SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
JULY 12, 2002
(Mark One) -------------------------
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
Commission file number 1-14191
YORKSHIRE POWER GROUP LIMITED
(Exact Name of Registrant as Specified in its Charter)
England and Wales
(Jurisdiction of Incorporation or Organization)
Carliol House, Market Street, Newcastle upon Tyne, NE1 6NE, United Kingdom
011-44-191-210-2000
(Address of Principal Executive
Offices) SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange On Which Registered
- ------------------- -----------------------------------------
8.08% Trust Securities of Yorkshire Capital Trust I, New York Stock Exchange
guaranteed by Yorkshire Power Group Limited
- --------------------------------------------------------------------------------
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES FOR WHICH THERE IS A REPORTING
OBLIGATION PURSUANT TO SECTION 15(d) OF
THE ACT:
None
- --------------------------------------------------------------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
440,000,002 Ordinary Shares Par Value (pound)1 Per Share
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__
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17__ Item 18_X_
TABLE OF CONTENTS
Page
Explanatory Notes 1
Cautionary Statement Regarding Forward-Looking Statements 1
PART I
Item 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 2
Item 2 OFFER STATISTICS AND EXPECTED TIMETABLE 2
Item 3 KEY INFORMATION 2
Item 4 INFORMATION ON THE COMPANY 8
Item 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS 27
Item 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 35
Item 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 37
Item 8 FINANCIAL INFORMATION 37
Item 9 THE OFFER AND LISTING 38
Item 10 ADDITIONAL INFORMATION 38
Item 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 39
Item 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES 43
PART II
Item 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 44
Item 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS 44
Item 15 [RESERVED] 44
Item 16 [RESERVED] 44
PART III
Item 17 FINANCIAL STATEMENTS 45
Item 18 FINANCIAL STATEMENTS 45
Item 19 EXHIBITS 45
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1
GLOSSARY OF SELECTED TERMS G-1
SIGNATURES Sig-1
Explanatory Notes
On April 3, 2001, Innogy Holdings plc ("Innogy") acquired 94.75% of the issued
share capital of Yorkshire Power Group Limited ("YPG") from its prior owners,
American Electric Power Company Inc. and Xcel Energy Inc. Xcel Energy Inc.
retained a 5.25% ownership interest. On September 21, 2001, CE Electric UK
Limited acquired 94.75% of the issued share capital of YPG from Innogy.
Please refer to the glossary beginning on page G-1 for definitions of selected
terms used herein.
We publish our financial statements in British pounds. Unless we note otherwise,
all amounts expressed in this annual report are expressed in British pounds. As
used herein, references to "US dollars", "dollars" or "$" and "cents" or "c" are
to US currency, references to "British pounds", "pounds", "Pounds Sterling" or
"(pound)" and "pence" or "p" are to UK currency and references to "euro" are to
the currency introduced at the start of the third stage of European economic and
monetary union pursuant to the Treaty establishing the European Community,
amended by the Treaty on European Union. For your convenience, unless otherwise
stated, this annual report contains translations of British pound amounts at the
rate of (pound)1.00 per $1.4543, the Noon Buying Rate in New York City for cable
transfers in British pounds as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") on December 31, 2001. On July
9, 2002, the Noon Buying Rate was $1.5465. See "Item 3 - Key Information" for
certain historical exchange rate information regarding the Noon Buying Rate. You
should not construe these translations as representations that the amounts
referred to actually represent translated amounts or that you could convert
these amounts into the translated currency at the rates indicated.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements included in this annual report are forward-looking statements
made pursuant to the US Private Securities Litigation Reform Act of 1995
("Reform Act"). Such statements are based on current expectations and involve a
number of known and unknown risks and uncertainties that could cause the actual
results and performance of YPG Group to differ materially from any expected
future results or performance expressed or implied by the forward-looking
statements. These statements are often, but not always, made through use of
words or phrases such as "will likely result", "are expected to", "will
continue", "believe", "is anticipated", "estimated", "intends", "plans", "seek",
"projection" and "outlook". In connection with the safe harbor provisions of the
Reform Act, YPG Group has identified important factors that could cause actual
results to differ materially from such expectations, including, without
limitation:
o general economic and business conditions in the UK, the Distribution
Services Area and elsewhere;
o currency fluctuations;
o governmental, statutory, regulatory or administrative initiatives
affecting YPG Group or the UK electricity industry;
o general industry trends;
o competition;
o interest rates and hedging costs;
o changes in business strategy, development plans or vendor
relationships;
o availability, terms and deployment of capital;
o availability of qualified personnel;
o increased rates of taxes or other changes in tax law; and
o changes in, or the failure or inability to comply with, governmental
regulation, including, without limitation, environmental regulations.
These forward-looking statements speak only as of the date of this annual
report. YPG assumes no responsibility to update the forward-looking information
contained herein. Because actual results could differ materially from those
expressed in forward-looking statements, you should not place undue reliance on
any of these forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected financial data of YPG Group presented below has been derived from
the consolidated financial statements of YPG Group, prepared in accordance with
US GAAP and reported in this annual report and those for previous periods. The
consolidated financial statements of YPG Group reported in this annual report
and those for previous periods, and from which the selected financial data below
has been derived, have been audited by Deloitte & Touche, independent chartered
accountants. We have included a translation of the data as of and for the year
ended December 31, 2001 from British pounds into US dollars solely for
convenience. The translation rate is at the rate of (pound)1.00 per $1.4543, the
Noon Buying Rate on December 31, 2001.
The results, which are presented in accordance with US GAAP, show losses
from continuing operations (i.e. from the retained Distribution Business),
in each of the periods to December 31, 2001. In each period, the losses arise as
a result of the requirement to eliminate the effects of all transactions,
including those in respect of the retained Distribution Business, with YEG's
former Supply Business which was disposed of on July 31, 2001.
Going forward, however, the YPG Group in fact will receive revenues in respect
of the retained Distribution Business which were previously internal to the
Group. These revenues will be received from the owner of YEG's former Supply
Business and/or from other third parties who may from time to time supply
electricity to the customers of YEG's former Supply Business. Reported historic
losses from continuing operations are therefore not necessarily reflective of
the future financial performance of YPG.
Footnote 2 on page 4 shows the effects of reinstating the transactions with the
former Supply Business, to the extent that those transactions relate to the
continuing operations of the YPG Group.
Year ended Year ended Nine months Year Year ended
----------- ----------- ------------ ----- ----------
December 31, 2001 December 31, ended ended March 31,
----------------- ------------- ------ ------ ---------
2000 December 31, March 31, 1998
---- ------------- ---------- ----
1999 (1) 1999
-------- ----
(Amounts in millions)
$ (pound) (pound) (pound) (pound) (pound)
Consolidated Income Statement Data:
Operating revenues from continuing operations (2) 250 172 105 68 71 65
Operating income/(loss) (3) (7) 11 7 (54) (63) (84) (80)
Other income/(loss), net (4) - - 1 6 (11) (39)
Interest expense, net (125) (86) (113) (86) (122) (104)
Benefit for income taxes 31 21 51 47 85 77
Loss from continuing operations (2) (83) (58) (115) (96) (132) (146)
Income from discontinued operations (2) 61 42 162 129 195 163
(Loss)/gain on disposal of discontinued
operations (5), net of income taxes/ (benefit) of
($51), (pound)((pound)35), -, ((pound)8),(pound)31, - (100) (68) - 8 24 -
Cumulative effect on prior years (to December 31,
1999) of changing to a different depreciation - - 8 - - -
method
Extraordinary loss (6) - - - - - (134)
- - - - - -----
Net (loss)/income (7) (122) (84) 55 41 87 (117)
===== ==== == == == =====
December, 31 2001 December 31, December 31, March 31, March 31,
----------------- ------------- ------------- ---------- ---------
2000 1999 1999 1998
---- ---- ---- ----
(Amounts in millions, except per share amounts)
-----------------------------------------------
$ (pound) (pound) (pound) (pound) (pound)
- ------- ------- ------- ------- -------
Consolidated Balance Sheet Data:
Fixed assets 1,436 987 1,093 1,036 985 1,060
Total assets 2,412 1,658 2,606 2,395 2,347 2,462
Long-term debt 1,119 769 1,161 964 1,103 1,026
Short-term debt and current portion of
long-term debt - - 110 305 150 488
Company obligated mandatorily redeemable
Trust Securities of junior subordinated
deferrable interest debentures 230 158 178 166 168 -
Net assets 620 426 506 451 410 323
Capital stock 640 440 440 440 440 440
Dividends per share - - - - - -
(1) The information presented above includes consolidated income
statement data for the nine months ended December 31, 1999 following
the change in YPG Group's accounting reference period in 1999 from
March 31 to December 31.
(2) YEG's Supply Business was disposed of during the year ended December
31, 2001. The results for continuing operations have been reduced by
transactions with the former Supply Business until the point of
disposal. As the continuing Distribution Business is substantially a
de facto regulated monopoly, sales will continue to be made to the
former Supply Business. The following table shows the results if the
transactions with the former Supply Business had not been eliminated.
Year ended Year ended Nine months Year Year ended
----------- ----------- ------------ ----- ----------
December 31, 2001 December 31, ended ended March 31,
----------------- ------------- ------ ------ ---------
2000 December 31, March 31, 1998
---- ------------- ---------- ----
1999 1999
---- ----
(Amounts in millions)
$ (pound) (pound) (pound) (pound) (pound)
Operating revenues from continuing operations:
As reported 250 172 105 68 71 65
Sales to former Supply Business 131 90 177 175 259 256
--- -- --- --- --- ---
Continuing operations restated 381 262 282 243 330 321
=== === === === === ===
Operating income/(loss):
As reported 11 7 (54) (63) (84) (80)
Transactions with former Supply Business 116 80 154 147 209 203
-- -- --- --- --- ---
Continuing operations restated 127 87 100 84 125 123
=== === === == === ===
(3) Operating income includes:
Year ended December 31, 2001: the impact of the disposal of the
Supply Business on July 31, 2001 and a charge of approximately
(pound)5 million following the collapse of Independent Insurance.
Year ended December 31, 2000: the effects of competition in the
electricity supply market resulting in more Distribution Business
revenues being derived from outside the YPG Group and a charge of
approximately (pound)4.5 million for costs associated with business
streamlining as a result of the impact of the distribution price
control review.
Nine months ended December 31, 1999: a charge of (pound)2 million for
costs in relation to Year 2000 modifications.
Year ended March 31, 1999: includes a charge of (pound)9 million for
costs in relation to Year 2000 modifications, (pound)2 million for
committed costs arising from delays in opening up the competitive
market and (pound)5 million for restructuring charges.
Year ended March 31, 1998: provision of (pound)4 million for
committed costs arising from delays in opening up the competitive
market and (pound)10 million for restructuring charges.
(4) Other income/(loss) These amounts include the following notable
items:
Year ended March 31, 1999: includes a loss of (pound)12 million
before taxes was charged following the reduction in fair value of
Yorkshire Group's investment in Ionica by (pound)11 million and a
subsequent loss on sale of the investment of (pound)1 million.
Year ended March 31, 1998: includes an unrealized loss of (pound)41
million before taxes was charged following the reduction in fair
value of Yorkshire Group's investment in Ionica.
(5) YEG's Supply Business was disposed of during the year ended December
31, 2001. The loss recognized on disposal resulted in a decrease in
net income in the year ended December 2001 of (pound)68 million (net
of related income taxes benefit of (pound)35 million).
YEG's Generation Business was disposed of during the year ended March
31, 1999. The gain recognized on disposal resulted in an increase in
net income in the year ended March 31, 1999 of (pound)24 million (net
of related income taxes of (pound)31 million). Provision was made in
the year ended March 31, 1999 for income taxes arising on the gain.
However, a favorable adjustment to tax liabilities of (pound)8
million, in respect of the disposal, arose and was recognized in the
income statement for the nine months ended December 31, 1999.
(6) Represents the windfall tax imposed by the UK government, which was
not deductible for UK corporation tax purposes.
(7) YEG has revised the 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 between 10
and 50 years. The previous policy was to depreciate such assets over
a period of between 10 and 80 years. In the year ended December 31,
2001 the effect of this change was to increase net income by (pound)4
million.
Exchange Rate Information
Solely for the convenience of the reader, pounds sterling amounts in the
consolidated financial statements have been translated into US dollar amounts at
the Noon Buying Rate in New York on December 31, 2001 of $1.4543 = (pound)1.00.
The following tables set forth, for the periods indicated, certain information
concerning the Noon Buying Rate in New York City for cable transfers in British
pounds as certified for customs purposes by the Federal Reserve Bank of New
York, expressed in U.S. dollars per (pound)1.00. On July 9, 2002 the Noon Buying
Rate was $1.5465 per (pound)1.00.
Last six months (U.S. dollars per British pound)
---------------
High Low
2002
June 1.54 1.45
May 1.47 1.45
April 1.46 1.43
March 1.43 1.41
February 1.43 1.41
January 1.45 1.41
High Low Average (1) End of Period
(U.S. dollars per British pound)
Year ended December 31,
2001 1.50 1.37 1.44 1.46
2000 1.65 1.40 1.52 1.50
1999 1.68 1.55 1.62 1.62
1998 1.72 1.61 1.66 1.66
1997 1.70 1.58 1.64 1.64
(1) The average of the Noon Buying Rate on the last business day of each month
during the relevant period.
We publish our financial statements in British pounds. See "Basis of
Presentation" in note 1 to the consolidated financial statements in Item 18
which presents the year end rate used in the preparation of those consolidated
financial statements.
B. Capitalization and Indebtedness
Not Applicable
C. Reasons for the Offer and Use of Proceeds
Not Applicable
D. Risk Factors
Credit Risk, Exchange Rate Risk and Interest Rate Risk
Reference is made to "Item 11 - Quantitative and Qualitative Disclosures About
Market Risk".
Regulation of the Distribution Business
YED's Distribution Business operates in a highly regulated industry and is thus
subject to regulations that may change from time to time. New or revised
regulations could have a material adverse effect on its operations in the
future. The principal legislation governing the structure and regulation of the
electricity industry in Great Britain is the Electricity Act, as amended by the
Utilities Act and related secondary legislation. The Electricity Act created the
institutional framework under which the industry is currently regulated,
including the post of Director General of Electricity Supply (the "Regulator"),
who was appointed by the Secretary of State. The Regulator was replaced by GEMA
in November 2000 under the Utilities Act, with the then Director General of both
Electricity Supply and Gas Supply becoming chairman of GEMA. Revenue from the
Distribution Business is controlled by a formula set by Ofgem in connection with
each distribution price control review. This formula determines the maximum
average price per Unit of electricity distributed (in pence per kilowatt hour) a
licensed distributor is entitled to charge. For certain additional risks
relating to the regulated nature of YPG Group's business see "Item 4: Informa-
tion on the Company - Regulation under the Electricity Act" and "- UK
Environmental Legislation".
Holding Company Structure
YPG is a non-operating holding company, conducting substantially all of its
business through YEG and its subsidiaries. YPG will rely on dividends,
indirectly, from YED to meet its obligations. Under English law, YED can make
distributions only to the extent that it has Distributable Reserves. As at
December 31, 2001 YED's distributable reserves were (pound)10.8 million. At
December 31, 2001, the direct and indirect subsidiaries of YPG had total
indebtedness (excluding indebtedness owed to YPG) of approximately (pound)927
million and such subsidiaries may incur additional indebtedness in the future.
Yorkshire Finance and Yorkshire Finance 2 are special purpose entities formed
solely as financing vehicles for YPG and its affiliates. Therefore, Yorkshire
Finance and Yorkshire Finance 2's ability to make interest and other payments is
solely dependent upon YPG making payments on its obligations to Yorkshire
Finance and Yorkshire Finance 2 as and when required. At December 31, 2001, YPG
had (pound)927 million ($1,349 million) of unsecured and unsubordinated debt
outstanding. The terms and conditions of those bonds contain no restrictions on
the amount of additional indebtedness that may be incurred by YPG and its
subsidiaries, including Yorkshire Finance and Yorkshire Finance 2. However, the
terms and conditions of those bonds contain restrictions on the ability of
Yorkshire Finance, Yorkshire Finance 2, YPG and any significant subsidiaries to
incur secured indebtedness.
Substantial Leverage
At December 31, 2001, the ratio of YPG's consolidated debt (excluding the Trust
Securities) to total capitalization was approximately 64%. The degree to which
YPG is leveraged could affect its ability to service its indebtedness, to make
capital investments, to take advantage of certain business opportunities, to
respond to competitive pressures or to obtain additional financing. The ability
of YPF to pay amounts due is solely dependent upon YPG making payments to YPF as
and when required.
Any declines in YED's future business, increases in capital costs or the
inability to borrow additional funds could impair YPG's ability to meet its debt
service obligations and, therefore, could adversely affect YPF's ability to make
payments of principal and interest. No assurance can be given that additional
financing will be available when needed or, if available, will be obtainable on
terms that are favorable to YPG or YPF.
European Monetary Union
On January 1, 1999, 11 European Union countries formed an economic and monetary
union and agreed to introduce a single currency, the Euro. Euro notes and coins
were introduced into circulation in those countries on January 1, 2002. Although
the UK has not joined the monetary union at this time, the UK Government has
indicated that it may join in the future but has not, as yet, announced whether
its criteria for entry have been met. YPG Group is not exposed to any
significant currency risk and, therefore, management considers the exposure from
entering the monetary union to be limited to the costs of ensuring that YPG
Group's financial systems are Euro compliant. Management is currently assessing
the effort and cost required to prepare YPG Group's financial systems for the
potential introduction of the Euro in the UK.
ITEM 4. INFORMATION ON THE COMPANY
On April 3, 2001, Innogy acquired 94.75% of the issued share capital of YPG
from its prior owners, American Electric Power Company Inc. and Xcel Energy Inc.
Xcel Energy Inc. retained a 5.25% ownership interest. On September 21, 2001, CE
acquired 94.75% of the issued share capital of YPG from Innogy.
YPG AND AFFILIATES
YPG
YPG was incorporated as a private company with limited liability under the
laws of England and Wales in July 1996. In 1997, YPG acquired YEG, at the
time one of the twelve RECs in England and Wales. YPG's primary asset is
the outstanding shares of Yorkshire Holdings, a public limited company
incorporated under the laws of England and Wales, which in turn
beneficially owns all of the outstanding shares of YEG. Yorkshire Holdings
was organized as a wholly-owned subsidiary of YPG solely for holding the
share capital of YEG and has no other significant operations.
On April 3, 2001, subsidiaries of AEP and Xcel sold 94.75% of the issued
share capital of YPG to Innogy, an integrated energy company in the UK. AEP
sold its entire interest in YPG, while Xcel retained a 5.25% interest.
On September 21, 2001, CE, a company incorporated under the laws of England
and Wales, acquired 94.75% of the issued share capital of YPG from Innogy.
CE is indirectly owned by MEHC, a company incorporated in Iowa, United
States of America.
YORKSHIRE FINANCE AND YORKSHIRE FINANCE 2
Yorkshire Finance and Yorkshire Finance 2 were incorporated under the laws
of the Cayman Islands in August 1997 and January 2000, respectively, solely
for the purpose of operating as financing vehicles for YPG and its
affiliates.
YEG
YEG was one of twelve RECs in England and Wales licensed to distribute and
supply electricity. YEG's two principal businesses were the Distribution
Business and the Supply Business. YEG's Distribution Business consisted
principally of the distribution of electricity to approximately two million
domestic, commercial, agricultural and industrial customers in its
Authorized Area. The majority of the Distribution Business is a regulated
monopoly. YEG's Supply Business consisted of the purchase and supply of
electricity and gas, primarily to customers within the Authorized Area, in
the competitive market. YEG does not own a generation business.
On July 31, 2001, YEG sold its Supply Business to Npower Yorkshire Limited,
a wholly-owned subsidiary of Innogy. As of that date, therefore, YEG ceased
to operate the Supply Business and all risks and liabilities associated
therewith transferred to Innogy.
On October 1, 2001, following the approval of the Department of Trade and
Industry and the enactment of the relevant provisions of the Utilities Act,
YEG's statutory transfer scheme took effect to transfer the assets and
liabilities of YEG's Distribution Business to YED, a wholly-owned sub-
sidiary of YEG. The Utilities Act permitted each of the former PESs to
implement a transfer scheme by which the assets and liabilities of the
Distribution and Supply Businesses were transferred to separate
subsidiaries holding a distribution or supply license.
YEG's transfer scheme had the effect of transferring any remaining assets
and liabilities of YEG's electricity Supply Business to Npower Yorkshire
Supply Limited, which is now a wholly-owned subsidiary of Innogy. This
included all the Supply Business assets and liabilities, the legal title to
which had not been transferred to Npower Yorkshire Limited on July 31,
2001. As of October 1, 2001, therefore, YEG ceased to have any further
legal or beneficial interest in the Supply Business.
Effective from October 1, 2001, under the terms of an asset transfer
agreement, YEG transferred those distribution-related assets not
transferred to YED under the transfer scheme to YEDSL, a wholly owned
subsidiary of YEG. From October 1, 2001, YEG's principal activity was to
act as a holding and investment company.
In the accounting period commencing January 1, 2001, YEG changed its
financial year end from December 31 to March 31. In the accounting period
commencing April 1, 2001, YEG changed its financial year end from March 31
to December 31.
YED
YED was incorporated under the laws of England and Wales on November 22,
2000 and is a wholly owned subsidiary of YEG. On October 1, 2001, following
the approval of the Secretary of State for Trade and Industry and the
enactment of the relevant provisions of the Utilities Act 2000, YEG's
transfer scheme took effect to transfer the assets and liabilities of YEG's
Distribution Business to YED. Also on October 1, 2001, the licensing scheme
under the Utilities Act 2000 took effect and YED, as the statutory
transferee of YEG's Distribution Business, began to hold a standard
electricity distribution license.
YED's business is the distribution of electricity to industrial,
commercial, agricultural and domestic customers in its Distribution
Services Area. YED's business receives electricity primarily from the NGC
transmission system and distributes it on behalf of suppliers to customers
via its own network of transformers, switchgear and cables.
YORKSHIRE TRUST
Yorkshire Trust is a statutory business trust created under Delaware law
pursuant to the filing of a certificate of trust with the Delaware
Secretary of State on February 4, 1998. Yorkshire Trust will terminate in
2043, but may dissolve earlier, as provided in the agreement. Yorkshire
Trust exists exclusively to act as a financing vehicle for YPG, through its
holding certain debt instruments issued by Yorkshire Finance and the
issuance of its Trust Securities.
YEDSL
YEDSL was incorporated under the laws of England and Wales on November 22,
2000 and is a wholly owned subsidiary of YEG. Effective from October 1,
2001, under the terms of an asset transfer agreement, YEDSL purchased the
distribution-related assets of YEG that had not been transferred to YED
pursuant to the transfer scheme. YEDSL provides restoration and maintenance
services in respect of the distribution network and head office
administrative services to YED and during 2001 also provided new connection
services to YED.
THE US PARENTS
MEHC
MEHC is a United States-based, privately owned, global energy company with
publicly traded fixed income securities. MEHC is involved in the production
of energy from diversified fuel sources including geothermal, natural gas,
hydroelectric, nuclear, biomass, wind and coal. MEHC serves approximately 5
million electricity and natural gas customers worldwide, has approximately
10,000 megawatts of generation capacity either owned, contracted and in
operation, under construction or in advanced development, and has
approximately 10,200 employees.
MEHC's revenues for the year ended December 31, 2001 were $5.3 billion and
its assets as of that date were $12.6 billion.
XCEL
Xcel, a Minnesota corporation, is a registered holding company under the
Public Utility Holding Company Act of 1935.
The revenues of Xcel and its subsidiaries are derived substantially from
the generation, purchase, transmission, distribution and sale of
electricity and from the purchase, transportation, distribution and sale of
natural gas.
YPG GROUP'S BUSINESS
BUSINESS SEPARATION
On October 1, 2001, the licensing scheme under the Utilities Act 2000 took
effect and YED, as the statutory transferee of YEG's Distribution Business,
began to hold a standard electricity distribution license. See also the
section below titled "Regulation under the Electricity Act".
The costs of business separation were addressed by Ofgem in its review of
the distribution and supply price controls. These controls became effective
on April 1, 2000, and included an allowance for separation costs of
(pound)7.5 million for YED's Distribution Business over the following 5
years ending March 31, 2005 and an allowance of (pound)200,000 per year for
YEG's former electricity supply business for the following 2 years.
The Utilities Act provided for the separate licensing of electricity supply
and distribution and, from October 1, 2001, introduced a bar on supply and
distribution licenses being held by the same legal person. This led to the
electricity supply and distribution businesses of the PESs being
transferred into and conducted by separate companies when the relevant
provision of the Utilities Act became effective on October 1, 2001.
On October 1, 2001, following the approval of the Secretary of State for
Trade and Industry and the enactment of the relevant provisions of the
Utilities Act 2000, YEG's transfer scheme took effect to transfer the
assets and liabilities of YEG's Distribution Business to YED.
DISTRIBUTION BUSINESS
The Distribution Business consists principally of the ownership, management
and operation of YED's electricity distribution network within the
Distribution Services Area. The primary activity of the Distribution
Business is the receipt of electricity from the Grid and the distribution
of electricity on behalf of suppliers to end users connected to YED's
network. Because YED's Distribution Business is substantially a de facto
regulated monopoly, virtually all electricity supplied to consumers in the
Distribution Services Area is transported through its distribution network,
thus providing YED with a stable distribution volume unaffected by customer
choice of the supplier of the electricity. As a holder of a standard
electricity distribution license, YED is subject to a revenue cap
regulatory framework providing economic incentives to operate in a
cost-effective manner. See the section below titled "The Electric Utility
Industry in Great Britain".
DISTRIBUTION BUSINESS CUSTOMERS, UNITS DISTRIBUTED, REVENUES AND
OPERATING PROFIT
---------------------------------------------------------------------
The Distribution Services Area covers approximately 10,000 square km
(3,860 square miles) from the Pennine uplands in the west, and the
cities of Leeds, Bradford and Sheffield, to the City of Hull, the
ports of the Humber estuary and the eastern coastline. It encompasses
the counties of West Yorkshire, East Yorkshire and almost all of
South Yorkshire, together with parts of North Yorkshire, Derbyshire,
Nottinghamshire, Lincolnshire and Lancashire. The regional economy is
diverse. The traditional heavy industries of iron and steel, coal
mining, textiles and engineering continue to contribute to the
regional economy, but their overall significance has declined,
particularly in the last decade. During this period, other
industries, such as chemicals and food and drink, have expanded, as
have service sector activities such as finance, retailing and
leisure. The region is well served by road and rail networks, has
three regional airports, and the seaports of the Humber estuary
provide access to European markets.
The following table sets out details of YED's distribution customers
and the volume of electricity distributed, as well as distribution
operating revenues and operating income at the dates and for the
periods presented.
At December 31,
---------------
2001 2000 1999
Number of customers connected
Domestic 1,942,895 1,931,483 1,922,091
Small/Medium Business 141,809 134,253 134,099
Large Business/Other 1,697 1,656 1,652
---------- --------- ---------
Total 2,086,401 2,067,392 2,057,842
========= ========= =========
Year ended December 31, Nine months ended
December 31, 1999
2001 2000
Electricity distributed (GWh)
Domestic 8,181 7,883 5,254
Small/Medium Business 5,996 5,801 4,220
Large Business/Other 9,851 9,686 7,092
----- ----- -----
Total 24,028 23,370 16,566
====== ====== ======
Year ended December 31, Nine months ended
December 31, 1999
2001 2000
(pound) (in Millions)
Distribution operating revenues 262 282 243
Distribution operating income 115 136 111
The financial information presented above includes transactions with
YPG Group companies.
COMPETITION IN THE DISTRIBUTION BUSINESS
YED, as successor to YEG under YEG's transfer scheme, has not
experienced significant competition in its Distribution Business and
believes that the cost of providing a duplicate distribution network
connected to the Grid would be prohibitive. To the extent that a
customer may invest in its own on-site electric generating plants,
however, such a customer would no longer require distribution and
related services from YED except for standby connection to YED's
electric distribution network.
Since 1995 certain elements of work to connect customers to YED's
distribution network have become open to competition as customers are
able to provide certain elements of their own network connections by
employing an approved contractor. Since 1995, in the Authorized Area
and, subsequently, the Distribution Services Area, approximately
1,418 individual connections have been provided or are planned to be
provided by contractors external to YPG Group. During the same
period, the YPG Group provided approximately 59,000 connections.
On July 24, 2000, Ofgem published proposals regarding competition in
connections. These proposals included:
o a significant reduction in work deemed to be non-contestable;
o the establishment of a nation-wide registration scheme for
contractors; and
o development of requirements for PES Distribution Businesses to ensure
that they charge their own connections business on the same basis as
third parties.
A number of national working groups were established by Ofgem to
develop the new processes that will be required. Ofgem has
subsequently published two consultation documents to facilitate the
introduction of competition in new connections. The introduction of
competition in new connections could lead to reduced revenue if
customers select third parties to perform the work necessary to
connect to YED's distribution system.
INSET NETWORKS
The licensing regime introduced under the Utilities Act on October 1,
2001, enables licensed distributors to own and operate networks
anywhere in Great Britain under their existing licenses, and defines
the circumstances in which new distributors would need to be licensed.
This has created a situation in which new networks serving domestic
customers can be constructed, owned and operated by licensed distri-
butors in addition to the distributor in whose Distribution Services
Area the development is located (the "incumbent distributor"). This
presents both threats and opportunities for existing distributors. The
threat is the possibility that new entrants may emerge in the distri-
bution network business. Partially mitigating the threat is the fact
that the systems necessary to facilitate the relevant commercial
transactions associated with providing such services do not yet exist
at either local or national level. The industry is currently engaged
in jointly developing such systems.
STRATEGY FOR THE DISTRIBUTION BUSINESS
The Distribution Business continued its strategy of maintaining a
reliable and safe distribution system, which meets customer
expectations while maximizing its operating efficiency and fulfilling
regulatory requirements. YED maintains a sufficient level of
investment in the distribution network to ensure continued
reliability and safety. During the year ended December 31, 2001,
(pound)141 million was invested in the distribution system, of which
(pound)93 million represented capital improvements, including new
substations, cables and overhead lines and (pound)48 million
represented expenditure of an operational, repair and maintenance
nature.
During the year ended December 31, 2001, YED restored services to
93.1% of all end-users affected by faults within three hours and on
average an end user was without power for only 47.56 minutes during
the year.
DISTRIBUTION FACILITIES
Electricity is transported across the Grid at 400 kV or 275 kV to 20
grid supply points within YED's distribution network, where NGC
transforms the voltage to 132 kV, 66 kV and 33 kV for entry into
YED's distribution system.
At December 31, 2001 YED's distribution system consisted of:
LV 11kV Above 11kV
-- ---- ----------
Number of metered supplies 2,141,026 1,681 26
Total length of circuits 30,506km 20,602km 5,077km
Percentage underground 91.7% 52.4% 31.9%
The primary distribution system consists of 20 grid supply points
from the Grid, an additional 67 supply points and 365 primary
substations. At December 31, 2001, the installed transformer capacity
with a secondary voltage higher than 650 volts at these substations
was 20,668,000 kVA, including 8,253,000 kVA at the grid supply
points. Remote control facilities enable the real time monitoring and
operation of most of these larger substations from one central
control room.
YED's distribution substations consist of 13,611 indoor substations,
2,299 outdoor substations and 16,824 pole-mounted substations. At
December 31, 2001, the installed transformer capacity with a
secondary voltage less than 650 volts was 9,502,000 kVA.
SUPPLY BUSINESS
ELECTRICITY SUPPLY
YEG's electricity Supply Business consisted of selling electricity to
customers, purchasing such electricity and arranging for its
distribution to those customers. Under the licensing arrangements
that then prevailed, YEG had an exclusive right to supply electricity
to domestic customers in its Authorized Area between 1990 and 1998.
The electricity supply business inside the Authorized Area has been
fully open to competition since 1999. The Supply Business also
provided Data Management Services to suppliers including data
collection and meter operation. These services became fully competi-
tive in April 2000.
COMPETITION IN THE ELECTRICITY SUPPLY BUSINESS
In September 1998, phased competition was introduced to the domestic
and small business electricity markets in Great Britain. This process
was completed for all PES customers in May 1999. OFFER, however,
introduced transitional price regulation for Designated Customers for
an initial period of two years from April 1, 1998. These price
controls required a change from April 1, 1999, of 3% below the level
of inflation and an adjustment to allow for changes to the Fossil
Fuel Levy.
GAS: SOURCING AND SUPPLY
Recognizing the long-term opportunities in the competitive gas supply
market, in April 1994, YEG acquired a 6.97% equity stake in the
Armada off-shore gas-condensate field (the "Armada Field") for
approximately (pound)27.8 million. As of December 31, 2000, the
Armada Field, which had a productive life of approximately 10 years,
had initial proven resources of approximately 1.2 trillion cubic feet
(84 billion cubic feet net to YEG) of gas and 64 million barrels of
oil and oil equivalents (4.4 million barrels net to YEG). Delivery of
such gas from the Armada Field began in October 1997. The initial
development costs associated with the Armada Field were lower than
originally anticipated. The reduction of bottle-necks allowed the
field to increase rates of production substantially. As of December
31, 2000, YEG had invested (pound)60 million in the Armada Field
including the initial acquisition costs. The net book value of the
investment at December 31, 2000 was (pound)33.5 million and was
accounted for by the full cost method. The asset was sold to Npower
Yorkshire Limited as part of the disposal of the Supply Business.
YEG marketed gas to all sectors of the gas market that has been
totally open to competition since May 1998. By December 31, 2000, YEG
had entered into contracts and supplied gas to more than 338,000
residential customers. Gas was sourced from YEG's interest in the
Armada Field, a purchase agreement with a major gas supplier, swing
contracts and purchases on the spot market which were designed to
give YEG a balanced gas purchase portfolio. YEG utilized risk
management methods in relation to gas purchasing and supply,
including storage and an interruptible customer portfolio, designed
to maximize its return consistent with an acceptable level of risk. A
system to evaluate and enable effective management of risk in gas
trading was used by YEG. The system enabled greater control of all
transactions including daily evaluation of key parameters such as
value at risk and profit and loss positions for each business unit of
YEG. Sale and purchase confirmations, invoicing and credit checking
were also carried out or facilitated by this system.
RESULTS OF THE SUPPLY BUSINESS
The following table sets forth the volume of electricity sold to
greater than 100kW supply customers and less than 100kW supply
customers, as well as electricity and gas supply operating revenues
and operating income. The figures for the year ended December 31,
2001 represent volumes sold and operating revenues and incomes for
the period to July 31, 2001, when the business was sold:
Year ended Nine months ended
December 31, December 31, 1999
2001 2000
Volume (GWh):
>100kW supply customers 7,688 11,642 8,647
<100kW supply customers 5,532 10,573 7,981
----- ------ -----
Total 13,220 22,215 16,628
====== ====== ======
Year ended Nine months ended
December 31, December 31, 1999
2001 2000
(in Millions)
Supply operating revenues (pound)830 (pound)1,428 (pound)997
Supply operating income (pound) 13 (pound) 82 (pound) 39
The financial information presented above includes transactions with
YPG Group companies.
YEG sold its electricity and gas supply business to Npower Yorkshire
Limited on July 31, 2001. YEG no longer owns or operates a Supply
Business.
THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
SUMMARY
The electric utility industry is divided into the functions of generation,
transmission, distribution, supply and metering.
INDUSTRY STRUCTURE
The generation, supply and distribution sectors are all subject to a
licensing regime that exists for the electricity industry in England and
Wales as well as in Scotland.
Competition in generation has increased over the last decade as RECs and
other new entrant generators have constructed new plants and as imports
through the interconnections with Scotland and France have grown.
In England and Wales electricity is transmitted through the Grid by NGC
and distributed by the twelve electricity distributors in their respective
Distribution Service Areas. The opening of the electricity supply market
to full competition, which was completed in May 1999, means that customers
have been free to choose their electricity supplier since that time.
In Scotland there are two vertically integrated companies, ScottishPower
and Scottish and Southern Energy, each generating, transmitting,
distributing and supplying electricity within their respective
distribution and supply service areas as well as competing to supply
electricity elsewhere.
The interconnection between the transmission systems of England and
Scotland, owned by ScottishPower and NGC, is capable of transferring
electricity between Scotland and England. There is also an interconnection
with France, owned by NGC and EdF, through which electricity can be
transferred between France and England and Wales.
The system of wholesale purchasing of electricity through the Pool in
England and Wales was replaced by a new system of trading arrangements,
known as NETA, on March 27, 2001. For further details of this review of
trading arrangements see "The Electric Utility Industry in Great Britain -
Regulation under the Electricity Act - New Electricity Trading
Arrangements".
There is no equivalent to NETA in Scotland, but ScottishPower and Scottish
and Southern are obligated by their licenses to offer electricity for sale
to second-tier suppliers. They are also required to provide access to
their transmission and distribution systems on a non-discriminatory basis
to competing suppliers and generators.
The reconfiguration of the electricity industry and the resolution of the
attendant regulatory and competitive issues may change the conduct of YPG
Group's business in the future. The nature and magnitude of any such
change cannot be determined at this time.
In response to competitive and regulatory changes, YPG Group may, from
time to time, consider various strategic initiatives. These may include
combinations with other entities, internal restructuring and dispositions
of assets or businesses or portions thereof. No assurance can be given as
to whether any such initiative will be pursued or will occur or as to the
ultimate effect of any such initiatives on the financial condition,
liquidity, cash flows or competitive position of YPG Group.
DISTRIBUTION OF ELECTRICITY
LICENSED DISTRIBUTORS
Anyone wishing to distribute electricity to customers in Great Britain
must hold a license granted in accordance with the Electricity Act or be
exempt from the requirement to hold such a license. Licensed distributors
receive electricity from the Grid and transfer it on behalf of suppliers
to end-user customers.
ACCESSIBILITY REQUIREMENTS
Each of the licensed electricity distributors is required to offer terms
for connection to, and use of, its distribution system to any person. In
providing use of its distribution system, a licensed electricity
distributor must not discriminate between users; nor may its charges
differ except where justified by differences in cost. Similar principles
apply to the carrying out of connection works. Disputes over the terms of
offers may be determined by GEMA.
DISTRIBUTION PRICE REGULATION: BACKGROUND
Revenue from the Distribution Business is controlled by a formula
principally based on P x (1+(RPI-Xd)) where Xd is currently 3% (the
"Distribution Price Control Formula"). P is the previous year's maximum
average price per unit of electricity distributed. Therefore the maximum
average price in any year is based in part on the maximum average price in
the preceding year, such that a price reduction in any given year has an
ongoing effect on the maximum average price for all subsequent years. The
Retail Price Index ("RPI") is a measure of inflation, and equals the
percentage change in the UK RPI between the six-month period from July to
December of the two previous years. Because RPI is based on a weighted
average of the prices of goods and services purchased by a typical
household, which may bear little resemblance to the inputs contributing to
a licensed distributor's business costs, the RPI calculation may not
accurately reflect the price changes affecting the licensee. The Xd factor
is established by Ofgem following review. This formula determines the
maximum average price per Unit of electricity distributed (in pence per
kilowatt hour) which a licensed distributor is entitled to charge.
The most recent distribution price control review took effect from April
1, 2000, for the five-year period ending March 31, 2005. As a result of
this review, YEG's allowed distribution revenue for the Regulatory
Accounting Period commencing April 1, 2000 was reduced by 23% in real
terms (the range of reductions for all distribution companies was between
19% and 33%) from the level permitted in the final year of the previous
price control which ended on March 31, 2000. In addition, for the second
through fifth Regulatory Accounting Periods in the five-year price control
review period, the Xd factor will be equal to 3%, which means that in each
of these years regulated distribution prices are required to fall in real
terms by a further 3% per annum.
In setting the distribution charges to apply during each Regulatory
Accounting Period, each licensed distributor must project the permitted
maximum average charge per unit to be distributed in that Regulatory
Accounting Period. The projection must take into account forecasts of
Units distributed, distribution line losses, the actual change in RPI and
NGC exit charges. Failure to forecast accurately may result in over-
charging or undercharging, which is taken into account in the following
Regulatory Accounting Period through a correction factor in the distribu-
tion price control formula. If a licensee has overcharged in a given
Regulatory Accounting Period, the maximum average charge per unit distri-
buted in the following Regulatory Accounting Period is reduced by an
amount to reflect the excess income received, to which is added interest
at the average of the daily base rates of Barclays Bank plc during the
period in respect of which the calculation falls plus 4%. In the event of
undercharging, the Distribution Price Control Formula allows the licensee
to recover the shortfall in income plus interest at the base rate.
In certain instances, however, overcharging or undercharging by a licensee
above specific percentage thresholds may result in adjustments by Ofgem.
If in any Regulatory Accounting Period the average charge per Unit
distributed exceeds the permitted maximum average charge per Unit
distributed by more than 3%, then in the next following Regulatory
Accounting Period the licensee may not increase distribution charges
unless it has satisfied Ofgem that the average charge per unit in that
next following Regulatory Accounting Period is not likely to exceed the
permitted maximum average charge. If, with respect to any two successive
Regulatory Accounting Periods, the sum of the amounts by which the average
charge per unit distributed has exceeded the permitted maximum average
charge per unit distributed is more than 4% of that permitted maximum
average charge, then, in the next following year, the licensee may be
required by Ofgem to adjust its charges so that they fall within the
maximum permitted average charge. If, with respect to two successive
Regulatory Accounting Periods, the licensee undercharges by more than 10%
of the maximum average charge, Ofgem may limit the amount by which such
undercharging may be recovered.
Since April 2000, the distribution price control formula is no longer
nationally divided into metering and non-metering components. The current
structure contains a general distribution allowance taking into account
movements of some metering services to electricity supply (e.g. data
collection). Non-half hourly meter provision and meter maintenance
activities relating to network connections, which became competitive on
April 1, 2000, are remunerated under the distribution price control
formula. As part of the latest price control review, provisions were added
to the distribution price control formula, which ensure that any reduction
in operating costs resulting from a decline in the provision of metering
services is reflected in lower permitted revenues.
Connection charges are levied when a customer first connects to a
licensee's distribution system or makes a material change in electricity
supply requirements. These charges are excluded from the distribution
price control formula. Since 1994 there has been competition in providing
connections to new customers and limitations on the extent to which, and
the circumstances in which, customers wishing to be connected would be
required to pay for the costs of reinforcement of the distribution system.
SUPPLY OF ELECTRICITY
LICENSED SUPPLIERS
Subject to minor exemptions, all electricity customers in Great Britain
must be supplied by a licensed supplier. Licensed suppliers purchase
electricity and make open access use of the transmission and distribution
networks to deliver electricity to customers' premises.
Prior to October 1, 2001, there were two types of licensed suppliers:
public electricity (or first-tier) suppliers, also known as PESs, and
second-tier suppliers. PESs included the RECs in England and Wales,
ScottishPower and Scottish and Southern Energy. Second-tier suppliers
included British Gas Trading, Innogy, PowerGen, Nuclear Electric,
ScottishPower, Scottish and Southern Energy and the other PESs (including
RECs supplying outside their Authorized Areas) and a number of independent
second-tier suppliers.
From October 1, 2001, pursuant to the changes brought about by the
Utilities Act the conditions relating to electricity supply from the
existing PES license and second tier licenses were combined into a new
single supply license for each supplier, permitting such suppliers to
supply electricity throughout Great Britain. The new supply licenses came
into force on October 1, 2001 and coincided with the creation of separate
legal entities for electricity supply and distribution.
ELECTRICITY SUPPLY PRICE REGULATION: BACKGROUND
Between 1990 and 1998 the supply of electricity to supply customers of
PESs was subject to "pass-through" price control. The maximum average
charge per unit of electricity supplied (in pence per kilowatt hour) was
controlled by a formula principally based upon (P x (1 + (RPI-Xs)) + Y)
(the "Supply Price Control Formula"). The initial value of Xs was set at 0
for all the RECs on March 31, 1990. The Supply Price Control Formula was
reviewed by OFFER with effect from April 1, 1994, when the Xs factor was
set at 2% for all the RECs. This applied until March 31, 1998. P was the
previous Regulatory Accounting Period's maximum average price per unit of
electricity supplied (in pence per kilowatt hour) that related to the REC
electricity supply business's own costs and margin. RPI was a measure of
inflation, equaling the percentage change in the UK Retail Price Index
between the six month period from July to December of the two previous
years. Because RPI is based on a weighted average of the prices of goods
and services purchased by a typical household, which may bear little
resemblance to the inputs contributing to each REC's business costs, the
RPI calculation may not have accurately reflected the price changes
affecting each REC. The Y factor was a pass-through of certain costs which
were either largely outside the management control of the REC or had been
regulated elsewhere. The Y factor thus covered the REC's electricity
purchase costs, including both direct Pool purchase costs and costs of
hedging, transmission charges made by NGC, REC distribution charges and
the fossil fuel levy (described below) or amounts equivalent thereto in
respect of the purchase of non-leviable electricity which were
attributable to franchise supply customers. The Supply Price Control
Formula was therefore designed to focus downward pressure on costs and
working capital, which were viewed as being within suppliers' direct
control.
There was a correction factor in the Supply Price Control Formula in the
event of overcharging or undercharging. If a REC had overcharged in the
previous regulatory accounting period, the maximum average charge per unit
supplied was reduced by an amount to reflect the excess income received, to
which was added interest. In the event of undercharging, the Supply Price
Control Formula allowed the licensee to recover the shortfall in income
plus interest.
A revised supply price control was implemented on April 1, 1998, and was
effective until March 31, 2000. This took the form of a series of price
caps on the tariffs applicable to designated customers in the Authorized
Area. These controls also required an additional 3% below inflation
reduction which became effective on April 1, 1999. The automatic
pass-through of costs previously passed through to domestic and business
customers below 100kW, consisting primarily of purchased power costs and
the correction factor, which annually adjusted prices for any imbalance
between forecast and actual costs, were both discontinued from April 1,
1998.
REGULATION UNDER THE ELECTRICITY ACT
THE REGULATOR
The principal legislation governing the structure and regulation of the
electricity industry in Great Britain is the Electricity Act, as amended
by the Utilities Act and related secondary legislation. The Electricity
Act created the institutional framework under which the industry is
currently regulated, including the post of Director General (the
"Regulator"), who was appointed by the Secretary of State. The Regulator's
office and support staff were collectively known as OFFER. Both OFFER and
OFGAS were replaced by Ofgem in June 1999 in anticipation of the formal
merger of the electricity and gas regulatory offices under the Utilities
Act. The posts of Director General of both Electricity and Gas Supply were
replaced by GEMA in November 2000 under the Utilities Act, with the then
Director General of both Electricity and Gas Supply becoming chairman of
GEMA. GEMA comprises a number of executive and non-executive members. The
management committee of Ofgem reports to GEMA, which determines strategy
and decides on major policy issues.
GEMA's functions under the Electricity Act, as amended by the Utilities
Act, include granting licenses to generate, transmit, distribute or supply
electricity; proposing modifications to licenses and, in the case of
non-acceptance of such proposals by licensees, making license modification
references to the Competition Commission; enforcing compliance with
license conditions; calculating the Fossil Fuel Levy rate and collecting
the levy; determining certain disputes between electricity licensees and
customers; setting standards of performance for electricity licensees; and
liaising as appropriate with the GECC.
Concurrently with the Director General of Fair Trading, GEMA exercises
certain functions relating to monopoly situations and also to courses of
conduct which have, or are intended or likely to have, the effect of
restricting, distorting or preventing competition in the generation,
transmission or supply of electricity under the Competition Act.
The Electricity Act, as amended by the Utilities Act, confers a principal
objective on GEMA and the Secretary of State to protect the interests of
customers, wherever appropriate by promoting effective competition. In
pursuing these functions, the Electricity Act requires GEMA and the
Secretary of State to exercise their functions in the manner each
considers is best calculated to ensure that all reasonable demands for
electricity are met and to secure that license holders are able to finance
their licensed activities.
In performing their functions the Secretary of State and GEMA have a
requirement to consider the interests of low income consumers, the
chronically sick, the disabled, people of pensionable age and consumers in
rural areas.
In the exercise of its statutory functions, GEMA also has a duty to
consider guidance issued by the Secretary of State on the social and
environmental objectives relevant to the gas and electricity sectors.
The Secretary of State has powers to make regulations covering a range of
activities including regulations relating to electricity supply and
safety, the promotion of energy efficiency and the generation of electri-
city from renewable sources, and to provide for a cross-subsidy for the
benefit of disadvantaged consumers.
REGULATORY DEVELOPMENTS
With effect from October 1, 2001, the Utilities Act introduced a
prohibition on the activity of distributing electricity without a license
or exemption. The supply and distribution of electricity became separate
licensable activities with a bar on the same legal entity holding both an
electricity supply and electricity distribution license. Standard license
conditions were introduced into the separate electricity supply and
distribution licenses. To comply with these requirements, YEG nominated
YED to be the distribution license holder and Npower Yorkshire Supply
Limited to be the electricity supply license holder within the YPG Group.
Npower Yorkshire Supply Limited was then immediately sold to Innogy in
accordance with the asset sale of the supply business which had taken
place on July 31, 2001. As part of the nomination of YED as the
distribution license holder, there was a transfer, among other things, of
certain assets of YEG constituting its distribution business and certain
related liabilities, including those as principal obligor under the
(pound)200 million Guaranteed Bonds due 2020, to YED on October 1, 2001
(the "Bonds"). Payments of all amounts in respect of the Bonds are
unconditionally and irrevocably guaranteed by YEG.
INFORMATION & INCENTIVES PROGRAM ("IIP")
The December 1999 distribution price control review proposals set out
Ofgem's intention to commence an ongoing program on information and
incentives.
The stated objective for this program was to try to address some of the
weaknesses which Ofgem believes have been associated with the existing
framework of price regulation:
o to reduce the emphasis on periodic negotiation with Ofgem;
o to give clearer incentives in respect of quality of supply; and
o to improve the incentive to achieve efficiency savings in both operating
costs and capital costs.
In order to ensure that the necessary information is available to operate
the IIP, Ofgem has introduced a specific distribution license condition
for the collection and audit of such information. Ofgem has decided,
following consultation, to allow Distribution Businesses to adjust their
regulated revenue by an amount equivalent to (pound)0.50 per customer for
one year to cover certain costs required to be incurred to obtain accurate
information with respect to low voltage customers. Such an allowance will
mean an additional approximately (pound)1 million revenue for YED's
Distribution Business, subject to a successful audit in 2002 by Ofgem's
appointed auditors. Ofgem has proposed that failure to meet the accuracy
standards for information provided under the information and incentives
program could result in financial penalties for breach of a License
condition. See Part I, Item 1, "The Electric Utility Industry in Great
Britain - Regulation under the Electricity Act - Financial Penalties".
FINANCIAL RINGFENCING
The distribution licenses include financial ringfencing arrangements, some
of which differ from those in the former PES licenses. The principal
features of the financial ringfencing arrangements are as follows:
o The licensee is not permitted to conduct any business or carry on any
activity other than the Distribution Business and businesses that are
"de-minimis".
o The aggregate turnover of all "de-minimis" businesses must not exceed 2.5%
of the licensee's Distribution Business and the amount invested in all such
businesses by the licensee must not exceed 2.5% of the sum of the share
capital in issue, share premium and consolidated reserves of the licensee.
o The licensee may not hold shares in businesses that carry on activities
that are not permitted purposes of the distribution license.
o The licensee must ensure that it has available to it the resources it
requires to carry out the Distribution Business and comply with its
statutory obligations. It must produce a certificate to GEMA on a periodic
basis confirming that it has the necessary resources available to it and it
may not declare a dividend without first certifying to GEMA that it is
compliant with a number of license obligations including the ring fencing
obligations.
o The licensee must procure from its ultimate controller undertakings in a
form specified by GEMA which are designed to ensure that those who may
exercise control over the licensee will not cause it to breach its
obligations.
o The licensee is required to use reasonable endeavors to ensure that the
licensee maintains at all times an investment grade issuer credit rating.
o The licensee is restricted in its ability to incur
indebtedness, including any mortgage, charge, pledge, lien,
or other form of security or to enter into any guarantee or
any obligation other than on an arm's length basis, on
normal commercial terms, and for a purpose which is
permitted by the license.
o The licensee may not transfer, lease, license, or lend any sum, asset,
right or benefit to an affiliate except in accordance with the license
condition which permits the following:
- A dividend or other distribution out of distributable reserves;
- Repayment of capital;
- Payment properly due for any goods, services or assets provided on
an arm's length basis and on normal commercial terms;
- A transfer, lease, license or loan of any sum or sums, asset, right
or benefit on an arm's length basis, on normal commercial terms and
made in compliance with the payment condition, which requires the
counter party to the transaction to pay in full when the
transaction is entered into, unless the counter party or its
guarantor benefits from an investment grade issuer credit rating;
- Repayment of, or payment of interest on, loans which have been
properly undertaken;
- Certain payments relating to tax; or
- An acquisition of shares, provided it is an acquisition permitted
by the terms of the ring fencing conditions.
o The licensee must not allow any term of any agreement to exist which would
mean that the licensee's liability to pay or repay any debt arises or is
increased or accelerated because of the default of another person.
REVIEW OF THE REGULATORY FRAMEWORK: THE UTILITIES ACT
The Utilities Act was brought into effect by a series of commencement
orders. Most sections of the Act took effect on October 1, 2001. The main
provisions of the Utilities Act include:
o the separation of the supply and distribution of electricity into separate
licensable activities with a bar on the same legal entity holding both an
electricity supply and electricity distribution license;
o implementation of a statutory transfer scheme pursuant to which assets and
liabilities related to the supply and distribution of electricity could be
transferred by former PES licensees to the new supply and distribution
licensees;
o the establishment of GEMA in place of the individual regulators for gas
and electricity. The office to support GEMA is known as Ofgem;
o a new principal objective for GEMA to protect the interests of consumers,
wherever appropriate by promoting effective competition;
o powers for GEMA to impose financial penalties on companies for breaches of
license conditions and other specified statutory requirements (such
penalties may not be in an amount to exceed 10% of the licensee's revenue)
See "Financial Penalties" below;
o the establishment of an independent council, the Gas and Electricity
Consumer Council (GECC), with responsibility for seeking to resolve
complaints, providing information of use to consumers, and advocating the
interests of all consumers to GEMA, government and others with an
influence on regulation;
o a requirement for price-regulated gas and electricity utilities to
disclose links (if any) between directors' pay and customer service
standards;
o legislation to underpin NETA;
o new `collective' license modification procedures enabling GEMA 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);
o a duty on GEMA, in the exercise of its statutory functions, to have regard
to guidance issued by the Secretary of State for Trade and Industry on the
social and environmental objectives relevant to the gas and electricity
sectors;
o new powers for the Secretary of State for Trade and Industry 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
o a requirement for GEMA to give reasons for certain key decisions and to
publish and consult on significant future programs.
FINANCIAL PENALTIES
Under the Utilities Act, GEMA is able to impose financial penalties on
license holders who contravene (or have in the past contravened) any
relevant condition or requirement or who are failing (or have in the past
failed) to achieve a satisfactory performance in relation to the
individual standards of performance prescribed by GEMA. Any penalty
imposed must be reasonable in all the circumstances of the case and may
not exceed 10% of the licensee's revenue.
The powers to impose penalties on licensees are in addition to GEMA's
powers under the Competition Act. However, GEMA is prevented from imposing
a Utilities Act financial penalty if it is satisfied that the most
appropriate way of proceeding is under the Competition Act.
The Utilities Act requires that GEMA prepare and publish a statement of
policy on the imposition of financial penalties and the determination of
their amount to which GEMA must have regard when deciding whether to
impose a penalty. Following consultation, GEMA published the policy
statement in April 2001.
The policy statement outlines a number of factors that GEMA will consider
in determining whether it would be appropriate for the imposition of a
financial penalty:
o compatibility of the imposition of a penalty with GEMA's principal
objective to protect the interests of consumers, and other statutory
duties;
o the need to incentivize the licensee's compliance and to deter the
licensee or other licensees from further contraventions or failures;
o whether the contravention/failure had damaged consumers and/or market
participants, for example by increasing costs;
o whether the infringement was accidental, inadvertent or caused by factors
outside the control of the licensee; and
o other factors including the duration and extent of the contravention or
failure.
In calculating the level of the proposed penalty, a number of factors will be
taken into account, including:
o the seriousness of the contravention or failure;
o the harm or increased costs that the contravention or failure had caused
to consumers and/or market participants;
o any gain (financial or otherwise) made by the licensee as a result of the
contravention or failure; and
o the need to make any adjustments for:
o increases due to aggravating factors, such as repeated contraventions
or failures, involvement of senior management, concealment of
activities; and
o decreases due to mitigating factors, such as taking steps to remedy
the contravention or failure and ensure compliance, and the licensee's
cooperation with GEMA during the investigation.
CONSUMERS' COMMITTEE
The GECC was formally established under the Utilities Act on November 1,
2000 and replaced the former Electricity Consumers Committees and the Gas
Consumers Council and the former regional offices of Ofgem. The GECC has
two main roles. The first is to act as a consumer advocate and to provide
information and advice to the UK government, the media and others and also
to consumers. The second function is to handle consumer complaints that
have not been satisfactorily dealt with by the gas or electricity company
concerned.
EMBEDDED GENERATION
In line with the UK Government's objective to increase the amount of
energy produced by generating stations using renewable sources, which
typically connect to distribution networks rather than to the Grid by
virtue of their smaller size, a Distribution Generation Coordination Group
("DGCG") was established in December 2001 to take forward embedded
generation issues, under the joint chairmanship of Ofgem and the
Department of Trade and Industry ("DTI"). YED continues to lobby both the
DTI and Ofgem for recognition and due allowance of the costs that will be
incurred in reinforcing distribution networks to cope with the power flows
that will result from the envisaged increase in embedded generation.
LANE RENTAL
The Government activated Section 74 of the New Roads and Street Works Act
1991 ("NRSWA") with effect from April 1, 2001. Under this Section, highway
authorities have the power to charge utilities when they fail to complete
street works by a deadline agreed between the two parties. In addition,
the Street Works (Charges for Occupation of the Highway) (England)
Regulations 2001 have been made under Section 74A of NRSWA. These contain
powers for highway authorities to levy a daily charge on utilities for
street works activities ("lane rental"), and have been made at this time
solely to enable the powers to be tested in certain parts of the country
through pilot schemes. For this purpose, two local authorities - neither
of them in YED's Distribution Services Area - are being allowed to operate
lane rental pilot schemes in their areas. YED continues, with other
licensed electricity distributors, to lobby the Government against the
concurrent imposition of both Section 74 and Section 74A powers.
LICENSE FEE COST RECOVERY
Following a review of the principles governing the recovery of its costs
through license fees, GEMA has determined that, with effect from
Regulatory Accounting Period 2002, license fees will be recovered only
from licensed monopoly network operators. This exclusion of suppliers and
generators has caused licensed distributors' share of license fees to
increase. To compensate for this, GEMA has amended network operators'
licenses to enable them to pass through to customers the full amount of
any difference between actual license fees levied and the amounts included
by GEMA within allowed revenue for license fees at the most recent
distribution price control review. In addition, in recognition of the
abnormally high level of license fees in Regulatory Accounting Period
2001, GEMA has allowed licensed network operators to pass through to
customers the difference between allowed and actual fees in respect of
that period also.
ENERGY EFFICIENCY
The Utilities Act gave the Secretary of State the power to impose
obligations on licensed gas and electricity suppliers, gas transporters,
and electricity distributors to meet targets for the promotion of
improvements in efficiency in consumers' use of energy. The obligations
have, to date, only been imposed on suppliers.
NEW ELECTRICITY TRADING ARRANGEMENTS
In 1998, OFFER published a framework document describing the delivery and
implementation of revised electricity trading arrangements based upon
market trading arrangements in commodities markets elsewhere. In October
1999, with the onset of the implementation phase, these new electricity
trading arrangements became known as NETA. The arrangements were 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 overall aim of NETA is to reduce prices to
end customers.
NETA trading commenced and replaced the Pool on March 27, 2001.
The Master Connection and Use of System Agreement was replaced with the
Connection and Use of System Code ("CUSC") which was given contractual
force through the CUSC Framework Agreement.
Electricity supply businesses incurred significant costs to introduce and
operate under NETA, while the financial impact on distributors was
minimal.
PES LICENSES
On October 1, 2001, the statutory licensing scheme under the Utilities Act
2000 took effect whereby YEG's PES license was converted into a standard
electricity distribution license held by YED and a standard electricity
supply license held by Npower Yorkshire Supply Limited. Consistent with
and pursuant to the asset sale of the electricity and gas supply business
of YPG Group to Innogy on July 31, 2001, Npower Yorkshire Supply Limited
was immediately sold to Innogy on October 1, 2001. Between July 31, 2001
and September 30, 2001, an agency agreement was in place between Innogy
and YEG whereby Innogy acted as YEG's agent for the fulfillment of YEG's
obligations under its PES License.
ELECTRICITY DISTRIBUTION LICENSE
YED's license contains a set of conditions that are standard to all
distribution licenses. The license is structured around the key activities
of YED by means of grouping together all of the standard conditions that
relate to these key activities. Accordingly, the license groups together
those standard conditions that apply to all licensees and are common
across all license types, those that apply in general to all distribution
licensees and those obligations falling on dominant licensees such as YED.
The license also includes a set of special conditions, unique to YED, that
mainly relates to the price control mechanism in respect of YED's DUoS
income.
TRANSMISSION LICENSES
In England and Wales, NGC is the only transmission license holder. The
transmission license imposes on NGC the obligation to operate the merit
order system for the central dispatch of generating units and gives NGC
responsibility for the economic purchasing of ancillary services from
generators and suppliers. The transmission license requires NGC to offer
terms on a non-discriminatory basis for the carrying out of works for
connection to, and use of, the transmission system.
MODIFICATIONS TO LICENSES
Subject to a power of veto by the Secretary of State, GEMA may modify
license conditions with the agreement of the license holder. It must first
publish the proposed modifications and consider representations or
objections made. If GEMA fails to agree modifications to the special
conditions of the license with a license holder, it may refer the matter
to the Competition Commission. The price control conditions of the license
are special conditions. If the Competition Commission finds that the
matter referred to it has, or may be expected to have, specified effects
adverse to the public interest which could be remedied or prevented by a
license modification, GEMA is required to make modifications that appear
to it requisite for the purpose of remedying or preventing the adverse
effects identified by the Competition Commission. Modifications to license
conditions may also be made by the Secretary of State as a consequence of
monopoly, merger or other competition references under general UK
competition law.
Subject to the determination of relevant voting thresholds by the
Secretary of State, the standard license conditions may be modified by a
collective modification process whereby modifications can be made without
the consent of individual licensees and without reference to the
Competition Commission, provided GEMA has secured the agreement of a
prescribed number of licensees.
TERM AND REVOCATION OF ELECTRICITY DISTRIBUTION LICENSE
By its terms, YED's electricity distribution license will continue in
effect until terminated by not less than 25 years' notice in writing given
by GEMA to YED. The Secretary of State for Trade and Industry may revoke
an electricity distribution license by not less than 30 days' notice in
writing to the licensee in certain specified circumstances. These
circumstances include any failure to comply with a final order made by
Ofgem requiring the license holder to comply with its license conditions
or requirements, or the insolvency of the licensee.
UK ENVIRONMENTAL LEGISLATION
YED's business is subject to numerous regulatory requirements with respect
to the protection of the environment. The principal laws that have
environmental implications for YED are the Electricity Act 1989, the
Wildlife and Countryside Act 1981, the Water Industry Act 1991, the Water
Resources Act 1991, the Environmental Protection Act 1990, the Statutory
Nuisance Act 1993 and the Environment Act 1995.
The Electricity Act requires YED to consider the preservation of natural
beauty and the conservation of natural and man-made features of particular
interest when it formulates proposals for development in connection with
certain of its activities. Environmental assessments are required to be
carried out in certain cases, including overhead line constructions at
higher voltages and larger substation developments. YED has produced an
environmental policy statement and an Electricity Act Schedule 9 Statement
that set out the manner in which it intends to comply with its
environmental obligations.
Possible adverse effects of EMFs from various sources, including
transmission and distribution lines, have been the subject of a number of
studies and increasing public discussion. Although some current scientific
research is indicating that EMFs do not cause adverse health effects,
there is the possibility that the passage of legislation and changing
regulatory standards would require measures to mitigate EMFs, with
resulting increases in capital and operational costs. In addition, the
potential exists for public liability with respect to lawsuits brought by
plaintiffs alleging damages caused by EMFs. The only UK standards for
exposure to power frequency EMFs are those promulgated by the National
Radiological Protection Board and relate to the levels above which
physiological effects have been observed. YED fully complies with these
standards.
The Groundwater Regulations 1998 (Water Resources Act 1991) seek to
prevent List I and List II substances entering groundwater and strengthens
the UK Environment Agency's powers to require additional protective
measures, especially in areas of important groundwater supplies. Mineral
oils and hydrocarbons are included in the more tightly controlled List I
substances. This affects the high voltage fluid filled electricity cable
network incorporating an insulating fluid currently in the List I
category. Further research may result in recategorization because of the
biodegradable qualities of the cable fluid. The existing voluntary
Operating Code of Practice, as agreed between the Environment Agency and
the electricity supply industry, is undergoing revision through the
services of the Electricity Association to address the regulatory changes.
Helpful discussions with the Environment Agency continue.
The Oil Storage Regulations started to come into force in 2002 and will
require the introduction of secondary containment measures (bunding) for
all above ground oil storage locations where the capacity is more than 200
litres. The primary containers must be in sound condition, leak free, and
positioned away from vehicle traffic routes. The secondary containment
must be impermeable to water and oil (without drainage valve) and be
subject to routine maintenance. The capacity of the bund must be
sufficient to hold up to 110% of the largest stored vessel or 25% of the
maximum stored capacity, whichever is the greater. The full impact of the
regulations will be phased in over the next three years. The regulations
come into effect as follows:
o March 1, 2002 for all new oil stores;
o September 1, 2003 for existing stores at "significant risk" (i.e.
within 10 metres of a water course); and
o September 1, 2005 for all remaining stores.
YED believes that it has taken, and intends to continue taking, measures
to comply with the applicable law and UK government regulations for the
protection of the environment. There are no material legal or
administrative proceedings pending against YED or any member of the YPG
Group with respect to any environmental matter.
UK AND EU COMPETITION LAW
The Competition Act, which came into force on March 1, 2000, gives new
concurrent powers to the Director General of Fair Trading and Ofgem to
investigate and act against anti-competitive agreements and conduct. These
new powers include fines of up to 10% of turnover over three years for
companies that breach the prohibitions of the Act. In March 1999 the
Office of Fair Trading issued formal guidelines on the concurrent
application of the Competition Act to the regulated industries:
"Concurrent Application to Regulated Industries".
In 2001 Ofgem published the final form of its guidance document
"Competition Act 1998: Application to the Energy Sectors". The document
provides advice and information about the actions that Ofgem will take
into account when considering whether, and if so, how, to exercise its
powers under the Competition Act. The proposals do not raise any
significant concerns for YED.
PROPERTIES
YED owns the freehold of its principal offices in Leeds. YED has both
network and non-network land and buildings.
NETWORK LAND AND BUILDINGS
At December 31, 2001, YED had interests in approximately 16,000 network
properties, comprising principally sub-station sites.
NON-NETWORK LAND AND BUILDINGS
At December 31, 2001, YED had freehold and leasehold interests in
non-network properties comprising chiefly offices, depots, warehouses and
workshops. YEG still owns a number of former retail outlets. The net book
value of non-network land and buildings at December 31, 2001, was
approximately (pound)7 million.
LEGAL PROCEEDINGS
Litigation and arbitration may affect various companies in the YPG Group in
the normal course of business. While the ultimate outcome of these
proceedings cannot be predicted with certainty, we do not believe that any
pending proceedings will have a material adverse effect on our results of
operations or financial position.
Litigation was concluded during the year ended December 31, 2001 with
respect to NGC and International Power's use of actuarial surpluses
declared in the ESPS.
The Pension Ombudsman (a UK arbitrator appointed by statute) had issued a
"final determination" in favor of complaints made by members of the ESPS
relating to NGC's use of the ESPS surplus to offset its additional costs of
early payment of pensions as a result of reorganization or redundancy,
together with additional contributions required after a valuation. Under
that determination the Pension Ombudsman directed NGC to pay into ESPS the
amount of that use of the surplus plus interest. The Pension Ombudsman's
final determination was challenged in the courts by NGC and International
Power, who was also subject to a similar complaint. The High Court
subsequently ruled that such use of surplus was permissible.
On February 10, 1999, the Court of Appeal ruled that the particular
arrangements made by NGC and International Power to dispose of the surplus,
partly by canceling liabilities relating to pension costs resulting from
early retirement, were invalid as they did not comply fully with the rules
and procedures for dealing with surplus at that time. However, the Court of
Appeal did uphold the High Court's ruling that NGC and International Power
could benefit from pension scheme surplus provided that the scheme rules
allow and that the interests of the members are taken into account.
Following a further hearing on May 25 and May 26, 1999 the Court of Appeal
ordered NGC and International Power to pay all sums properly payable by
them to their group trustees. However, enforcement of the order was stayed
pending the outcome of any appeals to the House of Lords, leave for which
was granted.
NGC and International Power initiated appeals in the House of Lords. NGC
and International Power also executed amendments which purported to cancel
their accrued contribution obligations arising from the Court of Appeal's
judgment.
As YPG Group had made similar use of actuarial surpluses a similar, retro-
spective deed of amendment was executed on January 22, 2001.
The appeals initiated by NGC and International Power in the House of Lords
were heard in February 2001 and the House of Lords judgement confirmed the
High Court judgement that such use of surplus was permissible.
On May 16, 2000, the European Court of Justice ruled that UK legislation on
the backdating of part-time employees' claims to pension scheme benefits on
the grounds of sex discrimination was incompatible with EU law. As a
result, part-time employees can claim for backdating of their pension
scheme benefits to April 8, 1976. YPG Group is unable to quantify the
effect if any of this ruling until such time as any claims are brought
against YPG Group and allowed by the Court. To date no such claims have
been brought.
MATERIAL SUBSIDIARIES
The following are material subsidiaries of YPG.
Subsidiary Percentage Country of
Owned Incorporation
Yorkshire Holdings plc 100% England and Wales
Yorkshire Power Finance Limited 100% Cayman Islands
Yorkshire Power Finance 2 Limited 100% Cayman Islands
Yorkshire Electricity Group plc 100% England and Wales
Yorkshire Electricity Distribution plc 100% England and Wales
Yorkshire Electricity Distribution
Services Limited 100% England and Wales
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following is management's discussion and analysis of certain significant
factors that have affected YPG's financial condition and results of operations
during the periods included in the accompanying statements of operations.
INTRODUCTION
YPG is indirectly owned by MEHC and Xcel. YPG was incorporated as a limited
company under the laws of England and Wales in July 1996. Effective April 1,
1997, YPG, through its wholly owned subsidiary Yorkshire Holdings, gained
effective control of YEG. YPG's primary asset is the stock of Yorkshire
Holdings. Yorkshire Holdings, which beneficially owns all the outstanding stock
of YEG, has no significant operations outside of its investment in YEG. YEG
beneficially owns all the outstanding stock in YED and YEDSL.
SIGNIFICANT FACTORS AND KNOWN TRENDS
COMPETITION AND INDUSTRY CHANGES
The current distribution price control formula is effective for the
five-year period beginning April 1, 2000. It includes a one time 23%
reduction in allowed revenue for YEG's Distribution Business for the
regulatory year ended March 31, 2001 compared to the previous price
control.
Effective from October 1, 2001, the Utilities Act introduced a prohibition
on the activity of distributing electricity without a license or an
exemption. The supply and distribution of electricity are now separate
licensable activities with a bar on the same legal entity holding both an
electricity supply and electricity distribution license. In addition, the
PES and second tier supply licenses were brought together into a single
supply license. In connection with these changes, on October 1, 2001, YEG
transferred its Distribution Business to YED and legal title to its
remaining Supply Business assets to Npower Yorkshire Supply Limited
(beneficial interest of the assets having been transferred to Innogy on
July 31, 2001). Npower Yorkshire Supply Limited was sold to Innogy on
October 1, 2001. As part of the nomination of YED as the distribution
license holder, there was a transfer, among other things, of certain
assets of YEG constituting its distribution business and certain related
liabilities, including those as principal obligor under the (pound)200
million Guaranteed Bonds due 2020 (the "Bonds"), to YED on October 1,
2001. In connection with the transfer of the primary liability on the
bonds from YEG to YED, YEG unconditionally and irrevocably guaranteed
payment of all amounts in respect of the Bonds.
YED's license contains a set of conditions that are standard to all
licenses. The license is structured around the key activities of YED that
it governs by means of grouping together all of the standard conditions
that relate to these key activities. Accordingly, the license groups
together those standard conditions that apply to all licensees and are
common across all license types, those that apply in general to all
distribution licensees and those obligations falling on dominant licensees
such as YED, known as the Distribution Services Obligations. The license
also includes a set of Special Conditions, unique to YED, that mainly
relates to the price control mechanism in respect of YED's Distribution
Use of System income.
SEPARATION OF DISTRIBUTION AND ELECTRICITY SUPPLY
YEG complied with the PES License modifications that became effective on
April 1, 2000 and, from that date, treated its Distribution Business and
Supply Business as separate businesses.
The costs of business separation were addressed by Ofgem in its review of
the distribution and supply price controls. These controls became
effective on April 1, 2000, and included an allowance for separation costs
of (pound)7.5 million for each REC's Distribution Business over the
following 5 years ending March 31, 2005, and an allowance of
(pound)200,000 per year for YEG's ex-electricity supply business for the
following 2 years.
FACTORS AFFECTING REVENUES
Two principal factors determine the amount of revenues produced by YED's
Distribution Business: the unit price of electricity distributed (which is
controlled by the Distribution Price Control Formula that may be changed
from time to time) and the number of electricity units distributed (which
depends upon customer demand as influenced in part by economic activity
and weather conditions).
BUSINESS RESTRUCTURING
On July 31, 2001 YEG sold its Supply Business to Npower Yorkshire Limited,
a wholly-owned subsidiary of Innogy. As of that date, therefore, YEG
ceased to operate the Supply Business. The majority of the cash received
was used to reduce the debt of YPG.
The results of the Supply Business have been excluded from the individual
line items in the financial statements and have been shown as income from
discontinued operations.
As part of pre-existing plans to reduce debt, YEG's Generation Business
was disposed of prior to March 31, 1999. Provision was made in the year
ended March 31, 1999 for income taxes arising on the gain. However, a
favorable adjustment to tax liabilities of (pound)8 million, in respect of
the disposal, arose and was recognized in the income statement for the
nine months ended December 31, 1999.
BUSINESS STREAMLINING
A voluntary programme of lay-offs for employees of YED and YEDSL is taking
place in 2002. The costs of the voluntary redundancy programme of
approximately (pound)5 million were charged against income in 2001.
ENVIRONMENTAL FACTORS
YED's business is subject to numerous regulatory requirements with respect
to the protection of the environment. The principal laws that have
environmental implications for YED are the Electricity Act 1989, the
Wildlife and Countryside Act 1981, the Water Industry Act 1991, the Water
Resources Act 1991, the Environmental Protection Act 1990, the Statutory
Nuisance Act 1993 and the Environment Act 1995. There are no material
legal or administrative proceedings pending against YPG Group with respect
to any environmental matter.
INFLATION
Inflation has not had a significant impact on YPG Group in the last three
years and is not expected to do so in the foreseeable future.
REVIEW OF POLICY ON DEPRECIATION OF OPERATIONAL ASSETS
YEG has revised the 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 between 10 and 50
years. In the year ended December 31, 2001 the effect of this change was
to decrease net income by (pound)4 million. The previous policy was to
depreciate such assets over a period of between 10 and 80 years.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the US requires management to make
judgements, assumptions and estimates that affect the amounts reported in
the consolidated financial statements and accompanying notes. Note 1 to the
consolidated financial statements in this annual report describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements. Estimates are used for, but not limited
to, the accounting for revenues, contingent liabilities and impairment of
long-lived assets. Actual results could differ from these estimates. The
following critical accounting policies are impacted by judgements,
assumptions and estimates used in the preparation of the consolidated
financial statements. The discussion below should be read in conjunction
with the full statement of accounting policies.
Revenues in the continuing operations are recorded based upon electricity
distributed and services provided to the end of the period. Where there is
an over-recovery of distribution business revenues against the maximum
regulated amount, revenues equivalent to the over-recovered amount are
deferred. The deferred amount is deducted from revenue and included in
other liabilities. Where there is an under-recovery, no anticipation of any
potential future recovery is made.
Tangible fixed assets, other than land, are generally depreciated on the
straight line method over their estimated operational lives. Operational
lives are estimated based on a number of factors including the expected
usage of the asset, expected physical deterioration and technological
obsolescence.
Long-lived assets consist primarily of the distribution system and goodwill
arising from business acquisitions. YPG believes that the useful lives
assigned to these assets, which range from 10 to 50 years, are reasonable.
YPG evaluates the long-lived assets for impairment when events or changes
in circumstances indicate, in management's judgement, that the carrying
value may not be recoverable. These computations utilise judgements and
assumptions inherent in management's estimates of undiscounted future cash
flows to determine recoverability of an asset. If management's assumptions
about these assets change as a result of events or circumstances, and
management believes that the assets may have declined in value, then YPG
may record impairment charges, resulting in lower profits.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Net income decreased by (pound)139 million from a (pound)55 million profit
in the year ended December 31, 2000 to a (pound)84 million loss in the
year ended December 31, 2001. This is primarily due to the disposal of the
Supply Business operation and the full year impact of the distribution
price control review in the year ended December 31, 2001.
OPERATING REVENUES
Operating revenues increased by (pound)67 million (64%) from (pound)105
million in the year ended December 31, 2000 to (pound)172 million in the
year ended December 31, 2001. The increase in the year ended December 31,
2001 reflects the impact of the disposal of the Supply Business on July
31, 2001.
GROSS MARGIN
Gross margin increased by (pound)71 million (86%) from (pound)83 million
in the year ended December 31, 2000 to (pound)154 million in the year
ended December 31, 2001. The increase in the year ended December 31, 2001
reflects the impact of the disposal of the Supply Business on July 31,
2001.
OPERATING COSTS
The reduction in maintenance costs of (pound)4 million (8%) to (pound)48
million in the year ended December 31, 2001 from (pound)52 million in the
year ended December 31, 2000 reflects further efficiencies made.
The increase in depreciation and amortization of (pound)7 million (15%)
from (pound)48 million to (pound)55 million was primarily due to the
revision of the useful economic lives of distribution network assets.
Selling, general and administrative costs increased in the year ended
December 31, 2001 by (pound)7 million (19%) from (pound)37 million to
(pound)44 million due to the disposal of the Supply Business on July 31,
2001.
NET INTEREST EXPENSE
The net interest expense decreased by (pound)27 million in the year ended
December 31, 2001 to (pound)86 million due to lower interest expense on
debts redeemed and interest earned on the proceeds from the disposal of
the Supply Business invested in short term money market investments.
INCOME TAXES
YPG Group recognized a favorable tax settlement of (pound)3 million in
respect of prior years' tax liabilities in the year ended December 31,
2000. The effective rate of tax in the year ended December 31, 2001 was
27% and in the year ended December 31, 2000 was 31%.
DISCONTINUED OPERATIONS
YEG's Supply Business was disposed of during the year ended December 31,
2001.
Income from discontinued operations after tax declined by (pound)120
million (74%) from (pound)162 million in the year ended December 31, 2000
to (pound)42 million in the year ended December 31, 2001 primarily due to
the results for the year ended December 31, 2001 reflecting only seven
months of operations.
The loss recognized on disposal resulted in a decrease in net income in
the year ended December 31, 2001 of (pound)68 million (net of related
income taxes benefit of (pound)35 million).
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
- ---------------------------------------------------------------------------
Year ended
December 31, 1999
(unaudited)
(pound)
(millions)
Operating revenues 87
Cost of sales 23
--
Gross margin 64
Operating expenses
Maintenance 59
Depreciation and amortization 52
Selling, general and administrative expenses
36
-----
Loss from operations (83)
Other income 2
Net interest expense (114)
-----
Income from continuing operations before income taxes (195)
Benefit for income taxes 61
-----
Loss from continuing operations (134)
Income from discontinued operations, net of income
taxes of(pound)21 177
Gain on disposal of discontinued operations 8
-
Net income 51
==
The year ended December 31, 1999, comprises audited financial information
for the nine months from April 1 to December 31, 1999 and unaudited
financial information for the three months from January 1 to March 31,
1999.
Net income increased by (pound)4 million (8%) from (pound)51 million in
the year ended December 31, 1999 to (pound)55 million in the year ended
December 31, 2000. This was primarily due to an increase in profit
attributable to the gas and electricity supply businesses offset by the
impact of the distribution price control review and the cumulative effect
on prior years of a revised depreciation method offset by a gain on
disposal of discontinued operations in the year ended December 31, 1999.
OPERATING REVENUES
Operating revenues increased by (pound)18 million (21%) from (pound)87
million in the year ended December 31, 1999 to (pound)105 million in the
year ended December 31, 2000, reflecting the effects of competition in the
electricity supply market resulting in more Distribution Business revenues
being derived from outside the YPG Group.
GROSS MARGIN
Gross margin increased by (pound)19 million (30%) from (pound)64 million
in the year ended December 31, 1999 to (pound)83 million in the year ended
December 31, 2000, due to the effects of competition in the electricity
supply market resulting in more Distribution Business revenues being
derived from outside the YPG Group.
OPERATING COSTS
The reduction in maintenance costs of (pound)7 million (12%) from
(pound)59 million in the year ended December 31, 1999 to (pound)52 million
in the year ended December 31, 2000 was the result of a reduction in
controllable costs and reflects further efficiencies made.
Selling, general and administrative costs increased by (pound)1 million
to (pound)37 million in the year ended December 31, 2000 from (pound)36
million in the year ended December 31, 1999.
The reduction in depreciation of (pound)4 million (8%) from (pound)52
million in the year ended December 31, 1999 to (pound)48 million in the
year ended December 31, 2000 was due to the revision of useful economic
lives of distribution network assets and the change in depreciation method
for distribution network assets.
NET INTEREST EXPENSE
Net interest expense reduced by (pound)1 million (1%) from (pound)114
million in the year ended December 31, 1999 to (pound)113 million in the
year ended December 31, 2000.
INCOME TAXES
YPG Group recognized a favorable tax settlement of (pound)3 million in
respect of prior years' tax liabilities in the year ended December 31,
2000. YPG recognized a favorable tax settlement of (pound)12 million in
respect of prior years' tax liabilities in the year ended December 31,
1999. The effective rate of tax in the year ended December 31, 2000 was
31% and in the year ended December 31, 1999 was 31%.
DISCONTINUED OPERATIONS
After tax income from discontinued operations decreased by (pound)15
million (8%) from (pound)177 million in the year ended December 31, 1999
to (pound)162 million in the year ended December 31, 2000 due to the
opening of competition in the electricity supply market.
YEG's Generation Business was disposed of during the year ended March 31,
1999. Provision was made in the year ended December 31, 1998 for income
taxes arising on the gain. However, a favorable adjustment to tax
liabilities of (pound)8 million, in respect of the disposal, has been
recognized in the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
YPG's primary asset is the entire share capital of Yorkshire Holdings, which, in
turn, owns the entire share capital of YEG as its primary asset. YPG is
therefore dependent upon dividends from YEG for its cash flow.
FINANCING
Prior to the acquisition of YPG by CE, all of YPG Group's committed
borrowing facilities including its commercial paper programme were
cancelled. At December 31, 2001, YPG Group had a cash balance of
(pound)220 million that satisfies its ongoing working capital
requirements.
AVAILABLE SOURCES OF CREDIT
At December 31, 2001, in addition to cash flow from YEG's operations
available for distribution indirectly to YPG, YPG had (pound)220 million
of cash available as its primary source of liquidity.
YPG will also be required to fund its ongoing capital expenditures, fund
its debt service and cover its working capital needs. YPG expects to fund
these ongoing cash requirements through a combination of available cash
flow and the (pound)220 million cash balance.
USE AND SOURCE OF FUNDS
The principal sources of funds of YPG Group during the year ended December
31, 2001 were (pound)106 million from operations and (pound)710 million
from the sale of the Supply Business. During this period, YPG Group
utilized (pound)72 million for capital expenditures. Proceeds from asset
sales (excluding the sale of the Supply Business) totalled (pound)4
million. The syndicated credit facility was reduced to nil during the
period.
The principal sources of funds of YPG Group during the year ended December
31, 2000 were (pound)140 million from operations. YPG Group utilized
(pound)104 million for capital expenditures. Proceeds from asset sales
totalled (pound)1 million.
The principal sources of funds of YPG Group during the nine months ended
December 31, 1999 were (pound)70 million from operations. During this
period, YPG Group utilized (pound)100 million for capital expenditures.
Proceeds from asset sales totalled (pound)1 million.
CAPITAL EXPENDITURES
Since the disposal of the Supply Business, YPG Group's capital expenditures
are all related to the Distribution Business and include expenditures for
load-related, non-load-related and non-operational capital assets.
Load-related capital expenditures are largely required by new business
growth. Customer contributions are normally received where capital
expenditures are made to extend or upgrade service to customers (except to
the extent that such capital expenditures are made to enhance Yorkshire's
distribution network generally). Non-load-related capital expenditures
include asset replacement, which is expected to continue. Other
non-load-related expenditures include system upgrade work that provides for
load growth and has the additional benefit of improving network security
and reliability. Non-operational capital expenditures are for assets such
as fixtures and equipment. For the year ended December 31, 2001 and the
year ended December 31, 2000 capital expenditures, net of customer
contributions, were (pound)72 million and (pound)104 million, respectively.
As part of the distribution price control review process, the five year
period to March 31, 2005 was considered. For this period, YEG's
distribution allowed revenues were based on Ofgem's capital projections for
load and non-load related expenditure totalling (pound)454 million (in year
ended March 31, 1998 prices).
Management believes that cash flow from operations, together with its
existing sources of cash and credit will provide sufficient financial
resources to meet YPG Group's projected capital needs and other expenditure
requirements for the foreseeable future.
OBLIGATIONS AND COMMITMENTS
YPG Group has contractual obligations and commercial commitments that may
affect its financial condition. Based on management's assessment of the
underlying provisions and circumstances of the material contractual
obligations and commercial commitments of YPG Group, including structured
finance arrangements, there is no known trend, demand, commitment, event or
uncertainty that is reasonably likely to occur which would have a material
effect on YPG Group's financial condition or results of operations.
CONTRACTUAL CASH OBLIGATIONS
Period payments are due
Total 2002 2003/4 2005/6 After
2006
(pound)
Long term debt (1) 762 - - 155 607
Company-obligated mandatory
redeemable Trust Securities
of junior subordinated
deferrable interest debenture 156 - - - 156
Operating leases (2) 4 - 3 - 1
- - - - -
Total 922 - 3 155 764
=== = = === ===
(1) Excludes unamortized debt premiums, discounts and fair value
purchase allocation adjustments
(2) Not reflected on the consolidated balance sheets.
For details of principal amounts, maturity dates and interest rates see
"Item 11 - Quantitative and Qualitative Disclosures About Market Risk".
OTHER COMMERCIAL COMMITMENTS
There are no other contractual commercial commitments.
OFF BALANCE SHEET TRANSACTIONS
There are no off balance sheet transactions.
RISK MANAGEMENT
Following the sale of YEG's Supply Business to Innogy on July 31, 2001, YPG
ceased to have any exposure to the risks associated with the Supply Business.
YED is exposed to a certain amount of risk of non-payment of its DUoS invoices
by counter-parties to those contracts. The counter-parties are electricity
supply companies supplying electricity to end-user customers in Great Britain.
Pursuant to an industry standard DUoS agreement with each counter-party,
counter-parties with an approved credit rating are not required to provide any
additional credit support for their DUoS payment obligations to YED. YED
requires each counter-party that does not possess such a credit rating to
provide a parent company guarantee, cash deposit or other acceptable credit
enhancement instruments. The terms and conditions of DUoS agreements may be
varied by agreement between the parties to the agreements and failing that
Ofgem may determine such disputes. In addition, YED has a credit insurance
policy in place covering, subject to the terms of the policy, up to an annual
maximum of (pound)7.5 million of DUoS revenue that has been billed and on which
payment is outstanding in the event of a counter-party ceasing to trade.
YED and YEDSL apply MEHC's corporate risk management philosophy to their
businesses which places great emphasis on personnel safety. Safety programs
include goals, awards, safety committees, and behavior-based safety. The
operations philosophy centers on maintaining high rates of service availability
and low rates of forced outages. Equipment is only operated within design limits
and is purchased only from recognized suppliers. Training through classroom
simulation and apprenticeship is monitored by management and technical support
staff. Key personnel participate in industry groups to maintain a current body
of knowledge on issues and developments. Technical support is available on-site
and off-site, augmented by engineering firms, consultants, and contractors, as
needed and root-cause analysis is required after significant events and lessons
learned are incorporated into operating practices.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets" which establish accounting and
reporting for business combinations. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001, to be accounted for using
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized but tested for
impairment on an annual basis. SFAS No. 142 is effective for the Company
beginning January 1, 2002. Under the current method of assessing goodwill for
impairment, which uses an undiscounted cash flow approach, no material
impairment existed at December 31, 2001. For 2002, YPG will begin to test
goodwill for impairment under the new rules, applying a fair-value-based
approach. YPG is in the process of quantifying the anticipated impact on its
financial condition and results of operations of adopting the provisions of SFAS
No. 142, which could be significant. The historical impact of not amortizing
goodwill would have been to increase net income for the years ended December 31,
2001 and 2000 and the nine month period ended December 31, 1999 by (pound)14
million, (pound)24 million and (pound)18 million, respectively assuming no
impairment had been required in those periods. However, impairment reviews may
result in future periodic write-downs.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses the accounting for legal obligations associated
with the retirement of tangible, long-lived assets, and the associated asset
retirement costs. This pronouncement is effective for financial years beginning
after June 15, 2002. YPG is evaluating the impact that adoption of this standard
will have on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". The adoption of SFAS No. 144 on January 1,
2002 did not have any impact on YPG Group's financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Management of YPG, Yorkshire Finance and Yorkshire Finance 2
The following table sets forth certain information with respect to the executive
officers and directors of YPG as of December 31, 2001:
Name Age Position
Mr G E Abel 39 Director, YPG
Mr P E Connor 53 Director, YPG, Yorkshire Finance and
Yorkshire Finance 2
Dr J M France 44 Director, YPG
Mr P J Goodman 35 Director, YPG
Mr K Linge 52 Director, YPG, Yorkshire Finance and
Yorkshire Finance 2
Mr J D Stallmeyer 44 Director, YPG
Mr J Elliott 37 Company Secretary, YPG
The directors are not subject to retirement by rotation and may be appointed and
removed by persons holding at least 50 percent of the ordinary shares in the
Company. The appointment of the directors is not subject to a specific term.
Once appointed the directors continue in office until they either resign or are
removed.
Gregory E Abel. Has been a director of YPG since September 2001. Mr Abel joined
MidAmerican Energy Holdings Company in 1992 and is President and Chief Operating
Officer of MidAmerican Energy Holdings Company. Mr Abel is a Chartered
Accountant and from 1984 to 1992 he was employed by Price Waterhouse. In the San
Francisco office of Price Waterhouse, he was responsible for clients in the
energy industry.
P Eric Connor. Has been a director of YPG and Yorkshire Finance and Yorkshire
Finance 2 since September 2001. Mr Connor is President and Chief Operating
Officer of Northern Electric plc and joined Northern Electric in 1992. Prior to
joining Northern Electric he was a director at NEI Reyrolle Limited. His
previous appointments included engineering and management posts with National
Nuclear Corporation, NEI and Marconi Space and Defence.
John M France. Has been a director of YPG since September 2001. Dr France has
worked for Northern Electric plc since 1989, during which time he has been
responsible for regulatory affairs. He is Director of Regulation for the CE
group of companies.
Patrick J Goodman. Has been a director of YPG since September 2001. Mr Goodman
is Senior Vice President and Chief Financial Officer of MidAmerican Energy
Holdings Company. Mr Goodman joined MidAmerican Energy Holdings Company in 1995
and served in various accounting positions including Chief Accounting Officer.
He was promoted to Senior Vice President and Chief Financial Officer in April
1999. Mr Goodman was Reinsurance and Financial Accounting Administrator for
National Indemnity Company from 1993 to 1995 and an auditor for Coopers &
Lybrand from 1989 to 1993.
Kenneth Linge. Has been a director of Yorkshire Finance and Yorkshire Finance 2
since September 2001 and of YPG since November 2001. Mr Linge has worked for
Northern Electric plc since 1968 and is Director of Finance for the CE group of
companies.
James D Stallmeyer. Has been a director of YPG since September 2001. Mr
Stallmeyer is General Counsel and Commercial Director of the CE group of
companies. Mr Stallmeyer joined MidAmerican Energy Holdings Company in August
1993. Prior to joining MidAmerican Energy Holdings Company he was an attorney in
the public finance and corporate finance departments at Chapman and Cutler in
Chicago (1984-1986; 1987-1993), in the public finance department of Skadden,
Arps, Slate, Meagher & Flom in Chicago (1986-1987), and an instructor of legal
writing at the University of Illinois College of Law (1987-1988).
John Elliott. Has been Company Secretary of YPG since September 2001. Mr Elliott
is a Chartered Secretary, has worked for Northern Electric plc since 1986 and is
Company Secretary for the CE group of companies.
EXECUTIVE COMPENSATION
Management Compensation of YPG, Yorkshire Finance and Yorkshire Finance 2
The officers and directors of YPG and Yorkshire Finance and Yorkshire Finance 2
listed above receive no cash or non-cash compensation as a result of their
services performed for YPG and Yorkshire Finance and Yorkshire Finance 2.
Transactions with Management and Others
None
Certain Business Relationships
See "Management of YPG" and "Executive Compensation" above.
Indebtedness of Management
None
Employees
At the start of the year ended December 31, 2001, all employees in YPG Group
were employed under contracts held by YEG. On October 1, 2001 when YEG's
transfer scheme and asset transfer agreement with YED and YEDSL became
effective, YEG's employees were transferred to either YED or YEDSL. The numbers
of employees of YPG Group over the last three years are as follows
At December 31,
2001 2000 1999
---- ---- ----
1,484 4,060 4,275
YPG and Yorkshire Holdings have no employees because they are holding companies
with no operations.
Approximately 85% of YPG Group's employees are represented by labor unions. All
YPG Group's employees who are not party to a personal employment contract are
subject to collective bargaining agreements. These agreements may be amended by
agreement between YED or YEDSL, as appropriate, and the unions and are
terminable with 12 months' notice by either side. YED and YEDSL believe that
their relations with its employees are favorable.
Following the purchase of 94.75% of the issued share capital of YPG by CE, a
voluntary programme of lay-offs for employees of YED and YEDSL is planned to
take place in 2002. The costs of the voluntary redundancy programme of
approximately (pound)5 million were charged against income in 2001.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The major shareholders of YPG are as follows
Shareholder Number of Shares Percentage
CE Electric UK Limited 416,900,001 94.75
Xcel Energy International, Inc 23,100,001 5.25
On April 3, 2001, subsidiaries of AEP and Xcel sold 94.75% of the issued share
capital of YPG to Innogy, an integrated energy company in the UK. AEP sold its
entire interest in YPG, while Xcel retained a 5.25% interest.
On September 21, 2001, CE, a company incorporated under the laws of England and
Wales, acquired 94.75% of the issued share capital of YPG from Innogy. CE is
indirectly owned by MEHC, a company incorporated in Iowa, United States of
America.
CE and Xcel do not have different voting rights.
RELATED PARTY TRANSACTIONS
YPG has provided a loan to CE on which it receives interest based on short term
money market rates (5.4% at December 31, 2001). The amount outstanding, as at
July 9, 2002 was approximately (pound)23 million and the maximum amount
outstanding during the period was (pound)47 million.
ITEM 8. FINANCIAL INFORMATION
See "Item 18 - Financial Statements".
LEGAL PROCEEDINGS
Litigation and arbitration may affect various companies in the YPG Group in the
normal course of business. While the ultimate outcome of these proceedings
cannot be predicted with certainty, we do not believe that any pending
proceedings will have a material adverse effect on the results of operations or
financial position. See "Item 4 - Information on the Company - Legal
Proceedings".
SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, there has been no
significant change in our financial position since December 31, 2001.
DIVIDEND POLICY
No dividends have been declared or paid in the periods covered by this annual
report.
ITEM 9. THE OFFER AND LISTING
There is no established public trading market for YPG's common stock, all of
which is owned indirectly by MEHC and Xcel.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
A discussion of our Memorandum and Articles of Association is incorporated by
reference to our registration statement on Form S-1 filed on March 13, 1998.
MATERIAL CONTRACTS
Other than contracts described elsewhere in this annual report, there were no
material contracts entered into by a member of the YPG Group during the prior
two years outside the ordinary course of business.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
We are not restricted by any current UK law, decree or regulation from
distributing to or receiving capital from, or paying dividends or interest or
otherwise making payments to, persons who are neither residents nor nationals of
the UK.
Under UK law and our Memorandum and Articles of Association, persons who are
neither residents nor nationals of the UK may freely hold, vote and transfer
their ordinary shares in the same manner as UK residents or nationals.
DOCUMENTS ON DISPLAY
It is possible to read and copy the documents referred to in this annual report
that have been filed with the SEC at the SEC's public reference room located at
451 Fifth Street, NW
Washington DC 20549
USA
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room and their copy charges.
In addition, documents referred to above are available at our headquarters,
located at
Carliol House
Market Street
Newcastle upon Tyne
NE1 6NE
England
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
Prior to the sale of its Supply Business, YEG had certain market risks inherent
in its business activities. The purchase and sale of electricity and gas exposed
YEG to market risk. Market risk represented the risk of loss that may have
impacted YEG due to adverse changes in market prices.
YEG's electricity supply risk management efforts were intended to appropriately
hedge the risks associated with the purchase and sale of electricity resulting
from Pool price volatility. When the Pool was the wholesale electricity market,
virtually all electricity generated in England and Wales was sold by generators
and bought by suppliers through the Pool. The most common contracts for
electricity supply to business customers were for twelve-month terms and
contained fixed rates. Similarly, domestic and small business tariffs contained
fixed rates. YEG was exposed to purchase price risk (the risk associated with
fluctuations in the cost of purchased electricity relative to the price received
from the electricity supply customer) to the extent that it had not hedged such
risk. YEG substantially hedged purchase price risk by employing a variety of
risk management tools, including management of its electricity supply contract
portfolio, hedging contracts and other means which mitigated the risk of Pool
price volatility. YEG employed risk management methods to maximize its return
consistent with an acceptable level of risk.
Under its PES License, YEG had a price cap on the prices it could charge its
domestic customers in the Authorized Area. Because the maximum price was fixed
for these customers, YEG was at risk from upward movements in purchase costs.
This risk was mitigated by hedging purchase contracts, mainly through contracts
for differences and electricity forward agreements.
Contracts for differences and electricity forward agreements were contracts
predominantly between generators and suppliers, which fixed the major elements
of the price of electricity for a contracted quantity of electricity over a
specific time period. Differences between the actual price set by the Pool and
the agreed prices gave rise to difference payments between the parties to the
particular contract for differences or electricity forward agreement.
The system of wholesale purchasing through the Pool was replaced by NETA on
March 27, 2001. NETA requires participants to submit half hourly forecasts of
electricity supply and demand and endeavor to balance contract positions and
metered volumes. There are incentives, in the form of imbalance payments, for
generators and suppliers to balance their supply/demand position. YEG redefined
its business operations in order to effectively manage its position in the new
market by seeking to predict its customers' demand for electricity on a
short-term basis as accurately as possible and to maximize the trading
opportunities, while effectively managing the risk of imbalances.
Gas was sourced from YEG's interest in the Armada Field. A purchase agreement
with a major gas supplier was entered into to meet the majority of the
requirements of YEG's residential gas market and swing contracts and purchases
on the spot market were utilised to give YEG a balanced gas purchase portfolio.
YEG utilized risk management methods in relation to gas purchasing and supply,
including storage and an interruptible customer portfolio, designed to maximize
its return consistent with an acceptable level of risk. A system to evaluate and
enable effective management of risk in gas trading was used by YEG. The system
enabled greater control of all transactions including daily evaluation of key
parameters such as value at risk and profit and loss positions for each YEG
business unit.
Following the sale of YEG's Supply Business to Innogy on July 31, 2001, YPG
Group ceased to have any exposure to the commodity price risk associated with
the Supply Business.
CREDIT RISK
Credit risk refers to the risk of financial loss that would result from the
failure of counter-parties to comply with the terms of their contractual
obligations with YPG Group.
YED is exposed to a certain amount of risk of non-payment of its DUoS invoices
by counter-parties to those contracts. The counter-parties are electricity
supply companies supplying electricity to end-user customers in Great Britain.
Pursuant to an industry standard DUoS agreement with each counter-party,
counter-parties with an approved credit rating are not required to provide any
additional credit support for their DUoS payment obligations to YED. YED
requires each counter-party that does not possess such a credit rating to
provide a parent company guarantee, cash deposit or other acceptable credit
enhancement instruments. In addition, YED has a credit insurance policy in place
covering, subject to the terms of the policy, up to an annual maximum of
(pound)7.5 million of DUoS revenue that has been billed and on which payment is
outstanding in the event of a counter-party ceasing to trade.
In the year ended December 31, 2001, Enron Direct Limited, an electricity
supplier, was declared insolvent and put into administration. At the time, Enron
Direct Limited owed YED approximately (pound)0.5 million in DUoS payments.
Discussions are on-going with Ofgem to reach an agreement whereby YED will be
allowed to recover a percentage of this amount through the distribution price
control mechanism. Some portion of the (pound)0.5 million may be recovered from
the administrators of Enron Direct Limited and the credit insurance policy.
In the year ended December 31, 2000, Independent Energy, an electricity
supplier, was declared insolvent and put into administration. At the time,
Independent Energy owed YED approximately (pound)1.5 million in DUoS payments.
Agreement was reached with Ofgem whereby YED will be allowed to recover 80% of
this outstanding amount through the distribution price control mechanism.
Ofgem has consulted on changes to the DUoS credit cover and payment regime that
potentially offer YED reduced risk in the event of insolvency of supply
companies. There is no assurance, however, that such changes will be
implemented.
FOREIGN CURRENCY EXCHANGE RATE RISK
YPG is partly capitalized by US dollar-denominated debt. Changes in the US
dollar/Pound Sterling exchange rate will affect the US Dollar value of YPG's
Pound Sterling cash flows and the Pound Sterling fair value of the US
dollar-denominated debt. YPG uses cross-currency swaps to manage the cash flow
and translation risks arising from its exposures to foreign currency exchange
rate movements associated with Pound Sterling cash flows and, US
dollar-denominated debt.
In connection with the agreement to sell YPG to CE, cross-currency swaps with a
value of $300 million were closed-out in 2001. The swaps were used to hedge
Yorkshire Finance $300 million Yankee bonds due 2008. Following completion of
the sale of YPG to CE in September 2001 new cross-currency swaps were taken out
to fully hedge this exposure.
In June 1998, YPG issued $275 million aggregate principal amount of 8.08% Trust
Securities which mature in 2038. In the absence of appropriate cover for this
maturity, cross-currency swaps maturing in June 2008 are used to manage the
foreign currency exchange rate risk arising from the trust securities
borrowings. The US dollar interest cash flows received under the cross-currency
swaps match the US dollar coupon payments under both bonds until 2008.
INTEREST RATE RISK
YPG is partly funded by long-term Pound Sterling-denominated debt bearing
variable and fixed interest rates and long-term US Dollar-denominated debt
bearing fixed interest rates. Changes in Pound Sterling and US Dollar interest
rates will affect the cash flows under debt bearing variable interest rates and
the fair value of debt bearing fixed interest rates.
At December 31, 2001, fixed interest rates were payable on 83% of debt and the
average debt maturity was 17 years.
The following tables present the total principal cash repayments and related
weighted average interest rates of YPG's debt and the total principal amounts
and weighted average interest rates of YPG's cross currency swaps as of December
31, 2001 and December 31, 2000.
At December 31, 2001
All amounts, millions Maturity Date
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Debt
Fixed interest rate Pound
Sterling - denominated debt
Amount - - - - - (pound)400 (pound)400 (pound)488
Average interest rate - - - - - 8.3% 8.3%
Variable interest rate
Pound Sterling -
denominated debt
Amount - - - (pound)155 - - (pound)155 (pound)164
Average interest rate - - - 5.8% - - 5.8%
Fixed interest rate
US dollar-denominated debt
Amount - - - - - $557 $557 $546
Average interest rate - - - - - 7.2% 7.2%
Cross currency swaps $8
Receive fixed interest
rate US dollars
Amount - - - - - $555 $555 -
Average interest rate - - - - - 7.4% 7.4%
Vs,
Pay fixed interest rate
Pounds Sterling
Amount - - - - - (pound)363 (pound)363 -
Average interest rate - - - - - 8.3% 8.3%
At December 31, 2000
All amounts, millions Maturity Date
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Debt
Fixed interest rate
Pound Sterling -
denominated debt
Amount (pound)4 (pound)4 - - (pound)150 (pound)400 (pound)558 (pound)643
Average interest rate 7.4% 7.5% - - 8.6% 8.3% 8.3%
Variable interest rate
Pound Sterling -
denominated debt
Amount (pound)106 - - - (pound)155 - (pound)261 (pound)261
Average interest rate 6.1% - - - 7.1% - 6.7%
Fixed interest rate
US dollar-denominated debt
Amount - - $350 - - $565 $915 $841
Average interest rate - - 6.2% - - 7.2% 6.8%
Cross currency swaps $(15)
Receive fixed interest
rate US dollars
Amount - - $350 - - $556 $906 -
Average interest rate - - 6.2% - - 7.4% 6.9%
Vs,
Pay fixed interest rate
Pounds Sterling
Amount - - (pound)215 - - (pound)341 (pound)556 -
Average interest rate - - 8.1% - - 8.8% 8.5%
Interest rate cap
Nominal amount (pound)40 - - - - - (pound)40 (pound)-
Interest rate 7.5% - - - - - 7.5%
The average interest rates shown are weighted average interest rates.
The average interest rate of debt is based on the coupon or interest rates of
the debt maturing in the period reported.
The variable interest rate Pound Sterling-denominated debt at December 31, 2001
consists of (pound)155 million Reset Senior Notes on which the interest rate is
reset semi-annually with the last reset being made on February 15, 2002.
The weighted average term of the variable interest rate Pound
Sterling-denominated debt at December 31, 2001 was 3 years.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See the financial statements beginning on page F-1.
The following financial statements and financial statement schedules are filed
as part of this annual report together with the report of the independent
auditors:
Financial Statements Page
Report of the Independent Auditors F-1
Consolidated Statements of Income for the years ended December 31,
2001 and 2000 and the nine months ended December 31, 1999 F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001 and 2000 and the nine
months ended December 31, 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 and the nine months ended
December 31, 1999 F-6
Supplemental Disclosure of Cash Flow Information for the
years ended December 31, 2001 and 2000 and the nine months
ended December 31, 1999 F-7
Financial Statement Schedules
Report of the Independent Auditors F-24
Schedule II - Valuation and Qualifying Accounts and Reserves F-25
ITEM 19. EXHIBITS
The following documents are filed as a part of this annual report on this Form
20-F:
(1) Financial Statements:
The financial statements and the related reports of independent
public accountants and auditors filed as a part of this annual report
are under Item 18 herein.
(2) Financial Statement Schedules:
Consolidated Valuation and Qualifying Accounts and Reserves (Schedule
II)
All other schedules are omitted because they are not applicable or
the required information is contained in the financial statements or
notes thereto.
(3) Exhibits:
Certain of the following exhibits, designated with an asterisk (*), are filed
herewith. The exhibits not so designated have heretofore been filed with the SEC
and, pursuant to 17 C.F.R. 229.10(d) and 240.12b-32, are incorporated herein by
reference to the documents indicated in parentheses following the descriptions
of such exhibits. Certain instruments which define the rights of holders of debt
securities of Yorkshire Power Group Limited and its subsidiaries are not filed
herewith pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, 17 C.F.R. 229.
Yorkshire Power Group Limited agrees to furnish a copy of each such instrument
to the SEC upon request.
Exhibit Description
Number
1.1 Memorandum and Articles of Association of Yorkshire Power Group
Limited (Designated in Registration 333-47925 as Exhibit 3.1).
1.2 Certificate of Incorporation of Yorkshire Power Group Limited
(Designated in Registration 333-47925 as Exhibit 3.2).
2.1 Subordinated Indenture dated as of June 1, 1998 among Yorkshire
Power Group Limited, Yorkshire Power Finance Limited, Banque
Generale du Luxembourg, and The Bank of New York (Annual Report
on Form 10-K for the year ended March 31, 1998, File No.
333-47925, Exhibit 4.1).
2.2 First Supplemental Indenture dated as of June 1, 1998 among
Yorkshire Power Group Limited, Yorkshire Power Finance Limited,
Banque Generale du Luxembourg and The Bank of New York (Annual
Report on Form 10-K for the year ended March 31, 1998, File No.
333-47925, Exhibit 4.2).
2.3 Certificate of Trust of Yorkshire Capital Trust I (Designated in
Registration 333-47925 as Exhibit 4.4).
2.4 Trust Agreement of Yorkshire Capital Trust I (Designated in
Registration 333-47925 as Exhibit 4.5).
2.5 Amended and Restated Trust Agreement of Yorkshire Capital Trust
I dated as of June 1, 1998 (Annual Report on Form 10-K for the
year ended March 31, 1998, File No. 333-47925, Exhibit 4.5).
2.6 Trust Securities Guarantee Arrangement dated as of June 1, 1998
between Yorkshire Power Group Limited and The Bank of New York
(Annual Report on Form 10-K for the year ended March 31, 1998,
File No. 333-47925, Exhibit 4.6).
2.7 Deposit Agreement dated as of June 1, 1998 between Yorkshire
Power Finance Limited and The Bank of New York (Annual Report on
Form 10-K for the year ended March 31, 1998, File No. 333-47925,
Exhibit 4.7).
2.8 Indenture, dated as of February 1, 1998 among Yorkshire Power
Finance Limited, Yorkshire Power Group Limited, The Bank of New
York and Banque Generale du Luxembourg (Annual Report on Form
10-K for the year ended March 31, 1998, File No. 333-47925,
Exhibit 4.8).
2.9 First Supplemental Indenture, dated as of February 25, 1998,
among Yorkshire Power Finance Limited, Yorkshire Power Group
Limited, The Bank of New York and Banque Generale du Luxembourg
(Annual Report on Form 10-K for the year ended March 31, 1998,
File No. 333-47925, Exhibit 4.9).
2.10 Second Supplemental Indenture, dated as of February 25, 1998,
among Yorkshire Power Finance Limited, Yorkshire Power Group
Limited, The Bank of New York and Banque Generale du Luxembourg
(Annual Report on Form 10-K for the year ended March 31, 1998,
File No. 333-47925, Exhibit 4.10).
2.11 Deposit Agreement, dated as of February 1, 1998 between The Bank
of New York and Yorkshire Power Finance Limited (Annual Report
on Form 10-K for the year ended March 31, 1998, File No.
333-47925, Exhibit 4.11).
2.12 Trust Deed, dated January 17, 1995, between Yorkshire
Electricity Group plc and Bankers Trust Company Limited (Annual
Report on Form 10-K for the year ended March 31, 1998, File No.
333-47925, Exhibit 4.12).
2.13 First Supplement, dated July 27, 1995, between Yorkshire
Electric Group plc and Bankers Trust Company Limited (Annual
Report on Form 10-K for the year ended March 31, 1998, File No.
333-47925, Exhibit 4.13).
4.1 Master Agreement dated as of October 25, 1995 among The National
Grid Holding plc, The National Grid Company plc, Yorkshire
Electricity Group plc and the other RECs (Designated in
Registration 333-47925 as Exhibit 10.8).
4.2 Memorandum of Understanding among the National Grid Group plc,
Yorkshire Electricity Group plc and the other RECs, dated
November 17, 1995 (Designated in Registration 333-47925 as
Exhibit 10.9).
4.3 Master Registration Agreement dated as of June 1, 1998 among
Yorkshire Electricity Group plc, Energy Pool Funds
Administration Limited and other parties (Annual Report on Form
10-K for the year ended March 31, 1998, File No. 333-47925,
Exhibit 10.11).
4.4 BSC Framework Agreement, dated as of August 14, 2000, among
Yorkshire Electricity Group plc and other parties (Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000,
File No 333-47925, Exhibit 10.17).
4.5 Transfer Deed relating to the transfer of certain assets and
liabilities of members of The Electricity Pool of England and
Wales as of August 14, 2000, among the Members of The
Electricity Pool of England and Wales (including Yorkshire
Electricity Group plc) and Elexon Limited (Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, File No
333-47925, Exhibit 10.18).
*4.6 Scheme made pursuant to paragraphs 13 and 17 of Schedule 7 to
the Utilities Act 2000 in respect of the Public Electricity
Supply licence and the other supply licences of Yorkshire
Electricity Group plc, dated 28 September 2001.
*4.7 Electricity distribution license: standard conditions under the
Utilities Act 2000: Determination of standard licence conditions
for electricity distribution licenses, dated 27 September 2001,
as modified on March 28, 2002, April 4, 2002 and April 23, 2002.
*8.1 List of subsidiaries of Yorkshire Power Group Limited
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
YORKSHIRE POWER GROUP LIMITED
We have audited the accompanying consolidated balance sheets of Yorkshire Power
Group Limited and its subsidiaries (the "Company") as of December 31, 2001 and
December 31, 2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 2001, the
year ended December 31, 2000 and for the nine month period ended December 31,
1999 (all expressed in pounds sterling). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Yorkshire Power Group Limited and
its subsidiaries as of December 31, 2001 and December 31, 2000, and the results
of their operations, changes in shareholders' equity and their cash flows for
the year ended December 31, 2001 and December 31, 2000 and for the nine month
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2000 the
Company changed its method of computing depreciation for its distribution
network assets.
Our audit also comprehended the translation of the pounds sterling amounts into
US dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 1. Such US dollar amounts are presented
solely for the convenience of readers in the United States of America.
Deloitte & Touche
Gainsborough House
34-40 Grey Street
Newcastle upon Tyne
NE1 6AE
England
July 12, 2002
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions)
Year ended December 31, 2001 Year ended Nine months ended
---------------------------- ----------- -----------------
December 31, 2000 December 31, 1999
----------------- -----------------
$ (pound) (pound) (pound)
(See Note 1)
Operating Revenues 250 172 105 68
Cost Of Sales 26 18 22 17
-- -- -- --
Gross Margin 224 154 83 51
--- --- -- --
Operating Expenses
Maintenance 70 48 52 44
Depreciation and amortization 80 55 48 41
Selling, general and administrative 63 44 37 29
-- -- -- --
Income/(Loss) From Operations 11 7 (54) (63)
-- - ---- ----
Total Other Income, Net - - 1 6
- - - -
Net Interest Expense
Interest Expense (138) (95) (116) (87)
Interest Income 13 9 3 1
-- - - -
Net Interest Expense (125) (86) (113) (86)
----- ---- ----- ----
Loss From Continuing Operations Before Income
Taxes
(114) (79) (166) (143)
Benefit For Income Taxes 31 21 51 47
-- -- -- --
Loss From Continuing Operations Before
Discontinued Operations
(83) (58) (115) (96)
Income From Discontinued Operations Net of Income
Taxes of $28,(pound)19,(pound)77 and(pound)61
61 42 162 129
Cumulative Effect on Prior Years (To December 31,
1999) of Changing to a Different Depreciation
Method - - 8 -
Operations, Net of Income Taxes Charge (Benefit)
of ($51), ((pound)35),(pound)- and ((pound)8) (100) (68) -
8
- ----- ---- -
Net (Loss)/Income (122) (84) 55 41
===== ==== == ==
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
December 31, 2001 December 31, 2000
----------------- -----------------
$ (pound) (pound)
(See Note 1)
ASSETS
FIXED ASSETS 1,436 987 1,093
----- --- -----
CURRENT ASSETS
Cash and cash equivalents 320 220 11
Investments - - 14
Accounts receivable, less provision for
uncollectibles of (pound)2 ($3) and (pound)19
118 81 111
Unbilled revenue 37 26 109
Electricity and gas trading contracts - - 76
Prepaids and other 9 6 59
- - --
Total current assets 484 333 380
--- --- ---
OTHER ASSETS
Goodwill, net of accumulated amortization of (pound)44
($64) and (pound)92
473 325 873
Investments, long-term - - 34
Prepaid pension asset - - 133
Electricity and gas trading contracts - - 22
Other non-current assets 19 13 71
-- -- --
Total other assets 492 338 1,133
--- --- -----
Total assets 2,412 1,658 2,606
===== ===== =====
====================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, except shares and per share amounts)
December 31, 2001 December 31, 2000
----------------- -----------------
$ (pound) (pound)
- ------- -------
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital,(pound)1 par value common shares,
440,000,100, authorized,
440,000,002 issued and outstanding 640 440 440
Accumulated other comprehensive income, net
6 4 -
Retained (deficit)/profit (26) (18) 66
---- ---- --
Total shareholders' equity 620 426 506
--- --- ---
Long-term debt 1,119 769 1,161
Company-Obligated Mandatorily Redeemable Trust
Securities of Subsidiary Holding Solely Junior
Subordinated Deferrable Interest Debentures
230 158 178
OTHER NON-CURRENT LIABILITIES
Deferred income taxes 305 210 220
Provision for uneconomic electricity and gas contracts
- - 21
Electricity and gas trading contracts - - 23
Other 19 13 15
-- -- --
Total other non-current liabilities 324 223 279
--- --- ---
CURRENT LIABILITIES
Current portion of long-term debt - - 4
Short-term debt - - 106
Accounts payable 15 10 78
Accrued liabilities and deferred income 94 65 115
Income taxes payable 10 7 47
Electricity and gas trading contracts - - 76
Other current liabilities - - 56
--- -- --
Total current liabilities 119 82 482
--- -- ---
Commitments and Contingencies (Note 4)
Total shareholders' equity and liabilities 2,412 1,658 2,606
===== ===== =====
====================================================================================================================================
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)
Share Capital Retained Accumulated other Total
Profit comprehensive (pound)
Amount (Deficit) income, net
Shares (pound) (pound) (pound)
Balance, April 1, 1999 440,000,002 440 (30) - 410
Net income for the period - 41 - 41
------------ --- ----- --- ---
-
Balance, December 31, 1999 440,000,002 440 11 - 451
Net income for the year - 55 - 55
----------- --- ----- --- ---
-
Balance, December 31, 2000 440,000,002 440 66 - 506
Change in fair value of cash flow - - 4 4
hedges, net of tax of(pound)2
Net loss for the year - - (84) - (84)
----------- --- ----- --- ----
Balance, December 31, 2001 440,000,002 440 (18) 4 426
=========== === ==== = ===
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)
Year ended Year ended Nine months
December 31, December 31, ended December 31,
2001 2000 1999
$ (pound) (pound) (pound)
Cash flows from operating activities:
Net (loss)/income (122) (84) 55 41
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities:
Cumulative effect of a change in depreciation
method, net of tax - - (8) -
Depreciation of fixed asset investment
included in cost of sales 2 1 11 7
Loss/(gain) on sale of discontinued operations 89 61 - (8)
Depreciation 91 63 52 43
Amortization 20 14 24 18
Loss on redemption of debt 50 35 - -
Gain on sale of long-term investment - - - (3)
Deferred income taxes 24 17 17 (11)
Changes in assets and liabilities:
Receivables and unbilled revenue (4) (3) (12) (24)
Prepaid pension asset - - (18) (17)
Provisions for uneconomic electricity and gas - - (4) (1)
contracts
Accounts payable 4 2 (1) 2
Other - - 24 23
- - -- --
Net cash provided by operating activities 154 106 140 70
--- --- --- --
Cash flows from investing activities:
Proceeds from sale of discontinued operations
1,033 710 - -
Capital expenditures (105) (72) (104) (100)
Proceeds from sale of property, plant and equipment
6 4 1 1
Proceeds from sale of long-term investment
- - - 3
Reduction in short-term investments 20 14 2 10
Other - - - (1)
- - - ---
Net cash provided by investing activities 954 656 (101) (87)
--- --- ----- ----
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In Millions)
Year ended December 31, 2001 Year ended Nine months ended
December 31, 2000 December 31, 1999
$ (pound) (pound) (pound)
Cash flows from financing activities:
Repayment of Trust Securities (9) (6) - -
Proceeds from issuance of long-term debt
- - 165 -
Repayments of long-term debt (641) (441) (12) (140)
Net change in short-term debt (154) (106) (190) 154
----- ----- ----- ---
Net cash (used in)/provided by financing activities
(804) (553) (37) 14
----- ----- ---- --
Increase/(decrease) in cash and cash equivalents
304 209 2 (3)
Beginning of period cash and cash equivalents
16 11 9 12
-- -- - --
End of period cash and cash equivalents 320 220 11 9
=== === == =
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Year ended December 31, 2001 Year ended Nine months ended
December 31, 2000 December 31, 1999
$ (pound) (pound) (pound)
Cash paid for interest 151 104 113 74
=== === === ==
Cash paid for income taxes 25 17 14 1
== == == =
The accompanying notes are an integral part of these consolidated financial
statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Yorkshire Power Group Limited ("YPG") was incorporated as a private
company with limited liability under the laws of England and Wales in
July 1996. In 1997, YPG acquired Yorkshire Electricity Group plc
("YEG"), at the time one of the twelve Regional Electricity Companies
in England and Wales. YPG's primary asset is the outstanding shares
of Yorkshire Holdings plc, a public limited company incorporated
under the laws of England and Wales, which, in turn, beneficially
owns all of the outstanding shares of YEG.
YPG, through its wholly-owned subsidiary Yorkshire Electricity
Distribution plc ("YED") is primarily engaged in one industry
segment: electricity distribution, which involves the distribution of
electricity by YED across its network to end users.
On April 3, 2001, Innogy Holdings plc ("Innogy") acquired 94.75% of
the issued share capital of YPG from its prior owners, American
Electric Power Company Inc. and Xcel Energy Inc. Xcel Energy Inc.
retained a 5.25% ownership interest. On September 21, 2001, CE
Electric UK Limited acquired 94.75% of the issued share capital of
YPG from Innogy.
Basis of presentation
The consolidated financial statements of YPG and its subsidiaries
("YPG Group") are presented in pounds sterling ((pound)) and in
conformity with accounting principles generally accepted in the
United States of America.
The consolidated balance sheet, income statement, statement 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 = $1.4543, the Noon Buying Rate in New York
on December 31, 2001. 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.
YPG Group is not subject to cost-based rate regulation but, rather,
is subject to price cap regulation and, therefore, the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for
the Effects of Certain Types of Regulation" ("SFAS 71") do not apply.
Principles of consolidation
The consolidated balance sheet includes the accounts of YPG and its
wholly-owned and majority-owned subsidiaries and has been prepared
from records maintained by YPG Group in the UK. Significant
intercompany items are eliminated on consolidation.
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 disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Revenues are stated net of value added tax ("VAT") and include
accrued revenues for service provided but unbilled at the end of each
reporting period.
Financial instruments
YPG Group enters into interest rate and cross currency swaps as a
part of its overall risk management strategy and does not hold or
issue material amounts of derivative financial instruments for
trading purposes. If the interest rate and cross currency swaps were
to be sold or terminated, any gain or loss would be recognized in the
period of the transaction. If the debt instrument being hedged by the
swaps were to be extinguished, any gain or loss attributable to the
swap would be recognized in the period of the transaction.
Contracts for differences ("CFDs") were used primarily to hedge the
Supply Business against the price risk of electricity purchases from
the Pool. Use of these CFDs was carried out within the framework of
YPG Group's purchasing strategy and hedging guidelines. CFDs were
accounted for as hedges and consequently, gains and losses were
deferred and recognized over the same period as the item hedged.
Gains and losses were recognised on CFDs when settlement was made,
which was generally monthly. Gains and losses on CFDs were recognized
as a decrease or increase to cost of sales based upon the difference
between fixed prices in the CFD compared to variable prices paid to
the Pool for the period. Gains and losses based upon the difference
between fixed prices in the CFD compared to variable prices paid to
the Pool for future electricity purchases were not recognized until
the period of such settlements.
On July 31, 2001, YEG sold its Supply Business to Npower Yorkshire
Limited, a wholly-owned subsidiary of Innogy. As of that date,
therefore, YEG ceased to operate the Supply Business and all risks
and liabilities associated therewith transferred to Innogy.
YPG Group considers the carrying amounts of financial instruments
classified as current assets and liabilities to be a reasonable
estimate of their fair value because of the short maturity of these
instruments.
On January 1, 2001, YPG Group adopted Statement of Financial
Accounting Standards Nos. 133 and 138 (SFAS Nos.133/138) pertaining
for the accounting for derivative instruments and hedging activities.
SFAS Nos 133/138 require an entity to recognize all of its
derivatives as either assets or liabilities in its statement of
financial position and measure those instruments at fair value. If
the conditions specified in SFAS Nos. 133/138 are met, those
instruments may be designated as hedges. Changes in the value of
hedge instruments would not impact earnings, except to the extent
that the instrument is not perfectly effective as a hedge. Initial
adoption of SFAS Nos. 133/138 did not have a material impact on the
results of operations for YPG Group.
Derivative commodity instruments
YPG Group used derivative commodity instruments to reduce exposure to
commercial risks associated with its gas supply business.
If an instrument ceased to be accounted for as a hedge, for example,
because the underlying hedged position was eliminated, the instrument
was marked to market and any resulting profit or loss recognized at
that time.
In accordance with EITF 98-10 gains or losses arising from
speculative trading, which were only undertaken within agreed risk
parameters, were recognized in the income statement in the period in
which they occurred.
On July 31, 2001, YEG sold its Supply Business to Npower Yorkshire
Limited, a wholly-owned subsidiary of Innogy. As of that date,
therefore, YEG ceased to operate the Supply Business and all risks
and liabilities associated therewith transferred to Npower Yorkshire
Limited.
Comprehensive income
Differences between net income and comprehensive income relate to
fair value adjustments on cash flow hedges.
Cash and cash equivalents
YPG Group considers all short-term investments with an original
maturity of three months or less to be cash equivalents.
Property, plant and equipment
Property, plant and equipment is recorded at fair market value as
adjusted at April 1, 1997 in accordance with APB 16. Items
capitalized subsequent to the acquisition are recorded at cost, which
includes materials, labor and appropriate overhead costs. Customer
contributions towards construction of distribution-related assets
reduce the cost of such assets.
YPG's policy is to record depreciation on a straight-line basis.
Assets are depreciated using the following estimated useful lives:
Years
Distribution network 50
Meters Up to 15
Buildings Up to 60
Fixtures and equipment Up to 15
Vehicles and mobile plant Up to 10
Customer contributions on distribution assets are credited to the
income statement on a straight-line basis over a 50 year period.
YPG has revised the estimated useful economic lives of its
distribution network assets in order to provide a more accurate
useful estimated life for each asset type. Distribution network
assets are now depreciated over a period of 50 years. The previous
policy was to depreciate such assets over a period of between 10 and
80 years. Meters are depreciated over a period of between 10 and 15
years. The effect of this change in the year ended December 31, 2001
was to decrease net income by (pound)4 million gross of tax. This is
included within depreciation in the consolidated statement of income.
Capitalization of Interest and Deferred Financing Costs
Prior to the commencement of operations, interest is capitalized on
the costs of the construction projects and resource development to
the extent incurred. Capitalized interest and other deferred charges
are amortized over the lives of the related assets.
Deferred financing costs are amortized over the term of the related
financing using the effective interest method.
Goodwill
YPG's policy is to amortize acquisition costs in excess of fair value
of net assets of the business acquired using the straight-line method
over a period of 40 years. Recoverability (evaluated on the basis of
undiscounted operating cash flow analysis) is reviewed when events or
changes in circumstances indicate that the carrying amount may exceed
fair value. Goodwill shown in the accompanying consolidated balance
sheet relates to the acquisition of YEG.
Investments
YPG accounts for investments in marketable debt and equity securities
in accordance with Statement of Financial Accounting Standards No.
115, "Investments in Certain Debt and Equity Securities" ("SFAS
115"). YPG's investments are classified as available-for-sale under
SFAS 115. Securities whose fair market values are readily
determinable are reported at fair value. Securities whose fair market
values are not readily determinable are recorded at the lower of cost
or net realizable value.
Income taxes
YPG accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes". This standard requires that deferred income taxes be recorded
for temporary differences between the financial statement basis and
the tax basis of assets and liabilities and loss carry-forwards and
that deferred tax balances be based on enacted tax laws at rates that
are expected to be in effect when the temporary differences reverse.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets" which
establish accounting and reporting for business combinations. SFAS
No. 141 requires all business combinations entered into subsequent to
June 30, 2001, to be accounted for using the purchase method of
accounting. SFAS No. 142 provides that goodwill and other intangible
assets with indefinite lives will not be amortized but tested for
impairment on an annual basis. SFAS No. 142 is effective for YPG
beginning January 1, 2002. Under the current method of assessing
goodwill for impairment, which uses an undiscounted cash flow
approach, no material impairment existed at December 31, 2001. For
2002, YPG will begin to test goodwill for impairment under the new
rules, applying a fair-value-based approach. YPG is in the process of
quantifying the anticipated impact on its financial condition and
results of operations of adopting the provisions of SFAS No. 142,
which could be significant. The historical impact of not amortizing
goodwill would have been to increase net income for the years ended
December 31, 2001 and 2000 and the nine months ended December 31,
1999 by (pound)14 million, (pound)24 million and (pound)18 million,
respectively assuming no impairment had been required in those
periods. However, impairment reviews may result in future periodic
write-downs.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses the accounting for legal
obligations associated with the retirement of tangible, long-lived
assets, and the associated asset retirement costs. This pronouncement
is effective for financial years beginning after June 15, 2002. YPG
is evaluating the impact that adoption of this standard will have on
its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The adoption of SFAS
No. 144 on January 1, 2002 did not have any impact on YPG Group's
financial statements.
2. RETIREMENT BENEFITS
Pension Plans
YEG operated two plans, one based on defined contributions and a
second based on defined benefits.
Defined Contribution Plan
The defined contribution plan was established on December 1, 1991.
From April 1, 1995, only new employees were eligible to join this
plan. This plan was transferred to Npower Yorkshire Limited under the
agreement for the sale of YEG's Supply Business. The remaining YPG
employees who were participants of this plan were transferred to a
Northern Electric section of the plan. The assets of the defined
contribution plan are held and administered by an independent
trustee. The cost recognized for this plan for the year ended
December 31, 2001, the year ended December 31, 2000 and the nine
months ended December 31, 1999, was less than (pound)1 million in
each accounting period.
Defined Benefit Plan
YEG participated in the ESPS, which provides pension and other
related defined benefits, based on final pensionable pay, to
employees throughout the electricity supply industry in the UK. The
YPG section of the ESPS was transferred to Npower Yorkshire Limited
under the agreement for the sale of YEG's Supply Business. The
remaining YPG employees who were participants of this plan
transferred to the Northern Electric section of the ESPS.
YEG used the projected unit credit actuarial method for accounting
purposes. Amounts funded to the pension plan are primarily invested
in equity and fixed income securities.
2001 2000
(Amounts in millions)
$ (pound) (pound)
Reconciliation of Projected Benefit Obligation
Projected benefit obligation at January 1 1,183 813 818
Service cost 8 5 8
Interest cost 31 22 29
Participants' contributions 1 1 1
Benefits paid (51) (35) (35)
Actuarial gain - - (8)
Amounts transferred to Npower Yorkshire Limited
(1,043) (717) -
------- ----- ------
129 89 813
Northern Electric scheme 845 581 -
=== === =
Projected benefit obligation at December 31 974 670 813
=== === ===
2001 2000
(Amounts in millions)
Reconciliation of Fair Value of Plan Assets $ (pound) (pound)
Fair value of plan assets at January 1 1,407 967 987
Actual return on plan assets 54 37 12
Employer contributions 3 2 2
Participants' contributions 1 1 1
Benefits paid (51) (35) (35)
Amounts transferred to Npower Yorkshire Limited
(1,283) (882) -
------- ----- ----
131 90 967
Northern Electric scheme 940 646 -
--- --- -
Fair value of plan assets at December 31 1,071 736 967
===== === ===
2001 2000
(Amounts in millions)
$ (pound) (pound)
Funded status 96 66 154
Unrecognized net actuarial loss (197) (135) (31)
Unrecognized prior service cost - - 10
- - --
Prepaid pension cost 293 201 133
=== === ===
The weighted average rates assumed in the actuarial calculations as of the
following dates were:
December 31,
2001 2000 1999
% % %
Discount rate 4.75 4.75 4.75
Annual salary rate increase 4.00 4.00 4.25
Expected long-term rate of
return on plan assets 6.75 7.00 7.50
The components of the plan's net periodic pension cost during the period are
shown below (in millions):
Year ended Year ended Nine months
December 31, December 31, ended December
2001 2000 31, 1999
$ (pound) (pound) (pound)
Service cost 8 5 11 8
Interest 31 22 38 27
Curtailment loss - - 1 -
Expected return on plan assets (54) (37) (67) (51)
Net amortization and deferral - - 1 1
- - - -
Net periodic pension credit (15) (10) (16) (15)
==== ==== ==== ====
3. REGULATORY MATTERS
The principal legislation governing the structure and regulation of
the electricity industry in Great Britain is the Electricity Act, as
amended by the Utilities Act and related secondary legislation. The
Electricity Act created the institutional framework under which the
industry is currently regulated, including the post of Director
General (the "Regulator"), who was appointed by the Secretary of
State. The Regulator's office and support staff were collectively
known as OFFER. Both OFFER and OFGAS were replaced by Ofgem in June
1999 in anticipation of the formal merger of the electricity and gas
regulatory offices under the Utilities Act. The posts of Director
General of both Gas and Electricity Supply were replaced by GEMA in
November 2000 under the Utilities Act, with the then Director General
of both Gas and Electricity Supply becoming chairman of GEMA. GEMA
comprises a number of executive and non-executive members. The
management committee of Ofgem reports to GEMA, which determines
strategy and decides on major policy issues.
GEMA's functions under the Electricity Act (as amended by the
Utilities Act) include granting licenses to generate, transmit,
distribute or supply electricity; proposing modifications to licenses
and, in the case of non-acceptance of such proposals by licensees,
making license modification references to the Competition Commission;
enforcing compliance with license conditions; calculating the Fossil
Fuel Levy rate and collecting the levy; determining certain disputes
between electricity licensees and customers; setting standards of
performance for electricity licensees; and liaising as appropriate
with the GECC.
Revenue from the Distribution Business is controlled by a formula
principally based on P x (1+(RPI-Xd)) where P is the previous year's
maximum average price per Unit of electricity distributed, RPI is the
percentage change in the UK Retail Price Index between the six-month
period from July to December in the preceding year and the same
period in the second preceding year and Xd is set by Ofgem in
connection with each review (the "Distribution Price Control
Formula"). Xd is currently 3%. Therefore the maximum average price in
any year is based in part on the maximum average price in the
preceding year, such that a price reduction in any given year has an
ongoing effect on the maximum average price for all subsequent years.
Because RPI is based on a weighted average of the prices of goods and
services purchased by a typical household, which may bear little
resemblance to the inputs contributing to a licensed distributor's
business costs, the RPI calculation may not accurately reflect the
price changes affecting the licensee. This formula determines the
maximum average price per Unit of electricity distributed (in pence
per kilowatt hour) which a licensed distributor is entitled to
charge.
At each price control review Ofgem has reviewed the costs and
efficiency of each distribution license holder in Great Britain.
Based upon an analysis of such costs and efficiencies, which takes
into account a number of factors including operating and capital
costs, the number and nature of customers and the nature and scale of
the network serving those customers, Ofgem has determined a one-time
adjustment to the distribution revenue of each distribution license
holder.
The most recent distribution price control review took effect from
April 1, 2000 for the five-year period ending March 31, 2005. As a
result of this review, YEG's allowed distribution revenue for the
Regulatory Accounting Period commencing April 1, 2000 was reduced by
23% in real terms (the range of reductions for all distribution
companies was between 19% and 33%) from the level permitted in the
final year of the previous price control which ended on March 31,
2000. In addition, for the second through fifth Regulatory Accounting
Periods in the five-year price control review period, the Xd factor
will be equal to 3%, which means that in each of these years
regulated distribution prices are required to fall in real terms by a
further 3% per annum.
In setting the distribution charges to apply during each Regulatory
Accounting Period, each licensed distributor must project the
permitted maximum average charge per Unit to be distributed in that
Regulatory Accounting Period. The projection must take into account
forecasts of Units distributed, distribution line losses, the actual
change in RPI and NGC exit charges. Failure to forecast accurately
may result in overcharging or undercharging, which is taken into
account in the following Regulatory Accounting Period through a
correction factor in the distribution price control formula. If a
licensee has overcharged in a given Regulatory Accounting Period, the
maximum average charge per Unit distributed in the following
Regulatory Accounting Period is reduced by an amount to reflect the
excess income received, to which is added interest at the average of
the daily base rates of Barclays Bank plc during the period in
respect of which the calculation falls plus 4%. In the event of
undercharging, the Distribution Price Control Formula allows the
licensee to recover the shortfall in income plus interest at the base
rate.
In certain instances, however, overcharging or undercharging by a
licensee above specific percentage thresholds may result in
adjustments by Ofgem. If in any Regulatory Accounting Period the
average charge per Unit distributed exceeds the permitted maximum
average charge per Unit distributed by more than 3%, then in the next
following Regulatory Accounting Period the licensee may not increase
distribution charges unless it has satisfied Ofgem that the average
charge per Unit in that next following Regulatory Accounting Period
is not likely to exceed the permitted maximum average charge. If,
with respect to any two successive Regulatory Accounting Periods, the
sum of the amounts by which the average charge per Unit distributed
has exceeded the permitted maximum average charge per Unit
distributed is more than 4% of that permitted maximum average charge,
then, in the next following year, the licensee may be required by
Ofgem to adjust its charges so that they fall within the maximum
permitted average charge. If, with respect to two successive
Regulatory Accounting Periods, the licensee undercharges by more than
10% of the maximum average charge, Ofgem may limit the amount by
which such undercharging may be recovered.
Since April 2000, the distribution price control formula is no longer
notionally divided into metering and non-metering components. The
current structure contains a general distribution allowance taking
into account movements of some metering services to electricity
supply (e.g. data collection). Non-half hourly meter provision and
meter maintenance activities relating to network connections, which
became competitive on April 1, 2000, are remunerated under the
distribution price control formula. As part of the latest price
control review, provisions were added to the distribution price
control formula, which ensure that any reduction in operating costs
resulting from a decline in the provision of metering services is
reflected in lower permitted revenues.
Connection charges are levied when a customer first connects to a
licensee's distribution system or makes a material change in
electricity supply requirements. These charges are excluded from the
Distribution Price Control Formula. Since 1994 there has been compe-
tition in providing connections to new customers and limitations on
the extent to which, and the circumstances in which, customers
wishing to be connected would be required to pay for the costs of
reinforcement of the distribution system.
4. COMMITMENTS AND CONTINGENCIES
Electricity and gas purchase agreements
As part of the sale of Regional Power Generators Limited during the
year ended December 31, 1999, a number of contracts were
renegotiated. This enabled YEG to release its balance sheet provision
for uneconomic electricity and gas contracts. In the light of
renegotiated contracts, a reduced provision of (pound)32 million was
created. The provision related to a financial instrument, which
compensated Regional Power Generators Limited in respect of gas
purchases in excess of market price for a period up to the year ended
December 31, 2008. The provision, for the net present value of
expected future payments, reflected management's expectation of
market prices of electricity (to which the contract was partially
indexed) and future gas prices. The provision at December 31, 2000
was (pound)20 million and represented the fair value of this
financial instrument.
In addition, YEG agreed to purchase portions of the output of
Yorkshire Cogen Limited, a former subsidiary disposed of as part of
the sale of the Generation Business, for up to 20 years.
YEG entered into a medium-term gas purchase agreement with a major
gas supplier, which had a potential end date of October 2003. However
due to a change in market conditions this contract was terminated in
January 2001. YEG also had a small number of swing contracts with
other parties for the purchase of gas, all on normal commercial
terms. There were three contracts in total, which were to terminate
between 2002 and 2007.
Following the sale of the Supply Business, YEG ceased to have an
interest in any electricity and gas purchase agreements, including
the foregoing agreements.
Legal Proceedings
Litigation and arbitration may affect various companies in the YPG
Group in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, we do not
believe that any pending proceedings will have a material adverse
effect on our results of operations or financial position.
Operating Leases
YPG has commitments under operating leases with various terms and
expiration dates. Rental expenses incurred for operating leases in
the year ended December 31, 2001, the year ended December 31, 2000
and the nine months ended December 31, 1999 were (pound)5 million ($7
million), (pound)7 million and (pound)6 million respectively.
Future minimum commitments under these operating leases as of
December 31, 2001 are as follows:
Due during the year ended December 31:
(pound)
(millions)
2002 -
2003 2
2004 1
2005 -
2006 -
Thereafter 1
----
Total 4
====
Labor Subject to Collective Bargaining Agreements
A majority of YPG's employees are subject to one of three collective
bargaining agreements. Such agreements are ongoing in nature, and
YPG's employees participation level is consistent with that of the
electric utility industry in the UK.
5. INCOME TAXES
YPG's income tax benefit from continuing operations is as follows:
Year ended Year ended December Nine months ended
December 31, 2001 31, 2000 December 31, 1999
$ (pound) (pound) (pound)
Current 58 40 69 22
Deferred (27) (19) (18) (25)
---- ---- ---- ----
Total 31 21 51 47
== == == ==
The following is a reconciliation of the difference between the
amount of income taxes from continuing operations computed by
multiplying book income before income taxes by the statutory rate,
and the amount of income taxes reported (in millions):
Year ended Year ended Nine months
December 31, December 31, ended
2001 2000 December 31,
1999
$ (pound) (pound) (pound)
Loss from continuing operations
before income taxes
114 79 166 143
Income taxes computed at statutory
rate (tax rate 30%) 34 23 50 43
Amortization of goodwill at 30% (3) (2) (2) (1)
Other - - 3 5
- - - -
Total income tax benefit
31 21 51 47
== == == ==
The tax effect of temporary differences between the carrying amounts of assets
and liabilities in the consolidated balance sheet and their respective tax
bases, which give rise to deferred tax assets and liabilities, are as follows
(in millions):
December 31, 2001 December 31, 2000
$ (pound) (pound)
Deferred tax liabilities:
Property 305 210 222
Pension - - 5
Other - - (9)
- - ---
Net deferred tax liability 305 210 218
Portion included in current assets - - 2
- - -
Long-term deferred tax liability 305 210 220
=== === ===
The tax years since 1996 are currently under review by the Inland Revenue in the
UK. In the opinion of management, the settlement of open years will not have a
material adverse effect on results of operations, financial position or cash
flows of YPG Group.
6. FINANCIAL INSTRUMENTS
YPG Group may enter into interest rate and cross currency swaps as a
part of its overall risk management strategy and does not hold or
issue material amounts of derivative financial instruments for
trading purposes. If any interest rate and cross currency swaps that
may be entered into were to be sold or terminated, any gain or loss
would be deferred and amortized over the remaining life of the debt
instrument being hedged by the swaps. If the debt instrument being
hedged by the swaps were to be extinguished, any gain or loss
attributable to the swap would be recognized in the period of the
transaction.
YPG Group considers the carrying amounts of financial instruments
classified as current assets and liabilities to be a reasonable
estimate of their fair value because of the short maturity of these
instruments.
Contracts for differences ("CFDs") were used primarily to hedge the
Supply Business against the price risk of electricity purchases from
the Pool. Use of these CFDs was carried out within the framework of
YPG Group's purchasing strategy and hedging guidelines. CFDs were
accounted for as hedges and consequently, gains and losses were
deferred and recognized over the same period as the item hedged.
Gains and losses were recognised on CFDs when settlement was made,
which was generally monthly. Gains and losses on CFDs were recognized
as a decrease or increase to cost of sales based upon the difference
between fixed prices in the CFD compared to variable prices paid to
the Pool for the period. Gains and losses based upon the difference
between fixed prices in the CFD compared to variable prices paid to
the Pool for future electricity purchases were not recognized until
the period of such settlements. Following the disposal of the Supply
Business, YEG is no longer a party to any CFDs.
In February 1998, YPG issued $300 million aggregate principal amount
of 6.496% Senior Notes due 2008. The dollar interest payments are
hedged using cross-currency swaps maturing in 2008.
In June 1998, YPG issued $275 million aggregate principal amount of
8.08% Trust Securities due 2038. In the absence of appropriate cover
for this maturity, cross currency swaps were taken out which mature
in June 2008. The original nominal value of the cross-currency swaps
was $265 million. YPG repurchased Trust Securities with a nominal
value of approximately $8 million in the year ended December 31,
2001, $6 million in the year ended December 31, 2000 and $3 million
in the nine months ended December 31, 1999. The aggregate nominal
value of the cross-currency swaps at December 31, 2001 was $256
million.
Payments to counter-parties in respect of cross-currency swaps are
recorded as an interest expense.
At December 31, 2001 and December 31, 2000 YPG was party to
cross-currency swap agreements with a notional value of (pound)363
million and (pound)556 million respectively.
The estimated fair values of YPG's financial instruments are as
follows (in millions):
December 31, 2001 December 31, 2000
Carrying Amount Fair Value Carrying Amount Fair Value
$ (pound) $ (pound) (pound) (pound)
Long term debt (including (1,349) (927) (1,494) (1,027) (1,343) (1,361)
Trust Securities)
Cross currency swap
agreements 8 5 8 5 - (10)
The fair value of long-term debt is estimated based on quoted market
prices for the same or similar issues or the current rates offered to
YPG for debt of the same remaining maturities. The fair values of any
cross currency swap and interest rate cap agreements entered into are
determined by reference to prices available from the markets on which
these instruments are traded.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
millions):
December 31,2001 December 31, 2000
$ (pound) (pound)
Distribution network 2,050 1,409 1,333
Non-network land and buildings 22 15 38
Other 114 79 213
Consumer contributions (529) (364) (328)
----- ----- -----
1,657 1,139 1,256
Accumulated depreciation (246) (169) (177)
----- ----- -----
Property, plant and equipment, net 1,411 970 1,079
Construction work in progress 25 17 14
-- -- --
Net fixed assets 1,436 987 1,093
===== === =====
8. LONG TERM DEBT
Long term debt consisted of the following (in millions):
December 31, December 31,
2001 2000
$ (pound) (pound)
7.25% Eurobonds, due 2028 274 189 198
8.625% Eurobonds, due 2005 - - 151
9.25% Eurobonds, due 2020 303 208 206
6.154% Senior Notes, due 2003 - - 234
6.496% Senior Notes, due 2008 300 206 201
8.08% Trust Securities, due 2038 230 158 178
Floating Rate Reset Senior Notes, due 2005 242 166 167
European Investment Bank:
7.52% credit facility, due 1999-2002 - - 8
- - -
Total 1,349 927 1,343
Less current maturities - - (4)
Less Trust Securities (230) (158) (178)
----- ----- -----
Long term debt, net of current maturities
and Trust Securities 1,119 769 1,161
===== === =====
Long term debt outstanding at December 31, 2001 is payable as follows (in
millions):
$ (pound)
During the years ending December 31,
2002 - -
2003 - -
2004 - -
2005 242 166
2006 - -
Thereafter 1,107 761
----- ---
Total 1,349 927
===== ===
Yorkshire Capital Trust I (the "Trust"), is a statutory business trust
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 issued by Yorkshire Power
Finance Limited (YPF), a subsidiary of YPG. 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 8.08% Junior Subordinated
Deferrable Interest Debentures, Series A due 2038 of YPF which in turn
loaned the net proceeds to YPG. Substantially all of the Trust's assets
will consist of the Junior Subordinated Deferrable Interest Debentures.
YPG considers that the mechanisms and obligations relating to the Trust
Securities issued for its benefit, taken together, constitute a full
and unconditional guarantee by it of the Trust's payment obligations
with respect to the Trust Securities.
The issue raised net proceeds of (pound)162 million, which was used as
working capital and for the repayment of short-term debt.
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 due February 15, 2020 (the "Senior Notes")
issued by Yorkshire Finance 2 ("YPF2"), a subsidiary of 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").
9. SHORT-TERM DEBT
Short-term debt consisted of the following (in millions):
December 31, 2001 December 31, 2000
$ (pound) (pound)
Syndicated credit facility - - 85
Bank loans - - 14
Loan notes - - 7
- - ---
Total - - 106
= = ===
10. DISCONTINUED OPERATIONS
YEG's Supply Business was disposed of during the year ended December
31, 2001.
The results, which are presented in accordance with US GAAP, show
losses from continuing operations (i.e., from the retained Distri-
bution Business), in each of the periods to December 31, 2001. In
each period, the losses arise as a result of the requirement to
eliminate the effects of all transactions, including those in respect
of the retained Distribution Business, with YEG's former Supply
Business which was disposed of on July 31, 2001.
Going forward, however, the YPG Group in fact will receive revenues
in respect of the retained Distribution Business which were
previously internal to the Group. These revenues will be received
from the owner of YEG's former Supply Business and/or from other
third parties who may from time to time supply electricity to the
customers of YEG's former Supply Business. Reported historic losses
from continuing operations are therefore not necessarily reflective
of the future financial performance of YPG.
The following condensed financial information relates to the
discontinued activities of the Supply Business.
Year ended Year ended Nine months
December 31, December 31, ended
2001 2000 December 31,
1999
$ (pound) (pound) (pound)
Consolidated Statements of Income
Operating revenues 1,190 818 1,407 969
Cost of Sales (902) (620) (1,025) (700)
----- ----- ------- -----
Gross Margin 288 198 382 269
Operating Costs (145) (100) (143) (79)
----- ----- ----- ----
Income from operations 143 98 239 190
Net interest expense (54) (37) - -
---- ---- - -
Income before income taxes 89 61 239 190
Provision for income taxes (28) (19) (77) (61)
---- ---- ---- ----
Income from discontinued operations 61 42 162 129
Loss on disposal, net of income
taxes of ($51), (pound)35, -, - (100) (68) - -
----- ---- -
Net (loss)/income (39) (26) 162 129
==== ==== === ===
Year ended December 31, 2000
$ (pound)
Consolidated Balance Sheets
Fixed Assets 115 79
Current Assets 468 322
Other Assets (including Goodwill
of (pound)534 1,053 724
----- ---
Total Assets 1,636 1,125
===== =====
Other non-current liabilities 111 76
Current liabilities 397 273
Corporate Funding 1,128 776
----- ---
Total shareholders' equity and liabilities 1,636 1,125
===== =====
YEG's Generation Business was disposed of during the year ended
March 31, 1999. Provision was made in the year ended March 31,
1999 for income taxes arising on the gain. However, a favorable
adjustment to tax liabilities of (pound)8 million, in respect of the
disposal, has been recognized in the nine months ended December 31,
1999.
The information presented in the financial statements for continuing
operations is stated net of transactions with the former Supply
Business whilst that business was part of the YPG Group. As the
continuing Distribution Business is substantially a de facto
monopoly, sales will continue to be made to the former Supply
Business. The following table shows the results if the transactions
with the former Supply Business had not been eliminated.
Year ended Year ended Nine months
December 31, December 31, ended
2001 2000 December 31,
1999
(Amounts in millions)
$ (pound) (pound) (pound)
Operating revenues from
continuing operations:
As reported 250 172 105 68
Sales to former Supply Business 131 90 177 175
Continuing operations restated 381 262 282 243
Operating income/(loss):
As reported 11 7 (54) (63)
Transactions with former
Supply Business 116 80 154 147
Continuing operations restated 127 87 100 84
11. BUSINESS RESTRUCTURING
A voluntary redundancy programme for employees of YED and YEDSL is
taking place in 2002. The costs of the voluntary redundancy programme
were charged against income in 2001.
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Board of Directors of Yorkshire Power Group Limited and
Subsidiaries
We have audited the consolidated financial statements of Yorkshire Power Group
Limited and its subsidiaries (the "Company") as of December 31, 2001 and
December 31, 2000, and for the years ended December 31, 2001 and December 31,
2000 and, for the nine month period ended December 31, 1999 and have issued our
report thereon dated July 12, 2002. Our audits also included the financial
statement schedule of the Company, listed in Item 18. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche
Gainsborough House
34-40 Grey Street
Newcastle upon Tyne
NE1 6AE
England
July 12, 2002
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
Additions
Description Balance at Charged to Charged to Deductions Balance at End
Beginning of Costs and Other Accounts of Period
Period Expenses
Year ended December 31, 2001
Deducted from Assets:
Accumulated Provision for 19 - (17)(a) - 2
== = ======= = =
Uncollectible Accounts
Year ended December 31, 2000
Deducted from Assets:
Accumulated Provision for 9 14 - 4(b) 19
= == = ==== ==
Uncollectible Accounts
Nine months ended
December 31, 1999
Deducted from Assets:
Accumulated Provision for 9 4 - 4(b) 9
= = = ==== =
Uncollectible Accounts
a) Amounts transferred to Npower Yorkshire Limited under the agreement for
the sale of YEG's Supply Business
b) Uncollectible accounts written off
GLOSSARY OF SELECTED TERMS
When used in this report, the following terms will have the meanings indicated
below.
"AEP" means American Electric Power Company, Inc.
"Authorized Area" means YEG's service area as determined by its PES License
"British Energy" means British Energy plc
"CE" means CE Electric UK Limited
"Competition Act" means the UK Competition Act 1998
"Competition Commission" means the body created in the UK by the Competition Act
which performs the functions previously performed by the UK Monopolies and
Mergers Commission
"Data Management Services" means the metering and data services in support of
the electricity trading arrangements
"Distributable Reserves" means accumulated, realized profits so far as not
previously utilized by distribution or capitalization, less accumulated realized
losses and, in the case of public limited companies, unrealized losses, which
may be legally distributed by way of dividends
"Distribution Business" means the business of distributing electricity on behalf
of suppliers in the Distribution Services Area, including the business of
providing new connections to YED's electricity distribution network and the
business of providing distributor metering and data services
"Distribution Services Area" means YED's service area, as defined in its
electricity distribution license
"DUoS" means distribution use of system
"EdF" means Electricite de France
"Electricity Act" means the UK Electricity Act 1989
"Electricity Association" means the body that represents companies involved in
the generation, transmission, distribution or supply of electricity
"EMFs" means electromagnetic fields
"ESPS" means Electricity Supply Pension Scheme
"EU" means the European Union
"FASB" means the US Financial Accounting Standards Board
"GECC" means Gas and Electricity Consumer Council in Great Britain (also known
as energywatch)
"GEMA" means Gas and Electricity Markets Authority in Great Britain
"Generation Business" means the business of generating electricity at power
stations
"Grid" means the national electricity transmission system owned by the National
Grid Company in England and Wales
"GWh" means gigawatt hours
"Innogy" means Innogy Holdings Plc (the UK business of the company which
formerly was known as National Power plc)
"International Power" means International Power plc (formerly known as National
Power plc)
"Ionica" means Ionica Group plc
"km" means kilometers
"kV" means kilovolts
"kW" means kilowatts
"kWh" means kilowatt hours
"LV" means low voltage
"MEHC" means MidAmerican Energy Holdings Company
"MW" means megawatt
"NETA" means the New Electricity Trading Arrangements, since March 27, 2001 the
means by which electricity is bought and sold on a bilateral basis in England
and Wales.
"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, being the office of the
Director General of Electricity Supply, the person appointed by the Government
of Great Britain to regulate the electricity industry in Great Britain, which
body has now been replaced by Ofgem
"OFGAS" means the Office of Gas Regulation, being the office of the Director
General of Gas Supply, the person appointed by the Government of Great Britain
to regulate the gas industry in Great Britain, which body has now been replaced
by Ofgem
"Ofgem" means the Office of Gas and Electricity Markets in Great Britain, being
the office of support staff of GEMA
"PES" means public electricity supplier
"PES License" means the public electricity supply license held by YEG prior to
October 1, 2001
"Pool" means the wholesale trading market for electricity in England and Wales
that was replaced by NETA on March 27, 2001
"Pooling and Settlement Agreement" means the agreement which governed the
constitution and operation of the Pool and the calculation of payments to and
from generators and suppliers
"PowerGen" means PowerGen plc
"REC" means one of the 12 regional electricity companies in England and Wales
licensed to supply electricity prior to October 1, 2001
"Regulatory Accounting Period" means the 12 month regulatory accounting period,
each ended March 31
"Scottish and Southern" means Scottish and Southern Energy plc
"ScottishPower" means Scottish Power plc
"SEC" means the US Securities and Exchange Commission
"SFAS" means US Statement of Financial Accounting Standards
"Supply Business" means the supply of electricity and/or gas to end-user
customers
"UK" means the United Kingdom
"Unit" means kWh
"US" means the United States of America
"US GAAP" means Generally Accepted Accounting Principles in the United States of
America
"US Parents" means MEHC and Xcel
"Utilities Act" means the UK Utilities Act 2000
"YED" means Yorkshire Electricity Distribution plc
"YEDSL" means Yorkshire Electricity Distribution Services Limited
"YEG" means Yorkshire Electricity Group plc
"Yorkshire Finance" means Yorkshire Power Finance Limited, a subsidiary of
Yorkshire Power Group Limited
"Yorkshire Finance 2" means Yorkshire Power Finance 2 Limited, a subsidiary of
Yorkshire Power Group Limited
"YPF" means Yorkshire Finance and Yorkshire Finance 2 collectively
"YPG" means Yorkshire Power Group Limited
"YPG Group" means Yorkshire Power Group Limited and its subsidiaries
"Yorkshire Holdings" means Yorkshire Holdings plc, a subsidiary of Yorkshire
Power Group Limited
"Yorkshire Trust" means Yorkshire Capital Trust I
"Xcel" means Xcel Energy Inc.
SIGNATURES
Pursuant to the requirements of the Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, Yorkshire Power Group Limited, certifies
that it has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on July 12, 2002.
YORKSHIRE POWER GROUP LIMITED
By: /s/ Paul J. Leighton
Paul J. Leighton
duly authorised by a power of attorney of the board of
directors dated June 27, 2002