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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1996
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 Southern Investments UK plc None
(Registered in England & Wales)
800 Park Avenue
Aztec West
Almondsbury
Bristol
BS12 4SE, UK
(01144) 1454 201101
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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 January 31, 1997
- ---------- --------------- --------------------
Southern Investments UK plc Par Value(pound)1 Per Share 500,400,587
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
For the Three For the Three
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
(pound) US $ (pound)
(Note F)
OPERATING REVENUES 242 414 219
COST OF SALES 173 296 143
---- ---- ----
GROSS MARGIN 69 118 76
---- ---- ----
OPERATING EXPENSES:
Maintenance 8 14 10
Depreciation and amortization 10 17 11
Selling, general, and administrative 12 20 18
---- ---- ----
Total operating expenses 30 51 39
---- ---- ----
Operating income 39 67 37
---- ---- ----
OTHER INCOME (EXPENSE):
Interest income - - 5
Interest expense (13) (23) (16)
Gain on sale of investments - - 7
Other, net 1 2 1
---- ---- ----
Total other income (expense) (12) (21) (3)
---- ---- ----
INCOME BEFORE INCOME TAXES 27 46 34
PROVISION FOR INCOME TAXES 11 19 12
---- ---- ----
NET INCOME 16 27 22
==== ==== ====
The accompanying notes form an integral part of these condensed consolidated statements.
3
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Millions)
For the Nine Months For the Nine Months
Ended December 31, 1996 Ended December 31, 1995
----------------------- -----------------------
(Pro forma - Note C)
` (pound) US $ (pound)
(Note F)
OPERATING REVENUES 602 1,031 541
COST OF SALES 417 714 343
---- ----- ----
GROSS MARGIN 185 317 198
---- ----- ----
OPERATING EXPENSES:
Maintenance 26 45 30
Depreciation and amortization 32 55 31
Selling, general, and administrative 37 63 57
---- ----- ----
Total operating expenses 95 163 118
---- ----- ----
Operating income 90 154 80
---- ----- ----
OTHER INCOME (EXPENSE):
Interest income 1 2 7
Interest expense (39) (67) (55)
Gain on sale of investments 1 2 7
Other, net 4 7 3
---- ----- ----
Total other income (expense) (33) (56) (38)
--- ----- ----
INCOME BEFORE INCOME TAXES 57 98 42
PROVISION FOR INCOME TAXES 22 38 15
---- ----- ----
NET INCOME 35 60 27
==== ===== ====
The accompanying notes form an integral part of these condensed consolidated statements.
4
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Millions)
For the Nine Months For the period from
Ended December 31, 1996 inception (June 23, 1995) to
----------------------- ----------------------------
December 31, 1995
-----------------
(pound) US $ (pound)
(Note F)
NET CASH PROVIDED BY OPERATING ACTIVITIES 52 89 73
---- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54) (93) (23)
Loans to related parties (2) (3) -
Proceeds from property sales 6 10 -
Consideration for the purchase of SWEB paid to former
shareholders - - (1,023)
Proceeds from sale of fixed asset investments 4 7 111
Disposal of current asset investments, net 6 10 -
---- ---- -----
Net cash used in investing activities (40) (69) (935)
---- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent - - 315
Capital contributions received - - 185
Payments of dividends (12) (20) (75)
Proceeds of bond issues 300 514 597
Change in short term borrowings (318) (545) 139
---- ---- -----
Net cash (used in) provided by financing activities (30) (51) 1,161
---- ---- -----
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (18) (31) 299
CASH AND CASH EQUIVALENTS, beginning of period 20 34 -
---- ---- -----
CASH AND CASH EQUIVALENTS, end of period 2 3 299
==== ==== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (39) (67) (8)
==== ==== =====
Cash (paid for) received from income tax (9) (15) 6
==== ==== =====
The audited consolidated statement of cash flows in respect of SWEB for the period from April 1, 1995 to September 17,
1995 (the date prior to the date of acquisition) is included on page F-25 of the Registration Statement (Note A).
The accompanying notes form an integral part of these condensed consolidated statements.
5
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
ASSETS
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
----------
(pound) US $ (pound)
(Note F)
PROPERTY, PLANT, AND EQUIPMENT: 1,298 2,223 1,227
Less accumulated depreciation 49 84 20
----- ------ ------
Property, plant, and equipment, net 1,249 2,139 1,207
----- ------ ------
OTHER ASSETS:
Investments 18 31 22
Prepaid pension cost 103 176 95
Goodwill, net of accumulated amortization of (pound)6 ($10)
at December 31 and(pound)2 at March 31 178 305 173
----- ------ ------
Total other assets 299 512 290
----- ------ ------
CURRENT ASSETS:
Cash and cash equivalents 2 3 20
Investments 20 35 26
Receivables:
Customer accounts, less provision for
uncollectibles of (pound)14 ($24) at December 31
and(pound)17 at March 31 110 188 95
Other 16 27 20
----- ------ ------
Receivables, net 126 215 115
Materials and supplies 4 7 3
Prepaid expenses 11 19 25
----- ------ ------
Total current assets 163 279 189
----- ------ ------
Total assets 1,711 2,930 1,686
===== ====== ======
The accompanying notes are an integral part of these condensed consolidated balance sheets.
6
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
---------
(pound) US $ (pound)
(Note F)
STOCKHOLDER'S EQUITY:
Share capital, (pound)1 par value, 500,400,587 shares
authorized, issued, and outstanding 500 856 500
Retained deficit (134) (229) (132)
----- ------ -----
Total stockholder's equity 366 627 368
----- ------ -----
NON-CURRENT LIABILITIES:
Long-term debt 300 514 -
Deferred income taxes 376 644 352
Provision for loss contracts 68 116 62
Other 64 110 66
----- ------ -----
Total non-current liabilities 808 1,384 480
----- ------ -----
CURRENT LIABILITIES:
Short-term borrowings 332 568 650
Accounts payable 55 94 45
Accrued income taxes 21 36 19
Unearned revenue 15 26 10
Common dividend declared 25 43 -
Other 89 152 114
----- ------ -----
Total current liabilities 537 919 838
----- ------ -----
COMMITMENTS AND CONTINGENT MATTERS (Notes D, E, and H)
Total stockholder's equity and liabilities 1,711 2,930 1,686
===== ======= =====
The accompanying notes are an integral part of these condensed consolidated balance sheets.
7
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Unaudited)
(A) This Form 10-Q is the first to be filed by Southern Investments UK plc
(the "Company"). The condensed consolidated financial statements
included herein have been prepared pursuant to the rules and
regulations of the SEC and in conformity with accounting principles
generally accepted in the United States. In the opinion of the
Company's management, the information furnished herein reflects all
adjustments (which included only normal recurring adjustments)
necessary to present fairly the results of the three-month and
nine-month periods ended December 31, 1996 and 1995. The Company's
fiscal year end is March 31. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements and footnotes be read in conjunction
with a prospectus dated November 18, 1996 issued by the Company and
filed with the SEC on Form S-1 as part of its Registration Statement
in respect of an issue of Senior Notes (the "Registration Statement").
(B) The condensed consolidated balance sheet at March 31, 1996 included
herein has been extracted from audited financial statements; all other
figures are unaudited. The condensed financial statements included
herein have been reviewed by the Company's independent public
accountants and their report is included herein as Exhibit 15.
(C) The unaudited pro forma condensed consolidated statement of income
presented herein for the nine months to December 31, 1995 reflects the
acquisition by the Company of South Western Electricity plc ("SWEB")
as if it had occurred as of April 1, 1995. Such unaudited pro forma
condensed consolidated statement of income has been prepared by the
Company based upon assumptions deemed proper by it and reflects a
preliminary allocation of the purchase price paid for SWEB. The
unaudited pro forma condensed consolidated statement of income
presented herein is shown for illustrative purposes only and is not
necessarily indicative of the future results of operations of the
Company or of the results of operations of the Company that would have
actually occurred had the transaction been in effect for the period
presented. The unaudited pro forma condensed consolidated statement of
income has been adjusted to reflect the acquisition as if it had
occurred at April 1, 1995, including increased depreciation and
amortization, the elimination of bid defense costs incurred by SWEB,
and increased interest expense using the assumption that the
acquisition had been 100% funded with short-term borrowings. A
schedule detailing the pro forma adjustments is included on pages
10 and 11.
(D) The Company and SWEB utilize certain financial derivative contracts
solely for the purpose of risk management. The Company's and SWEB's
participation in derivative contracts has been to hedge business
exposure in connection with fluctuations in interest rates, currency
rates related to certain of the Company's liabilities, and electricity
purchase costs. At December 31, 1996, the status of outstanding
derivative contracts was as follows:
(i) Interest rate swaps with a notional amount of (pound)500 million,
and currency swaps with a notional amount of (pound)300 million.
These swaps have maturities of 2001-2012. The unrealized loss was
(pound)20 million.
(ii) SWEB has contracts for differences ("CFDs") to mitigate its
exposure to volatility in the prices of electricity purchased
through the wholesale electricity trading market (the "Pool").
CFDs are in place to hedge electricity purchases on approximately
27,851 GWh through the year 2008. In fiscal year 1996,
8
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SWEB purchased approximately 11,065 GWh. Accordingly, the gains or
losses on such contracts are deferred and recognized as
electricity is purchased. It is not possible to estimate the fair
value of these contracts at present as the contract prices are
based on future events, the effects of which currently are not
estimable.
(E) 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 is it currently aware of
any threatened material legal proceedings. As described below, the
Company is aware of an issue which could subsequently impact on SWEB.
The Pension Ombudsman (a UK arbitrator appointed by statute) has
issued a final determination in favor of complaints made by
members of the Electricity Supply Pension Scheme ("ESPS")
relating to another employer's use of the ESPS surplus to offset
the employer's costs of the early payment of pensions as a result
of reorganization or redundancy, together with additional
contributions required after a valuation. Under that
determination the Pension Ombudsman directed the employer to pay
into ESPS the amount of that use of the surplus plus interest.
The Pension Ombudsman's final determination may be challenged
through the courts and no payments are required until such a
challenge has been heard. If the final determination is not
successfully challenged, it will have an adverse effect on SWEB,
but no assurance can be given as to the extent of that effect. It
is not practical to make an estimate of the exposure at the
present time.
(F) Solely for the convenience of the reader, pounds sterling amounts
have been translated into US dollars at the Noon Buying Rate on
December 31, 1996 of $1.7123 = (pound)1.00.
(G) In November 1996, the Company issued $168 million 6.375% Senior Notes
due 2001 and $332 million 6.800% Senior Notes due 2006 as described in
the Registration Statement. In January 1997, the Company issued $82
million subordinated debentures to a business trust formed by the
Company.
(H) The Conservative Party has held power in the UK since 1979. The next
General Election in the UK must be held no later than May 1997, and
may be called on approximately three weeks' notice at any time before
then. Certain senior members of the Labour party, which is the main
opposition party, have made statements regarding policies which a
Labour government would intend to introduce, including a windfall tax
on excess profits of privatized utilities and referring the whole
electricity industry to the competition authorities. There can be no
assurance that the policies of the UK government, by whichever party
it is controlled, would not adversely affect the Company's financial
position or results of operations.
(I) The condensed consolidated financial statements included herein 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 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 financial statements of the Company do not
contain such deferrals.
9
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS
ENDED DECEMBER 31, 1995
As a result of the acquisition, the basis of accounting for the Successor
Company (the Company) differs from that for the Predecessor Company (SWEB). The
condensed consolidated financial statements of the Predecessor Company are
presented on a historical cost basis while the consolidated financial statements
of the Successor Company reflect the acquisition under the purchase method of
accounting. Under the purchase method of accounting, fair value was assigned to
the assets and liabilities of SWEB at the date the Company acquired effective
control of SWEB. Goodwill was created to the extent the purchase price exceeded
the difference between the fair value of SWEB's assets and fair value of its
liabilities.
The following unaudited pro forma statement of income from continuing operations
is based upon the consolidated statement of income for the period from inception
(June 23, 1995) to December 31, 1995 of the Successor Company and the
consolidated statement of income of the Predecessor Company for the period from
April 1, 1995 to September 17, 1995, adjusted to reflect the items described in
notes (1) to (5) below as if the purchase business combination had occurred at
the beginning of the period.
In Millions
----------------------------------------------------------------------------------------------------
Successor Period Predecessor Period Pro Forma for the
Inception (June 23, 1995) April 1, 1995 to Nine Months Ended
to December 31, 1995 September 17, 1995 December 31, 1995
------------------------- ------------------ -----------------
US GAAP US GAAP Adjustments US GAAP
--------- ------- ------------------------------ -------
` (pound) (pound) 1 2 3 4 5 (pound)
OPERATING REVENUES 242 299 - - - - - 541
COST OF SALES 157 186 - - - - - 343
---- ---- -- -- -- --- --- ----
GROSS MARGIN 85 113 - - - - - 198
---- ---- -- -- -- --- --- ----
OPERATING EXPENSES:
Maintenance 12 18 - - - - - 30
Depreciation and amortization 12 14 3 2 - - - 31
Selling, general, and
administrative 24 41 - - - - (8) 57
---- ---- -- -- -- --- --- ----
Total operating expenses 48 73 3 2 - - (8) 118
---- ---- -- -- -- --- --- ----
Operating income 37 40 (3) (2) - - 8 80
---- ---- -- -- -- --- --- ----
OTHER INCOME (EXPENSE):
Interest income 5 2 - - - - - 7
Interest expense (17) (5) - - (1) (32) - (55)
Gain on sale of investments 7 - - - - - - 7
Other, net 2 1 - - - - - 3
---- ---- -- -- -- --- --- ----
Total other income (expense) (3) (2) - - (1) (32) - (38)
---- ---- -- -- -- --- --- ----
INCOME BEFORE INCOME TAXES 34 38 (3) (2) (1) (32) 8 42
PROVISION FOR INCOME TAXES 12 13 (1) (1) - (11) 3 15
---- ---- -- -- -- --- --- ----
INCOME FROM CONTINUING
OPERATIONS 22 25 (2) (1) (1) (21) 5 27
==== ==== == == == === === ====
(1) Depreciation expense which would have been recorded based on the valuation of property, plant, and equipment recorded in
connection with the purchase business combination, as if such combination had occurred on April 1,1995. It has been provided
using composite straight line rates which approximate 3.1% on an asset value of (pound)1,190 million for 170 days, less
depreciation already charged to the Predecessor Company's consolidated statement of income.
(2) Amortization of goodwill recorded in connection with the purchase business combination as if the combination had occurred on
April 1, 1995.
(3) Reflect the fair value of long-term debt obligations and associated interest expense recorded in connection with the purchase
business combination as if the combination had occurred on April 1, 1995. The charge relates to notional interest ((pound)
10
2 million) on a discounted provision for onerous purchase contracts ('Teesside'), partly offset by a reduction in interest to
market rates on the HM Government debt put in place at privatization ((pound)1 million).
(4) Reflect the interest expense recorded in connection with the purchase business combination as if the combination had occurred
on April 1, 1995 and had been 100% financed with short-term borrowings at an interest rate of 6% per year. The impact of a
1/4% change in the assumed interest rate would change income from continuing operations by (pound)0.4 million.
(5) Remove the costs incurred by the Predecessor Company relating to bid defense associated with the Acquisition.
11
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD FISCAL QUARTER 1997 vs. THIRD FISCAL QUARTER 1996
AND
FISCAL YEAR-TO-DATE 1997 vs. FISCAL YEAR-TO-DATE 1996
INTRODUCTION
The Company is a wholly-owned subsidiary of Southern Investments UK Holdings
Limited, of which 75% is owned indirectly by Southern Company and 25% is owned
indirectly by PP&L Resources, Inc. 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 SWEB, one of the 12 regional electricity
companies 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. The Company's sole investment and only significant asset is the
entire share capital of SWEB, which is headquartered in Bristol, England.
SWEB's two main business lines are the distribution of electricity and the
supply of electricity to approximately 1.3 million customers primarily in its
franchise area in southwest England. This area covers approximately 5,560 square
miles and has a resident population of approximately 2.8 million. It also has
ancillary business activities that support its main electricity businesses,
including electricity generation and gas supply.
RESULTS OF OPERATIONS
The revenues recorded for the franchise supply business for the pro forma nine
months ended December 31, 1995 and the nine months ended December 31, 1996 are
recognized, in part, using management estimates of the revenues which will be
permitted by the Director General of Electricity Supply to be earned during the
respective fiscal years ended March 31. Accordingly, increases in revenue,
operating income and net income between the two periods discussed below are not
necessarily indicative of the results which actually have been realized between
the pro forma nine months ended December 31, 1995 and the nine months ended
December 31, 1996 or which may actually be realized between the full fiscal
years.
Earnings
Operating income for the third quarter and year-to-date fiscal year 1997 was
(pound)39 million and (pound)90 million, respectively, compared to (pound)37
million and (pound)80 million for the corresponding periods of fiscal year 1996.
The increase in operating income of (pound)2 million in the third quarter is due
to an increase in the distribution business of (pound)2 million and ancillary
businesses of (pound)6 million, partly offset by a decrease in the supply
business of (pound)6 million. The increase in operating income of (pound)10
million for the year-to-date is due to increases in the distribution business of
(pound)5 million, in the supply business of (pound)1 million, and in ancillary
businesses of (pound)4 million.
Net income for the third quarter and year-to-date fiscal year 1997 was (pound)16
million and (pound)35 million, respectively, compared to (pound)22 million and
(pound)27 million for the corresponding periods of fiscal year
12
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1996. This reduction of (pound)6 million in net income in the third quarter was
primarily due to decreases in gains on the sale of investments of (pound)7
million and interest income of (pound)5 million, partly offset by an increase in
operating income discussed above of (pound)2 million, and a decrease in interest
expense of (pound)3 million, together with a fall in the provision for income
taxes of (pound)1 million. The increase of (pound)8 million in net income for
the year-to-date was primarily due to the increase in the operating income
discussed above of (pound)10 million, a reduction in interest expense of
(pound)16 million and an increase in other net income of (pound)1 million,
partly offset by decreases in interest income of (pound)6 million and in gains
on sale of investments of (pound)6 million, together with additional provision
for taxes of (pound)7 million.
Significant income statement items appropriate for discussion include the following :
Increase (Decrease)
------------------------------------------------------
Third Quarter Year-To-Date
------------------------------------------------------
(in millions) % (in millions) %
Revenues............................................ (pound) 23 11 (pound) 61 11
Cost of sales....................................... 30 21 74 22
Selling, general, and administrative expense........ (6) (33) (20) (35)
Interest income..................................... (5) (100) (6) (86)
Interest expense.................................... (3) (19) (16) (29)
Gain on sale of investments......................... (7) (100) (6) (86)
Provision for income taxes.......................... (1) (8) 7 47
Revenues
Revenue increases were primarily within the supply business where revenues
increased by (pound)16 million for the quarter and (pound)57 million for the
year-to-date. This reflects SWEB's strategy of becoming more active in the
non-franchise supply market; SWEB has significantly increased the number of its
industrial and commercial customers, increasing its unit sales in the
non-franchise market by 178% and 210% for the quarter and year-to-date,
respectively.
Cost of sales
Cost of sales primarily relate to the purchase cost of electricity. The increase
is thus largely due to the increase in sales within the non-franchise market as
discussed above, together with an increase in the average purchase cost.
Selling, general, and administrative expense
The decrease in selling, general and administrative expenses resulted in part
from a decrease in labor costs resulting from a reduction in personnel and in
part from a decrease in the level of bad debts, together with a decrease in
certain classes of computer software development costs which were expensed
during the pro forma nine months ended December 31, 1995, but which were
capitalized in the nine months ended December 31, 1996, having satisfied the
criteria for capitalization under the Company's accounting policy.
13
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Interest income
A reduction in cash balances has resulted in a reduction in interest income.
Interest expense
Interest expense for the pro forma nine months ended December 31, 1995 reflects
interest expense recorded in connection with the acquisition as if the
acquisition had occurred on April 1, 1995 and had been 100% financed with
short-term borrowings until the acquisition date of September 18, 1995 at an
interest rate of 6% per year. However, in the nine months ended December 31,
1996, the Company benefited from the conversion of (pound)500 million of debt to
equity during the second half of fiscal year 1996.
Gain on sale of investments
The decrease is largely due to a pretax gain of (pound)7 million realized in
December 1995 in respect of the sale of a substantial portion of SWEB's equity
holding in The National Grid Group plc ("NGG"). This gain is nonrecurring in
nature as it is the result of changes in circumstances after the fair valuation
of the investment in NGG resulting from the application of APB No. 16 which
valuation was finalized shortly after the date of acquisition.
Provision for income taxes
The movements in the provision for income taxes result from the change in pretax
income.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from the success of the implementation of reorganisation plans
to the level of energy sales growth in the electricity supply business.
The largest portion (approximately 85%) of SWEB's operating income is derived
from its distribution business -- essentially the operation and maintenance of
the electricity network in its franchise area of 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 franchise area.
The supply market is subject to change as it is currently partially open to
competition and competition is scheduled to be extended to the remaining
customers (largely domestic and small commercial) after March 31, 1998.
Reference is made to Notes (D), (E) and (H) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
14
SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
The major change in the Company's financial condition during the nine months to
December 31, 1996 was the addition by SWEB of approximately (pound)54 million
property, plant, and equipment, largely in respect of the distribution network.
The funds for these 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 met by cash generated from
its operating activities.
Demand for electricity in Great Britain, in general, and in SWEB's franchise
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 sole investment and only significant asset is the entire share
capital of SWEB. The Company is therefore 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 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.
Financing Activities
In November 1996, the Company issued $500 million Senior Notes in the US, the
proceeds of which were used to reduce short-term bank loans in the UK. $168
million of the Senior Notes are due for redemption in 2001 and $332 million in
2006. 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.
Sources of Capital
In January 1997, Southern Investments UK Capital Trust I (the "Trust"), a
statutory business trust formed under the laws of the State of Delaware and
established for the sole purpose of issuing its own securities (the "Trust
Securities") and investing the proceeds thereof in the 8.23% subordinated
debentures issued by the Company and scheduled to mature on February 1, 2027,
sold $82 million of its 8.23% Trust Securities. The Company guarantees the
Trust's obligations under the Trust Securities. The proceeds received by the
Company from the sale of the subordinated debentures were used to repay
short-term bank loans. The Company entered into currency swap transactions that
effectively convert the US dollar obligations of the subordinated debentures
into pounds sterling obligations, with a nominal value of (pound)50 million.
To meet short-term cash needs and contingencies, the Company and SWEB together
had at December 31, 1996 approximately (pound)2 million of cash and cash
equivalents and (pound)149 million of unused committed lines of credit with
banks. At December 31, 1996 the Company and SWEB together had short-term debt of
(pound)332 million largely payable to banks.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
15 - Report of Independent Public Accountants
27 - Financial Data Schedule
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the quarter for which this
report is being filed.
16
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.
SOUTHERN INVESTMENTS UK plc
/s/ Gale E. Klappa
By Gale E. Klappa
Director
/s/ C. B.(Mike) Harreld
By C. B. (Mike) Harreld
Director, Chief Financial and Accounting Officer
Date: February 12, 1997
17