10-Q 1 siukform10q_3rdqtr.txt FORM 10-Q 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 September 30, 2000 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) 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 October 31, 2000 ---------- ------------ ------------------- Southern Investments UK plc Par Value(pound)1 Per Share 902,128,735 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes forward-looking and historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking information; accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory issues; potential business strategies, including acquisitions or dispositions of assets or businesses or internal restructuring that may be pursued by the Company or its subsidiaries; the potential introduction of the Euro; changes in or application of environmental and other laws and regulations to which the Company and its subsidiaries are subject; political, legal and economic conditions and developments in which the Company and its subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the Company or its subsidiaries and the success of efforts to invest in and develop new opportunities; and other factors discussed elsewhere herein and in other reports filed from time to time by the Company with the SEC. 1

SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) (A) Solely for the convenience of the reader, certain pounds sterling amounts included in the condensed consolidated financial statements have been translated into US dollars at the exchange rate of $1.4787 = (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 September 30, 2000. (B) 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 necessary to present fairly the results of the three-month and six-month periods ended September 30, 2000 and 1999. All such adjustments are of a normal recurring nature. The Company's fiscal year-end is March 31. Certain information and footnote disclosures normally included in consolidated 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 consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. (C) The Company's principal operating subsidiary is South Western Electricity plc, which trades as Western Power Distribution ("WPD"). WPD's principal activity is electricity distribution, which involves the transfer of electricity from the national transmission system to end user's premises. WPD previously operated a supply business known as "SWEB" that purchased, marketed and sold electricity to customers within its service territory and to competitive customers throughout the United Kingdom. WPD sold that business, together with the name SWEB, to London Electricity plc for(pound)160 million and the assumption of certain liabilities. The sale was effective September 30, 1999. The Company recorded an anticipated after tax gain on the sale of (pound)124 million during the second quarter of fiscal year 2000. During the second quarter of fiscal year 2001, issues relating to working capital were resolved and a further(pound)4 million after tax gain was recorded. (D) The Company shows a retained earnings deficit primarily due to dividends in the amount of (pound)191 million being declared and paid by the Company during the fiscal year 1996 as proceeds from the sale of WPD'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's liability was assessed at (pound)90 million during fiscal year 1998. (E) The Company engages in price risk management activities. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial Instruments" and Note 7 to the financial statements of the Company in Item 8 of Form 10-K for a discussion of these activities. Activities for non-trading purposes consist of transactions employed to mitigate the Company's risk related to interest rates and foreign currency exchange rate fluctuations. At September 30, 2000, the status of outstanding non-trading related derivative contracts was as follows: (i) Interest rate swaps expiring between 2001 and 2012 with notional amounts totaling (pound)600 million, resulted in an unrealized loss of (pound)34 million. (ii) Currency swaps expiring between 2001 and 2007 with notional amounts totaling (pound)350 million, resulted in an unrealized gain of (pound)42 million. 7

The "Other" category includes 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 and taxes are wholly allocated to "Other" and are disclosed in the Condensed Consolidated Statements of Income. The values above exclude discontinued operations. (G) The Company and WPD 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 is a party to any material legal proceedings nor are they currently aware of any threatened material legal proceedings. Reference is made to Note 2 to the financial statements of the Company in Item 8 of the Form 10-K for information regarding complaints made by members of the Electricity Supply Pension Scheme ("ESPS") relating to the use by another employer, The National Grid Company plc ("NGC"), of ESPS surplus to offset that employer's costs of providing early pensions on redundancies and certain other items. 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 April 2001. 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 (pound)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. 8 SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (H) The condensed consolidated financial statements included herein have not been prepared in accordance with the policies of FASB Statement 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, WPD is not subject to rate regulation, but rather, is subject to price cap regulation and therefore the provisions of FASB Statement No. 71 do not apply. Financial statements presented in accordance with FASB Statement 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. (I) During the second quarter of fiscal year 2001, WPD made short-term loans totaling (pound)85 million to WPD Limited. This represents part of the funding for WPD Limited's purchase of Hyder plc shares. The loans were funded through an increase to short-term borrowings. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" for additional information.

Operating revenues. Within operating revenues, the distribution business segment decreased by (pound)6 million for the quarter and by (pound)8 million year-to-date when compared to the same period of fiscal year 2000. This was principally due to reduced distribution tariffs effective April 1, 2000 as determined by the Regulator in his recent price review finalized in December 1999. Revenues from ancillary businesses (net of eliminations) for the second quarter and year-to-date of fiscal year 2001 decreased by (pound)15 million and (pound)18 million, respectively, compared to the same period of fiscal year 2000 reflecting lower activity in the energy purchasing business following the sale of the electricity supply business effective September 30, 1999. Depreciation and amortization. The second quarter and year-to-date decrease is mainly attributed to a reduction in depreciation expense subsequent to a write down of assets in fiscal year 2000. Selling, general, and administrative expenses. The second quarter and year-to-date decrease is primarily attributed to cost reductions associated with restructuring after the sale of the electricity supply business, and staff reductions. Provision for income taxes. The second quarter and year-to-date decrease is due to lower income before tax. 9 SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 including the impact of current and future regulation. On August 23, 2000, WPD Limited, a company owned jointly by subsidiaries of Southern Energy and PPL, made an offer to acquire all of the outstanding shares of Hyder plc for a total purchase price of approximately (pound)565 million, or 365 pence per Hyder share. On September 15, 2000, WPD Limited committed unconditionally to purchase any shares of Hyder tendered by Hyder shareholders. Under UK company law, WPD Limited is able to compulsory purchase all Hyder shares if acceptances to its offer from shareholders exceeds 90% of the shares in issue. On October 25, 2000, acceptances exceeded 90%; WPD Limited has exercised its right to acquire all shares in issue. During the quarter, WPD made short-term loans totaling (pound)85 million to WPD Limited. This represents part of the funding for WPD Limited's purchase of Hyder shares. In addition, WPD Limited has replaced Hyder's board of directors with employees of WPD, Southern Energy, and PPL. Hyder provides water and sewerage, electricity distribution and other services to customers in Wales. South Wales Electricity is Hyder's electricity distribution subsidiary. It runs the electricity network in South Wales with approximately 18,700 kilometers of overhead electricity lines and 14,300 kilometers of underground cable. South Wales Electricity's revenues are principally derived from charges to electricity suppliers for using the distribution network. South Wales Electricity's distribution network provides electricity to approximately 981,000 end users. Once WPD Limited has completed the acquisition of Hyder, it is expected that the headquarters of South Wales Electricity will remain in South Wales and that WPD will provide management oversight for the operations of South Wales Electricity. WPD's distribution business constitutes an effective regional monopoly and is subject to control on the prices it can charge and the quality of supply it must provide. Distribution revenues are subject to price cap regulation. The 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. Distribution businesses must also meet the Guaranteed and Overall Standards of Performance, which are set by the Regulator to ensure an appropriate level of quality of supply. If a company fails to provide the level of service specified, it must make a fixed payment to the end user affected. SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION As part of the most recent price control review, effective April 1, 2000, the Regulator recognized that further analysis was required to address some of the weaknesses associated with the existing framework of price regulation. This included a commitment to an ongoing program of work - the Information and Incentives Project. A major objective of the Project is to strengthen the financial incentives on distribution businesses with regard to the quality of service that they deliver. Although the Guaranteed and Overall Standards of Performance impose penalty payments for not meeting specific targets, there is no explicit mechanism whereby distribution businesses are financially rewarded for improved quality of supply. The Regulator intends to introduce additional incentive mechanisms relating to quality of supply from April 2002. It will focus on these measurements: the number of interruptions to supply, the duration of the interruptions and a measure of customer satisfaction (telephone response). The financial impact of any additional mechanisms would be limited to +/-2% of price control revenue during the price control period from April 2002 until the end of March 2005. In July 2000 the Utilities Bill received Royal Assent. This provides the Regulator with powers to impose penalties on license holders, subject to a cap of 10% of turnover, in circumstances where they are in breach of license conditions and certain other requirements including requirements relating to specific standards of performance. It also provides for supply and distribution companies to be held in separate subsidiaries and new supply and distribution licenses. The Utilities Act provisions will be enacted over the next few months. The Company continues to analyze the effects of adoption of the rules promulgated by FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No.133". Together these statements establish accounting and reporting standards for derivative instruments. The provisions of the two Statements are mandatory for fiscal years beginning after June 15, 2000. Management is currently assessing the financial statement impact; however, such impact is not determinable at this time. Adoption of Statements No. 133 and 138 could increase volatility of earnings and other comprehensive income, but will have no impact on cash flow during any future period. In January 1999, eleven European Union countries formed an economic and monetary union and started using a single currency - the Euro. The UK did not join at this time, but the UK government has indicated that it might in the future. WPD has assessed changes that would be required if the Euro is introduced to the UK. The cost of conversion to Euro compatible systems could have a significant impact on future earnings. Reference is made to Note (G) in the "Notes to the Condensed Consolidated Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. 10 SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview A major change in the Company's financial condition during the six months to September 30, 2000 was the expenditure by WPD of approximately (pound)35 million in property, plant, and equipment, largely in respect of the distribution network. The funds required for such additions were derived primarily from operations. It is expected that WPD's capital requirements in the foreseeable future for its investment in property, plant, and equipment will be generated from operating activities. Demand for electricity in Great Britain, in general, and in WPD's Authorized Area, in particular, is seasonal, with demand being higher in the winter months and lower in the summer months. WPD balances the effect of this and other cyclical influences on its working capital needs with drawings under its available credit facilities. The Company holds 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 continue to exist at WPD to allow for reasonable and necessary dividends from WPD, through operations, to be distributed to the Company. In the UK, the Accounting Standards Board is currently reviewing the treatment of deferred income tax accounting. If full provision for deferred tax were required, WPD's distributable reserves could be eliminated. In addition, 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 flow from declaring a reasonable dividend. Financing Activities 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 September 30, 2000 the amount unutilized under these facilities was (pound)77 million. WPD enters into foreign currency contracts to hedge the currency risk associated with the interest and principal of each utilization under this program. WPD actively manages its short-term debt, which includes a number of banklines of credit in addition to the commercial paper program. At September 30, 2000 the Company and WPD together had short-term debt of (pound)435 million ($643 million) outstanding ($407 million from a swingline and revolving credit facility, and $236 million in other short-term loans). To meet short-term cash needs and contingencies, the Company and WPD together had at September 30, 2000 approximately (pound)2 million of cash and (pound)50 million of unutilized committed lines of credit with banks. Also available was (pound)77 million of the swingline and revolving credit facility mentioned above. During the quarter, WPD made short-term loans totaling (pound)85 million to WPD Limited. This represents part of the funding for WPD Limited's purchase of Hyder shares. Excluding swap agreements between the Company and Holdings UK, at September 30, 2000, the Company and WPD have sterling interest rate swaps expiring between 2001 and 2012, with notional amounts totaling (pound)600 million, and have cross currency swaps expiring between 2001 and 2007, with notional amounts totaling (pound)350 million. 11 SOUTHERN INVESTMENTS UK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. Exhibit 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. 12 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 By /s/ R. A. Symons R. A. Symons Director By /s/ D. C. S. Oosthuizen D. C. S. Oostuizen Director, Chief Financial and Accounting Officer Date: November 13, 2000

SOUTHERN INVESTMENTS UK PLC 10-Q