Securities and Exchange Commission
Washington, DC 20549
Form 8-K/A
Current Report
Pursuant to Section 13 to 15(d) of the
Securities Exchange Act 1934
Date of Report February 18, 1997
(Date of earliest event reported)
CalEnergy Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-9874 94-2213782
(State or other (Commission File (IRS Employee
jurisdiction of Number) Identification No.)
incorporation)
302 South 36th Street, Suite 400, Omaha, NE 68131
(Address of principle executive offices) Zip Code
Registrant's Telephone Number, including area code: (402) 341-4500
N/A
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
On December 24, 1996, CE Electric UK plc ("CE Electric"), which
is 70% owned indirectly by CalEnergy Company, Inc. (the
"Company") and 30% owned indirectly by Peter Kiewit Sons' Inc.
("PKS"), acquired majority ownership of the outstanding ordinary
share capital of Northern Electric plc ("Northern") pursuant to a
cash tender offer, with a loan note alternative, (the "Tender Offer")
to Northern's public shareholders which was commenced in the United Kingdom
by CE Electric on November 5, 1996. The total amount expected to
be paid to acquire all of Northern's ordinary and preference
shares is approximately $1.3 billion. The purchase price per share
contained in the Tender Offer was determined by CE Electric based upon
the then prevailing market price of Northern's shares on the London Stock
Exhange plus a premium in an amount sufficient, as determined by CE Electri,
to provide fair compensation to holders of Northern shares and to enable CE
Electric to acquire a significant position in Northern. In January 1997,
CE Electric designated a majority of Northern's board of
directors and assumed management control. Through January 31,
1997, CE Electric had purchased more than 90% of
Northern's ordinary shares. CE Electric expects to acquire the
remaining Northern shares by April 30, 1997 pursuant to United
Kingdom statutory powers available to compulsorily acquire shares
not purchased in the Tender Offer.
As of February 13, 1997, the Company had contributed to CE
Electric approximately $410 million of the approximately $1.3
billion required to acquire all of Northern's ordinary and
preference shares in connection with the Tender Offer, and PKS
had contributed approximately $176 million to CE Electric for such
purpose. The Company obtained such funds from cash on hand,
short-term borrowings, and borrowings of approximately $100
million under a $100 Million Credit Agreement entered into with
Credit Suisse on October 28, 1996 (the "CalEnergy Credit
Facility"). Borrowings under the CalEnergy Credit Facility are
unsecured and mature on October 28, 1997, subject to prepayment
by the Company at any time. The remaining funds necessary to
consummate the Tender Offer (approximately $734 million) will be
provided from capital contributions or loans to be made to CE
Electric by its sole shareholder, CE Electric UK Holdings ("CE
Electric Holdings"), which has arranged a 560 million ($896
million) Term Loan and Revolving Facility Agreement, dated
October 28, 1996 (the "U.K. Credit Facility"), by and among CE
Electric, CE Electric Holdings and Credit Suisse. The Company
has not guaranteed nor is it otherwise subject to recourse for
amounts borrowed under the U.K. Credit Facility. As of January
31, 1997, CE Electric Holdings had borrowed approximately 321
million under the U.K. Credit Facility to pay for Northern
ordinary and preference shares purchased to date.
The Company's strategy remains focused primarily upon continued
growth in its core power generation business through the
development of new projects, enhancement of existing and acquired
assets' performance, and the acquisition of companies and
projects that diversify the Company's power generation
technologies and enhance its competitive capabilities. The
Company also intends to pursue strategic expansion into other
aspects of the global power business, including the distribution
and supply of electricity, in order to diversify its business
and cash flows, develop and enhance its distribution, marketing
and power pool skills and increase its competitive capabilities.
The Northern acquisition was implemented in furtherance of this
aspect of its strategy. The Company believes that its existing
assets, strengths and skills, coupled with Northern's
distribution and supply skills, its experience in the largely
deregulated United Kingdom power market and the resulting
diversification in the Company's assets and geographic location
will position the Company to maximize its ability to participate
successfully (by way of acquisition or otherwise) in
opportunities expected to be created in the next few years by
restructurings in the United States and other global energy
markets. The Company also selectively will seek opportunities to
expand beyond power generation, distribution and supply in areas
related to these core businesses, such as power transmission and
gas production and supply, if such opportunities will enhance the
Company's competitive capabilities and financial position.
Northern is one of the twelve regional electricity companies
("RECs") which came into existence as a result of the
restructuring and subsequent privatization of the electricity
industry in the United Kingdom in 1990. Northern is primarily
engaged in the distribution and supply of electricity. Northern
was granted a Public Electricity Supply ("PES") license under the
Electricity Act 1989 (the "Electricity Act") to distribute and
supply electricity in Northern's authorized area located in
northeast England (Northern's "Authorized Area"). Northern's
Authorized Area covers approximately 14,400 square kilometers
with a population of approximately 3.2 million people and
includes the counties of Northumberland, Tyne and Wear, Durham,
Cleveland and North Yorkshire. Northern supplies electricity
outside its Authorized Area pursuant to second tier licenses.
Northern also is involved in non-regulated activities, including
the generation of electricity, electrical appliance retailing and
gas exploration and production.
The electricity industry in Great Britain is overseen by the
Office of Electricity Regulation headed by the Director General
of Electricity Supply (the "Regulator"). The regulatory
framework includes price controls which limit the maximum average
prices that Northern can charge for distributing and supplying
electricity.
Since its reorganization in 1995, Northern's principal assets are
the capital stock of its subsidiaries and all of the assets used
by such subsidiaries in their business. Each of the subsidiaries
focuses on its own particular objectives and customers and each
has its own employees and management team. Northern provides a
number of services to the subsidiaries, including
telecommunications, transportation and technology support, and
certain of the subsidiaries provide services to each other. The
operating subsidiaries are as follows:
Northern Electric Distribution Limited. Northern Electric
Distribution Limited ("Northern Distribution") receives
electricity from the national grid transmission system and
distributes electricity to each customer's premises using
Northern's network of transformers, switchgear and cables.
Substantially all of the customers in Northern's Authorized Area
are connected to Northern's network and can only be supplied with
electricity through Northern Distribution's distribution system,
regardless of whether the electricity is supplied by Northern's
supply business or by other suppliers, thus providing Northern
with distribution volume that is stable from year to year.
Northern serves approximately 1.5 million customers in Northern's
area and charges its customers access fees for the use of the
distribution system.
The prices for distribution to most customers are controlled by a
prescribed formula that limits increases (and may require
decreases) based on the rate of inflation in the United Kingdom.
Prices for distribution to customers taking their supplies at
extra high voltages are not directly controlled. The Regulator
reviewed the initial price formula in 1994 and introduced changes
that initially caused prices to be approximately 17% lower in
Northern's fiscal year ended March 31, 1996 than they would have
been had the initial formula continued unchanged. The Regulator
also limited price increases in future years, and in July, 1995
the Regulator limited price increases further. Currently,
increases will be limited to three percentage points below
inflation through March 31, 2000. Northern estimates that the
combined effect of the two reviews will be to reduce pre-tax
income by approximately 95 million (based on 1995-96 prices) for
the four year period ending March 31, 2000.
Most of Northern's distribution customers are customers in its
Authorized Area with a maximum demand of not more than 100kW
("Franchise Area Supply Customers"). This customer group
consists predominantly of residential and small commercial
consumers which are believed by Northern to constitute a stable
customer base. Northern's fastest growing category of
distribution customers, in terms of units distributed and
revenues, is domestic and commercial customers (as contrasted
with industrial customers). Commercial activity of Northern's
customers is about 40% industrial and 25% commercial. Northern
also distributes electricity to industrial concerns in its
Authorized Area. Northern's 20 largest distribution customers in
its Authorized Area accounted for approximately 18% of total
electricity distributed by Northern in Northern's fiscal year
ended March 31, 1996 in terms of units distributed, with no
single customer exceeding 4% of total electricity distributed.
Northern Electric Supply Limited. Northern Electric Supply
Limited ("Northern Supply") focuses on Northern's supply business
and is responsible for marketing, tariff setting, contracts and
customer service in connection with the supply of both
electricity and gas. Northern's supply business involves the
bulk purchase of electricity, primarily from the Pool, and
subsequent sale to individual customers. Until March 31, 1998,
each of the RECs is the exclusive supplier of electricity to
premises in each of their authorized areas, except where the
maximum demand of a customer is greater than 100kW. The formula
described in footnote 26 to the financial statements contained in
Item 7 controls the income that the supply business may receive
from Franchise Area Supply Customers and therefore the profits that
can be derived from the supply of electricity to franchise customers.
Supplies to other customers are not regulated since the Regulator
believes that the market in excess of 100kW is sufficiently
competitive not to require this. The current regulations that
permit each of the RECs to be the exclusive supplier in each of
their authorized areas will expire as of March 31, 1998.
Northern is one of the largest suppliers in the competitive and
open electricity market in the United Kingdom and supplies
customers in all 15 PES areas in Great Britain and Northern
Ireland. Northern supplies substantially more sites than it had
previously supplied prior to the beginning of open competition in
the supply business in the United Kingdom. In addition, Northern
Supply maintains a gas supply business and, at March 31, 1996,
Northern had won gas supply contracts for more than 4,000 sites
nationally, mainly outside northeast England.
Northern Utility Services Limited. Northern Utility Services
Limited ("Northern Utility") is an engineering company whose role
is to adapt, maintain and restore the distribution network of
Northern and to sell related services to third parties. Northern
Utility has been able to make significant cost reductions for
Northern during the past year by working with suppliers in order
to improve core processes, close selected depot locations,
increase staff productivity and reduce material and plant costs.
Northern Utility has pioneered techniques using innovative
diagnostic testing equipment which reduces the need for intrusive
maintenance. The equipment can identify some of the causes of
potential systems failures before breakdown and subsequent loss
of supply occurs. Also, the continued development in the use of
trenchless technology has brought both financial and
environmental benefits to Northern and its customers. While
Northern Utility's largest customer is Northern Distribution, it
increasingly has sold its services to third parties. Northern
Utility is Northern's largest employer.
Northern Electric Retail Limited. Northern Electric Retail
Limited sells electrical and gas appliances
and provides account collection and customer services for
Northern's other businesses.
Northern Electric Generation Limited. Northern Electric
Generation Limited ("Northern Generation") focuses on electricity
generation, primarily through its 15.4% stock ownership of
Teesside Power Limited, a company that owns and operates a 1,875
MW combined cycle gas-fired power station. Northern takes 400 MW
of electricity from the plant pursuant to a 15 year contract.
Northern Generation also operates a 5 MW diesel power generating
plant located in Northallerton, England in which the Company has
a 3 MW net ownership interest, and Northern operates 47 small-
scale combined heat and power facilities.
Northern Metering Services Limited. Northern Metering Services
Limited ("Northern Metering") provides meter supply,
installation, refurbishment and certification services as well as
meter operator and data collection services. Northern Metering
has developed an energy profiling system which helps businesses
reduce costs through the more efficient use of all fuels, not
just electricity.
Sovereign Exploration Limited. Sovereign Exploration Limited
("Sovereign Exploration"), a gas exploration and production
company, holds interests in the southern basin of the United
Kingdom sector of the North Sea, including a 5% ownership interest in
of the Victor Field, which had a subsea pipeline connection of
the north west extension of the field completed in 1995, and a 2%
ownership interest in the Schooner Field, which is currently
under development. Sovereign Exploration also has a 20%
ownership interest in the Windermere Field, which obtained
regulatory consent for development in April 1996. Sovereign
Exploration has interests in other potential gas developments
located in United Kingdom waters.
Item 7. Financial Statements and Exhibits Page
(a) Financial statements of business acquired:
Northern Electric plc
Financial Statements for the period ended March 31, 1996:
Report of Independent Auditors 6
Group Profit and Loss Account for the three years
ended in the period March 31, 1996 7
Statement of Total Recognised Gains and Losses for the
three years in the period ended March 31 1996 8
Group Balance Sheet as of March 31, 1996 and 1995 9
Group Statement of Cash Flows for the three years in
the period ended March 31, 1996 10
Notes to the Accounts 11
Financial Statements for the period ended September 30, 1996:
Independent Accountants' Review Report 48
Condensed Group Profit and Loss Account for the six
months ended September 30, 1996 and 1995 (unaudited) 49
Condensed Group Balance Sheet as of September 30,
1996 (unaudited) 50
Condensed Group Statement of Cash Flows for the six
months ended September 30, 1996 and 1995 (unaudited) 51
Notes to the condensed Interim Accounts (unaudited) 52
(b) Pro Forma Condensed Combined Unaudited Financial Data:
Condensed Combined Unaudited Balance Sheet as of
September 30, 1996 59
Condensed Combined Unaudited Statement of Earnings
for the year ended December 31, 1995 60
Condensed Combined Unaudited Statement of Earnings
for the nine months ended September 30, 1996 61
Notes to Pro Forma Condensed Combined Unaudited
Financial Data 62
NORTHERN ELECTRIC plc AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
We have audited the accompanying group balance sheet of Northern
Electric plc as of 31 March 1996 and 1995, and the related group
profit and loss account, statement of total recognised gains and
losses and statement of cash flows for each of the three years in
the period ended 31 March 1996. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United Kingdom
auditing standards which do not differ in any significant respect
from United States 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 the
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Northern Electric plc at 31 March 1996 and
1995, and the consolidated results of its operations and its
consolidated cash flows for each of the three years in the period
ended 31 March 1996 in conformity with accounting principles
generally accepted in the United Kingdom which differ in certain
respects from those followed in the United States (see Note 31 of
Notes to the Accounts).
ERNST & YOUNG
Chartered Accountants
Newcastle upon Tyne, England
20 June 1996,
except for Note 28 - Contingent Liabilities and
Note 31 - Differences between United Kingdom and
United States generally accepted accounting principles,
as to which the date is
14 February 1997.
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
GROUP PROFIT AND LOSS ACCOUNT
Year ended 31 March
Notes 1996 1996 1995 1994
$m pound pound pound
<S> <C> <C> <C> <C> <C>
TURNOVER 2&6 1,412.2 902.2 1,080.8 1,030.5
Cost of sales (1,035.4) (661.5) (753.9) (739.0)
--------------------------------------
GROSS PROFIT 6 376.8 240.7 326.9 291.5
Distribution costs (121.8) (77.8) (80.4) (81.0)
Administrative expenses (169.5) (108.3) (111.5) (97.1)
Other operating income 1.3 0.8 1.1 0.9
Income from interest in
associated undertakings 0.9 0.6 0.1 -
--------------------------------------
OPERATING PROFIT 5&6 87.7 56.0 136.2 114.3
Profit on disposal of
fixed assets 6 39.6 25.3 4.0 0.4
Exceptional shareholder costs 6 (24.6) (15.7) (15.1) -
Income from investments 3&6 154.2 98.5 19.5 17.6
--------------------------------------
PROFIT ON ORDINARY ACTIVITIES
BEFORE INTEREST 256.9 164.1 144.6 132.3
Net interest 4 (20.8) (13.3) (3.9) (3.6)
--------------------------------------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION 2&6 236.1 150.8 140.7 128.7
Tax on profit on ordinary
activities 9 (54.2) (34.6) (37.5) (30.4)
Tax on exceptional items 6 (75.8) (48.4) - -
--------------------------------------
PROFIT FOR THE YEAR* 106.1 67.8 103.2 98.3
Dividend on non-equity shares 10 (7.7) (4.9) 0.0 -
Dividends on equity shares 10 (675.3) (431.4) (36.8) (30.7)
--------------------------------------
RETAINED (LOSS)/ PROFIT
FOR THE YEAR (576.9) (368.5) (66.4) (67.6)
====== ===== ===== =====
EARNINGS PER SHARE: 11 cents pence pence pence
Basic 100.2 64.0 99.2 79.8
Exceptional items 6 23.6 15.1 11.2 -
--------------------------------------
Earnings per share before charging
or crediting exceptional items 123.8 79.1 110.4 79.8
====== ===== ===== =====
</TABLE>
* A summary of the significant adjustments to profit for the year
that would be required if United States generally accepted
accounting principles had been applied instead of those generally
accepted in the United Kingdom is set out in Note 31 of Notes to
the Accounts.
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Year ended 31 March
Notes 1996 1996 1995 1994
$m pound pound pound
<S> <C> <C> <C> <C> <C>
Profit attributable to members
of the parent company 106.1 67.8 103.2 98.3
Revaluation gain on investments 13 287.2 183.5 - -
-------------------------------
Total recognised gains and losses
related to the year 393.3 251.3 103.2 98.3
===== ===== ===== ====
</TABLE>
NOTES OF HISTORICAL COST PROFITS AND LOSSES
<TABLE>
Year ended 31 March
1996 1996 1995 1994
$m pound pound pound
<S> <C> <C> <C> <C>
Reported profit on ordinary
activities before taxation 236.1 150.8 140.7 128.7
Realisation of revaluation gain
on First Hydro Limited 17.1 10.9 - -
-------------------------------
Historical cost profit on ordinary
activities before taxation 253.2 161.7 140.7 128.7
===== ===== ===== =====
Historical cost (loss)/profit for the year
retained after taxation and dividends (293.8) (187.7) 66.4 67.6
===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
GROUP BALANCE SHEET
31 March
Notes 1996 1996 1995
FIXED ASSETS $m pound pound
<S> <C> <C> <C> <C>
Tangible assets 12 732.7 468.1 423.1
Investments 13 70.6 45.1 103.8
-------------------------
803.3 513.2 526.9
===== ===== =====
CURRENT ASSETS
Stocks 14 18.6 11.9 9.6
-------------------------
Debtors: 15
amounts falling due after one year 42.0 26.8 38.2
amounts falling due within one year 290.2 185.4 186.8
-------------------------
332.2 212.2 225.0
Investments 16 73.9 47.2 14.5
Cash at bank and in hand 17 54.6 34.9 20.4
-------------------------
479.3 306.2 269.5
CREDITORS: amounts falling due
within one year: 18
Loans and overdrafts (46.5) (29.7) (84.5)
Creditors and accruals (300.5) (192.0) (138.4)
-------------------------
(347.0) (221.7) (222.9)
NET CURRENT ASSETS 132.3 84.5 46.6
-------------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 935.6 597.7 573.5
===== ===== =====
CREDITORS: amounts falling due
after more than one year 19
Loans (402.4) (257.1) (61.5)
Other creditors (44.6) (28.5) (22.4)
-------------------------
(447.0) (285.6) (83.9)
PROVISIONS FOR LIABILITIES
AND CHARGES 21 (57.2) (36.5) (33.1)
---------------------------
TOTAL ASSETS LESS LIABILITIES 2 431.4 275.6 456.5
===== ===== =====
CAPITAL AND RESERVES
Called up share capital 22 91.3 58.3 55.8
Share premium account 23 5.3 3.4 1.8
Capital redemption reserve 23 9.7 6.2 6.2
Statutory reserve 23 3.4 2.2 1.0
Revaluation reserve 23 4.2 2.7 -
Profit and loss account 23 317.5 202.8 391.7
-------------------------
SHAREHOLDERS' FUNDS * 431.4 275.6 456.5
===== ===== =====
Equity interests 429.7 274.5 456.5
Non-equity interests 1.7 1.1 -
-------------------------
431.4 275.6 456.5
===== ===== =====
</TABLE>
* A summary of the significant adjustments to shareholders' funds
that would be required if United States generally accepted
accounting principles had been applied instead of those generally
accepted in the United Kingdom is set out in Note 31 of Notes to
the Accounts.
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
GROUP STATEMENT OF CASH FLOWS
Year ended 31 March
Notes 1996 1996 1995 1994
$m pounds m pounds m pounds m
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW FROM OPERATING
ACTIVITIES 5 218.5 139.6 83.7 177.0
---------------------------------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 5.8 3.7 4.8 2.8
Interest paid (13.3) (8.5) (7.6) (7.2)
Ordinary dividends and investment
income received 24.1 15.4 15.0 8.7
Exceptional dividends received 108.8 69.5 - -
Ordinary dividends paid (59.3) (37.9) (32.3) (27.7)
Exceptional dividends paid (270.2) (172.6) - -
---------------------------------
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE (204.1) (130.4) (20.1) (23.4)
===== ===== ==== ====
TAXATION
Corporation tax paid (including
ACT on dividends) (117.4) (75.0) (39.2) (22.8)
===== ===== ==== ====
INVESTING ACTIVITIES
Payments to acquire tangible fixed assets (87.0) (55.6) (71.7) (68.9)
Receipts from sales of tangible fixed assets 2.3 1.5 5.0 0.5
Receipt of consumers' contributions 19.7 12.6 13.8 12.9
Purchase of subsidiary undertaking
(net of cash and loans acquired) 13 (24.3) (15.5) - -
Payments to acquire fixed asset
investments (21.0) (13.4) (4.6) (2.0)
Receipts from sales of fixed asset
investments 58.2 37.2 - -
Payments to acquire equity accounted
entities - - (1.7) (10.7)
Payments to acquire current asset
investments with a maturity date of
more than three months (4.1) (2.6) (47.5) (75.6)
Receipts from disposals of current
asset investments with a maturity
date of more than three months 11.0 7.0 67.5 47.0
Receipts from sale of preference
shares by Northern Electric Share
Scheme Trustee Limited 2.0 1.3 - -
---------------------------------
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES (43.2) (27.5) (39.2) (96.8)
===== ===== ==== ====
NET CASH (OUTFLOW)/INFLOW BEFORE
FINANCING (146.2) (93.3) (14.8) 34.0
===== ===== ==== ====
FINANCING
Issue of ordinary share capital 22 (6.4) (4.1) (0.5) (1.7)
Purchase of own shares 22 - - 101.6 -
Loan finance 20 (253.6) (162.0) (33.0) (0.6)
Repayment of loans - - - 19.0
-------------------------------------
NET CASH (INFLOW)/OUTFLOW FROM
FINANCING (260.0) (166.1) 68.1 16.7
-------------------------------------
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 17 113.8 72.8 (82.9) 17.3
-------------------------------------
(146.2) (93.3) (14.8) 34.0
===== ===== ===== ====
</TABLE>
1 Major non-cash transactions are disclosed in Note 23
2 The significant differences between the cash flow statements
presented above and those required under United States
generally accepted accounting principles are set out in Note 31
of Notes to the Accounts.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS
1. ACCOUNTING POLICIES
General
Northern Electric plc ("the Company") is one of twelve Regional
Electricity Companies ("RECs") in England and Wales licensed to
distribute, supply and, to a limited extent, generate
electricity. The RECs were created as a result of the
privatisation of the UK electricity industry in 1990 after the
state owned low voltage distribution networks were allocated to
the then existing twelve regional boards. The Company's main
business, the distribution and supply of electricity to customers
in the North East of England, is regulated under the terms of the
Company's Public Electricity Supply License by the Office of
Electricity Regulation ("OFFER").
Basis of preparation
The accounts are prepared under the historical cost convention as
modified to include the revaluation of fixed asset investments
and in accordance with applicable UK accounting standards.
These financial statements are presented in pounds sterling
("pounds"). Solely for the convenience of the reader, US dollar
amounts have been translated at the exchange rate of 1 pound = U.S.
$1.5653, the noon buying rate in New York City for cable
transfers in pounds sterling as certified for customs purposes by
the Federal Reserve Bank of New York on September 30, 1996. No
representation is made that the pounds sterling amounts have
been, could have been, or could be converted into U.S. dollars at
that or any other rate of exchange.
Basis of consolidation
With the exception of the accounts of Sovereign Exploration
Limited which are made up to 31 December each year, the Group
accounts consolidate the accounts of the Company and its
subsidiary undertakings (together, the "Group" ) drawn up to 31
March each year. No profit and loss account is presented for the
Company as permitted by Section 230 of the Companies Act 1985.
Undertakings, other than subsidiary undertakings, in which the
Group has an investment of not less than 20% of the voting rights
and over which it exerts significant influence are treated as
associated undertakings. Where material, the Group accounts
include the appropriate share of these undertakings' results and
reserves based on the most recent audited accounts.
Goodwill
Depending on the circumstances of each acquisition, purchased
goodwill is either set off directly against reserves or amortised
through the profit and loss account over the directors' estimate
of its useful life.
Turnover
Turnover represents the value of electricity and gas sold during
the period, including an estimate of the sales value of units
supplied to customers between the date of the last meter reading
and the period end, and the invoice value of other goods sold and
services provided, exclusive of value added tax. Income from
credit sales charges is apportioned in the trading accounts over
the period of the sales agreements.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS
1. ACCOUNTING POLICIES continued
Regulatory correction factor (K Factor)
Where there is an overrecovery of supply or distribution business
revenues against the maximum regulated amount, revenues are
deferred equivalent to the overrecovered amount. The deferred
amount is deducted from turnover and included in provisions Where
there is an underrecovery, no anticipation of any potential
future recovery is made.
Royalties
Royalties in respect of gas production are accounted for in the
same year as the turnover to which they relate and are included
in cost of sales.
Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost. The charge for
depreciation is calculated to write off assets to their residual
values over their estimated useful lives using the methods
described below for distribution system and oil and gas assets
and straight-line depreciation for all other assets, as follows:
Distribution system assets _________________________..40 years
Depreciation is charged at 3% for 20 years followed by 2%
for the remaining 20 years
Certain short-life metering equipment included in
distribution system assets up to 10 years
Oil and gas assets
Expenditure on oil and gas properties is accounted for using
the full cost method. Under this method, exploration,
appraisal and development costs are capitalised in a single
cost pool. Capitalised costs, other than costs of
unevaluated exploration projects and projects awaiting
development consent, are depleted using the unit of
production method. Depletion is calculated based on
hydrocarbon reserves of properties in the evaluated pool
estimated to be commercially recoverable and include
anticipated future development costs in respect of those
reserves.
Non-operational assets
Buildings - freehold. up to 60 years
- leasehold lower of lease period or 60 years
Vehicles and mobile plant up to 10 years
Fixtures and equipment up to 10 years
Freehold land is not depreciated.
Consumers' contributions and capital grants are credited to the
profit and loss account over a 40 year period at a rate of 3%
for the first 20 years followed by 2% for the remaining 20 years.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
1. ACCOUNTING POLICIES continued
Commercial reserves of oil and gas
Commercial reserves used in the unit of production calculations
are proven and probable reserves. Reserves are based on estimates
provided by the operators.
Abandonment costs
Provision is made on a unit of production basis for the
abandonment of oil and gas production facilities, calculated
field-by-field using the same reserve quantities as are used for
depreciation purposes. The estimated costs, based on price levels
at the balance sheet date, are computed on the assumption that
the facilities will be fully removed where appropriate and are
based on estimates provided by the operators. It is assumed that
certain abandonment costs will be allowable for petroleum revenue
tax and corporation tax purposes when incurred.
Effects of changing estimates
The effects of changes in estimated costs or other factors
affecting oil and gas unit of production calculations for
depreciation and abandonment costs are dealt with prospectively
over the estimated remaining commercial reserves of each field.
Ceiling test of oil and gas assets
Ceiling tests are carried out at least annually and provision is
made for any permanent impairment where the net book amount of
capitalised expenditure, less provisions for future abandonment
costs and royalties, exceeds the estimated future undiscounted
net revenues using prices and cost levels ruling at the balance
sheet date.
Over and underlifts
The quantities of oil and other hydrocarbons lifted may differ
from the equity share of production giving rise to over or
underlifts. Overlifts are included in accruals whilst underlifts
are included in debtors, both being valued at the year end spot
or prevailing contract price. Any adjustment for over or
underlift is reflected in cost of sales.
Petroleum revenue tax
Provision is made for petroleum revenue tax over the expected
life of each field on a unit of production basis taking into
account the estimated benefit of uplift, oil allowance,
exploration expenditure relief, safeguard and abandonment costs
and using the relevant oil prices and cost levels prevailing at
the balance sheet date.
Property clawback
Under a trust deed HM Government is entitled to a proportion of
any property gain (above certain thresholds) accruing or treated
as accruing to the Company as a result of disposals or deemed
disposals. These arrangements will last until 31 March 2000. A
provision in respect of property disposals is made only to the
extent that it is probable that a liability will crystallise.
Such a liability will crystallise when an actual or deemed
disposal occurs.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
1. ACCOUNTING POLICIES continued
Investments
Fixed asset investments are stated at cost less provision for
permanent impairment in value, or at directors' valuation.
Current asset investments are shown at cost or directors'
valuation. Investments held in employee share option schemes are
written down to the option price over the period from the grant
of the option to the first date on which the options can be
exercised.
Stocks and work in progress
Stocks are stated at the lower of cost and net realisable value
as follows:
Raw materials and goods for resale - purchase cost on an
average price basis.
Work in progress - cost of direct materials and labor plus
attributable overheads based on the normal level of activity
less progress payments on short-term contracts.
Net realisable value is based on estimated selling price
less further costs expected to be incurred to completion and
disposal.
Research and development
Expenditure on research and development is written off to the
profit and loss account in the period in which it is incurred,
except that development expenditure incurred on an individual
project is carried forward when its future recoverability can
reasonably be regarded as assured. Any expenditure carried
forward is amortised in line with the expected future benefits
from the related project.
Deferred taxation
Deferred taxation is provided using the liability method on all
timing differences to the extent that they are expected to
reverse in the future without being replaced, calculated at the
rate at which it is anticipated the timing differences will
reverse. Deferred tax assets are only recognised if recovery is
reasonably certain.
Pensions
The Group contributes to the Electricity Supply Pension Scheme
and contributions to the scheme are charged to the profit and
loss account.
The capital cost of ex gratia and supplementary pensions is
normally charged to the profit and loss account in the period in
which they are granted. Variations in pension cost, which are
identified as a result of actuarial valuations, are amortised
over the average expected remaining working lives of employees in
proportion to their expected payroll costs. Differences between
the amounts funded and the amounts charged to the profit and loss
account are treated as either provisions or prepayments in the
balance sheet.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
2. TURNOVER AND SEGMENTAL ANALYSIS
The Group operates in four principal areas of activity, that of
the distribution, supply and generation of electricity, and
retailing, all in the United Kingdom. The distribution, supply
and generation activities are treated as separate businesses
under the Public Electricity Supply License granted to the
Company in 1990.
Turnover, all of which is in respect of continuing activities and
sales to United Kingdom customers, Group profit on ordinary
activities before taxation and net assets are analysed below:
<TABLE>
<CAPTION>
Year ended at 31 March 1996
Distribution Supply Generation Retailing Other Other Total
Trading
Activities
TURNOVER pound m pound m pound m pound m pound m pound m pound m
<S> <C> <C> <C> <C> <C> <C> <C>
Total sales 240.7 798.5 1.0 54.1 158.9 57.6 1,310.8
Inter-segment sales (205.8) (1.8) (0.3) (8.1) (142.3) (50.3) (408.6)
-------- ------- ----- ----- ------ ------ --------
Sales to third parties 34.9 796.7 0.7 46.0 16.6 7.3 902.2
======== ======= ===== ===== ====== ====== ========
PROFIT BEFORE TAXATION
Segment profit 79.7 (43.6) (1.4) 3.9 2.8 14.0 55.4
Profit on disposal of
fixed assets 1.0 - - - - 24.3 25.3
Exceptional shareholder
costs - - - - - (15.7) (15.7)
Group share of profit/
(loss) before taxation of
associated undertakings - - (0.5) - 1.1 - 0.6
Investment income - - 6.6 - - 91.9 98.5
Net interest - - - - - (13.3) (13.3)
------ ------- ------ ------ ---- ------ ------
Profit on ordinary activities
before taxation 80.7 (43.6) 4.7 3.9 3.9 101.2 150.8
======= ======= ====== ====== ===== ====== ======
NET ASSETS
Total net assets
by segment 386.6 (4.1) 42.9 32.6 32.5 (214.9) 275.6
====== ===== ==== ==== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIE
NOTES TO THE ACCOUNTS CONTINUED
2. TURNOVER AND SEGMENTAL ANALYSIS (continued)
Year ended and at 31 March 1995
Distribution Supply Generation Retailing Other Other Total
Trading
Activities
pound m pound m pound m pound m pound m pound m pound m
TURNOVER
<S> <C> <C> <C> <C> <C> <C> <C>
Total sales 260.1 982.9 1.2 57.0 13.9 38.5 1,353.6
Inter-segment sales (227.3) (2.1) (0.4) (7.6) (0.5) (34.9) (272.8)
-------------------------------------------------------------
Sales to third parties 32.8 980.8 0.8 49.4 13.4 3.6 1,080.8
===== ===== ==== ===== ===== ===== =======
PROFIT BEFORE TAXATION
Segment profit 98.8 24.9 (0.5) 3.5 1.2 8.2 136.1
Profit on disposal of
fixed assets 0.6 - - - - 3.4 4.0
Exceptional shareholder
costs - - - - - (15.1) (15.1)
Group share of profit/(loss)
before taxation of associated
undertakings - - (1.0) - 1.1 - 0.1
Investment income - - 6.3 - - 13.2 19.5
Net interest - - - - - (3.9) (3.9)
-------------------------------------------------------------
Profit on ordinary activities
before taxation 99.4 24.9 4.8 3.5 2.3 5.8 140.7
===== ===== ==== ===== ===== ===== =====
NET ASSETS
Net assets by segment 376.5 34.0 42.9 41.2 1.1 (49.4) 446.3
Group share of the
net assets of associated
undertakings - - - - 10.2 - 10.2
------------------------------------------------------------
Total net assets 376.5 34.0 42.9 41.2 11.3 (49.4) 456.5
===== ===== ==== ===== ===== ===== ======
</TABLE>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
2. TURNOVER AND SEGMENTAL ANALYSIS (continued)
<TABLE>
<CAPTION>
Year ended and at 31 March 1994
Distribution Supply Generation Retailing Other Other Total
Trading
Activities
pound m pound m pound m pound m pound m pound m pound m
TURNOVER
<S> <C> <C> <C> <C> <C> <C> <C>
Total sales 250.6 957.6 0.6 52.2 8.8 44.2 1,314.0
Inter-segment sales (229.8) (1.7) (0.1) (8.8) (1.1) (42.0) (283.5)
----------------------------------------------------------------
Sales to third
parties (ii) (iii) 20.8 955.9 0.5 43.4 7.7 2.2 1,030.5
===== ===== ==== ===== ===== ===== =======
PROFIT BEFORE TAXATION
Segment profit 97.3 5.8 (0.6) 2.7 0.3 8.8 114.3
Profit on disposal of fixed
assets 0.4 - - - - - 0.4
Investment income - - 5.4 - - 12.2 17.6
Net interest - - - - - (3.6) (3.6)
-----------------------------------------------------------------
Profit on ordinary activities
before taxation (ii) 97.7 5.8 4.8 2.7 0.3 17.4 128.7
===== ===== ==== ===== ===== ===== =====
NET ASSETS
Net assets by segment 339.3 (15.2) 39.5 33.1 1.6 85.0 483.3
Group share of the net assets
of associated undertakings - - - - - 10.7 10.7
-----------------------------------------------------------------
Total net assets 339.3 (15.2) 39.5 33.1 1.6 95.7 494.0
===== ===== ==== ===== ===== ===== ======
</TABLE>
(i) Other comprises business support units, and unallocated items
including investments, financing, dividends and taxation. The other
Trading Activities reflect the change in Group Structure effective from
1 April 1995 and include the Group's engineering, gas and energy
marketing activities.
(ii) Supply's turnover in 1996 is net of a 67.1m pound customer rebate in
consequence of the flotation of the National Grid Group plc. Segment
profit in 1996 is net of 61.0m pounds reflecting the reduction in cost of
sales owing to abatement of the non-fossil fuel levy. (Note 6)
(iii) Distribution's turnover in 1996 reflects an overrecovery of 2.9m
pounds (1995 - 4.1m pound underrecovery, 1994 - 0.5m pound overrecovery).
Supply's turnover reflects a net increase in the overrecovery of 0.1m pounds
(1995 - 9.2m pound reduction in overrecovery, 1994 - 4.9m pound reduction in
overrecovery).
At 31 March 1996 the cumulative underrecovery in the distribution business
was 2.0m pounds (1995 - 4.9m pound underrecovery) and in the supply business the
cumulative overrecovery was 7.2m pounds (1995 - 7.1m pound overrecovery).
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
3. INCOME FROM FIXED ASSET INVESTMENTS
Year ended 31 March
1996 1995 1994
pound m pound m poound m
Exceptional dividends received from The
National Grid Group plc (Note 6) 69.5 - -
Tax credit attributable to exceptional
dividends (Note 9) 14.1 - -
Ordinary dividends receivable from The
National Grid Group plc 4.5 10.6 9.7
Tax credit attributable to ordinary
dividends (Note 9) 1.2 2.6 2.5
Dividends received by Northern Electric
Share Scheme Trustee Limited 2.6 - -
---------------------
91.9 13.2 12.2
Interest receivable from Teesside
Power Limited 6.6 6.3 5.4
---------------------
Amount included in profit and loss account 98.5 19.5 17.6
==== ==== ====
4. NET INTEREST
Year ended 31 March
1996 1995 1994
pound m pound m pound m
Interest payable:
On loans and overdrafts wholly
repayable within five years (8.7) (8.0) (0.3)
On long-term loans repayable in
whole or in part after five years (8.0) - (7.0)
==== ==== ====
Total interest payable (16.7) (8.0) (7.3)
Interest receivable 3.4 4.1 3.7
-----------------------
(13.3) (3.9) (3.6)
==== ==== ====
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
5. OPERATING PROFIT Cost of Distribution Administrative
(i) This is stated after charging: Sales Costs Expenses Total
pound m pound m pound m pound m
<S> <C> <C> <C> <C>
Year ended 31 March 1996
Staff costs (Note 7) 3.9 29.9 34.7 68.5
Restructuring costs (Note 7) - - 13.5 13.5
Research and development expenditure - - 0.5 0.5
Depreciation 0.5 18.2 9.5 28.2
Exceptional depreciation on
non-operational property - - 2.4 2.4
Rental of land and buildings - - 3.4 3.4
Hire of plant and machinery - 2.0 - 2.0
Hire of computer equipment - - 1.8 1.8
Auditors' remuneration - audit services - - 0.1 0.1
- other services - - 0.2 0.2
===== ===== ===== =====
Year ended 31 March 1995
Staff costs (Note 7) 3.4 31.8 44.0 79.2
Restructuring costs (Note 7) - - 19.8 19.8
Research and development expenditure - 0.1 0.9 1.0
Depreciation 0.2 18.7 7.7 26.6
Depreciation credit on re-lifting
key meters - (1.6) - (1.6)
Rental of land and buildings - - 3.5 3.5
Hire of plant and machinery - 1.9 - 1.9
Hire of computer equipment - - 2.2 2.2
Auditors' remuneration - audit services - - 0.1 0.1
- other services - - 0.2 0.2
===== ===== ===== ====
Year ended 31 March 1994
Staff costs (Note 7) 4.4 33.0 46.2 83.6
Restructuring costs (Note 7) - - 6.9 6.9
Research and development expenditure - 0.1 1.0 1.1
Depreciation 0.2 16.9 7.0 24.1
Rental of land and buildings - - 3.5 3.5
Hire of plant and machinery - 1.6 - 1.6
Hire of computer equipment - - 1.9 1.9
Auditors' remuneration - audit services - - 0.1 0.1
- other services - - 0.1 0.1
===== ===== ===== =====
</TABLE>
In addition to the auditors' remuneration for other services,
there are fees payable of 0.2m pounds (1995 - 0.6m pounds) included within
the exceptional shareholder costs of 15.7m pounds (1995 - 15.1m pounds).
(ii) Reconciliation of operating profit to net cash inflow from operating
activities:
Year ended 31 March
1996 1995 1994
pound m pound m pound m
Operating profit 56.0 136.2 114.3
Exceptional shareholder costs (9.1) (15.1) -
Share of losses of associated undertakings (0.6) (0.1) -
Depreciation charges 30.6 25.0 24.1
Increase/(decrease) in provisions 3.4 (8.3) (2.8)
(Increase)/decrease in stocks (2.3) 0.5 (0.6)
Decrease/(increase) in debtors 52.3 (37.0) (8.5)
Increase/(decrease) in creditors 9.3 (17.5) 50.5
----- ------ -----
Net cash inflow from operating activities 139.6 83.7 177.0
===== ===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
6. EXCEPTIONAL ITEMS Year ended 31 March
1996 1995 1994
pound m pound m pound m
Recognised in arriving at operating profit:
Customer rebate in consequence of the flotation of
The National Grid Group plc (67.1) - -
Reduction in fossil fuel levy 6.1 - -
------ --- ----
Effect on gross profit (61.0) - -
------ --- ----
Recognised below operating profit:
Professional expenses incurred in respect of
the flotation of The National Grid Group plc (1.1) - -
Expenses incurred in respect of share option
compensation (10.8) - -
Expenses incurred in respect of the shareholder
package (3.8) (15.1) -
------ ------ ----
Exceptional shareholder costs charged to
profit and loss account (15.7) (15.1) -
Profit on sale of fixed assets 24.1 3.4 -
Specie dividend paid to Northern Electric
Share Scheme Trustee Limited 2.6 - -
Dividends received from The National Grid
Group plc (Note 3) 83.6 - -
------ ----- ----
94.6 (11.7) -
------ ----- ----
Effect on profit before tax 33.6 (11.7) -
Taxation effect of above (Note 9) (28.2) - -
Advance corporation tax written off (Note 9) (20.2) - -
------ ----- ----
Effect on earnings (14.8) (11.7) -
Dividends paid (Note 10) (391.6) - -
------- ----- -----
(406.4) (11.7) -
====== ===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
7. STAFF COSTS
Year ended 31 March
1996 1995 1994
pound m pound m pound m
Salaries 79.5 83.5 84.9
Social security costs 6.2 7.1 7.4
Other pension costs 8.9 10.6 10.7
Release of Barber v Guardian
Royal Exchange provision (5.5) - -
--------------------------
89.1 101.2 103.0
Less: charged as capital expenditure 20.6 22.0 19.4
--------------------------
68.5 79.2 83.6
Add: restructuring costs 13.5 19.8 6.9
--------------------------
Charged to profit and loss account 82.0 99.0 90.5
===== ===== =====
The salaries and social security costs are before charging those
elements of income tax and national insurance contributions borne
by the Group and included in the share option compensation
referred to in Note 6.
The average number of employees during the year was:
Year ended 31 March
1996 1995 1994
Number Number Number
Electricity 2,844 3,235 3,500
Retail 606 650 645
Other 432 571 569
---------------------------
3,882 4,456 4,714
===== ===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
8. DIRECTORS' REMUNERATION
Year ended 31 March
1996 1995 1994
Chairman pound 000 pound 000 pound 000
Executive directors' remuneration 141 185 187
Performance-related bonuses 30 45 21
---------------- -------
171 230 208
Pension costs - funded scheme 41 25 25
- unfunded arrangement 84 77 70
---------------- -------
Total remuneration 296 332 303
==== ==== ====
Chief Executive (i)
Executive directors' remuneration 200 175
Performance-related bonuses 43 40
----------------
243 215
Pension costs - funded scheme 58 24
- unfunded arrangement 73 74
----------------
Total remuneration 374 313
==== ====
(i) Amounts relating to the Chief Executive for 1994 were not
required to be disclosed.
All directors
Non-executive directors' fees 60 53 53
Executive directors' remuneration 740 704 641
Performance-related bonuses 155 164 71
---------------- -------
955 921 765
Pension costs - funded scheme 211 95 87
- unfunded arrangement 170 151 134
---------------- -------
Total remuneration 1,336 1,167 986
Payment on retirement of executive
director 94 - -
---------------- -------
1,430 1,167 986
===== ===== ====
The additional payment in 1996 was in respect of Alan Groves and
included benefits in kind of 14,000 pounds being the market value of
his company car given to him on his retirement from executive
office in August 1995.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
8. DIRECTORS' REMUNERATION continued
The number of directors with emoluments, excluding pension
contributions, within the bands stated were:
Year ended 31 March
1996 1995 1994
Number Number Number
pound 5,001 - 10,000 - 2 -
pound 15,001 - 20,000 3 2 3
pound 90,001 - 95,000 1 - -
pound 100,001 - 105,000 1 - 1
pound 115,001 - 120,000 - - 1
pound 120,001 - 125,000 - - 1
pound 125,001 - 130,000 - 1 -
pound 135,001 - 140,000 1 - -
pound 145,001 - 150,000 1 2 -
pound 160,001 - 165,000 - - 1
pound 170,001 - 175,000 1 - -
pound 205,001 - 210,000 - - 1
pound 215,001 - 220,000 - 1 -
pound 225,001 - 230,000 - 1 -
pound 240,001 - 245,000 1 - -
The Chief Executive was the highest paid director in 1996 ( 1995
and 1994- Chairman)
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
9. TAX ON PROFIT ON ORDINARY AND EXCEPTIONAL ACTIVITIES
Year ended 31 March
1996 1995 1994
pound m pound m pound m
Tax on profit for the year:
Corporation tax at 33% (1995 - 33%) 47.4 32.4 19.4
Provision for payment for consortium relief 2.3 3.2 11.2
Tax credits attributable to dividends received 15.3 2.6 2.5
Surplus advance corporation tax written off 20.2 - -
Corporation tax under/(over) provided in
previous years 1.8 (7.4) (6.3)
-----------------------
87.0 30.8 26.8
Deferred tax (4.9) 6.2 3.6
-----------------------
82.1 37.0 30.4
Tax on profits from associates 0.9 0.5 -
-----------------------
Tax charge 83.0 37.5 30.4
==== ==== ====
In arriving at the tax charge, it has been assumed that shareholder value
costs and The National Grid Group plc flotation costs are disallowable
expenses.
The tax effect in the profit and loss account relating to the
exceptional items recognised before operating profit was a credit
of 20.1m pounds (1995 and 1994 - Nil).
The overall tax effect on the Group of the exceptional items was
an additional charge to corporation tax of 48.4m pounds (1995 and 1994
- - Nil) including advance corporation tax written off of 20.2m pounds
(1995 and 1994 - Nil).
Deferred tax has been provided on interest receivable from
Teesside Power Limited and on the dividends receivable from
Northern Electric Insurance Services Limited. A deferred tax
asset has been created on deferred income received and interest
payable within Northern Electric Finance plc.
The tax charge has been reduced by 5.5m pounds (1995 - 11.0m pounds,
1994 - 11.5m pounds) being the effect of timing differences for
which no provision has been made. Potential deferred tax liabilities, for
which no provision has been made, computed at the current of
corporation tax of 33% (1995 - 33%), are as follows:
31 March
1996 1995
pound m pound m
Capital allowances in excess of depreciation 66.1 66.9
Other timing differences 49.6 43.3
-------- --------
115.7 110.2
Advance corporation tax written off (20.2) -
-------- --------
95.5 110.2
==== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
10. DIVIDENDS
<TABLE>
<CAPTION>
Year ended 31 March
1996 1995 (i) 1994 1996 1995 1994
pence pence pence pound m pound m pound m
<S> <C> <C> <C> <C> <C> <C>
Preference dividend for period
to 31 March 1996 4.47 - - 4.9 - -
==== ==== ==== ==== ===== =====
Interim dividend on ordinary
shares paid 12.00 10.85 7.40 11.9 10.7 9.1
Final dividend on ordinary
shares proposed 27.90 26.45 17.45 27.9 26.1 21.6
--------------------------------------------
39.90 37.30 24.85 39.8 36.8 30.7
--------------------------------------------
Exceptional dividend on ordinary shares
paid in September 1995 (ii) 113.04 - - 110.4 - -
Specie dividend on flotation of
The National Grid Group plc 221.49 - - 219.0 - -
Exceptional dividend on ordinary
shares paid in January 1996 63.50 - - 62.2 - -
--------------------------------------------
398.03 - - 391.6 - -
--------------------------------------------
Total dividends paid and payable to
ordinary shareholders (iii) 437.93 37.30 24.85 431.4 36.8 30.7
====== ===== ===== ===== ==== =====
</TABLE>
(i) The dividend per share for 1995 was 33.00 pence (1994 -
24.85 pence) which, after adjustment for share consolidation,
is equivalent to 37.30 pence (1994 - 28.09 pence).
(ii) The exceptional dividend of 100.00 pence paid in
September 1995 is equivalent to 113.04 pence after adjustment
for consolidation.
(iii) Dividends of 2.1m pounds were waived by Northern Electric Share
Scheme Trustee Limited in 1996.
11. EARNINGS PER ORDINARY SHARE
The calculation of basic earnings per ordinary share is based on
earnings, after deducting preference dividend, of 62.9m pounds (1995 -
103.2m pounds, 1994 - 98.3m pounds) and on 98,323,626 ordinary shares,
being the weighted average number of shares in issue during the year
(1995-117,651,149, 1994-123,184,663, adjusted on consolidation to
1995-104,074,206, 1994-112,472,953), excluding those held by
Northern Electric Share Scheme Trustee Limited which has waived
rights to dividends. The calculation of earnings per share
excluding net exceptional charges of 14.8m pounds (1995 - 11.7m pounds,
1994 - Nil) is included to give a fairer indication of the underlying
performance of the Group in the year.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
<TABLE>
<CAPTION>
12. TANGIBLE FIXED ASSET
Distribution Oil and gas Non- Fixtures Vehicles Deduct: Total
System assets operational and and mobile Consumers'
land and equipment plant contributions
buildings
pound m pound m pound m pound m pound m pound m pound m
<C> <C> <C> <C> <C> <C> <C> <C>
COST:
At 1 April 1993 630.6 - 40.4 48.7 20.1 (158.0) 581.8
Reclassification of assets (6.0) - (1.5) 7.6 (0.1) - -
Additions 53.2 - (0.1) 12.0 3.0 (13.5) 54.6
Disposals (4.1) - (0.1) (0.1) (0.6) 0.3 (4.6)
-------------------------------------------------------------
At 1 April 1994 673.7 - 38.7 68.2 22.4 (171.2) 631.8
Reclassification of assets 2.2 - - (2.2) - - -
Additions 60.5 - - 6.5 3.4 (13.2) 57.2
Disposals (3.9) - (0.8) (0.4) (1.6) 0.3 (6.4)
-------------------------------------------------------------
At 1 April 1995 732.5 - 37.9 72.1 24.2 (184.1) 682.6
Additions 50.4 33.7 - 3.5 0.9 (12.6) 75.9
Disposals (5.2) - - (5.8) (2.0) 0.7 (12.3)
-------------------------------------------------------------
At 31 March 1996 777.7 33.7 37.9 69.8 23.1 (196.0) 746.2
-------------------------------------------------------------
DEPRECIATION:
At 1 April 1993 219.0 - 6.9 26.0 9.4 (41.0) 220.3
Reclassification of assets (1.4) - - 1.4 - - -
Provided during the year 18.0 - 0.7 7.7 2.3 (4.6) 24.1
Disposals (4.1) - - (0.1) (0.6) 0.3 (4.5)
-------------------------------------------------------------
At 1 April 1994 231.5 - 7.6 35.0 11.1 (45.3) 239.9
Reclassification of assets 1.4 - - (1.4) - - -
Provided during the year 18.9 - 0.8 8.2 2.1 (5.0) 25.0
Disposals (3.9) - (0.1) (0.4) (1.3) 0.3 (5.4)
-------------------------------------------------------------
At 1 April 1995 247.9 - 8.3 41.4 11.9 (50.0) 259.5
Provided during the year 22.0 - 3.0 8.7 2.4 (5.5) 30.6
Disposals (5.2) - - (5.8) (1.7) 0.7 (12.0)
-------------------------------------------------------------
At 31 March 1996 264.7 - 11.3 44.3 12.6 (54.8) 278.1
===== ==== ===== ==== ==== ===== =====
Net book value at
31 March 1996 513.0 33.7 26.6 25.5 10.5 (141.2) 468.1
===== ==== ===== ==== ==== ===== =====
Net book value at
31 March 1995 484.6 - 29.6 30.7 12.3 (134.1) 423.1
===== ==== ===== ==== ==== ===== =====
Net book value at
31 March 1994 442.2 - 31.1 33.2 11.3 (125.9) 391.9
===== ==== ===== ==== ==== ===== =====
Assets in the course of construction included:
At 31 March 1996 10.5 5.4 - - - - 15.9
===== ==== ===== ==== ==== ===== =====
At 31 March 1995 10.3 - - - - - 10.3
===== ==== ===== ==== ==== ===== =====
At 31 March 1994 1.6 - - 0.7 - - 2.3
===== ==== ===== ==== ==== ===== =====
</TABLE>
The depreciation charge was 30.6m pounds (1995 - 25.0m pounds, 1994 - 24.1m
pounds) before taking account of profit from disposals of 1.2m pounds (1995 -
4.0m pounds, 1994 - 0.4m pounds).The depreciation charge for 1995 includes an
exceptional credit of 1.6m pounds following a reassessment which extended the
economic lives of key meters from five to ten years.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
12. TANGIBLE FIXED ASSETS continued
The net book value of non-operational land and buildings
comprises:
31 March
1996 1995
pound m pound m
Freehold 23.1 24.6
Long leasehold 3.4 4.9
Short leasehold 0.1 0.1
----- ----
26.6 29.6
===== ====
The total of land which is not depreciated is: 3.7 3.6
===== ====
<TABLE>
<CAPTION>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
13. INVESTMENTS
Associated undertakings Other undertakings Total
Shares Loans Shares Loans
pound m pound m pound m pound m pound m
<S> <C> <C> <C> <C> <C>
Cost:
At 1 April 1993 - - 56.5 31.5 88.0
Additions 5.0 5.7 2.0 - 12.7
Disposals - - - - -
------ ----- ----- ---- -----
At 1 April 1994 5.0 5.7 58.5 31.5 100.7
Restatement of opening position on change to
associate (ii) status 1.0 - (1.0) - -
Additions 1.7 - 4.2 0.4 6.3
Share of losses in associated
undertakings (0.4) - - - (0.4)
Goodwill written off (2.0) (0.8) - - (2.8)
------ ----- ----- ---- -----
At 1 April 1995 5.3 4.9 61.7 31.9 103.8
Share of losses in associated
undertakings (0.2) - - - (0.2)
Acquisition of controlling
interest in associate (iii) (6.3) (4.9) - - (11.2)
Additions - - 12.4 1.0 13.4
Revaluation of investment in
The National Grid Group plc (iv) - - 171.4 - 171.4
Revaluation of investment in
First Hydro Limited (iv) - - 10.9 - 10.9
Revaluation of associated
undertaking's assets 1.2 - - - 1.2
Disposals (v) - - (244.2) - (244.2)
----- ----- ----- ---- -------
At 31 March 1996 - - 12.2 32.9 45.1
===== ===== ===== ===== =======
</TABLE>
- -------------------------------------------
(i) All investments are unlisted securities.
(ii) Following the increases in 1995 in the shareholding in
Combined Power Systems Limited to 29.95% this company is now
accounted for as an associate and the shareholding at 1 April
1994 (1.0m pounds) was restated under the associates column.
(iii) Following the increase in the shareholding in Sovereign
Exploration Limited to 100% on 31 December 1995, this company
is now fully consolidated as a subsidiary.
(iv) In the year ended 31 March 1996 the investment in The
National Grid Group plc (NGG) was increased by 11.2m pounds and then
revalued by the directors to its flotation value of 226.6m pounds
prior to its distribution to Northern Electric plc
shareholders as a specie dividend. The residual investment in
First Hydro Limited was revalued by the directors to 17.6m pounds on
1 April 1995.
(v) The disposals comprise the specie dividend of NGG shares
226.6m pounds and the sale of First Hydro Limited 17.6m pounds.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
13. INVESTMENTS continued
On 31 December 1995, the Group acquired from Neste Oy the balance
of the ordinary shares of Sovereign Exploration Limited, thereby
increasing its investment to 100% of Sovereign's nominal share
capital. The purchase consideration was 11.2m pounds, comprising
5m pounds for the ordinary shares, 5m pounds for loan notes of 1 pound
nominal value and 1.2m pounds in respect of accrued interest, paid to
Neste. At the same time a capital reconstruction was effected
by Sovereign involving the issue of an additional 10,000,000
1 pound ordinary shares to the Group in consideration of the conversion
of the 10m pound loan notes into equity capital. On 18 January
1996, Sovereign issued to the Group a further 3,204,000 1 pound
ordinary shares in consideration for the repayment of 3.2m pounds short-term
loans. The investment in Sovereign Exploration Limited has been
included in the balance sheet at its fair value at the date of
acquisition and an analysis of the acquisition is given below:
Book value Adjustments Fair value
Revaluation Loan notes to Group
pound m pound m pound m pound m
Net assets at date of acquisition:
Tangible fixed assets 31.6 2.4 - 34.0
Debtors 1.4 - - 1.4
Cash 0.3 - - 0.3
Creditors due within one year (5.3) - - (5.3)
Creditors due after one year (14.6) - 10.0 (4.6)
Provisions (3.4) - - (3.4)
------- ------ ------ -----
Net assets 10.0 2.4 10.0 22.4
======= ====== ====== =====
Existing carrying value of Sovereign Exploration Limited as an
associate (11.2)
------
11.2
======
Discharged by:
Cash purchase of remaining 5,000,000 1 pound ordinary shares,
5,000,000 1 pound loan notes and 1.2m pounds accrued interest from Neste
11.2
Sovereign Exploration Limited was acquired on 31 December 1995,
the end of its financial year, and became a subsidiary from that
date. Thus, the acquisition had no effect on the Group's cash
flows for the year. The cash flows in respect of the purchase of
Sovereign Exploration Limited were as follows:
pound m
Cash in Sovereign Exploration Limited at date of acquisition 0.3
Loans in Sovereign Exploration Limited at date of acquisition (4.6)
Cash consideration (11.2)
------
Net cash outflow on acquisition of subsidiary undertaking (15.5)
======
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
13. INVESTMENTS continued
Sovereign Exploration Limited incurred an after tax loss in the
year ended 31 December 1995 of 0.4m pounds (1994 - 0.4m pounds profit). The
summarised profit and loss account for the period from 1 January
1995 to 31 December 1995, the date of acquisition, was as follows:
pound m
Turnover 6.0
=====
Operating profit 2.3
=====
Profit before tax 1.3
Taxation (1.7)
------
Loss for the year ended 31 December 1995 (0.4)
=====
There were no recognised gains and losses in the year ended 31
December 1995 other than the loss of 0.4m pounds above and the
unrealised gain on revaluation of 2.4m pounds.
Details of the principal investments of the Group are listed
below.
Country of Holding Proportion
registration of of voting
(or incorporation) ordinary rights and Nature of
Name of company and operation shares shares held business
- -------------------------------------------------------------------------------
Associated undertakings
Held by Northern Electric subsidiaries:
- -------------------------------------------------------------------------------
Combined Power Systems
Limited England and 457,475 29.95% Manufacturing
Wales at 1 pound power supply
systems
- -------------------------------------------------------------------------------
Fixed asset investments
Held by Northern Electric plc
- -------------------------------------------------------------------------------
Teesside Power Limited England and 26,923,176 15.4% Generation of
Wales at 1p electricity
- -------------------------------------------------------------------------------
Ionica L3 Limited England and 69,564 8.2% Public
Wales at 10p telephony
operator
- -------------------------------------------------------------------------------
UK Data Collection
Services Limited England and 155,000 8.3% Data collection
Wales at 1 pound agency
- -------------------------------------------------------------------------------
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
14. STOCKS
31 March
1996 1995
pound m pound m
Raw materials and consumables 3.7 3.7
Work in progress 3.9 2.9
Finished goods and goods for resale 6.7 5.7
Payments on account (2.4) (2.7)
----- -----
11.9 9.6
===== =====
The difference between the purchase price or production cost of
stocks and their replacement cost is not material.
15. DEBTORS
31 March
1996 1995
pound m pound m
Amounts falling due within one year:
Trade debtors 7.7 65.1
Credit sales installments not yet due 7.1 9.1
Prepayments and accrued income 3.5 1.3
Unbilled consumption 87.5 73.2
Advance corporation tax recoverable 48.2 9.8
Other 31.4 28.3
---- -----
185.4 186.8
Amounts falling due after more than one year:
Credit sales installments not yet due 20.9 33.4
Deferred tax 5.9 4.8
---- -----
Total debtors 212.2 225.0
===== =====
16. CURRENT ASSET INVESTMENTS
31 March
1996 1995
pound m pound m
Listed equity investments 5.7 7.0
Short-term deposits with banks 38.8 0.5
Treasury stock 2.7 7.0
---- -----
47.2 14.5
===== =====
The listed investments include a direct holding of 883,959 shares
(1995 - 141,051 shares) in the Company of 3.9m pounds (1995 - 1.1m pounds),
held by Northern Electric Share Scheme Trustee Limited as part of
the Northern Electric Employees' Share Trust explained in Note 22.
The market value of the listed investments at 31 March 1996 was
10.2m pounds (1995 - 13.0m pounds).
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
17. CASH AND CASH EQUIVALENTS 31 March
1996 1995 Change
ound m pound m pound m
Analysis of balances in Group balance sheet:
Cash at bank and in hand 34.9 20.4 14.5
Short-term investments 37.1 0.0 37.1
Short-term borrowings (29.7) (50.9) 21.2
---------------------------
42.3 (30.5) 72.8
===== ===== =====
Investments with an original maturity
date of more than three months 10.1 14.5 (4.4)
Provision made against value of
employee share option trust assets
to write down to option price 0.6 0.6 0.0
---------------------------
10.7 15.1 (4.4)
===== ===== =====
1995 1994 Change
pound m pound m pound m
Cash at bank and in hand 20.4 14.9 5.5
Short-term investments - 37.5 (37.5)
Short-term borrowings (50.9) - (50.9)
---------------------------
(30.5) 52.4 (82.9)
===== ===== =====
Investments with an original maturity
date of more than three months 14.5 34.7 (20.2)
Provision made against value of
employee share option trust assets
to write down to option price 0.6 0.4 0.2
---------------------------
15.1 35.1 (20.0)
===== ===== =====
1994 1993 Change
pound m pound m pound m
Cash at bank and in hand 14.9 9.0 5.9
Short-term investments 37.5 26.1 11.4
---------------------------
52.4 35.1 17.3
===== ===== =====
Investments with an original maturity
date of more than three months 34.7 6.3 28.4
Provision made against value of
employee share option trust assets
to write down to option price 0.4 0.2 0.2
---------------------------
35.1 6.5 28.6
===== ===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
18. CREDITORS: amounts falling due within one year
31 March
1996 1995
pound m pound m
Loans and overdrafts (Note 20) 29.7 84.5
Payments received on account 5.1 12.8
Trade creditors 89.4 69.8
Corporation tax 18.9 11.0
Advance corporation tax 26.8 6.6
Consortium relief - 0.4
Other taxes and social security costs 4.3 3.1
Other creditors 11.5 7.7
Accruals and deferred income 3.2 0.9
Dividends accrued and proposed (Note 10) 32.8 26.1
------------------
221.7 222.9
===== =====
19. CREDITORS: amounts
falling due after more than one year
31 March
1996 1995
pound m pound m
Loans (Note 20) 257.1 61.5
Deferred tax 7.0 2.8
Consortium relief 21.5 19.1
Other creditors - 0.5
------------------
285.6 83.9
===== =====
20. BORROWINGS
31 March
1996 1995
pound m pound m
Analysis of borrowings:
Not wholly repayable within five years 199.1 -
Wholly repayable between two to five years 58.0 61.5
Wholly repayable within one year 29.7 84.5
------------------
286.8 146.0
===== =====
The principal loans not wholly repayable within five years are
bearer bonds, repayable in 100m pound tranches in 2005 and 2020,
bearing interest at 8.625% and 8.875% respectively.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
Analysis of changes in borrowings during the year:
Year ended 31 March
1996 1995 1994
pound m pound m pound m
At 1 April 146.0 62.1 80.5
Net cash (outflow)/inflow from
cash and cash equivalents (Note 17) (21.2) 50.9 -
Net cash (outflow)/inflow from
borrowings 162.0 33.0 (18.4)
---------------------------
At 31 March 286.8 146.0 62.1
===== ===== =====
21. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
Regulatory Pensions Insurance Restructuring Other Total
correction claims
factor
pound m pound m pound m pound m pound m pound m
<S> <C> <C> <C> <C> <C> <C>
At 1 April 1993 21.2 5.5 9.2 5.4 2.9 44.2
Utilised/paid in year (21.2) - (0.4) (4.0) (0.5) (26.1)
Transferred from/(to)
profit and loss account 16.3 0.2 2.8 3.9 0.1 23.3
At 31 March 1994 16.3 5.7 11.6 5.3 2.5 41.4
--------- --------- --------- -------- ------- ------
Utilised/paid in year (16.3) - (0.7) (5.3) (0.7) (23.0)
Transferred from/(to)
profit and loss account 7.1 0.2 1.9 6.0 (0.5) 14.7
--------- --------- --------- -------- ------- -----
At 31 March 1995 7.1 5.9 12.8 6.0 1.3 33.1
---------- --------- --------- -------- ------- -----
Utilised/paid in year (7.1) - (2.8) (6.0) (0.4) (16.3)
Transferred from/(to)
profit and loss account 7.2 (5.3) (0.5) 13.5 4.8 19.7
---------- --------- --------- -------- ------- -----
At 31 March 1996 7.2 0.6 9.5 13.5 5.7 36.5
========== ========= ========= ======== =======
</TABLE>
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
22. SHARE CAPITAL
<TABLE>
<CAPTION>
31 March
1996 1995 1994 1996 1995 1994
Number Number Number pound m pound m pound m
(millions) (millions) (millions)
<S> <C> <C> <C> <C> <C> <C>
Authorised
Equity--ordinary
shares of 50p each - 200.0 200.0 - 100.0 100.0
Equity--ordinary shares
of 56 12/23p each 176.9 - - 100.0 - -
Non equity--cumulative
preference shares
of 1p each 115.0 - - 1.2 - -
----- ----- ----- ----- ----- -----
291.9 200.0 200.0 101.2 100.0 100.0
===== ===== ===== ===== ===== =====
Allotted, called up and
fully paid
Equity - ordinary shares
of 50p each - 111.5 123.7 - 55.8 61.9
Equity - ordinary shares
of 56 12/23p each 101.1 - - 57.2 - -
Non equity--cumulative
preference shares
of 1p each 111.7 - - 1.1 - -
----- ------ ----- ----- ----- -----
212.8 111.5 123.7 58.3 545.8 61.9
===== ====== ===== ===== ===== =====
</TABLE>
On 11 September 1995 the Company issued 111,662,378 preference
shares of an aggregate nominal value of 1.1m pounds to its shareholders
as a bonus issue of one preference share for every one ordinary
share of 50p held as at 16 August 1995. Cumulative preference
shares:
(i)entitle holders, in priority to holders of all other
classes of shares, to a fixed cumulative preferential
dividend of 8.061p (net) per share per annum payable half
-yearly in equal amounts on 31 March and 30 September;
(ii)on a return of capital on a winding up, or otherwise,
will carry the right to repayment of capital together
with a premium of 99p per share and a sum equal to any
arrears or accruals of dividend; this right is in
priority to the rights of ordinary shareholders;
(iii)carry the right to attend a general meeting of the
Company, and vote if, at the date of the notice convening
the meeting, payment of the dividend to which they are
entitled is six months or more in arrears, or if a
resolution is to be considered at the meeting for winding
up the Company or abrogating, varying or modifying any of
the special rights attaching to them; and,
(iv)are redeemable in the event of the revocation by the
Secretary of State of the Company's Public Electricity
Supply License at the value given in (ii) above.
In September 1995 the share capital was consolidated on the basis
of twenty three new 5612/23p ordinary shares for every twenty six
50p ordinary shares. Fractional shares arising as a consequence
of the consolidation were sold by the Company on behalf of the
shareholders entitled to them and the proceeds of sale (net of
expenses) were paid to those shareholders.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
22. SHARE CAPITAL continued
At an Extraordinary General Meeting on 8 December 1995
shareholders approved the distribution of the benefit of the
Company's holding in The National Grid Group plc ("NGG") by way
of a dividend in specie. As a consequence, holders of the
Company's ordinary shares received 1.07 NGG shares for each
Northern Electric plc ordinary share held at 8 December 1995.
Fractions of NGG shares were not transferred to shareholders but
were aggregated and transferred to the employee share ownership
trust. 3,698,479 NGG shares were retained by the Company for
purchase by the Trustee of the Northern Electric Employee Share
Trust to meet its obligations under the Company's share option
schemes.
At the Group's Annual General Meeting in August 1994,
shareholders gave approval to on-market purchases of up to 10% of
its shares and this was given effect on 21 September 1994 when
12,370,400 ordinary shares, with an aggregate nominal value of
6.2m pounds, were purchased for a consideration of 101.6m pounds. The
special rights redeemable preference share held by the Secretary of
State for Trade and Industry was redeemed at par by the Company on 30
March 1995.
At an extraordinary general meeting held on 15 February 1995, a
special resolution to alter the Company's Articles of Association
to remove the restriction limiting ownership of shares by a
single shareholder to 15% was passed.
Employee Share Schemes
On 11 December 1995, 786,334 ordinary and 795,067 preference
shares were transferred out of trust to employees under special
arrangements made at the time of the Offer for Sale in November
1990.
On 8 and 15 August 1995 the Trustee exercised its option under
the agreement to acquire 500,000 and 1,088,500 shares
respectively from the Bank at an aggregate price of 6.3m pounds to meet
Northern Electric plc's obligations under its share option
schemes.
As at 3 June 1996 the Company, through the Trustee held 858,135
(1995 - 1,716,920, 1994 - 1,642,653) of its own shares in trust
on behalf of employees in connection with share option schemes.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
22. SHARE CAPITAL continued
At 31 March 1996, options remained outstanding for the purchase
of shares as follows:
Option Date of Number
price Exercise of Shares
pound
To employees under the
Sharesave Scheme 1.5683 1 March 1996 146,071
2.7960 1 October 1997 1,030,987
To senior executives
under the Executive
Share Option Scheme 3.486 1 July 1995-July 2002 29,739
3.4861 July 1995-July 2002 65,560*
6.1745 January 1997-January 2004 228,649
6.1745 January 1997-January 2004 76,202
5.8788 July 1997 - July 2004 199,589
5.8788 July 1997 - July 2004 66,514*
6.3269 August 1997 - August 2004 156,244
6.3269 August 1997 - August 2004 52,053*
*In relation to these options, a second option was granted on the
same date over the same number of Northern Electric plc shares at
a price discounted by up to 15%. Each of these discounted
options may be exercised in whole or in part from the fifth to
the tenth anniversary of the date of the grant, in lieu of, but
not in addition to, the higher priced option of the same pair and
provided that Northern Electric plc achieves a growth in earnings
per share over the five financial years from the financial year
immediately prior to the date of grant which is at least 10%
above the Retail Price Index growth for the same period.
In accordance with the rules of the Northern Electric Sharesave
and Northern Electric Executive Share Option Schemes, the option
price and number of options granted were adjusted for each grant
with effect from 11 September 1995 following the bonus issue of
preference shares by Northern Electric plc. The method of
adjustment was approved by the Inland Revenue and certified by
the Group's auditors to be fair and reasonable.
3,211,515 (1995 - 228,931, 1994-622,431) ordinary shares with a
nominal value of 1.8m pounds (1995 - 0.1m pounds, 1994 - 0.3m
pounds) have been transferred to employees and senior executives during
the year under the share option schemes for an aggregate consideration of
6.8m pounds (1995 - 0.5m pounds, 1994 - 1.7m pounds). This includes new shares
issued by the Company with a nominal value of 1.4m pounds (1995 - 0.1m
pounds, 1994 - Nil) and shares transferred from Northern Electric
Share Scheme Trustee Limited with a nominal value of 0.4m pounds (1995 and
1994 - Nil).
In addition 2,444,060 (1995 and 1994 - Nil) NGG ordinary shares
with a nominal value of 0.2m pounds (1995 and 1994 - Nil) have been
issued to employees and senior executives under the share option
schemes.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
22. SHARE CAPITAL continued
Year ended 31 March
1996 1995 1994
Analysis of changes in share capital
during the year: pound m pound m pound m
At 1 April 55.8 61.9 61.6
----- ----- -----
Issue of share capital 4.1 0.5 1.7
Purchase of own shares - (101.6) -
----- ------ -----
Net cash inflow/(outflow) from financing 4.1 (101.1) 1.7
Nominal value of shares transferred
to capital redemption reserve - (6.2) -
Premium on shares transferred to
share premium account (2.7) (0.4) (1.4)
Premium on shares transferred from
profit and loss reserves - 101.6 -
Preference shares issued 1.1 - -
----- ----- -----
At 31 March 58.3 55.8 61.9
===== ===== =====
Analysis of changes in share premium during the year:
At 1 April 1.8 1.4 -
Issue of preference share (1.1) - -
Net cash inflow from financing 2.7 0.4 1.4
----- ----- -----
At 31 March 3.4 1.8 1.4
===== ===== =====
Analysis of changes in capital redemption reserve during the
year:
At 1 April 6.2 - -
Purchase of own shares - 6.2 -
----- ----- -----
At 31 March 6.2 6.2 -
===== ===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
23. MOVEMENT ON RESERVES AND RECONCILIATION OF SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Share Share Capital Statutory Revaluation Profit Total
Capital Premium Redemption Reserve Reserve & Loss Shareholders
Account Reserve Account Funds
pound m pound m pound m pound m pound m pound m pound m
<S> <C> <C> <C> <C> <C> <C> <C>
Total shareholders' funds
at 1 April 1993 61.6 - - 0.3 - 362.8 424.7
Profit attributable to members - - - - - 98.3 98.3
Dividends - - - - - (30.7) (30.7)
Transfer to statutory reserve (i) - - - 0.2 - (0.2) -
Issue of ordinary shares 0.3 1.4 - - - - 1.7
--------- --------- --------- --------- --------- --------- ------
Total shareholders' funds at
31 March 1994 61.9 1.4 - 0.5 - 430.2 494.0
Profit attributable to members - - - - - 103.2 103.2
Dividends - - - - - (36.8) (36.8)
Transfer to statutory reserve - - - 0.5 - (0.5) -
Issue of ordinary shares 0.1 0.4 - - - - 0.5
Purchase of own shares (ii) (6.2) - 6.2 - - (101.6) (101.6)
Adjustment to goodwill on
investments (iii) - - - - - (2.8) (2.8)
--------- --------- --------- --------- --------- --------- ---------
Total shareholders' funds
at 31 March 1995 55.8 1.8 6.2 1.0 - 391.7 456.5
Profit attributable to members - - - - - 67.8 67.8
Dividends - - - - - (217.3) (217.3)
Issue of preference shares (iv) 1.1 (1.1) - - - - -
Issue of ordinary shares 1.4 2.7 - - - - 4.1
Revaluation of fixed asset
investments (v) - - - - 182.3 - 182.3
Reserves on acquisition of
Sovereign Exploration Limited - - - - 1.2 - 1.2
Release of revaluation reserve
on distribution (iv) & (v) in
specie of shares in The
National Grid Group plc - - - - (169.9) 169.9 -
Distribution in specie of
shares in The National (iv)
& (v) Grid Group plc - - - - - (219.0) (219.0)
Disposal of investment in First
Hydro Limited (vi) - - - - (10.9) 10.9 -
Transfer to statutory reserve - - - 1.2 - (1.2) -
--------- ------- --------- --------- --------- --------- ---------
Total shareholders' funds
at 31 March 1996 58.3 3.4 6.2 2.2 2.7 202.8 275.6
====== ====== ====== ====== ====== ====== =====
Equity interests 274.5
Non-equity interests 1.1
---------
275.6
=======
</TABLE>
The cumulative amount of goodwill written off at 31 March 1996 is
2.8m pounds (1995 - 2.8m pounds, 1994 - Nil).
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
23. MOVEMENT ON RESERVES AND RECONCILIATION OF SHAREHOLDERS' FUNDS
(i)In order to comply with the requirements of the insurance
legislation in the Isle of Man, the Group's insurance company
has increased the statutory reserve by 1.2m pounds (1995 - 0.5m pounds,
1994 - 0.2m pounds) out of profits earned in the year.
(ii) At the Company's Annual General Meeting in August 1994,
shareholders gave approval to on-market
purchases of up to 10% of its shares and this was given
effect on 21 September 1994 when 12,370,400 shares were
purchased.
(iii) The write-down of goodwill is in respect
of the investment in Combined Power Systems Limited which is
now accounted for as an associate on the equity basis.
(iv) The issue of the preference shares,
1.1m pounds, and the demerger of the National Grid Group plc by a
dividend in specie, 219.0m pounds, constituted the major non-cash
transactions of the Group during the year.
(v)The investment in The National Grid Group plc was revalued by
the directors to its flotation value prior to its
distribution as a dividend in specie, to Northern Electric
plc shareholders.
(vi) As part of the arrangements for the
demerger of The National Grid Group plc, the pumped storage
business, First Hydro Limited, was retained by the regional
electricity companies and was subsequently sold. The
investment was revalued by the directors to the estimated
market value of the share of the net assets attributed to the
Group.
24. PENSION COMMITMENTS
The Electricity Supply Pension Scheme is a defined benefit scheme
for directors and employees which provides pension and other
related benefits based on final pensionable pay. The assets of
the Scheme are held in a separate trustee administered fund.
The pension cost to the Group for the period was 8.9m pounds (1995 -
10.6m pounds, 1994 -10.7m pounds). The last full actuarial valuation of the
Group's share of the Scheme was carried out by Bacon and Woodrow,
consulting actuaries, as at 31 March 1995 and the results of this
valuation have been used as a basis for assessing pension cost.
The attained age method was used for the valuation. The
principal actuarial assumptions were that the investment return
would exceed salary increases by 2.5% per annum (exclusive of
merit awards) and exceed future pension increases by 4% per
annum. The previous valuation was carried out by Bacon and
Woodrow as at 31 March 1992 using the attained age method. The
principal actuarial assumptions were that the investment return
would exceed salary increases by 2% per annum ( exclusive of
merit awards ) and exceed further pension increases by 4% per
annum.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
24. PENSION COMMITMENTS
For the Northern Electric Group the valuation showed that the
actuarial value of the assets represented 106.1% ( 31 March 1995
- - 108% ) of the actuarial value of the accrued benefits. The
accrued benefits include all benefits for pensioners and other
former members as well as benefits based on service completed to
date for active members, allowing for future salary increases.
Improvements in benefits for members and dependants are to be
made with effect from 1 April 1996. Allowing for these
improvements the actuarial value represents 103.2% ( 31 March
1995, allowing for improvements in benefits made with effect from
1 April 1993 - 104.6% ) of accrued benefits.
The total market value of the assets of the Scheme at the date of
actuarial valuation was 12,482.8m pounds (1995 - 9,521m pounds) of which
443.9m pounds (1995 - 327.3m pounds) represented the section of the Scheme
relating to the Northern Electric Group.
Contributions, based on a composite rate and payable by the Group
to the Scheme during the year were 8.7m pounds (1995 - 10.4m pounds,
1994 - 10.6m pounds). In addition, 0.2m pounds (1995 - 0.2m pounds,
1994 - 0.1m pounds) was incurred for provisions for unfunded supplementary
pensions. The latest actuarial valuation allowed for the additional liabilities
which have arisen from the European Court of Justice's decision
on 17 May 1990 in the case of Barber v Guardian Royal Exchange
which relates to the equal treatment of men and women in
occupational pension schemes.
The Actuary's valuation of the Scheme and of the separate Groups
is based on the situation known at the date of signature of the
report. It takes no account of any changes to the Group's assets
or liabilities which may arise from the determination of the
complaints in relation to the Scheme which may have been notified
by the Pensions Ombudsman at the request of certain members and
pensioners. Those complaints relate to other Groups and no
complaints have been registered regarding the Northern Electric
Group.
25. OBLIGATIONS UNDER HIRE AGREEMENTS
Land and
Buildings Other
31 March 31 March
Annual commitments under non-cancellable 1996 1995 1996 1995
operating leases are as follows: pound m pound m pound m pound m
Expiring within one year 0.2 0.1 0.3 0.6
Expiring between two and five years 0.3 0.1 2.1 3.6
Expiring after five years 2.5 2.6 - -
--- --- --- ---
3.0 2.8 2.4 4.2
==== ==== ==== ===
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
26. REGULATORY MATTERS
The Company is subject to price cap regulation. OFFER controls
the revenues generated by the Company in its distribution and
supply businesses by applying a price control formula, P + RPI -
X (where X is currently 3% for distribution and 2% for supply),
where P is the price level at the beginning of each new
regulatory period, RPI is the change in the Retail Price Index
and X is an adjustment factor determined by OFFER.
In the distribution business, the Distribution Price Control
Formula ("DPCR") is usually set for a five-year period, subject
to more frequent adjustments as determined necessary by the
Director General of Electricity Supply (the "Regulator"). At
each review, the Regulator can require a one-time price
reduction. An initial review by the Regulator of allowable income
in the distribution business led to a reduction of the price
level by 17% for the Company starting 1 April 1995, followed by
efficiency factors of X = 2% for each year until March 2000. On 6
July 1995, the Regulator announced the result of a further
distribution price review which was precipitated by certain
market events in the UK electric utility industry. For the
Company, such announcement meant a further real reduction of 11%
in allowable distribution income for the twelve months from 1
April 1996, followed by an efficiency factor X = 3% for each year
until 31 March 2000, before an allowed increase for inflation.
In the supply business, which is progressively being opened to
competition, price regulation still applies to the market for
customers with demand of not more than 100kW. The calculation of
the maximum supply charge is based on a Supply Price Control
Formula, similar to the DPCR and is set for a four-year period.
In 1993, OFFER announced the supply franchise market (i.e., with
demand of not more than 100kW) income entitlement for the four-
year period ending March 1998. A relatively small efficiency
factor of X = 2% was applied to the Company and is being offset
by an allowance for both unit and customer growth. The
nonfranchise markets (above 1MW) were opened to full competition
during privatisation in 1990; the nonfranchise markets above
100kW were opened to full competition starting in April 1994.
27. CAPITAL AND OTHER COMMITMENTS
Capital expenditure authorised by the Board of Directors but not
provided for at 31 March 1996 was 37.5m pounds (1995 - 50.7m pounds) in
respect of which the Group has entered into contractual
commitments of 2.9m pounds (1995 - 5.1m pounds).
The Company has entered into a contract relating to the purchase
of 400 megawatts of capacity from a 15.4% owned related party,
Teesside Power Limited ("Teesside"), for a period of 15 years
beginning 1 April 1993. The contract sets escalating purchase
prices at predetermined levels. Current contract prices exceed
those paid by the Company to the electricity pool (the "Pool")
which is operated by the NGG. However, the Company is able to
recover these costs under current price cap regulation expected
to expire 1 April 1998.
The Company additionally utilises contracts for differences
("CFDs") to mitigate its exposure to volatility in the prices of
electricity purchased through the Pool. Such contracts allow the
Company effectively to convert the majority of its anticipated
Pool purchases from market to fixed prices. As of 31, March
1996, CFDs were in place to hedge electricity purchases of
approximately 49,000 GWh through the year 2008.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
28. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 March 1996 or at 31
March 1995; however, the following have developed subsequent to
31 March 1996:
The Labour Party has asserted that, if they are elected at the
next General Election, which must be held no later than 22 May
1997, they will seek to introduce a "windfall" assessment to be
levied on the privatised utilities including the Company. The
basis for such a potential assessment is unknown but, if
introduced, such assessment could be substantial.
Following a complaint by two pensioners, in December 1996 the
Pensions Ombudsman made a ruling against National Grid Group
relating to the use of an actuarial valuation surplus in their
part of the Electricity Supply Pension Scheme (the "ESPS"). The
ruling, prohibits the use of valuation surplus to meet the
additional pension costs of early retirement arising from
restructuring. Although Northern would intend to appeal any
similar ruling against it, if a similar ruling was made against
Northern Electric and any subsequent appeal was unsuccessful then
the Company could potentially be required to make contributions
in lieu of utilizing any ESPS actuarial valuation surplus.
29. DIRECTORS' INTERESTS
There are no interests in contracts which are required to be
disclosed under the Companies Act 1985.
30. COMPANIES ACT 1985
These accounts do not compromise the Company's statutory accounts
within the meaning of section 240 of the Companies Act 1985 of
Great Britain. Statutory accounts for the years ended 31 March
1996, 1995 and 1994, on which the auditors' reports were
unqualified, have been delivered to the Registrar of Companies
for England and Wales.
31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Group's consolidated accounts are prepared in accordance with
accounting principles generally accepted in the United Kingdom
("UK GAAP") which differ from United States generally accepted
accounting principles ("US GAAP"). The significant differences as
they apply to the Group are summarised below.
Pension costs
The Group provides for the cost of retirement benefits based upon
the consistent percentages of employees' pensionable pay as
recommended by independent actuaries. Under US GAAP, the
projected benefit obligation, calculated using the projected unit
credit method and a discount rate which reflects current market
rates at which pension liabilities could effectively be settled,
would be matched against the fair value of the plan's assets and
would be adjusted to reflect any unrecognised obligations or
assets in determining the pension cost or credit for the year.
As it is not feasible to adopt US GAAP prior to 1 April 1994,
that date has been used as the adoption date and, accordingly
12.1m pounds of the transitional asset of 34.7m pounds at that date
has been recognised as a credit to shareholders' funds as of 1 April
1994 with the remaining 22.6m pounds being amortised over 9 years.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
Deferred taxation
The Group provides for deferred taxation using the liability
method on all timing differences to the extent that they are
expected to reverse in the future without being replaced.
Deferred tax assets are only recognised if recovery is reasonably
certain. Under US GAAP, deferred tax would be computed on all
differences between the tax bases and book values of assets and
liabilities which will result in taxable or tax deductible
amounts in future years. Deferred tax assets would be recognised
where their realisation is more likely than not.
Dividends
Under UK GAAP, dividends are provided, and the related advance
corporation tax ("ACT") accrued, in the year to which they
relate. Under US GAAP, dividends would be provided, and the
related ACT accrued, in the year in which they are declared.
Exceptional items
The amounts reported under UK GAAP after operating profit
relating to profit on disposal of fixed assets and exceptional
shareholder costs would be dealt with in the determination of
operating profit under US GAAP. Further, US GAAP do not permit
the disclosure of earnings per share before the effect of
exceptional items.
Goodwill
Under UK GAAP, goodwill arising on the acquisition of a
subsidiary or associated company is either set off against
reserves in the year of acquisition or amortised through the
profit and loss account over its estimated useful life. Under US
GAAP, such goodwill would be capitalised and amortised through
the profit and loss account over its estimated useful life, not
exceeding 40 years. Under UK GAAP 2.8m pounds of goodwill has been set
off against reserves. Under US GAAP, however, this goodwill would
have been written off as impaired to the profit and loss account
in the year ended 31 March 1995.
Investment in The National Grid Group plc and First Hydro Limited
Under UK GAAP, the Group's investment in The National Grid Group
plc ("NGG") was recorded at its share of NGG's pro forma
historical cost net asset value at 31 March 1990 of 780m pounds, which
amounted to 50.7m pounds. Under US GAAP the investment would have been
recorded at Nil. In connection with the flotation of NGG,
Northern Electric made a further investment in NGG and the carry
value of the investment in NGG was revalued to its flotation
value prior to its distribution as a dividend in specie to
Northern Electric's shareholders, pro rata to their holdings of
Northern Electric ordinary shares. Under US GAAP, at the time of
flotation the investment would have been treated as an available
for sale marketable security and would have been recorded at its
market value with a corresponding credit, net of related deferred
taxes, to a separate component of shareholders' funds. Under US
GAAP, the unrealised gain previously credited direct to
shareholders' funds would have been taken to Income at the time
the dividend in specie was declared. Of the specie dividend,
2.1m related to Northern Electric shares held by the ESOP. Under
UK GAAP this has been credited to the profit and loss account.
Under US GAAP this would have been deducted from the value of the
specie dividend.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
Under UK GAAP, prior to its sale, the Group's investment in First
Hydro was revalued to the estimated market value of the share of
its net assets attributable to the Group. Under US GAAP, this
revaluation would not have been made and the gain on sale would
have been correspondingly higher.
Under UK GAAP, NGG dividends and the related tax credits were
accounted for in the period to which they related to the extent
they had been announced prior to the finalisation of the
Company's accounts for those periods. Under US GAAP, they would
have been recognised in the periods in which they were declared.
Current asset investments - own shares
Under UK GAAP, the shares in the Company held by the Northern
Electric Share Trust (the "ESOP") are classified as current asset
investments. Under US GAAP, such shares would be classified as
treasury shares and reflected as a reduction of shareholders'
funds.
The following is a summary of the significant adjustments to
profit attributable to members of the parent company (net income)
and shareholders' funds which would be required if US GAAP were
to be applied instead of UK GAAP.
Net income
Year ended 31 March
1996 1995
pound m pound m
Net income as reported in the Group
profit and loss account 67.8 103.2
Adjustments:
Dividends receivable 6.2 (8.8)
Pension costs 9.0 6.8
Goodwill write off - (2.8)
Profit distribution of NGG shares 215.4 -
Profit on disposal of fixed assets 17.6 -
Advance corporation tax written off 20.2 -
Tax credits on dividends receivable (1.3) 1.8
Deferred taxation - on above adjustments (19.7) (2.2)
- methodology (15.1) (9.4)
--------- ---------
Net income as adjusted to accord
with US GAAP 300.1 88.6
--------- ---------
pence pence
Per ordinary share as so adjusted 305.3 85.1
===== =====
Net income per ordinary share has been calculated by dividing net
income in accordance with US GAAP of 300.1m pounds (1995 - 88.6m pounds) by
98.3m shares (1995 - 117.7m adjusted on consolidation of share
capital to 104.1m) being the weighted average number of ordinary
shares in issue.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
Shareholders' funds
31 March
1996 1995
pound m pound m
Shareholders' funds as reported in
the Group balance sheet 275.6 456.5
Adjustments:
Fixed Asset Investments - (50.7)
Dividends receivable - (7.0)
Current asset investment (3.9) (7.0)
Pension costs 27.9 18.9
Dividends payable 27.9 26.1
Advance corporation tax payable 7.0 -
Deferred taxation - on above adjustments (9.2) 10.5
methodology (96.0) (92.9)
--------- ---------
Shareholders' funds as adjusted
to accord with US GAAP 229.3 354.4
===== =====
Cash flows
The Group statement of cash flows prepared under UK GAAP presents
substantially the same information as that required under US GAAP
although there are differences with regard to the classification
of items within the statements and as regards the definition of
cash and cash equivalents.
Under UK GAAP, cash and cash equivalents are stated net of short-
term borrowings and include own shares. Under US GAAP, cash and
cash equivalents would not include short-term borrowings and own
shares. Under UK GAAP, cash flows are presented separately for
operating activities, returns on investments and servicing of
finance, taxation, investing activities and financing. US GAAP,
however, require only three categories of cash flow activity to
be reported: operating, investing and financing. Cash flows from
taxation and returns on investments and servicing of finance
shown separately under UK GAAP would be included as operating
activities under US GAAP with the exception of the payment of
dividends which would be included as a financing activity.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
NOTES TO THE ACCOUNTS CONTINUED
31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
The categories of cash flow activity under US GAAP can be
summarised as follows:
Year ended 31 March
1996 1995
pound m pound m
Cash inflow from operating activities 143.0 56.7
Cash outflow from investing activities (28.8) (59.9)
Cash outflow from financing activities (65.6) (49.5)
------- -------
Increase/(decrease) in cash and
cash equivalents 48.6 (52.7)
Cash and cash equivalents at 1 April 27.9 80.6
------- -------
Cash and cash equivalents at 31 March 76.5 27.9
==== ====
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
We have reviewed the accompanying condensed group balance sheet
of Northern Electric plc and subsidiaries as of 30 September 1996
and the related condensed group profit and loss accounts and
condensed group statements of cash flows for the six-month
periods ended 30 September 1996 and 1995. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the Bulletin "Review
of Interim Financial Information" issued by the United Kingdom
Auditing Practices Board which does not differ in any significant
respect from the standards established by the American Institute
of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical
procedures to financial data, and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, which will be
performed for the year with the objective of expressing an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
group financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the
United Kingdom which differ in certain respects from those
followed in the United States (see Note 8 of Notes to Condensed
Interim Accounts).
ERNST & YOUNG
Chartered Accountants
Newcastle upon Tyne England
29 November 1996,
except for Note 8 - Differences between United Kingdom and
United States generally accepted Accounting Principles,
as to which the date is
14 February 1997
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Condensed Group Profit and Loss Account (unaudited)
Six months ended 30 September
1996 1996 1995
$m pound m pound m
Turnover 695.0 444.0 429.8
Cost of sales (485.6) (310.2) (290.4)
--------- ------- -------
Gross profit 209.4 133.8 139.4
Distribution costs (56.8) (36.3) (38.4)
Administrative expenses (66.1) (42.2) (45.0)
Other operating income 0.3 0.2 0.2
Income from interests in associated undertakings - - 0.7
--------- ------- ------
Operating profit 86.8 55.5 56.9
Exceptional shareholder costs (0.8) (0.5) (2.9)
Profit on disposal of fixed assets 3.6 2.3 0.3
Income from investments 5.3 3.4 8.9
--------- ------- ------
Profit on ordinary activities before interest 94.9 60.7 63.2
Interest payable (19.6) (12.5) (4.7)
Interest receivable 3.9 2.5 0.2
--------- ------- ------
Profit on ordinary activities before taxation 79.2 50.7 58.7
Tax on profit on ordinary activities (20.7) (13.2) (16.0)
Deferred tax on revaluation of The
National Grid Group plc - - (35.6)
--------- ------ ------
Profit for the period * 58.5 37.5 7.1
Dividend on non-equity shares (6.9) (4.4) (0.4)
Ordinary dividend on equity shares (20.2) (12.9) (11.9)
--------- ------- ------
Retained profit/(loss) 31.4 20.2 (5.2)
Special dividends on equity shares - - (114.9)
--------- ------- ------
Transfer (from)/to reserves 31.4 20.2 (120.1)
========= ======= ======
Earnings per equity share
Cents Pence Pence
Basic 51.6 33.0 6.8
Exceptional items (2.8) (1.8) 2.9
Deferred tax provision on revaluation
of The National Grid Group plc - - 36.0
--------- ------- ------
Earnings per share before non-operating
exceptional items 48.8 31.2 45.7
========= ======= ======
Interim dividend per equity share 20.11 12.85 12.00
Special dividends per equity share:
Exceptional dividend on ordinary
shares paid in September 1995 - - 113.04
Exceptional dividend on ordinary
shares paid in January 1996 - - 4.58
--------- ------- -------
- - 117.62
--------- ------- -------
Average number of equity shares 100.4m 100.4m 98.8m
* A summary of the significant adjustments to profit for the
period that would be required if United States generally accepted
accounting principles had been applied instead of those generally
accepted in the United Kingdom is set out in Note 8 of Notes to
Condensed Interim Accounts.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Condensed Group Balance Sheet (unaudited)
As at
30 September 1996
$m pound m
Fixed assets
Tangible assets 744.0 475.3
Investments 70.6 45.1
----- -----
Current assets 814.6 520.4
----- -----
Stocks 19.3 12.3
Debtors: amounts falling due after one year 48.4 30.9
Debtors: amounts falling due within one year 188.3 120.3
Investments 181.3 115.8
Cash at bank and in hand 60.7 38.8
----- -----
498.0 318.1
----- -----
Creditors: amounts falling due within one year:
Loans and overdrafts (59.5) (38.0)
Creditors and accruals (282.7) (180.6)
----- -----
(342.2) (218.6)
----- -----
Net current assets 155.8 99.5
----- -----
Total assets less current liabilities 970.4 619.9
----- -----
Creditors: amounts falling due after more than one year:
Loans (402.4) (257.1)
Other creditors (45.1) (28.8)
----- -----
(447.5) (285.9)
----- -----
Provisions for liabilities and charges (57.4) (36.7)
----- -----
Total assets less liabilities 465.5 297.3
===== =====
Capital and reserves
Called up share capital 91.6 58.5
Share premium account 5.5 3.5
Capital redemption reserve account 9.7 6.2
Other reserves 7.7 4.9
Profit and loss account 351.0 224.2
----- -----
Shareholders' funds * 465.5 297.3
===== =====
Equity interests 463.7 296.2
Non-equity interests 1.8 1.1
----- -----
465.5 297.3
===== =====
* A summary of the significant adjustments to shareholders' funds
that would be required if United States generally accepted
accounting principles had been applied instead of those generally
accepted in the United Kingdom is set out in Note 8 of Notes to
Condensed Interim Accounts.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Condensed Group Statement Cash Flows (unaudited)
Notes Six months ended 30 September
1996 1996 1995
$m pound m pound m
Net cash inflow from operating activities 4 135.9 86.8 135.9
----- ----- ------
Returns on investments and servicing of finance
Interest received 3.3 2.1 0.3
Interest paid (0.5) (0.3) (4.4)
Ordinary dividends and investment income received 5.6 3.6 2.4
Dividends paid (56.7) (36.2) (26.1)
Exceptional dividends paid - - (110.4)
----- ----- ------
Net cash outflow from returns on investments
and servicing of finance (48.3) (30.8) (138.2)
----- ----- ------
Taxation
Corporation tax (paid)/recovered
(including ACT on dividends) 43.7 27.9 (1.8)
----- ----- ------
Investing activities
Payments to acquire tangible fixed assets (49.3) (31.5) (24.7)
Receipts from sales of tangible fixed assets 0.8 0.5 1.1
Receipt of consumers' contributions 11.3 7.2 5.1
Payments to acquire fixed asset investments - - (0.7)
Receipts from sales of fixed asset investments 7.2 4.6 -
Payments to acquire current asset investments
with a maturity date of more than three months (63.7) (40.7) (2.3)
Receipts from disposals of current asset
investments with a maturity date of more
than three months 24.6 15.7 9.4
----- ----- ------
Net cash outflow from investing activities (69.1) (44.2) (12.1)
----- ----- ------
Net cash (outflow)/inflow before financing 62.2 39.7 (16.2)
===== ===== =====
Financing
Issue of ordinary share capital (0.5) (0.3) (0.5)
Loan finance - - 39.5
----- ----- -------
Net cash (inflow)/outflow from financing (0.5) (0.3) 39.0
Increase/(decrease) in cash and cash
equivalents 5 62.7 40.0 (55.2)
----- ----- -------
62.2 39.7 (16.2)
===== ===== =======
The significant differences between the cash flow statements
presented above and those required under United States generally
accepted accounting principles are set out in Note 8 of Notes to
the Condensed Interim Accounts.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited)
1. General:
In the opinion of management of Northern Electric plc ("the
Company"), the accompanying unaudited condensed interim accounts
contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of 30
September 1996 and the results of operations and cash flows for
the six months ended 30 September 1996 and 1995.
Operating results for the six month period ended 30 September
1996 and 1995 are not necessarily indicative of the results that
may be expected for the full year.
These interim accounts should be read in conjunction with the
Company's audited accounts for the year ended 31 March 1996
included elsewhere in this current report on Form 8-K.
These interim accounts have been prepared in accordance with the
historical cost convention, as modified by the revaluation of
certain fixed asset investments, and for the purposes of the
interim accounts the accounting policy is that an average
electricity cost for the year as a whole is used in order to
establish an appropriate cost of sales in the non-franchise
market. With the exception of the foregoing, the accounting
policies applied in the preparation of these interim accounts are
in accordance with those set out in the audited accounts for the
year ended 31 March 1996.
These financial statements are presented in pounds sterling
("pounds"). Solely for the convenience of the reader, US dollar
amounts have been translated at the exchange rate of 1 pound = U.S.
$1.5653, the noon buying rate in New York City for cable
transfers in pounds sterling as certified for customs purposes by
the Federal Reserve Bank of New York on September 30, 1996. No
representation is made that the pounds sterling amounts have
been, could have been, or could be converted into U.S. dollars at
that or any other rate of exchange.
2. Other Footnote Information:
Profit is after charging depreciation of 14.3m pounds (1995 - 13.9m pounds).
The last full actuarial valuation of the Group's share of the
Electricity Supply Pension Scheme (the "ESPS") was carried out by
Bacon and Woodrow, consulting actuaries, as at 31 March 1995. At
the Company's request the actuaries have carried out a separate
formal review of the Company's future pension costs using
assumptions which represent a reasonable best estimate of those
costs in accordance with Statement of Standard Accounting
Practice 24. This review has been based on the same membership
and other data as at 31 March 1995. In the light of this review ,
the actuaries have confirmed that it is appropriate to use
revised assumptions, on the basis of which they have identified
an unutilised actuarial surplus as at 31 March 1995 of 60m
pounds. This is spread over the estimated remaining service
lives of employees in the ESPS of approximately 12 years.
The Board has, therefore, formally approved the use of the
revised assumptions for the purpose of calculating the Group's
pension cost charge. The total pension charge for the six months
ended 30 September 1996 has been reduced by 3.4m pounds to 0.9m
pounds (expected reduction in profit and loss charge for the
full year 5.6m pounds).
The difference between the amounts charged in the accounts and
the amounts paid over to the fund are shown as a prepayment in
the balance sheet.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited) Continued
2. Other Footnote Information continued
The taxation charge for the six months has been arrived at by
applying the estimated effective tax rate for the financial year.
Earnings per ordinary share are based on the profit for the
period, after deducting dividend on non-equity shares, and on the
weighted average number of ordinary shares in issue during the
period, excluding those held by Northern Electric Share Scheme
Trustee Limited which has waived rights to dividends.
The profit and loss account reserve has been adjusted by 1.2m pounds
which represents the value of the shares issued to satisfy the
requirements of the scrip dividend alternative.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited) Continued
3. Turnover and segmental analysis
Six months ended and at
30 September
1996 1995
pound m pound m
Turnover
Distribution 101.8 110.4
Supply 392.4 383.2
Generation 0.7 0.5
Retailing 24.1 24.1
Other Trading Activities 61.5 73.4
Other 26.0 26.9
----- -----
Total sales 606.5 618.5
Inter-segment sales (162.5) (188.7)
----- -----
Sales to third parties 444.0 429.8
===== ======
Profit before taxation
Distribution 31.4 35.5
Supply 11.5 10.1
Generation 3.0 2.9
Retailing 0.8 0.5
Other Trading Activities 5.6 1.8
Other 8.9 8.9
Exceptional shareholder costs (0.5) (2.9)
---- -----
60.7 56.8
Dividend receivable from The National
Grid Group plc - 5.7
Group share of profit before taxation of
associated undertakings - 0.7
Net interest (10.0) (4.5)
----- -----
Group profit before taxation 50.7 58.7
===== =====
Net assets
Distribution 396.7 364.4
Supply (33.5) (22.4)
Generation 42.5 41.5
Retail 32.2 29.8
Other Trading Activities 35.2 15.2
Other (175.8) 77.3
----- -----
297.3 505.8
Group share of the net assets of
associated undertakings - 12.3
---- -----
Total net assets 297.3 518.1
===== =====
The Distribution turnover in the period reflects an underrecovery
of 3.5m pounds (1995 - 1.4m pounds) and at the end of the period the
cumulative underrecovery was 5.5m pounds. In the supply business
turnover reflects an overrecovery of 1.8m pounds (1995 - 2.5m pounds) and at
the end of the period the cumulative overrecovery was 9.1m pounds
(1995 - 4.6m pounds).
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited) Continued
4. Reconciliation of operating profit to net cash inflow from
operating activities
Six months ended 30 September
1996 1995
pound m pound m
Operating profit 55.5 56.9
Exceptional shareholder costs 0.3 (2.9)
Share of profits of associated undertakings - (0.7)
Depreciation charges 14.3 13.9
Increase/(decrease) in provisions 0.2 (4.6)
Increase in stocks (0.4) (2.1)
Decrease in debtors 11.4 58.7
Increase in creditors 5.5 16.7
---- -----
Net cash inflow from operating activities 86.8 135.9
===== =====
5. Reconciliation of the movement of cash and cash equivalents
and the movement in net liquid funds
Six months ended 30 September
1996 1995
pound m pound m
Increase/(decrease) in cash and cash equivalents 40.0 (55.2)
Non-cash equivalent short-term borrowings made - 46.7
Net purchase/(sale) of non-cash equivalent current asset
investments 25.0 (7.1)
Provision made against value of employee share option trust
assets (0.8) (0.3)
--------- ---------
Increase/(decrease) in net liquid funds in balance sheet 64.2 (15.9)
===== =====
6. Net borrowings
Six months ended 30 September
1996 1995
pound m pound m
Cash at bank and in hand 38.8 11.9
Investments 115.8 7.1
Borrowings (295.1) (153.2)
--------- ---------
Net borrowings (140.5) (134.2)
===== =====
7. Net gearing*
Six months ended 30 September
1996 1995
47.3% 26.0%
*Net gearing is the quotient of net borrowings divided by
shareholders' funds expressed as a percentage.
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited) Continued
8. Differences between United Kingdom and United States generally
accepted accounting principles
The differences between accounting principles generally accepted
in the United Kingdom ("UK GAAP") and the United States generally
accepted accounting principles ("US GAAP"), significant to the
Group are described in Note 31 of Notes to the Accounts of
Northern Electric plc included elsewhere in this Current Report.
The effect of applying those differences is summarised as
follows:
Net income Six months ended 30 September
1996 1995
pound m pound m
Net income as reported in the Group
profit and loss account 37.5 7.1
Adjustments:
Pension costs 1.3 4.5
Dividend receivable - (7.1)
Advance corporation tax written off 0.8 -
Tax credits on dividends receivable - 1.4
Deferred tax - on above adjustments (0.4) (1.3)
methodology 0.1 4.5
--------- ------
Net income as adjusted to accord with US GAAP 39.3 9.1
===== =====
Per ordinary share as so adjusted 39.1p 9.2p
===== =====
Net income per ordinary share has been calculated by dividing net
income in accordance with US GAAP of 39.3m pounds (1995 - 9.1m pounds) by
100.404m shares (1995 - 98.756m), being the weighted average of
ordinary shares in issue.
As at 30 September
Shareholders' funds 1996
pound m
Shareholders' funds as reported in the Group balance sheet 297.3
Adjustments:
Current asset investments (6.9)
Pension costs 29.2
Dividends payable 12.9
Deferred tax - on above adjustments (9.6)
methodology (88.1)
---------
Shareholders' funds as adjusted to accord with US GAAP 234.8
=====
Six months ended 30 September
Cash flows 1996 1995
pound m pound m
Cash inflow from operating activities 120.1 132.4
Cash outflow from investing activities (22.2) (17.0)
Cash outflow from financing activities (27.6) (128.8)
--------- -------
Increase/(decrease) in cash and cash equivalents 70.3 (13.4)
Cash and cash equivalents at 1 April 76.5 27.9
--------- -------
Cash and cash equivalents at 30 September 146.8 14.5
===== =====
NORTHERN ELECTRIC plc AND SUBSIDIARIES
Notes to Condensed Interim Accounts (unaudited) Continued
9. CAPITAL AND OTHER COMMITMENTS
The Company has entered into a contract relating to the purchase
of 400 megawatts of capacity from a 15.4% owned related party,
Teesside Power Limited ("Teesside"), for a period of 15 years
beginning April 1993. The contract sets escalating purchase
prices at predetermined levels. Current contract prices exceed
those paid by the Company to the electricity pool (the "Pool")
which is operated by the National Grid Group. However, the
Company is able to recover these costs under current prices cap
regulation expected to expire 1 April 1998.
The Company additionally utilises contracts for differences
(CFD's) to mitigate its exposure to volatility in the prices of
electricity purchased through the Pool. Such contracts allow the
Company to effectively convert the majority of its anticipated
Pool purchases from market to fixed prices. As of 30 September
1996, CFD's were in place to hedge a portion of electricity
purchases of approximately 55,000 GWh through the year 2008.
10. CONTINGENT LIABILITIES
The Labour Party has asserted that, if they are elected at the
next General Election, which must be held no later than 22 May
1997, they will seek to introduce a "windfall" assessment to be
levied on the privatised utilities including the Company. The
basis for such a potential assessment is unknown but, if
introduced, such an assessment could be substantial.
Following a complaint by two pensioners, in December 1996 the
Pensions Ombudsman made a provisional ruling against National
Grid Group relating to the use of an actuarial valuation surplus
in their part of the Electricity Supply Pension Scheme ("the
ESPS"). The provisional ruling, which is under appeal, prohibits
the use of valuation surplus to meet the additional pension costs
of early retirement arising from restructuring. Although
Northern would intend to appeal any similar ruling against it, if
a similar ruling was made against Northern Electric and any
subsequent appeal was unsuccessful then the Company could
potentially be required to make contributions in lieu of
utilizing any ESPS actuarial valuation surplus.
11. Subsequent Event:
On 24 December 1996, CalEnergy Company Inc., through its 70%
owned subsidiary CE Electric plc, acquired a 50.3% controlling
interest in the Company and extended its offer to acquire all
minority equity interests.
PRO FORMA CONDENSED COMBINED UNAUDITED FINANCIAL DATA
The following Pro Forma Condensed Combined Unaudited
Balance Sheet as of September 30, 1996 combines the
historical consolidated balance sheet of CalEnergy Company,
Inc. ("the Company") and Northern Electric plc ("Northern")
as if the acquisition had occurred on September 30, 1996.
The Pro Forma Condensed Combined Unaudited Statements of
Earnings for the year ended December 31, 1995 and the nine
months ended September 30, 1996 combine the historical
statements of earnings of the Company, (i) Northern, (ii)
Falcon Seaboard Resources, Inc. ("FSRI") and (iii) BN
Geothermal, Inc., Niguel Energy Company, San Felipe Energy
Company, Inc. and Conejo Energy Company (collectively the
"Mission Acquired Companies") as if each acquisition had
occurred at the beginning of the periods presented. The
Company's, FSRI's and the Mission Acquired Companies'
fiscal years end on December 31 and Northern's fiscal year
ends on March 31. The acquisitions of Northern, FSRI and
the Mission Acquired Companies are recorded under the
purchase method of accounting, after giving effect to the
applicable pro forma adjustments and assumptions described
in the accompanying notes.
The Company has completed its preliminary assessment of the
fair values of Northern, FSRI and the Mission Acquired
Companies assets and liabilities. The Company expects to
finalise its fair value assessment in the year following
each respective acquisition. Accordingly, the final
purchase price allocation may differ from the pro forma
amounts set forth herein.
Northern's historical financial statements, included
elsewhere herein, were prepared in accordance with UK GAAP,
which differs in certain respects from US GAAP. The
historical financial statements included in the Pro Forma
Condensed Combined Unaudited Financial Data have been
restated to reflect Northern's financial position and
results of operations in accordance with US GAAP.
The pro forma condensed combined unaudited financial data
are intended for information purposes only and are not
intended to present the results that would have actually
occurred if the acquisitions of Northern, FSRI and the
Mission Acquired Companies had been in effect on the
assumed dates and for the assumed periods, and are not
necessarily indicative of the results that may be obtained
in the future.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED UNAUDITED BALANCE SHEET
September 30, 1996
(In thousands)
(1A&B and 2A&B)
The Pro Forma Pro Forma
Company Northern Adjustments Combined
Assets -----------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and investments $ 334,335 $149,560 $(254,841) $229,054
Joint venture cash and investments 37,092 - - 37,092
Restricted cash 94,392 - - 94,392
Short-term investments 2,864 46,200 - 49,064
Accounts receivable 109,453 197,200 - 306,653
Due from Joint Ventures 18,211 - - 18,211
Properties, plants, contracts
and equipment, net 2,223,770 794,464 528,908 3,547,142
Notes receivable-partnerships 11,250 - - 11,250
Excess of cost over fair value
of net assets acquired, net 393,763 - 678,365 1,072,128
Equity investments 200,408 - - 200,408
Deferred charges and other assets 122,904 178,902 207,266 509,072
-------------------------------------------------------------
Total assets $3,548,442 $1,366,326 $1,159,698 $6,074,466
========= ========= ========= ==========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 7,118 $188,020 $ - $195,138
Other accrued liabilities 103,160 196,254 662,827 962,241
Project finance loans 284,779 - - 284,779
Construction loans 351,923 - - 351,923
Senior discount notes 514,626 - - 514,626
Senior Notes 224,137 - - 224,137
Salton Sea notes and bonds 563,035 - - 563,035
Limited recourse senior secured notes 200,000 - - 200,000
Convertible subordinated debentures 73,755 - - 73,755
Revolving line of credit 35,000 - 60,000 95,000
Acquisition Loan - - 100,000 100,000
Northern Electric Bonds - 429,820 13,038 442,858
UK Credit Facility - - 739,054 739,054
Deferred income taxes 339,923 159,816 (200,594) 299,145
--------------------------------------------------------
Total liabilities 2,697,456 973,910 1,374,325 5,045,691
Deferred income 25,244 - - 25,244
Convertible preferred securities
of subsidiary 103,930 - - 103,930
Minority interest - - 177,789 177,789
Total stockholders' equity 721,812 392,416 (392,416) 721,812
--------------------------------------------------------
Total liabilities and
stockholders' equity $3,548,442 $1,366,326 $1,159,698 $6,074,466
========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these pro forma
unaudited condensed financial statements.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED UNAUDITED STATEMENT OF EARNING
for the for the year ended December 31, 1995
(In thousands, except per share data)
(1,3B&C) The (1,2 C)
Mission (1,4,B,C&D) FSRI FSRI Company (2D) Northern
The Acquired Pro Forma Acquired Pro Forma as Northern Pro Forma Pro Forma
Company Companies Adjustments Companies Adjustments Adjusted Electric Adjustments Combined
Revenues: ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of electricity and steam $335,630 $ - $97,728 $74,250 $ - $507,608 $ 1,412,989 $ - $1,920,597
Royalty income 19,482 - 980 - - 20,462 - - 20,462
Equity in earnings of affiliates - - - 16,776 (12,249) 4,527 - - 4,527
Interest and other income 43,611 - (959) 4,009 (9,700) 36,961 570,511 (546,562) 60,910
----------------------------------------------------------------------------------------------------------------
Total revenues 398,723 - 97,749 95,035 (21,949) 569,558 1,983,500 (546,562) 2,006,496
----------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales - - - - - - 1,035,120 (95,526) 939,594
Other operating costs 79,294 - 45,604 42,416 - 167,314 205,278 - 372,592
General and administration 23,376 2,740 1,064 1,225 (375) 28,030 49,589 (1,723) 75,896
Royalties 24,308 - - - - 24,308 - - 24,308
Depreciation and amortisation 72,249 - 24,994 6,403 13,717 117,363 47,826 68,979 234,168
Equity in loss of affiliates 362 - - - - 362 - - 362
Interest 134,637 - 10,937 14,782 2,450 162,806 20,934 96,850 280,590
Less interest capitalised (32,554) - (1,347) - - (33,901) - - (33,901)
----------------------------------------------------------------------------------------------------------------
Total costs and expenses 301,672 2,740 81,252 64,826 15,792 466,282 1,358,747 68,580 1,893,609
----------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 97,051 (2,740) 16,497 30,209 (37,741) 103,276 624,753 (615,142) 112,887
Provision for income taxes 30,631 (2,959) 5,363 3,963 (6,013) 30,985 154,823 (130,167) 55,641
----------------------------------------------------------------------------------------------------------------
Income (loss) before minority
interest and preferred dividends 66,420 219 11,134 26,246 (31,728) 72,291 469,930 (484,975) 57,246
Minority interest 3,005 - (3,005) - - - - 2,279 2,279
----------------------------------------------------------------------------------------------------------------
Net income (loss) 63,415 219 14,139 26,246 (31,728) 72,291 469,930 (487,254) 54,967
Preferred dividends 1,080 - - - - 1,080 7,641 (7,641) 1,080
----------------------------------------------------------------------------------------------------------------
Net income (loss) available to
common stockholders $ 62,335 $ 219 $ 14,139 $ 26,246 $(31,728) $71,211 $462,289 $(479,613) $53,887
======== ======== ======== ======== ========= ======= ======== ========= =======
Net income per share-primary $ 1.25 $ 1.35 $ 1.02
--------- ------- -------
Net income per share-fully
diluted $ 1.18 $ 1.29 $ .99
--------- ------- -------
Average number of shares
outstanding-primary 49,971 52,772 52,772
--------- ------- -------
Fully diluted shares 57,742 60,543 60,543
--------- ------- -------
</TABLE>
The accompanying notes are an integral part of these pro forma unaudited
condensed financial statements.
PRO FORMA CONDENSED COMBINED UNAUDITED STATEMENT OF EARNING
for the Nine Months Ended September 30, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
(1,3B&C) The (1,2 C)
Mission(1,4B,C&D)FSRI FSRI Company Northern
The Acquired Pro FormaAcquiredPro Forma as NorthernPro FormaPro Forma
Company CompaniesAdjustmentsCompaniesAdjustmentsAdjustedElectricAdjustmentsCombined
Revenues: ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of electricity and steam $346,166 $ - $18,250 $46,642 $ - $411,058 $1,105,664 - $1,516,722
Royalty income 5,995 - - - - 5,995 - - 5,995
Equity in earnings of affiliates 2,998 - - 15,306 (7,145) 11,159 - - 11,159
Interest and other income 30,039 - 436 2,299 (5,658) 27,116 14,519 - 41,635
------------------------------------------------------------------------------------------------------------------
Total revenues 385,198 - 18,686 64,247 (12,803) 455,328 1,120,183 - 1,575,511
------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales - - - - - - 770,418 - 770,418
Other operating cots 73,546 - 9,911 25,911 - 109,368 148,437 - 257,805
General and administration 15,814 684 - 1,310 (396) 17,412 38,591 - 56,003
Royalties 18,294 - - - - 18,294 - - 18,294
Depreciation and amortisation 80,300 - 5,259 3,709 8,003 97,271 37,163 50,732 185,166
Equity in loss of affiliates 3,966 - - - - 3,966 - - 3,966
Interest 116,521 - 1,700 7,638 1,429 127,288 23,561 74,149 224,998
Less interest capitalised (31,459) - - - - (31,459) - - (31,459)
Dividends on convertible
preferred securities 3,067 - - - - 3,067 - - 3,067
-------------------------------------------------------------------------------------------------- --------------
Total costs and expenses 280,049 684 16,870 38,568 9,036 345,207 1,018,170 124,881 1,488,258
-------------------------------------------------------------------------------------------------- -------------
Income before provision for
income taxes 105,149 (684) 1,816 25,679 (21,839) 110,121 102,013 (124,881) 87,253
Provision for income taxes 33,862 (644) 683 684 1,037 35,622 34,899 (29,391) 41,130
-------------------------------------------------------------------------------------------------- -------------
Income before minority interest
and preferred dividends 71,287 (40) 1,133 24,995 (22,876) 74,499 67,114 (95,490) 46,123
Minority interest - - - - - - - (4,607) (4,607)
-------------------------------------------------------------------------------------------------- --------------
Net income 71,287 (40) 1,133 24,995 (22,876) 74,499 67,114 (90,883) 50,730
Preferred dividends - - - - - - 14,287 (14,287) -
----------------------------------------------------------------------------------------------------------------
Net income available to common
stockholders $71,287 $ (40) $1,133 $24,995 $(22,876) $74,499 $52,827 $(76,596) $50,730
======== ======== ====== ======= =================================================
Net income per share-primary $ 1.29 $ 1.35 $ 0.92
-------- ------- -------
Net income per share-fully
diluted $ 1.18 $ 1.22 $ 0.87
-------- -------- -------
Average number of shares
outstanding-primary 55,362 55,362 55,362
-------- -------- -------
Fully diluted shares 66,397 66,397 66,397
-------- -------- -------
The accompanying notes are an integral part of these pro forma unaudited
condensed financial statements.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL DATA
(Table in thousands)
On December 24, 1996, CalEnergy Company, Inc. (the
"Company") announced that CE Electric UK plc, which is indirectly
owned 70% by the Company and 30% by Peter Kiewit Sons' Inc., had
acquired a majority of the ordinary shares of Northern Electric
plc (`Northern"). As of that date CE Electric had acquired 50.3%
or 51,077,904 shares of Northern's outstanding ordinary shares
and had extended offers to acquire the remaining minority equity
interest in Northern. As of January 29, 1997, CE Electric had
purchased 91.39% of Northern's outstanding stock, which gives CE
Electric the ability to legally force the sale of the remaining
minority shares. Since CE Electric has the ability and intent to
acquire the remaining shares in the near term, effectively CE
Electric has acquired 100% of Northern.
On August 7, 1996 the Company acquired all of the stock of
Falcon Seaboard Resources, Inc. ("FSRI"), including its ownership
interests in three operating gas-fired cogeneration plants,
Saranac Power Partners, L.P., Power Resources, Inc. and NorCon
Power Partners, L.P., for $226 million in cash. Certain assets,
liabilities and subsidiaries of FSRI were distributed out of FSRI
prior to the Company's acquisition of FSRI stock.
On April 17, 1996, a subsidiary of the Company acquired all
of the stock of BN Geothermal, Inc. ("BNG"), Niguel Energy
Company ("Niguel"), San Felipe Energy Company ("San Felipe") and
Conejo Energy Company (collectively the "Mission Acquired
Companies") from Edison Mission Energy for $70 million. The
Mission Acquired Companies own 50% partnership interests in each
of the Imperial Valley partnership projects (the "Partnership
Projects") in which the Company had an existing 50% ownership
interest resulting from the acquisition of Magma Power Company
("Magma"). During the first quarter of 1995, the Company
acquired the stock of Magma.
The acquisitions of Northern, FSRI, the Mission Acquired
Companies and Magma have been accounted for as purchase business
combinations pursuant to the principles of APB Opinion No. 16,
"Business Combinations." In applying APB No. 16, all identifiable
assets acquired and liabilities assumed are assigned a portion of
the cost of acquiring Northern, FSRI, the Mission Acquired
Companies and Magma, equal to their fair values at the date of
the acquisitions. The net cash flow projections used for
determining the fair values in the purchase accounting were those
used for the acquisitions as prepared by the Company and reflect
estimated cost reductions. The resulting purchase accounting
adjustments are based on the fair values determined in purchase
accounting and the historical financial statements of Northern,
FSRI, the Mission Acquired Companies and the Partnership Projects
in which the Acquired Companies have invested and Magma.
The Pro Forma Condensed Combined Unaudited Financial Data are
based on the following assumptions:
1. A. CE Electric had completed its acquisition of 100%
of the outstanding equity interests of Northern.
B. The Company obtained an acquisition loan for $100
million and increased its revolving loan to $95 million
and CE Electric obtained a credit facility for $739
million to complete the financing of the Northern
acquisition.
C. The acquisitions of Northern, FSRI, the Mission
Acquired Companies and Magma occurred at the beginning
of the periods presented for statements of earnings
purposes. The Pro Forma Condensed Combined Unaudited
Statement of Earnings for the Year Ended December 31,
1995 combines the Companies, FSRI's and the Mission
Acquired Companies historical Statements of Earnings for
the Year Ended December 31, 1995 with Northern's
historical Statement of Earnings for the Year Ended
March 31, 1996. The Pro Forma Condensed Combined
Unaudited Statement of Earnings for the Nine Months
Ended September 30, 1996 combines the Companies,
Northern's, FSRI's and the Mission Acquired Companies
historical Statements of Earnings for the Nine Months
Ended September 30, 1996.
2. The pro forma adjustments to reflect the effect of the
Northern acquisition are as follows:
A. The adjustments which have been made to the assets
and liabilities of Northern to reflect the effect of the
acquisition accounted for as a purchase business
combination follow:
Property and plant $528,908
Goodwill 678,365
Investments 187,208
Deferred taxes 200,594
Other Assets and liabilities (16,526)
Accrued preacquisition contingencies (636,607)
Long-term debt (13,038)
--------
Net increase in assets and liabilities $928,904
========
Included in accrued preacquisition contingencies are
reserves for contingent liabilities existing at Northern
at the time of acquisition relating to a contract
Northern had entered into relating to the purchase of
400 megawatts of capacity from a 15.4% owned related
party, Teesside Power Limited ("Teesside"), for a period
of 15 years beginning April 1, 1993. The contract sets
escalating purchase prices at predetermined levels.
Current contract prices exceed those paid by the Company
to the electricity pool which is operated by the
National Grid Group.
B. The cash which was used to acquire Northern,
including estimated transaction costs, has been provided
for in the pro forma adjustments as follows:
Reduced cash on hand at the Company $ 219,841
Increase in borrowings of the Company 195,000
CE Electric Credit Facility 739,054
Contribution from Minority Shareholder 177,789
-------
$1,331,684
========
Payments to shareholders $1,289,897
Other direct transaction costs 31,424
Financing costs 10,363
--------
$1,331,684
========
C. The pro forma adjustments to the Pro Forma
Condensed Combined Unaudited Statements of Earnings are
as follows:
i. Provide depreciation and amortisation of the fair
values assigned to all identifiable assets as
described below. The Company's policy is to provide
depreciation and amortisation expense upon the
commencement of revenue production over the
estimated remaining useful life of the identifiable
assets and to periodically assess the carrying value
of such assets for possible impairment in accordance
with the provisions of Statement of Financial
Accounting Standards No. 121.
The fair value of property and equipment is
depreciated using a systematic method, which
approximates the straight line method, over the
remaining portion (between 1-40 years) of the
original asset lives (between 3-60 years).
ii The fair values assigned to Northern's
investments are being amortised over the remaining
contract life of 11 years using a straight line
method.
iii. Record amortisation of the excess purchase
price over the net assets acquired using the
straight line method over 40 years.
iv.Adjust interest relating to (1) the borrowings under
The Company's acquisition loan and credit facility
(2) CE Electric's credit facility and (3) $225
million of Senior Notes, previously issued, to
reflect use of the proceeds from that offering in
this transaction.
v. Northern's historical Statement of Earnings for the
Year Ended March 31, 1996, has been adjusted to
eliminate one time non-recurring income and expense
of $546.6 million (349.0 million) and $97.2 million
(62.1 million), respectively. This income and
expense is attributable to the receipt of shares of
the National Grid Group plc and associated dividend
income, related customer discounts and the ultimate
sale and distribution of the shares to Northern
shareholders as a dividend-in-kind.
vi.Change income tax expense as a result of pro forma
adjustments which affect taxable income and to
reflect incremental US tax expense on foreign
earnings.
vii. Adjust for minority interest in CE Electric.
3. The acquisition on August 7, 1996 of FSRI is reflected in
the Company's historical consolidated balance sheet as of
September 30, 1996 and its historical consolidated statement
of earnings beginning August 1, 1996. The pro forma
adjustments to reflect the acquisition of FSRI are as
follows:
A. The adjustments which have been made to the assets
and liabilities of FSRI to reflect the effect of the
acquisition accounted for as a purchase business
combination follow:
Property and plant.. $ 58,050
Power sale agreements 46,604
Goodwill 99,206
Equity investments 136,375
Other assets and liabilities 8,008
Deferred taxes (95,206)
------------
Net increase in assets and
liabilities $253,037
=======
B. The FSRI historical statements have been adjusted
to reflect the exclusion of FSRI assets, liabilities and
subsidiaries not acquired by the Company and eliminate
historical general and administrative expenses and
project development expenses of FSRI which will no
longer be incurred by FSRI These FSRI assets,
liabilities and subsidiaries were distributed out of
FSRI prior to the acquisition of FSRI's stock by the
Company.
C. The pro forma adjustments to the Pro Forma
Condensed Combined Unaudited Statements of Earnings are
as follows:
i. Provide depreciation and amortisation of the
fair values assigned to all identifiable assets as
described below. The Company's policy is to provide
depreciation and amortisation expense upon the
commencement of revenue production over the
estimated remaining useful life of the identifiable
assets and to periodically assess the carrying value
of such assets for possible impairment in accordance
with the provisions of Statement of Financial
Accounting Standards No. 121.
The fair value of property and equipment is
depreciated using the straight line method over the
remaining portion (between 22-28 years) of the
original 30-year life.
Power sales agreements have been assigned values for
the remaining contract period and are being
amortised over such period using the straight line
method.
The fair values assigned to FSRI's equity
investments are being amortised over the remaining
contract periods using the straight line method.
ii. Record amortisation of the excess of the
purchase price over the net assets acquired using
the straight line method over the remaining weighted
average useful life of the facilities acquired (25
years).
iii. Record anticipated incremental general and
administrative expenses of The Company of $850,000
per year and reclassify historical state franchise
taxes from general and administrative expenses to
income tax expense.
iv. Adjust interest relating to (1) the borrowings
under the Company's revolving line of credit and (2)
the use of existing funds.
v. Change income tax expense as a result of pro
forma adjustments which affect taxable income.
4. The acquisition on April 17, 1996 of the Mission Acquired
Companies is reflected in the Company's historical
consolidated balance sheet as of September 30, 1996 and
its historical consolidated statement of earnings
beginning April 1, 1996. The pro forma adjustments to
reflect the effect of the acquisition of the Mission
Acquired Companies are as follows:
A. The adjustments which have been made to the assets
and liabilities of the Mission Acquired Companies to
reflect the effect of the acquisitions accounted for as
a purchase business combination follow:
Property and plant $(101,999)
Power sale agreements 44,797
Other assets and liabilities (4,882)
---------
Net decrease in assets and liabilities $ (62,084)
=======
B. The Salton Sea Funding Corporation Series D notes
and Series E bonds were issued and all existing project
level debt of the Partnership Projects was paid off at
the beginning of the period presented.
C. The pro forma adjustments to the Pro Forma
Condensed Combined Unaudited Statements of Earnings are
as follows:
i. Provide depreciation and amortisation of the
fair values assigned to all identifiable assets as
described below and capitalise interest on costs
allocated to projects under development and
construction. The Company's policy is to provide
depreciation and amortisation expense upon the
commencement of revenue production over the
estimated remaining useful life of the identifiable
assets and to periodically assess the carrying value
of such assets for possible impairment in accordance
with the provisions of Statement of Financial
Accounting Standards No. 121.
The fair value of property and equipment, net of
salvage value, and exploration and development cost
is depreciated using the straight line method over
the remaining portion (approximately 23 years) of
the original 30-year life.
Power sales agreements have been assigned values
separately for each of (1) the remaining portion of
the scheduled price periods of the power sales
agreements and (2) the 20 year avoided cost periods
of the power sales agreements and are being
amortised separately over such periods using the
straight line method.
ii. Adjust interest relating to (1) the issuance of
the Salton Sea Funding Corporation Series D notes
and Series E bonds net of the repayment of all
project level debt at the Partnership Projects and
(2) the use of existing funds.
iii. Change income tax expense as a result of pro
forma adjustments which affect taxable income.
D. For the year ended December 31,
1995, reflect the Magma Acquisition as a purchase
business combination beginning January 1, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
CalEnergy Company, Inc.
By: /s/ Douglas L. Anderson
Douglas L. Anderson
Assistant Secretary and
Assistant Genral Counsel
(U.S. and Corporate)
Dated: February 18, 1997
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