<PAGE>
RULE NO. 424(b)(3)
REGISTRATION NO. 333-47925
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS AND INFORMATION CONTAINED HEREIN IS SUBJECT TO +
+COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE REFERRED TO THE +
+RELATED FINAL PROSPECTUS FOR DEFINITIVE INFORMATION ON ANY MATTER CONTAINED +
+HEREIN. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 26, 1998
PROSPECTUS
- ----------
11,000,000 % TRUST SECURITIES
YORKSHIRE CAPITAL TRUST I
(LIQUIDATION AMOUNT $25 PER TRUST SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS SET FORTH HEREIN, BY
YORKSHIRE POWER GROUP LIMITED
----------
The % Trust Securities (the "Trust Securities") offered hereby represent
undivided beneficial interests in the assets of Yorkshire Capital Trust I, a
statutory business trust created under the laws of the State of Delaware (the
"Trust"). The Trust was created for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in an equivalent amount of %
Junior Subordinated Deferrable Interest Debentures, Series A due , 2038 (the
"Junior Subordinated Debentures"), to be issued by Yorkshire Power Finance
Limited, a private company with limited liability incorporated under the laws
of the Cayman Islands ("Yorkshire Finance"). The Junior Subordinated Debentures
will be redeemable, at the option of Yorkshire Finance, as described herein.
Yorkshire Power Group Limited, a private company with limited liability
incorporated under the laws of England and Wales ("Yorkshire Group") and parent
of Yorkshire Finance, will fully and unconditionally guarantee, as set forth
herein, all payments on the Trust Securities (the "Trust Securities
Guarantee"). Yorkshire Group will irrevocably and unconditionally guarantee on
a subordinated basis all payments on the Junior Subordinated Debentures when
due and payable (the "Debentures Guarantee").
(Continued on next page)
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE TRUST SECURITIES, INCLUDING THE PERIOD DURING
WHICH AND CIRCUMSTANCES UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE TRUST
SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF SUCH DEFERRAL.
The Trust Securities have been approved for listing, subject to official
notice of issuance, on the New York Stock Exchange (the "NYSE"). Trading of the
Trust Securities on the NYSE is expected to commence within the 30-day period
after the initial delivery thereof. See "Underwriting".
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE COMMISSION(1) THE TRUST(2)(3)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Trust Security............................. $25.00 (2) $25.00
- ---------------------------------------------------------------------------------------------
Total.......................................... $275,000,000 (2) $275,000,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Yorkshire Finance and Yorkshire Group have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) In view of the fact that the proceeds from the sale of the Trust Securities
will be used to purchase the Junior Subordinated Debentures from Yorkshire
Finance, the Underwriting Agreement provides that Yorkshire Finance will
pay to the Underwriters, as compensation ("Underwriters' Compensation") for
arranging the investment therein of such proceeds, $ per Trust Security
(or $ in the aggregate); provided that such compensation will be $
per Trust Security for sales of 10,000 or more Trust Securities to a single
purchaser. Therefore, to the extent of such sales, the actual amount of
Underwriters' Compensation will be less than the aggregate amount specified
in the preceding sentence. See "Underwriting".
(3) Expenses of the offering, which are payable pursuant to the Agreement as to
Expenses and Liabilities, are estimated to be $ .
----------
The Trust Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the Trust Securities will be only in book-entry form
through the facilities of The Depository Trust Company ("DTC"), on or about
June , 1998, against payment therefor in immediately available funds.
----------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
----------
THE DATE OF THIS PROSPECTUS IS JUNE , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TRUST
SECURITIES, INCLUDING BY ENTERING STABILIZING BIDS, PURCHASING TRUST
SECURITIES TO COVER SYNDICATE SHORT POSITIONS, AND IMPOSING PENALTY BIDS. FOR
A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING".
---------------
(Continued from previous page)
Holders of the Trust Securities will be entitled to receive, to the extent
of funds held by the Trust and available therefor, periodic cash distributions
accumulating from the date of original issuance and payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year,
commencing , 1998, at the rate of % per annum of the liquidation amount of
$25 per Trust Security (the "Distributions"). So long as no Event of Default
(as defined under "Description of the Junior Subordinated Debentures--
Indenture Event of Defaults") under the Indenture (as defined under "Summary--
The Offering") has occurred and is continuing, Yorkshire Finance has the right
to defer the payment of interest ("Interest Payments") on the Junior
Subordinated Debentures at any time or from time to time, for up to 20
consecutive quarters (each an "Extension Period"). An Extension Period,
however, cannot extend beyond the Stated Maturity (as defined below) of the
Junior Subordinated Debentures. If Interest Payments on the Junior
Subordinated Debentures are so deferred, Distributions on the Trust Securities
will also be deferred. Until all deferred Interest Payments and interest
thereon have been paid in full, Interest Payments on the Junior Subordinated
Debentures will continue to accrue (and the Trust Securities will accumulate
additional Distributions thereon) at the rate of % per annum, compounded
quarterly. During any Extension Period, holders of Trust Securities will be
required to accrue deferred interest as original issue discount ("OID"), and
to include such OID in their gross income for US Federal income tax purposes
in advance of the receipt of the cash distributions with respect to such
deferred Interest Payments. There could be multiple Extension Periods of
varying lengths throughout the term of the Junior Subordinated Debentures.
During an Extension Period, neither Yorkshire Finance nor Yorkshire Group will
be permitted, subject to certain exceptions set forth herein, to (i) declare
or pay any cash distributions with respect to its capital stock, (ii) make any
payments on its debt securities that rank pari passu with or junior to the
Junior Subordinated Debentures or the Debentures Guarantee, respectively,
(iii) make any payments with respect to any guarantee that ranks pari passu
with or junior to the Junior Subordinated Debentures or the Debentures
Guarantee, respectively, or (iv) make any payments on its debt securities held
by, make any loans or advances to, or make payments with respect to any
guarantee of the debt of, any affiliate. See "Description of the Junior
Subordinated Debentures--Option to Defer Payment of Interest". During an
Extension Period, Yorkshire Group's obligations to make payments under the
Trust Securities Guarantee and the Debentures Guarantee will be suspended.
Pursuant to the Trust Securities Guarantee, Yorkshire Group will guarantee
the payment of Distributions and payments on liquidation of the Trust or
redemption of the Trust Securities, but only in each case to the extent of
sufficient funds held by the Trust and available therefor. If Yorkshire
Finance does not make payments of principal of or interest on the Junior
Subordinated Debentures or Yorkshire Group does not make payments pursuant to
the Debentures Guarantee, the Trust will have insufficient funds to pay
Distributions on the Trust Securities or amounts payable on redemption thereof
or otherwise. The Trust Securities Guarantee does not cover payment of
Distributions or amounts when the Trust does not have sufficient funds
available to pay such amounts. See "Description of the Trust Securities
Guarantee". In such event, the remedy of a holder of Trust Securities will be
to enforce its rights under the Debentures Guarantee. See "Description of the
Junior Subordinated Debentures" and "Description of the Debentures Guarantee".
The Junior Subordinated Debentures will be unsecured and subordinate
obligations and junior in right of payment to all Senior Debt (as defined
under "Description of the Junior Subordinated Debentures--Subordination") of
Yorkshire Finance. The Trust Securities Guarantee and the Debentures Guarantee
will be unsecured and subordinate obligations and junior in right of payment
to all Senior Debt of Yorkshire Group and the Trust Securities Guarantee will
rank pari passu (equal in priority) with the most senior preferred stock of
Yorkshire Group. As of December 31, 1997, Yorkshire Group had (i)
approximately (Pounds)1,034 million ($1,699 million) of Senior Debt
outstanding, a portion of which will be repaid with proceeds of this offering
and (ii) no senior preferred stock outstanding with which the Trust Securities
Guarantee would rank pari passu. The terms of the Junior Subordinated
Debentures and the Trust Securities Guarantee and the Debentures Guarantee
will not place any limitation on the amount of Senior Debt that may be
incurred by Yorkshire Finance and Yorkshire Group, respectively. In addition,
Yorkshire Group's obligations under the Debentures Guarantee and the Trust
Securities Guarantee will be effectively subordinated to all existing and
future
2
<PAGE>
indebtedness and liabilities of its subsidiaries, including Yorkshire
Electricity Group plc ("Yorkshire"). At December 31, 1997, the direct and
indirect subsidiaries of Yorkshire Group had total indebtedness (excluding
indebtedness owed to Yorkshire Group) of approximately (Pounds)476 million
($782 million). See "Risk Factors", "Description of the Junior Subordinated
Debentures--Subordination", "Description of the Debentures Guarantee" and
"Description of the Trust Securities Guarantee".
AEP Resources, Inc., an Ohio corporation ("AEP Resources"), and New Century
International, Inc., a Delaware corporation ("New Century International" and,
with AEP Resources, collectively, the "US Affiliates"), will unconditionally
guarantee certain expenses and liabilities of the Trust (other than
obligations of the Trust to pay the holders of the Trust Securities the
amounts due such holders pursuant to the terms of the Trust Securities)
pursuant to the Agreement as to Expenses and Liabilities (as defined under
"Description of the Trust Securities Guarantee--The Agreement as to Expenses
and Liabilities"). See "Description of the Trust Securities Guarantee--The
Agreement as to Expenses and Liabilities". The Trust Securities Guarantee, the
Debentures Guarantee, the Indenture, the Junior Subordinated Debentures, the
Trust Agreement (as defined under "Summary--The Offering") and the Agreement
as to Expenses and Liabilities when taken together, will effectively provide a
full and unconditional guarantee, on a subordinated basis, of the Trust's
obligations under the Trust Securities. See "Relationship Among the Trust
Securities, the Junior Subordinated Debentures, the Trust Securities Guarantee
and the Debentures Guarantee".
The Trust Securities are subject to mandatory redemption, in whole or in
part, upon redemption of the Junior Subordinated Debentures in an amount equal
to the aggregate principal amount of Junior Subordinated Debentures being
redeemed at a price equal to the aggregate liquidation amount of such Trust
Securities plus accumulated and unpaid Distributions thereon to the date fixed
for redemption (the "Redemption Price"). The Trust Securities will also be
redeemed in whole at the Redemption Price at the Stated Maturity of the Junior
Subordinated Debentures. See "Description of the Trust Securities--
Redemptions". The Junior Subordinated Debentures will mature on , 2038
(the "Stated Maturity"). The Junior Subordinated Debentures are redeemable at
the option of Yorkshire Finance (i) on or after , 2003, in whole at any
time or in part from time to time, at a price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed
for redemption plus 100% of the aggregate principal amount thereof (the
"Debenture Redemption Price"), (ii) at any time, in whole (but not in part),
upon the occurrence and continuation of a Special Event (as defined under
"Description of the Trust Securities--Redemptions"), at the Debenture
Redemption Price or (iii) at any time, in whole (but not in part), if
Yorkshire Finance or Yorkshire Group has or will become obligated to pay
Additional Amounts (as defined under "Summary--The Offering"), as provided
under "Description of the Junior Subordinated Debentures--Optional Tax
Redemption", at the Debenture Redemption Price.
At any time, the Control Party (as defined under "Summary--The Offering"),
as the holder of the Control Certificate (as defined under "Summary--The
Offering") of the Trust, will have the right to dissolve the Trust and, after
satisfaction of liabilities to creditors of the Trust, if any, as provided by
applicable law, cause a Like Amount (as defined under "Description of the
Trust Securities--Redemptions") of Junior Subordinated Debentures to be
distributed to the holders of the Trust Securities in liquidation of the
Trust. See "Description of the Trust Securities--Distribution of Junior
Subordinated Debentures".
In the event of the dissolution and liquidation of the Trust, after
satisfaction of liabilities to creditors of the Trust, if any, as provided by
applicable law, the holders of the Trust Securities will receive a Like Amount
of Junior Subordinated Debentures unless, in certain circumstances, such
distribution is determined not to be practical, in which event holders will be
entitled to receive a liquidation amount of $25 per Trust Security plus
accumulated and unpaid Distributions thereon to the date of payment. See
"Description of the Trust Securities--Liquidation Distribution upon
Dissolution".
In addition to listing the Trust Securities on the NYSE, subject to official
notice of issuance, application will be made to list the Junior Subordinated
Debentures on the Luxembourg Stock Exchange. If the Junior Subordinated
Debentures are distributed to the holders of the Trust Securities upon the
liquidation of the Trust, Yorkshire Finance will use its best efforts to also
list the Junior Subordinated Debentures on the NYSE or such other stock
exchanges or other organizations, if any, on which the Trust Securities are
then listed.
The Trust Securities will be represented by global certificates registered
in the name of a nominee of DTC. Beneficial interests in the Trust Securities
will be shown on, and transfers thereof will be effected only through, records
maintained by Participants (as defined under "Description of the Trust
Securities--Book-Entry Issuance") in DTC. Except as described under
"Description of the Trust Securities--Book-Entry Issuance", Trust Securities
in definitive form registered in the names of the beneficial owners thereof
will not be issued in exchange for the global certificates.
3
<PAGE>
AVAILABLE INFORMATION
Following this offering, Yorkshire Group will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will file reports and other
information with the Securities and Exchange Commission (the "Commission").
Such reports and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may also be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission (http://www.sec.gov).
Yorkshire Group, Yorkshire Finance and the Trust, collectively, have filed
with the Commission a registration statement on Form S-1 (herein, together
with all amendments and exhibits thereto, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement.
No separate financial statements of Yorkshire Finance or the Trust have been
included herein. Yorkshire Group does not consider that such financial
statements would be material to holders of the Trust Securities because
Yorkshire Finance and the Trust are newly formed special purpose entities,
have no operating history or independent operations and are not engaged in and
do not propose to engage in any activity other than acting as financing
subsidiaries of Yorkshire Group and its affiliates. See "Summary", "Yorkshire
Capital Trust I", "Description of the Trust Securities", "Description of the
Junior Subordinated Debentures", "Description of the Trust Securities
Guarantee" and "Description of the Debentures Guarantee". In addition,
Yorkshire Group does not expect that the Trust or Yorkshire Finance will file
reports, proxy statements and other information under the Exchange Act with
the Commission.
ENFORCEABILITY OF CIVIL LIABILITIES
Yorkshire Group is a private company with limited liability incorporated
under the laws of England and Wales. Yorkshire Finance is a limited liability
company incorporated under the laws of the Cayman Islands. Substantially all
the assets of Yorkshire Group and Yorkshire Finance are located outside the
United States of America (the "US"). As a result, it may not be possible for
investors to effect service of process within the US upon Yorkshire Group and
Yorkshire Finance or to enforce against it judgments of US courts predicated
upon civil liabilities under US Federal securities laws. There is doubt as to
the enforceability in England and the Cayman Islands, in original actions or
in actions for enforcement of judgments of US courts, of civil liabilities
predicated upon US Federal securities laws.
The Trust Agreement and the Trust Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware. The Trust
Securities Guarantee, the Debentures Guarantee, the Indenture and the Junior
Subordinated Debentures will be governed by, and will be construed in
accordance with, the laws of the State of New York. Yorkshire Group and
Yorkshire Finance have submitted to the non-exclusive jurisdiction of the
Supreme Court of New York, New York County and the United States District
Court for the Southern District of New York and any appellate court from
either thereof for any legal suit, action or proceeding against Yorkshire
Group and Yorkshire Finance or their properties, assets or revenues with
respect to their obligations, liabilities or any other matter arising out of
or in connection with the Trust Securities Guarantee, the Debentures
Guarantee, the Indenture and the Junior Subordinated Debentures. See
"Description of the Junior Subordinated Debentures--Governing Law; Submission
to Jurisdiction".
4
<PAGE>
PRESENTATION OF CERTAIN INFORMATION AND EXCHANGE RATES
Yorkshire Group will publish its consolidated financial statements in pounds
sterling. In this Prospectus, references to "pounds sterling," "pence" or
"(Pounds)" are to currency of the United Kingdom ("UK") and references to "US
dollars", "US$" or "$" are to US currency. As used herein, "US GAAP" means US
generally accepted accounting principles. References to "Lv" are to low volts,
"MW" are to megawatts, "kW" are to kilowatts, "kWh" are to kilowatt hours,
"kV" are to kilovolts, "GWh" are to gigawatt hours and "km" are to kilometers.
All references herein to "Fiscal Year" mean a year ended March 31.
For the convenience of the reader, this Prospectus contains translations of
certain pounds sterling amounts into US dollars at specified rates, or, if not
so specified, the noon buying rate in New York City for cable transfers in
pounds sterling as certified for customs purposes by the Federal Reserve Bank
of New York (the "Noon Buying Rate") on December 31, 1997 of $1.64 =
(Pounds)1. No representation is made that the pounds sterling amounts have
been, could have been or could be converted into US dollars at the rates
indicated or at any other rates.
The following table sets out, for the periods indicated, certain information
concerning the exchange rates between UK Pounds sterling and US dollars based
on the Noon Buying Rates:
<TABLE>
<CAPTION>
FISCAL YEAR PERIOD END AVERAGE(1) HIGH LOW
----------- -------------------- ---------- ---- ----
($ PER (Pounds)1.00)
<S> <C> <C> <C> <C>
1993.............................. 1.50 1.68 2.00 1.42
1994.............................. 1.49 1.50 1.59 1.46
1995.............................. 1.62 1.56 1.65 1.49
1996.............................. 1.53 1.56 1.62 1.50
1997.............................. 1.65 1.60 1.71 1.50
1998 through December 31, 1997.... 1.64 1.64 1.70 1.58
==== ==== ==== ====
</TABLE>
- --------
(1) The average of the Noon Buying Rates in effect on the last business day of
each month during the relevant period.
On May , 1998, the Noon Buying Rate was $ = (Pounds)1.
UK SELLING RESTRICTIONS
There are restrictions on the offer and sale of the Trust Securities in the
UK. All applicable provisions of the Financial Services Act 1986 and the
Public Offers of Securities Regulations 1995 with respect to anything done by
any person in relation to the Trust Securities, in, from or otherwise
involving the UK must be complied with. See "Underwriting".
5
<PAGE>
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business", "The Electric Utility Industry in Great
Britain" and elsewhere constitute forward looking statements. Such forward
looking statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of the Yorkshire Group or any of its subsidiaries or industry
results, to differ materially from any future results, performance or
achievements expressed or implied by such forward looking statements. Such
risks, uncertainties and other important factors include, among others:
general economic and business conditions in the UK, the Franchise Area (as
defined under "Summary--Yorkshire Electricity Group plc") and elsewhere;
currency fluctuations; governmental, statutory, regulatory or administrative
initiatives affecting Yorkshire Group, Yorkshire or the UK electric and gas
utilities industries; general industry trends; competition; the cost and
availability of electricity, gas and other alternative energy sources; hedging
costs; changes in business strategy, development plans or vendor
relationships; availability, terms and deployment of capital; availability of
qualified personnel; increased rates of taxes or other changes in tax law;
changes in, or the failure or inability to comply with, governmental
regulation, including, without limitation, environmental regulations; and
other factors referenced in this Prospectus. These forward looking statements
speak only as of the date of this Prospectus.
6
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed financial and other information contained
elsewhere in this Prospectus.
YORKSHIRE POWER GROUP LIMITED
Yorkshire Group was incorporated as a private company with limited liability
under the laws of England and Wales in July 1996 and is indirectly owned by
American Electric Power Company, Inc. ("AEP") and New Century Energies, Inc.
("NCE" and, together with AEP, the "US Parents"). Each of the US Parents
indirectly owns 50% of the outstanding shares of the Yorkshire Group. In 1997,
Yorkshire Group was utilized in connection with the joint acquisition of
Yorkshire by the US Parents for approximately (Pounds)1.5 billion (the
"Acquisition"). Yorkshire Group holds all the outstanding shares of Yorkshire
Holdings plc ("Yorkshire Holdings"), which is its primary asset. Yorkshire
Holdings, in turn, beneficially owns all the outstanding shares of Yorkshire.
See "Yorkshire Group and the US Parents".
YORKSHIRE POWER FINANCE LIMITED
Yorkshire Finance, a subsidiary of Yorkshire Group, was incorporated as a
company with limited liability under the laws of the Cayman Islands in August
1997. Yorkshire Finance exists solely for the purpose of operating as a
financing vehicle for Yorkshire Group and its affiliates. See "Yorkshire Group
and the US Parents".
YORKSHIRE ELECTRICITY GROUP PLC
Yorkshire is one of twelve regional electricity companies ("RECs") in England
and Wales licensed to distribute, supply and, to a limited extent, generate
electricity. Yorkshire's two principal businesses are the "distribution
business" and the "supply business". Yorkshire's distribution business consists
of the distribution of electricity to approximately two million residential,
commercial and industrial customers in its Franchise Area. Substantially all of
the distribution business is a regulated monopoly. Yorkshire's supply business
consists of the purchase and supply of electricity primarily to customers
within the Franchise Area. See "Business".
Yorkshire generated total operating income of (Pounds)52 million ($85
million) in Fiscal Year 1997. During Fiscal Year 1997, however, Yorkshire
recorded a (Pounds)78 million ($128 million) provision for uneconomic gas and
electricity contracts and a (Pounds)50 million ($82 million) charge for
information system development costs to prepare for the opening of the
competitive electricity market in 1998 for Franchise Supply Customers (as
defined below). Excluding these charges, total operating income would have been
(Pounds)180 million ($295 million) in Fiscal Year 1997, including (Pounds)140
million ($230 million) (78% of total) associated with the core distribution
business and (Pounds)29 million ($48 million) (16% of total) associated with
the supply business. As discussed below under "Business--Business
Restructuring", beginning in 1998, Yorkshire will operate the distribution and
supply businesses as self-sufficient businesses.
Yorkshire is authorized under its Public Electricity Supply License (the "PES
License") to distribute and supply electricity in an area covering
approximately 10,000 square km (3,860 square miles), which 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 "Franchise Area"). The resident population of
the Franchise Area served by Yorkshire is approximately 4.4 million. The
regional economy is diverse, including traditional heavy industries such as
iron, steel and coal mining, as well as growing service
7
<PAGE>
sector activities such as finance, retailing and leisure. Centrally located in
the UK, the region is also well served by roads, railways, airports and ports
which provide access to other European markets.
Pursuant to its PES License, Yorkshire owns, manages and operates the
electricity distribution network within the Franchise Area. The primary
activity of the distribution business is the receipt of electricity from the
national grid transmission system and its distribution to end users connected
to Yorkshire's distribution network. Since the distribution business is
substantially a regulated monopoly, virtually all electricity supplied (whether
by Yorkshire's supply business or by any other suppliers) to consumers within
the Franchise Area is transported through Yorkshire's distribution network.
Yorkshire Group believes that economic, environmental and regulatory factors
are likely to prevent competitors from entering the distribution business in
the Franchise Area. See "Business--Distribution Business" and "--Business
Restructuring".
Yorkshire's supply business consists of selling electricity to end users and
purchasing such electricity and arranging for its distribution to those end
users. Within the Franchise Area, Yorkshire has an exclusive right to supply
electricity to consumers who, within the most recent twelve-month period, have
had an average peak demand ("Peak Demand") of not more than 100 kW in the three
months of highest maximum demand during such period ("Franchise Supply
Customers"). This exclusive right will continue until September 1998 when the
supply market for these customers is currently scheduled to become competitive
over a six-month phase-in period. The supply of electricity to Non-Franchise
Supply Customers (as defined below) is currently open to competition and
Yorkshire is able to competitively bid or negotiate to supply electricity to
such customers. By purchasing electricity at competitive rates from most of the
major power generators in the UK and providing high quality customer service,
Yorkshire has been able to sustain its position as one of the largest national
suppliers of electricity. "Non-Franchise Customers" are consumers, both inside
and outside of Yorkshire's Franchise Area, who, within the most recent twelve
month period, have had an average Peak Demand of more than 100 kW in the three
months of highest maximum demand during such period. See "Business--Supply
Business" and "--Business Restructuring".
The operations of Yorkshire are regulated under its PES License, pursuant to
which income generated by Yorkshire's distribution business and income derived
from Franchise Supply Customers are subject to a price cap regulatory framework
providing economic incentives to operate in a cost-effective manner, and, to a
limited extent, to increase the volume of electricity distributed. See "The
Electric Utility Industry in Great Britain".
Yorkshire also conducts ancillary business activities apart from the
distribution and supply businesses that are not subject to price regulation,
such as owning an interest in an off-shore gas field, supplying gas in the
competitive market and holding interests in power generation. See "Business--
Affiliate Businesses and Other Investments" and "--Business Restructuring".
YORKSHIRE CAPITAL TRUST I
The Trust is a statutory business trust created under the Delaware Business
Trust Act (the "Delaware Act") pursuant to the filing of a certificate of trust
with the Delaware Secretary of State on February 4, 1998. The Trust exists for
the exclusive purposes of (i) issuing and selling the Trust Securities
representing undivided beneficial interests in the assets of the Trust, (ii)
investing the gross proceeds of the Trust Securities in the Junior Subordinated
Debentures and (iii) engaging in only those other activities necessary,
appropriate, convenient or incidental thereto. See "Yorkshire Capital Trust I".
8
<PAGE>
THE OFFERING
As used herein, (i) the term "Indenture" means the Subordinated Indenture, as
the same may be amended and supplemented from time to time, among Yorkshire
Finance, Yorkshire Group, The Bank of New York, as Indenture Trustee, principal
paying agent, registrar and transfer agent (the "Indenture Trustee"), and
Banque Generale du Luxembourg, as paying agent and transfer agent, pursuant to
which the Junior Subordinated Debentures and the Debentures Guarantee will be
issued, and (ii) the term "Trust Agreement" means the Amended and Restated
Trust Agreement, among AEP Resources, Inc., as depositor, the Control Party, as
holder of the Control Certificate, The Bank of New York (Delaware), as Delaware
Trustee, The Bank of New York, as Property Trustee, the administrative trustees
named therein and the holders, from time to time, of undivided beneficial
interests in the assets of the Trust. Each of the other capitalized terms used
in this Prospectus and not otherwise defined has the meaning set forth in the
Indenture or the Trust Agreement, as the case may be.
Securities Offered ......... % Trust Securities (Liquidation Amount $25 Per
Trust Security).
Offering Price ............. $25 per Trust Security.
Distribution Dates ......... March 31, June 30, September 30 and December 31
of each year, commencing , 1998.
Record Date................. The record date for each Distribution Date (as
defined under "Description of the Trust
Securities--Distributions") will be the close of
business on the 15th calendar day prior to such
Distribution Date.
Ratings..................... The Trust Securities are expected to be assigned
ratings of BBB by Standard & Poor's Ratings
Services ("S&P"), BBB by Duff & Phelps Credit
Rating Company ("DCR") and "baa2" by Moody's
Investors Service, Inc. ("Moody's"). These
ratings will have been obtained with the
understanding that S&P, DCR and Moody's will
continue to monitor the credit rating of the
registrants and will make future adjustments to
the extent warranted. A rating reflects only the
views of S&P, DCR or Moody's, as the case may be,
and is not a recommendation to buy, sell or hold
the Trust Securities. There is no assurance that
any such rating will be retained for any given
period of time or that it will not be revised
downward or withdrawn entirely by S&P, DCR or
Moody's, as the case may be, if, in their
respective judgments, circumstances so warrant.
Deferral of Interest So long as no Event of Default under the
Payments.................... Indenture has occurred and is continuing,
Yorkshire Finance has the right to defer Interest
Payments on the Junior Subordinated Debentures,
at any time or from time to time, for up to 20
consecutive quarters; provided, however,
Yorkshire Finance cannot defer Interest Payments
beyond the Stated Maturity of the Junior
Subordinated Debentures. If Interest Payments on
the Junior Subordinated Debentures are so
deferred, Distributions on the Trust Securities
will also be deferred. During an Extension
Period, Yorkshire Group's obligations to make
payments under the Trust Securities Guarantee and
the Debentures Guarantee will be suspended. See
"Description of the Junior Subordinated
Debentures--Option to Defer Payment of Interest".
9
<PAGE>
Ranking of Junior
Subordinated Debentures and
Debentures Guarantee........
The Junior Subordinated Debentures and the
Debentures Guarantee will be unsecured and
subordinated obligations of Yorkshire Finance and
Yorkshire Group, respectively, and will be junior
in right of payment to all Senior Debt of
Yorkshire Finance and Yorkshire Group,
respectively, to the extent and in the manner set
forth in the Indenture. At December 31, 1997,
Senior Debt of Yorkshire Group aggregated
approximately (Pounds)1,034 million ($1,699
million), a portion of which will be repaid with
proceeds of this offering. Because Yorkshire
Group is a holding company, Yorkshire Group's
obligations under the Debentures Guarantee will
be effectively subordinated to all existing and
future indebtedness and liabilities of Yorkshire
Group, including Yorkshire. At December 31, 1997,
the direct and indirect subsidiaries of Yorkshire
Group had total indebtedness (excluding
indebtedness owed to Yorkshire Group) of
approximately (Pounds)476 million ($782 million).
See "Risk Factors--Factors Relating to the Trust
Securities and the Junior Subordinated
Debentures--Subordination of and Rights under the
Debentures Guarantee", "Description of the Junior
Subordinated Debentures--Subordination" and
"Description of the Debentures Guarantee".
Trust Securities Guarantee
and Debentures Guarantee....
The payment of Distributions and payments on
liquidation of the Trust or redemption of the
Trust Securities are guaranteed by Yorkshire
Group under the Trust Securities Guarantee, but
only to the extent of sufficient funds held by
the Trust and available therefor. The Trust
Securities Guarantee will be an unsecured and
subordinate obligation and junior in right of
payment to all Senior Debt of Yorkshire Group and
will rank pari passu with the most senior
preferred stock of Yorkshire Group. At December
31, 1997, Yorkshire Group had no senior preferred
stock outstanding with which the Trust Securities
Guarantee would rank pari passu. See "Risk
Factors--Factors Relating to the Trust Securities
and the Junior Subordinated Debentures--
Subordination of and Limitation of Funds
Available to Trust under the Trust Securities
Guarantee".
If Yorkshire Finance does not make payments of
principal of or interest on the Junior
Subordinated Debentures or Yorkshire Group does
not make payments pursuant to the Debentures
Guarantee, the Trust will not have sufficient
funds to pay Distributions on the Trust
Securities or amounts payable on redemption
thereof or otherwise. In such event, the Trust
Securities Guarantee will not apply to such
Distributions of such amounts until the Trust has
sufficient funds available therefor. The remedy
of a holder of Trust Securities, accordingly,
will be to enforce its rights under the
Debentures Guarantee.
Pursuant to the Debentures Guarantee, Yorkshire
Group will irrevocably and unconditionally
guarantee all payments on the Junior Subordinated
Debentures when and as the same shall become
10
<PAGE>
due and payable, whether at Stated Maturity, upon
redemption or otherwise. See "Description of the
Debentures Guarantee".
During an Extension Period, Yorkshire Group's
obligations to make payments under the Trust
Securities Guarantee and the Debentures Guarantee
will be suspended. See "Description of the Junior
Subordinated Debentures--Option to Defer Payment
of Interest".
The Trust Securities Guarantee, the Debentures
Guarantee, the Indenture, the Junior Subordinated
Debentures, the Trust Agreement and the Agreement
as to Expenses and Liabilities, when taken
together, will effectively provide a full and
unconditional guarantee, on a subordinated basis,
of the Trust's obligations under the Trust
Securities.
Redemption.................. The Trust Securities are subject to mandatory
redemption, (i) in whole or in part, upon
redemption of the Junior Subordinated Debentures
in an amount equal to the aggregate principal
amount of Junior Subordinated Debentures being
redeemed and (ii) in whole, at the Stated
Maturity of the Junior Subordinated Debentures,
in each case at the Redemption Price. The Junior
Subordinated Debentures are redeemable at the
option of Yorkshire Finance (i) on or after
, 2003, in whole at any time or in part from time
to time, (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a
Special Event or (iii) at any time, in whole (but
not in part), if Yorkshire Finance or Yorkshire
Group has or will become obligated to pay
Additional Amounts, as provided under
"Description of the Junior Subordinated
Debentures--Optional Tax Redemption", in each
case at the Debenture Redemption Price. See
"Description of the Trust Securities--
Redemptions--Mandatory Redemption", "--Optional
Redemption of Junior Subordinated Debentures" and
"--Special Event Redemption of Junior
Subordinated Debentures".
Distribution of Junior
Subordinated Debentures..... The Control Party will have the right at any time
to dissolve the Trust and, after satisfaction of
liabilities to creditors of the Trust, if any,
cause a Like Amount of Junior Subordinated
Debentures to be distributed to the holders of
the Trust Securities in liquidation of the Trust.
See "Description of the Trust Securities--
Distribution of Junior Subordinated Debentures".
Additional Amounts.......... Subject to certain exceptions as set forth under
"Description of the Junior Subordinated
Debentures--Additional Amounts", all payments in
respect of the Junior Subordinated Debentures and
the Debentures Guarantee and, therefore, the
Trust Securities will be made free and clear of,
and without withholding or deductions for or on
account of, any Gross-Up Taxes (as defined under
"Description of the Junior Subordinated
Debentures--Additional Amounts"), unless such
withholding or deduction is required by law. In
the event of any such withholding or deduction,
subject to certain exceptions, Yorkshire Finance
or Yorkshire Group will pay such additional
amounts (the "Additional Amounts") as will result
11
<PAGE>
in receipt by the holder of the Junior
Subordinated Debentures and, therefore, the
holders of the Trust Securities, of such amounts
as would have been received by it had no such
withholding or deduction been required. See
"Description of the Junior Subordinated
Debentures--Additional Amounts". Any reference in
this Prospectus to any payments with respect to
the Junior Subordinated Debentures or any
payments pursuant to the Debentures Guarantee
shall be deemed to include any such Additional
Amounts payable in connection therewith.
Listing..................... The Trust Securities have been approved for
listing on the NYSE, subject to official notice
of issuance. Application has been made to list
the Junior Subordinated Debentures on the
Luxembourg Stock Exchange. If the Junior
Subordinated Debentures are distributed to the
holders of the Trust Securities upon the
liquidation of the Trust, Yorkshire Finance will
use its best efforts to also list the Junior
Subordinated Debentures on the NYSE, or such
other stock exchanges or other organizations, if
any, on which the Trust Securities are then
listed.
Use of Proceeds ............ The proceeds to the Trust from the sale of the
Trust Securities will be invested by the Trust in
the Junior Subordinated Debentures to be issued
by Yorkshire Finance to the Trust. In turn,
Yorkshire Finance intends to loan the net
proceeds from such issuance to Yorkshire Group
and certain of its affiliates with such loans to
be evidenced by promissory notes issued by
Yorkshire Group and such affiliates (collectively
the "Intercompany Notes"). The proceeds therefrom
will be used for the working capital of such
affiliates and for the repayment of certain
indebtedness of Yorkshire Group. See "Use of
Proceeds" and "Capitalization".
Governing Law .............. The Trust Agreement and the Trust Securities will
be governed by, and construed in accordance with,
the laws of the State of Delaware. The Trust
Securities Guarantee, the Debentures Guarantee,
the Indenture and the Junior Subordinated
Debentures will be governed by, and construed in
accordance with, the laws of the State of New
York.
The Trustees................ The Bank of New York will act as property trustee
(the "Property Trustee") of the Trust. Four
employees of the US Parents also will act as
trustees (the "Administrative Trustees") of the
Trust. The Bank of New York (Delaware) will be an
additional trustee (the "Delaware Trustee") of
the Trust. The Property Trustee, the
Administrative Trustees and the Delaware Trustee
are herein, collectively, referred to as the
"Securities Trustees". The Bank of New York will
also act as Indenture Trustee under the Indenture
pursuant to which the Junior Subordinated
Debentures and the Debentures Guarantee will be
issued and will act as trustee under the Trust
Securities Guarantee (the "Guarantee Trustee").
12
<PAGE>
A wholly-owned subsidiary of Yorkshire Group
Control of the Trust........ designated pursuant to the Trust Agreement (the
"Control Party") will retain the administrative
and appointment power with respect to the Trust
by virtue of its possession of the Trust's
control certificate (the "Control Certificate").
The Control Certificate shall not provide any
economic interest in the Trust to the Control
Party. See "Yorkshire Capital Trust I".
Expenses of the Trust....... Pursuant to the Agreement as to Expenses and
Liabilities, the US Affiliates will irrevocably
and unconditionally guarantee to each person or
entity to whom the Trust becomes indebted or
liable the full payment of any indebtedness,
expenses or liabilities of the Trust (other than
obligations of the Trust to pay to the holders of
the Trust Securities the amounts due such holders
pursuant to the terms of the Trust Securities).
RECENT DEVELOPMENTS
As described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Significant Factors and Known Trends--
Investment in Ionica", Yorkshire has an approximate 14% equity investment in
Ionica Group plc ("Ionica"), a telecommunications company. On May 22, 1998, as
a result of Ionica's failure to reach agreed conditions that would enable it to
borrow under an existing bank credit facility, Ionica announced that it would
seek a strategic investor. Following this announcement, the share price of
Ionica declined significantly. As of May 26, 1998, the fair value of Yorkshire
Group's investment in Ionica was (Pounds)6 million ($10 million). Management is
in the process of evaluating the impact of this development on both the
valuation of Yorkshire Group's investment in Ionica as well as the timing of
the recognition of the resulting write-down. If its entire investment in Ionica
were written off, Yorkshire Group's income before income taxes for the affected
period would be reduced by (Pounds)55 million ($90 million). See also Note 14,
"Subsequent Events", to Yorkshire's consolidated financial statements, Note 13,
"Subsequent Events", to Yorkshire Group's consolidated financial statements and
Note 8, "Subsequent Events", to Yorkshire Group's condensed consolidated
financial statements included elsewhere in this Prospectus.
13
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary consolidated financial data for
Yorkshire Power Group Limited after March 31, 1997 ("Yorkshire Group" or the
"Successor Company") and Yorkshire Electricity Group plc ("Yorkshire" or the
"Predecessor Company") for each of the five Fiscal Years ended March 31, 1997
prepared in accordance with US GAAP. For a description of the financial
statements and records from which the following financial data have been
derived, see "Selected Consolidated Financial Data". This information should be
read in conjunction with "Capitalization", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto of the Successor Company and the
Predecessor Company included elsewhere in this Prospectus.
The summary unaudited pro forma consolidated income statement data for the
Successor Company for Fiscal Year 1997 presented below reflect the Acquisition
as if it had occurred as of April 1, 1996. Such data have been prepared by the
Successor Company based upon assumptions deemed proper in accordance with the
purchase method of accounting for business combinations and have been adjusted
to reflect (i) interest expense of (Pounds)74 million incurred as a result of
the financing of the Acquisition, (ii) amortization of (Pounds)24 million
related to goodwill recorded in connection with the Acquisition, (iii)
additional depreciation expense of (Pounds)6 million as a result of the
revaluation of certain fixed assets in connection with the Acquisition and (iv)
removal of the effect of recording the provision of (Pounds)78 million of
certain uneconomic gas and electricity contracts, the loss of (Pounds)7 million
on certain interest rate swap agreements and the write-down of (Pounds)6
million relating to non-operational property. Such data are shown for
illustrative purposes only and are not necessarily indicative of the future
results of operations of the Successor Company or of the results of operations
of the Successor Company that would have actually occurred had the Acquisition
occurred at the beginning of the period presented. Such data should be read in
conjunction with the unaudited pro forma consolidated statement of income and
notes thereto of the Successor Company included elsewhere in this Prospectus.
14
<PAGE>
PREDECESSOR COMPANY
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DA-
TA:
Operating revenues.............. 1,325 1,308 1,464 1,431 1,331
Operating income (1)............ 146 156 215 214 52
Other income (loss), net (2).... 15 (8) 16 313 20
Interest expense, net........... (7) (5) (12) (20) (33)
Provision for income taxes (3).. (54) (50) (78) (114) (13)
----- ----- ----- ----- -----
Net income...................... 100 93 141 393 26
===== ===== ===== ===== =====
<CAPTION>
MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Fixed assets.................... 613 701 747 769 796
Total assets.................... 1,214 1,241 1,367 1,408 1,375
Total shareholders' equity...... 561 612 517 399 359
Long-term debt.................. 104 126 305 424 419
Short-term debt and current por-
tion of long-term debt......... 217 99 91 90 87
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT (4)........................ 161 148 231 527 72
EBITDA (4)...................... 193 182 272 569 122
Cash flow from operations....... 187 237 201 222 96
Cash used in investing activi-
ties........................... (137) (201) (101) (8) (51)
Cash provided by (used in) fi-
nancing activities............. 129 (139) (67) (114) (76)
Ratio of earnings to fixed
charges (5).................... 6.6 6.8 10.5 12.0 1.8
</TABLE>
15
<PAGE>
SUCCESSOR COMPANY
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ ---------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ -------- ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
DATA:
Operating revenues............. 1,331 2,183 974 909 1,493
Operating income (1)........... 106 174 120 123 202
Other income, net (2).......... 20 33 17 2 3
Interest expense, net.......... (100) (164) (20) (78) (128)
Provision for income taxes..... (17) (28) (40) (5) (8)
----- ----- --- ------ ------
Income before extraordinary
item.......................... 9 15 77 42 69
Extraordinary item (7)......... -- -- -- (134) (220)
----- ----- --- ------ ------
Net income (loss).............. 9 15 77 (92) (151)
===== ===== === ====== ======
<CAPTION>
SUCCESSOR SUCCESSOR
APRIL 1, DECEMBER 31,
1997 1997
-------------- ---------------
(Pounds) $(6) (Pounds) $(6)
-------- ----- -------- ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Fixed assets................... 939 1,540 1,001 1,644
Total assets................... 2,591 4,249 2,522 4,143
Total shareholders' equity..... -- -- 330 542
Long-term debt................. 433 710 429 705
Accrued liability to purchase
Yorkshire..................... 1,496 2,453 -- --
Short-term debt and current
portion of long-term debt..... 87 143 1,081 1,776
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ ---------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ -------- ------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT before extraordinary item
(4)(7)........................ 126 207 137 125 205
EBITDA before extraordinary
item (4)(7)................... 206 338 169 183 300
Cash flow from operations...... 149 63 103
Cash used in investing
activities.................... (99) (1,575) (2,586)
Cash provided by (used in)
financing activities.......... (49) 1,409 2,314
Ratio of earnings to fixed
charges (5)................... 1.2 4.6 1.5
</TABLE>
16
<PAGE>
PREDECESSOR COMPANY
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Distribution.................... 332 348 362 334 308
Supply.......................... 1,206 1,220 1,343 1,309 1,178
Other........................... 182 162 162 163 172
Intrabusiness eliminations (8).. (395) (422) (403) (375) (327)
----- ----- ----- ----- -----
1,325 1,308 1,464 1,431 1,331
===== ===== ===== ===== =====
OPERATING INCOME (LOSS):
Distribution.................... 135 133 176 164 127
Supply (1)...................... 10 14 23 30 (132)
Other........................... 1 9 16 20 10
Intrabusiness eliminations
(1)(8)......................... -- -- -- -- 47
----- ----- ----- ----- -----
146 156 215 214 52
===== ===== ===== ===== =====
<CAPTION>
MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS:
Distribution.................... 476 513 556 589 643
Supply.......................... 177 161 198 212 178
Other and unallocated........... 561 567 613 607 554
----- ----- ----- ----- -----
1,214 1,241 1,367 1,408 1,375
===== ===== ===== ===== =====
</TABLE>
17
<PAGE>
SUCCESSOR COMPANY
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ --------------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ ---------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Distribution............... 308 505 225 224 368
Supply..................... 1,178 1,932 868 799 1,312
Other...................... 172 282 136 141 232
Intrabusiness eliminations
(8)....................... (327) (536) (255) (255) (419)
----- ----- ---- -------- --------
1,331 2,183 974 909 1,493
===== ===== ==== ======== ========
OPERATING INCOME (LOSS):
Distribution............... 97 159 99 89 146
Supply (1)................. (7) (11) 1 14 23
Other...................... 16 26 20 20 33
----- ----- ---- -------- --------
106 174 120 123 202
===== ===== ==== ======== ========
<CAPTION>
SUCCESSOR SUCCESSOR
APRIL 1, 1997 DECEMBER 31, 1997
-------------- --------------------
(Pounds) $(6) (Pounds) $(6)
-------- ----- ---------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS:
Distribution............... 1,802 2,955 1,754 2,881
Supply..................... 187 307 180 296
Other and unallocated...... 602 987 588 966
----- ----- -------- --------
2,591 4,249 2,522 4,143
===== ===== ======== ========
</TABLE>
18
<PAGE>
(1) Notable operating expenses include:
Fiscal Year 1997--(i) a provision of (Pounds)78 million for uneconomic gas
and electricity contracts (the effect of which is removed from the
Successor Company's unaudited pro forma consolidated statement of income
for Fiscal Year 1997), which resulted in a charge of (Pounds)125 million to
the supply business offset by an intrabusiness elimination of (Pounds)47
million and (ii) a charge of (Pounds)50 million for information system
development costs to prepare for the opening of the competitive electricity
market in 1998 for Franchise Supply Customers, of which (Pounds)37 million
was charged to the supply business and (Pounds)13 million was charged to
the distribution business.
Fiscal Years 1993, 1994 and 1995--reorganization costs of (Pounds)18
million, (Pounds)44 million and (Pounds)8 million, respectively.
(2) Other income (loss) principally represents income from Yorkshire's
investment in National Grid Group plc ("NGG") and, in Fiscal Year 1996, a
gain resulting from the NGG Transaction (as defined herein) and earnings
and losses from Yorkshire's investments in joint ventures and minority
holdings. Notable items include:
Fiscal Year 1997--gain on sale of Yorkshire's investment in Torch Telecom
of (Pounds)15 million.
Fiscal Year 1996--income from investment in NGG and gain in respect of the
NGG Transaction as described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction--NGG
Transaction".
Fiscal Year 1995--one-time termination payment received from Stockholm
Stadhus AB of (Pounds)17 million.
Fiscal Year 1994--loss on sale of Yorkshire's investment in Homepower
Retail Limited of (Pounds)18 million.
(3) Fiscal Year 1996 includes a tax charge of (Pounds)38 million relating to
the NGG Transaction.
(4) EBIT represents income before the sum of interest expense and income taxes.
EBITDA represents income before the sum of interest expense, income taxes,
depreciation and amortization. EBIT and EBITDA are provided for
informational purposes only and such measures should not be construed as
alternatives to operating income (as determined in accordance with US GAAP)
as indicators of operating performance, or as alternatives to cash flows
from operating activities (as determined in accordance with US GAAP) as
measures of liquidity. EBIT and EBITDA are widely accepted financial
indicators of a company's ability to incur and service debt. However, the
measures of EBIT and EBITDA presented herein may not be comparable to
similar measures presented by other companies.
(5) The ratio of earnings to fixed charges is computed as the sum of pre-tax
income (before extraordinary item), plus fixed charges divided by fixed
charges. Fixed charges consist of interest expense and amortization of debt
expense.
(6) Solely for the convenience of the reader, pounds sterling amounts have been
translated into US dollar amounts at the Noon Buying Rate on December 31,
1997 of $1.64 = (Pounds)1. See "Presentation of Certain Information and
Exchange Rates".
(7) Represents the windfall tax imposed by the UK government, which was not
deductible for UK corporation tax purposes.
(8) Intrabusiness eliminations consist primarily of intracompany transactions
between the distribution business and the supply business and interbusiness
transactions between ancillary businesses. Pursuant to the UK regulatory
framework, charges by the distribution business for electricity in respect
of supply customers in the Franchise Area are billed to the supply
business, which in turn incorporates the distribution charge into the bill
sent to the final end user.
19
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Trust Securities.
FACTORS RELATING TO YORKSHIRE'S BUSINESS
Substantial Leverage
Upon completion of this offering, Yorkshire Group will continue to have
substantial indebtedness. At December 31, 1997 (after the effect of the
windfall tax on shareholder's equity), on a pro forma basis after giving
effect to the Senior Notes and the Guaranteed Eurobonds (each as defined under
"Capitalization"), both issued in February 1998, and the issuance of the Trust
Securities offered hereby, the ratio of Yorkshire Group's consolidated debt to
total capitalization was approximately 73%. See "Capitalization". The degree
to which Yorkshire Group 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. Yorkshire Group believes that, following this offering,
it will be able to make payments on its obligations (including its obligations
under the Trust Securities Guarantee and the Debentures Guarantee) with those
funds subsequently being made available to make payments of principal of and
interest on the Junior Subordinated Debentures and the Trust Securities, as
applicable, from funds derived from the operations of Yorkshire and its
subsidiaries. The ability of Yorkshire Finance to pay amounts due on the
Junior Subordinated Debentures is solely dependent upon Yorkshire Group making
payments to Yorkshire Finance as and when required.
Unexpected declines in Yorkshire's future business, especially in light of
the increasingly competitive environment in the UK electric and gas utility
industries, increases in operating or capital costs, or the inability to
borrow additional funds, could impair Yorkshire Group's ability to meet its
debt service obligations, and, therefore, could adversely affect Yorkshire
Finance's ability to make payments of principal of and interest on the Junior
Subordinated Debentures and, ultimately, the Trust's ability to make payments
on the Trust Securities. 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 Yorkshire Group or Yorkshire Finance.
Price Regulation of the Distribution Business
The distribution business of Yorkshire is regulated under its PES License
pursuant to which charges by the distribution business to its customers are
controlled by the Distribution Price Control Formula (as defined under "The
Electric Utility Industry in Great Britain--Distribution of Electricity"). The
Distribution Price Control Formula determines the maximum allowable average
price per unit of electricity (expressed in kWh, a "unit") that a PES License
holder may charge in any year. The elements used in the Distribution Price
Control Formula (which includes the UK Retail Price Index) are established for
a five year period and are subject to review by the Director General of
Electricity Supply for the UK (the "Regulator") at the end of each five year
period and at other times at the discretion of the Regulator. At each review,
the Regulator can adjust the value of certain elements in the Distribution
Price Control Formula.
Following a review by the Regulator in July 1994, a 14% below inflation
price reduction was set for Yorkshire's allowed distribution revenues
effective April 1, 1995. Such adjustment was the principal reason for the
reduction of Yorkshire's distribution operating revenues to (Pounds)334
million ($548 million) for Fiscal Year 1996 from (Pounds)362 million ($594
million) for Fiscal Year 1995. In July 1995, a further review of distribution
prices was concluded by the Regulator for Fiscal Years 1997 to 2000. As a
result of this further review of Yorkshire's distribution prices, a further
13% below inflation reduction became effective April l, 1996 with a further 3%
below inflation reduction effective in each of the three following years. This
review was the principal reason for the reduction in distribution operating
revenues for Fiscal Year 1997 to (Pounds)308 million ($505 million). There can
be no assurance that any future review by the Regulator, the next of which is
scheduled for 2000, will not adversely affect Yorkshire. See "The Electric
Utility Industry in Great Britain--Distribution of Electricity--Price
Control".
Competition in and Price Regulation of the Supply Business
Each PES License holder currently has an exclusive right, subject to price
cap regulation, to supply Franchise Supply Customers in its franchise area.
However, the supply market is being progressively opened to
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full competition. The market for customers with a Peak Demand above 1 MW has
been open to competition for suppliers of electricity since privatization in
1990 while, for Non-Franchise Supply Customers, the market became competitive
in April 1994. The final stage of this process is currently scheduled to occur
over a period of six months commencing September 1998, when competition in the
supply of Franchise Supply Customers will be fully phased in and the exclusive
right to supply Franchise Supply Customers is scheduled to end. Yorkshire's
strategy to meet expanded competition in its supply business will focus on
active marketing and customer service to protect and sustain its position in
the electricity market in its Franchise Area. Furthermore, Yorkshire will seek
to expand market share outside its Franchise Area to the extent that such
business is profitable. There can be no assurance that this strategy will be
successful in avoiding loss of existing customers, or achieving gains of new
customers of Yorkshire's supply business. See "Business--Supply Business" and
"--Business Restructuring".
In October 1997, the Regulator published proposals for new transitional
supply price restraints to apply from April 1, 1998 to residential and small
business customers for an initial period of two years and until an adequate
level of competition is established. Yorkshire subsequently indicated its
acceptance of such proposals. The proposals (when taken together with the
reduction in the Fossil Fuel Levy (as defined under "The Electric Utility
Industry in Great Britain--Fossil Fuel Levy"), which became effective on April
1, 1998) resulted in the implementation of small reductions, also effective
April 1, 1998, in the tariffs for Yorkshire's residential and small business
customers in its Franchise Area compared to the corresponding tariffs in
effect in August 1997. The proposals also require an additional 3% below
inflation reduction effective April 1, 1999. See "The Electric Utility
Industry in Great Britain--Supply of Electricity--Price Regulation".
The license modifications that have been implemented to effect the new
controls also discontinued the automatic pass-through of all costs previously
passed through to residential and small business customers, consisting
primarily of purchased power costs. This change will increase the importance
to Yorkshire of effective power purchasing and hedging activities. See "--Pool
Purchase Price Volatility; Hedging Activities", "The Electric Utility Industry
in Great Britain--Supply or Electricity--Price Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The transition to competition in supply with respect to Franchise Supply
Customers requires each REC to provide additional data management services to
all suppliers. Assuming that such competition starts as currently scheduled in
September 1998 for Franchise Supply Customers, Yorkshire Group presently
estimates that costs totalling (Pounds)75 million will have been incurred for
re-engineering and information technology work. Of such amount, approximately
(Pounds)19 million was expensed in Fiscal Year 1997. The Regulator has made
proposals (which have been accepted by Yorkshire) to allow Yorkshire recovery
of (Pounds)23 million over a five year period ending March 31, 2003. A further
(Pounds)7 million is expected to be recovered through Pool cost recovery and
other national mechanisms and (Pounds)8 million is expected to be capitalized
as such amount is expected to provide future benefits to the supply business.
As a result of the above, the residual amount of approximately (Pounds)18
million, which will not be recovered or capitalized, will be expensed in
Fiscal Years 1998 and 1999 as incurred.
The Regulator has also made proposals (which have been accepted by
Yorkshire) to provide an annual allowance of (Pounds)3 million for the period
1998 through 2000 to cover operating costs. This allowance will be reviewed at
the time of the Distribution Price Control Formula review in 2000.
The October 1997 proposals therefore will allow Yorkshire to recover up to
50% of its forecasted set-up and operating costs over a five year period. The
shortfall could be higher if: (i) operating costs are higher than anticipated
(e.g., there is a higher level of customer activity); (ii) recovery of
operating costs is disallowed or reduced when the Distribution Price Control
Formula is reviewed for the period beginning April 1, 2000; or (iii) the
integrated national systems do not work as contemplated or require substantial
redevelopment.
The Regulator's proposals also provide that a REC should be penalized (i)
where it starts to open its market more than three months after the market
opening by the first REC; (ii) where it opens successive tranches of its
market more than three months after the opening of the corresponding tranche
by the first REC; and (iii) where the market opening of the first REC has been
delayed beyond April 1, 1998. The penalties will be calculated at
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1% of the operating revenues of the supply business per month of delay,
weighted by the proportion of customers affected and applied as a reduction in
allowed distribution business income. If Yorkshire did not open its market for
Franchise Supply Customers to competition until after April 1, 1999, it would
incur a penalty of approximately (Pounds)6 million. It is now apparent that
some penalty will be incurred due to the delay in the opening of the
competitive market for Franchise Supply Customers until September 1998.
Yorkshire Group expects that Yorkshire will be prepared to open its Franchise
Area to competition in September 1998.
Regulatory Policies Affecting Yorkshire Group
Certain modifications to Yorkshire's PES License following Yorkshire Group's
acquisition of Yorkshire imposed certain conditions designed to assure the
continued financial soundness of Yorkshire, including undertakings which
Yorkshire was required to obtain from AEP and NCE that they will refrain, and
cause their subsidiaries to refrain, from taking any action that would likely
result in Yorkshire breaching its obligations under its PES License and the
Electricity Act 1989 (the "Electricity Act") and an undertaking by Yorkshire
to use reasonable endeavors to maintain an investment grade rating of its debt
securities. Such conditions could have an effect on Yorkshire's dividend
payments which will constitute the principal source of funds for payment of
principal of and interest on the Junior Subordinated Debentures.
On February 24, 1998, following publication of the Monopolies and Mergers
Commission's (the "MMC") report in connection with the proposed PacifiCorp/The
Energy Group merger, the Regulator issued a consultation paper proposing
modifications to licenses of public electricity suppliers ("PESs") which had
been subject to takeovers.
The main proposals are:
1. to allow for a PES generation business to be carried on in an
affiliate which is not a subsidiary and in such cases for the generation
business to be conducted outside the scope of the modifications to the PES
license which have been brought into effect to ensure that the Regulator
can regulate a company effectively after it has been taken over and to help
ensure the financial stability of the PES (the "Ring-Fencing Conditions");
2. to restrict further the provisions of existing PES licenses allowing
PESs to carry out certain otherwise restricted activities provided they do
not exceed 5 percent of the revenues of the supply, second-tier supply and
distribution businesses, by introducing an additional test based on
cumulative investment;
3. to extend to all PESs that have been acquired the condition contained
in the licenses of London Electricity plc, Northern Electric plc and
Yorkshire to use reasonable endeavours to maintain an investment grade
rating of corporate debt;
4. to prohibit PESs from accepting "cross-default" provisions in
borrowing agreements; and
5. to make the payment of dividends and other distributions by a PES
expressly conditional on compliance with the Ring-Fencing Conditions in the
license.
Comments were due with respect to the proposals in the consultation paper by
March 27, 1998. Yorkshire provided comments on the consultation paper on March
25, 1998. In its response, Yorkshire indicated that it did not consider the
proposed modifications described in paragraphs (1), (4) and (5) immediately
above to be necessary. Further proposals are expected to be made by the
Regulator in light of this consultation paper that may result in further
modifications to PES licenses. There can be no assurance that any such
modifications to Yorkshire's PES License that result from such proposals will
not have a material adverse effect on Yorkshire. See "The Electric Utility
Industry in Great Britain--Regulation under the Electricity Act--Modifications
to Licenses".
The ability of AEP or NCE to contribute additional equity capital to
Yorkshire Group is currently subject to regulation of the Commission under the
Public Utility Holding Company Act of 1935, as amended (the "1935 Act"). The
Commission limits the aggregate amount that either AEP or NCE may invest in
foreign utility companies and exempt wholesale generators to specified
percentages of average consolidated retained earnings at the time an
investment is made. This regulation could delay or limit the making of loans
or the contributions of equity by AEP or NCE to Yorkshire Group to enable
Yorkshire Group to meet its obligations or to contribute additional equity
capital to Yorkshire.
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Governmental Review of Utility Regulation
On June 30, 1997, the new Labour government announced a comprehensive review
of the regulation of the electric, gas, water and telecommunications
industries to be directed by the Department of Trade and Industry. Generally,
the review has focused on whether the current system of regulation in the
utility industries is designed to ensure open and predictable regulation,
fairness to consumers and shareholders and the promotion of a competitive
environment. Particularly, the review has examined whether the current system
of price regulation delivers, over time, the greatest benefits to consumers
while maintaining proper incentives for innovation and investment and an
adequate return to shareholders.
The review culminated, in March 1998, with the publication by the UK
Government of a Green Paper entitled "A Fair Deal for Consumers: Modernising
the Framework for Utility Regulation" (the "March Green Paper"). The March
Green Paper sets forth a number of proposals of the UK Government designed to
reexamine utility regulation in the UK. Among the main proposals contained
within the March Green Paper are the retention of "RPI-X" as the fundamental
basis for price regulation; increased transparency and consistency of
regulation; the merger of the Office of Electricity Regulation ("OFFER") and
the Office of Gas Regulation ("OFGAS"); the separate licensing of the
distribution and supply businesses of the PESs; amendment of the statutory
duties of utility regulators to provide a new primary duty to exercise their
functions in the manner best calculated to protect the interests of consumers
in the short and long term, wherever possible through promoting competition;
and adopting price regulation to distinguish between income earned through
companies' own efforts and income which results from other factors. Some of
these proposals would require primary legislation. Responses to the March
Green Paper by interested parties have been requested by May 31, 1998.
On May 13, 1998, the Regulator issued a consultation paper on the separation
of distribution and supply businesses for PESs and the future treatment of
metering and meter reading. The material proposals and recommendations set out
in the consultation paper are as follows:
1. Full separation of the ownership of the supply and distribution
business was recommended and appropriate interim arrangements should be
contemplated for separate companies to comprise the distribution and supply
activities, each acting independently of the other.
2. Measures should be introduced to ensure that each PES supply
subsidiary operates at arm's length from the distribution subsidiary. These
measures would include separate contracts between the supply and
distribution businesses, avoiding the sharing of facilities between the
businesses, including requiring separate management teams for the two
businesses and minimizing corporate headquarters activities.
3. The distribution company should be responsible for the maintenance and
operation of the network and have a statutory duty to develop and maintain
an efficient, coordinated and economical system of electricity distribution
and to facilitate competition in generation and supply. It should connect
any person to the network on reasonable terms and act as a "last resort"
meter reading service, bought in from meter reading companies, for those
suppliers not wishing to provide the service themselves.
4. All suppliers should be placed on the same legislative footing and
tariff supply should be replaced by supply under contract. License
conditions would be introduced to protect customers and competitors against
dominant suppliers.
5. Metering services should be open to competition and arrangements for
transmission in Scotland should be brought into line with those in England
and Wales.
Responses to this consultation paper have been requested by June 15, 1998.
The Regulator intends to have a further consultation on separation of
businesses in July 1998 and to outline proposals on separation of businesses
in September 1998. The Regulator intends any revised definitions of
distribution, supply and metering responsibilities to be taken into account in
setting price controls and revising charging arrangements scheduled for 2000.
In October 1997, the UK government invited the Regulator to consider
parameters for a review of electricity trading arrangements. Such a review
would focus on the wholesale trading market for electricity within England and
Wales (the "Pool"), trading arrangements outside the Pool and price setting
mechanisms. The review was
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launched in January 1998 with an announcement that the Regulator and an
independent panel had been asked to report to the Energy Minister by July
1998. In December 1997, the UK government announced a review of energy sources
for power generation, including fuel diversity, sustainable development and
the role of coal. Representations of interested parties were submitted in mid-
February 1998. While the review is underway, the Secretary of State has
deferred decisions on most outstanding or new applications for the
construction of generating stations. An Energy Select Committee Report on the
Coal Industry issued in April 1998 recommended that such deferral, as it
relates to gas-fired generation, be lifted as soon as possible. The Trade and
Industry Select Committee is undertaking an inquiry into a number of aspects
of UK energy policy.
Yorkshire Group cannot predict the results of any of these reviews, whether
the proposals recommended in the consultation paper will be implemented or the
ultimate effects on Yorkshire or Yorkshire Group. See "The Electric Utility
Industry in Great Britain--Regulation under the Electricity Act--The
Regulator".
Pool Purchase Price Volatility; Hedging Activities
Yorkshire's supply business to Non-Franchise Supply Customers generally
involves entering into fixed price contracts to supply electricity to its
customers. Yorkshire obtains the electricity to satisfy its obligations under
such contracts primarily by purchases from the Pool. See "The Electric Utility
Industry in Great Britain". Because the price of electricity purchased from
the Pool can be volatile (due to the fact the price is set every half hour),
to the extent that Yorkshire purchases electricity from the Pool, Yorkshire is
exposed to risk arising from differences between the fixed price at which it
sells and the fluctuating prices at which it purchases electricity unless it
can effectively hedge such exposure. Although Yorkshire is currently party to
a series of contracts for differences ("CFDs") (most with terms of twelve
months) that limit such exposure, Yorkshire's ability to manage such risk at
acceptable levels will depend, in part, on the specific terms of the supply
contracts that Yorkshire enters into, Yorkshire's ability to implement and
manage an appropriate hedging strategy and the continued availability of
appropriate hedging instruments. No assurance can be given that this risk will
be effectively mitigated. In addition, under the supply price restraint
proposal published by the Regulator in October 1997 (and accepted by
Yorkshire), costs of power purchases from the Pool and related hedging
activities which are currently passed through to residential and small
business customers will no longer be automatically passed through to such
customers. See "Business--Supply Business".
Currency Risks; Hedging Transactions
Yorkshire Group's revenues generated by Yorkshire will be primarily in
pounds sterling while the interest and principal payment obligations with
respect to Junior Subordinated Debentures and the Trust Securities will be
payable in US dollars. As a result, any change in the currency exchange rate
that reduces the amount in pounds sterling obtained upon conversion of the US
dollar-based net proceeds of the Junior Subordinated Debentures and the Trust
Securities or that increases the effective principal and interest payment
obligations represented by the Junior Subordinated Debentures and the Trust
Securities upon conversion of pounds sterling-based revenues into US dollars
may, if not appropriately hedged, have a material adverse effect on Yorkshire
Group, Yorkshire Finance and the Trust or on their ability to make payments on
the Trust Securities. See "Presentation of Certain Information and Exchange
Rates" for certain information concerning the Noon Buying Rate for pounds
sterling expressed in US dollars. Although Yorkshire Group has entered into
certain transactions to hedge risks associated with exchange rate
fluctuations, there can be no assurance that any such transactions will be
successful in reducing such risks.
Working Capital Deficiency
Yorkshire Group had a working capital deficiency at December 31, 1997 of
(Pounds)1,099 million ($1,805 million), primarily as a result of the initial
financing structure of the Acquisition. This deficiency was largely
attributable to the 1997 Credit Facility (as defined under "Use of Proceeds")
which matures on July 30, 1998. For a discussion of the 1997 Credit Facility,
see Note 11, "Acquisition", to Yorkshire Group's consolidated balance sheet as
of April 1, 1997 included elsewhere in this Prospectus. Yorkshire Group has
partly refinanced the 1997 Credit Facility through the February 1998 issuances
of (Pounds)200 million of Guaranteed Eurobonds due in 2028, (Pounds)213
million of Senior Notes due 2003 and (Pounds)183 million of Senior Notes due
in 2008. It is proposed that the balance of the 1997 Credit Facility be
refinanced through the issuance of (Pounds)168 million of the Trust Securities
offered
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hereby, the potential issuance of additional senior notes, the entering into
of additional credit facilities, if available and on terms acceptable to
Yorkshire Group, and from the proceeds of the currently contemplated transfer
of Yorkshire Group's generation assets to an entity or entities other than
Yorkshire Group or its subsidiaries. Yorkshire Group is currently in
negotiations with respect to the replacement of the 1997 Credit Facility.
There can be no assurance that the balance of the 1997 Credit Facility can be
refinanced as planned. It is also possible that the terms under which the
balance of the 1997 Credit Facility is refinanced could result in an increase
in Yorkshire Group's financing costs.
FACTORS RELATING TO THE TRUST SECURITIES AND THE JUNIOR SUBORDINATED
DEBENTURES
Subordination of and Rights under the Debentures Guarantee
Yorkshire Group is a non-operating holding company, conducting substantially
all of its business through Yorkshire and its subsidiaries. Except to the
extent that Yorkshire Group may receive funds from the US Parents in the
future, Yorkshire Group will rely on dividends, indirectly, from Yorkshire to
meet its corporate expenses and outstanding obligations, including any
payments necessary pursuant to the Debentures Guarantee. Furthermore,
Yorkshire Group's obligations under the Debentures Guarantee will effectively
be subordinated to all existing and future indebtedness and liabilities of the
subsidiaries of Yorkshire Group, including Yorkshire. As a result, the rights
of holders of the Trust Securities, as beneficiaries of the Debentures
Guarantee, in respect of claims on the assets of each of Yorkshire Group's
subsidiaries upon any liquidation or administration are structurally
subordinated to, and therefore will be subject to the prior claims of, the
creditors of Yorkshire and its subsidiaries (including trade creditors),
except to the extent that Yorkshire Group may itself be a creditor with
recognized claims against Yorkshire and its subsidiaries. At December 31,
1997, the direct and indirect subsidiaries of Yorkshire Group had total
indebtedness (excluding indebtedness owed to Yorkshire Group) of approximately
(Pounds)476 million ($782 million).
Yorkshire Finance exists solely for the purpose of operating as a finance
vehicle for Yorkshire Group and its affiliates. Accordingly, Yorkshire Finance
will rely on funds from Yorkshire Group and its affiliates to meet its
corporate expenses and outstanding obligations, including payments on the
Junior Subordinated Debentures. If Yorkshire Finance does not receive such
funds from Yorkshire Group or its affiliates and Yorkshire Group does not make
payments pursuant to the Debentures Guarantee, there will not be sufficient
funds to make payments on the Junior Subordinated Debentures. If the Trust, as
holder of the Junior Subordinated Debentures, does not receive such funds, the
Trust will not have sufficient funds to pay Distributions on the Trust
Securities or amounts payable on redemption thereof or otherwise. The Trust
Securities Guarantee does not cover payment of Distributions or any such
amounts when the Trust does not have sufficient funds available to pay such
Distributions. In such event, the remedy of a holder of Trust Securities will
be to enforce its rights under the Debentures Guarantee. The Debentures
Guarantee will be an unsecured and subordinate obligation and junior in right
of payment to all present and future Senior Debt of Yorkshire Group, to the
extent and in the manner set forth in the Indenture. As of December 31, 1997,
Yorkshire Group had approximately (Pounds)1,034 million ($1,699 million)
principal amount of Senior Debt outstanding, a portion of which will be repaid
with proceeds of this offering.
There are no terms of the Trust Securities, the Trust Agreement, the
Indenture, the Junior Subordinated Debentures, the Trust Securities Guarantee
or the Debentures Guarantee that limit Yorkshire Finance's or Yorkshire
Group's ability to incur additional indebtedness, including Senior Debt. See
"Description of the Trust Securities", "Description of the Trust Securities
Guarantee", "Description of the Junior Subordinated Debentures--Subordination"
and "Description of the Debentures Guarantee".
Subordination of and Limitation of Funds Available to Trust under the Trust
Securities Guarantee
The Trust Securities Guarantee will be an unsecured and subordinate
obligation and junior in right of payment to all Senior Debt of Yorkshire
Group and will rank pari passu with the most senior preferred stock issued by
Yorkshire Group. If Yorkshire Finance does not make Interest Payments or other
payments with respect to the Junior Subordinated Debentures or Yorkshire Group
does not make payments pursuant to the Debentures Guarantee, the Trust will
have insufficient funds available to pay Distributions or amounts payable
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on redemption thereof or otherwise. In such event, holders of the Trust
Securities would not be able to rely upon the Trust Securities Guarantee for
payment of such amounts. See "Description of the Trust Securities Guarantee".
Option to Defer Payment of Interest; Potential Market Volatility During
Extension Period; Tax Consequences of Deferral
So long as no Event of Default under the Indenture has occurred and is
continuing, Yorkshire Finance has the right under the Indenture to defer
Interest Payments on the Junior Subordinated Debentures, at any time or from
time to time, for up to 20 consecutive quarters; provided, however, Yorkshire
Finance cannot defer Interest Payments beyond the Stated Maturity of the
Junior Subordinated Debentures. During such Extension Period, quarterly
Distributions on the Trust Securities would also be deferred (but would
continue to accumulate additional Distributions thereon) at the rate of %
per annum, compounded quarterly, by the Trust until all deferred Interest
Payments, together with interest thereon, have been paid in full. Further,
during an Extension Period, Yorkshire Group's obligations to make payments
under the Trust Securities Guarantee and the Debentures Guarantee will be
suspended.
During an Extension Period, neither Yorkshire Finance nor Yorkshire Group
will be permitted, subject to certain exceptions set forth herein, to (i)
declare or pay any cash distributions with respect to its capital stock, (ii)
make any payments on its debt securities that rank pari passu with or junior
to the Junior Subordinated Debentures or the Debentures Guarantee,
respectively, (iii) make any payments with respect to any guarantee that ranks
pari passu with or junior to the Junior Subordinated Debentures or the
Debentures Guarantee, respectively, or (iv) make any payments on its debt
securities held by, make any loans or advances to, or make payments with
respect to any guarantee of the debt of, any affiliate. Prior to the
termination of any such Extension Period, Yorkshire Finance may further extend
the interest payment period; provided that, such Extension Period, together
with all such previous and further extensions within such Extension Period,
may not exceed 20 consecutive quarters or the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, Yorkshire Finance may commence a new
Extension Period, subject to the above requirements. As a result, there could
be multiple Extension Periods of varying lengths throughout the term of the
Junior Subordinated Debentures. See "Description of the Trust Securities--
Distributions" and "Description of the Junior Subordinated Debentures--Option
to Defer Payment of Interest".
In the event Yorkshire Finance exercises its right to defer Interest
Payments on the Junior Subordinated Debentures, the market price of the Trust
Securities is likely to be affected. A holder that disposes of its Trust
Securities during such a deferral, therefore, might not receive the same
return on its investment as a holder that continues to hold its Trust
Securities. In addition, the market price of the Trust Securities may be more
volatile than the market prices of other securities that are not subject to
such deferrals.
In the event Yorkshire Finance exercises its rights to defer Interest
Payments on the Junior Subordinated Debentures, each holder of Trust
Securities will be required to include income in the form of OID in its gross
income for US Federal income tax purposes in respect of the deferred interest
(including interest thereon) allocable to its Trust Securities. As a result, a
holder of Trust Securities will recognize income for US Federal income tax
purposes in advance of the receipt of cash. Such holder will not receive the
cash from the Trust related to such income if such holder disposes of its
Trust Securities prior to the record date for the date on which Distributions
of such amounts are made. Such holder will increase its adjusted basis in its
Trust Securities by the amount of OID so included in income in respect of such
deferral and, to the extent that the adjusted tax basis exceeds the amount
realized on the sale or other disposition of such holder's Trust Securities,
recognize a capital loss. If the holder disposes of a Trust Security prior to
the occurrence of an Extension Period, any portion of the amount received from
the purchaser that is attributable to accrued interest will be treated as
interest income to the holder (that will only be includible as income to the
extent it previously has not been included in the holder's taxable income) and
will not be treated as part of the amount realized for purposes of determining
gain or loss on the disposition of the Trust Security. Subject to certain
limitations, capital losses cannot be applied to offset ordinary income for US
Federal income tax purposes. See "Material Income Tax Considerations--US
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Federal Income Tax Considerations--Original Issue Discount" and "--Disposition
of Trust Securities.". INVESTORS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES OF AN INVESTMENT IN THE TRUST SECURITIES.
Yorkshire Finance currently has no intention of exercising its right to
defer Interest Payments on the Junior Subordinated Debentures. Moreover,
because of the consequences of exercising such right, including a prohibition
on the payment of cash distributions by Yorkshire Finance and Yorkshire Group
with respect to their capital stock, Yorkshire Finance believes the likelihood
of such exercise is remote.
Special Event Redemption; Distribution of Junior Subordinated Debentures
Upon the occurrence and continuation of a Special Event, as described under
"Description of the Trust Securities--Redemptions--Special Event Redemption of
Junior Subordinated Debentures", Yorkshire Finance has the right to redeem the
Junior Subordinated Debentures in whole (but not in part) at the Debenture
Redemption Price, and thereby cause a mandatory redemption of the Trust
Securities, at the Redemption Price, within 90 days following the occurrence
of such Special Event.
In addition, at any time, the Control Party will have the right to dissolve
the Trust and, after satisfaction of liabilities to creditors, if any, of the
Trust as provided by applicable law, cause a Like Amount of Junior
Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. See "Description of the Trust
Securities--Distribution of Junior Subordinated Debentures".
Under current US Federal income tax law, a distribution of Junior
Subordinated Debentures upon a liquidation of the Trust would not be a taxable
event to holders of the Trust Securities. If, however, the Trust were
characterized for US Federal income tax purposes as an association taxable as
a corporation at the time of such liquidation, the distribution of the Junior
Subordinated Debentures would be a taxable event to holders of Trust
Securities. Under current US Federal income tax law, the redemption of the
Junior Subordinated Debentures upon occurrence of a Special Event or a
liquidation of the Trust in which holders of the Trust Securities receive cash
would be a taxable event to such holders. See "Material Income Tax
Considerations--US Federal Income Tax Considerations--Receipt of Junior
Subordinated Debentures or Cash in Certain Circumstances".
There can be no assurance as to the market prices for the Junior
Subordinated Debentures that may be distributed in exchange for the Trust
Securities if a liquidation of the Trust were to occur. Accordingly, the
Junior Subordinated Debentures that a holder of the Trust Securities may
receive upon liquidation of the Trust could trade at a discount to the price
that the investor paid to purchase the Trust Securities offered hereby.
Because holders of the Trust Securities may receive the Junior Subordinated
Debentures, if the Control Party exercises its right to dissolve the Trust,
prospective purchasers of the Trust Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and the Debentures
Guarantee and should carefully review all the information regarding the Junior
Subordinated Debentures and the Debentures Guarantee contained herein. See
"Description of the Junior Subordinated Debentures--Distribution of the Junior
Subordinated Debentures" and "Description of the Debentures Guarantee".
No Protection in the Event of a Change in Control, etc.
Neither holders of the Junior Subordinated Debentures nor holders of the
Trust Securities are afforded protection in the event of a highly leveraged
transaction, a change in control or other similar transactions involving
Yorkshire Finance or Yorkshire Group that may adversely affect such holders.
See "Description of the Junior Subordinated Debentures--Consolidation, Merger,
Sale of Assets and Other Transactions".
No Prior Market for the Trust Securities
The Trust Securities constitute a new issue of securities with no
established trading market. The Trust Securities have been approved for
listing on the NYSE, subject to official notice of issuance. There can be no
assurance, however, that an active market for the Trust Securities will
develop or be sustained in the future. Although the Underwriters have
indicated that they intend to make a market in the Trust Securities, as
permitted by applicable laws and regulations, they are not obligated to do so
and may discontinue any such market making at any time without notice.
Accordingly, no assurance can be given as to the liquidity of the trading
market for the Trust Securities.
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YORKSHIRE GROUP AND THE US PARENTS
YORKSHIRE GROUP
Yorkshire Group was incorporated as a private company with limited liability
under the laws of England and Wales in July 1996. In 1997, Yorkshire Group was
utilized in connection with the Acquisition by the US Parents of Yorkshire,
one of the twelve RECs in England and Wales. Yorkshire Group gained effective
control of Yorkshire on April 1, 1997. Yorkshire Group'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 Yorkshire. Yorkshire Holdings was
organized as a wholly-owned subsidiary of Yorkshire Group solely for holding
the share capital of Yorkshire and has no other significant operations.
Each of the US Parents holds an indirect 50% interest in Yorkshire Group.
AEP holds such interest through its wholly-owned subsidiary, AEP Resources.
NCE holds its 50% indirect interest in Yorkshire Group through its wholly-
owned subsidiary, NC Enterprises, Inc., a Delaware corporation, which in turn
wholly-owns New Century International.
YORKSHIRE FINANCE
Yorkshire Finance was incorporated under the laws of the Cayman Islands in
August 1997. Yorkshire Finance exists solely for the purpose of operating as a
financing vehicle for Yorkshire Group and its affiliates. Yorkshire Finance
does not, and does not expect to, prepare or publish any financial statements.
The registered office of Yorkshire Finance is P.O. Box 309, George Town, Grand
Cayman Island, British West Indies. The principal executive offices of
Yorkshire Finance are located at Wetherby Road, Scarcroft, Leeds LS14 3HS,
England, telephone number 011-44-113-289-2123.
YORKSHIRE
Yorkshire's principal businesses are the distribution of electricity to
approximately two million customers in its Franchise Area and the supply of
electricity primarily within its Franchise Area. Yorkshire generated total
operating income of (Pounds)52 million ($85 million) in Fiscal Year 1997.
During Fiscal Year 1997, however, Yorkshire recorded a (Pounds)78 million
($128 million) provision for uneconomic gas and electricity contracts and a
(Pounds)50 million ($82 million) charge for information system development
costs to prepare for the opening of the competitive electricity market in 1998
for Franchise Supply Customers (as defined herein). Excluding these charges,
total operating income would have been (Pounds)180 million ($295 million) in
Fiscal Year 1997, including (Pounds)140 million ($230 million) (78% of total)
associated with the core distribution business and (Pounds)29 million ($48
million) (16% of total) associated with the supply business. As discussed
below under "Business--Business Restructuring", beginning in 1998, Yorkshire
will operate the distribution and supply businesses as self-sufficient
businesses.
The registered office and principal executive offices of Yorkshire Group and
Yorkshire are located at Wetherby Road, Scarcroft, Leeds LS14 3HS, England,
telephone number 011-44-113-289-2123.
THE US PARENTS
AEP
AEP is an electric utility holding company registered under the 1935 Act.
AEP owns all of the outstanding common stock of AEP Generating Company,
Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan
Power Company, Kentucky Power Company, Kingsport Power Company, Ohio Power
Company and Wheeling Power Company. These eight utility subsidiaries are
engaged in the generation, purchase, transmission, distribution and sale of
electricity to over 2.9 million retail customers in portions of the states of
Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia. AEP
also owns all the outstanding common stock of AEP Resources and AEP Resources
International, Limited whose primary
28
<PAGE>
businesses are the development of, and investment in, exempt wholesale
generators, foreign utility companies, qualifying cogeneration facilities and
other power projects. In the year ended December 31, 1997, AEP generated
consolidated operating revenues of $6.2 billion and had consolidated assets of
approximately $16.6 billion.
On December 22, 1997, AEP announced the signing of a merger agreement with
Central and South West Corporation, a Dallas, Texas based electric utility
holding company that is registered under the 1935 Act ("CSW"). CSW owns four
electric operating subsidiaries serving 1.7 million customers in Texas,
Oklahoma, Louisiana and Arkansas. CSW also owns SEEBOARD plc, a REC which
serves the southeast coast of England. Under the merger agreement, each share
of CSW common stock will be converted into 0.6 share of AEP common stock.
Based on the price of AEP's common stock on December 19, 1997, the transaction
would be valued at $6.6 billion. The combined company will be named American
Electric Power Company, Inc. and will be based in Columbus, Ohio. The merger
is conditioned upon, among other things, the approvals of the shareholders of
AEP and CSW and various state and federal regulatory agencies. Assuming the
receipt of all required approvals, the merger is currently expected to be
consummated within twelve to eighteen months of its announcement.
NCE
NCE is also an electric utility holding company registered under the 1935
Act. NCE owns all the outstanding common stock of Public Service Company of
Colorado, Cheyenne Light, Fuel and Power Company and Southwestern Public
Service Company, which serve approximately 1.6 million retail electric
customers in portions of the states of Colorado, Texas, New Mexico, Oklahoma,
Kansas and Wyoming and approximately 1 million retail gas customers in
portions of the states of Colorado and Wyoming. These three electric and gas
utility subsidiaries are principally engaged in the generation, purchase,
transmission, distribution and sale of electricity and in the purchase,
transmission, distribution, sale and transportation of natural gas. In the
year ended December 31, 1997, NCE generated consolidated operating revenues of
$3.3 billion and had consolidated assets of approximately $7.3 billion.
29
<PAGE>
The following organizational chart illustrates the ownership structure of
Yorkshire, Yorkshire Group, Yorkshire Finance and the Trust:
[LOGO]
New Century
Energies, Inc.
("NCE")
American Electric
Power Company, Inc. NC
("AEP") Enterprises, Inc.
AEP Resources, Inc. New Century
("AEP Resources") International, Inc.
50% 50%
Yorkshire Power Group Limited
("Yorkshire Group") Trust
Securities
Guarantee
Debentures
Guarantee
Yorkshire Holdings The Control Yorkshire Power
plc Party Finance Limited
("Yorkshire Holdings") ("Yorkshire Finance")
ARROW UP
$
ARROW UP ARROW DOWN
Yorkshire Electricity Junior
Group plc Control Subordinated
("Yorkshire") Certificate Debentures
ARROW DOWN
Yorkshire Capital Trust I
(the "Trust")
ARROW UP
$ ARROW DOWN
ARROW DOWN
Holders Trust
Securities
30
<PAGE>
YORKSHIRE CAPITAL TRUST I
The 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. The Trust's business is defined in a trust agreement,
executed by AEP Resources, as Depositor, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware trustee, and Stephan T.
Haynes, as initial Administrative Trustee thereunder. This trust agreement
will be amended and restated in its entirety prior to the issuance of the
Trust Securities. The Trust exists for the exclusive purposes of (i) issuing
and selling the Trust Securities representing undivided beneficial interests
in the assets of the Trust, (ii) investing the gross proceeds of the Trust
Securities in the Junior Subordinated Debentures and (iii) engaging in only
those other activities necessary, appropriate, convenient or incidental
thereto. The Trust will terminate on , 2043, but may dissolve earlier, as
provided in the Trust Agreement.
Promptly after its creation, the Trust issued the Control Certificate to AEP
Resources for a nominal amount. AEP Resources transferred such Control
Certificate to Yorkshire Group. Yorkshire Group, in turn, will transfer such
Control Certificate to the Control Party. By holding the Control Certificate,
the Control Party will retain administrative and appointment power with
respect to the Trust. In certain circumstances, the holders of a majority in
liquidation amount of the Trust Securities will be entitled to appoint a
substitute Property Trustee. See "Description of the Trust Securities--Voting
Rights; Amendment of Trust Agreement".
The Trust's business and affairs will be conducted by the Securities
Trustees. Four employees of the US Parents initially will serve as
Administrative Trustees. The Bank of New York will serve as Property Trustee.
The Bank of New York (Delaware) will serve as Delaware Trustee.
The Property Trustee will hold the Book-Entry Interests (as defined under
"Description of the Junior Subordinated Debentures--Form, Book-Entry
Procedures and Transfer"), representing a 100% beneficial interest in the
Junior Subordinated Debentures, for the benefit of the Trust and the holders
of the Trust Securities and accordingly will have the power to exercise all
rights, powers and privileges under the Deposit Agreement (as defined under
"Description of the Junior Subordinated Debentures--Form, Book-Entry
Procedures and Transfer") and, indirectly, under the Indenture. The Property
Trustee will make payments of Distributions and payments on liquidation,
redemption and otherwise to the holders of the Trust Securities. Subject to
the right of the holders of the Trust Securities to appoint a substitute
Property Trustee in certain instances the Control Party as the holder of the
Control Certificate, will have the right to appoint, remove or replace all the
Securities Trustees.
The Junior Subordinated Debentures will constitute substantially all of the
assets of the Trust. Other assets that may constitute property of the Trust
include any cash on deposit in, or owing to, the payment account as
established under the Trust Agreement. In addition, the Trust may, from time
to time, receive cash pursuant to the Agreement as to Expenses and
Liabilities.
The rights of the holders of the Trust Securities, including economic
rights, rights to information and voting rights, are as set forth in the Trust
Agreement, the Delaware Business Trust Act and the Trust Indenture Act of
1939, as amended (the "1939 Act"). See "Description of the Trust Securities".
The principal place of business of the Trust is c/o American Electric Power
Service Corporation, 1 Riverside Plaza, Columbus, Ohio 43215, telephone 614-
223-1000, Attn: Corporate Finance Director.
US ACCOUNTING TREATMENT
For US financial reporting purposes, the Trust will be treated as a
subsidiary of Yorkshire Group and, accordingly, the accounts of the Trust will
be included in the consolidated financial statements of Yorkshire Group. The
Trust Securities will be presented as a separate line item in the consolidated
balance sheet of Yorkshire Group entitled "Company-Obligated Mandatorily
Redeemable Trust Securities of Subsidiary Holding Solely Junior Subordinated
Deferrable Interest Debentures" and appropriate disclosures about the Trust
Securities, the Trust Securities Guarantee, the Debentures Guarantee and the
Junior Subordinated Debentures will be included in the notes to the
consolidated financial statements. For financial reporting purposes, Yorkshire
Group will record Distributions payable on the Trust Securities as an expense.
31
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of the Trust Securities will be invested
by the Trust in the Junior Subordinated Debentures issued by Yorkshire Finance
to the Trust. In turn, Yorkshire Finance will loan the net proceeds to
Yorkshire Group and certain of its affiliates with such loans to be evidenced
by the Intercompany Notes. Such proceeds will be used for the working capital
of certain affiliates, and for the repayment of approximately (Pounds)162
million ($265 million) of Yorkshire Group's indebtedness under the Credit
Facility, dated July 31, 1997, between Yorkshire Group and Union Bank of
Switzerland (the "1997 Credit Facility"), which, at December 31, 1997, had an
outstanding balance of (Pounds)1,034 million ($1,699 million) and bore
interest at rates between 7.49% and 7.57%. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
CAPITALIZATION
The following table sets forth, at December 31, 1997 (i) the actual
consolidated capitalization of Yorkshire Group and (ii) the consolidated
capitalization of Yorkshire Group adjusted to reflect (A) the issuance of the
Trust Securities offered hereby and the application of the net proceeds
thereof, as described under "Use of Proceeds", (B) the issuance in February
1998 of (Pounds)200 million ($328 million) aggregate principal amount of
Yorkshire Finance's 7.25% Guaranteed Bonds due 2028 (the "Guaranteed
Eurobonds"), unconditionally and irrevocably guaranteed by Yorkshire Group,
and the application of the net proceeds thereof to reduce amounts outstanding
under the 1997 Credit Facility and (C) the issuance in February 1998 of
$350,000,000 aggregate principal amount of Yorkshire Finance's 6.154% Senior
Notes due 2003 (the "2003 Notes") and $300,000,000 aggregate principal amount
of Yorkshire Finance's 6.496% Senior Notes due 2008 (the "2008 Notes" and,
together with the 2003 Notes, the "Senior Notes"), each series unconditionally
and irrevocably guaranteed by Yorkshire Group, and the application of the net
proceeds thereof to reduce amounts outstanding under the 1997 Credit Facility.
This table should be read in conjunction with "Selected Consolidated Financial
Data", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
ACTUAL AS ADJUSTED
------------------------ ------------------------
(Pounds) $(1) % (Pounds) $(1) %
(AMOUNTS IN MILLIONS, EXCEPT %)
<S> <C> <C> <C> <C> <C> <C>
Capitalization:
1997 Credit Facility....... (Pounds)1,034 $1,699 56% (Pounds) 281 $ 461 15%
Other short-term debt...... 47 77 2 47 77 3
Long-term debt:
European Investment
Bank.................... 69 113 4 69 113 4
Eurobonds................ 359 590 20 359 590 19
Senior Notes............. -- -- -- 396 650 21
Guaranteed Eurobonds..... -- -- -- 200 328 11
Other debt............... 1 2 * 1 2 *
Company-obligated
Mandatorily Redeemable
Trust Securities of
Subsidiary Holding Solely
Junior Subordinated
Deferrable Interest
Debentures(2)............. -- -- -- 168 275 9
Total shareholders'
equity.................... 330 542 18 330 542 18
------------- ------ --- ------------- ------ ---
Total capitalization....... (Pounds)1,840 $3,023 100% (Pounds)1,851 $3,038 100%
============= ====== === ============= ====== ===
</TABLE>
- --------
(1) Solely for convenience of the reader, UK pounds sterling amounts have
been translated into US dollars at the Noon Buying Rate on December 31,
1997 of $1.64 = (Pounds) 1. See "Presentation of Certain Information and
Exchange Rates".
(2) As described under "Yorkshire Capital Trust I", substantially all of the
Trust's assets will consist of $275,000,000 aggregate principal amount of
Yorkshire Finance's % Junior Subordinated Deferrable Interest
Debentures, Series A due , 2038.
* Less than 1%.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated income statement data, other consolidated data and certain
business segment data of the Predecessor Company for each of the five Fiscal
Years ended March 31, 1997 and the consolidated balance sheet data and certain
business segment data of the Predecessor Company at the end of each such
Fiscal Year presented below have been derived from the audited consolidated
financial statements of the Predecessor Company. The consolidated balance
sheet data and certain business segment data of the Successor Company as of
April 1, 1997 presented below have been derived from the audited consolidated
balance sheet of the Successor Company. The consolidated income statement
data, other consolidated data and certain business segment data for the nine
months ended December 31, 1997 and 1996 of the Successor Company and the
Predecessor Company presented below have been derived from the condensed
unaudited consolidated financial statements of the Successor Company and the
Predecessor Company, respectively. The consolidated balance sheet data and
certain business segment data at December 31, 1997 of the Successor Company
presented below have been derived from the condensed unaudited consolidated
financial statements of the Successor Company. In the opinion of the
management of Yorkshire Group, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation of the
condensed unaudited consolidated financial statements have been included and
the accompanying condensed unaudited consolidated financial statements present
fairly the financial position and the results of operations for the interim
periods presented. The selected consolidated financial data presented below
that were derived from the audited consolidated financial statements of the
Predecessor Company and the Successor Company have been prepared in accordance
with US GAAP and audited by Deloitte & Touche. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and notes thereto of the Predecessor Company
and the Successor Company included elsewhere in this Prospectus.
The unaudited pro forma consolidated income statement data for the Successor
Company for Fiscal Year 1997 presented below reflect the Acquisition as if it
had occurred as of April 1, 1996. Such data have been prepared by the
Successor Company based upon assumptions deemed proper in accordance with the
purchase method of accounting for business combinations and have been adjusted
to reflect (i) interest expense of (Pounds)74 million incurred as a result of
the financing of the Acquisition, (ii) amortization of (Pounds)24 million
related to goodwill recorded in connection with the Acquisition, (iii)
additional depreciation expense of (Pounds)6 million as a result of the
revaluation of certain fixed assets in connection with the Acquisition and
(iv) removal of the effect of recording the provision of (Pounds)78 million
for certain uneconomic gas and electricity contracts, the loss of (Pounds)7
million on certain interest rate swap agreements and the write-down of
(Pounds)6 million relating to non-operational property. Such data are shown
for illustrative purposes only and are not necessarily indicative of the
future results of operations of the Successor Company or of the results of
operations of the Successor Company that would have actually occurred had the
Acquisition occurred at the beginning of the period presented. Such data
should be read in conjunction with the unaudited pro forma consolidated
statement of income and notes thereto of the Successor Company included
elsewhere in this Prospectus.
33
<PAGE>
PREDECESSOR COMPANY
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DA-
TA:
Operating revenues.............. 1,325 1,308 1,464 1,431 1,331
Operating income (1)............ 146 156 215 214 52
Other income (loss), net (2).... 15 (8) 16 313 20
Interest expense, net........... (7) (5) (12) (20) (33)
Provision for income taxes (3).. (54) (50) (78) (114) (13)
----- ----- ----- ----- -----
Net income...................... 100 93 141 393 26
===== ===== ===== ===== =====
<CAPTION>
MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Fixed assets.................... 613 701 747 769 796
Total assets.................... 1,214 1,241 1,367 1,408 1,375
Total shareholders' equity...... 561 612 517 399 359
Long-term debt.................. 104 126 305 424 419
Short-term debt and current por-
tion of long-term debt......... 217 99 91 90 87
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT (4)........................ 161 148 231 527 72
EBITDA (4)...................... 193 182 272 569 122
Cash flow from operations....... 187 237 201 222 96
Cash used in investing activi-
ties........................... (137) (201) (101) (8) (51)
Cash provided by (used in) fi-
nancing activities............. 129 (139) (67) (114) (76)
Ratio of earnings to fixed
charges (5).................... 6.6 6.8 10.5 12.0 1.8
</TABLE>
34
<PAGE>
SUCCESSOR COMPANY
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ ---------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ -------- ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
DATA:
Operating revenues............. 1,331 2,183 974 909 1,493
Operating income (1)........... 106 174 120 123 202
Other income, net (2).......... 20 33 17 2 3
Interest expense, net.......... (100) (164) (20) (78) (128)
Provision for income taxes..... (17) (28) (40) (5) (8)
----- ----- --- ------ ------
Income before extraordinary
item.......................... 9 15 77 42 69
Extraordinary item (7)......... -- -- -- (134) (220)
----- ----- --- ------ ------
Net income (loss).............. 9 15 77 (92) (151)
===== ===== === ====== ======
<CAPTION>
SUCCESSOR SUCCESSOR
APRIL 1, DECEMBER 31,
1997 1997
-------------- ---------------
(Pounds) $(6) (Pounds) $(6)
-------- ----- -------- ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Fixed assets................... 939 1,540 1,001 1,644
Total assets................... 2,591 4,249 2,522 4,143
Total shareholders' equity..... -- -- 330 542
Long-term debt................. 433 710 429 705
Accrued liability to purchase
Yorkshire..................... 1,496 2,453 -- --
Short-term debt and current
portion of long-term debt..... 87 143 1,081 1,776
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ ---------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ -------- ------
(AMOUNTS IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED DATA:
EBIT before extraordinary item
(4)(7)........................ 126 207 137 125 205
EBITDA before extraordinary
item (4)(7)................... 206 338 169 183 300
Cash flow from operations...... 149 63 103
Cash used in investing activi-
ties.......................... (99) (1,575) (2,586)
Cash provided by (used in) fi-
nancing activities............ (49) 1,409 2,314
Ratio of earnings to fixed
charges (5)................... 1.2 4.6 1.5
</TABLE>
35
<PAGE>
PREDECESSOR COMPANY
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Distribution.................... 332 348 362 334 308
Supply.......................... 1,206 1,220 1,343 1,309 1,178
Other........................... 182 162 162 163 172
Intrabusiness eliminations (8).. (395) (422) (403) (375) (327)
----- ----- ----- ----- -----
1,325 1,308 1,464 1,431 1,331
===== ===== ===== ===== =====
OPERATING INCOME (LOSS):
Distribution.................... 135 133 176 164 127
Supply (1)...................... 10 14 23 30 (132)
Other........................... 1 9 16 20 10
Intrabusiness eliminations
(1)(8)......................... -- -- -- -- 47
----- ----- ----- ----- -----
146 156 215 214 52
===== ===== ===== ===== =====
<CAPTION>
MARCH 31,
--------------------------------------------
1993 1994 1995 1996 1997
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS:
Distribution.................... 476 513 556 589 643
Supply.......................... 177 161 198 212 178
Other and unallocated........... 561 567 613 607 554
----- ----- ----- ----- -----
1,214 1,241 1,367 1,408 1,375
===== ===== ===== ===== =====
</TABLE>
36
<PAGE>
SUCCESSOR COMPANY
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
SUCCESSOR NINE MONTHS NINE MONTHS
PRO FORMA ENDED ENDED
FISCAL YEAR DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------- ------------ --------------
(Pounds) $(6) (Pounds) (Pounds) $(6)
-------- ----- ------------ -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Distribution..................... 308 505 225 224 368
Supply........................... 1,178 1,932 868 799 1,312
Other............................ 172 282 136 141 232
Intrabusiness eliminations(8).... (327) (536) (255) (255) (419)
----- ----- ---- ----- -----
1,331 2,183 974 909 1,493
===== ===== ==== ===== =====
OPERATING INCOME (LOSS):
Distribution..................... 97 159 99 89 146
Supply(1)........................ (7) (11) 1 14 23
Other............................ 16 26 20 20 33
----- ----- ---- ----- -----
106 174 120 123 202
===== ===== ==== ===== =====
<CAPTION>
SUCCESSOR
SUCCESSOR DECEMBER 31,
APRIL 1, 1997 1997
-------------- --------------
(Pounds) $(6) (Pounds) $(6)
-------- ----- -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS:
Distribution..................... 1,802 2,955 1,754 2,881
Supply........................... 187 307 180 296
Other and unallocated............ 602 987 588 966
----- ----- ----- -----
2,591 4,249 2,522 4,143
===== ===== ===== =====
</TABLE>
37
<PAGE>
(1)Notable operating expenses include:
Fiscal Year 1997--(i) a provision of (Pounds)78 million for uneconomic gas
and electricity contracts (the effect of which is removed from the
Successor Company's unaudited pro forma consolidated statement of income
for Fiscal Year 1997), which resulted in a charge of (Pounds)125 million to
the supply business offset by an intrabusiness elimination of (Pounds)47
million and (ii) a charge of (Pounds)50 million for information system
development costs to prepare for the opening of the competitive electricity
market in 1998 for Franchise Supply Customers, of which (Pounds)37 million
was charged to the supply business and (Pounds)13 million was charged to
the distribution business.
Fiscal Years 1993, 1994 and 1995--reorganization costs of (Pounds)18
million, (Pounds)44 million and (Pounds)8 million, respectively.
(2) Other income (loss) principally represents income from Yorkshire's
investment in NGG and, in Fiscal Year 1996, a gain resulting from the NGG
Transaction and earnings and losses from Yorkshire's investments in joint
ventures and minority holdings. Notable items include:
Fiscal Year 1997--gain on sale of Yorkshire's investment in Torch Telecom
of (Pounds)15 million.
Fiscal Year 1996--income from investment in NGG and gain in respect of the
NGG Transaction as described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction--NGG
Transaction".
Fiscal Year 1995--one-time termination payment received from Stockholm
Stadhus AB of (Pounds)17 million.
Fiscal Year 1994--loss on sale of Yorkshire's investment in Homepower
Retail Limited of (Pounds)18 million.
(3) Fiscal Year 1996 includes a tax charge of (Pounds)38 million relating to
the NGG Transaction.
(4) EBIT represents income before the sum of interest expense and income
taxes. EBITDA represents income before the sum of interest expense, income
taxes, depreciation and amortization. EBIT and EBITDA are provided for
informational purposes only and such measures should not be construed as
alternatives to operating income (as determined in accordance with US
GAAP) as indicators of operating performance, or as alternatives to cash
flows from operating activities (as determined in accordance with US GAAP)
as measures of liquidity. EBIT and EBITDA are widely accepted financial
indicators of a company's ability to incur and service debt. However, the
measures of EBIT and EBITDA presented herein may not be comparable to
similar measures presented by other companies.
(5) The ratio of earnings to fixed charges is computed as the sum of pre-tax
income (before extraordinary item), plus fixed charges divided by fixed
charges. Fixed charges consist of interest expense and amortization of
debt expense.
(6) Solely for the convenience of the reader, pounds sterling amounts have
been translated into US dollar amounts at the Noon Buying Rate on December
31, 1997 of $1.64 = (Pounds)1. See "Presentation of Certain Information
and Exchange Rates".
(7) Represents the windfall tax imposed by the UK government, which was not
deductible for UK corporation tax purposes.
(8) Intrabusiness eliminations consist primarily of intracompany transactions
between the distribution business and the supply business and
interbusiness transactions between ancillary businesses. Pursuant to the
UK regulatory framework, charges by the distribution business for
electricity in respect of supply customers in the Franchise Area are
billed to the supply business, which in turn incorporates the distribution
charge into the bill sent to the final end user.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
and condensed consolidated financial statements and the notes thereto of the
Successor Company and with the consolidated and condensed financial statements
and the notes thereto of the Predecessor Company and "Selected Consolidated
Financial Data" included elsewhere in this Prospectus. The consolidated and
condensed financial statements of the Successor Company and the Predecessor
Company discussed herein are presented in accordance with US GAAP.
INTRODUCTION
Background
Yorkshire Group is indirectly equally owned by AEP and NCE. Yorkshire Group
was incorporated as a limited company under the laws of England and Wales in
July 1996. Effective April 1, 1997, Yorkshire Group, through its wholly owned
subsidiary Yorkshire Holdings, gained effective control of Yorkshire.
Yorkshire Group's primary asset is the stock of Yorkshire Holdings. Yorkshire
Holdings, which owns all the outstanding stock of Yorkshire, has no
significant operations outside of its investment in Yorkshire.
Financing the Acquisition
Yorkshire Group indirectly acquired ownership of Yorkshire by means of a
cash offer commenced on February 24, 1997 and declared wholly unconditional on
April 1, 1997. The Acquisition was completed through the payment of cash
consideration of (Pounds)1,457 million and the issuance of loan notes in the
amount of (Pounds)22 million. The total consideration, including acquisition
costs, was (Pounds)1,496 million. The Acquisition was financed by cash
contributions of (Pounds)220 million from each of AEP and NCE and from
borrowings under a (Pounds)1,140 million five year term loan and revolving
facility agreement dated February 24, 1997. On July 31, 1997, this term loan
and revolving facility agreement was replaced by the 1997 Credit Facility.
Accounting for the Acquisition
The recorded assets and liabilities of Yorkshire at March 31, 1997 were
(Pounds)1,375 million and (Pounds)1,016 million, respectively. In accordance
with the purchase method of accounting, the assets and liabilities acquired
have been recorded based on an allocation of the purchase price. The final
purchase price allocation report has not yet been completed. However, the
Successor Company does not anticipate any material changes based on currently
available information. Effective April 1, 1997, Yorkshire's assets were
increased by (Pounds)222 million to their fair value of (Pounds)1,597 million,
reflecting principally: (a) an increase of (Pounds)138 million in the value of
Yorkshire's distribution network in excess of its depreciated cost basis; (b)
an increase in the pension asset for the defined benefit pension plan of
(Pounds)55 million; and (c) an increase in the value of an equity investment
in Ionica Group plc ("Ionica") of (Pounds)23 million. Yorkshire's liabilities
were increased by (Pounds)79 million to their fair value of (Pounds)1,095
million, reflecting principally: (a) an increase in the deferred tax liability
of (Pounds)67 million; and (b) an increase of (Pounds)14 million in the market
value of long-term borrowings. The excess of the purchase price plus
Acquisition costs, totalling (Pounds)1,496 million, over the fair value of
assets acquired net of liabilities assumed, totalling (Pounds)502 million,
resulted in goodwill of (Pounds)994 million which is being amortized over a 40
year period. The consolidated financial statements of the Predecessor Company
discussed below do not reflect the foregoing adjustments.
NGG Transaction
During Fiscal Year 1996, Yorkshire, together with the other 11 RECs in the
UK, distributed the majority of its shares in NGG to its shareholders. This
transaction, together with certain related transactions (collectively, the
"NGG Transaction"), had a material impact on Yorkshire's financial results for
that year. The related transactions included: (a) Yorkshire's receipt of
special and ordinary dividends; (b) the receipt by each Yorkshire residential
customer of a one-time discount pursuant to an agreement among the
shareholders of NGG; and
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<PAGE>
(c) Yorkshire's receipt of an in-kind dividend of approximately 9.2% of the
shares of PSB Holdings Limited ("PSB"), the holding company of First Hydro
Limited, which shares were subsequently converted to cash upon PSB's
liquidation.
SIGNIFICANT FACTORS AND KNOWN TRENDS
Competition and Industry Challenges
On April 1, 1995 and 1996, certain reductions in allowed distribution
revenues were made by the Regulator. Yorkshire's allowed distribution revenues
were impacted by a 14% below inflation reduction and a 13% below inflation
reduction on April 1, 1995 and 1996, respectively, following reviews by the
Regulator. On April 1, 1997 and April 1, 1998, Yorkshire's allowed
distribution revenues were decreased by an additional 3% below inflation
reduction, and there will be a further 3% below inflation reduction on April
1, 1999.
The potential exists for additional distribution price reductions based upon
further review by the Regulator. The next scheduled Distribution Price Control
Formula review will be in 2000. Future cost efficiency initiatives may not
result in sufficient savings to offset price reductions. Price reductions are
mitigated by the inclusion of the UK Retail Price Index in the determination
of the Distribution Price Control Formula. Because the maximum average price
in any year is based in part on the maximum average price in the preceding
year, a price reduction in any given year has an ongoing effect on the maximum
average price for all subsequent years. See "The Electric Utility Industry in
Great Britain--Distribution of Electricity--Price Control".
Yorkshire currently has an exclusive right to supply electricity to its
Franchise Supply Customers. Competition in supply to such customers was
scheduled to be phased in over a six month period commencing on April 1, 1998.
In October 1997, the Regulator published proposals for new transitional supply
price restraints to apply from April 1, 1998 to residential and small business
customers for an initial period of two years and until an adequate level of
competition is established. Yorkshire subsequently indicated its acceptance of
such proposals. The proposals (when taken together with the reduction in the
Fossil Fuel Levy, which became effective on April 1, 1998) resulted in the
implementation of small reductions, effective April 1, 1998, in the tariffs
for Yorkshire's residential and small business customers in its Franchise Area
compared to the corresponding tariffs in effect in August 1997. The proposals
also require an additional 3% below inflation reduction effective April 1,
1999. See "The Electric Utility Industry in Great Britain--Supply of
Electricity--Price Regulation".
Following an announcement in January 1998 by the Regulator, competition in
supply to Franchise Supply Customers has been delayed until September 1998.
Assuming that such competition starts as currently scheduled in September 1998
for Franchise Supply Customers, Yorkshire Group presently estimates that costs
totalling (Pounds)75 million will have been incurred for re-engineering and
information technology work. Of such amount, approximately (Pounds)19 million
was expensed in Fiscal Year 1997. The Regulator has made proposals (which have
been accepted by Yorkshire) to allow Yorkshire recovery of (Pounds)23 million
over a five year period ending March 31, 2003. A further (Pounds)7 million is
expected to be recovered through Pool cost recovery and other national
mechanisms and (Pounds)8 million is expected to be capitalized as such amount
is expected to provide future benefits to the supply business. As a result of
the above, the residual amount of approximately (Pounds)18 million, which will
not be recovered or capitalized, will be expensed in Fiscal Years 1998 and
1999 as incurred.
The Regulator has also made proposals (which have been accepted by
Yorkshire) to provide an annual allowance of (Pounds)3 million for the period
1998 through 2000 to cover operating costs. The allowance will be reviewed at
the time of the Distribution Price Formula Control review in 2000.
The October 1997 proposals therefore will allow Yorkshire to recover up to
50% of its forecasted set-up and operating costs over a five year period. The
shortfall could be higher if: (i) operating costs are higher than anticipated
(e.g., there is a higher level of customer activity); (ii) recovery of
operating costs is disallowed or reduced when the Distribution Price Control
Formula is reviewed for the period beginning April 1, 2000; or (iii) the
integrated national systems do not work as contemplated or require substantial
redevelopment.
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<PAGE>
The Regulator's proposals also provided that a REC should be penalized: (i)
where it starts to open its market more than three months after the market
opening by the first REC; (ii) where it opens successive tranches of its
market more than three months after the opening of the corresponding tranche
by the first REC; and (iii) where the market opening of the first REC has been
delayed beyond April 1, 1998. The penalties will be calculated at 1% of the
operating revenues of the supply business for Franchise Supply Customers per
month of delay, weighted by the proportion of customers affected and applied
as a reduction in allowed distribution business income. If Yorkshire does not
open its market for Franchise Supply Customers to competition until after
April 1, 1999, it would incur a penalty of approximately (Pounds)6 million. It
is now apparent that some penalty will be incurred due to the delay in the
opening of the competitive market for Franchise Supply Customers until
September 1998. Yorkshire Group expects that Yorkshire will be prepared to
open its Franchise Area to such competition in September 1998.
Factors Affecting Revenues
Two principal factors determine the amount of revenues produced by the
distribution business: the unit price of electricity distributed (which is
controlled by the Distribution Price Control Formula) and the number of
electricity units distributed (which depends upon customer demands as
influenced in part by economic activity and weather conditions).
Two principal factors determine the amount of revenues produced by the
supply business: the unit price of the electricity supplied (which, in the
case of the Franchise Supply Customers, is controlled by the Supply Price
Control Formula) and the number of electricity units supplied. Yorkshire is
currently expected to have the exclusive right to supply all Franchise Supply
Customers in its Franchise Area until September 1998.
UK Tax Law Changes
On July 2, 1997, the UK government enacted certain changes in tax law,
including a one-time windfall tax on privatized industries and a reduction in
rates of corporation tax on income from 33% to 31%. The windfall tax on
Yorkshire is (Pounds)134 million and will not be deductible for UK corporation
tax purposes. The windfall tax has been recorded as an extraordinary charge in
the nine month period ended December 31, 1997. The tax is payable in two equal
installments on December 1, 1997 and 1998. During the nine month period ended
December 31, 1997, Yorkshire Group estimated the impact of the reduction in
corporation tax rates, which resulted in a one-time reduction in deferred
income tax liabilities and a corresponding reduction in income tax expense of
approximately (Pounds)12 million.
Business Restructuring
In December 1997, Yorkshire announced a planned business restructuring
intended to enable it to meet increased competition and react to potential
regulatory developments in the energy markets in the UK. The restructuring
will result in the distribution and supply businesses becoming self-sufficient
businesses. As part of the restructuring, an alternative ownership structure
will be pursued for the generation business. Yorkshire currently contemplates
transferring such assets to an entity or entities other than Yorkshire Group
or its subsidiaries. It is expected that proceeds from the transfer of these
assets will be used to reduce debt of Yorkshire Group. See "Certain
Relationships and Related Transactions".
Total assets less current liabilities employed by the generation business at
December 31, 1997 were (Pounds)168 million. Operating income attributable to
the generation business in the nine months ended December 31, 1997 was
(Pounds)12 million.
As a result of this restructuring, approximately 160 positions will be
eliminated. A provision of approximately (Pounds)10 million was recorded in
the nine month period ended December 31, 1997 to reflect the cost of these
workforce reductions.
41
<PAGE>
Investment in Ionica
Yorkshire has an equity investment in Ionica, a telecommunications company.
The holding in Ionica was initially included in Yorkshire Group's consolidated
balance sheet at its fair value at acquisition on April 1, 1997 of (Pounds)54
million, plus a subsequent additional investment of (Pounds)1 million.
Following an announcement in November 1997 by Ionica of a temporary delay in
its roll out program due to problems in upgrading software, the fair value of
Yorkshire Group's investment in Ionica decreased to (Pounds)30 million at
December 31, 1997. At April 30, 1998, the fair value of Yorkshire Group's
investment in Ionica was valued at (Pounds)19 million ($31 million). This
reduction below the recorded book value has not been included as a charge
against earnings in Yorkshire Group's consolidated financial statements
included in this Prospectus as such diminution in value is not considered
permanent. For a description of certain recent developments adversely
affecting Yorkshire Group's investment in Ionica, see "Summary--Recent
Developments".
Derivative Financial Instruments and Interest Rates
Derivative financial instruments are used by Yorkshire on a limited basis
and are utilized only to mitigate business risks and not for speculative
purposes.
Yorkshire Group maintains its cash balances in pounds sterling. However,
Yorkshire Group's obligations related to the issuance of the Senior Notes will
be payable in US dollars. Yorkshire Group is not currently engaged in any
hedging of currency risks, although it expects to utilize derivative financial
instruments to hedge a portion of the currency risks associated with this
exposure.
Changes in interest rates have not had a significant impact on Yorkshire in
the last three years. However, Yorkshire has entered into debt facilities
which bear interest at variable rates. As part of its risk management policy
and to mitigate the effects of interest rate changes, Yorkshire Group enters
into interest rate swap agreements under which counterparties have agreed to
pay amounts to Yorkshire Group equal to variable interest obligations in
consideration of amounts payable by Yorkshire Group equivalent to fixed rates
of interest. If the counterparty to the interest rate swap was to default on
contractual payments, Yorkshire Group could be exposed to increased costs
related to replacing the original agreement. See Note 7, "Financial
Instruments", to Yorkshire's consolidated financial statements for the three
years ended March 31, 1997 and Note 6, "Interest Rate Swaps", to Yorkshire
Group's condensed consolidated financial statements for the nine months ended
December 31, 1997 included elsewhere in this Prospectus for additional
information on such agreements.
Environmental Factors
Yorkshire's businesses are subject to numerous regulatory requirements with
respect to the protection of the environment. The principal laws which have
environmental implications for Yorkshire are the Electricity Act, the
Environmental Protection Act 1990, the New Road and Street Works Act 1991 and
the Environment Act 1995. Yorkshire believes that it has taken, and intends to
continue taking, measures to comply with the applicable law and government
regulations for the protection of the environment. There are no material legal
or administrative proceedings pending against Yorkshire with respect to any
environmental matter.
Inflation
Inflation neither has had a significant impact on Yorkshire in the last
three years, nor is expected to do so in the foreseeable future. Yorkshire's
revenues from regulated activities are adjusted based on factors which include
an index for inflation in costs of operations.
Year 2000 Issues
Yorkshire Group is currently evaluating its business systems and processes
to determine the extent to which modifications are required to prevent
problems related to the year 2000, and the resources which will be required to
make such modifications. Yorkshire Group has established a dedicated team to
coordinate and control all date conformity work within a structured program
framework. Yorkshire Group estimates that the costs associated with year 2000
modifications will be approximately (Pounds)26 million, of which (Pounds)17
million will be expensed as incurred, and (Pounds)9 million will be
capitalized.
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<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended December 31, 1997 for the Successor Company Compared with
Nine Months Ended December 31, 1996 for the Predecessor Company
Earnings
Income from operations increased by (Pounds)3 million (3%) from (Pounds)120
million for the nine months ended December 31, 1996 to (Pounds)123 million for
the nine months ended December 31, 1997. This increase was principally due to
a decrease in net periodic pension costs of (Pounds)9 million, due to an
increase in the market value of the pension fund, other cost savings, and a
(Pounds)24 million charge in the nine months ended December 31, 1996 relating
to the replacement of billing and debt collection systems partially offset by
a provision of (Pounds)10 million for restructuring costs, amortization of
goodwill of (Pounds)18 million and additional depreciation of (Pounds)5
million arising from the revaluation of distribution network assets in
connection with the Acquisition.
Income from operations by segments for the nine months ended December 31,
1997 was (Pounds)89 million, (Pounds)14 million and (Pounds)20 million for the
distribution, supply and other segments, respectively. Income from those
segments in the nine months ended December 31, 1996 was (Pounds)99 million,
(Pounds)1 million and (Pounds)20 million, respectively.
Net interest expense rose from (Pounds)20 million for the nine months ended
December 31, 1996 to (Pounds)78 million for the nine months ended December 31,
1997 principally as a result of the financing costs associated with the
increased amount of debt incurred in connection with the Acquisition.
Net income decreased by (Pounds)169 million, from (Pounds)77 million in the
nine months ended December 31, 1996 due to a loss of (Pounds)92 million in the
nine months ended December 31, 1997. In addition to the variances discussed
above, the net loss for the nine months ended December 31, 1997 includes an
extraordinary charge of (Pounds)134 million for the windfall tax enacted by
the UK government in July 1997. The windfall tax is not deductible for UK
corporation tax purposes. Net income before this extraordinary charge for the
nine months ended December 31, 1997 was (Pounds)42 million.
Revenues
Operating revenues decreased by (Pounds)65 million (7%) from (Pounds)974
million in the nine months ended December 31, 1996 to (Pounds)909 million
during the nine months ended December 31, 1997 as follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM NINE MONTHS ENDED
DECEMBER 31, 1996
TO NINE MONTHS ENDED
DECEMBER 31, 1997
----------------------
(Pounds) MILLIONS
<S> <C>
Distribution........................................ (1)
Supply.............................................. (69)
Other............................................... 5
---
Total operating revenues.......................... (65)
===
</TABLE>
Revenues from the distribution business decreased by (Pounds)1 million from
(Pounds)225 million for the nine months ended December 31, 1996 to (Pounds)224
million for the nine months ended December 31, 1997 due to a decrease in the
maximum allowable average price of units distributed as a result of the
application of the revised Distribution Price Control Formula. Units
distributed increased by 1% in the nine months ended December 31, 1997
partially offsetting such decrease.
Franchise Supply Customers, who are generally residential and small
commercial customers, comprised 51% of total sales volume for the nine months
ended December 31, 1997. The volume of unit sales of electricity
43
<PAGE>
for Franchise Supply Customers is influenced largely by the number of
customers in the Franchise Area, weather conditions and prevailing economic
conditions. Unit sales to Non-Franchise Supply Customers, who are typically
large commercial and industrial businesses, constituted 49% of total sales
volume for the nine months ended December 31, 1997. Sales to Non-Franchise
Supply Customers are determined primarily by the success of the supply
business in contracting to supply electricity to customers who are located
both inside and outside the Franchise Area.
During the nine months ended December 31, 1997, the number of electricity
units supplied decreased by 4% and total revenues produced by the supply
business decreased by (Pounds)69 million (8%) to (Pounds)799 million from
(Pounds)868 million for the nine months ended December 31, 1996. Revenues
decreased partly due to a reduction of 10% in sales to Non-Franchise Supply
Customers as a result of increased competition and partly due to reduced
purchase of electricity costs, the benefits of which are passed on to
customers.
Cost of Sales
Cost of sales decreased by (Pounds)63 million (9%) from (Pounds)681 million
in the nine months ended December 31, 1996 to (Pounds)618 million in the nine
months ended December 31, 1997. This decrease was due principally to the
reduction in units supplied. Additionally, electricity purchase costs
decreased due primarily to reductions in the Fossil Fuel Levy.
Operating Expenses
Operating expenses decreased by (Pounds)5 million (3%) from (Pounds)173
million in the nine months ended December 31, 1996 to (Pounds)168 million in
the nine months ended December 31, 1997. This decrease was principally due to
a reduction in pension costs of (Pounds)9 million, other cost savings and the
recording of a (Pounds)24 million charge relating to the replacement of
billing and debt collection systems in the nine months ended December 31, 1996
partially offset by a provision of (Pounds)10 million for restructuring and an
increase of (Pounds)23 million relating to increased depreciation and
amortization of goodwill due to the Acquisition.
Net Interest Expense
Net interest expense increased by (Pounds)58 million from (Pounds)20 million
during the nine months ended December 31, 1996 to (Pounds)78 million in the
nine months ended December 31, 1997, principally as a result of the financing
costs associated with the 1997 Credit Facility entered into to finance the
Acquisition.
Income Taxes
Yorkshire Group's effective income tax rate, excluding the windfall tax,
decreased from 34% for the nine months ended December 31, 1996 to 11% for the
nine months ended December 31, 1997. The effective rate in the 1997 period was
affected by the (Pounds)12 million favorable impact of the reduction in the UK
corporation tax rate from 33% to 31% as discussed above, partially offset by
the amortization of goodwill, which is not deductible for UK income tax
purposes.
Windfall Tax
Yorkshire Group recorded a one-time extraordinary charge of (Pounds)134
million during the nine months ended December 31, 1997 for the windfall tax
enacted by the UK government in July 1997. This windfall tax is not deductible
for UK corporation tax purposes.
Fiscal Year 1997 Compared with Fiscal Year 1996
Earnings
Income from operations was (Pounds)52 million in Fiscal Year 1997, a
decrease of (Pounds)162 million from (Pounds)214 million in Fiscal Year 1996.
The following items reduced Fiscal Year 1997 income from operations: (i) a
(Pounds)78 million provision for uneconomic gas and electricity contracts,
which resulted in a charge of (Pounds)125 million to the supply
44
<PAGE>
business offset by an intrabusiness elimination of (Pounds)47 million; (ii) a
(Pounds)50 million charge for information system development costs to prepare
for the opening of the competitive electricity market in 1998 for Franchise
Supply Customers, of which (Pounds)37 million was charged to the supply
business and (Pounds)13 million was charged to the distribution business;
(iii) a (Pounds)26 million decrease in distribution revenues as a consequence
of price reductions imposed by the Regulator; (iv) a (Pounds)8 million charge
incurred for advisers' fees in respect of the Acquisition; and (v) a (Pounds)6
million write-down of the value of non-operational property.
Income (loss) from operations by segments for Fiscal Year 1997 were
(Pounds)127 million, (Pounds)(132) million and (Pounds)10 million for the
distribution, supply and other segments, respectively. Income from operations
from those segments in Fiscal Year 1996 were (Pounds)164 million, (Pounds)30
million and (Pounds)20 million, respectively.
Net income was (Pounds)26 million in Fiscal Year 1997, a decrease of
(Pounds)367 million from (Pounds)393 million in Fiscal Year 1996, principally
due to the NGG Transaction in Fiscal Year 1996 and the charges recorded in
Fiscal Year 1997 discussed above.
Revenues
Operating revenues decreased by (Pounds)100 million (7%) from (Pounds)1,431
million in Fiscal Year 1996 to (Pounds)1,331 million in Fiscal Year 1997 as
follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM FISCAL YEAR 1996
TO FISCAL YEAR 1997
---------------------
(Pounds) MILLIONS
<S> <C>
Distribution......................................... (26)
Supply............................................... (131)
Other................................................ 9
Intrabusiness........................................ 48
----
Total operating revenues........................... (100)
====
</TABLE>
Revenues from the distribution business decreased by (Pounds)26 million (8%)
from (Pounds)334 million for Fiscal Year 1996 to (Pounds)308 million for
Fiscal Year 1997, principally due to a decrease in the maximum allowable
average price of units distributed as a result of the application of the
revised Distribution Price Control Formula. Units distributed increased by
0.5% in Fiscal Year 1997 partially offsetting such decrease.
During Fiscal Year 1997, the number of electricity units supplied decreased
by 6% while total revenues produced by the supply business decreased by
(Pounds)131 million (10%) to (Pounds)1,178 million from (Pounds)1,309 million
for Fiscal Year 1996. The reduction was partly due to a decrease of 12% in
units supplied to Non-Franchise Supply Customers, which was largely offset by
a corresponding reduction in cost of sale, and partly due to reduced charges
from the distribution business, the benefits of which are passed on to
customers, resulting in lower average unit prices. Franchise Supply Customers
and Non-Franchise Supply Customers each comprised 50% of total sales volume in
Fiscal Year 1997.
Cost of Sales
Cost of sales decreased by (Pounds)81 million (8%) from (Pounds)1,013
million in Fiscal Year 1996 to (Pounds)932 million in Fiscal Year 1997. This
reduction was the result of a decrease in supply business sales volumes and
reduced charges from the distribution business.
Operating Expenses
Operating expenses increased by (Pounds)143 million (70%) from (Pounds)204
million in Fiscal Year 1996 to (Pounds)347 million in Fiscal Year 1997.
Operating costs in Fiscal Year 1997 included: (i) a (Pounds)78 million
provision for uneconomic
45
<PAGE>
gas and electricity contracts made for the net present value of expected
future payments in excess of anticipated recoverable amounts, reflecting
expectations of market prices for electricity following the opening of the
competitive electricity market in 1998 for Franchise Supply Customers and
future gas prices; (ii) a (Pounds)50 million charge for information system
development costs, including (Pounds)19 million relating to the opening of the
competitive electricity market in 1998 for Franchise Supply Customers and a
(Pounds)31 million charge relating to the replacement of billing and debt
collection systems; (iii) a (Pounds)8 million charge incurred for advisers'
fees in respect of the Acquisition; and (iv) a (Pounds)6 million write-down of
the value of non-operational property.
Other Income
Other income was (Pounds)20 million in Fiscal Year 1997, a decrease of
(Pounds)293 million from (Pounds)313 million in Fiscal Year 1996. Other income
in Fiscal Year 1996 included the NGG Transaction, totalling (Pounds)300
million as described under "--Fiscal Year 1996 Compared with Fiscal Year
1995--Other Income". Following the NGG Transaction, ordinary dividends
received from NGG decreased from (Pounds)21 million in Fiscal Year 1996 to
(Pounds)2 million in Fiscal Year 1997. Other income for Fiscal Year 1997 also
includes the effect of the (Pounds)15 million gain on disposal by Yorkshire of
its share of a joint venture investment.
Net Interest Expense
Net interest expense increased by (Pounds)13 million from (Pounds)20 million
in Fiscal Year 1996 to (Pounds)33 million in Fiscal Year 1997, including a
(Pounds)7 million charge in relation to the termination of interest rate swap
agreements. Increased financing costs arising from the payment of a special
dividend of (Pounds)185 million in January 1996 were partly mitigated by the
effects of asset sales.
Income Taxes
The effective income tax rate of 22% in Fiscal Year 1996 increased to 33%
for Fiscal Year 1997. The effective income tax rate in Fiscal Year 1996 was
reduced principally due to the lower tax rate on gains arising from the NGG
Transaction. See Note 6, "Income Taxes", to Yorkshire's consolidated financial
statements for the three years ended March 31, 1997 included elsewhere in this
Prospectus for additional information.
Fiscal Year 1996 Compared with Fiscal Year 1995
Earnings
Income from operations was (Pounds)214 million in Fiscal Year 1996, a
decrease of (Pounds)1 million from Fiscal Year 1995. Distribution revenues
decreased by (Pounds)28 million, principally due to a reduction in the maximum
allowable average price of units distributed as a result of the application of
the revised Distribution Price Control Formula. This decrease was largely
offset by cost savings.
Income from operations by segments for Fiscal Year 1996 were (Pounds)164
million, (Pounds)30 million, and (Pounds)20 million for the distribution,
supply and other segments, respectively. Income from operations from those
segments in Fiscal Year 1995 were (Pounds)176 million, (Pounds)23 million, and
(Pounds)16 million, respectively.
Other income was (Pounds)313 million in Fiscal Year 1996, an increase of
(Pounds)297 million from (Pounds)16 million in Fiscal Year 1995 due to the NGG
Transaction totalling (Pounds)300 million which are described in detail below.
Income taxes increased by (Pounds)36 million, from (Pounds)78 million in
Fiscal Year 1995 to (Pounds)114 million in Fiscal Year 1996, including taxes
relating to the NGG Transaction.
Net income increased by (Pounds)252 million from (Pounds)141 million in
Fiscal Year 1995 to (Pounds)393 million in Fiscal Year 1996, principally due
to increased other income as a result of the NGG Transaction offset by the
income taxes discussed above.
46
<PAGE>
Revenues
Operating revenues decreased by (Pounds)33 million (2%) from (Pounds)1,464
million in Fiscal Year 1995 to (Pounds)1,431 million in Fiscal Year 1996 as
follows:
<TABLE>
<CAPTION>
OPERATING REVENUES
INCREASE (DECREASE)
FROM FISCAL YEAR 1995
TO FISCAL YEAR 1996
---------------------
(Pounds) MILLIONS
<S> <C>
Distribution......................................... (28)
Supply............................................... (34)
Other................................................ 1
Intrabusiness........................................ 28
---
Total operating revenues........................... (33)
===
</TABLE>
Revenues from the distribution business decreased by (Pounds)28 million (8%)
from (Pounds)362 million for Fiscal Year 1995 to (Pounds)334 million for
Fiscal Year 1996, principally due to a decrease in the maximum allowable
average price of units distributed as a result of the application of the
revised Distribution Price Control Formula. A 3% increase in sales volume
partially offset the average price decrease.
Revenues from the supply business decreased by (Pounds)34 million (3%) from
(Pounds)1,343 million in Fiscal Year 1995 to (Pounds)1,309 million in Fiscal
Year 1996 as a result of lower average unit prices, principally due to reduced
charges from the distribution business, the benefits of which are passed on to
customers, and a decrease in units sold of 1%. Franchise Supply Customers
comprised 46% of total sales volume in Fiscal Year 1996 and Non-Franchise
Supply Customers comprised 54%.
Cost of Sales
Cost of sales decreased by (Pounds)12 million (1%) from (Pounds)1,025
million in Fiscal Year 1995 to (Pounds)1,013 million in Fiscal Year 1996 as a
result of the decrease in units sold.
Operating Expenses
Operating expenses decreased by (Pounds)20 million (9%) from (Pounds)224
million in Fiscal Year 1995 to (Pounds)204 million in Fiscal Year 1996 as a
result of cost savings, principally due to a reduction in the number of
employees from 4,567 at the end of Fiscal Year 1995 to 3,907 at the end of
Fiscal Year 1996.
Other Income
Other income increased by (Pounds)297 million from (Pounds)16 million in
Fiscal Year 1995 to (Pounds)313 million in Fiscal Year 1996. During Fiscal
Year 1996, Yorkshire, together with the other 11 RECs in the UK, distributed
the majority of its shares in NGG to its shareholders in connection with the
NGG Transaction. The NGG Transaction had a material impact on Yorkshire's
financial results for that year. The NGG Transaction included the following:
(a) Yorkshire received special dividends totalling (Pounds)118 million.
(b) At April 1, 1995, Yorkshire held 9.2% of the issued share capital of
NGG, which was recorded on its balance sheet at (Pounds)72 million.
Additional share capital of NGG, totalling (Pounds)16 million, was
subscribed for by Yorkshire during Fiscal Year 1996. In December 1995, when
NGG became a company listed on the London Stock Exchange, Yorkshire
revalued its interest in NGG to its market value of (Pounds)321 million.
Also in December 1995, Yorkshire made a distribution in-kind to its
shareholders of approximately 90% of its interest in NGG. A further 2%,
approximately, was distributed to Yorkshire's optionholders. The aggregate
gain arising from these distributions totalled (Pounds)215 million.
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<PAGE>
(c) Each Yorkshire residential customer received a one-time discount as
part of an agreement among the shareholders of NGG, which stipulated that
each REC would provide such discount. The net cost of such discount was
(Pounds)85 million.
(d) Yorkshire received an in-kind dividend of approximately 9.2% of the
shares of PSB, which shares were subsequently converted to cash upon PSB's
liquidation, resulting in a gain of (Pounds)56 million.
(e) Legal and other expenses relating to these transactions totalled
(Pounds)4 million.
Other income in Fiscal Year 1995 also included a one-time termination
payment of (Pounds)17 million received from Stockholm Stadshus AB and a one-
time loss of (Pounds)18 million following the disposal of the business and
certain of the assets of Homepower Retail Limited, Yorkshire's retailing joint
venture.
Net Interest Expense
Net interest expense increased by (Pounds)8 million from (Pounds)12 million
in Fiscal Year 1995 to (Pounds)20 million in Fiscal Year 1996, principally as
a result of substantially more long-term debt outstanding during Fiscal Year
1996 than during Fiscal Year 1995 due to the payment of a special dividend of
(Pounds)188 million in January 1995.
Income Taxes
The effective income tax rate decreased from 36% to 22% from Fiscal Year
1995 to Fiscal Year 1996, principally due to a lower effective income tax rate
on the NGG Transaction. See Note 6, "Income Taxes", to Yorkshire's
consolidated financial statements for the three years ended March 31, 1997
included elsewhere in this Prospectus for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Yorkshire Group's sole investment and only significant asset is the entire
share capital of Yorkshire Holdings, which, in turn, owns the entire share
capital of Yorkshire. Yorkshire Group is therefore dependent upon dividends
from Yorkshire for its cash flow.
At December 31, 1997, in addition to cash flow from Yorkshire's operations
available for distribution indirectly to Yorkshire Group, Yorkshire Group had
(Pounds)300 million available under existing bank facilities, including
(Pounds)50 million under the 1997 Credit Facility, as its primary source of
liquidity.
Yorkshire Group will be required to refinance the 1997 Credit Facility,
which matures on July 30, 1998. For a discussion of the 1997 Credit Facility,
see Note 11, "Acquisition", to Yorkshire Group's consolidated balance sheet as
of April 1, 1997 included elsewhere in this Prospectus. Yorkshire Group
currently expects to refinance the 1997 Credit Facility through a series of
transactions, including the February 1998 issuance of (Pounds)200 million of
the Guaranteed Eurobonds, the February 1998 issuance of (Pounds)396 million of
the Senior Notes, the issuance of (Pounds)168 million of the Trust Securities
offered hereby, the potential issuance of additional senior notes, the
entering into of additional credit facilities, if available and on terms
acceptable to Yorkshire Group, and from the proceeds of the currently
contemplated transfer of Yorkshire Group's generation assets to an entity or
entities other than Yorkshire Group or its subsidiaries. Yorkshire Group is
currently in negotiations with respect to the replacement of the 1997 Credit
Facility.
Yorkshire Group also will be required to fund its ongoing capital
expenditures, fund its debt service (including with respect to the Trust
Securities) and the final windfall tax payment and cover its seasonal working
capital needs. Yorkshire Group expects to fund these ongoing cash requirements
through a combination of available cash flow from Yorkshire's operations and
amounts available under the committed bank facilities of (Pounds)300 million.
The principal sources of funds of the Successor Company during the nine
months ended December 31, 1997 were (Pounds)63 million from operations, which
reflects interest paid of (Pounds)66 million and tax paid of (Pounds)71
million, including the first installment of the windfall tax of (Pounds)67
million. Yorkshire Group raised (Pounds)1,034 million from
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the 1997 Credit Facility and (Pounds)440 million in equity. During this
period, Yorkshire Group utilized (Pounds)1,474 million to acquire Yorkshire,
(Pounds)129 million for capital expenditures and (Pounds)61 million to repay
short-term loans.
The principal sources of funds of Yorkshire during Fiscal Year 1997 were
(Pounds)96 million from operations, which reflects interest paid of (Pounds)42
million and tax paid of (Pounds)30 million. During Fiscal Year 1997, Yorkshire
invested (Pounds)121 million in capital expenditures and long-term investments
and paid dividends of (Pounds)71 million. Proceeds from asset sales totalled
(Pounds)73 million.
The principal sources of funds of Yorkshire during Fiscal Year 1996 were
(Pounds)222 million from operations, which reflects interest paid of
(Pounds)46 million and tax paid of (Pounds)98 million. During Fiscal Year
1996, Yorkshire invested (Pounds)126 million in capital expenditures and long-
term investments and paid dividends of (Pounds)243 million, including a
special dividend of (Pounds)185 million. Proceeds from asset sales, including
PSB, totalled (Pounds)119 million. Yorkshire raised (Pounds)150 million from
the issuance of Eurobonds.
At December 31, 1997, the Successor Company had net current liabilities of
(Pounds)1,099 million, primarily as a result of the initial financing
structure of the Acquisition. To meet short-term cash needs, the Successor
Company had (Pounds)118 million of cash and cash equivalents at December 31,
1997.
Yorkshire's capital expenditures are primarily 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 until at
least the next decade. 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 Fiscal Years
1996 and 1997 capital expenditures, net of customer contributions, were
(Pounds)91 million and (Pounds)126 million, respectively. Yorkshire is
required to file five year projections with the Regulator for gross capital
expenditures related to its regulated distribution network and updates of such
projections annually. The most recent projection was for the five year period
ended March 31, 2000 and was filed in July 1997. This filing indicated
Yorkshire's current projection of approximately (Pounds)575 million in capital
expenditures for the five year period. Approximately (Pounds)180 million has
already been spent in Fiscal Year 1996 and Fiscal Year 1997 related to this
five year projection.
To reduce the impact of interest rate changes, Yorkshire Group has entered
into several interest rate swap agreements with total notional amount of
(Pounds)650 million currently outstanding and with maturity dates ranging from
January 2008 to February 2008. The interest rate swaps are from a LIBOR
variable rate to an average fixed rate of approximately 7.3%. See Note 6,
"Interest Rate Swaps", to Yorkshire Group's condensed consolidated financial
statements for the nine months ended December 31, 1997 included elsewhere in
this Prospectus for further information on such agreements.
Yorkshire Group does not have any foreign currency hedging contracts in
place; however, to the extent that it becomes economically desirable, it may
swap some or all of any US dollar liabilities associated with security
issuances back to pounds sterling to hedge the currency risk associated
therewith.
Demand for electricity in the UK, including the Franchise Area, is seasonal,
with demand being higher in the winter months and lower in the summer months.
Yorkshire bills the majority of its Franchise Supply Customers on a staggered
quarterly basis while it is generally required to pay related expenses
(principally the cost of purchased electricity) on 28-day terms. However,
approximately 50% of the Franchise Supply Customers settle their accounts
using regular payment plans based on prepayment or spreading of the cost of
their annual bill evenly throughout the year. A majority of Yorkshire's supply
revenues are based on a fixed price per unit. The cost of supply to Yorkshire
from the Pool, if not covered by hedging mechanisms, varies throughout the
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<PAGE>
year, generally being higher in winter months and lower in summer months.
Yorkshire balances the effect of these influences on its working capital needs
with drawings under its available credit facilities.
Yorkshire's supply business to Non-Franchise Supply Customers generally
involves entering into fixed price contracts to supply electricity to its
customers. The electricity is obtained primarily by purchases from the Pool.
Because the price of electricity purchased from the Pool can be volatile due
to the fact that the price is set every half hour, Yorkshire is exposed to
risk arising from differences between the fixed price at which it sells
electricity and the fluctuating prices at which it purchases electricity
unless it can effectively hedge such exposure. To mitigate its exposure to
volatility, Yorkshire utilizes CFDs and power purchase contracts with major UK
power generators to stabilize the price of electricity. Yorkshire had entered
into CFDs and power purchase contracts for 17,882 GWh of electricity for the
nine months ended December 31, 1997. Yorkshire's electricity sales volumes
were 22,391 GWh and 21,116 GWh for Fiscal Year 1996 and Fiscal Year 1997,
respectively.
Management believes that cash flow from operations, together with its
existing sources of credit and the proceeds from the Offering and the
refinancing of the 1997 Credit Facility, will provide sufficient financial
resources to meet Yorkshire Group's projected capital needs and other
expenditure requirements for the foreseeable future. Following the
Acquisition, Yorkshire agreed to an amendment to its PES License to the effect
that it will use all reasonable endeavours to ensure that it maintains an
investment grade credit rating on its long-term debt.
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<PAGE>
BUSINESS
INTRODUCTION
Yorkshire's principal businesses are the distribution of electricity and the
supply of electricity to approximately two million customers. For information
with respect to a recent proposal to separate the PESs' ownership of their
distribution and supply businesses, see "The Electric Utility Industry in
Great Britain -- Regulation under the Electricity Act". Yorkshire also
conducts ancillary business activities apart from the distribution and supply
businesses that are not subject to price regulation, such as owning an
interest in an off-shore gas field, supplying gas in the competitive market
and holding interests in power generation. See "--Business Restructuring".
DISTRIBUTION BUSINESS
Yorkshire's distribution business consists of the ownership, management and
operation of the electricity distribution network within Yorkshire's Franchise
Area. The primary activity of the distribution business is the receipt of
electricity from the national grid transmission system (the "Grid") and the
distribution of electricity to end users connected to Yorkshire's power lines.
Because Yorkshire's distribution business is substantially a regulated
monopoly, virtually all electricity supplied (whether by Yorkshire's supply
business or by other suppliers) to consumers in the Franchise Area is
transported through its distribution network, thus providing Yorkshire with a
stable distribution volume unaffected by customer choice of supplier. As a
holder of a PES License, Yorkshire is subject to a price cap regulatory
framework providing economic incentives to operate in a cost effective manner
and, to a limited extent, to increase the volume of electricity distributed.
See "The Electric Utility Industry in Great Britain".
Distribution Business Customers, Units Distributed, Revenues and Operating
Profit
Yorkshire's Franchise 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 ports of the Humber estuary
provide access to European markets.
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The following table sets out details of Yorkshire'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:
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
NUMBER OF CUSTOMERS CONNECTED
Residential.............................. 1,879,944 1,896,470 1,910,752
Commercial............................... 125,350 125,827 126,003
Industrial............................... 22,151 21,924 21,889
----------- ----------- -----------
Total.................................. 2,027,445 2,044,221 2,058,644
=========== =========== ===========
<CAPTION>
FISCAL YEAR
-----------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ELECTRICITY DISTRIBUTED (GWH)
Residential.............................. 6,806 7,110 7,196
Commercial............................... 5,207 5,383 5,580
Industrial............................... 10,618 10,729 10,566
----------- ----------- -----------
Total.................................. 22,631 23,222 23,342
=========== =========== ===========
<CAPTION>
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Distribution operating revenues.......... (Pounds)362 (Pounds)334 (Pounds)308
Distribution operating income............ (Pounds)176 (Pounds)164 (Pounds)127
</TABLE>
Competition in the Distribution Business
Yorkshire has not experienced significant competition in its distribution
business. Yorkshire believes that the cost of providing a duplicate
distribution network connected to the Grid would be prohibitive. To the extent
a customer may invest in its own on-site electric generating plants, however,
such customer would no longer require distribution and related services from
Yorkshire except for standby connection to the Grid. The distribution business
is subject to marginal loss of income from related services, such as metering.
For a discussion of certain recently announced proposals impacting metering,
see "The Electric Utility Industry in Great Britain--Distribution of
Electricity--Price Control".
Strategy for the Distribution Business
Yorkshire's distribution strategy consists of maintaining a reliable and
safe distribution system which meets customer expectations while maximizing
its operating efficiencies and fulfilling its regulatory obligations.
To implement its strategy, Yorkshire is taking a number of steps. Yorkshire
intends to maintain a sufficient level of investment in the distribution
system to ensure its continued reliability and safety. In Fiscal Year 1997,
Yorkshire invested (Pounds)169 million in the distribution system, of which
(Pounds)96 million represented capital improvements in new substations, cables
and overhead lines and (Pounds)73 million represented expenditures related to
the operation, repair and maintenance of the distribution system. Yorkshire is
currently investing in a Distribution Asset Management System ("DAMS") that
centralizes information currently stored in over sixty computerized and paper-
based systems into one integrated computerized system. The centralization of
such information is intended to improve both access to and quality of
information which is vital to the operation of an efficient distribution
system.
Yorkshire is also concentrating on maintaining and improving its responses
to system faults. In Fiscal Year 1997, Yorkshire restored services to 95% of
all customers affected by faults within three hours and on average a
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Yorkshire customer was without power for only 59.7 minutes. Furthermore,
Yorkshire has introduced a new toll-free phone number available for customers
who have lost power. Such direct access is intended to permit Yorkshire to
respond more effectively and rapidly to power loss situations. Finally,
Yorkshire publishes a Quality of Supply Report which details the manner in
which Yorkshire intends to improve both the availability and quality of
electricity supply in its region in order to inform both its customers and
OFFER as to its plans for the period to April 2000.
Distribution Facilities
Electricity is transported across the Grid at 400 kV or 275 kV to 21 grid
supply points within Yorkshire's distribution network, where the National Grid
Company transforms the voltage to 132 kV, 66 kV and 33 kV for entry into
Yorkshire's distribution system.
At March 31, 1997, Yorkshire's distribution system consisted of:
<TABLE>
<CAPTION>
LV 11 KV ABOVE 11 KV
--------- --------- -----------
<S> <C> <C> <C>
Number of metered supplies................... 2,057,173 1,455 16
Total length of circuits..................... 30,350 km 18,011 km 4,676 km
Percentage underground....................... 92% 50% 28%
</TABLE>
The primary distribution system consists of 21 grid supply points from the
Grid, an additional 68 supply points and 357 primary substations. At March 31,
1997, the installed transformer capacity with a secondary voltage higher than
650 v at these substations was 20,527,000 kVA. Remote control facilities
enable the real time monitoring and operation of most of these larger
substations from one central control room.
Yorkshire's distribution substations amount to 12,849 indoor substations,
2,774 outdoor substations and 16,618 pole mounted substations. At March 31,
1997, the installed transformer capacity with a secondary voltage less than
650 v was 9,251,220 kVA.
SUPPLY BUSINESS
Yorkshire's supply business consists of selling electricity to end users,
purchasing such electricity and arranging for its distribution to those end
users. Under its PES License, Yorkshire has an exclusive right to supply
electricity to Franchise Supply Customers. This exclusive right is currently
scheduled to continue until September 1998. The supply business to Non-
Franchise Supply Customers, both inside and outside Yorkshire's Franchise
Area, is open to competition.
The following table sets forth the volume of electricity sold, by Non-
Franchise Supply Customer and Franchise Supply Customer, as well as supply
operating revenues and operating income (loss):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Volume (GWh):
Non-Franchise Supply
Customers.................... 12,572 12,046 10,627
Franchise Supply Customers.... 10,148 10,345 10,489
------------- ------------- -------------
Total....................... 22,720 22,391 21,116
============= ============= =============
<CAPTION>
(IN MILLIONS)
-----------------------------------------
<S> <C> <C> <C>
Supply operating revenues....... (Pounds)1,343 (Pounds)1,309 (Pounds)1,178
Supply operating income (loss).. (Pounds) 23 (Pounds) 30 (Pounds) (132)
</TABLE>
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<PAGE>
Competition in the Supply Business
The supply business is currently divided between Franchise Supply Customers
within the Franchise Area, and Non-Franchise Supply Customers, inside and
outside the Franchise Area. The non-franchise threshold was lowered to 100 kW
in April 1994 allowing competition in supply for these customers while
Franchise Supply Customers remained subject to regulation. Competition in
supply to Franchise Supply Customers is currently scheduled to be phased in
over a six-month period commencing in September 1998, at which time the
exclusive right of Yorkshire to supply the Franchise Area will cease. The
Regulator, however, proposed transitional price regulation for smaller
consumption Franchise Supply Customers for an initial period of two years
until an adequate level of competition is established. Yorkshire subsequently
indicated its acceptance of such proposals. The proposals (when taken together
with the reduction in the Fossil Fuel Levy which became effective on April 1,
1998) resulted in the implementation of small reductions, effective April 1,
1998, in the tariffs for Yorkshire's residential and small business customers
in its Franchise Area compared to the corresponding tariffs in effect in
August 1997. The proposals also require an additional 3% below inflation
reduction effective April 1, 1999. See "The Electric Utility Industry in Great
Britain--Industry Structure" and "--Supply of Electricity".
Strategy for the Supply Business
Yorkshire's supply strategy consists of (i) protecting and sustaining
Yorkshire's electricity market position within the Franchise Area, (ii) cross-
selling gas to its existing customer base, (iii) securing market share for gas
and electricity supply outside the Franchise Area to the extent that such
contracts are profitable and (iv) seeking marketing and strategic alliances in
the supply business.
To implement its strategy, Yorkshire is taking a number of steps. Yorkshire
is endeavoring to retain its existing Non-Franchise Supply Customers in the
Franchise Area by purchasing electricity at competitive rates from power
generators in the UK and providing high quality customer service. In doing so,
in Fiscal Year 1997, Yorkshire maintained a significant portion of its
existing business. Yorkshire has also applied this strategy to Non-Franchise
Supply Customers outside of its Franchise Area and to gas customers. For
example, in Fiscal Year 1997, Yorkshire was awarded new contracts with such
entities as East Midlands Airport, Lancashire County Council, South
Staffordshire Water and a number of Ministry of Defense sites. Furthermore, in
addition to marketing gas and electricity under the Yorkshire brand name,
Yorkshire intends to enter into "channel partnerships" with various business
and commercial entities (a "channel partner") whereby Yorkshire markets energy
to customers outside of its Franchise Area under the name of the channel
partner or in the joint name of Yorkshire and the channel partner. Yorkshire
is currently negotiating to establish a "channel partnership" with a chain of
retail appliance stores. Yorkshire expects to maintain this strategy for all
business customers and potential business customers after competition
commences for both gas and electricity and to extend this approach to the
residential market. There is no assurance that Yorkshire will be able to enter
into such "channel partnerships" and, if it does, that they will be
successful.
As discussed under "--Affiliate Businesses and Other Investments--Gas
Sourcing and Supply", Yorkshire has taken significant steps toward developing
its gas supply capabilities. Currently, gas may be sold to residential
customers in selected regional markets that have been opened to competition.
By retaining its existing customer base and, eventually, expanding into new
markets which will be open to competition, Yorkshire intends to be in a
position to offer those customers both electricity and gas. In offering such
flexibility, Yorkshire intends to solidify its relationship with these
customers and provide an established market base for its developing gas supply
business.
In a joint statement issued in January 1998, the Regulator and OFGAS asked
each of the RECs and BG Centrica plc (the former supply business of British
Gas plc) ("Centrica") to give undertakings to stop "dual fuel" offers to
supply gas and electricity. In addition, OFGAS asked the RECs to undertake not
to market gas to residential customers in areas where their respective markets
are not open to competition except where contracts have already been signed.
The regulators also made proposals concerning competition in meter reading.
Following discussions with the regulators, it was announced that the RECs had
agreed only to provide additional dual fuel benefits to customers once their
individual franchise area is opened to electricity competition and that OFGAS
had agreed that RECs' gas supply businesses should be permitted to continue to
compete in the gas
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<PAGE>
market both within and outside their franchise areas on the basis that there
are no undue restrictions or distortions in the gas market in those areas. The
RECs also agreed to work with the Regulator and OFGAS to ensure measures to
limit distortion of the meter reading market.
AFFILIATE BUSINESSES AND OTHER INVESTMENTS
Yorkshire's ancillary business activities have primarily included, among
other things, gas sourcing and supply and holding interests in power
generation.
Gas Sourcing and Supply
Recognizing the long-term opportunities in the competitive gas supply
market, in April 1994, Yorkshire acquired a 6.97% equity stake in the Armada
off-shore gas field (the "Armada Field") for approximately (Pounds)27.8
million. As of December 31, 1997, the Armada Field, which has a production
life of approximately 15 years, had proven resources of approximately 1.2
trillion cubic feet (84 billion cubic feet net to Yorkshire) of gas and 68
million barrels of oil and oil equivalents (4.8 million barrels net to
Yorkshire). Delivery of such gas from the Armada Field to Yorkshire began, on
schedule, in October 1997. The development costs associated with the Armada
Field have been lower than originally anticipated. As of December 31, 1997,
Yorkshire had invested (Pounds)62 million in the Armada Field.
Yorkshire markets gas to industrial and commercial customers and, with the
gradual removal of the residential franchise of Centrica, has recently started
marketing gas to residential customers. By the end of March 1998, Yorkshire
had entered into contracts for the supply of gas to more than 200,000
residential customers. Gas is sourced from Yorkshire's interest in the Armada
Field and through swing contracts and purchases on the spot markets which are
designed to give Yorkshire a balanced purchase portfolio. Yorkshire utilizes
risk management methods, in relation to gas purchasing and supply, similar to
electricity purchasing and supply, which are designed to maximize its return
consistent with an acceptable level of risk.
The Regulator and OFGAS recently proposed to restrict the ability of the
RECs, including Yorkshire, to provide "dual fuel" offers to supply gas and
electricity to residential customers in areas which are not open to
competition. See "--Supply Business--Strategy for the Supply Business".
Power Generation
Through its wholly-owned subsidiary, Yorkshire Electric Power Limited
("YEPL"), Yorkshire has invested in various power generation projects.
Yorkshire's PES License currently enables it and its affiliates to make
investments of up to 800 MW of electricity generation. Currently, Yorkshire
and its subsidiaries own, or have committed to, investments in 519 MW of power
generation assets. See "--Business Restructuring" for a discussion of the
proposed transfer of Yorkshire's current ownership interests in generation
assets.
The centerpiece of Yorkshire's generation activities is a 272 MW combined
cycle gas turbine ("CCGT") generating station at Brigg in north Lincolnshire
developed and operated by Regional Power Generators Limited ("RPG"). YEPL owns
a 75% interest in RPG with IVO Energy Limited holding the remaining 25%.
Yorkshire holds a power purchase agreement for 100% of the output of the
station.
Yorkshire CoGen Limited ("YCL"), a YEPL subsidiary, constructed and
currently operates combined heat and power ("CHP") plants at St. James's
Hospital, Leeds (4.5 MW), A. H. Marks, a chemical company based in Bradford
(4.5 MW) and Queen's Medical Centre, Nottingham (4.9 MW). YCL is also
constructing a 56 MW CHP plant at the premises of Hays Chemicals, a Cheshire
based company, and is nearing completion of a 50 MW CCGT plant at Thornhill.
YCL also owns and operates 52.6 MW of diesel fired peaking plants. YCL has
submitted an application to the UK's Department of Trade and Industry to
construct a 56 MW CHP plant at the premises of Hickson and Welch Chemicals in
Yorkshire. Further small scale (50 MW) embedded plants (including cogeneration
plants) are also planned. All of the above plants provide an opportunity for
Yorkshire's
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<PAGE>
electricity supply business to purchase the power offtake and a partial
strategic hedge in the event that electricity prices rise and reduce profit
margins of Yorkshire's supply business.
In addition, YEPL owns a 50% interest in a company which owns two windfarms
at Ovenden Moor (9.2 MW) and at Royd Moor (6.5 MW). All of the output from
these windfarms is sold to The Non-Fossil Fuel Purchasing Agency under an
agreement which expires on December 31, 1998.
YCL's generation portfolio has concentrated on smaller scale projects which
export less than 50 MW, principally because in doing so YCL is not required to
obtain a generation license and such smaller scale projects are not required
to trade in the Pool. Trading outside the Pool means that the export power has
a higher value and provides YCL with increased operational flexibility.
CUSTOMER SERVICE
As part of Yorkshire's commitment to delivering high levels of customer
service, Yorkshire launched its Customer Service Initiative in 1995. Virtually
all of its employees have attended training sessions aimed at developing a
company culture consistent with Yorkshire's corporate mission to be a leader
in the market of electricity distribution and electricity and gas supply,
while consistently providing high levels of customer service. These employees
have been trained in the values and behavior which need to be adopted to
achieve this corporate mission.
Improvements to customer service which have been implemented as a result of
this initiative include the provision of a toll-free service for account
inquiries and fault reporting, as described under "--Distribution Business--
Strategy for Distribution Business", and an increase in the number of bill
payment outlets for the convenience of customers.
Yorkshire continues to seek to improve the service it provides to its
customers and, to do so, continues to train employees further. A customer
service tracking system has been put in place to ensure that directors and
managers of Yorkshire gain regular feedback from customers on the service they
receive.
RISK MANAGEMENT
Yorkshire's risk management efforts are primarily focused on the supply
business and intended to hedge the risks associated with the purchase and sale
of electricity resulting from Pool price volatility. Virtually all electricity
generated in England and Wales is sold by generators and bought by suppliers
through the Pool. The most common contracts for supply to Non-Franchise Supply
Customers are for twelve-month terms and contain fixed rates. Yorkshire is
exposed to purchase price risk (the risk associated with fluctuations in the
cost of purchased electricity relative to the price received from the supply
customer) to the extent that it has not hedged such risk. Yorkshire
substantially hedges purchasing price risk by employing a variety of risk
management tools, including management of its supply contract portfolio,
hedging contracts and other means which mitigate the risk of Pool price
volatility. Yorkshire employs risk management methods to maximize its return
consistent with an acceptable level of risk.
Until March 31, 1998, regulations governing the franchise supply market
permitted the pass-through to customers of prudent purchase costs which
included the cost of arrangements such as CFDs to hedge against Pool price
volatility. Under the supply price restraint proposals published by the
Regulator in October 1997, and accepted by Yorkshire, effective April 1, 1998,
such purchase costs are no longer automatically passed through to such
customers. CFDs are contracts predominantly between generators and suppliers
which fix 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 give rise to difference
payments between the parties to the particular CFD. At the present time,
Yorkshire expects its supply demand for the calendar year 1998 to be
substantially hedged through various types of agreements, including CFDs.
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<PAGE>
Yorkshire's ability to manage its purchase price risk depends, in part, on
the continuing availability of properly priced risk management mechanisms such
as CFDs. No assurance can be given that an adequate, transparent market for
such products will in fact be available.
BUSINESS RESTRUCTURING
In December 1997, Yorkshire announced a planned business restructuring
intended to enable it to meet increased competition and react to potential
regulatory developments in the energy markets in the UK. The restructuring
will result in the distribution and supply businesses of Yorkshire becoming
self-sufficient businesses. As part of the restructuring, an alternative
ownership structure will be pursued for the generation business. Yorkshire
currently contemplates transferring such assets to an entity or entities other
than Yorkshire Group or its subsidiaries. It is expected that proceeds from
the transfer of these assets will be used to reduce debt of Yorkshire Group.
See "Certain Relationships and Related Transactions".
Total assets less current liabilities employed by the generation business at
December 31, 1997 were (Pounds)168 million. Operating income attributable to
the generation business in the nine months ended December 31, 1997 was
(Pounds)12 million.
As a result of this restructuring, approximately 160 positions will be
eliminated. A provision of approximately (Pounds)10 million was recorded in
the nine months ended December 31, 1997 to reflect the cost of these work
force reductions.
UK ENVIRONMENTAL REGULATION
Yorkshire's businesses are subject to numerous regulatory requirements with
respect to the protection of the environment. The principal laws which have
environmental implications for Yorkshire are the Electricity Act, the
Environmental Protection Act 1990, the New Road and Street Works Act 1991 and
the Environment Act 1995.
The Electricity Act requires Yorkshire 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 generating station developments. Yorkshire has produced a
Corporate Environmental Policy Statement and an Electricity Act Schedule 9
Statement which sets out the manner in which it intends to comply with its
environmental obligations.
Possible adverse effects of electro-magnetic fields ("EMFs") from various
sources, including transmission and distribution lines, have been the subject
of a number of studies and increasing public discussion. The current
scientific research is inconclusive as to whether EMFs may 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. Yorkshire fully complies with these standards.
Yorkshire believes that it has taken, and intends to continue taking,
measures to comply with the applicable law and government regulations for the
protection of the environment. There are no material legal or administrative
proceedings pending against Yorkshire with respect to any environmental
matter. Yorkshire estimates (Pounds)7 million was spent on environmental
compliance in Fiscal Year 1998, approximately half of which was of a capital
nature. This level of expenditures is expected to continue in future Fiscal
Years.
UK AND EU COMPETITION LAW
Yorkshire's businesses are subject to the competition rules of both the UK
and the European Community.
The UK Restrictive Trade Practices Act 1976 stipulates that failure to
furnish to the Office of Fair Trading an agreement that is registrable under
such Act renders unenforceable certain restrictions contained in such
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agreement. Briefly stated, the Fair Trading Act 1973 and the Competition Act
1980 both regulate the activities of companies with market power. UK
competition law, particularly the law relating to restrictive agreements, is
in the process of reform and is likely to follow the approach of European
Community law.
The Treaty of Rome contains provisions which prohibit anti-competitive
agreements and practices, including the abuse of a dominant position within
the European Union ("EU") or a substantial part of it. Penalties for violation
of these provisions include fines, third party damages and infringing
contractual provisions being unenforceable.
In January 1993, the UK implemented the EU Utilities Directive on the
procedures to be followed for the award of supply and works contracts by
utility companies, including electricity utilities. This directive was
replaced by EU Directive 93/36, which was implemented by the UK in December
1996 and which covers service contracts as well as supply and work contracts.
Those contracts that exceed the relevant financial thresholds have to be
advertised in the Official Journal of the European Communities. Suppliers and
contractors who believe they have suffered harm from failure to implement the
correct procedure in awarding the contract are able to institute proceedings
in the English High Court. The European Commission also has the power to
intervene prior to the award of a contract. Yorkshire Group believes that
Yorkshire has complied with any obligations it may have under those
regulations but the interpretation and application of those regulations and of
the European Union directives which they implement is not free from doubt and
no assurance can be given that any claim for damages against Yorkshire for
breach of the rules would be unsuccessful.
EMPLOYEES
Yorkshire had approximately 4,000 employees (approximately 3,800 full-time
equivalent) at the end of Fiscal Year 1997. Yorkshire Group has no employees
because it is a holding company with no operations. Approximately 62% of
Yorkshire's employees are represented by labor unions. All Yorkshire employees
who are not party to a personal employment contract are subject to a
collective bargaining agreement called The Electricity Business Agreement.
This Agreement may be amended by agreement between Yorkshire and the unions
and is terminable with 12 months' notice by either side. Yorkshire believes
that its relations with its employees are favorable. See "--Business
Restructuring" for a discussion of planned staffing reductions.
PROPERTY
Yorkshire owns the freehold of its principal offices north of Leeds.
Yorkshire has both network and non-network land and buildings.
Network Land and Buildings
At March 31, 1997, Yorkshire had interests in approximately 15,000 network
properties, comprising principally sub-station sites.
Non-Network Land and Buildings
At March 31, 1997, Yorkshire had freehold and leasehold interests in non-
network properties comprising chiefly offices, depots, warehouses, workshops
and a number of former retail outlets. The net book value of total non-network
land and buildings at March 31, 1997 was (Pounds)52 million.
LEGAL PROCEEDINGS
Yorkshire is routinely a party to legal proceedings arising in the ordinary
course of business which are not material, either individually or in the
aggregate. Yorkshire currently is not a party to any material legal
proceedings nor is it aware of any threatened material legal proceedings.
On May 18, 1998, Optimum Solutions Limited ("Optimum"), a company that
conducts research and development in the UK electric industry, entered a claim
in the UK High Court of Justice, Chancery Division,
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against Yorkshire, Eastern Electricity plc, which is also a REC, NGC (as
defined herein) and Logica plc alleging, in the case of Yorkshire, that
Yorkshire breached a confidentiality agreement with Optimum regarding the use
of confidential information in Yorkshire's preparation for the competitive
changes to the electricity supply market in and after 1998. Optimum requests
an injunction against the continued use of, and the return of, such
confidential information, an unspecified amount of damages relating to breach
of contract and equitable compensation for misuse of such confidential
information. Yorkshire is currently assessing its response to this claim. The
final outcome of this matter cannot now be determined.
Litigation is ongoing with respect to another corporation's use of actuarial
surpluses declared in the Electricity Supply Pension Scheme ("ESPS"). The
Pension Ombudsman (a UK arbitrator appointed by statute) has issued a "final
determination" in favor of complaints made by members of the ESPS relating to
another corporation's use of the ESPS surplus to offset such corporation's
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 such corporation to
pay into ESPS the amount of that use of the surplus plus interest. The Pension
Ombudsman's final determination has been successfully challenged in the
courts. At the same time, the courts also considered other areas of
uncertainty relating to the uses made of actuarial surpluses arising in the
ESPS, including the ability to reduce or suspend standard employer
contributions to reduce such surpluses. The courts ruled that such reductions
were permissible. The final decisions of the courts are subject to appeal. If
any of the decisions are reversed on appeal they may have an adverse effect on
Yorkshire, which has made similar use of its actuarial surplus, but no
assurance can be given as to the extent of that effect.
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THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
The information set forth below relating to the electric utility industry in
Great Britain has been derived from publicly available sources.
SUMMARY
The following summarizes the general structure of the electric utility
industry in England and Wales as it has developed since the privatization of
the industry in 1990. The electric utility industry in England and Wales is
divided into various functions, with different companies participating in the
respective functions. This is in contrast to the US utility industry, in which
vertically integrated companies generally participate in all functions.
<TABLE>
<CAPTION>
FUNCTION DESCRIPTION OF ELECTRICITY MAJOR PARTICIPANTS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Generation Power station production of electricity National Power plc, PowerGen, plc
British Energy plc, The Energy Group
plc, First Hydro Company
- -----------------------------------------------------------------------------------------------------------------------
Wholesale Trading The Pool is a single market for a bulk trading All generators and suppliers of electricity.
(buying and selling) of virtually all the
electricity generated in England and Wales.
- -----------------------------------------------------------------------------------------------------------------------
Transmission Bulk transfer of electricity across the Grid, The National Grid Company ("NGC")
which is a high voltage open-acccess system
from generators to RECs.
- -----------------------------------------------------------------------------------------------------------------------
Distribution A REC's transfer of electricity from NGC's high Yorkshire and the 11 other RECs
voltage transmission system across the REC's
low voltage distribution system to end-user
consumers.
Each REC has a substantially regulated
monopoly for distribution of electricity in
its franchise area. Accordingly, a REC is
the exclusive distributor of electricity
within its franchise area regardless of
the identity of the generator or supplier
actually selling the electricity at retail
to the end-user. This regulated monopoly
in the distribution business can be
distinguished from the efforts to introduce
competition in the supply business.
- -----------------------------------------------------------------------------------------------------------------------
Supply The retail sale of electricity to end-user Yorkshire, the 11 other RECs and a
consumers. It is generally similar to power- variety of other companies holding
marketing in the US. End-user consumers are supply licenses issued by the Regulator.
divided into two groups: Other companies include the generators
and other energy providers
(i) Franchise Supply Customers. Currently
they must buy their electricity from their
local REC. Starting in September 1998, they
will be allowed to buy from any licensed
supplier. However, the local REC will still
distribute their electricity.
(ii) Non-Franchise Supply Customers.
Currently, they can purchase their electricity
from any licensed supplier although it is
distributed by the local REC.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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INDUSTRY STRUCTURE
Great Britain has two separate but connected electricity markets, each with
a different commercial framework. In England and Wales electricity is produced
by generators, the largest of which are National Power plc ("National Power"),
PowerGen plc ("PowerGen") and Nuclear Electric plc, a subsidiary of British
Energy plc ("British Energy"). Electricity is transmitted through the Grid by
NGC and distributed by the twelve RECs in their respective franchise areas.
Most customers are currently supplied with electricity by their local REC,
although there are other suppliers holding second-tier supply licenses,
including other generators and RECs, who can compete to supply customers with
higher Peak Demand in such REC's franchise area.
In Scotland there are two vertically integrated companies, Scottish Power
plc ("Scottish Power") and Scottish Hydro Electric plc ("Hydro Electric"),
each generating, transmitting, distributing and supplying electricity within
their respective franchise areas as well as competing to supply electricity
elsewhere. Scottish Nuclear, another subsidiary of British Energy, sells all
the electricity it generates to Scottish Power and Hydro Electric.
The interconnection between the two transmission systems, owned by Scottish
Power and NGC, is capable of transferring electricity between Scotland and
England. There is also an interconnection with France, owned by NGC and
Electricite de France, through which electricity can be transferred between
France and England and Wales.
Virtually all electricity generated in England and Wales is sold by
generators and bought by suppliers through the Pool. A generator which is also
a licensed supplier must nevertheless sell all the electricity it generates
into the Pool and purchase all the electricity which it supplies from the
Pool. Because Pool prices fluctuate, generators and suppliers may enter into
bilateral arrangements, such as CFDs, to provide a degree of protection
against such fluctuations. See "Business--Risk Management".
There is no equivalent to the Pool in Scotland, but Scottish Power and Hydro
Electric 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.
INDUSTRY BACKGROUND
The industry structure described above was put in place in March 1990 in
order to introduce competition into the generation and supply of electricity.
At the same time, a licensing regime was introduced for the electricity
industry both in England and Wales as well as in Scotland.
The RECs, which at that time collectively owned NGG, NGC's holding company,
were privatized in December 1990. National Power and PowerGen were partly
privatized in March 1991 (with the balance of the UK government's holdings
being sold to investors in March 1995). Scottish Power and Hydro Electric were
privatized in June 1991 and British Energy was privatized in July 1996. By
December 1995, most of the RECs ownership of NGG had been publicly sold, and
NGG was listed on the London Stock Exchange. Since the summer of 1995, 11 of
the RECs have been acquired by other companies. Yorkshire was indirectly
acquired by Yorkshire Group in April 1997.
In 1990, the vast majority of generating capacity in England and Wales was
owned by three generators. However, since that time competition in generation
has increased as RECs and other new entrant generators have constructed new
plants and as imports through the interconnections with Scotland and France
have grown. In addition, pursuant to undertakings given to the Regulator,
National Power and PowerGen have disposed of an aggregate of 6,000 MW of
generating capacity to The Energy Group plc ("Energy Group").
Competition in supply has been progressively introduced both in England and
Wales and in Scotland. The RECs in England and Wales, and Scottish Power and
Hydro Electric in Scotland, are subject to competition from second-tier
suppliers for the supply of electricity to larger customers in their
respective franchise areas. In April
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1990, electricity users with a Peak Demand in excess of 1 MW became Non-
Franchise Customers of a REC and therefore were allowed to choose their
electricity supplier. In April 1994, the Non-Franchise Customer class was
expanded to include users with a Peak Demand in excess of 100 kW. Currently,
all electricity customers in Great Britain are scheduled to be able to choose
their electricity supplier over a six month phase in the period beginning in
September 1998, according to customers' designated postal codes.
DISTRIBUTION OF ELECTRICITY
Accessibility Requirements
Each of the RECs is required to offer terms for connection to its
distribution system to any person, for use of its distribution system to any
authorized electricity operator and for the provision of supplemental and
backup supplies to any person. In providing use of its distribution system, a
REC must not discriminate between its own supply business and that of any
other authorized electricity operator, or between those of other authorized
electricity operators; nor may its charges differ except where justified by
differences in cost. Similar principles apply to the provision of supplemental
and backup supplies of electricity, and in the carrying out of connection
works. Disputes over the terms of offers may be determined by the Regulator.
Price Control
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. Because the maximum average
price in any year is therefore based in part on the maximum average price in
the preceding year, a price reduction in any given year has an ongoing effect
on the maximum average price for all subsequent years. RPI is a measure of
inflation, and equals the percentage change in the UK Retail Price Index
between the six month period of 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 bear little resemblance to the inputs
contributing to Yorkshire's business costs, the RPI calculation may not
accurately reflect the price changes affecting Yorkshire. The Xd factor is
established by the Regulator following review. This formula determines the
maximum average price per unit of electricity distributed (in pence per
kilowatt hour) which a REC is entitled to charge. This price, when multiplied
by the expected number of units to be distributed, determines the expected
distribution revenues of the REC for the relevant year. The current
Distribution Price Control Formula permits RECs to partially retain additional
revenues due to increased distributions of units and allows for a pound for
pound increase in operating profit for efficient operations and reduction of
expenses within a review period. However, during the next Distribution Price
Control Formula review, the Regulator may reduce any such increase in
operating profit to the extent he determines it not to be a function of
efficiency savings or, if genuine efficiency savings have been made, he
determines that customers should benefit through lower prices in the future.
Upon privatization, the Regulator set different Xd factors for each of the
RECs to permit annual price increases by the RECs of between 0% and 2.5% (1.3%
for Yorkshire) greater than RPI for the five year period ending on March 31,
1995. Following a scheduled distribution price review by the Regulator of all
twelve RECs in August 1994, the Regulator required an overall real reduction
in regulated distribution prices for Fiscal Year 1996 of between 11% and 17%
(14% for Yorkshire) from the previous year, and set the Xd factor for the
subsequent four year period ending on March 31, 2000 to subtract 2% from RPI
in each such year. Also in connection with the August 1994 distribution price
review, the Regulator, (i) halved from 100% to 50% the extent to which
distribution revenues would be allowed to vary with the number of units of
electricity distributed and (ii) determined numbers of Franchise Area
customers based on REC forecasts for each year through and including Fiscal
Year 2000, allowing distribution revenues to vary by 50% of the predetermined
annual change in such forecast numbers. The stated intention of the Regulator
in introducing this change was "to remove any artificial incentive on the
companies to sell more electricity, while retaining a general incentive for
companies to seek out and meet the needs of their customers". In light of
information concerning the financial position of the RECs that emerged during
the unsuccessful bid by Trafalgar House plc for Northern Electric plc (one of
the
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RECs) and representations by Consumers' Committees and others, the Regulator
conducted an unscheduled distribution price review of all twelve RECs in July
1995. As a result of this unscheduled review, the Regulator revised regulated
distribution prices for the four year period ending on March 31, 2000,
requiring an overall real reduction in regulated distribution prices for
Fiscal Year 1997 of between 10% and 13% (13% for Yorkshire) from the previous
year, and resetting the Xd factor for the remaining three year period ending
on March 31, 2000 to subtract 3% from RPI in each such year.
The Distribution Price Control Formula is expected to be further reviewed
with effect from April 1, 2000. Following the review, the Regulator will make
a proposal for a revised formula to apply from that date. If a REC does not
agree with the proposal the Regulator may refer the proposal to the MMC and,
following the publication of the report of the MMC, the Regulator may make
appropriate modifications to the REC's PES License.
In setting the distribution charges each year, each REC must project the
permitted maximum average charge per unit to be distributed in that year. The
projection will have to take account of 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 year through a correction factor
in the Distribution Price Control Formula. If a REC has overcharged in the
previous year, the maximum average charge per unit distributed is reduced by
an amount to reflect the excess income received, to which is added interest.
In the event of undercharging, the Distribution Price Control Formula allows
the licensee to recover the shortfall in income plus interest.
In certain instances, however, overcharging or undercharging by a REC above
specific percentage thresholds may result in adjustments by the Regulator. If,
in any year, the average charge per unit distributed exceeds the permitted
maximum average charge per unit distributed by more than 3%, then, in the next
following year, the REC may not increase distribution charges unless it has
satisfied the Regulator that the average charge per unit in that next
following year is not likely to exceed the permitted maximum average charge.
If, with respect to any two successive years, the sum of the amounts by which
the average charge per unit distributed has exceeded the permitted maximum
average charge per unit distributed in the second of those years is more than
4% of that permitted maximum average charge, then, in the next following year,
the REC may be required by the Regulator to adjust its charges so that they
fall within the maximum permitted average charge. If, with respect to two
successive years, the licensee undercharges by more than 10% of the maximum
average charge, the Regulator may, by directions to the licensee, limit the
amount by which such undercharging may be recovered.
Since April 1995, the Distribution Price Control Formula has been notionally
divided into metering and non-metering components, with the metering component
equal to about 10% of each REC's allowed revenue. However, the Regulator
indicated when making these proposals that there should be no presumption that
this sum would be assigned to a metering business.
Operations related to the metering of network connections to non half-hourly
metered customers (generally residential and other small customers) are
subject to the metering component of the Distribution Price Control Formula.
Such price controls are scheduled to be disapplied from April 1, 2000, at
which time competitive market pricing is scheduled to be introduced. In a
joint statement issued in January 1998, the Regulator and OFGAS made proposals
concerning competition in meter reading. See "Business--Supply Business--
Strategy for the Supply Business". Competitive market pricing already exists
for operations related to the metering of network connections to half-hourly
metered customers.
Connection charges are levied when a customer first connects to a REC's
distribution system or makes a material change in electricity supply
requirements. These charges are excluded from the Distribution Price Control
Formula. In the August 1994 distribution review, the Regulator introduced the
concept of competition in providing connections to new customers and limited
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.
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Data Management Services
Beginning in September 1998, the electricity supply market for Franchise
Supply Customers is currently scheduled to be opened to competition and
customers will be able to select the supplier of their choice. Significant
additional costs have been, and will be, incurred by the distribution business
to develop new systems to facilitate competition. The new services, termed
"data management services" include meter operation, data retrieval, processing
and aggregation, meter point administration and distribution use of system
billing.
Assuming that competition in supply starts as currently scheduled in
September 1998 for Franchise Supply Customers, Yorkshire Group presently
estimates that costs totalling (Pounds)75 million will have been incurred for
re-engineering and information technology work. Of such amount, approximately
(Pounds)19 million was expensed in Fiscal Year 1997. The Regulator has made
proposals (which have been accepted by Yorkshire) to allow Yorkshire recovery
of (Pounds)23 million over a five year period ending March 31, 2003. A further
(Pounds)7 million is expected to be recovered through Pool cost recovery and
other national mechanisms and (Pounds)8 million is expected to be capitalized
as such amount is expected to provide future benefits to the supply business.
As a result of the above, the residual amount of approximately (Pounds)18
million, which will not be recovered or capitalized, will be expensed in
Fiscal Years 1998 and 1999 as incurred.
The Regulator has also made proposals (which have been accepted by
Yorkshire) to provide an annual allowance of (Pounds)3 million for the period
1998 through 2000 to cover operating costs. This allowance will be reviewed at
the time of the Distribution Price Control Formula Review in 2000.
Such proposals therefore will allow Yorkshire to recover up to 50% of its
forecasted set-up and operating costs over a five year period. The shortfall
could be higher if: (i) operating costs are higher than anticipated (e.g.,
there is a higher level of customer activity); (ii) recovery of operating
costs is disallowed or reduced when the Distribution Price Control Formula is
reviewed for the period beginning April 1, 2000; or (iii) the integrated
national systems do not work as contemplated or require substantial
redevelopment.
SUPPLY OF ELECTRICITY
Licensed Suppliers
Subject to minor exceptions, 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
achieve delivery to customers' premises.
There are two types of licensed suppliers: public electricity (or first-
tier) suppliers, also known as PESs, and second-tier suppliers. PESs include
the RECs, Scottish Power and Hydro Electric each supplying in its respective
franchise area. Second-tier suppliers include National Power, PowerGen,
Nuclear Electric, Scottish Power, Hydro Electric and other PESs (including
RECs supplying outside their respective franchise areas) and a number of
independent second-tier suppliers.
At present, a Franchise Supply Customer can only buy electricity from the
REC authorized to supply the relevant franchise area. Franchise Supply
Customers typically include residential and small commercial and industrial
customers. Non-Franchise Supply Customers are not limited to buying
electricity from the local REC and can choose to buy from a second-tier
supplier. Such customers are typically larger commercial and industrial
electricity users. Second-tier suppliers compete with one another and with the
local REC to supply customers in this competitive (or "non-franchise") sector
of the market.
Price Regulation
The supply of electricity to Franchise Supply Customers currently remains
subject to 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") where
Xs was
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2%. 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 the Regulator 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 year's maximum average price
per unit of electricity supplied (in pence per kilowatt hour) that relates to
the REC 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 of 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 bear little resemblance to the inputs
contributing to Yorkshire's business costs, the RPI calculation may not
accurately reflect the price changes affecting Yorkshire. The Y factor was a
pass-through of certain costs which are either largely outside the management
control of the REC or have 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 are
attributable to Franchise Supply Customers. The Supply Price Control Formula
was therefore designed to focus downward pressure on costs and working
capital, which are viewed as being within suppliers' direct control.
As with the Distribution Price Control Formula, 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 year, 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.
Under the current licensing regime, over a six-month period currently
scheduled to commence in September 1998 all customers, including those who are
currently Franchise Supply Customers, will be permitted to choose their
electricity supplier. The Regulator indicated in his supply price restraint
proposals published in October 1997, which proposals Yorkshire accepted, that
price regulation for supply to all residential and smaller business customers
within Yorkshire's Franchise Area, whose annual consumption is under 12,000
kWh, would be extended beyond March 31, 1998 until an adequate level of
competition is established, and, at least, until March 31, 2000. The Regulator
has indicated that the nature and extent of possible restraints after that
date will be reviewed in the light of experience and prospects and that such
review would take place concurrently with the ongoing review of the
Distribution Price Control Formula.
The license modifications that have been implemented to effect the new
controls take the form of a series of price caps on the tariffs applicable to
residential and small business customers. The new controls (when taken
together with the reduction in the Fossil Fuel Levy which became effective on
April 1, 1998) have resulted in the implementation of small reductions,
effective April 1, 1998, in the tariffs for Yorkshire's residential and small
business customers compared to the corresponding tariffs in effect in August
1997. See "Fossil Fuel Levy". The new controls also require an additional 3%
below inflation reduction effective April 1, 1999. The license modifications
also discontinued the automatic pass-through of costs previously passed
through to residential and small business customers, consisting primarily of
purchased power costs.
In addition, the license modifications provide for an allowable charge to
cover the additional cost of providing data management services that will be
required to be provided by each REC. For a discussion of the costs associated
with these data management services, see"--Distribution of Electricity--Data
Management Services". The duration and level of the allowances for operating
costs are likely to be reviewed at the time of the next Distribution Price
Control Formula review. The license modifications also provide for restraints
on pre-payment meter charges.
Further, the license modifications stipulated that a REC should be
penalized: (i) where it starts to open its market more than three months after
the market opening by the first REC; (ii) where it opens successive tranches
of its market more than three months after the opening of the corresponding
tranche by the first REC; and (iii) where the market opening of the first REC
has been delayed beyond April 1998. The penalties will be calculated
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at 1% of the operating revenues of the supply business for Franchise Supply
Customers per month of delay, weighted by the proportion of customers affected
and applied as a reduction is allowed for distribution business income. If
Yorkshire does not open its market to competition until after April 1999, it
would incur a penalty of approximately (Pounds)6 million. It is now apparent
that some penalty will be incurred due to the delay in the opening of the
competitive market for Franchise Supply Customers until September 1998.
Yorkshire Group expects that Yorkshire will be prepared to open its Franchise
Area to such competition in September 1998.
THE POOL
The Pool was established in April 1990 for bulk trading of electricity in
England and Wales between generators and suppliers. The Pool reflects two
principal characteristics of the physical generation and supply of electricity
from a particular generator to a particular supplier. First, it is not
possible to trace electricity from a particular generator to a particular
supplier. Second, it is not practicable to store electricity in significant
quantities, creating the need for a constant matching of supply and demand.
Subject to certain exceptions, all electricity generated in England and Wales
must be sold and purchased through the Pool. All licensed generators and
suppliers must become signatories to the Pooling and Settlement Agreement,
which governs the constitution and operation of the Pool and the calculation
of payments due to and from generators and suppliers. The Pool also provides
centralized settlement of accounts and clearing. The Pool does not itself buy
or sell electricity.
Prices for electricity are set by the Pool daily for each half hour of the
following day based on the bids of the generators and a complex set of
calculations matching supply and demand and taking account of system
stability, security and other costs. Each day, generators inform NGC of the
amount of electricity which each of their generating units will be able to
provide the next day and the price at which they are willing to operate each
such unit. NGC uses this information to construct a "merit order" which ranks
each generating unit in order of increasing price. NGC then schedules the
stations to operate according to such merit order, calling into service the
least expensive generating units first and continuing to call generating units
into service until enough are operating to meet the demand of all suppliers.
Factors which may constrain NGC's ability to order stations into operation in
strict observance of the merit order include transmission system constraints
and the inflexibility of some generating units. A computerized system (the
settlement system) is used to calculate prices and to process metered,
operational and other data and to carry out the other procedures necessary to
calculate the payments due under the Pool trading arrangements. The settlement
system is administered on a day to day basis by NGC Settlements Limited, a
subsidiary of NGC, as settlement system administrator.
The UK government recently invited the Regulator to review these electricity
wholesale trading arrangements, trading arrangements outside the Pool and
price setting mechanisms. The review was launched in January 1998 with an
announcement that the Regulator and an independent panel had been asked to
report to the Energy Minister by July 1998.
FOSSIL FUEL LEVY
All the RECs are obligated to obtain a specified amount of generating
capacity from non-fossil fuel sources (the "NFFOs"). Because electricity
generated from non-fossil fuel plants is generally more expensive than
electricity from fossil fuel plants, a levy system (the "Fossil Fuel Levy")
has been instituted to reimburse the generators and the RECs for the extra
costs involved. The Regulator sets the rate of the Fossil Fuel Levy annually.
The current Fossil Fuel Levy is 0.9% of the value of sales of electricity made
in England and Wales and 0.8% of the value of sales of electricity made in
Scotland.
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. The Electricity
Act established the industry structure described above so as to enable
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privatization to take place. The Electricity Act also created the
institutional framework under which the industry is currently regulated,
including the office of the Regulator, who is appointed by the Secretary of
State. The present Regulator, Professor Stephen Littlechild, was appointed for
a five year term commencing September 1, 1989 and he was reappointed in 1994
for a further five year term ending on August 31, 1999. Professor Littlechild
holds the formal title of Director General of Electricity Supply and is head
of OFFER.
The Regulator's functions under the Electricity Act include granting
licenses to generate, transmit or supply electricity (a function which he
exercises under a general authority from the Secretary of State); proposing
modifications to licenses and, in case of non-acceptance of such proposals by
licensees, making license modification references to the MMC; enforcing
compliance with license conditions; advising the Secretary of State in respect
of the setting of each NFFO round; calculating the Fossil Fuel Levy rate and
collecting the levy; determining certain disputes between electricity
licensees and customers; and setting standards of performance for electricity
licensees. The term "supply" as used in the context of the Electricity Act and
the PES License covers both distribution and supply activities.
The Regulator exercises concurrently with the Director General of Fair
Trading certain functions relating to monopoly situations under the Fair
Trading Act 1973 and certain functions relating 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 1980.
The Electricity Act requires the Regulator 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 satisfied, secure that
license holders are able to finance their licensed activities and promote
competition in the generation and supply of electricity.
Subject to these duties, the Secretary of State and the Regulator are
required to exercise their functions in the manner which each considers is
best calculated: to protect the interests of consumers of electricity supplied
by licensed suppliers in respect of price, continuity of supply, and the
quality of electricity supply services; to promote efficiency and economy on
the part of licensed electricity suppliers and the efficient use of
electricity supplied to consumers; to promote research and development by
persons authorized by license to generate, transmit or supply electricity; to
protect the public from the dangers arising from the generation, transmission
or supply of electricity; and to secure the establishment and maintenance of
machinery for promoting the health and safety of workers in the electricity
industry. The Secretary of State and the Regulator also have a duty to take
into account the effect on the physical environment of activities connected
with the generation, transmission or supply of electricity.
In performing their duties to protect the interests of consumers in respect
of prices and other terms of supply, the Secretary of State and the Regulator
are required to take into account in particular the interests of consumers in
rural areas. In performing their duties to protect the interests of consumers
in respect of the quality of electricity supply services, they are required to
take into account in particular the interests of those who are disabled or of
pensionable age.
On June 30, 1997, the UK government announced its intention to conduct a
comprehensive review of the regulatory framework governing the electricity
distribution and supply businesses in England and Wales, as well as the
regulatory framework applicable to other privatized utilities. The review
culminated in the March Green Paper which sets forth a number of proposals of
the UK Government designed to reexamine utility regulation in the UK. Among
the main proposals contained within the March Green Paper are the retention of
"RPI-X" as the fundamental basis for price regulation; increased transparency
and consistency of regulation; the merger of OFFER and OFGAS; the separate
licensing of the distribution and supply businesses of the PESs; amendment of
the statutory duties of utility regulators to provide a new primary duty to
exercise their functions in the manner best calculated to protect the
interests of the consumers in the short and long term, wherever possible
through promoting competition; and adopting price regulation to distinguish
between income earned through companies' own efforts and income which results
from other factors. Some of these proposals would require primary legislation.
Responses to the March Green Paper by interested parties have been requested
by May 31, 1998.
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On May 13, 1998, the Regulator issued a consultation paper on the separation
of distribution and supply businesses for PESs and the future treatment of
metering and meter reading. The material proposals and recommendations set out
in the consultation paper are as follows:
1. Full separation of the ownership of the supply and distribution
business was recommended and appropriate interim arrangements should be
contemplated for separate companies to comprise the distribution and supply
activities, each acting independently of the other.
2. Measures should be introduced to ensure that each PES supply
subsidiary operates at arm's length from the distribution subsidiary. These
measures would include separate contracts between the supply and
distribution businesses, avoiding the sharing of facilities between the
businesses, including requiring separate management teams for the two
businesses and minimizing corporate headquarters activities.
3. The distribution company should be responsible for the maintenance and
operation of the network and have a statutory duty to develop and maintain
an efficient, coordinated and economical system of electricity distribution
and to facilitate competition in generation and supply. It should connect
any person to the network on reasonable terms and act as a "last resort"
meter reading service, bought in from meter reading companies, for those
suppliers not wishing to provide the service themselves.
4. All suppliers should be placed on the same legislative footing and
tariff supply should be replaced by supply under contract. License
conditions would be introduced to protect customers and competitors against
dominant suppliers.
5. Metering services should be open to competition and arrangements for
transmission in Scotland should be brought into line with those in England
and Wales.
Responses to this consultation paper have been requested by June 15, 1998.
The Regulator intends to have a further consultation on separation of
businesses in July 1998 and to outline proposals on separation of businesses
in September 1998. The Regulator intends any revised definitions of
distribution, supply and metering responsibilities to be taken into account in
setting price controls and revising charging arrangements scheduled for 2000.
In October 1997, the UK government invited the Regulator to consider
parameters for a review of electricity trading arrangements. Such a review
would focus on the wholesale electricity market in England and Wales and would
likely cover existing trading within the Pool, trading arrangements outside
the Pool and price setting mechanisms. The impact on, and possible need for
change to, the framework of regulatory controls could also be considered,
including Pool governance, regulation of and access to the Grid, licenses, the
Electricity Act and the implications of European Union law. A review of
certain of these issues was launched in January 1998 with an announcement that
the Regulator and an independent panel had been asked to report to the Energy
Minister by July 1998.
In December 1997, the UK government announced a review of energy sources for
power generation, including fuel diversity, sustainable development and the
role of coal. Representations of interested parties were to be submitted by
mid-February 1998. While the review is underway, the Secretary of State has
deferred decisions on most outstanding or new applications for the
construction of generating stations. An Energy Select Committee Report on the
Coal Industry issued in April 1998 recommended that such deferral, as it
relates to the construction of gas fired generating stations, be lifted as
soon as possible. The Trade and Industry Select Committee is also undertaking
an inquiry into a number of aspects of UK energy policy. See "Risk Factors--
Factors Relating to Yorkshire's Business--Governmental Review of Utility
Regulation".
CONSUMERS' COMMITTEE
The Regulator is required under the Electricity Act to establish a
consumers' committee for the franchise area of each PES License holder (or, if
the Secretary of State so determines, for the franchise areas of two or more
such suppliers). Each committee comprises a chairman appointed by the
Regulator after consultation with the Secretary of State and between 10 and 20
other members appointed by the Regulator after consultation with the committee
chairman. The duties of each committee are to make representations to, and
consult with, their
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allocated PES License holders about matters affecting the interests of
customers or potential customers of such supplier(s), to review matters
affecting the interests of electricity consumers in such committee's area, and
to advise the Regulator on any other matter which warrants discussion or which
is referred to them by the Regulator.
LICENSES
Generation Licenses
Unless covered by an exemption, all electricity generators engaging in the
construction, expansion or operation of a power station in Great Britain are
required to have a generation license. There are currently 51 generation
license holders, including RPG, in Great Britain. Although generation is not
subject to price control, generators are not permitted to discriminate between
customers or cross subsidize their licensed activities. The conditions
attached to a generation license in England and Wales require the holder,
among other things, to comply with the Grid Code, to comply with any REC's
distribution code to the extent applicable, to be a member of the Pool and to
submit relevant generating sets for central dispatch. The conditions attached
to a generation license in Scotland require the holder, among other things, to
comply with the Scottish Grid Code. Failure to comply with any of the
generation license conditions may subject the licensee to a variety of
sanctions, including enforcement orders by the Regulator or license revocation
if the license holder is not in compliance with an enforcement order.
PES Licenses
Each of the RECs, Scottish Power and Scottish Hydro Electric has a PES
License for its Franchise Area and is required, under the Electricity Act, to
supply electricity upon request to any premises in that area, except in
specified circumstances. Each PES is also required not to discriminate between
its own supply business and other users of its distribution system and the PES
License prohibits cross subsidy between the various regulated businesses. As
described above, PESs are subject to separate price controls on the amounts
they may charge for the use of their distribution system by all customers in
their Franchise Area and for the supply of electricity to Franchise Supply
Customers. The PES Licenses also require the licensee to procure electricity
at the best price reasonably obtainable having regard to the sources
available.
As part of his continued monitoring of the electric utility industry, the
Regulator published on August 15, 1996 comparative information relating to the
RECs' economic purchasing performance. The publication entitled "Yardstick of
Electricity Purchase Costs", compared in yardstick value terms, the generation
costs which RECs passed through to Franchise Supply Customers in Fiscal Years
1995 and 1996 under the Supply Price Control Formula. The Regulator has
reviewed the supply price controls applicable to PES License holders and
published in October 1997 proposals for new controls to take effect on April
1, 1998. He issued a consultation paper on this matter on September 5, 1996
entitled "The Competitive Electricity Market from 1998: Price Restraints". He
subsequently issued four further consultation papers in January, May, July and
August, 1997. The October 1997 proposals were for maximum price restraints in
respect of supply to residential and small business customers for a period of
at least two years beginning April 1, 1998, which would eliminate the pass-
through of costs to such customers, consisting primarily of purchased power
costs. Yorkshire accepted these proposals. See "--Supply of Electricity--Price
Regulation".
In England and Wales, each PES License limits the extent of the generation
capacity in which the relevant REC may hold an interest without the prior
consent of the Regulator ("own-generation limits"). These own-generation
limits, expressed in megawatts, currently restrict the participation of a REC
in generation to a level of approximately 15% of the simultaneous maximum
electricity consumption in that REC's franchise area at the time of
privatization. In the case of Yorkshire, the own-generation limit is fixed at
800 MW.
The Regulator has stated that it would be reasonable to consider a REC's
request to increase its own- generation limit on the condition that it
accepted explicit restrictions on the contracts it signed with its supply
business, and that at a minimum the REC would be prohibited from entering into
additional own-generation contracts in its franchise market. The Regulator
considers that an increase in own-generation limits subject to such
restrictions could allow a REC to contribute more fully to the development of
competition in generation
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without the allegation that it was exploiting its captive market and local
monopoly position. In June 1996, the Regulator stated that he had indicated to
Energy Group, in the context of its acquisition of 6,000 MW of generating
capacity from National Power and PowerGen, that he would be favorably inclined
to relax the own-generation limits of Energy Group subject to the Regulator
and Energy Group agreeing to license modifications as set out in a
consultation paper which he had published in August 1995.
The Regulator has made modifications to 14 PES Licenses in connection with
the introduction of competition for Franchise Supply Customers currently
scheduled to begin in September 1998. These modifications comprise a number of
new obligations to offer services to all competing suppliers. These services
are generally known as data management services, including registration, data
collection and aggregation, meter operation and provision of prepayment meter
infrastructure. The Regulator has issued full modifications to the first-tier
and second-tier licenses to encompass the changes. In response to respective
individual requirements, the PESs are providing collectively a data transfer
service. Preparations are being made to provide these services as part of a
program of work and in October 1997 the Regulator made final proposals for the
recovery of the costs of this program which were accepted by Yorkshire in
November 1997.
The RECs are also contributing to a program of work by the Pool to adopt
settlement arrangements for the competitive market in 1998. It has been agreed
that these costs, subject to a cap above which recovery would be partial, will
be recovered from charges to be made to suppliers by the Pool over a five year
period.
Second-Tier Supply Licenses
Other than a PES in its Franchise Area and subject to certain other
exceptions, a supplier of electricity to premises in Great Britain must
possess a second-tier supply license. Subject to the restrictions described in
"--Supply of Electricity" above, second-tier licensees may compete for the
supply of electricity with one another and with the PES for the relevant area.
There are currently 40 second-tier supply license holders for England and
Wales, including Yorkshire, and 27 for Scotland.
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 nondiscriminatory 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, the Regulator may
modify license conditions with the agreement of the license holder. He must
first publish the proposed modifications and consider representations or
objections made. If the Regulator fails to agree to modifications with a
license holder, he may refer a matter relating to generation, transmission or
supply of electricity under a license to the MMC. If the MMC 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, the Regulator is required to make modifications that
appear to him requisite for the purpose of remedying or preventing the adverse
effects identified by the MMC. 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.
Following the acquisition of Yorkshire by Yorkshire Group, the Regulator
proposed that Yorkshire's PES License be modified, by agreement, to take into
account the fact that the PES License is now held by a subsidiary company. In
particular, the Regulator proposed that the license be modified to provide
that, with few exceptions, the only business activities which Yorkshire is
permitted to undertake directly are its franchise and second-tier supply
businesses and its distribution business. The license modifications also
require Yorkshire to ensure that it has sufficient management resources and
financial resources and facilities to conduct its supply and distribution
businesses and to comply with its statutory and license obligations. Yorkshire
is required to provide an annual
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certificate to the Regulator approved by the Yorkshire Board of Directors and
signed by a Director to that effect and in the interim to notify the Regulator
immediately of any changes threatening the validity of such certificates.
Additionally, the license modifications require Yorkshire to obtain from AEP
and NCE legally enforceable undertakings in favor of Yorkshire that they and
their subsidiaries will refrain from any action which would be likely to cause
Yorkshire to breach any of its obligations under the Electricity Act or the
PES License. Further, the consent of the Regulator is required for Yorkshire
to create security over its assets, to incur indebtedness or to give
guarantees, unless the transaction is on normal commercial and arm's length
terms and for a "permitted purpose" (which refers to the supply, distribution
or generation business, or any business conducted by Yorkshire or its
affiliates or subsidiaries on March 31, 1997) or the transaction involves any
businesses whose aggregate revenues in any financial year do not exceed 5% of
the aggregate turnover of the supply, second-tier supply and distribution
businesses in the previous financial year. The consent of the Regulator also
is required before Yorkshire may transfer assets or make loans to affiliates
or subsidiaries except for certain specified purposes, including payment of
dividends out of distributable reserves, repayments of capital, and payments
on normal commercial and arm's length terms for goods, services or assets
supplied. These provisions are subject to an overriding provision in the PES
License which prevents any REC from disposing of (which would include creating
a security interest in) distribution assets without the Regulator's express
prior consent. Additionally, the license modifications require Yorkshire to
use reasonable efforts to maintain the investment grade credit ratings of its
debt. Finally, because Yorkshire is now owned by Yorkshire Group, the
Regulator required Yorkshire to obtain from AEP and NCE legally enforceable
undertakings to provide information to Yorkshire, as licensee, in order to
comply with requirements of the Regulator. These modifications to the PES
License have been agreed to by Yorkshire and took effect on December 15, 1997
and the required undertakings were also provided on December 15, 1997. In
February 1998, the Regulator issued, for public consultation, proposals for
further modifications to the licenses of PESs that have been subject to
takeovers. Further proposals are expected to be made by the Regulator in light
of this consultation paper that may result in further modifications to PES
licenses. See "Risk Factors--Factors Relating to Yorkshire's Business--
Regulatory Policies Affecting Yorkshire Group".
TERM AND REVOCATION OF LICENSES
Yorkshire's PES License will continue in effect until at least 2025 unless
revoked. Under ordinary circumstances, the license may not be revoked except
on 25 years' prior notice, which notice may not be given until 2000.
Otherwise, the Secretary of State may revoke a PES License by not less than 30
days' notice in writing to the licensee in certain specified circumstances
including any failure to comply with a final order of the Regulator requiring
the license holder to comply with its license conditions or requirements, or
the insolvency of the licensee.
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MANAGEMENT
MANAGEMENT OF YORKSHIRE GROUP
The following table sets forth certain information with respect to the
officers and directors of Yorkshire Group as of December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------
<S> <C> <C>
Dr. E. Linn Draper, Jr............ 55 Chairman and Director
Donald M. Clements, Jr............ 48 Director
Armando A. Pena................... 52 Chief Financial Officer and Director
Wayne H. Brunetti................. 55 Director
Richard C. Kelly.................. 51 Director
Teresa S. Madden.................. 41 Director
</TABLE>
Dr. E. Linn Draper, Jr. Has been a Director and Chairman of Yorkshire Group
since February 1997. Since April 1993 has been Chairman of the Board of
Directors of AEP and all of its major subsidiaries. In March 1992, appointed
President of AEP and President and Chief Operating Officer of American
Electric Power Service Corporation. Serves as a Director of BCP Management,
Inc. and Cell Net Data Systems.
Donald M. Clements, Jr. Has been a Director of Yorkshire Group since
February 1997. Since October 1995, has been President of AEP Resources, Inc.
Joined AEP in September 1994 as Senior Vice President. From 1978 to 1994, was
employed with Gulf States Utility Company.
Armando A. Pena. Since February 1997, has been a Director, and, since July
1997, has been Chief Financial Officer of Yorkshire Group. Since January 1998,
has been Chief Financial Officer, and, since March 1996, Senior Vice President
and Treasurer of American Electric Power Service Corporation. Since November
1995, has been Treasurer of all of AEP's major subsidiaries. From 1989 to
March 1996, was Vice President-Finance of American Electric Power Service
Corporation.
Wayne H. Brunetti. Has been a Director of Yorkshire Group since February
1997. Since August 1997, has been President and Chief Executive Officer of
NCE. Since January 1996, has been the President and Chief Executive Officer of
Public Service Company of Colorado. Joined Public Service Company of Colorado
in July 1994 as President and Chief Operating Officer. From 1991 to July 1994,
was President and Chief Executive Officer of Management Systems International,
a management consulting firm. Serves as a Director of e prime and YGSC Natural
Fuels.
Richard C. Kelly. Has been a Director of Yorkshire Group since February
1997. Since August 1997, has been Executive Vice President, Finance and
Support Services and Chief Financial Officer of NCE. From 1990 to August 1997,
was Chief Financial Officer of Public Service Company of Colorado.
Teresa S. Madden. Has been a Director of Yorkshire Group since February
1997. Since September 1997, has been Controller and Secretary of NCE. From
1990 to August 1997, was Director of Corporate Accounting and Assistant
Secretary of Public Service Company of Colorado.
MANAGEMENT COMPENSATION OF YORKSHIRE GROUP
The officers and directors of Yorkshire Group listed above (each an "AEP/NCE
Officer or Director", as applicable) receive no cash or non-cash compensation
as a result of their services performed for Yorkshire Group. The salaries of
all AEP/NCE Officers and Directors are paid by either AEP or NCE, as
applicable, solely for the services performed by them for either AEP or NCE,
as applicable.
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MANAGEMENT OF YORKSHIRE FINANCE
The following table sets forth certain information with respect to the Board
of Directors of Yorkshire Finance as of December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Graham J. Hall................................................ 54 Director
Roger Dickinson............................................... 51 Director
Andrew G. Donnelly............................................ 42 Director
</TABLE>
Graham J. Hall. Has been a Director of Yorkshire Finance since August 1997.
Since January 1998, has been the Chief Executive of Yorkshire. From April 1997
to December 1997, was the Group Operations Director of Yorkshire. From 1990
through 1997, was the Group Executive Director, Distribution of Yorkshire.
Roger Dickinson. Has been a Director of Yorkshire Finance since August 1997.
Since 1989, has been Group Company Secretary and Solicitor of Yorkshire.
Andrew G. Donnelly. Has been a Director of Yorkshire Finance since December
1997. Since January 1998, has been Finance Director of Yorkshire. From January
1996 through December 1997, was Group Financial Controller of Yorkshire. From
1993 to 1996, was Financial Controller, System Division of Yorkshire.
MANAGEMENT COMPENSATION OF YORKSHIRE FINANCE
The directors of Yorkshire Finance listed immediately above receive no cash
or non-cash compensation as a result of their services performed for Yorkshire
Finance. The salaries of all directors listed immediately above are paid by
Yorkshire solely for their services performed for Yorkshire.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described under "Business--Business Restructuring", an alternative
ownership structure is being pursued for the generation business. Yorkshire
currently contemplates that such assets may be transferred to a new entity or
to new entities that will be an indirect subsidiary or will be indirect
subsidiaries of the US Parents. It is expected that proceeds from the transfer
of these assets will be used to reduce debt of the Guarantor.
Total assets less current liabilities employed by the generation business at
December 31, 1997 were (Pounds)168 million. Operating income attributable to
the generation business in the nine months ended December 31, 1997 was
(Pounds)12 million. See "Business--Business Restructuring".
SECURITY OWNERSHIP
Yorkshire Group is wholly owned indirectly by AEP and NCE. Yorkshire Finance
is wholly owned by Yorkshire Group. The following table shows the number of
shares of common stock of AEP and NCE, respectively, owned by the directors
and executive officers of Yorkshire Group and Yorkshire Finance as of December
31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME TITLE OF SECURITY BENEFICIALLY OWNED(1)
- ---- ----------------- ---------------------
<S> <C> <C>
Dr. E. Linn Draper, Jr................. AEP Common Stock 7,373(2)(3)(4)
Donald M. Clements, Jr................. AEP Common Stock 907(2)
Armando A. Pena........................ AEP Common Stock 7,761(2)
Wayne H. Brunetti...................... NCE Common Stock 370,802(5)(6)
Richard C. Kelly....................... NCE Common Stock 143,515(5)
Teresa S. Madden....................... NCE Common Stock 28,938(5)
Directors of Yorkshire Finance and
Yorkshire Group as a group
(6 persons)........................... AEP Common Stock 16,041
NCE Common Stock 543,255
</TABLE>
- --------
(1) "Beneficial ownership" means the sole or shared power to vote, or to
direct the voting of, a security and/or investment power with respect to a
security.
(2) Includes shares of AEP common stock held in the AEP Savings Plan as
follows: Dr. Draper 2,717 shares, Mr. Clements 907 shares and Mr. Pena
3,222 shares.
(3) Includes 2,200 shares of AEP common stock held in joint tenancy with Dr.
Draper's wife.
(4) Includes 2,050 shares of AEP common stock held in the AEP Performance
Share Incentive Plan.
(5) Includes shares of NCE common stock in the form of unexercised stock
options awarded pursuant to the Omnibus Incentive Plan as follows: Mr.
Brunetti 352,334, Mr. Kelly 141,050 and Ms. Madden 28,550 shares.
(6) Includes 18,468 shares of NCE common stock held in joint tenancy.
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DESCRIPTION OF THE TRUST SECURITIES
The Trust Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the
1939 Act. The Property Trustee will act as the indenture trustee with respect
to the Trust, as well as the Trust Securities Guarantee, for purposes of
compliance with the provisions of the 1939 Act. The terms of the Trust
Securities will include those stated in the Trust Agreement, the Delaware
Business Trust Act, and those made part of the Trust Agreement by the 1939
Act. The following summary of the material terms and provisions of the Trust
Securities is subject to, and qualified in its entirety by reference to, the
Trust Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, as well as the 1939 Act.
GENERAL
The Trust Agreement authorizes the Administrative Trustees, on behalf of the
Trust, to issue the Trust Securities, which represent undivided beneficial
interests in the assets of the Trust. The Trust Agreement does not permit the
issuance by the Trust of any securities other than the Trust Securities and
the Control Certificate or the incurrence of any indebtedness by the Trust.
Pursuant to the Trust Agreement and the Deposit Agreement, the Property
Trustee will own Book-Entry Interests representing a 100% beneficial interest
in the Junior Subordinated Debentures for the benefit of the Trust and the
holders of the Trust Securities.
Pursuant to the Trust Securities Guarantee, Yorkshire Group will guarantee
the payment of Distributions and payments upon redemption of the Trust
Securities or liquidation of the Trust, but only in each case to the extent of
sufficient funds held by the Trust and available therefor. See "Description of
the Trust Securities Guarantee". The Trust Securities Guarantee does not cover
payment of Distributions on the Trust Securities or amounts payable on
redemption or otherwise when the Trust does not have sufficient funds
available to make such payments. In such event, a remedy of a holder of Trust
Securities is to direct the Property Trustee to enforce its rights under the
Junior Subordinated Debentures and the Debentures Guarantee. In addition, if
Interest Payments or any other payments are due but have not been made on the
Junior Subordinated Debentures, pursuant to the terms of the Debentures
Guarantee, a holder of Trust Securities may institute a legal proceeding
directly against Yorkshire Group without first instituting a legal proceeding
against or requesting or directing that action be taken by the Property
Trustee or any other person or entity for enforcement of payment to such
holder under the Debentures Guarantee in respect of Interest Payments or any
other payments due on the Junior Subordinated Debentures having a principal
amount equal to the aggregate Liquidation Amount of the Trust Securities of
such holder on or after the due dates specified in the Junior Subordinated
Debentures. See "Description of the Trust Securities Guarantee", "Description
of the Debentures Guarantee" and "Relationship Among the Trust Securities, the
Junior Subordinated Debentures, the Trust Securities Guarantee and the
Debentures Guarantee". The above mechanisms and obligations, together with the
US Affiliates' obligations under the Agreement as to Expenses and Liabilities,
constitute a full and unconditional guarantee of the Trust's obligations under
the Trust Securities.
DISTRIBUTIONS
Distributions on each Trust Security shall be fixed at the rate of % per
annum of the stated Liquidation Amount of $25, payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year. Distributions
that are in arrears for more than one quarter will accumulate additional
Distributions thereon at the rate of % per annum thereof, compounded
quarterly ("Additional Distributions"). The term "Distributions" as used
herein includes any Additional Distributions, Additional Amounts or Additional
Interest (as defined herein). Distributions will accumulate from the date of
original issuance of the Trust Securities. The first Distribution Date for the
Trust Securities will be , 1998. The amount of Distributions payable for
any full period will be computed on the basis of a 360-day year of twelve 30-
day months and for any partial period shall be computed on the basis of the
number of days elapsed in a 360-day year of twelve 30-day months.
So long as no Event of Default under the Indenture has occurred and is
continuing, Yorkshire Finance has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures, at any time and
from time to time, for up to 20 consecutive quarters; provided, however,
Yorkshire Finance cannot defer
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Interest Payments beyond the Stated Maturity of the Junior Subordinated
Debentures. During such an Extension Period, quarterly Distributions on the
Trust Securities would also be deferred (but would continue to accumulate
Additional Distributions thereon at the rate of % per annum, compounded
quarterly) by the Trust. Until all deferred Interest Payments, together with
interest thereon, have been paid in full, neither Yorkshire Finance nor
Yorkshire Group may, directly or indirectly, (i) declare or pay any cash
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of its capital stock, (ii) make any
payments on or repay, repurchase or redeem, any of its debt securities
(including other Indenture Securities or other junior subordinated securities
issued by Yorkshire Finance) that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or the Debentures Guarantee,
respectively, (iii) make any payments with respect to any guarantee that ranks
pari passu with or junior to the Junior Subordinated Debentures or the
Debentures Guarantee, respectively, or (iv) make any payments on, or repay,
repurchase or redeem, any of its debt securities held by, make any loans or
advances to, or make any payments with respect to any guarantee of the debt
of, any affiliate, in each case other than (a) dividends or distributions in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, the common stock of Yorkshire Finance or Yorkshire Group and exchanges or
conversions of common stock of one class for common stock of another class,
(b) payments by Yorkshire Group under the Trust Securities Guarantee (or any
other guarantee by Yorkshire Group with respect to any securities issued by
its direct or indirect subsidiaries, provided that the proceeds from the
issuance of such securities were used to purchase other Indenture Securities
or other junior subordinated securities issued by Yorkshire Finance), (c)
payments by Yorkshire Group under the Debentures Guarantee, (d) any dividend
or payment by Yorkshire Group which is applied, directly or indirectly, to any
Tax Payments (as defined below), (e) payments by Yorkshire Group, directly or
indirectly, on the Intercompany Notes or any other promissory notes held by
Yorkshire Finance (or any other direct or indirect wholly-owned subsidiary of
Yorkshire Group) evidencing loans made with the proceeds from the issuance by
Yorkshire Finance (or any other direct or indirect wholly-owned subsidiary of
Yorkshire Group) of securities guaranteed by Yorkshire Group or (f) the
reinvestment of any proceeds received under clause (e) above by Yorkshire
Finance (or any other direct or indirect wholly-owned subsidiary of Yorkshire
Group) in additional debt securities of Yorkshire Group or any of its other
direct or indirect wholly-owned subsidiaries. "Tax Payments" shall mean any
direct or indirect payment by Yorkshire Group to governmental authorities in
respect of UK, US or Cayman Islands taxes arising from the operations of
Yorkshire Group, Yorkshire Finance, the Trust or Yorkshire as and when such
taxes become due and payable. Prior to the termination of any such Extension
Period, Yorkshire Finance may further extend the interest payment period;
provided that, such Extension Period, together with all such previous and
further extensions within such Extension Period, may not exceed 20 consecutive
quarters or the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any Extension Period and the payment of all amounts then
due, Yorkshire Finance may commence a new Extension Period, subject to the
above requirements. As a result, there could be multiple Extension Periods of
varying lengths throughout the term of the Junior Subordinated Debentures. See
"Description of the Junior Subordinated Debentures--Option to Defer Payment of
Interest".
Yorkshire Finance currently has no intention of exercising its right to
defer Interest Payments on the Junior Subordinated Debentures. Moreover,
because of the consequences of exercising such right, including a prohibition
on the payment of cash distributions by Yorkshire Finance and Yorkshire Group
with respect to their capital stock, Yorkshire Finance believes that the
likelihood of such exercise is remote.
In the event that a Distribution Date is not a Business Day (as defined
below), payment of the Distributions payable on such date will be made on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, payment of such Distributions shall be made
on the immediately preceding Business Day, in each case with the same force
and effect as if made on such date (each date on which Distributions are
payable in accordance with the foregoing, a "Distribution Date"). A "Business
Day" shall mean any day other than a Saturday or a Sunday, or a day on which
banking institutions in The City of New York are authorized or required by law
or executive order to remain closed, or a day on which the corporate trust
office of the Property Trustee or the Indenture Trustee is closed for
business.
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Distributions on the Trust Securities must be paid and shall be deemed
payable on the Distribution Date only to the extent that the Trust has
sufficient funds available therefor. The payment of Distributions (if and to
the extent the Trust has sufficient funds available for the payment of such
Distributions) is guaranteed by Yorkshire Group as set forth herein under
"Description of the Trust Securities Guarantee". It is anticipated that the
revenue of the Trust available for Distributions on the Trust Securities will
be limited to payments under the Junior Subordinated Debentures or the
Debentures Guarantee. See "Description of the Junior Subordinated Debentures"
and "Description of the Debentures Guarantee". If Yorkshire Finance does not
make payments of principal of or interest on the Junior Subordinated Debentures
or if Yorkshire Group does not make payments with respect to the Debentures
Guarantee, the Trust will not have sufficient funds available to pay
Distributions on the Trust Securities or amounts payable on redemption thereof
or otherwise.
Distributions on the Trust Securities will be payable to the holders of
record as they appear on the register of the Trust on the relevant record
dates, which, as long as the Trust Securities remain in book-entry form, will
be one Business Day prior to the relevant Distribution Date. In the event that
any Trust Securities are not in book-entry form, the relevant record date for
such Trust Securities shall be the date 15 calendar days prior to the relevant
Distribution Date.
REDEMPTIONS
Mandatory Redemption. Upon the repayment of the Junior Subordinated
Debentures at Stated Maturity or upon the redemption, in whole or in part, of
the Junior Subordinated Debentures (as described below and in "Description of
the Junior Subordinated Debentures--Redemption"), the proceeds from such
repayment or redemption will be applied to redeem a Like Amount of Trust
Securities, upon not less than 30 nor more than 60 days' notice to each holder
of Trust Securities at its registered address, at the Redemption Price.
Optional Redemption of Junior Subordinated Debentures. Yorkshire Finance will
have the right to redeem the Junior Subordinated Debentures on or after ,
2003, in whole at any time or in part from time to time, at the Debenture
Redemption Price and thereby cause a mandatory redemption of a Like Amount of
Trust Securities at the Redemption Price. See "Description of the Junior
Subordinated Debentures--Redemption".
Yorkshire Finance will also have the right to redeem the Junior Subordinated
Debentures in whole (but not in part), at the Debenture Redemption Price, if
Yorkshire Finance or Yorkshire Group has or will become obligated to pay
Additional Amounts as provided under "Description of the Junior Subordinated
Debentures--Optional Tax Redemption", and thereby cause a mandatory redemption
of the Trust Securities in whole (but not in part) at the Redemption Price.
Special Event Redemption of Junior Subordinated Debentures. Upon the
occurrence and continuation of a Special Event, Yorkshire Finance shall have
the right, at any time, to redeem the Junior Subordinated Debentures in whole
(but not in part) at the Debenture Redemption Price and thereby cause a
mandatory redemption of the Trust Securities in whole (but not in part) at the
Redemption Price within 90 days following the occurrence of such Special Event.
If a Special Event occurs and Yorkshire Finance does not elect to redeem the
Junior Subordinated Debentures or to dissolve the Trust, the Trust Securities
will remain outstanding and, if such Special Event is a Tax Event, Additional
Interest (as described under "Description of the Junior Subordinated
Debentures--Certain Covenants") may be payable on the Junior Subordinated
Debentures.
The Internal Revenue Service (the "IRS") recently challenged the
deductibility, for US Federal income tax purposes, of interest payments
pursuant to instruments similar to the Junior Subordinated Debentures held by
an entity similar in certain respects to the Trust. Based on the information
available to them, Yorkshire Group and Yorkshire Finance do not believe that
deductibility of interest payments on the Junior Subordinated Debentures is
jeopardized by the position taken by the IRS. See "Material Income Tax
Considerations--US Federal Income Tax Considerations--Classification of the
Junior Subordinated Debentures". Developments favoring the IRS's position in
respect of the above-described challenge, or other unrelated subsequent
developments, could give rise to a Tax Event.
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"Tax Event" means the receipt by Yorkshire Finance or Yorkshire Group of an
opinion of independent counsel (which may be counsel to Yorkshire Group or its
affiliates) experienced in such matters to the effect that there has been (a)
any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of any supranational federation to
which the UK belongs or the jurisdiction (or any political subdivision or
taxing authority thereof or therein) in which Yorkshire Finance or Yorkshire
Group is incorporated or created, as applicable, or in which Yorkshire Finance
or Yorkshire Group is managed and controlled or has a place of business (each,
a "Taxing Jurisdiction"), (b) any official administrative pronouncement or
judicial decision interpreting, clarifying or applying such laws or
regulations or (c) a threatened challenge asserted by a government or taxing
authority with respect to Yorkshire Group or any of its subsidiaries, or a
threatened challenge asserted in writing by a government or taxing authority
against any other taxpayer that has raised capital through the issuance of
securities that are substantially similar to the Junior Subordinated
Debentures or the Trust Securities, which amendment or change is effective or
which pronouncement, clarification, challenge or decision is announced on or
after the date of this Prospectus, and that results in there being more than
an insubstantial risk that (i) Yorkshire Finance is, or will be within 90 days
of the date thereof, subject to income tax within a Taxing Jurisdiction (other
than the UK corporation income tax) with respect to interest accrued or
received on the Intercompany Notes, (ii) Yorkshire Finance is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount
of other tax, duties or other governmental charges, (iii) Interest Payments on
the Junior Subordinated Debentures are not, or within 90 days of the date
thereof will not be, deductible, in whole or in part for (as appropriate) US
Federal or UK corporation income tax purposes, as they accrue by Yorkshire
Finance or by a member of any tax group to which Yorkshire Group belongs or
(iv) interest payable with respect to the Intercompany Notes by Yorkshire
Group or its affiliates is not, or within 90 days of the date thereof will not
be, deductible, in whole or in part, for (as appropriate) US Federal or UK
corporation income tax purposes, as it accrues by one of (as appropriate)
Yorkshire Group, its shareholders or a member of any tax group to which
Yorkshire Group belongs.
"Investment Company Act Event" means that Yorkshire Group or Yorkshire
Finance shall have received an opinion of independent counsel (which may be
counsel to Yorkshire Group or its affiliates) experienced in such matters to
the effect that, as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority
(an "Investment Company Act Change"), there is more than an insubstantial risk
that Yorkshire Finance or Yorkshire Group is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which
Investment Company Act Change becomes effective on or after the date of this
Prospectus.
"Special Event" means the occurrence of a Tax Event or an Investment Company
Act Event.
"Like Amount" means (i) with respect to a repayment or redemption of any
Trust Securities, Trust Securities having a Liquidation Amount equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously repaid or redeemed and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of the Trust
Securities in connection with a dissolution and liquidation of the Trust or a
payment of any Additional Amounts or Additional Interest on the Trust
Securities, Junior Subordinated Debentures having a principal amount equal to
the Liquidation Amount of the Trust Securities of the holder to whom such
Junior Subordinated Debentures are distributed or such payment is being made.
"Liquidation Amount" means the stated liquidation amount of $25 per Trust
Security.
REDEMPTION PROCEDURES
Trust Securities redeemed on each Redemption Date shall be redeemed at the
Redemption Price with the applicable proceeds from the contemporaneous
repayment or redemption of the Junior Subordinated Debentures. Redemptions of
the Trust Securities shall be made, and the Redemption Price shall be deemed
payable, on each
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Redemption Date only to the extent that the Trust has sufficient funds
available for the payment of such Redemption Price at 10:00 a.m., New York
City time, on the Redemption Date.
If the Property Trustee gives a notice of redemption in respect of any Trust
Securities, then, by 12:00 noon, New York City time, on the Redemption Date,
subject to the immediately preceding paragraph, the Property Trustee will
deposit irrevocably with DTC, so long as the Trust Securities are in book-
entry only form, funds sufficient to pay the applicable Redemption Price and
will give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders of such Trust Securities. See "--Book-Entry Issuance". If
the Trust Securities are no longer in book-entry form, the Property Trustee,
subject to the immediately preceding paragraph, will irrevocably deposit with
the paying agent for the Trust Securities funds sufficient to pay the
applicable Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Trust Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Trust Securities called for redemption shall be
payable to the holders of such Trust Securities as of the relevant record
dates for the related Distribution Dates. If notice of redemption shall have
been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Trust Securities so called for
redemption will cease, except the right of the holders of such Trust
Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Trust Securities will cease to be outstanding. In
the event that any date fixed for redemption of Trust Securities is not a
Business Day, then payment of the Redemption Price payable on such date will
be made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day falls in the next succeeding calendar year, such payment will be
made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date. In the event that payment of the
Redemption Price in respect of Trust Securities called for redemption is
improperly withheld or refused and not paid either by the Trust or by
Yorkshire Group pursuant to the Trust Securities Guarantee or the Debentures
Guarantee, Distributions on such Trust Securities will continue to accumulate
at the then applicable rate from the Redemption Date originally established by
the Trust for such Trust Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed
for redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, Rule 14e-1 under
the Exchange Act and any other applicable US Federal securities law),
Yorkshire Group, Yorkshire Finance, the US Affiliates or their affiliates may
at any time and from time to time purchase outstanding Trust Securities by
tender, in the open market or by private agreement.
Payment of the Redemption Price on the Trust Securities and any distribution
of Junior Subordinated Debentures to holders of Trust Securities shall be made
to the holders of record as they appear on the register of the Property
Trustee as of the relevant record date, which, as long as the Trust Securities
remain in book-entry form, will be one Business Day prior to the relevant
Redemption Date or liquidation date, as applicable; provided, however, that in
the event that the Trust Securities are not in book-entry form, the relevant
record date for the Trust Securities shall be the date 15 calendar days prior
to the Redemption Date or liquidation date, as applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, the particular Trust Securities to be redeemed shall be selected on a
pro rata basis not more than 60 days prior to the Redemption Date by the
Property Trustee from the outstanding Trust Securities not previously called
for redemption, by such method as the Property Trustee shall deem fair and
appropriate, which shall provide for the selection for redemption of portions
(equal to $25 or an integral multiple of $25 in excess thereof) of the
Liquidation Amount of Trust Securities of a denomination larger than $25. The
Property Trustee shall promptly notify the transfer agent and registrar in
writing of the Trust Securities selected for redemption and, in the case of
any Trust Securities selected for partial redemption, the aggregate
Liquidation Amount thereof to be redeemed.
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DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Control Party has the right, at any time, to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust, if any, as
provided by applicable law, to cause a Like Amount of Junior Subordinated
Debentures to be distributed to the holders of the Trust Securities in
liquidation of the Trust. Under current US Federal income tax law, provided
the Trust is treated as a grantor trust at the time of such distribution, such
distribution would not be a taxable event to holders of the Trust Securities.
See "Description of the Junior Subordinated Debentures--Distribution of the
Junior Subordinated Debentures" and "Material Income Tax Considerations--US
Federal Income Tax Considerations--Receipt of Junior Subordinated Debentures
or Cash in Certain Circumstances".
After the date fixed for any distribution of Junior Subordinated Debentures
upon liquidation of the Trust (i) the Trust Securities will no longer be
deemed to be outstanding and the Trust Securities Guarantee will be
discharged, (ii) DTC or its nominee, as the record holder of the Trust
Securities, will receive Global Book-Entry Interests (as defined herein)
representing a 100% beneficial interest in the Junior Subordinated Debentures
to be delivered upon such distribution, or, if any Trust Securities are not
held by DTC or its nominee, the certificates representing the Trust Securities
will be deemed to represent Book-Entry Interests representing the Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities, and bearing accrued and unpaid interest in an
amount equal to the accrued and unpaid Distributions on the Trust Securities
until such certificates are presented to Yorkshire Finance or its agent for
transfer or reissuance and (iii) Yorkshire Finance will use its reasonable
efforts to list the Junior Subordinated Debentures on the NYSE or such other
exchanges or other organizations, if any, on which the Trust Securities are
then listed or traded.
There can be no assurance as to the market price for the Junior Subordinated
Debentures that may be distributed if a dissolution and liquidation of the
Trust were to occur. Accordingly, the Junior Subordinated Debentures that an
investor may receive upon a dissolution and liquidation of the Trust may trade
at a discount to the price that such investor paid to purchase its Trust
Securities offered hereby.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Trust Agreement, the Trust shall dissolve upon the first to
occur of: (i) , 2043, (ii) the delivery of written direction to the
Property Trustee by the Control Party at any time to dissolve the Trust (which
direction is optional and wholly within the discretion of Yorkshire Group) and
to distribute the Junior Subordinated Debentures to the holders of the Trust
Securities in liquidation of the Trust (see "--Distribution of Junior
Subordinated Debentures"), (iii) the occurrence of a Bankruptcy Event (as
defined in the Trust Agreement) in respect of Yorkshire Finance, dissolution
or liquidation of Yorkshire Finance, or the dissolution of the Trust pursuant
to a judicial decree or (iv) the payment at Stated Maturity or redemption of
all of the Junior Subordinated Debentures and the consequent redemption of all
of the Trust Securities.
If an early dissolution occurs as described in clause (ii) or (iii) above,
the Trust shall be liquidated, and the Property Trustee shall distribute to
each holder of Trust Securities a Like Amount of Junior Subordinated
Debentures, unless, in the case of an event described in clause (iii), such
distribution is determined by the Administrative Trustees not to be practical,
in which event such holders will be entitled to receive, out of the assets of
the Trust available for distribution to holders after satisfaction of
liabilities to creditors, an amount equal to the aggregate of the Liquidation
Amount plus accumulated and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Trust
Securities shall be paid on a pro rata basis in proportion to the full
Liquidation Distribution for which the Trust Securities would be entitled.
MERGERS, CONVERSIONS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS
The Trust may not merge with or into, convert into, consolidate, amalgamate,
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
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described below or as otherwise described in the Trust Agreement. The Trust
may, at the request of the Control Party, with the consent of the
Administrative Trustees and without the consent of the holders of the Trust
Securities, merge with or into, convert into, consolidate, amalgamate, be
replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of
any jurisdiction; provided that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Trust
Securities or (b) substitutes for the Trust Securities other securities having
substantially the same terms as the Trust Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Trust
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) such successor entity transfers to
the Control Party, directly or indirectly, a control certificate (or similar
instrument) or common securities relating to such successor entity, (iii) the
Control Party expressly appoints a trustee of such successor entity possessing
the same powers and duties as the Property Trustee as the holder, directly or
indirectly, of the Junior Subordinated Debentures, (iv) the Successor
Securities are listed or traded, or any Successor Securities will be listed or
traded upon notification of issuance, on any national securities exchange or
other organization on which the Trust Securities are then listed, if any, (v)
such merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Trust Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (vi) such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Trust Securities
(including any Successor Securities) in any material respect, (vii) such
successor entity has a purpose substantially identical to that of the Trust,
(viii) prior to such merger, conversion, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Control Party has received an
opinion from independent counsel experienced in such matters to the effect
that (a) such merger, conversion, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Trust Securities (including
any Successor Securities) in any material respect, and (b) following such
merger, conversion, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust, the Control Party, Yorkshire Finance nor
such successor entity will be required to register as an "investment company"
under the Investment Company Act and (ix) Yorkshire Group or any permitted
successor or assignee guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Trust
Securities Guarantee. Notwithstanding the foregoing, the Trust shall not,
except with the consent of holders of 100% of the Liquidation Amount of the
Trust Securities, consolidate, amalgamate, merge with or into, convert into,
or be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, convert into or replace it, if
such consolidation, amalgamation, merger, conversion or replacement would
cause (i) the Trust or the successor entity to be classified as other than a
grantor trust for US Federal income tax purposes, (ii) the Trust or the
successor entity to be classified as a company or other than as a trust whose
beneficiaries are fully entitled to the underlying income of the Trust as it
arises (a "Transparent Trust"), in either case, for purposes of UK tax law,
(iii) the Control Party, Yorkshire Finance, the Trust or the successor entity
to be required to register as an "investment company" under the Investment
Company Act or (iv) Yorkshire Finance to be classified as an association or a
publicly traded partnership taxable as a corporation for US Federal income tax
purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below, under "--Events of Default" and under "Description
of the Trust Securities Guarantee--Amendments and Assignment" and as otherwise
required by law, in the Indenture and the Trust Agreement, the holders of the
Trust Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Securities
Trustees, the Control Party and AEP Resources, as depositor, without the
consent of the holders of the Trust Securities: (i) to cure any ambiguity, to
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision therein, or to make any other provisions
with respect to matters or questions arising under the Trust Agreement that
shall not be inconsistent with the other provisions of the Trust Agreement;
(ii) to modify, eliminate or add to
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any provisions of the Trust Agreement to such extent as shall be necessary to
ensure that (a) the Trust will be classified for US Federal income tax
purposes as a grantor trust at all times that any of the Trust Securities are
outstanding, (b) the Trust will be a Transparent Trust and will not be
classified as a company, in either case, for purposes of UK tax law, (c)
neither the Trust, Yorkshire Finance nor the Control Party will be required to
register as an "investment company" under the Investment Company Act or (d)
Yorkshire Finance will not be classified as an association or a publicly
traded partnership taxable as a corporation for US Federal income tax
purposes; or (iii) to effect the acceptance of appointment by a successor
Property Trustee, provided, however, that, except in the case of clause (ii),
such action shall not adversely affect in any material respect the interests
of any holder of Trust Securities, and, in the case of clause (i), any such
amendment of the Trust Agreement shall become effective when notice thereof is
given to the holders of Trust Securities. Except as provided in the next
succeeding paragraph, other amendments to the Trust Agreement may be made (i)
with the consent of the holders of not less than 66 2/3% in aggregate
Liquidation Amount of the Trust Securities then outstanding and (ii) upon
receipt by the Securities Trustees of an opinion of independent counsel
experienced in such matters to the effect that such amendment or the exercise
of any power granted by the Securities Trustees in accordance with such
amendment will not (A) affect the Trust's status as a grantor trust for US
Federal income tax purposes, (B) affect the Trust's, Yorkshire Finance's or
the Control Party's exemption from the Investment Company Act, (C) cause the
Trust to be treated as a company for purposes of UK tax law or as a trust
which is not a Transparent Trust, in either case, for purposes of UK tax law
or (D) affect Yorkshire Finance's status as a partnership for US Federal
income tax purposes.
Notwithstanding the foregoing, no amendment or modification may be made to
the Trust Agreement if such amendment or modification would cause (i) the
Trust to be classified as other than a grantor trust for US Federal income tax
purposes, (ii) the Trust to be classified as a company or as a trust which is
not a Transparent Trust, in either case, for purposes of UK tax law, (iii) the
Trust, Yorkshire Finance or the Control Party to be required to register as an
"investment company" under the Investment Company Act or (iv) Yorkshire
Finance to be classified as an association or a publicly traded partnership
taxable as a corporation for US Federal income tax purposes.
Notwithstanding the foregoing, without the consent of each affected holder
of Trust Securities, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date, (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date or (iii) change the consent required to amend
the Trust Agreement.
So long as any Junior Subordinated Debentures are held by or for the benefit
of the Property Trustee, the Securities Trustees shall not (i) direct the
time, method and place of conducting any proceeding for any remedy available
to the Indenture Trustee, or executing any trust or power conferred on the
Indenture Trustee with respect to such Junior Subordinated Debentures or the
Debentures Guarantee, (ii) waive any past default that is waivable under the
applicable provisions of the Indenture, (iii) exercise any right to rescind or
annul a declaration that any Interest Payment or other payment with respect to
the Junior Subordinated Debentures or the Debentures Guarantee shall be due
and payable or (iv) consent to any amendment, modification or termination of
the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, or take any other action under the Indenture without, in each
case, obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Trust Securities; provided, however,
that where a consent under the Indenture would require the consent of each
holder of Junior Subordinated Debentures affected thereby, no such consent
shall be given by the Securities Trustees without the prior written consent of
each holder of the Trust Securities. The Securities Trustees shall not revoke
any action previously authorized or approved by a vote of the Trust Securities
except by subsequent vote of the holders of the Trust Securities. The Property
Trustee shall notify all holders of Trust Securities of any notice of default
with respect to the Junior Subordinated Debentures. In addition to obtaining
the foregoing approvals of the holders of the Trust Securities, prior to
taking any of the foregoing actions, the Securities Trustees shall obtain an
opinion of independent counsel, designated by Yorkshire Group, experienced in
such matters to the effect that (i) the Trust will not be classified as other
than a
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grantor trust for US Federal income tax purposes on account of such action,
(ii) the Trust will be a Transparent Trust and will not be classified as a
company for purposes of UK tax law on account of such action, (iii) neither
the Trust, Yorkshire Finance nor the Control Party will be required to
register as an "investment company" under the Investment Company Act on
account of such action and (iv) Yorkshire Finance will not be classified as an
association or a publicly traded partnership taxable as a corporation for US
Federal income tax purposes on account of such action.
Any required approval of holders of Trust Securities may be given at a
meeting of holders of Trust Securities convened for such purpose or pursuant
to written consent. The Administrative Trustees will cause a notice of any
meeting at which holders of Trust Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each holder of record of Trust Securities in the manner set forth
in the Trust Agreement.
No vote or consent of the holders of Trust Securities will be required for
the Trust to redeem and cancel the Trust Securities in accordance with the
Trust Agreement.
Notwithstanding that holders of Trust Securities are entitled to vote or
consent under any of the circumstances described above, any of the Trust
Securities that are owned by Yorkshire Group, or any of its affiliates, shall,
for purposes of such vote or consent, be treated as if they were not
outstanding.
EVENTS OF DEFAULT
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (a "Trust Agreement Event of Default") with respect to the
Trust Securities issued thereunder (whatever the reason for such Trust
Agreement Event of Default, and whether it shall be voluntary or involuntary
or be effected by operation of law or pursuant to any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of an Event of Default under the Indenture (see
"Description of the Junior Subordinated Debentures--Indenture Events of
Default"); or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable (subject to an Extension Period) and the
continuation of such default for a period of 60 days; or
(iii) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, of any covenant or warranty
of the Securities Trustees in the Trust Agreement (other than a covenant or
warranty a default in the performance of which is covered by clause (ii) or
(iii) above), and continuation of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to such
Securities Trustees by the holders of at least 33% in aggregate Liquidation
Amount of the outstanding Trust Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Trust.
Within 90 days after the occurrence of any Trust Agreement Event of Default,
the Property Trustee shall transmit notice of any default known to the
Property Trustee to the holders of Trust Securities, the Control Party and
Yorkshire Finance, unless such Trust Agreement Event of Default shall have
been cured or waived.
If a Trust Agreement Event of Default occurs and is continuing, then,
pursuant to the Trust Agreement, holders of a majority in aggregate
Liquidation Amount of Trust Securities have the right to direct the time,
method and place of conducting any proceeding for remedy available to the
Property Trustee or to direct the exercise of any trust or power conferred
upon the Property Trustee under the Trust Agreement, including the right to
direct the Property Trustee under the Trust Agreement to exercise the remedies
available to it as indirect holder of the Junior Subordinated Debentures and
as direct beneficiary of the Debentures Guarantee.
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Furthermore, if the Property Trustee fails to enforce its rights under the
Debentures Guarantee, a holder of Trust Securities may, to the fullest extent
permitted by applicable law, institute a legal proceeding directly against
Yorkshire Group to enforce the Property Trustee's rights with respect to the
Debentures Guarantee without first instituting any legal proceeding against or
requesting or directing that action be taken by the Property Trustee or the
Trust. Notwithstanding the foregoing, a holder of Trust Securities may
institute a legal proceeding directly against Yorkshire Group without first
instituting a legal proceeding against the Property Trustee or any other
person or entity for enforcement of payment to such holder under the
Debentures Guarantee in respect of Interest Payments or any other payments due
on the Junior Subordinated Debentures having an aggregate principal amount
equal to the aggregate Liquidation Amount of the Trust Securities of such
holder on or after the due dates specified in the Junior Subordinated
Debentures. See "Relationship Among the Trust Securities, the Junior
Subordinated Debentures, the Trust Securities Guarantee and the Debentures
Guarantee".
Unless an Event of Default under the Indenture shall have occurred and be
continuing, any Securities Trustee may be removed at any time by act of the
holder of the Control Certificate. If an Event of Default under the Indenture
has occurred and is continuing, the Property Trustee and the Delaware Trustee
may be removed at such time by act of the holders of a majority in aggregate
Liquidation Amount of the Trust Securities. In no event will the holders of
the Trust Securities have the right to vote, appoint, remove or replace the
Administrative Trustees, which rights are vested exclusively with the Control
Party. No resignation or removal of any Securities Trustee and no appointment
of a successor shall be effective until the acceptance of appointment by the
successor trustee in accordance with the requirements of the Trust Agreement.
PAYMENT AND PAYING AGENCY
Payments in respect of Trust Securities held by DTC or its nominee shall be
made as described under "--Book-Entry Issuance". If any Trust Securities are
not held by DTC or its nominee, such payments shall be made by check mailed to
the address of the holder entitled thereto as such address shall appear on the
register of the Trust. The paying agent shall initially be The Bank of New
York in New York, New York.
BOOK-ENTRY ISSUANCE
DTC will act as initial securities depositary for the Trust Securities. The
Trust Securities will be issued as fully-registered global securities in book-
entry form registered in the name of Cede & Co. (DTC's partnership nominee).
One or more fully-registered global certificates in book-entry form will be
issued for the Trust Securities representing the aggregate total number of the
Trust Securities and will be deposited with DTC or its custodian.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with Direct Participants, either directly or
indirectly ("Indirect Participants"). The rules applicable to DTC and its
Participants are on file with the Commission.
Purchases of Trust Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Trust
Securities on DTC's records. The ownership interest of each actual purchaser
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of each Trust Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Direct or Indirect Participants through which the Beneficial Owners purchased
Trust Securities. Transfers of ownership interests in the Trust Securities are
to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Trust Securities, except in the
event that use of the book-entry system for the Trust Securities is
discontinued.
To facilitate subsequent transfers, all of the Trust Securities deposited by
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of Trust Securities with DTC and their registration in
the name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Trust Securities; DTC's
records reflect only the identity of the Direct Participants to whose accounts
such Trust Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the Trust
Securities are being redeemed, DTC will determine the amount of the interest
of each Direct Participant to be redeemed in accordance with its current
procedures.
Neither DTC nor Cede & Co. will consent or vote with respect to Trust
Securities. Under its usual procedures, DTC mails an omnibus proxy (the
"Omnibus Proxy") to the Property Trustee as soon as possible after the record
date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to
those Direct Participants to whose accounts such Trust Securities are credited
on the record date (identified in a listing attached to the Omnibus Proxy).
Distribution payments on the Trust Securities will be made to DTC in
immediately available funds. DTC's current practice, upon receipt of any
payment in respect of securities such as the Trust Securities, is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices and will be the responsibility of such Participant and
not of DTC, the Trust, Yorkshire Group or Yorkshire Finance, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to DTC is the responsibility of the Property Trustee,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursements of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
If (i) DTC discontinues providing its services as securities depositary with
respect to the Trust Securities at any time by giving reasonable notice to the
Trust or the Property Trustee, (ii) the Trust or the Control Party decides to
discontinue use of the system of book-entry transfers through DTC (or a
successor depositary) and a successor securities depositary is not obtained or
(iii) the Trust fails to pay any amounts due and payable in respect of the
Trust Securities or Yorkshire Group fails to pay any amounts payable in
respect of the Trust Securities Guarantee or the Debentures Guarantee, as
required by their respective terms, definitive Trust Securities certificates
will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust and Yorkshire Finance believe to
be accurate, but the Trust and Yorkshire Finance assume
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no responsibility for the accuracy thereof. Neither the Trust nor Yorkshire
Finance has any responsibility for the performance by DTC or its Participants
of their respective obligations as described herein or under the rules and
procedures governing their respective operations.
REGISTRAR AND TRANSFER AGENT
The Bank of New York will act as registrar and transfer agent for the Trust
Securities.
Registration of transfers of Trust Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required to register or cause to be registered
the transfer of Trust Securities after the date such Trust Securities have
been called for redemption.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that (i) neither the Control
Party, Yorkshire Finance nor the Trust will be deemed to be an "investment
company" required to be registered under the Investment Company Act, (ii) the
Trust will not be classified other than as a grantor trust for US Federal
income tax purposes, (iii) the Trust will be classified as a Transparent Trust
and not as a company for purposes of UK tax law, (iv) Yorkshire Finance will
not be classified as an association or a publicly traded partnership taxable
as a corporation for US Federal income tax purposes and (v) the Junior
Subordinated Debentures will be treated as indebtedness for US Federal income
tax purposes. In this connection, the Control Party and the Administrative
Trustees are authorized to take any action, not inconsistent with applicable
law, the certificate of trust or the Trust Agreement, that each of the Control
Party and the Administrative Trustees determine in their discretion consider
to be necessary or desirable for such purposes, as long as such action does
not materially and adversely affect the interests of the holders of the Trust
Securities.
The Trust and the holders of Trust Securities (by acceptance of a beneficial
interest in a Trust Security) will agree to treat the Junior Subordinated
Debentures as indebtedness of Yorkshire Finance for all US Federal income tax
purposes.
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DESCRIPTION OF THE TRUST SECURITIES GUARANTEE
The Trust Securities Guarantee will be executed and delivered by Yorkshire
Group (concurrently with the issuance by the Trust of the Trust Securities)
for the benefit of the holders from time to time of the Trust Securities. The
Bank of New York will act as indenture trustee (the "Guarantee Trustee") under
the Trust Securities Guarantee for the purposes of compliance with the 1939
Act. The Trust Securities Guarantee will be qualified as an indenture under
the 1939 Act. This summary of material provisions of the Trust Securities
Guarantee is subject to, and qualified in its entirety by reference to, all of
the provisions of the Trust Securities Guarantee and the 1939 Act. The form of
the Trust Securities Guarantee has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Trust Securities Guarantee for the benefit of the
holders of the Trust Securities.
GENERAL
Yorkshire Group will fully and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth therein, the Guarantee Payments
(as defined below), to the extent not paid by, or on behalf of, the Trust to
the holders of the Trust Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that Yorkshire Group may have or
assert other than the defense of payment. The following payments or
distributions with respect to the Trust Securities, to the extent not paid by
or on behalf of the Trust, will be subject to the Trust Securities Guarantee
(without duplication): (i) any accumulated and unpaid Distributions required
to be paid on the Trust Securities, to the extent that the Trust has
sufficient funds available therefor to make such payment, (ii) the Redemption
Price with respect to any Trust Securities called for redemption to the extent
that the Trust has sufficient funds available therefor to make such payment or
(iii) upon a voluntary or involuntary dissolution, winding-up or liquidation
of the Trust (unless the Junior Subordinated Debentures are distributed to
holders of the Trust Securities or the Trust Securities are redeemed in
whole), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions on the Trust Securities to the date of
payment, to the extent the Trust has sufficient funds available therefor, and
(b) the amount of assets of the Trust remaining available for distribution to
holders of the Trust Securities in liquidation of the Trust (the "Guarantee
Payments"). Yorkshire Group's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by Yorkshire Group to the
holders of the Trust Securities or by causing the Trust to pay such amounts to
such holders.
The Trust Securities Guarantee will be an irrevocable guarantee on a
subordinated basis of the Trust's obligations under the Trust Securities, but
will apply only to the extent that the Trust has sufficient funds available to
make such payments.
If Yorkshire Finance does not make payments of principal of or interest on
the Junior Subordinated Debentures or Yorkshire Group does not make payments
pursuant to the Debentures Guarantee, it is expected that the Trust will not
pay Distributions on the Trust Securities and will not have sufficient funds
available therefor.
The Trust Securities Guarantee, the Debentures Guarantee, the Indenture, the
Junior Subordinated Debentures, the Trust Agreement and the Agreement as to
Expenses and Liabilities, when taken together, will effectively provide a full
and unconditional guarantee, on a subordinated basis, of the Trust's
obligations under the Trust Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such a guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Securities.
See "Relationship Among the Trust Securities, the Junior Subordinated
Debentures, the Trust Securities Guarantee and the Debentures Guarantee".
During an Extension Period, Yorkshire Group's obligations to make payments
under the Trust Securities Guarantee will be suspended. See "Description of
the Junior Subordinated Debentures--Option to Defer Payment of Interest".
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STATUS OF THE TRUST SECURITIES GUARANTEE
Yorkshire Group's obligations under the Trust Securities Guarantee to make
the Guarantee Payments will constitute an unsecured obligation of Yorkshire
Group and will rank (i) subordinate and junior in right of payment to all
Senior Debt of Yorkshire Group (which excludes those obligations or
liabilities made pari passu or subordinate by their terms), (ii) pari passu
with the most senior preferred or preference stock now or hereafter issued by
Yorkshire Group and with any guarantee now or hereafter entered into by
Yorkshire Group in respect of any preferred or preference securities of any
affiliate of Yorkshire Group, and (iii) senior to all common stock of
Yorkshire Group. The terms of the Trust Securities will provide that each
holder of Trust Securities by acceptance thereof agrees to the subordination
provisions and other terms of the Trust Securities Guarantee.
The Trust Securities Guarantee will constitute a guarantee of payment and
not of collection (that is, the guaranteed party may institute a legal
proceeding directly against Yorkshire Group to enforce its rights under the
guarantee without first instituting a legal proceeding against any other
person or entity).
The Trust Securities Guarantee will not be discharged except by payment of
the Guarantee Payments in full to the extent not paid by or on behalf of the
Trust (without duplication) or upon distribution to the holders of the Trust
Securities of the Junior Subordinated Debentures. The Trust Securities
Guarantee does not place a limitation on the amount of additional Senior Debt
that may be incurred by Yorkshire Group. Yorkshire Group expects from time to
time to incur additional indebtedness constituting Senior Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially and adversely
affect the rights of holders of the Trust Securities (in which case no vote
will be required), the Trust Securities Guarantee may not be amended without
the prior approval of the holders of a majority of the aggregate Liquidation
Amount of the outstanding Trust Securities. The manner of obtaining any such
approval is set forth under "Description of the Trust Securities--Voting
Rights; Amendment of Trust Agreement". All guarantees and agreements contained
in the Trust Securities Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of Yorkshire Group and shall inure to
the benefit of the holders of the Trust Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Trust Securities Guarantee will occur upon the
failure of Yorkshire Group to perform any of its payment obligations
thereunder. The holders of a majority in aggregate Liquidation Amount of the
Trust Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Trust Securities Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Trust Securities
Guarantee.
Any holder of the Trust Securities may institute a legal proceeding directly
against Yorkshire Group to enforce its rights under the Trust Securities
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, before the occurrence of an event of default under
the Trust Securities Guarantee and after the curing or waiving of all events
of default under the Trust Securities Guarantee, undertakes to perform only
such duties as are specifically set forth in the Trust Securities Guarantee
and, after an event of default with respect to the Trust Securities Guarantee
has occurred (that has not been waived or cured), must exercise such of the
rights and powers vested in it by the Trust Securities Guarantee and use the
same degree of care and skill thereof as a prudent person would exercise or
use under the circumstances in the conduct of his or her own affairs.
Notwithstanding this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by the Trust Securities Guarantee
at the request of any holder of the Trust Securities
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unless it is offered reasonable security and indemnity against the costs,
expenses and liabilities that might be incurred thereby.
The Bank of New York, the Guarantee Trustee, also serves as the Property
Trustee and the Indenture Trustee. Yorkshire Group and certain of its
affiliates maintain banking relationships with The Bank of New York.
TERMINATION OF THE TRUST SECURITIES GUARANTEE
The Trust Securities Guarantee will terminate and be of no further force and
effect upon full payment of the Redemption Price of the Trust Securities, upon
full payment of the amounts payable upon liquidation of the Trust or upon
distribution of the Junior Subordinated Debentures to the holders of the Trust
Securities. The Trust Securities Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of the Trust
Securities must restore payment of any sums paid under the Trust Securities or
the Trust Securities Guarantee.
GOVERNING LAW
The Trust Securities Guarantee will be governed by and construed in
accordance with the laws of the State of New York.
THE AGREEMENT AS TO EXPENSES AND LIABILITIES
Pursuant to an expense agreement ( the "Agreement as to Expenses and
Liabilities"), the US Affiliates will irrevocably and unconditionally
guarantee to each person or entity to whom the Trust becomes indebted or
liable the full payment, when and as due, of any indebtedness, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Trust Securities or other similar interests in the Trust, the
amounts due such holders pursuant to the terms of the Trust Securities or such
other similar interests, as the case may be.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Indenture with
terms corresponding to the terms of the Trust Securities. This summary of
material terms and provisions of the Junior Subordinated Debentures and the
Indenture is subject to, and is qualified in its entirety by reference to, the
Indenture, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and the 1939 Act.
GENERAL
Concurrently with the issuance of the Trust Securities, the Trust will
invest the proceeds thereof in the Junior Subordinated Debentures issued by
Yorkshire Finance. The Junior Subordinated Debentures will be unsecured and
will rank junior and be subordinate in right of payment to all Senior Debt of
Yorkshire Finance and will rank pari passu with any other series of Indenture
Securities (as defined below) issued by Yorkshire Finance. Additional series
of securities (together with the Junior Subordinated Debentures, the
"Indenture Securities") may be issued, without limitation as to amount, under
the Indenture and the Indenture does not limit the incurrence or issuance of
other secured or unsecured securities of Yorkshire Finance, whether under the
Indenture, any other indenture that Yorkshire Finance may enter into in the
future or otherwise. See "--Subordination". Application will be made to list
the Junior Subordinated Debentures on the Luxembourg Stock Exchange.
The entire principal amount of the Junior Subordinated Debentures will
mature and become due and payable, together with any accrued and unpaid
interest thereon, on , 2038.
INTEREST
The Junior Subordinated Debentures will bear interest at the rate of % per
annum of the principal amount thereof, payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year (each, an "Interest
Payment Date"), commencing , 1998, initially, through a Paying Agent to
the Book-Entry Depositary (as defined under "--Form, Book-Entry Procedures and
Transfer"), as the holder of the Global Debentures (as defined under "--Form,
Book-Entry Procedures and Transfer"), and, otherwise, as described under "--
Form, Book-Entry Procedures and Transfer--Payments on the Junior Subordinated
Debentures". The amount of interest payable for any full period will be
computed on the basis of a 360-day year of twelve 30-day months and for any
partial period shall be computed on the basis of the number of days elapsed in
a 360-day year of twelve 30-day months. In the event that any date on which an
Interest Payment is payable on the Junior Subordinated Debentures is not a
Business Day, then the Interest Payment payable on such date will be made on
the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on the date such payment was originally payable. Interest
Payments that are in arrears for more than one quarter will accrue additional
interest (to the extent permitted by law) at the rate of % per annum thereof,
compounded quarterly. The term "interest" as used herein shall include
quarterly Interest Payments, interest on quarterly Interest Payments in
arrears, Additional Amounts and Additional Interest, as applicable.
OPTION TO DEFER PAYMENT OF INTEREST
So long as no Event of Default under the Indenture has occurred and is
continuing, Yorkshire Finance has the right under the Indenture during the
term of the Junior Subordinated Debentures to defer Interest Payments, at any
time or from time to time, for up to 20 consecutive quarters; provided,
however, that Yorkshire Finance cannot defer Interest Payments beyond the
Stated Maturity of the Junior Subordinated Debentures. Until all deferred
Interest Payments together with interest thereon have been paid in full,
interest will continue to accrue, together with interest thereon at the stated
rate of interest on the Junior Subordinated Debentures, to the extent
permitted by law.
In the event that Yorkshire Finance exercises this right, until all deferred
Interest Payments together with interest thereon have been paid in full,
neither Yorkshire Finance nor Yorkshire Group may, directly or indirectly, (i)
declare or pay any cash dividends or distributions on, or redeem, purchase,
acquire, or make a
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liquidation payment with respect to, any of its capital stock, (ii) make any
payments on, or repay, repurchase or redeem, any of its debt securities
(including other Indenture Securities or other junior subordinated securities
issued by Yorkshire Finance) that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or the Debentures Guarantee,
respectively, (iii) make any payments with respect to any guarantee that ranks
pari passu with or junior in interest to the Junior Subordinated Debentures or
the Debentures Guarantee, respectively, or (iv) make any payments on, or
repay, repurchase or redeem, any of its debt securities held by, make any
loans or advances to, or make any payments with respect to any guarantee of
the debt of, any affiliate, in each case other than (a) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase shares of, common stock of Yorkshire Finance or Yorkshire Group and
exchanges or conversions of common stock of one class for common stock of
another class, (b) payments by Yorkshire Group under the Trust Securities
Guarantee (or any other guarantee by Yorkshire Group with respect to any
securities issued by its direct or indirect subsidiaries, provided that the
proceeds from the issuance of such securities were used to purchase other
Indenture Securities or other junior subordinated securities issued by
Yorkshire Finance), (c) payments by Yorkshire Group under the Debentures
Guarantee, (d) any dividend or payment by Yorkshire Group which is applied,
directly or indirectly, to any Tax Payments, (e) payments by Yorkshire Group,
directly or indirectly, on the Intercompany Notes or any other promissory
notes held by Yorkshire Finance (or any other direct or indirect wholly-owned
subsidiary of Yorkshire Group) evidencing loans made with the proceeds from
the issuance by Yorkshire Finance (or any other direct or indirect wholly-
owned subsidiary of Yorkshire Group) of securities guaranteed by Yorkshire
Group or (f) the reinvestment of any proceeds received under clause (e) above
by Yorkshire Finance (or any other direct or indirect wholly-owned subsidiary
of Yorkshire Group) in additional debt securities of Yorkshire Group or any of
its other direct or indirect wholly-owned subsidiaries.
Prior to the termination of any such Extension Period, Yorkshire Finance may
further extend the interest payment period; provided that, such Extension
Period, together with all such previous and further extensions within such
Extension Period, may not exceed 20 consecutive quarters or the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, Yorkshire Finance
may commence a new Extension Period, subject to the above requirements. As a
result, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debentures.
Yorkshire Finance must give the Property Trustee and the Indenture Trustee
notice of its intention to defer Interest Payments at least one Business Day
prior to the earlier of (i) the next succeeding Interest Payment Date and (ii)
the date Yorkshire Finance is required to give notice to the NYSE or other
applicable self-regulatory organization or to holders of the Junior
Subordinated Debentures of any record date or such Interest Payment Date, but
in any event not less than one Business Day prior to such record date. The
Property Trustee shall give notice of Yorkshire Finance's intention to defer
Interest Payments to the holders of the Trust Securities within five Business
Days of the receipt of notice thereof.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of Yorkshire Finance (i) on or after , 2003, in whole at any time or
in part from time to time, (ii) at any time, in whole (but not in part) within
90 days following the occurrence of a Special Event or (iii) at any time, in
whole (but not in part), if Yorkshire Finance or Yorkshire Group has or will
become obligated to pay Additional Amounts, as provided under "--Optional Tax
Redemption", in each case, at the Debenture Redemption Price.
The proceeds of any such redemption will be used by the Trust to redeem the
Trust Securities in accordance with their terms. Yorkshire Finance may not
redeem less than all of the Junior Subordinated Debentures unless all accrued
and unpaid interest, if any, has been paid in full on all outstanding Junior
Subordinated Debentures for all interest periods terminating on or prior to
the Redemption Date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless
Yorkshire Finance defaults in payment of the Debenture Redemption Price, on
and after the Redemption Date interest shall cease to accrue on the Junior
Subordinated Debentures or portions thereof called for redemption.
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ADDITIONAL AMOUNTS
All payments in respect of the Junior Subordinated Debentures and all
payments made pursuant to the Debentures Guarantee shall be made free and
clear of, and without withholding or deduction for or on account of, any
present or future taxes, duties, assessments or governmental charges of
whatever nature imposed, levied, collected, withheld or assessed by or within
a Taxing Jurisdiction or by or within any political subdivision thereof or any
authority therein or thereof having power to tax ("Gross-Up Taxes"), unless
such withholding or deduction is required by law. In the event of any such
withholding or deduction, Yorkshire Finance or Yorkshire Group, as the case
may be, shall pay to the relevant holder of Junior Subordinated Debentures the
amount that would otherwise have been due to such holder in the absence of
such withholding or deduction, except that no Additional Amounts shall be
payable:
(a) to, or to a person on behalf of, a holder who is liable for such
Gross-Up Taxes in respect of the Junior Subordinated Debentures or the
Debentures Guarantee by reason of such holder having some connection with
the relevant Taxing Jurisdiction (including being a citizen or resident or
national of, or carrying on a business or maintaining a permanent
establishment in, or being physically present in, such Taxing Jurisdiction)
other than the mere holding of a Junior Subordinated Debenture or the
receipt of any payment in respect thereof or in respect of the Debentures
Guarantee;
(b) to, or to a person on behalf of, a holder who presents a Junior
Subordinated Debenture (whenever presentation is required) for payment more
than 30 days after the Relevant Date (as defined below) except to the
extent that such holder would have been entitled to such Additional Amounts
on presenting such Junior Subordinated Debenture for payment on the last
day of such period of 30 days;
(c) to, or to a person on behalf of, a holder who presents a Junior
Subordinated Debenture (where presentation is required) in the UK or Cayman
Islands;
(d) to, or to a person on behalf of, a holder who would not be liable or
subject to the withholding or deduction by making a declaration of non-
residence or similar claim for exemption to the relevant tax authority; or
(e) to, or to a person on behalf of, a holder of a Definitive Registered
Debenture (as defined under "--Form, Book-Entry Procedures and Transfer")
issued pursuant to an Optional Definitive Security Request (as defined
under "--Form, Book-Entry Procedures and Transfer").
Such Additional Amounts will also not be payable where, had the beneficial
owner of the Junior Subordinated Debentures (or any interest therein) been the
holder of the Junior Subordinated Debentures, he would not have been entitled
to payment of Additional Amounts by reason of any one or more of the clauses
(a) through (e) above. If Yorkshire Group or Yorkshire Finance, as applicable,
shall determine that Additional Amounts will not be payable because of the
immediately preceding sentence, Yorkshire Group or Yorkshire Finance, as
applicable, will inform such holder promptly after making such determination
setting forth the reason(s) therefor.
"Relevant Date" means whichever is the later of (i) the date on which such
payment first becomes due and (ii) if the full amount payable has not been
received in The City of New York by the Book-Entry Depositary (as defined
herein) or the Indenture Trustee on or prior to such due date, the date on
which, the full amount having been so received, notice to that effect shall
have been given to the holders in accordance with the Indenture.
Any reference in this Prospectus to any payments with respect to the Junior
Subordinated Debentures or pursuant to the Debentures Guarantee shall be
deemed to include any such Additional Amounts payable in connection therewith.
OPTIONAL TAX REDEMPTION
If (a) Yorkshire Group or Yorkshire Finance satisfies the Indenture Trustee
prior to the giving of a notice as provided below that it has or will become
obligated to pay Additional Amounts with respect to the Junior Subordinated
Debentures or the Debentures Guarantee as a result of either (x) any change
in, or amendment to, the laws or regulations of a Taxing Jurisdiction or any
political subdivision or any authority or agency thereof or
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therein having power to tax or levy duties, or any change in the application
or interpretation of such laws or regulations, which change or amendment
becomes effective on or after the date of this Prospectus or (y) the issuance
of Definitive Registered Debentures pursuant to an Optional Definitive
Security Request or clause (i) or (ii) of the second sentence of "--Form,
Book-Entry Procedures and Transfer--Definitive Registered Debentures" and (b)
such obligation cannot be avoided by Yorkshire Group or Yorkshire Finance
taking reasonable measures available to it, Yorkshire Finance may, at its
option, on giving not more than 60 nor less than 30 days' notice to the
holders, redeem, as a whole but not in part, the Junior Subordinated
Debentures at the Debenture Redemption Price provided that no such notice of
redemption shall be given earlier than 90 days prior to the earliest date on
which Yorkshire Group or Yorkshire Finance would be obligated to pay such
Additional Amounts were a payment in respect of the Junior Subordinated
Debentures then due. Prior to the publication of any notice of redemption
pursuant to this paragraph, Yorkshire Finance shall deliver to the Indenture
Trustee a certificate signed by a director of Yorkshire Finance stating that
the obligation referred to in clause (a) above cannot be avoided by Yorkshire
Group or Yorkshire Finance taking reasonable measures available to it, and the
Indenture Trustee shall accept such certificate as sufficient evidence of the
condition precedent set forth in clause (b) above, in which event it shall be
conclusive and binding on the holders.
In the event that the Global Debentures are redeemed in whole or in part
pursuant to this provision or "--Redemption" above, the Book-Entry Depositary
will redeem, from the amount received by it in respect of the redemption of
the Global Debentures an equal amount of the related Book-Entry Interests
initially held by the Property Trustee. The redemption price payable in
connection with the redemption of such Book-Entry Interests will be equal to
the amount received by the Book-Entry Depositary in connection with the
redemption of the Global Debentures.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
At any time, the Control Party has the right at any time to dissolve the
Trust, and, in such event, cause a Like Amount of Junior Subordinated
Debentures to be distributed to the holders of the Trust Securities in
liquidation of the Trust after satisfaction of liabilities to creditors of the
Trust, if any, as provided by applicable law. See "Description of the Trust
Securities--Distribution of Junior Subordinated Debentures". If distributed to
holders of the Trust Securities in liquidation of the Trust, the Junior
Subordinated Debentures will initially be issued as described under "--Form,
Book-Entry Procedures and Transfer". If the Junior Subordinated Debentures are
distributed to the holders of the Trust Securities upon the dissolution and
liquidation of the Trust, Yorkshire Finance will use its best efforts to list
the Junior Subordinated Debentures on the NYSE or such other stock exchanges
or other organizations, if any, on which the Trust Securities are then listed.
There can be no assurance as to the market price of the Junior Subordinated
Debentures that may be distributed to the holders of the Trust Securities.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to a series of Indenture Securities that has occurred and
is continuing constitutes an "Event of Default" with respect to such series of
Indenture Securities:
(i) failure for 60 days to pay any interest or similar payment on such
series of Indenture Securities when due and payable (subject to Yorkshire
Finance's right to defer such payment); or
(ii) failure to pay principal of or premium, if any, on such series of
Indenture Securities when due and payable; or
(iii) failure to perform, or breach of, any covenant or warranty of
Yorkshire Finance or Yorkshire Group contained in the Indenture for 60 days
after written notice to Yorkshire Finance or Yorkshire Group from the
Indenture Trustee or to Yorkshire Finance or Yorkshire Group and the
Indenture Trustee by the holders of at least 33% in aggregate principal
amount of such series of outstanding Indenture Securities as provided in
the Indenture; or
(iv) certain events in bankruptcy, insolvency or reorganization of
Yorkshire Finance or Yorkshire Group; or
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(v) the Debentures Guarantee shall be held in a judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force
and effect; or
(vi) any other Event of Default specified with respect to such series of
Indenture Securities.
If an Event of Default due to the default in payment of principal of, or
interest or similar payment on, any series of Indenture Securities or due to
the default in the performance or breach of any other covenant or warranty of
Yorkshire Finance or Yorkshire Group applicable to the Indenture Securities of
such series but not applicable to all series occurs and is continuing, then
either the Indenture Trustee or the holders of not less than 33% in aggregate
principal amount of the outstanding Indenture Securities of such series may
declare the principal of all of the Indenture Securities of such series and
interest or other amounts accrued or accumulated thereon to be due and payable
immediately (subject to the subordination provisions of the Indenture) and, in
the case of the Junior Subordinated Debentures, should the Indenture Trustee
or such holders of such Junior Subordinated Debentures fail to make such
declaration, the holders of at least 33% in aggregate Liquidation Amount of
the Trust Securities shall have such right. If an Event of Default due to the
default in the performance of any covenants or agreements in the Indenture
applicable to all outstanding Indenture Securities or due to certain events of
bankruptcy, insolvency or reorganization of Yorkshire Finance has occurred and
is continuing, either the Indenture Trustee or the holders of not less than
33% in aggregate principal amount of all outstanding Indenture Securities (or
Trust Securities, as described above), considered as one class, and not the
holders of the Indenture Securities (or Trust Securities) of any one of such
series, may make such declaration of acceleration (subject to the
subordination provisions of the Indenture).
At any time after such a declaration of acceleration with respect to the
Indenture Securities of any series has been made and before a judgment or
decree for payment of the money due has been obtained by the Indenture
Trustee, the Event or Events of Default giving rise to such declaration of
acceleration will, without further act, be deemed to have been waived, and
such declaration and its consequences will, without further act, be deemed to
have been rescinded and annulled, if
(a) Yorkshire Finance or Yorkshire Group has paid or deposited with the
Indenture Trustee a sum sufficient to pay
(1) all overdue interest and similar payments on all Indenture
Securities of such series;
(2) the principal of and premium, if any, on any Indenture Securities
of such series which have become due otherwise than by such declaration
of acceleration and interest or other amounts thereon at the rate or
rates prescribed therefor in such Indenture Securities;
(3) interest upon overdue interest or other amounts at the rate or
rates prescribed therefor in such Indenture Securities, to the extent
that payment of such interest or other amounts is lawful; and
(4) all amounts due to the Indenture Trustee under the Indenture; and
(b) any other Event or Events of Default with respect to Indenture
Securities of such series, other than the nonpayment of the principal of
the Indenture Securities of such series which has become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture.
The holders of a majority in aggregate principal amount of the Indenture
Securities of all series then outstanding may waive compliance by Yorkshire
Finance or Yorkshire Group with certain restrictive provisions of the
Indenture. The holders of a majority in aggregate principal amount of the
outstanding Indenture Securities of any series may, on behalf of the holders
of all the Indenture Securities of such series, waive any past default under
the Indenture with respect to such series and its consequences, except a
default in the payment of principal of or premium, if any, or interest or
other amounts (unless such default has been cured and a sum sufficient to pay
all matured installments of interest, principal and such other amounts due
otherwise than by declaration of acceleration has been deposited with the
Indenture Trustee) or a default in respect to a covenant or provision under
the Indenture which cannot be modified or amended without the consent of the
holder of each outstanding Indenture Security of such series affected. With
respect to the Junior Subordinated Debentures, the Trust may not waive
compliance by Yorkshire Finance or Yorkshire Group with certain restrictive
provisions of the Indenture or waive any past defaults thereunder without the
consent of a majority in aggregate Liquidation
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Amount of the outstanding Trust Securities and, if the prior consent of the
holder of each Junior Subordinated Debenture is required, the consent of each
holder of the Trust Securities.
In case an Event of Default shall occur and be continuing as to the Junior
Subordinated Debentures, the Property Trustee will have the right to declare
the principal of and the interest on the Junior Subordinated Debentures and
any other amounts payable under the Indenture to be immediately due and
payable and to enforce its other rights as a creditor with respect to the
Junior Subordinated Debentures. Furthermore, a holder of Trust Securities may
institute a proceeding directly against Yorkshire Group for enforcement of
payment to such holder under the Debentures Guarantee in respect of Interest
Payments or any other payments due on the Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Trust Securities of such holder on or after the due dates specified in the
Junior Subordinated Debentures. See "Description of the Trust Securities--
Voting Rights; Amendment of Trust Agreement" and "Description of the Trust
Securities Guarantee".
MODIFICATION OF INDENTURE
Without the consent of any holder of Indenture Securities, Yorkshire Group,
Yorkshire Finance and the Indenture Trustee may enter into one or more
supplemental indentures for any of the following purposes: (a) to evidence the
assumption by any permitted successor to Yorkshire Finance or Yorkshire Group
of the covenants of Yorkshire Finance or Yorkshire Group, respectively, in the
Indenture and in the Indenture Securities; (b) to add one or more covenants of
Yorkshire Finance or Yorkshire Group or other provisions for the benefit of
the holders of outstanding Indenture Securities or to surrender any right or
power conferred upon Yorkshire Finance or Yorkshire Group by the Indenture;
(c) to add any additional Events of Default under the Indenture with respect
to outstanding Indenture Securities; (d) to modify, eliminate or add
provisions to the Indenture to such extent as shall be necessary to ensure
that (1) Yorkshire Finance will not be classified as an association or a
publicly traded partnership taxable as a corporation for US Federal income tax
purposes or (2) Yorkshire Finance or Yorkshire Group will not be required to
register as an "investment company" under the Investment Company Act; (e) to
change or eliminate any provision of the Indenture or to add any new provision
to the Indenture, provided that such change, elimination or addition will
become effective only as to the Indenture Securities of any series created by
such supplemental indenture and Indenture Securities of any series
subsequently created to which such change or elimination is made applicable by
the subsequent supplemental indenture creating such series; (f) to provide
collateral security for the Indenture Securities; (g) to establish the form or
terms of Indenture Securities of any other series as permitted by the
Indenture; (h) to provide for the authentication and delivery of bearer
securities and coupons appertaining thereto representing interest, if any,
thereon and for the procedures for the registration, exchange and replacement
thereof and for the giving of notice to, and the solicitation of the vote or
consent of, the holders thereof, and for any and all other matters incidental
thereto; (i) to evidence and provide for the acceptance of appointment of a
separate or successor Indenture Trustee under the Indenture with respect to
the Indenture Securities of one or more series and to add to or change any of
the provisions of the Indenture as shall be necessary to provide for or to
facilitate the administration of the trusts under the Indenture by more than
one trustee; (j) to provide for the procedures required to permit the
utilization of a noncertificated system of registration for the Indenture
Securities of all or any series; (k) to change any place where (1) the
principal of and premium, if any, and interest or other payments, if any, on
all or any series of Indenture Securities shall be payable, (2) all or any
series of Indenture Securities may be surrendered for registration of transfer
or exchange and (3) notices and demands to or upon Yorkshire Finance or
Yorkshire Group in respect to Indenture Securities and the Indenture may be
served; or (l) to cure any ambiguity or inconsistency or to add or change any
other provisions with respect to matters and questions arising under the
Indenture, provided that, except in the case of clause (d) above, such changes
or additions shall not adversely affect the interests of the holders of
Indenture Securities of any series in any material respect.
The Indenture contains provisions permitting Yorkshire Finance and Yorkshire
Group, with the consent of the holders of a majority in aggregate principal
amount of each outstanding series of Indenture Securities affected, to modify
the Indenture in a manner affecting the rights of the holders of such series
of the Indenture Securities; provided, that no such modification may (i)
change the maturity, if any, of any series of Indenture Securities, or reduce
the principal amount thereof, or reduce the rate or extend the time of payment
of interest
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thereon (except such extension as is contemplated thereby), (ii) reduce the
percentage of principal amount of outstanding Indenture Securities of any
series (or, if applicable, the Liquidation Amount of the Trust Securities),
the holders of which are required to consent to any such modification of the
Indenture, (iii) reduce any amount payable under, delay or defer the required
time of payment under, or impair the right to institute suit to enforce any
payment under the Debentures Guarantee, (iv) modify the provisions of the
Indenture with respect to the subordination of the Indenture Securities of any
series or the Debentures Guarantee or (v) modify certain of the provisions of
the Indenture relating to supplemental indentures, waivers of certain
covenants and waivers of past defaults with respect to the Indenture
Securities of any series, without the consent of the holder of each
outstanding Indenture Security affected thereby, provided, that in the case of
the Junior Subordinated Debentures, so long as any of the Trust Securities
remain outstanding, no such modification may be made that adversely affects
the holders of the Trust Securities, and no termination of the Indenture may
occur, and no waiver of any Event of Default under the Indenture or compliance
with any covenant under the Indenture may be effective, without the prior
consent of the holders of a majority of the aggregate Liquidation Amount of
such Trust Securities unless and until the principal of the Junior
Subordinated Debentures and all accrued and unpaid interest or other amounts
thereon have been paid in full and, if the prior consent of the holder of each
outstanding Junior Subordinated Debenture is required, such modification or
waiver shall not be effective until each holder of the Trust Securities shall
have consented to such modification or waiver.
Notwithstanding the foregoing, no amendment or modification may be made to
the Indenture if such amendment or modification would cause (i) Yorkshire
Finance to be classified as an association or publicly traded partnership
taxable as a corporation for US Federal income tax purposes or (ii) Yorkshire
Finance or Yorkshire Group to be required to register as an "investment
company" under the Investment Company Act.
DEBENTURES GUARANTEE
Pursuant to the Indenture, Yorkshire Group will irrevocably and
unconditionally guarantee the Junior Subordinated Debentures as described
under "Description of the Debentures Guarantee".
CERTAIN COVENANTS
Each of Yorkshire Finance and Yorkshire Group will covenant in the Indenture
that it will not, directly or indirectly, (i) declare or pay any cash
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of its capital stock, (ii) make any
payments on, or repay, repurchase or redeem, any of its debt securities
(including other Indenture Securities or other junior subordinated securities
issued by Yorkshire Finance) that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or the Debentures Guarantee,
respectively, (iii) make any payments with respect to any guarantee that ranks
pari passu with or junior in interest to the Junior Subordinated Debentures or
the Debentures Guarantee, respectively, or (iv) make any payments on, or
repay, repurchase or redeem, any of its debt securities held by, make any
loans or advances to, or make any payments with respect to any guarantee of
the debt of, any affiliate, in each case other than (a) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase shares of, the common stock of Yorkshire Finance or Yorkshire Group
and exchanges or conversions of common stock of one class for common stock of
another class, (b) payments by Yorkshire Group under the Trust Securities
Guarantee (or any other guarantee by Yorkshire Group with respect to any
securities of any of its direct or indirect subsidiaries, provided that the
proceeds from the issuance of such securities were used to purchase other
Indenture Securities or other junior subordinated securities issued by
Yorkshire Finance), (c) payments by Yorkshire Group under the Debentures
Guarantee, (d) any dividend or payment by Yorkshire Group which is applied,
directly or indirectly, to any Tax Payments, (e) payments by Yorkshire Group,
directly or indirectly, on the Intercompany Notes or any other promissory
notes held by Yorkshire Finance (or any other direct or indirect wholly-owned
subsidiary of Yorkshire Group) evidencing loans made with the proceeds from
the issuance by Yorkshire Finance (or any other direct or indirect wholly-
owned subsidiary of Yorkshire Group) of securities guaranteed by Yorkshire
Group or (f) the reinvestment of any proceeds received under clause (e) above
by Yorkshire Finance (or any other direct or indirect wholly-owned subsidiary
of Yorkshire Group) in additional debt securities of Yorkshire Group or any of
its other direct or indirect wholly-owned subsidiaries, if at such time (i)
there shall have occurred and be continuing a payment default (whether before
or after expiration
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of any period of grace) or an Event of Default with respect to any series of
Indenture Securities, (ii) Yorkshire Group shall be in default with respect to
its payment of any obligations under the Trust Securities Guarantee or the
Debentures Guarantee or any other such guarantee as described above or (iii)
Yorkshire Finance shall have given notice of its intention to defer payment of
interest or other amounts as provided in the Indenture with respect to any
series of Indenture Securities, shall not have rescinded such notice and such
deferral shall be continuing until all deferred interest or similar payments
together with interest thereon have been paid in full.
Yorkshire Finance and Yorkshire Group also will covenant that so long as any
Trust Securities remain outstanding, if the Trust shall be required to pay,
with respect to its income derived from payments of principal of or interest
on the Junior Subordinated Debentures or pursuant to the Debentures Guarantee,
any amounts for or on account of any taxes, duties, assessments or
governmental charges of whatever nature imposed by a Taxing Jurisdiction or
any other taxing authority, then, in any such case, Yorkshire Finance or
Yorkshire Group will pay as interest on the Junior Subordinated Debentures
such amounts as may be necessary in order that the net amounts received and
retained by the Trust after the payment of such taxes, duties, assessments or
governmental charges shall result in the Trust having such funds as it would
have had in the absence of the payment of such taxes, duties, assessments or
governmental charges ("Additional Interest"). Furthermore, Yorkshire Finance
and Yorkshire Group will covenant, so long as the Junior Subordinated
Debentures remain outstanding, to keep effective and comply with the terms and
conditions of the Demand Share Issue and Purchase Agreement, dated February
24, 1998, between Yorkshire Finance and Yorkshire Group.
Yorkshire Group will also covenant to (i) ensure that a wholly-owned
subsidiary of Yorkshire Group will retain the Control Certificate, provided
that certain successors which are permitted pursuant to the Trust Agreement
may succeed to the ownership of the Control Certificate and (ii) use its
reasonable efforts, consistent with the terms and provisions of the Trust
Agreement, to cause (a) the Trust not to be classified as anything other than
a grantor trust for US Federal income tax purposes, (b) the Trust to remain a
Transparent Trust and not to be treated as a company for purposes of UK tax
law, (c) each of Yorkshire Group, Yorkshire Finance and the Trust not to be
required to register as an "investment company" under the Investment Company
Act, (d) Yorkshire Finance to not be classified as an association or a
publicly traded partnership taxable as a corporation for US Federal income tax
purposes and (e) Yorkshire Finance not, at any time, to be engaged in a US
trade or business for US Federal income tax purposes. Furthermore, Yorkshire
Group and Yorkshire Finance will covenant to treat the Junior Subordinated
Debentures as indebtedness of Yorkshire Finance for all US Federal income tax
purposes.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that Yorkshire Group shall not consolidate with or
merge into any other corporation or convey, transfer or lease its properties
and assets substantially as an entirety to any person, unless (i) in case
Yorkshire Group consolidates with or merges into another corporation or
conveys or transfers its properties and assets substantially as an entirety to
any person, the successor corporation expressly assumes the obligations of
Yorkshire Group under the Debentures Guarantee; (ii) immediately after giving
effect thereto, no Event of Default under the Indenture, and no event which,
after notice or lapse of time or both, would become an Event of Default under
the Indenture, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
Yorkshire Finance may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any corporation or other entity, except as
described below. Yorkshire Finance may, without the consent of the holders of
the Junior Subordinated Debentures, consolidate, amalgamate, merge with or
into, or be replaced by a limited partnership, limited liability company or
trust organized under the laws of any state of the US; provided, that (i) such
successor entity either (a) expressly assumes all of the obligations of
Yorkshire Finance under the Junior Subordinated Debentures or (b) substitutes
for the Junior Subordinated Debentures other securities having substantially
the same terms as the Junior Subordinated Debentures (the "Successor
Debentures"), so long as the Successor Debentures are not junior to any other
equity securities of the successor entity with respect to participation in the
profits and distributions, and in the assets, of the successor entity, (ii) if
the Junior Subordinated Debentures are then so listed, the Junior Subordinated
Debentures continue to be listed, or any Successor Debentures are or will be
listed
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upon notification of issuance, on any national securities exchange or with
another organization on which the Junior Subordinated Debentures are then
listed or quoted, (iii) such merger, consolidation, amalgamation or
replacement does not cause the Trust Securities (or, in the event that the
Trust is liquidated, the Junior Subordinated Debentures (including any
Successor Debentures)) to be downgraded by any nationally recognized
statistical securities rating organization, (iv) such merger, consolidation,
amalgamation or replacement does not adversely affect the powers, preferences
and other special rights of the holders of the Trust Securities or Junior
Subordinated Debentures (including any Successor Debentures) in any material
respect (other than, in the case of Junior Subordinated Debentures or
Successor Debentures, with respect to any dilution of the holders' interest in
the new resulting entity), (v) such successor entity has a purpose
substantially identical to that of Yorkshire Finance, (vi) Yorkshire Group
guarantees the obligations of such successor entity under the Successor
Debentures to the same extent as provided by the Debentures Guarantee and
(vii) prior to such merger, consolidation, amalgamation or replacement,
Yorkshire Group and Yorkshire Finance have received an Opinion of Counsel
experienced in such matters to the effect that: (A) such successor entity will
be treated as a partnership and not as an association or publicly traded
partnership taxable as a corporation for US Federal income tax purposes, (B)
such merger, consolidation, amalgamation or replacement will not adversely
affect the limited liability of the holders of the Junior Subordinated
Debentures (or the Successor Debentures), (C) following such merger,
consolidation, amalgamation or replacement, neither Yorkshire Group, Yorkshire
Finance nor such successor entity will be required to register as an
"investment company" under the Investment Company Act and (D) such merger,
consolidation, amalgamation or replacement would not cause the Trust to be
classified as (x) other than as a grantor trust for US Federal income tax
purposes and (y) other than as a Transparent Trust for purposes of UK tax law.
In the event that any such successor entity is organized under the laws of a
country located outside of a Taxing Jurisdiction and withholding or deduction
is required by law for or on account of any present or future taxes, duties,
assessments or governmental charges of whatever nature imposed, levied,
collected, withheld or assessed by or within such country in which the
successor entity is organized or by or within any political subdivision
thereof or any authority therein or thereof having power to tax, the successor
entity shall pay to the relevant holder of the Global Debentures or to the
relevant holders of the Definitive Registered Debentures or to the relevant
holder or holders of the Successor Debentures, as the case may be, such
additional amounts, under the same circumstances and subject to the same
limitations as are specified for "Gross-Up Taxes", as is set forth under "--
Additional Amounts" above, but substituting for the applicable Taxing
Jurisdiction in each place the name of the country under the laws of which
such successor entity is organized, managed and controlled or has a place of
business. In addition, such successor entity shall be entitled to effect an
optional tax redemption of the Junior Subordinated Debentures under the same
circumstances and subject to the same limitations as are set forth under "--
Optional Tax Redemption" above, but substituting for the applicable Taxing
Jurisdiction in each place the name of the country under the laws of which
such successor entity is organized, managed and controlled or has a place of
business.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged
transaction, a change in control or other transaction involving Yorkshire
Finance or Yorkshire Group that may adversely affect holders of the Junior
Subordinated Debentures.
SATISFACTION AND DISCHARGE
Subject to the satisfaction of certain conditions contained in the
Indenture, the principal amount of Junior Subordinated Debentures will be
deemed to have been paid for purposes of the Indenture and the entire
indebtedness of Yorkshire Finance in respect thereof will be deemed to have
been satisfied and discharged, if there shall have been irrevocably deposited
with the Indenture Trustee or any Paying Agent, in trust: (a) money in an
amount which will be sufficient, or (b) Government Obligations (as defined
herein), which do not contain provisions permitting the redemption or other
prepayment thereof at the option of the issuer thereof, the principal of and
the interest on which when due, without any regard to reinvestment thereof,
will provide moneys which, together with the money, if any, deposited with or
held by the Indenture Trustee, will be sufficient, or (c) a combination of (a)
and (b) which will be sufficient, to pay when due the principal of and
premium, if any, or interest or other amounts, if any, due and to become due
on the Junior Subordinated Debentures (including any
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Additional Amounts then known) that are outstanding. For this purpose,
Government Obligations include direct obligations of, or obligations
unconditionally guaranteed by, the US entitled to the benefit of the full
faith and credit thereof and certificates, depository receipts or other
instruments which evidence a direct ownership interest in such obligations or
in any specific interest or principal payments due in respect thereof.
SUBORDINATION
In the Indenture, Yorkshire Finance has covenanted and agreed that any
Indenture Securities issued thereunder will be subordinate and junior in right
of payment to all Senior Debt of Yorkshire Finance to the extent provided in
the Indenture. Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of Yorkshire Finance, the holders of Senior Debt of
Yorkshire Finance will first be entitled to receive payment in full of
principal of, premium, if any, and interest, if any, on such Senior Debt of
Yorkshire Finance before the holders of Indenture Securities will be entitled
to receive or retain any payment in respect of the principal of, premium, if
any, or interest or other amounts, if any, on the Indenture Securities.
In the event of the declaration of acceleration of any Indenture Securities,
the holders of all Senior Debt of Yorkshire Finance outstanding at the time of
such declaration will be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon such declaration) before the
holders of Indenture Securities will be entitled to receive any payment upon
the principal of, premium, if any, or interest, if any, on the Indenture
Securities.
No payments on account of principal, premium, if any, or interest or other
amounts, if any, in respect of any Indenture Securities may be made if there
shall have occurred and be continuing a default in any payment with respect to
Senior Debt of Yorkshire Finance or an event of default remaining uncured with
respect to any Senior Debt resulting in the acceleration of the maturity
thereof.
The term "Senior Debt" means, with respect to any person, (i) any payment
due in respect of indebtedness of such person, whether outstanding at the date
of execution of the Indenture or thereafter incurred, created or assumed, (a)
in respect of money borrowed (including any financial derivative, hedging or
futures contract or similar instrument) and (b) evidenced by securities,
debentures, bonds, notes or other similar instruments issued by such person
that, by their terms, are senior or senior subordinated debt securities; (ii)
all capital lease obligations; (iii) all obligations issued or assumed as the
deferred purchase price of property, all conditional sale obligations and all
obligations of such person under any title retention agreement (but excluding
trade accounts payable arising in the ordinary course of business and long-
term purchase obligations); (iv) all obligations for the reimbursement of any
letter of credit, banker's acceptance, security purchase facility or similar
credit transaction; (v) all obligations of the type referred to in clauses (i)
through (iv) above of other persons the payment of which such person is
responsible or liable as obligor, guarantor or otherwise; and (vi) all
obligations of the type referred to in clauses (i) through (v) above of other
persons secured by any lien on any property or asset of such person (whether
or not such obligation is assumed by such person); provided, however, that
Senior Debt shall not include (1) in the case of Yorkshire Finance, the
Indenture Securities or any such indebtedness that is by its terms
subordinated to or pari passu with (A) the Indenture Securities or (B) any
other such indebtedness that is subordinated to or pari passu with the
Indenture Securities and (2) any unsecured indebtedness between or among such
person and its affiliates. Such Senior Debt shall continue to be Senior Debt
and be entitled to the benefits of the subordination provisions contained in
the Indenture irrespective of any amendment, modification or waiver of any
term of such Senior Debt.
The Indenture places no limitation on the amount of additional Senior Debt
that may be incurred by Yorkshire Finance or Yorkshire Group. Yorkshire
Finance and Yorkshire Group expect from time to time to incur additional
indebtedness constituting Senior Debt.
FORM, BOOK-ENTRY PROCEDURES AND TRANSFER
General
The Junior Subordinated Debentures will be issued initially only as a Global
Debenture in bearer form (the "Global Debenture") and will be payable only in
US dollars. Title to such Global Debentures will pass by
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delivery. The Global Debentures will be deposited on issue with The Bank of
New York in New York, New York, as book-entry depositary (the "Book-Entry
Depositary"), which will hold the Global Debentures for the benefit of the
Trust pursuant to the terms of the deposit agreement (the "Deposit Agreement")
dated as of May , 1998 among Yorkshire Finance, the Book-Entry Depositary and
the holders and beneficial owners from time to time of interests in the Book-
Entry Interests. Pursuant to the Deposit Agreement, the Book-Entry Depositary
will issue one or more certificateless depository interests (the "Book-Entry
Interests"), which together will represent a 100% beneficial interest in the
Global Debentures. Such Book-Entry Interests will initially be issued to the
Property Trustee.
If Book-Entry Interests are distributed to holders of Trust Securities in
liquidation of such holders' interests in the Trust, the Global Debentures
held by the Book-Entry Depositary and representing all of the Junior
Subordinated Debentures will cease to be held for the benefit of the Trust and
will, for all purposes under the Indenture and the Deposit Agreement, be held
by the Book-Entry Depositary for the benefit of DTC and its Participants, and
all of the Book-Entry Interests in the Global Debentures will be transferred
by the Property Trustee to DTC, which will operate a book-entry system for
interests in the Book-Entry Interests in global form (the "Global Book-Entry
Interests"). DTC will initially credit Direct Participants holding Trust
Securities with interests in the Global Book-Entry Interests (pro rata to
their holding of Trust Securities) registered in the name of DTC or its
nominee. Unless and until the Global Debentures are exchanged in whole for
Definitive Registered Debentures, Global Book-Entry Interests held by DTC may
not be transferred except as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee
to a successor of DTC or a nominee of such successor. For a description of DTC
and its book-entry system, see "Description of the Trust Securities--Book-
Entry Issuance". As of the date of this Prospectus, the description herein of
DTC's book-entry system and DTC's practices as they relate to purchases,
transfers, notices and payments with respect to the Trust Securities will
apply in all material respects to any Global Book-Entry Interests registered
in the name of and held by DTC or its nominee. Yorkshire Finance may appoint a
successor to DTC or any successor depositary in the event DTC or such
successor depositary is unable or unwilling to continue as depositary for the
Global Book-Entry Interests.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in such Global Book Entry
Interests.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
Global Debentures, the Book-Entry Depositary or such nominee, as the case may
be, will be considered the sole holder of the Global Debentures (and the
Junior Subordinated Debentures) for all purposes under the Indenture. Except
as set forth below with respect to the issuance of Definitive Registered
Debentures, if the Junior Subordinated Debentures (represented by Global Book-
Entry Interests) are held through the facilities of DTC, Direct Participants
or Indirect Participants will not be entitled to have Junior Subordinated
Debentures registered in their names, will not receive or be entitled to
receive physical delivery of Junior Subordinated Debentures in definitive
bearer or registered form and will not be considered the owners or holders
thereof under the Indenture or the Deposit Agreement. Accordingly, if the
Junior Subordinated Debentures (represented by Global Book-Entry Interests)
are held through the facilities of DTC, each person owning an interest in the
Global Book-Entry Interests must rely on the procedures of the Book-Entry
Depositary and DTC and, if such person is not a Direct Participant in DTC, on
the procedures of the Direct Participant through which such person owns its
interest, to exercise any rights and obligations of a holder under the
Indenture or the Deposit Agreement.
In addition to a Paying Agent in the Borough of Manhattan, The City of New
York, Yorkshire Finance will, so long as Junior Subordinated Debentures are
listed on the Luxembourg Stock Exchange and the rules of such stock exchange
so require, maintain a Paying Agent in Luxembourg.
Neither Yorkshire Finance, Yorkshire Group nor any agent of Yorkshire
Finance or Yorkshire Group will have any responsibility or liability for any
aspect relating to payments made or to be made by the Book-Entry Depositary to
the persons entitled thereto in respect of the Junior Subordinated Debentures
or the Book-Entry
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Interests. None of Yorkshire Finance, Yorkshire Group, the Indenture Trustee,
the Book-Entry Depositary or any agent of any of the foregoing will have any
responsibility or liability for any aspect relating to payments made or to be
made by DTC on account of a Direct Participant's or Indirect Participant's
ownership of an interest in the Global Book-Entry Interests or for
maintaining, supervising or reviewing any records relating to a Direct
Participant's or Indirect Participant's interests in the Global Book-Entry
Interests.
Payments on the Junior Subordinated Debentures
Payments of any amounts in respect of the Global Debenture will be made
through a Paying Agent to the Book-Entry Depositary, as the holder thereof.
Such payments shall be considered paid on the date they are due if the Paying
Agent holds at 11:00 a.m. New York City time on that date money deposited by
or on behalf of Yorkshire Group or Yorkshire Finance in immediately available
funds, designated for and sufficient to pay the amount due in full. The Book-
Entry Depositary will pay an amount equal to each such payment to the Property
Trustee as the initial holder of the Book-Entry Interests, which will
distribute such payments to DTC. If the Global Book-Entry Interests
representing the Junior Subordinated Debentures are held through the
facilities of DTC, such payments will be made by the Book-Entry Depositary to
DTC, as holder of the Global Book-Entry Interests, which will distribute such
payments to its Direct Participants.
If any Definitive Registered Debentures have been issued, the interest
payable on such Definitive Registered Debenture other than at maturity or
earlier redemption will be paid to the holder in whose name such Definitive
Registered Debenture is registered at the close of business on the fifteenth
day (whether or not a Business Day) immediately preceding the relevant
Interest Payment Date (each a "Record Date"). The principal amount of a
Definitive Registered Debenture will be payable to the person in whose name
such Definitive Registered Debenture is registered at the close of business on
the immediately preceding Record Date upon surrendering such Definitive
Registered Debenture at the Indenture Trustee's office in New York City.
Interest payable at maturity or earlier redemption will be payable to the
person to whom principal is payable.
If any Definitive Registered Debentures have been issued, Interest Payments
on such Definitive Registered Debentures to be paid other than at maturity
will be made by check to the person entitled thereto at such person's address
appearing on the Security Register. Interest Payments on the Definitive
Registered Debentures may also be made, in the case of a holder of at least US
$1,000,000 aggregate principal amount of Junior Subordinated Debentures by
wire transfer to a US Dollar account maintained by the payee with a bank in
the US; provided that such holder elects payment by wire transfer by giving
written notice to the Indenture Trustee or a Paying Agent to such effect
designating such account no later than 15 days immediately preceding the
relevant due date for payment (or such other date as the Indenture Trustee may
accept in its discretion).
Any monies paid by Yorkshire Finance or Yorkshire Group to the Indenture
Trustee or any Paying Agent, or held by Yorkshire Finance or Yorkshire Group
in trust, or the payments of the principal of or any interest or Additional
Amounts on any Junior Subordinated Debentures and remaining unclaimed at the
end of two years after such principal, interest or Additional Amounts become
due and payable will be paid to the US Affiliates, or released from the trust,
upon its written request, and upon such payment or release all liability of
Yorkshire Finance, Yorkshire Group, the Indenture Trustee and such Paying
Agent with respect thereto will cease.
All payments to the Book-Entry Depositary in respect of the Global
Debenture, and all payments to the holders of the Definitive Registered
Debentures, if issued, will be made without deduction or withholding for any
Gross-Up Taxes or other governmental charges, or if any such deduction or
withholding is required to be made under the provisions of any applicable law
or regulation, except as described under "--Additional Amounts", such
Additional Amounts will be paid as may be necessary in order that the net
amounts received by any holder of the Global Debenture or of any Definitive
Registered Debenture, after such deduction or withholding, will equal the
amounts that such holder would have otherwise received in respect of the
Global Debentures or of such Definitive Registered Debentures absent such
deduction or withholding. If Definitive Registered Debentures are issued
pursuant to an Optional Definitive Security Request, neither Yorkshire Finance
nor Yorkshire Group will be obligated to pay Additional Amounts in respect of
such Definitive Registered Debentures.
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If the due date for any interest in respect of the Junior Subordinated
Debentures is not a Business Day, the holder thereof will not be entitled to
payment of the amount due until the next succeeding Business Day and will not
be entitled to any further interest or other payment in respect of any such
delay.
Redemption
In the event the Global Debenture (or a portion thereof) is redeemed, the
Book-Entry Depositary will deliver all amounts received by it in respect of
the redemption of the Global Debenture to the persons entitled thereto and (in
the case of redemption in full) surrender the Global Debenture to the
Indenture Trustee for cancellation. The redemption price payable in connection
with the redemption of interests in a Book-Entry Interest will be equal to the
amount received by the Book-Entry Depositary in connection with the redemption
of the Global Debentures (or a portion thereof). For any redemption of the
Global Debenture in part, if the Junior Subordinated Debentures are held
through the facilities of DTC, selection of interests in the related Global
Book-Entry Interest to be redeemed will be made in accordance with the
procedures of DTC. Once redeemed in part, the Global Debenture will be
endorsed to reflect the principal amount equal to the unredeemed portion
thereof.
Action by Holders of Junior Subordinated Debentures
As soon as practicable after receipt by the Book-Entry Depositary of notice
of any solicitation of consents or request for a waiver or other action with
respect to the Book-Entry Interests or the Junior Subordinated Debentures, the
Book-Entry Depositary will mail to the Property Trustee (or, if the Global
Book-Entry Interests representing the Junior Subordinated Debentures are then
held through the facilities of DTC, to DTC) a notice containing (a) such
information as is contained in such notice, (b) a statement of the record date
with respect to such consent, waiver or other action, (c) a statement that on
or prior to a specified date (which specified date may be no later than 180
days after the record date) the Property Trustee (or DTC, as applicable) will
be entitled, subject to the provisions of the Deposit Agreement or the
Indenture, as the case may be, to instruct the Book-Entry Depositary as to
such consent, waiver or other action and (d) a statement as to the manner in
which such instructions may be given. Upon the written request of the Property
Trustee (or DTC, as applicable), the Book-Entry Depositary shall endeavor
insofar as practicable to take such action regarding the requested consent,
waiver or other action in respect of the Junior Subordinated Debentures in
accordance with any instructions set forth in such request. DTC is expected to
follow procedures described under "Description of the Trust Securities--Book-
Entry Issuance" with respect to soliciting instructions from Participants. The
Book-Entry Depositary will not exercise any discretion in the granting of
consents or waivers or the taking of any other action relating to the Deposit
Agreement or the Indenture.
Meetings of Holders of Junior Subordinated Debentures
A meeting of the holders of Junior Subordinated Debentures may be called at
any time from time to time pursuant to the Indenture to make, give or take any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by the Indenture to be made given or taken by holders of the
Junior Subordinated Debentures.
To be entitled to vote at any meeting of holders of Junior Subordinated
Debentures, a person shall be (a) a holder of Junior Subordinated Debentures
or (b) a person appointed by an instrument in writing as proxy for a holder or
holders of Junior Subordinated Debentures by such holder or holders. The only
persons who shall be entitled to attend any meeting of holders of Junior
Subordinated Debentures shall be the persons so entitled to vote at such
meeting and their counsel, any representatives of the Indenture Trustee and
its counsel, and any representatives of Yorkshire Finance and its counsel.
At any meeting of holders of Junior Subordinated Debentures, the persons
holding or representing Junior Subordinated Debentures in an aggregate
principal amount sufficient under the appropriate provision of the Indenture
to take action upon the business for the transaction of which such meeting was
called shall constitute a quorum. No action at a meeting of holders shall be
effective unless approved by persons holding or representing Junior
Subordinated Debentures in the aggregate principal amount required by the
provision of the Indenture pursuant to which such action is being taken. At
any meeting of holders, each holder or proxy shall be entitled to one vote for
each $25 principal amount of outstanding Junior Subordinated Debentures held
or represented.
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Until such time as written instruments shall have been delivered to the
Indenture Trustee evidencing the taking of any action at a meeting of holders
by the holders of the percentage in aggregate principal amount of the Junior
Subordinated Debentures specified in the Indenture in connection with such
action, any holder of a Junior Subordinated Debenture the serial number of
which is included in the Junior Subordinated Debentures the holders of which
have consented to such action may, by filing written notice with the Indenture
Trustee at its principal corporate trust office and upon proof of holding as
provided in the Indenture, revoke such consent so far as concerns such Junior
Subordinated Debentures. Except as aforesaid any such consent given by the
holder of any Junior Subordinated Debentures shall be conclusive and binding
upon such holder and upon all future holders and owners of such Junior
Subordinated Debentures and of any securities issued in exchange therefor, in
lieu thereof or upon transfer thereof, irrespective of whether or not any
notation in regard thereto is made upon such securities. Any action taken by
the holders of the percentage in aggregate principal amount of the holders
specified in the Indenture in connection with such action shall be
conclusively binding upon Yorkshire Finance, the Indenture Trustee and the
holders of all the Junior Subordinated Debentures.
Reports and Notices
So long as the Junior Subordinated Debentures are listed on the Luxembourg
Stock Exchange and the rules of such Stock Exchange so require, notice to
holders of the Junior Subordinated Debentures will be published in a leading
newspaper having general circulation in Luxembourg (which is expected to be
the Luxemburger Wort) in addition to notifying the Book-Entry Depositary. If
any Junior Subordinated Debentures have been distributed to holders of Trust
Securities, the Book-Entry Depositary will immediately send to DTC a copy of
any notices, reports and other communications received by it relating to
Yorkshire Finance, Yorkshire Group or the Junior Subordinated Debentures. In
the case of Definitive Registered Debentures, all notices regarding the Junior
Subordinated Debentures will, in addition to publication as referred to above,
be mailed to holders by first-class mail at their respective addresses as they
appear on the registration books of the registrar.
Amendment and Termination of the Deposit Agreement
The Deposit Agreement may be amended by agreement between Yorkshire Finance
and the Book-Entry Depositary, and the consent of the Property Trustee or DTC
(if any Junior Subordinated Debentures (represented by Global Book-Entry
Interests) are held through the facilities of DTC) shall not be required in
connection with any amendment to the Deposit Agreement (i) to cure any formal
defect, omission, inconsistency or ambiguity in the Deposit Agreement, (ii) to
add to the covenants and agreements of Yorkshire Finance or the Book-Entry
Depositary, (iii) to effect the assignment of the Book-Entry Depositary's
rights and duties to a qualified successor as provided in the Deposit
Agreement, (iv) to comply with the requirements of the Securities Act, the
Exchange Act, the 1939 Act or the Investment Company Act, or any other
applicable securities laws, (v) to modify the Deposit Agreement in connection
with an amendment of the Indenture that does not require the consent of the
holders of Junior Subordinated Debentures or (vi) to modify, alter, amend or
supplement the Deposit Agreement in any other respect not inconsistent with
such agreement which, in the opinion of counsel acceptable to Yorkshire
Finance, is not materially adverse to the Property Trustee or DTC (if any
Junior Subordinated Debentures (represented by Global Book-Entry Interests)
are then held through the facilities of DTC) or the beneficial owners of the
interests in the Book-Entry Interests. Except as provided in the preceding
sentence, no amendment that materially adversely affects any holder or
beneficial owner of an interest in the Book-Entry Interests may be made to the
Deposit Agreement without the consent of such holder or beneficial owner.
If Definitive Registered Debentures are issued by Yorkshire Finance in
exchange for the entire Global Debenture, the Book-Entry Depositary, as holder
of the Global Debenture, will surrender the Global Debenture against receipt
of the Definitive Registered Debentures and distribute the Definitive
Registered Debentures to the holders of Book-Entry Interests (or such other
persons as the Book-Entry Depositary becomes aware are entitled thereto),
whereupon the Deposit Agreement will terminate. The Deposit Agreement may also
be terminated upon the resignation of the Book-Entry Depositary if no
successor has been appointed within 120 days.
Resignation of Book-Entry Depositary
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
with respect to the Global Debenture upon 60 days' prior written notice. If a
successor depository meeting the requirements specified in the
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Deposit Agreement has agreed to enter into arrangements with the same effect
as the Deposit Agreement, the Book-Entry Depositary shall deliver the Global
Debenture to that successor. If no such successor has so agreed within 120
days, the terms of the Deposit Agreement provide that the Property Trustee or
DTC (if any Junior Subordinated Debentures (represented by Global Book-Entry
Interests) are held through the facilities of DTC) may request Yorkshire
Finance to issue Definitive Registered Debentures with respect to the Global
Debenture. On receipt of such Definitive Registered Debentures, the Book-Entry
Depositary will surrender the Global Debenture and distribute such Definitive
Registered Debentures to the persons entitled thereto. The Deposit Agreement
will then terminate.
Obligation of Book-Entry Depositary
The Book-Entry Depositary will assume no obligation or liability under the
Deposit Agreement other than to act in good faith without negligence or
willful misconduct in the performance of its duties thereunder.
Definitive Registered Debentures
Beneficial owners of the Book-Entry Interests shall be entitled to receive
definitive Junior Subordinated Debentures in registered form ("Definitive
Registered Debentures") only in the limited circumstances set forth in this
paragraph. The Book-Entry Depositary will promptly notify the Indenture
Trustee and request in writing that Yorkshire Finance issue and the Indenture
Trustee authenticate and deliver Definitive Registered Debentures in exchange
for the Global Debenture, as a whole but not in part, in such names and
authorized denominations as DTC shall specify, if: (i) DTC notifies Yorkshire
Finance and the Book-Entry Depositary that it is unwilling or unable to
continue to hold the Global Book-Entry Interests related to the Global
Debenture or DTC at any time ceases to be a "clearing agency" registered as
such under the Exchange Act and, in either case, a successor is not appointed
by Yorkshire Finance within 120 days; (ii) the Book-Entry Depositary notifies
Yorkshire Finance that it is unwilling or unable to continue as Book-Entry
Depositary with respect to the Global Debenture and no successor Book-Entry
Depositary is appointed within 120 days; or (iii) Yorkshire Finance, in its
sole discretion, executes and delivers to the Indenture Trustee an officers'
certificate providing that the Global Debentures shall be so exchangeable. In
addition, if an Event of Default shall have occurred and be continuing with
respect to the Junior Subordinated Debentures, any beneficial owner of
interests in Book-Entry Interests in the Global Debenture shall, upon written
request, be entitled to receive Definitive Registered Debentures in exchange
for such interests (an "Optional Definitive Security Request"). In no event
will an owner of beneficial interests in the Book-Entry Interests be entitled
to receive definitive Junior Subordinated Debentures in bearer form on account
of such ownership.
Definitive Registered Debentures so issued will be issued only in minimum
denominations of $25 and integral multiples thereof and will be issued in
registered form only, without coupons, and shall have the same interest rate,
terms and the same aggregate principal amount as the Global Debenture for
which they are exchanged. Such Definitive Registered Debentures shall be
registered in the name or names of such persons as the Book-Entry Depositary
shall notify the Trustee based on the instructions of DTC. It is expected that
such instructions may be based upon directions received by DTC from its
Participants with respect to ownership of beneficial interests in the Book-
Entry Interests.
PARTICIPANTS AND INDIRECT PARTICIPANTS SHOULD BE AWARE THAT, UNDER CURRENT
UK TAX LAW, UPON THE ISSUANCE TO SUCH PARTICIPANTS AND INDIRECT PARTICIPANTS
OF DEFINITIVE REGISTERED DEBENTURES, SUCH PARTICIPANTS AND INDIRECT
PARTICIPANTS, AS HOLDERS OF DEFINITIVE REGISTERED DEBENTURES, WILL BECOME
SUBJECT TO UK INCOME TAX (CURRENTLY AT THE RATE OF 20%) THAT MUST BE WITHHELD
ON ANY PAYMENTS OF INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES AS SET FORTH
UNDER "MATERIAL INCOME TAX CONSIDERATIONS--UK INCOME TAX CONSIDERATIONS". IF
SUCH DEFINITIVE REGISTERED DEBENTURES ARE ISSUED FOLLOWING AN EVENT OF DEFAULT
WITH RESPECT TO JUNIOR SUBORDINATED DEBENTURES PURSUANT TO THE REQUEST OF
BENEFICIAL OWNERS OF INTERESTS IN THE
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BOOK-ENTRY INTERESTS IN ALL OF THE GLOBAL DEBENTURES, NEITHER YORKSHIRE
FINANCE NOR YORKSHIRE GROUP WILL BE OBLIGATED TO PAY ANY ADDITIONAL AMOUNTS IN
RESPECT OF SUCH DEFINITIVE REGISTERED DEBENTURES.
However, holders of Definitive Registered Debentures may be entitled to
receive a refund of withheld amounts from the UK Inland Revenue in certain
circumstances. See "Material Income Tax Considerations--UK Tax
Considerations". In addition, if an owner of a beneficial interest in a Book-
Entry Interest receives Definitive Registered Debentures other than pursuant
to its request, such owner will be entitled to receive Additional Amounts with
respect to such Definitive Registered Debentures. See "--Additional Amounts".
Transfer and Exchange of Definitive Registered Debentures
In the event that Definitive Registered Debentures are issued, a holder may
transfer or exchange the Definitive Registered Debentures in accordance with
the Indenture. Yorkshire Finance and the transfer agent and registrar may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents, and may require a holder to pay a sum sufficient to cover
any taxes, other governmental charges and fees required by law or permitted by
the Indenture. Yorkshire Finance is not required to issue, register the
transfer of or exchange Definitive Registered Debentures of any series during
a period beginning at the opening of business 15 days before the day of the
mailing of a notice of redemption as required by the Indenture and ending at
the close of business on the day of such mailing, or to register the transfer
of or exchange any Definitive Registered Debentures so selected for redemption
in whole or in part, except that Yorkshire Finance shall be required to
register the transfer of or exchange the unredeemed portion of any Definitive
Registered Debentures being redeemed in part. Upon the issuance of Definitive
Registered Debentures, holders will be able to transfer and exchange
Definitive Registered Debentures at the offices of the transfer agent and
registrar; provided that all transfers and exchanges must be effected in
accordance with the terms of the Indenture and, among other things, be
recorded in the Security Register maintained by the transfer agent and
registrar.
GOVERNING LAW; SUBMISSION TO JURISDICTION
The Indenture, the Junior Subordinated Debentures and the Debentures
Guarantee will be governed by and construed in accordance with the laws of the
State of New York. Any legal suit, action or proceeding against Yorkshire
Finance or Yorkshire Group or the properties, assets or revenues with respect
to their respective obligations, liabilities or any other matter relating to
Yorkshire Finance or Yorkshire Group arising out of or in connection with the
Indenture, a Junior Subordinated Debenture or the Debentures Guarantee may be
brought in the Supreme Court of New York, New York County or in the United
States District Court for the Southern District of New York and any appellate
court from either thereof. Yorkshire Finance and Yorkshire Group have
submitted to the non-exclusive jurisdiction of such courts for the purposes of
any such proceeding and have irrevocably waived, to the fullest extent that
they may effectively do so, any objection to the laying of venue of any such
proceeding in any such court and the defense of an inconvenient forum.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have, and shall be subject to, all the duties
and responsibilities specified with respect to an indenture trustee under the
1939 Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Indenture Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
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DESCRIPTION OF THE DEBENTURES GUARANTEE
Pursuant to the Indenture, Yorkshire Group will irrevocably and
unconditionally guarantee all payments on the Junior Subordinated Debentures
when and as the same shall become due and payable, whether at maturity, upon
redemption or otherwise. The Debentures Guarantee will be a direct and
unsecured obligation of Yorkshire Group and will rank subordinate and junior
to all Senior Debt that may be issued by Yorkshire Group. As of December 31,
1997, Senior Debt of Yorkshire Group aggregated approximately (Pounds)1,034
million ($1,699 million), a portion of which will be repaid with proceeds of
this offering. Yorkshire Group is a non-operating holding company, conducting
substantially all of its business through Yorkshire and its subsidiaries.
Except to the extent that Yorkshire Group receives funds from the US Parents
in the future, Yorkshire Group will rely on dividends, indirectly, from
Yorkshire to meet its obligations for payment of its outstanding obligations,
including any payments necessary pursuant to the Debentures Guarantee, and
corporate expenses. Furthermore, Yorkshire Group's obligations under the
Debentures Guarantee will effectively be subordinated to all existing and
future indebtedness and liabilities of the subsidiaries of Yorkshire Group,
including Yorkshire. As a result, the rights of holders of the Trust
Securities in respect of claims on the assets of each of the Yorkshire Group's
subsidiaries upon any liquidation or administration are structurally
subordinated to, and therefore will be subject to the prior claims of, the
creditors of Yorkshire and its subsidiaries (including trade creditors),
except to the extent that Yorkshire Group may itself be a creditor with
recognized claims against Yorkshire and its subsidiaries. At December 31,
1997, the direct and indirect subsidiaries of Yorkshire Group had total
indebtedness (excluding indebtedness owed to Yorkshire Group) of approximately
(Pounds)476 million ($782 million) and such subsidiaries may incur additional
indebtedness in the future.
During an Extension Period, Yorkshire Group's obligations to make payments
under the Debentures Guarantee will be suspended. See "Description of the
Junior Subordinated Debentures--Option to Defer Payment of Interest".
Under the terms of the Indenture and the Debentures Guarantee, if the
Property Trustee fails to enforce the Trust's rights with respect to the
Debentures Guarantee, a holder of Trust Securities may institute a legal
proceeding directly against Yorkshire Group to enforce the Trust's rights with
respect to the Debentures Guarantee to the fullest extent permitted by law,
without first instituting any legal proceeding against the Property Trustee or
the Trust. Notwithstanding the foregoing, a holder of Trust Securities may
institute a legal proceeding directly against Yorkshire Group for enforcement
of payment to such holder under the Debentures Guarantee in respect of
principal of or interest on the Junior Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Trust
Securities of such holder on or after the due dates specified in the Junior
Subordinated Debentures, without first instituting any legal proceeding
against the Property Trustee or any other person.
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RELATIONSHIP AMONG THE TRUST SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES,
THE TRUST SECURITIES GUARANTEE AND
THE DEBENTURES GUARANTEE
As long as Interest Payments and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate Liquidation Amount of the
Trust Securities, (ii) the interest rate and Interest Payment Dates on the
Junior Subordinated Debentures will match the Distribution rate and
Distribution Dates and other payment dates for the Trust Securities; (iii) the
Agreement as to Expenses and Liabilities provides that the US Affiliates shall
pay for all and any costs, expenses and liabilities of the Trust (except the
obligations of the Trust to pay holders of the Trust Securities the amounts
due such holders pursuant to the terms of the Trust Securities); and (iv) the
Trust Agreement further provides that the Trust will not engage in any
activity that is not consistent with the limited purposes of the Trust.
Payments of Distributions and other amounts due on the Trust Securities (to
the extent the Trust has sufficient funds available for the payment of such
Distributions) are irrevocably guaranteed by Yorkshire Group as and to the
extent set forth under "Description of the Trust Securities Guarantee". If and
to the extent that Yorkshire Finance does not make payments on the Junior
Subordinated Debentures or Yorkshire Group does not make payments pursuant to
the Debentures Guarantee, the Trust will not pay Distributions or other
amounts due on the Trust Securities. The Trust Securities Guarantee does not
cover payment of Distributions when the Trust does not have sufficient funds
available to pay such Distributions.
If the Trust has sufficient funds available to make Distribution payments,
but does not make such payments and Yorkshire Group fails to make payments
under the Trust Securities Guarantee, the Trust Securities Guarantee provides
a mechanism whereby the holders of the Trust Securities may direct the
Guarantee Trustee to enforce its rights thereunder. In addition, any holder of
Trust Securities may institute a legal proceeding directly against Yorkshire
Group to enforce the Guarantee Trustee's rights under the Trust Securities
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee or any other person or entity.
Furthermore, if Yorkshire Finance fails to make Interest Payments or other
payments which are due on the Junior Subordinated Debentures or Yorkshire
Group does not make payments which are due pursuant to the Debentures
Guarantee, the Trust Agreement provides a mechanism whereby the holders of the
Trust Securities may direct the Property Trustee to enforce its rights under
the Junior Subordinated Debentures and the Debentures Guarantee, including
proceeding directly against Yorkshire Finance to enforce the Junior
Subordinated Debentures and proceeding directly against Yorkshire Group to
enforce the Debentures Guarantee. If the Property Trustee fails to enforce its
rights under the Debentures Guarantee, to the fullest extent permitted by
applicable law, any holder of Trust Securities may institute a legal
proceeding directly against Yorkshire Group to enforce the Property Trustee's
rights under the Debentures Guarantee without first instituting any legal
proceeding against or requesting or directing that action be taken by the
Property Trustee or any other person or entity. Notwithstanding the foregoing,
a holder of Trust Securities may institute a legal proceeding directly against
Yorkshire Group, without first instituting a legal proceeding against or
requesting or directing that action be taken by the Property Trustee or any
other person or entity, for enforcement of payment to such holder under the
Debentures Guarantee in respect of Interest Payments or any other payments due
on the Junior Subordinated Debentures having an aggregate principal amount
equal to the aggregate Liquidation Amount of the Trust Securities of such
holder on or after the due dates specified in the Junior Subordinated
Debentures.
The Debentures Guarantee, the Trust Securities Guarantee, the Indenture, the
Junior Subordinated Debentures, the Trust Agreement and the Agreement as to
Expenses and Liabilities, when taken together, effectively provide a full and
unconditional guarantee, on a subordinated basis, of the Trust's obligations
under the Trust Securities. No single document standing alone or operating in
conjunction with fewer than all of the
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other documents constitutes such guarantee. It is only the combined operation
of these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Trust's obligations under the Trust Securities.
Notwithstanding anything to the contrary in the Indenture and the Debentures
Guarantee, Yorkshire Group has the right to set-off any payment it is
otherwise required to make under the Debentures Guarantee with and to the
extent Yorkshire Finance has theretofore made, or is concurrently on the date
of such payment making, a payment under the Indenture.
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust not involving the distribution of the Junior Subordinated
Debentures, after satisfaction of creditors of the Trust, if any, as provided
by the Delaware Act, the holders of Trust Securities will be entitled to
receive, out of assets held by the Trust, the Liquidation Distribution in
cash. See "Description of the Trust Securities--Liquidation Distribution upon
Dissolution". Upon any voluntary or involuntary liquidation or bankruptcy of
Yorkshire Finance, the Property Trustee, as beneficial owner of the Junior
Subordinated Debentures, would be a subordinated creditor of Yorkshire
Finance, subordinated in right of payment to all Senior Debt, but entitled to
receive all payments in full due on the Junior Subordinated Debentures, before
any stockholders of Yorkshire Finance receive payments or distributions.
Because Yorkshire Group is the guarantor under the Debentures Guarantee and
the Trust Securities Guarantee, the positions of a holder of Trust Securities
and a holder of Junior Subordinated Debentures relative to other creditors and
to stockholders of Yorkshire Group in the event of liquidation or bankruptcy
of Yorkshire Group would be substantially the same.
A default or event of default under any Senior Debt would not constitute a
default or Event of Default with respect to the Junior Subordinated
Debentures. However, in the event of payment defaults under, or acceleration
of, Senior Debt, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Junior Subordinated Debentures until
such Senior Debt has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on any Junior
Subordinated Debentures would constitute an Event of Default under the
Indenture.
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MATERIAL INCOME TAX CONSIDERATIONS
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THEIR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF STATE, LOCAL OR FOREIGN LAWS,
INCLUDING UK TAX LAWS, TO WHICH THEY MAY BE SUBJECT.
UK TAX CONSIDERATIONS
The comments below are based on UK law and UK Inland Revenue practice as of
the date of this Prospectus and represent the opinion of Allen & Overy, UK
counsel to Yorkshire Group, Yorkshire Finance and the Trust, so far as such
comments relate to matters of law or legal conclusions. They relate only to
holders of Junior Subordinated Debentures who are the absolute beneficial
owners thereof and related interest and may not apply to certain classes of
persons, including persons who do not hold such securities as capital assets
and special classes of investors such as dealers in securities. The UK
inheritance tax is not discussed. The UK tax position of a holder of the Trust
Securities is not addressed because the Trust is not a UK entity and is not
intended to be resident in the UK for UK tax purposes and the Trust Securities
will not be offered to UK-resident persons. Moreover, these comments do not
address the tax position of UK-resident holders of Junior Subordinated
Debentures (or of holders of such Junior Subordinated Debentures who carry on
a trade profession or vocation in the UK through a branch or agency to which
the holding of such Junior Subordinated Debentures is attributable). Any
prospective holders of Junior Subordinated Debentures or Trust Securities who
are in any doubt as to their tax position should consult their professional
advisers.
Payments on the Junior Subordinated Debentures
For UK tax purposes, provided that the Junior Subordinated Debentures (i)
remain represented by the Global Debenture, (ii) are in bearer form and (iii)
continue to be listed on the Luxembourg Stock Exchange or some other stock
exchange recognized under Section 841 UK Income and Corporation Taxes Act 1988
by the UK Inland Revenue, Interest Payments by Yorkshire Finance to the Trust
or any other holder of the Junior Subordinated Debentures may be made without
withholding or deduction for or on account of UK income tax for so long as the
paying agent of Yorkshire Finance, the Book-Entry Depositary, and the Trust is
not in the UK. In the event that Yorkshire Finance becomes liable to make any
withholding or deduction in respect of Interest Payments on the Junior
Subordinated Debentures, Additional Amounts will become payable to the extent
set out above under "Description of the Junior Subordinated Debentures--
Additional Amounts".
In other cases (subject to any direction to the contrary by the UK Inland
Revenue under an applicable double-taxation treaty), and in particular if
Definitive Registered Debentures are issued, Interest Payments will be made
after deduction of UK income tax (currently at the rate of 20%). A US-resident
holder of Junior Subordinated Debentures may be eligible to recover in full
any UK tax withheld from Interest Payments to which such holder is
beneficially entitled by making a claim under the US/UK- Double Tax Treaty on
the appropriate form. Alternatively, a claim may be made by such a US holder
in advance of an Interest Payment. If the claim is accepted by the UK Inland
Revenue, they will usually authorize subsequent payments to that US holder to
be made without withholding of UK income tax. Claims for repayment of UK tax
withheld must be made within six years of the end of the UK year of assessment
(generally April 5 in each year) to which the Interest Payments relate and
must be accompanied by the original statement provided by Yorkshire Finance
when the Interest Payment was made showing the amount of UK income tax
deducted. Because a claim is not considered made until the UK tax authorities
receive the appropriate form from the IRS, forms should be sent to the IRS, in
the case of an advance claim, well before the relevant Interest Payment Date
or, in the case of a claim for the repayment of the tax, well before the end
of the appropriate limitation period.
Where a person in the UK acts as a collecting agent, i.e. either:
(i) acts as custodian of the Junior Subordinated Debentures and receives
Interest Payments on the Junior Subordinated Debentures or directs that
Interest Payments on the Junior Subordinated Debentures be paid to another
person, or consents to such payment; or
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(ii) collects or secures payment of, arranges to secure or collect
payment of or receives Interest Payments on, the Junior Subordinated
Debentures for a holder (except by means of clearing a cheque or arranging
for the clearing of a cheque),
the collecting agent will be required to withhold on account of UK income tax
at the lower rate (currently 20%) unless the person who is the beneficial
owner of the Junior Subordinated Debentures and beneficially entitled to the
interest is not resident in the UK, and a declaration to that effect in the
required form has been given to the collecting agent, or the Inland Revenue
has issued a notice to the collecting agent, or one of the other exceptions to
the withholding obligation applies and, in each case, the conditions imposed
by regulations which need to be satisfed for the exemption from withholding to
apply have been complied with.
The above collecting agent rules apply to the Trust Securities as they apply
to the Junior Subordinated Debentures. The Trust does not intend to appoint a
UK collecting agent in respect of Interest Payments on the Junior Subordinated
Debentures. The above section may become relevant in relation to the Junior
Subordinated Debentures if they are distributed to the holders of the Trust
Securities in a liquidation of the Trust.
In the event that the Junior Subordinated Debentures are distributed to the
holders of the Trust Securities in a liquidation of the Trust, holders of
Junior Subordinated Debentures in other jurisdictions may be entitled to a
refund of all or part of any UK income tax deducted or withheld or to make a
claim for interest on the Junior Subordinated Debentures to be paid without,
or subject to a reduced rate of, deduction or withholding under the provisions
of an applicable double tax treaty.
A credit in respect of all or part of any UK income tax deducted or withheld
may, depending on individual circumstances, be available to a holder of Junior
Subordinated Debentures who is resident in the UK or who carries on a trade,
profession or vocation in the UK through a branch or agency to which the
Junior Subordinated Debentures are attributable.
Holders of Trust Securities should be aware that under current UK tax law
upon the issuance of Definitive Registered Debentures, the Interest Payments
on such Definitive Registered Debentures will (subject to any entitlement to
make a claim under the provisions of an applicable double tax treaty as
described above) become subject to UK withholding tax, currently at the rate
of 20%. Holders of Definitive Registered Debentures (including the Trust) will
be entitled to the payment of Additional Amounts in respect of the tax
withheld, except as set forth under "Description of the Junior Subordinated
Debentures--Additional Amounts" and under "Description of the Junior
Subordinated Debentures--Form, Book-Entry Procedures and Transfer--Definitive
Registered Debentures", and then subject to the right of Yorkshire Finance in
certain circumstances to redeem the Junior Subordinated Debentures. See
"Description of the Junior Subordinated Debentures--Optional Tax Redemption".
Interest Payments on the Junior Subordinated Debentures constitute UK-source
income and, as such, may be subject to UK income tax by direct assessment even
where paid without deduction or withholding. However, UK tax chargeable on
such income from a UK source beneficially owned by persons not regarded as
resident in the UK for tax purposes will normally be limited to the tax, if
any, deducted at source on payment of such income. This limitation on the UK
tax charge will not apply if such income is beneficially owned by a person who
is not resident for tax purposes in the UK if that person carries on a trade,
profession or vocation in the UK through a UK branch or agency in connection
with which the income is received or to which the Junior Subordinated
Debentures are attributable. There are in any case exemptions for certain
types of income received by certain categories of UK agent (such as some
brokers and investment managers) on behalf of non-UK resident persons.
Where the Junior Subordinated Debentures are held by the Trust and any
holder of Trust Securities is a UK resident, special considerations apply.
Section 128(5) Finance Act 1995 provides "This section [i.e. the section
providing the limitation on the UK tax charge referred to in the second
sentence of the previous paragraph above] shall NOT apply to the income tax
chargeable for any year of assessment on the income of trustees NOT resident
in the United Kingdom if there is a relevant beneficiary of the trust who is
either: (a) an individual ordinarily resident in the United Kingdom; or (b) a
company resident in the United Kingdom". It is not entirely clear, as a
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matter of law, whether Section 128(5) applies where the trust in question is
one under the terms of which the beneficiaries are entitled to the underlying
income of the trust as and when it arises. However, as a matter of practice,
it is understood that the UK Inland Revenue does not currently seek to apply
Section 128(5) to such trusts. Consequently, if the holders of Trust
Securities are entitled to the underlying income of the Trust as and when it
arises, it is not anticipated that the UK Inland Revenue will seek to assess
the Trust directly even if any holder of Trust Securities is UK-resident.
No stamp duty or stamp duty reserve tax ("SDRT") will be payable on the
issue or transfer by delivery of the Junior Subordinated Debentures.
US FEDERAL INCOME TAX CONSIDERATIONS
The following opinion of Dewey Ballantine LLP, counsel to Yorkshire Group,
Yorkshire Finance and the Trust ("Tax Counsel"), describes the material US
Federal income tax consequences of the acquisition, ownership and disposition
of the Trust Securities by purchasers upon original issuance that are US
citizens or residents, corporations, partnerships or other entities created or
organized in or under the laws of the US or any state thereof, an estate, the
income of which is subject to US Federal income taxation regardless of its
source or a trust, the administration of which is subject to the primary
supervision of a US court and for which one or more US persons have the
authority to control all substantial decisions, in each case that are resident
in the US and not resident in the UK for purposes of the current double
taxation convention between the US and the UK ("US Holders") and that hold
their beneficial interest in the Trust Securities as capital assets. This
opinion so far as it relates to matters of law or legal conclusions is based
upon the provisions of the US Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury regulations promulgated thereunder and administrative
and judicial interpretations thereof now in effect, all of which are subject
to change, possibly with retroactive effect. This opinion does not discuss all
aspects of US Federal income taxation (for example, alternative minimum tax
consequences) that may be relevant to particular investors in light of their
particular investment circumstances, nor does it discuss any aspects of state,
local or foreign tax laws or any estate or gift tax considerations. This
opinion does not deal with certain classes of US persons subject to special
treatment under the US Federal income tax laws (for example, dealers in
securities, banks, regulated investment companies, life insurance companies,
tax exempt organizations or persons whose functional currency is not the US
dollar).
The Trust Securities are not being marketed to persons that would not
constitute US Holders ("non-United States Persons") and, consequently, the
following discussion does not discuss the tax consequences that might be
relevant to non-United States Persons. NON-UNITED STATES PERSONS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC US FEDERAL INCOME TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF TRUST SECURITIES.
Tax Counsel has advised that there is no authority directly on point dealing
with securities such as the Trust Securities or transactions of the type
described herein and that the opinions expressed herein are not binding on the
IRS or the courts, either of which could take a contrary position. No rulings
have been or will be sought from the IRS. Accordingly, there can be no
assurance that the IRS will not challenge the opinions expressed herein or
that a court would not sustain such a challenge.
PROSPECTIVE PURCHASERS OF TRUST SECURITIES SHOULD CONSULT, AND SHOULD RELY
UPON, THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN US FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE
POSSIBLE REDEMPTION OF THE TRUST SECURITIES OR REDEMPTION OF THE JUNIOR
SUBORDINATED DEBENTURES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE
"DESCRIPTION OF THE TRUST SECURITIES--REDEMPTIONS" AND "DESCRIPTION OF THE
JUNIOR SUBORDINATED DEBENTURES--OPTIONAL TAX REDEMPTION", RESPECTIVELY.
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Classification of the Trust
Tax Counsel is of the opinion that, under current law, and assuming full
compliance with the terms of the Indenture and the Trust Agreement, the Trust
will be classified as a grantor trust for US Federal income tax purposes and
not as an association or a publicly traded partnership taxable as a
corporation. Accordingly, for US Federal income tax purposes, each US Holder
will be considered the beneficial owner of a pro rata undivided interest in
the Junior Subordinated Debentures held by the Trust, and each US Holder will
be required to include in its gross income its allocable share of the entire
income attributable to the Junior Subordinated Debentures. Each US Holder
generally will determine its net income or loss with respect to the Trust in
accordance with its own method of accounting, although income arising from
OID, if any, must be taken into account under the accrual method of accounting
even if the US Holder otherwise would use the cash receipts and disbursements
method.
Classification of the Junior Subordinated Debentures
Yorkshire Group, Yorkshire Finance, the Trust and the holders of Trust
Securities (by acceptance of a beneficial interest in a Trust Security) will
agree to treat the Junior Subordinated Debentures as indebtedness of Yorkshire
Finance for all US Federal income tax purposes. Tax Counsel is of the opinion
that, under current law, and assuming full compliance with the terms of the
Indenture, the Junior Subordinated Debentures will be classified as
indebtedness of Yorkshire Finance for US Federal income tax purposes.
Original Issue Discount
Under Treasury regulations applicable to debt instruments issued on or after
August 13, 1996 (the "Regulations"), it is the opinion of Tax Counsel that,
for the reasons described in the immediately following paragraph, the Junior
Subordinated Debentures will not be treated as issued with OID.
The terms of the Junior Subordinated Debentures permit Yorkshire Finance to
defer the payment of interest on the Junior Subordinated Debentures at any
time and from time to time for up to 20 consecutive quarters with respect to
each Extension Period; provided, however, that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Under the
Regulations, a "remote" contingency that stated interest will not be timely
paid will be ignored in determining whether a debt instrument is issued with
OID. Yorkshire Finance believes that the likelihood of its exercising its
option to defer Interest Payments is "remote" since exercising that option
would prevent Yorkshire Finance and Yorkshire Group from declaring dividends
on any class of its equity securities. Accordingly, it is the opinion of Tax
Counsel, and Yorkshire Finance intends to take the position, that interest on
the Junior Subordinated Debentures generally will be taxable to a US Holder as
ordinary income at the time it is paid or accrued in accordance with such
holder's method of accounting. It should be noted that the Regulations have
not yet been addressed in any rulings or other interpretations by the IRS.
Accordingly, it is possible that the IRS could take a position contrary to the
interpretations described herein.
Under the Regulations, if Yorkshire Finance were to exercise its option to
defer Interest Payments, the Junior Subordinated Debentures would at that time
be treated as reissued with OID, and all stated interest on the Junior
Subordinated Debentures would thereafter be treated as OID as long as the
Junior Subordinated Debentures remain outstanding. In such event, all of a US
Holder's taxable interest income with respect to the Junior Subordinated
Debentures would thereafter be accounted for on an economic accrual basis
regardless of such holder's method of tax accounting, and actual distributions
of stated interest would not be reported as taxable income. Consequently, a US
Holder would be required to include in gross income OID even though Yorkshire
Finance would not make actual cash payments during an Extension Period.
Moreover, under the Regulations, if the option to defer Interest Payments was
determined not to be "remote," the Junior Subordinated Debentures would be
treated as having been originally issued with OID. In such event, all of a US
Holder's taxable interest income with respect to the Junior Subordinated
Debentures would be accounted for on an economic accrual basis regardless of
such holder's method of tax accounting, and actual distributions of stated
interest would not be reported as taxable income.
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The Regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to Tax Counsel's interpretation herein.
Because income on the Trust Securities will constitute interest or OID,
corporate holders of the Trust Securities will not be entitled to a dividends-
received deduction with respect to any income recognized with respect to the
Trust Securities. In the case of a US Holder other than a corporation, such
income in general will also constitute "investment income" for purposes of
determining the deduction allowable for investment interest expense.
A US Holder, subject to certain limitations, may be eligible to claim as a
credit or deduction for purposes of computing its US Federal income tax
liability UK taxes withheld (if any). For that purpose, interest income and
Additional Amounts will generally be treated as foreign source passive income
or, if income were subject to a foreign withholding tax of five percent or
more, high withholding tax interest (or, in the case of certain US Holders,
financial services income). The rules relating to foreign tax credits are
extremely complex, and US Holders should consult with their own tax advisors
with regard to the availability of a foreign tax credit and the application of
the foreign tax credit rules to their particular situation.
Market Discount
A US Holder of a Trust Security at a discount from face (or the adjusted
issue price if the Trust Security bears OID) of such purchaser's pro rata
share of the Junior Subordinated Debentures acquires such Trust Security with
"market discount." However, market discount with respect to a Trust Security
will be considered to be zero if it is de minimis. Market discount will be de
minimis with respect to a Trust Security if it is less than the product of (i)
0.25% of the adjusted issue price of the purchaser's pro rata share of the
Junior Subordinated Debentures multiplied by (ii) the number of complete years
to maturity of such Junior Subordinated Debentures after the date of purchase.
The purchaser of a Trust Security with more than a de minimis amount of market
discount generally will be required to treat any gain on the sale, exchange,
redemption or other disposition of all or part of the Trust Securities (or
related Junior Subordinated Debentures) as ordinary income to the extent of
accrued (but not previously taxed) market discount. Market discount generally
will accrue ratably during the period from the date of purchase of such Trust
Security to the maturity date of the Junior Subordinated Debentures, unless
the US Holder irrevocably elects to accrue such market discount on the basis
of a constant interest rate.
A US Holder who has acquired a Trust Security at a market discount generally
will be required to defer any deductions of interest expense attributable to
any indebtedness incurred or continued to purchase or carry the Trust
Security, to the extent such interest expense exceeds the related interest
income. Any such deferred interest expense generally will be allowable as a
deduction not later than the year in which the related market discount income
is recognized. As an alternative to the inclusion of market discount in income
upon disposition of all or a portion of a Trust Security or the related Junior
Subordinated Debentures (including redemptions thereof), a US Holder may make
an election (which may not be revoked without the IRS's consent) to include
market discount income as it accrues on all market discount instruments
acquired by the US Holder during or after the taxable year for which the
election is made. In that case, the preceding deferral rule for interest
expense will not apply.
Disposition of Trust Securities
A US Holder will recognize capital gain or loss on a sale, exchange or other
disposition of Trust Securities, including a redemption for cash, equal to the
difference between the amount realized and the US Holder's adjusted tax basis
in the Trust Securities. Gain or loss recognized by a US Holder on the sale,
exchange or other disposition of Trust Securities held for more than one year
will generally be taxable as long-term capital gain or loss, except to the
extent of any accrued market discount. See "--Market Discount". The maximum
effective US Federal income tax rate applicable to gains resulting from the
sale of capital assets held by individuals for more than one year but not more
than 18 months is 28%. The maximum effective tax rate on long-term capital
gain will decrease to 20% if the Trust Securities are held for more than 18
months.
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A US Holder that sells, exchanges or otherwise disposes of Trust Securities
during a period of deferral of Interest Payments on the Junior Subordinated
Debentures, and prior to the record date for the date on which Distributions
of such amounts are made, will increase its adjusted tax basis in its Trust
Securities by the amount of OID included in income in respect of such deferral
and, to the extent that the adjusted tax basis exceeds the amount realized on
the sale or other disposition of such holder's Trust Securities, recognize a
capital loss. If the US Holder disposes of a Trust Security prior to the
occurrence of an Extension Period, any portion of the amount received from the
purchaser that is attributable to accrued interest will be treated as interest
income to the US Holder (that will only be includible as income to the extent
it previously has not been included in the US Holder's taxable income) and
will not be treated as part of the amount realized for purposes of determining
gain or loss on the disposition of the Trust Security. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for US Federal income tax purposes.
For foreign tax credit limitation purposes, gain realized on the sale,
exchange or other disposition of a Trust Security generally will be US source
income. At this time, the source of loss is uncertain because the US Treasury
Department has not yet issued final regulations with respect to the allocation
between foreign and US source income of losses from the sale, exchange or
other disposition of securities such as the Trust Securities.
A US Holder's tax basis in its Trust Securities generally will be equal to
(i) the amount paid by such holder for its Trust Securities, increased by (ii)
the amount includible in income by such holder with respect to its Trust
Securities, including any related accrued OID and market discount included in
taxable income by the US Holder, and reduced by (iii) the amount of cash or
other property distributed to such holder with respect to amounts included in
the holder's tax basis pursuant to clause (ii) hereof. A US Holder that
acquires Trust Securities at different prices may be required to maintain a
single aggregate adjusted tax basis in all of its Trust Securities and, upon
sale or other disposition of some of such Trust Securities, to allocate a pro
rata portion of such aggregate tax basis to the Trust Securities sold or
disposed of (rather than maintaining a separate tax basis in each Trust
Security for purposes of computing gain or loss upon a sale or other
disposition of that Trust Security).
Receipt of Junior Subordinated Debentures or Cash In Certain Circumstances
Yorkshire Finance has the right, at any time, to dissolve the Trust and to
cause Junior Subordinated Debentures to be distributed to the US Holders in
liquidation of the Trust. Such liquidating distribution will generally be tax-
free to each US Holder and will result in each US Holder receiving an
aggregate tax basis in its Junior Subordinated Debentures equal to such
holder's aggregate tax basis in its Trust Securities. A US Holder's holding
period in the Junior Subordinated Debentures will include the holding period
for which the US Holder held the related Trust Securities. If a liquidation of
the Trust occurs following a determination that the Trust is subject to US
Federal income tax with respect to the amounts received on the Junior
Subordinated Debentures, then such liquidation will be taxable to the US
Holders. In that event, gain or loss would be recognized in the amount
measured by the difference between the fair market value of the Junior
Subordinated Debentures received in the liquidation and the US Holder's
aggregate tax basis in its Trust Securities. In such a case, the holding
period for the Junior Subordinated Debentures received in the liquidation
would not include the period during which the Trust Securities were held.
The Junior Subordinated Debentures may be redeemed for cash and the proceeds
of such redemption distributed to US Holders in redemption of their Trust
Securities. Such redemption of the Trust Securities would, for US Federal
income tax purposes, constitute a taxable disposition of the redeemed Trust
Securities, and a US Holder would recognize gain or loss as if it had sold
such redeemed Trust Securities for an amount of cash equal to the proceeds
received upon the redemption. See "--Disposition of Trust Securities".
The redemption of only part of a Trust Security will require an allocation
of the US Holder's tax basis in the related Junior Subordinated Debentures
between the portion of the Junior Subordinated Debentures redeemed and the
portion retained by the US Holder in order to determine gain or loss.
114
<PAGE>
Information Reporting and Backup Withholding
Income on the Trust Securities will be reported to US Holders on IRS Form
1099, which should be mailed to US Holders by January 31 following each
calendar year. Payments made on and proceeds from the sale of Trust Securities
may be subject to a "backup withholding" tax of 31% unless the US Holder
complies with certain identification requirements. Any withheld amount
generally will be allowed as a credit against the US Holder's US Federal
income tax, provided the required information is timely filed with the IRS. In
addition, recently adopted US Treasury regulations, which generally are
effective for payments made after December 31, 1998, subject to certain
transition rules, modify in certain respects the backup withholding and
information reporting rules. In general, the new regulations do not
significantly alter the substantive requirements of these rules, but unify
current procedures and forms and clarify reliance standards. Prospective
purchasers are urged to consult their own tax advisors regarding the new
regulations.
CAYMAN ISLANDS TAXATION
It is the opinion of Maples and Calder, Cayman Islands counsel for Yorkshire
Finance, that, under existing Cayman Islands laws:
(i) payments in respect of the Junior Subordinated Debentures will not be
subject to taxation in the Cayman Islands and no withholding will be
required on such payments to any holder of the Junior Subordinated
Debentures and gains derived from the sale of the Junior Subordinated
Debentures, if distributed, will not be subject to Cayman Islands income or
corporation tax. The Cayman Islands currently has no income tax or taxation
in the nature of a withholding tax, corporate or capital tax and no estate
duty, inheritance tax or gift tax; and
(ii) the holder of a Junior Subordinated Debenture in bearer form (or the
legal personal representative of such holder) whose Junior Subordinated
Debenture in bearer form is brought into the Cayman Islands in original
form may be liable to pay stamp duty imposed under the laws of the Cayman
Islands in respect of such Junior Subordinated Debenture in bearer form
(currently up to CI $250 (U.S. $305) per Junior Subordinated Debenture in
bearer form (unless duty of CI$500 is paid in respect of the series of such
Junior Subordinated Debentures)). Definitive Registered Debentures and any
Global Debentures which are evidence of entitlement only and title to which
passes by entry in the relevant register, will not be subject to Cayman
Islands stamp duty. Any instrument transferring title to any Junior
Subordinated Debenture in registered form may be subject to Cayman Islands
stamp duty of CI$100 if brought to or executed in the Cayman Islands.
Yorkshire Finance has been incorporated under the laws of the Cayman Islands
as an exempted company and, as such, has obtained an undertaking dated
September 9, 1997 from the Governor-in-Council of the Cayman Islands that, for
a period of twenty years from the date of the undertaking, no law enacted in
the Cayman Island imposing any tax to be levied on profits, income, gains or
appreciations shall apply to Yorkshire Finance or its operations and, in
addition, that no tax to be levied on profits, income, gains, or appreciations
or which is in the nature of estate duty or inheritance tax shall be payable
by Yorkshire Finance on or in respect of the shares, debentures or other
obligations of Yorkshire Finance or by way of the withholding in whole or in
part of any relevant payments (as defined in Section 6(3) of the Tax
Concessions Law (1995 Revisions)).
115
<PAGE>
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing or other employee benefit plan (an
"ERISA Plan") subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the ERISA Plan's particular circumstances before authorizing an
investment in the Trust Securities. Among other factors, the fiduciary should
consider whether such an investment is in accordance with the documents
governing the ERISA Plan and whether the investment is appropriate for the
ERISA Plan in view of its overall investment policy and diversification of its
portfolio.
Certain provisions of ERISA and the Code prohibit ERISA Plans, as well as
individual retirement accounts and Keogh plans subject to section 4975 of the
Code (collectively, "Plans"), from engaging in certain "prohibited"
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the Plan. The acquisition of Trust Securities by a Plan, the payment to a Plan
of Distributions or payments to a Plan on liquidation of the Trust or
redemption of the Trust Securities could be prohibited transactions if any of
the US Parents, Yorkshire Group, Yorkshire Holdings, Yorkshire Finance,
Yorkshire, the Administrative Trustees, the Indenture Trustee, Securities
Trustees or Guarantee Trustee, or certain of their affiliates, is a party in
interest or disqualified person with respect to the Plan. Any prohibited
transaction could be treated as exempt under ERISA and the Code if the Trust
Securities were acquired and held pursuant to and in accordance with one or
more "class exemptions" issued by the US Department of Labor ("DOL"), such as
Prohibited Transaction Class Exemption ("PTCE") 96-23 (for certain
transactions determined by in-house asset managers), PTCE 95-60 (for certain
transactions involving insurance company general accounts), PTCE 91-38 (for
certain transactions involving bank collective investment funds), PTCE 90-1
(for certain transactions involving insurance company separate accounts), or
PTCE 84-14 (for certain transactions determined by independent qualified asset
managers). Any purchaser or holder of the Trust Securities or any interest
therein will be deemed to have represented by its purchase and holding thereof
that it either (a) is not a Plan and is not purchasing such securities on
behalf of or with "plan assets" of any Plan or (b) is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14.
If the Trust assets were determined under ERISA or the Code to be "plan
assets" of Plans holding the Trust Securities, fiduciaries of such Plans might
under certain circumstances be subject to liability for actions taken by the
Trust. Moreover, fiduciaries with responsibilities to Plans might be deemed to
have improperly delegated their fiduciary responsibilities to the Trust in
violation of ERISA. Although under certain circumstances ERISA and the Code,
as interpreted by the DOL in currently effective regulations, apply a "look-
through" rule under which the assets of an entity in which a Plan has made an
equity investment may generally constitute "plan assets," the applicable
regulations except investments in certain publicly registered securities from
the application of the "look-through" principle.
In order to qualify for the exception described above, the securities in
question must be: (i) freely transferable; (ii) owned by at least 100
investors independent of the issuer and of one another; and (iii) either (a)
part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (b) sold as part of a public offering pursuant to an effective
registration statement under the Securities Act and registered under the
Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the issuer's fiscal year during which the
offering occurred.
The Trust currently anticipates that the Trust Securities will be "freely
transferable" within the meaning of the DOL regulations, and will be owned by
at least 100 investors independent of the issuer and of one another. Finally,
no Trust Securities will be sold except pursuant to an effective registration
statement under the Securities Act, and the Trust intends to make the required
filings under the Exchange Act. Therefore, the Trust should qualify for the
exception, so that the Trust assets should not be "plan assets" of any Plan
holding the Trust Securities.
116
<PAGE>
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that any person
considering the purchase of Trust Securities with Plan assets consult with its
counsel regarding the consequences under ERISA and the Code of the acquisition
and ownership of Trust Securities and the availability of exemptive relief
under the class exemptions listed above. In John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Employee
benefit plans which are governmental plans (as defined in Section 3(32) of
ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
generally are not subject to ERISA requirements.
117
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement (the
"Underwriting Agreement"), the Trust has agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of the Underwriters,
for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, A.G. Edwards &
Sons, Inc., Morgan Stanley & Co. Incorporated, PaineWebber Incorporated,
Prudential Securities Incorporated and Smith Barney Inc. are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Trust, the number of Trust Securities set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
TRUST
UNDERWRITERS SECURITIES
------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
A.G. Edwards & Sons, Inc. ......................................
Morgan Stanley & Co. Incorporated...............................
PaineWebber Incorporated........................................
Prudential Securities Incorporated..............................
Smith Barney Inc. ..............................................
----------
Total.................................................... 11,000,000
==========
</TABLE>
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Underwriters are committed to take and pay for all such Trust Securities
offered hereby, if any are taken. Default by one Underwriter would not relieve
any non-defaulting Underwriter from its several obligation, and in the event
of such a default, the non-defaulting Underwriters may be required by the
Trust to purchase the Trust Securities that they have severally agreed to
purchase and, in addition, to purchase the Trust Securities that the
defaulting Underwriter or Underwriters shall have failed to purchase up to an
amount equal to one-ninth of the Trust Securities that such non-defaulting
Underwriter or Underwriters have otherwise agreed to purchase.
The Trust has been advised by the Representatives that the Underwriters
propose to offer the Trust Securities in part directly to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and in part to certain securities dealers at such price less a concession of
not to exceed $ per Trust Security. The Underwriters may allow, and such
dealers may reallow, a concession of not to exceed $ per Trust Security to
certain brokers and dealers. After the Trust Securities are released for sale
to the public, the offering price and other selling terms may from time to
time be varied by the Underwriters.
In view of the fact that the proceeds from the sale of the Trust Securities
will be used to purchase the Junior Subordinated Debentures, the Underwriting
Agreement provides that Yorkshire Finance will pay as Underwriters'
Compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $ per Trust Security (or $ in the aggregate);
provided that such compensation for sales of 10,000 or more Trust Securities
to a single purchaser will be $ per Trust Security. Therefore, to the
extent of such sales, the actual amount of Underwriters' Compensation will be
less than the aggregate amount specified in the preceding sentence.
Prior to this offering, there has been no public market for the Trust
Securities. The Trust Securities have been approved for listing on the NYSE,
subject to official notice of issuance. In order to meet one of the
requirements for listing the Trust Securities on the NYSE, the Underwriters
have undertaken to sell lots to a minimum of 400 beneficial holders. Trading
of the Trust Securities on the NYSE is expected to commence within the 30-day
period after the initial delivery of the Trust Securities. The Underwriters
have advised Yorkshire
118
<PAGE>
Group that they intend to make a market in the Trust Securities prior to
commencement of trading on the NYSE, but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Trust Securities.
In connection with the sale of the Trust Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price
of the Trust Securities. Specifically, the Underwriters may bid for, and
purchase, the Trust Securities in the open market to cover syndicate short
positions or to stabilize the price of the Trust Securities, and in connection
therewith impose a penalty bid on certain Underwriters and selling group
members. This means that if the Underwriters purchase Trust Securities in the
open market to reduce any short position or to stabilize the price of the Trust
Securities, they may reclaim the amount of the selling concession from the
Underwriter or Underwriters and selling group members who sold those Trust
Securities as part of this offering. Any of these activities may stabilize or
maintain the market price of the Trust Securities above independent market
levels. The Underwriters will not be required to engage in these activities and
may end any of these activities at any time.
Yorkshire Group, Yorkshire Finance and the Trust have agreed, during the
period of 30 days from the date of the Underwriting Agreement, not to sell,
offer to sell, grant any option for the sale of, or otherwise dispose of any
trust securities, any security convertible into or exchangeable into or
exercisable for Trust Securities or the Junior Subordinated Debentures or debt
securities substantially similar to the Junior Subordinated Debentures or
equity securities substantially similar to the Trust Securities (except for the
Junior Subordinated Debentures and the Trust Securities issued pursuant to the
Underwriting Agreement), without the prior written consent of the
Representatives.
Each Underwriter has also agreed that (a) it has not offered or sold and,
prior to the date six months after the date of issuance of the Trust
Securities, will not offer or sell any Trust Securities to persons in the UK
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the UK within the meaning of the
Public Offers of Securities Regulations 1995, (b) it has complied, and will
comply with all applicable provisions of the Financial Services Act 1986 of
Great Britain with respect to anything done by it in relation to the Trust
Securities in, from or otherwise involving the UK, and (c) it has only issued
or passed on, and will only issue or pass on, in the UK any document received
by it in connection with the issuance of the Trust Securities to a person who
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person
to whom such document may otherwise lawfully be issued or passed on.
Each of the Underwriters has severally represented and agreed that it has not
and will not make any invitation to the public in the Cayman Islands to
purchase any Junior Subordinated Debentures or any Trust Securities, whether
directly or indirectly.
Yorkshire Group and Yorkshire Finance have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to Yorkshire Group and its affiliates, for which such Underwriters or
their affiliates have received or will receive customary fees and commissions.
119
<PAGE>
LEGAL OPINIONS
Certain matters of Delaware law will be passed upon by Richards, Layton &
Finger, P.A., special Delaware counsel to Yorkshire Group, Yorkshire Finance
and the Trust. Certain matters of English law will be passed upon by Allen &
Overy, London, England, special UK counsel to Yorkshire Group, Yorkshire
Finance and the Trust. Certain matters of New York and US Federal law
including US Federal income tax considerations, will be passed upon by Dewey
Ballantine LLP, New York, New York, special US counsel to Yorkshire Group,
Yorkshire Finance and the Trust. Certain matters of Cayman Islands law will be
passed upon by Maples and Calder, special Cayman Islands counsel for Yorkshire
Finance. Certain matters of New York and US Federal law will be passed upon by
Winthrop, Stimson, Putnam & Roberts, New York, New York, counsel for the
Underwriters.
Dewey Ballantine LLP and Winthrop, Stimson, Putnam & Roberts may rely,
without independent investigation, upon Allen & Overy with respect to matters
relating to English law and upon Maples and Calder with respect to matters
relating to Cayman Islands law.
EXPERTS
The consolidated balance sheets of Yorkshire Electricity Group plc as of
March 31, 1996 and 1997, consolidated statements of income, cash flows and
changes in shareholders' equity for the three years ended March 31, 1995, 1996
and 1997 and the consolidated balance sheet or Yorkshire Power Group Limited
as of April, 1 1997 included in this Prospectus have been audited by Deloitte
& Touche, independent chartered accountants, as stated in their reports
appearing herein.
NATURE OF FINANCIAL INFORMATION
The financial information in respect of the Successor Company and the
Predecessor Company set forth in "Summary--Summary Financial Information",
"Capitalization", "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
herein does not constitute statutory accounts under Section 240 of the
Companies Act 1985. Statutory accounts for the Fiscal Year 1997 to which such
financial information relates have been delivered to the Registrar of
Companies in England and Wales. The auditors of the Successor Company and the
Predecessor Company have made a report under Section 236 of the Companies Act
1985 on the statutory accounts for such Fiscal Year which was not qualified
within the meaning of Section 262 of the Companies Act 1985 and did not
contain a statement made under Section 237(2) or 237(3) of that Act.
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
Independent Auditors' Report............................................. F-2
Consolidated Statements of Income........................................ F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Changes in Shareholders' Equity............... F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to the Consolidated Financial Statements........................... F-8
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Income..................... F-20
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
Independent Auditors' Report............................................. F-21
Consolidated Balance Sheet............................................... F-22
Notes to the Consolidated Balance Sheet.................................. F-24
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
Independent Accountants' Review Report................................... F-33
Condensed Consolidated Statements of Income.............................. F-34
Condensed Consolidated Balance Sheets.................................... F-35
Condensed Consolidated Statement of Changes in Shareholders' Equity...... F-36
Condensed Consolidated Statements of Cash Flows.......................... F-37
Notes to the Condensed Consolidated Financial Statements................. F-38
</TABLE>
F-1
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
of Yorkshire Electricity Group plc
We have audited the accompanying consolidated balance sheets of Yorkshire
Electricity Group plc and its subsidiaries (the "Company") as of March 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1997 (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 generally accepted auditing
standards 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 Electricity Group
plc and its subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1997 in conformity with generally accepted accounting
principles in the United States of America.
Deloitte & Touche
Leeds
United Kingdom
July 15, 1997
(December 31, 1997 as to Note 14)
F-2
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
OPERATING REVENUES................................. 1,331 1,431 1,464
COST OF SALES...................................... 932 1,013 1,025
GROSS MARGIN....................................... 399 418 439
OPERATING EXPENSES
Maintenance........................................ 76 77 64
Depreciation....................................... 50 42 41
Provision for uneconomic gas and electricity
contracts......................................... 78 -- --
Selling, general and administrative................ 93 85 111
Systems development costs (Note 9)................. 50 -- --
Restructuring charges.............................. -- -- 8
----- ----- -----
Income from operations............................. 52 214 215
----- ----- -----
OTHER INCOME (EXPENSE)
National Grid transaction (Note 12):
Realized gain on sale of National Grid Group
plc............................................. 1 215 --
Realized gain on sale of PSB Holdings Limited.... 6 56 --
Special dividend................................. -- 118 --
Customer discounts awarded....................... -- (85) --
Administrative costs............................. -- (4) --
Dividend income.................................... 2 21 18
Equity in loss of associates....................... (4) (6) (19)
Gain on sale of associate.......................... 15 -- --
Loss on sale of subsidiary......................... -- (2) --
Compensation payment-Stockholm Stadhus AB.......... -- -- 17
----- ----- -----
Total other income, net............................ 20 313 16
----- ----- -----
Interest expense................................... (55) (46) (23)
Interest income.................................... 22 26 11
----- ----- -----
Net interest expense............................... (33) (20) (12)
----- ----- -----
INCOME BEFORE INCOME TAXES......................... 39 507 219
PROVISION FOR INCOME TAXES......................... 13 114 78
----- ----- -----
NET INCOME......................................... 26 393 141
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
ASSETS -------- --------
(Pounds) (Pounds)
<S> <C> <C>
FIXED ASSETS
Property, plant and equipment, net of accumulated
depreciation of (Pounds)500 and (Pounds)458................ 765 735
Construction work in progress............................... 31 34
----- -----
Total fixed assets........................................ 796 769
----- -----
OTHER ASSETS
Investments, long-term...................................... 109 103
Long-term receivables....................................... -- 15
Prepaid pension asset....................................... 6 4
----- -----
Total other assets........................................ 115 122
----- -----
CURRENT ASSETS
Cash and cash equivalents................................... 221 252
Investments................................................. 29 37
Customer receivables, less provision for uncollectible
accounts of (Pounds)6 and (Pounds)7........................ 90 89
Unbilled revenue............................................ 84 99
Other receivables........................................... 21 26
Other....................................................... 19 14
----- -----
Total current assets...................................... 464 517
----- -----
Total assets.............................................. 1,375 1,408
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital, 68 2/11 pence par value common shares,
220,000,000 shares, authorized, 159,131,326 in 1997 and
158,555,100 in 1996 issued and outstanding.................. 108 108
Additional paid-in capital................................... 92 89
Unrealized gain on available-for-sale investments............ 13 14
Retained earnings............................................ 146 188
----- -----
Total shareholders' equity................................. 359 399
----- -----
LONG-TERM DEBT............................................... 419 424
OTHER NON-CURRENT LIABILITIES
Deferred income taxes........................................ 136 158
Provision for uneconomic gas and electricity contracts....... 78 --
Other........................................................ 15 23
----- -----
Total other non-current liabilities........................ 229 181
----- -----
CURRENT LIABILITIES
Current portion of long-term debt............................ 5 5
Short-term debt.............................................. 82 85
Accounts payable............................................. 15 17
Electricity purchases payable................................ 64 75
Payments received in advance................................. 14 55
Accrued liabilities and deferred income...................... 69 52
Income taxes payable......................................... 51 45
Other current liabilities.................................... 68 70
----- -----
Total current liabilities.................................. 368 404
----- -----
Total liabilities.......................................... 1,016 1,009
----- -----
COMMITMENTS AND CONTINGENCIES (NOTE 4)
Total shareholders' equity and liabilities................. 1,375 1,408
===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SHARE CAPITAL ADDITIONAL AVAILABLE
--------------------- PAID-IN RETAINED FOR SALE
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS TOTAL
----------- -------- ---------- -------- ----------- --------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1994.. 207,865,920 104 74 434 -- 612
Common shares issued.... 1,141,446 -- 3 -- -- 3
Reduction in shares from
reverse shares
split(1)............... (25,109,191) -- -- -- -- --
Net income.............. -- -- -- 141 -- 141
Dividends declared...... -- -- -- (239) -- (239)
----------- --- --- ---- ---- ----
Balance, March 31,
1995................... 183,898,175 104 77 336 -- 517
Common shares issued.... 5,537,644 4 12 -- -- 16
Reduction in shares from
reverse shares
split(2)............... (30,880,719) -- -- -- -- --
Revaluation of NGG
shares to fair market
value.................. -- -- -- -- 233 233
Realization of gain on
distribution of NGG
shares................. -- -- -- -- (215) (215)
Deferred tax on
revaluation of NGG
shares................. -- -- -- -- (4) (4)
Revaluation of PSB
shares to fair market
value.................. -- -- -- -- 56 56
Realization of gain on
sale of PSB............ -- -- -- -- (56) (56)
Net income.............. -- -- -- 393 -- 393
NGG special dividend.... -- -- -- (298) -- (298)
Dividends declared...... -- -- -- (243) -- (243)
----------- --- --- ---- ---- ----
Balance, March 31,
1996................... 158,555,100 108 89 188 14 399
Common shares issued.... 576,226 -- 3 -- -- 3
Gain on sale of NGG
shares................. -- -- -- -- (1) (1)
Revaluation of PSB
shares to fair market
value.................. -- -- -- -- 6 6
Realization of gain on
sale of PSB............ -- -- -- -- (6) (6)
Net income.............. -- -- -- 26 -- 26
Dividends declared...... -- -- -- (68) -- (68)
----------- --- --- ---- ---- ----
Balance, March 31,
1997................... 159,131,326 108 92 146 13 359
=========== === === ==== ==== ====
</TABLE>
(1) In January 1995 the share capital was consolidated on the basis of 22 new
56 9/11 pence ordinary shares for every 25 existing 50 pence ordinary
shares.
(2) In January 1996 the share capital was consolidated on the basis of 5 new 68
2/11 pence ordinary shares for every 6 existing 56 9/11 pence shares.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... 26 393 141
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 50 42 41
Write off of capitalized system costs.............. 22 -- --
Deferred income taxes.............................. (24) 23 23
Gain on disposal of investments.................... (7) (271) --
Equity in loss of associates....................... 4 6 19
Gain on sale of associate.......................... (15) -- --
Changes in assets and liabilities:
Receivables........................................ 14 21 (44)
Provision for uneconomic gas and electricity
contracts......................................... 78 -- --
Electricity purchases.............................. (11) 15 6
Payments received in advance....................... (41) 25 (26)
Other.............................................. -- (32) 41
---- ---- ----
Net cash provided by operating activities.......... 96 222 201
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (103) (101) (89)
Proceeds from sale of fixed assets................. 29 33 3
Proceeds from sale of subsidiary................... -- 33 --
Purchases of associates............................ -- -- (11)
Proceeds from sale of associate.................... 26 -- --
Loans (advanced to) repaid by associate............ (3) 2 (24)
Purchases of long-term investments................. (18) (25) (30)
Proceeds from sale of PSB.......................... 10 53 --
Sales (purchases) of short-term investments........ 8 (3) 50
---- ---- ----
Net cash used in investing activities.............. (51) (8) (101)
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........... -- 163 196
Proceeds from issuance of common stock............. 3 11 3
Repayments of long-term debt....................... (5) (47) (17)
Net change in short-term debt...................... (3) 2 (10)
Dividends paid..................................... (71) (243) (239)
---- ---- ----
Net cash used in financing activities.............. (76) (114) (67)
---- ---- ----
(Decrease) increase in cash and cash equivalents... (31) 100 33
Beginning of period cash and cash equivalents...... 252 152 119
---- ---- ----
End of period cash and cash equivalents............ 221 252 152
==== ==== ====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. 42 46 19
==== ==== ====
Cash paid for income taxes......................... 30 98 23
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Yorkshire Electricity Group plc ("YEG" or the "Company") is one of the
twelve regional electricity companies ("RECs") in England and Wales licensed
to supply, distribute, and to a limited extent, generate electricity. The RECs
were created as a result of the privatization of the UK electricity industry
in 1990 after the state owned low voltage distribution networks were allocated
to the then existing twelve regional boards. The Company's main business, the
distribution and supply of electricity to customers in its franchise area (the
"Franchise Area") in the North of England, is regulated under the terms of a
Public Electricity Supply License ("PES License") by the Office of Electricity
Regulation ("OFFER").
The Company operates primarily in its Franchise Area in Northern England.
The Franchise Area covers approximately 10,000 square kilometers, encompassing
parts of the counties of West Yorkshire, Humberside, South Yorkshire,
Derbyshire, Nottinghamshire, Lincolnshire and Lancashire. The Franchise Area
has a resident population of approximately 4.4 million.
The Company purchases power primarily from the wholesale trading market for
electricity in England and Wales (the "Pool"). The Pool monitors supply and
demand between generators and suppliers, sets prices for generation and
provides for centralized settlement of accounts due between generators and
suppliers.
BASIS OF PRESENTATION
The consolidated financial statements of the Company are presented in pounds
sterling ((Pounds)) and in conformity with accounting principles generally
accepted in the United States of America. The Company is not subject to 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" do not apply.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries and have been prepared
from records maintained by the Company in the UK. Significant intercompany
items are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
UNBILLED REVENUE
The Company records revenue net of value added tax ("VAT") and accrues
revenues for service provided but unbilled at the end of each reporting
period.
RECOVERY OF REGULATED INCOME
Charges for distribution of electricity and for supply to customers with a
maximum demand under 100 kW are subject to a price control formula set out in
the Company's PES License which allows a maximum charge per unit of
electricity. Differences in the charges, or in the purchase cost of
electricity, can result in the under or overrecovery of revenues in a
particular period.
F-8
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Where there is an overrecovery of supply or distribution business revenues
against the regulated maximum allowable amount, revenues are deferred in an
amount equivalent to the overrecorded amount. The deferred amount is deducted
from operating revenues and included in other current liabilities.
FINANCIAL INSTRUMENTS
The Company enters into contracts for differences ("CFDs") primarily to
hedge its supply business against the price risk of electricity purchases from
the Pool. Use of these CFDs is carried out within the framework of the
Company's purchasing strategy and hedging guidelines. CFDs are accounted for
as hedges and, consequently, gains and losses are deferred and recognized over
the same period as the item hedged. The Company recognizes gains (losses) on
CFDs when settlement is made, which is generally monthly. Gains (losses) on
CFDs are recognized as a decrease (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 (losses) based upon the difference between
fixed prices in the CFD compared to variable prices paid to the Pool for
future electricity purchases are not recognized until the period of such
settlements.
The Company enters into interest rate 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. The Company accounts for its
interest rate swaps in accordance with Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts" and various Emerging
Issues Task Force pronouncements. If the interest rate swaps 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 interest rate swap.
If the debt instrument being hedged by the interest rate swap were to be
extinguished, any gain or loss attributable to the swap would be recognized in
the period of the transaction.
The Company considers the carrying amounts of financial instruments
classified as current assets and current liabilities to be a reasonable
estimate of their fair value because of the short maturity of these
instruments.
CASH AND CASH EQUIVALENTS
The Company 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 stated at original cost, which includes
materials, labor and appropriate overhead costs, and the estimated cost of
borrowed funds used during construction. The cost of maintenance, repairs and
replacement of minor items of property is charged to maintenance expense.
The Company records book depreciation expense on a straight-line basis,
except for distribution network assets which are charged at 3% for 20 years
and 2% for the remaining 20 years. Assets are depreciated using the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Distribution network................................................ 40
Generation.......................................................... 20
Buildings........................................................... Up to 60
Fixtures and equipment.............................................. Up to 10
Vehicles and mobile plant........................................... Up to 10
</TABLE>
F-9
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVESTMENTS
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Investments in Certain Debt and Equity Securities" ("SFAS 115"). The
Company'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
The Company 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 carryforwards 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.
2. RETIREMENT BENEFITS
PENSION PLANS
The Company operates two schemes, one based on defined contributions and a
second based on defined benefits.
DEFINED CONTRIBUTION
The defined contribution plan was established on December 1, 1991. From
April 1, 1995 new employees are only eligible to join this plan. The assets of
the defined contribution plan are held and administered by an independent
trustee. The cost recognized for this plan was less than (Pounds)1 million for
each of the three fiscal years ended March 31, 1997.
DEFINED BENEFITS
The Company participates in the Electricity Supply Pension Scheme, which
provides pension and other related defined benefits, based on final
pensionable pay, to substantially all employees throughout the electricity
supply industry in the UK.
The Company uses the projected unit credit actuarial method for accounting
purposes. Amounts funded to the pension are primarily invested in equity and
fixed income securities.
Statement of Financial Accounting Standards No. 87 "Employers' Accounting
For Pensions" ("SFAS 87") was effective for fiscal years beginning after
December 15, 1988. The provisions of SFAS No. 87 were initially adopted by the
Company on April 1, 1992. The amount of the unrecognized net transition
obligation on April 1, 1992 was (Pounds)51 million.
F-10
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Accumulated benefit obligation:
Vested benefits.......................................... 590 570
Nonvested benefits....................................... 35 40
---- ----
625 610
---- ----
Fair value of plan assets.................................. 725 666
Projected benefit obligation............................... (664) (648)
---- ----
Assets in excess of projected benefit obligation........... 61 18
Unrecognized net transition obligation..................... 37 40
Unrecognized prior service cost............................ 10 10
Other unrecognized net gain................................ (102) (64)
---- ----
Prepaid pension asset...................................... 6 4
==== ====
</TABLE>
The weighted average rates assumed in the actuarial calculations as of the
following dates were:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
% % %
<S> <C> <C> <C>
Discount rate................................... 8.0 8.5 7.5
Annual salary rate increase..................... 6.0 6.5 5.5
Long-term rate of return on plan assets......... 9.0 9.0 9.0
The components of the plan's net periodic pension cost during the periods
are shown below (in millions):
<CAPTION>
MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Service cost (benefits earned during the
period)........................................ 10 9 11
Interest cost on projected benefit obligation... 52 49 45
Actual return on plan assets.................... (89) (113) 1
Net amortization and deferral................... 33 65 (52)
--- ---- ---
Net periodic pension cost....................... 6 10 5
=== ==== ===
</TABLE>
3. REGULATORY MATTERS
The distribution business of the Company is regulated under its PES License,
pursuant to which revenue of the distribution business is controlled by the
Distribution Price Control Formula (the "DPCF"). The DPCF determines the
maximum average price per unit of electricity (expressed in kilowatt hours)
that the Company can charge. The DPCF is usually set for a five-year period,
subject to more frequent adjustments as determined necessary by the Director
General of Electricity Supply (the "Regulator"). At each review, the Regulator
can adjust the value of certain elements in the DPCF. The Company's allowed
distribution revenues were reduced by a 14% below inflation reduction and a
13% below inflation reduction on April 1, 1995 and 1996, respectively,
following a review by the Regulator. On April 1, 1997 and April 1, 1998, the
Company's allowed distribution revenues were decreased by an additional 3%
below inflation reduction and there will be a further annual 3% below
inflation reduction on April 1, 1999.
F-11
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's supply business is also regulated by the Regulator, and prices
are established based upon the Supply Price Control Formula which is similar
to the DPCF; however, it currently allows full pass through for all properly
incurred costs.
The non-franchise supply market, which typically includes larger commercial
and industrial customers was opened to competition for all customers with
usage above 1MW upon privatization of the industry in 1990. The non-franchise
supply markets of 100 kW or more were opened to full competition in April
1994.
Currently, the Company, under its PES License, has the exclusive right to
supply residential and small commercial and industrial customers within its
Franchise Area. However, it is anticipated that the supply market will become
fully competitive over a several month period beginning September 1998.
4. COMMITMENTS AND CONTINGENCIES
ELECTRICITY AND GAS PURCHASE AGREEMENTS
The Company and its subsidiaries have entered into contracts for purchases
of electricity and gas for a period of up to 2009. A provision of (Pounds)78
million has been made for the net present value of expected future payments in
excess of anticipated recoverable amounts, reflecting management's current
expectations of market prices for electricity following the opening of the
competitive market for franchise supply customers and future gas prices. The
actual net costs are highly sensitive to movements in future prices. The
Company's provision includes amounts in respect of contracts with a non
wholly-owned subsidiary.
The Company has additional contracts with unaffiliated parties relating to
the purchase of gas which expire by October 2005, the terms of which are
immaterial with respect to quantity and price, both annually and in the
aggregate.
LEGAL PROCEEDINGS
The Company is a party to legal proceedings arising in the ordinary course
of business which are not material, either individually or in the aggregate,
nor is it currently aware of any threatened material legal proceedings.
OPERATING LEASES
The Company has commitments under operating leases with various terms and
expiration dates. At March 31, 1997 estimated minimum rental commitments for
noncancelable operating leases were (Pounds)2 million and (Pounds)1 million
for the fiscal years ending March 31, 1998 and 1999, respectively. Rental
expenses incurred for operating leases were (Pounds)4 million, (Pounds)5
million, and (Pounds)8 million during fiscal years 1997, 1996 and 1995,
respectively.
LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS
The majority of the Company's employees are subject to one of three
collective bargaining agreements. Such agreements are ongoing in nature, and
the Company's employees' participation level is consistent with that of the
electric utility industry in the UK.
5. SEGMENT REPORTING
The Company is primarily engaged in two electric industry segments;
distribution, which involves the transmission of electricity across its
network to its customers, and supply, which involves bulk purchase of
electricity from the Pool for delivery to the distribution networks. Included
in "Other" are insignificant operating
F-12
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiaries of the Company as well as various corporate activities, and non-
allocated corporate assets. Intersegment sales primarily represent sales from
distribution to supply for use of the distribution networks. A summary of
information about the Company's operations by segments follows (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 308 1,178 172 (327) 1,331
Operating income
(loss)................. 127 (132) 10 47 52
Depreciation............ 30 1 19 -- 50
Total assets employed at
period end............. 643 178 554 -- 1,375
Capital expenditures.... 87 8 31 -- 126
<CAPTION>
MARCH 31, 1996
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 334 1,309 163 (375) 1,431
Operating income........ 164 30 20 -- 214
Depreciation............ 28 1 13 -- 42
Total assets employed at
period end............. 589 212 607 -- 1,408
Capital expenditures.... 70 8 13 -- 91
<CAPTION>
MARCH 31, 1995
--------------------------------------------------------
DISTRIBUTION SUPPLY OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- ------------ ------------
(Pounds) (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
Operating revenues...... 362 1,343 162 (403) 1,464
Operating income........ 176 23 16 -- 215
Depreciation............ 25 1 15 -- 41
Total assets employed at
period end............. 556 198 613 -- 1,367
Capital expenditures.... 55 11 25 -- 91
</TABLE>
6. INCOME TAXES
The Company's income tax expense consists of the following (in millions):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Current........................................... 37 91 55
Deferred.......................................... (24) 23 23
--- --- ---
Total............................................. 13 114 78
=== === ===
</TABLE>
F-13
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the difference between the amount of
income taxes computed by multiplying book income before income taxes by the
statutory rate, and the amount of income taxes reported (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
--------------------------
1997 1996 1995
-------- -------- --------
(Pounds) (Pounds) (Pounds)
<S> <C> <C> <C>
Pre-tax income....................................... 39 507 219
--- --- ---
Income taxes computed at statutory rate.............. 13 167 72
National Grid transactions:
Gain on sale of PSB excluded from taxable income... (2) (19) --
Effect of difference between statutory rate (33%)
and rate on dividends received (20%).............. -- (21) (3)
Permanent differences................................ 6 (11) 8
Other................................................ (4) (2) 1
--- --- ---
Total income tax expense............................. 13 114 78
=== === ===
</TABLE>
The tax effect of temporary differences between the carrying amounts of
assets and liabilities in the consolidated balance sheets and their respective
tax bases, which give rise to deferred tax assets and liabilities are as
follows (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Deferred tax liabilities:
Property related
temporary differences.. 172 164
Provision for uneconomic
gas and electricity
contracts.............. (26) --
Other................... (6) --
--- ---
Net deferred tax
liability................ 140 164
Portion included in
current liabilities...... (4) (6)
--- ---
Long-term deferred tax
liability................ 136 158
=== ===
</TABLE>
The tax years since fiscal year 1993 are currently under review by the
Inland Revenue in the UK. In the opinion of management, the final settlement
of open years will not have a material effect on the financial position or
results of operations.
7. FINANCIAL INSTRUMENTS
The Company utilizes contracts for differences ("CFDs") to mitigate its
exposure to volatility in the prices of electricity purchased through the
Pool. Such contracts allow the Company to effectively convert the majority of
its anticipated Pool purchases from market prices to fixed prices. CFDs are in
place to hedge a portion of electricity purchases on approximately 30,662 GWh
through the year 2009. Accordingly, the gains and losses on such contracts are
deferred and recognized as electricity is purchased. Management's estimate of
the fair value of CFDs outstanding at March 31, 1997 is a net liability of
(Pounds)22 million. This estimate is based on management's projections of
future prices of electricity. The net liability will be recovered through
electricity costs passed through to franchise customers during the fiscal year
ended March 31, 1998.
F-14
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is exposed to losses in the event of non-performance by
counterparties to its CFDs. To manage this credit risk, the Company selects
counterparties based on their credit ratings, limits its exposure to any one
counterparty under defined guidelines, and monitors the market position of the
programs and its relative market position with each counterparty.
As part of its risk management policy, the Company enters into interest rate
swap agreements under which counterparties have agreed to pay amounts to the
Company equal to variable interest obligations in consideration of amounts
payable by the Company equivalent to fixed rates of interest. If the
counterparty to the interest rate swap was to default on contractual payments,
the Company could be exposed to increased costs related to replacing the
original agreement. At March 31, 1996, the Company was party to interest rate
swap agreements with a notional value of (Pounds)89 million which were at
fixed interest rates varying between 6.64% and 10.98%. During the fiscal year
ended March 31, 1997, the Company terminated these agreements at a cost of
(Pounds)7 million.
The estimated fair value of the Company's financial instruments are as
follows (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C>
Long-term debt........................... 424 438 429 421
Interest rate swap agreements............ -- -- -- (9)
</TABLE>
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 the Company for
debt of the same maturities. The fair values of interest rate swap agreements
are estimated by obtaining quotes from brokers.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following (in
millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Distribution network....................................... 1,163 1,073
Generation................................................. 132 128
Non-network land and buildings............................. 72 93
Other...................................................... 154 128
Consumer contributions..................................... (256) (229)
----- -----
1,265 1,193
Accumulated depreciation................................... (500) (458)
----- -----
Property, plant and equipment, net......................... 765 735
===== =====
</TABLE>
Arrangements have been put in place to entitle the British Government to a
proportion of any property gain (above certain thresholds) accruing as a
result of disposals, or events treated as disposals for these purposes,
occurring after March 31, 1990 in relation to land in which the Company had an
interest at that date (and, in certain circumstances, land in which the
Company acquires an interest thereafter from other members of the electricity
industry) and any buildings on that land. These arrangements will last until
March 31, 2000.
F-15
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A provision in respect of these property disposals is made only to the extent
that it is probable that a liability will be incurred.
9. SYSTEMS DEVELOPMENT COSTS
During the year ended March 31, 1997, a (Pounds)50 million charge to earnings
was recorded for costs incurred related to information systems development
costs pertaining to the opening up of the competitive electricity market in
1998. It is management's opinion that, at this stage in the development of the
future commercial and regulatory environment, it would not be prudent to
capitalize these costs.
10. LONG-TERM DEBT
Long-term debt consisted of the following (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
8.625% Eurobonds, due 2005................................. 149 149
9.25% Eurobonds, due 2020.................................. 197 197
European Investment Bank:
7.52% credit facility, due 1999-2002..................... 15 15
6.55% credit facility, due 1997-2000..................... 15 15
8.05% amortizing term loan, due 2009..................... 48 50
Unsecured loan stock, LIBOR minus .5%, due 2007............ -- 3
--- ---
Total...................................................... 424 429
Less current maturities.................................... (5) (5)
--- ---
Long-term debt, net of current maturities.................. 419 424
=== ===
</TABLE>
Long-term debt outstanding at March 31, 1997 is payable as follows (in
millions):
<TABLE>
<CAPTION>
(Pounds)
--------
<S> <C>
For the fiscal years ended March 31
1998.............................................................. 5
1999.............................................................. 6
2000.............................................................. 11
2001.............................................................. 12
2002.............................................................. 7
Thereafter........................................................ 383
---
Total........................................................... 424
===
</TABLE>
11. SHORT-TERM DEBT
Short-term debt consisted of the following (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
-------- --------
(Pounds) (Pounds)
<S> <C> <C>
Commercial paper........................................... 81 77
Bank loans and overdrafts.................................. 1 8
--- ---
Total...................................................... 82 85
=== ===
Year-end weighted average interest rate.................... 6.2% 6.1%
</TABLE>
F-16
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At March 31, 1997 and 1996 unused committed bank facilities were available
to the Company in the amount of (Pounds)250 million. Commitment fees of
approximately 1/10 of 1% of the unused committed bank facilities are required
to maintain the facilities which have expiration dates between 2000 and 2002.
In addition, the Company has commercial paper programs (denominated in US
dollars) which provide for the issuance of up to $550 million in commercial
paper with short-term maturities (up to 364 days) issued at a discount to face
value.
12. DISTRIBUTION OF NATIONAL GRID INVESTMENT
At April 1, 1995, the Company's investment in the issued share capital of
National Grid Group plc ("NGG"), formerly National Grid Holdings plc, was
recorded at (Pounds)72 million, the estimated fair value at privatization.
During December 1995 the following transactions relating to the Company's NGG
investment occurred:
a) Special dividends of (Pounds)118 million (pre-tax) were paid by NGG to
the Company and recognized in other income. The Company reinvested
(Pounds)16 million of this dividend in additional NGG shares.
b) NGG became listed on the London Stock Exchange and therefore, the
Company revalued its investment in NGG to its fair market value of
(Pounds)321 million.
c) The Company distributed, in kind, approximately 90% of its NGG shares
to its shareholders and recognized a gain of (Pounds)210 million within
other income.
d) A (Pounds)50 discount to each of the Company's residential customers
was provided. The net effect of the customer discount in the amount of
(Pounds)85 million has been recorded as other expense during the year ended
March 31, 1996.
In November 1995, NGG also distributed to the RECs its ownership shares in
PSB Holdings Limited ("PSB") based on their respective ownership percentages
of NGG. The PSB shares were revalued at their estimated market value of
(Pounds)56 million. In December 1995 this investment was sold and a gain on
sale of (Pounds)56 million was recognized. In the year to March 31, 1997
further consideration of (Pounds)6 million was received.
In order that holders of options in the Company's shares were not
disadvantaged by the NGG transactions, the Company's Directors established a
new employee share trust. The Company contributed (Pounds)9 million to the
trust which was used to purchase NGG shares from the Company. This
contribution was recorded as a dividend. A corresponding gain of (Pounds)5
million was recognized upon distribution of NGG shares from the trust to
option holders during the year ended March 31, 1996.
13. EMPLOYEE OPTION AND SHARE PLANS
The Company operates various employee option and share plans. During the
fiscal year 1995, an Executive Long Term Share Incentive Scheme for certain
eligible Executive Directors was introduced. Under the scheme amounts (as
determined by the earnings per share and market value growth of YEG) were paid
to a trust to be utilized to purchase Company shares. After the final
determination of the amounts in the first cycle of 1998, the shares were to
have been released to participants. Amounts transferred were expensed. 54,025
shares and 23,951 shares were held in trust at March 31, 1997 and 1996,
respectively.
On July 1, 1996 a trust related to the Company's Profit Sharing Scheme
purchased 243,356 ordinary shares of the Company for (Pounds)1,769,198 or
(Pounds)7.27 per share. 64 shares were allocated to each eligible employee.
The net cost of acquiring the shares and maintaining the trust was borne by
the Company.
F-17
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the acquisition (note 14), all shares held in the above
trusts were transferred to employees in accordance with the provisions of the
schemes.
The Company had two option plans, the Executive Share Option Scheme and the
Savings-Related Share Option Scheme. The Executive Share Option Scheme
provides for the granting of stock options to purchase ordinary shares to
certain key executives of the Company at the discretion of the Renumeration
Committee of the Company. The options vest three years from the date of grant
and expire ten years after the date of grant. Options to purchase ordinary
shares of the Company have been granted to employees under the Savings-Related
Share Option Schemes adopted in 1996 and 1997. The options vest five years
from date of grant and expire five and a half years after the date of grant.
The following table summarizes the transactions of the share option scheme
for the three year period ended March 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
(Pounds)
<S> <C> <C>
Unexercised options outstanding-March 31, 1994............ 7,853,647 2.26
Granted................................................... 45,636 7.82
Exercised................................................. 1,141,446 2.58
Forfeited................................................. 313,686 1.75
--------- ----
Unexercised options outstanding-March 31, 1995............ 6,444,151 2.26
Granted................................................... 1,650,259 5.58
Exercised................................................. 5,536,659 1.99
Forfeited................................................. 105,934 1.75
--------- ----
Unexercised options outstanding-March 31, 1996............ 2,451,817 5.13
Granted................................................... 1,059,218 5.97
Exercised................................................. 576,226 4.05
Forfeited................................................. 118,865 4.01
Expired................................................... 642 1.75
--------- ----
Unexercised options outstanding-March 31, 1997............ 2,815,302 5.72
========= ====
Exercisable options-March 31, 1997........................ 129,781 4.78
========= ====
Exercisable options-March 31, 1996........................ 590,379 4.64
========= ====
</TABLE>
In connection with the acquisition, holders of any outstanding options were
given the opportunity to exercise their options and sell their shares to
Yorkshire Holdings plc at a price of (Pounds)9.27 per share. If the holders of
the options did not exercise their options, such options were cash cancelled
and the holders were paid (Pounds)9.27 per share less the option's exercise
price.
The Company accounts for its share-based compensation schemes in accordance
with Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued
to Employees". Compensation expense of (Pounds)1 million was recognized in
1997, 1996 and 1995. Because of the change in control of the Company and the
immaterial impact on net income of applying the fair value method, the
disclosures required by Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", have not been presented.
F-18
<PAGE>
YORKSHIRE ELECTRICITY GROUP PLC AND SUBSIDIARIES
(PREDECESSOR COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENTS
On February 24, 1997 the Boards of American Electric Power Company, Inc.
("AEP") and Public Service Company of Colorado ("PS Colorado") announced the
terms of a cash offer for Yorkshire Electricity Group plc to be made by
Yorkshire Holdings plc, a subsidiary of Yorkshire Power Group Limited. The
offer was declared wholly unconditional on April 1, 1997. On April 16, 1997
notices were issued by Yorkshire Holdings plc in accordance with section 429
of the Companies Act 1985 to acquire all those Yorkshire Electricity Group plc
shares outstanding at the end of the requisite notice period.
Yorkshire Holdings plc completed its purchase of the shares of YEG during
April and May 1997 through payment of cash consideration of (Pounds)1.457
billion and the issuance of loan notes to former YEG shareholders in the
amount of (Pounds)22 million.
WINDFALL TAX
On July 2, 1997 the British Government announced a "windfall tax" to be
applied at that date to companies privatized by flotation and regulated by
relevant privatization statutes. A decrease in the UK statutory income tax
rate from 33% to 31% was also included in the legislation. The Company will
record a charge to income of (Pounds)134 million for the windfall tax and an
income tax benefit as a result of the change in the UK statutory income tax
rate of approximately (Pounds)12 million during the quarter ending September
30, 1997. The windfall tax is not deductible for UK income tax purposes and is
payable in two equal installments on or before December 1, 1997 and 1998.
BUSINESS RESTRUCTURING
On December 4, 1997 a planned business restructuring was announced. The
restructuring will result in the Company's main divisions (electricity
distribution and energy supply) becoming self sufficient businesses within the
group structure. A separate ownership structure will be pursued for the
generation business. As a result of the restructuring approximately 160
positions will no longer be required. The estimated cost of this restructuring
is (Pounds)10 million.
IONICA
Following a profits warning issued by Ionica Group plc ("Ionica") in
November 1997, the fair value of the Company's investment in Ionica decreased
from (Pounds)54 million at April 1, 1997 to (Pounds)30 million at December 31,
1997. The reduction is not regarded by management as a permanent diminution in
value.
F-19
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH
31, 1997
The following unaudited pro forma consolidated statement of income is based
upon the consolidated statement of income for the year ended March 31, 1997 of
Yorkshire Electricity Group plc (the "Predecessor Company") adjusted to
reflect the items described in notes (1) through (4) below as if the indirect
acquisition of the Predecessor Company (the "Acquisition") by Yorkshire Power
Group Limited (the "Successor Company") had occurred at April 1, 1996.
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------------------------------
PREDECESSOR PERIOD PRO FORMA FOR
APRIL 1, 1996 TO THE YEAR ENDED
MARCH 31, 1997 ADJUSTMENTS MARCH 31, 1997
------------------ ------------------ --------------
(Pounds) (1) (2) (3) (4) (Pounds) $(5)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... 1,331 -- -- -- -- 1,331 2,183
----- --- --- --- --- ----- -----
Income from operations.. 52 -- (24) (6) 84 106 174
----- --- --- --- --- ----- -----
Other income
Gain on sale of
associate............. 15 -- -- -- -- 15 25
Other.................. 5 -- -- -- -- 5 8
----- --- --- --- --- ----- -----
Total other income..... 20 -- -- -- -- 20 33
----- --- --- --- --- ----- -----
Interest expense........ (55) (74) -- -- 7 (122) (200)
Interest income......... 22 -- -- -- -- 22 36
----- --- --- --- --- ----- -----
Net interest expense.... (33) (74) -- -- 7 (100) (164)
----- --- --- --- --- ----- -----
Income before income
taxes.................. 39 (74) (24) (6) 91 26 43
Provision for income
taxes.................. (13) 24 -- 2 (30) (17) (28)
----- --- --- --- --- ----- -----
Net income.............. 26 (50) (24) (4) 61 9 15
===== === === === === ===== =====
</TABLE>
- --------
(1) To reflect the interest expense recorded in connection with the
Acquisition financed by (Pounds)22 million loan notes issued by Yorkshire
Holdings plc ("Yorkshire Holdings") and (Pounds)1,034 million in short-
term debt incurred by the Successor Company and share capitalization of
(Pounds)440 million. The loan notes issued by Yorkshire Holdings are
redeemable at the option of the bond holder until 2000. An interest rate
of 7% has been assumed for both types of debt. The impact of a 1/8% change
in the assumed interest rate would affect net income by (Pounds)1 million.
(2) Amortization of goodwill recorded in connection with the Acquisition.
(3) Additional depreciation expense that would have been recorded in
connection with the Acquisition.
(4) To remove the effect of recording the provision for uneconomic gas and
electricity contracts ((Pounds)78 million), loss on interest rate swap
agreements ((Pounds)7 million) and write-down of non-operational
properties ((Pounds)6 million). If the Acquisition had occurred on April
1, 1996, these items would have been accounted for as fair value
adjustments at that date.
(5) Solely for convenience of the reader, UK pound sterling amounts have been
translated into US dollars at the Noon Buying Rate on December 31, 1997 of
$1.64=(Pounds)1. See "Presentation of Certain Information and Exchange
Rates" in this Offering Memorandum.
During the pro forma fiscal year ended March 31, 1997, the Predecessor
Company incurred expenses of (Pounds)8.0 million relating to the Acquisition.
F-20
<PAGE>
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 sheet of Yorkshire
Power Group Limited and its subsidiaries (the "Company") as of April 1, 1997
(expressed in pounds sterling). This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated balance sheet presentation. We
believe that our audit of the consolidated balance sheet provides a reasonable
basis for our opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the consolidated financial position of Yorkshire Power
Group Limited and its subsidiaries as of April 1, 1997 in conformity with
generally accepted accounting principles in the United States of America.
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. The translation of the financial
statement amounts into US dollars has been made solely for the convenience of
readers in the United States of America.
Deloitte & Touche
Leeds
United Kingdom
July 15, 1997
(December 31, 1997 as to Note 13)
F-21
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Pounds) $
-------- ------------
(SEE NOTE 1)
<S> <C> <C>
ASSETS
FIXED ASSETS
Property, plant and equipment........................... 908 1,489
Construction work in progress........................... 31 51
----- -----
Total fixed assets.................................... 939 1,540
----- -----
OTHER ASSETS
Goodwill (Note 11)...................................... 994 1,630
Investments, long-term.................................. 133 218
Other non-current assets................................ 61 100
----- -----
Total other assets.................................... 1,188 1,948
----- -----
CURRENT ASSETS
Cash and cash equivalents............................... 221 362
Investments............................................. 29 47
Customer receivables, less provision for uncollectibles
of (Pounds)6........................................... 90 148
Unbilled revenue........................................ 84 138
Other................................................... 40 66
----- -----
Total current assets.................................. 464 761
----- -----
Total assets.......................................... 2,591 4,249
===== =====
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-22
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Pounds) $
-------- ------------
(SEE NOTE 1)
<S> <C> <C>
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY (NOTE 11)
Share capital, (Pounds)1 par value common shares,
436,000,100 shares authorized, 2 issued and
outstanding............................................. -- --
Share capital subscribed but not yet issued.............. -- --
Retained earnings........................................ -- --
----- -----
Total shareholders' equity............................. -- --
----- -----
LONG-TERM DEBT........................................... 433 710
OTHER NON-CURRENT LIABILITIES
Deferred income taxes.................................... 204 335
Provision for electricity and gas contracts.............. 78 128
Other.................................................... 13 21
----- -----
Total other non-current liabilities.................... 295 484
----- -----
CURRENT LIABILITIES
Current portion of long-term debt........................ 5 8
Short-term debt.......................................... 82 134
Accounts payable......................................... 15 25
Electricity purchases payable............................ 64 105
Payments received in advance............................. 14 23
Accrued liabilities and deferred income.................. 69 113
Income taxes payable..................................... 51 84
Accrued liability to purchase Yorkshire Electricity Group
plc (Note 11)........................................... 1,496 2,453
Other current liabilities................................ 67 110
----- -----
Total current liabilities.............................. 1,863 3,055
----- -----
Total liabilities...................................... 2,591 4,249
----- -----
COMMITMENTS AND CONTINGENCIES (NOTE 4)
Total shareholders' equity and liabilities............. 2,591 4,249
===== =====
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-23
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Yorkshire Power Group Limited ("YPG" or the "Company") is a joint venture
formed by subsidiaries of American Electric Power Company, Inc. and Public
Service Company of Colorado for the purpose of acquiring the entire issued
share capital of Yorkshire Electricity Group plc ("YEG"). The acquisition of
YEG was made effective as of April 1, 1997 by Yorkshire Holdings plc, a
wholly-owned subsidiary of YPG.
YEG is one of the twelve regional electricity companies ("RECs") in England
and Wales licensed to supply, distribute, and to a limited extent, generate
electricity. The RECs were created as a result of the privatization of the UK
electricity industry in 1990 after the state owned low voltage distribution
networks were allocated to the then existing twelve regional boards. YEG's
main business, the distribution and supply of electricity to customers in its
franchise area (the "Franchise Area"), is regulated under the terms of YEG's
Public Electricity Supply License ("PES License") by the Office of Electricity
Regulation ("OFFER").
YEG operates primarily in its Franchise Area in Northern England. YEG's
Franchise Area covers approximately 10,000 square kilometers, encompassing
parts of the counties of West Yorkshire, Humberside, South Yorkshire,
Derbyshire, Nottinghamshire, Lincolnshire and Lancashire. The Franchise Area
has a resident population of approximately 4.4 million.
The Company purchases power primarily from the wholesale trading market for
electricity in England and Wales (the "Pool"). The Pool monitors supply and
demand between generators and suppliers, sets prices for generation and
provides for centralized settlement of accounts due between generators and
suppliers.
BASIS OF PRESENTATION
On February 24, 1997, the joint venture partners of the Company announced
the terms of a cash tender offer for Yorkshire Electricity Group plc to be
made by Yorkshire Holdings plc, a subsidiary of the Company. The offer was
declared wholly unconditional on April 1, 1997. On April 16, 1997 notices were
issued by Yorkshire Holdings plc in accordance with section 429 of the
Companies Act 1985 to acquire all YEG shares outstanding at the end of the
requisite notice period.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations" ("APB 16"). The purchase price of YEG has been
allocated to the underlying assets and liabilities based on preliminary
estimated fair values at the acquisition date (April 1, 1997). The final
purchase price allocation report has not yet been completed; however, the
Company does not anticipate any material changes based on currently available
information.
The consolidated balance sheet of the Company is presented in pounds
sterling ((Pounds)) and in conformity with accounting principles generally
accepted in the United States of America. The Company is not subject to 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.
The consolidated balance sheet and certain information in the notes to the
consolidated balance sheet are presented in pounds sterling ((Pounds)) and in
US dollars ($) solely for the convenience of the reader, at the exchange rate
of (Pounds)1= $1.6427, the noon buying rate in New York City for cable
transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York on December 31, 1997. 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.
F-24
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated balance sheet includes the accounts of the Company and its
wholly-owned and majority-owned subsidiaries and has been prepared from
records maintained by the Company in the UK. Significant intercompany items
are eliminated in 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
disclosures of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
UNBILLED REVENUE
The Company records revenue net of value added tax ("VAT") and accrues
revenues for service provided but unbilled at the end of each reporting
period.
RECOVERY OF REGULATED INCOME
Charges for distribution of electricity and for supply to customers with a
maximum demand under 100kW are subject to a price control formula set out in
YEG's PES license which allows a maximum charge per unit of electricity.
Differences in the charges, or in the purchase cost of electricity, can result
in the under or over recovery of revenues in a particular period.
Where there is an overrecovery of supply or distribution business revenues
against the regulated maximum allowable amount, revenues are deferred in an
amount equivalent to the overrecorded amount and included in other current
liabilities.
FINANCIAL INSTRUMENTS
YEG enters into contracts for differences ("CFDs") primarily to hedge its
supply business against the price risk of electricity purchases from the Pool.
Use of these CFDs is carried out within the framework of YEG's purchasing
strategy and hedging guidelines. CFDs are accounted for as hedges and,
consequently, gains and losses are deferred and recognized over the same
period as the item hedged. The Company recognizes gains (losses) on CFDs when
settlement is made, which is generally monthly. Gains (losses) on CFDs are
recognized as a decrease (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 (losses) based upon the difference between fixed prices
in the CFD compared to variable prices paid to the Pool for future electricity
purchases are not recognized until the period of such settlements.
The Company enters into interest rate 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. The Company accounts for its
interest rate swaps in accordance with Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts" and various Emerging
Issues Task Force pronouncements. If the interest rate swaps 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 interest rate swap.
If the debt instrument being hedged by the interest rate swaps were to be
extinguished, any gain or loss attributable to the swap would be recognized in
the period of the transaction.
The Company 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.
F-25
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
CASH AND CASH EQUIVALENTS
The Company 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 the acquisition date in accordance with APB 16. Items capitalized
subsequent to the acquisition will be recorded at original cost, which
includes materials, labor and appropriate overhead costs, and the estimated
cost of borrowed funds used during construction.
The Company's policy is to record depreciation on a straight-line basis,
except for distribution network assets which are charged at 3% for 20 years
and 2% for the remaining 20 years. Assets are depreciated using the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Distribution network................................................ 40
Generation.......................................................... 20
Buildings........................................................... Up to 60
Fixtures and equipment.............................................. Up to 10
Vehicles and mobile plant........................................... Up to 10
</TABLE>
GOODWILL
The Company's policy is to amortize 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 annually or sooner if events or changes in
circumstances indicate that the carrying amount may exceed fair value, in
accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". Goodwill shown in the accompanying
consolidated balance sheet relates to the acquisition of YEG (Note 11).
INVESTMENTS
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Investments in Certain Debt and Equity Securities" ("SFAS 115"). The
Company'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
The Company 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 carryforwards 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.
2. RETIREMENT BENEFITS
PENSION PLANS
The Company operates two schemes, one based on defined contributions and a
second based on defined benefits.
F-26
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
DEFINED CONTRIBUTION
The defined contribution plan was established on December 1, 1991. From
April 1, 1995 new employees are only eligible to join this plan. The assets of
the defined contribution plan are held and administered by an independent
trustee.
DEFINED BENEFITS
The Company participates in the Electricity Supply Pension Scheme, which
provides pension and other related defined benefits, based on final
pensionable pay, to substantially all employees throughout the electricity
supply industry in the UK.
The Company uses the projected unit credit actuarial method for accounting
purposes. Amounts funded to the pension are primarily invested in equity and
fixed income securities.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at April 1, 1997 (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Accumulated benefit obligation, including vested benefits of
(Pounds)590 ($968)......................................... 625 1,025
==== ======
Fair value of plan assets................................... 725 1,189
Projected benefit obligation for service rendered to date... (664) (1,089)
---- ------
Prepaid pension asset....................................... 61 100
==== ======
</TABLE>
The weighted average discount rate, expected rate of increase in future
compensation, and the expected long-term rate of return on plan assets used to
determine the plan's funded status were, 8.0%, 6.0% and 9.0%, respectively.
3. REGULATORY MATTERS
The distribution business of YEG is regulated under its PES License,
pursuant to which revenue of the distribution business is controlled by the
Distribution Price Control Formula ("DPCF"). The DPCF determines the maximum
average price per unit of electricity (expressed in kilowatt hours) that YEG
can charge. The DPCF is usually set for a five-year period, subject to more
frequent adjustments as determined necessary by the Director General of
Electricity Supply (the "Regulator"). At each review, the Regulator can adjust
the value of certain elements in the DPCF. YEG's allowed distribution revenues
were reduced by a 14% below inflation reduction and a 13% below inflation
reduction on April 1, 1995 and 1996, respectively, following a review by the
Regulator. On April 1, 1997 and April 1, 1998, YEG's allowed distribution
revenues were decreased by an additional 3% below inflation reduction, and
there will be a further annual 3% below inflation reduction on April 1, 1999.
The supply business of YEG is also regulated by the Regulator, and prices
are established based upon the Supply Price Control Formula which is similar
to the DPCF; however, it currently allows full pass through for all properly
incurred costs.
The non-franchise supply market, which typically includes larger commercial
and industrial customers was opened to competition for all customers with
usage above 1 MW upon privatization of the industry in 1990. The non-franchise
supply markets of 100 kW or more were opened to full competition in April
1994.
F-27
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
Currently, YEG, under its PES License has the exclusive right to supply
residential and small commercial and industrial customers within its Franchise
Area. However, it is anticipated that the supply market will become fully
competitive over a several month period beginning September 1998.
4. COMMITMENTS AND CONTINGENCIES
ELECTRICITY AND GAS PURCHASE AGREEMENTS
The Company and its subsidiaries have entered into contracts for purchases
of electricity and gas for a period of up to 2009. A provision of (Pounds)78
million ($128 million) has been made for the net present value of expected
future payments in excess of anticipated recoverable amounts, reflecting
management's current expectations of market prices for electricity following
the opening of the competitive market to franchise supply customers and future
gas prices. The actual net costs are highly sensitive to movements in future
prices. The Company's provision includes amounts in respect of contracts with
a non wholly-owned subsidiary.
The Company has additional contracts with unaffiliated parties relating to
the purchase of gas which expire by October 2005, the terms of which are
immaterial with respect to quantity and price, both annually and in the
aggregate.
LEGAL PROCEEDINGS
The Company is a party to legal proceedings arising in the ordinary course
of business which are not material, either individually or in the aggregate,
nor is it currently aware of any threatened material legal proceedings.
OPERATING LEASES
The Company has commitments under operating leases with various terms and
expiration dates. At April 1, 1997 estimated minimum rental commitments for
noncancelable operating leases were (Pounds)2 million ($3 million) and
(Pounds)1 million ($2 million) for the fiscal years ending March 31, 1998 and
1999, respectively.
LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS
A majority of the Company's employees are subject to one of three collective
bargaining agreements. Such agreements are ongoing in nature, and the
Company's employees participation level is consistent with that of the
electric utility industry in the UK.
5. SEGMENT REPORTING
The Company is primarily engaged in two electric industry segments;
distribution, which involves the transmission of electricity across its
network to its customers, and supply, which involves bulk purchase of
electricity from the Pool for delivery to the distribution networks. Included
in "Other" are insignificant operating subsidiaries of the Company as well as
various corporate activities, and non-allocated corporate assets. The
Company's assets in these individual segments as of April 1, 1997 are as
follows (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- -----
<S> <C> <C>
Distribution.................................................. 1,802 2,955
Supply........................................................ 187 307
Other......................................................... 602 987
----- -----
Total......................................................... 2,591 4,249
===== =====
</TABLE>
F-28
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
6. INCOME TAXES
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, at April 1,
1997 are as follows (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
Deferred tax liabilities:
Property related temporary differences....................... 217 356
Pension...................................................... 20 33
Provision for electricity and gas contracts.................. (26) (43)
Other........................................................ (3) (5)
--- ---
Net deferred tax liability..................................... 208 341
Portion included in current liabilities........................ (4) (6)
--- ---
Long-term deferred tax liability............................... 204 335
=== ===
</TABLE>
The tax years since 1993 are currently under review by the Inland Revenue in
the UK. In the opinion of management, the final settlement of open years will
not have a material effect on financial position.
7. FINANCIAL INSTRUMENTS
YEG utilizes contracts for differences ("CFDs") to mitigate its exposure to
volatility in the prices of electricity purchased through the Pool. Such
contracts allow YEG to effectively convert the majority of its anticipated
Pool purchases from market prices to fixed prices. CFDs are in place to hedge
a portion of electricity purchases on approximately 30,662 GWh through the
year 2009. Accordingly, the gains and losses on such contracts are deferred
and recognized as electricity is purchased. Management's estimate of the fair
value of CFDs outstanding at March 31, 1997 is a net liability of (Pounds)22
million. This estimate is based on management's projections of future prices
of electricity. The net liability will be recovered through electricity costs
passed through to franchise customers during the fiscal year ended March 31,
1998.
YEG is exposed to losses in the event of non-performance by counterparties
to its CFDs. To manage this credit risk, YEG selects counterparties based on
their credit ratings, limits its exposure to any one counterparty under
defined guidelines, and monitors the market position of the programs and its
relative market position with each counterparty.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at April 1, 1997 consisted of the following
(in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- -----
<S> <C> <C>
Distribution network......................................... 882 1,446
Generation................................................... 112 184
Non-network land and buildings............................... 57 93
Other........................................................ 57 93
Consumer contributions....................................... (200) (327)
---- -----
Total........................................................ 908 1,489
==== =====
</TABLE>
Arrangements have been put in place to entitle the British Government to a
proportion of any property gain (above certain thresholds) accruing as a
result of disposals, or events treated as disposals for clawback purposes,
F-29
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
occurring after March 31, 1990 in relation to land in which YEG had an
interest at that date (and, in certain circumstances, land in which YEG
acquires an interest thereafter from other members of the electricity
industry) and any buildings on that land. These arrangements will last until
March 31, 2000.
A provision for clawback in respect of property disposals is made only to
the extent that it is probable that a liability will be incurred.
9. LONG-TERM DEBT
Long-term debt at April 1, 1997 consisted of the following (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
8.625% Eurobonds, due 2005..................................... 152 249
9.25% Eurobonds, due 2020...................................... 208 340
European Investment Bank:
7.52% credit facility, due 1999-2002......................... 15 25
6.55% credit facility, due 1997-2000......................... 15 25
8.05% amortizing term loan, due 2009......................... 48 79
--- ---
Total.......................................................... 438 718
Less current maturities........................................ (5) (8)
--- ---
Long-term debt, net of current maturities...................... 433 710
=== ===
</TABLE>
Long-term debt outstanding at April 1, 1997 is payable as follows (in
millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
For the fiscal years ending March 31
1998.......................................................... 5 8
1999.......................................................... 6 10
2000.......................................................... 11 18
2001.......................................................... 12 20
2002.......................................................... 7 11
Thereafter.................................................... 397 651
--- ---
Total........................................................... 438 718
=== ===
</TABLE>
10. SHORT-TERM DEBT
Short-term debt at April 1, 1997 consisted of the following (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ---
<S> <C> <C>
Commercial paper................................................ 81 132
Bank loans and overdrafts....................................... 1 2
--- ---
Total........................................................... 82 134
=== ===
</TABLE>
The weighted average interest rate on short-term debt instruments was 6.2%
at April 1, 1997.
At April 1, 1997 unused committed bank facilities were available to YEG in
the amount of (Pounds)250 million ($410 million). Commitment fees of
approximately 1/10 of 1% of the unused committed bank facilities are
F-30
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
required to maintain the facilities which have expiration dates between 2000
and 2002. In addition, YEG has commercial paper programs (denominated in US
dollars) which provide for the issuance of up to $550 million in commercial
paper with short-term maturities (up to 364 days) issued at a discount to face
value.
11. ACQUISITION
On February 24, 1997 the joint venture partners of the Company announced the
terms of a cash offer for YEG to be made by Yorkshire Holdings plc, a
subsidiary of the Company. The offer was declared wholly unconditional on
April 1, 1997. On April 16, 1997 notices were issued by Yorkshire Holdings plc
in accordance with section 429 of the Companies Act 1985 to acquire all those
YEG shares outstanding at the end of the requisite notice period.
Yorkshire Holdings plc completed its purchase of the shares of YEG during
April and May 1997 through payment of cash consideration of (Pounds)1.457
billion ($2.393 billion) and the issuance of loan notes to former YEG
shareholders in the amount of (Pounds)22 million ($36 million).
The acquisition was financed by cash contributions of (Pounds)220 million
($361 million) from each of the joint venture partners, against which shares
in the Company were subsequently allotted, and borrowings under a
(Pounds)1.140 billion ($1.873 billion) term loan and revolving facility
agreement. The term loan and revolving facility agreement provided for a
revolving credit facility of (Pounds)50 million ($82 million) and a term loan
facility in the aggregate amount of (Pounds)1.090 billion ($1.790 billion).
Effective July 31, 1997 the term loan and revolving credit facility
agreement was replaced with a (Pounds)1.085 billion ($1.782 billion) credit
facility. This credit facility consists of two parts which are Facility A
(term loan facility) for (Pounds)1.034 billion ($1.699 billion) and Facility B
(revolving credit facility) for (Pounds)50 million ($82 million). Facility A
is repayable on July 30, 1998. The interest rates on the facilities are based
on LIBOR plus a margin which ranges from 0.125% to 0.5% dependent on the time
elapsed since the Facility became available, plus a defined margin which is
based on a bank cost of funds. The Facilities contain certain restrictive
covenants which include a maximum consolidated net debt to capitalization
ratio and minimum earnings to interest ratio. The Company intends to partly
repay Facility A, in 1998, through issue, by subsidiaries of the Company, of
bonds and preferred securities, the proceeds of which will be loaned to the
Company.
The acquisition was accounted for using the purchase method of accounting in
accordance with APB 16. The purchase price of YEG has been allocated to the
underlying assets and liabilities based on preliminary estimated fair values
at the acquisition date. The final purchase price allocation report has not
yet been completed; however, the Company does not anticipate any material
changes based on currently available information. The acquisition cost
exceeded the fair market value of net assets acquired, including (Pounds)17
million ($28 million) of acquisition related costs, by (Pounds)994 million
($1.630 billion) and is considered goodwill.
The net purchase price of (Pounds)1.496 billion ($2.453 billion) was
allocated as follows at April 1, 1997 (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ------
<S> <C> <C>
Property, plant and equipment............................... 939 1,540
Prepaid pension asset....................................... 61 100
Current assets.............................................. 464 761
Investments................................................. 133 218
Goodwill.................................................... 994 1,630
Current liabilities......................................... (367) (602)
Other liabilities........................................... (728) (1,194)
----- ------
Purchase price.............................................. 1,496 2,453
===== ======
</TABLE>
F-31
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
APRIL 1, 1997
NOTES TO THE CONSOLIDATED BALANCE SHEET--(CONTINUED)
12. EMPLOYEE OPTION AND SHARE PLANS
Prior to the acquisition of YEG by the Company, employees of YEG were
eligible to participate in the 1997 and 1996 Savings-Related Share Option
Schemes, Executive Share Option Scheme, Profit Sharing Scheme, and/or the Long
Term Incentive Scheme. In connection with the acquisition, employees were
given the opportunity to exercise their options granted under the Savings-
Related Share Option Schemes and the Executive Share Option Scheme and sell
their shares to Yorkshire Holdings plc at a price of (Pounds)9.27 ($15.20) per
share. If the holders of the options did not exercise their options, such
options were cash cancelled and the holders were paid (Pounds)9.27 ($15.20)
per share less the option's exercise price. There were 2,815,302 options
outstanding, which were all exercised or cash cancelled subsequent to April 1,
1997.
Prior to April 1, 1997, the following shares of stock were held in trust on
behalf of employees:
<TABLE>
<CAPTION>
SHARES
-------
<S> <C>
Profit Sharing Scheme................................................ 236,525
Long-Term Incentive Scheme........................................... 54,025
</TABLE>
In connection with the acquisition, all shares of YEG issued under the
Profit Sharing Scheme, Long-Term Incentive Scheme, as well as the NGG shares
held in trust for the benefit of certain option holders, were transferred to
employees in accordance with vesting rights as previously established and the
related schemes and trusts were terminated.
13. SUBSEQUENT EVENTS
On July 2, 1997 the British Government announced a "windfall tax" to be
applied at that date to companies privatized by flotation and regulated by
relevant privatization statutes. A decrease in the UK statutory income tax
rate, from 33% to 31% was also included in the legislation. The Company will
record a charge to income of (Pounds)134 million ($220 million) for the
windfall tax and an income tax benefit as a result of the change in the UK
statutory income tax rate of approximately (Pounds)12 million ($20 million)
during the quarter ending September 30, 1997. The windfall tax is not
deductible for UK income tax purposes and is payable in two equal installments
on or before December 1, 1997 and 1998.
On December 4, 1997 a planned business restructuring was announced. The
restructuring will result in the Company's main divisions (electricity
distribution and energy supply) becoming self-sufficient businesses within the
group structure. A separate ownership structure will be pursued for the
generation business. As a result of the restructuring approximately 160
positions will no longer be required. The estimated cost of this restructuring
is (Pounds)10 million ($16 million).
Following a profits warning issued by Ionica Group plc ("Ionica") in
November 1997, the fair value of the Company's investment in Ionica decreased
from (Pounds)54 million ($89 million) at April 1, 1997 to (Pounds)30 million
($49 million) at December 31, 1997. The reduction is not regarded by
management as a permanent diminution in value.
F-32
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors
of Yorkshire Power Group Limited
We have reviewed the accompanying condensed consolidated balance sheet of
Yorkshire Power Group Limited and subsidiaries (the "Company") as of December
31, 1997 and the related condensed consolidated statements of income, changes
in shareholders' equity and cash flows (all expressed in pounds sterling) for
the nine-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles in the United
States of America.
Deloitte & Touche
Leeds, United Kingdom
April 30, 1998
F-33
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
(SEE NOTE 1)
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996
------------ ------------ ------------
(Pounds) $ (Pounds)
------------ ------------ ------------
(SEE NOTE 2) (SEE NOTE 2)
<S> <C> <C> <C>
Operating revenues...................... 909 1,493 974
Cost of sales........................... 618 1,015 681
Operating expenses...................... 168 276 173
--- ----- ---
Income from operations.................. 123 202 120
Other income ........................... 2 3 17
Net interest expense.................... 78 128 20
--- ----- ---
Income before income taxes.............. 47 77 117
Provision for income taxes.............. 5 8 40
--- ----- ---
Income before extraordinary item........ 42 69 77
Extraordinary loss-UK windfall tax...... 134 220 --
--- ----- ---
Net (loss) income....................... (92) (151) 77
=== ===== ===
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-34
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER DECEMBER APRIL
31, 1997 31, 1997 1, 1997
-------- -------- --------
(Pounds) $ (Pounds)
-------- -------- --------
(SEE NOTE 2)
<S> <C> <C> <C>
ASSETS
Fixed Assets, net.................................. 1,001 1,644 939
Goodwill, net of accumulated amortization of
(Pounds)18, $30 and (Pounds)0..................... 976 1,603 994
Investments........................................ 90 148 133
Other non-current assets........................... 88 145 61
Current assets:
Cash and cash equivalents........................ 118 194 221
Customer receivables and unbilled revenue........ 168 276 174
Other current assets............................. 81 133 69
----- ----- -----
Total assets................................... 2,522 4,143 2,591
===== ===== =====
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' Equity:
Share capital.................................... 440 723 --
Retained earnings................................ (92) (151) --
Unrealized loss on available-for-sale
investments..................................... (18) (30) --
----- ----- -----
Total shareholders' equity..................... 330 542 --
----- ----- -----
Liabilities:
Current liabilities:
Liability to purchase Yorkshire Electricity
Group plc...................................... -- -- 1,496
Other........................................... 385 632 280
Short-term debt and current portion of long-term
debt............................................ 1,081 1,776 87
Long-term debt................................... 429 705 433
Long-term deferred income taxes.................. 203 334 204
Other non-current liabilities.................... 94 154 91
----- ----- -----
Total liabilities.............................. 2,192 3,601 2,591
----- ----- -----
Total shareholders' equity and liabilities..... 2,522 4,143 2,591
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-35
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
AVAILABLE-
RETAINED FOR-SALE
SHARE CAPITAL EARNINGS INVESTMENTS TOTAL
-------------------- -------- ----------- --------
SHARES (Pounds) (Pounds) (Pounds) (Pounds)
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1997..... 2 -- -- -- --
Net income................. -- -- (92) -- (92)
Issuance of ordinary
shares.................... 440,000,000 440 -- -- 440
Market value adjustments on
investments............... -- -- -- (18) (18)
----------- --- --- --- ---
BALANCE, DECEMBER 31,
1997...................... 440,000,002 440 (92) (18) 330
=========== === === === ===
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
(SEE NOTE 1)
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996
------------ ------------ ------------
(Pounds) $ (Pounds)
------------ ------------ ------------
(SEE NOTE 2) (SEE NOTE 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES...
Net (loss) income.................... (92) (151) 77
Depreciation......................... 40 65 31
Deferred income taxes................ (7) (11) 8
Equity in (profit) loss of
associates.......................... (1) (2) 1
Gain on sale of associate............ -- -- (15)
Goodwill amortization................ 18 30 --
Change in assets and liabilities:
Receivables.......................... 6 10 21
Electricity Purchases................ 33 54 6
Income tax payable................... 64 105 31
Other................................ 2 3 (11)
------ ------ ---
Net cash provided by operating
activities............................ 63 103 149
------ ------ ---
INVESTING ACTIVITIES:
Capital expenditures................. (129) (212) (72)
Loans repaid by (advanced to)
associates.......................... 1 2 (4)
Proceeds from property, plant and
equipment sales..................... 20 33 28
Proceeds from sale of associate...... -- -- 26
Purchases of long-term investments... (8) (13) (7)
Proceeds from sale of long-term
investments......................... 25 41 6
Purchase of Yorkshire Electricity
Group plc........................... (1,474) (2,421) --
Purchase of short-term investments... (10) (16) (76)
------ ------ ---
Net cash used in investing activities.. (1,575) (2,586) (99)
------ ------ ---
FINANCING ACTIVITIES:
Issuance of common stock............. 440 723 2
Repayment of long-term debt.......... (4) (7) (4)
Change in short-term debt............ 973 1,598 (1)
Dividends paid....................... -- -- (46)
------ ------ ---
Net cash provided by (used in)
financing activities.................. 1,409 2,314 (49)
------ ------ ---
Net (decrease) increase in cash and
cash equivalents...................... (103) (169) 1
Cash and cash equivalents, beginning of
period................................ 221 363 252
Cash and cash equivalents, end of
period................................ 118 194 253
====== ====== ===
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............... 66 108 12
Cash paid for income taxes........... 71 117 --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company issued (Pounds)22 million ($36 million) of loan notes, during
the nine months ended December 31, 1997, to former YEG shareholders (see Note
3).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Yorkshire Power Group Limited and Subsidiaries ("YPG" or "the Company") is a
joint venture formed by subsidiaries of American Electric Power Company, Inc.
and New Century Energies, Inc. for the purpose of acquiring Yorkshire
Electricity Group plc ("YEG" or the "Predecessor"). The acquisition of YEG was
made effective as of April 1, 1997 by Yorkshire Holdings plc, a wholly-owned
subsidiary of YPG.
YEG is one of the twelve regional electricity companies ("RECs") in England
and Wales licensed to supply, distribute, and to a limited extent, generate
electricity. The RECs were created as a result of the privatization of the UK
electricity industry in 1990 after the state owned low voltage distribution
networks were allocated to the then existing twelve regional boards. YEG's
main business, the distribution and supply of electricity to customers in its
Franchise Area, is regulated under the terms of YEG's Public Electricity
Supply License by the Office of Electricity Regulation ("OFFER").
YEG operates primarily in its Franchise Area in Northern England. YEG's
Franchise Area covers approximately 10,000 square kilometers, encompassing
parts of the counties of West Yorkshire, Humberside, South Yorkshire,
Derbyshire, Nottinghamshire, Lincolnshire and Lancashire. The Franchise Area
has a resident population of approximately 4.4 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated balance sheet of the Company is presented in
pounds sterling ((Pounds)) and in conformity with accounting principles
generally accepted in the United States of America.
The condensed consolidated financial statements and certain information in
the notes to the condensed consolidated financial statements are presented in
pounds sterling ((Pounds)) and in US dollars ($), solely for the convenience
of the reader, at the exchange rate of (Pounds)1=$1.6427, the noon buying rate
in New York City for cable transfers in pounds sterling as certified for
customs purposes by the Federal Reserve Bank of New York on December 31, 1997.
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.
PRINCIPLES OF CONSOLIDATION
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries
and has been prepared from records maintained by the Company in the UK. All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of the management of the Company, the condensed
consolidated financial statements reflect all adjustments (consisting of
normal recurring adjustments) considered necessary for the fair presentation
of the financial position and results of operations for the periods presented.
Such unaudited interim financial statements should be read in conjunction with
the audited balance sheet of the Company and financial statements of YEG
contained elsewhere in this Offering Memorandum.
PREDECESSOR COMPANY FINANCIAL STATEMENTS
The Predecessor company unaudited condensed financial statements for the
nine month period ended December 31, 1996 are presented for comparison
purposes only. Those financial statements do not reflect any of the effects of
the purchase accounting adjustments and financing transactions described in
Note 3. Those effects
F-38
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
consist primarily of the amortization of goodwill, depreciation of fixed
assets valued at a historical cost which is less than the fair value recorded
by the Successor company and interest expense on the borrowings incurred to
finance the acquisition.
3. ACQUISITION
On February 24, 1997 the joint venture partners of the Company announced the
terms of a cash offer for YEG to be made by Yorkshire Holdings plc, a
subsidiary of the Company. The offer was declared wholly unconditional on
April 1, 1997. On April 16, 1997 notices were issued by Yorkshire Holdings plc
in accordance with section 429 of the Companies Act 1985 to acquire all YEG
shares outstanding at the end of the requisite notice period.
Yorkshire Holdings plc completed its purchase of the shares of YEG during
April and May 1997 through payment of cash consideration of (Pounds)1.457
billion ($2.393 billion) and the issuance of loan notes to former YEG
shareholders in the amount of (Pounds)22 million ($36 million).
The acquisition was financed by cash contributions of (Pounds)220 million
($361 million) from each of the joint venture partners, against which shares
in the Company were subsequently allotted, and borrowings under a
(Pounds)1.140 billion ($1.873 billion) term loan and revolving facility
agreement. The term loan and revolving facility agreement provided for a
revolving credit facility of (Pounds)50 million ($82 million) and a term loan
facility in the aggregate amount of (Pounds)1.090 billion ($1.790 billion).
Effective July 31, 1997 the term loan and revolving credit facility
agreement was replaced with a (Pounds)1.085 billion ($1.782 billion) credit
facility. This credit facility consists of two parts which are Facility A
(term loan facility) for (Pounds)1.034 billion ($1.699 billion) and Facility B
(revolving credit facility) for (Pounds)50 million ($82 million). Facility A
is repayable on July 30, 1998. The interest rates on the facilities are based
on LIBOR plus a margin which ranges from 0.125% to 0.5% dependent on the time
elapsed since the facility became available, plus a defined margin which is
based on a bank cost of funds. The facilities contain certain restrictive
covenants which include a maximum consolidated net debt to capitalization
ratio and minimum earnings to interest ratio. The Company intends to partly
repay Facility A, in 1998, through issue, by subsidiaries of the Company, of
bonds and preferred securities, the proceeds of which will be loaned to the
Company.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations". The purchase price of YEG has been allocated to the
underlying assets and liabilities based on estimated fair values at the
acquisition date. The acquisition cost exceeded the fair market value of net
assets acquired by (Pounds)994 million ($1.630 billion), including (Pounds)17
million ($28 million) of acquisition related costs, and is considered
goodwill.
The net purchase price of (Pounds)1.496 billion ($2.453 billion) was
allocated as follows at April 1, 1997 (in millions):
<TABLE>
<CAPTION>
(Pounds) $
-------- ------
<S> <C> <C>
Property, plant and equipment............................... 939 1,540
Prepaid pension asset....................................... 61 100
Current assets.............................................. 464 761
Investments................................................. 133 218
Goodwill.................................................... 994 1,630
Current liabilities......................................... (367) (602)
Other liabilities........................................... (728) (1,194)
----- ------
Purchase price.............................................. 1,496 2,453
===== ======
</TABLE>
F-39
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. BUSINESS RESTRUCTURING CHARGES
On December 4, 1997, a planned business restructuring was announced. The
restructuring will result in the Company's main divisions (electricity
distribution and energy supply) becoming self-sufficient businesses. A
separate ownership structure will be pursued for the generation business. As a
result of the restructuring, approximately 160 positions within the head
office and corporate services division will no longer be required. The
estimated cost of this restructuring charged to operating expenses is
(Pounds)10 million ($16 million). As at December 31, 1997, the actual amount
of termination benefits paid was (Pounds)1 million ($2 million) relating to 4
employees.
5. SYSTEM DEVELOPMENT COSTS
During the nine month period ended December 31, 1996, a (Pounds)24 million
($39 million) charge to earnings was recorded for costs incurred related to
information systems development costs pertaining to the opening up of the
competitive electricity market in 1998. It is management's opinion that, at
this stage in the development of the future commercial and regulatory
environment, it would not be prudent to capitalize these costs.
6. INTEREST RATE SWAPS
As part of its risk management policy, the Company enters into interest rate
swap agreements under which counterparties have agreed to pay amounts to the
Company equal to variable interest obligations in consideration of amounts
payable by the Company equivalent to fixed rates of interest. If the
counterparty to the interest rate swap was to default on contractual payments,
the Company could be exposed to increased costs related to replacing the
original agreement. At December 31, 1997, the Company was party to interest
rate swap agreements with a notional value of (Pounds)650 million ($1.068
billion) which were at fixed interest rates varying between 7.13% and 7.50%.
Had the Company terminated its interest rate swap agreements on December 31,
1997, it would have incurred a loss of (Pounds)31 million ($51 million).
In January 1998, the Company issued (Pounds)200 million ($329 million) of
7.25% Eurobonds which are due in 2028 and paid (Pounds)14 million ($23
million) to terminate interest rate swaps with a notional value of (Pounds)200
million ($329 million). The termination payments will be deferred and
amortized over the remaining life of the debt instruments being hedged.
In February 1998, the Company issued $350 million aggregate principal amount
of 6.154% Senior Notes due 2003 and $300 million aggregate principal amount of
6.496% Senior Notes due 2008. Upon issuance of these notes, (Pounds)300
million of the above mentioned swaps and (Pounds)100 million new swap
agreements were consolidated with cross currency swaps to hedge the currency
exposure related to having sterling cash flows and dollar interest payments.
7. EXTRAORDINARY LOSS--WINDFALL TAX
In July 1997, the British Government announced a "windfall tax" to be
applied at that date to companies privatized by floatation and regulated by
relevant privatization statutes. A decrease in the UK statutory income tax
rate from 33% to 31% was also included in the legislation. The Company
recorded an extraordinary loss of (Pounds)134 million ($220 million) for the
windfall tax and an income tax benefit as a result of the change in the UK
statutory income tax rate of approximately (Pounds)12 million ($20 million)
during the quarter ended September 1997. The windfall tax is not deductible
for UK corporation tax purposes and is payable in two equal instalments on or
before December 1, 1997 and 1998.
F-40
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
(SUCCESSOR COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. SUBSEQUENT EVENTS
Following a profits warning issued by Ionica Group plc ("Ionica") in
November 1997, the fair value of the Company's investment in Ionica decreased
from (Pounds)54 million ($89 million) at April 1, 1997 to (Pounds)30 million
($49 million) at December 31, 1997 and an unrealized loss of (Pounds)18
million ($30 million), net of tax has been recorded. At April 30, 1998, the
fair value of the Company's investment in Ionica is valued at (Pounds)19
million ($31 million). This reduction of the fair value has not been included
as a charge against earnings as it is not considered that the diminution in
value is permanent.
F-41
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE TRUST, YORKSHIRE FINANCE, YORKSHIRE GROUP OR THE UNDER-
WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE TRUST, YORKSHIRE FINANCE OR YORKSHIRE GROUP SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUAL-
IFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO-
LICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 4
Enforceability of Civil Liabilities....................................... 4
Presentation of Certain Information and Exchange Rates.................... 5
UK Selling Restrictions................................................... 5
Forward Looking Statements................................................ 6
Summary................................................................... 7
Risk Factors.............................................................. 20
Yorkshire Group and the US Parents........................................ 28
Yorkshire Capital Trust I................................................. 31
US Accounting Treatment................................................... 31
Use of Proceeds........................................................... 32
Capitalization............................................................ 32
Selected Consolidated Financial Data...................................... 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 39
Business.................................................................. 51
The Electric Utility Industry in Great Britain............................ 60
Management................................................................ 72
Certain Relationships and Related Transactions............................ 74
Security Ownership........................................................ 74
Description of the Trust Securities....................................... 75
Description of the Trust Securities Guarantee............................. 87
Description of the Junior Subordinated Debentures......................... 90
Description of the Debentures Guarantee................................... 106
Relationship Among the Trust Securities, the Junior Subordinated
Debentures, the Trust Securities Guarantee and the Debentures Guarantee.. 107
Material Income Tax Considerations........................................ 109
ERISA Considerations...................................................... 116
Underwriting.............................................................. 118
Legal Opinions............................................................ 120
Experts................................................................... 120
Nature of Financial Information........................................... 120
Index to Financial Statements............................................. F-1
</TABLE>
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11,000,000
% TRUST SECURITIES
YORKSHIRE CAPITAL TRUST I
(LIQUIDATION AMOUNT $25 PER
TRUST SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS SET FORTH HEREIN, BY
YORKSHIRE POWER
GROUP LIMITED
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
JUNE , 1998
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