1
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, 2000
[ ] 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, 2000
----------------------------------------------------------------------------
Yorkshire Power Par Value (pound)1 Per Share 440,000,002
Group Limited
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARY COMPANIES
Form 10-Q
For The Quarter Ended June 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Consolidated Statements of Income 4
Consolidated Balance Sheets 6
Consolidated Statements of Cash Flows 8
Consolidated Statements of Changes in Shareholders' Equity 10
Notes to Consolidated Financial Statements 12
Management's Discussion and Analysis of Results of
Operations and Financial Condition 21
PART II OTHER INFORMATION
Item 5 Other Information 26
Item 6 Exhibit and Reports on Form 8-K 29
SIGNATURES 30
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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; 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.
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SELECTED DEFINITIONS
- --------------------
When used in this report, the following terms will have the meaning indicated.
"AEP" means American Electric Power Company, Inc.
"Authorized Area" means Yorkshire's service area as determined by its PES
license
"CFD" means contract for differences
"CSW" means Central and South West Corporation
"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 the
Transition Period
"Ionica" means Ionica Group plc
"NETA" means New Electricity Trading Arrangements
"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
"SEEBOARD" means SEEBOARD plc
"Supply" means the supply of electricity and gas
"Transition Period" means the nine-month period beginning April 1, 1999 and
ending December 31, 1999
"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
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Three Months Ended
June 30, June 30,
2000 1999
-------------- -------
(pound) $ (pound)
OPERATING REVENUES ....................... 328 497 316
COST OF SALES ............................ 226 342 219
--- --- ---
GROSS MARGIN ............................. 102 155 97
--- --- ---
OPERATING EXPENSES:
Maintenance ............................ 11 17 14
Depreciation and Amortization .......... 19 29 20
Selling, General and Administrative .... 29 44 29
--- --- ---
INCOME FROM OPERATIONS ................... 43 65 34
INTEREST EXPENSE, NET: ................... (28) (42) (28)
--- --- ---
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................... 15 23 6
PROVISION FOR INCOME TAXES ............... 7 11 4
--- --- ---
NET INCOME ............................... 8 12 2
=== === ===
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
Six Months Ended
June 30, June 30,
2000 1999
---------------- -------
(pound) $ (pound)
OPERATING REVENUES ....................... 751 1,137 710
COST OF SALES ............................ 520 787 493
--- ----- ---
GROSS MARGIN ............................. 231 350 217
--- ----- ---
OPERATING EXPENSES:
Maintenance ............................ 25 38 29
Depreciation and Amortization .......... 38 58 40
Selling, General and Administrative .... 66 100 65
--- ----- ---
INCOME FROM OPERATIONS ................... 102 154 83
OTHER EXPENSE, NET: ...................... -- -- (4)
INTEREST EXPENSE, NET: ................... (57) (86) (56)
--- ----- ---
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .................... 45 68 23
PROVISION FOR INCOME TAXES ............... 17 26 11
--- ----- ---
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE .................. 28 42 12
CUMULATIVE EFFECT ON PRIOR YEARS (TO
DECEMBER 31, 1999) OF CHANGING TO A
DIFFERENT DEPRECIATION METHOD (NOTE 7) ... 8 12 --
--- ----- ---
NET INCOME ............................... 36 54 12
=== ===== ===
PROFORMA AMOUNTS ASSUMING THE
NEW DEPRECIATION METHOD IS
APPLIED RETROACTIVELY
NET INCOME ............................... 28 42 14
=== ===== ===
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
June 30, December 31,
2000 1999
--------------- -------
(pound) $ (pound)
(See Note 1)
ASSETS
- ------
FIXED ASSETS:
Property, Plant and Equipment, Net of Accumulated
Depreciation of (pound)165 ($250) and (pound)139 ............ 1,052 1,593 1,005
Construction Work in Progress ................................. 12 18 31
----- ----- -----
Total Fixed Assets .................................... 1,064 1,611 1,036
----- ----- -----
CURRENT ASSETS:
Cash and Cash Equivalents ..................................... 6 9 9
Investments ................................................... 17 26 16
Accounts Receivable, Less Provision for
Uncollectibles of (pound)10 ($15) and (pound)9 .............. 123 186 108
Unbilled Revenue .............................................. 63 95 100
Electricity and Gas Trading Contracts ......................... 58 88 4
Prepaids and Other ............................................ 47 71 40
----- ----- -----
Total Current Assets .................................. 314 475 277
----- ----- -----
OTHER ASSETS:
Goodwill, Net of Accumulated Amortization of
(pound)80 ($121) and (pound)68 .............................. 890 1,348 902
Investments, Long-term ........................................ 41 62 45
Prepaid Pension Asset ......................................... 125 189 115
Electricity and Gas Trading Contracts ......................... 33 50 --
Other Non-Current Assets ...................................... 22 33 20
----- ----- -----
Total Other Assets .................................... 1,111 1,682 1,082
----- ----- -----
TOTAL ASSETS .................................................... 2,489 3,768 2,395
===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
June 30, December 31,
2000 1999
---------------- -------
(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 ................................. 440 666 440
Retained Profit .......................................... 47 71 11
----- ----- -----
Total Shareholders' Equity ............................. 487 737 451
----- ----- -----
LONG-TERM DEBT ............................................. 1,131 1,712 964
SHORT-TERM DEBT REFINANCED FEBRUARY 2000 ................... -- -- 165
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
SECURITIES OF SUBSIDIARY HOLDING SOLELY JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (NOTE 8) ..... 162 245 166
OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes .................................... 217 329 195
Provision for Uneconomic Electricity
and Gas Contracts ...................................... 27 41 29
Electricity and Gas Trading Contracts .................... 34 51 --
Other .................................................... 15 22 13
----- ----- -----
Total Other Non-Current Liabilities .................... 293 443 237
----- ----- -----
CURRENT LIABILITIES:
Current Portion of Long-term Debt ........................ 9 14 9
Short-term Debt .......................................... 127 192 131
Accounts Payable ......................................... 44 67 79
Accrued Liabilities and Deferred Income .................. 75 114 91
Electricity and Gas Trading Contracts .................... 56 85 3
Income Taxes Payable ..................................... 54 82 58
Other Current Liabilities ................................ 51 77 41
----- ----- -----
Total Current Liabilities .............................. 416 631 412
----- ----- -----
TOTAL LIABILITIES .......................................... 2,002 3,031 1,944
----- ----- -----
COMMITMENTS AND CONTINGENCIES (NOTE 4)
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES ................. 2,489 3,768 2,395
===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
Six Months Ended
June 30, June 30,
2000 1999
--------------- ------
(pound) $ (pound)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................ 36 54 12
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation of Fixed Asset Investment
Included in Cost of Sales ............................. 4 6 6
Depreciation and Amortization ........................... 38 57 40
Cumulative Effect of a Change in
Depreciation Method ................................... (12) (18) --
Loss on Investment in Ionica ............................ -- -- 1
Deferred Income Tax Liability ........................... 15 23 16
Changes in Assets and Liabilities:
Receivables and Unbilled Revenue ........................ 22 33 (4)
Income Taxes Payable .................................... (4) (6) 2
Prepaids and Other Current Assets ....................... (2) (3) (20)
Prepaid Pension Asset ................................... (10) (15) (11)
Other Current Liabilities ............................... 12 18 17
Accounts Payable ........................................ (35) (53) (38)
Accrued Liabilities and Deferred Income ................. (16) (24) 3
Other ................................................... 4 6 3
---- ---- ---
Net Cash Provided by Operating
Activities .......................................... 52 78 27
---- ---- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures .................................... (47) (71) (69)
Proceeds from Sale of Discontinued Operations ........... -- -- 94
Proceeds from Sale of Property,
Plant and Equipment ................................... 1 2 6
Net change in Short-term Investments .................... (1) (2) 9
Other ................................................... -- -- 3
---- ---- ---
Net Cash (Used) Provided by Investing Activities ...... (47) (71) 43
---- ---- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-term Debt ................ 165 250 --
Repayment of Long-term Debt ............................. (4) (6) --
Net Change in Short-term Debt ........................... (169) (256) (69)
---- ---- ---
Net Cash Used by
Financing Activities ................................ (8) (12) (69)
---- ---- ---
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........... (3) (5) 1
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 9 14 8
==== ==== ===
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ 6 9 9
==== ==== ===
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months Ended
June 30, June 30,
2000 1999
------------- ------
(pound) $ (pound)
Cash Paid for Interest ..................... 63 95 64
== == ==
Cash Paid for Income Taxes ................. 9 14 3
== == ==
The accompanying notes are an integral part of these consolidated financial
statements.
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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, 2000:
Share Capital
------------------- Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) pound) (pound)
Balance, April 1, 2000 ......... 440,000,002 440 39 479
Net Income ..................... -- -- 8 8
----------- --- -- ---
Balance, June 30, 2000 ......... 440,000,002 440 47 487
=========== === == ===
For the three months ended June 30, 1999:
Share Capital
------------------- Retained
Shares Amount Deficit Total
------ ------ ------- -----
(pound) (pound) (pound)
Balance, April 1, 1999 ........ 440,000,002 440 (30) 410
Net Income ..................... -- -- 2 2
----------- --- --- ---
Balance, June 30, 1999 ......... 440,000,002 440 (28) 412
=========== === === ===
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions, except shares)
(UNAUDITED)
For the six months ended June 30, 2000:
Share Capital
------------------ Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) (pound) (pound)
Balance, January 1, 2000 ....... 440,000,002 440 11 451
Net Income ..................... -- -- 36 36
----------- --- -- ---
Balance, June 30, 2000 ......... 440,000,002 440 47 487
=========== === == ===
For the six months ended June 30, 1999:
Share Capital
------------------ Retained
Shares Amount Deficit Total
------ ------ -------- -----
(pound) (pound) (pound)
Balance, January 1, 1999 ...... 440,000,002 440 (40) 400
Net Income ..................... -- -- 12 12
----------- --- --- ---
Balance, June 30, 1999 ......... 440,000,002 440 (28) 412
=========== === === ===
The accompanying notes are an integral part of these consolidated financial
statements.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements for the Transition
Period ended December 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 ((pound)) and in
US dollars ($) solely for the convenience of the reader, at the exchange
rate of (pound)1 = $1.5139, the closing mid-point in London on June 30,
2000. 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.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
2. FINANCING AND RELATED ACTIVITIES
Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust')
is a New York common law trust, the sole assets of which consist of (i) a
100% beneficial interest in (pound)155 million principal amount of Reset
Senior Notes, issued in February 2000 and due February 15, 2020, (the
`Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of
Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a
currency swap with UBS AG, London Branch (the `Currency Swap') and an
option granted to UBS AG, London Branch (the `Call Option').
The PATS Trust has issued $250 million principal amount of 8.25%
Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the
Certificates). All of the US Dollar proceeds from the offering by the
PATS Trust of the Certificates have been swapped by the Trust with UBS
AG, London Branch for (pound) Sterling pursuant to the Currency Swap. The
PATS Trust has used the (pound) Sterling, together with the proceeds
received by the PATS Trust from UBS AG, London Branch under the Call
Option, to purchase the Senior Notes issued by YPF2. YPF2 has loaned the
net proceeds to YPG and subsidiaries. These proceeds were used as working
capital and for the repayment of debt, including repayment of a loan
which was entered into in December 1999 to repay Tranche B of Yorkshire
Group's syndicated credit facility. YPG has issued a guarantee that fully
and unconditionally guarantees the due and punctual payment of principal
and interest on the Senior Notes.
3. NEW ACCOUNTING STANDARD
SFAS No. 133, `Accounting for Derivative Instruments and Hedging
Activities', was issued in June 1998. This statement was originally
scheduled to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999: SFAS No. 137 has delayed the effective
date for one year. SFAS 133 establishes accounting and reporting
standards for derivative instruments. It requires that all derivatives be
recognized as either an asset or a liability, measured at fair value, in
the financial statements. If certain conditions are met a
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
3. NEW ACCOUNTING STANDARD (continued)
derivative may be designated as a hedge of possible changes in fair value
of a recognized asset or liability or of an unrecognized firm commitment;
variable cash flows of a recognized asset or liability or of a forecasted
transaction; or foreign currency exposure. The accounting/reporting for
fair value changes in a derivative used as a hedging instrument depends
on the intended use and resulting designation of the derivative.
Management is currently studying the provisions of SFAS 133 to determine
the impact of its adoption on results of operations, cash flows and
financial condition. Yorkshire intends to adopt the standard as required
by January 2001.
4. CONTINGENCIES
LEGAL PROCEEDINGS
Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings"
for details of ongoing litigation with respect to other corporations' use
of actuarial surpluses declared in the ESPS. Yorkshire made similar use
of actuarial surplus and, if it is decided by the House of Lords that the
sums concerned are all due to the ESPS, the maximum amount payable by
Yorkshire in respect of its use of surplus is approximately (pound)38
million plus interest.
Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings"
for details of ongoing litigation with respect to Optimum Solutions
Limited. The final outcome of this matter cannot be determined at
present.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
4. CONTINGENCIES (continued)
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements. As a result of the transition to a more
competitive utility environment, estimates are required for revenues and
the costs to produce revenues, including bad debt expense.
Electricity generated in England and Wales is sold by generators
and bought by suppliers through the Pool. Charges are raised on a half
hourly basis. Prior to opening the domestic market to competition on
September 14, 1998, all charges were allocated between suppliers based on
actual meter readings. Charges in respect of residential customers, whose
meters are not read at half hourly intervals, were allocated to the host
PES. Since September 14, 1998, it is necessary to allocate charges in
respect of residential customers between suppliers based on estimates.
Actual results could differ from the Company's estimates.
REVISION TO ASSET LIVES
In addition to the change in depreciation method, described below
in Note 7, Yorkshire Group has revised the estimated useful economic
lives of its distribution network assets in order to provide a more
accurate estimated life for each asset type. Such assets are now
depreciated over a period of between 10 and 80 years. In the six months
ended June 30, 2000, the effect of this change was to increase net income
by (pound)2 million. The effect of the change in the year ending December
31, 2000 is expected to be an increase in net income of (pound)4 million.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
4. CONTINGENCIES (continued)
OFGEM PRICE CONTROL REVIEW
Following the conclusion of the electricity distribution and supply
price control reviews and other Ofgem initiatives, a number of PES
licence modifications became effective on April 1, 2000. Consequently,
from that date, there has been a reduction in the prices Yorkshire can
charge its distribution and supply customers. For details of the price
control reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's
Businesses - Industry Background - Distribution of Electricity -
Distribution Price Regulation from April 1, 2000" and "Yorkshire's
Businesses - Industry Background - Supply of Electricity - Electricity
Supply Price Regulation from April 1, 2000".
In response to Ofgem's final proposals and increasing competition,
Yorkshire has adopted an aggressive program of reducing controllable
costs. Significant features of this program include reductions in capital
expenditure, staff reductions, outsourcing of certain functions and
consolidation of facilities. Yorkshire intends to aggressively pursue
this cost reduction program and is evaluating additional cost reduction
measures to further mitigate the effects of Ofgem's final proposals and
increasing competition in the electricity supply business. Yorkshire
Group expects that the net result of Ofgem's electricity supply and
distribution price reductions, and competitive demands in the Supply
business and Yorkshire's mitigation efforts will be a decline in
Yorkshire Group's results of operations and a reduction in its cash flows
which, in each case, may be significant.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
5. RATIONALIZATION
Yorkshire plans to streamline its distribution and Supply
workforces and has announced a reduction of approximately 350 positions
(260 positions from the distribution business and 90 positions from the
Supply business) during 2000 and a further 75 positions from the
distribution business in 2001. A provision of approximately (pound)7
million has been recorded in January 2000 (in Selling, General and
Administrative expenses) to reflect the cost of the 350 reductions in
2000. The majority of these redundancies are expected to take place in
the latter half of 2000. The balance of the provision at June 30, 2000
was approximately (pound)5 million.
Such streamlining is part of the overall program of reducing
controllable costs in response to Ofgem's final distribution and supply
price control reviews and to increasing competition in the Supply
business.
6. 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. 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 network.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
6. BUSINESS SEGMENTS (continued)
A summary of information about Yorkshire Group's operations by
segments follows (in millions):
Six Months Ended June 30, 2000
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(pound) (pound) (pound) (pound) (pound)
Revenues from
external customers 44 707 -- -- 751
Intersegment sales 104 12 -- (116) --
Income (loss) from
operations 70 47 (3) (12) 102
Total assets 1,082 464 2,798 (1,855) 2,489
Six Months Ended June 30, 1999
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(pound) (pound) (pound) (pound) (pound)
Revenues from
external customers 36 672 2 -- 710
Intersegment sales 123 23 4 (150) --
Income (loss) from
operations 73 23 (2) (11) 83
Total assets 981 401 2,661 (1,703) 2,340
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
6. BUSINESS SEGMENTS (continued)
Non-allocated items within total assets consist principally of
goodwill of (pound)890 million at June 30, 2000 and (pound)919 million at
June 30, 1999.
Non-allocated items within income (loss) from operations consist
principally of amortization of goodwill of (pound)12 million in the six
months ended June 30 for both 2000 and 1999.
7. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Yorkshire Group has implemented a change in the depreciation method
for its distribution network assets. Previously distribution network
assets were depreciated at a rate of 3% per annum for 20 years and 2% per
annum for the remaining 20 years. A straight line depreciation method has
now been implemented for such assets as this is believed to better match
the cost of the assets with the anticipated usage pattern. The effect of
this change in the six months ended June 30, 2000 was to increase net
income by (pound)2 million. The cumulative effect of this change in
accounting principle on prior accounting periods to December 31, 1999 is
an increase in income of approximately (pound)8 million, after a
reduction for income taxes of (pound)4 million recorded in the quarter
ended March 31, 2000.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES OF SUBSIDIARY
HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
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") 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 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.
Since June 1998 Yorkshire Group has repurchased 385,000 Trust
Securities with a nominal value of approximately $10 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Quarter Ended June 30, 2000 vs. Quarter Ended June 30, 1999
-----------------------------------------------------------
And
---
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
-----------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for the year to date period increased by (pound)24
million (200%) from (pound)12 million to (pound)36 million. There was an
increase in net income of (pound)6 million (300%) in the latest quarter
from (pound)2 million to (pound)8 million. This is due primarily to the
following: an increase in gross margin attributable to the gas and
electricity supply businesses and the cumulative effect on prior years of
a revised depreciation method.
Income statement line items that changed significantly were:
Increase/(decrease)
-------------------
Second Quarter Year to Date
(pound) % (pound) %
(in millions)
Operating Revenues 12 4 41 6
Gross Margin 5 5 14 6
Provision for Income Taxes 3 75 6 55
Cumulative effect on prior -- -- 8 N/A
years (to December 31, 1999)
of changing to a different
depreciation method
Net Income 6 300 24 200
Electricity supply operating revenues have decreased when compared to
the same period last year. A decline in volumes supplied to the
residential electricity supply market has been partially offset by a
growth in the volume of electricity supplied to the non-residential
electricity supply market.
External revenues attributable to the distribution business have
increased due to the competitive market creating growth in revenues for
the use of the distribution network. However, this growth has been offset
in part by the impact of the distribution price control review from April
1, 2000 which
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adversely affected distribution revenues in the quarter ended June 30,
2000.
Gas supply revenues increased as the number of residential gas supply
customers rose in the competitive market. Increased volumes have led to an
improvement in gross margin for the gas supply business.
Despite competitive pressures, gross margin for the electricity
supply business has increased, primarily due to lower electricity pool
costs and reduced CFD payments. In addition other costs have decreased,
notably those associated with the use of the distribution network, as a
result of the distribution price control review from April 1, 2000.
It is anticipated that strong competitive pressures and the impact of
the price control reviews on revenues experienced in the quarter ended
June 30, 2000 will continue during the remainder of the year. In addition
the method of trading electricity will change following the implementation
of NETA which is now scheduled to be in place by November 21, 2000. It is
anticipated that NETA will make the market for the sale of electricity by
generators more competitive.
Selling, general and administrative costs during the six months ended
June 30, 2000 moved little compared to 1999 because the increase in
rationalization costs in 2000 was offset by a reduction in costs incurred
in relation to Year 2000 modifications and costs associated with the
development of new systems to facilitate competition.
Certain reclassifications have been made to the prior period
financial information. Expenditure of (pound)9 million charged to
maintenance in the six month period ended June 30, 1999 has been restated
as Selling, General and Administrative expenditure so as to be consistent
with the position of these costs for the six month period ended June 30,
2000.
The provision for income taxes has increased in line with the
increased profitability of Yorkshire Group in the six month period ended
June 30, 2000.
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Yorkshire Group has implemented a change in the depreciation method
for its distribution network assets. Previously, distribution network
assets were depreciated at a rate of 3% per annum for 20 years and 2% per
annum for the remaining 20 years. A straight line depreciation method has
now been implemented for such assets as this is believed to
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better match the cost of the assets with the anticipated usage pattern.
The effect of this change in the six months ended June 30, 2000 was to
increase net income by (pound)2 million. The cumulative effect of this
change in accounting principle on prior accounting periods to December
31, 1999 is an increase in income of approximately (pound)8 million,
after a reduction for income taxes of (pound)4 million recorded in the
quarter ended March 31, 2000.
REVISION TO ASSET LIVES
In addition to the change in depreciation method, Yorkshire Group
has revised the estimated useful economic lives of its distribution
network assets in order to provide a more accurate estimated life for each
asset type. Such assets are now depreciated over a period of between 10
and 80 years. In the six months ended June 30, 2000, the effect of this
change was to increase net income by (pound)2 million. The effect of the
change in the year ending December 31, 2000 is expected to be an increase
in net income of (pound)4 million.
FINANCIAL CONDITION
Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust')
is a New York common law trust, the sole assets of which consist of (i) a
100% beneficial interest in (pound)155 million principal amount of Reset
Senior Notes, issued in February 2000 and due February 15, 2020, (the
`Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of
Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a
currency swap with UBS AG, London Branch (the `Currency Swap') and an
option granted to UBS AG, London Branch (the `Call Option').
The PATS Trust has issued $250 million principal amount of 8.25%
Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the
Certificates). All of the US Dollar proceeds from the offering by the PATS
Trust of the Certificates have been swapped by the Trust with UBS AG,
London Branch for (pound) Sterling pursuant to the Currency Swap. The PATS
Trust has used the (pound) Sterling, together with the proceeds received
by the PATS Trust from UBS AG, London Branch under the Call Option, to
purchase the Senior Notes issued by YPF2. YPF2 has loaned the net proceeds
to YPG and subsidiaries. These proceeds were used as working capital and
for the repayment of debt, including repayment of a loan which was entered
into to repay Tranche B of Yorkshire Group's syndicated credit facility.
YPG has issued a guarantee that fully and unconditionally guarantees the
due and punctual payment of principal and interest on the Senior Notes.
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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 has
increased as a result of increased energy trading during the six months
ended June 30, 2000. Risk management policies have been established by a
risk management committee which has responsibility for oversight of all
energy risk management. Trading is conducted in accordance with defined
Value at Risk parameters approved by Yorkshire Group. Value at Risk has
not changed significantly in the six month period ended June 30, 2000.
Risks arising from changes in foreign currency exchange rates and interest
rates has not changed significantly since December 31, 1999. For further
details on market risk, see Part II, Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk" in Form 10-K.
RATIONALIZATION
Yorkshire plans to streamline its distribution and Supply workforces
and has announced a reduction of approximately 350 positions (260
positions from the distribution business and 90 positions from the Supply
business) during 2000 and a further 75 positions from the distribution
business in 2001. A provision of approximately (pound)7 million has been
recorded in January 2000 to reflect the cost of the 350 reductions in
2000. The majority of these redundancies are expected to take place in the
latter half of 2000. The balance of the provision at June 30, 2000 was
approximately (pound)5 million.
Such streamlining is part of the overall program of reducing
controllable costs in response to Ofgem's final distribution and supply
price control reviews and to increasing competition in the Supply
business.
LEGAL PROCEEDINGS
Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings"
for details of ongoing litigation with respect to other corporations' use
of actuarial surpluses declared in the ESPS. Yorkshire made similar use of
actuarial surplus and, if it is decided by the House of Lords that the
sums concerned
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are all due to the ESPS, the maximum amount payable by Yorkshire in
respect of its use of surplus is approximately (pound)38 million plus
interest.
OFGEM PRICE CONTROL REVIEW
Following the conclusion of the electricity distribution and supply
price control reviews and other Ofgem initiatives, a number of PES
license modifications became effective on April 1, 2000. Consequently,
from that date, there has been a reduction in the prices Yorkshire can
charge its distribution and supply customers. For details of the price
control reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's
Businesses - Industry Background - Distribution of Electricity -
Distribution Price Regulation from April 1, 2000" and "Yorkshire's
Businesses - Industry Background - Supply of Electricity - Electricity
Supply Price Regulation from April 1, 2000".
In response to Ofgem's final proposals and increasing competition,
Yorkshire has adopted an aggressive program of reducing controllable
costs. Significant features of this program include reductions in capital
expenditure, staff reductions, outsourcing of certain functions and
consolidation of facilities. Yorkshire intends to aggressively pursue
this cost reduction program and is evaluating additional cost reduction
measures to further mitigate the effects of Ofgem's final proposals and
increasing competition in the electricity supply business. Yorkshire
Group expects that the net result of Ofgem's electricity supply and
distribution price reductions, and competitive demands in the Supply
business and Yorkshire's mitigation efforts will be a decline in
Yorkshire Group's results of operations and a reduction in its cash flows
which, in each case, may be significant.
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.
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PART II. OTHER INFORMATION
Item 5. Other Information
Reference is made to Form 10-K, Part I, Item 1 "Yorkshire Group and
the US Parents - AEP" and to Form 10-Q for the quarter ended March 31,
2000, Part II, Item 5 "Other Information" for details of the planned
merger between AEP and CSW. On June 15, 2000, following the receipt of
final regulatory approval the merger of AEP and CSW was completed.
The common ownership in the UK resulting from the merger of one of
Yorkshire's parent companies and the sole owner of SEEBOARD creates what
is known as a "deemed merger" in the UK. As noted in Form 10-K, Part I,
Item 1 "Yorkshire Group and the US Parents - AEP" in January 2000, the UK
Department of Trade and Industry sought assurances about this deemed
merger situation, in particular the separation of Yorkshire's
distribution business from its electricity supply business and about
facilitation of competition in generation and electricity supply. These
assurances were given and clearance of this deemed merger granted.
Modifications will be made to the PES Licenses of both Yorkshire and
SEEBOARD in order to reflect such assurances. These modifications are
expected to become effective in late August 2000.
Reference is made to Form 10-K, Part I, Item 1 "Yorkshire Group and
the US parents - NCE" for details of the planned merger of NCE and NSP.
The NCE/NSP merger is now expected to be completed in the third quarter
of 2000.
Reference is made to Form 10-K, Part 1, Item I "The Electric
Utility Industry in Great Britain - Regulatory Developments - Review of
the Regulatory Framework: The Utilities Bill" for details of the UK
government's proposed legislation to modernize the framework for utility
regulation of the electricity and gas sectors.
On July 28, 2000, the Utilities Bill received Royal Assent thereby
creating the Utilities Act 2000 (the "Utilities Act"). The main
provisions of the Utilities Act include:
- the establishment of the Gas and Electricity Markets Authority
("the Authority") in place of the individual regulators for gas and
electricity. The office to support the Authority will be known as Ofgem;
- a new principal objective for the Authority to protect the
interests of consumers, wherever appropriate by promoting
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effective competition;
- powers for the Authority to impose financial penalties on
companies for breaches of license conditions and other specified
statutory requirements (such penalties may be in an amount not to exceed
10% of the licensees' turnover);
- the establishment of an independent Council with responsibility
for seeking to resolve complaints, providing information of use to
consumers, and advocating the interests of all consumers to the
Authority, government and others with an influence on regulation;
- a requirement for price-regulated gas and electricity utilities
to disclose links (if any) between directors' pay and customer service
standards;
- legislation to underpin NETA;
- separate licensing of electricity supply and distribution, and
the introduction of a bar on supply and distribution licenses being held
by the same legal person (which effectively means that the electricity
supply and distribution businesses of current PESs would be put into
separate companies. This does not preclude common ownership of the
companies holding the electricity supply and distribution licenses);
- new `collective' license modification procedures enabling the
Authority to modify standard license conditions without a Competition
Commission reference, even if some companies disagree (although in
certain circumstances a Competition Commission reference will still be
necessary);
- a duty on the Authority, in the exercise of its statutory
functions, to have regard to guidance issued by the Secretary of State on
the social and environmental objectives relevant to the gas and
electricity sectors;
- new powers for the Secretary of State to make regulations to
promote energy efficiency and the generation of electricity from
renewable sources, and to provide for a cross-subsidy for the benefit of
disadvantaged consumers; and
- a requirement for the Authority to give reasons for certain key
decisions and to publish and consult on significant future programs.
The only clause in the Utilities Act which is currently in force,
however, is that relating to the license modifications
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required to implement NETA. All other sections will come into force after
the Secretary of State has issued appropriate statutory instruments
announcing dates. There is currently no clear timetable for the
implementation of the different elements of the Utilities Act. Yorkshire
is assessing the implications of the Utilities Act for the Company.
Reference is made to Form 10-K, Part 1, Item I "The Electric
Utility Industry in Great Britain - Regulatory Developments - New
Electricity Trading Arrangements" for details of the new electricity
trading arrangements designed to replace the Pool. The Utilities Act
gives the UK Secretary of State for Trade and Industry the power to
impose the PES license changes required to implement NETA. These changes
will contain a requirement for PESs to be party to a number of new
industry-wide agreements in addition to securing changes to current core
industry documents.
NETA trading is now expected to commence on November 21, 2000,
although this date is dependent on the successful completion of system
trialling and testing. Yorkshire has been selected to join the NETA
market integration testing, subject to an external review of the
Company's program readiness.
On July 31, 2000, Ofgem published initial proposals for an
environmental action plan. An increased emphasis on environmental and
social issues is the first of Ofgem's priority projects for 2000/01 and
this focus reflects the objectives for Ofgem set under the Utilities Act.
These proposals explore Ofgem's involvement in:
- creating incentives to use energy efficiency in price controls
for gas and electricity;
- administering the climate change levy exemption and the
percentage obligation for renewables;
- promoting energy efficiency standards of performance;
- promoting trading in green certificates for renewable generation
and in emissions levels from power stations;
- requiring new codes of practice covering energy efficiency
advice;
- working on the design of new electricity trading arrangements;
and
- monitoring the development of combined heat and power
generation.
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Ofgem is seeking comments on the document by the end of September
2000 and there will follow a series of meetings and workshops with
interested parties to finalize the plan. Yorkshire is currently assessing
the implications for Yorkshire of these proposals.
Reference is made to Form 10-K, Part I, Item 1 "The Electric
Utility Industry in Great Britain - Industry Structure" for details of
various industry combinations. On August 3, 2000, TXU Europe announced
its purchase of Norweb Energi, the supply business of United Utilities
plc.
Reference is made to Form 10-K, Part 1, Item I "UK and EU
Competition Law" for details of the Competition Act which came into force
on March 1, 2000 and gives new concurrent powers to the Director General
of Fair Trading and Ofgem to investigate and act against anti-competitive
agreements and conduct. On May 31, 2000, Ofgem, in consultation with the
Office of Fair Trading, published a consultation document "Competition
Act 1998 Application to the Energy Sectors". The document provides advice
and information about the actions which the Director General of Gas and
Electricity Markets will take into account when considering whether, and
if so, how, to exercise his powers under the Competition Act. The
proposals do not raise any significant concerns for Yorkshire.
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 June 30,
2000.
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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
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