<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period from ____ to ____
Registrant; State or Other
Commission Jurisdiction of Incorporation; I.R.S Employer
File Number Address; and Telephone Number Identification No.
----------- ----------------------------- ------------------
333-47925 Yorkshire Power Group Limited 84-1393785
(England & Wales)
Wetherby Road
Scarcroft
Leeds LS14 3HS
United Kingdom
011-44-113-289-2123
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
A description of the registrant's common stock follows:
Description of Shares Outstanding
Registrant Common Stock at October 31, 2000
--------------------------------------------------------------------------------
Yorkshire Power Par Value (pound)1 Per Share 440,000,002
Group Limited
<PAGE> 2
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARY COMPANIES
Form 10-Q
For The Quarter Ended September 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Consolidated Statements of Income 5
Consolidated Balance Sheets 7
Consolidated Statements of Cash Flows 9
Consolidated Statements of Changes in Shareholders' Equity 11
Notes to Consolidated Financial Statements 13
Management's Discussion and Analysis of Results of
Operations and Financial Condition 23
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 5 Other Information 30
Item 6 Exhibits and Reports on Form 8-K 37
SIGNATURES 38
1
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Forward Looking Statements
--------------------------
Certain statements in this Form 10-Q under the captions "Management's
Discussion and Analysis of Results of Operations and Financial Condition",
"Other Information" and elsewhere may constitute forward looking statements.
Such forward looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results, performance or
achievements of the Yorkshire Group or any of its subsidiaries or industry
results, to differ materially from any future results, performance or
achievements expressed or implied by such forward looking statements. Such
risks, uncertainties and other important factors include, among others: general
economic and business conditions in the UK, the Authorized Area and elsewhere;
currency fluctuations; governmental, statutory, regulatory or administrative
initiatives affecting Yorkshire Group, Yorkshire or the UK electric and gas
utilities industries; general industry trends; competition; the cost and
availability of electricity, gas and other alternative energy sources; changes
in commodity prices, interest rates and hedging costs; changes in business
strategy, development plans or vendor relationships; availability, terms and
deployment of capital; availability of qualified personnel; increased rates of
taxes or other changes in tax law; changes in, or the failure or inability to
comply with, governmental regulation, including, without limitation,
environmental regulations; the potential introduction of the Euro; and other
factors referenced in this Form 10-Q. These forward looking statements speak
only as of the date of this Form 10-Q.
2
<PAGE> 4
SELECTED DEFINITIONS
When used in this report, the following terms will have the meaning indicated.
"AEP" means American Electric Power Company, Inc.
"Authorized Area" means Yorkshire's service area as determined by its PES
license
"CFD" means contract for differences
"CSW" means Central and South West Corporation
"DTI" means the UK Department of Trade and Industry
"ESPS" means Electricity Supply Pension Scheme
"Fiscal Year" means a year ended March 31
"Form 10-K" means the Annual Report on Form 10-K of Yorkshire Group for the
Transition Period
"GEMA" means Gas and Electricity Markets Authority
"Hyder" means Hyder plc
"Independent Energy" means Independent Energy UK Ltd, a subsidiary of
Independent Energy Holdings plc
"Innogy" means Innogy Holdings plc
"NCE" means New Century Energies
"NETA" means New Electricity Trading Arrangements
"NGC" means the National Grid Company plc, which is wholly owned by NGG
"NGG" means the National Grid Group plc
"NSP" means Northern States Power Company
"Ofgem" means Office of Gas and Electricity Markets
"PES" means public electricity supplier
"PPL" means PPL Incorporation
3
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"Pool" means the wholesale trading market for electricity in England and Wales
"SEEBOARD" means SEEBOARD plc
"SEI" means Southern Energy Inc
"Supply" means the supply of electricity and gas
"SWALEC" means South Wales Electricity plc
"Transition Period" means the nine-month period beginning April 1, 1999 and
ending December 31, 1999
"UK" means the United Kingdom
"US" means the United States of America
"Utlilities Act" means Utilities Act 2000
"WPD" means Western Power Distribution Limited
"Yorkshire" means Yorkshire Electricity Group plc and its subsidiaries
"Yorkshire Group" means Yorkshire Power Group Limited and its subsidiaries
4
<PAGE> 6
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
2000 1999
----------------- ---------
(pound) $ (pound)
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . 336 497 329
COST OF SALES. . . . . . . . . . . . . . . 228 337 233
------ ------ ------
GROSS MARGIN . . . . . . . . . . . . . . . 108 160 96
------ ------ ------
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 12 18 14
Depreciation and Amortization. . . . . . 18 27 21
Selling, General and Administrative. . . 38 56 29
------ ------ ------
INCOME FROM OPERATIONS . . . . . . . . . . 40 59 32
OTHER INCOME, NET: . . . . . . . . . . . . 1 1 3
INTEREST EXPENSE, NET: . . . . . . . . . . (28) (41) (29)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 13 19 6
PROVISION FOR INCOME TAXES . . . . . . . . 3 4 -
------ ------ ------
NET INCOME . . . . . . . . . . . . . . . . 10 15 6
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
----------------- ---------
(pound) $ (pound)
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . 1,087 1,607 1,039
COST OF SALES. . . . . . . . . . . . . . . 748 1,106 726
------ ------ ------
GROSS MARGIN . . . . . . . . . . . . . . . 339 501 313
------ ------ ------
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 37 55 43
Depreciation and Amortization. . . . . . 56 83 61
Selling, General and Administrative. . . 104 153 94
------ ------ ------
INCOME FROM OPERATIONS . . . . . . . . . . 142 210 115
OTHER INCOME (EXPENSE), NET:. . . . . . . 1 1 (1)
INTEREST EXPENSE, NET: . . . . . . . . . . (85) (126) (85)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 58 85 29
PROVISION FOR INCOME TAXES . . . . . . . . 20 29 11
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE. . . . . . . . . . 38 56 18
CUMULATIVE EFFECT ON PRIOR YEARS (TO
DECEMBER 31, 1999) OF CHANGING TO A
DIFFERENT DEPRECIATION METHOD (NOTE 7) . . 8 12 -
------ ------ ------
NET INCOME . . . . . . . . . . . . . . . . 46 68 18
====== ====== ======
PROFORMA AMOUNTS ASSUMING THE
NEW DEPRECIATION METHOD IS
APPLIED RETROACTIVELY
NET INCOME . . . . . . . . . . . . . . . . 38 56 20
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 8
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- -------
(pound) $ (pound)
(See Note 1)
<S> <C> <C> <C>
ASSETS
------
FIXED ASSETS:
Property, Plant and Equipment, Net of Accumulated
Depreciation of (pound)177 ($262) and (pound)139 . . 1,063 1,571 1,005
Construction Work in Progress. . . . . . . . . . . . 10 15 31
------ ------ ------
Total Fixed Assets . . . . . . . . . . . . . 1,073 1,586 1,036
------- ------ ------
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . . . . . . . . 7 10 9
Investments. . . . . . . . . . . . . . . . . . . . . 17 25 16
Accounts Receivable, Less Provision for
Uncollectibles of (pound)10 ($15) and (pound)9 . . . 117 173 108
Unbilled Revenue . . . . . . . . . . . . . . . . . . 59 87 100
Electricity and Gas Trading Contracts. . . . . . . . 83 123 4
Prepaids and Other . . . . . . . . . . . . . . . . . 47 70 40
------ ------ ------
Total Current Assets . . . . . . . . . . . . 330 488 277
------ ------ ------
OTHER ASSETS:
Goodwill, Net of Accumulated Amortization of
(pound)86 ($127) and (pound)68 . . . . . . . . . . 884 1,307 902
Investments, Long-term . . . . . . . . . . . . . . . 38 56 45
Prepaid Pension Asset. . . . . . . . . . . . . . . . 129 191 115
Electricity and Gas Trading Contracts. . . . . . . . 29 43 -
Other Non-Current Assets . . . . . . . . . . . . . . 22 33 20
------ ------ ------
Total Other Assets . . . . . . . . . . . . . 1,102 1,630 1,082
------ ------ ------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . 2,505 3,704 2,395
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 9
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -----------
(pound) $ (pound)
(See Note 1)
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital,(pound)1 par value common shares,
440,000,100 authorized and 440,000,002
issued and outstanding . . . . . . . . . . . . . . 440 651 440
Retained Profit. . . . . . . . . . . . . . . . . . . 57 84 11
------ ------ ------
Total Shareholders' Equity . . . . . . . . . . . . 497 735 451
------ ------ ------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 1,130 1,671 964
SHORT-TERM DEBT REFINANCED FEBRUARY 2000 . . . . . . . - - 165
COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST
SECURITIES OF SUBSIDIARY HOLDING SOLELY JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES (NOTE 8) 162 239 166
OTHER NON-CURRENT LIABILITIES:
Deferred Income Taxes. . . . . . . . . . . . . . . . 231 342 195
Provision for Uneconomic Electricity
and Gas Contracts. . . . . . . . . . . . . . . . . 28 41 29
Electricity and Gas Trading Contracts. . . . . . . . 27 40 -
Other . . . . . . . . . . . . . . . . . . . . . . . 14 21 13
------ ------ ------
Total Other Non-Current Liabilities. . . . . . . . 300 444 237
------ ------ ------
CURRENT LIABILITIES:
Current Portion of Long-term Debt. . . . . . . . . . 9 13 9
Short-term Debt. . . . . . . . . . . . . . . . . . . 80 119 131
Accounts Payable . . . . . . . . . . . . . . . . . . 61 90 79
Accrued Liabilities and Deferred Income. . . . . . . 85 126 91
Electricity and Gas Trading Contracts. . . . . . . . 80 118 3
Income Taxes Payable . . . . . . . . . . . . . . . . 42 62 58
Other Current Liabilities. . . . . . . . . . . . . . 59 87 41
------ ------ ------
Total Current Liabilities. . . . . . . . . . . . . 416 615 412
------ ------ ------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . 2,008 2,969 1,944
------ ------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES . . . . . . 2,505 3,704 2,395
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 10
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
----------------- -----------
(pound) $ (pound)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . 46 68 18
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation of Fixed Asset Investment
Included in Cost of Sales. . . . . . . . 7 10 8
Depreciation and Amortization. . . . . . . 56 83 61
Cumulative Effect of a Change in
Depreciation Method. . . . . . . . . . . (12) (18) -
Gain on Sale of Investments. . . . . . . . - - (3)
Loss on Investment in Ionica . . . . . . . - - 1
Deferred Income Tax Liability. . . . . . . 30 44 22
Changes in Assets and Liabilities:
Receivables and Unbilled Revenue . . . . . 32 47 8
Income Taxes Payable . . . . . . . . . . (16) (24) (2)
Prepaids and Other Current Assets. . . . . (3) (4) (9)
Prepaid Pension Asset. . . . . . . . . . . (14) (20) (16)
Other Current Liabilities. . . . . . . . . 20 30 2
Accounts Payable . . . . . . . . . . . . . (18) (27) (29)
Accrued Liabilities and Deferred Income. . (6) (9) 8
Other. . . . . . . . . . . . . . . . . . . 1 1 7
------ ----- ------
Net Cash Provided by Operating
Activities . . . . . . . . . . . . . . 123 181 76
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . (69) (102) (106)
Proceeds from Sale of Discontinued Operations - - 94
Proceeds from Sale of Property,
Plant and Equipment. . . . . . . . . . . 1 1 6
Proceeds from Sale of Long-term Investments - - 3
Net change in Short-term Investments . . . (1) (1) 12
Other. . . . . . . . . . . . . . . . . . . - - (1)
------ ------ ------
Net Cash (Used) Provided by Investing Activities (69) (102) 8
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long-term Debt . 165 244 -
Repayment of Long-term Debt. . . . . . . . (5) (7) -
Net Change in Short-term Debt. . . . . . . (216) (319) (80)
------ ------ ------
Net Cash Used by
Financing Activities . . . . . . . . . (56) (82) (80)
------ ------ ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2) (3) 4
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9 13 8
====== ====== ======
CASH AND CASH EQUIVALENTS AT END OF PERIOD 7 10 12
====== ====== ======
</TABLE>
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
----------------- ------
(pound) $ (pound)
<S> <C> <C> <C>
Cash Paid for Interest . . . . . . . . . . . 88 130 87
====== ====== ======
Cash Paid for Income Taxes . . . . . . . . . 9 13 1
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions, except shares)
(UNAUDITED)
For the three months ended September 30, 2000:
<TABLE>
<CAPTION>
Share Capital
------------- Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) (pound) (pound)
<S> <C> <C> <C> <C>
Balance, July 1, 2000 . . . . . 440,000,002 440 47 487
Net Income . . . . . . . . . . . - - 10 10
----------- ---- ---- ----
Balance, September 30, 2000. . . 440,000,002 440 57 497
=========== ==== ==== ====
</TABLE>
For the three months ended September 30, 1999:
<TABLE>
<CAPTION>
Share Capital
------------- Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) (pound) (pound)
<S> <C> <C> <C> <C>
Balance, July 1, 1999. . . . . . 440,000,002 440 (28) 412
Net Income . . . . . . . . . . . - - 6 6
----------- ---- ---- ----
Balance, September 30, 1999. . . 440,000,002 440 (22) 418
=========== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions, except shares)
(UNAUDITED)
For the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Share Capital
------------- Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) (pound) (pound)
<S> <C> <C> <C> <C>
Balance, January 1, 2000 . . . . 440,000,002 440 11 451
Net Income . . . . . . . . . . . - - 46 46
----------- ---- ---- ----
Balance, September 30, 2000. . . 440,000,002 440 57 497
=========== ==== ==== ====
</TABLE>
For the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Share Capital
------------- Retained
Shares Amount Profit Total
------ ------ -------- -----
(pound) (pound) (pound)
<S> <C> <C> <C> <C>
Balance, January 1, 1999. . . . . 440,000,002 440 (40) 400
Net Income . . . . . . . . . . . - - 18 18
----------- ---- ---- ----
Balance, September 30, 1999. . . 440,000,002 440 (22) 418
=========== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements for the Transition
Period ended December 31, 1999 filed in Form 10-K. In the opinion of
management, the financial statements reflect all adjustments (consisting
of only normal recurring accruals) which are necessary for a fair
presentation of the results of operations for interim periods.
The consolidated financial statements of Yorkshire Power Group
Limited and its subsidiaries ("Yorkshire Group") are presented in pounds
sterling and in conformity with accounting principles generally accepted
in the United States of America.
The consolidated balance sheets, income statements, statements of
cash flows and certain information in the notes to the consolidated
financial statements are presented in pounds sterling ((pound)) and in
US dollars ($) solely for the convenience of the reader, at the exchange
rate of (pound)1 = $1.4785, the closing mid-point in London on September
30, 2000. This presentation has not been translated in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." No representation is made that the pounds sterling amounts
have been, could have been, or could be converted into US dollars at
that or any other rate of exchange.
13
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
2. FINANCING AND RELATED ACTIVITIES
Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust')
is a New York common law trust, the sole assets of which consist of (i) a
100% beneficial interest in (pound)155 million principal amount of Reset
Senior Notes, issued in February 2000 and due February 15, 2020, (the
`Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of
Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a
currency swap with UBS AG, London Branch (the `Currency Swap') and an
option granted to UBS AG, London Branch (the `Call Option').
The PATS Trust has issued $250 million principal amount of 8.25%
Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the
Certificates). All of the US Dollar proceeds from the offering by the
PATS Trust of the Certificates have been swapped by the Trust with UBS
AG, London Branch for (pound) Sterling pursuant to the Currency Swap. The
PATS Trust has used the (pound) Sterling, together with the proceeds
received by the PATS Trust from UBS AG, London Branch under the Call
Option, to purchase the Senior Notes issued by YPF2. YPF2 has loaned the
net proceeds to YPG and subsidiaries. These proceeds were used as working
capital and for the repayment of debt, including repayment of a loan
which was entered into in December 1999 to repay Tranche B of Yorkshire
Group's syndicated credit facility. YPG has issued a guarantee that fully
and unconditionally guarantees the due and punctual payment of principal
and interest on the Senior Notes.
3. NEW ACCOUNTING STANDARD
SFAS No. 133, `Accounting for Derivative Instruments and Hedging
Activities', was issued in June 1998. This statement was originally
scheduled to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999: SFAS No. 137 has delayed the effective
date for one year. SFAS 133 establishes accounting and reporting
standards for derivative instruments. It requires that all derivatives be
recognized as either an asset or a liability, measured at fair value, in
the financial statements. If certain conditions are met a
14
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
3. NEW ACCOUNTING STANDARD (continued)
derivative may be designated as a hedge of possible changes in fair value
of a recognized asset or liability or of an unrecognized firm commitment;
variable cash flows of a recognized asset or liability or of a forecasted
transaction; or foreign currency exposure. The accounting/reporting for
fair value changes in a derivative used as a hedging instrument depends
on the intended use and resulting designation of the derivative.
Currently, there are outstanding issues under consideration by the
Financial Accounting Standards Board's Derivative Implementation Group.
Management is currently studying the provisions of SFAS 133 to determine
the impact of its adoption on results of operations, cash flows and
financial condition. Yorkshire intends to adopt the standard as required
by January 2001.
The SEC has issued Staff Accounting Bulletin 101 "Revenue
Recognition" which provided guidance on the timing and methods of
recognizing revenues that SEC registrants must adopt in the fourth
quarter of 2000. The adoption of this Staff Accounting Bulletin is not
expected to have a material effect on the financial statements of
Yorkshire since Yorkshire already follows the principles outlined in this
Staff Accounting Bulletin.
4. CONTINGENCIES
LEGAL PROCEEDINGS
Reference is made to Form 10-K for the Transition Period, Part I,
Item 3 "Legal Proceedings" for details of litigation between Optimum
Solutions Limited ("the Claimant") and Yorkshire Electricity Group plc
("Yorkshire"), Eastern Electricity plc ("Eastern"), National Grid Company
plc ("NGC") and Logica plc.
Yorkshire and Eastern made motions in the UK High Court of Justice
Chancery Division (the "High Court") that the Claimant's action against
them be dismissed or in the alternative, that the Claimant should provide
security for the costs of Yorkshire and Eastern.
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YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
4. CONTINGENCIES (continued)
In response, the High Court ordered that the Claimant provide
security for Yorkshire and Eastern's costs of (pound)950,000 by November
1, 2000, and that failure to pay such costs would result in dismissal of
the Claimant's actions. Yorkshire and Eastern were also awarded costs
incurred already.
The Claimant did not provide the security ordered and did not pay
the costs awarded to Yorkshire and Eastern by the date ordered by the
High Court. As a consequence, the claim was dismissed on November 1,
2000.
On the application of Yorkshire and Eastern, provisional
liquidators of the Claimant were appointed on October 11, 2000.
Reference is made to Form 10-K for the Transition Period Part I,
Item 3 "Legal Proceedings" and Form 10-Q for the quarter ended June 30,
2000, Part II, Item 5 for details of ongoing litigation with respect to
other corporations' use of actuarial surpluses declared in the ESPS. The
appeals initiated by NGC and National Power in the House of Lords will
now be heard in February 2001.
Yorkshire, along with other ESPS member companies, is now in the
process of preparing similar retrospective deeds of amendment to those
executed by NGC and National Power. It is expected that Yorkshire's deed
will be executed in late November or early December 2000.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements. As a result of the transition to a more
competitive utility environment, estimates are required for revenues and
the costs to produce revenues, including bad debt expense.
16
<PAGE> 18
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
4. CONTINGENCIES (continued)
Electricity generated in England and Wales is sold by generators
and bought by suppliers through the Pool. Charges are raised on a half
hourly basis. Prior to opening the domestic market to competition on
September 14, 1998, all charges were allocated between suppliers based on
actual meter readings. Charges in respect of residential customers, whose
meters are not read at half hourly intervals, were allocated to the host
PES. Since September 14, 1998, it is necessary to allocate charges in
respect of residential customers between suppliers based on estimates.
Actual results could differ from the Company's estimates.
REVISION TO ASSET LIVES
In addition to the change in depreciation method, described below
in Note 7, Yorkshire Group has revised the estimated useful economic
lives of its distribution network assets in order to provide a more
accurate estimated life for each asset type. Such assets are now
depreciated over a period of between 10 and 80 years. In the nine months
ended September 30, 2000, the effect of this change was to increase net
income by (pound)3 million. The effect of the change in the year ending
December 31, 2000 is expected to be an increase in net income of (pound)4
million.
17
<PAGE> 19
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
4. CONTINGENCIES (continued)
OFGEM PRICE CONTROL REVIEW
Following the conclusion of the electricity distribution and supply
price control reviews and other Ofgem initiatives, a number of PES
licence modifications became effective on April 1, 2000. Consequently,
from that date, there has been a reduction in the prices Yorkshire can
charge its distribution and supply customers. For details of the price
control reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's
Businesses - Industry Background - Distribution of Electricity -
Distribution Price Regulation from April 1, 2000" and "Yorkshire's
Businesses - Industry Background - Supply of Electricity - Electricity
Supply Price Regulation from April 1, 2000".
In response to Ofgem's final proposals and increasing competition,
Yorkshire has adopted an aggressive program of reducing controllable
costs. Significant features of this program include reductions in capital
expenditure, staff reductions, outsourcing of certain functions and
consolidation of facilities. Yorkshire intends to aggressively pursue
this cost reduction program and is evaluating additional cost reduction
measures to further mitigate the effects of Ofgem's final proposals and
increasing competition in the electricity supply business. Yorkshire
Group expects that the net result of Ofgem's electricity supply and
distribution price reductions, and competitive demands in the Supply
business and Yorkshire's mitigation efforts will be a decline in
Yorkshire Group's results of operations and a reduction in its cash flows
which, in each case, may be significant.
18
<PAGE> 20
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
5. RATIONALIZATION
Yorkshire is currently implementing plans to streamline its
distribution and Supply workforces and has announced a reduction of
approximately 350 positions (260 positions from the distribution business
and 90 positions from the Supply business) during 2000 and a further 75
positions from the distribution business in 2001. A provision of
approximately (pound)7 million has been recorded in January 2000 (in
Selling, General and Administrative expenses) to reflect the cost of the
350 reductions in 2000. The balance of the provision at September 30,
2000 was approximately (pound)3 million.
Such streamlining is part of the overall program of reducing
controllable costs in response to Ofgem's final distribution and supply
price control reviews and to increasing competition in the Supply
business.
6. BUSINESS SEGMENTS
Yorkshire Group is primarily engaged in two businesses: electricity
distribution, which involves the transmission of electricity across its
network to end users, and supply, which involves bulk purchase of
electricity and gas for delivery to its customers. These businesses form
the basis for the identification of reportable segments as shown below.
Included in "Other" are insignificant operating subsidiaries as well as
various corporate activities, and non-allocated corporate assets.
Management evaluates segment performance based on segment income
from operations, which is shown below.
Intersegment sales primarily represent sales from the distribution
business to the Supply business for use of the distribution network.
19
<PAGE> 21
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
6. BUSINESS SEGMENTS (continued)
A summary of information about Yorkshire Group's operations by
segments follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Revenues from
external customers 77 1,012 - (2) 1,087
Intersegment sales 136 16 1 (153) -
Income (loss) from
operations 100 63 (5) (16) 142
Total assets 1,098 473 2,738 (1,804) 2,505
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(pound) (pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Revenues from
external customers 58 976 4 1 1,039
Intersegment sales 179 30 5 (214) -
Income (loss) from
operations 109 27 (4) (17) 115
Total assets 998 376 2,638 (1,675) 2,337
</TABLE>
20
<PAGE> 22
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
6. BUSINESS SEGMENTS (continued)
Non-allocated items within total assets consist principally of
goodwill of (pound)884 million at September 30, 2000 and (pound)913
million at September 30, 1999.
Non-allocated items within income (loss) from operations consist
principally of amortization of goodwill of (pound)18 million in the
nine months ended September 30 for both 2000 and 1999.
7. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Yorkshire Group has implemented a change in the depreciation method
for its distribution network assets. Previously distribution network
assets were depreciated at a rate of 3% per annum for 20 years and 2% per
annum for the remaining 20 years. A straight line depreciation method has
now been implemented for such assets as this is believed to better match
the cost of the assets with the anticipated usage pattern. The effect of
this change in the nine months ended September 30, 2000 was to increase
net income by (pound)2 million. The cumulative effect of this change in
accounting principle on prior accounting periods to December 31, 1999 is
an increase in income of approximately (pound)8 million, after a
reduction for income taxes of (pound)4 million recorded in the quarter
ended March 31, 2000.
21
<PAGE> 23
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES OF SUBSIDIARY
HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Yorkshire Capital Trust I, (the "Trust"), is a statutory business
trust wholly owned by Yorkshire Power Group Limited, created for the sole
purpose of issuing trust securities and investing the proceeds in an
equivalent amount of Junior Subordinated Deferrable Interest Debentures,
Series A due 2038 (the "Debentures") issued by Yorkshire Power Finance
Limited ("Yorkshire Finance"), a subsidiary of Yorkshire Power Group
Limited. On June 9, 1998 the Trust issued 11,000,000 shares of 8.08%
Trust Securities at the liquidation amount of $25 per Trust Security. The
Trust invested the $275 million proceeds in an equivalent amount of
Debentures of Yorkshire Finance. Yorkshire Finance in turn loaned the net
proceeds to Yorkshire Power Group Limited. Substantially all of the
Trust's assets consist of the Debentures.
The Trust Securities are subject to mandatory redemption upon
payment of the Debentures at maturity or upon redemption. The Debentures
are redeemable, in whole or in part, at the option of Yorkshire Finance
or at any time upon the occurrence of certain events. Yorkshire Power
Group Limited considers that the mechanisms and obligations relating to
the Trust Securities issued for its benefit, taken together, constitute a
full and unconditional guarantee by it of the Trust's payment obligations
with respect to the Trust Securities.
Since June 1998 Yorkshire Group has repurchased 385,000 Trust
Securities with a nominal value of approximately $10 million.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QUARTER ENDED SEPTEMBER 30, 2000 VS. QUARTER ENDED SEPTEMBER 30, 1999
AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30,
1999
RESULTS OF OPERATIONS
Net income for the year to date period increased by (pound)28
million (156%) from (pound)18 million to (pound)46 million. There was an
increase in net income of (pound)4 million (67%) in the latest quarter
from (pound)6 million to (pound)10 million. This is due primarily to the
following: an increase in gross margin attributable to the gas and
electricity supply businesses and the cumulative effect on prior years of
a revised depreciation method.
Income statement line items that changed significantly were:
<TABLE>
<CAPTION>
Increase/(decrease)
-------------------
Third Quarter Year to Date
(pound) % (pound) %
(in milions)
<S> <C> <C> <C> <C>
Operating Revenues 7 2 48 5
Gross Margin 12 13 26 8
Selling, General and
Administrative Expenses 9 31 10 11
Provision for Income Taxes 3 N/A 9 82
Cumulative effect on prior - - 8 N/A
years (to December 31, 1999)
of changing to a different
depreciation method
Net Income 4 67 28 156
</TABLE>
Electricity supply operating revenues in the competitive market have
decreased when compared to the same period last year. A decline in volumes
supplied to the residential electricity supply market and smaller
non-residential customers has been partially offset by a growth in the
volume of electricity supplied to larger non-residential electricity
supply customers.
23
<PAGE> 25
External revenues attributable to the distribution business have
increased due to the competitive market creating growth in revenues for
the use of the distribution network from external customers. However, this
growth has been offset in part by the impact of the distribution price
control review from April 1, 2000 which adversely affected distribution
revenues in the six month period ended September 30, 2000.
Gas supply revenues in the competitive market increased as the number
of residential gas supply customers rose in the period. Increased
residential volumes have led to an improvement in gross margin for the gas
supply business.
Despite competitive pressures, gross margin for the electricity
supply business has increased, primarily due to lower electricity pool
costs and favourable CFD settlements. In addition other costs have
decreased, notably those associated with the use of the distribution
network, as a result of the distribution price control review from April
1, 2000.
It is anticipated that strong competitive pressures and the impact of
the price control reviews on revenues experienced since April 1, 2000 will
continue during the remainder of the year. In addition the method of
trading electricity will change following the implementation of NETA which
is now not anticipated to be in place until March 27, 2001. It is
anticipated that NETA will make the market for the sale of electricity by
generators more competitive.
Selling, general and administrative costs during the nine months
ended September 30, 2000 have increased when compared to 1999. An increase
in rationalisation costs in 2000 was largely offset by a reduction in
costs incurred in 1999 in relation to Year 2000 modifications and costs
associated with the development of new systems to facilitate competition.
However increased costs associated with the competitive market in the
three months to September 30, 2000 have led to an increase in year to date
and quarterly costs when compared to the corresponding prior year period.
Certain reclassifications have been made to the prior period
financial information. Expenditure of (pound)9 million charged to
maintenance in the nine month period ended September 30, 1999 has been
restated as Selling, General and Administrative expenditure so as to be
consistent with the position of these costs for the nine month period
ended September 30, 2000.
The provision for income taxes has increased in line with
24
<PAGE> 26
the increased profitability of Yorkshire Group in the current quarter and
the nine month period ended September 30, 2000.
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Yorkshire Group has implemented a change in the depreciation method
for its distribution network assets. Previously, distribution network
assets were depreciated at a rate of 3% per annum for 20 years and 2% per
annum for the remaining 20 years. A straight line depreciation method has
now been implemented for such assets as this is believed to better match
the cost of the assets with the anticipated usage pattern. The effect of
this change in the nine months ended September 30, 2000 was to increase
net income by (pound)2 million. The cumulative effect of this change in
accounting principle on prior accounting periods to December 31, 1999 is
an increase in income of approximately (pound)8 million, after a reduction
for income taxes of (pound)4 million recorded in the quarter ended March
31, 2000.
REVISION TO ASSET LIVES
In addition to the change in depreciation method, Yorkshire Group
has revised the estimated useful economic lives of its distribution
network assets in order to provide a more accurate estimated life for each
asset type. Such assets are now depreciated over a period of between 10
and 80 years. In the nine months ended September 30, 2000, the effect of
this change was to increase net income by (pound)3 million. The effect of
the change in the year ending December 31, 2000 is expected to be an
increase in net income of (pound)4 million.
FINANCIAL CONDITION
Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust')
is a New York common law trust, the sole assets of which consist of (i) a
100% beneficial interest in (pound)155 million principal amount of Reset
Senior Notes, issued in February 2000 and due February 15, 2020, (the
`Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of
Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a
currency swap with UBS AG, London Branch (the `Currency Swap') and an
option granted to UBS AG, London Branch (the `Call Option').
The PATS Trust has issued $250 million principal amount of 8.25%
Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the
Certificates). All of the US Dollar proceeds from the offering by the PATS
Trust of the
25
<PAGE> 27
Certificates have been swapped by the Trust with UBS AG, London Branch for
(pound) Sterling pursuant to the Currency Swap. The PATS Trust has used
the (pound) Sterling, together with the proceeds received by the PATS
Trust from UBS AG, London Branch under the Call Option, to purchase the
Senior Notes issued by YPF2. YPF2 has loaned the net proceeds to YPG and
subsidiaries. These proceeds were used as working capital and for the
repayment of debt, including repayment of a loan which was entered into to
repay Tranche B of Yorkshire Group's syndicated credit facility. YPG has
issued a guarantee that fully and unconditionally guarantees the due and
punctual payment of principal and interest on the Senior Notes.
MARKET RISKS
Yorkshire Group has certain market risks inherent in its business
activities, arising from the purchase and sale of electricity and gas,
changes in foreign currency exchange rates and interest rates. Market risk
represents the risk of loss that may impact Yorkshire Group due to adverse
changes in market prices and rates.
Yorkshire Group's exposure to commodity price variability has
increased as a result of increased energy trading during the nine months
ended September 30, 2000. Risk management policies have been established
by a risk management committee which has responsibility for oversight of
all energy risk management. Trading is conducted in accordance with
defined Value at Risk parameters approved by Yorkshire Group. Value at
Risk has not changed significantly in the nine month period ended
September 30, 2000. Risks arising from changes in foreign currency
exchange rates and interest rates has not changed significantly since
December 31, 1999. For further details on market risk, see Part II, Item
7A. "Quantitative and Qualitative Disclosures About Market Risk" in Form
10-K.
RATIONALIZATION
Yorkshire is currently implementing plans to streamline its
distribution and Supply workforces and has announced a reduction of
approximately 350 positions (260 positions from the distribution business
and 90 positions from the Supply business) during 2000 and a further 75
positions from the distribution business in 2001. A provision of
approximately (pound)7 million has been recorded in January 2000 to
reflect the cost of the 350 reductions in 2000. The balance of the
provision at September 30, 2000 was approximately (pound)3 million.
Such streamlining is part of the overall program of reducing
controllable costs in response to Ofgem's final
26
<PAGE> 28
distribution and supply price control reviews and to increasing
competition in the Supply business.
LEGAL PROCEEDINGS
Reference is made to Form 10-K for the Transition Period Part I,
Item 3 "Legal Proceedings for details of ongoing litigation with respect
to other corporations' use of actuarial surpluses declared in the ESPS.
The appeals initiated by NGC and National Power in the House of Lords will
now be heard in February 2001.
Yorkshire, along with other ESPS member companies, is now in the
process of preparing similar retrospective deeds of amendment to those
executed by NGC and National Power. It is expected that Yorkshire's deed
will be executed in late November or early December 2000.
OFGEM PRICE CONTROL REVIEW
Following the conclusion of the electricity distribution and supply
price control reviews and other Ofgem initiatives, a number of PES license
modifications became effective on April 1, 2000. Consequently, from that
date, there has been a reduction in the prices Yorkshire can charge its
distribution and supply customers. For details of the price control
reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's Businesses -
Industry Background - Distribution of Electricity - Distribution Price
Regulation from April 1, 2000" and "Yorkshire's Businesses - Industry
Background - Supply of Electricity - Electricity Supply Price Regulation
from April 1, 2000".
In response to Ofgem's final proposals and increasing competition,
Yorkshire has adopted an aggressive program of reducing controllable
costs. Significant features of this program include reductions in capital
expenditure, staff reductions, outsourcing of certain functions and
consolidation of facilities. Yorkshire intends to aggressively pursue this
cost reduction program and is evaluating additional cost reduction
measures to further mitigate the effects of Ofgem's final proposals and
increasing competition in the electricity supply business. Yorkshire Group
expects that the net result of Ofgem's electricity supply and distribution
price reductions, and competitive demands in the Supply business and
Yorkshire's mitigation efforts will be a decline in Yorkshire Group's
results of operations and a reduction in its cash flows which, in each
case, may be significant.
27
<PAGE> 29
EUROPEAN MONETARY UNION
On January 1, 1999, 11 European Union countries formed an economic
and monetary union and introduced a single currency, the Euro. Although
the UK did not join at this time, the UK Government has indicated that it
may join in the future. Management is currently assessing the effort
required to prepare Yorkshire Group for the potential introduction of the
Euro in the UK.
28
<PAGE> 30
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Form 10-K for the Transition Period, Part I, Item 3
"Legal Proceedings" for details of litigation between Optimum Solutions Limited
("the Claimant") and Yorkshire Electricity Group plc ("Yorkshire"), Eastern
Electricity plc ("Eastern"), National Grid Company plc ("NGC") and Logica plc.
Yorkshire and Eastern made motions in the UK High Court of Justice
Chancery Division (the "High Court"), that the Claimant's action against them be
dismissed or in the alternative, that the Claimant should provide security for
the costs of Yorkshire and Eastern.
In response the High Court ordered that the Claimant provide security for
Yorkshire and Eastern's costs of (pound)950,000 by November 1, 2000, and that
failure to pay such costs would result in dismissal of the Claimant's actions.
Yorkshire and Eastern were also awarded costs incurred already.
The Claimant did not provide the security ordered and did not pay the
costs awarded to Yorkshire and Eastern by the date ordered by the High Court. As
a consequence, the claim was automatically dismissed on November 1, 2000.
On the application of Yorkshire and Eastern, provisional liquidators of
the Claimant were appointed on October 11, 2000.
Reference is made to Form 10-K for the Transition Period Part I, Item 3
"Legal Proceedings" and Form 10-Q for the quarter ended June 30, 2000, Part II,
Item 5 for details of ongoing litigation with respect to other corporations' use
of actuarial surpluses declared in the ESPS. The appeals initiated by NGC and
National Power in the House of Lords will now be heard in February 2001.
Yorkshire, along with other ESPS member companies, is now in the process
of preparing similar retrospective deeds of amendment to those executed by NGC
and National Power. It is expected that Yorkshire's deed will be executed in
late November or early December 2000.
29
<PAGE> 31
Item 5. OTHER INFORMATION
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"Yorkshire Group and the US Parents - The US Parents - NCE" for details of the
planned merger of NCE and NSP. On August 21, 2000, following receipt of final
regulatory approval, the merger of NCE and NSP was completed to form Xcel Energy
Inc.
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"The Electric Utility Industry in Great Britain - Industry Structure" for
details of various industry combinations. On August 7, 2000, Scottish and
Southern agreed to purchase the SWALEC energy supply business from British
Energy. In addition WPD acquired Hyder. WPD is jointly owned by PPL and SEI. PPL
and SEI also jointly own WPD Holdings UK which is the holding company of South
Western Electricity plc, the electricity distribution business in south west
England.
On September 8, 2000, Independent Energy, a licensed supplier of
electricity went into receivership. Although Innogy has acquired the major
supply assets of Independent Energy, it is not responsible for any of
Independent Energy's liabilities prior to appointment of receivers, leaving
millions of pounds in unpaid bills. Independent Energy's liability to Yorkshire
for distribution use of system charges has been confirmed as (pound)1.7 million.
Yorkshire is insured for part of this debt, leaving a net liability of
approximately (pound)1.5 million. Yorkshire is attempting through Ofgem to
recover part of this bad debt through a distribution price control adjustment.
Ofgem has confirmed that it will review this issue, but not until early 2001.
Reference is made to Form 10-K for the Transition Period, Part I, Item 1,
"Yorkshire's Businesses - Distribution Business - Competition in the
Distribution Business" for details of the introduction of competition in
connecting customers to the distribution network. On July 24, 2000, Ofgem
published proposals regarding competition in connections. These proposals
include:
- a significant reduction in work deemed to be non-contestable;
- the establishment of a nation-wide registration scheme for contractors;
and
- PES distribution businesses to ensure that they charge their own
connections business on the same basis as third parties.
Yorkshire is currently assessing the impact of these proposals on its
distribution business.
30
<PAGE> 32
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"The Electric Utility Industry in Great Britain - Regulatory Developments -
Information & Incentives Program". Ofgem has issued final proposals detailing
the information distribution businesses will need to provide to Ofgem under the
information and incentives program. Some companies may need to invest in new
systems to meet the requirements of these proposals. Ofgem takes the position
that these new systems should be funded by the existing allowance in the
distribution price control. However, Ofgem is consulting on whether to allow
distribution businesses to adjust their regulated revenue by an amount
equivalent to (pound)0.50 per customer for one year to cover certain costs to
obtain accurate information with respect to low voltage customers. Such an
allowance would mean an additional (pound)1 million revenue for Yorkshire's
distribution business.
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"The Electric Utility Industry in Great Britain - Regulatory Developments - New
Electricity Trading Arrangements" and to Form 10-Q for the quarter ended June
30, 2000, Part II, Item 5 "Other Information" for details of NETA. The legal
process to bring about the changes required for NETA is referred to as the
Implementation Scheme. This Scheme changes a number of core industry documents
and sets up a new means of trading wholesale electricity. It creates a new
balancing and settlement system and transfers the governance of electricity
wholesale trading from the Pool to a new balancing and settlement company:
Elexon Limited. NGC will continue to retain responsibility for ensuring that the
electricity transmission system as a whole is kept in balance.
On August 14, 2000, the following documents, amongst others, were
executed by NETA participants:
- Implementation Scheme Framework Agreement - the document through which
the Implementation Scheme comes into effect.
- Balancing and Settlement Code Framework Agreement - the document through
which the original signatories agreed to be bound by and comply with the
terms of the Balancing and Settlement Code. Signing this document makes
it obligatory to sign the Implementation Scheme Framework Agreement
- Pool Transfer Deed - this allows for the transfer of physical and
intellectual assets and liabilities from the Pool to Elexon Limited.
The DTI and Ofgem have indicated that they intend to replace the existing
Master Connection and Use of System Agreement with the Connection and Use of
System Code ("CUSC") which will be
31
<PAGE> 33
given contractual force through a CUSC Framework Agreement. This will entail a
modification of PES License conditions. Ofgem/DTI have not yet issued final
proposals on CUSC but implementation is not expected before April 1, 2001.
On a date to be specified by the DTI electricity trading will switch to
NETA and Pool trading will cease. This date is known as "go live" and was
initially expected to be November 21, 2000. National testing for NETA is now
behind schedule and on October 27, 2000, Ofgem announced that the NETA program
is now working toward a "go live" date of March 27, 2001.
Yorkshire is substantially ready for NETA and remains one of the more
advanced industry participants.
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"Yorkshire's Businesses - Supply Business - Electricity Supply Risk Management"
and also Form 10-Q for the quarter ended March 31, 2000, Part II, Item 5 "Other
Information" for details of the market abuse license condition. In September
2000, Ofgem issued guidelines for the market abuse license condition to take
account of the introduction of NETA. Ofgem has stated that, although NETA will
fundamentally alter the trading environment for generators and suppliers, it
cannot eliminate all opportunities for exploitation of substantial market power
that is damaging to competition and/or consumers. Ofgem is also of the view that
such a license condition will be more effective if it is couched as a general
prohibition on behaviour which amounts to exploitation of market power and which
in its effect causes substantial harm to competition and/or consumers, rather
than being a condition targeted at preventing only specified conduct which has
been identified as likely to have certain effects.
Reference is made to Form 10-K for the Transition Period, Part I, Item 1
"Yorkshire Group and the US Parents - The US Parents - AEP" and to Form 10-Q for
the quarter ended June 30, 2000, Part II, Item 5 "Other Information" for
discussion of the "deemed merger" of Yorkshire and SEEBOARD resulting from the
merger of AEP and CSW. In connection therewith, modifications have been made to
Yorkshire's PES License.
The new deemed merger conditions require that:
- Yorkshire conduct its distribution business so as to facilitate
competition in the generation of electricity and in the supply of
electricity within its authorized area;
- any generation business pursued by Yorkshire shall be carried on by an
affiliate in which Yorkshire has no shareholding interest;
32
<PAGE> 34
- Yorkshire's generation business be removed from the category of
`permitted purposes' for which Yorkshire may provide investment, security
or financial support; and
- Yorkshire be prohibited from supplying or offering to supply electricity
to customers in SEEBOARD's authorized area, other than those with whom it
has entered into contracts to supply electricity prior to the date on
which this License condition comes into force.
Equivalent conditions will also apply to SEEBOARD. Yorkshire has
previously disposed of its generation business. On October 30, 2000, AEP
announced that it had decided not to pursue the combination of Yorkshire and
SEEBOARD.
The Utilities Act will have a significant impact on both gas and
electricity licenses. Reference is made to Form 10-K for the Transition Period,
Part I, Item 1 "The Electric Utility Industry in Great Britain - Regulatory
Developments - Standard Conditions For Electricity and Gas Licenses" and to Form
10-Q for the quarter ended March 31, 2000, Part II, Item 5 "Other Information"
for a discussion of standard conditions in gas and electricity licenses. The Act
introduces a prohibition on the activity of distributing electricity without a
license or exemption. The supply and distribution of electricity will become
separate licensable activities with a bar on the same legal entity holding both
an electricity supply and electricity distribution license. In addition, the PES
and second tier supply licenses will be brought together into a single supply
license. Standard license conditions, which are presently a feature of gas
licenses, will be introduced into electricity licenses. This means that
Yorkshire will need to put in place a new group structure. This new structure
may require changes to Yorkshire's existing financing arrangements.
In addition to conditions presently contained in the existing PES
Licenses the new electricity supply license will contain conditions in relation
to the removal of PES tariff supply. These will be replaced by contractual
supply and supplier of last resort conditions. The major initial impact of the
new supplier of last resort license conditions will be the requirement that all
license suppliers have security in place with regard to electricity supply to
domestic customers. This security will be used to cover the costs of the
supplier who is asked to take on a supplier's customers should that supplier go
into receivership and the receiver does not sell the business. The amount of the
security required has not yet been set by Ofgem but it is anticipated that the
license conditions will set a cap on the maximum amount that can be set by
Ofgem.
33
<PAGE> 35
On October 25, 2000, Ofgem published a final proposals document on the
standard license conditions, together with revised drafts of the standard
conditions for each type of license. Yorkshire is currently assessing the
implications of these revised drafts. The deadline for responses to Ofgem's
proposals is December 8, 2000.
The DTI has indicated that the final versions of the standard license
conditions will be available early in 2001.
Reference is made to Form 10-Q for the quarter ended June 30, 2000, Part
II, Item 5 "Other Information" for discussion of certain key provisions of the
Utilities Act. Under the Utilities Act GEMA will be able to impose financial
penalties on License holders who contravene (or have in the past contravened)
any relevant condition or requirement or who are failing (or have in the past
failed) to achieve any individual standard of performance. Any penalty imposed
must be reasonable in all the circumstances of the case and may not exceed 10%
of the licensee's turnover. Such turnover would be determined in accordance with
provisions specified in an order made by the Secretary of State (and approved by
a positive resolution of both Houses of Parliament).
These powers to impose penalties on licensees are in addition to the
license enforcement powers currently held by the Regulator (which will be
transferred to GEMA under the Utilities Act) and are in addition to the
Regulator/GEMA's powers under the Competition Act. However, GEMA is prevented
from imposing a Utilities Act financial penalty if it is satisfied that the most
appropriate way of proceeding is under the Competition Act.
The Utilities Act requires that GEMA prepare and publish a statement of
policy on the imposition of financial penalties and the determination of their
amount to which GEMA must have regard when deciding whether to impose a penalty.
A consultation paper entitled "Utilities Act Financial Penalties" was published
on August 9, 2000. This sets out the relevant issues that GEMA might wish to
consider when deciding whether to impose a Utilities Act financial penalty and
the level of any such penalty.
A number of factors may have relevance to whether it would be appropriate
for GEMA to impose a financial penalty:
- compatibility of the imposition of a penalty with GEMA's principal
objective to protect the interests of consumers, and other statutory
duties;
- the need to incentivise the licensee's compliance and to deter the
licensee or other licensees from further
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contraventions or failures;
- whether the contravention/failure had damaged consumers and/or market
participants, for example by increasing costs;
- whether any gain (financial or otherwise) had been made by the licensee;
and
- other factors including the duration and extent of the contravention or
failure.
In calculating the level of the proposed penalty, a number of factors may
be taken into account, including:
- the seriousness of the contravention or failure;
- the harm or increased costs that the contravention or failure has caused
to consumers and/or market participants;
- any gain (financial or otherwise) made by the licensee as a result of the
contravention or failure;
- the need to make any adjustments for:
- increases due to aggravating factors, such as repeated contraventions or
failures, involvement of senior management, concealment of activities;
and
- decreases due to mitigating factors, such as taking steps to remedy the
contravention or failure and ensure compliance, and the licensee's
co-operation with GEMA during the investigation.
The consultation paper also sets out how GEMA's financial penalty powers
will operate with the existing enforcement process and the Competition Act.
Both the Electricity Association Utilities Act Steering Group and
Yorkshire responded to this consultation. After receiving views on the
consultation paper, Ofgem will publish a statement of policy in respect of
financial penalties.
On October 5, 2000, the DTI published its preliminary consultation on the
renewable electricity obligation: "New and Renewable Energy: Prospects for the
21st Century". This obligation, being introduced under the Utilities Act, will
take effect from October 2001.
The proposals outlined by the DTI will require electricity suppliers to
purchase a certain proportion of electricity from renewable generation.
Suppliers will have three options in complying with the obligation: they can
physically supply the required amount of power from eligible renewable sources;
they can buy renewable energy certificates from other suppliers or third
parties; or they can `buy out' of the obligation at the
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rate set by the UK government.
The DTI is proposing to set the buy-out price at 3p/kWh ((pound)30/MWh).
Initial indications are that the costs for Yorkshire are likely to be in excess
of (pound)300 million over the next ten years at the proposed buy-out price.
Although this obligation will apply to all electricity suppliers, there is no
assurance that full cost recovery can be made in the competitive market.
The Utilities Act will give the Secretary of State the power to impose
obligations on licensed gas and electricity suppliers, gas transporters, and
electricity distributors to meet targets for the promotion of improvements in
efficiency in consumers' use of energy. The Secretary of State will be able to
set an overall energy efficiency target, which covers both gas and electricity,
and this will be apportioned between the two. The target will be the saving of a
specified amount of energy. It will be the responsibility of the licensee to
determine the activities it will undertake to meet the required energy saving.
GEMA will be responsible for the calculation and enforcement of the
requirement, using its normal enforcement powers, including monetary penalties.
It is anticipated that this new scheme will commence in April 2002 and
run until March 2005. Although the extent of the obligation is currently under
consultation the minimum is expected to be (pound)3.60 per household per fuel
per year, which equates to a cost for Yorkshire in the region of (pound)7.2
milion per year for 3 years. There is no assurance that full cost recovery can
be made in the competitive market.
A further consultation is expected to be published by the DTI in April
2001.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.16 - New Electricity Trading Arrangements Programme
Implementation Scheme as of August 14, 2000, among Yorkshire
Electricity Group plc and other parties.
Exhibit 10.17 - BSC Framework Agreement, dated as of August 14,
2000, among Yorkshire Electricity Group plc and other parties.
Exhibit 10.18 - Transfer Deed relating to the transfer of certain
assets and liabilities of members of The Electricity Pool of
England and Wales as of August 14, 2000, among the Members of The
Electricity Pool of England and Wales (including Yorkshire
Electricity Group plc) and Elexon Limited.
Exhibit 10.19 - Yorkshire Electricity Group plc Public Electricity
Supply License Modifications dated July 28, 2000, August 7, 2000,
and September 1, 2000.
Exhibit 10.20 - Yorkshire Electricity Group Plc Second Tier License
to supply electricity for England and Wales modifications dated
August 7, 2000 and September 1, 2000.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YORKSHIRE POWER GROUP LIMITED
BY: /S/ Armando A. Pena Dated: November 14, 2000
------------------------
Armando A. Pena
Chief Financial Officer and Director
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