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 Quarterly Period Ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from to
Registrant; State or Other
Commission Jurisdiction of Incorporation; I.R.S Employer
File Number Address; and Telephone Number Identification No.
333-47925 Yorkshire Power Group Limited 84-1393785
(England & Wales)
Wetherby Road
Scarcroft
Leeds LS14 3HS
United Kingdom
011-44-113-289-2123
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 __
A description of the registrant's common stock follows:
Description of Shares Outstanding
Registrant Common Stock at October 30, 1998
Yorkshire Power Par Value (POUND)1 Per Share 440,000,002
Group Limited
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARY COMPANIES
Form 10-Q
For The Quarter Ended September 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Consolidated Statements of Income 3
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 7
Consolidated Statements of Changes in Shareholders' Equity 9
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis of Results of
Operations and Financial Condition 16
PART II. OTHER INFORMATION
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
Forward Looking Statements
Certain statements in this Form 10-Q under Part
I Financial Information - "Management's Discussion
and Analysis of Results of Operations and Financial
Condition" may constitute forward looking
statements. Such forward looking statements
involve known and unknown risks, uncertainties and
other important factors that could cause the actual
results, performance or achievements of the
Yorkshire Group or any of its subsidiaries, or
industry results, to differ materially from any
future results, performance or achievements
expressed or implied by such forward looking
statements. Such risks, uncertainties and other
important factors include, among others: general
economic and business conditions in the UK, the
Yorkshire franchise area and elsewhere; currency
fluctuations; governmental, statutory, regulatory
or administrative initiatives affecting Yorkshire
Group, Yorkshire or the UK electric and gas
utilities industries; general industry trends;
competition; the cost and availability of
electricity, gas and other alternative energy
sources; hedging costs; changes in business
strategy, developments, plans or vendor
relationships; availability, terms and deployment
of capital; availability of qualified personnel;
increased rates of taxes or other changes in tax
law; changes in, or the failure or inability to
comply with, governmental regulation, including,
without limitation, environmental regulations; the
ability of Yorkshire to adequately identify and
address Year 2000 issues and the ability of third
parties to do the same; the ability of Yorkshire to
identify and implement Year 2000 contingency plans;
and other factors referenced in this Form 10-Q.
These forward looking statements speak only as of
the date of this Form 10-Q.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Three Months Ended
September 30, September 30,
1998 1997
(POUND) $ (POUND)
(See Note 1)
OPERATING REVENUES . . . . . . . . . . . . 301 511 270
COST OF SALES. . . . . . . . . . . . . . . 191 325 172
GROSS MARGIN . . . . . . . . . . . . . . . 110 186 98
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 15 26 19
Depreciation and Amortization. . . . . . 19 32 18
Selling, General and Administrative. . . 32 54 22
INCOME FROM OPERATIONS. . . . . . . 44 74 39
OTHER INCOME (EXPENSE):
Loss on Investment in Ionica . . . . . . (5) (9) -
Other Income (Expense), net. . . . . . . 4 7 (2)
Total Other Income (Expense), net . (1) (2) (2)
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (34) (57) (29)
Interest Income. . . . . . . . . . . . . 2 3 4
Net Interest Expense. . . . . . . . (32) (54) (25)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . 11 18 12
(CREDIT) FOR INCOME TAXES. . . . . . . . . (1) (2) (6)
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . 12 20 18
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUND)1 ($2)
AND (POUND)1. 0 0 3
INCOME BEFORE EXTRAORDINARY ITEM . . . . . 12 20 21
EXTRAORDINARY LOSS - UK WINDFALL TAX . . . - - (134)
NET INCOME (LOSS). . . . . . . . . . . . . 12 20 (113)
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Six Months Ended
September 30, September 30,
1998 1997
(POUND) $ (POUND)
(See Note 1)
OPERATING REVENUES . . . . . . . . . . . . 593 1008 527
COST OF SALES. . . . . . . . . . . . . . . 379 644 341
GROSS MARGIN . . . . . . . . . . . . . . . 214 364 186
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 31 53 34
Depreciation and Amortization. . . . . . 37 63 35
Selling, General and Administrative. . . 56 95 49
INCOME FROM OPERATIONS. . . . . . . 90 153 68
OTHER (EXPENSE) INCOME:
Loss on Investment in Ionica . . . . . . (11) (19) -
Other Income, net. . . . . . . . . . . . 4 7 2
Total Other (Expense) Income, net . (7) (12) 2
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (66) (112) (56)
Interest Income. . . . . . . . . . . . . 3 5 7
Net Interest Expense. . . . . . . . (63) (107) (49)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 20 34 21
(CREDIT) PROVISION FOR INCOME TAXES. . . . (9) (15) (1)
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM . . . . . . . . . . . 29 49 22
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUND)2 ($3)
AND (POUND)2. 3 5 4
INCOME BEFORE EXTRAORDINARY ITEM . . . . . 32 54 26
EXTRAORDINARY LOSS - UK WINDFALL TAX . . . - - (134)
NET INCOME (LOSS). . . . . . . . . . . . . 32 54 (108)
The accompanying notes are an integral part of these consolidated financial statements
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
March 31,
September 30, 1998 1998
(POUND) $ (POUND)
(See Note 1)
ASSETS
FIXED ASSETS:
Property, Plant and Equipment, Net of Accumulated
Depreciation of (POUND)79 ($134) and (POUND)53 . . 1,042 1,770 992
Construction Work in Progress. . . . . . . . . . . . 57 97 68
Total Fixed Assets . . . . . . . . . . . . . 1,099 1,867 1,060
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 30 51 35
Investments. . . . . . . . . . . . . . . . . . . . . 43 73 41
Accounts Receivable, Less Provision for
Uncollectible Accounts of (POUND)7 ($12) and (POUND)6. . . . 52 88 62
Unbilled Revenue . . . . . . . . . . . . . . . . . . 58 99 78
Prepaids and other . . . . . . . . . . . . . . . . . 58 99 50
Total Current Assets . . . . . . . . . . . . 241 410 266
OTHER ASSETS:
Goodwill, Net of Accumulated Amortization of
(POUND)37 ($63) and (POUND)25. . . . . . . . . . . 957 1,626 969
Investments, Long-term . . . . . . . . . . . . . . . 61 104 73
Prepaid Pension Asset. . . . . . . . . . . . . . . . 85 144 75
Other Non-Current Assets . . . . . . . . . . . . . . 28 48 19
Total Other Assets . . . . . . . . . . . . . 1,131 1,922 1,136
Total Assets . . . . . . . . . . . . . . . . . . . . . 2,471 4,199 2,462
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
March 31,
September 30, 1998 1998
(POUND) $ (POUND)
(See Note 1)
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital, (POUND)1 par value common shares,
440,000,100 authorized and 440,000,002
issued and outstanding . . . . . . . . . . . . . . 440 748 440
Retained Deficit . . . . . . . . . . . . . . . . . . (85) (145) (117)
Total Shareholders' Equity . . . . . . . . . . . . 355 603 323
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 1,159 1,970 1,026
SHORT-TERM DEBT REFINANCED . . . . . . . . . . . . . . - - 164
Company-Obligated Mandatorily Redeemable Trust
Securities of Subsidiary Holding Solely Junior
Subordinated Deferrable Interest Debentures (Note 2) 168 285 -
OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes. . . . . . . . . . . . . . . . 207 352 208
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . . . . . . 77 131 84
Other . . . . . . . . . . . . . . . . . . . . . . . 12 20 15
Total Other Non-current Liabilities. . . . . . . . 296 503 307
CURRENT LIABILITIES:
Current Portion of Long-term Debt. . . . . . . . . . 5 8 5
Short-term Debt. . . . . . . . . . . . . . . . . . . 183 311 319
Accounts Payable . . . . . . . . . . . . . . . . . . 74 126 82
Accrued Liabilities and Deferred Income. . . . . . . 69 117 63
Income Taxes Payable . . . . . . . . . . . . . . . . 34 58 40
Windfall Tax Payable . . . . . . . . . . . . . . . . 67 114 67
Other Current Liabilities. . . . . . . . . . . . . . 61 104 66
Total Current Liabilities. . . . . . . . . . . . . 493 838 642
Total Liabilities. . . . . . . . . . . . . . . . . . . 2,116 3,596 2,139
COMMITMENTS AND CONTINGENCIES (NOTE 4)
Total Shareholders' Equity and Liabilities . . . . . . 2,471 4,199 2,462
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Six Months Ended
September 30, September 30,
1998 1997
(POUND) $ (POUND)
Cash Flows From Operating Activities:
Net Income (Loss). . . . . . . . . . . . . . 32 54 (108)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By Operating Activities:
Depreciation and Amortization. . . . . . . 41 70 39
Gain on sale of fixed assets . . . . . . . (2) (3) (1)
Loss on Investment in Ionica . . . . . . . 11 19 -
Deferred Income Taxes. . . . . . . . . . . (1) (2) (4)
Changes in Assets and Liabilities:
Receivables and Unbilled Revenue . . . . . 30 51 43
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . (7) (12) (1)
Prepaid Pension Asset. . . . . . . . . . . (10) (17) (6)
Accounts Payable . . . . . . . . . . . . . (8) (14) 5
Accrued Liabilities and Deferred Income. . 6 10 (2)
Windfall Tax . . . . . . . . . . . . . . . - - 134
Prepaids and Other Current Assets. . . . . (8) (14) 17
Other Current Liabilities. . . . . . . . . (5) (8) 6
Other. . . . . . . . . . . . . . . . . . . (9) (15) 9
Net Cash Provided by Operating
Activities . . . . . . . . . . . . . . 70 119 131
Cash Flows From Investing Activities:
Capital Expenditures . . . . . . . . . . . (70) (119) (76)
Proceeds from Sale of Property,
Plant and Equipment. . . . . . . . . . . 4 7 9
Purchase of Yorkshire Electricity Group plc - - (1,474)
Other. . . . . . . . . . . . . . . . . . . (1) (2) 4
Net Cash Used in Investing Activities. . (67) (114) (1,537)
Cash Flows From Financing Activities:
Proceeds From Issuance of Trust Securities 162 275 -
Proceeds From Issuance of Common Stock . . - - 436
Receipt of Capital Contribution. . . . . . - - 4
Proceeds From Issuance of Long-term Debt . 130 221 -
Net Change in Short-term Debt. . . . . . . (300) (509) 953
Other. . . . . . . . . . . . . . . . . . . - - -
Net Cash (Used) Provided by Financing Activities (8) (13) 1,393
Decrease in Cash and Cash Equivalents. . . . (5) (8) (13)
Cash and Cash Equivalents at Beginning of Period 35 59 221
Cash and Cash Equivalents at End of Period . 30 51 208
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Six Months Ended
September 30, September 30,
1998 1997
(POUND) $ (POUND)
Cash Paid for Interest . . . . . . . . . . . . . 34 58 48
Cash Paid for Income Taxes . . . . . . . . . . . 0 0 6
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions, except shares)
(UNAUDITED)
For the three months ended September 30, 1998:
Unrealized
Profit on
Available
Share Capital For Sale Retained
Shares Amount Investments Deficit Total
(POUND) (POUND) (POUND) (POUND)
Balance, July 1, 1998. .. . . 440,000,002 440 1 (97) 344
Unrealized Profit on Available
for Sale Investments . . .. . - - (1) - (1)
Net Income . . . . . . . . . . - - - 12 12
Balance, September 30, 1998 . 440,000,002 440 - (85) 355
For the three months ended September 30, 1997:
Unrealized
Shares Profit on
Subscribed Available
Share Capital But Not For Sale Retained
Shares Amount Yet Issued Investments Deficit Total
(POUND) (POUND) (POUND) (POUND) (POUND)
Balance, July 1, 1997. 436,000,002 436 4 - 5 445
Unrealized Profit on Available
for Sale Investments . . - - - 20 - 20
Net Loss . . . . . . . . . . . - - - - (113) (113)
Balance,
September 30, 1997 . 436,000,002 436 4 20 (108) 352
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions, except shares)
(UNAUDITED)
For the six months ended September 30, 1998:
Share Capital Retained
Shares Amount Deficit Total
(POUND) (POUND) (POUND)
Balance, April 1, 1998 . 440,000,002 440 (117) 323
Net Income . . . . . . . - - 32 32
Balance,
September 30, 1998 . . 440,000,002 440 (85) 355
For the six months ended September 30, 1997:
Unrealized
Shares Profit on
Subscribed Available
Share Capital But Not For Sale Retained
Shares Amount Yet Issued Investments Deficit Total
(POUND) (POUND) (POUND) (POUND) (POUND)
Balance, April 1, 1997 . 2 - - - - -
Issuance of
Ordinary Shares 436,000,000 436 - - - 436
Receipt of Capital - - 4 - - 4
Contribution
Unrealized Profit on
Available
for Sale Investments . - - - 20 - 20
Net Loss . . . . - - - - (108) (108)
Balance,
September 30,
1997 . 436,000,002 43 6 4 20 (108) 352
The accompanying notes are an integral part of these consolidated
financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial
statements should be read in conjunction
with the audited financial statements
for the Fiscal Year ended March 31, 1998
(the "1998 Audited Financial
Statements") filed in Yorkshire Power
Group Limited's Annual Report on Form
10-K for the Fiscal Year ended March 31,
1998 (the "Form 10-K"). In the opinion
of management, the financial statements
reflect all adjustments (consisting of
only normal recurring accruals) which
are necessary for a fair presentation of
the results of operations for interim
periods.
The consolidated financial
statements of Yorkshire Power Group
Limited and its subsidiaries ("Yorkshire
Group") are presented in pounds sterling
and in conformity with accounting
principles generally accepted in the
United States of America.
The consolidated balance sheets,
income statements, statements of cash
flows and certain information in the
notes to the consolidated financial
statements are presented in pounds
sterling ((POUND)) and in US dollars ($)
solely for the convenience of the
reader, at the exchange rate of ((POUND)) 1 =
$1.6995, 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, 1998. This
presentation has not been translated in
accordance with Statement of Financial
Accounting Standards No. 52, "Foreign
Currency Translation." No representation
is made that the pounds sterling amounts
have been, could have been, or could be
converted into US dollars at that or any
other rate of exchange.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
2. FINANCING AND RELATED ACTIVITIES
Yorkshire Capital Trust I, (the
"Trust"), is a statutory business trust
wholly owned by Yorkshire Power Group
Limited, created for the sole purpose of
issuing trust securities and investing
the proceeds in an equivalent amount of
Junior Subordinated Deferrable Interest
Debentures, Series A due 2038 (the
"Debentures") to be issued by Yorkshire
Power Finance Limited ("Yorkshire
Finance"), a subsidiary of Yorkshire
Power Group Limited. On June 9, 1998 the
Trust issued 11,000,000 shares of 8.08%
Trust Securities at the liquidation
amount of $25 per Trust Security. The
Trust invested the $275 million proceeds
in an equivalent amount of Debentures, of
Yorkshire Finance. Yorkshire Finance in
turn loaned the net proceeds to Yorkshire
Power Group Limited. Substantially all of
the Trust's assets will consist of the
Debentures.
The Trust Securities are subject to
mandatory redemption upon payment of the
Debentures at maturity or upon
redemption. The Debentures are
redeemable, in whole or in part at the
option of Yorkshire Finance or at any
time upon the occurrence of certain
events. Yorkshire Power Group Limited
considers that the mechanisms and
obligations relating to the Trust
Securities issued for its benefit, taken
together, constitute a full and
unconditional guarantee by it of the
Trust's payment obligations with respect
to the Trust Securities.
The net proceeds of the issue were
used for the repayment of short term
debt.
Yorkshire Group's credit facility
with Union Bank of Switzerland (the "1997
Credit Facility") matured on July 30,
1998 and has been refinanced by a (POUND)550
million syndicated credit facility. This
credit facility consists of four tranches
which are: Tranche A a (POUND)150 million 364
day revolving credit with a one-year
extension option; Tranche B a (POUND)130
million 5 year term loan; Tranche C a (POUND)50
million 5 year revolving credit facility
and Tranche D a (POUND)220 million 5 year
revolving credit facility. Tranches A
and B have been drawn down to repay the
1997 Credit Facility and Tranches C and D
have replaced existing committed bank
facilities.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
3. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting
Standards (SFAS) No. 130 "Reporting
Comprehensive Income" was adopted by
Yorkshire Group in the first quarter of
Fiscal Year 1999. SFAS No. 130
established the standards for reporting
and displaying components of
"comprehensive income," which is the
total of net income and all transactions
not included in the net income affecting
equity except those with shareholders.
There was a (POUND)20 million unrealized profit
on available for sale investments in the
quarter ended September 30, 1997 which is
a difference between comprehensive income
and net income. There is no material
difference between comprehensive income
and net income for the first six months
of Fiscal Year 1999.
In the first quarter of Fiscal Year
1999 Yorkshire Group adopted the American
Institute of Certified Public
Accountants' Statement of Position (SOP)
98-1, "Accounting for the Costs of
Computer Software Developed or Obtained
for Internal Use". The SOP requires the
capitalization and amortization of
certain costs of acquiring or developing
internal use computer software. The
adoption of the SOP did not have a
material effect on results of operations,
cash flows or financial condition.
4. CONTINGENCIES
Yorkshire Group continues to be
involved in certain other matters
discussed in the Fiscal Year 1998
Financial Statements Note 5 and
Management's Discussion and Analysis of
Results of Operations and Financial
Condition.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
5. IONICA
Reference is made to Note 7 to the
1998 Audited Financial Statements.
Yorkshire Group charged an unrealized
loss of (POUND)11 million to the Income
Statement in the first six months of
Fiscal Year 1999 to write down Yorkshire
Group's investment in Ionica Group plc
("Ionica") to management's estimate of
fair value.
Ionica announced on October 29, 1998
that it had appointed administrators for
its operating subsidiary due to its
inability to obtain further investment
necessary to continue trading and expand
its service. Ionica plans to distribute
net assets after closing the operating
subsidiary. The Ionica Board has been
advised that this is a complex process
that may take a considerable time to
complete. Management is currently
assessing the recoverability of the
remaining book value of the investment
((POUND)3 million at September 30, 1998).
6. DISCONTINUED OPERATIONS - GENERATION
BUSINESSES
Yorkshire Electricity Group plc
("Yorkshire") has decided to divest its
generation assets, primarily as part of
its strategy to reduce debt. It is
anticipated that the disposal of these
assets will be completed during the
current fiscal year. See Form 10-K Part
I Item 1 "Business Restructuring".
Yorkshire's principal investment in
generation is a 75% interest in Regional
Power Generators ("RPG"). Yorkshire has
agreed to sell its 75% share and loan
interests in RPG to IVO Energy Ltd
("IVO"). IVO is a subsidiary of Imatran
Voima Oy, part of Finland's energy group
Forum. IVO already owned 25% of RPG.
RPG owns Brigg power station, a 272-
megawatt combined cycle, gas-fired plant
located in North Lincolnshire, England.
The consideration receivable from IVO
will include cash and the repayment of
Yorkshire's loan to RPG. In addition,
Yorkshire, RPG and IVO have agreed to
restructure certain contracts relative to
the Brigg power station and its
operations. The sale is subject to a
number of conditions prior to closing.
It is anticipated that the sale will be
completed by December 30, 1998.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Yorkshire has an additional 191.4
megawatts of generating capacity.
Investments in Combined Heat and Power
and Peaking are grouped together in
Yorkshire's 100% owned subsidiary
Yorkshire CoGen Ltd. Windpower plants
are held within a 50:50 joint venture
company, Yorkshire Windpower Ltd.
Yorkshire is in the process of evaluating
indicative offers for these remaining
assets.
As of September 30, 1998 the book
value of Generation assets and
liabilities were (POUND)214 million and (POUND)97
million respectively. Generating
revenues (including trading with other
Yorkshire Group companies) for the three
month period to June 1998 were (POUND)13
million and (POUND)33 million for the six
months ended September 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Second Quarter Fiscal Year 1999 vs.
Second Quarter Fiscal Year 1998
And
Year to Date Fiscal Year 1999 vs Year to
Date Fiscal Year 1998
Results of Operations
Net income before extraordinary item
for the year to date period increased by
(POUND)6 million (23%) from (POUND)26 million to (POUND)32
million due primarily to the following:
the settlement of earlier years tax
liabilities resulting in a (POUND)12 million
release of tax provisions; a (POUND)6 million
release of deferred tax provision due to
a reduction in the UK corporation tax
rate from 31% to 30%; changes in the
regulation of supply business revenues
and increases in electricity and gas
supply margins due to reduced purchase
costs. These items were partly offset by
increased interest expense and a write
down in the investment in Ionica.
Income statement line items which
changed significantly were:
Increase (Decrease)
Second Quarter Year to Date
(POUND) % (POUND) %
(in millions) (in millions)
Operating Revenues 31 11 66 13
Gross Margin 12 12 28 15
Maintenance (4) (21) (3) (9)
Selling, General and
Administrative 10 45 7 14
Loss on Investment in Ionica (5) N/A (11) N/A
Interest Expense (5) (17) (10) (18)
(Credit) Provision for
Income Taxes 5 83 (8) (800)
Extraordinary item -
UK Windfall Tax (134) N/A (134) N/A
The increase in operating revenues is largely
due to the signing of new electricity contracts
with Non-Franchise Supply Customers in April 1998
and the commencement of residential gas sales in
Fiscal Year 1999. In addition, beginning with
Fiscal Year 1999 there was a change in the
regulation of supply business revenues in that the
Supply Price Control Formula covering supply of
electricity to Franchise Supply Customers ended and
was replaced by supply regulation based on maximum
tariffs for residential and smaller business
electricity customers in Yorkshire's Franchise Area
(Yorkshire's service area as determined by its PES
license) whose annual consumption is under 12,000
kWh. Consequently, accruals to reduce operating
revenues to the regulated amount which were made in
the first six months of Fiscal Year 1998 were not
required in the first six months of Fiscal Year
1999.
The changes in revenues noted above, in
addition to reduced purchase costs for electricity
and gas, caused gross margin to increase.
The reduction in maintenance expense is due to
delays in maintenance work and an increased
emphasis on capital work during the first half of
Fiscal Year 1999.
The increase in selling, general and
administrative costs is due primarily to costs
incurred in relation to year 2000 modifications and
expenditures in relation to the opening up of the
competitive market in the supply business. These
increases were partially offset by a change in
respect of identifying the element of costs to be
capitalized within the distribution network,
reducing operating expenses by (POUND)7 million.
Management have further written down the
investment in Ionica to their estimate of fair
value by charging an unrealized loss of (POUND)5 million
before taxes in the second quarter of Fiscal Year
1999. This is in addition to the (POUND)41 million
charged in the Fiscal Year 1998 and the (POUND)6 million
charged in the first quarter of Fiscal Year 1999,
bringing the remaining book value down to (POUND)3
million. The reduction in fair value of the
investment was recognized by management as "other
than temporary" following an announcement by Ionica
on May 22, 1998 that Ionica had been unsuccessful
in negotiating release of credit lines from
providers of bank finance and had been advised to
obtain further equity investment prior to seeking
further bank funding. On October 29, 1998 Ionica
appointed administrators as they had been unable to
obtain further equity investment. Management is
currently assessing the recoverability of the
remaining investment.
The increase in interest expense arises from
the debt in connection with Yorkshire Group's
acquisition of Yorkshire Electricity Group plc
being drawn down in installments during the first
quarter of Fiscal Year 1998 and higher interest
rates.
The first quarter of Fiscal Year 1999 was
favorably affected by a (POUND)12 million settlement
related to earlier years' tax liabilities.
In the second quarter of Fiscal Year 1998, the
UK rate of corporation tax on income was reduced
from 33% to 31%, resulting in a tax release of (POUND)12
million. In the second quarter of Fiscal Year
1999, a further reduction in the rate of
corporation tax on income, from 31% to 30%, was
enacted by the UK government. The impact of this
reduction was approximately (POUND)6 million.
The effective income tax rate decreased from
(5)% in the first six months of Fiscal Year 1998 to
(45)% in the first six months of Fiscal Year 1999.
The effective income tax rate in both quarters has
been increased by the amortization of goodwill,
which is not deductible for UK income tax purposes.
On July 2, 1997 the UK government enacted a
"windfall tax" to be applied at that date to
companies privatized by flotation and regulated by
relevant privatization statutes. The windfall tax
is not deductible for UK income tax purposes and
was recorded as an extraordinary charge in Fiscal
Year 1998. The final installment of the windfall
tax, which amounts to (POUND)67 million is due for
payment in December 1998.
Financial Condition
During the first quarter of Fiscal Year 1999
Yorkshire Capital Trust I, a statutory business
trust wholly owned by Yorkshire Power Group
Limited, issued 11,000,000 shares of 8.08% Trust
Securities at the liquidation amount of $25 per
Trust Security. The proceeds of $275,000,000 were
invested in an equivalent amount of 8.08% Junior
Subordinated Deferrable Interest Debentures, Series
A due June 30, 2038 issued by Yorkshire Finance.
Yorkshire Finance in turn loaned the net proceeds
to Yorkshire Power Group Limited, which repaid
short term debt.
Yorkshire Group's credit facility with Union
Bank of Switzerland (the "1997 Credit Facility")
matured on July 30, 1998 and has been refinanced by
a (POUND)550 million syndicated credit facility. This
credit facility consists of four tranches which
are: Tranche A a (POUND)150 million 364 day revolving
credit with a one-year extension option; Tranche B
a (POUND)130 million 5 year term loan; Tranche C a (POUND)50
million 5 year revolving credit facility and
Tranche D a (POUND)220 million 5 year revolving credit
facility. Tranches A and B have been drawn down to
repay the 1997 Credit Facility and Tranches C and D
have replaced existing committed bank facilities.
Year 2000 Problem
A potentially world-wide problem has arisen
with computer programs and micro-processing chips
due to the method used to represent the year part
of a date. This may lead systems and equipment to
wrongly interpret dates falling after December 31,
1999. In addition, certain systems may fail to
detect that the year 2000 is a leap year.
Company State of Readiness:
The company has established a program which
addresses both computer hardware and software e.g.
mainframe, servers and applications, and embedded
chips e.g. in the electricity distribution network
, which are being tested, and repaired or replaced
as necessary.
Work has been prioritized in accordance with
business risk. The highest priority has been given
to those activities which potentially impact on
safety and/or continuity of electricity supply to
customers.
The problem is also being addressed with third
parties that the Company has material relationships
with, chiefly suppliers, customers and government
organizations and regulators. Assurances are being
sought from key suppliers regarding their state of
Year 2000 readiness.
The company is actively involved in national
forums with other members of the electricity
industry and other utilities such as gas,
telecommunications and water to share good practice
and to provide consolidated information to the UK
Department of Trade and Industry and to the UK
Electricity Industry Regulator regarding progress.
Progress on readiness of critical systems is
shown below.
I T Systems Non-I T Systems
Year 2000 Program Completion Completion
Phases Date/ Date/
Estimated Estimated
Completion Percentage Completion Percentage
Date Complete Date Complete
Program Initiation Phase
Mobilization of the October 30, 100% October 30, 100%
Program, including 1997 1997
establishing awareness,
structure and budgets and:
Performance of High Level
Business Impact Analysis
including establishing key
issues for each business
area.
Project Scoping Phase
Sizing the problems, March 31, 100% May 31, 100%
including gathering 1998 1998
detailed inventory
information and
additional risk analysis
and:
Determining costed
business solutions,
including examination of
options to achieve date
conformance in the time
required.
Project Delivery Phase
Management of the March 31, 50% June 1, 85%
implementation cycle and 1999 1999
delivery of the project.
Costs to Address the Company's Year 2000 Issue
The company has expended (POUND)5 million to
September 30, 1998 on the Year 2000 Program and
estimates spending an additional (POUND)15 million to
achieve Year 2000 readiness. Of this (POUND)20 million,
approximately (POUND)15 million will be expensed as
incurred and (POUND)5 million will be capitalized. The
company intends to fund these expenditures through
internal sources. Although significant , the cost
of becoming Year 2000 ready is not expected to have
a material impact on the Company's results of
operations, cash flows or financial condition.
Risks of the Company's Year 2000 Issues
The applications posing the greatest business
risk to the Company's operations should they
experience Year 2000 problems are the power
distribution systems, telecommunications systems,
energy trading systems and billing systems. The
potential problems related to erroneous processing
by, or failure of, these systems are power service
interruptions to customers, interrupted revenue
collection and poor customer relations.
As discussed the company is monitoring its
relationships with third parties, such as suppliers
(including the generators). However these third
parties nonetheless represent a risk that cannot be
assessed with precision or controlled with
certainty.
Due to the complexity of the problem and the
interdependent nature of systems, if the company's
corrective actions, and/or the actions of others
not affiliated with Yorkshire, fail for critical
applications, Year 2000 - related issues may
materially adversely affect Yorkshire.
Company's Contingency Plans
The company is currently developing contingency
plans to address possible Year 2000 failure of
equipment or critical suppliers. A risk based
approach has been adopted in the development of
contingency plans on a case-by-case basis and shall
be complete by the end of September 1999.
PART II. OTHER INFORMATION
Item 5. Other Information
On September 14, 1998 the domestic electricity
market opened up to competition in the UK. From
that date more than 750,000 customers in certain
geographic areas, including some customers supplied
by Yorkshire, were able to choose their electricity
supplier. Over the coming months choice will
spread to other customers so that all 24 million
homes and 2 million small firms across the country
will have that choice.
Yorkshire was one of only 4 PESs to meet the
scheduled target date for the opening of the
domestic market.
Recently proposed combinations involving (i)
Southern Electric plc and Scottish Hydro-Electric
plc and (ii) PowerGen plc and East Midlands
Electricity plc have raised a number of regulatory
and competitive issues in the UK electric utilities
industry. The consummation, or failure to
consummate, these combinations and the resolution
of the attendant regulatory and competitive issues
may change the conduct of Yorkshire's business in
the future. The nature and magnitude of any such
change cannot be determined at this time.
On September 24, 1998 the Secretary of State
for Trade and Industry announced the appointment of
Callum McCarthy as the next Director General of Gas
Supply from November 1, 1998 and Director General
of Electricity Supply from January 1, 1999.
Mr McCarthy will be appointed as the first Energy
Regulator for Great Britain subject to legislation
to amalgamate the regulatory regime for gas and
electricity. Both appointments will run until
October 31, 2003.
Reference is made to Form 10-Q for the quarter
ended June 30, 1998, Part II. Item 5. "Other
Information", for a review of the preliminary
conclusions and discussion relating to a UK
Government review of energy sources for power
generation. On October 8, 1998 the UK Government
issued the conclusions of this review in a White
Paper: "Conclusions on the Review of Energy Sources
for Power Generation and Government Response to
Fourth and Fifth Reports of the Trade and Industry
Committee".
The White Paper has been presented by the UK
Government as a radical program to reform
electricity trading arrangements, forming part of a
key government policy to ensure secure, diverse and
sustainable supplies of energy at competitive
prices.
The reform program comprises:
1. reform of the electricity trading
arrangements in England and Wales;
2. seeking opportunities for divestment by the
major coal-fired generators to ensure competition
in, and more intensive use of, coal-fired flexible
plant;
3. pressing forward with competition in
electricity supply for all customers;
4. a proper regulatory framework separating
distribution from supply activities;
5. resolving the technical issues about the
growth of gas;
6. continuing to press for open energy markets
in Europe.
On October 21, 1998 the UK Government published
a Consultation Paper in relation to modernizing the
framework for utility regulation entitled: "Public
Consultation Paper on the Future of Gas and
Electricity Regulation". This Consultation Paper
further describes the reform program identified
above. Comments on this consultation paper have
been requested by November 16, 1998.
Reference is made to Form 10-K Part I Item 1
"Affiliate Businesses and Other Investments -
Power Generation" and "Business Restructuring". In
1998 Yorkshire reached conditional agreement to
sell its 75% share and loan interests in RPG to
IVO. IVO is a subsidiary of Imatran Voima Oy, part
of Finland's energy group Forum. IVO already owned
25% of RPG. The transaction, which is part of
Yorkshire's larger strategy to reduce debt by
divesting generation assets, is expected to be
completed by December 30, 1998. RPG owns Brigg
power station, a 272-megawatt combined cycle, gas-
fired plant located in North Lincolnshire, England.
Yorkshire will continue to own 191.4 megawatts of
generating capacity after the sale of RPG and is in
the process of evaluating indicative offers for its
remaining generation assets.
LEGAL PROCEEDINGS
Reference is made to Form 10-K Part I "Legal
Proceedings". In case of the ongoing litigation
with respect to another corporation's use of
actuarial surpluses declared in the Electricity
Supply Pension Scheme, the court's decision in
favor of the corporation has been appealed. The
appeal hearing took place on October 26, 1998. The
matter remains pending.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 - Settlement Agreement for the
Electricity Industry in
Scotland, dated as of
August 14, 1998.
Exhibit 10.2 - Agreements for (POUND)550 million
Credit
Facility, each dated July 22,
1998, for
Yorkshire Power Group Limited,
among
Yorkshire Power Group Limited
and the
banks' names therein.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended September 30, 1998.
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.
YORKSHIRE POWER GROUP LIMITED
BY:
BY:/S/ Armando A. Pena
Armando A. Pena
Chief Financial Officer and Director
DATE BY: November 12, 1998