Exhibit 99
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
MANAGEMENT'S REPORT
2000 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 accounting principles
generally accepted in the United States 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 accounting
principles generally accepted in the United States.
Barney S. Rush D. Charl S. Oosthuizen
Chairman and Chief Executive Officer Chief Financial and Accounting Officer
June 15, 2000
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999 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, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN
Bristol, England
June 15, 2000
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
CONSOLIDATED STATEMENTS OF INCOME
(In Millions)
2000 1999 1998
---- ---- ----
(Note 1)
OPERATING REVENUES (Pounds)275 $438 (Pounds)261 (Pounds)245
COST OF SALES 20 32 16 19
--- ---- ---- ----
GROSS MARGIN 255 406 245 226
--- ---- ---- ----
OPERATING EXPENSES:
Maintenance 35 56 37 34
Depreciation and amortization 56 89 51 46
Selling, general and administrative 7 11 35 36
Write down of meters (Note 3) 22 35 - -
Incremental expenses incurred as a direct consequence of the
disposal of the supply business (Note 13) 3 5 - -
--- ---- ---- ----
Total operating expenses 123 196 123 116
--- ---- ---- ----
OPERATING INCOME FROM CONTINUING OPERATIONS 132 210 122 110
--- --- --- ---
OTHER INCOME (EXPENSE):
Interest income 2 3 1 2
Interest income from affiliated companies 20 32 6 -
Interest expense (56) (89) (55) (52)
Investment income 7 11 5 9
Gain on sale of assets - - 7 -
--- ---- ---- ----
Total other expense (27) (43) (36) (41)
--- ---- ---- ----
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 105 167 86 69
(PROVISION) BENEFIT FOR INCOME TAXES:
Customary (23) (36) (21) (28)
Effect of change in tax rates (Note 6) - - 11 22
Windfall levy (Note 6) - - - (90)
--- ---- ---- ----
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 82 131 76 (27)
DISCONTINUED OPERATIONS:
Income from operations of supply business, less applicable
income taxes of (Pounds)2 ($3), (Pounds)5 and (Pounds)5 4 6 11 12
Gain on disposal of supply business, less applicable income
taxes of (Pounds)49 ($78) (Note 13) 125 199 - -
------------ ---- ----------- ------------
NET INCOME (LOSS) (Pounds)211 $336 (Pounds)87 (Pounds)(15)
============ ==== =========== ============
The accompanying notes are an integral part of these consolidated statements.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
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, 1997 500 (Pounds)500 (Pounds)(114) (Pounds)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 902 902 (146) 756
Net income - - 211 211
Dividends declared on common stock - - (188) (188)
--- ------------ ------------ ---------------
Balance, March 31, 2000 902 (Pounds)902 (Pounds)(123) (Pounds)779
=== ============ ============ ===============
_____________
(1) The Net Loss is stated after a one-off windfall levy charge of
(Pounds)90 million.
(2) The Company shows a retained earnings deficit primarily due to dividends
in the amount of (Pounds)191 million being declared and paid by the
Company during the fiscal year 1996 as proceeds from the sale of South
Western Electricity plc'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"; South Western
Electricity plc's liability was assessed at (Pounds)90 million.
The accompanying notes are an integral part of these consolidated statements.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
2000 1999 1998
---- ---- ----
(Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (Pounds)211 $ 336 (Pounds)87 (Pounds)(15)
------------- ----- ------------ -----------
Adjustments to reconcile net income to net cash provided from
operating activities:
Income from operations of discontinued supply business (4) (6) (11) (12)
Gain on disposal of supply business (Note 13) (125) (199) - -
Depreciation and amortization 56 89 47 54
Write down of meters (Note 3) 22 35 - -
Deferred income taxes 5 8 2 (16)
Changes in assets and liabilities:
Receivables, net (49) (78) 6 13
Accounts payable 37 58 (14) 2
Accrued income taxes (4) (6) (34) 52
Other, net (25) (40) (11) (38)
---- ----- ---- ----
Total adjustments (87) (139) (15) 55
---- ----- ---- ----
Net cash provided from operating activities 124 197 72 40
---- ----- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (67) (107) (75) (81)
Proceeds from sale of supply business (Note 13) 160 255 - -
Proceeds from sales of assets - - 10 2
Proceeds from sales of investments 5 8 2 1
---- ----- ---- ----
Net cash provided from (used for) investing activities 98 156 (63) (78)
---- ----- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short term borrowings (57) (91) 37 79
Issue of share capital - - 402 -
Loans to affiliated company - - (351) -
Payment of premium in respect of loans to affiliated company and related
hedges - - (42) -
Payment of dividends (188) (299) (70) (59)
---- ----- ---- ----
Net cash (used for) provided from financing activities (245) (390) (24) 20
---- ----- ---- ----
CASH PROVIDED BY DISCONTINUED OPERATIONS 20 32 15 20
---- ----- ---- ----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3) (5) - 2
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5 8 5 3
------------- ----- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Pounds)2 $ 3 (Pounds)5 (Pounds)5
============= ===== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) (Pounds)56 $ 89 (Pounds)54 (Pounds)51
============= ===== ============ ==========
Income taxes:
Customary 25 40 2 20
Windfall levy (Note 6) - - 45 45
------------- ----- ------------ ----------
Total cash paid for income taxes (Pounds)25 $ 40 (Pounds)47 (Pounds)65
============= ===== ============ ==========
The accompanying notes are an integral part of these consolidated statements.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2000 AND 1999
(In Millions)
ASSETS 2000 1999
------ --------------------------------- ---------------
(Note 1)
PROPERTY, PLANT, AND EQUIPMENT (Pounds) 1,467 $2,336 (Pounds) 1,452
Less accumulated depreciation 202 322 151
--------------- ------- ---------------
Property, plant, and equipment, net 1,265 2,014 1,301
--------------- ------- ---------------
OTHER ASSETS:
Investments 16 25 16
Prepaid pension cost (Note 2) 145 231 134
Goodwill, net of accumulated amortization of (Pounds)20 ($32) at
March 31, 2000 and (Pounds)16 at March 31, 1999 163 259 167
Loans to affiliated company (Note 10) 351 559 351
Premium in respect of loans to affiliated company and related
hedges, net of accumulated amortization of (Pounds)12 ($19) at
March 31, 2000 and (Pounds)3 at March 31,1999 (Note 10) 30 48 39
--------------- ------- ---------------
Total other assets 705 1,122 707
--------------- ------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 2 3 5
Investments 13 21 15
Receivables:
Customer accounts, less provision for uncollectables of (Pounds)2
($3) at March 31, 2000 and (Pounds)10 at March 31, 1999 50 80 80
Other 14 22 17
--------------- ------- ---------------
Receivables, net 64 102 97
Materials and supplies 2 3 3
Prepaid expenses 6 10 11
--------------- ------- ---------------
Total current assets 87 139 131
--------------- ------- ---------------
TOTAL ASSETS (Pounds) 2,057 $3,275 (Pounds) 2,139
=============== ======= ===============
The accompanying notes are an integral part of these consolidated balance
sheets.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2000 AND 1999
(In Millions)
STOCKHOLDER'S EQUITY AND LIABILITIES 2000 1999
------------------------------------ -------------------------- --------------
(Note 1)
STOCKHOLDER'S EQUITY:
Common stock, (Pounds)1 par value, 902,128,735 shares authorized,
issued and outstanding at March 31, 2000, and March 31, 1999
(Pounds) 902 $1,436 (Pounds) 902
Retained deficit (123) (196) (146)
-------------- ------- --------------
Total stockholder's equity 779 1,240 756
-------------- ------- --------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SOUTHERN INVESTMENTS UK CAPITAL TRUST I HOLDING COMPANY JUNIOR
SUBORDINATED DEBENTURES (Note 10) 50 80 50
COMMITMENTS AND CONTINGENT MATTERS (Notes 2,3,4,7, and 10)
NON-CURRENT LIABILITIES:
Long-term debt 301 479 301
Deferred income taxes (Note 6) 417 664 363
Provision for loss contracts - - 69
Other 16 25 36
-------------- ------- --------------
Total non-current liabilities 734 1,168 769
-------------- ------- --------------
CURRENT LIABILITIES:
Commercial paper - - 94
Notes payable to banks 311 495 273
Notes payable to affiliated company 26 42 25
Other notes payable 5 8 7
Accounts payable 4 6 44
Accrued income taxes 44 70 48
Accrued interest 8 13 9
Other 96 153 64
-------------- ------- --------------
Total current liabilities 494 787 564
-------------- ------- --------------
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES
(Pounds) 2,057 $3,275 (Pounds) 2,139
============== ======= ==============
The accompanying notes are an integral part of these consolidated balance
sheets.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Southern Investments UK plc ("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 South Western Electricity plc, one of the 12 Regional
Electricity Companies ("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 South Western Electricity plc, and
subsequently replaced South Western Electricity plc'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 South Western Electricity plc, which is
headquartered in Bristol, England.
The Company is a wholly owned subsidiary of WPD Holdings Limited
("Holdings"), which in turn has been wholly owned by WPD Holdings UK ("Holdings
UK") since June 1998. From September 1995 to July 1996, Holdings was an
indirect wholly owned subsidiary of Southern Company ("Southern"). In July
1996, Southern sold a 25% economic interest in Holdings to a subsidiary of PPL
Corporation ("PPL"). In June 1998, Southern sold an additional 26% economic
interest in Holdings to PPL, and on the same day both parties agreed to exchange
their interests in Holdings for interests in Holdings UK that carried the same
rights. Southern currently has a 49% economic interest in South Western
Electricity plc and the Holdings UK group, yet retain operational and management
control with 50.5% of the voting rights.
In September 1999, South Western Electricity plc completed the sale of its
electricity supply business (known as "SWEB") and certain related activities,
together with the name SWEB, to London Electricity plc for (Pounds)160 million
and the assumption of certain liabilities. South Western Electricity plc now
trades under the name Western Power Distribution ("WPD").
Basis of Presentation
The financial statements of the Company are presented in pounds sterling
((Pounds)) and in conformity with accounting principles generally accepted in
the United States ("US GAAP"). 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, WPD 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 WPD 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 11).
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 $1.5922 = (Pounds)1.00, the noon buying rate in New York City
for cable transfers in pounds sterling as certified for customs purposes by the
Federal Reserve Bank of New York on March 31, 2000. This presentation has not
been translated in accordance with Statement of Financial Accounting Standard
No. 52, "Foreign Currency Translation".
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table sets out the exchange rate for previous periods:
Fiscal Year Period end Average (1) High Low
- ----------- ---------- ---------- ---- ---
($ per (Pounds)1.00)
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
2000................................................... 1.59 1.61 1.65 1.58
(1) The average of the Noon Buying Rates in effect on the last business day of
each month during the relevant period.
Use of Accounting Estimates
The preparation of financial statements in conformity with US GAAP 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
WPD records revenue net of value added tax ("VAT") and accrues revenues for
services provided but unbilled at the end of each reporting period.
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.
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.
Goodwill shown in the accompanying consolidated financial statements relates to
the acquisition of South Western Electricity plc.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Impairment of Long-Lived Assets and Intangibles
The Company evaluates long-lived assets, including goodwill and identifiable
intangibles, when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has occurred is based on an estimate of undiscounted future cash
flows attributable to the assets, as compared to the carrying value of the
assets. If an impairment has occurred, the amount of the impairment recognized
is determined by estimating the fair value of the assets and recording a
provision for loss if the carrying value is greater than the fair value (Note
3).
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 11).
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
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.
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.
2. RETIREMENT BENEFITS
WPD has two pension plans, a defined contribution plan and a defined benefit
plan. The measurement date for plan assets and obligations 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 WPD on behalf of its
employees were (Pounds)0.2 million ($0.3 million) for the fiscal year 2000,
(Pounds)0.3 million for the fiscal year 1999 and (Pounds)0.2 million for the
fiscal year 1998.
Defined Benefit Plan
WPD participates in the Electricity Supply Pension Scheme ("ESPS"), which
provides pension and other related defined benefits, based on final pensionable
pay, to substantially all employees throughout the Electricity Supply Industry
in the United Kingdom ("UK"). Contributions to the plan by WPD on behalf of its
employees were (Pounds)0.2 million ($0.3 million) for the fiscal year 2000,
(Pounds)0.3 for the fiscal year 1999 and (Pounds)0.3 million for the fiscal year
1998.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Changes during the year in the projected benefit obligations and the fair
value of the plan assets were as follows (in millions):
March 31, 2000 March 31, 1999
-------------- --------------
Change in projected benefit obligation
- --------------------------------------
Benefit obligation at beginning of year......................... (Pounds) 639 $1,017 (Pounds) 542
Service cost.................................................... 8 13 7
Interest cost................................................... 36 57 39
Amendments...................................................... 26 41 -
Actuarial (gain)/loss........................................... (56) (89) 87
Divestiture..................................................... (30) (48) -
Benefits paid................................................... (43) (68) (36)
------------ ------ ------------
Benefit obligations at end of year.............................. (Pounds) 580 $ 923 (Pounds) 639
------------ ------ ------------
Plan Assets
- -----------
Fair value of plan assets at beginning of year.................. (Pounds) 786 $1,251 (Pounds) 701
Actual return on plan assets.................................... 144 229 117
Divestiture..................................................... (36) (57) -
Employee contributions.......................................... 2 3 4
Benefits paid................................................... (43) (68) (36)
------------ ------ ------------
Fair value of plan assets at end of year........................ (Pounds) 853 $1,358 (Pounds) 786
------------ ------ ------------
Reconciliation of funded status
- -------------------------------
Funded status of plan........................................... (Pounds) 273 $ 435 (Pounds) 147
Unrecognized prior service cost................................. 26 41 2
Unrecognized net gain........................................... (154) (245) (15)
------------ ------ ------------
Prepaid pension cost in the Consolidated Balance Sheet.......... (Pounds) 145 $ 231 (Pounds) 134
------------ ------ ------------
The components of the plan's net periodic income (excluding the impact of
the Supply sale) were as follows (in millions):
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Service cost.................................................. (Pounds) 8 $ 13 (Pounds) 7 (Pounds) 7
Interest cost................................................. 36 57 39 43
Expected return on plan assets................................ (60) (96) (60) (60)
Amortization of prior service cost............................ 1 2 - -
--- ---- ---- ---
Gross benefit credit.......................................... (15) (24) (14) (10)
Employee contributions........................................ (2) (3) (4) (3)
--- ---- ---- ---
Net pension income............................................ (17) (27) (18) (13)
--- ---- ---- ---
The assumptions used in the actuarial calculations were as follows:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
Discount rate...................................................... 6.50% 5.75% 7.50%
Expected rate of return on assets.................................. 8.75% 8.75% 9.50%
Rate of pay increase............................................... 4.00% 4.00% 4.75%
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 in
May 1999. 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,
which contains a requirement for the amounts offset against the surplus, plus
interest, to be paid into the pension fund. It is unlikely a hearing will take
place before the House of Lords earlier than Fall 2000. National Grid Company
("NGC"), together with National Power PLC, have now initiated appeals in the
House of Lords. NGC and National Power PLC have executed deeds of amendment,
which purport to cancel their accrued contribution obligations arising from the
Court of Appeal's judgment. The House of Lords is unlikely to rule whether such
amendments are effective before December 2000. WPD is considering whether to
execute similar amendments. Based on the Company's assessment of the current
legal position, it anticipates that a payment into the ESPS of (Pounds)24
million will ultimately be required. Under Financial Accounting Standards Board
("FASB") Statement No. 87, "Employers' Accounting for Pensions", there will be
no immediate impact to Net Income.
3. REGULATORY MATTERS
Distribution revenues are subject to price cap regulation. The Director
General of Gas and Electricity Supply ("Regulator") applies a price control
formula ("DPCF"), 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 the Regulator. 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.
In December 1999, the Regulator published final price proposals for
distribution price control for the 14 regional electricity distribution
businesses. For WPD, these proposals represent a 20% reduction to distribution
prices effective April 2000, followed by a reduction in real terms of 3% each
year from April 2001. This price control is scheduled to operate until March
2005. In response, management plans to maximize efficiency and customer service
as a focused distribution company. The implementation of the plans has
necessitated an overall reduction in staffing levels. The reductions are
focused on administrative and corporate functions, with minimal impact on field
staff, ensuring customer service is not affected. Management are evaluating
further opportunities to reduce ongoing operating costs.
The UK electricity Regulator is introducing competition in metering
activities, namely meter fixing (meter provision, installation, certification,
and repair) and meter reading. Meter fixing must be undertaken by authorized
providers, of which WPD is one. Based on the proposed regulation, the current
carrying value of metering assets will be impaired. As a result the Company
recorded an impairment loss of (Pounds)22 million ($35 million), in the third
quarter of fiscal year 2000, to reflect the amount by which the carrying value
of metering assets exceeded their fair value. The fair value is assessed by
reference to the present value of estimated future cash flows attributable to
the assets, using a discount rate commensurate with the risks involved.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. COMMITMENTS AND CONTINGENT MATTERS
Operating Leases
WPD has commitments under operating leases with various terms and expiration
dates. Expenses associated with these commitments totaled (Pounds)6 million ($10
million) for the fiscal year 2000, (Pounds)6 million for the fiscal year 1999,
and (Pounds)5 million for the fiscal year 1998. At March 31, 2000, estimated
minimum rental commitments for noncancelable operating leases were as follows
(in millions):
Fiscal year
2001........................................................ (Pounds) 1 $ 2
2002........................................................ 1 2
2003........................................................ 1 2
2004........................................................ 1 2
2005........................................................ 1 2
2006 and thereafter......................................... 3 5
---------- ---
Total minimum payment............................................. (Pounds) 8 $15
========== ===
Labor Subject to Collective Bargaining Agreements
Substantially all of WPD's employees are subject to one of two collective
bargaining agreements. Such agreements are ongoing in nature, and WPD's
employee participation level is consistent with that of the electric utility
industry in the UK.
5. SEGMENT AND RELATED INFORMATION
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's distribution business, including electricity generation for standby
purposes, property and telecommunications, as well as corporate items and assets
not allocated to specific segments. 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
below exclude discontinued operations.
Business Segments
-----------------
Fiscal Year Distribution Other Eliminations Consolidated
- ---------- ------------ ----- ------------ ------------
(in millions)
2000
- ----
Operating revenues (Pounds) 247 $ 393 (Pounds) 46 $ 73 (Pounds) (18) $ (28) (Pounds) 275 $ 438
Depreciation and Amortization 52 83 4 6 - - 56 89
Operating income 107 170 25 40 - - 132 210
Total assets employed at
year-end 1,592 2,535 465 740 - - 2,057 3,275
Capital expenditures 63 101 4 6 - - 67 107
1999
- -------------------------------
Operating revenues (Pounds) 247 (Pounds) 49 (Pounds) (35) (Pounds) 261
Depreciation and Amortization 45 6 - 51
Operating income 111 12 (1) 122
Total assets employed at
year-end 1,599 540 - 2,139
Capital expenditures 70 3 - 73
1998
- -------------------------------
Operating revenues (Pounds) 228 (Pounds) 44 (Pounds) (27) (Pounds) 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
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
2000 1999 1998
---- ---- ----
Total provision for income taxes:
Customary:
Currently payable (Pounds) 23 $36 (Pounds) 8 (Pounds) 22
Deferred - - 13 6
----------- --- ---------- -----------
23 36 21 28
Effect of change in tax rates - - (11) (22)
Windfall levy - - - 90
----------- --- ----------- -----------
Total income taxes charged to continuing operations (Pounds) 23 $36 (Pounds) 10 (Pounds) 96
=========== === =========== ===========
The decrease in customary income taxes from fiscal year 1998 to fiscal year
1999 is primarily due to an increase to the income tax provision in fiscal year
1998 to cover possible disallowable items. In the fiscal year 1999, the
provision was reduced following the resolution of some of these items. This
also explains the increase in taxes from fiscal year 1999 to fiscal year 2000.
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 WPD's provision for deferred income taxes and a corresponding
decrease in income tax expense of approximately (Pounds)11 million, during
fiscal year 1999.
In fiscal year 1998, the UK corporation tax rate was reduced from 33% to
31%, 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 (Pounds)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, WPD's liability was assessed at (Pounds)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,
2000 1999
-------- --------
Deferred tax liabilities:
Property, plant, and equipment basis differences.......... (Pounds) 334 $ 532 (Pounds) 345
Pensions.................................................. 43 68 41
Heldover gain............................................. 49 78 -
------------ ------- ------------
Total................................................... 426 678 386
Deferred tax assets:
Accruals, including acquisition related items........... 9 14 23
------------ ------- ------------
Net deferred tax liabilities in consolidated balance sheet. (Pounds) 417 $ 664 (Pounds) 363
============ ======= ============
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Excluding the effect of the change in tax rates in fiscal years 1999 and
1998, and the effect of the windfall levy in fiscal year 1998, the
reconciliation of the UK statutory rate to the effective customary income tax
rate is as follows:
Fiscal Year Fiscal Year Fiscal Year
2000 1999 1998
---- ---- ----
UK statutory rate 30% 31% 31%
Nondeductible amortization of goodwill 1 1 2
Other permanent differences (9) (7) 5
---- ---- ----
Effective customary income tax rate 22% 25% 38%
==== ==== ====
7. FINANCIAL INSTRUMENTS
The Company and WPD utilize interest rate swaps to 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, 2000, sterling interest rate swaps expiring between 2001 and 2012 with
notional amounts totaling (Pounds)600 million, resulted in a cumulative
unrealized loss of (Pounds)27 million.
Foreign currency swaps embedded in cross currency swaps and interest rate
swap hybrid instruments are used by the Company and WPD 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, 2000, currency swaps expiring
between 2001 and 2007 with notional amounts totaling (Pounds)350 million,
resulted in a cumulative unrealized profit of (Pounds)5 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.
Other financial instruments for which the carrying amount did not equal fair
value at March 31 were as follows (in millions):
March 31, 2000 March 31, 1999
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Long-term debt (Pounds) 301 (Pounds) 298 (Pounds) 301 (Pounds) 314
Preferred securities (Pounds) 50 (Pounds) 46 (Pounds) 50 (Pounds) 49
The fair values for long-term debt and preferred securities were based on
the closing market price.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following (in millions):
March 31, 2000 March 31, 1999
-------------- --------------
Distribution network......................................... (Pounds) 1,244 $1,980 (Pounds) 1,231
Non-network land and buildings............................... 34 54 33
Other........................................................ 40 64 78
Consumer contributions....................................... (53) (84) (41)
-------------- ------ --------------
Property, plant, and equipment, net........................... (Pounds) 1,265 $2,014 (Pounds) 1,301
-------------- ------ --------------
9. CAPITAL BUDGET
The Company's capital expenditure for the fiscal year 2000 was (Pounds)67
million ($107 million); for the fiscal years 2001 and 2002 capital expenditures
are estimated to be (Pounds)69 million and (Pounds)68 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.
10. 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 November 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 (Pounds)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 (Pounds)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
(Pounds)402 million were contributed to the Company for newly issued shares and
the Company made three US dollar loans, totaling $584 million ((Pounds)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 ((Pounds)51 million) to Holdings UK. Of the premium
payments, (Pounds)42 million is being amortized over the life of the respective
loans and swaps, and (Pounds)9 million represented accrued interest.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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, 2000 the amount
unutilized under these facilities was $92 million. WPD 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,
2000, the Company and WPD have sterling interest rate swaps expiring between
2001 and 2012 with notional amounts totalling (Pounds)600 million, and cross
currency swaps expiring between 2001 and 2007 with notional amounts totalling
(Pounds)350 million.
11. INVESTMENTS
The Company's long-term investments accounted for under the cost method
consist of its 7.69% ownership of Teesside Power Limited, the fair value of
which is not readily determinable. The Company's (Pounds)13 million of short-
term investments are classified as available-for-sale under SFAS No. 115, the
fair value of which approximated cost at March 31, 2000.
12. COMMON STOCKHOLDER'S EQUITY
The Company's main investment and only significant asset is the entire share
capital of WPD. The Company is primarily dependent upon dividends from WPD for
its cash flow. WPD 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 distribution business
as required by its regulatory license. The Company believes that currently
sufficient distributable reserves will exist at WPD to allow for any and all
cash flow generated at WPD 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, WPD's distributable reserves could be
eliminated. In addition, in September 1999, the Regulator varied the licenses
under which all RECs (including WPD) 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. WPD
has no reason to believe that a breach of its license would occur from declaring
a reasonable dividend.
13. ASSET SALES
In September 1999, South Western Electricity plc completed the sale of its
electricity supply business (known as 'SWEB') and certain related activities,
together with the name 'SWEB', to London Electricity plc for (Pounds)160 million
and the assumption of certain liabilities. The Company recorded an after tax
gain on the sale of (Pounds)125 million. The remaining distribution business
was renamed Western Power Distribution ("WPD"). The Consolidated Statements of
Income for all periods shown reflect the supply business segment as
discontinued.
There are certain incremental costs relating to the ongoing business which
are a direct consequence of the sale of the supply business and related
activities to London Electricity plc. These costs total (Pounds)3 million and
principally involve the establishment of a new computer environment and data
migration.
SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
14. SUBSEQUENT EVENTS
On April 17, 2000, Southern Energy, Inc., an indirect parent of the Company,
approved plans to register with the Securities and Exchange Commission shares of
Southern Energy common stock. Southern Energy is currently a wholly owned
subsidiary of Southern Company. Upon completion of this offering, Southern
Company will own over 80% of the outstanding shares of the common stock.
Southern Company has announced that it plans to complete a spin-off of Southern
Energy within 12 months after the completion of the offering by distributing the
remaining shares of common stock to the holders of Southern Company's common
stock. There can be no assurance that this offering will be completed.
On May 31, 2000 an associate of the Company made a bid of (Pounds)464
million to purchase the entire ordinary share capital of Hyder plc, the company
which owns and runs the electricity network in South Wales and the water
distribution and waste water treatment business for the whole of Wales. This
represents a bid of (Pounds)3 per share. If the bid is successful, it is
intended that WPD will become involved with the management of the electricity
network in South Wales. The offer will be circulated to Hyder plc shareholders
and final approval could take up to 90 days. This bid follows an earlier bid
from the Principal Finance Group to purchase the company for (Pounds)2.60 per
share.