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 DECEMBER 31, 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 January 31, 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 December 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Consolidated Statements of Income 5
Consolidated Balance Sheets 7
Consolidated Statements of Cash Flows 9
Consolidated Statements of Changes in Shareholders' Equity 11
Notes to Consolidated Financial Statements 13
Management's Discussion and Analysis of Results of
Operations and Financial Condition 18
PART II. OTHER INFORMATION
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 28
SIGNATURES 29
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 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.
SELECTED DEFINITIONS
"1998 Audited Financial Statements" means the audited
financial statements of Yorkshire Group for Fiscal Year 1998.
"1997 Audited Financial Statements" means the audited
financial statements of Yorkshire Group for Fiscal Year 1997.
"1997 Credit Facility" means Yorkshire Group's 1997 Credit
Facility with Union Bank of Switzerland.
"Fiscal Year" means a year ended March 31.
"Form 10-K" means the Annual Report on Form 10-K of Yorkshire
Group for Fiscal Year 1998.
"Ionica" means Ionica Group plc.
"IVO" means IVO Energy Limited.
"kW" means kilowatts.
"MMC" means the UK Monopolies and Mergers Commission.
"MW" means megawatt.
"Non-Franchise Supply Customers" means customers who within
the most recent twelve month period have an average peak
demand of more than 100 kW in the three months of the highest
maximum demand during such period.
"PES" means public electricity supplier.
"REC" means one of the twelve regional electricity companies
in England and Wales licensed to distribute and supply
electricity.
"Regulator" means the Director General of Electricity Supply
in Great Britain.
"RPG" means Regional Power Generators Limited.
"UK" means the United Kingdom.
"US" means the United States.
"YCL" means Yorkshire CoGen Limited, a subsidiary of
Yorkshire.
"Yorkshire" means Yorkshire Electricity Group plc and its
subsidiaries.
"Yorkshire Finance" means Yorkshire Power Finance Limited, a
subsidiary of Yorkshire Group.
"Yorkshire Group" means Yorkshire Power Group Limited and its
subsidiaries.
"Yorkshire Holdings" means Yorkshire Holdings plc, a
subsidiary of Yorkshire Group.
"Yorkshire Trust" means Yorkshire Capital Trust I.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Three Months Ended
December 31, December 31,
1998 1997
(POUND) $ (POUND)
(See Note 1)
OPERATING REVENUES . . . . . . . . . . . . 379 631 349
COST OF SALES. . . . . . . . . . . . . . . 253 421 263
GROSS MARGIN . . . . . . . . . . . . . . . 126 210 86
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 14 23 6
Depreciation and Amortization. . . . . . 19 32 18
Selling, General and Administrative. . . 37 62 14
INCOME FROM OPERATIONS. . . . . . . 56 93 48
OTHER INCOME, NET. . . . . . . . . . . . . - - 1
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (33) (55) (29)
Interest Income. . . . . . . . . . . . . 2 3 2
Net Interest Expense. . . . . . . . (31) (52) (27)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . 25 41 22
PROVISION FOR INCOME TAXES . . . . . . . . 5 8 5
INCOME FROM CONTINUING OPERATIONS
BEFORE DISCONTINUED OPERATIONS . . . . . 20 33 17
LOSS FROM DISCONTINUED OPERATION
NET OF INCOME TAX (CREDIT) OF
(POUND)(1) ($(2)) AND (POUND)- . . . . - - (1)
GAIN ON DISPOSAL OF DISCONTINUED
OPERATION NET OF INCOME TAXES OF
(POUND)30 ($50) . . . . . . . . .. . . 25 42 -
NET INCOME . . . . . . . . . . . . . . . . 45 75 16
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)
Nine Months Ended
December 31, December 31,
1998 1997
(POUND) $ (POUND)
(See Note 1)
OPERATING REVENUES . . . . . . . . . . . . 972 1,617 876
COST OF SALES. . . . . . . . . . . . . . . 632 1,051 604
GROSS MARGIN . . . . . . . . . . . . . . . 340 566 272
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 45 75 40
Depreciation and Amortization. . . . . . 56 93 53
Selling, General and Administrative. . . 93 155 63
INCOME FROM OPERATIONS. . . . . . . 146 243 116
OTHER (EXPENSE) INCOME:
Loss on Investment in Ionica . . . . . . (11) (18) -
Other Income, Net. . . . . . . . . . . . 4 6 3
Total Other (Expense) Income, Net . (7) (12) 3
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (99) (164) (85)
Interest Income. . . . . . . . . . . . . 5 8 9
Net Interest Expense. . . . . . . . (94) (156) (76)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 45 75 43
(CREDIT) PROVISION FOR INCOME TAXES. . . . (4) (6) 4
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND DISCONTINUED
OPERATIONS . . . . . . . . . . . . . . 49 81 39
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUND)1 ($2)
AND (POUND)2. 3 5 3
GAIN ON DISPOSAL OF DISCONTINUED
OPERATION NET OF INCOME TAXES OF
(POUND)30 ($50). . . .. . . . . . . . 25 42 -
INCOME BEFORE EXTRAORDINARY ITEM . . . . . 77 128 42
EXTRAORDINARY LOSS - UK WINDFALL TAX . . . - - (134)
NET INCOME (LOSS). . . . . . . . . . . . . 77 128 (92)
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,
December 31, 1998 1998
(POUND) $ (POUND)
(See Note 1)
ASSETS
FIXED ASSETS:
Property, Plant and Equipment, Net of Accumulated
Depreciation of (POUND)95 ($158) and (POUND)53 . . 952 1,584 992
Construction Work in Progress. . . . . . . . . . . . 11 18 68
Total Fixed Assets . . . . . . . . . . . . . 963 1,602 1,060
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 8 13 35
Investments. . . . . . . . . . . . . . . . . . . . . 29 48 41
Accounts Receivable, Less Provision for
Uncollectible Accounts of (POUND)8 ($13) and (POUND)6. 67 111 62
Unbilled Revenue . . . . . . . . . . . . . . . . . . 102 170 78
Receivable from the Sale of YCL. . . . . . . . . . . 95 158 -
Prepaids and Other . . . . . . . . . . . . . . . . . 31 52 50
Total Current Assets . . . . . . . . . . . . 332 552 266
OTHER ASSETS:
Goodwill, Net of Accumulated Amortization of
(POUND)44 ($73) and (POUND)25. . . . . . . . . . . 930 1,547 969
Investments, Long-Term . . . . . . . . . . . . . . . 60 100 73
Prepaid Pension Asset. . . . . . . . . . . . . . . . 91 152 75
Other Non-Current Assets . . . . . . . . . . . . . . 26 43 19
Total Other Assets . . . . . . . . . . . . . 1,107 1,842 1,136
Total Assets . . . . . . . . . . . . . . . . . . . . . 2,402 3,996 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,
December 31, 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 . . . . . . . . . . . . . . 440 732 440
Retained Deficit . . . . . . . . . . . . . . . . . . (40) (66) (117)
Total Shareholders' Equity . . . . . . . . . . . . 400 666 323
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 1,107 1,842 1,026
SHORT-TERM DEBT REFINANCED . . . . . . . . . . . . . . - - 164
Company-Obligated Mandatorily Redeemable Trust
Securities of Subsidiary Holding Solely Junior
Subordinated Deferrable Interest Debentures (Note 2) 168 279 -
OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes. . . . . . . . . . . . . . . . 204 339 208
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . . . . . . 31 52 84
Other . . . . . . . . . . . . . . . . . . . . . . . 14 23 15
Total Other Non-Current Liabilities. . . . . . . . 249 414 307
CURRENT LIABILITIES:
Current Portion of Long-Term Debt. . . . . . . . . . 8 13 5
Short-Term Debt. . . . . . . . . . . . . . . . . . . 225 374 319
Accounts Payable . . . . . . . . . . . . . . . . . . 97 162 82
Accrued Liabilities and Deferred Income. . . . . . . 74 123 63
Income Taxes Payable . . . . . . . . . . . . . . . . 32 53 40
Windfall Tax Payable . . . . . . . . . . . . . . . . - - 67
Other Current Liabilities. . . . . . . . . . . . . . 42 70 66
Total Current Liabilities. . . . . . . . . . . . . 478 795 642
Total Liabilities. . . . . . . . . . . . . . . . . . . 2,002 3,330 2,139
COMMITMENTS AND CONTINGENCIES (NOTE 4)
Total Shareholders' Equity and Liabilities . . . . . . 2,402 3,996 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)
Nine Months Ended
December 31, December 31,
1998 1997
(POUND) $ (POUND)
Cash Flows From Operating Activities:
Net Income (Loss). . . . . . . . . . . . . . 77 128 (92)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By Operating Activities:
Gain on Sale of Discontinued Operations. . (25) (42) -
Depreciation and Amortization. . . . . . . 61 102 58
Gain on Sale of Fixed Assets . . . . . . . (3) (5) (3)
Loss on Investment in Ionica . . . . . . . 11 18 -
Deferred Income Taxes. . . . . . . . . . . 3 5 (7)
Changes in Assets and Liabilities:
Receivables and Unbilled Revenue . . . . . (29) (48) 6
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . (10) (17) (2)
Income Taxes Payable . . . . . . . . . . . (5) (8) (3)
Windfall Tax . . . . . . . . . . . . . . . (67) (111) 67
Prepaid Pension Asset. . . . . . . . . . . (16) (27) (10)
Accounts Payable . . . . . . . . . . . . . 15 25 33
Other Current Liabilities. . . . . . . . . (15) (25) 24
Other. . . . . . . . . . . . . . . . . . . 7 12 (8)
Net Cash Provided by Operating
Activities . . . . . . . . . . . . . . 4 7 63
Cash Flows From Investing Activities:
Proceeds from Sale of Discontinued
Operations . . . . . . . . . . . . . . . 42 70 -
Capital Expenditures . . . . . . . . . . . (106) (177) (129)
Proceeds from Sale of Property,
Plant and Equipment. . . . . . . . . . . 5 8 20
Purchases of Long-Term Investments . . . . - - (8)
Proceeds from Sale of Long-Term Investments - - 25
Purchase of Yorkshire Electricity Group plc - - (1,474)
Purchase of Short-Term Investments . . . . (2) (3) (10)
Other. . . . . . . . . . . . . . . . . . . 1 2 1
Net Cash Used in Investing Activities. . (60) (100) (1,575)
Cash Flows From Financing Activities:
Proceeds From Issuance of Trust Securities 162 269 -
Proceeds From Issuance of Common Stock . . - - 440
Proceeds From Issuance of Long-Term Debt . 130 216 -
Net Change in Short-Term Debt. . . . . . . (258) (429) 973
Repayment of Long-Term Debt. . . . . . . . (5) (8) (4)
Net Cash Provided by Financing Activities. . 29 48 1,409
Decrease in Cash and Cash Equivalents. . . . (27) (45) (103)
Cash and Cash Equivalents at Beginning of Period 35 58 221
Cash and Cash Equivalents at End of Period . 8 13 118
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Nine Months Ended
December 31, December 31,
1998 1997
(POUND) $ (POUND)
Cash Paid for Interest . . . . . . . . . . . . . 65 108 66
Cash Paid for Income Taxes . . . . . . . . . . . 67 111 71
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 December 31, 1998:
Share Capital Retained
Shares Amount Deficit Total
(POUND) (POUND) (POUND)
Balance, October 1, 1998 . . . . . . .440,000,002 440 (85) 355
Net Income . . . . . . . . . . . . . . - - 45 45
Balance, December 31, 1998 . . . . . .440,000,002 440 (40) 400
For the three months ended December 31, 1997:
Unrealized
Shares Profit (Loss)
Subscribed on Available
Share Capital But Not For Sale Retained
Shares Amount Yet Issued Investments Deficit Total
(POUND) (POUND) (POUND) (POUND) (POUND)
Balance, October 1, 1997 . . .436,000,002 436 4 20 (108) 352
Unrealized Loss on Available
for Sale Investments . . . . - - - (38) - (38)
Issuance of Ordinary Shares. . 4,000,000 4 (4) - - -
Net Income . . . . . . . . . . - - - - 16 16
Balance, December 31, 1997 . .440,000,002 440 - (18) (92) 330
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 nine months ended December 31, 1998:
Share Capital Retained
Shares Amount Deficit Total
(POUND) (POUND) (POUND)
Balance, April 1, 1998 . . . . 440,000,002 440 (117) 323
Net Income . . . . . . . . . . . - - 77 77
Balance, December 31, 1998 . . . 440,000,002 440 (40) 400
For the nine months ended December 31, 1997:
Unrealized
Loss on
Available
Share Capital For Sale Retained
Shares Amount Investments Deficit Total
(POUND) (POUND) (POUND) (POUND)
Balance, April 1, 1997 . . . . 2 - - - -
Issuance of Ordinary Shares . 440,000,000 440 - - 440
Unrealized Loss on Available
for Sale Investments . . . . - - (18) - (18)
Net Loss . . . . . . . . . . . - - - (92) (92)
Balance, December 31, 1997 . . 440,000,002 440 (18) (92) 330
The accompanying notes are an integral part of these consolidated financial
statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements should
be read in conjunction with the 1998 Audited Financial
Statements filed in 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 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 =
$1.6638, the closing mid-point in London on December 31,
1998, as published in The Financial Times. 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
DECEMBER 31, 1998
(UNAUDITED)
2. FINANCING AND RELATED ACTIVITIES
Yorkshire 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 Finance, a subsidiary
of Yorkshire Group. On June 9, 1998 Yorkshire Trust issued
11,000,000 shares of 8.08% Trust Securities at the
liquidation amount of $25 per Trust Security. Yorkshire
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 Yorkshire 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 Group considers
that the mechanisms and obligations relating to Yorkshire
Trust Securities issued for its benefit, taken together,
constitute a full and unconditional guarantee by it of
Yorkshire 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 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 were drawn
down to repay the 1997 Credit Facility. At December 31, 1998
amounts outstanding under the above facility were as follows:
Tranche A - (POUND)100 million; Tranche B - (POUND)130 million and
Tranche D - (POUND)90 million.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 an (POUND)18 million unrealized loss on
available for sale investments in the nine months ended
December 31, 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
nine 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.
EITF Issue No. 98-10, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities" was issued
during the quarter ended December 31, 1998 and will be
effective for fiscal years beginning after December 15, 1998.
Management is currently assessing the impact that the above
standard will have on Yorkshire Group.
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
DECEMBER 31, 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 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. The
remaining book value at December 31, 1998 ((POUND)3 million)
represents management's estimate of net realizable value.
6. DISCONTINUED OPERATIONS - GENERATION BUSINESS
In November 1998, Yorkshire completed the sale of its 75%
interest in RPG to IVO. IVO is a subsidiary of Imatran Voima
Oy, part of Finland's energy group Forum. RPG owns Brigg
Power Station, a 272-megawatt combined cycle, gas fired plant
located in North Lincolnshire, England. The net book value
of the assets sold was (POUND)14 million. The cash consideration
received from IVO, including payment for the intercompany
balance and net of cash retained by RPG, was (POUND)42 million. In
addition, certain contracts between Yorkshire and RPG were
renegotiated enabling Yorkshire Group to reduce its balance
sheet provision for uneconomic gas and electricity contracts.
The sale resulted in an increase in Net Income in the three
month and nine month periods ended December 31, 1998 of (POUND)18
million.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
On December 31, 1998 Yorkshire entered into an
unconditional agreement to sell its subsidiary, YCL, to
PowerGen CHP Limited, a subsidiary of PowerGen plc. YCL owns
three combined heat and power plants and seven peaking
facilities with a total declared capacity of 70 MW which are
operational, a 50 MW combined cycle gas plant currently under
test operation, a 56 MW combined heat and power plant under
construction and a 56 MW combined heat and power plant under
development. Yorkshire will purchase portions of the output
of these facilities for up to 20 years. The net book value
of the assets sold was (POUND)3 million. The consideration for the
sale, including the payment for the intercompany balance of
(POUND)67 million, was a (POUND)95 million note receivable due January 5,
1999. The total gain on the sale is (POUND)15 million, of which (POUND)8
million after tax was included in Net Income in the period
ended December 31, 1998. The remaining (POUND)7 million is deferred
and will be amortized over the life of contracts existing
between Yorkshire and YCL.
The remaining generating assets of Yorkshire, windpower
plants held within a 50:50 joint venture company, Yorkshire
Windpower Limited, were sold in February 1999 for a loss of
(POUND)1 million. At December 31, 1998 these assets were
considered impaired and the loss was reflected in that
period.
These transactions complete the disposal of Yorkshire's
generation business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Third Quarter Fiscal Year 1999 vs. Third Quarter Fiscal Year
1998
And
Year to Date Fiscal Year 1999 vs. Year to Date Fiscal Year
1998
Results of Operations
Net income from continuing operations before
extraordinary item and discontinued operations for the year
to date period increased by (POUND)10 million (26%) from (POUND)39
million to (POUND)49 million due primarily to the following: the
settlement of earlier years tax liabilities resulting in a
(POUND)12 million reduction in estimated tax liabilities and
increases in electricity and gas supply margins. These items
were partly offset by increased interest expense, an increase
in selling, general and administrative costs and a write down
in the investment in Ionica.
Income statement line items which changed significantly
were:
Increase ( Decrease)
Third Quarter Year to Date
(POUND) % (POUND) %
(in millions) (in millions)
Operating Revenues 30 9 96 11
Gross Margin 40 46 68 25
Maintenance 8 133 5 13
Selling, General and
Administrative 23 164 30 48
Loss on Investment in Ionica - - 11 N/A
Interest Expense 4 14 14 16
(Credit) Provision for
Income Taxes - - (8) (200)
Extraordinary item -
UK Windfall Tax - - (134) (100)
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.
The changes in revenues noted above, in addition to
reduced purchase costs for electricity and gas, caused gross
margin to increase.
The increase in the year-to-date maintenance expense is
due primarily to increased engineering information system
costs in Fiscal Year 1999. The increase in maintenance
expense in the third quarter of Fiscal Year 1999 when
compared with the third quarter of Fiscal Year 1998 is due to
a change in respect of identifying the element of costs to be
capitalized within the distribution network, which reduced
maintenance expense by (POUND)8 million in the third quarter of
Fiscal Year 1998.
The increase in selling, general and administrative costs
is due primarily to expenditures in relation to the opening
up of the competitive market in the supply business,
including ongoing marketing and customer service costs, and
costs incurred in relation to Year 2000 modifications.
Earlier in Fiscal Year 1999, management wrote down the
investment in Ionica to their estimate of fair value by
charging an unrealized loss of (POUND)11 million before taxes.
This was in addition to the (POUND)41 million charged in Fiscal
Year 1998, 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.
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 in Fiscal Year 1999.
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 in the nine month period ended
December 31, 1998.
The effective income tax rate decreased from 9% in the
first nine months of Fiscal Year 1998 to (9)% in the first
nine months of Fiscal Year 1999. The effective income tax
rate in both years 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
amounted to (POUND)67 million was paid in December 1998.
Financial Condition
During the first quarter of Fiscal Year 1999 Yorkshire
Trust, 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 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 were drawn
down to repay the 1997 Credit Facility. At December 31, 1998
amounts outstanding under the above facility were as follows:
Tranche A - (POUND)100 million; Tranche B - (POUND)130 million and
Tranche D - (POUND)90 million.
Legal Proceedings
Reference is made to Form 10-K Part I. "Legal
Proceedings". In the case of the ongoing litigation with
respect to other corporations' use of actuarial surpluses
declared in the Electricity Supply Pension Scheme (ESPS), the
court's decision in favour of the corporations has been
appealed. On February 10, 1999 the Court of Appeal ruled
that the particular arrangements made by the corporations to
dispose of the surplus, partly by cancelling liabilities
relating to additional pension payments resulting from early
retirement, were invalid. The Court of Appeal did not order
the corporations to make payments to the ESPS but will hold a
further hearing to decide what action needs to be taken. It
is likely that the case will then be referred to the House of
Lords.
Yorkshire has made similar use of actuarial surplus.
Pension deficiency costs totalling (POUND)26 million have been
offset against actuarial surplus. Management is in the
process of reviewing the Court of Appeal's decision and any
potential impact of this decision on its results of
operations and financial condition. The final outcome of this
matter cannot now be determined.
Year 2000 Issues
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 June 30, 74% June 30, 94%
implementation cycle and 1999 1999
delivery of the project.
Costs to Address the Company's Year 2000 Issue
The Company has expended (POUND)10 million to December 31, 1998
on the Year 2000 Program and estimates spending an additional
(POUND)9 million to achieve Year 2000 readiness. Of this (POUND)19
million, approximately (POUND)15 million will be expensed as
incurred and (POUND)4 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 Group, fail for critical applications, Year 2000 -
related issues may materially adversely affect Yorkshire
Group.
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.
European Monetary Union
On January 1, 1999, 11 European Union countries formed an
economic and monetary union and introduced a single currency,
the Euro. Although the UK did not join at this time, the UK
Government has indicated that it may join in the future.
Management is currently assessing the effort required to
prepare Yorkshire Group for the potential introduction of the
Euro in the UK.
PART II. OTHER INFORMATION
Item 5 Other Information
Reference is made to Form 10-Q for the quarter ended
September 30, 1998, Part II. Item 5. "Other Information" for
a discussion of the UK Government consultation paper relating
to the Future of Gas and Electricity Regulation. On November
13, 1998, Yorkshire responded to this consultation paper. In
its response, Yorkshire:
Supported both the introduction of separate licensing
for supply and distribution activities and also the
proposal to establish separate legal companies (which
could be in common ownership) for each. It stated its
belief that the costs associated with this change must be
recognized in the price control mechanism and that forced
separation of ownership is unnecessary.
Stated its belief that a radical split of
operational arrangements is not in the interests of
customers and that companies should not be forced to
operate supply and distribution separately unless the
benefits outweigh the costs.
Stated its belief that suppliers should be placed on
an equal footing in the competitive electricity supply
market.
Reference is made to Form 10-K Part 1. Item 1. "Business-
Regulation under the Electricity Act - The Regulator" for a
discussion of the Regulator's consultation paper on the
separation of the distribution and supply businesses of PESs
and the future treatment of metering and meter reading. On
November 30, 1998, the Regulator published a second
consultation paper on the separation of PES activities,
particularly distribution and supply, with a view to PES's
producing initial proposals by May 1999 to give effect to
greater separation. This consultation paper also proposed
major reform of the metering and meter reading of PES's,
including the need to introduce competition in all metering
activities by April 2000. Yorkshire responded to this
consultation paper, stressing the significant degree of
separation that already exists within Yorkshire and
highlighting the potential cost of additional operational
separation.
Reference is made to Form 10-Q for the quarter ended
September 30, 1998, Part II. Item 5. "Other Information" for
a discussion of a UK Government program to reform electricity
trading arrangements. Also on November 30, 1998, the
Regulator published a framework document describing the
delivery and implementation of new electricity trading
arrangements based upon market trading arrangements in
commodities markets elsewhere. The arrangements are designed
to better facilitate the development of competition, to
ensure maximum transparency and to give all interested
parties the opportunity to participate in the process. The
feasibility of April 2000 as a target date for introducing
the new trading arrangements is currently being assessed.
Reference is made to Form 10-Q for the quarter ended
September 30, 1998, Part II. Item 5. "Other Information" for
an explanation of the opening up to competition of the
domestic electricity market in the UK. Since September 1998
the Regulator has announced several dates for the beginning
of competition in supply to residential and small commercial
customers for all 14 PES areas. By June 1999 the process is
expected to be completed for all PES customers. Yorkshire
will open its full market to competition on February 22,
1999, making it one of the first PESs to do so.
On January 22, 1999, the UK Government issued an
"Invitation to Comment" on the proposed merger between
American Electric Power Inc ("AEP") and Central and South
West Corporation ("CSW"). AEP has a 50% interest in Yorkshire
Group through a joint venture with New Century Energies, Inc
and CSW owns Seeboard plc, the REC serving the Southeast
coast of England. The UK Government is considering whether
this acquisition qualifies for investigation under the merger
provisions of the Fair Trading Act 1973. Should it be found
to qualify, the merger may be referred to the MMC for
investigation and report. On February 5, 1999, the Regulator
published a consultation paper on the regulatory issues for
both Yorkshire Group and Seeboard plc under the proposed
merger. Comments have been invited on this consultation
paper by February 19, 1999.
Reference is made to Form 10-Q for the quarter ended
September 30, 1998, Part II. Item 5. "Other Information", for
information relating to proposed industry combinations. On
November 25, 1998 National Power plc announced its
acquisition of the supply business of Midlands Electricity
plc and on January 27, 1999 the European Commission
authorized Electricite de France's acquisition of London
Electricity. National Power's acquisition has involved the
first separation of a REC's distribution and supply
businesses. Such combinations continue to raise both
competitive and regulatory issues that may affect Yorkshire
in the future.
Reference is made to Form 10-K Part I. Item 1. "Affiliate
Businesses and Other Investments - Power Generation" and
"Business Restructuring" and also Form 10-Q for the quarter
ended September 30, 1998 Part II. Item 5. "Other
Information". On November 26, 1998, Yorkshire completed the
sale of its 75% interest in RPG to IVO. On December 31,
1998, Yorkshire sold YCL and on February 9, 1999, Yorkshire
also sold its 50% share interest in Yorkshire Windpower
Limited, both to subsidiaries of PowerGen plc. Substantially
all of the cash received from these sales, net of cash
retained by RPG, approximately (POUND)139m, will be used to reduce
the debt of Yorkshire Group.
Legal Proceedings
Reference is made to Form 10-K Part I. "Legal
Proceedings" for details of ongoing litigation against
Yorkshire. On October 7, 1999, Yorkshire filed a defense to
the claim made against it by Optimum Solutions Limited. The
final outcome of this matter cannot be determined at present.
Reference is made to Form 10-K Part I. "Legal
Proceedings". In the case of the ongoing litigation with
respect to other corporations' use of actuarial surpluses
declared in the Electricity Supply Pension Scheme (ESPS), the
court's decision in favour of the corporations has been
appealed. On February 10, 1999 the Court of Appeal ruled
that the particular arrangements made by the corporations to
dispose of the surplus, partly by cancelling liabilities
relating to additional pension payments resulting from early
retirement, were invalid. The Court of Appeal did not order
the corporations to make payments to the ESPS but will hold a
further hearing to decide what action needs to be taken. It
is likely that the case will then be referred to the House of
Lords.
Yorkshire has made similar use of actuarial surplus.
Pension deficiency costs totalling (POUND)26 million have been
offset against actuarial surplus. Management is in the
process of reviewing the Court of Appeal's decision and any
potential impact of this decision on its results of
operations and financial condition. The final outcome of this
matter cannot now be determined.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended December 31, 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:
/s/Armando A. Pena
Armando A. Pena
Chief Financial Officer and Director