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 JUNE 30, 1999
[ ] 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 July 31, 1999
Yorkshire Power Par Value (POUNDS)1 Per Share
440,000,002
Group Limited
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARY COMPANIES
Form 10-Q
For The Quarter Ended June 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Consolidated Statements of Income 5
Consolidated Balance Sheets 6
Consolidated Statements of Cash Flows 8
Consolidated Statements of Changes in Shareholders' Equity 9
Notes to Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
PART II. OTHER INFORMATION
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Forward Looking Statements
Certain statements in this Form 10-Q under the captions
"Management's Discussion and Analysis of Results of Operations and
Financial Condition", "Other Information" and elsewhere 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 Authorized 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; changes in
commodity prices, interest rates and hedging costs; changes in
business strategy, development 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; Year 2000 issues; the potential
introduction of the Euro; 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
When used in this report, the following terms will have the
meaning indicated.
"Authorized Area" means Yorkshire's service area as determined
by its PES license
"BNFL" means British Nuclear Fuels Ltd
"British Energy" means British Energy plc
"CSW" means Central and South West Corporation
"DAMS" means Distribution Asset Management System
"EdF" means Electricite de France
"EPTL" means Electricity Pensions Trustee Limited
"ESPS" means Electricity Supply Pension Scheme
"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 1999
"Ionica" means Ionica Group plc
"kW" means kilowatts
"London Electricity" means London Electricity plc
"National Power" means National Power plc
"NFFO" means the Non-fossil fuel obligation - the obligation of
the RECs to obtain a specified amount of generating capacity
from non-fossil fuel sources
"NGC" means the National Grid Company plc, which is wholly owned
by NGG
"NGG" means the National Grid Group plc
"OFFER" means the Office of Electricity Regulation, the body
appointed by the Government of the UK to regulate the
electricity industry in Great Britain
"OFGAS" means the Office of Gas Regulation, the body appointed
by the Government of the UK to regulate the gas industry in
Great Britain
"OFGEM" means Office of Gas and Electricity Markets
"PES" means public electricity supplier
"Pool" means the wholesale trading market for electricity in
England and Wales
"Supply" means the supply of electricity and gas
"SWEB" means South Western Electricity plc
"SWALEC" means South Wales Electricity plc, the REC which,
together with Welsh Water, became part of the Hyder plc group
"UK" means the United Kingdom
"US" means the United States of America
"Yorkshire" means Yorkshire Electricity Group plc and its
subsidiaries
"Yorkshire Group" means Yorkshire Power Group Limited and its
subsidiaries
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Three Months Ended
June 30, 1999 June 30, 1998
(POUNDS) $ (POUNDS)
OPERATING REVENUES . . . . . . . . . . . . 316 498 292
COST OF SALES. . . . . . . . . . . . . . . 219 345 188
GROSS MARGIN . . . . . . . . . . . . . . . 97 153 104
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 14 22 16
Depreciation and Amortization. . . . . . 20 32 18
Selling, General and Administrative. . . 29 46 24
INCOME FROM OPERATIONS . . . . . . . . . . 34 53 46
OTHER EXPENSE:
Loss on Investment in Ionica . . . . . . - - (6)
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (29) (46) (32)
Interest Income. . . . . . . . . . . . . 1 2 1
Net Interest Expense . . . . . . . . . . . (28) (44) (31)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 6 9 9
PROVISION (CREDIT) FOR INCOME TAXES. . . . 4 6 (8)
INCOME FROM CONTINUING OPERATIONS. . . . . 2 3 17
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUNDS)- ($-)
(POUNDS)1. . . . - - 3
NET INCOME . . . . . . . . . . . . . . . . 2 3 20
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,
June 30, 1999 1999
(POUNDS) $ (POUNDS)
(See Note 1)
ASSETS
FIXED ASSETS:
Property, Plant and Equipment, Net of Accumulated
Depreciation of (POUNDS)110 ($173) and (POUNDS)96. . 984 1,551 970
Construction Work in Progress. . . . . . . . . . . . 12 19 15
Total Fixed Assets . . . . . . . . . . . . . 996 1,570 985
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 9 14 12
Investments. . . . . . . . . . . . . . . . . . . . . 17 27 26
Accounts Receivable, Less Provision for
Uncollectibles of (POUNDS)8 ($13) and (POUNDS)9 . 113 178 100
Unbilled Revenue . . . . . . . . . . . . . . . . . . 60 95 84
Prepaids and Other . . . . . . . . . . . . . . . . . 52 82 44
Total Current Assets . . . . . . . . . . . . 251 396 266
OTHER ASSETS:
Goodwill, Net of Accumulated Amortization of
(POUNDS)56 ($88) and (POUNDS)50. . . . . . . . . . 919 1,448 925
Investments, Long-term . . . . . . . . . . . . . . . 50 79 51
Prepaid Pension Asset. . . . . . . . . . . . . . . . 102 161 98
Other Non-Current Assets . . . . . . . . . . . . . . 22 35 22
Total Other Assets . . . . . . . . . . . . . 1,093 1,723 1,096
Total Assets . . . . . . . . . . . . . . . . . . . . . 2,340 3,689 2,347
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,
June 30, 1999 1999
(POUNDS) $ (POUNDS)
(See Note 1)
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital, (POUNDS)1 par value common shares,
440,000,100 authorized and 440,000,002
issued and outstanding . . . . . . . . . . . . . . 440 693 440
Retained Deficit . . . . . . . . . . . . . . . . . . (28) (44) (30)
Total Shareholders' Equity . . . . . . . . . . . . 412 649 410
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 1,103 1,739 1,103
Company-Obligated Mandatorily Redeemable Trust
Securities of Subsidiary Holding Solely Junior
Subordinated Deferrable Interest Debentures. . . . . 168 265 168
OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes. . . . . . . . . . . . . . . . 218 344 214
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . . . . . . 30 47 30
Other . . . . . . . . . . . . . . . . . . . . . . . 14 22 13
Total Other Non-Current Liabilities. . . . . . . . 262 413 257
CURRENT LIABILITIES:
Current Portion of Long-term Debt. . . . . . . . . . 8 13 8
Short-term Debt. . . . . . . . . . . . . . . . . . . 156 246 142
Accounts Payable . . . . . . . . . . . . . . . . . . 59 93 77
Accrued Liabilities and Deferred Income. . . . . . . 76 120 85
Income Taxes Payable . . . . . . . . . . . . . . . . 34 53 37
Other Current Liabilities. . . . . . . . . . . . . . 62 98 60
Total Current Liabilities. . . . . . . . . . . . . 395 623 409
Total Liabilities. . . . . . . . . . . . . . . . . . . 1,928 3,040 1,937
COMMITMENTS AND CONTINGENCIES (NOTE 4)
Total Shareholders' Equity and Liabilities . . . . . . 2,340 3,689 2,347
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)
Three Months Ended
June 30, June 30,
1999 1998
(POUNDS) $ (POUNDS)
Cash Flows from Operating Activities:
Net Income . . . . . . . . . . . . . . . . . 2 3 20
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation of Fixed Asset Investment
Included in Cost of Sales. . . . . . . . 2 3 2
Depreciation and Amortization. . . . . . . 20 32 20
Loss on Investment in Ionica . . . . . . . - - 6
Deferred Income Taxes. . . . . . . . . . . 4 6 13
Changes in Assets and Liabilities:
Receivables and Unbilled Revenue . . . . . 11 17 2
Other Current Assets . . . . . . . . . . . (8) (13) 5
Prepaid Pension Asset. . . . . . . . . . . (4) (6) (5)
Accounts Payable . . . . . . . . . . . . . (18) (28) 1
Accrued Liabilities and Deferred Income. . (9) (14) (10)
Other. . . . . . . . . . . . . . . . . . . - - (21)
Net Cash Provided by Operating
Activities . . . . . . . . . . . . . . - - 33
Cash Flows from Investing Activities:
Capital Expenditures . . . . . . . . . . . (26) (41) (31)
Proceeds from Sale of Property,
Plant and Equipment. . . . . . . . . . . - - 4
Net Change in Short-term Investments . . . 9 14 3
Other. . . . . . . . . . . . . . . . . . . - - 1
Net Cash Used in Investing Activities. . (17) (27) (23)
Cash Flows from Financing Activities:
Proceeds from Issuance of Trust Securities - - 162
Net Change in Short-term Debt. . . . . . . 14 22 (176)
Net Cash Provided (Used) by
Financing Activities . . . . . . . . . 14 22 (14)
Decrease in Cash and Cash Equivalents. . . . (3) (5) (4)
Cash and Cash Equivalents at Beginning of Period 12 19 35
Cash and Cash Equivalents at End of Period 9 14 31
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Interest . . . . . . . . . . . 25 39 14
Cash Paid for Income Taxes . . . . . . . . . 3 5 -
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 June 30, 1999:
Share Capital Retained
Shares Amount Deficit Total
(POUNDS) (POUNDS) (POUNDS)
Balance, April 1, 1999 . . . . . 440,000,002 440 (30) 410
Net Income . . . . . . . . . . . - - 2 2
Balance, June 30, 1999 . . . . . 440,000,002 440 (28) 412
For the three months ended June 30, 1998:
Unrealized
Profit on
Available
Share Capital For Sale Retained
Shares Amount Investments Deficit Total
(POUNDS) (POUNDS) (POUNDS) (POUNDS)
Balance, April 1, 1998 . . . . . 440,000,002 440 - (117) 323
Unrealized Profit on Available
For Sale Investments . . . . . - - 1 - 1
Net Income . . . . . . . . . . . - - - 20 20
Balance, June 30, 1998 . . . . . 440,000,002 440 1 (97) 344
The accompanying notes are an integral part of these consolidated financial statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, 1999 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 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 ((POUNDS)) and in US dollars ($) solely
for the convenience of the reader, at the exchange rate of
(POUNDS)1 = $1.5763, the closing mid-point in London on June
30, 1999. 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.
On March 30, 1999 the Board of Directors of Yorkshire
Power Group Limited ratified a proposal to change its fiscal
year end from March 31 to December 31. A Transition Report
for the transition period from March 31, 1999 to December
31, 1999 will be reported on Form 10-K.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
2. FINANCING AND RELATED ACTIVITIES
During the quarter ended June 30, 1999, Yorkshire Group
canceled Tranche A of its syndicated credit facility.
Tranche A had originally been a (POUNDS)150 million 364 day
revolving credit with a one-year extension option and had
been reduced to (POUNDS)100 million in Fiscal Year 1999. For
further details of the syndicated credit facility, see Part
II, Item 7. "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in Form 10-K.
3. NEW ACCOUNTING STANDARD
During the quarter ended June 30, 1999, Yorkshire Group
adopted the Financial Accounting Standards Board's Emerging
Issues Task Force Consensus (EITF) 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management
Activities". The EITF requires that all energy trading
contracts be marked-to-market. The adoption of the EITF 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 Form 10-K, in Note 5 to the audited
financial statements included therein, and Part II, Item 7.
"Management's Discussion and Analysis of Results of
Operations and Financial Condition".
5. IONICA
Yorkshire Group's investment in Ionica was sold during
Fiscal Year 1999. See Note 7 to the audited financial
statements included in Form 10-K for further details.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
6. DISCONTINUED OPERATIONS - GENERATION BUSINESSES
As part of pre-existing plans to reduce debt, Yorkshire's
generation business was disposed of during Fiscal Year 1999.
Proceeds of (POUNDS)136 million were received (net of fees
and cash disposed of), in respect of the sale, which were
used to reduce debt. A gain on sale of (POUNDS)24 million,
net of income taxes of (POUNDS)31 million was included in net
income for Fiscal Year 1999.
The consolidated statement of income for the 3 months
ended June 30, 1998 has been restated to show the results of
the generation business as income from discontinued
operations.
7. BUSINESS SEGMENTS
Yorkshire Group is primarily engaged in two businesses:
electricity distribution, which involves the transmission of
electricity across its network to end users, and supply,
which involves bulk purchase of electricity and gas for
delivery to its customers through the distribution networks.
These businesses form the basis for the identification of
reportable segments as shown below. Included in "Other" are
insignificant operating subsidiaries as well as various
corporate activities, and non-allocated corporate assets.
Management evaluates segment performance based on segment
income from operations, which is shown below.
Intersegment sales primarily represent sales from the
distribution business to the Supply business for use of the
distribution networks.
The results attributable to the generation business for
Fiscal Year 1999, which has been treated as a discontinued
operation, are excluded from the segment information shown
below.
The results of Yorkshire Group relating to information
technology support activities have been included in the
results reported for the Supply business from the start of
the current accounting period. The segment information for
the quarter ended June 30, 1998 has been reclassified to
conform to current period presentation.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
7. BUSINESS SEGMENTS (continued)
A summary of information about Yorkshire Group's
operations by segments follows (in millions):
Quarter Ended June 30, 1999
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
Revenues from
external customers 17 297 2 - 316
Intersegment sales 57 12 - (69) -
Income (loss) from
operations 33 9 (2) (6) 34
Total assets 981 401 2,661 (1,703) 2,340
Quarter Ended June 30, 1998
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
Revenues from
external customers 12 279 1 - 292
Intersegment sales 61 18 5 (84) -
Income (loss) from
operations 36 21 (5) (6) 46
Total assets 868 327 2,869 (1,601) 2,463
Non-allocated items within total assets consist solely of
goodwill of (POUNDS)919 million at June 30, 1999 and
(POUNDS)963 million at June 30, 1998.
Non-allocated items within income (loss) from operations
consist solely of amortization of goodwill of (POUNDS)6
million in the quarters ended June 30 for both 1999 and
1998.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
8. OFGEM DRAFT PRICE PROPOSAL
As part of a review of PES distribution price
controls, OFGEM published draft price proposals for the 14
regional electricity distribution businesses on August 12,
1999. The draft price proposals are expected to be issued
in final form in November 1999 and would be effective for
the five-year period beginning April 1, 2000. Distribution
prices would be reduced an average of 16% to 21% under the
draft proposals. The proposed distribution rates for
Yorkshire call for a 15% to 20% reduction in distribution
revenues. Yorkshire is in the process of evaluating the
draft price proposals.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
FIRST QUARTER OF THE 9 MONTH PERIOD ENDING DECEMBER 31, 1999
VS. FIRST QUARTER FISCAL YEAR 1999
RESULTS OF OPERATIONS
Net income decreased by (POUNDS)18 million, from
(POUNDS)20 million for the 3 months ended June 30, 1998 to
(POUNDS)2 million for the three months ended June 30, 1999,
due primarily to the following: a decrease in gross margin
attributable to the gas and electricity supply businesses and
an increase in marketing and customer service costs as a
result of the opening up of the competitive market in the
Supply business. In addition there was a favorable
adjustment to tax liabilities of (POUNDS)12 million in the
first quarter of Fiscal Year 1999. These were partly offset
by reduced interest expense in the current accounting period
and a write down in the investment in Ionica of (POUNDS)6
million in Fiscal Year 1999.
Income statement line items which changed significantly
from the first quarter of Fiscal Year 1999 were:
Increase ( Decrease)
(POUNDS) %
in millions
Operating Revenues 24 8
Gross Margin (7) (7)
Loss on Investment in Ionica 6 N/A
Selling, General and Administrative
Expenses 5 21
Interest Expense (3) (9)
Provision (Credit) for Income Taxes 12 150
Electricity supply operating revenues have increased
primarily as a result of growth in the volume supplied to the
non-residential electricity supply market partially offset by
lower sales contract prices.
Although the number of residential gas supply customers
has increased, gross margins for the gas supply business
decreased in the current period compared to the previous
period due to the effects of warmer weather and a decline in
gas market prices.
Revenues attributable to the distribution business have
increased due to growth in the level of electrical
contracting work undertaken and an increase in external
revenues for use of the distribution network due to the
opening up of competition in the domestic electricity supply
market.
Yorkshire Group sold its investment in Ionica during the
last quarter of Fiscal Year 1999. The loss recognized in the
first quarter of Fiscal Year 1999 in respect of a reduction
in fair value of the investment was (POUNDS)6 million. For
further details on the Ionica investment, see Note 7 to the
audited financial statements included in Form 10-K.
The increase in selling general and administrative costs
resulted from increased marketing and customer service
activity since the full opening of the electricity supply
market to competition and a one-time profit on sale of
distribution assets of (POUNDS)2 million in the first quarter
of Fiscal Year 1999, partially offset by reduced costs
incurred in relation to Year 2000 modifications.
The decrease in interest expense resulted from the
application of the proceeds from the sale of the generation
business during Fiscal Year 1999 to reduce the debt of
Yorkshire Group, in addition to lower interest rates in the
UK during the quarter ended June 30, 1999.
The first quarter of Fiscal Year 1999 was favorably
affected by a (POUNDS)12 million settlement of prior years'
tax liabilities, which resulted in an increase in the
effective income tax rate from (54)% in the first quarter of
Fiscal Year 1999 to 67% in the first quarter of the current
accounting period. 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.
FINANCIAL CONDITION
During the quarter ended June 30, 1999, Yorkshire Group
canceled Tranche A of its syndicated credit facility.
Tranche A had originally been a (POUNDS)150 million 364 day
revolving credit with a one-year extension option and had
been reduced to (POUNDS)100 million in Fiscal Year 1999. For
further details of the syndicated credit facility, see Part
II, Item 7. "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in Form 10-K.
LEGAL PROCEEDINGS
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item 3. "Legal Proceedings" for
details of the ongoing litigation with respect to other
corporations' use of actuarial surpluses declared in the
ESPS.
NGC and National Power have now initiated appeals in the
House of Lords. Yorkshire expects the appeal process to be
lengthy.
NGC and National Power have executed deeds of amendment
which purport to cancel their accrued contribution
obligations arising from the Court of Appeal's judgment.
Yorkshire intends to execute similar amendments if and
when the House of Lords rules that such amendments are
effective. This is unlikely to happen before December 2000.
MARKET RISKS
Yorkshire Group has certain market risks inherent in its
business activities, arising from the purchase and sale of
electricity and gas, changes in foreign currency exchange
rates and interest rates. Market risk represents the risk of
loss that may impact Yorkshire Group due to adverse changes
in market prices and rates.
Yorkshire Group's exposure to commodity price variability
and risks arising from changes in foreign currency exchange
rates and interest rates has not changed significantly since
March 31, 1999. For further details, see Part II, Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk"
in Form 10-K.
OFGEM DRAFT PRICE PROPOSAL
As part of a review of PES distribution price
controls, OFGEM published draft price proposals for the 14
regional electricity distribution businesses on August 12,
1999. The draft price proposals are expected to be issued
in final form in November 1999 and would be effective for
the five-year period beginning April 1, 2000. Distribution
prices would be reduced an average of 16% to 21% under the
draft proposals. The proposed distribution rates for
Yorkshire call for a 15% to 20% reduction in distribution
revenues. Yorkshire is in the process of evaluating the
draft price proposals.
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 interpret incorrectly 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:
Yorkshire Group has established a program which tests,
repairs or replaces, as necessary, both computer hardware and
software including mainframe, servers, applications, and
embedded chips including those in the electricity
distribution network.
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.
Testing and remediation of these highest priority systems
are now complete.
The problem is also being addressed with third parties
with whom Yorkshire Group has material relationships,
including suppliers, generators, customers and government
organizations and regulators. Assurances are being sought
from such parties regarding their state of Year 2000
readiness. However these third parties nonetheless represent
a risk that cannot be assessed with precision or controlled
with certainty.
Yorkshire Group 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.
Yorkshire Group's program has been independently assessed
on behalf of the Regulator. The Regulator reported above-
average progress and that Yorkshire Group is on target for
timely completion of the program.
Progress on readiness of critical systems (those that affect
safety and/or continuity of supply of electricity to
customers, or would have a material impact on Yorkshire
Group) 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 August 31, 99% April 13, 100%
implementation cycle and 1999 1999
delivery of the project.
Costs to Address the Company's Year 2000 Issue
Yorkshire Group has expended (POUNDS)15 million to June
30, 1999 on the Year 2000 Program and estimates spending an
additional (POUNDS)2 million to achieve Year 2000 readiness.
Of this (POUNDS)17 million, approximately (POUNDS)14 million
will be expensed as incurred and (POUNDS)3 million will be
capitalized. Yorkshire Group 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 Yorkshire Group's results of operations,
cash flows or financial condition.
Risks of the Company's Year 2000 Issues
Yorkshire Group is implementing a detailed series of tests
to minimize the possibility of service or business
interruption related to Year 2000 issues. Yorkshire Group
believes, based on the current tests, that the distribution
system will be able to distribute electricity after December
31, 1999. The results of these tests increase confidence,
but do not guarantee error free operations.
The applications posing the greatest business risk to
Yorkshire Group'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.
Due to the complexity of the problem and the
interdependent nature of systems, if Yorkshire Group'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.
Year 2000 Contingency Plans
Yorkshire Group has well established contingency plans
that have been tested. These plans are being reviewed to
develop additional procedures to deal specifically with
situations that could arise in relation to the Year 2000
problem. A risk based approach has been adopted and should
be completed 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-K for the Fiscal Year ended
March 31, 1999, Part I, Item 1. "Business - Yorkshire Group
and the US Parents - AEP" for details of the planned merger
of AEP and CSW. Assuming the receipt of all required
approvals, the merger is now expected to be completed in the
first quarter of 2000.
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item 1. "Business - The Electric
Utility Industry in Great Britain - Industry Structure". On
June 11, 1999, London Electricity, which is owned by EdF,
announced its bid for the electricity supply business of
SWEB. On June 30, 1999, British Energy announced its bid for
the electricity and gas supply businesses of SWALEC.
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item I. "Business - Regulation under
the Electricity Act - Regulatory Developments" for details of
the OFFER and OFGEM consultation paper on "Distribution Price
Control Review" published on May 20, 1999.
Yorkshire submitted its response to the consultation on
July 2, 1999. In its response:
- - Yorkshire supported the continuation of the RPI-X form
of regulation but agreed that some improvements may be
required;
- - Yorkshire expressed concern that the distribution price
control review consultation pre-empts the business
separation debate and ignores cost recovery;
- - Yorkshire strongly supported the intention to take
quality of supply into account when assessing relative
efficiency;
- - Yorkshire pointed out that its controllable operating
costs have reduced significantly under the RPI-X form of
control but noted that the historical rate of reduction
cannot be sustained;
- - Yorkshire expressed concern that adjustments made to
operating costs were inconsistent between PESs and in some
cases inaccurate;
- - Yorkshire expressed concern with respect to the
differences among PES's between actual capital expenditure
and those estimated at the last review.
In addition Yorkshire commented that the benefits of
shareholder investments in DAMS should be addressed as part
of this review.
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item I. "Business - The Electric
Utility Industry in Great Britain - Supply of Electricity -
Current Electricity Supply Price Regulation" for details of
the consultation document published in June 1999 by the
Regulator entitled "Review of Domestic and Small Business
Electricity Supply Regulation".
Yorkshire responded to this consultation document on
July 9, 1999. Among the principal points of Yorkshire's
response are:
- - the growth of vertical integration poses a threat to the
effective development of the competitive market;
- - there should be equal electricity purchase cost
allowances across all PES's;
- - business customers can be effectively protected by the
workings of the market and do not need to be part of price
control;
- - regional maximum prices should be replaced by a national
maximum price cap;
- - the price control should be a maximum price cap
restraint;
- - the regulatory price cap should recognize any movement
of costs from distribution to electricity supply and the
mandatory cost of introducing the revised electricity
trading arrangements; and
- - there should be a level playing field on social
obligations - all energy suppliers should be obliged to
offer the same minimum levels of service.
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item 1. "Business - The Electric
Utility Industry in Great Britain - Regulation Under the
Electricity Act - Separation of Distribution and Electricity
Supply; Metering and Meter Reading" for details of the
Regulator's proposals and consultation on business
separation.
Yorkshire submitted its response to the consultation
document on June 30, 1999. The main points of this response
included:
- - Yorkshire expressed the view that the numerous
requirements embodied in the existing PES Licenses provide
considerable protection to competing suppliers and
customers;
- - Yorkshire emphasized that it had introduced separation
to the extent required by the existing PES License
conditions. Any further separation would be purely to
meet regulatory requirements and any related costs
incurred should be fully recoverable;
- - the cost impact of separation would be very significant.
Yorkshire supported OFGEM's view that the sharing of some
services, where competition is not impacted, should be
allowed and is efficient; and
- - Yorkshire expressed concern that statutory, common law
and governance requirements, which impose fiduciary and
other responsibilities (including a duty of care) on
Directors should not be diluted or diminished as a result
of OFGEM's proposals.
As requested by OFGEM, Yorkshire submitted an outline of a
preliminary business separation implementation plan by July
9, 1999.
Yorkshire also responded to OFFER's proposals regarding
the introduction of competition in metering. Revised PES
License proposals reflecting the introduction of competition
in metering are expected to be issued by OFGEM during August
1999.
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item I. "Business- The Electric
Utility Industry in Great Britain - Regulation under the
Electricity Act - Social Action Plan" for details of the
discussion document published by OFFER and OFGAS on their
proposals to strengthen their social action plans.
Yorkshire responded to this discussion document on July
15, 1999, the key points of which are as follows:
- - Yorkshire believes that social obligations are best
delivered through the distribution business, with costs
allowed through the price control;
- - if obligations are placed on the Supply business, all
suppliers should have the same obligations; and
- - Yorkshire is in favor of a social fund which would
subsidize the cost of prepayment metering.
Legal Proceedings
Reference is made to Form 10-K for the Fiscal Year ended
March 31, 1999, Part I, Item 3. "Legal Proceedings" for
details of the ongoing litigation with respect to other
corporations' use of actuarial surpluses declared in the
ESPS.
NGC and National Power have now initiated appeals in the
House of Lords. Yorkshire expects the appeal process to be
lengthy.
NGC and National Power have executed deeds of amendment
which purport to cancel their accrued contribution
obligations arising from the Court of Appeal's judgment.
Yorkshire intends to execute similar amendments if and
when the House of Lords rules that such amendments are
effective. This is unlikely to happen before December 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
A report on Form 8-K dated April 9, 1999 was filed under
Item 8. Change in Fiscal Year.
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