10-Q 1 siuk10-q.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, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Name of Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. ------------ ------------------------------------------ ------------------ 333-09033 SIUK plc None (Registered in England & Wales) Avonbank Feeder Road Bristol BS2 0TB, UK (01144) 117 9332000 ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ ------------------------- The number of shares outstanding of the Registrant's Common Stock, par value (pound)1 per share, at October 31, 2001, was 902,128,735. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The information presented in this quarterly report on Form 10-Q includes forward-looking statements, in addition to historical information. These statements involve known and unknown risks and relate to future events, our future financial performance or projected business results. In some cases, forward-looking statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "targets," "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements are only predictions. Actual events or results may differ materially from any forward-looking statement as a result of various factors, which include: o legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the electric utility industry; o the extent and timing of the entry of additional competition; o our pursuit of potential business strategies, including acquisitions or dispositions of assets or internal restructuring; o changes in or application of environmental and other laws and regulations to which the Company and its subsidiaries are subject; o political, legal, market, and economic conditions and developments in which the Company and its subsidiaries operate; o financial market conditions and the results of our financing efforts; o changes in commodity prices and interest rates; o weather and other natural phenomena; o performance of our projects undertaken and the success of our efforts to invest in and develop new opportunities; o the direct or indirect effects on our business, including the availability of insurance, resulting from the terrorist attacks on September 11, 2001 or any other terrorist actions or responses to such actions; o the direct and indirect effects on our business resulting from the inability of significant energy market participants to perform on their delivery or payment obligations to us, or to a third party; and o other factors, discussed elsewhere herein and in other reports (including our Form 10-K filed on June 22, 2001, and our Form 10-Q filed on August 9, 2001) described from time to time in our filings with the SEC. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not undertake a duty to update any of the forward-looking statements. SIUK plc and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Millions)

SIUK plc and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Millions)

SIUK plc and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Millions) ASSETS

SIUK plc and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Millions) STOCKHOLDER'S EQUITY AND LIABILITIES

SIUK plc and SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (A) Accounting and Reporting Policies Basis of Accounting. These unaudited condensed financial statements should be read in conjunction with the Company's audited consolidated financial statements and the accompanying footnotes which are contained in the Company's annual report on Form 10-K for the year ended March 31, 2001. Management believes that the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair statement of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results for the entire year. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC and in conformity with accounting principles generally accepted in the United States ("US GAAP"). They have not been prepared in accordance with the policies of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation". This pronouncement, under which most US electric utilities report financial statements, applies to entities which are subject to cost-based rate regulation. By contrast, Western Power Distribution (South West) plc ("WPD South West"), formerly South Western Electricity plc, is not subject to rate regulation, but rather, is subject to price cap regulation and therefore the provisions of SFAS No. 71 do not apply. Financial statements presented in accordance with SFAS No. 71 often contain certain deferred items which have not been included in rates charged to customers in compliance with the respective regulatory authority rulings, but which would have been included in the income statement of enterprises in general under US GAAP. The accompanying consolidated financial statements of the Company do not contain such deferrals. US Dollar Presentation. Solely for the convenience of the reader, certain pounds sterling amounts included in the consolidated financial statements have been translated into US dollars at the exchange rate of $1.4691 = (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, 2001. This presentation has not been translated in accordance with SFAS No. 52, "Foreign Currency Translation". Accounting Changes. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and, generally, adopts a non-amortization and periodic impairment analysis approach to goodwill and indefinitely-lived intangibles. The Company adopted early application of the provisions of SFAS No. 142 effective from April 1, 2001, the results of which are disclosed in note B. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the financial statement impact of this statement but has not yet determined the final impact. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which Supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 amends accounting and reporting standards for the disposal of segments of a business and addresses various issues related to the accounting for impairments or disposals of long-lived assets. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the financial impact of this statement but has not yet determined the final impact. (B) Goodwill and Other Intangible Assets - Adoption of Statement 142

(C) Comprehensive Income (Loss) Comprehensive income includes unrealized gains and losses on certain derivatives which qualify as cash flow hedges. The following table sets forth the comprehensive income for the three and six months ended September 30, 2001 and 2000 (in millions):

Accumulated other comprehensive loss consisted of the following, net of tax (in millions): Balance, March 31, 2001............................ (pound) (16) Other comprehensive income for the period: Change in fair value of derivative instruments... (1) Reclassification to earnings..................... 2 ----- Other comprehensive income......................... 1 ----- Balance, September 30, 2001........................ (pound) (15) ===== The Company estimates that (pound)3 million of net derivative after-tax losses included in OCI as of September 30, 2001 will be reclassified into earnings or otherwise settled within the next twelve months as certain forecasted transactions relating to interest payments become realized, and principal repayments of foreign currency denominated debt are made. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (D) Retained deficit The Company shows a retained deficit primarily due to dividends in the amount of (pound)191 million being declared and paid by the Company during the fiscal year 1996 as proceeds from the sale of WPD South West's shares in The National Grid Group plc provided cash in addition to that provided from operations. In addition, the first budget of the Labour government included a "one-off windfall levy on the excess profits of the privatized utilities"; WPD South West's liability was assessed at (pound)90 million during fiscal year 1998. (E) Debt As of September 30, 2001, sources of liquidity included a $520 million US commercial paper program, $503 million of which is supported by a swingline and revolving credit facility provided by a syndicate of banks. In addition, the Company had (pound)100 million committed and (pound)95 million uncommitted lines of credit with banks. The Company's existing facilities and cash position, along with any new facilities to be arranged, are expected to provide sufficient liquidity for working capital and capital expenditures through fiscal year 2002. As of September 30, 2001 the Company and WPD South West had drawn $310 million under the swingline and revolving credit facility and (pound)50 million under committed lines of credit with banks. Additionally, the Company held (pound)5 million in unrestricted cash. The Company's 6.375% Notes, with a nominal value of $168 million, mature on November 15, 2001. It is intended that the repayment will be funded through a reduction in loans due from an affiliate, WPD Holdings UK. At September 30, 2001, WPD Holdings UK had a cash balance of (pound)125 million ($184 million). (F) Financial Instruments Derivative Hedging Instruments The Company uses derivative instruments to manage exposures arising from changes in interest rates and foreign currency exchange. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. Derivative gains and losses arising from cash flow hedges that are included in OCI are reclassified into earnings in the same period as the settlement of the underlying transaction. During the three and six months ended September 30, 2001, (pound)1 million and (pound)2 million, respectively, of pre-tax derivative losses was reclassified to other income/expense. The maximum term over which the Company is hedging exposures to the variability of cash flows is through 2012. Interest Rate Hedging The Company's policy is to manage interest expense using a combination of fixed- and variable-rate debt. To manage this mix in a cost-efficient manner, the Company enters into interest rate swaps in which it agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts. These swaps are designated to hedge underlying debt obligations. For qualifying hedges, the changes in the fair value of gains and losses of the swaps are deferred in OCI, net of tax, and the interest rate differential is reclassified from OCI to interest expense as an adjustment over the life of the swaps. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Foreign Currency Hedging The Company utilizes cross currency swaps and other derivatives that offset the effect of exchange rate fluctuations on US dollar denominated instruments and fixes the interest rate exposure. These derivatives qualify as cash flow hedges, and gains and losses on the derivatives are deferred in OCI, net of tax, until the forecasted transaction affects earnings. The reclassification is then made from OCI to earnings to the same expense or income category as the hedged transaction. (G) Commitments and Contingent Matters The Company and WPD South West are routinely party to legal proceedings arising in the ordinary course of business which are not material, either individually or in aggregate. Neither the Company nor WPD South West is a party to any material legal proceedings nor are they currently aware of any threatened material legal proceedings. (H) Subsequent Events On October 5, 2001, the Company completed the sale of its former Bristol headquarters for (pound)13 million, realizing a pre-tax gain of (pound)8 million. SIUK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER FISCAL YEAR 2002 vs. SECOND QUARTER FISCAL YEAR 2001 AND FISCAL YEAR-TO-DATE 2002 vs. FISCAL YEAR-TO-DATE 2001 Overview The Company is a wholly owned indirect subsidiary of WPD Holdings UK. Economic ownership of WPD Holdings UK is 49% indirectly by Mirant and 51% indirectly by PPL. Until December 1, 2000, Mirant had management control of the group; from that date management control has been equally shared. The Company's principal operating subsidiary is Western Power Distribution (South West) plc ("WPD South West"), formerly South Western Electricity plc. WPD South West's principal activity is electricity distribution, which involves the transfer of electricity from the national transmission system to end users' premises in an area covering approximately 5,560 square miles in the southwest of England. WPD South West's distribution network consists of approximately 18,000 miles of overhead lines and 12,000 miles of underground cable, and is connected to approximately 1.4 million end users. On March 16, 2001, ownership of Western Power Distribution (South Wales) plc ("WPD South Wales"), formerly South Wales Electricity plc, was transferred from WPD Limited, a company owned jointly by subsidiaries of Mirant and PPL, to WPD Holdings UK. The combination of the WPD South West and WPD South Wales distribution businesses is expected to deliver significant savings in overhead costs, particularly in respect of information technology where the incremental cost of a second distribution business is relatively low. Other savings are expected in purchase efficiency. Results of operations Significant income statement items appropriate for discussion include the following:

Operating expenses. Operating expenses for the three and six months ended September 30, 2001 were (pound)19 million and (pound)39 million, respectively, a decrease of (pound)5 million and (pound)7 million over the same periods in 2000. The following factors were responsible for the decrease in operating expenses: o Depreciation and amortization expenses for the three and six months ended September 30, 2001, were (pound)10 million and (pound)20 million, respectively, compared to (pound)12 million and (pound)23 million for the same periods in 2000. These decreases of (pound)2 million and (pound)3 million resulted primarily from the early adoption of SFAS No. 142, whereby goodwill has not been amortized from April 1, 2001. Goodwill amortized in the three and six months ended September 30, 2000, was (pound)1 million and (pound)2 million respectively. In addition, depreciation is lower following the write down of certain short life assets in December 2000. This was largely a consequence of the sale of the electricity supply business, which resulted in certain assets being replaced sooner than anticipated. SIUK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION o Selling, general and administrative expense for the three and six months ended September 30, 2001 was (pound)5 million and (pound)11 million, respectively, compared to (pound)7 million and (pound)15 million for the same periods in 2000. These decreases of (pound)2 million and (pound)4 million resulted primarily from operating cost synergies derived from combining the distribution operations of WPD South West and WPD South Wales. Other Income (Expense). Other expense for the three and six months ended September 30, 2001 was (pound)6 million and (pound)11 million, respectively, compared to other expense of (pound)7 million and (pound)13 million from the same periods in 2000. The decreases of (pound)1 million and (pound)2 million were primarily due to: o Interest income from affiliated companies for the three and six months ended September 30, 2001 was (pound)8 million and (pound)15 million, respectively, compared to (pound)5 million and (pound)10 million for the same periods of 2000. The increase of (pound)3 million for the quarter was primarily attributed to the part cessation of swap premium amortization in respect of loans to an affiliated company. The year-to-date increase of (pound)5 million includes interest receivable on an (pound)85 million loan made to WPD Limited during the second quarter of fiscal year 2001 to part finance WPD Limited's acquisition of Hyder plc. SIUK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Cash provided by operating activities totaled (pound)77 million for the six months ended September 30, 2001 as compared to (pound)41 million for the same period last year. The increase in other was primarily due to the transfer of the processing of cash receipts and cash payments for WPD South Wales (a fellow subsidiary of the Company) into the bank account of WPD South West. In addition, accrued interest was received on an (pound)85 million loan to WPD Limited, a loan which in part financed WPD Limited's acquisition of Hyder plc. The loan was made during the second quarter of fiscal year 2001. On May 3, 2001, the loan was assigned to WPD Holdings UK. On June 22, 2001, the Company received (pound)90 million from WPD Holdings UK representing repayment of the loan principal and (pound)5 million accrued interest from the date of inception. Cash provided by investing activities totaled (pound)72 million for the six months ended September 30, 2001 as compared to cash used of (pound)118 million for the same period in 2000. The movement was primarily attributable to the issue and subsequent repayment of the (pound)85 million loan principal to WPD Limited, as discussed above. In addition, during the six months ended September 30, 2001, WPD South West incurred expenditure of (pound)30 million on property, plant, and equipment, largely in respect of the distribution network. This compared with (pound)35 million for the same period last year. On April 6, 2001, (pound)16 million deferred contingent consideration was received relating to the sale of The National Grid Holding plc shares in fiscal year 1996. Reference is made to the "Management's Discussion and Analysis of Results of Operations and Financial Condition - Results of Operations" section of the Company's Form 10-K filed June 22, 2001, for further information. Cash used in financing activities totaled (pound)145 million for the six months ended September 30, 2001 as compared to cash provided of (pound)77 million for the same period in 2000. The movement reflects the issue and subsequent repayment of the loan made to WPD Limited which was funded through short-term borrowings. The Company expects its cash and financing needs over the next several years to be met through a combination of cash flows from operations and debt financings. As of September 30, 2001, sources of liquidity included a $520 million US commercial paper program, $503 million of which is supported by a swingline and revolving credit facility provided by a syndicate of banks. In addition, the Company had (pound)100 million committed and (pound)95 million uncommitted lines of credit with banks. The Company's existing facilities and cash position, along with any new facilities to be arranged, are expected to provide sufficient liquidity for working capital and capital expenditures through fiscal year 2002. As of September 30, 2001 the Company and WPD South West had drawn $310 million under the swingline and revolving credit facility and (pound)50 million under committed lines of credit with banks. Additionally, the Company held (pound)5 million in unrestricted cash. Demand for electricity in Great Britain in general, and in WPD South West's Authorized Area in particular, is seasonal, with demand being higher in the winter months and lower in the summer months. WPD South West balances the effect of this and other cyclical influences on its working capital needs with drawings under its available credit facilities. SIUK plc and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company holds the entire share capital of WPD South West. The Company is primarily dependent upon dividends from WPD South West for its cash flow. WPD South West can pay dividends to the Company under English law to the extent that it has distributable reserves, subject to the retention of sufficient financial resources to conduct its distribution business as required by its regulatory license. The Company believes that sufficient distributable reserves will continue to exist at WPD South West to allow for reasonable and necessary dividends from WPD South West, through operations, to be distributed to the Company. In the U.K., the Accounting Standards Board has recently issued a new accounting standard, Financial Reporting Standard ("FRS") 19 "Deferred Tax" ("FRS 19"), relating to the accounting treatment of deferred income tax. FRS 19, which replaces an earlier standard (SSAP 15), is mandatory for accounting periods ending on or after January 23, 2002), and will require full provision to be made for deferred tax assets and liabilities (SSAP 15 only required a partial provision basis); discounting of deferred tax liabilities will be permitted but is not mandatory. WPD South West will take advantage of the discounting option, but adoption of FRS 19 will significantly reduce WPD South West's distributable reserves. The directors of distribution companies must also certify to the Regulator that it is reasonably foreseeable that the declaration of a dividend will not breach any license conditions. WPD South West has no reason to believe that a breach of its license would occur from declaring a reasonable dividend. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, including changes in interest rates, and currency exchange rates. To manage the volatility attributable to these exposures, the Company has entered into various derivative transactions, the sole purpose of which is to hedge exposure in these areas. The Company utilizes interest rate swaps to hedge certain debt obligations. These swaps are designated as hedges of specific debt issuances. Currency swaps are also utilized by the Company to hedge US dollar denominated debt. These swaps offset the dollar cash flows, thereby effectively converting the debt to sterling. For all derivative financial instruments, the Company is exposed to losses in the event of nonperformance by counterparties to these derivative financial instruments. The Company has established controls to determine and monitor the creditworthiness of counterparties to mitigate its exposure to counterparty credit risk. Excluding swap agreements between the Company and WPD Holdings UK, at September 30, 2001, the Company and WPD South West had sterling interest rate swaps expiring between 2001 and 2012, with notional amounts totaling (pound)600 million, and had cross currency swaps expiring between 2001 and 2007, with notional amounts totaling (pound)350 million. 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. (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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIUK plc ------------------------- By R. A. Symons Director --------------------------- By D. C. S. Oosthuizen Director, Chief Financial and Accounting Officer Date: November 9, 2001

SIUK PLC 10-Q