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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ------------------------------------ ------------------
333-09033 SIUK plc None
(Registered in England & Wales)
Avonbank
Feeder Road
Bristol
BS2 0TB, UK
(01144) 117 9332000
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 __
----
Description of Shares Outstanding
Registrant Common Stock at July 31, 2001
- ---------- ------------------------ ----------------
SIUK plc Par Value(pound)1 Per Share 902,128,735
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information presented in this quarterly report on Form 10-Q includes
forward-looking statements, in addition to historical information. These
statements involve known and unknown risks and relate to future events, the
Company's future performance or its projected business results. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", or "continue" or the negative of these terms or other comparable
terminology.
Forward-looking statements are only statements of intent, belief or
expectations. Actual events or results may differ materially from any
forward-looking statement as a result of various factors. These factors include:
(i) legislative and regulatory issues; (ii) the Company's pursuit of potential
business strategies, including acquisitions or dispositions of assets or
internal restructuring; (iii) the potential introduction of the Euro; (iv)
changes in or application of environmental and other laws and regulations to
which the Company and its subsidiaries are subject; (v) political, legal and
economic conditions and developments in which the Company and its subsidiaries
operate; (vi) financial market conditions and the results of financing efforts;
changes in commodity prices and interest rates; weather and other natural
phenomena; (vii) the performance of projects undertaken by the Company or its
subsidiaries and the success of efforts to invest in and develop new
opportunities; and (viii) other factors, discussed elsewhere herein and in other
reports (including the Company's Form 10-K filed June 22, 2001) filed from time
to time by the Company with the SEC.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
events, levels of activity, performance or achievements. The Company does not
undertake a duty to update any of the forward-looking statements.
SIUK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
For the Three Months Ended June 30,
-----------------------------------
2001 2000
---- ----
(Note A)
OPERATING REVENUES (pound) 54 $ 76 (pound)54
COST OF SALES 5 7 6
------ ------ ------
GROSS MARGIN 49 69 48
------ ------ ------
OPERATING EXPENSES:
Maintenance 9 13 8
Depreciation and amortization 10 14 11
Selling, general, and administrative 1 1 3
------ ------ ------
Total operating expenses 20 28 22
------ ------ ------
OPERATING INCOME 29 41 26
------ ------ ------
OTHER INCOME (EXPENSE):
Interest income from affiliated companies 7 10 5
Interest expense (14) (20) (13)
Other, net 2 3 2
------ ------ ------
Total other expense (5) (7) (6)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 24 34 20
PROVISION FOR INCOME TAXES 9 13 6
------ ------ ------
NET INCOME (pound) 15 $ 21 (pound)14
====== ====== ======
The accompanying notes form an integral part of these condensed consolidated
statements.
SIUK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
For the Three Months Ended June 30,
-----------------------------------
2001 2000
---- ----
(Note A)
OPERATING ACTIVITIES:
Net income (pound) 15 $ 21 (pound) 14
Adjustments to reconcile net income to net cash provided by
operating activities from continuing operations:
Depreciation and amortization 10 14 11
Deferred income taxes (1) (1) 1
Changes in certain current assets and liabilities:
Receivables, net 13 18 10
Accounts payable (5) (7) 3
Accrued income taxes 8 11 5
Other 6 9 (5)
------ ------ ------
Net cash provided by operating activities 46 65 39
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (13) (18) (19)
(Purchase) Sale of current asset investments (2) (3) 2
Repayment of loan to affiliated company 85 119 -
Receipt of deferred contingent consideration 16 23 -
------ ------ ------
Net cash provided by (used in) investing activities 86 121 (17)
------ ------ ------
FINANCING ACTIVITIES:
Payments of common stock dividends (4) (6) (4)
Change in short-term borrowings (82) (115) (18)
------ ------ ------
Net cash used in financing activities (86) (121) (22)
------ ------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 46 65 -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 1 2
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (pound) 47 $ 66 (pound) 2
====== ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (pound) 12 $ 17 (pound)10
Income taxes (pound) 3 $ 4 (pound) -
The accompanying notes form an integral part of these condensed consolidated
statements.
SIUK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
At June 30, 2001 At March 31,
---------------- ------------
(Unaudited) 2001
----------- ----
(Note A)
PROPERTY, PLANT, AND EQUIPMENT (pound) 1,551 $ 2,184 (pound) 1,539
Less accumulated depreciation 257 362 247
------ ------ ------
Total 1,294 1,822 1,292
------ ------ ------
OTHER ASSETS:
Investments 15 21 15
Prepaid pension cost 174 245 170
Goodwill (Notes A and B) 158 223 158
Loans to affiliated company 414 582 410
Derivative hedging instruments (Note F) 45 63 56
Premium in respect of loans to affiliated
company and related hedges, net of
accumulated amortization of(pound)22 ($31)
at June 30, 2001 and(pound)20 at March 31, 2001 20 28 22
------ ------ ------
Total 826 1,162 831
------ ------ ------
CURRENT ASSETS:
Cash and cash equivalents 47 66 1
Investments 12 17 10
Receivables:
Customer accounts, less provision for uncollectables
of(pound)4 ($6) at June 30, 2001 and(pound)5 at
March 31, 2001 31 44 43
Loan to affiliated company - - 85
Other 22 31 20
Materials and supplies 5 7 5
Accrued deferred contingent consideration - - 16
Derivative hedging instruments (Note F) 24 34 25
Prepayments 12 17 13
------ ------ ------
Total 153 216 218
------ ------ ------
TOTAL ASSETS (pound) 2,273 $ 3,200 (pound) 2,341
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
SIUK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
At June 30, 2001 At March 31,
---------------- ------------
(Unaudited) 2001
----------- ----
(Note A)
STOCKHOLDER'S EQUITY:
Common stock, par value(pound)1 per share, 902,128,735
shares authorized, issued and outstanding (pound) 902 $ 1,269 (pound) 902
Accumulated other comprehensive loss (Note C) (11) (15) (16)
Retained deficit (47) (66) (58)
------ ------ ------
Total 844 1,188 828
------ ------ ------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SIUK CAPITAL TRUST I HOLDING COMPANY JUNIOR SUBORDINATED DEBENTURES 58 82 58
COMMITMENTS AND CONTINGENT MATTERS (NOTE G)
NON-CURRENT LIABILITIES:
Long-term debt 236 332 234
Accumulated deferred income taxes 420 591 419
Derivative hedging instruments (Note F) 57 80 75
Miscellaneous 10 14 10
------ ------ ------
Total 723 1,017 738
------ ------ ------
CURRENT LIABILITIES:
Current portion of long-term debt 119 168 118
Notes payable to banks 330 465 387
Notes payable to affiliated company 1 1 26
Other notes payable 4 6 4
Accounts payable 2 3 6
Accrued income taxes 54 76 46
Interest accrued 11 15 9
Derivative hedging instruments (Note F) 29 41 29
Miscellaneous 98 138 92
------ ------ ------
Total 648 913 717
------ ------ ------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES (pound) 2,273 $ 3,200 (pound)2,341
====== ====== ======
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
SIUK plc and SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Accounting and Reporting Policies
Basis of Accounting. These condensed financial statements should be read
in conjunction with the Company's audited consolidated financial
statements and the accompanying footnotes which are contained in the
Company's annual report on Form 10-K for the year ended March 31, 2001.
Management believes that the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of
normal recurring items, necessary for a fair statement of results for the
interim periods presented. The results for interim periods are not
necessarily indicative of the results for the entire year.
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the SEC and
in conformity with accounting principles generally accepted in the United
States ("US GAAP"). They have not been prepared in accordance with the
policies of Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulation". This
pronouncement, under which most US electric utilities report financial
statements, applies to entities which are subject to cost-based rate
regulation. By contrast, Western Power Distribution (South West) plc
("WPD South West"), formerly South Western Electricity plc, is not
subject to rate regulation, but rather, is subject to price cap
regulation and therefore the provisions of SFAS No. 71 do not apply.
Financial statements presented in accordance with SFAS No. 71 often
contain certain deferred items which have not been included in rates
charged to customers in compliance with the respective regulatory
authority rulings, but which would have been included in the income
statement of enterprises in general under US GAAP. The accompanying
consolidated financial statements of the Company do not contain such
deferrals.
US Dollar Presentation. Solely for the convenience of the reader, certain
pounds sterling amounts included in the consolidated financial statements
have been translated into US dollars at the exchange rate of $1.4077 =
(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 June 30, 2001. This presentation has not been
translated in accordance with SFAS No. 52, "Foreign Currency
Translation".
Accounting Change. In July 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets and,
generally, adopts a non-amortization and periodic impairment analysis
approach to goodwill and indefinitely-lived intangibles. The Company
adopted early application of the provisions of SFAS No. 142 effective
from April 1, 2001, the results of which are disclosed in note B.
(B) Goodwill and Other Intangible Assets - Adoption of Statement 142
Three Months Ended
------------------
June 30,
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(In millions) 2001 2000
------ ------
Reported net income................ (pound) 15 (pound) 14
Add back: Goodwill amortization.... - 1
------ ------
Adjusted net income................ (pound) 15 (pound)15
====== ======
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(C) Comprehensive Income (Loss)
Comprehensive income includes unrealized gains and losses on certain
derivatives which qualify as cash flow hedges. The following table sets
forth the comprehensive income for the three months ended June 30, 2001
(in millions):
Three Months Ended
------------------
June 30,
--------
2001 2000
----- ------
Net income...................... (pound) 15 (pound) 14
Other comprehensive income...... 5 -
----- -------
Comprehensive income............ (pound) 20 (pound) 14
===== =======
Because the derivative instruments are valued on market indices the
Company anticipates that the volatility of other comprehensive income
will increase.
Accumulated other comprehensive income for the three months ended June
30, 2001 consisted of the following, net of tax (in millions):
Balance, March 31, 2001............................. (pound) (16)
Other comprehensive income for the period:
Change in fair value of derivative instruments.... 4
Reclassification to earnings...................... 1
-------
Other comprehensive income.......................... 5
-------
Balance, June 30, 2001.............................. (pound) (11)
=======
The Company estimates that (pound)3 million of net derivative after-tax
losses included in OCI as of June 30, 2001 will be reclassified into
earnings or otherwise settled within the next twelve months as certain
forecasted transactions relating to interest payments become realized,
and principal repayments of foreign currency denominated debt are made.
(D) Retained deficit
The Company shows a retained 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 WPD South West'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"; WPD South West's liability was assessed at
(pound)90 million during fiscal year 1998.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(E) Debt
As of June 30, 2001, sources of liquidity included a $520 million US
commercial paper program, $503 million of which is supported by a
swingline and revolving credit facility provided by a syndicate of banks.
In addition, the Company had (pound)100 million committed and (pound)110
million uncommitted lines of credit with banks. The Company's existing
facilities and cash position, along with any new facilities to be
arranged, are expected to provide sufficient liquidity for working
capital and capital expenditures through fiscal year 2002. As of June 30,
2001 the Company and WPD South West had drawn $351 million under the
swingline and revolving credit facility and (pound)60 million under
committed lines of credit with banks. Additionally, the Company held
(pound)47 million in unrestricted cash.
(F) Financial Instruments
Derivative Hedging Instruments
The Company uses derivative instruments to manage exposures arising from
changes in interest rates and foreign currency exchange. The Company's
objectives for holding derivatives are to minimize the risks using the
most effective methods to eliminate or reduce the impacts of these
exposures.
Derivative gains and losses arising from cash flow hedges that are
included in OCI are reclassified into earnings in the same period as the
settlement of the underlying transaction. During the three months ended
June 30, 2001, (pound)1 million of pre-tax derivative losses was
reclassified to other income/expense. The maximum term over which the
Company is hedging exposures to the variability of cash flows is through
2012.
Interest Rate Hedging
The Company's policy is to manage interest expense using a combination of
fixed- and variable-rate debt. To manage this mix in a cost-efficient
manner, the Company enters into interest rate swaps in which it agrees to
exchange, at specified intervals, the difference between fixed and
variable interest amounts calculated by reference to agreed-upon notional
principal amounts. These swaps are designated to hedge underlying debt
obligations. For qualifying hedges, the changes in the fair value of
gains and losses of the swaps are deferred in OCI, net of tax, and the
interest rate differential is reclassified from OCI to interest expense
as an adjustment over the life of the swaps.
Foreign Currency Hedging
The Company utilizes cross currency swaps and other derivatives that
offset the effect of exchange rate fluctuations on US dollar denominated
instruments and fixes the interest rate exposure. These derivatives
qualify as cash flow hedges, and gains and losses on the derivatives are
deferred in OCI, net of tax, until the forecasted transaction affects
earnings. The reclassification is then made from OCI to earnings to the
same expense or income category as the hedged transaction.
(G) Commitments and Contingent Matters
The Company and WPD South West 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 WPD South West is a
party to any material legal proceedings nor are they currently aware of
any threatened material legal proceedings.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pension Issue. The Electricity Supply Pension Scheme ("ESPS") provides
pension and other related defined benefits, based on final pensionable
pay, to substantially all employees throughout the electricity supply
industry in the U.K. The majority of WPD South West's employees are ESPS
members. WPD South West faces potential regulatory issues related to the
use of pension surplus which was primarily utilized to offset the cost of
providing early pensions to terminated employees. An independent pension
arbitrator has issued a ruling directing that another industry employer
should refund such amounts with interest to the ESPS. This ruling was
appealed to the House of Lords who, in April 2001, upheld the employer's
appeal. It is understood that the complainants are considering whether to
appeal to a European Court. The Company cannot provide assurance that WPD
South West will not be required to refund to the ESPS any amounts
previously used to fund early retirement costs, which management
estimates to be approximately (pound)24 million. Under SFAS No. 87
"Employers' Accounting for Pensions", the Company does not anticipate any
immediate impact to its net income should such a payment be required.
(H) Segment Reporting
The Company's principal business segment is electricity distribution,
which involves the transfer of electricity from the high voltage
transmission system, and its delivery, across lower voltage distribution
systems, to consumers. Included in "Other" are ancillary business
activities that generally support WPD South West's distribution business,
including electricity generation for standby purposes, property and
telecommunications, as well as corporate items not allocated to
distribution. Interest and income taxes are wholly allocated to "Other"
and are disclosed in the Consolidated Statements of Income.
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
(in millions)
Three Months Ended June 30, 2001:
---------------------------------
Operating revenues (pound) 50 (pound) 5 (pound)(1) (pound) 54
Segment operating income 27 2 - 29
Total assets at June 30, 2001 (pound)1,627 (pound) 646 (pound) - (pound)2,273
Three Months Ended June 30, 2000:
---------------------------------
Operating revenues (pound) 51 (pound) 4 (pound)(1) (pound) 54
Segment operating income 24 2 - 26
Total assets at March 31, 2001 (pound)1,627 (pound) 714 (pound) - (pound)2,341
SIUK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER FISCAL YEAR 2002 vs. FIRST QUARTER FISCAL YEAR 2001
Overview
The Company is a wholly owned indirect subsidiary of WPD Holdings UK.
Economic ownership of WPD Holdings UK is 49% indirectly by Mirant and 51%
indirectly by PPL. Until December 1, 2000, Mirant had management control of the
group; from that date management control has been equally shared.
The Company's principal operating subsidiary is Western Power
Distribution (South West) plc ("WPD South West"), formerly South Western
Electricity plc. WPD South West's principal activity is electricity
distribution, which involves the transfer of electricity from the national
transmission system to end users' premises in an area covering approximately
5,560 square miles in the southwest of England. WPD South West's distribution
network consists of approximately 18,000 miles of overhead lines and 12,000
miles of underground cable, and is connected to approximately 1.4 million end
users.
On March 16, 2001, ownership of Western Power Distribution (South Wales)
plc ("WPD South Wales"), formerly South Wales Electricity plc, was transferred
from WPD Limited, a company owned jointly by subsidiaries of Mirant and PPL, to
WPD Holdings UK. The combination of the WPD South West and WPD South Wales
distribution businesses is expected to deliver significant savings in overhead
costs, particularly in respect of information technology where the incremental
cost of a second distribution business is relatively low. Other savings are
expected in purchase efficiency.
Results of operations
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
----------------------------
First Quarter
(in millions) %
Operating expenses
Selling, general, and administrative.............. (2) (67)
Other Income (expense)
Interest income from affiliated companies......... 2 40
Provision for income taxes........................... 3 50
Operating expenses. Operating expenses for the three months ended June 30, 2001
were (pound)20 million, a decrease of (pound)2 million over the same period in
2000. The following factor was responsible for the decrease in operating
expenses:
o Selling, general and administrative expense for the three months ended
June 30, 2001 was (pound)1 million compared to (pound)3 million for the
same period in 2000. The first quarter decrease is primarily attributed
to the impact on WPD South West of operating cost synergies derived on
combining the distribution operations of WPD South West and WPD South
Wales. Expenses for both fiscal years are reduced by the impact of a
pension credit as required by SFAS No. 87, "Employers' Accounting for
Pensions".
SIUK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other Income (Expense). Other expense for the three months ended June 30, 2001
was (pound)5 million compared to other expense of (pound)6 million from the same
period in 2000. This change of (pound)1 million was primarily due to:
o Interest income from affiliated companies for the three months ended June
30, 2001 was (pound)7 million compared to (pound)5 million for the same
period of 2000. This increase of (pound)2 million for the quarter was due
to interest receivable on an (pound)85 million loan made to WPD Limited
during the second quarter of fiscal year 2001 to part finance WPD
Limited's acquisition of Hyder plc.
Provision for income taxes. The provision for income taxes for the three months
ended June 30, 2001 was (pound)9 million, an increase of (pound)3 million for
the same period in 2000. The increase is primarily due to higher income before
tax.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and, generally, adopts a
non-amortization and periodic impairment analysis approach to goodwill and
indefinitely-lived intangibles. The Company adopted early application of the
provisions of SFAS No. 142 effective from April 1, 2001.
SIUK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Cash provided by operating activities totaled (pound)46 million for the
three months ended June 30, 2001 as compared to (pound)39 million for the same
period last year. This increase is primarily due to the receipt of accrued
interest on an (pound)85 million loan to WPD Limited, to part finance WPD
Limited's acquisition of Hyder plc. The loan was made during the second quarter
of fiscal year 2001. On May 3, 2001, the loan was assigned to WPD Holdings UK.
On June 22, 2001, the Company received (pound)90 million from WPD Holdings UK
representing repayment of the loan principal and (pound)5 million accrued
interest from the date of inception.
Cash provided by investing activities totaled (pound)86 million for the
three months ended June 30, 2001 as compared to cash used in of (pound)17
million for the same period in 2000. During the three months ended June 30,
2001, WPD South West incurred expenditure of (pound)13 million on property,
plant, and equipment, largely in respect of the distribution network. This
compared with (pound)19 million for the same period last year. As discussed
above, the (pound)85 million loan principal to WPD Limited was repaid following
reassignment of the loan from the Company to WPD Holdings UK. On April 6, 2001,
(pound)16 million deferred contingent consideration was received relating to the
sale of The National Grid Holding plc shares in fiscal year 1996. Reference is
made to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Results of Operations" section of the Company's Form 10-K
filed June 22, 2001, for further information.
Cash used in financing activities totaled (pound)86 million for the three
months ended June 30, 2001 as compared to (pound)22 million for the same period
in 2000. The increase is primarily attributable to a reduction in short-term
borrowings following reassignment of the loan made to WPD Limited and subsequent
(pound)90 million repayment by WPD Holdings UK. The cash received was used to
reduce short-term borrowings by (pound)44 million and the remaining (pound)46
million was placed on short-term deposit pending the maturity of certain
short-term borrowings.
The Company expects its cash and financing needs over the next several
years to be met through a combination of cash flows from operations and debt
financings.
As of June 30, 2001, sources of liquidity included a $520 million US
commercial paper program, $503 million of which is supported by a swingline and
revolving credit facility provided by a syndicate of banks. In addition, the
Company had (pound)100 million committed and (pound)110 million uncommitted
lines of credit with banks. The Company's existing facilities and cash position,
along with any new facilities to be arranged, are expected to provide sufficient
liquidity for working capital and capital expenditures through fiscal year 2002.
As of June 30, 2001 the Company and WPD South West had drawn $351 million under
the swingline and revolving credit facility and (pound)60 million under
committed lines of credit with banks. Additionally, the Company held (pound)47
million in unrestricted cash.
Demand for electricity in Great Britain, in general, and in WPD South
West's Authorized Area, in particular, is seasonal, with demand being higher in
the winter months and lower in the summer months. WPD South West balances the
effect of this and other cyclical influences on its working capital needs with
drawings under its available credit facilities.
SIUK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company holds the entire share capital of WPD South West. The Company
is primarily dependent upon dividends from WPD South West for its cash flow. WPD
South West can pay 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 distribution business as required by its regulatory
license. The Company believes that sufficient distributable reserves will
continue to exist at WPD South West to allow for reasonable and necessary
dividends from WPD South West, through operations, to be distributed to the
Company. In the U.K., the Accounting Standards Board has recently issued a new
accounting standard, Financial Reporting Standard ("FRS") 19 "Deferred Tax"
("FRS 19"), relating to the accounting treatment of deferred income tax. FRS 19,
which replaces an earlier standard (SSAP 15), is mandatory for accounting
periods ending on or after January 23, 2002 (though earlier adoption is
encouraged), and will require full provision to be made for deferred tax assets
and liabilities (SSAP 15 only required a partial provision basis); discounting
of deferred tax liabilities will be permitted but is not mandatory. WPD South
West will take advantage of the discounting option, but adoption of FRS 19 will
significantly reduce WPD South West's distributable reserves. The directors of
distribution companies must also certify to the Regulator that it is reasonably
foreseeable that the declaration of a dividend will not breach any license
conditions. WPD South West has no reason to believe that a breach of its license
would occur from declaring a reasonable dividend.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, including changes in interest
rates, and currency exchange rates. To manage the volatility attributable to
these exposures, the Company has entered into various derivative transactions,
the sole purpose of which is to hedge exposure in these areas.
The Company utilizes interest rate swaps to hedge certain debt
obligations. These swaps are designated as hedges of specific debt issuances.
Currency swaps are also utilized by the Company to hedge US dollar
denominated debt. These swaps offset the dollar cash flows, thereby effectively
converting the debt to sterling.
For all derivative financial instruments, the Company is exposed to
losses in the event of nonperformance by counterparties to these derivative
financial instruments. The Company has established controls to determine and
monitor the creditworthiness of counterparties to mitigate its exposure to
counterparty credit risk.
Excluding swap agreements between the Company and WPD Holdings UK, at
June 30, 2001, the Company and WPD South West had sterling interest rate swaps
expiring between 2001 and 2012, with notional amounts totaling (pound)600
million, and had cross currency swaps expiring between 2001 and 2007, with
notional amounts totaling (pound)350 million.
Additional Factors that Could Affect Future Performance
In addition to the discussion of certain risks in the Management's
Discussion and Analysis of Results of Operations and Financial Condition and the
notes to the condensed consolidated financial statements, other factors that
could affect the Company's future performance (business, financial condition or
results of operations) are set forth below.
Effect of Government Regulation
The Company's operations are subject to extensive governmental
regulation. To comply with these legal requirements, which include laws, rules
and regulations relating to competition, health and safety, and environmental
and anti-pollution concerns, among other matters, may require the expenditure of
considerable sums. The standards imposed by such environmental and
anti-pollution regulations may also increase with time and impose more onerous
obligations and liabilities on the Company in the future. In particular,
government regulation imposes certain performance standards. The performance of
WPD South West's network is related to a number of performance criteria,
including (i) availability (the number of minutes each end user is without
supply), (ii) security (the frequency of supply interruption), and (iii) quality
of service (e.g., restoration of supply within a certain time after
interruption). Compliance with these criteria requires the expenditures of
considerable sums and the implementation of various initiatives. The Company may
also be exposed to compliance risks from existing and future facilities.
To conduct its business, the Company must obtain licenses, permits, and
approvals for its facilities. The Company cannot assure you that it will be able
to obtain and comply with all necessary licenses, permits, and approvals. If it
cannot comply with all applicable regulations, the Company's business, results
of operations, and financial condition could be adversely affected.
In addition, government regulation relating to pricing, competition,
deregulation, and other matters has the capacity to greatly affect the success
and profitability of the Company's operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Regulation of Distribution
The operations of WPD South West are regulated under its Public
Electricity Supply license (a "PES license"), pursuant to which income generated
by the distribution business is subject to a price cap regulatory framework that
provides economic incentives to increase efficiency and reduce costs while
maintaining an appropriate quality of supply and enabling the company to finance
new investments and provide a return to investors.
In December 1999, the U.K. electricity industry Regulator published final
price proposals for distribution price control for the 12 regional electricity
distribution businesses in England and Wales, including WPD South West. For WPD
South West, those proposals represented a 20% reduction to distribution prices
effective April 1, 2000, followed by reductions in real terms of 3% each year
from April 1, 2001. This price control is scheduled to operate until March 31,
2005.
There can be no assurance that these price reductions, and potential
further reductions following additional reviews in the future, will not
adversely affect the Company's profitability and the value of its securities.
Changes in Technology May Significantly Impact the Company's Business by Making
Its Distribution Network Less Competitive
The Company's business is presently focused on distributing power from
central power plants. Research and development activities are, however, ongoing
to seek improvements in alternative electricity generation methods, most notably
fuel cells, microturbines, windmills, and photovoltaic (solar) cells. It is
possible that advances will reduce the cost of alternative methods of
electricity production (perhaps in combination with tax or regulatory incentives
favoring such alternative methods of electricity production) to a level that is
equal to or below that of most central station electric production. If this were
to happen, WPD South West's distribution network might need to be reconfigured,
and the value of WPD South West's distribution network may be significantly
impaired.
The Company's Facilities May Not Operate as Planned, Which May Lead to Poor
Financial Performance
The Company's operations involve many risks, including the breakdown or
failure of distribution equipment or other equipment or processes, labor
disputes, fuel interruption, adverse impact from the plant of connected parties,
and operating performance below expected levels. In addition, weather-related
incidents and other natural disasters can disrupt both generation and
transmission delivery systems. Operation of WPD South West's distribution
network below expected efficiency levels may result in lost revenues or
increased expenses, including higher maintenance costs and penalties.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) Reference is made to the Notes to the Consolidated Financial Statements
herein for information regarding certain legal and administrative
proceedings in which the Company is involved.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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(b) Reports on Form 8-K.
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No report on Form 8-K was filed by the Company during the quarter for
which this report is being filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIUK plc
By /s/ R. A. Symons
R. A. Symons
Director
By /s/ D. C. S. Oosthuizen
D. C. S. Oosthuizen
Director, Chief Financial and Accounting Officer
Date: August 10, 2001