraph 7.3.
7.2 Accounting statements prepared under paragraph 4 and, where relevant,
description of transactions prepared under paragraph 6 shall:
(1) describe the basis of any apportionment or allocation of
revenues. costs, assets and liabilities between the Appointed
Business and any other business or activity of the Appointee
or between the Appointee and any Associated Company;
(2) specify the nature of the revenues, costs, assets or
liabilities which have been so apportioned or allocated; and
(3) specify between which business, activity or Associated Company
the revenues, costs, assets or liabilities have been so
apportioned or allocated.
7.3 The Director may, after consulting such bodies as are reasonably
representative of undertakers holding appointments made under Chapter I
of Pan II of the Act, or, if none, the Appointee, from time to time by
reasonable notice to the Appointee issue such guidelines as are
reasonable and appropriate for the purpose set out in sub-paragraph
1(5) as to the bases of allocations and apportionments to be adopted in
preparing the analyses required under sub-paragraphs 5.1(1), 5.1(3) and
5.2 and in
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making the allocations and apportionments referred to in sub-paragraph
7.2(1) and thereafter the Appointee shall prepare the analyses and make
the allocations and apportionments in accordance with such guidelines
as may apply from time to time.
8. Current Cost Accounting Statements
8.1 In addition to preparing accounting statements under paragraph 4, the
Appointee shall prepare accounting statements on the current cost basis
in respect of the same period in accordance with such guidelines as are
reasonable and appropriate for the purposes of this Condition as the
Director may from time to time, after consulting with such bodies as
are reasonably representative of undertakers holding appointments made
under Chapter I of Part II of the Act or, if none, the Appointee,
notify to the Appointee for the purposes of this paragraph.
8.2 Guidelines notified by the Director to the Appointee under
sub-paragraph 8.1 may:
(1) specify the form and content of current cost accounting
statements, including information on specified types of
revenue, cost, asset or liability and information on the
revenues, costs, assets and liabilities attributable to
specified activities, provided that the guidelines may not
require the Appointee to disclose information in such current
cost accounting statements in respect of items in respect of
which the Appointee is not required to give information in
accounting statements prepared under paragraph 4 from time to
time;
(2) require any reconciliation that may be required with the
annual accounts of the Appointee prepared under the 1985 Act;
(3) specify the accounting principles and the bases of valuation
to be used in preparing current cost accounting statements;
and
(4) specify the nature of the report by the Auditors required to
be given in respect of accounting statements.
9. Audit and publication of accounting statements
9.1 The Appointee shall procure the following reports by the Auditors
addressed to the Director:
(1) in respect of each set of accounting statements prepared under
this Condition a report stating whether in their opinion:
(a) proper accounting records have been kept by the
Appointee as required by paragraph 3; and
(b) that set of accounting statements (including the
information required to be shown or disclosed under
paragraphs 5,6 and 7) is in agreement with the
Appointee's accounting records and complies with the
relevant paragraphs (including any relevant
guidelines) or, in the case of
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accounting statements prepared under paragraph 8, complies
with the relevant guidelines;
(2) in respect of each set of accounting statements prepared under
paragraph 4, a report stating whether in their opinion that
set of accounting statements represents a true and fair view
of the revenues, costs, assets and liabilities of, or
reasonably attributable to, the businesses and activities
mentioned in paragraph 4; and
(3) in respect of each set of accounting statements prepared under
paragraph 8, a statement of opinion as to such other matters
as may be specified in the guidelines applying to those
accounting statements.
9.2 The Appointee shall enter into a contract of appointment with the
Auditors which shall include a term that the Auditors will provide such
further explanation or clarification of their reports and such further
Information in respect of the matters which are the subject of their
reports, as the Director may reasonably require.
9.3 The Appointee shall deliver to the Director a copy of each set of
accounting statements prepared under this Condition and of each report
referred to in subparagraph 9.1 as soon as reasonably practicable and
in any event not later than six months after the end of the financial
year to which they relate.
9.4 Accounting statements prepared under this Condition (excluding the
information required to be disclosed under sub-paragraphs 5.1(4) and
5.2, paragraph 6 and sub-paragraphs 7.1 and 7.2 and any information
exempted from this sub-paragraph from time to time by the Director by
notice to the Appointee), together with the Auditors' reports delivered
to the Director under sub-paragraph 9.3 in respect of those accounting
statements (but excluding any part of any such report to the extent
that it relates specifically to any information excluded or exempted
from this sub-paragraph as aforesaid), shall be published with the
annual accounts of the Appointee prepared under the 1985 Act or, at the
Appointee's option, with the annual accounts of its holding company
prepared under the 1985 Act and copies thereof made available upon
request to customers.
10. Guidelines and references to the Monopolies Commission
10.1 The Appointee may be notice given to the Director within 1 month of the
date of any such notice or notification as is referred to in paragraphs
5, 6, 7 and 8, require the Director to refer to the Monopolies
Commission for determination by it the question whether the guidelines
the subject of the relevant notice or notification are appropriate and
reasonable for the purposes specified in the relevant paragraph.
10.2 Where the Appointee requires the Director to make a reference to the
Monopolies Commission under sub-paragraph 10.1 any guidelines issued by
the Director which are the subject of that reference shall not apply
unless and until the Monopolies Commission determines that they shall
apply.
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For this purpose the value shall be taken to be the value attributed to
the relevant items in the accounting records kept by the Appointee or,
in the case of an interest in land or buildings which is affected by
the omission, the open market value of that interest or, where under
Condition K a certificate as to the best price of that interest bas
been furnished to the Director, that best price.
/s/ ICR BYATT
I C R BYATT
3 March 1993
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APPENDIX
COLUMN 1 COLUMN 2
1. Any borrowings or sums lent: 1. The principal of the amount
borrowed or lent, the date on which
(a) by or to the Appointed or the dates between which
Business to or by any other repayment is to be made and the
business or activity of the rate of interest payable.
Appointee; or
(b) by or to the Appointee to
or by any Associated Company.
lA Any dividend paid to any IA The basis on which the dividend
Associated Company. has been established.
2. The giving of any guarantee or 2. The form of the guarantee or
any other form of security by the other security given, the assets
Appointee for or in respect of any the subject of the security, the
obligations of any Associated amount of the obligation (including
Company. where relevant the rate of interest
payable) and the date of maturity
of the obligation.
3. The transfer of any asset or 3. The asset or liability the
liability: subject of the transfer, the amount
of the consideration for the
(a) to or by the Appointee by transfer and the value attributed
or to an Associated Company; or to the asset or liability in the
accounting records kept by the
(b) to or by the Appointed Appointee.
Business by or to any other
business or activity of the
Appointee.
3. The supply of any service by or
to the Appointee to or by an
Associated Company or by or to the
Appointed Business to or by
4. any other business or activity 4. The nature of the service
of the Appointee. supplied, the terms on which it was
supplied and the total charge made
for the service.
5. The omission by the Appointee or 5. The company omitting to exercise
any Associated Company to exercise the right and the amount by which
a right as a result of which the the values of the net assets of the
value * of the aggregate assets Appointee is decreased.
less the aggregate liabilities
("net assets") of the Appointee is
decreased.
6. The waiver by the Appointee or 6. The amount of the considention,
the Appointed Business of any remuneration or payment waived.
consideration, remuneration or
other payment owed to it by any
Associated Company or other
business or activity of the
Appointee.
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OFFICE OF WATER SERVICES
WATER INDUSTRY ACT 1991, SECTION 13(1)
MODIFICATION OF CONDITION B OF THE CONDITIONS OF APPOINTMENT OF
WESSEX WATER SERVICES LTD
MADE: 28 MARCH 1994
COMING INTO EFFECT: 1 APRIL 1994
Part IV. Interim Determinations
13. Matters of interpretation and construction which apply for the purposes
of this Part IV
13.1 In this Part of this Condition:
"THE APPROPRIATE DISCOUNT RATE" means such rate of return as, at the
time at which the Appropriate Discount Rate falls to be applied from
time to time under this Condition, investors and creditors would
reasonably expect of a properly managed company holding the
Appointments whose sole business consists of being a water undertaker
and a sewerage undertaker and, without excluding other considerations
which may also be relevant, having its equity share capital listed on
The International Stock Exchange of the United Kingdom and the Republic
of Ireland Limited, and the same Appropriate Discount Rate shall be
applied for all purposes in determining questions the subject of the
same reference (including questions determined by the Director under
paragraph 15 when he determines questions referred to him by the
Appointee under paragraph 14);
"EQUITY SHARE CAPITAL" has the same meaning as in the 1985 Act;
"INTERIM DETERMINATION" means the determination by the Director of the
relevant questions the subject of a reference by the Appointee under
paragraph 14 or pursuant to paragraph 15 or, as the case may be, the
determination by the Monopolies Commission of the relevant questions or
of the disputed determinations the subject of a reference to it
pursuant to sub-paragraph 16(2) or 16(3), which relates to a reference
by the Appointee under paragraph 14 or a determination pursuant to
paragraph 15;
"MAKING A RELEVANT DETERMINATION" means determining the Adjustment
Factor initially or determining, in carrying out the most recent
Periodic Review or making any subsequent Interim Determination (or,
where there has been no Periodic Review, in making any Interim
Determination) whether the Adjustment Factor should be changed (and, if
so, what change should be made to the Adjustment Factor), and "Relevant
Determination" shall be construed accordingly; r
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"NET PRESENT VALUE" means the net present value calculated as at 30
September in the year in which the relevant Reference Notice is given
or, where in any year no Reference Notice is given under paragraph 14
but the Director gives a notice to the Appointee under paragraph 15, as
at 30 September in the year in which the Director gives the notice, by
discounting subsequent cash flows and inflating earlier cash flows at
the Appropriate Discount Rate, assuming all cash flows in any Charging
Year occur on 30 September in that charging Year;
a "NOTIFIED ITEM" is any item notified by the Director to the Appointee
as not having been allowed for (either in full or at all) in making a
Relevant Determination; and for the purpose of this definition:
(a) where any such item was not allowed for in full then
it shall only be a Notified Item to the extent that
it was not allowed for; and
(b) where, in determining whether the Adjustment Factor
should be changed (and if so what change should be
made to the Adjustment Factor), the Director, or, as
the case may be, the Monopolies Commission, allows
for any such item as was previously so notified by
the Director then references in this Condition to
Notified Items and Relevant Items shall be taken, for
the purposes of any subsequent Interim Determination,
to exclude such item to the extent that the Director,
or, as the case may be, the Monopolies Commission,
allowed for it as aforesaid;
a "RELEVANT CHANGE OF CIRCUMSTANCE" is any of the following:
(1) (a) the application to the Appointee of any legal
requirement; and
(b) any change to any legal requirement which applies to
the Appointee (including any legal requirement
ceasing to apply, being withdrawn or not being
renewed);
(2) either of the following circumstances for any Charging Year in
respect of which the Secretary of State, or, as the case may
be, the Director, notified the Water Authority or, as the case
may be, the Appointee that variations in value received or
expected to be received from Relevant Disposals of Land shall
constitute a Relevant Change of Circumstance:
(a) where for any Charging Year the value received or
expected to be received from a Relevant Disposal of
any Identified Land is, or is expected to be,
different from the value which the Secretary of
State, or, as the case may be, the Director, notified
the Water Authority or, as the case may be, the
Appointee was the value attributable to a Relevant
Disposal of that Identified Land for that Charging
Year which had been allowed for in determining the
Adjustment Factor initially or whether the Adjustment
Factor should be changed (and if so what change
should be made to the Adjustment Factor);
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(b) where for any Charging Year, and to the extent not
taken into account under (a) above, the aggregate
value received or expected to be received from
Relevant Disposals of Non-identified Land is, or is
expected to be, different from the value which the
Secretary of State, or, as the case may be, the
Director, notified the Water Authority or, as the
case may be, the Appointee was the value attributable
to Relevant Disposals of Non-identified Land for that
Charging Year which had been allowed for in
determining the Adjustment Factor initially or
whether the Adjustment Factor should be changed (and
if so what change should be made to the Adjustment
Factor)
and so that any notification by the Director for purposes of
this sub-paragraph shall be relevant for the purposes of this
sub-paragraph (2) to the exclusion of any earlier notification
by the Secretary of State or the Director for the purposes of
this sub-paragraph (2) to the extent that the first-mentioned
notification is made in respect of matters in respect of which
that earlier notification was made.
For the purposes of this sub-paragraph (2):
(i) "IDENTIFIED LAND" means any piece or parcel of
protected land identified in any such notification
referred to in (a) above as is relevant for the time
being for the purposes of this sub-paragraph (2) as
being included in that notification, not being, or
being part of, a piece or parcel of land which has
previously been the subject of a transfer under
paragraph 7 of Condition K;
(ii) "LAND" includes any interest or right in or over
land;
(iii) "NON-IDENTIFIED LAND" means any piece or parcel of
protected land, not being, or being part of:
(A) a piece or parcel of protected land
identified in any such notification referred
to in (a) above as is relevant for time
being for the purposes of this sub-paragraph
(2); or
(B) a piece or parcel of protected land which
has previously been the subject of a
transfer under paragraph 7 of Condition K;
(iv) "PROTECTED LAND" and "DISPOSAL" have the meanings
respectively given to them in section 189;
(v) a "RELEVANT DISPOSAL" means and includes any disposal
by the Appointee and any transfer under paragraph 7
of Condition K;
(vi) a "RELEVANT DISPOSAL OF LAND" means and includes a
Relevant Disposal of Identified Land and a Relevant
Disposal of Non-identified Land:
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(vii) "VALUE" includes value of any kind including, without
limitation. cash, the value of real or personal
property or any interest in such property, the value
of any right or benefit (actual or prospective) and
the value of any release, in whole or in part, of any
obligation or claim, provided that to the extent that
any property, right or benefit shall consist of a
right to receive cash or any other asset then no
value shall be attributed to that property, right or
benefit but the cash or other asset the subject
thereof shall be included and treated as value
received or expected to be received in the Charging
Year in which it is received or expected to be
received;
(viii) references to "VALUE RECEIVED OR EXPECTED TO BE
RECEIVED" shall be construed so as to include
receipts by, and grants to, the Appointee, any
Associated Company or any other business in which
either the Appointee or any Associated Company has a
material direct or indirect interest;
(ix) for the purpose of COMPUTING "VALUE RECEIVED OR
EXPECTED TO BE RECEIVED" in respect of a Relevant
Disposal of Land which consists of a transfer made
under paragraph 7 of Condition K the "value received
or expected to be received" shall be the value for
which that transfer is made under that paragraph 7,
but so that where that value includes a right to
receive cash or any other asset then, for the purpose
of this sub-paragraph, no value shall be attributed
to that right but the cash or other asset the subject
thereof shall be included and treated as value
received or expected to be received in the Charging
Year in which it is received or expected to be
received;
(x) in the case of a right or benefit, but subject to the
proviso to (vii) above, value shall be deemed to have
been received at the time the right is granted or the
benefit arises;
(3) where:
(i) in making a Relevant Determination, an amount has
been allowed for on account of steps taken or to be
taken for the purpose of securing or facilitating
compliance with a legal requirement (not being one to
comply with which the Water Authority or the
Appointee has determined to make a change to the
basis on which it charges customers for water supply
or sewerage services) or achieving a service standard
adopted or to be adopted by the Appointee; and
(ii) in any such case:
(A) the Appointee has not taken (by the date by
which it was assumed for the purposes of
assessing the amount allowed for as
aforesaid it would take those steps) any or
all of those steps which, for the purpose of
assessing the amount allowed for as
aforesaid, it was assumed it would take; and
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(B) as a result, the amount allowed for as
aforesaid is substantially greater than the
sum of (a) the costs (if any) actually
incurred by the Appointee for the relevant
purpose specified in (i) above and (b) so
much (if any) of that amount as has been
otherwise offset by prudent management of
the capital programme; and
(C) that purpose has not been otherwise
achieved;
a "Relevant Item" is any of the following:
(1) A Relevant Change of Circumstance (other than a Relevant
Change of Circumstance falling within sub-paragraph (2) of the
definition);
(2) A Notified Item; and
(3) A Relevant Disposal of Land
and references to a Relevant Item are to a Relevant Change of
Circumstance (other than a Relevant Change of Circumstance falling
within sub-paragraph (2) of the definition), a Notified Item or a
Relevant Disposal of Land as the context may require.
13.2 In the definition of a "Relevant Change of Circumstance" and for the
purpose of that definition
(1) a "LEGAL REQUIREMENT" is any of the following:
(a) any enactment or subordinate legislation to the extent that it
applies to the Appointee in its capacity as a water undertaker
or sewerage undertaker (and for this purpose, but without
prejudice to the generality of the foregoing, "subordinate
legislation" includes any order made under section 20 and any
authorisation granted, approval given, or prohibition imposed,
by the Secretary of State under The Water Supply (Water
Quality) Regulations 1989);
(b) any regulation made by the Council or the Commission of the
European Communities to the extent that it applies to the
Appointee in its capacity as a water undertaker or sewerage
undertaker, or decision taken by the said Commission which is
binding on the Appointee in its capacity as a water undertaker
or sewerage undertaker and to the extent that it is so
binding;
(c) any licence, consent or authorisation given or to be given by
the Secretary of State, the Authority or other body of
competent jurisdiction to the Appointee for the purpose of
carrying on any of the functions of a water undertaker or
sewerage undertaker;
(d) any undertaking given by the Appointee to. and accepted by,
the Secretary State or, as the case may be, the Director for
the purposes of section 20(5)(b);
(e) other than any such undertaking as is referred to in (d), any
undertaking given by the Appointee to any enforcement
authority, and accepted by that enforcement authority, to take
all such steps:
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(i) as are specified by that enforcement authority to be
necessary or appropriate for the Appointee to take
for the purpose of securing or facilitating
compliance with any legal requirement in relation to
which that enforcement authority is the enforcement
authority; or
(ii) the taking of which is specified by that enforcement
authority to be a condition or requirement of
granting or renewing any such licence, consent or
authorisation as is referred to in (c) or agreeing
not to withdraw the same;
(f) the Conditions of these Appointments; and
(g) any interpretation of law, or finding, contained in any
judgment given by a court or tribunal of competent
jurisdiction in respect of which the period for an appeal has
expired which requires any legal requirement falling within
(a) to (b) above to have effect in a way;
(i) different to that in which it previously had effect;
or
(ii) different to that in which it was taken to have
effect:
(A) for the purpose of determining the
Adjustment Factor or, as the case may be,
(B) in determining whether the Adjustment Factor
should be changed (and if so what change
should be made to the Adjustment Factor)
but so that nothing in sub-paragraphs (a) to (g) above shall apply so as to
include:
(i) any such legal requirement as is referred to in
section 113 or 129, or
(ii) those sections
to the extent in either case that they require the Appointee to pay fees or the
relevant enforcement authority; and charges to
(2) "enforcement authority" means any person or body having
jurisdiction or to take action under or in respect of the
relevant legal requirement.
13.3 In paragraph 14 and in the definition of a "Relevant Change of
Circumstance": to enforce
(1) references to costs include references to expenditure and loss
of revenue and references to costs being incurred include
references to expenditure being made and loss of revenue being
suffered; and
(2) references to receipts include references to receipts, cash or
other assets of any sort, whether of a capital or revenue
nature and including receipts of grants, contributions, gifts
and loans.
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13.4 (1) For the purposes of sub-paragraph 14.2(1) costs, receipts and
savings shall be ascertained at the general price level prevailing, or
expected to prevail, on 30 September in the year in which the Appointee
gives notice under sub-paragraph 14.1, or the Director gives notice
under paragraph 15(1).
(2) In sub-paragraphs 14.2(8) and 14.2(9) and sub-paragraph (3)
below "at Outturn Prices", in relation to the amount of any
Base Cash Flow or depreciational means that amount as adjusted
to take account of the actual or expected cumulative
percentage change in the Retail Prices Index from that
prevailing, or expected to prevail, on 30 September in the
year in which the Appointee gives notice under subparagraph
14.1, or the Director gives notice under paragraph 15(1), up
to and including that prevailing, or expected to prevail, on
30 September in the year in which the Base Cash flow or
depreciation occurred, or is expected to occur.
(3) In sub-paragraph 14.2(8) "Current Value", in relation to any
Base Cash Flow or depreciation at Outturn Prices, means that
amount, as adjusted to take account of the actual or expected
cumulative percentage change in the Retail Prices Index from
30 September in the year in which that Base Cash Flow or
depreciation occurred or is expected to occur, up to and
including 30 September in the relevant year.
13.5 For the purpose of section 15(5)(b), the provisions of this Condition,
to the extent that they relate to a Relevant Change of Circumstance
falling within sub-paragraph (2) of that definition, are provisions of
the Appointments which cannot be modified. This sub-paragraph shall
cease to have effect if, but only if, this Condition ceases to contain
any provision relating to changes to the Adjustment Factor to allow for
Notified Items and Relevant Changes of Circumstance.
14. References to the Director relating to Notified Items and Relevant
Changes of Circumstance
14.1 The Appointee may from time to time refer to the Director for
determination by him (having considered the proposals of the Appointee)
the questions set out in sub-paragraph 14.2. Such reference shall be
made by notice given to the Director, which shall be given in
accordance with sub-paragraph 14.4. For the purposes of sub-paragraph
14.2 a single reference may be made in respect of any number of
Notified Items and Relevant Changes or Circumstance and sub-paragraph
14.2 shall be construed accordingly.
15. In the case of a Notified Item or where there has been or is to be a
Relevant Change of Circumstance all of the following:
(1) what are, or are likely to be, the costs, receipts and savings
reasonably attributable to the Relevant Item and also, in the
case of a Relevant Change of Circumstance falling within
sub-paragraph (2) of the definition, the costs, receipts and
savings reasonably connected with the Relevant Disposal of
Land;
(2) except in the case of a Relevant Change of Circumstance
falling within sub-paragraph (2) of the definition, to what
extent:
(a) are the costs determined under (1) reasonably
recoverable through charges for services provided,
functions carried out by, and other activities of,
the Appointee in its capacity as a water undertaker
or sewerage undertaker which are not Standard Charges
for Basket Items (not being Excluded Charges);
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(b) in the case of receipts and savings, is the Relevant
Item relevant to services provided, functions carried
out by, and other activities of, the Appointee as a
water undertaker or sewerage undertaker which are not
Basket Items in respect of which the Appointee makes
Standard Charges (not being Excluded Charges)
and where it is determined that such costs are reasonably
recoverable as aforesaid or, as the case may be, that the
Relevant Item is relevant as aforesaid, either in full or to
an extent, then references hereafter to costs, receipts and
savings reasonably attributable to a Relevant Item are to
those costs, receipts and savings except to that extent;
(3) both of the following:
(a) what costs reasonably attributable to, or connected
with, the Relevant Item as determined under (1) and
what dining of incurring of such costs are
appropriate and reasonable for the Appointee in all
the circumstances to incur and programme, or, as the
case may be, to have incurred and programmed, by
reason of the Relevant Item; and
(b) what receipts and savings reasonably attributable to,
or connected with, the Relevant Item as determined
under (1) and what timing of such receipts and
savings is appropriate and reasonable for the
Appointee in all the circumstance to achieve and
programme or, as the case may be, to have achieved
and programmed, by reason of the Relevant Item
and for the purpose of determining the separate amounts under (a) and
(b), but without prejudice to the generality of the foregoing:
(i) no account shall be taken of:
(A) any trivial amounts;
(B) any costs, to the extent that they
would have been, or would be, avoided
by prudent management action taken
since the transfer date (and for this
purpose what constitutes "prudent
management action" shall be assessed
by reference to the circumstances
which were known or which ought
reasonably to have been known to the
Appointee at the relevant time);
(C) any savings achieved by management
action taken since the transfer date
over and above those which would have
been achieved by prudent management
action (and for this purpose what
constitutes "prudent management
action" shall be assessed by
reference to the circumstances at the
relevant time); or
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(D) any amounts attributable to matters allowed
for in making a Relevant Determination,
except to the extent that such amounts
otherwise fall to be taken into account as
amounts reasonably attributable to, or
connected with, the Relevant Item under this
sub-paragraph (3) and sub-paragraph (1) by
virtue of the definition of a Notified Item
and a Relevant Change of Circumstance; and
(ii) In the case of a Relevant Change of Circumstance
falling within sub-paragraph (1) of the definition,
regard shall be had to whether either:
(a) the Secretary of State has notified the
Director of any change of policy, concerning
any environmental or water-quality standard,
which has been made since the Adjustment
Factor was last determined, or
(b) the Appointee has itself given notice to the
Director of the application to it of, or any
change to, any legal requirement, before
referring that legal requirement to the
Director under subparagraph 14.1;
(4) having determined under (3) the separate amounts of costs and
of receipts and savings in respect of each Relevant Item, what
are the annual cash flows thereof (costs being netted off
against the amount of receipts and savings for this purpose)
over each Charging Year included in the dining determined
under (3) (those annual cash flows being hereinafter referred
to as tithe Base Cash Flows");
(5) what is the annual aggregate of:
(a) one half of the Base Cash Flows in respect of
Relevant Changes of Circumstance falling
within sub-paragraph (2) of that definition;
and
(b) the Base Cash Flows in respect of all other
Relevant Changes of Circumstance and Notified
Items
in both cases the subject of the notice or notices under
sub-paragraph 14.4 or paragraph 15;
(6) what is the Net Present Value of the amounts determined under
(5) calculated up to the start of the first of the Charging
Years for which the next Periodic Review falls to be carried
out (having regard to any Review Notice or Reference Notice
which has been given at the time when the reference is made)
and what is the aggregate of those Net Present Values ("the
Materiality Amount");
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(7) is the Materiality Amount equal to or does it exceed ten per
cent of the turnover attributable to the Appointed Business in
the latest financial year for which accounting statements have
been prepared and delivered to the Director under Condition F,
as shown by those accounting statements, and for this purpose
where the Materiality Amount is a negative figure it shall be
treated as though it were a positive figure;
(8) if so, for each year, ("THE RELEVANT YEAR") until the first
of the Charging Years for which the next Periodic Review falls
to be carried out (having regard to any Review Notice or
Reference Notice which has been given at the time when the
reference is made);
(a) what are the following amounts:
(i) all Base Cash Flows at Outturn Prices
attributable to the creation or acquisition
of depreciable assets ("Allowable Capital
Expenditure");
(ii) all Base Cash Flows at Outturn Prices
attributable to the creation or acquisition
of non-depreciable assets ("Allowable
Infrastructure Asset Expenditure");
(iii) all other Base Cash flows at Outturn Prices
("Other Allowable Expenditure");
(iv) the sum of the Current Value of all
Allowable Capital Expenditure occurring up
to and including the relevant year, divided
by the weighted avenge expected life of the
assets attributable to that Allowable
Capital Expenditure at the time those assets
were or are expected to be created or
acquired ("Allowable Depredation");
(v) the sum of the Current Value of all
Allowable Capital Expenditure occurring up
to and including the relevant year less the
sum of the Current Value of all Allowable
Depreciation occurring up to and including
the relevant year ("Allowable Net Asset
Value");
(vi) the sum of the Current Value of all
Allowable Infrastructure Asset Expenditure
occurring up to and including the relevant
year ("Allowable Infrastructure Asset
Value");
(vii) the Appropriate Discount Rate, adjusted so
as to exclude any allowance for changes in
the Retail Price Index, multiplied by the
sum of:
(A) the Allowable Net Asset Value for
the relevant year; and
(B) the Allowable Infrastructure Asset
Value for the relevant year;
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("THE ALLOWABLE RETURN"); and
(b) what is the sum or:
(i) Other Allowable Expenditure;
(ii) Allowable Depreciation; and
(iii) the Allowable Return;
(the "ANNUAL ALLOWABLE AMOUNT")
(9) what change to the Adjustment Factor over the period from the
beginning of the first of the Charging Years referred to in
sub-paragraph 14.4(1) (in any case where a Reference Notice
has been given in respect of sub-paragraph 14.2) or paragraph
15(1) (in any other case) until the first of the Charging
Years for which the next Periodic Review falls to be carried
out (having regard to any Review Notice or Reference Notice
which has been given at the time when the reference is made)
("the Relevant Period") is most likely to allow, or, as the
case may be, require, the Appointee to make such charges over
the Relevant Period ("Adjusted Charges"), in such a manner as
to secure that the increase, or, as the case may be, the
decrease, in revenue attributable to the making of Adjusted
Charges would, in each year of the Relevant Period, be equal
to:
(i) the Annual Allowable Amount for that year,
plus
(ii) where Base Cash Flows at Outturn Prices have occurred prior to
the first year of the Relevant Period, the amount, which,
calculated as a constant annual amount over the Relevant
Period, would result in the sum of the Net Present Values of
these amounts equaling the Sum of the Net Present Values or
the Annual Allowable Amounts for each of the years prior to
the Relevant Period.
14. Not used.
14.4 A Reference Notice given to the Director in respect of sub-paragraph
14.2 shall contain or be accompanied by reasonable details of the
Relevant Item in respect of which the Reference Notice is given and,
unless the Director otherwise consents, shall be given not later than:
(1) the first day of October immediately preceding the first of
the Charging Years in respect of which the Appointee wishes
the change to the Adjustment Factor to take effect; or
(2) if later, where the Director has given a notice to the
Appointee under paragraph 15(1) in respect of the same
Charging Year, within fourteen days from the receipt by the
Appointee of that notice.
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<PAGE> 176
15 Changes to the Adjustment Factor initiated by the Director relating to
Notified Items and Relevant Changes of Circumstance.
In the case of a Notified Item or where any Relevant Change of
Circumstance has occurred or is to occur, the Director may, having
given notice to the Appointee specifying the Notified Item or, as the
case may be, the Relevant Change of Circumstance, of his intention so
to do not later than:
(1) the first day of October immediately preceding the first of
the Charging Years in respect of which he proposes the change
to the Adjustment Factor to take effect; or
(2) if later, where the Appointee has given a Reference Notice to
the Director in respect of sub-paragraph 14.2 and falling
within sub-paragraph 14.4(1) in respect of the same Charging
Year, within fourteen days from the receipt by the Director of
that Reference Notice
determine the questions set out in sub-paragraph 14.2 in respect of
that Notified Item or, as the case may be, that Relevant Change of
Circumstance. A single notice may be given under this paragraph 15 in
respect of any number of Notified Items and Relevant Changes of
Circumstance and sub-paragraph 14.2 shall be construed accordingly.
where sub-paragraph 14.4(2) or 15(2) applies, the questions set out in (5) to
(9) inclusive of sub-paragraph 14.2 shall be determined in respect of all
Notified Items and Relevant Changes of Circumstance in respect of which the
Appointee and the Director have given notice, taken as a whole.
Part V is unchanged.
Part VI. Provision of information to the Director
18.1 The Appointee shall furnish to the Director:
(1) not later than 31st March immediately following the date of
the relevant Reference Notice (in the case of a reference
under paragraph 10);
(2) not later than 30th September immediately following the date
of the Reference Notice (in the case of a reference under
paragraph 11);
(3) at the time when it gives the relevant Reference Notice to the
Director (in the case of a reference under paragraph 14
falling within sub-paragraph 14.4(1),
(4) as soon as reasonably practicable and in any event not later
than the expiry of one month from the date of the Director's
notice to the Appointee under paragraph 15 (in the case of
such a notice, including the case of a reference under
paragraph 14 falling within sub-paragraph 14.4(2))
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<PAGE> 177
such Information as the Appointee reasonably believes is
necessary or, as the case may be, as the Director may
reasonably require in his said notice, to enable the Director
to make his determination. The Appointee shall also furnish to
the Director as soon as reasonably practicable such further
Information as the Director may from time to time by notice to
the Appointee reasonably require to make his determination.
The remainder of Part VI is unchanged.
/s/ I C R BYATT
I C R BYATT
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<PAGE> 178
OFWAT PRESS NOTICE 29 MARCH 1994
- - ALSO STOCK EXCHANGE ANNOUNCEMENT 29 MARCH 1994
OFWAT INTERFERES LESS IN CHANGING WATER COMPANIES' PRICE LIMITS
Ian Byatt, Director General of Water Services, today welcomed changes to the
licences of another 27 water and sewerage companies which will reduce the scope
and simplify the procedure for adjusting charges between Periodic Reviews -
either at the request of the company or the Director General. The changes will
reduce regulatory risk because the outcome of these Interim Determinations will
be more clear and there will be less scope for disagreement. The licence
amendments made today will come into effect from Friday 1 April.
All the companies now have agreed similar amendments with the Director General,
except for the smallest, Cholderton and District Water Company Limited.
Up until now the licence has allowed the Regulator to look at all aspects of
company business when considering adjusting price limits between Periodic
Reviews. Commenting on the changes Ian Byatt said:
"The interests of each company and its customers are best served if
most changes in price limits are made at five or ten yearly Periodic
Reviews. If there is an interim adjustment, the basis for the change
should be both clear arid certain.
"Reducing the scope for change between Periodic Reviews provides a
stable basis a which each company can draw up its business plans.
Revenue will grow more steadily, investment can be more stable and
assets can be renewed in a steady and sustainable way. Companies will
be better placed to take advantage of technological and other
innovations.
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"Where adjustments need to be made, the criteria for adjusting price
limits have been clarified. Where adjustments are required to allow for
new quality and environmental obligations, the new provisions will
ensure that changes follow directly from changes in Government policy.
"When I reset all price limits in July, I will take full account of
these licence amendments. I will consider the risk carried by each
company when assessing a reasonable return on capital".
The modifications to Part IV of Condition B of the Licence are:
* to limit the scope for Interim Determinations by reducing from eight to
three the number of "relevant changes of circumstance" which may
trigger a Determination;
Four of the companies have retained a fourth relevant change,
relating to changes in expenditure because national
construction costs are at a different level from that assumed
when price limits were last set.
* to set out a procedure for notifying new legal requirements which may
involve changes in costs;
* to simplify and make more automatic the calculation of revised price
limits at Interim Determinations.
Adjustments to price limits between Periodic Reviews are still possible, but
mainly take account of any unanticipated, legal requirements which may be
imposed on companies.
In addition, eight companies have deleted the provision which allows them to
ask for a change to their price limit if they suffer a substantial adverse
effect on their business. Thirteen others now have this provision as a two-way
process, so that the Director General can seek to revise price limits in
unforeseen substantially beneficial circumstances.
Price Limit adjustments at Interim Determinations will be simplified and made
more automatic by calculating them in a specified way on the basis of allocated
cost changes.
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Sixteen companies retain the requirement that the Director General should, in
making Interim Determinations, also take account of the implications for the
level of interest cover until the next Periodic Review. In these cases, it will
be assumed that additional costs are between Reviews by means of borrowing
rather than by a share issue. For companies without the reference to Interest
cover, price limit adjustments will be based on a weighted average cost of
capital which will be higher than the cost of borrowing.
NOTES TO EDITORS
1 Relevant changes of circumstance retained by all companies are:
- the application of (or change to) any legal requirement;
- differences between proceeds or the sale of surplus land and
the proceeds which were assumed when the Adjustment Factors
were last set;
- non-achievement of a legal requirement allowed for when
Adjustment Factors were last revised.
Only these RCCs now apply to the licences of the following companies:
Bournemouth and West Hampshire Water pics, Cambridge Water Company,
Chester Waterworks Company, Dwr Cymru Cyfyngedig, Eastbou me Water PLC,
East Surrey Water plc,Essex Water PLC, Folkestone and Dover Water
Services Limited, Hartlepools Water Company, Mid Kent Water plc,
Mid-Sussex Water PLC, North East Water PLC, North Surrey Water Limited,
Portsmouth Water plc, South Staffordshire Water plc, Southern Water
Services Ltd, South West Water Services Limited, Suffolk Water PLC,
Sutton District Water plc, Tendring Hundred Water Services Ltd, Three
Valleys Water PLC, Wessex Water Services rid, West Kent Water PLC,
Wrexham and East Denbiglishire Water Company and York Waterworks plc.
Companies also retaining Relevant Change of Circurtance 6 (renumbered
RCC4), relating to changes in national construction costs:
Anglian Water Services Limited, North West Water Limited, Northumbrian
Water Limited and Yorkshire Water Services Limited.
2 Companies deleting the substantial adverse effect provision:
Cambridge Water Company, Chester Waterworks Company, Dwr Cymru
Cyfyngedig, Eastbourne Water PLC, Essex Water PLC, Mid-Sussex Water
PLC, North East Water PLC, North West Water Limited, Northumbrian Water
Limited, Portsmouth Water plc, Southern Water Services Ltd, South
Staffordshire Water plc, Suffolk Water PLC , Wessex Water Services
Limited, West Kent Water PLC and
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Wrexham and East Denbigbshire Water Company.
Companies adopting the substantial adverse/beneficial effect provision:
Anglian Water Services Limited, Bournemouth and West Hampshire Water
plcs, East Surrey Water plc, Folkestone and Dover Water Services
Limited, Hartlepools Water Company, Mid Kent Water plc, North Surrey
Water Limited, South West Water Services Limited, Sutton District Water
plc, Tendring Hundred Water Services plc, Three Valleys Water Services
plc, York Waterworks plc and Yorkshire Water Services Limited.
3 Companies which have a provision referring to interest cover included
in their Licences:
Anglian Water Services Limited, Bournemouth and West Hampshire Water
plcs, Chester Waterworks Company, Dwr Cymni Cyfyngedig, East Surrey
Water plc, Folkestone and Dover Water Services Limited, Hartlepools
Water Company, North Surrey Water Limited, Northumbrian Water Limited,
Portsmouth Water plc, South Staffordshire Water plc, South West Water
Services Limited, Tendring Hundred Water Services Ltd, Three Valleys
Water Services plc and Wrexham and East Denbiglishire Water Company.
Companies in which interest cover is not referred to in their Licences:
Cambridge Water Company, Eutbourne Water PLC, Essex Water PLC, Mid Kent
Water plc, Mid-Sussex Water PLC, North East Water PLC, North West Water
Limited, Southern Water Services Ltd, Sutton District Water plc,
Suffolk Water PLC, Wessex Water Services Ltd, West Kent Water PLC, York
Waterworks plc and Yorkshire Water Services Limited.
4 Licence amendments have already been made for Thames Water, Severn
Trent and Bristol Water.
5 Copies of the amendments are available from Ofwat Library at a cost of
l0p per sheet with a minimum charge of(pound)1, (free of charge to the
media).
MEDIA ENQUIRIES TO PRESS OFFICE, ON 021 625 1450/1442
OUT OF HOURS CALLS TO 021 454 1520
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WATER INDUSTRY ACT 1991 S.13
MODIFICATIONS OF THE CONDITIONS OF APPOINTMENT OF ALL WATER
AND WATER AND SEWERAGE COMPANIES IN ENGLAND AND WALES
MADE ON 27 MARCH 1996
COMING INTO EFFECT ON 1 APRIL 1996
CONDITION K: "RING FENCING", AND DISPOSALS OF LAND
1. Introduction
The purposes of this Condition are to ensure:
(1) that the Appointee retains sufficient rights and assets for
the purpose described in sub-paragraph 3.1; and
(2) that the best price is received from disposals of land to
which this Condition applies so as to secure benefits to
customer through the application of the proceeds of such
disposals to reduce charges as provided in, and subject to the
provisions of, Condition B.
2. Interpretation and Construction
2.1 In this Condition and for the purposes of this Condition:
a "DISPOSAL CERTIFICATE" means a certificate signed by all the
directors of the Appointee for the time being or approved by a duly
convened meeting of the board of directors of the Appointee for the
time being and signed by a director or the secretary of the Appointee
confirming that it has been so approved and having attached to it a
certified copy of an extract of the minutes of the relevant meeting
containing the resolution to approve the certificate;
"FORMAL TENDER" means a tender, acceptance of which creates a binding
obligation to purchase;
"LAND" includes any interest or right in or over any land;
"THE MATERALITY AMOUNT" for the purpose of any disposal of land
is (pound)1 million
or such greater amount as may from time to time be determined by the
Director so as to allow for movements in the Retail Prices Index or as
may from time to time otherwise be determined by the Director and
approved by the Secretary of State;
"NOMINEE" of any person includes any person acting at the direction
of, or in concert with, that first-mentioned person or pursuant to any
agreement or understanding with that first mentioned person;
a "PROPOSED DISPOSAL" is any such disposal to which paragraphs 4, 5 or
6 applies;
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"PROTECTED LAND" and "DISPOSAL" have the meanings respectively given to
them in section 169 and cognate expressions shall be construed
accordingly;
"SHORT TERM DISPOSAL" means a disposal which consists of the creation
of any interest or right in or over protected land which the Appointee
has an unconditional right to terminate without penalty at any time and
from time to time by not more than thirty months' notice or which
expires or otherwise ceases in accordance with its terms within thirty
months of the date of its creation without any other interest or right
arising on such expiry or cessation;
"THE TRANSFER THRESHOLD" for the purpose of any disposal of land to an
Associated Company is
(pound)500,000
or such greater amount as may from time to time be determined by the
Director so as to allow for movements in the Retail Prices Index or as
may from time to time otherwise be determined by the Director and
approved by the Secretary of State;
"VALUE" includes value of any kind including, without limitation, cash,
the value of real or personal property or any interest in such property
and the value of any right or benefit, actual or prospective, and the
value of any release, in whole or in part, of any obligation or claim.
2.2 For the purpose of calculating "best price":
(1) for the purpose of any valuer's certificate required to be
furnished under sub-paragraph 4.6(1)(a)(i), or 5.1(1)(b);
(a) no reduction shall be made on account of the method,
terms and timing of the proposed disposal (if
relevant) in respect of which the relevant
certificate is required to be furnished, but "best
price" shall be calculated on the basis of a disposal
of the land in question, the method, terms and timing
of which are most likely to secure that the best
price is obtained; and
(b) where the proposed disposal or, as the case may be,
the change of use is related to, or connected or
interdependent with, any other proposed disposal,
then, subject to subparagraph (a), no account shall
be taken of that fact; and
(2) for any purpose under this Condition, "best price" shall
include value of any kind as "value" is defined in
sub-paragraph 2.1.
3. "RING FENCING"
3.1 The Appointee shall at all times ensure, so far is reasonably
practicable, that if a special administration order were made in
respect of the Appointee the Appointee would have available to it
sufficient rights and assets (other than financial resources) to enable
the special administrator so to manage the affairs, business and
property of the Appointee that the purposes of
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such order could be achieved, provided that this paragraph shall not
require the Appointee to seek to re-negotiate the terms of any
contract or obligation which, in accordance with a scheme under
Schedule 2, is transferred to the Appointee.
3.2 The Appointee shall publish with its audited accounts for each
financial year a statement as to whether the Appointee was in
compliance with subparagraph 3.1 as at the end of that financial year.
3.3 Where any such rights and assets as are mentioned in sub-paragraph 3.1
are provided or made available by any Group Company, the Appointee's
obligations under sub-paragraph 3.1 in respect of such rights and
assets shall be such as they would be if the words "so far as
reasonably practicable" and the proviso were omitted from that
sub-paragraph.
3.4 The state, condition and capacity of assets used by the Appointee in
the Appointed business are the subject of Conditions J and L and
accordingly sub-paragraph 3.1 shall not apply thereto.
4.0 Disposals of protected lend other than disposals by auction or formal
tender or to Associated Companies
4.1 Subject to sub-paragraph 4.2, the Appointee shall not make any
disposal of any protected land, unless the Appointee shall
have complied with the provision of sub-paragraph 4.3.
4.2 Sub-paragraph 4.1 shall not apply:
(1) to any Short-term Disposal;
(2) to any disposal of any protected land the value of
which, when aggregated with:
(a) the value of any other protected land which
affects or might affect the value of such
protected land or the value of which is or
might be affected by such protected land;
and
(b) to the extent not taken into account under
(a) the value of any other protected land
the subject of any other disposal which has
taken place, is proposed or contemplated and
which in the honestly held and reasonable
opinion of the Appointee is or might be
related to, or connected or interdependent
with, the first mentioned disposal
does not exceed the Materiality Amount;
(3) to any such disposal of protected land as is referred
to in paragraphs 5 and 6;
(4) to any disposal of any protected land made in
accordance with any such provision as is referred to
in section 152(5(a) to the relevant person referred
to in that section; or
(5) to any disposal of any protected land made pursuant
to any obligation entered into by the Water Authority
prior to the transfer date.
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4.3 Subject to sub-paragraph 4.6, the Appointee shall:
(1) not less than 10 working days prior to the Appointee entering
into an obligation (whether unconditional or subject to
conditions) which requires or might require it to make the
proposed disposal, furnish to the Director a Disposal
Certificate which:
(a) identifies the protected land the subject of the
proposed disposal both by written description and by
a plan showing:
(i) such protected land; and
(ii) all other land contiguous or adjacent to
such protected land in or over which the
Appointee or, to the best of the knowledge,
information and belief of the Appointee
having made due and careful enquiry any
Associated Company has any interest or
right and which affects or might affect the
value of such protected land or the value
of which is or might be affected by such
protected land;
(b) describes the interest or right in or over the
protected land to be disposed of;
(c) sets out the terms of the proposed disposal;
(d) describes:
(i) the consideration to be received or expected
to be received; and
(ii) separately, any other value which, in the
reasonable opinion of the Appointee, is to
be received or derived, or expected to be
received or derived
In each case from or in connection with the proposed
disposal by the Appointee and the timing of the
receipt or derivation thereof;
(e) sets out details as required by (a) to (d) inclusive
above in respect of any other disposal of protected
land which has taken place, is proposed or
contemplated and which in the honestly held and
reasonable opinion of the Appointee is or might be
related to, or connected with or interdependent with,
the proposed disposal or, if none, a statement to
that effect;
(f) confirms that the protected land the subject of the
proposed disposal is, or at the time the Appointee is
required to give vacant possession will be, no longer
required for carrying out the Regulated Activities
and will not be so required in the foreseeable
future;
(g) confirms:
(i) that the proposed disposal is an arms length
transaction;
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<PAGE> 186
(ii) that the consideration and other value (if
any) certified under (d) above to be
received or derived, or expected to be
received or derived, by the Appointee from
or in connection therewith is the total
value to be received or derived, or expected
to be received or derived, from the proposed
disposal, whether by the Appointee or any
other person;
(iii) except where a certificate is furnished
under subparagraph 4.5, that in the honestly
held and reasonable opinion of the
Appointee. taking account of proper
professional advice obtained by the
Appointee for that purpose, the
consideration certified under (ii) is the
best price that could reasonably be obtained
for the protected land in question, having
regard to all the circumstances at the time
when the certificate is given (including,
but without limitation, any reasonable
prospect of planning permissions being
obtained); and
(iv) that neither the Appointee nor, to the best
of the knowledge, information and belief of
the Appointee, having made due and careful
enquiry, any Associated Company or any
company or business in which the Appointee,
or, to the best of the knowledge,
information and belief of the Appointee,
having made due and careful enquiry, any
Associated Company, has a material direct or
indirect interest, shall, following the
proposed disposal or any other transaction,
a continuing interest whether direct or
indirect in the protected land the subject
of the proposed disposal or in any
development involving or connected with that
protected land; and
(2) prior to entering into the relevant obligation, furnish to the
Director in writing such further Information regarding the
proposed disposal which the Director may reasonably request.
4.4 For the purpose of sub-paragraph 4.3(1)(g)(iv), "interest" includes an
entitlement to a share of profits or participation in assets, rights or
benefits but excludes any interest which consists solely of an
entitlement to receive installments of consideration which as to amount
and timing are certain or variable only by reference to the grant of
planning permissions.
4.5 The Appointee may, instead of giving the confirmation required by
sub-paragraph 4.3(1)(g)(iii), furnish to the Director a certificate by
a valuer appointed by the Appointee ("THE VALUER") addressed to the
Director which states that in the opinion of the Valuer the
consideration certified under sub-paragraph 4.3(1)(g)(iii) is the best
price that could reasonably be obtained for the protected land in
question, having regard to all the circumstances at the time when the
certificate is given (including, but without limitation, any reasonable
prospect of planning permissions being obtained).
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4.6 Where the Appointee proposes to make any such disposal as is mentioned
in sub-paragraph 4.1 and the terms or circumstances of the proposed
disposal are such that a Disposal Certificate giving the full
confirmation required by (f) or (g) of sub-paragraph 4.3(1)
(including, where relevant, such a certificate as is referred to in
sub-paragraph 4.5) cannot properly be given, the Appointee shall not
enter into any obligation (whether unconditional or subject to
conditions) which requires or might require it to make that proposed
disposal unless:
(1) in any case where the full confirmation required by (9) of
sub-paragraph 4.3(1) (including, where relevant, such a
certificate as is referred to in sub-paragraph 4.5) cannot
properly be given:
(a) either:
(i) not less than 10 working days prior to the
Appointee entering into the relevant
obligation, the Appointee has furnished to
the Director a Disposal Certificate as
required by sub-paragraph 4.3 including such
of the matters specified in (g) as can
properly be certified and a certificate by a
valuer appointed by the Appointee and
approved by the Director for the purpose of
this sub-paragraph ("the Valuer") addressed
to the Director which states:
(A) that in the opinion of the Valuer
the consideration to be received by
the Appointee from the proposed
disposal is the best price likely
to be obtained from the land in
question, having regard to all the
circumstances at the time when the
certificate is given (including,
but without limitation, any
reasonable prospect of planning
permissions being obtained); and
(B) the amount of the consideration to
be received or expected to be
received by the Appointee from the
proposed disposal, expressed in
cash according to when that
consideration is to be, or is
expected to be, received; or
(ii) the Director gives his prior written consent
to the proposed disposal, such consent not
to be unreasonably withheld or delayed; and
(b) prior to entering into the relevant obligation, the
Appointee shall have furnished to the Director in
writing such further information regarding the
proposed disposal which the Director may reasonably
request; and
(2) in any case where the full confirmation required by (f) of
sub-paragraph 4.3(1) cannot properly be given, the prior
written consent of the Director to the proposed disposal has
been obtained, such consent not to be unreasonably withheld or
delayed.
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5. Disposals of protected land by auction or formal tender.
5.1 Where the Appointee proposes to dispose by auction or formal
tender of any protected land. the value of which (when
aggregated with the value of any other such protected land as
is described in sub-paragraphs 4.2(2) (a) and (b)) exceeds the
Materiality Amount, it shall:
(1) not less than 10 working days prior to the date of
the auction or the invitation to tender:
(a) furnish to the Director a Disposal
Certificate which:
(i) contains the information and
confirmations required to be
contained in a Disposal Certificate
furnished under subparagraph 4.3(1)
under items (a), (b), (c), (e), (f)
and (g)(iv) of that sub-paragraph
(but so that for this purpose
references in the said item (e) to
items (a) to (d) inclusive shall be
taken to be references to items (a)
to (c) inclusive);
(ii) sets out the reserve price (if
any): and
(iii) confirms that the auction will be
conducted on the basis that bids
will be accepted only on condition
that they are not made by an
Associated Company or any nominee
of any Associated Company or, as
the case may be, that, it will be a
term of the invitation to tender
that it is not capable of
acceptance by an Associated Company
or any nominee of any Associated
Company;
(b) furnish to the Director a certificate by a
valuer appointed by the Appointee ("the
Valuer") addressed to the Director which
states that in the opinion of the Valuer the
disposal of the protected land by auction
or, as the case may be, formal tender and
the timing of the proposed disposal are
respectively the method and timing of
disposal most likely to secure that the best
price is obtained for the land in question;
(2) prior to the date of the auction or the invitation to
tender, furnish to the Director in writing such
further Information regarding the proposed disposal
which the Director may reasonably request.
5.2 In any case where the full confirmation required by
sub-paragraph 5.1(1)(a)(i) or (iii) cannot properly be given,
the Appointee shall not proceed with the proposed disposal
without the prior written consent of the Director.
6 Disposals of Protected Land to Associated Companies
6.1 Subject to subparagraph 6.2, the Appointee shall not make any
disposal, other than a Short Term Disposal, of any protected
land to any Associated Company, unless it has complied with
the provisions of sub-paragraph 6.3.
6.2 Subparagraph 6.1 shall not apply:
to any disposal of any protected land the value of
which, when aggregated with:
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<PAGE> 189
(a) the value of any other protected land which affects
or might affect the value of such protected land or
the value of which is or might be affected by such
protected land; and
(b) to the extent not taken into account under (a), the
value of any other protected land the subject of any
other disposal which has taken place, is proposed or
contemplated and which in the honestly held and
reasonable opinion of the Appointee is or might be
related to, or connected or interdependent with, the
first mentioned disposal
does not exceed the Transfer Threshold.
6.3 Subject to sub-paragraph 6.4, the Appointee shall:
(1) not later than 10 working days (or such other period to be
agreed in advance between the Appointee and the Director)
prior to the Appointee entering into any obligation (whether
unconditional or subject to conditions) which requires or
might require it to make that disposal (a "RELEVANT
OBLIGATION"), furnish to the Director:
(i) a Disposal Certificate, which contains the
information and confirmations required to be
contained in a Disposal Certificate furnished under
sub-paragraph 4.3(1), including such of the matter
specified in (g) as can properly be certified; and
(ii) a certificate by a valuer appointed by the Appointee
and approved by the Director for the purpose of this
sub-paragraph ('"the Valuer") addressed to the
Director which states:
(A) that in the opinion of the Valuer the
consideration to be received by the
Appointee from the proposed disposal is the
best price likely to be obtained from a
disposal of the land in question to an
unconnected third party, having regard to
all the circumstances at the time when the
certificate is given (including, but without
limitation, any reasonable prospect of
planning permissions being obtained); and
(B) the amount of the consideration to be
received or expected to be received by the
Appointee from the proposed disposal,
expressed in cash according to when that
consideration is to be, or is expected to be
received; and
(2) shall furnish to the Director in writing such further
information regarding the proposed disposal which the Director
may reasonably request; and
(3) ensure that the terms on which the proposed disposal is made
are in accordance with any terms which may have been specified
by the Director, either in relation to disposals of protected
land to Associated Companies generally or in relation to the
particular proposed disposal, being such terms as the Director
considers appropriate to secure that the Appointee receives
such share of any value to be derived or expected to be
derived by the Associated Company from the land in question as
the Director considers appropriate, having regard to the duty
imposed on the Director under section 7(3)(c).
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6.4 In any case where the full confirmation required by (f) of
sub-paragraph 4.3(1) cannot properly be given the Appointee shall not
enter into a relevant obligation unless the prior written consent of
the Director to the proposed disposal has been obtained, such consent
not to be unreasonably withheld or delayed.
7. Disclosure of Information to Valuers
The Appointee shall disclose to the Valuer appointed for the purpose of
any provision of this Condition all Information which, in the
reasonable opinion of the Appointee, has or is likely to have a
material bearing on the Valuer's certificate to be given under that
provision and such other Information as the Valuer may reasonably
require to enable him to give his certificate.
/s/ I C R BYATT
I C R BYATT
26
<PAGE> 191
WATER INDUSTRY ACT 1991 SECTION 13
MODIFICATION OF THE CONDITIONS OF
APPOINTMENT OF
WESSEX WATER SERVICES LTD
MADE 18 APRIL 1997
COMING INTO EFFECT 19 APRIL 1997
The following condition shall be inserted into the Appointment.
"Condition Q: Interruptions in Supply because of Drought
1. Interpretation
"business customer" means the person who is liable to pay the
Appointee's charges in respect of a supply of water to premises other
than domestic premises;
"drought order" means an order made under section 73 of the Water
Resources Act 1991;
"household customer" means the person who is liable to pay the
Appointee's charges in respect of a supply of water to domestic
premises.
2. Liability and amounts of payments
2.1 Where a supply of water to premises is interrupted or cut off under the
authority of a drought order the Appointee shall, subject to
sub-paragraph 2.2, pay to the customer (or credit to his account)
whichever of the amounts referred to in paragraph 3 is applicable.
2.2 The Appointee shall not be liable to make any payments under this
Condition where the circumstances were so exceptional that it would
have been unreasonable to have expected the interruption or cut-off to
have been avoided.
3. Amounts payable to household and business customers
3.1.1 The Appointee shall pay to a household customer(pound)10 for each day
during which (or during part of which) the supply is interrupted or cut
off.
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3.1.2 The amount payable to any household customer in any Charging Year shall
not exceed the average amount of water charges payable to the Appointee
by household customers for the Charging Year preceding that in which
the interruption or cut-off happens.
3.2.1 The Appointee shall pay to a business customer(pound)50 for each day
during which (or during part of which) the supply is interrupted or cut
off.
3.2.2 The amount payable to any business customer in any Charging Year shall
not exceed -
(a) the amount of water charges payable by that customer for the
supply of water to those premises for the Charging Year
preceding that in which the interruption or cut-off happens or
(b) if that customer was not liable to pay those charges,
(pound)500.
3.2.3 When calculating the charges payable by a business customer for the
supply of water services, amounts payable in respect of any separate
supply which was provided solely for purposes other than domestic
purposes shall be excluded.
3.3 If, when a payment becomes due under this Condition, a customer owes
money to the Appointee and the debt has been outstanding for more than
6 weeks, any payment frpm the Appointee to which the customer is
entitled under this Condition shall, to the extent that it does not
exceed the amount so owed, be made by way of credit to that customer's
account.
4. Determination of Disputes
4.1 Where any dispute arises between the Appointee and a customer as to the
right of that customer to a payment or credit under this Condition, the
matter may be referred to the Director by either party for
determination(1).
4.2 Any determination under this Condition shall be final and, fails to
give effect to the determination, the customer amount in question
against any payment which is due to the Appointee.
- --------------------------
(1) An explanatory note, which is not part of the Condition, is
attached.
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<PAGE> 193
5. Cessation or Modification of this Condition
5.1 This Condition shall cease to have effect in relation to any
interruptions or cut-offs occurring on or after the commencement date
of any Regulations made by the Secretaries of State pursuant to Section
38 of the Water Industry Act 1991, implementing the recommendations
made to them by the Director in May 1996 for the making of payments to
customers for interruptions or cut-offs because of drought.
5.2 If the Regulations referred to in sub-paragraph 5.1 relate to either
household customers or business customers only, this Condition shall
cease to have effect in so far as it relates to those customers."
/s/ I C R BYATT
I C R BYATT
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<PAGE> 194
Explanatory Note about Condition Q4
The Director has indicated that, when deciding whether to require the Appointee
to make a payment under paragraph 4 of Condition Q he will, while not being able
to anticipate all relevant circumstances, take account of the following:
(a) the resources available to the company and its management of
those resources, including the exploration of new resources;
(b) the promotion by the company of the efficient use of water by
its customers;
(c) the company's ability to prohibit or restrict the use of water
by the exercise of its powers under section 76 of the Water
Industry Act 1991 (hosepipe bans) or by obtaining a drought
order containing the provision authorised by paragraph (b) of
section 74(2) of the Water Resources Act 1991 (non-essential
use); and
(d) the maintenance of the company's assets, including the
management by the company of leakage.
18 April 1997
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<PAGE> 195
WATER INDUSTRY ACT 1991 SECTION 13
MODIFICATION OF CONDITION F
OF THE CONDITIONS OF
APPOINTMENT OF ALL WATER AND
WATER AND SEWERAGE COMPANIES
IN ENGLAND AND WALES
Made 7 May 1997
Coming effect 8 May 1997
Sub-paragraph 9.3 in Condition F shall be amended as follows:
"The Appointee shall deliver to the Director a copy of each set of
accounting statements prepared under this Condition and of each report
referred to in sub-paragraph 9.1 as soon as reasonably practicable and
in any event not later than 15 July following the end of the financial
year to which they relate."
/s/ I C R BYATT
I C R Byatt
5
<PAGE> 196
OFFICE OF WATER SERVICES
WATER INDUSTRY ACT 1991, ss. 7 to 9
Variations of the Appointments of Thames Water Utilities Ltd,
Wessex Water Services Ltd and Southern Water Services Ltd as
Water and as Sewerage Undertaker
Made on 26 August 1998
Coming into effect on 1 September 1998
1. Thames Water Utilities Ltd ("Thames") Wessex Water Services Ltd
("Wessex") and Southern Water Services Ltd ("Southern") hold
Appointments as water and as sewerage undertakers for their respective
areas ("the Appointments").(1)
2. The premises which are shown edged pink on each of the plans attached
to this variation ("Tidworth") are partly within the respective Water
Supply Area and the Sewerage Services Area of Wessex and partly within
the Water Supply Area and Sewerage Services Area of Southern.
3. Thames has applied for variations of its Appointments, under section 7
of the Water Industry Act 1991 ("the Act").
4. On 27 June 1995 the Secretary of State for the Environment authorised
me to deal with applications such as this. After public consultation as
required by section 8 of the Act, I have decided that I should grant
Thames' applications without modification.
5. Therefore, as provided by section 7(2) and 7(4)(a) and (b) of the Act
and subject to the exclusions in paragraph 6 below,
I vary
(i) Thames' Appointments as both a water and a sewerage
undertaker, so that each applies also to Tidworth
and
(ii) each of the Appointments of Wessex and of Southern as a water
and a sewerage undertaker, so that it excludes that part of
Tidworth referred to in 2 above.
- ------------------------------
(1)THE APPOINTMENT WERE MADE BY THE SECRETARY OF STATE FOR THE ENVIRONMENT UNDER
SECTIONS 11 AND 14 OF THE WATER ACT 1989, NOW REPLACED BY SECTIONS 7 AND 11 OF
THE WATER INDUSTRY ACT 1991.
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<PAGE> 197
1. Thames' extended Sewerage Services Area, referred to in paragraph 5
(i), above does not include the following premises, which are served by
Wessex:
12,71 Beech Hill Road
12,15,16 Ludgenshall Road
1,2 Police House, Penning Road
Foodmarket Penning Road
Retail Shop, Pennings Road
Ram Inn, Pennings Road
Portlando House (club, surgery, restaurant shop) Pennings Road
Post Office, Pennings Road
Hair Salon, Pennings Road
Betting Shop, Pennings Road
Shop and Flat (Sweeney), Pennings Road
Glebelands House, Pennings Road
Tidworth Garage, Pennings Road
/s/ I C R BYATT
I C R Byatt
7
<PAGE> 198
OFFICE OF WATER SERVICES
WATER INDUSTRY ACT 1991 SECTIONS 13 AND 14
PROPOSALS BY THE DIRECTOR GENERAL OF WATER SERVICES FOR THE
MODIFICATION OF THE CONDITIONS OF APPOINTMENT OF
WESSEX WATER SERVICES LTD
The process
Wessex Water Services Ltd (Wessex Water) is a wholly-owned subsidiary of Wessex
Water plc (Wessex). Enron Water (Europe) PLC is owned by Enron Corp (Enron). As
a condition of the takeover of Wessex Water by Enron Water (Europe) PLC, Enron
has agreed to the modification of the conditions of appointment of Wessex Water
as a water and a sewarage undertaker.
Any representation about, or objection to, these proposals must be in writing
and sent to the Director General of Water Services, Centre City Tower, 7 Hill
Street, Birmingham B5 4UA (Fax 0121 625 3606) so as to be received by him not
later than 5:00 PM on Friday 27 November 1998. Please quote reference LEG34/4.
EXPLANATION OF THE PROPOSED MODIFICATIONS AND THE REASONS FOR THEM
MAINTENANCE OF COMPARISONS WITH OTHER WATER AND SEWARAGE UNDERTAKERS.
The Director General of Water Services (the Director) believes that the
modifications are necessary to enable him to continue to gather information
about how Wessex Water carried out its statutory functions and the costs which
it incurs, after Wessex becomes part of the Enron Group. The modifications will
therefore -
1.(a) prohibit payment to any Associated Company in respect of any Charging
Year of any amount on account of services received by Wessex Water from
that company which exceeds:
(i) the prices ascertained from market testing carried
out by Wessex Water in accordance with arrangements
previously approved by the Director and which have no
prejudicial effect on the proper carrying out of
Wessex Water's functions; or
(ii) if, in the opinion of the Director, market testing is
not appropriate, then such proportion of the costs
(including a reasonable return) actually incurred by
the Associated Company as the Director agrees is
appropriate; and
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(b) require Wessex Water to obtain from the Associated Company information
required by the Director about the latter's costs.
RING-FENCING OF THE ASSETS OF WESSEX WATER AND ITS ABILITY TO ACT SEPARATELY
FROM ENRON OR ANY INTERMEDIATE PARENT COMPANY.
At the same time, the Director wishes to ensure that Wessex Water's licensed
business is ring-fenced from other activities of the Enron Group. Wessex Water
must not, whether through its involvement in those other group activities or by
its dividend policy, put at risk its ability either to carry out its functions
as a water and a sewerage undertaker or to finance them. Further modifications
will therefore -
2. prohibit the transfer of any asset from Wessex Water to any Associated
Company except with the Director's consent and in compliance with his
requirements concerning the valuation of the asset and its treatment in
Wessex Water's accounts;
3. prohibit Wessex Water from:
(i) giving any guarantee of any liability of any company within
the Enron Group;
(ii) making to any such company any loan;
(iii) continuing or assuming any commitment which includes a
cross-default obligation (whereby Wessex Water's financial
liabilities are increased or accelerated because of default
elsewhere within the Enron Group)
without the Director's consent; and
4. require that Wessex Water's dividend policy will not, in the opinion of
the Director, impair its ability to finance the proper carrying out of
its functions.
The directors of Wessex Water are already required to certify annually to the
Director that the company has adequate financial and management resources.
Further modifications will require -
5. (i) Wessex Water to inform the Director as soon as its Board
becomes aware of any circumstance which causes the Board to
believe that its most recent annual certificate of adequacy of
its financial and management resources could not be repeated
in the light of those circumstances;
(ii) that every annual certificate referred to in i) shall be
accompanied by a report prepared by Wessex Water's
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Auditors and addressed to the Director, stating whether they
are aware of any inconsistencies between, on one hand, that
certificate and the statements submitted with it and, on the
other hand, any information which they obtained during their
work as Wessex Water's Auditors; and
(iii) that the directors record their opinion that all contracts
entered into with any Associated Company include all necessary
provisions and requirements concerning the standard of service
to be provided to Wessex Water to ensure that it is able to
meet all its obligations as a water and a sewerage undertaker.
Although Wessex Water is, and will continue to be, a subsidiary, it has its own
duties as the water and the sewerage undertaker for the areas of those
Appointments. The Director considers it important that Wessex Water should, in
carrying out those functions, behave as if they were substantially its sole
business and it were a separate public limited company. Further modifications
will require -
6. that Wessex Water shall, at all times, conduct the Appointed Business
as if it was substantially Wessex Water's sole business and Wessex
Water was a separate public limited company. In doing so, Wessex Water
should have particular regard to the following:
(a) the competition of Wessex Water's Board should be such that
its directors, acting as such, act independently of Enron and
any intermediate parent company;
(b) Wessex Water must ensure that each such of its directors must
disclose, to it and to the Director, conflicts between their
duties to Wessex Water and other duties;
(c) where potential conflicts exist between the interests of
Wessex Water as a water and a sewarage undertaker and those of
other companies in the Enron Group, Wessex Water and its
directors must ensure that, in acting as directors of Wessex
Water they have regard exclusively to the interests of Wessex
Water as a water and a sewerage undertaker;
(d) no director of Wessex Water should vote on any contractor any
arrangement or any other proposal in which he has an interest
by virtue of other directorships. This arrangement should be
reflected in Wessex Water's Articles of Association;
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(e) Wessex Water should inform the Director without delay when:
(i) a new director is appointed;
(ii) the resignation or removal of a director takes
effect; or
(iii) any important change in the functions or executive
responsibilities of a director occurs.
Wessex Water should notify the Director of the effective date of the change and,
in the case of an appointment, whether the position is executive or
non-executive and the nature of any specific function or responsibility.
(f) the dividend policy adopted by Wessex Water in the light of
proposal 4 (above); and
(g) the principles of corporate governance which are from time to
time recognized by the listing rules of the London Stock
Exchange.
7. that Wessex Water will publish the annual interim and financial results
information which would be required, were it subject to the listing
rules of the London Stock Exchange; and
8. that Wessex Water will issue a variable rate bond not later than 31
December 2000 and use all reasonable endeavours to procure its listing
on the London Stock Exchange. The variable rate will be linked to
Wessex Water's credit rating, according to two London-based independent
credit rating agencies.
9. that Wessex Water will use all reasonable endeavours to ensure that its
corporate debt retains investment-grade credit rating throughout its
life (being a rating awarded by all the reputable credit-rating
agencies having comparable standing in the UK and the USA).
THE ROLE OF ENRON AS OWNER OF WESSEX WATER
Wessex Water should have the active co-operation of its owner, Enron, in
complying with the conditions of its Appointments and in the proper discharge of
its functions as a water and a sewerage undertaker. Further modifications will -
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10. (a) require Wessex Water to obtain from Enron a
legally-enforceable undertaking in Wessex Water's favour and
in a form specified by the Director, that it will:
(i) refrain from any action which would be likely to
cause Wessex Water to breach any of its obligations
under the Water Industry Act 1991 or the conditions
of its appointments as a water and a sewerage
undertaker; and
(ii) ensure that Wessex Water's Board contains not less at
least three independent non-executive directors,
being persons of standing who shall collectively have
relevant experience, local knowledge and
understanding of the interests of Wessex Water's
customers
(b) require all terms of that undertaking to apply to all other
companies within the Enron Group;
(c) require that the undertaking remain in force for so long as
Wessex Water holds its Appointments as a water and a sewerage
undertaker (or either of them) and remains a member of the
Enron Group; and
(d) require the undertaking to be delivered to the Director not
later than 21 days after this modification comes into force;
11. require Wessex Water to -
(i) produce to the Director the original of the
undertaking under 9 above and provide him with any
certified copies which he requires; and
(ii) inform the Director immediately in writing, if it
becomes aware that the undertaking has ceased to be
legally-enforceable, or that there has been any
breach of its terms; and
12. prohibit Wessex Water (except with the Director's consent) from making
any contract with a member of the Enron Group which is not one of the
Wessex Water's subsidiaries, for along as the above undertakings have
not been given or there is an unremedied breach of any of them.
12
<PAGE> 203
WATER INDUSTRY ACT 1991, SECTION 13
MODIFICATIONS OF CONDITION B OF THE
CONDITIONS OF APPOINTMENT OF EVERY WATER AND
WATER AND SEWERAGE UNDERTAKER IN
ENGLAND AND WALES
MADE 1998
COMING INTO EFFECT 1 APRIL 2000
Note: In the following text, the lower numbers refer to the paragraphs in the
Conditions of Appointment of Water companies and the higher numbers refer to the
equivalent paragraphs in the Conditions of Appointment of the Water and Sewerage
companies.
..... Condition B shall be modified as follows:
1. Paragraph 1.2 is amended to read as follows:
"1.2 To provide for a review of the Appointed Business to be carried out by
the Director at five-yearly intervals, so that the Director can
determine whether the Adjustment Factor should be changed. Except where
expressly provided in this Condition all reviews will cover periods of
five consecutive years. This is dealt with in Part III under the
heading "Periodic Reviews"."
2. In subparagraph 1. 3 (1) is deleted.
3. Paragraph 7/8 is deleted.
4. Paragraph 8/9 is amended to read as follows:
"Periodic Reviews of the Appointed Business at regular Five-yearly intervals."
"8.1/9.1 The Appointee shall furnish to the Director such information as the
Director may reasonably require to enable him to carry out a Periodic
Review for the purpose of determining the question whether (having
regard to all the circumstances which are relevant in the light of the
principles which apply by virtue of Part 1 of the Act in relation to
the Director's determination, including, without limitation, any change
in circumstance which has occurred since the last Periodic Review or
which is to occur) the Adjustment Factor should be changed (and if so,
what change should be made to it) for:
(1) the five consecutive Charging Years starting on 1 April 2005;
and
13
<PAGE> 204
(2) each period of five consecutive Charging Years starting on the
fifth anniversary of the first day of the period in respect of
which the immediately-preceding Periodic Review was carried
out.
8.2/9.2 The Appointee shall furnish to the Director such Information (including
further detail about or explanation of Information previously supplied,
whether or not under this sub-paragraph 8.2/9.2) as the Director may by
notice reasonably require to enable him to carry out the Periodic
Review."
5. Paragraph 9/10 is deleted.
6. In Paragraph 11/12, in place of "ten" as it appears in line four and in
indent (1) there shall be inserted "five".
7. Paragraph 15/16 is amended as follows:
"15/16. References to the Monopolies Commission
Where:
(1) pursuant to paragraph 8/9 or following a reference
under paragraph 10/11, the Director has not given
notice to the Appointee of his determination within
one year from the Review Notice Date or, in the case
of a reference under paragraph 10/11, within one year
form the date of the relevant Reference Notice:"
The remainder of paragraph 15/16 is unchanged.
8. In paragraph 17.1/18.1, item (1) is deleted.
9. In subparagraph 17.3/18.3, "7/8 or" is deleted.
14
<PAGE> 205
WATER INDUSTRY ACT OF 1991, SECTION 13
MODIFICATION OF CONDITION B OF THE
CONDITIONS OF APPOINTMENT OF EVERY WATER
UNDERTAKER IN
ENGLAND AND WALES
MADE 1998
COMING INTO EFFECT 1 APRIL 2000
CONDITION B: CHARGES
In paragraph 2, in the definition of "EXCLUDED CHARGES" (after item 6) there
shall be inserted:
"(6A) charges for supplies of water when the requirement for water
exceeds 250 megalitres per year; but so that the reference of
250 megalitres will be reduced to the amount for the time
being referred to in any Order made under Section 7 (6) of the
Water Industry Act 1991;"
In paragraph 2, in the definition of "STANDARD CHARGES" (after item 6) there
shall be inserted:
"(7) Provided that no part of this definition shall apply to any
charge which is for the time being an Excluded Charge by
virtue of (6A)/(7A) of the definition of Excluded Charges."
15
<PAGE> 206
WATER INDUSTRY ACT OF 1991, SECTION 13
MODIFICATION OF CONDITION B OF THE
CONDITIONS OF APPOINTMENT OF EVERY WATER
WATER AND SEWERAGE UNDERTAKER IN
ENGLAND AND WALES
MADE 1998
COMING INTO EFFECT 1 APRIL 2000
CONDITION B: CHARGES
In paragraph 2, in the definition of "EXCLUDED CHARGES" (after item 7) there
shall be inserted:
"(7A) charges for supplies of water (or for the provision of
sewerage services) when the requirement for water exceeds 250
megalitres per year; but so that the reference of 250
megalitres will be reduced to the amount for the time being
referred to in any Order made under Section 7 (6) of the Water
Industry Act 1991;".
In paragraph 2, in the definition of "STANDARD CHARGES" (after item 6) there
shall be inserted:
"(7) Provided that no part of this definition shall apply to any
charge which is for the time being an Excluded Charge by
virtue of (6A)/(7A) of the definition of Excluded Charges."
16
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED AGREEMENT
DATED: DECEMBER 17, 1998
(pound)73,000,000
CREDIT FACILITY
FOR
AZURIX EUROPE LTD.
AND
BRISTOL WATER TRUST
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE #
------
<S> <C> <C>
1. INTERPRETATION.......................................................................................... 1
1.1 Definitions.................................................................................... 1
1.2 Construction...................................................................................16
1.3 Original Agreement.............................................................................17
2. THE FACILITY............................................................................................17
2.1 Facility.......................................................................................17
2.2 Change of currency.............................................................................17
3. PURPOSE AND AVAILABILITY................................................................................17
4. REPAYMENT...............................................................................................17
5. PREPAYMENT AND CANCELLATION.............................................................................18
5.1 Voluntary prepayment...........................................................................18
5.2 Additional right of prepayment and cancellation................................................18
5.3 Mitigation.....................................................................................18
5.4 Mandatory prepayment...........................................................................18
5.5 Miscellaneous provisions.......................................................................19
6. INTEREST PERIODS........................................................................................19
6.1 Interest periods...............................................................................19
6.2 Overrunning of repayment dates.................................................................19
7. INTEREST................................................................................................20
7.1 Interest rate..................................................................................20
7.2 Due dates......................................................................................20
7.3 Default interest...............................................................................20
8. PAYMENTS................................................................................................20
8.1 Place..........................................................................................20
8.2 Currency and funds.............................................................................20
8.3 Set-off and counterclaim.......................................................................21
8.4 Non-business days..............................................................................21
8.5 Partial payments...............................................................................21
9. TAXES...................................................................................................21
9.1 Gross-up.......................................................................................21
9.2 Tax receipts...................................................................................22
9.3 Refund of tax credits..........................................................................22
9.4 Double taxation relief.........................................................................22
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
10. ILLEGALITY..............................................................................................23
11. REPRESENTATIONS AND WARRANTIES..........................................................................23
11.1 Representations and warranties.................................................................23
11.2 Status.........................................................................................23
11.3 Powers and authority...........................................................................24
11.4 Legal validity.................................................................................24
11.5 Non-conflict...................................................................................24
11.6 No default.....................................................................................24
11.7 Authorisations.................................................................................24
11.8 Accounts.......................................................................................24
11.9 Litigation.....................................................................................25
11.10 Environmental matters..........................................................................25
11.11 Assets.........................................................................................26
11.12 No commitment..................................................................................26
11.13 Appointment....................................................................................26
11.14 Payment of taxes...............................................................................26
11.15 Investment Company Act of 1940.................................................................26
11.16 Times for making representations and warranties................................................26
11.17 Qualifications to representations..............................................................27
12. UNDERTAKINGS............................................................................................27
12.1 Duration.......................................................................................27
12.2 Financial information..........................................................................27
12.3 Information - miscellaneous....................................................................28
12.4 Notification of default........................................................................28
12.5 Accounting matters.............................................................................28
12.6 Authorisations.................................................................................28
12.7 Pari passu ranking.............................................................................29
12.8 Disposals......................................................................................29
12.9 Change of business.............................................................................29
12.10 Distributions..................................................................................29
12.11 Constitutional documents.......................................................................29
12.12 Compliance with laws...........................................................................29
12.13 Financial covenants............................................................................30
13. DEFAULT.................................................................................................33
13.1 Events of Default..............................................................................33
13.2 Non-payment of principal.......................................................................33
13.3 Breach of other obligations....................................................................34
13.4 Misrepresentation..............................................................................34
13.5 Cross acceleration with the(pound)736,000,000 Credit Facility..................................34
13.6 Insolvency.....................................................................................34
13.7 Insolvency proceedings.........................................................................34
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
13.8 Appointment of receivers and managers..........................................................35
13.9 Analogous proceedings..........................................................................35
13.10 Cessation of business..........................................................................35
13.11 Unlawfulness...................................................................................35
13.12 Appointment....................................................................................36
13.13 Compliance with the Act........................................................................36
13.14 Amendments to the Act..........................................................................36
13.15 Expropriation..................................................................................36
13.16 Acceleration...................................................................................37
14. EXPENSES................................................................................................37
14.1 Initial and special costs......................................................................37
14.2 Enforcement costs..............................................................................37
15. STAMP DUTIES............................................................................................37
16. INDEMNITIES.............................................................................................38
16.1 Currency indemnity.............................................................................38
16.2 Other indemnities..............................................................................38
17. CHANGES TO THE PARTIES..................................................................................39
17.1 Transfers by the Company.......................................................................39
17.2 Transfers by the Lender........................................................................39
17.3 Increased costs, etc...........................................................................39
18. DISCLOSURE OF INFORMATION...............................................................................39
19. SEVERABILITY............................................................................................40
20. COUNTERPARTS............................................................................................40
21. NOTICES.................................................................................................40
21.1 Giving of notices..............................................................................40
21.2 Addresses for notices..........................................................................40
21.3 Facsimile notices..............................................................................41
22. GOVERNING LAW...........................................................................................41
</TABLE>
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<PAGE> 5
THIS AMENDED AND RESTATED AGREEMENT (this "Agreement") is dated December 17,
1998 between:
(1) AZURIX EUROPE LTD., formerly known as ENRON WATER (EUROPE) PLC
(Registered No. 3570749) (together with its successors and permitted
assigns, the "COMPANY"); and
(2) BRISTOL WATER TRUST, a statutory business trust, organized under the
laws of Delaware, U.S.A., ("Bristol," and together with its successors
and permitted assigns, the "LENDER").
WHEREAS, on 29th September 1998 the Company and Enron Corp. ("Enron") entered
into a (pound)73 million Senior Loan Agreement ("Original Agreement"), under
which Enron provided a loan to the Company in the amount of (pound)73 million;
WHEREAS, Enron and the Company have always contemplated revising the terms of
the original Agreement once the terms of other transactions then contemplated
were finalised;
WHEREAS, those transactions now have been finalised;
WHEREAS, immediately prior to the execution hereof, the Company, Atlantic Water
Trust, a statutory business trust organized under the laws of Delaware, U.S.A.
("Atlantic"), and Bristol entered into two Deeds of novation, pursuant to which
(i) Enron assigned and transferred all rights and obligations of Enron under the
Original Agreement to Atlantic, and (ii) Atlantic assigned and transferred all
such rights and obligations under the Original Agreement to Bristol; and
WHEREAS, the Company and Bristol now wish to amend and restate the Original
Agreement in its entirety,
IT IS AGREED as follows:
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement:
"ACCEPTABLE OFFER"
means an offer to take an assignment of the rights and obligations of
the Lender under the terms of this Agreement and the other Finance
Documents for a wholly cash consideration in Sterling (or in United
States dollars at an exchange rate of (pound)1.00 to $1.71233) at least
-1-
<PAGE> 6
thereon, and (iii) all other amounts due under the Finance Documents,
pursuant to the terms of which offer (i) the assignment of the Loan
must be consummated, and (ii) the payment of the consideration for such
assignment must be made in immediately available funds either to the
Azurix Europe Indebtedness Proceeds Account (Sterling) (as defined in
the Indenture), if paid in Sterling, or to the Azurix Europe
Indebtedness Proceeds Account (as defined in the Indenture), if paid in
United States dollars, all within one (1) Business Day after the offer
is made.
"ACCOUNTING DATE"
means the last day of each financial quarter of the Company.
"ACCOUNTING PERIOD"
means any period of approximately three months or one year ending on an
Accounting Date for which accounts are required to be prepared for the
purposes of this Agreement.
"ACQUISITION"
means the acquisition by the Company of any Shares pursuant to the
Offer and/or pursuant to open market purchases.
"ACT"
means the Water Act 1989 as consolidated by the Water Industry Act 1991
and, unless the context otherwise requires, all subordinate legislation
made pursuant to it.
"ADJUSTED CAPITAL AND RESERVES"
has the meaning given to it in Clause 12.13 (Financial covenants).
"AFFILIATE"
means a Subsidiary or a Holding Company of a person and any other
Subsidiary of that Holding Company.
"APPLICABLE ACCOUNTING PRINCIPLES"
means accounting principles and practices, which at the date of this
Agreement are generally accepted in the United Kingdom and approved by
the Institute of Chartered Accountants of England and Wales and which
are consistent with the accounting principles and practices applied in
the preparation of the audited annual consolidated accounts of the
Target for and as at the end of the financial year of the Target ended
31st December, 1997.
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<PAGE> 7
"APPOINTMENT"
means the appointment as a water and sewerage undertaker held by a
member of the Group and issued pursuant to Sections 11 and 14 of the
Act, as modified or supplemented from time to time.
"APPOINTMENT HOLDER"
means at any time the member of the Group which then holds the
Appointment.
"APPOINTMENT UNDERTAKING"
has the meaning given to it in the (pound)736,000,000 Credit Facility.
"AUDITORS"
means any "Big Five" firm of accountants or any other firm (approved
under the (pound)736,000,000 Credit Facility or any Successor
Agreement) of independent public accountants of international standing
recognised and authorised by the Institute of Chartered Accountants of
England and Wales which is appointed by the Company to audit the
consolidated annual accounts of the Company.
"BORROWING"
means at any time the aggregate (without double counting) of the
following:
(a) the outstanding principal amount of any moneys borrowed and
any outstanding overdraft debit balance;
(b) the outstanding principal amount of any debenture, bond, note,
loan stock or other security;
(c) the outstanding principal amount of any acceptance under any
acceptance credit opened by a bank or other financial
institution;
(d) the outstanding principal amount of all moneys owing in
connection with the sale or discounting of receivables
(otherwise than on a non-recourse basis);
(e) the outstanding principal amount of any non-trade indebtedness
arising from any advance or deferred payment (where payment is
deferred for more than 180 days) agreements arranged primarily
as a method of raising finance or financing the acquisition of
an asset;
(f) the capitalised element of indebtedness (other than any
operating leases or rental arrangements not included on the
applicable balance sheet) in respect of a lease
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<PAGE> 8
entered into primarily as a method of raising finance or
financing the acquisition of the asset leased;
(g) any fixed or minimum premium payable on the repayment or
redemption of any instrument referred to in paragraph (b)
above; and
(h) the outstanding principal amount of any indebtedness of any
person of a type referred to in paragraphs (a) - (g) above
which is the subject of a guarantee, indemnity or similar
assurance against financial loss,
but excluding any Subordinated Debt.
"BUSINESS DAY"
means a day (other than a Saturday or a Sunday) on which banks are open
for business in London and Wilmington, Delaware, U.S.A.
"CAPITALISATION RATIO"
has the meaning given to it in Clause 12.13 (Financial covenants).
"CASH FLOW"
means, for any period for which it is being tested, Consolidated EBITDA
for that period, but adjusted so as to:
(a) add back any taxes refunded during that period;
(b) deduct any increase or add any reduction in working capital
which occurs during that period;
(c) deduct any taxes accrued or paid during that period (adjusted
in the case of VAT for any VAT input);
(d) deduct outflows and add inflows of cash effect resulting from
any Extraordinary Items;
(e) deduct any capital expenditure or costs or expense of a
capital nature paid during that period and any other
expenditure not already taken into account which is required
to be paid under the Appointment, or any applicable law or
regulation during the following financial quarter; and
(f) take no account of any book profits or losses arising from the
disposal of any assets.
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<PAGE> 9
"CODE"
has the meaning given such term in the (pound)736,000,000 Credit
Facility.
"COMMITMENT"
means (pound)73,000,000, to the extent not canceled or reduced under
this Agreement.
"CONSOLIDATED EBITDA"
has the meaning given to it in Clause 12.13 (Financial covenants).
"CONSOLIDATED NET INTEREST PAYABLE"
has the meaning given to it in Clause 12.13 (Financial covenants).
"CONSOLIDATED TOTAL BORROWINGS"
has the meaning given to it in Clause 12.13 (Financial covenants).
"CONSOLIDATED TOTAL INTEREST PAYABLE"
has the meaning given to it in Clause 12.13 (Financial covenants).
"DANGEROUS SUBSTANCE"
means any radioactive emissions, noise, any natural or artificial
substance (whether in the form of a solid, liquid, gas or vapour) the
generation, transportation, storage, treatment, use or disposal of
which (whether alone or in combination with any other substance)
including (without limitation) any controlled, special, hazardous,
toxic, radioactive or dangerous substance or waste, gives rise to risk
of causing harm to man or any other living organism or damaging the
Environment or public health or welfare.
"DEBENTURE"
has the meaning given to it in the (pound)736,000,000 Credit Facility.
"DEEDS OF ASSIGNMENT"
means, collectively, the Deed of Assignment dated December 17, 1998
among the Company, Bristol and Marlin pursuant to which Bristol shall
assign all of its rights under this Agreement to Marlin, and the Deed
of Assignment dated December 17, 1998 among the Company, [BRISTOL,]
Marlin, and the Marlin Indenture Trustee pursuant to which Marlin shall
assign all of its rights under this Agreement to the Marlin Indenture
Trustee.
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<PAGE> 10
"DEFAULT"
means an Event of Default or an event which, with the giving of notice,
expiry of any applicable grace period or determination of materiality
by the Lender specified (in any such case) in Clause 13 (Default) (or
any combination of the foregoing), would constitute an Event of
Default.
"DIRECTOR"
means the person appointed from time to time by the Secretary of State
to hold office as the Director General of Water Services for the
purpose of the Act.
"DOUBLE TAXATION TREATY"
means any convention between the government of the United Kingdom and
any other government for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income and for
capital gains.
"ENVIRONMENT"
means any of the following media: the air (including, without
limitation, the air within buildings and the air within other natural
or man-made structures above or below ground), water (including,
without limitation, ground and surface water) and land (including,
without limitation, surface and sub-surface soil).
"ENVIRONMENTAL CLAIM"
means any claim by any person:
(a) in respect of any loss or liability suffered or incurred by
that person as a result of or in connection with any violation
of Environmental Law; or
(b) that arises as a result of or in connection with Environmental
Contamination and that could give rise to any remedy or
penalty (whether interim or final) that may be enforced or
assessed by private or public legal action or administrative
order or proceedings, including, without limitation, any such
claim arising from injury to persons, property or natural
resources.
"ENVIRONMENTAL CONTAMINATION"
means each of the following and their consequences:
(a) any release, emission, leakage or spillage of any Dangerous
Substance at or from any site owned, occupied or used by any
member of the Group into any part of the Environment; or
-6-
<PAGE> 11
(b) any accident, fire, explosion or sudden event at any site
owned, occupied or used by any member of the Group which is
directly or indirectly caused by or attributable to any
Dangerous Substance; or
(c) any other pollution of the Environment.
"ENVIRONMENTAL LAW"
means all applicable laws (including, without limitation, common law),
regulations, directing codes of practice, circulars, guidance notices
and the like having legal effect (whether in the United Kingdom or
elsewhere) concerning pollution or the protection of human health, the
Environment, the conditions of the work place or the generation,
transportation, storage, treatment or disposal of Dangerous Substances.
"ENVIRONMENTAL LICENCE"
means any authorization required by any Environmental Law.
"EVENT OF DEFAULT"
means an event specified as such in Clause 13.1 (Events of default).
"EXCEPTIONAL ITEMS"
has the meaning given to it in Clause 12.13 (Financial covenants).
"EXTRAORDINARY ITEMS"
has the meaning given to it in Clause 12.13 (Financial covenants).
"FINANCE DOCUMENT"
means:
(a) this Agreement;
(b) a Subordination Agreement; or
(c) any other document designated as such by the Lender and the
Company.
"FINANCIAL INDEBTEDNESS"
means (without double counting) any indebtedness in respect of:
(a) moneys borrowed;
-7-
<PAGE> 12
(b) any debenture, bond, note, loan stock or other security;
(c) any acceptance credit;
(d) receivables sold or discounted (otherwise than on a
non-recourse basis);
(e) the acquisition cost of any asset to the extent payable before
or more than 180 days after the time of acquisition or
possession by the party liable where the advance or deferred
payment is arranged primarily as a method of raising finance
or financing the acquisition of that asset;
(f) any lease entered into primarily as a method of raising
finance or financing the acquisition of the asset leased;
(g) any currency swap or interest swap, cap or collar arrangement
or any other derivative instrument;
(h) any amount raised under any other transaction having the
commercial effect of a borrowing or raising of money; or
(i) any guarantee, indemnity or similar assurance against
financial loss of any person.
"GROUP"
means at any time the Company and its Subsidiaries at that time.
"HOLDING COMPANY"
has the meaning given to it in Section 736 of the Companies Act 1985.
"INDENTURE"
means that certain Indenture dated December 17, 1998, among Marlin,
Marlin Corp., and the Marlin Indenture Trustee.
"INTEREST PERIOD"
means a period of 6 months, except in the case of the first Interest
Period hereunder which shall end on three (3) Business Days prior to
June 15, 1999.
"ISSUER CREDIT RATING"
means the implied senior most credit rating of the Company, which:
-8-
<PAGE> 13
(a) is a long term credit rating;
(b) does not rank ahead of Financial Indebtedness under the
(pound)736,000,000 Credit Facility or any Successor Agreement;
and
(c) does not benefit from any guarantee, liquidity support or
other credit enhancement except as contemplated by the Finance
Documents (as defined in the (pound)736,000,000 Credit
Facility), or as contemplated in any Successor Agreement.
"LOAN"
means the loan made pursuant to the Original Agreement or the principal
amount outstanding of that loan.
"LOAN NOTES"
means any loan note offered or issued by the Company to a shareholder
of the Target in connection with the Offer.
"MARLIN"
means Marlin Water Trust, a statutory business trust organised under
the laws of Delaware, U.S.A.
"MARLIN CERTIFICATES"
means the certificates of Marlin Trust issued pursuant to the Marlin
Trust Agreement.
"MARLIN CORP."
means Marlin Water Capital Corp., a corporation organised under the
laws of Delaware, U.S.A.
"MARLIN INDENTURE TRUSTEE"
means Bankers Trust Company, and any successor to Bankers Trust Company
as trustee under the Indenture.
"MARLIN NOTE TRIGGER EVENT"
has the meaning given to it in the Indenture.
"MARLIN SENIOR NOTES"
means the 7.09% Senior Notes of Marlin and Marlin Corp. issued pursuant
to the Indenture.
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<PAGE> 14
"MARLIN TRUST AGREEMENT"
means the Amended and Restated Marlin Water Trust Agreement dated as of
December 17, 1998 between Enron Corp., as depositor and for purposes of
certain sections specified therein, and Wilmington Trust Company, as
trustee.
"MATERIAL ADVERSE EFFECT"
means any event, occurrence or circumstance having, or being reasonably
likely to have, a material adverse effect on the ability of the Company
to perform and comply with its payment obligations hereunder or its
obligations under Clause 12.13 (Financial covenants).
"MATERIAL SUBSIDIARY"
means:
(a) the Target;
(b) any member of the Group (other than the Company and any
Project Finance Subsidiary):
(i) which is the Appointment Holder; or
(ii) whose pre-tax profits represent at least ten percent
of the consolidated pre-tax profits of the Group; or
(iii) the book value of whose gross assets represents at
least ten percent of the consolidated gross assets of
the Group,
and for this purpose:
(A) in the case of a company which itself has
Subsidiaries, the calculation shall be made
by using the consolidated pre-tax profits or
gross assets, as the case may be, of it and
its Subsidiaries;
(B) all calculations of consolidated pre-tax
profits or gross assets shall be made by
reference to:
(1) the latest accounts of the relevant
company (or, as the case may be, a
consolidation of the accounts of it
and its Subsidiaries) used for the
purpose of the then latest unaudited
quarterly or audited annual
consolidated accounts of the Group
delivered to the Lender under Clause
12.2 (Financial information); and
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<PAGE> 15
(2) those unaudited quarterly or, as the
case may be, audited annual
consolidated accounts of the Group;
and shall be made in accordance with the Applicable
Accounting Principles; or
(c) any member of the Group (other than the Company and any
Project Finance Subsidiary) which is not otherwise a Material
Subsidiary under this definition but to which any Material
Subsidiary transfers, in any annual Accounting Period, all or
substantially all of its assets; the Material Subsidiary from
which the assets were transferred shall cease to be a Material
Subsidiary unless and until it is shown to be a Material
Subsidiary under any other paragraph of this definition.
In the event of any dispute as to whether a Subsidiary is or is not at
any time a Material Subsidiary the question shall be referred to the
Auditors for determination according to the provisions of this
definition (acting as experts at the cost of the Company) and their
decision shall be conclusive and binding on the Parties in the absence
of manifest error.
"MOODY'S"
means Moody's Investors Service, Inc. (or any of its successors).
"OFFER"
means the offer made for the Shares (other than the 50p preference
shares then outstanding) by or on behalf of the Company to the
shareholders of the Target, as such offer was amended, extended, varied
and/or waived.
"OFFER COSTS"
means all costs, fees and expenses (including taxes or similar charges
thereon) and all stamp, documentary, registration and similar taxes or
charges incurred by or on behalf of the Company in connection with the
Offer, including the preparation, negotiation and entry into of the
Finance Documents.
"ORIGINAL AGREEMENT"
has the meaning given to it in the recitals hereto.
"PARTY"
means a party to this Agreement.
-11-
<PAGE> 16
"PERMITTED ASSIGNEES"
has the meaning given to it in Clause 17.2 (Transfers by the Lender).
"PERMITTED TRANSACTION"
means:
(a) a reconstruction, amalgamation, reorganisation, merger or
consolidation of the Company or a Material Subsidiary on terms
approved under the (pound)736,000,000 Credit Facility (or any
Successor Agreement) and approved by the Lender;
(b) a disposal of assets permitted by the terms of this Agreement;
or
(c) a solvent liquidation, dissolution or winding-up of a Material
Subsidiary (other than the Target or the Appointment Holder)
which does not have a Material Adverse Effect.
"PROJECT FINANCE INDEBTEDNESS"
means any Borrowing which finances the acquisition, development,
ownership and/or operation of an asset:
(a) which is incurred by a Project Finance Subsidiary; or
(b) in respect of which the person or persons to whom the
Borrowing is or may be owed by the relevant debtor (whether or
not a member of the Group) has or have no recourse whatsoever
to any member of the Group (other than to a Project Finance
Subsidiary) for its repayment other than:
(i) recourse to the debtor for amounts limited to the
cash flow or net cash flow (other than historic cash
flow or historic net cash flow) from the asset;
and/or
(ii) recourse to the debtor for the purpose only of
enabling amounts to be claimed in respect of that
Borrowing in an enforcement of any Security Interest
given by the debtor over the asset or the income,
cash flow or other proceeds deriving from the asset
(or given by any shareholder or the like in the
debtor over its shares or like interest in the
capital of the debtor) to secure the Borrowing but
only if:
(A) the extent of the recourse to the debtor is limited
solely to the amount of any recoveries made on any
such enforcement; and
(B) that person or persons are not entitled, by virtue of
any right or claim arising out of or in connection
with that Borrowing, to commence proceedings for
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<PAGE> 17
the winding up or dissolution of the debtor or to
appoint or procure the appointment of any receiver,
trustee or similar person or officer in respect of
the debtor or any of its assets (other than the
assets the subject of that Security Interest); and/or
(iii) recourse to the debtor generally, or directly or
indirectly to a member of the Group, under any form
of assurance, undertaking or support, which recourse
is limited to a claim for damages (other than
liquidated damages and damages required to be
calculated in a specified way) for breach of an
obligation (other than a payment obligation or an
obligation to procure payment by another or an
indemnity in respect thereof or any obligation to
comply or to procure compliance by another with any
financial ratios or other tests of financial
condition) by the person against whom such recourse
is available.
"PROJECT FINANCE SUBSIDIARY"
means any Subsidiary of the Company (other than the Appointment
Holder):
(a) which is a company whose principal assets and business are
constituted by the ownership, acquisition, development and/or
operation of an asset whether directly or indirectly;
(b) none of whose Borrowings in respect of the financing of the
ownership, acquisition, development and/or operation of an
asset benefits from any recourse whatsoever to any member of
the Group (other than the Subsidiary itself or another Project
Finance Subsidiary) in respect of its repayment, except as
expressly referred to in paragraph (b)(iii) of the definition
of Project Finance Indebtedness in this Clause 1.1
(Definitions); and
(c) which has been designated as such by the Company by notice to
the Lender.
However, the Company may give notice to the Lender at any time that any
Project Finance Subsidiary is no longer a Project Finance Subsidiary,
whereupon it shall cease to be a Project Finance Subsidiary.
"QUALIFIED BANK"
means a financial institution whose unsecured long term debt is rated
"Aa3" or better by Moody's or "AA-" or better by Standard & Poor's.
"REPAYMENT DATE"
means three (3) Business Days prior to 15th December, 2001.
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<PAGE> 18
"SECRETARY OF STATE"
means the Secretary of State as referred to in the Act.
"SECURITY INTEREST"
means any mortgage, pledge, lien, charge, assignment, hypothecation or
security interest or any other agreement or arrangement having the
effect of conferring security.
"(pound)736,000,000 CREDIT FACILITY"
means the Agreement for a (pound)736,000,000 Credit Facility dated 18th
August 1998 between, inter alia, the Company and National Westminster
Bank plc, as agent.
"SHARE OPTION"
means an option to acquire shares in the Target.
"SHARE OPTION HOLDER"
means any holder of a Share Option.
"SHARES"
means all the issued shares (and Share Options) in the capital of the
Target.
"STANDARD & POOR'S"
means Standard & Poor's Rating Group (or any of its successors).
"STANDSTILL EXPIRATION DATE"
has the meaning given to it in the Indenture.
"STANDSTILL PERIOD"
has the meaning given to it in the Indenture.
"STERLING" or "(pound)"
means the lawful currency for the time being of the United Kingdom.
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<PAGE> 19
"SUBORDINATED DEBT"
means a separate unsecured loan to the Company from a shareholder, or
an Affiliate of a shareholder, of the Company and/or any other person
permitted under this Agreement which:
(a) has a maturity date falling after the Repayment Date;
(b) is not capable of acceleration (other than in the event of
insolvency or an insolvency proceeding) whilst any amount may
be or become payable by the Company under the Finance
Documents or any of the Commitment remain in effect; and
(c) is subordinated (as regards priority of payment, ranking,
rights of enforcement and all other rights) as to principal,
interest and all other amounts payable on or in respect
thereof and any and all claims (including for damages) related
thereto to all amounts which may be or become payable by the
Company under the Finance Documents,
all in accordance with a Subordination Agreement.
"SUBORDINATION AGREEMENT"
means a subordination agreement entered, or to be entered, into by the
Lender, the Company and any other person in respect of Subordinated
Debt, substantially in the form of Schedule 8 to the (pound)736,000,000
Credit Facility, modified mutatis mutandis.
"SUBSIDIARY"
means:
(a) a subsidiary within the meaning of Section 736 of the
Companies Act 1985, as amended by Section 144 of the Companies
Act 1989; and
(b) for the purposes of Clause 12.13 (Financial covenants) and any
financial information relating to the Group, a subsidiary
undertaking within the meaning of Section 21 of the Companies
Act 1989.
"SUCCESSOR AGREEMENT"
means (i) the successor credit agreement to the (pound)736,000,000
Credit Facility, in the event the (pound)736,000,000 Credit Facility is
replaced in whole, and (ii) the successor credit agreement with the
largest commitment (which shall be, in all cases, not less than
(pound)100,000,000), in the event the (pound)736,000,000 Credit
Facility is replaced in part.
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<PAGE> 20
"SURPLUS CASH FLOW"
means, for any period for which Cash Flow is calculated, Cash Flow for
that period less the obligations of the Group in respect of Financial
Indebtedness which are actually paid during that period plus (without
double counting) any net cash balances in the Company.
"TARGET"
means Wessex Water Ltd., formerly named Wessex Water Plc (Registered
no. 2366633).
1.2 CONSTRUCTION
(a) In this Agreement, unless the contrary intention appears, a reference
to:
(i) an order for or petition for "ADMINISTRATION" of any person
includes an order or petition for the special administration
of that person for the purposes of Section 24 of the Act;
"ASSETS" includes properties, revenues and rights of every
description;
an "AUTHORISATION" includes an authorisation, consent,
approval, resolution, licence, exemption, filing, registration
and notarisation;
"DOLLAR" or "U.S.$" means the lawful currency for the time
being of the United States of America;
a "MONTH" is a reference to a period starting on one day in a
calendar month and ending on the numerically corresponding day
in the next calendar month, except that:
(1) if there is no numerically corresponding day in the
month in which that period ends, that period shall
end on the last Business Day in that calendar month;
or
(2) if an Interest Period commences on the last Business
Day of a calendar month, that Interest Period shall
end on the last Business Day in the calendar month in
which it is to end; and
a "REGULATION" includes any regulation, rule, official
directive, request or guideline (whether or not having the
force of law, but if not having the force of law being of a
type with which the person concerned is accustomed to comply)
of any governmental body, agency, department or regulatory,
self-regulatory or other authority or organisation;
(ii) a provision of a law is a reference to that provision as
amended or re-enacted;
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<PAGE> 21
(iii) a Clause or a Schedule is a reference to a clause of or a
schedule to this Agreement;
(iv) a person includes its successors and permitted assigns;
(v) a Finance Document, the (pound)736,000,000 Credit Facility, or
another document is a reference to that Finance Document, the
(pound)736,000,000 Credit Facility, or that other document as
amended, novated, supplemented, replaced or renewed; and
(vi) a time of day is a reference to London time.
(b) Unless the contrary intention appears, a term used in any other Finance
Document or in any notice given under or in connection with any Finance
Document has the same meaning in that Finance Document or notice as in
this Agreement.
(c) If either Standard & Poor's or Moody's cease to provide ratings of the
type contemplated by any Clause of this Agreement, the relevant rating
agency may be replaced by another ratings agency acceptable to the
Company and the Lender and references to Standard & Poor's or Moody's,
as the case may be, shall be construed as references to that ratings
agency.
(d) The index to and the headings in this Agreement are for convenience
only and are to be ignored in construing this Agreement.
1.3 ORIGINAL AGREEMENT
This Agreement amends and restates the Original Agreement in its entirety and
shall take effect with respect to the rights and obligations of the Company and
the Lender from and after the date of this Agreement.
2. THE FACILITY
2.1 FACILITY
Subject to the terms of the Original Agreement, the Loan was made to the Company
in the aggregate amount of (pound)73,000,000.
2.2 CHANGE OF CURRENCY
If a change in any currency of a country occurs, this Agreement will be amended
to the extent the Lender (acting reasonably) specifies to be necessary to
reflect the change in currency and to put the Lender (and, if possible and
practicable, the Company) in the same position, so far as possible, that they
would have been in if no change in currency had occurred.
3. PURPOSE AND AVAILABILITY
(a) The Company applied the Loan in accordance with the Original Agreement.
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<PAGE> 22
(b) Without affecting the obligations of the Company in any way, the Lender
is not bound to verify the application of the Loan.
4. REPAYMENT
The Company shall repay the Loan in full on the Repayment Date.
5. PREPAYMENT AND CANCELLATION
5.1 VOLUNTARY PREPAYMENT
The Company may at any time, by giving not less than 3 Business Days' prior
notice to the Lender, prepay the Loan, in whole or in part (but, if in part, in
a minimum amount of (pound)5,000,000 and an integral multiple of
(pound)1,000,000), together with all accrued and unpaid interest hereunder and
all fees, costs, or expenses, if any, then due and payable. Any prepayment
hereunder is subject to Clause 16 (Indemnities).
5.2 ADDITIONAL RIGHT OF PREPAYMENT AND CANCELLATION
If the Company is required to pay any amount to the Lender under Clause 9
(Taxes), the Company may, whilst the circumstances giving rise to the
requirement continue, serve a notice of prepayment and cancellation on the
Lender. In this event on the date falling 5 Business Days after the date of
service of the notice, the Company shall prepay the Loan in full together with
all other amounts payable by it to the Lender under this Agreement.
5.3 MITIGATION
If circumstances arise which would, or would on the giving of notice, result in:
(a) any additional amounts becoming payable under Clause 9.1 (Gross-up); or
(b) any prepayment or cancellation under Clause 10 (Illegality),
then, without limiting the obligations of the Company under this Agreement and
without prejudice to the terms of Clauses 9.1 (Gross-up) and 10 (Illegality),
the Lender shall, at the request of, and in consultation with, the Company, take
such reasonable steps as may be open to it to mitigate or remove the relevant
circumstance, unless to do so might (in the opinion of the Lender) have a
material adverse effect on its business, operations, or financial condition or
be contrary to its banking policies or be otherwise prejudicial to it, and
provided that the Company pays any costs incurred by the Lender in connection
with such mitigation or removal.
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<PAGE> 23
5.4 MANDATORY PREPAYMENT
(a) Subject to Clause 5.4(b), the Company shall prepay the Loan, together
with all other amounts payable by the Company under the Finance
Documents upon the happening of all of the following:
(i) the occurrence of any Marlin Note Trigger Event, and
(ii) the expiration of any applicable Standstill Period; and
(iii) the Company's receipt of notice from the Lender, at least 3
Business Days following the later to occur of the events
described in Clauses 5.4(a)(i) and (ii), demanding such
payment.
(b) If, during the 3 Business Day period following the later to occur of
the events described in Clause 5.4(a)(i) or (ii), the Lender receives
an Acceptable Offer, the Lender shall be obligated to accept such offer
and shall not demand payment under Clause 5.4(a), unless the assignment
pursuant to the Acceptable Offer is not timely consummated in
accordance with its terms. If an Acceptable Offer and the assignment
pursuant thereto are timely made and consummated in accordance with the
terms of such Acceptable Offer, then all of Clauses 11 (Representations
and warranties), 12 (Undertakings), and 13 (Default) (other than
Clauses 13.2 (Non-payment of principal), 13.6 (Insolvency) through 13.9
(Analogous proceedings) and 13.16 (Acceleration)) shall be deemed
deleted from this Agreement. If an Acceptable Offer and the assignment
pursuant thereto are not timely made and consummated, the Lender shall
be entitled to demand payment of the Loan pursuant to Clause 5.4(a).
5.5 MISCELLANEOUS PROVISIONS
(a) Any notice of prepayment under this Agreement is irrevocable.
(b) All prepayments under this Agreement shall be made together with
accrued interest on the amount prepaid.
(c) No prepayment is permitted except in accordance with the express terms
of this Agreement.
(d) No amount prepaid may subsequently be re-borrowed.
6. INTEREST PERIODS
6.1 INTEREST PERIODS
The Loan will have successive Interest Periods. The first Interest Period
commenced on September 29, 1998, and will end 3 Business Days prior to June 15,
1999. Subsequent Interest Periods will commence on the expiry of the preceding
Interest Period.
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<PAGE> 24
6.2 OVERRUNNING OF REPAYMENT DATES
If an Interest Period would otherwise overrun the date when all the outstanding
principal amount of the Loan has been repaid or, without limitation, prepaid,
that Interest Period shall be shortened so that it ends on such date.
7. INTEREST
7.1 INTEREST RATE
The rate of interest on the Loan for each of its Interest Periods is 6.25
percent per annum.
(b) Subject to the provisions of Clause 7.3 (Default interest), interest
shall not be compounded.
(c) In calculating interest, the rate of interest (being a rate per annum)
shall be deemed a rate for a 360-day year consisting of twelve 30-day
months, and each month (as defined in Clause 1.2(a)(i) shall be deemed
for purposes of such calculations to have 30 days.
7.2 DUE DATES
(a) Except as otherwise provided in paragraph (b) below or elsewhere in
this Agreement, accrued interest on the Loan is payable by the Company
on the last day of each Interest Period.
(b) The first payment of accrued interest on the Loan shall be made by the
Company three (3) Business Days prior to June 15, 1999 and no accrued
interest shall be payable before such date, and, subject to the
provisions of Clause 7.3 (Default interest), the last payment of
accrued interest on the Loan shall be made by the Company on the last
day of the last Interest Period or on the date of a mandatory
prepayment or acceleration pursuant to Clause 5.4 (Mandatory
prepayment) or Clause 13.16 (Acceleration).
7.3 DEFAULT INTEREST
(a) If the Company fails to pay all amounts payable by it under this
Agreement on the Repayment Date, it shall forthwith on demand by the
Lender pay interest on the overdue amount from the due date up to the
date of actual payment, as well after as before judgment, at two
percent (2%) per annum in excess of the rate specified in Clause 7.1
(Interest rate).
(b) Default interest will be compounded every 30 days.
8. PAYMENTS
8.1 PLACE
All payments by the Company under this Agreement shall be made to the account of
the Lender at such bank in the U.K. as it may notify to the Company for this
purpose.
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<PAGE> 25
8.2 CURRENCY AND FUNDS
Payments under this Agreement to the Lender shall be made in Sterling for value
on the due date at such times as the Lender may specify to the Company as being
customary at the time for the settlement of transactions in Sterling.
8.3 SET-OFF AND COUNTERCLAIM
All payments made by the Company hereunder shall be made without set-off or
counterclaim.
8.4 NON-BUSINESS DAYS
(a) If a payment hereunder is due on a day which is not a Business Day, the
due date for that payment shall instead be the next Business Day in the
same calendar month (if there is one) or the preceding Business Day (if
there is not).
(b) During any extension of the due date for payment of any principal under
this Agreement interest is payable on the principal at the rate payable
on the original due date.
8.5 PARTIAL PAYMENTS
(a) If the Lender receives a payment insufficient to discharge all the
amounts then due and payable by the Company hereunder, the Lender shall
apply that payment towards the obligations of the Company hereunder in
the following order:
(i) first, at the Lender's discretion, in or towards payment pro
rata of any unpaid fees, costs and expenses payable to the
Lender hereunder (if any);
(ii) secondly, in or towards payment pro rata of any principal due
but unpaid under this Agreement;
(iii) thirdly, in or towards payment pro rata of any accrued
interest due but unpaid under this Agreement; and
(iv) fourthly, in or towards payment pro rata of any other sum due
but unpaid under this Agreement.
(b) Paragraph (a) above shall override any appropriation made by the
Company.
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<PAGE> 26
9. TAXES
9.1 GROSS-UP
(a) All payments by the Company hereunder (and all payments from the Azurix
Europe Interest Account (Sterling) , as defined in the Indenture, and
the Azurix Europe Note Proceeds Account (Sterling) as defined in the
Indenture) shall be made without any deduction and free and clear of
and without deduction for or on account of any taxes or other
deductions, except to the extent that such deduction is required by law
to make payment subject to any taxes. If any tax or amounts in respect
of tax must be deducted, or any other deductions must be made, from any
amounts payable or paid by the Company hereunder (or any payments from
the Azurix Europe Interest Account (Sterling) and the Azurix Europe
Note Proceeds Account (Sterling)), the Company shall pay such
additional amounts as may be necessary to ensure that the Lender
receives a net amount equal to the full amount which it would have
received had payment not been made subject to such deduction.
(b) The Company agrees to notify the Lender promptly if it becomes aware
that sub-clause 9.1(a) applies.
9.2 TAX RECEIPTS
All taxes required by law to be deducted or withheld by the Company from any
amounts paid or payable hereunder shall be paid by the Company when due and the
Company shall, within 15 days of the payment being made, deliver to the Lender
evidence satisfactory to the Lender (including all relevant tax receipts, if
available) that the payment has been duly remitted to the appropriate authority.
9.3 REFUND OF TAX CREDITS
If:
(a) the Company makes a payment under Clause 9.1 (Gross-up) (a "TAX
PAYMENT") in respect of a payment to the Lender hereunder; and
(b) the Lender determines in good faith that it has obtained a refund of
tax or obtained and used a credit against tax on its overall net income
(a "TAX CREDIT") which the Lender is able to identify in good faith as
attributable to that Tax Payment,
then, if it determines, acting in good faith, that it can do so without any
other adverse consequences for itself, the Lender shall forthwith reimburse the
Company such amount as the Lender in its absolute discretion determines to be
such proportion of that Tax Credit as will leave the Lender (after that
reimbursement) in no better or worse position in respect of its worldwide tax
liabilities than it would have been in if no Tax Payment had been required. The
Lender shall have an absolute discretion as to whether to claim any Tax Credit
(and, if it does claim, the extent, order and manner in which it does so) and
whether any amount is due from it under this Clause 9.3 (Refund of tax
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<PAGE> 27
credits) (and, if so, what amount and when). The Lender shall not be obliged to
disclose any information regarding its tax affairs and computations. If the
Lender reimburses the Company pursuant to this Clause 9.3 (Refund of tax
credits) and the Lender subsequently determines that the Tax Credit was not
available or has been withdrawn or that it was unable to use the Tax Credit in
full, the Company shall reimburse the Lender such amount (not exceeding the
amount originally reimbursed by the Lender) as is necessary to place the Lender
in the same after-tax position as it would have been in if the Tax Credit had
been obtained and fully used by the Lender.
9.4 DOUBLE TAXATION RELIEF
(a) The Lender shall (if it is able to do so and if permitted by law) as
soon as reasonably practicable after the date of this Agreement (or any
assignment thereof) deliver to the Company a duly completed form from
the relevant tax authorities such that the Company may apply to the
Inland Revenue for a direction under the Double Taxation Relief (Taxes
on Income) (General) Regulations 1970 that the Company shall, on
account of the relevant Double Taxation Treaty, pay any interest due to
the Lender hereunder without deduction of U.K. tax. The Lender shall,
upon the reasonable request of the Company, promptly and duly (if it is
able to do so and if permitted by law)) execute and deliver any and all
such further instruments and documents which the Company has determined
are required for the purpose of obtaining such a direction.
(b) The Company will not be liable to pay to the Lender under Clause 9.1
(Gross-up) any amount in respect of taxes levied or imposed by the U.K.
or any taxing authority of or in the U. K. which it would not have been
obliged to pay if the Lender had performed its obligations under
paragraph (a) above to provide the forms and other instruments and
documents specified therein; provided that the Lender shall be deemed
to have performed its obligations under paragraph (a) above, unless,
notwithstanding the Company's preparation, completion (to the extent of
the Company's knowledge of the relevant facts), and delivery of all
such forms, instruments and documents required to be executed and
delivered by the Lender or any Permitted Assignee, the Lender or any
Permitted Assignee fails to execute and deliver such forms,
instruments, and documents.
10. ILLEGALITY
If it is or becomes unlawful or contrary to any regulation in any jurisdiction
for the Lender to give effect to any of its obligations as contemplated by this
Agreement or to fund or maintain its participation in the Loan, then:
(a) the Lender shall promptly notify the Company accordingly; and
(b) the Company shall, on the latest day permitted by the relevant law or
regulation, prepay the Loan together with all other amounts payable by
it to the Lender under this Agreement.
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<PAGE> 28
11. REPRESENTATIONS AND WARRANTIES
11.1 REPRESENTATIONS AND WARRANTIES
The Company makes the representations and warranties set out in this Clause 11
(Representations and warranties) to the Lender.
11.2 STATUS
(a) It is a private limited company, duly incorporated under the law of
England and Wales, and validly existing under the Companies Act 1985;
and
(b) it has the power to own its assets and carry on its business as it is
being conducted.
11.3 POWERS AND AUTHORITY
It has the power to enter into and perform, and has taken all necessary action
to authorise the entry into, performance and delivery of, this Agreement and the
transactions contemplated by this Agreement.
11.4 LEGAL VALIDITY
This Agreement constitutes its legal, valid, binding and enforceable obligation
of the Company.
11.5 NON-CONFLICT
The entry into and performance by it of, and the transactions contemplated by,
this Agreement do not and will not:
(a) conflict with any law or regulation, judicial or official order or the
Appointment or Appointment Undertaking;
(b) conflict with its memorandum or articles of association; or
(c) conflict with any document which is binding upon any member of the
Group or any asset of any member of the Group (other than a financing
agreement to which the Target or any Subsidiary of the Target is a
party, the Borrowing in respect of which is refinanced prior to 20th
March 1999).
11.6 NO DEFAULT
No Event of Default or Default is outstanding or will result from the Loan.
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11.7 AUTHORISATIONS
All authorisations required of the Company by the laws of England or the terms
of the Appointment or Appointment Undertaking in connection with the entry into,
performance, validity and enforceability of, and the transactions contemplated
by, this Agreement have been obtained or effected (as appropriate) and are in
full force and effect.
11.8 ACCOUNTS.
(a) In the case of the Company, the pro forma unaudited consolidated
accounts of the Group dated September 30, 1998;
(i) have been prepared in accordance with Applicable Accounting
Principles; and
(ii) fairly represent the consolidated financial condition of the
Group as at the date to which they were drawn up.
(b) In the case of the Target, its audited consolidated accounts for fiscal
year 1998:
(i) have been prepared in accordance with Applicable Accounting
Principles; and
(ii) fairly represent its consolidated financial condition as at
the date to which they were drawn up.
(c) Since the dates of the accounts described in subparagraphs (a) and (b)
above, through the date hereof, there has been no material adverse
change in the consolidated financial position or consolidated results
of operations of the Company or the Target.
11.9 LITIGATION
No litigation, arbitration or administrative proceedings involving the Company
are current or, to its knowledge, pending or threatened:
(a) to restrain the entry into, exercise of any of its rights, and/or
performance or enforcement of or compliance with any of its
obligations, hereunder; or
(b) which have a Material Adverse Effect.
11.10 ENVIRONMENTAL MATTERS
(a) Each member of the Group has obtained all material Environmental
Licences required for the carrying on of its business as then conducted
and is in compliance in all material respects with:
(i) the terms and conditions of those Environmental Licences; and
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<PAGE> 30
(ii) all other applicable Environmental Law,
which, in each case, if not obtained or complied with, has a Material
Adverse Effect and there are, to its knowledge, no circumstances which
may materially prevent or interfere with such compliance in the future.
(b) So far as the Company is aware, no Dangerous Substance has been used,
disposed of, generated, stored, transported, dumped, released,
deposited, buried or emitted at, on, from or under any site or premises
(whether or not owned, leased, occupied or controlled by any member of
the Group and including any offsite waste management or disposal
location utilised by any member of the Group) in circumstances where
this has a Material Adverse Effect.
(c) So far as the Company is aware, there is no Environmental Claim
(whether in respect of any site previously or currently owned or
occupied by any member of the Group or otherwise) pending or
threatened, and there are no past or present acts, omissions, events or
circumstances that would be likely to form the basis of any
Environmental Claim (whether in respect of any site previously or
currently owned or occupied by any member of the Group or otherwise),
against it which, in each case, is reasonably likely to be determined
against it and which, if so determined, has a Material Adverse Effect.
11.11 ASSETS
The Company is the legal and/or beneficial owner of all its assets free from any
Security Interests (other than any Security Interests permitted under the
(pound)736,000,000 Credit Facility, any Successor Agreement, or Clause 17.9
(Negative pledge) of the (pound)736,000,000 Credit Facility.
11.12 NO COMMITMENT
As of the date hereof, the Company does not have any material Financial
Indebtedness other than those arising under the (pound)736,000,000 Credit
Facility, a subordinated loan by Azurix Ltd. (formerly named Enron Water Ltd.),
a private limited company organized under the laws of the Cayman Islands, in the
original principal amount of (pound)954,000,000; those certain loan notes
ranking pari passu with the Loan, issued to certain former shareholders of the
Target, in the aggregate principal amount of approximately (pound)70,000,000;
the short-term, unsecured credit facility ranking pari passu with the Loan, from
Enron in the original principal amount of (pound)72,000,000; this Agreement; the
Offer; any Offer Costs arising in respect of the Appointment or any Appointment
Undertaking; and intercompany loans from Enron not exceeding (pound)12 million.
11.13 APPOINTMENT
(a) The Appointment is in full force and effect.
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<PAGE> 31
(b) There exist no material breaches of the terms of the Appointment or
Appointment Undertakings.
(c) There are no circumstances in existence which would entitle the
Director or the Secretary of State to seek to revoke the Appointment.
11.14 PAYMENT OF TAXES
The Company has paid all taxes, assessments and other governmental charges
imposed on it that have become due and payable.
11.15 INVESTMENT COMPANY ACT OF 1940
Neither the Company, nor any of its Subsidiaries, is an "investment company"
within the meaning of the U.S. Investment Company Act of 1940, as amended.
11.16 TIMES FOR MAKING REPRESENTATIONS AND WARRANTIES
The representations and warranties set out in this Clause 11 (Representations
and warranties) are made by the Company, unless it is expressly provided to the
contrary, on the date of this Agreement.
11.17 QUALIFICATIONS TO REPRESENTATIONS
(a) The representations and warranties contained in Clauses 11.4 (Legal
validity) and 11.7 (Authorisations) shall (where applicable) be
subject, as to matters of law only, to the qualifications in any legal
opinions delivered in connection with this Agreement.
(b) The Company shall promptly disclose to the Lender if any representation
and warranty to be made under this Clause 11 (Representations and
warranties) ceases to be correct as at the date it is be made. Any
misrepresentation which has arisen or which may arise and which has
been disclosed to the Lender may be waived only by a written instrument
executed by the Lender expressly setting forth such waiver.
12. UNDERTAKINGS
12.1 DURATION
The undertakings in this Clause 12 (Undertakings) remain in force from the date
of this Agreement for so long as any amount in respect of principal or interest
payable under this Agreement is outstanding.
12.2 FINANCIAL INFORMATION
The Company shall supply to the Lender:
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(a) as soon as the same are available (and in any event within 120 days of
the end of each of its financial years):
(i) the audited consolidated accounts of the Group for that
financial year; and
(ii) the audited consolidated accounts of the Target and its
Subsidiaries for that financial year;
(b) as soon as the same are available (and in any event within 60 days of
the end of the first half-year of each of its financial years and
within 45 days of the end of each quarter of each of its financial
years):
(i) the unaudited consolidated accounts of the Group for that
half-year or that quarter, as the case may be; and
(ii) the unaudited consolidated accounts of the Target and its
Subsidiaries for that half-year or that quarter, as the case
may be.
(c) (i) together with the accounts specified in paragraph (a)(i)
above, a certificate signed by its auditors setting out in
reasonable detail computations establishing compliance or
non-compliance with Clause 12.13 (Financial covenants) as at
the date to which those accounts were drawn-up; and
(ii) together with the accounts specified in paragraph (b)(i)
above, a certificate signed by two of its senior authorised
officers on its behalf setting out in reasonable detail
computations establishing compliance or non-compliance with
Clause 12.13 (Financial covenants) as at the date to which
those accounts were drawn-up; and
(d) within five (5) Business Days of them being delivered to the Director
under Part F of Schedule 2 of the Appointment, the accounting
statements delivered to the Director by the Appointment Holder.
12.3 INFORMATION - MISCELLANEOUS
The Borrower shall promptly supply to the Lender such information in the
possession or control of any member of the Group regarding its financial
condition and operations as the Lender may reasonably request and which the
Company is able to provide without breaching any legal obligation or regulation.
12.4 NOTIFICATION OF DEFAULT
The Company shall notify the Lender of any outstanding Default (and the steps,
if any, being taken to remedy it) promptly (and in any event within five days)
upon an executive officer of the Company becoming aware of its occurrence.
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12.5 ACCOUNTING MATTERS
(a) If, at any time after the date of this Agreement, any material change
is made to the Applicable Accounting Principles, the Company shall
notify the Lender of the change and, in the absence of any agreement
between the Company and the Lender to the contrary, the Company shall
ensure that the Auditors provide a description of the change and the
adjustments which would be required to be made to the latest accounts
or financial statements so that those accounts or financial statements
reflect the Applicable Accounting Principles, and any reference to any
financial statements or accounts delivered under this Agreement shall
be construed as a reference to those accounts or financial statements
as adjusted to reflect the Applicable Accounting Principles.
(b) The Company will ensure that each set of financial information to be
delivered by it to the Lender under the terms hereof is prepared and
audited (in the case of annual financial statements) in accordance with
Applicable Accounting Principles, with reconciliation to U.S. generally
accepted accounting principles and practices, consistent with the
principles and practices applied in the preparation of the audited
annual consolidated financial statements of Azurix Corp., a Delaware
corporation, and the indirect parent of the Company.
12.6 AUTHORISATIONS
The Company shall promptly obtain, maintain and comply with the terms of any
authorisation required under any law or regulation to enable it to perform its
obligations under or for the validity or enforceability of this Agreement.
12.7 PARI PASSU RANKING
The Company shall procure that its payment obligations hereunder do and will
rank at least pari passu with all its other present and future unsecured and
unsubordinated obligations, except for obligations which are mandatorily
preferred by law applying to companies generally.
12.8 DISPOSALS
The Company shall not sell, transfer or otherwise dispose of or cease to
exercise control over any of the Shares in the Target acquired by it.
12.9 CHANGE OF BUSINESS
The Company shall procure that no substantial change is made to the general
nature or scope of the business of the Company or the Group from that carried on
at the date of this Agreement or those which are usual for water and sewerage
companies in the United Kingdom as at the date of this Agreement. An extension
into ancillary businesses does not constitute a change in the general nature or
scope of the business of the Company or the Group for the purposes of this
Clause.
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12.10 DISTRIBUTIONS
The Company shall not declare, recommend, make or pay any dividend, distribution
or payment (including by way of redemption, repurchase, defeasance, retirement,
return or repayment) to any of its shareholders or make any payment (including
by way of redemption, repurchase, defeasance, retirement, return or repayment
and including the payment of interest) in respect of any Subordinated Debt
unless no Default is then outstanding or will result from the relevant dividend,
distribution or payment.
12.11 CONSTITUTIONAL DOCUMENTS
The Company will not, and the Company will procure that no other member of the
Group will, without the prior consent of the Lender or as required by law, amend
or seek or agree to amend or replace the memorandum or articles of association
or other constitutional documents or by-laws of any member of the Group in any
way which would be likely materially and adversely to affect the interests of
the Lender hereunder.
12.12 COMPLIANCE WITH LAWS
The Company shall, and the Company will procure that each other member of the
Group will, comply in all material respects with all applicable laws and
regulations, whether domestic or foreign, having jurisdiction over it or any of
its assets, failure to comply with which has a Material Adverse Effect.
12.13 FINANCIAL COVENANTS
(a) In this Clause 12.13:
"ADJUSTED CAPITAL AND RESERVES"
means the amount (including any share premium) for the time being paid up or
credited as paid up on the issued share capital of the Company, adjusted as
follows:
(i) plus the outstanding amount of any Subordinated Debt;
(ii) plus the amount standing to the credit (or, as the case may
be, minus the amount standing to the debit) of the capital and
revenue reserves of the Group;
(iii) plus any amount standing to the credit or minus any amount
standing to the debit of the consolidated profit and loss
account of the Group;
(iv) minus any distribution declared or made by the Company or any
of its Subsidiaries (other than to another member of the
Group) out of profits included within reserves to the extent
that those reserves have not already been reduced on account
of it;
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(v) minus amounts attributable to the interests (if any) of
outside holders of issued share capital in any member of the
Group other than the Company itself;
and, for the purposes of the foregoing:
(A) no item shall be effectively deducted or added more
than once, all items shall be calculated on a
consolidated basis and (subject only as may be
required in order to reflect the express inclusion or
exclusion of items as specified in this definition)
in accordance with the Applicable Accounting
Principles; and
(B) where the calculation is being made as at the end of
any Accounting Period it shall be determined from the
balance sheet forming part of the relevant quarterly
or annual accounts for that Accounting Period.
"CAPITALISATION RATIO"
means, at any time, the ratio of Consolidated Total Borrowings to the aggregate
of Consolidated Total Borrowings and Adjusted Capital and Reserves, expressed as
a percentage.
"CONSOLIDATED EBITDA"
for any period comprising an annual Accounting Period of the Company or
consecutive quarterly Accounting Periods of the Company (taken together as one
period) means the profit of the Group for such period:
(i) before deducting all depreciation and other amortisation
(including, without limitation, amortisation of goodwill
arising from and upon the acquisition of the Shares and
amortisation of Offer Costs in accordance with Financial
Reporting Standard 4 issued by the Accounting Standards
Board);
(ii) before taking into account all Extraordinary Items (whether
positive or negative) but after taking into account all
Exceptional Items (whether positive or negative);
(iii) before deducting tax;
(iv) before taking into account Consolidated Net Interest Payable
for such period;
(v) before deducting any Offer Costs; and
(vi) after deducting any gain, or adding any loss, to book value
arising in favour of the Group on the sale, lease or other
disposal of any asset (other than on the sale of trading
stock) during such period and deducting any gain, or adding
any loss, arising on revaluation of any asset during such
period, in each case to the extent that it would otherwise be
taken into account, whether as an Exceptional Item or
otherwise,
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and, for the purposes of the foregoing, no item shall be effectively deducted or
credited more than once in this calculation, all items shall be determined on a
consolidated basis and (subject only as may be required in order to reflect the
express inclusion or exclusion of items as specified in this definition) in
accordance with the Applicable Accounting Principles and as determined from the
consolidated accounts of the Group for that annual Accounting Period or for the
relevant Accounting Periods falling within that period.
"CONSOLIDATED NET INTEREST PAYABLE"
means Consolidated Total Interest Payable less any interest or amounts in the
nature of interest receivable during the relevant annual Accounting Period of
the Company or consecutive quarterly Accounting Periods of the Company (taken
together as one period), determined on the same basis and manner as for
Consolidated Total Interest Payable.
"CONSOLIDATED TOTAL BORROWINGS"
at any time means the aggregate at that time of the Borrowings of the members of
the Group from sources external to the Group plus (to the extent not otherwise
included) the amount of any actual or contingent liability of any member of the
Group:
(i) for Borrowings at that time of any person in which any member
of the Group has an ownership interest; or
(ii) to provide funds by loan, subscription for share capital or
otherwise to any person in which any member of the Group has
an ownership interest;
calculated on a consolidated basis and (subject only as may be required in order
to reflect the express inclusion or exclusion of items as specified herein
and/or in the definition of Borrowings in this Clause) in accordance with the
Applicable Accounting Principles and, where the calculation is being made as at
the end of any Accounting Period for which a consolidated balance sheet of the
Group has been delivered to the Lender, as shown in that balance sheet.
"CONSOLIDATED TOTAL INTEREST PAYABLE"
for any period comprising an annual Accounting Period of the Company or
consecutive quarterly Accounting Periods of the Company (taken together as one
period) means the interest (and all amounts required by the Applicable
Accounting Principles to be accounted for as interest) accrued on Borrowings of
the Group and any Subordinated Debt during such period as an obligation of any
member or members of the Group (whether or not paid or capitalised during or
deferred for payment after such period) adjusted to take account of any amount
constituting interest receivable by any members of the Group under interest rate
and/or currency hedging agreements or instruments under which all parties are in
compliance with their payment and other material obligations, all determined on
a consolidated basis and (subject only as may be required in order to reflect
the express inclusion or exclusion of items as specified in this definition) in
accordance with the Applicable Accounting
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Principles and as shown in the consolidated accounts of the Group for such
annual Accounting Period or for the Accounting Periods falling within such
period.
"EXCEPTIONAL ITEMS"
has the meaning given to it in Financial Reporting Standard 3 issued by the
Accounting Standards Board (as in force at the date of this Agreement), but
shall exclude any items falling within the definition of Extraordinary Items.
"EXTRAORDINARY ITEMS"
has the meaning given to it in Financial Reporting Standard 3 issued by the
Accounting Standards Board (as in force at the date of this Agreement) but in
addition shall include those items listed in paragraph 20 thereof.
(b) (i) All the terms used in paragraph (a) above are to be
calculated in accordance with the Applicable Accounting
Principles.
(ii) If there is a dispute as to any interpretation of or
computation for paragraph (a) above, the interpretation or
computation of the Auditors prevails.
(c) The Company shall procure that:
(i) as of each date on which it is tested under paragraph (d)
below, the ratio of Consolidated EBITDA to Consolidated Net
Interest Payable is no less than 1.75:1; and
(ii) the Capitalisation Ratio shall not, as of each date on which
it is tested under paragraph (e) below, exceed 60 percent.
(d) (i) The first test of the covenant set out in paragraph (c)(i)
above shall be made in respect of the period beginning on the
date the Target becomes a member of the Group and ending on
the 31st December 1998;
(ii) the next three tests of the covenant set out in paragraph
(c)(i) above shall be made on a cumulative basis as of the
expiry of each subsequent quarterly Accounting Period; and
(iii) each test of the covenant set out in paragraph (c)(i) above
thereafter shall be made on a quarterly basis and in respect
of the four consecutive quarterly Accounting Periods ending on
the expiry of the relevant quarterly Accounting Period.
(e) The first test of the covenant set out in paragraph (c)(ii) above shall
be made on the 31st December 1998 and each test thereafter shall be
made on a quarterly basis and in respect of
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the annual Accounting Period ending on the expiry of the relevant
quarterly Accounting Period.
13. DEFAULT
13.1 EVENTS OF DEFAULT
Each of the events set out in Clauses 13.2 (Non-payment of principal) to 13.15
(Expropriation) (inclusive) is an Event of Default (whether or not caused by any
reason whatsoever outside the control of the Lender or any other person).
13.2 NON-PAYMENT OF PRINCIPAL
The Company does not pay on the due date any amount of principal payable by it
to the Lender hereunder at the place at and in the currency in which it is
expressed to be payable and (if caused by technical or administrative error)
such non-payment continues unremedied for 3 Business Days from the receipt by
the Company of notice of non-payment from the Lender.
13.3 BREACH OF OTHER OBLIGATIONS
The Company fails to comply with any other undertaking hereunder (other than the
failure to pay interest) and such failure continues unremedied for 30 days from
the earlier of the Company becoming aware of such failure and receipt by the
Company of notice of such non-compliance from the Lender.
13.4 MISREPRESENTATION
A representation, warranty or statement made in this Agreement is incorrect in
any material respect when made or deemed to be made by reference to the facts
and circumstances then subsisting and, if the circumstances causing the
misrepresentation are capable of remedy within that period, that
misrepresentation is not remedied within 28 days of the earlier of the Company
becoming aware of the misrepresentation and receipt by the Company of notice
from the Lender requiring remedy.
13.5 CROSS ACCELERATION WITH THE (pound)736,000,000 CREDIT FACILITY
The indebtedness under the (pound)736,000,000 Credit Facility or under any
Successor Agreement becomes prematurely due and payable as a result of an event
of default under the document relating to such indebtedness.
13.6 INSOLVENCY
(a) The Company or a Material Subsidiary is, or is deemed for the purposes
of any law (but for this purpose Section 123(1)(a) of the Insolvency
Act 1986 will take effect as if for "(pound)750" there was substituted
"(pound)5,000,000") to be, unable to pay its debts as they fall due or
to be insolvent, or admits inability to pay its debts as they fall due;
or
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(b) the Company or a Material Subsidiary suspends making payments on all or
any class of its debts or announces an intention to do so, or a
moratorium is declared in respect of all or any class of its
indebtedness; or
(c) the Company or a Material Subsidiary by reason of financial
difficulties, begins negotiations with one or more of its creditors
with a view to the readjustment or rescheduling of all or any class of
its indebtedness.
13.7 INSOLVENCY PROCEEDINGS
(a) Any step (including petition, proposal or convening a meeting) is taken
with a view to a composition, assignment or arrangement with any
creditors of the Company or a Material Subsidiary; or
(b) a meeting of the Company or a Material Subsidiary is convened for the
purpose of considering any resolution for (or to petition for) its
winding-up or its administration or any such resolution is passed; or
(c) any person presents a petition for the winding-up or for the
administration of the Company or a Material Subsidiary, and, in the
case of a petition for winding-up presented by any person other than
the Company or the relevant Material Subsidiary, it is not withdrawn,
discharged or stayed within 21 days; or
(d) any order is made for the winding-up or administration of the Company
or a Material Subsidiary; or
(e) any other step (including petition, proposal or convening a meeting) is
taken with a view to the rehabilitation, administration, custodianship,
liquidation, winding-up or dissolution of the Company or a Material
Subsidiary or any other insolvency proceedings involving the Company or
a Material Subsidiary, and, in the case of any such step taken by any
person other than the Company or the relevant Material Subsidiary, it
is not withdrawn, discharged or stayed within 21 days, except for any
which arises from a Permitted Transaction.
13.8 APPOINTMENT OF RECEIVERS AND MANAGERS
(a) Any liquidator, trustee in bankruptcy, judicial custodian, compulsory
manager, receiver, administrative receiver, administrator or the like
is appointed in respect of the Company or a Material Subsidiary or any
part of its assets, otherwise than in connection with a Permitted
Transaction; or
(b) the directors of the Company or a Material Subsidiary request the
appointment of a liquidator, trustee in bankruptcy, judicial custodian,
compulsory manager, receiver, administrative receiver, administrator or
the like, otherwise than in connection with a Permitted Transaction; or
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(c) any other step is taken to enforce any Security Interest over any part
of the assets of the Company or a Material Subsidiary and is not
withdrawn, discharged or stayed within 21 days.
13.9 ANALOGOUS PROCEEDINGS
There occurs, in relation to the Company or Material Subsidiary, any event which
in the opinion of the Lender, appears to correspond with any of those mentioned
in Clause 13.7 (Insolvency proceedings) or Clause 13.8 (Appointment of receivers
and managers).
13.10 CESSATION OF BUSINESS
The Company or a Material Subsidiary ceases to carry on all or a substantial
part of its business, other than in connection with a Permitted Transaction.
13.11 UNLAWFULNESS
It is or becomes unlawful for the Company to perform any of its material
obligations hereunder.
13.12 APPOINTMENT
(a) The Appointment is revoked or surrendered or ceases to be held by the
Target or a wholly-owned Subsidiary of the Target or the Company, other
than in circumstances which permit the Target or one of its
wholly-owned Subsidiaries to carry on the water and sewerage business
of the Appointment Holder substantially as envisaged at the date of
this Agreement without the Appointment as a result of any change in the
Act, or
(b) the Appointment or the rights and/or the obligations of the Appointment
Holder under the Appointment is materially modified in any manner
which, in the reasonable opinion of the Lender, has a Material Adverse
Effect; or
(c) any person other than the Target or one of its wholly-owned
Subsidiaries is authorised to be a water undertaker and/or sewerage
undertaker under the Act in the area covered by the Appointment at the
date of the Agreement in circumstances where this has a Material
Adverse Effect.
13.13 COMPLIANCE WITH THE ACT
(a) An order is made in respect of the Appointment Holder pursuant to
Section 24 of the Act; or
(b) (i) any final enforcement order is made; or
(ii) any provisional enforcement order is confirmed with respect to
the Company or the Appointment Holder under the Act
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(other than where the Company demonstrates to the reasonable
satisfaction of the Lender that the order is being contested in good
faith by the Appointment Holder pursuant to Section 21 of the Act),
and, in each case, in circumstances which have a material Adverse
Effect.
13.14 AMENDMENTS TO THE ACT
Any step is taken to reduce or qualify the obligations of the Secretary of State
or the Director insofar as they affect the creditors of the Appointment Holder
and/or the creditworthiness of the Appointment Holder in circumstances which
have a Material Adverse Effect.
13.15 EXPROPRIATION
The authority or ability of the Company or the Target or the Appointment Holder
to conduct its business is wholly or substantially curtailed by any
expropriation or renationalisation by or on behalf of any governmental
authority.
13.16 ACCELERATION
(a) Subject to Clause 13.16(b), the Lender shall have the right, by notice
to the Company at least three (3) Business Days following the
occurrence of an Event of Default to demand that all or part of the
Loan, together with accrued interest, and all other amounts accrued
under this Agreement be immediately paid, whereupon they shall become
immediately due and payable.
(b) If, during the three (3) Business Day period following occurrence of an
Event of Default, the Lender receives an Acceptable Offer, the Lender
shall be obligated to accept such offer and shall not demand payment
under Clause 13.16(a), unless the assignment pursuant to the Acceptable
Offer is not timely consummated in accordance with its terms. If an
Acceptable Offer and the assignment pursuant thereto are timely made
and consummated in accordance with the terms of such Acceptable Offer,
then all of Clauses 11 (Representation and warranties), 12
(Undertakings), and 13 (Default) (other than Clauses 13.2 (Non-payment
of principal), 13.6 (Insolvency) through 13.9 (Analogous proceedings)
and 13.6 (Acceleration)) shall be deemed deleted from this Agreement.
If an Acceptable Offer and the assignment pursuant thereto are not
timely made and consummated in accordance with the terms of such
Acceptable Offer, the Lender shall be entitled to demand payment of the
Loan pursuant to Clause 13.16(a).
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14. EXPENSES
14.1 INITIAL AND SPECIAL COSTS
The Company shall promptly on demand pay to the Lender the amount of all
reasonable costs and expenses (including legal fees and any related
irrecoverable value added tax) reasonably incurred by it in connection with any
amendment, waiver, consent or suspension of rights (or any proposal for any of
the foregoing) requested by or on behalf of the Company and relating to this
Agreement.
14.2 ENFORCEMENT COSTS
The Company shall forthwith on demand pay to the Lender the amount of all
reasonable costs and expenses (including, without limitation, legal fees and any
related irrevocable value added tax) incurred by it in connection with the
enforcement of, or the preservation of any rights, under this Agreement.
15. STAMP DUTIES
The Company shall pay and forthwith on demand indemnify the Lender against any
liability it incurs in respect of any stamp, registration and similar tax or
duty which is or becomes payable in connection with the entry into, performance
or enforcement of this Agreement.
16. INDEMNITIES
16.1 CURRENCY INDEMNITY
(a) If the Lender receives an amount in respect of the Company's liability
hereunder in, or if that liability is converted into a claim, proof,
judgement or order in, a currency other than the currency (the
"CONTRACTUAL CURRENCY") in which the amount is expressed to be payable
hereunder:
(i) the Company shall indemnify the Lender as an independent
obligation against any loss or liability arising out of or as
a result of the conversion;
(ii) if the amount received by the Lender, when converted into the
contractual currency at a market rate in the usual course of
its business, is less than the amount owed in the contractual
currency, the Company concerned shall forthwith on demand pay
to the Lender an amount in the contractual currency equal to
the deficit; and
(iii) the Company shall pay to the Lender on demand any exchange
costs and taxes payable in connection with any such
conversion.
(b) The Company waives any right it may have in any jurisdiction to pay any
amount hereunder in a currency other than that in which it is expressed
to be payable.
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16.2 OTHER INDEMNITIES
The Company agrees, to the fullest extent permitted by law, to indemnify and
hold harmless the Lender and each of its Permitted Assignees, and each of the
directors, officers, employees and agents of any of them from and against any
and all claims, damages, liabilities and expenses (including, without
limitation, reasonable fees and disbursements of counsel and claims, damages,
liabilities and expenses relating to environmental matters) for which any of
them may become liable or which may be incurred by or asserted against the
Lender or such Permitted Assignee or the director, officer, employee or agent of
any of them in each case in connection with or arising out of or by reason of
any investigation, litigation, or proceeding, arising out of, relating to or in
connection with this Agreement or any transaction in which any proceeds of all
or any part of the Loan are applied (expressly including any such claim, damage,
liability or expense attributable to the ordinary, sole or contributory
negligence of such indemnified party, but excluding any such claim, damage,
liability or expense attributable to the gross negligence or willful misconduct
of such indemnified party). It is the intent of the parties hereto that the
Lender and each of its Permitted Assignees and the directors, officers,
employees and agents of any of them, shall, to the extent provided in this
Clause 16.2, (Other indemnities) be indemnified for their own ordinary, sole or
contributory negligence.
17. CHANGES TO THE PARTIES
17.1 TRANSFERS BY THE COMPANY
The Company may not assign, transfer, novate or dispose of any of, or any
interest in, its rights and/or obligations under this Agreement.
17.2 TRANSFERS BY THE LENDER
The Company hereby expressly acknowledges and consents to the assignment by
Bristol of its rights under this Agreement to Marlin and the assignment by
Marlin of its rights under this Agreement to the Marlin Indenture Trustee
pursuant to the Deeds of Assignment, and acknowledges and consents to the pledge
by Bristol of its rights hereunder to Marlin pursuant to the Bristol Water
Security Agreement, dated as of the date hereof between Bristol and Marlin and
the pledge by Marlin of certain of its rights hereunder to the Marlin Indenture
Trustee (together with Marlin, "Permitted Assignees") as contemplated in the
Indenture. All references to the "Lender" hereunder shall be deemed to include
such Permitted Assignees so long as the Deeds of Assignment and the Indenture
are in effect.
17.3 INCREASED COSTS, ETC.
If:
(a) the Lender assigns, transfers or novates any of its rights and/or
obligations hereunder without the prior consent of the Company; and
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(b) as a result of circumstances existing at the date the assignment,
transfer, novation or change occurs, the Company would be obliged to
make a payment to the transferee under Clause 9 (Taxes)
then, notwithstanding the provisions of Clause 9 (Taxes), the transferee is only
entitled to receive payment under those Clauses from the Company to the same
extent as the transferor would have been if the assignment, transfer, novation
or change had not occurred.
18. DISCLOSURE OF INFORMATION
(a) Bristol may disclose to any Permitted Assignee:
(i) a copy of this Agreement; and
(ii) any information which Bristol has acquired under or in
connection herewith,
so long as such Permitted Assignee agrees not to disclose such information to
any person, other than (i) the holders of the Marlin Senior Notes requesting
such information, in the case of the Marlin Indenture Trustee, and (ii) the
holders of the Marlin Certificates requesting such information, in the case of
Marlin, in each case, upon prior receipt by such Permitted Assignee of a
confidentiality agreement executed by the holder of the Marlin Senior Note or
Marlin Certificate requesting such information, in the form attached as Schedule
I hereto.
19. SEVERABILITY
If a provision of this Agreement is or becomes illegal, invalid or unenforceable
in any jurisdiction, that shall not affect:
(a) the legality, validity or enforceability in that jurisdiction of any
other provision of this Agreement; or
(b) the legality, validity or enforceability in other jurisdictions of that
or any other provision of this Agreement.
20. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and this has the
same effect as if the signatures on the counterparts were on a single copy of
this Agreement.
21. NOTICES
21.1 GIVING OF NOTICES.
Except as otherwise expressly provided herein in any particular case, all
notices, approvals, consents, requests and other communications hereunder shall
be in writing and shall, if addressed as provided
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in Clause 21.2 (Addresses for notices), be deemed to have been given, (i) when
delivered by hand, (ii) one Business Day after being sent by a private
nationally or internationally recognized overnight courier service, or (iii)
when sent by telecopy, if immediately after transmission the sender's facsimile
machine records in writing the correct answer back. However, a notice given in
accordance with the above but received on a day that is not a Business Day or
after business hours in the place of receipt will only be deemed to be given on
the next Business Day in that place.
21.2 ADDRESSES FOR NOTICES
The address, telex number and facsimile number of each Party for all notices
under or in connection herewith are:
(i) that notified by that Party for this purpose to the other
Party on or before it becomes a Party; or
(ii) any other notified by that Party for this purpose to the other
Party by not less than five Business Days' notice.
21.3 FACSIMILE NOTICES
Each Party shall indemnify the other Party against any loss or liability which
such other Party incurs as a result of such other Party accepting and/or acting
upon any notices hereunder received by such other Party from the first Party by
facsimile and which may not have been incurred if, at the time of receipt, such
other Party had been given the notice other than by facsimile.
22. GOVERNING LAW
This Agreement is governed by English law.
23. LIMITATION OF LIABILITY
It is expressly understood and agreed by the parties hereto that (a) this
Agreement is executed and delivered by Wilmington Trust Company, not
individually or personally, but solely as Trustee, in the exercise of the powers
and authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of Bristol or Marlin, as
Lender or a Permitted Assignee, is made and intended not as representations,
undertakings and agreements by Wilmington Trust Company, personally or
individually, but is made and intended for the purpose of binding only Marlin or
Bristol, as the case may be, (c) nothing herein contained shall be construed as
creating any liability on Wilmington Trust Company, individually or personally,
to perform any covenant, either express or implied, contained herein, all such
liability, if any, being expressly waived by the parties hereto and by any
person claiming by, through or under the parties hereto, (d) under no
circumstances shall Wilmington Trust Company be personally liable for the
payment of any indebtedness or expenses of Bristol or Marlin, as Lender or a
Permitted Assignee, or be liable for the breach or failure of any obligation,
representation, warranty or covenant made or undertaken by Bristol or Marlin, as
Lender or a Permitted Assignee, under this Agreement or any other related
documents.
-41-
<PAGE> 46
The Parties hereto have caused this Agreement to be executed as a deed
as of the day and year first above written.
Executed as a deed by
AZURIX EUROPE LTD. ACTING BY
/s/ JAMES V. DERRICK, JR.
- ------------------------------------------
Printed Name: James V. Derrick, Jr.
Title: Director
AND
/s/ RODNEY L. GRAY
- ------------------------------------------
Printed Name: Rodney L. Gray
Title: Director
ACTING UNDER THE AUTHORITY OF
THAT COMPANY IN THE PRESENCE OF:
Witness
Signature: /s/ DEBORAH KORKMAS
- ------------------------------------------
Printed Name: Deborah Korkmas
Address: 6450 Olympia Drive
Houston, TX 77057
[SIGNATURE PAGE 1 OF 2]
AMENDED AND RESTATED AGREEMENT (POUND)73M CREDIT FACILITY FOR AZURIX
EUROPE LTD. AND BRISTOL WATER Trust
-42-
<PAGE> 47
Executed as a deed by
BRISTOL WATER TRUST
By: Wilmington Trust Company,
not in its individual capacity,
but solely as trustee,
acting by:
/s/ James P. Lawler
- ------------------------------------------
Printed Name: James P. Lawler
Title: Vice President
AND
- ------------------------------------------
- ------------------------------------------
Printed Name
- ------------------------------------------
Title
ACTING UNDER THE AUTHORITY OF THAT
COMPANY IN THE PRESENCE OF:
Witness
Signature:
-------------------------------
Printed
Name:
-------------------------------
Address:
-------------------------------
[SIGNATURE PAGE 2 OF 2]
AMENDED AND RESTATED AGREEMENT (POUND)73M CREDIT FACILITY FOR AZURIX
EUROPE LTD. AND BRISTOL WATER Trust
-43-
<PAGE> 1
EXHIBIT 21
AZURIX CORP.
SUBSIDIARIES
Azurix Jose Holdings Ltd.
Azurix Jose Investment Ltd.
Azurix Jose Ltd.
Enron Argentina Holding Inc.
Azurix Misiones SRL
Azurix Cancun B.V.
Azurix Cancun SRL
Enron Water Israel Ltd.
Azurix Suez Ltd.
Azurix Colombia Holdings Ltd.
Azurix Colombia Investments Ltd.
Azurix Colombia Ltd.
Azurix Isla Mujeres B.V.
Operadora de Buenos Aires SRL
Operadora de Misiones SRL
Azurix Mendoza Water Investments Ltd.
Azurix Chengdu Holdings Ltd.
Azurix Chengdu Ltd.
Azurix Misiones Holdings Ltd.
Azurix Misiones Ltd.
Azurix U.K. Ltd.
Azurix Rio Holdings Ltd.
Azurix Rio Investments Ltd.
SPE-Sociedade PAULISTA de Energia Ltda.
SEC-Sociedade Carioca de Energia Ltda.
Azurix Kuwait Ltd.
Azurix AGOSBA Holdings Ltd.
Azurix AGOSBA Ltd.
Azurix AGOSBA SRL
Azurix Chaoyang Water Holdings Ltd.
Azurix Chile Holdings Ltd.
Azurix Chile Ltd.
Azurix Suzhou Water Holdings Ltd.
Azurix Vietnam Holdings Ltd.
Azurix Vietnam Investments Ltd.
Azurix Vietnam Ltd.
Azurix Jordan Ltd.
Azurix Lebanon Ltd.
Azurix Tangiers Ltd.
Azurix Philippines Holdings Ltd.
Azurix Philippines Investments Ltd.
Azurix Philipppines Ltd.
Azurix Guam Corporation
Azurix Panama Holdings Ltd.
Azurix Panama Investments Ltd.
Azurix China Holdings Ltd.
Azurix China Investments Ltd..
Azurix Projects Holdings Ltd.
Azurix Projects Ltd.
Azurix Saigon Holding Co.
Azurix Saigon Ltd.
Azurix Ltd.
Azurix Europe Ltd.
Wessex Water Ltd.
Wessex Water Services Ltd.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Houston, Texas
March 15, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the use of our report (and to
all references to our Firm) included in or made a part of this registration
statement.
Arthur Andersen
London, England
15 March 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1
(Registration No. 333- ) of our report dated March 12, 1999 on our audit of
the consolidated financial statements of Wessex Water Ltd (formerly Wessex Water
Plc) as at March 31, 1998 and for the years ended March 31, 1998 and 1997. We
also consent to the reference to our firm under the caption "Experts".
PricewaterhouseCoopers
Chartered Accountants
Bristol, England
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS OF AZURIX CORP. AS OF AND FOR THE PERIOD ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS CONTAINED IN THIS REGISTRATION STATEMENT ON FORM S-1 DATED MARCH 15,
1999.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-29-1998
<PERIOD-END> DEC-31-1998
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 70
<ALLOWANCES> 6
<INVENTORY> 0
<CURRENT-ASSETS> 132
<PP&E> 2,271
<DEPRECIATION> 17
<TOTAL-ASSETS> 3,358
<CURRENT-LIABILITIES> 261
<BONDS> 1,034
0
0
<COMMON> 1
<OTHER-SE> 1,645
<TOTAL-LIABILITY-AND-EQUITY> 3,358
<SALES> 120
<TOTAL-REVENUES> 120
<CGS> 32
<TOTAL-COSTS> 74
<OTHER-EXPENSES> 1
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 29
<INCOME-TAX> 18
<INCOME-CONTINUING> 10
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
