-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BUkM79JnYHIcVOh+P5dSPSTo//sVyyZuwjs+sD8dSevkh6/rFDTRkcQ1DrMH33XO R6q6FzFRsorOOo/yVpr2Ng== 0001019672-99-000003.txt : 19990625 0001019672-99-000003.hdr.sgml : 19990625 ACCESSION NUMBER: 0001019672-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN INVESTMENTS UK PLC CENTRAL INDEX KEY: 0001019672 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-09033 FILM NUMBER: 99651439 BUSINESS ADDRESS: STREET 1: SOUTHERN COMPANY SERVICES, INC. STREET 2: 333 PIEDMONT AVE, NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 404-506-71 MAIL ADDRESS: STREET 1: 800 PARK AVENUE AZTEC WEST ALMONDSBURY STREET 2: BRISTOL BS12 4SE CITY: ENGLAND STATE: X0 10-K405 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Registrant, State or other Jurisdiction Commission of Incorporation or Organization, I.R.S. Employer File Number Address and Telephone Number Identification No. ----------- ------------------------------------- ----------------- 333-09033 Southern Investments UK plc None (Registered in England & Wales) 800 Park Avenue Aztec West Almondsbury Bristol BS32 4SE, UK (01144) 1454 201101 =============================================================================== Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) Aggregate market value of voting stock held by non-affiliates: $0 A description of the registrant's common stock follows: Description of Shares Outstanding Registrant Common Stock at May 31, 1999 - ---------- -------------- ------------------ Southern Investments UK plc Par Value(pound)1 Per Share 902,128,735
Table of Contents PART I PAGE Item 1 Business General..............................................................................................I-1 Overview of the Electric Utility Industry in England and Wales.......................................I-1 SWEB's Main Businesses...............................................................................I-2 SWEB's Ancillary Business Activities.................................................................I-6 Risk Management......................................................................................I-6 UK Environmental Regulation..........................................................................I-7 Employee Relations...................................................................................I-7 Item 2 Properties..............................................................................................I-8 Item 3 Legal Proceedings.......................................................................................I-8 Item 4 Submission of Matters to a Vote of Security Holders.....................................................I-9 PART II Item 5 Market for Registrant's Common Equity...................................................................II-1 Item 6 Selected Financial Data.................................................................................II-1 Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition Introduction.........................................................................................II-2 Results of Operations................................................................................II-2 Financial Condition..................................................................................II-9 Item 7A Quantitative and Qualitative Disclosures about Market Risk..............................................II-11 Item 8 Financial Statements and Supplementary Data.............................................................II-12 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................II-31 PART III Item 10 Directors and Executive Officers of the Registrant......................................................III-1 Item 11 Executive Compensation..................................................................................III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management..........................................III-3 Item 13 Certain Relationships and Related Transactions..........................................................III-5 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................................................................................IV-1
Cautionary Statement Regarding Forward-Looking Information The Company's 1999 Annual Report Form 10-K contains forward-looking and historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking information; accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory issues (such as the results of the current review of regulation, and the results of the distribution price review scheduled to take effect April 1, 2000); potential business strategies, including acquisitions or dispositions of assets or internal restructuring that may be pursued by the Company or its subsidiaries; Year 2000 issues; the potential introduction of the Euro; changes in or application of environmental and other laws and regulations to which the Company and its subsidiaries are subject; political, legal and economic conditions and developments in which the Company and its subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the Company or its subsidiaries and the success of efforts to invest in and develop new opportunities; and other factors discussed elsewhere herein and in other reports filed from time to time by the Company with the SEC. i SELECTED DEFINITIONS When used in this report, the following terms will have the meanings indicated. "Accentacross" means Accentacross Limited, a Director of the Company. "Authorized Area" means a REC's designated service area as determined by its PES license. "Calendar Year" means a year ended December 31. "Company" means Southern Investments UK plc. "Distribution Price Control Formula" ("DPCF") is determined by the PES license. It means a formula of P+RPI-Xd where P reflects the previous maximum average price per unit of electricity distributed, RPI reflects the percentage change in the Retail Price Index between the previous year and the current year and the Xd factor is established by the Regulator following review. "Electricity Act" means the Electricity Act 1989. "EMFs" means electromagnetic fields. "Fiscal Year" means a year ended March 31. "Fossil Fuel Levy" means a levy system instituted to reimburse the generators and the RECs for the extra costs involved in generating electricity from non-fossil fuel plants as compared to generating electricity from fossil fuel plants. "Holdings" means SWEB Holdings Limited, the direct parent company of the Company. "Holdings UK" means SWEB Holdings UK, an unlimited liability company and the direct parent company of Holdings. "London Electricity" means London Electricity plc. "Mighteager" means Mighteager Limited, a Director of the Company. "National Grid" is the high voltage transmission system in England and Wales and connects the power stations to regional and local distribution systems. "NGC" means the National Grid Company plc, which is wholly-owned by NGG, and owns and operates the National Grid. "NGG" means the National Grid Group plc. "OFFER" means the Office of Electricity Regulation, the body appointed by the Government of the UK to regulate the electricity industry in Great Britain. "Outage" means a disruption to the supply of electricity. "PES" means public electricity supplier licensed by the Regulator. "PMDC" means PMDC UK, a direct shareholder in Holdings UK and an indirect wholly owned subsidiary of PP&L Resources. "PMDC Directors" means Accentacross and Mighteager. "Pool" means the wholesale trading market for electricity in England and Wales. ii "Pooling and Settlement Agreement" means the agreement which governs the constitution and operation of the Pool and the calculation of payments to and from generators and suppliers. "PP&L" means PP&L Resources, Inc., a public stock corporation, and ultimate parent of PMDC and the registered utility Pennsylvania Power and Light. "Price Cap" means a maximum price per unit of electricity supplied for various tariffs as established by the Regulator. "PSB" means NGC's pumped storage electricity generation business. "REC" means one of the 12 regional electricity companies in England and Wales licensed to distribute, supply, and, to a limited extent, generate electricity. "Regulated Supply Customers" means customers whose electricity prices are subject to regulation, and comprises mainly domestic and small commercial customers. See "Unregulated Supply Customers" below for an associated definition. "Regulator" means The Director General of Electricity and Gas Supply in Great Britain. "SEC" means the Securities and Exchange Commission. "SFAS" means US Statement of Financial Accounting Standard. "Southern" means The Southern Company, the ultimate parent company of the Southern Company system. "Southern Company system" means Southern and its subsidiaries. "Supply Price Control Formula" ("SPCF") is determined by the PES license. It related to Regulated Supply Customers and applied until March 31, 1998. It meant P+RPI-Xs+Y, where P reflected the maximum average price unit of electricity supplied, and RPI reflected the percentage change in the Retail Price Index between the previous year and the current year. The Xs factor was established by the Regulator following review and the Y term was a pass through of certain costs. "SWEB" means South Western Electricity plc, a subsidiary of the Company, and the main operating company within the Holdings UK group. "Unregulated Supply Customers" are defined until March 31, 1998, as customers with a demand greater than 100kW and, from April 1, 1998, as customers who are non-domestic and have an annual consumption in excess of 12,000kWh. "UK" means the United Kingdom. "UK GAAP" means accounting principles generally accepted in the UK. "US" means the United States of America. "US GAAP" means accounting principles generally accepted in the US. iii PART I Item 1. BUSINESS Solely for the convenience of the reader, certain pounds sterling amounts have been translated into US dollars at the Noon Buying Rate on March 31, 1999 of $1.6140 = (pound)1.00; see Note 1 in the "Notes to the Consolidated Financial Statements". General The Company was incorporated as a public limited company under the laws of England and Wales in June 1995 as a vehicle for the acquisition of SWEB, one of the 12 RECs in England and Wales licensed to distribute, supply and, to a limited extent, generate electricity. In September 1995, the Company gained effective control of SWEB, and subsequently replaced SWEB's board of directors and certain senior managers with officers and employees of companies from within the Southern Company system. The Company's main investment and only significant asset is the entire share capital of SWEB, which is headquartered in Bristol, England. The Company is a wholly-owned subsidiary of Holdings. Holdings is a wholly-owned subsidiary of Holdings UK, which is owned indirectly by Southern and PP&L. Until July 1996, Holdings was an indirect wholly-owned subsidiary of Southern. In July 1996, Southern sold a 25 percent stake in Holdings to PP&L. In June 1998, Southern sold an additional 26 percent economic interest in Holdings to PP&L. This further sale increased PP&L's economic interest in Holdings to 51 percent. Subsequently in June 1998, shares in Holdings held by Southern and PP&L were exchanged for equivalent shares in Holdings UK. Under the terms of the associated shareholders' agreement, Southern retains operational and management control of SWEB and the Holdings UK group. Southern continues to hold a majority of the voting shares in Holdings UK and appoints a majority of the board of directors. SWEB's two main business lines during the period under review were the distribution of electricity and supply of electricity to approximately 1.3 million customers in its Authorized Area in southwest England. The distribution business and the supply business are distinct business segments. On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity. The sale is subject to regulatory clearance. See Note 12 in the "Notes to the Consolidated Financial Statements". SWEB's Authorized Area covers approximately 5,560 square miles extending from Bristol and Bath in the northeast, 188 miles southwest along the peninsula to Land's End and 28 miles beyond to the Isles of Scilly, and has a resident population of approximately 2.8 million. The southwest of England, of which the Authorized Area forms the greater part, has benefitted from economic growth (as measured by Gross Domestic Product) which on average has exceeded the UK rate over the long term and on average during the 1990's. The area has also benefited from an average unemployment rate during calendar year 1998 of approximately 3.5% which was below the UK average of 4.7% according to a 1999 study by Cambridge Econometrics. The largest cities and towns in SWEB's Authorized Area are Bath, Bristol, Exeter, Plymouth and Taunton. Business activity is generally concentrated in the population centers around Bristol, Bath and Plymouth. The Bristol and Bath area is served by the M4 and M5 motorways, a rail network including a link between Bristol and London, and a commercial port at Avonmouth. The Company and SWEB have undertaken to make SWEB a more focused and competitive company concentrating on the main electricity businesses of distribution and supply. Several businesses not related to distribution and supply have been sold since SWEB was acquired by Southern, and the remaining ancillary businesses have been redirected to focus on support for the main electricity businesses. Overview of the Electric Utility Industry in England and Wales In 1990, the electric utility industry in Great Britain was privatized, and SWEB was created along with the other 11 RECs in England and Wales. In connection with the privatization, distribution assets in England and Wales, previously owned indirectly by Her Majesty's Government, were allocated among the RECs, licensing requirements were established for the RECs and price controls were implemented in the areas of distribution and supply. In England and Wales, generation assets (other than nuclear facilities) were allocated to two generating companies, and the high voltage transmission assets were allocated to NGC. I-1 The high voltage transmission system in England and Wales, which is generally referred to as the National Grid, carries the generated electricity in bulk from the power stations to the regional and local distribution systems. This transmission system is owned and operated by NGC. Distributors transfer electricity over their networks, generally at lower voltage than the National Grid, from supply points on the national grid to final consumers. The distribution systems in England and Wales are owned by the 12 RECs. Virtually all customers in England and Wales are connected to the distribution system of the RECs and have no choice as to the distribution system from which they receive their electricity. Distribution prices charged by the RECs are regulated by the Distribution Price Control Formula ("DPCF"). Suppliers sell electricity to end users. Each REC is required to have a PES license which authorizes it to supply electricity. Electricity customers fall into two categories, Regulated Supply Customers (largely domestic and small commercial) and Unregulated Supply Customers. Prices for supply of electricity to Regulated Supply Customers were regulated by the Supply Price Control Formula ("SPCF") until March 1998. From April 1998, prices are subject to a Price Cap determined by the Regulator. This Price Cap only applies to Regulated Customers that a PES supplies in its Authorized Area. The exclusive right for a REC to supply Regulated Supply Customers in its Authorized Area was phased out from September 1998 - see "SWEB's Main Businesses - Supply Business". Unregulated Supply Customers have been able to choose their supplier for several years. Such suppliers, including SWEB, compete for business nationally and at prices determined by competitive bids or negotiation. At the time of privatization, the Pool was established for bulk trading of electricity in England and Wales between generators and suppliers. The Pool reflects two principal characteristics of the physical generation and supply of electricity from a particular generator to a particular supplier. First, it is not possible to trace electricity from a particular generator to a particular supplier. Second, it is not practicable to store electricity in significant quantities, creating the need for a constant matching of supply and demand. Subject to certain exceptions, all electricity generated in England and Wales must be sold and purchased through the Pool. All licensed generators and suppliers must become signatories to a Pooling and Settlement Agreement, which governs the constitution and operation of the Pool and the calculation of payments due to and from generators and suppliers. Prices for electricity are set by the Pool daily for each half hour of the following day based on the bids of the generators and a complex set of calculations matching supply and demand and taking account of system stability, security and other costs. The Regulator is currently considering how a program for the delivery and implementation of new electricity trading arrangements, targeted for April 2000, will be taken forward - see "Results of Operations - Future Earnings Potential". SWEB's Main Businesses Distribution Business SWEB's distribution business is the ownership, management and operation of the electricity distribution network within SWEB's Authorized Area. The primary activity of the distribution business is the receipt of electricity from the National Grid transmission system and its distribution to end users of electricity that are connected to SWEB's power lines. Virtually all electricity supplied (whether by SWEB's independent supply business or by other suppliers) to consumers in SWEB's Authorized Area is transported through its distribution network, thus providing SWEB with distribution volume that is stable from year to year. As a holder of a PES license, SWEB is subject to a regulatory framework that provides economic incentives to increase the number of units of electricity distributed and to operate in a more cost-efficient manner. SWEB's distribution business has grown in both its customer base and in the number of units distributed, primarily reflecting population and economic growth in the southwest of England. At March 31, 1999 SWEB had experienced a 5-year compound annual growth rate of 0.97% in customers and 1.97% in units distributed. I-2 Strategy Since being acquired by the Company, SWEB has reviewed and refined its distribution strategy and has established key goals of cost reduction, improved customer service and network performance. Staff reductions play a key role in cost savings. Since acquisition, SWEB has implemented a plan of voluntary and other staff reductions, mainly in the distribution business. By March 31, 1999 staff numbers had been reduced by 722 (22%). Part of these reductions were made possible due to new work practices which SWEB has developed with the cooperation of SWEB's unions. Team restructuring in the engineering division and the establishment of multi-skilled independent field teams has also contributed to improved cost efficiency. In addition, management restructuring has produced a flatter organizational structure by reducing management levels from seven to three. Improvements in customer service in the distribution business are a key part of SWEB's strategy. SWEB aims to meet or exceed all the performance criteria established by the Regulator who is responsible for setting the performance standards and targets. SWEB believes that achieving these goals is important both for improving customer satisfaction and for maintaining good relations with the Regulator. Improvements in customer service are being pursued, in part, through improvements in system performance, measured primarily in terms of the frequency and duration of outages. To that end, several initiatives have been implemented or are being pursued including: * eliminating a backlog of tree-trimming near distribution lines. At March 31, 1999, 90.4% of high voltage (11kV) lines and 74.4% of low voltage (415/240V) lines had been cleared of trees; * introduction of rubber glove working techniques, allowing work to take place on the network without disrupting supplies to customers; * refurbishment of 11kV aluminum overhead lines; * implementing a program of network improvements that improves the reliability of worst performing circuits; * reordering the priorities of SWEB's capital expenditure program to focus on improving system reliability; * implementation of a computerized telecontrol system, allowing the move to one centralized control center, providing a speedier, more accurate and reliable service to customers; * continuous process improvement and training at our call center supported by new computerized information systems; and, * monthly measurement of customer satisfaction through individual telephone surveys. An indication of the success of these initiatives on improving system reliability is in the number of minutes that the average customer is off supply (excluding major storms). In fiscal year 1999, this was 57.7 minutes per customer which compares with 72.3 minutes for fiscal year 1998, an improvement of 20%. Excellent progress has been made with the restoring of supplies within three hours where SWEB has exceeded the 90% target set by the Regulator with a total success rate of 93%. Customers A high proportion of SWEB's distribution customers are domestic and smaller businesses. SWEB's fastest growing category of distribution customers are commercial customers, e.g. retail. Commercial activity of SWEB's customers is mostly service based and includes financial and business services, electronics and technology-related businesses. SWEB also distributes electricity to a number of larger industrial concerns in its Authorized Area. The principal activities of SWEB's largest distribution customers include china clay extraction, ship repair, fertilizer production, aerospace, defense engineering, cement and paper manufacturing. SWEB's 20 largest distribution customers in its Authorized Area accounted for 10% of total electricity distributed by SWEB in fiscal year 1999 in terms of units distributed, with no single customer exceeding 3% of total electricity distributed. I-3 The following table sets out details of SWEB's distribution customers, units distributed and distribution revenues.
Distribution Business - ------------------------------------------------------------------------------------------------------------------------ Distribution Customers Electricity Units Distributed Revenues(4) ---------------------- ----------------------------- ----------- % of 5 year Volume % of 5 year % of Number(1) Total CAGR(2) Twh(3) Total CAGR(2) Total -------- ----- ------- ------ ----- ------- ----- not more than 100kW........... 1,344,682 99.78 0.96% 8.8 62 1.45% 79 above 100kW to 1MW............ 2,715 0.20 3.98 2.5 17 5.01 13 above 1MW..................... 250 0.02 3.55 2.9 21 1.22 8 ---------- ------ ---- ---- --- ---- ---- Total 1,347,647 100.00 0.97 14.2 100 1.97 100 ========== ====== ==== ==== === ==== ==== - --------------- (1) At March 31, 1999. (2) Represents the compound annual growth rate ("CAGR") for the period from April 1, 1994 through March 31, 1999. (3) In terawatt hours for fiscal year 1999. (4) For fiscal year 1999.
Distribution Facilities Electricity is transported across the National Grid transmission system at 400kV or 275kV to ten grid supply points connected to SWEB's distribution network, where it is transformed to 132kV and enters SWEB's distribution system. Substantially all electricity which enters SWEB's system is received at these ten grid supply points. At March 31, 1999, SWEB's electricity distribution network (excluding service connections to consumers) included overhead lines and underground cables at the operating voltage levels and approximate lengths as indicated in the table below:
Overhead lines Underground cables Operating voltage: (Circuit miles) (Circuit miles) --------------- -------------------- 132kV................................................................. 910 37 33kV.................................................................. 1,750 577 11kV.................................................................. 10,633 3,982 6.6kV................................................................. 15 77 480 or 415/240V...................................................... 4,902 6,950 ------ ------ Total........................................................... 18,210 11,623 ====== ====== In addition to the circuits referred to above, SWEB's distribution facilities also include approximately: Aggregate Capacity (mega Volt- Number Amperes) ___________________________________________________________________________ ------ -------------------- Transformers: - ------------- 132kV/lower voltages........................................................ 91 5,040 33kV/11kV or 6.6kV.......................................................... 535 7,652 11kV or 6.6kV/lower voltages (including 36,638 pole mounted transformers) 48,331 6,680 Substations: - ----------- 132kV/33kV.................................................................. 46 33kV/11kV or 6.6kV.......................................................... 311 11kV or 6.6kV/415V or 240V.................................................. 12,143
Substantially all substations are owned in freehold, and most of the balance are held on leases which will not expire within 10 years. Operation and control of SWEB's distribution system is continuously monitored and coordinated from a control center located in Exeter. Electricity is received by customers at various voltages depending upon their requirements. At March 31, 1999, SWEB's distribution system was connected to over 1.3 million customers. I-4 Supply Business On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity. The sale is subject to regulatory clearance. See Note 12 in the "Notes to the Consolidated Financial Statements". SWEB's supply business is selling electricity to end users, purchasing such electricity, primarily from the Pool, and arranging for its distribution to those end users. SWEB's supply business is comprised predominantly of supplying Regulated Supply Customers (largely domestic and small commercial). In fiscal year 1999, these customers accounted for approximately 49% of all units of electricity supplied by SWEB. Prices for supply of electricity to Regulated Supply Customers in a REC's Authorized Area are subject to Price Cap regulation until at least March 2000. The exclusive right for a REC to supply Regulated Supply Customers in its Authorized Area was phased out from September 1998. Each REC's Authorized Area was opened to competition in three phases. The first phase covered 10 percent of customers plus maximum demand and half-hourly metered customers. The second phase, approximately three months later, covered a further third of customers including the remaining business customers. Phase three covered the remaining domestic customers. The process took around six months in each REC's Authorized Area and has been completed for all RECs. From May 1999, all supply customers can choose their electricity supplier. SWEB's first phase commenced in November 1998, followed by phases two and three in February and May, 1999, respectively. Once a REC's Authorized Area opened to competition, it could compete in the Authorized Area of other RECs where competition had commenced, and vice versa. SWEB intends to maintain a significant share of these customers by providing superior service and competitive pricing. The Regulator has imposed a penalty on all RECs, including SWEB, relating to the delay in opening the remainder of the supply market to competition beyond the April 1998 deadline; the penalty imposed on SWEB did not have a material impact on earnings. The market to supply Unregulated Supply Customers has been fully competitive for some years, principally with other RECs and the major generators. Unregulated Supply Customers are typically supplied through individual contracts with a duration of one to two years with competitively bid or negotiated prices. Strategy Since its acquisition by the Company, SWEB has completed a review of the supply market, established new goals for its supply business and adopted new strategies for achieving those goals. The key goals established are the retention of its current Regulated Supply Customers as supply customers following the opening of the market, and a profitable increase in SWEB's share of electricity supplied to Unregulated Supply Customers both inside and outside SWEB's Authorized Area. SWEB's strategy for retaining its Regulated Supply Customers is to build customer loyalty and to offer competitive prices. SWEB seeks to build customer loyalty by providing superior, responsive service in dealing with billing and other matters and providing other service enhancements. Initiatives in relation to the Regulated Supply Customers include: * a single-number, toll free, telephone service call center; * improvements and enhancements to the billing and customer service system which will enable employees at the call center to act on or resolve customer billing and account inquiries on line during their calls; and * increasing meter reads to reduce estimated readings. In the UK, most meters are located within buildings and meter readers are required to obtain access from occupants in order to read meters. SWEB's strategy for sales to Regulated Supply Customers outside its Authorized Area is to actively pursue high margin/low acquisition cost customers and respond to any request received for a quotation. SWEB's strategy for Unregulated Supply Customers both inside and outside its Authorized Area is to offer competitive pricing and build customer loyalty through superior service. Additional initiatives to support growth in market share in both the Supply Customer markets include: I-5 * higher profile and more focused advertising campaigns; * the introduction of a business call center; * increasing the number of proposals and bids made to customers, potential customers, brokers and agents; * development of an integrated system for contract customer sales, electronic registration and marketing with full customer life-cycle management and tracking facilities; and * further enhancement of a competitive price setting system used to determine appropriate contract supply prices. Regulated Supply Market Sales to Regulated Supply Customers during fiscal year 1999 represented 49% of total units supplied by SWEB and produced 57% of SWEB's total supply revenues. As discussed above, the exclusive right for a REC to supply Regulated Supply Customers in its Authorized Area has been phased out and SWEB intends to maintain a significant share of these customers by providing superior customer service and competitive pricing. As at May 31, 1999 SWEB had retained 98% of its Regulated Supply Customers. In fiscal year 1999, SWEB met or exceeded seven of the Regulator's eight standards of performance targets for services measured by the Regulator; it narrowly failed to meet a target for meter reading. By the end of fiscal year 1998, SWEB had moved from worst to best in a national ranking of RECs in respect of customer complaints to the Regulator and has maintained this position throughout fiscal year 1999. Unregulated Supply Market In addition to competing for Unregulated Supply Customers in its Authorized Area, SWEB holds the required license to compete with RECs and other suppliers to provide electricity to Unregulated Supply Customers outside its Authorized Area. At the end of fiscal year 1999, SWEB had approximately 1,600 Unregulated Supply Customers, consisting primarily of large commercial and industrial accounts. Revenue from Unregulated Supply Customers during fiscal year 1999 accounted for 43% of total supply revenues. SWEB's Ancillary Business Activities SWEB also has ancillary business activities that support its main electricity distribution and supply businesses, including electricity generation, energy purchasing, property and telecommunications. SWEB owns generating assets with 16 MW of capacity used to back up the distribution network as well as minority investments in windfarms, and a 7.69% interest in Teesside Power Limited, owner of a 1,875 MW combined cycle plant. SWEB also markets and develops property no longer used in the main electricity businesses. The energy purchasing business is ancillary to the supply business. Provided the sale of the supply business receives regulatory clearance, the energy purchasing business will cease. Risk Management SWEB's distribution business does not involve the purchase and sale of electricity, and therefore SWEB's risk management efforts are focused on the supply business which is exposed to Pool price volatility. SWEB utilizes contracts to mitigate its exposure to Pool price volatility. These contracts allow the Company to effectively convert the majority of its anticipated Pool prices to fixed prices. The gains and losses on these contracts are deferred and recognized as electricity is purchased. Recently, a market has developed for trading these contracts in the United Kingdom. However, due to the immaturity of this market and the complexity of the existing contracts, it is not practicable to estimate the fair value of these contracts. The most common terms for supply to both Regulated and Unregulated Supply Customers contain fixed rates. SWEB is exposed to two principal risks associated with such terms: load shape risk (the risk associated with a shift in the customer's usage pattern, including absolute amounts demanded and timing of amounts demanded) and purchasing price risk (the cost of purchased electricity relative to the price received from the supply customer). I-6 SWEB employs risk management methods to maximize its return consistent with an acceptable level of risk. SWEB manages load shape risk by setting customer sales prices based on their expected load shape and including an additional premium to cover the risk of load shape variation. Variable volume energy purchasing contracts are also used when available at a competitive price. SWEB, through its energy purchasing business, manages purchasing price risk by employing a variety of risk management tools, including management of its supply contract portfolio, and other means which mitigate risk of future Pool price volatility. SWEB's ability to manage its purchasing price risk depends, in part, on the future availability of properly priced risk management mechanisms such as energy purchasing contracts. SWEB intends to purchase cover at competitive prices and constantly evaluates market conditions. No assurance can be given that an adequate, transparent market for such products will in fact be available and thus that contracts will be available at competitive prices. The Company and SWEB utilize certain financial derivative contracts for the sole purpose of hedging business exposure in connection with fluctuations in interest rates and currency rates. Interest rate swaps are used to assure the stability of future interest charges by effectively converting a portion of outstanding variable-rate debt into fixed rates. In addition, the US dollar liabilities associated with certain of the Company's and SWEB's debt are converted into pounds sterling by entering into foreign currency hedging contracts. UK Environmental Regulation SWEB's businesses are subject to numerous regulatory requirements with respect to the protection of the environment. The Electricity Act obligates the President of the Board of Trade and Secretary of State for Trade and Industry to take into account the effect of electricity generation, transmission and supply activities upon the physical environment in approving applications for the construction of generating facilities and the location of overhead power lines. The Electricity Act requires SWEB to have regard to the desirability of preserving natural beauty and the conservation of natural and man-made features of particular interest when it formulates proposals for development in connection with certain of its activities. SWEB mitigates the effects its proposals have on natural and man-made features and is required to carry out an environmental assessment when it intends to lay cables, construct overhead lines or carry out any other development in connection with its licensed activities. SWEB also has produced an Environmental Policy Statement which sets out the manner in which it intends to comply with its obligations under the Electricity Act. The Environmental Protection Act 1990 addresses waste management issues and imposes certain obligations and duties on companies which handle and dispose of waste. Some of SWEB's distribution activities produce waste, but SWEB believes that it is in compliance with applicable standards in such regard. Possible adverse health effects of EMFs from various sources, including transmission and distribution lines, have been the subject of a number of studies and public discussion. Scientific research has not shown any causal link between EMFs and adverse health effects. UK standards for exposure to power frequency EMFs are those promulgated by the National Radiological Protection Board and relate to the levels above which non-reversible physiological effects may be observed. SWEB fully complies with these standards. However, there is the possibility that the future introduction and passage of legislation and change of regulatory standards would require measures to mitigate EMFs, with resulting increases in capital and operating costs. In addition, the potential exists for public liability with respect to lawsuits brought by plaintiffs claiming damages for adverse health effects caused by EMFs. SWEB believes that it has taken and continues to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against SWEB or the Company with respect to any environmental matter. Employee Relations At March 31, 1999, SWEB had 2,618 employees (2,537 full time equivalent) and the Company had no employees. Of SWEB's employees, 95% are represented by labor unions. All SWEB employees who are not party to a personal employment contract are subject to one of two collective bargaining agreements. One is called The Electricity Business Agreement, which covered 2,400 employees at March 31, 1999 (2,319 full time equivalent); it may be amended by agreement between SWEB and the unions and is terminable with 12 months notice by either side. The other is called the SWEB Data Collection Services Agreement, which covered 93 employees at March 31, 1999 (93 full time equivalent); it may be I-7 amended by agreement between SWEB and the unions and is terminable by written notice (with no period specified) by either side. SWEB believes that its relations with its employees are favorable. Legal proceedings concerning the Electricity Supply Pension Scheme involving a company other than SWEB were taken. These proceedings may affect SWEB in the future. See "Item 3 - Legal Proceedings". Item 2. PROPERTIES SWEB has both network and non-network land and buildings. Network Land and Buildings At March 31, 1999 SWEB had freehold and leasehold interests in approximately 12,000 network properties, comprising principally substation sites. The recorded cost of total network land and buildings at March 31, 1999 was (pound)75 million ($121 million). Non-Network Land and Buildings At March 31, 1999 SWEB had freehold and leasehold interests in non-network properties comprising chiefly offices, former retail outlets, depots, warehouses and workshops and included the freehold of its principal executive offices in Bristol. The recorded cost of total non-network land and buildings at March 31, 1999 was (pound)35 million ($56 million). The number of properties in each category is: Freehold or Long Leasehold Leasehold -------------- --------- Depots........................................ 18 1 Offices....................................... 7 - Surplus property(1)........................... 38 12 - --------- (1)......Largely unused retail sites (shops). SWEB markets and develops property no longer used in the main electricity businesses. For a discussion of other properties and other assets of SWEB, see Item 1 "Business - SWEB's Main Businesses - Distribution Facilities". Item 3. LEGAL PROCEEDINGS The Company and SWEB are routinely party to legal proceedings arising in the ordinary course of business which are not material, either individually or in aggregate. Neither the Company nor SWEB is a party to any material legal proceedings nor are they currently aware of any threatened material legal proceedings. As described below, the Company is aware of an issue which could subsequently impact SWEB. The Pensions Ombudsman (a UK statutorily appointed independent arbitrator) has issued a determination in favor of complaints made by members of the Electricity Supply Pension Scheme ("ESPS") relating to another employer's use of ESPS surplus to offset the employer's costs of providing early pensions on redundancies and certain other items. Under that determination the Pensions Ombudsman directed the employer to pay into ESPS the amount of that use of the surplus plus interest. The determination was challenged in the High Court by the employer, and the High Court upheld the employer's appeal in a judgment delivered in June 1997. The High Court also granted the complainants leave to appeal to the Court of Appeal. The Court of Appeal hearing took place in October 1998, and its judgment was given in February 1999. While the complainants' appeal was successful, the Court of Appeal indicated that it may be possible to validate the employer's actions by a retrospective rule amendment. The Court of Appeal gave leave in principle for a subsequent appeal to the House of Lords (the UK Supreme Court), but also made arrangements for a further hearing held on May 25 and 26. The Court of Appeal declined to hear further arguments and told the parties that any outstanding matters would have to be addressed by the House of Lords. The parties agreed a form of order, stayed pending the further appeal, I-8 which contains a requirement for the amounts offset against the surplus, plus interest, to be paid into the pension fund. Until any further appeal is determined it is not known whether this case will have a material impact on SWEB's financial position or results of operations. It is unlikely a hearing will take place before the House of Lords earlier than Fall 2000. Therefore it is not practical to make an estimate of the exposure at the present time. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. I-9 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY There is no established public trading market for the Company's common stock, all of which is owned indirectly by Southern and PP&L. Item 6. SELECTED FINANCIAL DATA (In Millions)
Period from | inception | Period from (2) (June | April 1, Fiscal Fiscal Fiscal 23, 1995) | 1995 to Fiscal Year Year Year to March | September Year 1999 (1) 1998 (1) 1997 (1) 31, 1996 (1)| 17, 1995 1995 Successor Successor Successor Successor | Predecessor Predecessor --------- --------- --------- ----------- | ----------- ----------- | Operating Revenues from | continuing operations........(pound) 261 $ 421 (pound) 245 (pound) 257 (pound) 144 |(pound) 122 (pound) 277 Net Income (Loss) from | continuing operations (3).... 76 123 (27) 50 45 | 24 82 Total Assets.................... 2,139 3,452 1,728 1,721 1,690 | 795 820 Long-term Debt.................. 301 486 301 301 - | 95 95 Preferred Securities (4)........ 50 81 50 50 - | - - Common Dividend Declared........ 70 113 34 37 191 | 75 30 - ------------- (1) Successor periods are not comparable to predecessor periods due to acquisition related adjustments (including the revaluation of assets and liabilities) and to increases in debt as a result of the acquisition. (2) The Company was incorporated on June 23, 1995, as a vehicle for the acquisition of SWEB. Effective control was gained on September 18, 1995 and designated as the acquisition date; the operating results of SWEB have been included in the Company's financial statements from that date. Given that SWEB represents substantially all of the current operations of the Company, SWEB is considered the "Predecessor" Company. The Company and its subsidiaries is considered the "Successor" Company. (3) The Net Loss in fiscal year 1998 is stated after a one-off windfall levy charge of (pound)90 million ($145million). The results for 1999 and 1998 have benefited from a decrease in UK income tax rates which served to reduce the Company's provision for deferred income taxes with a corresponding reduction in income tax expense of (pound)11 million ($18 million) and (pound)22 million ($36 million) respectively. (4) Company Obligated Mandatorily Redeemable Preferred Securities of Southern Investments UK Capital Trust I Holding Company Junior Subordinated Debentures. See Note 9 in the "Notes to the Consolidated Financial Statements".
II-1 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto. The consolidated financial statements discussed in this Section are presented in accordance with US GAAP. Solely for the convenience of the reader, certain pounds sterling amounts have been translated into US dollars at the Noon Buying Rate on March 31, 1999 of $1.6140 = (pound)1.00; see Note 1 in the "Notes to the Consolidated Financial Statements". INTRODUCTION Background In 1995, the Company was incorporated as a vehicle for the acquisition of SWEB. In September 1995, the Company gained effective control of SWEB. Significant Events On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity for consideration of (pound)160 million cash and the assumption of certain liabilities. This sale is subject to regulatory clearance. See Note 12 in the "Notes to the Consolidated Financial Statements". The Consolidated Statements of Income for all periods shown have been restated to reflect discontinued operations accounting for this business segment. In December 1998 a more efficient capital structure for Holdings UK and the Company was put in place. At that time, Holdings UK became a co-obligor of the Company's existing long-term debt and subordinated debentures - see Note 9 to "Notes to the Consolidated Financial Statements". This arrangement reduces the net interest cost of the Company as reported in this Form 10-K, but has no impact at the Holdings UK group level. The UK government's 1998 Finance Act included a reduction in the rate of UK corporation tax from 31% to 30% effective April 1999. This decrease resulted in a reduction to SWEB's provision for deferred income taxes and a corresponding reduction in income tax expense of approximately (pound)11 million during fiscal year 1999. In July 1997 the Labour government presented its first budget which included a "one-off windfall levy on the excess profits of the privatized utilities". Based upon the legislation, SWEB's liability was assessed at (pound)90 million. The levy was paid in 1997 and 1998. The legislation also reduced the UK corporation tax rate from 33% to 31% effective April 1997. This decrease resulted in a reduction to the Company's provision for deferred income taxes and a corresponding reduction in income tax expense of approximately (pound)22 million during fiscal year 1998. In December 1998, the board of directors elected W. P. Bowers, who had been serving as Senior Vice President of marketing at Georgia Power, an affiliated company, as Chairman and Chief Executive of SWEB. He succeeded Gale Klappa, who has been appointed as Senior Vice President and President of Southern Energy's North America Group. Effective June 1, 1999, the board of directors elected Charl Oosthuizen, who had been serving as Assistant to the SWEB Chief Executive prior to taking up his most recent role as General Manager, Information Resources at SWEB, as Chief Financial and Accounting Officer of SWEB. He replaces Mike Harreld, who has been appointed as Senior Vice President and Controller of Southern Energy's North America Group, and Southern Energy Controller. RESULTS OF OPERATIONS Operating results from continuing operations Earnings Earnings in fiscal years 1999 and 1998 benefited from a decrease in the UK corporation tax rate which reduced the Company's provision for deferred income taxes by (pound)11 million and (pound)22 million respectively, as discussed in "Significant Events" above. Earnings in fiscal year 1998 were adversely affected by a (pound)90 million windfall levy assessed against SWEB. II-2 Operating income increased by (pound)12 million (11%) to (pound)122 million in the fiscal year 1999 from (pound)110 million in the fiscal year 1998. This increase is due to a (pound)7 million increase in operating income from ancillary businesses (net of eliminations), and a (pound)5 million increase in the distribution business. Operating income decreased by (pound)3 million (3%) to (pound)110 million in the fiscal year 1998 from (pound)113 million in the fiscal year 1997. This decrease is due to a (pound)2 million decrease in the distribution business, and a (pound)1 million decrease from ancillary businesses (net of eliminations). Net income from continuing operations increased by (pound)24 million (59%) to (pound)65 million in the fiscal year 1999 from (pound)41 million in the fiscal year 1998, before the effect of the tax rate change on deferred income taxes in fiscal years 1998 and 1999, and the windfall levy in fiscal year 1998. This increase was principally due to interest income on three US dollar loans made to Holdings UK in December 1998 (as discussed in Note 9 to "Notes to the Consolidated Financial Statements"), a gain on the sale of certain non-core assets, the increase in operating income discussed above, and a reduction to the income tax provision, which was prudently increased in fiscal year 1998 to cover possible disallowable items, following the resolution of some of these items in fiscal year 1999. Net income from continuing operations decreased by (pound)9 million (18%) to (pound)41 million in the fiscal year 1998, before the windfall levy and effect of the tax rate change on deferred income taxes, from (pound)50 million in the fiscal year 1997. This decrease was principally due to increased interest expense, a decrease in investment related income, and the decrease in operating income discussed above. Revenues Operating revenues increased by (pound)16 million (7%) to (pound)261 million in the fiscal year 1999 from (pound)245 million in fiscal year 1998 which had decreased by (pound)12 million (5%) from (pound)257 million in fiscal year 1997 as follows:
Operating Revenues Operating Revenues Increase (Decrease) from the Increase (Decrease) from the Fiscal Year 1998 Fiscal Year 1997 to the Fiscal Year 1999 to the Fiscal Year 1998 -------------------------------------------------------------------- ((pound)millions, except %) ((pound)millions, except %) Electricity distribution............ 19 (3) Other(1)............................ 5 (11) Intra-business(2)................... (8) 2 --- ---- Total operating revenues............ 16 (12) --- ---- Percentage change................... 7% (5%) - -------------
(1) "Other" includes SWEB's ancillary activities as well as corporate items not allocated to distribution. (2) Intra-business revenues relate to the elimination of intra-business revenues in consolidation. Two factors determine the amount of revenues produced by the distribution business: the unit price of the electricity distributed (which is controlled by the Distribution Price Control Formula) and the number of electricity units distributed. In July 1995, the Regulator announced the result of the distribution price review which was precipitated by certain market events in the UK electric utility industry. For SWEB, such announcement meant a real reduction of 11% in allowable distribution income for the twelve months from April 1, 1996, followed by an efficiency factor of X = 3% for each year thereafter. The number of units distributed depends on the demand of SWEB's customers for electricity. That demand varies based in part upon weather conditions and economic activity. Revenues from the distribution business increased by (pound)19 million (8%) to (pound)247 million for the fiscal year 1999 from (pound)228 million for fiscal year 1998 which had decreased by (pound)3 million (1%) from fiscal year 1997 as a result of the following factors: II-3
Operating Revenues from Operating Revenues from Electricity Distribution Electricity Distribution Increase (Decrease) from the Increase (Decrease) from the Fiscal Year 1998 Fiscal Year 1997 to the Fiscal Year 1999 to the Fiscal Year 1998 ------------------------------------------------------------------------------- ((pound)millions, except %) ((pound)millions, except %) Application of Distribution Price Control Formula.......... 7 (2) Sales growth............................................... 4 1 Other revenue attributable to distribution business........ 8 (2) ---- --- Total distribution revenues................................ 19 (3) ---- --- Percentage change.......................................... 8% (1%)
Revenues from "other" increased by (pound)5 million (11%) to (pound)49 million in the fiscal year 1999 from (pound)44 million for the fiscal year 1998. The increase was principally due to the setting up of an energy purchasing business in April 1998 to manage the purchase price risk of the supply business, and to higher revenue from the Information Resources business which was primarily due to the Year 2000 project. This was partly offset by lower reported sales in the gas retailing business due to a restructuring of that business, including a teaming arrangement with another organization effective from October 1997. In addition, due to the commencement of competition for Regulated Supply Customers which began in SWEB's Authorized Area in November 1998, and the uncertainty of recoverability of an element of the unbilled revenue receivable, management reflected, as a corporate item, a (pound)9 million revision to this balance during fiscal year 1999. Revenues from "other" decreased by (pound)11 million (20%) to (pound)44 million in the fiscal year 1998 from (pound)55 million for the fiscal year 1997. The decrease was principally due to the lower activity in the gas retailing business as discussed above. Intra-business eliminations for fiscal year 1999 increased by (pound)8 million (30%) from fiscal year 1998 which decreased by (pound)2 million (7%) from fiscal year 1997. The increase in fiscal year 1999 was primarily due to higher internal charges from the Information Resources business relating to Year 2000 project costs. Cost of Sales Cost of sales decreased by (pound)3 million (16%) to (pound)16 million in the fiscal year 1999 from (pound)19 million in the fiscal year 1998. The decrease principally arose from lower reported sales in the gas retailing business. Cost of sales decreased by (pound)18 million (49%) to (pound)19 million in the fiscal year 1998 from (pound)37 million in the fiscal year 1997. The decrease principally arose from lower volumes in the gas retailing business. Operating Expenses Operating expenses increased by (pound)7 million (6%) to (pound)123 million in the fiscal year 1999 from (pound)116 million in the fiscal year 1998. The increase was principally due to a (pound)5 million increase in depreciation and amortization, a (pound)3 million increase in maintenance costs, partly offset by a (pound)1 million decrease in selling, general and administrative expenses. Operating expenses increased by (pound)9 million (8%) to (pound)116 million in the fiscal year 1998 from (pound)107 million in the fiscal year 1997. The increase was principally due to a (pound)7 million increase in selling, general and administrative costs, a (pound)3 million increase in depreciation and amortization, partly offset by a (pound)1 million decrease in maintenance costs. The increase in selling, general and administrative costs is primarily due to the activities and restructuring of the gas retailing business. Interest Income from Affiliated Companies Interest income, net of amortization of associated premium, from affiliated companies was (pound)6 million in fiscal year 1999. There was no interest income from affiliated companies in fiscal years 1998 and 1997. This interest relates to three US dollar loans totaling $584 million ((pound)351 million) made to Holdings UK in December 1998 - see Note 9 to "Notes to the Consolidated Financial Statements". II-4 Interest Expense Interest expense increased by (pound)3 million (6%) to (pound)55 million in the fiscal year 1999 from (pound)52 million in the fiscal year 1998. This increase is largely due to increased short term borrowings to finance the first and second installments of the windfall levy, paid in the third quarters of fiscal years 1998 and 1999, respectively. The weighted average balance of debt outstanding during the fiscal year 1999 was (pound)686 million at a weighted average interest rate of 7.9% compared to (pound)654 million at 7.9% during the fiscal year 1998. The increase in the average level of debt is primarily due to financing the windfall levy payments. Interest expense increased by (pound)5 million (11%) to (pound)52 million in the fiscal year 1998 from (pound)47 million in the fiscal year 1997. This was caused by an approximate 1% increase in bank borrowing rates during the fiscal year 1998, the increase in debt as described above and the replacement of short term debt with higher margin long term debt. Investment Income Investment income decreased by (pound)4 million (44%) to (pound)5 million in the fiscal year 1999 from (pound)9 million in the fiscal year 1998, which increased by (pound)3 million (50%) from (pound)6 million in the fiscal year 1997. The movements are mainly due to the timing of dividends from an investment in a generating plant. Gain on Sale of Assets The gain on sale of assets of(pound)7 million in fiscal year 1999 was due to the sale of certain non-core assets. Gain on Sale of Investments The (pound)6 million gain in the fiscal year 1997 related principally to additional proceeds of (pound)4 million relating to the demerger of the PSB associated with the sale of NGG and the sale by SWEB of its interest in a cable television and telecommunications company. Operating results from discontinued operations On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity. This sale is subject to regulatory clearance. See Note 12 in the "Notes to the Consolidated Financial Statements". As a result of the above, the supply business has been treated as a discontinued activity. The supply business is selling electricity to end users, purchasing such electricity, and arranging for its distribution to those end users. Two factors determine the amount of revenues produced by the supply business: the unit price of the electricity supplied and the number of electricity units supplied. From April 1998 the unit price of electricity supplied to Regulated Supply Customers in a REC's Authorized Area is subject to Price Cap regulation; until March 1998, it was controlled by the Supply Price Control Formula. Regulated Supply Customers are generally residential/domestic and small commercial customers. The volume of unit sales of electricity for Regulated Supply Customers is influenced largely by the number of customers in the Authorized Area, weather conditions and prevailing economic conditions. Unit sales to Unregulated Supply Customers are determined primarily by the success of the supply business in entering into contracts to supply customers with electricity. Revenues from the supply business increased by (pound)34 million (5%) to (pound)740 million for the fiscal year 1999 from (pound)706 million for the fiscal year 1998. The number of electricity units supplied in the fiscal year 1999 increased by 12%, which mainly arose from a 58% increase in units supplied to Unregulated Supply Customers outside SWEB's Authorized Area. Although units supplied to Regulated Supply Customers increased by 4%, revenues remain unchanged mainly due to a reduction in the fossil fuel levy, which is passed through to customers, together with a 3% tariff reduction. II-5 Revenues from the supply business decreased by (pound)82 million (10%) to (pound)706 million for the fiscal year 1998 from (pound)788 million for the fiscal year 1997. The number of electricity units supplied in the fiscal year 1998 decreased by 10%, which mainly arose from a reduction in units supplied to Unregulated Supply Customers. In addition to units supplied reducing, revenues were also reduced due to a reduction in the fossil fuel levy for the fiscal year 1998. Revenues from Regulated Supply Customers reduced by 5% mainly due to the reduction in the fossil fuel levy, together with a reduction in allowable income as set by the Supply Price Control Formula. Future Earnings Potential The results of operations for the past three years are not necessarily indicative of future earnings potential. On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity. This sale is subject to regulatory clearance. See Note 12 within the "Notes to the Consolidated Financial Statements". The level of future earnings also depends on numerous factors including the outcome of the current and future distribution price reviews. The largest portion of SWEB's operating income is derived from its distribution business - the operation and maintenance of the electricity distribution network in its Authorized Area in the southwest of England. SWEB is the only distributor of electricity in this area, and management believes that economic, environmental and regulatory factors are likely to prevent competitors from entering this business in SWEB's Authorized Area. Distribution revenues are subject to price-cap regulation. Current regulation is expected to continue until March 2000. A regulatory review has commenced which will determine the regulation to apply thereafter; the final outcome of this review is expected to be announced by the Regulator in November 1999. There are currently a number of issues which impact the electricity industry and which are the subject of discussion and consultation papers. The principal ones are: (i) In March 1998 the government published a discussion paper ("Green Paper") on the regulation of the water, electricity, gas and telecommunications utilities within the UK entitled "A Fair Deal for Consumers: Modernizing the Framework for Utility Regulation". The government's stated objective for the review is to set a long term stable framework for utilities which is seen to be fair by all the interested groups involved. The guiding principles are that regulation must be transparent, consistent and predictable. In July 1998 the government announced its conclusions on reform of utility regulation. Key decisions include merging the electricity and gas regulators, the retention of the RPI - X approach to regulation, social and environmental actions to be issued by Ministers, and greater transparency. These proposals will be the subject of new legislation as soon as Parliamentary time permits. In October 1998 the government published their proposals in two areas for consultation. The two documents are "The Future of Gas and Electricity Regulation" and "Consumer Councils". The government is currently considering the responses received. (ii) In May 1998 the Director General of Electricity Supply (the "Regulator") issued a consultation paper concerning the separation of businesses in the context of the reviews of the price controls post 2000. It is the Regulator's view that full separation of supply and distribution would be desirable. However, he recognizes that it is likely that interim arrangements will be necessary. The Regulator published further consultation papers on separation of the businesses in November 1998 and May 1999. He remains of the view that full separation between supply and distribution is desirable. However, the papers acknowledge that, for certain unspecified shared services, an interim exemption may be allowed. Discussions are continuing. (iii) In October 1997 the government's Minister for Science, Energy and Industry invited the Regulator to consider how a review of electricity trading arrangements might be undertaken. In July 1998 the Regulator published a proposals document describing new market based trading arrangements for electricity. In October 1998 the government accepted these proposals. The proposals envisage market-based trading arrangements more like those in commodity markets elsewhere. Forwards and futures markets would operate up to several years ahead, evolving in response to demand. A voluntary short-term bilateral market is proposed to enable "fine tuning" of contract positions. The system operator will be responsible for balancing generation and demand from about four hours before each half-hour trading period. Suppliers and generators will be charged an imbalance fee for differences between their contractual and physical positions by the System Operator. The proposals document sets a target date of April 2000 for the introduction of these new arrangements. In November 1998 the Regulator published a Framework Document setting out how a program for the delivery and implementation of new electricity trading arrangements will be taken forward. (iv) The current distribution and supply price control reviews, expected to be effective April 2000. II-6 As these papers and review are only consultative at this time, it is not possible for the Company to determine the impact until after such issues have been finalized by the government, and firm proposals are made by the Regulator. In relation to separation, SWEB's supply business and associated staff will be employed by London Electricity once the sale of SWEB's supply business has been completed. These staff will continue to occupy SWEB's buildings along with distribution business staff for the immediate future. Depending on the outcome of the Regulator's review and the detailed agreements between SWEB and London Electricity, there will be costs involved for physically separating the business. The supply market has been undergoing change and is now fully open to competition as discussed in Item 1 "Business - SWEB's Main Businesses - Supply Business". Until March 2000, a REC has the exclusive right to provide meter operation, data collection, and data aggregation services to non half-hourly metered customers (generally residential and small businesses) in its Authorized Area. From April 2000, competitive market pricing will be introduced and suppliers, on behalf of non half-hourly metered customers, will be able to contract these services from any company holding an appropriate license. SWEB does not expect the introduction of competition to have a significant impact on future earnings. Competitive market pricing already exists for operations related to the metering of network connections to half-hourly metered customers. A possible further impact on future earnings is a court ruling related to a pension matter. See Note 2 in the "Notes to the Consolidated Financial Statements" herein for discussion of this matter. Additionally, other contingencies, including the possibility of changes in the valuation of the Teesside contract, and other matters that may affect future earnings potential, are discussed in Notes 3 and 4. Year 2000 Year 2000 Challenge In order to save storage space, computer programmers in the 1960s and 1970s shortened the year portion of date entries to two digits. Computers assumed, in effect, that all years began with "19". This practice was widely adopted and hard-coded into computer chips and processors found in some equipment. This approach, intended to save processing time and storage space within computers, was used until the mid-1990s. Unless corrected before the Year 2000, affected software systems and devices containing a chip or microprocessor with date and time functions could incorrectly process dates or the systems may cease to function. SWEB depends on complex computer systems for many aspects of its operations, which is primarily the distribution of electricity, as well as other business support activities. SWEB's goal is to have critical devices or software that are required to maintain operations to be Year 2000 ready by June 1999. Year 2000 ready means that a system or application is determined suitable for continued use through the Year 2000 and beyond. Critical systems include, but are not limited to, control center computer systems, customer service systems, and telephone switches and equipment. Year 2000 Program and Status SWEB's executive management recognizes the seriousness of the Year 2000 challenge and has dedicated what it believes to be adequate resources to address the issue. An executive steering committee reviews Millennium Project progress on a regular basis, and Southern receives periodic updates and progress reports. SWEB's Millennium Project is divided into two phases. Phase 1 began in 1996 and consisted of identifying and assessing corporate assets related to software systems and devices that contain a computer chip or clock. The first phase was completed in July 1997. Phase 2 consists of testing and remediating high priority systems and devices. Also, contingency planning is included in this phase. Phase 2 is on target for completion by the end of June 1999. The Millennium Project will continue to monitor the affected computer systems, devices, and applications into the Year 2000. II-7 Year 2000 Costs Current projected costs of SWEB's Year 2000 readiness are approximately (pound)15 million. These costs include labor necessary to identify, test and renovate affected devices and systems. From its inception through March 31, 1999, the Year 2000 program costs amounted to (pound)10 million. Year 2000 Risks SWEB is implementing a detailed process to minimize the possibility of service interruptions related to the Year 2000. SWEB believes, based on current tests, that the system can provide customers with electricity. These tests increase confidence, but do not guarantee error-free operations. SWEB is taking what it believes to be prudent steps to prepare for the Year 2000, and it expects any interruptions in service that may occur to be isolated and short in duration. SWEB has followed a proven methodology for identifying and assessing software and devices containing potential Year 2000 challenges. Remediation and testing of those devices are in progress. SWEB is also assessing risks associated with critical assets. Following risk assessment, SWEB is preparing contingency plans as appropriate and is participating with the UK Electricity Industry. SWEB is currently reviewing the Year 2000 readiness of material third parties which provide goods and services crucial to SWEB's operations. Among such critical third parties are the NGG, telecommunications, water, and other suppliers. There is some risk associated with representations by third parties regarding their readiness and completion of their own Year 2000 related work. Contingency plans based on the assessment of each third party's ability to continue supplying critical goods and services to SWEB are being developed. There is a potential for some earnings erosion caused by reduced electrical demand by customers because of their Year 2000 issues. Year 2000 Contingency Plans SWEB is skilled at using contingency plans in unusual circumstances because of experience with storms. As part of Year 2000 business continuity and contingency planning, SWEB is drawing on that experience to make risk assessments and is developing additional plans to deal specifically with situations that could arise relative to Year 2000 challenges. SWEB is identifying critical operational locations, and key employees will be on duty at those locations during the Year 2000 transition. In September 1999, drills are scheduled to be conducted to test contingency plans. Because of the level of detail of the contingency planning process, management feels that the contingency plans will keep any service interruptions that may occur isolated and short in duration. SWEB is participating with the rest of the UK Electricity Industry and also with other utilities (water, telecommunications and gas) through the Year 2000 Utilities Interest Group where the focus now is very much on contingency planning. The material in this section constitutes forward looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. There can be no assurance that the actual results of the Company, its suppliers, or other third party dependencies will not materially differ from expectations. European Monetary Union In January 1999, 11 European Union countries formed an economic and monetary union and started using a single currency - the Euro. The UK did not join at this time, but the UK government has indicated that it might in the future. Some suppliers and possibly customers may be affected by the introduction of the Euro, which may have a possible impact on SWEB. Currently, SWEB is assessing the requirements for the potential introduction of the Euro. The cost of conversion to Euro compatible systems could have a material impact on the Company's earnings. II-8 New Accounting Standard The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement was originally scheduled to be adopted for fiscal years beginning after June 15, 1999. However, in response to requests from entities and their auditors for more time to study, understand, and implement the provisions of the statement, the FASB has issued an exposure draft which proposes to defer the effective date of the statement to fiscal years beginning after June 15, 2000. The Company is in the process of quantifying the impact of adopting this statement on its financial statements; the adoption could increase volatility in earnings and other comprehensive income. FINANCIAL CONDITION Overview The Company's financial condition continues to remain strong. Excluding interest income on the inter-company loan between the Company and Holdings UK, Income Before Income Taxes has remained at approximately the same level for the last three fiscal years. SWEB's operating income is predominantly from the distribution business and this will continue after the sale of the supply business has been completed. During the fiscal year 1999 SWEB incurred expenditure of approximately (pound)75 million on property, plant, and equipment, largely in respect of the distribution network. This compared with (pound)81 million during fiscal year 1998. The funds required for such additions were derived primarily from operations. It is expected that SWEB's capital requirements in the foreseeable future for its investment in property, plant, and equipment will be generated from operating activities. Demand for electricity in Great Britain, in general, and in SWEB's Authorized Area, in particular, is seasonal, with demand being higher in the winter months and lower in the summer months. SWEB balances the effect of this and other cyclical influences on its working capital needs with drawings under its available credit facilities. The Company's main investment and only significant asset is the entire share capital of SWEB. The Company is primarily dependent upon dividends from SWEB for its cash flow. SWEB can make distribution of dividends to the Company under English law to the extent that it has distributable reserves, subject to the retention of sufficient financial resources to conduct its supply and distribution businesses as required by its regulatory license. The Company believes that currently sufficient distributable reserves will continue to exist at SWEB to allow for reasonable and necessary dividends from SWEB, through operations, to be distributed to the Company. In the UK, the Accounting Standards Board is currently reviewing the treatment of deferred income tax accounting. If full provision for deferred tax were required, SWEB's distributable reserves could be eliminated. In addition, in March 1999, the Regulator proposed a variation to the licenses under which all RECs (including SWEB) operate such that the directors of a REC must certify to the Regulator that it is reasonably foreseeable that the REC will not breach any of its license conditions if it declares a dividend. This variation is currently subject to further discussion. SWEB has no reason to believe that a breach of its license would flow from declaring a reasonable dividend. Derivative Financial Instruments The Company is exposed to market risks, including changes in interest rates, currency exchange rates, and certain commodity prices. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for other material exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. The Company's policy is that derivatives are to be used only for hedging purposes. Derivative positions are monitored using techniques that include market value and sensitivity analysis. The Company utilizes interest rate swaps to hedge certain debt obligations. These swaps hedge specific debt issuances and currently qualify for hedge accounting. Consequently, the interest rate differential associated with the swap is reflected as an adjustment to interest expense over the life of the instruments. If the Company sustained a 100 basis point change in interest rates for all variable rate debt in all currencies, the change would affect annualized interest expense by approximately (pound)1 million (1%) on (pound)117 million of variable rate debt as at March 31, 1999. Based on the Company's overall interest II-9 rate exposure at March 31, 1999, including derivative and other interest rate sensitive instruments, a 100 basis point change in interest rates would not materially affect the consolidated financial statements. Currency swaps and forward agreements are also utilized by the Company to hedge US dollar denominated debt. These swaps offset the dollar cash flows, thereby effectively converting debt to the pound. Gains and losses related to qualified hedges of foreign currency firm commitments are deferred and included in the basis of the underlying transactions. To the extent that a qualifying hedge is terminated or ceases to be effective as a hedge, any deferred gains and losses to that point continue to be deferred and are included in the basis of the underlying transaction. For all derivative financial instruments, the Company is exposed to losses in the event of nonperformance by counterparties to such derivative financial instruments. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. The Company is not aware of any counterparties to financial derivatives that will fail to meet their obligations. The Company has derivative financial instruments with an affiliate, Holdings UK. See "Financing Activities" in Note 9 to "Notes the Consolidated Financial Statements". FASB has issued Statement No. 133 relating to the accounting for derivative financial instruments. This could have a material impact on the Company's accounting for its derivative financial instruments and Net Income - See "New Accounting Standard" above. Financing Activities In December 1998 a more efficient capital structure for Holdings UK and the Company was put in place. At that time, Holdings UK became a co-obligor of the Company's existing long-term debt and subordinated debentures see Note 9 to "Notes to the Consolidated Financial Statements". This arrangement reduces the net interest cost of the group as reported in this Form 10-K, but has no impact at the Holdings UK group level. The Company has a US commercial paper program, which is fully supported by a swingline and revolving credit facility provided by a syndicate of banks, under which the maximum available is $520 million. At March 31, 1999 the amount unutilized under these facilities was $118 million. SWEB enters into foreign currency contracts to hedge the currency risk associated with the interest and principal of each utilization under this program. SWEB actively manages its short-term debt, which includes a number of bank lines of credit in addition to the commercial paper program. At March 31, 1999 the Company and SWEB together had short-term debt of (pound)399 million ($643 million) outstanding ($250 million from a swingline and revolving credit facility, and $393 million in other short-term loans). To meet short-term cash needs and contingencies, the Company and SWEB together had at March 31, 1999 approximately (pound)3 million of cash and (pound)5 million of unutilized committed lines of credit with banks. Also available was $118 million of the swingline and revolving credit facility mentioned above. Excluding swap agreements between the Company and Holdings UK, at March 31, 1999, the Company and SWEB have sterling interest rate swaps expiring between 2001 and 2012, with notional amounts totaling (pound)600 million, and have cross currency swaps expiring between 2001 and 2007, with notional amounts totaling (pound)350 million. II-10 Cautionary Statement Regarding Forward-Looking Information The Company's 1999 Annual Report Form 10-K contains forward-looking and historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking information; accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory issues (such as the results of the current review of regulation, and the results of the distribution price review scheduled to take effect April 1, 2000); potential business strategies, including acquisitions or dispositions of assets or internal restructuring that may be pursued by the Company or its subsidiaries; Year 2000 issues; the potential introduction of the Euro; changes in or application of environmental and other laws and regulations to which the Company and its subsidiaries are subject; political, legal and economic conditions and developments in which the Company and its subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the Company or its subsidiaries and the success of efforts to invest in and develop new opportunities; and other factors discussed herein and in other reports filed from time to time by the Company with the SEC. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to information in Item 1 "Business Risk Management" above, and in the Company's "Management's Discussion and Analysis - Derivative Financial Instruments" above, and to Notes 1 and 7 in the "Notes to the Consolidated Financial Statements" under the heading "Financial Instruments" contained herein. II-11 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Southern Investments UK plc and Subsidiaries Index to the Consolidated Financial Statements
Page Management's Report..................................................................................... II-13 Report of Independent Public Accountants................................................................ II-14 Consolidated Statements of Income....................................................................... II-15 Consolidated Statements of Changes in Stockholder's Equity.............................................. II-16 Consolidated Statements of Cash Flows................................................................... II-17 Consolidated Balance Sheets............................................................................. II-18 Notes to the Consolidated Financial Statements.......................................................... II-20
II-12 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES MANAGEMENT'S REPORT 1999 Annual Report The management of the Company has prepared -- and is responsible for -- the consolidated financial statements and related information included in this report. These statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances and necessarily include amounts that are based on the best estimates and judgments of management. Financial information throughout this annual report is consistent with the financial statements. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that books and records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's internal audit staff. The Company's independent public accountants also consider certain elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements. Management believes that its policies and procedures provide reasonable assurance that the Company's operations are conducted according to a high standard of business ethics. In management's opinion, the consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States. /s/ Richard J. Pershing /s/ D. Charl S. Oosthuizen Richard J. Pershing D. Charl S. Oosthuizen Chief Executive Officer Chief Financial and Accounting Officer June 23, 1999 II-13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Southern Investments UK plc: We have audited the accompanying consolidated balance sheets of SOUTHERN INVESTMENTS UK plc (the "Company" being a company incorporated in England and Wales) and SUBSIDIARIES as of March 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholder`s equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Investments UK plc and subsidiaries as of March 31, 1999 and 1998 and the consolidated results of its operations, changes in stockholder's equity and cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles in the United States. /s/ ARTHUR ANDERSEN ARTHUR ANDERSEN Bristol, England June 23, 1999 II-14 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997 CONSOLIDATED STATEMENTS OF INCOME (In Millions)
1999 1998 1997 ---- ---- ---- (Note 1) OPERATING REVENUES (pound) 261 $421 (pound) 245 (pound) 257 COST OF SALES 16 26 19 37 ----- ---- ----- ----- GROSS MARGIN 245 395 226 220 ----- ---- ----- ----- OPERATING EXPENSES: Maintenance 37 60 34 35 Depreciation and amortization 51 82 46 43 Selling, general and administrative 35 56 36 29 ----- ---- ----- ----- Total operating expenses 123 198 116 107 ----- ---- ----- ----- OPERATING INCOME FROM CONTINUING OPERATIONS 122 197 110 113 ----- ---- ----- ------ OTHER INCOME (EXPENSE): Interest income 1 2 2 2 Interest income from affiliate companies 6 10 - - Interest expense (55) (89) (52) (47) Investment income 5 8 9 6 Gain on sale of assets 7 11 - - Gain on sale of investments - - - 6 ----- ---- ----- ----- Total other income (expense) (36) (58) (41) (33) ----- ---- ----- ----- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 86 139 69 80 PROVISION FOR INCOME TAXES: Customary (21) (34) (28) (30) Effect of change in tax rates (Note 6) 11 18 22 - Windfall levy (Note 6) - - (90) - ----- ---- ----- ----- NET INCOME (LOSS) FROM CONTINUING OPERATIONS 76 123 (27) 50 INCOME FROM DISCONTINUED OPERATIONS, net of income tax effect of (pound)5 ($8), (pound)5 and (pound)2, respectively (Note 12) 11 18 12 5 ----- ---- ----- ----- NET INCOME (LOSS) (pound) 87 $141 (pound) (15) (pound) 55 ===== ==== ===== ===== The accompanying notes are an integral part of these consolidated statements.
II-15
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (In Millions) Number of Retained Total Ordinary Share Earnings/ Stockholder's Shares Capital (Deficit)(2) Equity ---------------------------------------------------------- Balance, March 31, 1996 500 (pound) 500 (pound) (132) (pound) 368 Net income - - 55 55 Dividends declared on common stock - - (37) (37) ----- ----- ------ ----- Balance, March 31, 1997 500 500 (114) 386 Net loss (1) - - (15) (15) Dividends declared on common stock - - (34) (34) ----- ----- ------ ----- Balance, March 31, 1998 500 500 (163) 337 Issue of share capital 402 402 - 402 Net income - - 87 87 Dividends declared on common stock - - (70) (70) ----- ----- ------ ----- Balance, March 31, 1999 902 (pound) 902 (pound)(146) (pound) 756 ===== ===== ====== ===== - ------------- (1) The Net Loss is stated after a one-off windfall levy charge of(pound)90 million. (2) The Company shows a retained earnings deficit primarily due to dividends in the amount of (pound)191 million being declared and paid by the Company during the fiscal year 1996 as proceeds from the sale of SWEB's shares in The National Grid Group plc provided cash in addition to that provided from operations. In addition, the first budget of the Labour government included a "one-off windfall levy on the excess profits of the privatized utilities"; SWEB's liability was assessed at (pound)90 million. The accompanying notes are an integral part of these consolidated statements.
II-16
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997 CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) 1999 1998 1997 ---- ---- ---- (Note 1) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) (pound) 87 $ 141 (pound) (15) (pound) 55 ----- ----- ------ ----- Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 47 76 54 43 Changes in assets and liabilities: Receivables, net 2 3 33 (17) Accounts payable (6) (10) (10) 3 Income taxes, accrued/deferred (32) (51) 36 23 Other, net (11) (18) (38) (48) ------ ------ ----- ----- Total adjustments - - 75 4 ----- ----- ----- ----- Net cash provided from operating activities 87 141 60 59 ----- ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (75) (121) (81) (70) Proceeds from sales of assets 10 16 2 5 Proceeds from sales of investments 2 3 1 17 ----- ----- ----- ------ Net cash used for investing activities (63) (102) (78) (48) ------ ------ ----- ------ CASH FLOWS FROM financing ACTIVITIES: Proceeds from issuance of bonds - - - 300 Change in short term borrowings 37 60 79 (366) Issue of share capital 402 649 - - Loans to affiliated company (351) (567) - - Payment of premium in respect of loans to affiliated company and related hedges (42) (68) - - Issue of mandatorily redeemable preferred securities - - - 50 Payment of dividends (70) (113) (59) (12) ------ ------ ------ ------ Net cash (used for) provided from financing activities (24) (39) 20 (28) ------ ------ ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - - 2 (17) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5 8 3 20 ------ ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR (pound) 5 $ 8 (pound) 5 (pound) 3 ====== ====== ====== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) (pound) 54 $ 87(pound) 51(pound) 48 ====== ====== ====== ====== Income taxes: Customary 2 3 20 11 Windfall levy (Note 6) 45 73 45 - ------ ------ ------ ------ Total cash paid for income taxes (pound) 47 $ 76(pound) 65(pound) 11 ====== ====== ====== ====== The accompanying notes are an integral part of these consolidated statements.
II-17
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1999 and 1998 (In Millions) ASSETS 1999 1998 ______________________________________________________________________________ _____________________________ ___________ (Note 1) PROPERTY, PLANT, AND EQUIPMENT (pound) 1,452 $ 2,344 (pound) 1,389 Less accumulated depreciation 151 244 109 ------- -------- ------ Property, plant, and equipment, net 1,301 2,100 1,280 ------- -------- ------ OTHER ASSETS: Investments 16 26 17 Prepaid pension cost (Note 2) 134 216 116 Goodwill, net of accumulated amortization of (pound)16 ($26) at March 31, 1999 and(pound)11 at March 31, 1998 167 270 172 Loans to affiliated company 351 566 - Premium in respect of loans to affiliated company and related hedges, net of accumulated amortization of (pound)3 ($5) at March 31, 1999 39 63 - ------- -------- ------ Total other assets 707 1,141 305 ------- -------- ------ CURRENT ASSETS: Cash and cash equivalents 5 8 5 Investments 15 24 17 Receivables: Customer accounts, less provision for uncollectables of (pound)10 ($16) at March 31, 1999 and (pound)9 at March 31, 1998 80 129 85 Other 17 27 14 ------- -------- ------ Receivables, net 97 156 99 Materials and supplies 3 5 4 Prepaid expenses 11 18 18 ------- -------- ------ Total current assets 131 211 143 ------- -------- ------ TOTAL ASSETS (pound) 2,139 $ 3,452 (pound)1,728 ======= ======== ====== The accompanying notes are an integral part of these consolidated balance sheets.
II-18
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1999 and 1998 (In Millions) STOCKHOLDER'S EQUITY AND LIABILITIES 1999 1998 _____________________________________________________________________________ ______________________________ ______________ (Note 1) STOCKHOLDER'S EQUITY: Common stock, (pound)1 par value, 902,128,735 and 500,400,587 shares authorized, issued and outstanding at March 31, 1999, and March 31, 1998, respectively (pound) 902 $ 1,456 (pound) 500 Retained deficit (146) (236) (163) ------- ------- ------- Total stockholder's equity 756 1,220 337 ------- ------- ------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SOUTHERN INVESTMENTS UK CAPITAL TRUST I HOLDING COMPANY JUNIOR SUBORDINATED DEBENTURES (Note 9) 50 81 50 NON-CURRENT LIABILITIES: Long-term debt 301 486 301 Deferred income taxes (Note 6) 363 586 361 Provision for loss contracts (Note 4) 69 111 72 Other 36 58 46 ------- ------- ------- Total non-current liabilities 769 1,241 780 ------- ------- ------- CURRENT LIABILITIES: Commercial paper 94 151 80 Notes payable to banks 273 439 248 Notes payable to affiliated company 25 40 25 Other notes payable 7 13 10 Accounts payable 44 74 50 Accrued income taxes 48 73 82 Unearned revenue 1 5 4 Accrued interest 9 15 8 Other 63 100 54 -------- ------- ------- Total current liabilities 564 910 561 -------- ------- ------- TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,139 $ 3,452 (pound) 1,728 ======== ======= ======= The accompanying notes are an integral part of these consolidated balance sheets.
II-19 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Company was incorporated as a public limited company under the laws of England and Wales on June 23, 1995 as a vehicle for the acquisition of South Western Electricity plc (together with its subsidiaries, "SWEB"). The effective date of acquisition was September 18, 1995. The Company is a wholly-owned subsidiary of Holdings. Holdings is a wholly-owned subsidiary of Holdings UK, which is owned indirectly by Southern and PP&L. Until July 1996, Holdings was an indirect wholly-owned subsidiary of Southern. In July 1996, Southern sold a 25 percent stake in Holdings to PP&L. In June 1998 Southern sold an additional 26 percent interest in Holdings to PP&L. This further sale increased PP&L's economic interest in Holdings to 51 percent. Subsequently in June 1998, shares in Holdings held by Southern and PP&L were exchanged for equivalent shares in Holdings UK. Under the terms of the agreement, Southern retains operational and management control of SWEB and the Holdings UK group. Southern continues to hold a majority of the voting shares in Holdings UK and appoints a majority of the board of directors. Basis of Presentation The financial statements of the Company are presented in pounds sterling ((pound)) and in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have not been prepared in accordance with the policies of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"). This pronouncement, under which most US electric utilities report financial statements, applies to entities which are subject to cost-based rate regulation. By contrast, SWEB is not subject to rate regulation, but, rather is subject to price cap regulation (Note 3) and therefore the provisions of SFAS No. 71 do not apply. Financial statements presented in accordance with SFAS No. 71 contain deferred items which have not yet been included in rates charged to customers in compliance with the respective regulatory authorities, but which would have been included in the income statement of enterprises in general under US GAAP. The accompanying financial statements of the Company do not contain such deferrals. The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries and have been prepared from records maintained by SWEB in the United Kingdom. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in companies in which the Company's ownership interests range from 20% to 50% and the Company exercises significant influence over operating and financial policies are accounted for using the equity method. Other investments are accounted for using the cost method (Note 10). Solely for the convenience of the reader, certain pounds sterling amounts included in the financial statements have been translated into US dollars at the exchange rate of $1.6140 = (pound)1.00, the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 1999. The following table sets out this rate for previous periods:
Fiscal Year Period end Average (1) High Low ----------- ---------- ----------- ---- --- ($ per (pound)1.00) 1995............................................... 1.55 1.58 1.64 1.53 1996............................................... 1.53 1.53 1.56 1.50 1997............................................... 1.64 1.59 1.71 1.49 1998............................................... 1.68 1.65 1.69 1.61 1999............................................... 1.61 1.65 1.70 1.60
(1) The average of the Noon Buying Rates in effect on the last business day of each month during the relevant period. II-20 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Revenue Recognition SWEB records revenue net of value added tax ("VAT") and accrues revenues for services provided but unbilled at the end of each reporting period. SWEB purchases power primarily from a market for the bulk trading of electricity (the "Pool"). The Company has a diversified base of customers. No single customer comprises 10% or more of revenues. Cash and Cash Equivalents The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. Property, Plant, and Equipment Property, plant, and equipment are recorded at fair market value as adjusted at the acquisition date in accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations" ("APB No. 16"). Items capitalized subsequent to the acquisition are recorded at original cost, which includes materials, labor, appropriate administrative and general costs, and the estimated cost of funds used during construction. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense. Depreciation of the recorded cost of depreciable property, plant, and equipment is provided primarily by using composite straight-line rates, which approximate 3.2% per year (2.5% per year for depreciable utility plant in service). Upon the retirement or sale of assets, the costs of such assets and the related accumulated depreciation are removed from the balance sheet and the gain or loss, if any, is included in income. Information Technology Consultancy and Development Costs Significant information technology ("IT") consultancy and development costs are capitalized when they become technologically feasible and are amortized over their estimated useful economic life from the date of first use. Other IT consultancy and development costs are charged to income in the period in which they are incurred. This policy was adopted effective October 1, 1995 as the Company embarked on a significant program of investment and will be incurring significant development costs which are fundamental to the future performance of the business and which will benefit the business for a number of years. The directors are of the opinion that in relation to the planned development costs to be incurred in the future, the policy followed by the Predecessor Company of writing off such costs to the Statement of Income does not give a fair reflection of the period over which the benefits will accrue. Prior to this change in accounting policy the Company expensed all IT consultancy and development costs as incurred. The effect of adopting this policy has resulted in the capitalization of (pound)8 million of costs in the fiscal year 1999, (pound)14 million of costs in the fiscal year 1998 and (pound)11 million of costs in the fiscal year 1997. Goodwill The Company amortizes costs in excess of fair value of net assets of the business acquired using the straight-line method over a period of 40 years. Recoverability (performed on the basis of undiscounted operating cash flow analysis) is reviewed annually or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Goodwill shown in the accompanying consolidated financial statements relates to the acquisition of SWEB. II-21 Investments The Company accounts for its current investments in accordance with SFAS No. 115, "Accounting for Investments for Certain Debt and Equity Securities". These investments represent investments in debt securities, which management classifies as available-for-sale securities in accordance with SFAS No. 115. The Company's long-term investments consist of investments accounted for using the cost method (Note 10). Income Taxes SFAS No. 109, "Accounting for Income Taxes", requires the asset and liability approach for financial accounting and reporting for deferred income taxes. The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. Comprehensive Income In fiscal year 1999, the Company adopted FASB Statement No. 130, "Reporting Comprehensive Income". This statement establishes rules for the reporting and display of comprehensive income and its components. The objective of the statement is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. There were no items for inclusion in a consolidated statement of comprehensive income other than net income as shown on the condensed consolidated statements of income. Consequently, a consolidated statement of comprehensive income has not been included. Financial Instruments Non-trading derivative financial instruments are used to hedge exposures to fluctuations in interest rates and foreign currency exchange rates. Gains and losses on qualifying hedges are deferred and recognized either in income or as an adjustment to the carrying amount when the hedged transaction occurs. The Company utilizes interest rate swaps and cross currency swaps to minimize borrowing costs by changing the interest rate and currency of the original borrowing. For qualifying hedges, the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps (see Note 7). 2. RETIREMENT BENEFITS SWEB has two pension plans, a defined contribution plan and a defined benefit plan. In 1998, SWEB adopted FASB Statement No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits". The measurement date is December 31 for each year. Defined Contribution Plan The defined contribution plan was established in fiscal year 1994. The assets of the defined contribution plan are held and administered by an independent trustee. Contributions to the plan by SWEB on behalf of its employees were (pound)0.3 million ($0.5 million) for the fiscal year 1999, (pound)0.2 million for the fiscal year 1998 and (pound)0.1 million for the fiscal year 1997. II-22 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Defined Benefit Plan SWEB participates in the Electricity Supply Pension Scheme, which provides pension and other related defined benefits, based on final pensionable pay, to substantially all employees throughout the Electricity Supply Industry in the UK. Contributions to the plan by SWEB on behalf of its employees were (pound)0.3 million ($0.5 million) for the fiscal year 1999, (pound)0.3 for the fiscal year 1998 and (pound)0.6 million for the fiscal year 1997. Changes during the year in the projected benefit obligations and the fair value of the plan assets were as follows (in millions):
March 31, 1999 March 31, 1998 -------------- -------------- Change in projected benefit obligation - -------------------------------------- Benefit obligation at beginning of year........................... (pound) 542 $ 875 (pound) 529 Service cost ..................................................... 7 11 7 Interest cost..................................................... 39 63 43 Actuarial loss.................................................... 87 140 - Benefits paid..................................................... (36) (58) (37) ------ ------- ----- Benefit obligations at end of year................................ (pound) 639 $ 1,031 (pound) 542 ------ ------- ----- Plan Assets - ----------- Fair value of plan assets at beginning of year.................... (pound) 701 $ 1,131 (pound) 641 Actual return on plan assets...................................... 117 189 94 Employee contributions............................................ 4 6 3 Benefits paid..................................................... (36) (58) (37) ------ ------- ----- Fair value of plan assets at end of year.......................... (pound) 786 $ 1,268 (pound) 701 ------ ------- ----- Reconciliation of funded status - ------------------------------- Funded status of plan............................................. (pound) 147 $ 237 (pound) 159 Unrecognized prior service cost................................... 2 3 3 Unrecognized net gain............................................. (15) (24) (46) ------ ----- ----- Prepaid pension cost in the Consolidated Balance Sheet............ (pound) 134 $ 216 (pound) 116 ------ ----- ----- The components of the plan's net periodic income were as follows (in millions): Fiscal Year Fiscal Year Fiscal Year 1999 1998 1997 ---- ----- ---- Service cost...................................................... (pound) 7 $ 11 (pound) 7 (pound) 9 Interest cost..................................................... 39 63 43 44 Expected return on plan assets.................................... (60) (97) (60) (57) ---- ----- ---- ---- Gross benefit cost/(credit)....................................... (14) (23) (10) (4) Employee contributions............................................ (4) (6) (3) (4) ----- ----- ---- ---- Net benefit cost/(credit)......................................... (18) (29) (13) (8) ----- ----- ---- ---- The assumptions used in the actuarial calculations were as follows: Fiscal Year Fiscal Year Fiscal Year 1999 1998 1997 ---- ---- ---- Discount rate..................................................... 5.75% 7.50% 8.50% Expected rate of return on assets................................. 8.75% 9.50% 9.50% Rate of pay increase.............................................. 4.00% 4.75% 5.75%
II-23 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Pensions Contingency The Pensions Ombudsman (a UK statutorily appointed independent arbitrator) has issued a determination in favor of complaints made by members of the Electricity Supply Pension Scheme ("ESPS") relating to another employer's use of ESPS surplus to offset the employer's costs of providing early pensions on redundancies and certain other items. Under that determination the Pensions Ombudsman directed the employer to pay into ESPS the amount of that use of the surplus plus interest. The determination was challenged in the High Court by the employer, and the High Court upheld the employer's appeal in a judgment delivered in June 1997. The High Court also granted the complainants leave to appeal to the Court of Appeal. The Court of Appeal hearing took place in October 1998, and its judgment was given in February 1999. While the complainants' appeal was successful, the Court of Appeal indicated that it may be possible to validate the employer's actions by a retrospective rule amendment. The Court of Appeal gave leave in principle for a subsequent appeal to the House of Lords (the UK Supreme Court), but also made arrangements for a further hearing held on May 25 and 26. The Court of Appeal declined to hear further argument and told the parties that any outstanding matters would have to be addressed by the House of Lords. The parties agreed a form of order, stayed pending the further appeal, which contains a requirement for the amounts offset against the surplus, plus interest, to be paid into the pension fund. Until any further appeal is determined it is not known whether this case will impact SWEB significantly. It is unlikely a hearing will take place before the House of Lords earlier than Fall 2000. Therefore it is not practical to make an estimate of the exposure at the present time. 3. REGULATORY MATTERS Distribution OFFER controls the revenues generated by SWEB in its distribution business by applying a price control formula, P + RPI -X, 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. X is currently 3%. The DPCF is usually set for a five-year period, subject to more frequent adjustments as determined necessary by the Regulator. At each review, the Regulator can require a one-time price adjustment. An initial review by the Regulator of allowable income in the distribution business led to a reduction of the price level by 14% for SWEB starting April 1995, followed by efficiency factors of X = 2% for each year until March 2000. In 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 SWEB, such announcement meant a real reduction of 11% in allowable distribution income for the twelve months from April 1996, followed by an efficiency factor of X = 3% for each year, before an allowed increase for inflation. The Regulator is currently undertaking the next DPCF review expected to become effective from April 2000. Supply On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity. The sale is subject to regulatory clearance. See Note 12 in the "Notes to the Consolidated Financial Statements". Within the supply business, customers fall into the two categories of Unregulated and Regulated Supply Customers. Unregulated Supply Customers have been able to choose their supplier for some years. Regulated Customers are those customers who are not Unregulated Supply Customers and largely comprise domestic and small business customers. Prices charged to Regulated Supply Customers by a REC within its Authorized Area are controlled by regulation. Until March 1998, the calculation of the maximum supply charge was based on a SPCF, similar to the DPCF, plus an ability to pass through certain costs, principally the costs of energy purchases, transmission and distribution use of system charges. For the four-year period ending March 1998, an efficiency factor of X = 2% (before an allowed increase for inflation) was applied to SWEB, offset by an allowance for both unit and customer growth. From April 1998 supply business charges to Regulated Supply Customers within a REC's Authorised Area have been subject to a Price Cap instead of being based on the SPCF; the concept of pass through costs no longer applies. II-24 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Following the announcement by the Regulator in October 1997, in respect of the latest supply price review for Regulated Supply Customers effective from April 1998, SWEB has implemented a tariff reduction of 2.8% effective from that date. A further 3% reduction (before an allowed increase for inflation) will be implemented for fiscal year 2000. The Regulator is currently undertaking the next supply price review expected to become effective from April 2000. The exclusive right for a REC to supply Regulated Supply Customers in its Authorized Area was phased out from September 1998, and from May 1999, all supply customers can choose their electricity supplier. SWEB's first phase commenced in November 1998, followed by phases two and three in February and May, 1999, respectively. Once a REC's Authorized Area opened to competition, it could compete in the Authorized Area of other RECs where competition had commenced, and vice versa. The Regulator has imposed a penalty on all RECs, including SWEB, relating to the delay in opening competition to Regulated Supply Customers beyond the April 1998 deadline; the penalty imposed on SWEB did not have a material impact on earnings. The supply tariffs in fiscal years 1999 and 2000 represent maximum price restraints intended to protect each REC's Regulated Supply Customers, which it supplies within its Authorized Area. 4. COMMITMENTS AND CONTINGENT MATTERS Power Purchase Agreements SWEB has entered into a contract relating to the purchase of 200 megawatts of capacity from a 7.69% owned related party, Teesside Power Limited ("Teesside"), for a period of 15 years beginning April 1993. The contract sets escalating electricity purchase prices at predetermined levels. The Company has recognized an accrual at the acquisition date for the excess of these Teesside power purchase costs in each year over an estimate of the equivalent Pool costs in that respective year. These costs have been discounted at an appropriate rate to their present value of (pound)69 million ($111 million) at March 31, 1999 and (pound)72 million at March 31, 1998. Over the past three years, the Pool prices have been less than anticipated when the accrual was recognized. The Company is continuing to review the trend of Pool prices and an adjustment to the provision may be required in the future. As part of the sale of the supply business it is anticipated that London Electricity will assume SWEB's obligations under the contract. Operating Leases SWEB has commitments under operating leases with various terms and expiration dates. Expenses associated with these commitments totaled (pound)6 million ($10 million) for the fiscal year 1999, (pound)5 million for the fiscal year 1998, and (pound)4 million for the fiscal year 1997. At March 31, 1999, estimated minimum rental commitments for noncancelable operating leases were as follows (in millions): Fiscal year 2000....................................... (pound) 4 $ 6 2001....................................... 2 3 2002....................................... 1 2 2003....................................... 1 2 2004....................................... - - 2005 and thereafter........................ 4 6 ---- ---- Total minimum payment........................ (pound) 12 $ 19 ==== ==== II-25 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Labor Subject to Collective Bargaining Agreements Substantially all of SWEB's employees are subject to one of two collective bargaining agreements. Such agreements are ongoing in nature, and SWEB's employee participation level is consistent with that of the electric utility industry in the UK. 5. SEGMENT AND RELATED INFORMATION Effective March 31, 1998, the Company adopted FASB Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information". All revenues are in respect of sales to customers in the UK.
Business Segments - ----------------- (in millions) Fiscal Year Distribution Other Eliminations Consolidated - ---------- ------------ ----- ------------ ------------ 1999 - ---- Operating revenues (pound) 247 $ 399(pound)49 $ 79(pound)(35) $ (57) (pound)261 $ 421 Depreciation and Amortization 45 72 6 10 - - 51 82 Operating income 111 180 12 19 (1) (2) 122 197 Total assets employed at year-end 1,599 2,581 540 871 - - 2,139 3,452 Capital expenditures 70 113 3 5 - - 73 118 1998 - ---- Operating revenues (pound) 228 (pound) 44 (pound) (27) (pound) 245 Depreciation and Amortization 39 7 - 46 Operating income 106 4 - 110 Total assets employed at year-end 1,540 188 - 1,728 Capital expenditures 78 4 (1) 81 1997 - ---- Operating revenues (pound) 231 (pound) 55 (pound) (29) (pound) 257 Depreciation and Amortization 37 6 - 43 Operating income 108 6 (1) 113 Total assets employed at year-end 1,481 240 - 1,721 Capital expenditures 64 6 (1) 69
Distribution involves the transfer of electricity from the high voltage transmission system, and its delivery, across low voltage distribution systems, to consumers. Included in "Other" are ancillary business activities that generally support SWEB's distribution business, including electricity generation for standby purposes, property and telecommunications, as well as corporate items and assets not allocated to specific segments and energy purchasing. Interest expense and taxes are wholly allocated to "Other" and are disclosed in the Consolidated Income Statements. With the exception of total assets employed and capital expenditures, the values above exclude discontinued operation - see Note 12. II-26 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 6. INCOME TAXES Details of the income tax provisions are as follows (in millions):
Fiscal Year Fiscal Year Fiscal Year 1999 1998 1997 ---- ---- ---- Total provision for income taxes: Customary: Currently payable (pound) 13 $ 21 (pound) 27 (pound) 21 Deferred 13 21 6 11 ---- ---- ----- ---- 26 42 33 32 Effect of change in tax rates (11) (18) (22) - Windfall levy - - 90 - ---- ---- ----- ---- Total income taxes charged to operations (pound) 15 $ 24 (pound) 101 (pound) 32 ==== ==== ===== ====
The decrease in customary income taxes from fiscal year 1998 to fiscal year 1999 is primarily due to a prudent increase to the income tax provision in fiscal year 1998 to cover possible disallowable items. In the fiscal year 1999, it has been possible to reduce the provision following the resolution of some of these items. The UK government's 1998 Finance Act included a reduction in the rate of UK corporation tax from 31% to 30% effective April 1999. This decrease resulted in a reduction to SWEB's provision for deferred income taxes and a corresponding decrease in income tax expense of approximately (pound)11 million, during fiscal year 1999. In fiscal year 1998, the UK corporation tax rate was reduced from 33% to 31% with effective April 1997, which resulted in a reduction to the Company's provision for deferred income taxes and a corresponding decrease in income tax expense of approximately (pound)22 million. In July 1997 the Labour government presented its first budget which included a "one-off windfall levy on the excess profits of the privatized utilities". Based upon the legislation, SWEB's liability was assessed at (pound)90 million. The levy was paid by installments; the first half in December 1997 and the second half in two tranches in November and December 1998. The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows (in millions):
March 31, March 31, 1999 1998 --------- --------- Deferred tax liabilities: Property, plant, and equipment basis differences...................(pound)345 $ 557 (pound) 361 Pensions........................................................... 41 66 38 ----- ----- ----- Total...................................................... 386 623 399 Deferred tax assets: Accruals, including acquisition related items............. 23 37 38 ----- ----- ----- Net deferred tax liabilities in consolidated balance sheet...........(pound)363 $ 586 (pound) 361 ===== ===== =====
The effect of the change in tax rates, as discussed above, would reduce the effective rate by 11% and 26% in fiscal years 1999 and 1998 respectively. The effect of the windfall levy would increase the effective rate by 105%, in fiscal year 1998. Excluding these items, the reconciliation of the UK statutory rate to the effective customary income tax rate is as follows: II-27 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Fiscal Year Fiscal Year Fiscal Year 1999 1998 1997 ---- ---- ---- UK statutory rate 31% 31% 33% Nondeductible amortization of goodwill 1 2 2 Other permanent differences (7) 5 1 --- --- --- Effective customary income tax rate 25% 38% 36% === === ===
7. FINANCIAL INSTRUMENTS The Company and SWEB utilize interest rate swaps to minimize borrowing costs and mitigate their exposure to fluctuations in interest rates by allowing them to convert their outstanding variable rate debt into fixed rate debt. These swaps are designated as hedges of underlying debt obligations and, as such, the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. At March 31, 1999, sterling interest rate swaps expiring between 2001 and 2012 with notional amounts totaling (pound)600 million ($968 million), resulted in an unrealized loss of (pound)80 million ($129 million). Foreign currency swaps embedded in cross currency swaps and interest rate swap hybrid instruments are used by the Company and SWEB to hedge exposure to currency fluctuations for US dollar denominated debt. Gains and losses on these hedges are deferred and recognized as an adjustment to the carrying amount when the hedged transaction occurs. At March 31, 1999, currency swaps expiring between 2001 and 2007 with notional amounts totaling (pound)350 million, resulted in an unrealized profit of (pound)23 million. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. The Company is unaware of any counterparties that will fail to meet their obligations. SWEB utilizes contracts to mitigate its exposure to Pool price volatility. These contracts allow the Company to effectively convert the majority of its anticipated Pool prices to fixed prices. The gains and losses on these contracts are deferred and recognized as electricity is purchased. Recently a market has developed for trading these contracts. However, due to the immaturity of this market and the complexity of the Company's existing contracts, it is not practicable to estimate the fair value of these contracts. Other financial instruments for which the carrying amount did not equal fair value at March 31 were as follows (in millions):
March 31, 1999 March 31, 1998 -------------- -------------- Carrying Fair Value Carrying Fair Value Amount Amount Long-term debt (pound) 301 (pound) 335 (pound) 301 (pound) 332 Preferred securities (pound) 50 (pound) 70 (pound) 50 (pound) 67
The fair values for long-term debt have been calculated by discounting cashflows at prevailing interest rates. The fair values for preferred securities were based on the closing price of comparable instruments. II-28 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 8. CAPITAL BUDGET The Company's capital expenditure for the fiscal year 1999 was (pound)73 million ($118 million); for the fiscal years 2000 and 2001 capital expenditures are estimated to be (pound)62 million and (pound)61 million respectively. The capital budget is subject to periodic review and revision, and actual capital cost incurred may vary from the above statement because of numerous factors. The factors include: changes in business conditions; revised load growth projections; change in regulatory requirements; and increasing costs of labor, equipment, and materials. 9. FINANCING The Company has $500 million Senior Notes in the US, of which some $168 million of the Senior Notes are due for redemption in 2001 and $332 million in 2006; the Senior Notes are at rates of 6.375% and 6.8% respectively. The Company entered into currency swap transactions that effectively convert the US dollar obligations of the Senior Notes into pounds sterling obligations, with a nominal value of (pound)300 million. Southern Investments UK Capital Trust I (the "Trust"), issued $82 million of its 8.23% preferred securities and invested the proceeds thereof in 8.23% subordinated debentures issued by the Company, which are scheduled to mature on February 1, 2027. The Company guarantees the Trust's obligations under the preferred securities. The Company has also entered into foreign currency swap contracts to hedge the currency risk associated with the interest and principal on the preferred securities, by swapping the US dollar liabilities back to pounds sterling for the period to February 2007. The nominal value of the swapped liabilities is (pound)50 million. The Company owns all of the common securities of the Trust, all of the assets of which are the aforementioned subordinated debentures of the Company in the aggregate principal amount of $84.5 million. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by the Company of the Trust's payment obligations with respect to the preferred securities. In December 1998 a more efficient capital structure for Holdings UK and the Company was put in place. At that time, Holdings UK became a co-obligor of the Company's existing long-term debt and subordinated debentures. Sums totaling (pound)402 million were contributed to the Company for newly issued shares and the Company made three US dollar loans, totaling $584 million ((pound)351 million) to Holdings UK on the same terms as the existing long-term debt and subordinated debentures. In consideration of entering into these loans and their related currency and interest rate swaps, the Company made premium payments (independently calculated as a fair arms-length value between unconnected parties) of $84 million ((pound)51 million) to Holdings UK. Of the premium payments, (pound)42 million is being amortized over the life of the respective loans and swaps, and (pound)9 million represents accrued interest. This arrangement reduces the net interest cost of the SIUK group as reported in this Form 10-K, but has no impact at the Holdings UK group level. The Company has a US commercial paper program, which is fully supported by a swingline and revolving credit facility provided by a syndicate of banks, under which the maximum available is $520 million. At March 31, 1999 the amount unutilized under these facilities was $118 million. SWEB enters into foreign currency contracts to hedge the currency risk associated with the interest and principal of each utilization under this program. Excluding swap agreements between the Company and Holdings UK, at March 31, 1999, the Company and SWEB have sterling interest rate swaps expiring between 2001 and 2012 with notional amounts totalling (pound)600 million ($968 million), and cross currency swaps expiring between 2001 and 2007 with notional amounts totalling (pound)350 million ($565 million). II-29 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 10. INVESTMENTS The Company's long-term investments accounted for under the cost method consist of its 7.69% ownership of Teesside (Note 4), the fair value of which is not readily determinable. The Company's short-term investments are classified as available-for-sale under SFAS No. 115, the fair value of which approximated cost at March 31, 1999. The fair value of SWEB's holdings at acquisition in PSB was assessed at (pound)39 million. PSB was subsequently sold and a gain of (pound)4 million was recognized in fiscal year 1997. 11. COMMON STOCKHOLDER'S EQUITY The Company's main investment and only significant asset is the entire share capital of SWEB. The Company is primarily dependent upon dividends from SWEB for its cash flow. SWEB can make distribution of dividends to the Company under English law to the extent that it has distributable reserves, subject to the retention of sufficient financial resources to conduct its supply and distribution businesses as required by its regulatory license. The Company believes that currently sufficient distributable reserves will exist at SWEB to allow for any and all cash flow generated at SWEB through operations to be distributed to the Company through dividends to the Company. In the UK, the Accounting Standards Board is currently reviewing the treatment of deferred income tax accounting. If full provision for deferred tax were required, SWEB's distributable reserves could be eliminated. In addition, in March 1999, the Regulator proposed a variation to the licenses under which all RECs (including SWEB) operate such that the directors of a REC must certify to the Regulator that it is reasonably foreseeable that the REC will not breach any of its license conditions if it declares a dividend. This variation is currently subject to further discussion. SWEB has no reason to believe that a breach of its license would flow from declaring a reasonable dividend. 12. SUBSEQUENT EVENT On June 11, 1999, SWEB reached agreement to sell its supply business to London Electricity for consideration of (pound)160 million cash and the assumption of certain liabilities. The decision to accept London Electricity's offer followed an intense review and evaluation of interest from numerous parties. Approximately 800 SWEB staff will transfer to the employment of London Electricity. SWEB's distribution business, which owns and operates the electricity network in the south west of England, is not part of this contract and ownership will not change. The sale is expected to be completed, subject to regulatory approval, in the third quarter of fiscal year 2000. The Company expects to record a gain on the sale of the supply business once regulatory approval has been given. The supply business segment is accounted for as discontinued operations, and accordingly, amounts in the financial statements and related notes for all periods shown have been restated to reflect discontinued operations accounting. Summarized results of this business are shown separately as discontinued. The net assets directly attributable to the discontinued activity as at March 31, 1999 were (pound)21 million and largely comprise accounts receivable and accounts payable. The value of net assets to be transferred as part of the sale will be determined once regulatory approval has been given. II-30 SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-31 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT The following table sets forth certain information with respect to the directors and executive officers of the Company as of March 31, 1999:
Name Age Position ---- --- ----------------------------------------------------- Richard J. Pershing.............................. 52 Director, Chief Executive Officer C. B. (Mike) Harreld............................. 54 Director, Chief Financial and Accounting Officer W. P. Bowers..................................... 42 Director C. Philip Saunders............................... 46 Director Robert A. Symons................................. 46 Director Accentacross Limited............................. Director Mighteager Limited............................... Director
Richard J. Pershing has been a Director of the Company since June 1995 and Chief Executive Officer since July 1996. From February 1994 to the present, Mr. Pershing has served as Executive Vice President of Southern Energy, an indirect wholly-owned subsidiary of Southern. C. B. (Mike) Harreld was a Director of the Company from September 1995 and Chief Financial and Accounting Officer of the Company from July 1996. He was also the Finance Director of SWEB from September 1995. From February 1986 to August 1995, he had served as Vice President, Comptroller and Chief Accounting Officer of Georgia Power. Effective June 1, 1999, he was appointed as Senior Vice President and Controller of Southern Energy's North America Group, and Southern Energy Controller. He was replaced on this Board and the SWEB Board by D.C.S. Oosthuizen, who had been serving as Assistant to the SWEB Chief Executive prior to taking up his most recent role as General Manager, Information Resources at SWEB. W. P. Bowers has been a Director of the Company since December 1998. He has also been Chief Executive Officer of SWEB since that date. From September 1995 to December 1998, he served as Senior Vice President of Marketing for Georgia Power. C. Philip Saunders has been a Director of the Company since September 1995. He has also been Supply Director of SWEB since that date. From February 1994 to September 1995, he served as Western Region Director and Power Marketing Director for US business development at Southern Energy. From May 1992 to February 1994, Mr. Saunders was Assistant to the Senior Vice President of Marketing at Georgia Power. Robert A. Symons has been a Director of the Company since October 1997. He has also been Distribution Director of SWEB since that date. From December 1994 to September 1997, Mr. Symons served as Network Services Manager in Plymouth for SWEB. From October 1994 to November 1994, he was in Network Services, West and from April 1992 to September 1994, Mr. Symons served as Meter Test Manager for SWEB. Accentacross Limited ("Accentacross") has been a Director of the Company since July 1996. Stephen J. Feerrar represents Accentacross at meetings of the Directors of the Company. Mr. Feerrar has represented Accentacross at meetings of the Directors of the Company since July 1996. From March 1995 to the present, Mr. Feerrar has served as Vice President and Chief Financial Officer of PP&L Global, Inc. Prior to March 1995, Mr. Feerrar served as Finance Director for Air Products and Chemicals, Inc. Mighteager Limited ("Mighteager") has been a Director of the Company since July 1996. Stephen J. Feerrar represents Mighteager at meetings of the Directors of the Company. Mr. Feerrar has represented Mighteager at meetings of the Directors of the Company since July 1996. From March 1995 to the present, Mr. Feerrar has served as Vice President and Chief Financial Officer of PP&L Global, Inc. Prior to March 1995, Mr. Feerrar served as Finance Director for Air Products and Chemicals, Inc. III-1 Accentacross and Mighteager were elected by PMDC to the board of the Company pursuant to a Shareholders' Agreement dated July 1, 1996 among Southern Electric International-Europe Inc. ("SEI-Europe"), PMDC and Holdings and reaffirmed under a revised Shareholders' Agreement of June 18, 1998 (the "Shareholders' Agreement") between SEI-Europe, PMDC and Holdings UK. The Shareholders' Agreement provides that holders of a majority of the A shares can appoint the majority of directors to the board and that holders of a majority of the B shares can appoint a number of directors that is one less than the number of directors that the holders of the A shares have the right to appoint. This applies not only to the board of directors of Holdings UK but also extends to the boards of Holdings and of the Company as wholly-owned subsidiaries of Holdings UK. During the period under review Holdings UK as holder of the B shares exercised this right to the extent of electing Accentacross and Mighteager to the board of the Company. Accentacross and Mighteager are represented on the board of directors of the Company by Mr. Feerrar. Item 11. EXECUTIVE COMPENSATION Accentacross and Mighteager (the "PMDC Directors") do not receive compensation for their services as Directors of the Company. Mr. Symons has received, and will continue to receive, compensation in respect of services performed as a SWEB Officer, SWEB being his primary employer and a subsidiary of the Company. He receives no cash or non-cash compensation as a result of these arrangements beyond that which he would otherwise receive from SWEB for the services performed by him for SWEB. The other officers and directors listed in Item 10 above (such officers and directors, with the exception of Robert Symons and the PMDC Directors, each a "Southern Company system Officer or Director", as applicable) have received, and will continue to receive, compensation in respect of services performed by such persons in their capacities as Southern Company system Officers or Directors of the Company from Southern Energy, their primary employer and an affiliate of the Company. The salaries, including a portion of the overhead costs associated with each, for Messrs. Bowers, Harreld and Saunders are paid by Southern Energy, and Southern Energy is reimbursed by the Company, in accordance with a services agreement between the Company and Southern Energy. Southern Company system Officers and Directors receive no cash or non-cash compensation as a result of these arrangements beyond that which they would otherwise receive from Southern Energy for the services performed by them for Southern Energy. III-2 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners. The authorized share capital of the Company consists of 902,128,735 ordinary shares of (pound)1 each, all of which have been issued fully paid and are held by Holdings. Holdings is a wholly-owned subsidiary of Holdings UK. The following table sets forth, as of March 31, 1999, certain information regarding beneficial ownership of Holdings UK common stock held by each person known by the Company to own beneficially more than 10% of Holdings UK outstanding common stock.
Name and Address Amount and Nature Percent of Beneficial of Beneficial of Title of Class Owner Ownership Class - ----------------------------------------------------------------------------------------------------- A Ordinary The Southern Company 12,184,716 (1) 100% 270 Peachtree Street, N.W. Atlanta, Georgia 30303 B Ordinary PP&L Resources, Inc. 11,936,049 (2) 100% 2 North Ninth Street Allentown, Pennsylvania 18101 C Ordinary PP&L Resources, Inc. 746,003 (2) 100% 2 North Ninth Street Allentown, Pennsylvania 18101 (1) Such shares are owned by SEI-Europe UK Limited, an indirect wholly-owned subsidiary of Southern. (2) Such shares are owned by PMDC UK, an indirect wholly-owned subsidiary of PP&L.
The A Ordinary shares and the B Ordinary shares have the same voting rights, while the C Ordinary shares have no voting rights. The only other material difference between them is the requirement for dividends attributable to the calendar year ended December 31, 1998 aggregating up to (pound)30.4 million to be allocated 61% to the holder(s) of the A shares and 39% to the holders of the B shares and the C shares collectively, and for dividends attributable to the calendar year ended December 31, 1998 in excess of (pound)30.4 million to be allocated pro-rata to the shareholders in accordance with their ownership of shares. Security ownership of management. The following table shows the number of shares of Southern common stock owned by the directors, nominees and executive officers as of March 31, 1999. It is based on information furnished by the directors, nominees and executive officers. The shares owned by all directors, nominees and executive officers as a group constitute less than one percent of the total number of shares outstanding on March 31, 1999.
Name of Directors, Nominees and Number of Shares Executive Officers Title of Class Beneficially Owned1,2 - ------------------ ------------- ---------------------- Richard J. Pershing Southern Common 35,238 Carson B. Harreld Southern Common 10,427 W. P. Bowers Southern Common 13,856 C. Philip Saunders Southern Common 11,813 The directors, nominees, and executive officers as a group (7 persons) Southern Common 71,334 1 As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security and/or investment power with respect to a security, or any combination thereof. 2 The shares shown include shares of Southern common stock of which certain directors and executive officers have the right to acquire beneficial ownership within 60 days pursuant to the Executive Stock Plan, as follows: Mr. Pershing 11,912 shares; Mr. Harreld 6,150 shares; Mr. Bowers 6,206 shares; and Mr. Saunders 4,858 shares.
III-3 Mr. Symons and the two corporate directors, Accentacross Limited and Mighteager Limited, do not own any equity securities of the Company or any of its parents or subsidiaries. Changes in control. The Company knows of no arrangements which may at a subsequent date result in any change in control. II-4 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with management and others. In December 1998 a more efficient capital structure for Holdings UK and the Company was put in place. At that time, Holdings UK became a co-obligor of the Company's existing long-term debt and subordinated debentures - see Note 9 to "Notes to the Consolidated Financial Statements". Certain business relationships. See Item 11 herein. Indebtedness of management. None. Transactions with promoters. None. III-5 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report on this Form 10-K: (1) Financial Statements: The financial statements and the related reports of independent public accountants filed as a part of this annual report are listed under Item 8 herein. (2) Financial Statement Schedules: Report of Independent Public Accountants as to Schedules for SOUTHERN INVESTMENTS UK plc and Subsidiaries is included herein on page S-1 Financial Statement Schedules for the Company are included herein on page S-2. (3) Exhibits: Exhibits are listed in the Exhibit Index on page E-1 and E-2. (b) Reports on Form 8-K: The registrant has not filed any reports on Form 8-K during the last quarter of the fiscal year ended March 31, 1999. IV-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Southern Investments UK plc, a public limited company incorporated and existing under the laws of England and Wales, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on the 23rd day of June, 1999. SOUTHERN INVESTMENTS UK plc By: Richard J. Pershing Director and Chief Executive Officer By:/s/ WAYNE BOSTON Wayne Boston Attorney-in-Fact Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following directors and officers of Southern Investments UK plc in the capacities and on the date indicated: Signature Title Date RICHARD J. PERSHING Chairman and Chief Executive Officer D. CHARL S. OOSTHUIZEN Chief Financial and Accounting Officer W. P. BOWERS | | C. PHILIP SAUNDERS | | ROBERT A. SYMONS | | Directors MIGHTEAGER LIMITED | | By: Stephen J. Feerrar | Director | /s/ WAYNE BOSTON June 23, 1999 Wayne Boston Attorney-in-Fact IV-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To the Board of Directors of Southern Investments UK plc: We have audited in accordance with generally accepted auditing standards, the financial statements of SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES included in this report and have issued our report thereon dated June 23, 1999. Our audit was made for the purposes of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN ARTHUR ANDERSEN Bristol, England June 23, 1999 S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997 (In Millions)
Additions ------------------------------- Balance at Charged Charged to Balance Beginning (Credited) Other at End of of Period to Income Accounts Deductions Period (pound) (pound) (pound) (pound) (pound) ------------ --------- ---------- --------- --------- Provision for Uncollectable Accounts Year-Ended March 31, 1997................ 17 (1) (2) - (3) 12 == === = === == Year-Ended March 31, 1998................ 12 (2) - (1) 9 == === = === = Year-Ended March 31, 1999................ 9 2 - (1) 10 = = = === == - ------------- (1) In the year ended March 31, 1997,(pound)2 million of this provision was reversed as part of the review of the purchasing accounting adjustments.
S-2 EXHIBIT INDEX The following exhibits indicated by an asterisk preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the SEC, respectively, as the exhibits and in the file numbers indicated and are incorporated herein by reference. 3.1 -- Memorandum of Association of the Company. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 3.1.) 3.2 -- Articles of Association of the Company. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 3.2.) 4.1 -- Trust Indenture dated as of November 21, 1996, between the Company and Bankers Trust Company, as trustee. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 4.1.) 4.2 -- First Supplemental Indenture dated as of November 21, 1996 between the Company and Bankers Trust Company, as trustee. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.2.) 4.3 -- Deposit Agreement dated as of November 21, 1996 between the Company and Bankers Trust Company, as book-entry depositary. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.3.) 4.4 -- Subordinated Debenture Indenture dated as of January 29, 1997, among the Company, Bankers Trust Company, as trustee, and Bankers Trust Luxembourg S.A., as paying agent and transfer agent. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.1.) 4.5 -- Certificate of Trust of Southern Investments UK Capital Trust I (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.3.) 4.6 -- Amended and Restated Declaration of Trust dated as of January 29, 1997 of Southern Investments UK Capital Trust I. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.4.) 4.7 -- Form of Exchange Guarantee of the Company relating to the Exchange Capital Securities. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.6.) 4.8 -- Capital Securities Guarantee dated as of January 29, 1997 of the Company relating to the Original Capital Securities. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.8.) 4.9 -- Common Securities Guarantee dated as of January 29, 1997 of the Company relating to the Common Securities. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.9.) 4.10 -- Deposit Agreement dated as of January 29, 1997 between the Company and Bankers Trust Company, as book-entry depositary. (Designated in Form S-4 Registration No. 333-26939 as Exhibit 4.10.) 10.1 -- SWEB Public Electricity Supply License dated January 31, 1996. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.1.) 10.2 -- Modifications of License Conditions dated March 31, 1998, March 18, 1998, January 23, 1998, December 30, 1997, and March 7, 1997. (Designated in Form 10-K for the year ended March 31, 1998 as Exhibit 10.2). 10.3 -- Pooling and Settlement Agreement (as amended and restated at July 28, 1997) together with modifications dated September 19, 1997 and May 14, 1998 between SWEB, Energy Settlements and Information Services (as Settlement System Administrator), Energy Pool Funds Administration Limited (as Pool Funds Administrator), NGC (as Grid Operator and Ancillary Services Provider) and Other Parties. (Designated in Form 10-K for the year ended March 31, 1998 as Exhibit 10.3). E-1 10.4 -- Master Connection and Use of System Agreement dated as of March 30, 1990 among NGC and its users (including SWEB). (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.4.) 10.5 -- Form of Supplemental Agreement between NGC and SWEB. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.5.) 10.6 -- Variations dated April 1, 1998, March 31, 1998 and March 31, 1998 to the Master Connection and Use of System Agreement dated as of March 30, 1990 among NGC and its users (including SWEB) and to the Form of Supplemental Agreement between NGC and SWEB. (Designated in Form 10-K for the year ended March 31, 1998 as Exhibit 10.6). 10.7 -- Master Agreement dated as of October 25, 1995 among The National Grid Holding plc, NGC, SWEB and the other RECs. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.6.) 10.8 -- Memorandum of Understanding between NGG, SWEB and each of the RECs, dated November 17, 1995. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.7.) 10.9 -- Form of SWEB Use of Distribution System Agreement. (Designated in Form 10-K for the year ended March 31, 1998 as Exhibit 10.9). * 10.10 -- Form of Agreement for the Connection of an Exit Point, generally applicable to commercial customers. 10.11 -- Form of Agreement for the Connection of an Exit Point, generally applicable to residential customers. (Designated in Form 10-K for the year ended March 31, 1998 as Exhibit 10.11). 10.12 -- Services Agreement dated as of January 1, 1996 between Southern Electric International, Inc. (now Southern Energy, Inc.) and the Company. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.10.) 10.13 -- Services Agreement dated as of January 1, 1996 between Southern Electric International, Inc. (now Southern Energy, Inc.) and SWEB. (Designated in Form S-1 Registration No. 33-09033 as Exhibit 10.11.) 10.14 -- Services Agreement dated as of January 1, 1996 between SWEB and Holdings. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.12.) 10.15 -- Services Agreement dated as of January 1, 1996 between the Company and SWEB. (Designated in Form S-1 Registration No. 333-09033 as Exhibit 10.13.) * 21.1 -- Subsidiaries of Registrant. * 24.1 -- Power of Attorney and Resolution. * 27.1 -- Financial Data Schedule. E-2
EX-10 2 FORM OF AGREEMENT Exhibit 10.10 GENERAL TERMS FOR CONNECTION SCALE A - electricity supplied at high voltage in excess of 1,000 volts ac where You provide free accommodation for the Connection Equipment. 1. YOUR RIGHT TO AN ELECTRICITY CONNECTION 1.1 You have the right for Your Installation to be Connected and to remain Connected to Our Distribution System at the Exit Point subject to the terms of this Agreement. 1.2 The right to be Connected does not include the right to be Energised. Under the terms of this Agreement, You have the right for the Exit Point to be Energised provided that:- (a) You have an electricity supply contract with an Authorised Electricity Operator who agrees to supply electricity to You and agrees terms with Us for use of Our Distribution System; or (b) You take a supply from Us on Our published tariff terms. 1.3 We shall De-Energise the Exit Point as soon as We reasonably can :- (a) after being instructed to do so by You or by an Authorised Electricity Operator; or (b) where We are authorised to do so under the Regulations; or (c) where the conditions referred to in sub-clause 2.2 are no longer satisfied; and where the instruction has been given by an Authorised Electricity Operator, We will give You a minimum of 48 hours' written notice of Our intention to De-Energise, and any grounds stated in the instruction unless Force Majeure prevents Us from doing so. 1.4 We may De-Energise the Exit Point immediately if we are:- (a) instructed to do so by NGC; or (b) required to do so under the Pooling and Settlement Agreement; or (c) required to do so by the Act; or (d) authorised to do so under the Regulations; or (e) entitled to do so under the terms of this Agreement and We shall at all times act in accordance with Good Industry Practice in carrying out De-Energisation. 1.5 If We are notified of circumstances in which We may be instructed or required to take action under sub-clause 1.4 act or We become aware of circumstances in which We may wish to take such action, We shall immediately inform You. 1.6 We are entitled to De-energise the Distribution System and Our Equipment from time to time provided that: (a) We comply with the requirements of Our Distribution Code; and (b) We give You a minimum of 48 hours' written notice of Our intention to De-energise the Exit Point unless Force Majeure prevents Us from doing so; or if the Exit Point has to be De-energised immediately because of accident or other emergency; or to avoid failure of, or serious interference with, other electricity supplies; and (c) We re-Energise the Exit Point as quickly as reasonably possible. 1.7 When the Exit Point under this Agreement is Energised, the characteristics of the supply of electricity delivered at the Exit Point shall be as specified in the Schedule, subject to the variations permitted by the Regulations. 1.8 If the Exit Point is temporarily De-Energised or Disconnected at Your request, You shall pay Us on demand any reasonable and proper direct costs incurred by Us as a result of the De-Energisation or Disconnection and any subsequent re-Energisation or re-Connection. 2. PAYMENT OF CONNECTION CHARGES 2.1 Normally, no Connection Charge is payable where Your Installation is already Connected to an Exit Point. However, if You require a new connection to an Exit Point, or a Modification to an existing connection, You will pay Us charges as set out in the Schedule. 2.2 You will pay Us any Connection Charge specified in the Schedule or any subsequent charge for a Modification. The Connection Charge is calculated in accordance with Our Connection Charge Statement for the time being in force and shall be payable within fourteen days of the date of Our invoice. 2.3 If the Director decides that any Connection Charge payable under this Agreement has not been calculated correctly under Our Connection Charge Statement, We shall pay You the amount by which You have been overcharged together with interest on that amount from the date on which such charge was paid until the date of payment of such amount. Such interest shall accrue from day to day at the rate equivalent to Lloyds Bank Minimum Lending Rate. 3. LIMITATION OF DEMAND 3.1 You shall not take more electricity than the Maximum Capacity through the Exit Point at any time. If You do so, We may give You written notice setting out details and asking You to reduce your electricity demand. If You have not reduced your demand within three days of receipt of that notice, We may De-energise the Exit Point until You are able to satisfy Us that the Maximum Capacity will not be exceeded. 3.2 Where the Maximum Capacity is exceeded You shall pay Us any reasonable additional costs which we incur as a result, including the costs of De-energising the Exit Point under sub-clause 3.1 and any later re-Energisation. 4. DISTRIBUTION CODE 4.1 Both Parties shall comply with all relevant provisions of Our Distribution Code (a copy of which is available from Us on request. 4.2 In the event of any conflict between this Agreement and Our Distribution Code, the latter shall prevail. 5. PLANT AND APPARATUS 5.1 Each Party shall ensure that its agents, employees and guests will not interfere in any way with any of the Plant or Apparatus of the other Party without the other Party`s consent except where emergency action has to be taken to protect the health and safety of persons or to protect Our Distribution System. 5.2 Each Party shall take all necessary precautions at all times to protect the other Party's equipment on the Premises from damage and to comply with any reasonable requirements from time to time made by the other Party for that purpose. 5.3 If either Party breaches sub-clause 5.1 and/or 5.2 and as a result any equipment is lost or damaged, the Party in breach shall pay the other Party the full amount of, any loss, damage and expenses the other Party suffers as a result, unless such loss or damage was caused by fair wear and tear or Force Majeure. 6. ACCOMMODATION AND RIGHTS OF ACCESS 6.1 The rights of access specified in the Act shall apply to this Agreement. Any person to whom access is given under this Clause 6 shall comply with all reasonable directions given by Us or You and Your employees and agents as to general safety and site security requirements. 6.2 You acknowledge that any of Our Equipment which is laid, installed or fixed in the Premises shall remain in Our ownership and shall not be deemed to pass to a third party on a transfer of the Premises. 6.3 You shall permit such employees or agents of Ours as are reasonably necessary to enter the Premises to carry out connection or modification works, read meters, inspect or test the Metering Equipment, work on and/or operate Our Equipment or lawfully Disconnect or De-energise the Exit Point or for any other purpose required for the operation of Our Distribution System and that they shall be given safe and unobstructed access. 6.4 As Your Connection is or will be at High Voltage (i.e exceeding 1,000 volts AC), You shall provide, without cost to Us:- (a) Accommodation on the Premises and where appropriate as specified in the Schedule in accordance with Our equirements for Our Equipment, and (where appropriate) with separately located accommodation for the Metering Equipment, cable termination and ancillary equipment; and (b) where required , a dual switch socket outlet, a luminaire and space heating to a minimum standard so as to give frost protection together with a 240 volt electricity supply; and You will keep in good order repair and condition all parts of the Accommodation including the interior surfaces and any boundary fences and/or cladding which enclose the Accommodation. 7. YOUR INSTALLATION AND EQUIPMENT 7.1 Except where clear written representations are given by Us, We give no warranty about the adequacy, safety or other characteristics of Your Installation. 7.2 You understand that We may use switchgear with auto-reclosing facilities, that Your Installation should be designed so as not to suffer damage through the operation of these facilities and that We accept no liability for such damage to the extent such damage is attributable to Your failure adequately to design Your Installation. 7.3 If You take a supply of electricity from Our Distribution System for the operation of any equipment which during the normal operation of Our Distribution System adversely affects voltage regulation or the supply of electricity to You or others or in our reasonable opinion is likely so to do, You shall at Your own expense remedy the condition in such manner as We reasonably consider to be adequate and if the condition is not remedied within a reasonable time of Us giving notice to You, We may immediately De-energise the Exit Point until the condition has been remedied and You pay Us the full costs, expenses and losses caused to Us. 7.4 You shall not connect any electricity generating plant directly or indirectly to Our Distribution System without Our previous written consent, which will not be unreasonably delayed or withheld. Consent has been granted for the generator(s) (if any) specified in the Schedule. 7.5 You may also use emergency back-up electricity generation not specified in the Schedule when Your supply of electricity is not available from Our Distribution System provided that You first isolate Your Installation including the generating plant from Our Distribution System. 8. POWER FACTOR AND PHASE BALANCE 8.1 Where required by Us, You shall maintain at Your cost the power factor of any supply of electricity as near to unity (1.0) as is reasonably practicable. 8.2 Where a supply of electricity is provided in two or more phases, You shall ensure as far as is reasonably possible that the demand is balanced between the phases made available. 9. MODIFICATION 9.1 Where You wish to make a Modification to your Installation You shall complete and submit to Us Our form of Application for a Modification and comply with its terms. 9.2 We shall make a Modification Offer to You within 90 days of Our receipt of Your written notice requiring a Modification. The Modification Offer shall include the details of any proposed variations We require to this Agreement. 9.3 Where We wish to make a Modification to Our Equipment We shall send You a notice giving details of the Modification. 9.4 We shall have no obligation to compensate You for the cost and expense of any Modification required to be made by You as a result of any Modification by Us. 9.5 Where We and You share the ownership of electrical connection equipment (at the Premises), the cost of any Modification will be shared equitably between Us. 9.6 You have the right of appeal to the Director if You and We cannot agree terms for a Modification. 10. METERING AND INFORMATION 10.1 You must employ a Registered Meter Operator as Your agent to install, maintain and/or remove Your Metering. 10.2 Schedule 7 to the Act permits You to provide Your own Meter(s) to be used or intended to be used in connection with an exempt supply, subject to Our consent, such consent not to be unreasonably withheld. 10.3 Whoever owns the Metering, You must provide adequate and secure accommodation for the Metering and Our Metering Equipment and take all reasonable precautions to ensure it is not damaged. 10.4 The Act requires You to keep the Metering in good order for correctly registering the supply of electricity. If the Metering is not kept in good order then We may De-Energise the Exit Point until it is put into good order. 10.5 We do not give any warranty, express or implied or accept any responsibility, as to the adequacy, safety or other characteristics of the Metering. 10.6 Only Authorised Persons will be allowed to operate Our Connection Equipment or Metering Equipment including metering potential fuses (as appropriate) in order to connect any metering at the Metering Point. 10.7 You will provide Us with such information and assistance as We may reasonably require to enable Us to exercise Our rights and perform Our obligations as operator of the Distribution System. 10.8 You will allow Us (at Our expense) to install monitoring equipment on Your premises if We consider it necessary to do so. Such monitoring equipment will be independent of and additional to the Metering, and shall remain Our property. 11. ASSIGNMENT This Agreement shall not be assigned to another person by either Party without the previous written consent of the other Party, such consent not to be unreasonably withheld. If You leave the Premises, We will offer a new connection agreement to the next owner or occupier of the Premises. 12. EVENTS OF DEFAULT AND TERMINATION 12.1 This Agreement shall continue until the termination date specified in the Schedule unless terminated at an earlier date by :- (a) You giving not less than 28 days` notice in writing to Us; or (b) by Us under Clause 12.4 12.2 In the event that :- (a) You do not pay any valid account for Connection Charges by the due date for payment and that amount remains unpaid seven days after We send You a reminder that it is overdue; or (b) You breach the terms of this Agreement and do not remedy the breach within a reasonable time after receiving written notice of default from Us; or (c) You permanently stop having electricity delivered through Your Connection; or (d) You no longer own or occupy Your Premises ; or (e) any other circumstances arise which legally entitle Us to do so, We will Disconnect Your Connection and, where appropriate, We will write to You advising You that this Agreement is ended. 12.3 Once We have given notice of an event of default under Clause 12.2 this Agreement shall terminate and, without prejudice to Our other rights and remedies, We may Disconnect the Exit Point. 12.4 If the Exit Point is De-Energised for a continuous period of three months We may give You twenty-eight days notice in writing of our intention to terminate this Agreement. 12.5 Upon termination of the Agreement You shall allow Us to enter Your Premises in order to remove Our Equipment and shall pay Us all sums then due and payable or accrued under this Agreement and any reasonable costs incurred by Us in Disconnecting the Exit Point and removing Our Equipment. 12.6 The ending of this Agreement will not affect any rights, remedies or obligations which may have come into being under this Agreement and Clause 14 will continue to apply to those rights, remedies and obligations. 13. FORCE MAJEURE 13.1 If either Party shall be unable to carry out any of its obligations under this Agreement due to circumstances beyond that Party's reasonable control ('Force Majeure') this Agreement shall remain in effect but except as otherwise provided in this Agreement each Party`s obligations other than any obligation as to payment of charges shall be suspended without liability for a period equal to the Force Majeure event provided that:- (a) the suspension of performance is no greater and of no longer duration than is required by the Force Majeure; (b) any obligations of either Party that arose before the Force Majeure causing a suspension of performance are not excused as a result of the Force Majeure; and (c) the non-performing Party uses all reasonable efforts to remedy its inability to perform. 14. LIMITATION OF LIABILITY 14.1 Neither Party shall be liable to the other for any breach of this Agreement directly or indirectly caused by Force Majeure. 14.2 Neither Party (the "Party Liable") nor any of its officers, employees or agents shall be liable to the other Party for loss arising from any breach of this Agreement other than for loss directly resulting from such breach and which at the date of this Agreement was reasonably foreseeable as likely to result in the ordinary course of events from such breach and which resulted in physical damage to the property of the other Party, its officers, employees or agents provided that the liability of either Party in respect of claims for such loss or damage shall will not exceed the sum of (pound)1,000,000 (one million pounds) per incident or series of related incidents, irrespective of whether You have claimed under this Agreement and/or any other agreement. 14.3 Nothing in this Agreement shall exclude or limit the liability of the Party liable for death or personal injury resulting from the negligence of the Party Liable, or any of its officers, employees or agents and the Party Liable shall indemnity and keep indemnified the other Party, its officers, employees or agents from and against all such and any loss or liability which such other Party may suffer or incur by reason of any claim on account of death or personal injury resulting from the negligence of the Party Liable, or any of its officers, employees or agents. 14.4 Subject to Clause 14.6, neither Party, nor any of its officers, employees or agents shall in any circumstances whatsoever be liable to the other Party for any loss of profit, loss of revenue, loss of use, loss of contract or loss of goodwill or any indirect or consequential loss or loss resulting from the liability of such other Party to any other person however and whenever arising except under Clause 14.3. 14.5 The rights and remedies provided by this Agreement to the Parties are exclusive and not cumulative and exclude and are in place of all rights or remedies provided by common law or statute, including any rights either Party may possess in tort which shall include actions brought in negligence and/or nuisance. 14.6 Clause 14 shall override any other provision of this Agreement so far as it excludes or limits liability, provided that nothing in this Clause shall exclude or restrict or otherwise prejudice any of the rights, powers, duties and obligations of either Party which are conferred or created by the Act, the Licence, or the Regulations or the rights, powers, duties and obligations of the Director or the Secretary of State under the Act, the Licence or otherwise. 15. VARIATION, WAIVER AND SAVINGS 15.1 No variations to this Agreement shall be effective unless made in writing and signed by or on behalf of both Parties. However, each Party shall effect any amendment required to be made to this Agreement by the Director as a result of a change in the Licence or an order made under the Act or as a result of settling any of the terms of this Agreement and You authorise and instruct Us to make any such amendment on Your behalf and undertake not to withdraw or qualify such authority or instruction at any time during the period of this Agreement. 15.2 Either Party shall at any time be entitled to propose variations to this Agreement by notice in writing to the other Party. Both Parties shall negotiate in good faith the terms of any such variation, but if a variation to this Agreement has not been agreed and put into effect within one month after it has been proposed, either Party shall be entitled to refer the matter to the Director as if the variation were a new agreement as referred to in that condition. Both Parties shall give effect to the decision of the Director and shall enter into any agreement supplemental to this Agreement as shall be necessary to give effect to any variation agreed or so decided. 15.3 None of the provisions of this Agreement shall be considered waived by either Party unless the waiver is given in writing, 15.4 No delay by or omission of either Party in exercising any right, power, privilege or remedy under this Agreement or the Our Distribution Code shall reduce such right, power, privilege or remedy or be construed as a waiver. 15.5 If any provision of this Agreement is or becomes or is declared invalid, unenforceable or illegal by the courts of any jurisdiction to which it is Subject or by order of the Commission of the European Communities or by order of the Secretary of State such invalidity, unenforceability or illegality shall not prejudice or affect the remaining provisions of this Agreement which shall continue in full force and effect notwithstanding such invalidity, unenforceability or illegality. 16. ARBITRATION 16.1 Any dispute or difference arising in connection with this Agreement shall be referred to arbitration under the arbitration rules of the Electricity Arbitration Association in force from time to time except where expressly stated in this Agreement to the contrary, and subject to any contrary provision of the Act, any licence issued under the Act or the Regulations. 16.2 Whatever the nationality residence or domicile of either Party and wherever the dispute or difference arose the law of England and Wales shall be the proper law of any reference to arbitration and in particular the provisions of the Arbitration Act 1996 shall apply to any such arbitration wherever it shall be conducted. 16.3 Subject to Clause 16.5, if any third party brings any legal proceedings in any court against any Party, (the "defendant Party") and the defendant Party wishes to make a third party claim (as defined in Clause 16.4) against the other Party which would but for this Clause 16.3 have been a dispute or difference referred to arbitration under Clause 16.1 then the provisions of Clause 16.1 shall not apply and instead of arbitration, the court in which the legal proceedings have been commenced shall hear and completely adjudicate upon the legal proceedings and the third party claim not only between the third party and the defendant Party but also between either or both of them and the other Party whether by way of third party proceedings or otherwise as may be ordered by the court. 16.4 For the purpose of this Clause "third party claim" shall mean:- (a) any claim by a defendant Party against the other Party (whether or not already a party to the legal proceedings) for any contribution or indemnity, or (b) any claim by a defendant Party against the other Party for any relief or remedy connected with the subject matter of the legal proceedings and substantially the same as some relief or remedy claimed by the third party, or (c) any requirement by a defendant Party that any question or issue connected with the subject matter of the legal proceedings should be determined not only as between the third party and the defendant Party but also as between either or both of them and the other Party (whether or not already a party to the legal proceedings). 16.5 Clause 16.3 above shall apply only if at the time the legal proceedings are commenced no arbitration has been commenced between the defendant Party and the other Party raising or involving the same or substantially the same issues as would be raised by or involved in the third party claim. The tribunal in any arbitration which has been commenced prior to the commencement of legal proceedings shall decide the question, in the event of dispute, whether the issues raised or involved are the same or substantially the same. 17. ADMINISTRATION AND INTERPRETATION 17.1 This Agreement, including the Schedule, any Appendix and Drawing(s) shall constitute the entire agreement between the Parties concerning its subject matter and replaces all previous agreements and understandings between the Parties with respect to connection and each of the Parties acknowledges and confirms that it does not enter into this Agreement in reliance on any representation or warranty or other undertaking not fully reflected in the terms of this Agreement, and no amendment, modification or substitution shall be effective unless in writing and signed by both Parties. 17.2 This Agreement shall be governed by the law of England and Wales. 17.3 Any notice given under this Agreement shall be properly given if sent by first class letter post, by hand, or by facsimile transmission to the relevant Notices Address on the Front Sheet. 17.4 Any notice sent by first class post will be deemed to have been given two working days after it was sent and a notice delivered during normal office hours by hand or facsimile will be deemed to have been served upon actual delivery or transmission. 17.5 Any reference in this Agreement to a statute, statutory instrument, regulation or order shall be a reference to such statute, statutory instrument, regulation or order as amended or re-enacted. Similarly, any reference in this Agreement to another agreement or any deed or other instrument shall be a reference to that other agreement, deed or other instrument as amended. 18. DEFINITIONS 18.1 In this Agreement the following expressions shall have the meanings set next to them:- "Accommodation" the accommodation specified in the Schedule, "Act" The Electricity Act 1989; "thisAgreement" comprises the Front Sheet. the General Terms and Conditions for Connection Equipment Schematic drawing, substation site drawing; "Application for a Modification" Our standard Form of Application for a Modification; "Apparatus" all equipment in which electrical conductors are used supported or of which they may form part; "Authorised Person" a person who is not an employee of Ours but who is authorised by Us to undertake certain work on Our Equipment at the Metering Point; "Authorised Electricity Operator" a person who is the holder of a licence to supply electricity under the Electricity Act 1989 or exempted from holding such a licence under that Act; "Competent Authority" includes the Secretary of State, the Director and any local or national agency, authority, department, inspectorate, minister, ministry, official or public or statutory person of, or of the government of, the United Kingdom or of the European Community; "Connect(ed)" the installation of the Connection Equipment in such a way that subject to Energisation You may receive a supply of electricity over the Distribution System and "Connection" and "Re-Connected" shall be construed accordingly; "Connection Charge" any charge for a Connection or Modification calculated in accordance with Our Connection Charge Statement. "Connection Equipment" that part of Our Equipment which has been or is to be provided and installed to establish a connection at the Exit Point listed in the Schedule and where applicable is illustrated on the drawing attached to this Agreement; "De-energise/De-energisation" the movement of any switch or the removal of any fuse or the taking of any other step where no electrical current can flow from Our Distribution System through the Connection Equipment to Your Installation at the Exit Point; "Directive" includes any present or future directive, requirement, instruction, direction or rule of any Competent Authority and includes any modification, extension or replacement then in force; "Director" the Director General of Electricity Supply appointed for the time being under the Act; whose address is: The Office of Electricity Regulation, Hagley House, Hagley Road, Edgbaston, Birmingham. B16 8QG; "Disconnection" the permanent separation and if appropriate, removal of all or any of the Connection Equipment; "Energisation" the movement of any switch or the insertion of any fuse or the taking of any other step to enable an electrical current to flow from Our Distribution System through the Connection Equipment to Your Installation at the Exit Point; "Exit Point" the point of connection specified on the Front Sheet at which a supply of electricity may flow between Our Distribution System and Your Installation upon Energisation; "the Front Sheet" that part of this Agreement marked as such and containing a description of each Party, the premises (to be) connected, the Schedule, characteristics of supply, generators (if any) and signatures; "Good Industry Practice" the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and, ordinarily be expected from a skilled operator engaged in the same type of undertaking under the same or similar circumstances; "Material Effect" An effect causing either Us or You to carry out any works or to alter the manner of operation of Our Equipment or Your Installation which in either case involves the unavoidable but necessary expenditure of more than (pound)500; "Maximum Capacity" the maximum amount of electricity expressed in kVA that We have allowed to flow through the Exit Point as specified in the Schedule; "Meter" a device that measures the electricity that flows through the Exit Point; "Metering" any Meter and associated equipment, including where necessary communication and/or control equipment (not being Ours) installed by the Registered Meter Operator at the Metering Point; "Metering Equipment" the equipment (being Ours) associated with a particular Meter, including any related current transformer, voltage transformer, and potential fuses; "the Metering Point" the position of the Meter, which will normally be located as near as possible to the Exit Point; "Modification" any replacement, renovation, modification, alteration or construction by or on behalf of a Party to either that Party's Plant or Apparatus or the manner of its operation at the Exit Point which has or will have a Material Effect on the other Party at the Exit Point; "Modification Notification" the Company's standard form of Modification Notification which applies from time to time; "Modification Offer" an offer by Us to You of terms for connection concerning a Proposed Modification at or affecting the Exit Point including any revision or extension of such offer; "NGC' the National Grid Company plc; "Our Connection Charge Statement" the Statement of the Basis of Charges for Connection to Our Distribution System issued in accordance with Our Licence (this statement may be varied from time to time); "Our Distribution Code" Our distribution code referred to in Our Licence; "Our Distribution System" Our system for the distribution of electricity as defined in Our Licence; "Our Equipment" Our switchgear, metering or other equipment, lines, cables or other parts of the Distribution System or Our other property or rights; "Our Licence" Our public electricity supply licence granted under the Act; "Our Premises" any land or buildings of Ours in which any of Your Installation is to be installed; "Party" each person for the time being and from time to time party to this Agreement and any successor(s) in title to, or permitted assign(s) of, such person; "Plant" fixed and movable items other than Apparatus; "Pooling and Settlement Agreement" the agreement of that title for the time being approved by the Secretary of State or by the Director; "Premises" Your land or buildings in which Our Equipment is to be installed or is for the time being Placed, including the premises specified in the Schedule on the Front Sheet; "Registered Meter Operator" a company holding a valid Registration Certificate issued by the Registration Authority for metering; "Regulations" the Electricity Supply Regulations 1988; "the Schedule" the Schedule on the Front Sheet. "Your Installation" any structures, equipment, lines, appliances or devices (not being Our Equipment) used by You and connected or to be connected to Our Distribution System. GENERAL TERMS FOR CONNECTION. SCALE B - Electricity supplied at low voltage up to 1,000 volts ac where You provide substation accommodation at a nominal price for Our use to supply You and other customers of Ours. SCALE C - electricity supplied at low voltage up to 1,000 volts ac. 1. YOUR RIGHT TO AN ELECTRICITY CONNECTION 1.1 You have the right for Your Premises to be Connected and remain Connected to Our Distribution System in accordance with the provisions of the Act, any other legal requirements that apply from time to time, and the terms of this Agreement. 1.2 The right to be Connected does not include the right to receive a supply of electricity. 1.3 While this Agreement continues, You will only have the right to receive a supply of electricity through the Exit Point when:- (a) You have an electricity supply contract with a person who is the holder of a licence to supply electricity under the Act or exempt from holding such a licence under the Act and who, where required, has an agreement with Us to use Our Distribution System; or (b) You are taking a supply from Us on Our published tariff terms. 1.4. We may cut off Your supply of electricity to Your Connection where We are entitled to do so under general law. We may also cut off Your supply of electricity where We are required to do so under Your electricity supply contract or the electricity industry arrangements under which We operate. 1.5 If We temporarily cut off and subsequently Re-Connect Your supply of electricity to Your Connection at Your request, You shall pay Us on demand any reasonable costs incurred by Us. 2. PAYMENT OF CONNECTION CHARGES 2.1 You agree to pay Us any Connection Charge specified in the Schedule or required for any subsequent Modification. All Connection Charges are calculated in accordance with Our Connection Charge Statement and shall be payable within 14 days of the date of our Invoice. 2.2 If the Director decides that the Connection Charge payable under this Agreement has not been calculated in accordance with Our Connection Charge Statement We shall pay to You the amount by which You have been overcharged together with interest which shall accrue from day to day at the rate equivalent to Lloyds Bank Minimum Lending Rate for the period in question. 3. DISTRIBUTION SYSTEM LIMITATIONS 3.1 Our obligations under this Agreement are subject to the Maximum Capacity as specified in the Schedule and any other design features of Your Connection. 3.2 The characteristics of the supply of electricity delivered to Your Connection shall be as specified in the Schedule, subject to the variations permitted by the Electricity Supply Regulations 1988. 3.3 We may cut off the supply of electricity to Your Premises until You are able to satisfy Us that the Maximum Capacity will not be exceeded. Where the Maximum Capacity is exceeded You shall pay Us any reasonable costs incurred by Us as a result. 3.4 We do not guarantee that We will deliver electricity through Our Distribution System at all times or that electricity delivered through Our Distribution System will be free of brief variations in voltage or frequency as permitted by the appropriate legal provisions. 4. DISTRIBUTION CODE We both agree to comply with all relevant provisions of the Distribution Code. In the event of any conflict between this Agreement and the Distribution Code, the Distribution Code shall prevail. 5. OUR EQUIPMENT 5.1 We both shall ensure that our respective agents, employees and guests will not interfere in any way with any of the Equipment of the other without consent except where emergency action has to be taken to protect the health and safety of persons or to protect Our Distribution System. 5.2 We both agree to take all necessary precautions at all times to protect each other`s equipment on Your Premises from damage and for that purpose both of Us shall comply with any reasonable requirements from time to time made by either of Us. 5.3 If either of us is in breach of Clauses 5.1 and 5.2 and as a result any Equipment is lost or damaged, whoever of us is responsible agrees to pay to the other the full amount of any loss, damage and expenses sustained as a result, unless the loss or damage was caused by fair wear and tear or Force Majeure (as defined in Clause 14). 6. INFORMATION FROM YOU You must provide Us with any information We request in relation to the nature, or use by You, of electrical equipment on Your Premises. We will only ask for information that We need in relation to this Agreement or the Distribution Code . 7. METERING 7.1 As part of the arrangements for providing the supply of electricity to Your Premises, a meter operator must be appointed to provide, maintain and / or remove the Metering. 7.2 If You own the Meter, the Act requires You to keep it in good order for correctly registering the supply of electricity. 7.3 Whoever owns the Metering, You must provide adequate and secure accommodation for it and Our Metering Equipment and take all reasonably practicable steps to ensure that it is not damaged. 7.4 If the Meter is not kept in good order, We may cut off the supply until it operates correctly. 7.5 Except for Authorised Agents of your electricity supplier, We will not allow anyone to remove or replace Our cut-out fuses or Our metering potential fuses (as appropriate) in order to connect any Meter at the Metering Point. 7.6 You will allow Us (at our expense) to install monitoring equipment on Your Premises if We consider it necessary to do so. Such monitoring equipment will be independent of and additional to the Meter, and shall remain Our property. 8. ACCOMMODATION AND RIGHTS OF ACCESS 8.1 The rights of access specified in the Act shall apply to this Agreement. Anyone to whom access is given under this Clause 8 shall comply with all reasonable directions given by either of us as to general safety and site security. 8.2 In addition to the rights of access referred to in Clause 8.1, You will ensure that such employees or agents of Ours as are reasonably necessary are able to enter Your Premises to carry out Connection or Modification works, read meters, inspect or test the Metering Equipment, work on or operate Our Equipment or lawfully cut off the supply of electricity and that they are given safe and unobstructed access. 8.3 You acknowledge that any of Our Equipment which is at any time laid, installed or fixed in Your Premises shall continue to belong to Us. You will allow Us to keep suchEquipment in place free of charge (except and only in so far as we are obliged to pay You for allowing Us to do so under the terms of an agreement made independently of this Agreement). 8.4 Where We agree to apply Low Voltage Substation Use of System Charges and You agree to provide Substation Accommodation on Your Premises for Us to supply You and other customers of Ours, You also agree as follows:- (a) unless We already have a lease of the Substation Accommodation or You have agreed to sell Us the freehold, You will grant or arrange for the grant of a lease of the Substation Accommodation to Us at a nominal price within twenty eight days of the date of Our written request. Each of Us shall bear our own costs in relation to the transaction; and (b) that You will keep all parts of the Substation Accommodation in good order, repair and condition including the interior surface and/or cladding and/or boundary fences which enclose or form part of the Substation Accommodation. 8.5 Where We are to take a lease of the Substation Accommodation, the form of the lease shall be substantially as set out in the Appendix to this Agreement. We will be responsible for the reasonable costs of preparing and producing the lease. If You are a leasehold owner, the length of Your lease to Us will be for 99 years or for the length of your leasehold ownership if that is less than 99 years. 9. YOUR INSTALLATION AND EQUIPMENT 9.1 Except where clear written representations are given by Us, We give no warranty about the adequacy, safety or other characteristics of Your Installation. 9.2 You understand that We may use switchgear with auto-reclosing facilities and that Your Installation should be designed so as not to suffer damage to Your Equipment through the operation of these facilities. We accept no liability for such damage to the extent that such damage is attributable to Your failure adequately to design Your Installation. 9.3 You agree not to connect any electricity generating plant directly or indirectly to Our Distribution System without Our previous written consent, which will not be unreasonably delayed or withheld. Consent has been granted for the generator(s) (if any) specified in the Schedule. 9.4 You may also use emergency back-up electricity generation not included in the Schedule when Your supply of electricity is not available from Our Distribution System provided that You first isolate Your Installation including the generating plant from Our Distribution System. 10. POWER FACTOR AND PHASE BALANCE 10.1 Where required by Us, You agree to maintain at Your cost the overall power factor of Your Equipment to as near unity as is reasonably practicable. 10.2 Where Your Connection is provided from two or more phases, You shall ensure as far as is reasonably possible that the demand is balanced between the phases made available. 11. MODIFICATIONS 11.1 In accordance with existing legal rules, You must contact us in advance if You propose to make any significant change to Your Connection, electric lines or electrical equipment, install or operate generating equipment or do anything else that could effect Our Distribution System or require alterations to Your Connection. 11.2 We shall respond to Your formal request within 90 days of receipt of Your request, giving You Our estimate of the cost of any work involved, the associated terms and conditions and include details of any proposed modification to this Agreement. 11.3 Where We wish to modify Our Equipment that effects Your Connection, We shall send You formal notification of Our proposals. 11.4 We shall have no obligation to compensate You for the cost and expense of any Modification required to be made by You as a result of any Modification by Us. 11.5 Where We share the ownership of the Connection Equipment, the cost of the Modification will be shared equitably between us. 11.6 You have the right of appeal to the Director if we cannot agree the terms for modifying Your Connection. 12. ASSIGNMENT You must not transfer this Agreement to another person without Our consent. 13. EVENTS OF DEFAULT AND TERMINATION 13.1 This Agreement shall continue in force until the termination date specified in the Schedule unless :- (a) You end it sooner by giving Us at least 28 days` notice in writing; or (b) We give notice to You under Clause 13.2. 13.2 In the event that :- (a) You do not pay any valid account for Connection Charges by the due date for payment and that amount remains unpaid seven days after We send You a reminder that it is overdue ; or (b) You breach the terms of this Agreement and do not remedy the breach within a reasonable time after receiving written notice of default; or (c) You permanently stop having electricity delivered through Your Connection; or (d) You no longer own or occupy Your Premises ; or (e) any other circumstances arise which legally entitle Us to do so, We will cut off Your electricity supply to Your Connection and, where appropriate, We will write to You advising You that this Agreement is ended. 13.3 The ending of this Agreement will not affect any rights, remedies or obligations which may have come into being under this Agreement and Clause 15 will continue to apply to those rights, remedies and obligations. 14. FORCE MAJEURE If either of us is unable to carry out any of our obligations under this Agreement due to circumstances beyond our reasonable control ("Force Majeure") this Agreement shall remain in effect but except as otherwise provided for in this Agreement, our obligations, other than Your obligation to pay the Connection Charges, shall be suspended without liability for a period equal to the Force Majeure event, provided that:- (a) the suspension of performance is no greater and of no longer duration than is required by the Force Majeure; (b) any obligations on either of us that arose before the Force Majeure causing a suspension of performance are not excused as a result of Force Majeure; and whichever of us is affected by the Force Majeure, we use all reasonable efforts to remedy our inability to perform. 15. LIMITATION OF LIABILITY 15.1 If We fail to comply with any terms of this Agreement, or are negligent, You may be entitled under the general law to recover compensation from Us for any loss You have suffered. However, We will not be required to compensate You for loss caused by anything beyond our reasonable control, or for any indirect, consequential, economic or financial loss (including loss of revenue, profit or opportunity, wasted expenses or loss of contract or goodwill), other than where You are entitled to recover compensation for such loss under the general law in relation to death or personal injury. 15.2 Each of us will be liable to the other in accordance with the limitations in Clause 15.1 and up to a maximum of(pound)1,000,000 per incident or series of related incidents. 16. VARIATION 16.1 Either of us may propose a variation to this Agreement. If We cannot agree on the variation, either of us may refer the matter to the Director for determination in accordance with Our Licence. 16.2 No variations to this Agreement shall be effective unless made in writing and signed by or on behalf of us both. 17 DISPUTES AND GOVERNING LAW 17.1 Any dispute between us in relation to this Agreement will be submitted to arbitration under the rules of the Electricity Arbitration Association. 17.2 This Agreement shall be governed by the law of England and Wales. 18 ENTIRE AGREEMENT 18.1 This Agreement, shall constitute the entire agreement between us and replaces all previous agreements and understandings between us. 18.2 Any notice given under this Agreement shall be properly given if sent by first class letter post, by hand or by facsimile transmission to the relevant Notices Address.. 19 DEFINITIONS In this Agreement, except where the context requires otherwise, the following terms shall have the meanings set opposite them below:- "the Act" the Electricity Act 1989. "Authorised Agent" a person who is not an employee of Ours but who is authorised by Us to undertake certain work on Our Equipment at the Metering Point. "Connect(ed)" the installation of Our Connection Equipment in such a way that You may receive a supply of electricity over Our Distribution System provided that all relevant requirements of this Agreement are met and "Connection" and "Re-Connect(ed)" shall be construed accordingly. "Connection Charge" any charge for a Connection or a Modification calculated in accordance with Our Connection Charge Statement. "Connection Equipment" that part of Our Equipment which has been or is to be provided and installed to establish a Connection at the Exit Point. "the Director" the Director General of Electricity Supply appointed for the time being under the Act, whose address is The Office of Electricity Regulation, Hagley House, Hagley Road, Edgbaston, Birmingham, B16 8QG. "the Distribution Code" Our distribution code as defined in Our Licence - a copy of which is available from Us on request. "Equipment" all apparatus in which electrical conductors are used to support or of which they may form part, together with such plant which is fixed or moveable and forms part of the Connection to Our Distribution System or Your Installation (as the case may be). "the Exit Point" the point of connection specified in the Schedule through which a supply of electricity may flow between Our Distribution System and Your Installation. "Low Voltage Substation Use of System Charges" Charges (Scale B) that apply for using Our Distribution System only where You provide free substation accommodation for Us on Your Premises. "the Maximum Capacity" the maximum amount of electricity expressed in kVA that We Agree may flow through the Exit Point as specified in the Schedule. "Meter" a device that measures the electricity that flows through the Exit Point. "Metering" any Meter and associated equipment, including where necessary communication and/or control equipment (not being Ours) installed by the meter operator at the Metering Point. "Metering Equipment" the equipment (being Ours) associated with a particular Meter, including any related current transformer, voltage transformer, and potential fuses. "Metering Point" the position of the Meter, which will normally be located as near as possible to the Exit Point. "Modification" any replacement, renovation, modification, alteration or construction of our plant or apparatus or the manner of its operation at the Exit Point which has or will have a material effect on the Connection Equipment. "Notices Address" the notices address for each of us, as shown on the front page of this Agreement. "Our Connection Charge Statement" the Statement of the Basis of Charges for Connection to Our Distribution System issued in accordance with Our Licence (this statement may be varied from time to time.) "Our Distribution System" our system for the distribution of electricity as defined in Our Licence. "Our Licence" Our Public Electricity Supply Licence, granted under section 6(1) (c) of the Act. "the Schedule" the schedule shown on the front page of this Agreement. "Your Installation" any structure, Equipment, lines, appliances or devices (not being Our Equipment) used by you and Connected or to be Connected to Our Distribution System. "Your Premises" any land or buildings in which Our Connection Equipment is installed or is for the time being placed, as specified in the Schedule. EX-21 3 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 Southern Investments UK plc - subsidiaries ------------------------------------------
SIUK plc Subsidiary % owned Status South Western Electricity plc 100 Operating Aztec Insurance Limited 100 Operating EA Technology Limited 7.7 Operating ElectraLink Limited 6.19 Operating Electricity Association Limited 5.9 Operating Electricity Pensions Limited 0 Operating Electricity Pensions Trustee Limited 5 Operating ESN Holdings Limited 4.5 Operating Non-Fossil Purchasing Agency Limited 8.3 Operating Northmere Limited 0 Operating REC Collect Limited 25 Operating South West Enterprise Limited 0 Operating South Western Electricity Share Scheme Trustees Limited 100 Dormant South Western Energy Limited 100 Dormant South Western Helicopters Limited 100 Operating South Western Natural Gas Limited 100 Dormant South Western Power Limited 100 Operating Green Electron Limited 90 Operating South Western Power Investments Limited 100 Operating Teesside Power Limited 7.7 Operating Wind Resources Limited 45 Operating Carland Cross Limited 100 Operating Coal Clough Limited 100 Operating Winterton Power Limited 25 Operating St Clements Services Limited 9.1 Operating SWEB Data Collection Services Limited 100 Operating SWEB Energy Purchasing Limited 100 Operating SWEB Finance Limited 100 Dormant SWEB Gas Limited 100 Dormant SWEB Insurance Limited 100 Operating SWEB Investments 1996 Limited 100 Operating Croeso Systems Development Limited 50 Operating EBusiness South West Limited 45 Operating SWEB Limited 100 Dormant SWEB Natural Gas Limited 100 Dormant SWEB Meter Operator Services Limited 100 Dormant SWEB Pension Trustee Limited 100 Dormant SWEB Property Developments Limited 100 Operating Temple Back Developments Limited 49 Operating Weston-Super-Mare Developments Limited 100 Operating SWEB Property Investments Limited 100 Operating SWEB Retail Limited 100 Dormant SWEB Telecom Limited 100 Dormant UK Data Collection Services Limited 8.3 Operating Western Natural Gas Limited 100 Dormant
EX-24 4 POWER OF ATTORNEY June 16, 1998 Miles W. McHugh, Wayne Boston and Richard A. Childs Dear Sirs: Southern Investments UK plc proposes to file or join in the filing of statements under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission with respect to the following: (1) the filing of this Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999, and (2) quarterly filings on Form 10-Q for the quarters ended June 30, 1999, September 30, 1999 and December 31, 1999 and Current Reports on Form 8-K during the company's fiscal year 2000. Southern Investments UK plc and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K and any appropriate amendment or amendments thereto and any necessary exhibits, said Quarterly Reports on Form 10-Q and any necessary exhibits. Yours very truly, SOUTHERN INVESTMENTS UK PLC By /s/ Richard J. Pershing Chief Executive Officer Richard J. Pershing Chief Executive Officer - 2 - /s/William P. Bowers /s/Richard J. Pershing - -------------------------------- -------------------------------- William P. Bowers Richard J. Pershing /s/ Stephen J. Feerrar /s/C. Philip Saunders - -------------------------------- -------------------------------- Mighteager Limited C. Philip Saunders By: Stephen J. Feerrar Director /s/D. Charl Oosthuizen /s/Robert A. Symons - -------------------------------- -------------------------------- D. Charl Oosthuizen Robert A. Symons UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF SOUTHERN INVESTMENTS UK plc TO THE ADOPTION OF CERTAIN ACTIONS AND RESOLUTIONS IN LIEU OF MEETING The undersigned, being all of the members of the Board of Directors of Southern Investments UK plc (the "Company"), do hereby approve and adopt as of June 16, 1999, the following action and resolution: Power of Attorney to Execute Documents Filed with the Securities and Exchange Commission. RESOLVED, That for the purpose of signing reports under the Securities Exchange Act of 1934 to be filed with the Securities and Exchange Commission with respect to (1) the filing of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999, and (2) quarterly filings on Form 10-Q for the quarters ended June 30, 1999, September 30, 1999 and December 31, 1999 and Current Reports on Form 8-K during the Company's fiscal year 2000; and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company, the members of its Board of directors, and its officers are authorized to give their several powers of attorney to Miles W. McHugh, Wayne Boston and Richard A. Childs. /s/Stephen J. Feerrar /s/Richard J. Pershing - -------------------------------- -------------------------------- Accentacross Limited Richard J. Pershing By: Stephen J. Feerrar Director /s/William P. Bower /s/C. Philip Saunders - -------------------------------- -------------------------------- William P. Bowers C. Philip Saunders /s/Stephen J. Feerrar /s/Robert A. Symons - -------------------------------- -------------------------------- Mighteager Limited Robert A. Symons By: Stephen J. Feerrar Director /s/D. Charl Oosthuizen - -------------------------------- D. Charl Oosthuizen EX-27 5 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT This schedule contains summary financial information extracted from Southern Investments UK plc Form 10-K for the twelve months ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. Values are in (pound) sterling. 1,000,000 Pounds Sterling 12-MOS MAR-31-1999 APR-1-1998 MAR-31-1999 1.6140 PER-BOOK 1,286 15 131 0 707 2,139 0 902 (146) 756 50 0 301 305 0 94 0 0 0 0 633 2,139 261 139 139 122 19 10 131 55 [INCOME-CONTINUING] 76 [DISCONTINUED] 11 87 0 0 70 0 87 0 0
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