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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
( ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
(x) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from April 1, 1999 to December 31, 1999
Registrant, State or other Jurisdiction
Commission of Incorporation or Organization, I.R.S. Employer
File Number Address and Telephone Number Identification No.
333-47925 Yorkshire Power Group Limited 84-1393785
Wetherby Road
Scarcroft
Leeds LS14 3HS
United Kingdom
011-44-113-289-2123
================================================================
Securities registered pursuant to Section 12(b) of the Act: 8.08% Trust
Securities *
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
* Issued by Yorkshire Capital Trust I and guaranteed by Yorkshire Power Group
Limited
Aggregate market value of voting and non-voting common equity held by non-
affiliates: None
A description of the registrant's common stock follows:
Description of Shares Outstanding
Registrant Common Stock at January 31, 1999
Yorkshire Power Group Par Value (POUNDS)1 Per Share 440,000,002
Limited
TABLE OF CONTENTS
Page
PART I
Item 1 Business
Yorkshire Group and the US Parents 8
Yorkshire's Businesses 11
The Electric Utility Industry in
Great Britain 23
UK Environmental Legislation 51
UK and EU Competition Law 52
Employees 52
Presentation of Certain Information and
Exchange Rates 52
Item 2 Properties 52
Item 3 Legal Proceedings 53
Item 4 Submission of Matters to a Vote of
Security Holders 55
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 56
Item 6 Selected Financial Data 56
Item 7 Management's Discussion and Analysis of Results
of Operations and Financial Condition 63
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 91
Item 8 Financial Statements and Supplementary Data 92
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 132
PART III
Item 10 Directors and Executive Officers of
the Registrant 132
Item 11 Executive Compensation 134
Item 12 Security Ownership of Certain Beneficial Owners
and Management 135
Item 13 Certain Relationships and Related Transactions 136
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 137
Signatures 138
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-K 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-K. These forward
looking statements speak only as of the date of this Form 10-K.
SELECTED DEFINITIONS
When used in this report, the following terms will have the meanings
indicated.
"1935 Act" means Public Utility Holding Company Act of 1935, as amended
"Acquisition" means acquisition of Yorkshire, indirectly, by Yorkshire
Group, effective April 1, 1997
"AEP" means American Electric Power Company, Inc.
"AEP Resources" means AEP Resources, Inc.
"Authorized Area" means Yorkshire's service area as determined by its PES
license
"British Energy" means British Energy plc
"Calendar Year" means a year ended December 31
"CFDs" means contracts for differences
"Competition Act" means the Competition Act 1998
"Competition Commission" means the body created by the Competition Act to
take over the existing functions of the UK Monopolies and Mergers
Commission
"CSW" means Central and South West Corporation
"DAMS" means Distribution Asset Management System
"Data Management Services" means the metering and data services in support
of the electricity trading arrangements
"Designated Customer" means any residential customer or commercial customer
using less than 12,000 kWh of electricity per year
"DTI" means the UK Department of Trade and Industry
"EC" means European Community, a previous name for the EU
"Economy 7" means electricity tariffs which apply to electricity that
incorporates lower unit charges because it is used during the seven hours
of the night
"EdF" means Electricite de France
"Electricity Act" means the Electricity Act 1989
"EMFs" means electromagnetic fields
"Energy Group" means The Energy Group plc
"EPSL" means Electricity Pension Services Ltd
"ESPS" means Electricity Supply Pension Scheme
"EU" means European Union (See "EC")
"Fiscal Year" means a year ended March 31
"Fossil Fuel Levy" means a levy system instituted to reimburse the
generators and the RECs for the extra costs involved in generating
electricity from non-fossil fuel plants as compared to generating
electricity from fossil fuel plants
"Franchise" means an electricity supply franchise granted to PESs between
1990 and 1998 where second tier suppliers were prevented from supplying
certain customers whose electricity usage was below the Franchise Limit
"Franchise Limit" means (a) during the four year period from March 31,
1990, to March 30, 1994: one megawatt; and (b) during the succeeding four
year period from March 31, 1994, to March 30, 1998: 0.1 megawatt
"Franchise Supply Customers" means electricity customers who within the
most recent twelve month period have an average peak demand ("Peak Demand")
in the three months of highest demand during such period below the
Franchise Limit
"Grid" means the UK's national grid transmission system
"GWh" means gigawatt hours
"Ionica" means Ionica Group plc
"IT" means information technology
"km" means kilometers
"kV" means kilovolts
"kW" means kilowatts
"kWh" means kilowatt hours
"London Electricity" means London Electricity plc
"LV" means low voltage
"March 1998 Green Paper" means the UK Government's Green Paper of March
1998 entitled "A Fair Deal for Consumers: Modernizing the Framework for
Utility Regulation"
"MW" means megawatt
"National Power" means National Power plc
"NCE" means New Century Energies, Inc.
"NETA" means the new electricity trading arrangements
"NFFO" means the Non-fossil fuel obligation - the obligation of the RECs to
obtain a specified amount of generating capacity from non-fossil fuel
sources
"NGC" means the National Grid Company plc, which is wholly-owned by NGG
"NGG" means the National Grid Group plc
"Non-Franchise Supply Customers" means electricity customers who within the
most recent twelve month period have an average peak demand ("Peak Demand")
in the three months of the highest maximum demand during such period above
the Franchise Limit
"NSP" means Northern States Power Company
"OFFER" means the Office of Electricity Regulation, the body appointed by
the Government of the UK to regulate the electricity industry in Great
Britain. This body has now been replaced by Ofgem.
"OFGAS" means the Office of Gas Supply, the body appointed by the
Government of the UK to regulate the gas industry in Great Britain. This
body has now been replaced by Ofgem.
"Ofgem" means the Office of Gas and Electricity Markets, the body appointed
by the UK government effective June 1999 to regulate the gas and
electricity industries in Great Britain.
"Own-generation limits" means the limit imposed by the PES license on the
extent of generation capacity in which a REC may hold an interest
"Peak Demand" means the maximum electricity demand recorded in any half-
hourly period at the customer's site by the appropriate metering
"PES" means public electricity supplier
"Pool" means the wholesale trading market for electricity in England and
Wales
"Pooling and Settlement Agreement" means the agreement which governs the
constitution and operation of the Pool and the calculation of payments to
and from generators and suppliers
"PowerGen" means PowerGen plc
"Predecessor Company" means Yorkshire prior to its acquisition, indirectly,
by Yorkshire Group
"Pro Forma Fiscal Year 1997" means unaudited pro forma information for the
Fiscal Year ended March 31, 1997
"REC" means one of the 12 regional electricity companies in England and
Wales licensed to distribute and supply electricity
"RPG" means Regional Power Generators Limited
"Scottish and Southern" means Scottish and Southern Energy plc
"Scottish Power" means Scottish Power plc
"SEC" means the US Securities and Exchange Commission
"SFAS" means US Statement of Financial Accounting Standards
"Successor Company" means Yorkshire Power Group Limited and its
subsidiaries
"Supply" means the supply of electricity and gas
"SWALEC" means South Wales Electricity plc
"SWEB" means South Western Electricity plc
"Swing Contracts" means gas purchase contracts that contain options which
enable the buyer to vary the volumes of gas taken under the contract from
time to time (typically on a daily basis). The major obligation of the
buyer is to purchase a specific minimum volume over the contract period.
"Transco" means BG Transco plc
"Transition Period" means the nine-month period beginning April 1, 1999 and
ending December 31, 1999
"UK" means the United Kingdom
"Unit" means kWh
"US" means the United States of America
"US GAAP" means Generally Accepted Accounting Principles in the US
"US Parents" means AEP and NCE
"YCL" means Yorkshire CoGen Limited
"Yorkshire" means Yorkshire Electricity Group plc and its subsidiaries
"Yorkshire Finance" means Yorkshire Power Finance Limited, a subsidiary of
Yorkshire Power Group Limited
"Yorkshire Finance 2" means Yorkshire Power Finance 2 Limited, a subsidiary
of Yorkshire Power Group Limited
"Yorkshire Group" means Yorkshire Power Group Limited and its subsidiaries
"Yorkshire Holdings" means Yorkshire Holdings plc, a subsidiary of
Yorkshire Power Group Limited
"Yorkshire Trust" means Yorkshire Capital Trust I
PART I
ITEM 1. BUSINESS
YORKSHIRE GROUP AND THE US PARENTS
YORKSHIRE GROUP
Yorkshire Power Group Ltd 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 joint acquisition
by the US Parents of Yorkshire, one of the twelve RECs in England and
Wales. Each of the US Parents holds an indirect 50% interest in Yorkshire
Group. 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.
YORKSHIRE FINANCE AND YORKSHIRE FINANCE 2
Yorkshire Finance and Yorkshire Finance 2 were incorporated under the
laws of the Cayman Islands. Yorkshire Finance was incorporated in August
1997 and Yorkshire Finance 2 in January 2000. Both companies exist solely
for the purpose of operating as financing vehicles for Yorkshire Group and
its affiliates.
YORKSHIRE
Yorkshire is one of twelve RECs in England and Wales licensed to
distribute and supply 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, agricultural and
industrial customers in the Authorized Area. The majority of the
distribution business is a regulated monopoly. Yorkshire's Supply business
consists of the purchase and supply of electricity and gas, primarily to
customers within the Authorized Area, in the competitive market.
Yorkshire changed its fiscal year end from March 31 to December 31
beginning with the accounting period April 1, 1999 to December 31, 1999.
YORKSHIRE TRUST
Yorkshire Trust is a statutory business trust created under Delaware
law pursuant to the filing of a certificate of trust with the Delaware
Secretary of State on February 4, 1998. Yorkshire Trust will terminate in
2043, but may dissolve earlier, as provided in the agreement. Yorkshire
Trust exists exclusively to act as a financing vehicle for Yorkshire Group,
through its holding certain debt instruments issued by Yorkshire Finance
and the issuance of its Trust Securities.
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 3 million retail customers in
portions of the states of Indiana, Kentucky, Michigan, Ohio, Tennessee,
Virginia and West Virginia. Certain other subsidiaries of AEP own and
operate a 1,900 mile natural gas pipeline and related facilities in
Louisiana. AEP also directly owns all the outstanding common stock of AEP
Resources and, indirectly, of AEP Resources International Limited, whose
primary 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, 1999,
AEP had consolidated operating revenues of $6.9 billion and had
consolidated assets of approximately $21.5 billion.
On December 22, 1997, AEP and CSW, a Dallas, Texas based electric
utility holding company that is registered under the 1935 Act, announced
that their Boards of Directors had approved and signed a definitive merger
agreement. 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 of England
("SEEBOARD"). The Minister for Consumers and Corporate Affairs of DTI has
announced that, consistent with the advice of the Director General of Fair
Trading and the views of Ofgem, he has decided not to refer the AEP/CSW
merger to the Competition Commission. In this connection, AEP, Yorkshire
and SEEBOARD gave DTI certain assurances as to the future conduct of the
businesses of Yorkshire and SEEBOARD. The AEP/CSW merger is conditional
upon the approvals of various state and federal regulatory agencies.
Assuming the receipt of all required approvals, the AEP/CSW merger is
currently expected to be completed in the first half of 2000.
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
electric customers in portions of the states of Colorado, Texas, New
Mexico, Wyoming, Oklahoma and Kansas and approximately 1.1 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, transportation, distribution and sale of natural gas.
In the year ended December 31, 1999, NCE had consolidated operating
revenues of $3.4 billion and had consolidated assets of approximately $8.3
billion.
On March 24, 1999, NCE and NSP entered into a definitive merger
agreement which provides for a strategic business combination of NCE and
NSP. NSP owns three utility companies which provide electricity to about
1.5 million customers in portions of Minnesota, Wisconsin, North Dakota,
Michigan and South Dakota and transport and distribute natural gas to more
than 500,000 customers in Minnesota, Wisconsin, North Dakota, Michigan and
Arizona. Through its wholly-owned subsidiary NRG Energy, Inc., NSP owns
various interests in a number of independent power projects and other
businesses in the US and around the world, including projects in the UK,
Australia, Germany and Latin America. The consummation of the NCE/NSP
merger is subject to certain closing conditions and various regulatory
approvals. The NCE/NSP merger is expected to be complete by mid-2000.
YORKSHIRE'S BUSINESSES
DISTRIBUTION BUSINESS
Yorkshire's distribution business consists of the ownership, management
and operation of its electricity distribution network within the Authorized
Area. The primary activity of the distribution business is the receipt of
electricity from 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 electricity supply business or by other
suppliers) to consumers in the Authorized 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 revenue cap regulatory framework
providing economic incentives to operate in a cost effective manner. See
"The Electric Utility Industry in Great Britain".
Distribution Business Customers, Units Distributed, Revenues and Operating
Profit
The Authorized Area covers approximately 10,000 square km (3,860 square
miles) from the Pennine uplands in the west, and the cities of Leeds,
Bradford and Sheffield, to the City of Hull, the ports of the Humber
estuary and the eastern coastline. It encompasses the counties of West
Yorkshire, East Yorkshire and almost all of South Yorkshire, together with
parts of North Yorkshire, Derbyshire, Nottinghamshire, Lincolnshire and
Lancashire. The regional economy is diverse. The traditional heavy
industries of iron and steel, coal mining, textiles and engineering
continue to contribute to the regional economy, but their overall
significance has declined, particularly in the last decade. During this
period, other industries, such as chemicals and food and drink, have
expanded, as have service sector activities such as finance, retailing and
leisure. The region is well served by road and rail networks, has three
regional airports, and the seaports of the Humber estuary provide access to
European markets.
The following table sets out details of 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>
At December 31, At March 31,
1999 1999 1998
<CAPTION>
<S> <C> <C> <C>
Number of customers connected
Residential 1,922,091 1,955,110 1,930,719
Commercial 116,432 126,768 126,812
Industrial 19,319 21,034 21,455
Total 2,057,842 2,102,912 2,078,986
Transition Period Fiscal Year
1999 1998
Electricity distributed (GWh)
Residential 5,254 7,351 7,149
Commercial 4,385 6,135 5,800
Industrial 6,927 9,629 10,484
Total 16,566 23,115 23,433
(In Millions)
Distribution operating revenues (POUNDS)238 (POUNDS)322 (POUNDS)309
Distribution operating income (POUNDS)111 (POUNDS)153 (POUNDS)154
</TABLE>
The amounts shown above for operating revenues and operating income
have been taken from the consolidated financial statements.
Competition in the Distribution Business
Yorkshire has not experienced significant competition in its
distribution business and believes that the cost of providing a duplicate
distribution network connected to the Grid would be prohibitive. To the
extent a customer may invest in its own on-site electric generating plants,
however, such customers 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.
Since 1995 work to connect customers to the network has become
contestable as customers are able to provide their own network connections
by employing an approved contractor. Some work, such as design and
energizing the connection has remained non-contestable and is still carried
out by Yorkshire. Ofgem is looking for ways to increase competition in the
provision of connections. Since 1995, in the Authorized Area, only one
connection has been provided other than by Yorkshire.
Data Management Services
With the recent introduction of competition to the electricity supply
market, customers are now able to select their electricity supplier.
Significant additional costs have been incurred by the distribution
business to develop new systems for services 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.
The phase-in of competition in the electricity supply market was
completed for all PESs in May 1999. The total cost for re-engineering and
information technology work was (POUNDS)67 million. Of such amount,
approximately (POUNDS)19 million was accounted for in Fiscal Year 1997,
(POUNDS)31 million in Fiscal Year 1998, (POUNDS)16 million in Fiscal Year
1999, and (POUNDS)1 million in the Transition Period. Ofgem made proposals
in October 1999 (which were accepted by Yorkshire) to allow Yorkshire
recovery of (POUNDS)25 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 has been
capitalized as such amount is expected to provide future benefits to the
Supply business, with the balance of (POUNDS)27 million being expensed. Of
the amount expensed, approximately (POUNDS)19 million was expensed in
Fiscal Year 1997, (POUNDS)2 million was expensed in Fiscal Year 1998 and
(POUNDS)5 million was expensed in Fiscal Year 1999. The remaining
(POUNDS)1 million was expensed in the Transition Period. The Pool cost
recovery mechanism referred to above pursuant to which (POUNDS)7 million is
expected to be recovered will be terminated with the introduction of NETA.
It is expected that the arrangements under NETA will allow the recovery of
1998 costs as planned.
OFFER also made proposals in October 1997 (which were accepted by
Yorkshire) to provide an annual allowance of (POUNDS)3 million for the
period 1998 through 2000 to cover related operating costs. This allowance
has been retained for the period to 2004/05 under Ofgem's final
distribution price control formula published in December 1999 and in
addition the set-up cost allowance of (POUNDS)5 million per year has been
extended for a further two years from 2002/03 to 2004/05. The December
1999 distribution price control final proposal divides the data management
services allowance which covers both the set up and operating costs
described above between the electricity supply and distribution businesses
with two thirds of the allowance remaining in the distribution business.
This reflects the transfer of meter reading and data collection activities
to electricity supply.
For further details of the December 1999 final distribution price
control proposal see Part I, Item 1. "The Electric Utility Industry in
Great Britain - Regulation Under the Electricity Act - Regulatory
Developments - Price Control Reviews".
Strategy for the Distribution Business
Yorkshire's distribution business 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 the
Transition Period Yorkshire invested (POUNDS)120 million in the
distribution system, of which (POUNDS)86 million represented capital
improvements in new substations, cables and overhead lines and (POUNDS)34
million represented expenditures related to the operation, repair and
maintenance of the distribution system. Yorkshire's investment in DAMS has
centralized information previously stored in over sixty computerized and
paper-based systems into one integrated computerized system. The
centralization of such information has improved both access to and quality
of information which is vital to the operation and management of an
efficient distribution system.
Yorkshire is also continuing to maintain and improve its responses to
system faults. In the Transition Period Yorkshire restored services to
93.67% of all customers affected by faults within three hours and on
average a Yorkshire customer was without power for only 41.36 minutes.
Distribution Facilities
Electricity is transported across the Grid at 400 kV or 275 kV to 20
grid supply points within Yorkshire's distribution network, where NGC
transforms the voltage to 132 kV, 66 kV and 33 kV for entry into
Yorkshire's distribution system.
At December 31, 1999, Yorkshire's distribution system consisted of:
LV 11kV Above 11kV
Number of metered supplies 2,056,144 1,672 26
Total length of circuits 30,250km 20,438km 4,973km
Percentage underground 91.6% 52.0% 30.4%
The primary distribution system consists of 20 grid supply points from
the Grid, an additional 66 supply points and 360 primary substations. At
December 31, 1999, the installed transformer capacity with a secondary
voltage higher than 650 volts at these substations was 20,693,980 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 13,304 indoor
substations, 2,423 outdoor substations and 16,709 pole mounted substations.
At December 31, 1999, the installed transformer capacity with a secondary
voltage less than 650 v was 9,482,501 kVA.
SUPPLY BUSINESS
Electricity Supply
Yorkshire's electricity supply business consists of selling electricity
to customers, purchasing such electricity and arranging for its
distribution to those customers. Under its PES License, Yorkshire had an
exclusive right to supply electricity to Franchise Supply Customers between
1990 and 1998. The electricity supply business inside the Authorized Area
is now fully open to competition.
Competition in the Electricity Supply Business
The electricity supply business was divided between Franchise Supply
Customers within the Authorized Area, and Non-Franchise Supply Customers,
inside and outside the Authorized Area. The Franchise Limit was lowered to
100 kW in April 1994 allowing competition in the supply of electricity for
customers with maximum demands above the Franchise Limit while Franchise
Supply Customers remained subject to price regulation. On September 14,
1998, phased competition was introduced to the domestic and small business
electricity markets in the UK. This process was completed for all PES
customers in May 1999. OFFER, however, introduced transitional price
regulation for Designated Customers for an initial period of two years from
April 1, 1998. The price controls required a change from April 1, 1999, of
3% below the level of inflation and an adjustment to allow for changes to
the Fossil Fuel Levy. These requirements resulted in a reduction of 0.06%
to prices for Designated Customers compared to prices in Fiscal Year 1999.
In December 1999, Ofgem issued final proposals on the supply price
control review. These proposals contained a real price reduction in
Yorkshire's standard domestic tariff of 3.6% from the year beginning April
1, 2000. This incorporated a reduction of 7.3% as a consequence of the
distribution price control review. The proposal also provided for a nominal
price freeze for the year beginning April 1, 2001. There can be no
assurance that Yorkshire will be able to set prices to the maximum allowed
by Ofgem and retain customers, due to competitive pressures. For further
details of the December 1999 electricity supply price control review see
Part I, Item 1. "The Electric Utility Industry in Great Britain -
Regulation Under the Electricity Act - Regulatory Developments - Price
Control Reviews".
Electricity Supply Risk Management
Yorkshire's current electricity supply risk management efforts are
intended to approximately hedge the risks associated with the purchase and
sale of electricity resulting from Pool price volatility. In the existing
wholesale electricity market, virtually all electricity generated in
England and Wales is sold by generators and bought by suppliers through the
Pool. The most common contracts for electricity supply to business
customers are for twelve-month terms and contain fixed rates. Similarly,
domestic and small business tariffs 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
electricity supply customer) to the extent that it has not hedged such
risk. Yorkshire substantially hedges purchase price risk by employing a
variety of risk management tools, including management of its electricity
supply contract portfolio, hedging contracts and other means which mitigate
the risk of Pool price volatility. Yorkshire employs risk management
methods to maximize its return consistent with an acceptable level of risk.
Under its current PES License, Yorkshire has a price cap on the prices
it may charge its Designated Customers in the Authorized Area. From April
2000, the maximum price cap will apply only to domestic customers in the
Authorized Area. Because the maximum price is fixed for these customers,
Yorkshire is at risk from upward movements in purchase costs. This risk is
mitigated by hedging purchase contracts, mainly through CFDs.
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. Yorkshire's
electricity supply demand for the Calendar Year 1999 was, and is expected
to be in 2000, substantially hedged through various types of agreements,
including CFDs.
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.
The current system of wholesale purchasing through the Pool is under
review, and NETA is targeted to be in place by October 31, 2000. NETA
will replace the Pool. NETA will require participants to submit half hourly
forecasts of electricity supply and demand and endeavor to balance contract
positions and metered volumes. There will be incentives, in the form of
imbalance payments, for generators and suppliers to balance their
supply/demand position. The precise nature of the incentives is currently
being debated. Yorkshire is redefining current business operations in
order to manage and exploit the new market by seeking to predict its
customers' demand for electricity on a short-term basis as accurately as
possible and to maximize the trading opportunities, while effectively
managing the risks of imbalances. See Part I, Item 1. "The Electric
Utility Industry in Great Britain - Regulation Under the Electricity Act -
Regulatory Developments - New Electricity Trading Arrangements".
On January 31, 2000, Ofgem issued final guidelines for its proposed
license condition to prevent abuse of the wholesale electricity market by
generators. The guidelines have been amended following a period of
consultation with the industry and other interested parties.
The seven generators who will initially be covered by the license
condition were chosen on the basis of their share of total output and their
ability to set prices in the Pool. The generators are National Power,
PowerGen, TXU Europe, Edison Mission Energy, British Energy, Magnox and
AES.
The guidelines set out examples of abusive and non-abusive behavior and
procedures Ofgem will follow when investigating possible market abuse. The
proposed market abuse condition prohibits action that would materially
prejudice the efficient balancing of the transmission system, limiting
generation or capacity in such a way as to increase wholesale prices and
unduly discriminatory pricing policies.
British Energy, National Power and PowerGen have rejected the good
market behavior license clauses proposed by Ofgem and they are now likely
to be referred to the Competition Commission.
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-condensate field (the "Armada Field") for
approximately (POUNDS)27.8 million. As of December 31, 1999, the Armada
Field, which has a productive life of approximately 10 years, had initial
proven resources of approximately 1.2 trillion cubic feet (84 billion cubic
feet net to Yorkshire) of gas and 64 million barrels of oil and oil
equivalents (4.4 million barrels net to Yorkshire). Delivery of such gas
from the Armada Field began in October 1997. The initial development costs
associated with the Armada Field have been lower than originally
anticipated. The reduction of bottle-necks has allowed the field to
increase rates of production substantially. As of December 31, 1999,
Yorkshire had invested (POUNDS)60 million in the Armada Field including the
initial acquisition costs. The net book value of the investment at
December 31, 1999 was (POUNDS)45 million.
Yorkshire markets gas to all sectors of the gas market which has been
totally open to competition since May 1998. By December 31, 1999,
Yorkshire had entered into contracts and supplied gas to more than 315,000
residential customers. Gas is sourced from Yorkshire's interest in the
Armada Field, a purchase agreement with a major gas supplier designed to
meet the majority of the requirements of Yorkshire's residential gas
market, Swing Contracts and purchases on the spot market which are designed
to give Yorkshire a balanced gas purchase portfolio. Yorkshire utilizes
risk management methods, in relation to gas purchasing and supply,
including storage and an interruptible customer portfolio, which are
designed to maximize its return consistent with an acceptable level of
risk. A system to evaluate and enable effective management of risk in gas
trading was installed at the beginning of Calendar Year 1999. The system
enables greater control of all transactions including daily evaluation of
key parameters such as value at risk and profit and loss positions for each
business unit of Yorkshire. Sale and purchase confirmations, invoicing and
credit checking are also carried out or facilitated by this system.
Strategy for the Supply Business
Yorkshire's Supply strategy consists of (i) protecting and sustaining
Yorkshire's electricity market position within the Authorized Area, (ii)
cross-selling gas to its existing customer base, (iii) securing market
share for the supply of gas and electricity outside the Authorized 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 Supply customers in the
Authorized Area by purchasing electricity at competitive rates from power
generators in the UK and providing high quality customer service. In doing
so, in the Transition Period, Yorkshire maintained a significant portion of
its existing business. Yorkshire is also applying this strategy to Supply
customers outside the Authorized Area.
Yorkshire continues to take significant steps toward developing its gas
supply capabilities. By retaining its existing customer base and expanding
into the new markets Yorkshire now offers 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.
Customer Service
Yorkshire remains committed to delivering the highest standards of
customer service and continues to build on its 'Customer Service
Initiative' which was originally launched in 1995.
Yorkshire has carried out research with existing and potential
customers, asking what is the ideal behavior of an energy supplier. These
brand values have been confirmed for the competitive marketplace and have
been communicated throughout Supply through the 'Mission Possible'
initiative, a communication program which helps to ensure that all staff
who deal with customers are aware of, and contribute fully to, Yorkshire's
mission of delivering customer service excellence.
Results of the Supply Business
The following table sets forth the volume of electricity sold, by
greater than 100kW supply customers and less than 100kW supply customers,
as well as electricity and gas supply operating revenues and operating
income:
Transition Fiscal Year
Period
1999 1998
Volume (GWh):
>100kW supply customers 8,647 10,732 9,747
<100kW supply customers (Franchise
up to 1998) 7,981 10,944 10,489
Total 16,628 21,676 20,236
(In Millions)
Supply operating revenues (POUNDS)997(POUNDS)1,346(POUNDS)1,222
Supply operating income (POUNDS)39 (POUNDS)69 (POUNDS)33
The amounts shown above for operating revenues and operating income
have been taken from the consolidated financial statements. The basis of
segment reporting was changed during the Transition Period and the
financial statements for Fiscal Years 1999 and 1998 have been restated on
this basis.
BUSINESS STREAMLINING
Yorkshire plans to streamline its distribution and Supply workforces
and has announced a reduction of approximately 350 positions during 2000
and a further 75 positions from the distribution business in 2001.
Yorkshire is consulting fully with the trades unions on the extent of the
changes and hopes to achieve the redundancies through a voluntary program.
A provision of approximately (POUNDS)7 million has been recorded in January
2000 to reflect the cost of the 350 reductions in 2000.
Such streamlining is part of the overall program of reducing
controllable costs in response both to Ofgem's final distribution and
electricity supply price control reviews and to increasing competition in
the Supply business.
For further details of both price control reviews and also of the
controllable cost reduction program see Part I, Item 1. "The Electric
Utility Industry in Great Britain - Regulation Under the Electricity Act -
Regulatory Developments - Price Control Reviews".
BUSINESS SEPARATION
During 1998 and 1999 Yorkshire has implemented 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 has resulted in the distribution and Supply businesses of
Yorkshire becoming more self-sufficient (sharing common services where it
is effective and efficient to do so) and in a significant down-sizing of
the corporate center.
On May 13, 1998, OFFER issued a consultation paper on the separation of
the distribution and electricity supply businesses of PESs. Since that
date, there have been a number of further Ofgem consultations on this issue
to which Yorkshire has responded.
The Utilities Bill, published in January 2000, includes a requirement
for separate licensing of electricity supply and distribution and the
introduction of a ban on electricity supply and distribution licenses being
held by the same legal entity (which effectively means that the electricity
supply and distribution businesses of PESs would have to be held by
separate companies).
In October 1999, Ofgem addressed business separation costs in its
proposals on the distribution price control review. This document included
an allowance for separation costs of (POUNDS)7.5 million for each REC's
distribution business over the next 5 years. Ofgem also proposed that
electricity supply would receive an allowance of (POUNDS)200,000 per year
for the next two years for separation costs. Although this was in addition
to the distribution allowance, commercial pressures in the competitive
electricity supply market may limit the ability to actually recover these
allowed amounts.
In November 1999 Yorkshire submitted a business separation compliance
plan to Ofgem. The compliance plan includes the actions Yorkshire will
need to undertake in order to implement business separation, including the
appointment of a compliance officer (as required by the new condition 12A
of the PES License), a review of governance and management issues and the
separate branding of the electricity supply and distribution businesses.
It is also proposed to develop internal service level agreements for
remaining common services, including IT systems.
As part of their proposals for business separation, Ofgem have issued a
proposed modification to condition 12 of the PES License: "Restriction on
Use of Certain Information and Independence of the Distribution Business".
Under this proposed condition any information relating to or deriving from
the management or operation of the distribution business shall be treated
as confidential. The condition requires that confidential information is
protected by the full operational separation of electricity supply and
distribution businesses.
It is expected that Ofgem will issue a direction against its separation
requirements on the basis of the compliance plan. There does, however,
remain a risk that Ofgem may extend the scope of the separation
requirements based on a stricter interpretation of condition 12. This
would lead to increased costs.
On December 20, 1999, Yorkshire accepted the fundamental principles of
the business separation proposals on the basis of the proposed modification
of condition 12 and the acceptance of the compliance plan submitted by
Yorkshire to Ofgem without significant changes. Yorkshire intends to manage
costs within the Ofgem allowance.
On December 22, 1999, Yorkshire agreed to give assurances to Ofgem that
full operational separation would be undertaken in the event of a merger
between Yorkshire and SEEBOARD. The cost allowance for business separation
would not include any costs arising under such assurances.
The compliance plan does not include actions to conform with the
published requirements of the Utilities Bill. The Utilities Bill will
impose additional obligations in terms of the legal separation of REC
electricity distribution and supply businesses. For further details of the
Utilities Bill see Part I, Item 1. "The Electric Utility Industry in Great
Britain - Regulation Under the Electricity Act - Regulatory Developments -
Review of the Regulatory Framework: The Utilities Bill".
In February 2000 Ofgem issued a draft proposed new PES License
condition 12B "Restriction on use of certain information relating to the
Supply Business" and further drafts of condition 12 and condition 12A. The
implementation date for these proposed modifications is April 1, 2000. The
new condition 12B is intended to provide protection to electricity
suppliers who take meter reading and data services from other supply
businesses until competition in these businesses is sufficiently developed.
Ofgem view the need for the proposed condition 12B as a temporary measure
which would fall away by April 2001 at the latest. Yorkshire is seeking to
confirm with Ofgem that these proposed PES License modifications would not
add additional business separation requirements to those agreed in December
1999.
THE ELECTRIC UTILITY INDUSTRY IN GREAT BRITAIN
SUMMARY
The electric utility industry in England and Wales is divided into
various functions, with different companies participating in the respective
functions. There has, however, been a recent shift towards more vertically
integrated companies which are similar to traditional US utilities which
generally participate in electricity generation, distribution and supply.
INDUSTRY STRUCTURE
Great Britain has two separate but connected electricity markets, each
with a different commercial framework. Both markets are subject to a
licensing regime which exists for the electric industry both in England and
Wales as well as in Scotland.
In England and Wales a significant amount of generating capacity is
owned by three generators: National Power, PowerGen and Nuclear Electric
plc, a subsidiary of British Energy. Competition in generation has
increased over the last decade as RECs and other new entrant generators
have constructed new plants and as imports through the interconnections
with Scotland and France have grown. In addition, pursuant to undertakings
given to OFFER, National Power and PowerGen have disposed of an aggregate
of 17,129 MW of generating capacity as both companies seek electricity
supply acquisitions. In England and Wales electricity is transmitted
through the Grid by NGC and distributed by the twelve RECs in their
respective authorized areas. The opening of the electricity supply market
to full competition, which was completed in May 1999, now means that
customers are free to choose their electricity supplier.
In Scotland there are two vertically integrated companies, Scottish
Power and Scottish and Southern each generating, transmitting, distributing
and supplying electricity within their respective authorized 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 Scottish and Southern.
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 EdF, through which electricity can be transferred between France
and England and Wales.
Virtually all electricity generated in England and Wales is currently
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.
There is no equivalent to the Pool in Scotland, but Scottish Power and
Scottish and Southern are obligated by their licenses to offer electricity
for sale to second-tier suppliers. They are also required to provide
access to their transmission and distribution systems on a non-
discriminatory basis to competing suppliers and generators.
The current system of wholesale purchasing of electricity through the
Pool is under review, and a new system of trading arrangements, known as
NETA, is targeted to be in place by October 31, 2000. For further details
of this review of trading arrangements see Part I, Item 1. "The Electric
Utility Industry in Great Britain - Regulation Under the Electricity Act -
Regulatory Developments - New Electricity Trading Arrangements".
Industry combinations involving (i) Southern Electric plc and Scottish
and Southern, (ii) PowerGen and East Midlands Electricity plc (iii)
National Power and the supply business of Midlands Electricity plc, (iv)
EdF and London Electricity, (v) London Electricity and the electricity
supply business of SWEB, and (vi) British Energy and the electricity and
gas supply business of SWALEC, have raised a number of regulatory and
competitive issues in the UK electric utilities industry. National Power's
acquisition of the supply business of Midlands Electricity plc resulted in
the first separation of a REC's distribution and electricity supply
businesses and the introduction of specific license conditions to provide a
framework for such separation.
On December 14, 1999, TXU Europe, the parent company of Eastern
Electricity, and London Electricity, a subsidiary of EdF, announced their
proposal to establish a joint venture company to maintain and operate the
two companies' distribution networks. The ownership of the assets will
remain separate and the responsibility of the two parent distribution
companies. The two companies also propose that licenses continue to be
held separately with their supply businesses continuing to operate
separately as competitors. The parent companies anticipate that the new
joint venture company will seek to obtain contracts for the provision of
network services to other utility network asset owners in the gas,
electricity and water industries.
On November 17, 1999, National Power announced proposals to restructure
into two separate corporate entities: an integrated UK energy business
("npower") and an international power business ("International Power"). The
restructuring is scheduled to take place during its next fiscal year.
National Power has also recently disposed of a substantial amount of
generating capacity.
The consummation of these combinations and the resolution of the
attendant regulatory and competitive issues may change the conduct of
Yorkshire's business in the future. The nature and magnitude of any such
change cannot be determined at this time.
In response to competitive and regulatory changes, Yorkshire may, from
time to time, consider various strategic initiatives. These may include
combinations with other entities, internal restructuring and dispositions
of assets or businesses or portions thereof. No assurance can be given as
to whether any such initiative will be pursued or will occur or as to the
ultimate effect of any such initiatives on the financial condition or
competitive position of Yorkshire.
INDUSTRY BACKGROUND
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 electricity 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 Ofgem.
Distribution Price Regulation: Background
Revenue from the distribution business is controlled by a formula
principally based on P x (1+(RPI-Xd)) where Xd is currently 3% (the
"Distribution Price Control Formula"). P is the previous year's maximum
average price per unit of electricity distributed. 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. The
Retail Price Index ("RPI") is a measure of inflation, and equals the
percentage change in the UK RPI between the six month period 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 a
RECs business costs, the RPI calculation may not accurately reflect the
price changes affecting RECs. The Xd factor is established by Ofgem
following review. This formula determines the maximum average price per
unit of electricity distributed (in pence per kilowatt hour) which a 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 previous distribution price control review was conducted in July
1995. As a result of this review regulated distribution prices for the
four year period ending on March 31, 2000, required 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.
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 a given year, the maximum average charge per unit
distributed in the following year 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 Ofgem.
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 Ofgem 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 Ofgem 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, Ofgem 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 distribution
revenue. However, OFFER indicated when making the proposals for this split
in the 1995 price control that there should be no presumption that this sum
would be assigned to a metering business.
Meter provision and meter operation activities relating to network
connections, which will be competitive from April 1, 2000, are nevertheless
subject to the Distribution Price Control Formula. Ofgem initially
indicated that it would review price control provisions if a PES
distribution business lost a significant volume of meter related work to
the competitive market. Ofgem have now included a term in the Distribution
Price Control Formula which would reduce the allowed maximum charge per
unit of electricity distributed in respect of cash cost reductions
(excluding costs of a non-recurring nature) resulting from the provision of
these metering services by third parties. 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, OFFER 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.
Distribution Price Regulation from April 1, 2000
In early December 1999, Ofgem issued final proposals in its review of
the Distribution Price Control Formula. These proposals were in line with
those published in October 1999, and are to be effective for the five year
period beginning April 1, 2000. The proposals included a 15% reduction in
allowed revenue for Yorkshire and a further 8% transfer of costs to
Yorkshire's electricity supply business. Ofgem proposed that the X factor
would continue to be 3%. The overall reduction in distribution revenues for
Yorkshire would be 23%. Also included in the proposals was the allowance
for separation costs previously discussed under Part I, Item 1.
"Yorkshire's Businesses - Business Separation".
If accepted, these proposals would apply from April 1, 2000. On
December 20, 1999, Yorkshire indicated its intention to accept these
proposals.
For further details of the distribution price control review proposals
see Part I, Item 1. "Yorkshire's Businesses - Distribution Business - Data
Management Services" and "The Electric Utility Industry in Great Britain -
Regulation Under the Electricity Act - Regulatory Developments - Price
Control Reviews".
Metering & Data Services
The December 1999 final proposals for amendments to the distribution
price control, if implemented, will result in a number of changes in
respect of metering and data services. These include the transfer of meter
reading, data aggregation and data processing activities from distribution
to electricity supply from April 1, 2000 onwards. The costs for these
services are included in the 8% transfer of costs from distribution to
electricity supply.
SUPPLY OF ELECTRICITY
Licensed Suppliers
Subject to minor exemptions, all electricity customers in Great Britain
must be supplied by a licensed supplier. Licensed suppliers purchase
electricity and make open access use of the transmission and distribution
networks to deliver electricity to customers' premises.
There are currently two types of licensed suppliers: public electricity
(or first-tier) suppliers, also known as PESs, and second-tier suppliers.
PESs include the RECs in England and Wales, Scottish Power and Scottish and
Southern. Second-tier suppliers include National Power, PowerGen, Nuclear
Electric, Scottish Power, Scottish and Southern and other PESs (including
RECs supplying outside their Authorized Areas) and a number of independent
second-tier suppliers.
Second-tier suppliers have license conditions restricting their supply
to certain premises. This mechanism provided for the enforcement of the
PES Franchise and the phased opening of the electricity supply market to
full competition.
Electricity Supply Price Regulation: Background
Between 1990 and 1998 the supply of electricity to supply customers of
PESs was subject to "pass-through" price control. The maximum average
charge per unit of electricity supplied (in pence per kilowatt hour) was
controlled by a formula principally based upon (P x (1 + (RPI-Xs)) + Y)
(the "Supply Price Control Formula"). The initial value of Xs was set at 0
for all the RECs on March 31, 1990. The Supply Price Control Formula was
reviewed by OFFER with effect from April 1, 1994, when the Xs factor was
set at 2% for all the RECs. This applied until March 31, 1998. P was the
previous year's maximum average price per unit of electricity supplied (in
pence per kilowatt hour) that related to the REC electricity supply
business's own costs and margin. RPI was a measure of inflation, equaling
the percentage change in the UK Retail Price Index between the six month
period 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 each REC's business costs, the RPI calculation may not accurately
reflect the price changes affecting each REC. 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 were 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 is 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.
The current supply price control, which was implemented on April 1,
1998, and is effective until March 31, 2000, takes the form of a series of
price caps on the tariffs applicable to Designated Customers in the
Authorized Area. These controls also required an additional 3% below
inflation reduction which became effective on April 1, 1999. The automatic
pass-through of costs previously passed through to residential and business
customers below 100kW, consisting primarily of purchased power costs and
the correction factor, which annually adjusted prices for any imbalance
between forecast and actual costs, were both discontinued from April 1,
1998. From April 1, 2000, electricity priced within the allowed level will
need to be secured and purchase price risk managed accordingly. If costs
turn out significantly below the level allowed by the new price control,
Ofgem may take steps to ensure that tariffs are reduced. Price caps for
Fiscal Year 1999 took account of the residual correction factor from Fiscal
Year 1998.
Electricity Supply Price Regulation From April 1, 2000
In early December 1999, Ofgem issued final proposals for a form of
transitional price regulation for electricity supply businesses for an
additional two years. Such proposals would result in a real price reduction
in Yorkshire's standard domestic tariff of 3.6% for the year beginning
April 1, 2000. This incorporated a 7.3% distribution price reduction as a
result of the distribution price control review. The proposal also provided
for a nominal price freeze for the year beginning April 1, 2001.
Yorkshire believes that competitive pressures in the market may require
it to charge supply prices which are lower than the maximum prices
established by Ofgem. If Yorkshire charges such lower prices, the result
will be a further reduction in supply revenues beyond that mandated by
Ofgem. Yorkshire's supply business is under competitive and regulatory
pressure to lower supply prices for classes of customers other than those
subject to Ofgem's final supply price proposals.
On December 20, 1999, Yorkshire indicated its intention to accept these
proposals.
For further details of the electricity supply price control review
proposals see Part I, Item 1. "The Electric Utility Industry in Great
Britain - Regulation Under the Electricity Act - Regulatory Developments -
Price Control Reviews".
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
electricity 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 electricity 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.
On November 30, 1998, OFFER published a framework document describing
the delivery and implementation of revised electricity trading arrangements
based upon market trading arrangements in commodities markets elsewhere.
The arrangements are designed to better facilitate the development of
competition, to ensure maximum transparency and to give all interested
parties the opportunity to participate in the process.
NETA encompasses the design and development of the forward and futures
market, the power exchange, the balancing mechanism and the associated
settlement process required to support these markets. These new wholesale
electricity trading arrangements in England and Wales will replace the
Pool.
It is expected that NETA will be implemented by October 31, 2000. See
Part I, Item 1. "The Electric Utility Industry in Great Britain -
Regulation Under the Electricity Act - Regulatory Developments - New
Electricity Trading Arrangements" for further details relating to NETA.
Fossil Fuel Levy
All the RECs are obliged to obtain a specified amount of generating
capacity from Non Fossil Fuel generators (the "NFFO"). Because electricity
generated from non-fossil fuel plants is generally more expensive than
electricity produced from fossil fuel plants, the Fossil Fuel Levy has been
instituted. Ofgem sets the rate of the Fossil Fuel Levy annually and
collects and redistributes the revenues from it. The current Fossil Fuel
Levy is 0.3% of the value of sales of electricity made in England and Wales
and will be 0.8% of the value of sales of electricity made in Scotland as
from April 1, 2000.
Climate Change Levy
In March 1999, the UK government announced the introduction of a levy
on the business use of energy, designed to encourage energy efficiency,
which will be introduced from April 2001.
In November 1999, the UK government announced amendments to the
proposed climate change levy. Such amendments included:
- - lowering the overall size of the levy from (POUNDS)1.75 billion to
(POUNDS)1 billion by reducing the planned levy rates;
- - offering an 80% discount to energy-intensive sectors that agree to
deliver energy efficiency schemes in line with UK government targets -
the upper limit for discounts had previously been 50%;
- - exempting electricity generated from "new" forms of renewable energy
from the levy, along with "good quality" combined heat and power
plants.
The UK government no longer claims that the tax will be revenue
neutral, stating instead that it will only be revenue neutral for the
private sector. It also reiterated the commitment that the climate change
levy is not a revenue-raising exercise, as there will be no net financial
gain for the public finances.
In December 1999 the UK government published draft legislative clauses
relating to collection of the levy. As currently drafted, the legislation
describes a complex collection process with severe penalties for non-
compliance.
The issue for Yorkshire is the implementation costs of the levy. At the
present time it is not possible to quantify the potential cost to
Yorkshire.
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. This Act
created the institutional framework under which the industry is currently
regulated, including the post of the Director General (the "Regulator"),
who is appointed by the Secretary of State. The Regulator and his staff
were collectively known as OFFER. OFFER has now been replaced by Ofgem.
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 the case of non-acceptance of such
proposals by licensees, making license modification references to the
Competition Commission; 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 electricity supply activities.
The Regulator exercises, concurrently with the Director General of Fair
Trading, certain functions relating to monopoly situations and also to
courses of conduct which have, or are intended or likely to have, the
effect of restricting, distorting or preventing competition in the
generation, transmission or supply of electricity under the Competition Act
(See "UK and EU Competition Law").
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
electricity 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 electricity 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 November 1, 1998, Callum McCarthy became Director General of Gas
Supply and on January 1, 1999, he also became the Director General of
Electricity Supply. Mr McCarthy's appointment was subject to legislation to
amalgamate the regulatory regime for gas and electricity. In addition, in
June 1999, the UK government announced that the new name for the combined
Office of Electricity Regulation and Office of Gas Supply would be the
Office of Gas and Electricity Markets ("Ofgem").
In January 2000 the UK government published a Utilities Bill. This
legislation, if enacted, would amend some of the fundamental
characteristics of the current system of regulation. For further details of
this proposed legislation see Part I, Item 1. "The Electric Utility
Industry in Great Britain - Regulation Under the Electricity Act -
Regulatory Developments - Review of the Regulatory Framework: The Utilities
Bill".
Regulatory Developments
Separation of Distribution and Electricity Supply
For details of the separation of distribution and electricity supply
see Part I, Item 1. "Yorkshire's Businesses - Business Separation" and "The
Electric Utility Industry in Great Britain - Regulatory Developments -
Review of the Regulatory Framework: The Utilities Bill".
Price Control Reviews
Ofgem has undertaken a review of distribution prices in anticipation of
establishing revised distribution price controls to apply from April 1,
2000. On October 8, 1999, Ofgem proposed a 15% reduction in allowed revenue
for Yorkshire and a further 8% transfer of costs to Yorkshire's electricity
supply business. Ofgem proposed that the X factor would continue to be 3%.
The overall reduction in Yorkshire's distribution revenues would be 23%
based on these updated proposals.
Ofgem's October 8, 1999 document also released further details on
business separation, including the allowance for separation costs
previously discussed under Part I, Item 1. "Yorkshire's Businesses -
Business Separation".
On October 8, 1999, Ofgem also issued draft electricity supply price
proposals. Key features of the proposals were :
- - Retention of a supply price cap on standard domestic and Economy 7
tariffs which would apply for a further two years from April 2000 until
March 2002. Ofgem proposed that the cap would not apply to small
industrial and commercial customers or domestic customers supplied on
other tariffs where the market was sufficiently competitive.
- - A reduction in the price cap for domestic electricity prices which
would lead to an average fall in Great Britain of 9.9% for customers on
standard domestic tariffs and 6.4% for those on Economy 7 tariffs.
- - An expectation that PESs would reduce prices below the proposed price
caps if generation prices were to fall as expected after the
introduction of NETA.
If adopted, these proposals would have meant that in the year
commencing April 2000 and ending in March 2001 the real price reduction for
Yorkshire's electricity supply business would have been 10.7% (of which
7.3% was due to lower distribution charges arising from the distribution
price control review) on the standard domestic tariff. The proposed price
reduction for customers on the Economy 7 tariff would not have had a
significant impact on Yorkshire. For the year commencing April 2001 and
ending in March 2002 there was a proposed nominal price freeze. The
proposed reductions to the standard domestic and Economy 7 tariffs would
put pressure on PESs either to pass similar reductions to direct debit and
prompt payment customers or to reduce the discounts given to those
customers. The former would result in a loss of revenue while the latter
may result in a loss of customers.
In December 1999, Ofgem issued its final proposals in both the
distribution and supply price control reviews. The final distribution
price control proposals with respect to Yorkshire are substantially the
same as Ofgem's October 1999 proposals. The final supply price control
proposals differ principally from Ofgem's prior proposals in that the real
price reduction in Yorkshire's standard domestic tariff will be 3.6% from
the year beginning April 1, 2000. This reduction incorporates the 7.3%
reduction arising from the distribution price control review. There will
be no real price reduction in Yorkshire's Economy 7 tariff and there will
also be a nominal price freeze for the year beginning April 1, 2001.
While these final proposals somewhat mitigate the electricity supply
revenue reductions previously proposed by Ofgem, they still result in a
significant decline in allowed revenues for Yorkshire.
On December 20, 1999, Yorkshire indicated to Ofgem its intention to
accept the final proposals.
Yorkshire believes that competitive pressures in the electricity market
may require it to charge supply prices which are lower than the maximum
prices established by Ofgem. If Yorkshire charges such lower prices, the
result will be a further reduction in supply revenues beyond that mandated
by Ofgem. Yorkshire's supply business is under competitive and regulatory
pressure to lower supply prices for classes of customers other than those
subject to Ofgem's final supply price proposals.
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. For further details of this cost reduction program see Part
I, Item 1. "Yorkshire's Businesses - Business Streamlining."
Information & Incentives Program
The December 1999 distribution price control review proposals set out
Ofgem's intention to commence an ongoing program on information and
incentives.
The objective for this program is to try to address some of the
weaknesses which Ofgem believes have been associated with the existing
framework of price regulation:
- - to reduce the emphasis on periodic negotiation with Ofgem;
- - to give clearer incentives in respect of quality of supply; and
- - to improve the incentive to achieve efficiency savings in both
operating costs and capital costs.
To achieve the objectives the program has three major workstreams:
1. To review the information provided to Ofgem on an annual basis and to
standardize across all companies.
2. To introduce incentives for quality of supply. These could have a
financial impact on each PES of plus or minus 2% of price control
revenue in each year from April 2002.
3. To develop a broader suite of performance incentives (or yardsticks) for
implementation at the start of the next review period in 2005.
Ofgem has stated in both the December 1999 distribution price control
proposals and in the December 1999 consultation on the information and
incentives program that (i) it is not intended that this program will
result in a change to the PES's risk profile and hence its cost of capital;
and (ii) where particular targets for quality of electricity supply have
been established as part of the distribution price control review, it is
expected that broadly consistent targets will be reflected in the
additional mechanisms for the duration of the next distribution price
control period.
Standard Conditions for Electricity and Gas Licenses
On November 23, 1999, Ofgem issued proposals for changes to electricity
and gas licenses. Included in the proposals were the separation of
licenses for electricity supply and distribution businesses and the
alignment of the standard conditions of gas and electricity licenses.
These proposals have been made in preparation for the implementation of the
Utilities Bill. The major points of this consultation include:
- - the introduction of a new license for distribution businesses;
- - a single type of electricity supply license replacing the existing
public electricity supply and second tier supply licenses; and
- - standard conditions for each type of electricity license, mirroring gas
licenses.
- - The proposals also request views on:
- - the obligations that should be required in the new electricity
distribution and electricity supply licenses;
- - which obligations should be standard conditions and which should be
special; and
- - the alignment of gas and electricity provisions.
Comments or views are being sought from the industry and other
interested parties before Ofgem advises the government on what might be
appropriate for each type of license.
On February 7, 2000, Ofgem issued a further draft of standard license
conditions for consultation. Yorkshire's management are currently
assessing the impact of this consultation before providing a response.
The scheduled date for implementation of the standard license
conditions for electricity supply and distribution businesses is April
2001.
Financial Ringfencing
In December 1999, Ofgem issued a consultation paper on financial
ringfencing conditions for the standard license conditions to apply to the
separate electricity supply and distribution licenses, provision for which
is made in the Utilities Bill.
The principal proposed changes to the new electricity distribution
license can be summarized as follows:
- - To amend the existing restriction on PES ancillary activities (5% of
aggregate turnover of electricity supply and distribution businesses)
to 2.5% of distribution business turnover. This is on the basis of a
2.5% threshold having been included in Transco's license.
- - To prevent transfers to affiliates of any sum, asset right or benefit
by way of loan, lease, conditional sale or reservation of title or
where consideration of equivalent value is not paid in full on or
before the date of transfer unless the counter-party has and agrees to
maintain an investment grade issuer credit rating or its obligations
are guaranteed by another person having and agreeing to maintain an
investment grade issuer credit rating.
- - To amend the requirements regarding parental undertakings to require
the licensee to comply with any direction made by Ofgem to take
enforcement action in respect of the undertakings, and to extend the
prohibition on the payment of dividends and entry into agreements with
affiliates to include circumstances where such a direction has been
made and the relevant enforcement action remains pending.
- - To require the licensee to seek and maintain an investment grade issuer
credit rating.
- - To include in any compliance certificate required prior to the payment
of dividends confirmation that the licensee has complied in full with
any applicable enforcement order or direction made by Ofgem then in
force.
Ofgem has stated that it does not believe financial ringfencing of
supply licensees is appropriate following the introduction of separate
licenses. However, Ofgem's December 1999 consultation raised the
possibility of applying financial ringfencing to PES supply businesses to
support the Regulator's duty to ensure that licensees can finance their
functions. This could include requirements relating to the availability of
resources, undertakings from owners and financing arrangements.
A further consultation on the need for supply business ringfencing is
expected before the end of April 2000.
It is unclear from the current proposals whether Ofgem would require
financing to be conducted at the level of the legally separate distribution
and supply businesses (such legal separation being proposed under the
Utilities Bill) or at the holding company level.
Review of the Regulatory Framework : The Utilities Bill
On October 13, 1999, the UK government published a statement of intent
which set out its legislative proposals to modernize the framework for
utility regulation for the electricity, gas, water and telecommunications
sectors. The proposals are spread across two documents; one outlining
specific provisions for the gas and electricity industries, and the other
containing regulatory, environmental and equal treatment impact appraisals
emerging from the UK government review of utility regulation as a whole.
The latter document, therefore, includes a number of generic proposals that
are also relevant to the energy sector in addition to the specific
proposals contained in the former.
The publication of the statement of intent marks the last phase of a
process of consultation which began in 1997 and which included the March
1998 Green Paper, the UK government's response thereto and a large number
of other consultations on business separation, energy sources, social
obligations, energy efficiency and environmental issues.
On November 12, 1999, Yorkshire responded to the UK government's
consultation "A Fair Deal for Consumers: Modernising the Framework for
Utility Regulation". Yorkshire expressed concern on a number of issues
including:
- - Increased risk for utility companies - the proposals provide both the
UK government and the regulators with new discretionary powers to
impose obligations and penalties on utilities. This can only increase
uncertainty, making regulation less predictable and less consistent
and, therefore, increasing risk and cost of capital for utilities.
- - Increased regulatory burden for utility companies - the granting of the
new powers referred to above, together with the powers granted to
regulatory authorities under the Competition Act, results in a far
greater regulatory burden being placed upon utilities, at a time when
markets are increasingly competitive and regulators should adopt "an
increasingly light regulatory touch".
- - Development of competition and barriers to entry - the proposals fail
to address pertinent competition issues, such as the market dominance
of Centrica and the growth in the number of vertically integrated
companies.
- - Increased costs for utility companies - the proposals not to extend to
Ofgem the ceiling on costs of the gas regulator's office, and to impose
social and environmental obligations will result in higher costs for
companies: however, no specific mechanism is included within the
proposals for price-controlled companies to pass these costs on to
consumers.
- - NETA - the proposals for reform of the electricity trading arrangements
are still not supported by a robust business case illustrating how cost
savings will be achieved. There is no mechanism included in the
proposals for price-controlled companies to pass the costs of
implementing NETA on to consumers.
On January 20, 2000, the UK government published the Utilities Bill.
The proposed legislation includes:
- - the replacement of individual regulators by a regulatory board - the
Gas and Electricity Markets Authority ("Gema") with the Regulator as
the Chairman;
- - increased emphasis on protection of the interests of consumers
including those in energy and telecommunications, reflecting the more
competitive nature of these markets, and a new principal objective for
the regulators to protect the interests of consumers;
- - powers for the UK government to issue guidance to Gema on social and
environmental matters;
- - a range of reforms to the electricity market, including the
establishment of NETA;
- - a requirement for separate licensing of electricity supply and
distribution businesses, and the introduction of a ban on electricity
supply and distribution licenses being held by the same legal person
(which effectively means that the electricity supply and distribution
businesses of current PES's would be put into separate companies);
- - powers to enable social issues such as fuel poverty to be tackled;
- - tough fines to be imposed on companies guilty of bad practice or poor
performance, such as mis-selling, interruptions to supplies and the
speed of reconnecting customers. There will be no upper limit on the
fines the regulator can impose;
- - `one stop' independent consumer councils to be established for gas and
electricity, telecommunications and water utilities to investigate
complaints and assist customers;
- - price-regulated utilities to publish links between directors' pay and
quality of service;
- - regulators to give reasons for their key decisions; and
- - UK government ministers to be given powers to promote energy efficiency
and electricity from renewable sources.
Assuming the Utilities Bill becomes law in more or less the anticipated
form, there will be a significant number of areas where action will be
required to ensure future compliance. One particular change which will
impact will, of course, be the "legislative" business separation which will
require separate legal entities for the separately licensed electricity
distribution and supply businesses.
The Bill will be subject to a number of readings before enactment,
which is expected late 2000. The effective date is yet to be determined.
On March 2, 2000, the UK government announced that all Utilities Bill
clauses relating to the water and telecommunications utility industries
would be removed from the Bill.
New Electricity Trading Arrangements
In 1998, OFFER published a framework document describing the delivery
and implementation of revised electricity trading arrangements based upon
market trading arrangements in commodities markets elsewhere. In October
1999, with the onset of the implementation phase, these new electricity
trading arrangements became known as NETA. The arrangements are designed
to better facilitate the development of competition, to ensure maximum
transparency and to give all interested parties the opportunity to
participate in the process.
The NETA program encompasses the design and development of the forward
and futures market, the power exchange, the balancing mechanism and the
associated settlement process required to support these markets. These new
wholesale electricity arrangements in England and Wales will replace the
Pool.
As a result of the implementation of NETA, planned for October 31,
2000, it is envisaged that the Pooling and Settlement Agreement will be
replaced by a Balancing and Settlement Code which NGC will be obliged to
maintain and enforce. Both electricity supply and distribution businesses
will incur significant costs to introduce and operate under NETA. Whilst
the UK government propose that such costs will ultimately be borne by
customers, Ofgem has not allowed such costs in the price controls proposed
for effect from April 2000.
As the NETA program develops it is clear that there are a number of
proposals which may have a negative effect on Yorkshire's distribution
business. Yorkshire is currently evaluating such proposals and is lobbying
to minimize the detrimental impact of NETA on its distribution business and
to ensure that all additional obligations are fully allowed through the
distribution price control review.
On February 29, 2000 the UK government and Ofgem jointly announced
proposals for the license changes required to implement NETA. Yorkshire is
currently assessing these proposals.
For further details of how the Pool works, see Part I, Item 1. "The
Electric Utility Industry in Great Britain - The Pool".
Social Action Plan
During the Transition Period, OFFER, OFGAS and Ofgem published a number
of consultations and discussion documents in relation to social issues such
as fuel poverty.
In response to these various consultations Yorkshire pointed out that
it believes social obligations are best delivered through the distribution
business, with costs allowed through the price control; that if obligations
are placed on the electricity supply business, all suppliers should have
the same obligations; and that it is in favor of a social fund which would
subsidize the cost of prepayment metering.
While Yorkshire accepts that initiatives to address the needs of
disadvantaged and vulnerable customers are welcome, it believes that action
should only be taken where necessary and where Ofgem and the industry can
have best effect.
Yorkshire also raised concerns that little detail has been provided of
the costs of carrying out Ofgem's different initiatives, or in the manner
in which these costs will be borne.
On January 10, 2000, Ofgem published proposals for license
modifications aimed at improving the services provided by gas and
electricity companies to poor and disadvantaged customers.
These proposals, which follow concerns raised by consumer groups, align
the social conditions contained in gas and electricity supply licenses and
add new obligations.
On March 1, 2000, Ofgem published a final version of its Social Action
Plan. The contents of the Plan are as anticipated and its impact on
Yorkshire is not expected to be significant.
Consumers' Committee
Ofgem is required under the Electricity Act to establish a consumers'
committee for the Authorized Area of each PES License holder (or, if the
Secretary of State so determines, for the Authorized Areas of two or more
such suppliers. The duties of each committee are to make representations
to, and consult with, their 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 Ofgem on any other matter
which warrants discussion or which is referred to it by Ofgem.
On April 9, 1999, the UK government published a response to a
consultation exercise on consumer committees carried out during October
1998. The response confirmed the intention to set up an independent energy
consumer council for gas and electricity. The council will have two main
roles. The first will be to act as a customer advocate and to provide
information and advice to the UK government, the media and others and also
to consumers. The second function will be to handle consumer complaints
which have not been satisfactorily dealt with by the gas or electricity
company concerned.
The re-organization of independent consumer councils has been included
in the draft Utilities Bill.
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 in Great Britain.
PES Licenses
Each of the RECs, Scottish Power and Scottish and Southern has a PES
License for its Authorized 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 electricity 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 Authorized Area and for the
supply of electricity to Designated 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 its continued monitoring of the electric utility industry,
OFFER 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 electricity Supply Price
Control Formula. OFFER reviewed the electricity 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
electricity 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 Part I, Item 1. "The
Electric Utility Industry in Great Britain - Supply of Electricity -
Electricity Supply Price Regulation: Background".
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 Ofgem ("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 Authorized Area at the time
of privatization. In the case of Yorkshire, the own-generation limit is
fixed at 800 MW.
OFFER 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 electricity
supply business, and that at a minimum the REC would be prohibited from
entering into additional own-generation contracts in its authorized area.
OFFER considered 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 without the allegation that it was exploiting
its captive market and local monopoly position.
OFFER has made modifications to 14 PES Licenses in connection with the
introduction of competition for Franchise Supply Customers which began in
September 1998. These modifications comprised 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,
aggregation and transfer, meter operation and provision of prepayment meter
infrastructure. These proposals were accepted by Yorkshire. OFFER 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 were made
to provide these services as part of a program of work and in October 1997
OFFER made final proposals for the recovery of the costs of this program
which were accepted by Yorkshire in November 1997.
The RECs also contributed to a program of work by the Pool to adopt
settlement arrangements for the competitive market in 1998. It was agreed
that these costs, subject to a cap above which recovery would be partial,
would be recovered from charges to be made to suppliers by the Pool over a
five year period.
Second-Tier Electricity Supply Licenses
Other than a PES in its Authorized Area and subject to certain other
exceptions, a supplier of electricity to premises in Great Britain must
possess a second-tier electricity supply license. Subject to the
restrictions described in "The Electric Utility Industry in Great Britain -
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 electricity supply license
holders for England and Wales, and 27 for Scotland (including Yorkshire in
both cases).
Transmission Licenses
In England and Wales, NGC is the only transmission license holder. The
transmission license imposes on NGC the obligation to operate the merit
order system for the central dispatch of generating units and gives NGC
responsibility for the economic purchasing of ancillary services from
generators and suppliers. The transmission license requires NGC to offer
terms on a non-discriminatory basis for the carrying out of works for
connection to, and use of, the transmission system.
Modifications to Licenses
Subject to a power of veto by the Secretary of State, 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 Competition
Commission. If the Competition Commission finds that the matter referred
to it has, or may be expected to have, specified effects adverse to the
public interest which could be remedied or prevented by a license
modification, 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 Competition Commission. Modifications to license
conditions may also be made by the Secretary of State as a consequence of
monopoly, merger or other competition references under general UK
competition law.
In February 1998, OFFER issued proposals for further modifications to
the licenses of PESs that have been subject to takeovers. The main
proposals were:
- - 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 OFFER can
regulate a PES effectively after it has been taken over and to help
ensure the financial stability of the PES;
- - to restrict further the provisions of existing PES Licenses allowing
PESs to carry out certain otherwise restricted activities provided they
do not exceed 5% of the revenues of the electricity supply, second-tier
electricity supply and distribution businesses, by introducing an
additional test based on cumulative investment;
- - to extend to all PESs that have been acquired the condition contained
in the licenses of London Electricity, Northern Electric plc and
Yorkshire to use reasonable endeavors to maintain an investment grade
rating of corporate debt;
- - to prohibit PESs from accepting "cross default" provisions in borrowing
agreements; and
- - to make the payment of dividends and other distributions by a PES
expressly conditional on compliance with the ringfencing conditions in
the license.
These proposals were accepted by Yorkshire and the Company's PES
License was amended effective September 17, 1999. The September PES License
amendments also included the change in Yorkshire's fiscal year end from
March 31 to December 31.
There are a number of current consultations proposing modifications to
PES licenses, including amendments to take account of the forthcoming
separation of the electricity supply and distribution businesses and
measures to improve services to poor and disadvantaged customers. For
further details of such proposed license modifications see Part I, Item 1.
"The Electric Utility Industry in Great Britain - Regulation Under the
Electricity Act - Regulatory Developments - Review of the Regulatory
Framework: The Utilities Bill" and "The Electric Utility Industry in Great
Britain - Regulation Under the Electricity Act - Social Action Plan".
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 Ofgem requiring the license holder to comply with its license conditions
or requirements, or insolvency of the licensee.
UK ENVIRONMENTAL LEGISLATION
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 larger substation 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 EMFs from various sources, including
transmission and distribution lines, have been the subject of a number of
studies and increasing public discussion. Although some current scientific
research is indicating that EMF's do not cause adverse health effects,
there is the possibility that the passage of legislation and changing
regulatory standards would require measures to mitigate EMFs, with
resulting increases in capital and operational costs. In addition, the
potential exists for public liability with respect to lawsuits brought by
plaintiffs alleging damages caused by EMFs. The only UK standards for
exposure to power frequency EMFs are those promulgated by the National
Radiological Protection Board and relate to the levels above which
physiological effects have been observed. 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 UK 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 spent (POUNDS)7.5 million on environmental
compliance in the Transition Period approximately (POUNDS)5.4 million of
which was of a capital nature.
UK AND EU COMPETITION LAW
The Competition Act, which comes into force on March 1, 2000, gives new
concurrent powers to the Director General of Fair Trading and Ofgem to
investigate and act against anti-competitive agreements and conduct. These
new powers include fines of up to 10% of turnover over three years for
companies which breach the prohibitions of the Act. In March 1999 the
Office of Fair Trading issued formal guidelines on the concurrent
application of the Competition Act to the regulated industries: "Concurrent
Application to Regulated Industries".
EMPLOYEES
Yorkshire had 4,275 employees (approximately 4,121 full-time
equivalent) at the end of the Transition Period. Yorkshire Power Group Ltd
has no employees because it is a holding company with no operations.
Approximately 60% of Yorkshire's employees are represented by labor unions.
All Yorkshire employees who are not party to a personal employment contract
are subject to collective bargaining agreements. These agreements may be
amended by agreement between Yorkshire and the unions and are terminable
with 12 months notice by either side. Yorkshire believes that its
relations with its employees are favorable.
For details of business streamlining in Yorkshire see Part I, Item 1.
"Yorkshire's Businesses - Business Streamlining".
PRESENTATION OF CERTAIN INFORMATION AND EXCHANGE RATES
Solely for the convenience of the reader, this document contains
translations of certain pounds sterling amounts into US dollar amounts at
the closing mid-point in London on December 31, 1999 of $1.6117 =
(POUNDS)1. See note 1 "Summary of Significant Accounting Policies", to
Yorkshire Group's consolidated financial statements for the Transition
Period included elsewhere in this document.
ITEM 2. PROPERTIES
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 December 31, 1999, Yorkshire had interests in approximately 16,010
network properties, comprising principally sub-station sites.
Non-Network Land and Buildings
At December 31, 1999, 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 December 31, 1999, was
approximately (POUNDS)35 million.
ITEM 3. LEGAL PROCEEDINGS
Yorkshire Group is routinely a party to legal proceedings arising in
the ordinary course of business which are not material, either individually
or in the aggregate. Except as described below, Yorkshire Group is
currently 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, against
Yorkshire, Eastern Electricity plc, which is also a REC, NGC 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 sought 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.
On October 7, 1998, Yorkshire filed a defense to the claim made against
it by Optimum. Following discovery, an amended claim was served by Optimum
on Yorkshire and Eastern Electricity plc on July 7, 1999, and the
claimant's claim for injunctive relief was discontinued. The final outcome
of this matter cannot be determined at present.
Litigation is ongoing with respect to NGC and National Power's use of
actuarial surpluses declared in the ESPS. The Pension Ombudsman (a UK
arbitrator appointed by statute) issued a "final determination" in favor of
complaints made by members of the ESPS relating to NGC's use of the ESPS
surplus to offset its additional costs of early payment of pensions as a
result of reorganization or redundancy, together with additional
contributions required after a valuation. Under that determination the
Pension Ombudsman directed NGC to pay into ESPS the amount of that use of
the surplus plus interest. The Pension Ombudsman's final determination was
challenged in the courts by NGC and National Power, who were also subject
to a similar complaint. The High Court subsequently ruled that such use of
surplus was permissible.
On February 10, 1999, the Court of Appeal ruled that the particular
arrangements made by NGC and National Power to dispose of the surplus,
partly by cancelling liabilities relating to pension costs resulting from
early retirement, were invalid as they did not comply fully with the rules
and procedures for dealing with surplus at that time. However, the Court
of Appeal did uphold the High Court's ruling that NGC and National Power
could benefit from pension scheme surplus provided that the scheme rules
allow and that the interests of the members are taken into account.
Following a further hearing on May 25 and May 26, 1999 the Court of
Appeal ordered NGC and National Power to pay all sums properly payable by
them to their group trustees. However, enforcement of the order was stayed
pending the outcome of any appeals to the House of Lords, leave for which
was granted.
NGC and National Power have now initiated appeals in the House of
Lords. NGC and National Power have also executed amendments which purport
to cancel their accrued contribution obligations arising from the Court of
Appeal's judgment.
Yorkshire made similar use of actuarial surplus and, if it is decided
by the House of Lords that the sums concerned are all due to the ESPS, the
maximum amount receivable by the ESPS in respect of the use of surplus by
Yorkshire would be approximately (POUNDS)38 million plus interest.
Yorkshire is considering, with EPSL (the Scheme's central
co-ordinating and policy body) and other member companies, the option
of executing similar retrospective deeds of amendment to those executed
by the two litigants: NGC and National Power.
An agreement has been reached between Yorkshire and its pension
trustees to the effect that no legal action for the recovery of
"outstanding" contributions will be initiated by the trustees against
Yorkshire prior to the House of Lords judgment on the NGC and National
Power appeals. In consideration of this, Yorkshire will waive any defense
in this matter based on the six year statutory limitation period, this
waiver commencing from June 24, 1999, the date when the agreement was first
mooted and agreed in principle.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for Yorkshire Power Group
Limited's common stock, all of which is owned indirectly by AEP and NCE.
Item 6. SELECTED FINANCIAL DATA
The consolidated income statement data and other consolidated data of
the Predecessor Company for the Fiscal Years ended March 31, 1997 and March
31, 1996 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. Such data for the Predecessor
Company has not been restated to show the generation business as a
discontinued operation. The consolidated income statement data and other
consolidated data of the Successor Company for the Transition Period, the
Fiscal Years 1999 and 1998 and the consolidated balance sheet data of the
Successor Company at the end of each such period presented below have been
derived from the audited consolidated financial statements of the Successor
Company. The selected consolidated financial data presented below was
derived from the audited consolidated financial statements of the Successor
Company that have been prepared in accordance with US GAAP. See "Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the consolidated financial statements and notes thereto of
the Successor Company included elsewhere in this document.
The unaudited pro forma consolidated data for the Successor Company for
Fiscal Year 1997 presented below reflects the Acquisition as if it had
occurred as of April 1, 1996. Such data has been prepared by the Successor
Company based upon assumptions deemed proper in accordance with the
purchase method of accounting for business combinations and has 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 is shown for illustrative purposes only and is 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 statements of income and notes thereto of
the Successor Company included elsewhere in this document. The unaudited
pro forma consolidated data has not been restated to show the generation
business as a discontinued operation (see note 14 to the Successor Company
Financial Statements).
Predecessor Company
Fiscal Year
1997 1996
(POUNDS) (POUNDS)
(Amounts in Millions)
Consolidated Income Statement Data:
Operating revenues 1,331 1,431
Operating income (1) 52 214
Other income, net (2) 20 313
Interest expense, net (33) (20)
Provision for income taxes (3) 13 114
Net income 26 393
March 31,
1997 1996
(POUNDS) (POUNDS)
(Amounts in Millions)
Consolidated Balance Sheet Data:
Fixed assets 796 769
Total assets 1,375 1,408
Total shareholders' equity 359 399
Long-term debt 419 424
Short-term debt and current portion
of long-term debt 87 90
Fiscal Year
1997 1996
(POUNDS) (POUNDS)
(Amounts in Millions, Except Ratios)
Other Consolidated Data:
EBIT (4) 72 527
EBITDA (4) 122 569
Cash flow from operations 96 222
Cash used in investing activities (51) (8)
Cash used in financing activities (76) (114)
Ratio of earnings to fixed charges (5) 1.8 12.0
<TABLE>
Successor Company
<CAPTION>
Successor Successor
9 Month Pro Forma
Period Ended Fiscal
December 31, Fiscal Year Year
1999 1999 1998 1997
(POUNDS) $(6) (POUNDS)(POUNDS)(POUNDS)
(Amounts in Millions)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Operating revenues 1,037 1,671 1,366 1,234 1,331
Operating income (1) 127 204 195 148 106
Other income, (loss) net (2) 6 10 (11) (39) 20
Interest expense, net (86) (138) (122) (104) (100)
Provision (benefit) for income
taxes 14 23 3 (4) 17
Income from continuing operations
before extraordinary item and
discontinued operation 33 53 59 9 9
Income from discontinued
operation (8) - - 4 8 -
Gain on disposal of discontinued
operation (8) 8 13 24 - -
Income before extraordinary item 41 66 87 17 9
Extraordinary loss (7) - - - (134) -
Net income (loss) 41 66 87 (117) 9
December 31 March 31 March 31
1999 1999 1998
(POUNDS) $(6) (POUNDS) (POUNDS)
(Amounts in Millions)
Consolidated Balance Sheet Data:
Fixed assets 1,036 1,669 985 1,060
Total assets 2,395 3,860 2,347 2,462
Total shareholders' equity 451 727 410 323
Long-term debt 964 1,553 1,103 1,026
Short-term debt and current
portion of long-term debt 140 226 150 324
Short term debt refinanced June 1998 - - - 164
Short term debt refinanced
February 2000 165 266 - -
Company obligated mandatorily
redeemable Trust Securities of
junior subordinated deferrable
interest debentures 166 268 168 -
Successor
Successor Pro forma
9 Month Period Fiscal
Ended December 31 Fiscal Year Year
1999 1999 1998 1997
(POUNDS) $(6)(POUNDS) (POUNDS)(POUNDS)
(Amounts in Millions, Except Ratios)
Other Consolidated Data:
EBIT before extraordinary
item (4)/(7) 133 214 184 109 126
EBITDA before extraordinary
item (4)/(7) 201 324 268 180 206
Cash flow from operations 70 113 31 62
Cash used in investing activities (87) (140) - (1,639)
Cash (used in) provided by
financing activities 14 23 (54) 1,391
Ratio of earnings to fixed
charges (5) 1.5 1.5 1.4 1.0 1.2
EBIT, EBITDA and ratio of earnings to fixed charges have been
calculated from income statement data excluding amounts attributable to the
generation business, which was disposed of during Fiscal Year 1999 and has
been treated as a discontinued operation. EBIT, EBITDA and ratio of
earnings to fixed charges for Fiscal Year 1999, calculated to include the
results of the generation business, would be (POUNDS)191 million,
(POUNDS)280 million and 1.5 respectively. For Fiscal Year 1998, these
items would be (POUNDS)122 million, (POUNDS)200 million and 1.1
respectively.
</TABLE>
(1) Notable operating expenses include:
Nine Month Period Ended December 31, 1999 - a charge of (POUNDS)2
million for costs in relation to Year 2000 modifications.
Fiscal Year 1999 - a charge of (POUNDS)9 million for costs in
relation to Year 2000 modifications, (POUNDS)5 million for committed
costs arising from delays in opening up the competitive market and
(POUNDS)5 million restructuring charges.
Fiscal Year 1998 - provision of (POUNDS)5 million for committed costs
arising from delays in opening up the competitive market and (POUNDS)10
million restructuring charges.
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.
(2) Other income (loss) - notable items include:
Fiscal Year 1999 - a loss of (POUNDS)12 million before taxes was
charged following the reduction in fair value of Yorkshire Group's
investment in Ionica by (POUNDS)11 million and a subsequent loss on
sale of the investment of (POUNDS)1 million.
Fiscal Year 1998 - an unrealized loss of (POUNDS)41 million before
taxes was charged following the reduction in fair value of Yorkshire
Group's investment in Ionica.
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.
(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 net interest expense and
income taxes. EBITDA represents income before the sum of net 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 closing
mid-point in London on December 31, 1999 of $1.6117= (POUNDS)1.
See "Note 1. Summary of Significant Accounting Policies" to
the Consolidated Financial Statements of the Successor.
(7) Represents the windfall tax imposed by the UK government,
which was not deductible for UK corporation tax purposes.
(8) Yorkshire's generation business was disposed of during Fiscal Year
1999. The gain recognized on disposal resulted in an increase in net
income in Fiscal Year 1999 of (POUNDS)24 million (net of related income
taxes of (POUNDS)31 million). A favorable adjustment to tax
liabilities of (POUNDS)8 million, in respect of the disposal, has been
recognized in the Transition Period.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto of the Successor
Company and "Selected Financial Data" included elsewhere in this document.
The consolidated 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
Power Group Limited was incorporated as a limited company under the laws of
England and Wales in July 1996. Effective April 1, 1997, Yorkshire Power
Group Limited, through its wholly owned subsidiary Yorkshire Holdings,
gained effective control of Yorkshire. Yorkshire Power Group Limited's
primary asset is the stock of Yorkshire Holdings. Yorkshire Holdings,
which beneficially owns all the outstanding stock of Yorkshire, has no
significant operations outside of its investment in Yorkshire.
Significant Factors and Known Trends
Competition and Industry Challenges
On April 1, 1997 and April 1, 1998, Yorkshire's allowed distribution
revenues were decreased by a 3% below inflation reduction, following
reviews by the Regulator, and on April 1, 1999 there was a further 3% below
inflation reduction.
In early December 1999, Ofgem issued final proposals in its review of
the Distribution Price Control Formula. These proposals were in line with
those published in October 1999, and are to be effective for the five year
period beginning April 1, 2000. The proposals included a 15% reduction in
allowed revenue for Yorkshire and a further 8% transfer of costs to
Yorkshire's electricity supply business. Ofgem proposed that the X factor
would continue to be 3%. The overall reduction in distribution revenues for
Yorkshire would be 23%.
If accepted, these proposals would apply from April 1, 2000. On
December 20, 1999, Yorkshire indicated its intention to accept these
proposals.
Under its PES License, Yorkshire had an exclusive right to supply
electricity to Franchise Supply Customers between 1990 and 1998. The
electricity supply business inside the Authorized Area is now fully open to
competition.
The electricity supply business was divided between Franchise Supply
Customers within the Authorized Area, and Non-Franchise Supply Customers,
inside and outside the Authorized Area. The Franchise Limit was lowered to
100 kW in April 1994 allowing competition in the supply of electricity for
customers with maximum demands above the Franchise Limit while Franchise
Supply Customers remained subject to price regulation. On September 14,
1998, phased competition was introduced to the domestic and small business
electricity markets in the UK. The process was completed for all PES
customers in May 1999.
The current supply price control, which was implemented on April 1,
1998, and is effective until March 31, 2000, takes the form of a series of
price caps on the tariffs applicable to Designated Customers in the
Authorized Area. These controls also required an additional 3% below
inflation reduction which became effective on April 1, 1999. The automatic
pass-through of costs previously passed through to residential and business
customers below 100kW, consisting primarily of purchase power costs and the
correction factor, which annually adjusted prices for any imbalance between
forecast and actual costs, were both discontinued from April 1, 1998. From
April 1, 2000, electricity priced within the allowed level will need to be
secured and purchase price risk managed accordingly. If costs turn out
significantly below the level allowed by the new price control, Ofgem may
take steps to ensure that tariffs are reduced. Price caps for Fiscal Year
1999 took account of the residual correction factor from Fiscal Year 1998.
In early December 1999, Ofgem issued final proposals for a form of
transitional price regulation for electricity supply businesses for an
additional two years. Such proposals would result in a real price reduction
in Yorkshire's standard domestic tariff of 3.6% for the year beginning
April 1, 2000. This incorporated a 7.3% distribution price reduction as a
result of the distribution price control review. The proposal also provided
for a nominal price freeze for the year beginning April 1, 2001.
Yorkshire believes that competitive pressures in the electricity market
may require it to charge supply prices which are lower than the maximum
prices established by Ofgem. If Yorkshire charges such lower prices, the
result will be a further reduction in supply revenues beyond that mandated
by Ofgem. Yorkshire's supply business is under competitive and regulatory
pressure to lower supply prices for classes of customers other than those
subject to Ofgem's final supply price proposals.
On December 20, 1999, Yorkshire indicated its intention to accept these
proposals.
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.
With the recent introduction of competition to the electricity supply
market, customers are now able to select their electricity supplier.
Significant additional costs have been incurred by the distribution
business to develop new systems for services 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.
The phase-in of competition in the electricity supply market was
completed for all PESs in May 1999. The total cost for re-engineering and
information technology work was (POUNDS)67 million. Of such amount,
approximately (POUNDS)19 million was accounted for in Fiscal Year 1997,
(POUNDS)31 million in Fiscal Year 1998, (POUNDS)16 million in Fiscal Year
1999, and (POUNDS)1 million in the Transition Period. Ofgem made proposals
in October 1999 (which were accepted by Yorkshire) to allow Yorkshire
recovery of (POUNDS)25 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 has been
capitalized as such amount is expected to provide future benefits to the
Supply business, with the balance of (POUNDS)27 million being expensed. Of
the amount expensed, approximately (POUNDS)19 million was expensed in
Fiscal Year 1997, (POUNDS)2 million was expensed in Fiscal Year 1998 and
(POUNDS)5 million was expensed in Fiscal Year 1999. The remaining
(POUNDS)1 million was expensed in the Transition Period. The Pool cost
recovery mechanism referred to above pursuant to which (POUNDS)7 million is
expected to be recovered will be terminated with the introduction of NETA.
It is expected that the arrangements under NETA will allow the recovery of
1998 costs as planned.
OFFER also made proposals in October 1997 (which were accepted by
Yorkshire) to provide an annual allowance of (POUNDS)3 million for the
period 1998 through 2000 to cover related operating costs. This allowance
has been retained for the period to 2004/05 under Ofgem's final
distribution price control formula published in December 1999 and in
addition the set-up cost allowance of (POUNDS)5 million per year has been
extended for a further two years from 2002/03 to 2004/05. The December
1999 distribution price control final proposal divides the data management
services allowance, which covers both the set up and operating costs
described above, between the electricity supply and distribution businesses
with two thirds of the allowance remaining in the distribution business.
This reflects the transfer of meter reading and data collection activities
to electricity supply.
The Regulator's proposals also provided that RECs should be penalized
as a result of the market opening being delayed beyond April 1998.
Yorkshire has incurred a penalty of (POUNDS)3 million as a consequence of
the delay. A provision for penalties of (POUNDS)3 million was included in
the results of operations for Fiscal Year 1998.
Separation of Distribution and Electricity Supply
During 1998 and 1999 Yorkshire has implemented 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 has resulted in the distribution and supply businesses of
Yorkshire becoming more self-sufficient (sharing common services where it
is effective and efficient to do so) and in a significant down-sizing of
the corporate center.
On May 13, 1998, OFFER issued a consultation paper on the separation of
the distribution and electricity supply businesses of PESs. Since that
date, there have been a number of further Ofgem consultations on this issue
to which Yorkshire has responded.
The Utilities Bill, published in January 2000, includes a requirement
for separate licensing of electricity supply and distribution and the
introduction of a ban on electricity supply and distribution licenses being
held by the same legal entity (which effectively means that the electricity
supply and distribution businesses of PESs would have to be held by
separate companies).
In October 1999, Ofgem addressed business separation costs in its
proposals on the distribution price control review. This document included
an allowance for separation costs of (POUNDS)7.5 million for each REC's
distribution business over the next 5 years. Ofgem also proposed that
electricity supply would receive an allowance of (POUNDS)200,000 per year
for the next two years for separation costs. Although this was in addition
to the distribution allowance, commercial pressures in the competitive
electricity supply market may limit the ability to actually recover these
allowed amounts.
On December 20, 1999, Yorkshire accepted the fundamental principles of
the business separation proposals on the basis of the proposed modification
of condition 12 of the PES license and the acceptance of the compliance
plan submitted by Yorkshire to Ofgem without significant changes. Yorkshire
intends to manage costs within the Ofgem allowance.
On December 22, 1999, Yorkshire agreed to give assurances to Ofgem that
full operational separation would be undertaken in the event of a merger
between Yorkshire and SEEBOARD. The cost allowance for business separation
would not include any costs arising under such assurances.
For further details of business separation see Part I, Item 1
"Yorkshire's Businesses - Business Separation."
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
electricity supply business: the price of the electricity supplied (which,
in the case of Designated Customers within the Yorkshire Authorized Area,
is controlled by the supply price regulation in force) and the number of
electricity units supplied. The price (except as described in the
preceding sentence) and the number of units supplied, which is largely
determined by the number of customers supplied, are subject to competition.
The revenues produced by the gas supply business are similarly
determined by the price and the volume of gas supplied, which in turn are
determined by the number and characteristics of customers acquired and
lost.
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 was (POUNDS)134 million and was not deductible for UK corporation
tax purposes. The windfall tax has been recorded as an extraordinary
charge in Fiscal Year 1998. The tax was paid in two equal installments on
December 1, 1997 and 1998. During Fiscal Year 1998, 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.
On July 31, 1998 a further reduction in the rate of corporation tax on
income, from 31% to 30%, was enacted by the UK government. This resulted
in a one-time reduction in deferred tax liabilities and a corresponding
reduction in income tax expense of approximately (POUNDS)6 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
has resulted in the distribution and Supply businesses of Yorkshire
becoming more self-sufficient (sharing common services where it is
effective and efficient to do so) and in a significant down-sizing of the
corporate center.
As a result of the business restructuring, approximately 291 positions
were eliminated. A provision of approximately (POUNDS)10 million was
recorded in Fiscal Year 1998 together with (POUNDS)5 million in Fiscal Year
1999 to reflect the cost of these workforce reductions.
As part of pre-existing plans to reduce debt, Yorkshire's generation
business was disposed of during Fiscal Year 1999.
In November 1998, Yorkshire completed the sale of its 75% interest in
RPG to IVO. IVO is a subsidiary of Imatran Voima Oy, part of Finland's
energy group Forum. At this time RPG owned Brigg Power Station, a 272-
megawatt combined cycle, gas fired plant located in North Lincolnshire,
England. The net book value of the assets sold was (POUNDS)14 million.
The cash consideration received from IVO, including payment for the
intercompany balance and net of cash retained by RPG, was (POUNDS)38
million. In addition, certain contracts between Yorkshire and RPG were
renegotiated enabling Yorkshire to reduce its balance sheet provision for
uneconomic gas and electricity contracts. The sale resulted in an increase
in net income in Fiscal Year 1999 of (POUNDS)18 million.
A favorable adjustment to tax liabilities of (POUNDS)8 million in
respect of the disposal, has been recognized in the Transition Period.
On December 31, 1998 Yorkshire entered into an unconditional agreement
to sell its subsidiary, YCL, to PowerGen CHP Limited, a subsidiary of
PowerGen. At this time YCL owned three combined heat and power plants and
seven peaking facilities with a total declared capacity of 70 MW which were
operational, a 50 MW combined cycle gas plant under test operation, a 56 MW
combined heat and power plant under construction and a 56 MW combined heat
and power plant under development. Yorkshire will purchase portions of the
output of these facilities for up to 20 years. The net book value of the
assets sold was (POUNDS)3 million. The consideration for the sale,
including the payment for the intercompany balance of (POUNDS)69 million,
was (POUNDS)95 million. The total gain on the sale was (POUNDS)15 million,
of which (POUNDS)8 million after tax was included in net income in Fiscal
Year 1999. The remaining (POUNDS)7 million was deferred and is being
amortized over the life of contracts existing between Yorkshire and YCL.
The remaining generating assets of Yorkshire, windpower plants held
within a joint venture company, Yorkshire Windpower Limited, were sold in
February 1999 for a loss of (POUNDS)2 million.
Substantially all of the cash received from these sales, approximately
(POUNDS)136 million, net of fees and cash retained by RPG, was used to
reduce the debt of Yorkshire Group.
These transactions completed the disposal of Yorkshire's generation
business.
Business Streamlining
Yorkshire plans to streamline its distribution and Supply workforces
and has announced a reduction of approximately 350 positions (260 positions
from the distribution business and 90 positions from the Supply business)
during 2000 and a further 75 positions from the distribution business in
2001. Yorkshire is consulting fully with the trades unions on the extent
of the changes and hopes to achieve the redundancies through a voluntary
program. A provision of approximately (POUNDS)7 million has been recorded
in January 2000 to reflect the cost of the 350 reductions in 2000.
Such streamlining is part of the overall program of reducing
controllable costs in response both to Ofgem's final distribution and
electricity supply price control reviews and to increasing competition in
the Supply business.
Investment in Ionica
Yorkshire Group's investment in Ionica was initially included in its
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. The book value of the investment was written down by
charging losses of (POUNDS)41 million before taxes in Fiscal Year 1998 and
(POUNDS)11 million before taxes in Fiscal Year 1999.
The reduction in fair value of the investment was initially recognized
by management as "other than temporary" following an announcement by Ionica
on May 22, 1998 that it had been unsuccessful in negotiating release of
credit lines from existing providers of bank finance and had been advised
to obtain further equity investment prior to seeking further bank funding.
Ionica announced on October 29, 1998 that it had appointed administrators
for its operating subsidiary due to its inability to obtain further
investment necessary to continue trading and expand its service.
On March 19, 1999 Yorkshire Group sold its investment in Ionica for
(POUNDS)2 million and recognized a further loss on sale of (POUNDS)1
million in Fiscal Year 1999.
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.
Market Risks
Commodity Price Risk
Yorkshire has certain market risks inherent in its business activities.
The purchase and sale of electricity and gas exposes Yorkshire to market
risk. Market risk represents the risk of loss that may impact Yorkshire
due to adverse changes in market prices and rates.
Yorkshire's current electricity supply risk management efforts are
intended to approximately hedge the risks associated with the purchase and
sale of electricity resulting from Pool price volatility. In the existing
wholesale electricity market, virtually all electricity generated in
England and Wales is sold by generators and bought by suppliers through the
Pool. The most common contracts for electricity supply to business
customers are for twelve-month terms and contain fixed rates. Similarly,
domestic and small business tariffs 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
electricity supply customer) to the extent that it has not hedged such
risk. Yorkshire substantially hedges purchase price risk by employing a
variety of risk management tools, including management of its electricity
supply contract portfolio, hedging contracts and other means which mitigate
the risk of Pool price volatility. Yorkshire employs risk management
methods to maximize its return consistent with an acceptable level of risk.
Under its current PES License, Yorkshire has a price cap on the prices
it may charge its Designated Customers in the Authorized Area. From April
2000 the maximum price cap will apply only to domestic customers in the
Authorized area. Because the maximum price is fixed for these customers,
Yorkshire is at risk from upward movements in purchase costs. This risk is
mitigated by hedging purchase contracts, mainly through CFDs.
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. Yorkshire
expects its electricity supply demand for the Calendar Year 2000 to be
substantially hedged through various types of agreements, including CFDs.
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.
The current system of wholesale purchasing through the Pool is under
review, and NETA is targeted to be in place by October 31, 2000. NETA will
replace the Pool. NETA will require participants to submit half hourly
forecasts of electricity supply and demand and endeavor to balance contract
positions and metered volumes. There will be incentives, in the form of
imbalance payments, for generators and suppliers to balance their
supply/demand position. The precise nature of the incentives is currently
being debated. Yorkshire is redefining current business operations in
order to manage and exploit the new market by seeking to predict its
customers' demand for electricity on a short-term basis as accurately as
possible and to maximize the trading opportunities, while effectively
managing the risks of imbalances. See Part I, Item 1. "The Electric
Utility Industry in Great Britain - Regulation under the Electricity Act -
Regulatory Developments - New Electricity Trading Arrangements".
Gas is sourced from Yorkshire's interest in the Armada Field, a
purchase agreement with a major gas supplier designed to meet the majority
of the requirements of Yorkshire's residential gas market, Swing Contracts
and purchases on the spot market which are designed to give Yorkshire a
balanced gas purchase portfolio. Yorkshire utilizes risk management
methods, in relation to gas purchasing and supply, including storage and an
interruptible customer portfolio, which are designed to maximize its return
consistent with an acceptable level of risk. A system to evaluate and
enable effective management of risk in gas trading was installed at the
beginning of Calendar Year 1999. The system enables greater control of all
transactions including daily evaluation of key parameters such as value at
risk and profit and loss positions for each business unit of Yorkshire.
Yorkshire Group measures its open exposure to commodity price
variability within the electricity and gas businesses. A Value at Risk
("VaR") methodology is used to quantify the amount by which a portfolio can
vary in value over a specified time period based on historical volatility
and correlation of price movements of the positions in the portfolio.
At the respective period ends, the calculated VaR was as follows:
December 31 March 31
1999 1999
(POUNDS) (POUNDS)
(millions)
Electricity 6 2
Gas 1 2
Throughout the Transition Period the highest, lowest and average
quarterly VaR for electricity and gas were less than or equal to (POUNDS)7
million and (POUNDS)1 million respectively.
The specified time period for gas VaR calculations is 5 years, with a
confidence level of 95%.
A time period of 2 years is used for electricity VaR. It is not
possible to state a statistical confidence level for the calculations as a
result of assumptions that have to be made due to the illiquidity which
currently exists in the electricity wholesale market. (There are a
relatively small number of generators in the Pool market and a very limited
range of derivative instruments which are effectively traded.)
Credit Risk
Credit risk refers to the risk of financial loss that would result from
the failure of counterparties to comply with the terms of their contractual
obligations with Yorkshire Group.
The concentration of credit risk in respect of trade accounts
receivable is limited, due to Yorkshire's large customer base.
Yorkshire is exposed to losses in the event of non-performance by
counterparties to its CFDs. To manage this credit risk, Yorkshire 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.
Yorkshire Group is also exposed to losses in the event of non-
performance by counterparties to its financial market transactions. To
manage this credit risk, Yorkshire Group selects counterparties based on
their credit ratings and applies limits to its exposure to each
counterparty.
Foreign Currency Exchange Rate Risk
Yorkshire Group is partly funded by US Dollar-denominated debt. Changes
in the US Dollar/Pound Sterling exchange rate will affect the Pound
Sterling value of cash flows under the US Dollar-denominated debt and the
Pound Sterling fair value of the US Dollar-denominated debt. Yorkshire
Group uses cross-currency swaps to manage the cash flow and translation
risks arising from its exposures to foreign currency exchange rate
movements associated with US Dollar-denominated debt.
In June 1998, Yorkshire Group issued $275 million aggregate principal
amount of 8.08% Trust Securities which mature in 2038. In the absence of
appropriate cover for this maturity, cross-currency swaps maturing in June
2008 are used to manage the foreign currency exchange rate risk arising
from the Trust Securities borrowings. The US Dollar interest cash flows
received under the cross-currency swaps match the US Dollar quarterly
coupon payments under the Trust Securities until 2008. The original nominal
value of the cross-currency swaps was $265 million. In December 1999
Yorkshire Group repurchased Trust Securities with a nominal value of
approximately $3 million. In order to preserve the hedge of US Dollar
interest cash flows one of the cross-currency swaps was partially
cancelled. The aggregate nominal value of the cross-currency swaps at
December 31, 1999 was $262 million. The risks arising from the mismatches
in the maturity dates and principal values of the Trust Securities and the
cross-currency swaps are not considered material.
All US Dollar cash flows under other US denominated debt issued by
Yorkshire Group are matched by cash flows under cross-currency swaps.
Interest Rate Risk
Yorkshire Group is partly funded by short and long-term Pound Sterling-
denominated debt bearing variable and fixed interest rates and long-term US
Dollar-denominated debt bearing fixed interest rates. Changes in Pound
Sterling and US Dollar interest rates will affect the cash flows under debt
bearing variable interest rates and the fair value of debt bearing fixed
interest rates.
Yorkshire Group uses interest rate caps to manage its cash flow
exposures to Pound Sterling-denominated debt that bears interest at
variable rates. Other financial instruments may be used in the future.
At December 31, 1999, fixed interest rates were payable on 79% of debt
and interest rate caps covered a further 3% of debt; the average debt
maturity was 14 years.
<TABLE>
The following tables present by Calendar Year of maturity date, as of
December 31, 1999 and March 31, 1999, the total principal cash repayments
and related weighted average interest rates of Yorkshire Group's debt and
the total principal amounts and weighted average interest rates of
Yorkshire Group's cross currency swaps and interest rate cap.
<CAPTION>
At December 31, 1999
All amounts, Maturity date
Millions 2000 2001 2002 2003 2004 There Fair
after Total value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt
Fixed interest rate
Pound sterling-
denominated debt
Amount (POUNDS)9(POUNDS)4(POUNDS)4 - - (POUNDS)550(POUNDS)567(POUNDS)649
Average interest
rate 6.9% 7.5% 7.5% - - 8.3% 8.3%
Variable interest rate
Pound sterling-
denominated debt
Amount (POUNDS)295 - - - - - (POUNDS)295(POUNDS)295
Average interest
rate 6.0% - - - - - 6.0%
Fixed interest rate
US dollar-denominated
debt
Amount - - - $350 - $572 $922 $806
Average interest rate - - - 6.2% - 7.2% 6.8%
Cross currency swaps ($84)
Receive fixed interest
rate US dollars
Amount - - - $350 - $562 $912
Average interest rate - - - 6.2% - 7.4% 6.9%
Vs.
Pay fixed interest
rate Pounds sterling
Amount - - -(POUNDS)215 - (POUNDS)345(POUNDS)560
Average interest rate - - - 8.1% - 8.8% 8.5%
Interest rate cap
Nominal amount -(POUNDS)40 - - - - (POUNDS)40(POUNDS)-
Interest rate - 7.5% - - - - 7.5%
At March 31, 1999
All amounts, Maturity date (Fiscal Year)
Millions 2000 2001 2002 2003 2004 There Fair
after Total value
Debt
Fixed interest rate
Pound sterling-
denominated debt
Amount (POUNDS)8 (POUNDS)9 (POUNDS)4 (POUNDS)4 - (POUNDS)550(POUNDS)575 (POUNDS)690
Average interest
rate 7.0% 7.0% 7.5% 7.5% - 8.3% 8.3%
Variable interest rate
Pound sterling-
denominated debt
Amount (POUNDS)131 - - - (POUNDS)130 - (POUNDS)261(POUNDS)261
Average interest
rate 6.1% - - - 6.4% - 6.2%
Fixed interest rate
US dollar-denominated
debt
Amount - - - $350 - $575 $925 $913
Average interest rate - - - 6.2% - 7.3% 6.8%
Cross currency swaps ($108)
Receive fixed interest
rate US dollars
Amount - - - $350 - $565 $915
Average interest rate - - - 6.2% - 7.4% 6.9%
Vs.
Pay fixed interest
rate Pounds sterling
Amount - - - (POUNDS)215 - (POUNDS)347(POUNDS)562
Average interest rate - - - 8.1% - 8.8% 8.5%
Interest rate cap
Nominal amount - - (POUNDS)40 - - - (POUNDS)40 (POUNDS)-
Interest rate - - 7.5% - - - 7.5%
- - The average interest rates shown are weighted average interest
rates.
- - The average interest rate of debt is based on the coupon or
interest rates of the debt that is maturing in the period reported.
- - The variable interest rate Pound Sterling-denominated debt at
December 31, 1999 comprises: (POUNDS)135 million of borrowings under
Yorkshire Group's revolving credit facility, a (POUNDS)130 million term
loan, (POUNDS)20 million drawn under uncommitted credit facilities and
(POUNDS)10 million of loan notes on which the interest rate is reset semi-
annually, with the next reset being made on March 31, 2000, and which may
be redeemed at various dates from March 31, 2000.
- - The weighted average term of the variable interest rate Pound
Sterling-denominated debt at December 31, 1999, was 50 days.
</TABLE>
Year 2000 Issues
Yorkshire Group has successfully completed a program to combat the
threat of systems and equipment failing to interpret correctly dates
falling after December 31, 1999.
The overall expenditure on this project was (POUNDS)16 million at
December 31, 1999 and it is anticipated that further costs to be incurred
will be less than (POUNDS)1 million. Of the (POUNDS)16 million,
approximately (POUNDS)13 million has been expensed and (POUNDS)3 million
has been capitalized. The expected remaining costs will be expensed in
Calendar Year 2000.
The success of the program was measured by the fact that there was no
disruption to customers, no significant adverse publicity, no major legal
liabilities, no financial penalties and no increases in health, safety and
environmental risks to staff or the general public. Yorkshire Group is not
aware of any disruption to trading resulting from the reaction of customers
to the threat of the Year 2000 problem.
Yorkshire Group is continuing to monitor its systems and liaise with
its suppliers to mitigate continued risks associated with Year 2000 issues.
These risks include a failure of systems to detect that the Year 2000 is a
leap year and the effect this may have on suppliers.
No significant issues have arisen on or after January 1, 2000 but
Yorkshire Group has retained contingency plans to deal with situations
related to the Year 2000 problem, thus reducing the risk of any adverse
impact on operations.
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.
Review of Policy on Depreciation of Operational Assets
Yorkshire is currently reviewing the useful economic lives of its
operational assets, which may result in changes to the useful economic
lives and method of charging depreciation on those assets.
<TABLE>
RESULTS OF OPERATIONS
<CAPTION>
Transition Period Compared with the Nine Month Period Ended December 31,
1998
9 Months ended Increase / (Decrease)
December 31,
1999 1998
unaudited
(POUNDS) (POUNDS) (POUNDS) %
(millions)
<S> <C> <C> <C> <C>
Operating revenues 1,037 972 65 7
Gross margin 320 340 (20) (6)
Maintenance 44 45 (1) (2)
Depreciation and amortization 61 56 5 9
Selling, general and
administrative expenses 88 93 (5) (5)
Income from operations 127 146 (19) (13)
Loss on investment in
Ionica - (11) (11) (100)
Other income 6 4 2 50
Interest expense (87) (99) (12) (12)
Interest income 1 5 (4) (80)
Income from continuing operations
before income taxes 47 45 2 4
Provision (benefit) for income taxes 14 (4) 18 450
Income from continuing operations 33 49 (16) (33)
</TABLE>
Earnings
Income from continuing operations decreased by (POUNDS)16 million (33%)
from (POUNDS)49 million in the nine month period ended December 31, 1998 to
(POUNDS)33 million in the Transition Period. This decrease was due
primarily to reductions in electricity and gas supply margins and a
favorable tax adjustment in the nine month period ended December 31, 1998.
This was partially offset by a reduction in interest expense, a decrease in
selling, general and administrative expenses and the recording of losses on
the investment in Ionica in the nine month period ended December 31, 1998.
Income (loss) from operations by segments for the Transition Period was
(POUNDS)111 million, (POUNDS)39 million and (POUNDS)(5) million for the
distribution, supply and other segments, respectively, in addition to non-
allocated costs of (POUNDS)18 million. Income (loss) from those segments in
the nine month period ended December 31, 1998 was (POUNDS)113 million,
(POUNDS)55 million and (POUNDS)(3) million respectively, in addition to
non-allocated costs of (POUNDS)19 million.
Revenues
Operating revenues increased by (POUNDS)65 million (7%), from
(POUNDS)972 million in the nine month period ended December 31, 1998 to
(POUNDS)1,037 million in the Transition Period. This increase is analyzed
as follows:
Operating Revenues
from External Customers
Increase (Decrease)
from the Nine Months Ended
December 31, 1998
to the Transition Period
(POUNDS) millions
Distribution 19
Supply 49
Other (3)
Total operating revenues 65
Overall revenues (including inter-business sales) for the distribution
business have remained stable at (POUNDS)238 million for the Transition
Period, compared with (POUNDS)237 million for the nine month period ended
December 31, 1998. However, a greater proportion of revenues from the
distribution business are now received from external customers due to the
opening up of competition in the domestic electricity supply market.
Residential and small (<100kW) commercial customers, comprised 48% of
total electricity sales volume for the Transition Period and 50% for Fiscal
Year 1999. The volume of unit sales of electricity for such customers is
influenced largely by the number of customers in the Authorized Area,
weather conditions and prevailing economic conditions. (Since Yorkshire's
exclusive right to supply Franchise Supply Customers ended during Fiscal
Year 1999, the number of residential and small commercial electricity
supply customers is subject to competition.) Unit sales to >100kW Supply
Customers, who are typically large commercial and industrial businesses,
constituted 52% of total sales volume for the Transition Period and 50% for
Fiscal Year 1999. Sales to these 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 Authorized Area. The
increase in the proportion of total electricity sales volume attributable
to >100kW Supply customers has arisen as a result of increased volumes
supplied to this market.
During the Transition Period, total revenues (including inter-business
sales) produced by the Supply business increased by (POUNDS)37 million (4%)
to (POUNDS)997 million from (POUNDS)960 million for the nine month period
ended December 31, 1998. Revenues increased primarily due to the increase
in volumes supplied in the residential and non-residential gas supply
markets and an increase in volumes in the commercial electricity supply
market.
Gross Margin
Gross margin decreased by (POUNDS)20 million (6%) from (POUNDS)340
million in the nine month period ended December 31, 1998 to (POUNDS)320
million in the Transition Period due to the factors described below.
Although the number of residential gas supply customers increased,
sales volumes were below expectations partly due to the effect of warmer
weather. Gross margin percentages for the gas supply business have
decreased as lower than expected sales volumes led to the sale of excess
gas at reduced margins.
Gross margin for the electricity supply business has decreased. Higher
electricity Pool prices and price competition in the non-residential sector
have offset the positive impact of lower CFD costs and increased sales
volumes to both residential and non-residential customers.
Operating Costs
The decrease in selling, general and administrative costs is largely
due to reduced expenditures in relation to the development of new systems
to facilitate competition and reduced costs incurred relating to Year 2000
modifications.
The increase in depreciation and amortization expense is due to
increased capital expenditure in both the Supply and distribution
businesses.
Net Interest Expense
The decrease in interest expense resulted from the application of the
proceeds from the sale of the generation business to reduce the debt of
Yorkshire Group.
Income taxes
The nine month period ended December 31, 1998 was favorably affected by
a (POUNDS)12 million settlement of prior years' tax liabilities and a
(POUNDS)6 million impact of the reduction in the rate of the UK corporation
tax on income from 31% to 30%. Yorkshire Group has recognized a favorable
tax settlement of (POUNDS)12 million in respect of prior years' tax
liabilities in the Transition Period. The effective tax rate in both
periods has been increased by the amortization of goodwill, which is not
deductible for UK income tax purposes.
Fiscal Year 1999 Compared with Fiscal Year 1998
Earnings
Income from continuing operations before extraordinary item and
discontinued operations increased by (POUNDS)50 million (556%) from
(POUNDS)9 million for Fiscal Year 1998 to (POUNDS)59 million for Fiscal
Year 1999. This increase was due primarily to the following: increases in
electricity and gas supply margins, a write down/loss on sale of the
investment in Ionica of (POUNDS)12 million in Fiscal Year 1999 compared
with a write down of (POUNDS)41 million in Fiscal Year 1998 and a
(POUNDS)12 million reduction in estimated tax liabilities. These items
were partly offset by increased interest expense and an increase in
selling, general and administrative costs.
Income (loss) from operations by segments for Fiscal Year 1999 was
(POUNDS)153 million, (POUNDS)69 million and (POUNDS)(3) million for the
distribution, supply and other segments, respectively, in addition to non-
allocated costs of (POUNDS)24 million. Income (loss) from those segments
in Fiscal Year 1998 was (POUNDS)154 million, (POUNDS)33 million and
(POUNDS)(11) million, respectively, in addition to non-allocated costs of
(POUNDS)28 million.
In addition to the factors discussed above, which affect net income
(loss), the net loss for Fiscal Year 1998 includes an extraordinary charge
of (POUNDS)134 million for the windfall tax enacted by the UK Government in
July 1997, which was not deductible for income tax purposes.
Revenues
Operating revenues increased by (POUNDS)132 million (11%), from
(POUNDS)1,234 million in Fiscal Year 1998 to (POUNDS)1,366 million in
Fiscal Year 1999. This increase is analyzed as follows:
Operating Revenues
from External Customers
Increase (Decrease)
from Fiscal Year 1998
to Fiscal Year 1999
(POUNDS) millions
Distribution 10
Supply 126
Other (4)
Total operating revenues 132
Overall revenues from the distribution business (including inter-
business sales) increased by (POUNDS)13 million (4%), from (POUNDS)309
million in Fiscal Year 1998 to (POUNDS)322 million in Fiscal Year 1999.
This increase is primarily due to an increase in the volume of electrical
contracting work undertaken.
Residential and small (<100kW) commercial customers, (Designated
Customers in Fiscal Year 1999 and Franchise Supply Customers in Fiscal Year
1998) comprised 50% of total electricity sales volume for Fiscal Year 1999
and 52% for Fiscal Year 1998. The volume of unit sales of electricity for
such customers is influenced largely by the number of customers in the
Authorized Area, weather conditions and prevailing economic conditions.
(Since Yorkshire's exclusive right to supply Franchise Supply Customers
ended during Fiscal Year 1999, the number of residential and small
commercial electricity supply customers is subject to competition.) Unit
sales to >100kW Supply Customers, who are typically large commercial and
industrial businesses, constituted 50% of total sales volume for Fiscal
Year 1999 and 48% for Fiscal Year 1998. Sales to these 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 Authorized Area.
During Fiscal Year 1999, total revenues produced by the Supply business
(including inter-business sales) increased by (POUNDS)124 million (10%) to
(POUNDS)1,346 million from (POUNDS)1,222 million for Fiscal Year 1998.
Revenues increased primarily due to the signing of new electricity
contracts with Non-Franchise Supply Customers in April 1998 and the
commencement of residential gas sales in Fiscal Year 1999. Of the total
increase of (POUNDS)124 million, (POUNDS)70 million relates to gas supply.
Gross Margin
Gross margin increased by (POUNDS)88 million (24%), from (POUNDS)372
million in Fiscal Year 1998 to (POUNDS)460 million in Fiscal Year 1999 as a
result of both the increase in operating revenues described above and
reduced unit purchase costs for electricity and gas. The reduced unit
purchase costs for electricity have arisen as a result of lower Pool
prices, lower-cost CFDs with generators and reduced costs levied by NGC for
the management of demand and supply in the Pool.
Operating Costs
Operating expenses increased by (POUNDS)41 million (18%) from
(POUNDS)224 million in Fiscal Year 1998 to (POUNDS)265 million in Fiscal
Year 1999. This increase was due primarily to a (POUNDS)36 million
increase in selling, general and administrative costs, together with a
(POUNDS)5 million increase in maintenance expense.
The increase in selling, general and administrative costs is largely
due to expenditures in relation to the opening up of the competitive market
in the supply business, including ongoing marketing and customer service
costs, and costs incurred in relation to Year 2000 modifications.
The increase in maintenance expense is due primarily to increased
engineering information system costs in Fiscal Year 1999.
Other Income/Expense - Loss on Investment in Ionica
During Fiscal Year 1999, management wrote down the investment in Ionica
to their estimate of fair value by charging a loss of (POUNDS)11 million
before taxes, in addition to the (POUNDS)41 million before taxes charged in
Fiscal Year 1998. The reduction in fair value of the investment was
initially recognized by management as "other than temporary" following an
announcement by Ionica on May 22, 1998 that it had been unsuccessful in
negotiating release of credit lines from providers of bank finance and had
been advised to obtain further equity investment prior to seeking further
bank funding. On October 29, 1998 Ionica appointed administrators, as it
had been unable to obtain further equity investment.
On March 19, 1999 Yorkshire Group sold its investment in Ionica for
(POUNDS)2 million, recognizing a further loss on sale of (POUNDS)1 million.
Net Interest Expense
Net interest expense increased by (POUNDS)18 million (17%), from
(POUNDS)104 million in Fiscal Year 1998 to (POUNDS)122 million in Fiscal
Year 1999.
The increase in interest expense in Fiscal Year 1999 arises from the
debt in connection with Yorkshire Group's acquisition of Yorkshire being
drawn down in installments during the first quarter of Fiscal Year 1998 and
higher interest rates in Fiscal Year 1999.
Income Taxes
Fiscal Year 1999 was favorably affected by a (POUNDS)12 million
adjustment to tax liabilities.
During Fiscal Year 1998, the UK rate of corporation tax on income was
reduced from 33% to 31%, resulting in a reduction of tax of (POUNDS)12
million. A further reduction in the rate of corporation tax on income,
from 31% to 30%, was enacted by the UK government in Fiscal Year 1999 and
resulted in a reduction in tax liabilities of (POUNDS)6 million for
Yorkshire Group.
Yorkshire Group's effective income tax rate, excluding the windfall tax
in Fiscal Year 1998, increased from (6%) for Fiscal Year 1998 to 7% for
Fiscal Year 1999. The effective income tax rate in both years has been
increased by the amortization of goodwill, which is not deductible for UK
income tax purposes.
Liquidity and Capital Resources
Yorkshire Power Group Limited's primary asset is the entire share
capital of Yorkshire Holdings, which, in turn, owns the entire share
capital of Yorkshire as its primary asset. Yorkshire Power Group Limited
is therefore dependent upon dividends from Yorkshire for its cash flow.
Financing
During Fiscal Years 1999 and 1998, Yorkshire Group refinanced the 1997
Credit Facility, which matured on July 30, 1998. The 1997 Credit Facility
was refinanced through a series of transactions including the February 1998
issuance of (POUNDS)197 million guaranteed Eurobonds, the February 1998
issuance of (POUNDS)400 million of Senior Notes, the June 1998 issuance of
(POUNDS)162 million Trust Securities and the entering into of a (POUNDS)550
million syndicated credit facility in July 1998.
The syndicated credit facility consisted of four tranches: Tranche A, a
(POUNDS)150 million 364 day revolving credit with a one-year extension
option (reduced to (POUNDS)100 million in Fiscal Year 1999 and subsequently
cancelled on April 21, 1999); Tranche B, a (POUNDS)130 million 5 year term
loan cancelled on December 15, 1999; Tranche C, a (POUNDS)50 million 5 year
revolving credit facility and Tranche D, a (POUNDS)220 million 5 year
revolving credit facility. Tranches A and B were drawn down to repay the
1997 Credit Facility. During the Transition Period the (POUNDS)130 million
loan under Tranche B was replaced in December 1999 by two (POUNDS)65
million 364 day bridging loans, (the "Bridge Facility"). At December 31,
1999 amounts outstanding under the above syndicated credit facility were as
follows: Tranche D - (POUNDS)135 million.
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 (POUNDS)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 (POUNDS) Sterling pursuant to the Currency Swap. The PATS
Trust has used the (POUNDS) 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. YPG has issued a guarantee that fully and
unconditionally guarantees the due and punctual payment of principal and
interest on the Senior Notes.
The issue raised net proceeds of (POUNDS)165 million, after deducting
an allowance for issue costs, which was used as working capital and for the
repayment of debt, including repayment of the Bridge Facility.
Available Sources of Credit
At December 31, 1999, in addition to cash flow from Yorkshire's
operations available for distribution indirectly to Yorkshire Group,
Yorkshire Group had (POUNDS)135 million available under the syndicated
credit facility, as its primary source of liquidity.
Yorkshire Group will also be required to fund its ongoing capital
expenditures, fund its debt service 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,
amounts raised by the issue of the Certificates and amounts available under
the syndicated credit facility.
Use and Source of Funds
The principal sources of funds of Yorkshire Group during the Transition
Period were (POUNDS)70 million from operations, which reflects interest
paid of (POUNDS)74 million and tax paid of (POUNDS)1 million and
(POUNDS)500 million available under the syndicated credit facility (reduced
to (POUNDS)270 million during the period). During this period, Yorkshire
Group utilized (POUNDS)100 million for capital expenditures. Proceeds from
asset sales totalled (POUNDS)1 million.
The principal source of funds of Yorkshire Group during Fiscal Year
1999 were (POUNDS)31 million from operations, which reflects interest paid
of (POUNDS)104 million and tax paid of (POUNDS)67 million, in respect of
the second installment of the windfall tax; (POUNDS)162 million from the
issue of Trust Securities; (POUNDS)550 million available under the
syndicated credit facility (reduced to (POUNDS)500 million during the year)
and (POUNDS)136 million from the sale of the generation business. During
this period Yorkshire Group utilized (POUNDS)149 million for capital
expenditures. Proceeds from asset sales (excluding the sale of the
generation business) totalled (POUNDS)11 million.
The principal sources of funds of Yorkshire Group during Fiscal Year
1998 were (POUNDS)62 million from operations, which reflects interest paid
of (POUNDS)132 million and tax paid of (POUNDS)77 million, including the
first installment of the windfall tax of (POUNDS)67 million. Yorkshire
Group raised (POUNDS)1,034 million from the 1997 Credit Facility and
(POUNDS)440 million in equity. During this period, Yorkshire Group
utilized (POUNDS)1,474 million to acquire Yorkshire, (POUNDS)191 million
for capital expenditures and raised (POUNDS)593 million from the issue of
bonds. Proceeds from asset sales totalled (POUNDS)20 million.
Capital Expenditures
Yorkshire Group'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 the Transition Period and
Fiscal Year 1999 capital expenditures, net of customer contributions, were
(POUNDS)100 million and (POUNDS)149 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 projections are based on Fiscal Year 1996
prices, as required by the Regulator. The most recent projection was for
the five year period ended March 31, 2000 and was filed in June 1999. This
filing indicated Yorkshire's current projection of approximately
(POUNDS)540 million in capital expenditures for the five year period. As
part of the distribution price control review process the five year period
to March 31, 2005 was considered. In Ofgem's final proposals, published in
December 1999, Yorkshire's distribution allowed revenues were based on
Ofgem's capital projections for load and non-load related expenditure
totaling (POUNDS)454 million (in Fiscal Year 1998 prices).
Management believes that cash flow from operations, together with its
new and existing sources of credit 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 endeavors to ensure that it
maintains an investment grade credit rating on its long-term debt.
Risk Management
Demand for electricity in the UK is seasonal, with demand being higher
in the winter months and lower in the summer months. Yorkshire bills its
smaller electricity 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 52% of the
smaller (<100kW) electricity 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 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 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, Yorkshire utilizes CFDs with major UK power
generators to fix the price of electricity. Yorkshire had entered into
CFDs and power purchase contracts for 14,520 GWh of electricity at December
31, 1999 and 33,275 GWh at March 31, 1999. Yorkshire's electricity sales
volumes were 16,628 GWh, 21,676 GWh and 20,236 GWh for the Transition
Period, Fiscal Years 1999, and 1998 respectively.
New Accounting Standards
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 derivative may be designated
as a hedge of possible changes in fair value of a recognized asset or
liability or of an unrecognized firm commitment; variable cash flows of a
recognized asset or liability or of a forecasted transaction; or foreign
currency exposure. The accounting/reporting for fair value changes in a
derivative used as a hedging instrument depends on the intended use and
resulting designation of the derivative. Management is currently studying
the provisions of SFAS 133 to determine the impact of its adoption on
results of operations, cash flows and financial condition. Yorkshire
intends to adopt the standard as required by January 2001.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the "Market Risks" section in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Yorkshire Power Group Limited and Subsidiaries (Successor Company).
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Yorkshire Power Group Limited and Subsidiaries
Unaudited Pro Forma Consolidated Statement
of Income 93
Yorkshire Power Group Limited and Subsidiaries
Independent Auditors' Report 95
Consolidated Statements of Income 96
Consolidated Balance Sheets 97
Consolidated Statements of Changes in
Shareholders' Equity 99
Consolidated Statements of Cash Flows 100
Notes to the Consolidated Financial Statements 102
<TABLE>
YORKSHIRE POWER GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR
THE YEAR ENDED MARCH 31, 1997
<CAPTION>
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 the Predecessor Company adjusted to reflect the items described
in notes (1) through (4) below as if the indirect acquisition of the
Predecessor Company by the Successor Company had occurred at April 1, 1996.
(In Millions)
Predecessor Pro Forma for
Period the Year Ended
April 1, 1996 to Adjustments March 31, 1997
March 31, 1997
(POUNDS) (1) (2) (3) (4)(POUNDS) $(5)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues 1,331 - - - - 1,331 2,145
Income from operations 52 - (24) (6) 84 106 171
Other income
Gain on sale of
associate 15 - - - - 15 24
Other 5 - - - - 5 8
Total other income 20 - - - - 20 32
Interest expense (55) (74) - - 7 (122) (197)
Interest income 22 - - - - 22 36
Net interest expense (33) (74) - - 7 (100) (161)
Income before income taxes 39 (74) (24) (6) 91 26 42
Provision for income taxes (13) 24 - 2 (30) (17) (27)
Net income 26 (50) (24) (4) 61 9 15
(1) To reflect the interest expense recorded in connection with the
Acquisition financed by (POUNDS)22 million loan notes issued by
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 2002. 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.
YORKSHIRE POWER GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR
THE YEAR ENDED MARCH 31, 1997
(5) Solely for convenience of the reader, UK pound sterling amounts have
been translated into US dollars at the closing mid-point in London on
December 31, 1999 of $1.6117 = (POUNDS)1. See Note 1 ''Summary of
Significant Accounting Policies'' to Yorkshire Group's consolidated
financial statements for the Transition Period included elsewhere in
this document.
During Pro Forma Fiscal Year 1997, the Predecessor Company incurred
expenses of (POUNDS)8.0 million relating to the Acquisition.
No adjustments have been made to the pro forma consolidated statement
of income in respect of discontinued operations.
</TABLE>
<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 sheets of
Yorkshire Power Group Limited and its subsidiaries (the "Company") as of
December 31, 1999 and March 31, 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for
the nine months ended December 31, 1999 and for the years ended March 31,
1999 and 1998 (all expressed in pounds sterling). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted within the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Yorkshire Power Group
Limited and its subsidiaries as of December 31, 1999 and March 31, 1999,
and the results of their operations and their cash flows for the nine
months ended December 31, 1999 and for the years ended March 31, 1999 and
1998 in conformity with accounting principles generally accepted 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. Such US dollar
amounts are presented solely for the convenience of readers in the United
States of America.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 16, 2000
<PAGE>
<TABLE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Millions)
<CAPTION>
9 Month Period Ended Year Ended
December 31 March 31,
1999 1999 1998
(POUNDS) $ (POUNDS) (POUNDS)
(See Note 1)
<S> <C> <C> <C> <C>
OPERATING REVENUES 1,037 1,671 1,366 1,234
COST OF SALES 717 1,156 906 862
GROSS MARGIN 320 515 460 372
OPERATING EXPENSES
Maintenance 44 71 69 64
Depreciation and amortization 61 98 76 71
Selling, general and administrative 88 142 115 79
Restructuring charges - - 5 10
INCOME FROM OPERATIONS 127 204 195 148
OTHER INCOME EXPENSE
Loss on investment in Ionica - - (12) (41)
Other income, net 6 10 1 2
Total other income (expense), net 6 10 (11) (39)
NET INTEREST EXPENSE
Interest expense (87) (140) (126) (117)
Interest income 1 2 4 13
Net interest expense (86) (138) (122) (104)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 47 76 62 5
PROVISION (BENEFIT) FOR INCOME TAXES 14 23 3 (4)
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM AND
DISCONTINUED OPERATION 33 53 59 9
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUNDS)- ($-)
(POUNDS)2 AND (POUNDS)3 - - 4 8
GAIN ON DISPOSAL OF DISCONTINUED
OPERATION NET OF INCOME TAXES
CHARGE (BENEFIT) OF
(POUNDS)(8) ($(13)) (POUNDS)31 AND (POUNDS)- 8 13 24 -
INCOME BEFORE EXTRAORDINARY ITEM 41 66 87 17
EXTRAORDINARY LOSS - UK WINDFALL TAX - - - (134)
NET INCOME (LOSS) 41 66 87 (117)
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions)
<CAPTION>
December 31, March 31,
1999 1999
(POUNDS) $ (POUNDS)
ASSETS (See Note 1)
<S> <C> <C> <C>
FIXED ASSETS
Property, plant and equipment, net
of accumulated depreciation
of (POUNDS)139 ($224) and (POUNDS)96 1,005 1,619 970
Construction work in progress 31 50 15
Total fixed assets 1,036 1,669 985
CURRENT ASSETS
Cash and cash equivalents 9 15 12
Investments 16 26 26
Accounts receivable, less
provision for uncollectibles
of (POUNDS)9 ($15) and (POUNDS)9 108 174 100
Unbilled revenue 100 161 84
Prepaids and other 44 71 44
Total current assets 277 447 266
OTHER ASSETS
Goodwill, net of accumulated
amortization of (POUNDS)68 ($110)
and (POUNDS)50 902 1,454 925
Investments, long-term 45 73 51
Prepaid pension asset 115 185 98
Other non-current assets 20 32 22
Total other assets 1,082 1,744 1,096
Total assets 2,395 3,860 2,347
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Millions, Except Shares)
December 31, March 31,
1999 1999
(POUNDS) $ (POUNDS)
(See Note 1)
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital, (POUNDS)1 par value common shares,
440,000,100 , authorized,
440,000,002 issued and outstanding 440 709 440
Retained profit (deficit) 11 18 (30)
Total shareholders' equity 451 727 410
Long-term debt 964 1,553 1,103
Short-term debt refinanced February 2000 165 266 -
Company-Obligated Mandatorily Redeemable
Trust Securities of Subsidiary Holding
Solely Junior Subordinated Deferrable
Interest Debentures 166 268 168
OTHER NON-CURRENT LIABILITIES
Deferred income taxes 195 314 214
Provision for uneconomic
electricity and gas contracts 29 47 30
Other 13 21 13
Total other non-current liabilities 237 382 257
CURRENT LIABILITIES
Current portion of long-term debt 9 15 8
Short-term debt 131 211 142
Accounts payable 79 127 77
Accrued liabilities and
deferred income 91 147 85
Income taxes payable 58 93 37
Other current liabilities 44 71 60
Total current liabilities 412 664 409
Total liabilities 1,944 3,133 1,937
COMMITMENTS AND CONTINGENCIES (NOTE 5)
Total shareholders' equity and
liabilities 2,395 3,860 2,347
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Millions, Except Shares)
For the year ended March 31, 1998
Share Capital Retained
Shares Amount Deficit Total
(POUNDS) (POUNDS) (POUNDS)
Balance, April 1, 1997 2 - - -
Issuance of ordinary shares 440,000,000 440 - 440
Net loss - - (117) (117)
Balance, March 31, 1998 440,000,002 440 (117) 323
For the year ended March 31, 1999
Share Capital Retained
Shares Amount Deficit Total
(POUNDS) (POUNDS) (POUNDS)
Balance, April 1, 1998 440,000,002 440 (117) 323
Net income - - 87 87
Balance, March 31, 1999 440,000,002 440 (30) 410
For the nine month period ended December 31, 1999
Share Capital Retained
Shares Amount Deficit Total
(POUNDS) (POUNDS) (POUNDS)
Balance, April 1, 1999 440,000,002 440 (30) 410
Net income - - 41 41
Balance, December 31, 1999 440,000,002 440 11 451
<PAGE>
<TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<CAPTION>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
9 Month Period Year Ended
Ended December 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS)(POUNDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) 41 66 87 (117)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of discontinued operation - - (24) -
Depreciation of fixed asset investment
included in cost of sales 7 11 8 -
Depreciation 43 69 56 53
Amortization 18 29 25 25
Gain on sale of fixed assets - - (3) (3)
Gain on sale of long-term investment (3) (5) - -
Loss on investment in Ionica - - 12 41
Deferred income taxes (19) (30) 15 4
Changes in assets and liabilities:
Receivables and unbilled revenue (24) (38) (44) 34
Prepaid pension asset (17) (27) (23) (14)
Provisions for uneconomic electricity
and gas contracts (1) (2) (11) 6
Accounts payable 2 3 (5) 3
Windfall tax payable - - (67) 67
Other current assets - - (4) (10)
Other 23 37 9 (27)
Net cash provided by operating activities 70 113 31 62
Cash flows from investing activities:
Proceeds from sale of discontinued
operation - - 136 -
Capital expenditures (100) (161) (149) (191)
Proceeds from sale of property,
plant and equipment 1 2 11 20
Proceeds from sale of
long-term investment 3 5 2 -
Purchase of
Yorkshire Electricity Group plc - - - (1,474)
Reduction in short-term investments 10 16 1 -
Other (1) (2) (1) 6
Net cash used in investing activities (87) (140) - (1,639)
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
9 Month Period Year Ended
Ended December 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS) (POUNDS)
Cash flows from financing activities:
Proceeds from issuance of
Trust Securities - - 162 -
Proceeds from issuance of long-term debt - - 130 593
Proceeds from issuance of common stock - - - 440
Payments to terminate interest rate
swap agreements - - - (14)
Repayments of long-term debt (140) (225) (5) (5)
Net change in short-term debt 154 248 (341) 377
Net cash provided by (used in)
financing activities 14 23 (54) 1,391
Decrease in cash and cash equivalents (3) (4) (23) (186)
Beginning of year cash and cash
equivalents 12 19 35 221
End of year cash and cash equivalents 9 15 12 35
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
9 Month Period Year Ended
Ended December 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS) (POUNDS)
Cash paid for interest 74 119 104 132
Cash paid for income taxes 1 2 67 77
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Yorkshire Group issued (POUNDS)22 million of loan notes during Fiscal
Year 1998 to former shareholders of Yorkshire Electricity Group plc (see
note 12).
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 New Century Energies, Inc. 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 licensed
area (the "Authorized Area"), is regulated under the terms of YEG's
Public Electricity Supply License ("PES License") by Ofgem.
YEG operates primarily in its Authorized Area in Northern
England. YEG's Authorized Area covers approximately 10,000 square
kilometers, encompassing parts of the counties of West Yorkshire,
East Yorkshire, South Yorkshire, Derbyshire, Nottinghamshire,
Lincolnshire and Lancashire. The Authorized Area has a resident
population of approximately 4.4 million.
YEG 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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 estimated fair values at the acquisition date
(April 1, 1997).
Yorkshire is not subject to cost-based rate regulation but
rather, is subject to price cap regulation and, therefore, the
provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS
71") do not apply.
The consolidated financial statements of Yorkshire Group are
presented in pounds sterling ((POUNDS)) and in conformity with
accounting principles generally accepted in the United States of
America.
The consolidated balance sheet, income statement, statement of
cash flows and certain information in the notes to the consolidated
financial statements are presented in pounds sterling ((POUNDS)) and
in US dollars ($) solely for the convenience of the reader, at the
exchange rate of (POUNDS)1 = $1.6117, the closing mid-point in London
on December 31, 1999. This presentation has not been translated in
accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation". No representation is made that the
pounds sterling amounts have been, could have been, or could be
converted into US dollars at that or any other rate of exchange.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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. 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 (see Revenue Recognition below).
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.
Revenue Recognition
Yorkshire Group records revenue net of value added tax ("VAT")
and accrues revenues for service provided but unbilled at the end of
each reporting period. Residential customers are normally billed at
quarterly intervals, and such bills may be based on estimated meter
readings. As a result, unbilled revenues are subject to a degree of
estimation that can be significant.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. YEG
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.
Yorkshire Group enters into interest rate and cross currency
swaps as a part of its overall risk management strategy and does not
hold or issue material amounts of derivative financial instruments
for trading purposes. If the interest rate and cross currency swaps
were to be sold or terminated, any gain or loss would be deferred and
amortized over the remaining life of the debt instrument being hedged
by the swaps. If the debt instrument being hedged by the swaps were
to be extinguished, any gain or loss attributable to the swap would
be recognized in the period of the transaction.
Yorkshire Group considers the carrying amounts of financial
instruments classified as current assets and liabilities to be a
reasonable estimate of their fair value because of the short maturity
of these instruments.
Cash and cash equivalents
Yorkshire Group considers all short-term investments with an
original maturity of three months or less to be cash equivalents.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 are recorded at cost, which
includes materials, labor and appropriate overhead costs. Customer
contributions towards construction of distribution-related assets
reduce the cost of such assets.
Yorkshire Group'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:
Years
Distribution network 40
Generation 20
Buildings Up to 60
Fixtures and equipment Up to 15
Vehicles and mobile plant Up to 10
Goodwill
Yorkshire Group's policy is to amortize acquisition costs in
excess of fair value of net assets of the business acquired using the
straight-line method over a period of 40 years. Recoverability
(evaluated on the basis of undiscounted operating cash flow analysis)
is reviewed when events or changes in circumstances indicate that the
carrying amount may exceed fair value. Goodwill shown in the
accompanying consolidated balance sheet relates to the acquisition of
YEG.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments
Yorkshire Group accounts for investments in marketable debt and
equity securities in accordance with Statement of Financial
Accounting Standards No. 115, "Investments in Certain Debt and Equity
Securities" ("SFAS 115"). Yorkshire Group'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
Yorkshire Group accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". This standard requires that deferred income taxes be
recorded for temporary differences between the financial statement
basis and the tax basis of assets and liabilities and loss carry-
forwards and that deferred tax balances be based on enacted tax laws
at rates that are expected to be in effect when the temporary
differences reverse.
2. EXTRAORDINARY LOSS
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. Yorkshire Group
recorded an extraordinary loss of (POUNDS)134 million in Fiscal Year
1998 for this tax. The windfall tax is not deductible for UK
corporation tax purposes. Half of the tax was paid on December 1,
1997 with the final installment paid on December 1, 1998.
3. RETIREMENT BENEFITS
Pension plans
Yorkshire operates two plans, one based on defined contributions
and a second based on defined benefits.
3. RETIREMENT BENEFITS (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. The cost recognized for this
plan for the Transition Period and Fiscal Year 1999 was less than
(POUNDS)1 million in each accounting period.
Defined benefit
Yorkshire participates in the ESPS, 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.
Yorkshire uses the projected unit credit actuarial method for
accounting purposes. Amounts funded to the pension are primarily
invested in equity and fixed income securities.
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
(amounts in millions)
Reconciliation of Projected Benefit Obligation
Projected benefit obligation
at April 1 812 1,309 740
Service cost 8 13 9
Interest cost 27 43 43
Plan participants' contributions 2 3 2
Actuarial (gain) loss (2) (3) 44
Prior service cost incurred - - 14
Benefits paid (29) (47) (40)
Projected benefit obligation
at December 31 (March 31) 818 1,318 812
Reconciliation of Fair Value of Plan Assets
Fair value of plan assets
at April 1 908 1,463 855
Actual return on plan assets 104 168 84
Employer contributions 2 3 7
Plan participants' contributions 2 3 2
Benefits paid (29) (47) (40)
Fair value of plan assets
at December 31 (March 31) 987 1,590 908
3. RETIREMENT BENEFITS (continued)
Funded Status
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
Funded status 170 274 96
Unrecognized net actuarial gain (67) (108) (11)
Unrecognized prior service cost 12 19 13
Prepaid pension cost 115 185 98
The weighted average rates assumed in the actuarial calculations
as of the following dates were:
December 31, 1999 March 31,
1999 1998
% % %
Discount rate 4.75 4.50 6.00
Annual salary rate increase 4.25 4.00 5.25
Expected long-term rate of return
on plan assets 7.50 8.25 9.00
The components of the plan's net periodic pension cost during the
period are shown below (in millions):
9 Month Period Ended Year Ended Year Ended
December 31, March 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS) (POUNDS)
Service cost 8 13 9 9
Interest 27 43 43 50
Expected return on plan assets (51) (82) (70) (66)
Net amortization and deferral 1 2 1 -
Net periodic pension credit (15) (24) (17) (7)
4. REGULATORY MATTERS
The distribution business of Yorkshire 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 pence per kilowatt hour) that YEG can charge. The DPCF
is usually set for a five-year period, subject to more frequent
adjustments as determined necessary by the Regulator. At each
review, the Regulator can adjust the value of certain elements in the
DPCF. On April 1, 1997, 1998 and 1999 YEG's allowed distribution
revenues were decreased by 3% below the applicable rate of inflation
in the formula, following a review by the Regulator.
In early December 1999, Ofgem issued final proposals in its
review of the Distribution Price Control Formula. These proposals
were in line with those published in October 1999, and are to be
effective for the five year period beginning April 1, 2000. The
proposals included a 15% reduction in allowed revenue for Yorkshire
and a further 8% transfer of costs to Yorkshire's electricity supply
business. Ofgem proposed that the X factor would continue to be 3%.
The overall reduction in distribution revenues for Yorkshire would be
23%.
If accepted these proposals would apply from April 1, 2000. On
December 20, 1999, Yorkshire indicated its intention to accept these
proposals.
Yorkshire's electricity supply business is also regulated by
Ofgem. Until March 31, 1998 prices were established based upon the
Supply Price Control Formula. The current supply price control,
which was implemented on April 1, 1998 and is effective until March
31, 2000, takes the form of a series of price caps on the tariffs
applicable to Designated Customers in the Authorized Area. These
controls also required an additional 3% below inflation reduction
which became effective on April 1, 1999. The automatic pass-through
of costs previously passed through to residential and business
customers below 100kW, consisting primarily of purchased power costs
and the correction factor, which annually adjusted prices for any
imbalance between forecast and actual costs, were both discontinued
from April 1, 1998. From April 1, 2000, electricity priced within
the allowed
4. REGULATORY MATTERS (continued)
level will need to be secured and purchase price risk managed
accordingly. If costs turn out significantly below the level allowed
by the new price control, Ofgem may take steps to ensure that tariffs
are reduced. Price caps for Fiscal Year 1999 took account of the
residual correction factor from Fiscal Year 1998.
In early December 1999, Ofgem issued final proposals for a form
of transitional price regulation for electricity supply businesses
for an additional two years. Such proposals would result in a real
price reduction in Yorkshire's standard domestic tariff of 3.6% for
the year beginning April 1, 2000. This incorporated a 7.3%
distribution price reduction as a result of the distribution price
control review. The proposal also provided for a nominal price freeze
for the year beginning April 1, 2001.
Yorkshire believes that competitive pressures in the market may
require it to charge supply prices which are lower than the maximum
prices established by Ofgem. If Yorkshire charges such lower prices,
the result will be a further reduction in supply revenues beyond that
mandated by Ofgem. Yorkshire's Supply business is under competitive
and regulatory pressure to lower supply prices for classes of
customers other than those subject to Ofgem's final supply price
proposals.
On December 20, 1999, Yorkshire indicated its intention to accept
these proposals.
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
4. REGULATORY MATTERS (continued)
in its cash flows which, in each case, may be significant. With the
recent introduction of competition to the electricity supply market,
customers are now able to select their electricity supplier.
Significant additional costs have been incurred by the distribution
business to develop new systems for services 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.
The phase-in of competition in the electricity supply market was
completed for all PESs in May 1999. The total costs for re-
engineering and information technology work was (POUNDS)67 million.
Of such amount, approximately (POUNDS)19 million was accounted for in
Fiscal Year 1997, (POUNDS)31 million in Fiscal Year 1998, (POUNDS)16
million in Fiscal Year 1999, and (POUNDS)1 million in the Transition
Period. Ofgem made proposals in October 1999 (which were accepted by
Yorkshire) to allow Yorkshire recovery of (POUNDS)25 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 has been capitalized as
such amount is expected to provide future benefits to the Supply
business, with the balance of (POUNDS)27 million being expensed. Of
the amount expensed, approximately (POUNDS)19 million was expensed in
Fiscal Year 1997, (POUNDS)2 million was expensed in Fiscal Year 1998
and (POUNDS)5 million was expensed in Fiscal Year 1999. The
remaining (POUNDS)1 million was expensed in the Transition Period.
The Pool cost recovery mechanism referred to above pursuant to which
(POUNDS)7 million is expected to be recovered will be terminated with
the introduction of NETA. It is expected that the arrangements under
NETA will allow the recovery of 1998 costs as planned.
OFFER also made proposals in October 1997 (which were accepted by
Yorkshire) to provide an annual allowance of (POUNDS)3 million for
the period 1998 through 2000 to cover related operating costs. This
allowance has been retained for the period to 2004/05 under Ofgem's
final Distribution Price Control Formula published in December 1999
and in addition the set-up cost allowance of (POUNDS)5 million per
year has been extended for a further two years from 2002/03 to
2004/05. The December 1999
4. REGULATORY MATTERS (continued)
distribution price control final proposal divides the data management
services allowance which covers both the set up and operating costs
described above between the electricity supply and distribution
businesses with two thirds of the allowance remaining in the
distribution business. This reflects the transfer of meter reading
and data collection activities to electricity supply.
The Regulator's proposals also provided that RECs should be
penalized as a result of the market opening being delayed beyond
April 1998. Yorkshire has incurred a penalty of (POUNDS)3 million as
a consequence of the delay. A provision for penalties of (POUNDS)3
million was included in the results for Fiscal Year 1998.
5. COMMITMENTS AND CONTINGENCIES
Electricity and gas purchase agreements
As part of the sale of RPG during Fiscal Year 1999, certain
contracts were renegotiated. This enabled Yorkshire to release its
balance sheet provision for uneconomic electricity and gas contracts.
In the light of renegotiated contracts, a reduced provision of
(POUNDS)32 million was created. The new provision relates to a
financial instrument, which compensates RPG in respect of gas
purchases in excess of market price for a period up to Fiscal Year
2009. The provision, for the net present value of expected future
payments, reflects management's expectation of market prices of
electricity (to which the contract is partially indexed) and future
gas prices. The provision at December 31, 1999 was (POUNDS)29
million.
In addition, Yorkshire has agreed to purchase portions of the
output of YCL, a former subsidiary disposed of as part of the sale of
the generation business, for up to 20 years.
Yorkshire has entered into a medium-term gas purchase agreement
with a major gas supplier, which has a potential end date of October
2003. Yorkshire also has a small number of Swing Contracts with
other parties for the purchase of gas, all on normal commercial
terms. There are three contracts in total, which terminate in either
October 2002 or October 2003.
5. COMMITMENTS AND CONTINGENCIES (continued)
Legal Proceedings
Yorkshire Group is routinely a party to legal proceedings arising
in the ordinary course of business which are not material, either
individually or in the aggregate. Except as described below,
Yorkshire Group is currently not a party to any material legal
proceedings nor is it aware of any threatened material legal
proceedings.
Litigation is ongoing with respect to NGC and National Power's
use of actuarial surpluses declared in the ESPS. The Pension
Ombudsman (a UK arbitrator appointed by statute) issued a "final
determination" in favor of complaints made by members of the ESPS
relating to NGC's use of the ESPS surplus to offset its additional
costs of early payment of pensions as a result of reorganization or
redundancy, together with additional contributions required after a
valuation. Under that determination the Pension Ombudsman directed
NGC to pay into ESPS the amount of that use of the surplus plus
interest. The Pension Ombudsman's final determination was challenged
in the courts by NGC and National Power, who were also subject to a
similar complaint. The High Court subsequently ruled that such use
of surplus was permissible.
On February 10, 1999, the Court of Appeal ruled that the
particular arrangements made by NGC and National Power to dispose of
the surplus, partly by cancelling liabilities relating to pension
costs resulting from early retirement, were invalid as they did not
comply fully with the rules and procedures for dealing with surplus
at that time. However, the Court of Appeal did uphold the High
Court's ruling that NGC and National Power could benefit from pension
scheme surplus provided that the scheme rules allow and that the
interests of the members are taken into account.
Following a further hearing on May 25 and May 26, 1999 the Court
of Appeal ordered NGC and National Power to pay all sums properly
payable by them to their group trustees. However, enforcement of the
order was stayed pending the outcome of any appeals to the House of
Lords, leave for which was granted.
5. COMMITMENTS AND CONTINGENCIES (continued)
NGC and National Power have now initiated appeals in the House of
Lords. NGC and National Power have also executed amendments which
purport to cancel their accrued contribution obligations arising from
the Court of Appeal's judgment.
Yorkshire made similar use of actuarial surplus and, if it is
decided by the House of Lords that the sums concerned are all due to
the ESPS, the maximum amount receivable by the ESPS in respect of the
use of surplus by Yorkshire would be approximately (POUNDS)38 million
plus interest.
Yorkshire is considering, with EPSL (the Scheme's central co-
ordinating and policy body) and other member companies, the option of
executing similar retrospective deeds of amendment to those executed
by the two litigants: NGC and National Power.
An agreement has been reached between Yorkshire and its pension
trustees to the effect that no legal action for the recovery of
"outstanding" contributions will be initiated by the trustees against
Yorkshire prior to the House of Lords judgment on the NGC and
National Power appeals. In consideration of this, Yorkshire will
waive any defense in this matter based on the six year statutory
limitation period, this waiver commencing from June 24, 1999, the
date when the agreement was first mooted and agreed in principle.
Operating leases
Yorkshire Group has commitments under operating leases with
various terms and expiration dates. Rental expenses incurred for
operating leases in the Transition Period, Fiscal Year 1999 and
Fiscal Year 1998 were (POUNDS)6 million ($10 million), (POUNDS)3
million and (POUNDS)3 million respectively.
5. COMMITMENTS AND CONTINGENCIES (continued)
Future minimum commitments under these operating leases as of
December 31, 1999 are as follows:
Due during Calendar Year ending December 31,
(POUNDS)
(millions)
2000 3
2001 1
2002 1
2003 1
2004 1
Thereafter 8
Total 15
Labor subject to Collective Bargaining Agreements
A majority of Yorkshire Group's employees are subject to one of
three collective bargaining agreements. Such agreements are ongoing
in nature, and Yorkshire Group's employees participation level is
consistent with that of the electric utility industry in the UK.
6. SEGMENT REPORTING
Yorkshire Group is primarily engaged in two industry segments:
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. This forms 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.
Yorkshire Group's accounting policies for segments are the same
as those described in the summary of significant accounting policies.
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.
6. SEGMENT REPORTING (continued)
The results and capital expenditure attributable to the
generation business, which was disposed of during Fiscal Year 1999
has been treated as a discontinued operation, are excluded from the
segment information shown below.
Depreciation and amortization includes depreciation of fixed
asset investments, which is included within cost of sales in the
income statement.
Information technology support activities for Yorkshire Group
have been included in the results reported for the Supply business
from April 1, 1999. The segment information for Fiscal Years 1999
and 1998 has been reclassified to conform to current period
presentation.
<PAGE>
<TABLE>
6. SEGMENT REPORTING (continued)
A summary of information about Yorkshire Group's operations by
segments follows (in millions):
<CAPTION>
Nine Month Period Ended December 31, 1999
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(POUNDS) $ (POUNDS) $ (POUNDS) $ (POUNDS) $ (POUNDS) $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from
external customers 63 102 969 1,561 4 6 1 2 1,037 1,671
Intersegment sales 175 282 28 45 1 2 (204) (329) - -
Depreciation and
amortization 33 53 16 26 1 2 18 29 68 110
Income from
operations 111 178 39 63 (5) (8) (18) (29) 127 204
Total assets 1,013 1,633 455 733 2,710 4,368 (1,783) (2,874) 2,395 3,860
Capital expenditure 72 116 28 45 - - - - 100 161
Year Ended March 31, 1999
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
Revenues from
external customers 63 1,295 8 - 1,366
Intersegment sales 259 51 15 (325) -
Depreciation and
amortization 38 17 4 25 84
Income from
operations 153 69 (3) (24) 195
Total assets 960 417 2,586 (1,616) 2,347
Capital expenditure 108 23 3 - 134
Year Ended March 31, 1998
Distribution Supply Other Eliminations Consolidated
and non-
allocated
items
(POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
Revenues from
external customers 53 1,169 12 - 1,234
Intersegment sales 256 53 30 (339) -
Depreciation and
amortization 35 6 5 25 71
Income from
operations 154 33 (11) (28) 148
Capital expenditure 134 23 4 - 161
6. SEGMENT REPORTING (Continued)
Non-allocated items within total assets consist of goodwill of
(POUNDS)902 million in the Transition Period and (POUNDS)925 million
in Fiscal Year 1999.
Non-allocated items within income from operations consist of
amortization of goodwill of (POUNDS)18 million in the Transition
Period and (POUNDS)25 million in both Fiscal Year 1999 and Fiscal
Year 1998.
</TABLE>
7. LOSS ON INVESTMENT IN IONICA
Yorkshire Group's investment in Ionica was initially included in
its 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. The Company has written down the
carrying value of the investment to their estimate of fair value by
charging a loss of (POUNDS)11 million to the income statement during
Fiscal Year 1999.
The reduction in fair value of the investment was initially
recognized by management as "other than temporary" following
announcement by Ionica on May 22, 1998 that Ionica had been
unsuccessful in negotiating release of credit lines from existing
providers of bank finance and had been advised to obtain further
equity investment prior to seeking further bank funding. On October
29, 1998 Ionica announced that it had appointed administrators for its
operating subsidiary due to its inability to obtain further investment
necessary to continue trading and expand its service.
On March 19, 1999 Yorkshire Group sold its investment in Ionica
for (POUNDS)2 million, recognizing a loss on sale of (POUNDS)1
million.
<PAGE>
<TABLE>
8. INCOME TAXES
Yorkshire Group's income tax expense (benefit) consists of the
following (in millions):
<CAPTION>
9 Month Period Ended Year Ended Year Ended
December 31, March 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS) (POUNDS)
<S> <C> <C> <C> <C>
Current 34 55 (10) (5)
Discontinued operation (8) (13) - -
Deferred (20) (32) 15 4
Total 6 10 5 (1)
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):
9 Month Period Ended Year Ended
December 31, March 31,
1999 1999 1998
(POUNDS) $ (POUNDS)(POUNDS)
Income before taxes and
extraordinary loss including
income from discontinued
operations of (POUNDS)- nil,
(POUNDS)6 million and (POUNDS)11 million
before income taxes 47 76 68 16
Income taxes computed at
statutory rate (tax rate 30%) 14 23 20 5
Effect of change in tax rate
on deferred taxes - - (6) (12)
Permanent differences 5 8 8 10
Discontinued operation (8) (13) - -
Adjustment to tax liabilities (4) (6) (12) -
Other (1) (2) (5) (4)
Total income tax expense
(credit) 6 10 5 (1)
The tax effect of temporary differences between the carrying
amounts of assets and liabilities in the consolidated balance sheet
and their respective tax bases, which give rise to deferred tax
assets and liabilities, are as follows (in millions):
8. INCOME TAXES (continued)
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
Deferred tax liabilities:
Property related temporary
differences 181 292 207
Pension 33 53 27
Provision for electricity and
gas contracts (9) (15) (9)
Other (8) (13) (8)
Net deferred tax liability 197 317 217
Portion included in current
liabilities 2 3 3
Long-term deferred tax liability 195 314 214
The tax years since 1994 are currently under review by the Inland
Revenue in the UK. In the opinion of management, the settlement of
open years will not have a material adverse effect on results of
operations, financial position or cash flows of Yorkshire Group.
</TABLE>
9. FINANCIAL INSTRUMENTS
Yorkshire utilizes CFDs to mitigate its exposure to volatility in
the prices of electricity purchased through the Pool. Such contracts
allow Yorkshire to effectively convert the majority of its
anticipated Pool purchases from variable market prices to fixed
prices. CFDs are in place to hedge a portion of electricity
purchases on approximately 14,520 GWh through the year 2003.
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 December 31, 1999 and March 31,
1999 is a net liability of (POUNDS)46 million ($74 million) and
(POUNDS)6 million, respectively. This estimate is based on
management's projections of future prices of electricity.
Yorkshire is exposed to losses in the event of non-performance by
counterparties to its CFDs. To manage this credit risk, Yorkshire
selects counterparties based on their credit ratings, limits its
exposure to any one counterparty, and monitors the market position of
the programs and its relative market position with each counterparty.
There was no non-performance by counterparties at December 31, 1999
and March 31, 1999.
9. FINANCIAL INSTRUMENTS (continued)
Yorkshire Group has entered into interest rate cap agreements as
part of its risk management policy and to mitigate the effects of
interest rate changes. Under these agreements counterparties have
agreed to pay amounts to Yorkshire Group equal to the excess of
variable interest rate obligations over fixed cap interest rate
obligations in consideration of a fixed non-returnable premium
payment. Receipts from counterparties are recognized as a reduction
in interest expense. Premium payments are recognized as an increase
in interest expense over the term of the agreement. At December 31,
1999, Yorkshire Group was party to interest rate cap agreements with
a notional value of (POUNDS)40 million which were at a fixed cap
interest rate of 7.5%.
In February 1998, Yorkshire Group 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, to hedge the currency exposure related to
having sterling cash flows and dollar interest payments, cross-
currency swaps were taken out, maturing in 2003 and 2008.
In June 1998, Yorkshire Group issued $275 million aggregate
principal amount of 8.08% Trust Securities due 2038. In order to
hedge the resulting currency exposure cross currency swaps were taken
out which mature in 2008. One of these swaps was partially cancelled
in December 1999 following the repurchase by Yorkshire Group of Trust
Securities with a face value of approximately $3 million.
Payments to counterparties in respect of cross-currency swaps are
recorded as an interest expense.
At December 31, 1999 and March 31, 1999 Yorkshire Group was party
to cross-currency swap agreements with a notional value of
(POUNDS)560 million and (POUNDS)562 million respectively.
The estimated fair values of Yorkshire Group's financial
instruments are as follows (in millions):
9. FINANCIAL INSTRUMENTS (continued)
December 31, 1999 March 31, 1999
Carrying Fair
Carrying Amount Fair Value Amount Value
(POUNDS) $ (POUNDS) $ (POUNDS)(POUNDS)
Long term debt
(including Trust Securities) (1,139) (1,836) (1,149) (1,852) (1,279) (1,393)
Cross currency swap agreements - - (52) (84) - (67)
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 Yorkshire Group for debt of the same remaining maturities.
The fair values of cross currency swap and interest rate cap
agreements are determined by reference to prices available from the
markets on which these instruments are traded.
The book value and fair value of the interest rate cap at
December 31, 1999 and March 31, 1999 was (POUNDS)nil.
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in
millions):
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
Distribution network 1,214 1,956 1,141
Non-network land and buildings 38 61 37
Other 180 290 149
Consumer contributions (288) (464) (261)
1,144 1,843 1,066
Accumulated depreciation (139) (224) (96)
Property, plant and equipment, net 1,005 1,619 970
10. PROPERTY, PLANT AND EQUIPMENT (continued)
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 Yorkshire had an interest at that date
(and, in certain circumstances, land in which Yorkshire 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.
11. LONG-TERM DEBT
Long-term debt consisted of the following (in millions):
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
7.25% Guaranteed Eurobonds, due 2028 198 319 198
8.625% Eurobonds, due 2005 151 243 151
9.25% Eurobonds, due 2020 207 334 207
6.154% Senior Notes, due 2003 215 346 215
6.496% Senior Notes, due 2008 185 298 185
8.08% Trust Securities, due 2038 166 268 168
Syndicated Credit Facility - - 130
0% Unsecured Loan, due 2000-2009 1 2 1
European Investment Bank:
7.52% credit facility,
due 1999-2002 11 18 15
6.55% credit facility,
due 1997-2000 5 8 9
Total 1,139 1,836 1,279
Less current maturities (9) (15) (8)
Less Trust Securities (166) (268) (168)
Long-term debt, net of current
maturities and Trust Securities 964 1,553 1,103
11. LONG-TERM DEBT (continued)
Long-term debt outstanding at December 31, 1999 is payable as
follows (in millions):
(POUNDS) $
For the calendar years ended December 31,
2000 9 15
2001 4 6
2002 4 6
2003 215 347
2004 - -
Thereafter 907 1,462
Total 1,139 1,836
In addition (POUNDS)165 million of short-term debt was replaced,
in February 2000, by long-term debt maturing no earlier than 2005.
Yorkshire Capital Trust I, (the "Trust"), is a statutory business
trust created for the sole purpose of issuing trust securities and
investing the proceeds in an equivalent amount of Junior Subordinated
Deferrable Interest Debentures, Series A due 2038 issued by Yorkshire
Power Finance Limited (YPF), a subsidiary of YPG. On June 9, 1998
the Trust issued 11,000,000 shares of 8.08% Trust Securities at the
liquidation amount of $25 per Trust Security. The Trust invested the
$275 million proceeds in an equivalent amount of 8.08% Junior
Subordinated Deferrable Interest Debentures, Series A due 2038 of YPF
which in turn loaned the net proceeds to YPG. Substantially all of
the Trust's assets will consist of the Junior Subordinated Deferrable
Interest Debentures. YPG considers that the mechanisms and
obligations relating to the Trust Securities issued for its benefit,
taken together, constitute a full and unconditional guarantee by it
of the Trust's payment obligations with respect to the Trust
Securities.
The issue raised net proceeds of (POUNDS)162 million, which was
used as working capital and for the repayment of short-term debt.
12. SHORT-TERM DEBT
Short-term debt consisted of the following (in millions):
December 31, 1999 March 31, 1999
(POUNDS) $ (POUNDS)
Syndicated credit facility 100 161 108
Bank loans 1 2 24
Bills of exchange 20 32 -
Loan notes 10 16 10
Total 131 211 142
At December 31, 1999 and March 31, 1999 the weighted average
interest rate was 6.0% and 6.1%, respectively.
A syndicated credit facility was entered into during Fiscal Year
1999, which consisted of four tranches: Tranche A, a (POUNDS)150
million 364 day revolving credit with a one-year extension option
(reduced to (POUNDS)100 million in Fiscal Year 1999 and subsequently
cancelled on April 21, 1999); Tranche B, a (POUNDS)130 million 5 year
term loan cancelled on December 15, 1999; Tranche C, a (POUNDS)50
million 5 year revolving credit facility and Tranche D, a (POUNDS)220
million 5 year revolving credit facility. The interest rates on the
facilities are based on LIBOR plus a margin of 0.25%, plus the cost
imputed to the lenders of compliance with central bank and regulator
requirements. The facilities contain certain restrictive covenants
which include a minimum earnings to interest ratio.
12. SHORT-TERM DEBT (continued)
The acquisition of YEG was financed in part by the issuance of
(POUNDS)22 million of loan notes to former YEG shareholders. These
notes are redeemable at the option of the holder, on March 31, 1998
and thereafter on each March 31 prior to March 31, 2002. (POUNDS)6
million of notes were redeemed at March 31, 1998 and a further
(POUNDS)6 million at March 31, 1999. Any loan notes outstanding at
March 31, 2002 shall be repaid in full at that date. The interest
rate on the notes is reset semi annually at 1% below the rate at
which National Westminster Bank plc is offering six month sterling
deposits of (POUNDS)5 million in the London inter-bank market. At
December 31, 1999, and March 31, 1999 the interest rate on the notes
was 5.0% and 4.2%, respectively.
At December 31, 1999 and March 31, 1999 unused committed bank
facilities were available to the Company in the amount of (POUNDS)135
million ($218 million) and (POUNDS)262 million, respectively.
Commitment fees of approximately 1/10 of 1% of the unused committed
bank facilities are required to maintain the facilities existing at
December 31, 1999, which have expiration dates in Calendar Year 2003.
In addition, the Company has commercial paper programs which provide
for the issuance, at a discount, of up to $550 million at face value
in commercial paper with short-term maturities (up to 364 days).
13. SHORT-TERM DEBT REFINANCED
On December 15, 1999 Yorkshire cancelled tranche B of the
Syndicated loan facility, a (POUNDS)130 million 5 year term loan.
This was replaced with two (POUNDS)65 million loans on 364 day terms.
The two loans were used to bridge the gap between the cancellation of
tranche B and the issue of the Pass-Through Asset Trust Securities in
February 2000. Yorkshire repaid the loans on February 16, 2000.
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 (POUNDS)155 million
principal amount of Reset Senior Notes 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").
13. SHORT-TERM DEBT REFINANCED (continued)
The PATS Trust has issued $250 million, principal amount of its
8.25% Pass-Through Asset Trust Securities 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 PATS
Trust with UBS AG, London Branch for (POUNDS) Sterling pursuant to
the Currency Swap. The PATS Trust has used the (POUNDS) 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. YPG has issued a guarantee that fully and
unconditionally guarantees the due and punctual payment of principal
and interest on the Senior Notes.
The issue raised net proceeds of (POUNDS)165 million, after
deducting an allowance for issue costs, which was used as working
capital and for the repayment of debt, including repayment of the
loans described above.
14. DISCONTINUED OPERATIONS
Yorkshire's generation business was disposed of during Fiscal
Year 1999. In respect of the sale proceeds of (POUNDS)136 million
were received (net of fees and cash disposed of), which were used to
reduce debt. A gain on sale of (POUNDS)24 million, net of income
taxes of (POUNDS)31 million was included in net income for Fiscal
Year 1999.
A favorable adjustment to tax liabilities of (POUNDS)8 million,
in respect of the disposal, has been recognized in the Transition
Period.
15 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 has resulted in the distribution and
supply businesses becoming more self-sufficient (sharing common
services where it is effective and efficient to do so).
As a result of the business restructuring, approximately 291
positions were eliminated, which related principally to the
distribution business in Fiscal Year 1999 and corporate center
employees in Fiscal Year 1998. A charge of approximately (POUNDS)5
million was recorded in Fiscal Year 1999 (relating to 131 positions)
together with (POUNDS)10 million in Fiscal Year 1998 (relating to 160
positions) to reflect the cost of these workforce reductions.
The amount of the provision reflected in the balance sheets at
December 31, 1999 and March 31, 1999 is (POUNDS)nil and (POUNDS)2
million respectively. There has been no significant change to the
estimate of costs incurred or the number of positions eliminated.
Business Streamlining
Yorkshire plans to streamline its distribution and Supply
workforces and has announced a reduction of approximately 350
positions (260 positions from the distribution business and 90
positions from the supply business) during 2000 and a further 75
positions from the distribution business in 2001. A provision of
approximately (POUNDS)7 million has been recorded in January 2000 to
reflect the cost of the 350 reductions in 2000.
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following amounts reflect the treatment of the generation
business (disposed of during Fiscal Year 1999) as a discontinued
operation for Fiscal Years 1999 and 1998.
Quarterly Periods Ended 1999
(in (POUNDS) millions) June 30 September 30 December 31
Operating revenues 316 329 392
Operating income 34 32 61
Net income 2 6 33
A favorable adjustment to tax liabilities of (POUNDS)8 million in
respect of the disposal of Yorkshire's generation business during
Fiscal Year 1999, has been recognized during the last quarter in the
Transition Period. Yorkshire's portfolio of energy contracts is
structured so that, compared to Fiscal Year 1999, higher CFD costs
are incurred in summer months, with comparatively lower CFD costs
anticipated in winter months.
Quarterly Periods Ended 1998/99
(in (POUNDS) millions)
June 30 September 30 December 31 March 31
Operating revenues 292 301 379 394
Operating income 46 44 56 49
Net income 20 12 45 10
The quarter ended December 31, 1998 includes a gain on sale of
discontinued operation of (POUNDS)24 million (net of income taxes of
(POUNDS)31 million).
Quarterly Periods Ended 1997/98
(in (POUNDS) millions)
June 30 September 30 December 31 March 31
Operating revenues 25 270 349 358
Operating income 29 39 48 32
Net income (loss) before
Extraordinary item 5 21 16 (25)
Net income 5 (113) 16 (25)
The quarter ended September 30, 1997 includes an extraordinary
loss of (POUNDS)134 million for windfall tax. The quarter ended
March 31, 1998 includes an unrealized loss following the reduction in
fair value of Yorkshire Group's investment in Ionica of (POUNDS)41
million.
17. UNAUDITED INCOME STATEMENT FOR THE
NINE MONTH PERIOD ENDED DECEMBER 31, 1998
Nine Month Period Ended
December 31, 1998
(in millions)
(POUNDS)
OPERATING REVENUES . . . . . . . . . . . . 972
COST OF SALES. . . . . . . . . . . . . . . 632
GROSS MARGIN . . . . . . . . . . . . . . . 340
OPERATING EXPENSES:
Maintenance. . . . . . . . . . . . . . . 45
Depreciation and Amortization. . . . . . 56
Selling, General and Administrative. . . 93
INCOME FROM OPERATIONS. . . . . . . 146
OTHER (EXPENSE) INCOME:
Loss on Investment in Ionica . . . . . . (11)
Other Income, net. . . . . . . . . . . . 4
Total Other (Expense) Income, net . (7)
NET INTEREST EXPENSE:
Interest Expense . . . . . . . . . . . . (99)
Interest Income. . . . . . . . . . . . . 5
Net Interest Expense. . . . . . . . (94)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . 45
(BENEFIT) FOR INCOME TAXES. . . . . . . . . (4)
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND DISCONTINUED
OPERATIONS . . . . . . . . . . . . . . 49
INCOME FROM DISCONTINUED OPERATION
NET OF INCOME TAXES OF (POUNDS)1. . . . . . . . 3
GAIN ON DISPOSAL OF DISCONTINUED
OPERATION NET OF INCOME TAXES OF
(POUNDS)30 . . . . . . . . . . . . . . . . . 25
NET INCOME (LOSS). . . . . . . . . . . . . 77
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management of Yorkshire Group
The following table sets forth certain information with respect to the
executive officers and directors of Yorkshire Group as of December 31,
1999:
Name Age Position
Dr. E. Linn Draper, Jr. 57 Chairman and Director
Donald M. Clements, Jr. 50 Director
Armando A. Pena 54 Chief Financial Officer and Director
Wayne H. Brunetti 57 Vice Chairman and Director
Richard C. Kelly 53 Director
Paul J. Bonavia 48 Director
As of January 1, 2000, Mr Brunetti became Chairman of Yorkshire Group
and Dr Draper became Vice Chairman.
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 CellNet Data Systems, Inc.
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 American Electric Power Service Corporation in September 1994
as Senior Vice President and became Executive Vice President in December
1996. From 1978 to 1994, was employed with Gulf States Utilities 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 of American Electric Power Service Corporation.
Since November 1995, has been Treasurer of AEP and 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 Operating
Officer of NCE. Since July 1994, has been the President and became Vice
Chairman and Chief Executive Officer of Public Service Company of Colorado
in September 1997. Joined Public Service Company of Colorado in July 1994
as President and Chief Operating Officer.
Richard C. Kelly. Has been a Director of Yorkshire Group since
February 1997. Since August 1997, has been Executive Vice President and
Chief Financial Officer of NCE. From 1990 to 1997, was Senior Vice
President of Public Service Company of Colorado.
Paul J. Bonavia. Has been a Director of Yorkshire Group since
December 1998. Since December 1997, has been Senior Vice President and
General Counsel of NCE. From March 1997 to December 1997 was Of Counsel at
LeBoeuf, Lamb, Greene & MacRae, LLP. From 1991 to February 1997, was
Senior Vice President at Dominion Resources, Inc.
Management of Yorkshire Finance and Yorkshire Finance 2
The following table sets forth certain information with respect to the
Boards of Directors of Yorkshire Finance as of December 31, 1999 and
Yorkshire Finance 2 as of January 7, 2000:
Name Age Position
Graham J. Hall 56 Director
Roger Dickinson 53 Director
Andrew G. Donnelly 44 Director
Graham J. Hall. Has been a Director of Yorkshire Finance since August
1997 and a Director of Yorkshire Finance 2 since January 2000. 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 and a Director of Yorkshire Finance 2 since January 2000.
Since 1989, has been Group Company Secretary and Solicitor of Yorkshire.
Andrew G. Donnelly. Has been a Director of Yorkshire Finance since
December 1997 and a Director of Yorkshire Finance 2 since January 2000.
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.
ITEM 11. EXECUTIVE COMPENSATION
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.
Management Compensation of Yorkshire Finance and Yorkshire Finance 2
The directors of Yorkshire Finance and Yorkshire Finance 2 listed above
receive no cash or non-cash compensation as a result of their services
performed for Yorkshire Finance and Yorkshire Finance 2. The salaries of
all directors listed immediately above are paid by Yorkshire solely for
their services performed for Yorkshire.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Yorkshire Power Group Ltd is wholly owned indirectly by AEP and NCE.
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 Power Group Limited as of December 31, 1999:
Name Title of Security Number of Shares
Beneficially
Owned (1)
Dr. E. Linn Draper, Jr. AEP Common Stock 8,670 (2)(3)
Donald M. Clements, Jr. AEP Common Stock 1,424 (2)
Armando A. Pena AEP Common Stock 5,306 (2)
Wayne H. Brunetti NCE Common Stock 378,123 (4)(5)(6)
Richard C. Kelly NCE Common Stock 111,215 (4)(6)(7)
Paul J. Bonavia NCE Common Stock 88,848 (4)(6)
Directors and executive officers of Yorkshire Power Group Ltd as a group (6
persons)
AEP Common Stock 15,400(8)
NCE Common Stock 578,186 (8)
(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 3,449 shares, Mr. Clements 1,424 shares and Mr.
Pena 3,791 shares.
(3) Includes 5,221 shares of AEP common stock held in joint tenancy with
Dr. Draper's wife.
(4) Includes shares of NCE common stock which the following have the right
to acquire as of December 31, 1999, through the exercise of options,
currently exercisable or exercisable within 60 days, granted under
the NCE Omnibus Incentive Plan and the predecessor PSCo Omnibus
Incentive Plan as follows: Mr. Brunetti 348,334 Mr. Kelly 100,000 and
Mr. Bonavia 88,000 shares.
(5) Includes 29,127 shares of NCE common stock held in joint tenancy.
(6) Includes shares of NCE stock held in the NCE's Employee Savings and
Stock Option Plan as follows: Mr. Brunetti 662, Mr. Kelly 2,876 and
Mr. Bonavia 148.
(7) Includes 263 shares of NCE common stock held by Mr. Kelly's wife in the
NCE Savings Plan.
(8) Represents less than 1% of outstanding common stock of AEP or NCE, as
applicable.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
None
CERTAIN BUSINESS RELATIONSHIPS
See Items 10 and 11 herein.
INDEBTEDNESS OF MANAGEMENT
None
TRANSACTIONS WITH PROMOTERS
None
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report on this
Form 10-K:
(1) Financial Statements:
The financial statements and the related reports of independent
public accountants and auditors filed as a part of this annual
report are listed under Item 8 herein.
(2) Financial Statement Schedules:
Consolidated Valuation and Qualifying Accounts (Schedule II)
All other schedules are omitted because they are not applicable
or the required information is contained in the financial
statements or notes thereto.
(3) Exhibits:
Exhibits are listed in the Exhibit Index on pages 141 to 145.
(b) Reports on Form 8-K:
The registrant has not filed any reports on Form 8-K during the last
quarter of the Transition Period.
A report on Form 8-K, dated December 20 1999, was filed during the
quarter ended March 31, 2000, under Item 5 of Form 8-K, in respect of
the supply and distribution price control reviews.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant, Yorkshire Power Group
Limited, certifies that it has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in London, England on
March 16, 2000.
YORKSHIRE POWER GROUP LIMITED
By: /s/Armando A. Pena
Director and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
(i) Principal Executive Officer:
/s/*Wayne H Brunetti.
Chairman of the Board March 16, 2000
and Director
(ii) Principal Financial Officer
and Principal Accounting Officer:
Chief Financial Officer March 16, 2000
/s/Armando A. Pena and Director
(iii) A Majority of the Directors
*Dr. E. Linn Draper, Jr.
*Donald M Clements, Jr.
*Richard C Kelly
*Paul J Bonavia
*BY Authorized Representative March 16, 2000
/s/Armando A. Pena, Attorney-in-Fact in the United States
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Board of Directors of Yorkshire Power Group
Limited and Subsidiaries
We have audited the consolidated financial statements of Yorkshire
Power Group Limited and its subsidiaries (the "Company") as of December 31,
1999, March 31, 1999 and March 31, 1998, and for the 9 month period ended
December 31, 1999, and the years ended March 31, 1999 and March 31, 1998,
and have issued our report thereon dated March 16, 2000. Our audits also
included the financial statement schedule of the Company, listed in Item
14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when
considered in relation to the corresponding basic financial statements
taken as a whole, presents fairly in all material respects the information
set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 16, 2000
<PAGE>
<TABLE>
YORKSHIRE POWER GROUP LIMITED
(Successor Company)
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Millions)
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
Description (POUNDS) (POUNDS) (POUNDS) (POUNDS) (POUNDS)
<S> <C> <C> <C> <C> <C>
9 month period ended December 31, 1999
Deducted from Assets:
Accumulated Provision for
Uncollectible Accounts 9 4 - 4(a) 9
9 4 - 4 9
Year ended March 31, 1999
Deducted from Assets:
Accumulated Provision for
Uncollectible Accounts 6 9 - 6(a) 9
6 9 - 6 9
Year ended March 31, 1998
Deducted from Assets:
Accumulated Provision for
Uncollectible Accounts 6 6 - 6(a) 6
6 6 - 6 6
(a) Uncollectible accounts written-off
</TABLE>
EXHIBIT INDEX
Certain of the following exhibits, designated with an asterisk (*), are
filed herewith. The exhibits not so designated have heretofore been filed
with the Commission and, pursuant to 17 C.F.R. 229.10(d) and 240.12b-32,
are incorporated herein by reference to the documents indicated in
parentheses following the descriptions of such exhibits. Certain
instruments which define the rights of holders of debt securities of
Yorkshire Power Group Limited and its subsidiaries are not filed herewith
pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, 17 C.F.R. 229.
Yorkshire Power Group Limited agrees to furnish a copy of each such
instrument to the SEC upon request.
Exhibit
Number Description
3.1 Memorandum and Articles of Association of Yorkshire Power Group
Limited (Designated in Registration 333-47925 as Exhibit 3.1).
3.2 Certificate of Incorporation of Yorkshire Power Group Limited
(Designated in Registration 333-47925 as Exhibit 3.2).
4.1 Subordinated Indenture dated as of June 1, 1998 among Yorkshire
Power Group Limited, Yorkshire Power Finance Limited, Banque
Generale du Luxembourg, and The Bank of New York (Annual Report on
Form 10-K for the fiscal year ended March 31, 1998, File No. 333-
47925, Exhibit 4.1).
4.2 First Supplemental Indenture dated as of June 1, 1998 among
Yorkshire Power Group Limited, Yorkshire Power Finance Limited,
Banque Generale du Luxembourg and The Bank of New York (Annual
Report on Form 10-K for the fiscal year ended March 31, 1998, File
No. 333-47925, Exhibit 4.2).
4.3 Certificate of Trust of Yorkshire Capital Trust I (Designated in
Registration 333-47925 as Exhibit 4.4).
4.4 Trust Agreement of Yorkshire Capital Trust I (Designated in
Registration 333-47925 as Exhibit 4.5).
4.5 Amended and Restated Trust Agreement of Yorkshire Capital Trust I
dated as of June 1, 1998 (Annual Report on Form 10-K for the fiscal
year ended March 31, 1998, File No. 333-47925, Exhibit 4.5).
4.6 Trust Securities Guarantee Arrangement dated as of June 1, 1998
between Yorkshire Power Group Limited and The Bank of New York
(Annual Report on Form 10-K for the fiscal year ended March 31,
1998, File No. 333-47925, Exhibit 4.6).
4.7 Deposit Agreement dated as of June 1, 1998 between Yorkshire Power
Finance Limited and The Bank of New York (Annual Report on Form 10-K
for the fiscal year ended March 31, 1998, File No. 333-47925,
Exhibit 4.7).
4.8 Indenture, dated as of February 1, 1998 among Yorkshire Power Finance
Limited, Yorkshire Power Group Limited, The Bank of New York and
Banque Generale du Luxembourg (Annual Report on Form 10-K for the
fiscal year ended March 31, 1998, File No. 333-47925, Exhibit 4.8).
4.9 First Supplemental Indenture, dated as of February 25, 1998, among
Yorkshire Power Finance Limited, Yorkshire Power Group Limited, The
Bank of New York and Banque Generale du Luxembourg (Annual Report on
Form 10-K for the fiscal year ended March 31, 1998, File No. 333-
47925, Exhibit 4.9).
4.10 Second Supplemental Indenture, dated as of February 25, 1998, among
Yorkshire Power Finance Limited, Yorkshire Power Group Limited, The
Bank of New York and Banque Generale du Luxembourg (Annual Report on
Form 10-K for the fiscal year ended March 31, 1998, File No. 333-
47925, Exhibit 4.10).
4.11 Deposit Agreement, dated as of February 1, 1998 between The Bank of
New York and Yorkshire Power Finance Limited (Annual Report on Form
10-K for the fiscal year ended March 31, 1998, File No. 333-47925,
Exhibit 4.11).
4.12 Trust Deed, dated January 17, 1995, between Yorkshire Electricity
Group plc and Bankers Trust Company Limited (Annual Report on Form
10-K for the fiscal year ended March 31, 1998, File No. 333-47925,
Exhibit 4.12).
4.13 First Supplement, dated July 27, 1995, between Yorkshire Electric
Group plc and Bankers Trust Company Limited (Annual Report on Form
10-K for the fiscal year ended March 31, 1998, File No. 333-47925,
Exhibit 4.13).
10.1 Yorkshire Electricity Group plc Public Electricity Supply License
dated March 26, 1990 as modified by modifications dated March 30,
1994, March 31, 1995, September 25, 1995, December 11, 1997,
December 30, 1997 and March 31, 1998 (Designated in Registration
333-47925 as Exhibit 10.1).
10.2 Second Tier License to Supply Electricity for England and Wales for
Yorkshire Electricity Group plc dated June 8, 1990 (Designated in
Registration 333-47925 as Exhibit 10.2).
10.3 Modifications to Yorkshire Electricity Group plc Second Tier License
to Supply Electricity for England and Wales dated October 24, 1990,
April 22, 1992, March 11, 1994, April 29, 1994 and January 19, 1998
(Designated in Registration 333-47925 as Exhibit 10.3).
10.4 Second Tier License to Supply Electricity for Scotland for Yorkshire
Electricity Group plc dated March 25, 1991 (Designated in
Registration 333-47925 as Exhibit 10.4).
10.5 Modifications to Yorkshire Electricity Group Second Tier License to
Supply Electricity for Scotland dated June 15, 1992, June 30, 1993,
March 11, 1994 and January 20, 1998 (Designated in Registration 333-
47925 as Exhibit 10.5).
10.6 Pooling and Settlement Agreement dated March 30, 1990 among
Yorkshire Electricity Group plc, National Grid Company plc and other
parties (Designated in Registration 333-47925 as Exhibit 10.6).
10.7 Master Connection and Use of System Agreement dated as of March
30, 1990 among The National Grid Company plc and its users
(including Yorkshire Electricity Group plc) (Designated in
Registration 333-47925 as Exhibit 10.7).
10.8 Master Agreement dated as of October 25, 1995 among The National
Grid Holding plc, The National Grid Company plc, Yorkshire
Electricity Group plc and the other RECs (Designated in
Registration 333-47925 as Exhibit 10.8).
10.9 Memorandum of Understanding among the National Grid Group plc,
Yorkshire Electricity Group plc and the other RECs, dated November
17, 1995 (Designated in Registration 333-47925 as Exhibit 10.9).
10.10 Master Registration Agreement dated as of June 1, 1998 among
Yorkshire Electricity Group plc, Energy Pool Funds Administration
Limited and other parties (Annual Report on Form 10-K for the
Fiscal Year ended March 31, 1998, File No. 333-47925, Exhibit
10.11).
10.11 Settlement Agreement for the Electricity Industry in Scotland,
dated as of August 14, 1998 (Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, File No. 333-47925, Exhibit
10.1).
10.12 Agreement for (POUNDS)220 million Credit Facility, dated July 22,
1998, for Yorkshire Electricity Group plc arranged by Citibank,
N.A. and Deutsche Bank AG London (Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, File No. 333-47925,
Exhibit 10.2).
*10.13 Supplemental Agreement dated December 13, 1999, relating to a Credit
Facility for Yorkshire Electricity Group plc arranged by Citibank,
N.A. and Deutsche Bank AG London incorporating an Agreement for a
(POUNDS)50,000,000 Revolving Credit Facility dated July 22, 1998
for Yorkshire Electricity Group plc arranged by Citibank N.A. and
Deutsche Bank AG London.
*10.14 Yorkshire Electricity Group plc Public Electricity Supply License
modifications dated September 17, 1999.
*12.1 Computation of ratios of earnings to fixed charges.
*21.1 List of subsidiaries of Yorkshire Power Group Limited
*24.1 Power of Attorney of certain officers and directors of Yorkshire
Power Group Limited.
*27.1 Financial Data Schedule.
Exhibit 10.14
THIS SUPPLEMENTAL AGREEMENT is dated 13th December, 1999 and made
between:
(1) YORKSHIRE POWER GROUP LIMITED ("YPG") ;
(2) YORKSHIRE HOLDINGS PLC ("YH");
(3) YORKSHIRE ELECTRICITY GROUP PLC ("YEG"); and
(4) CITIBANK INTERNATIONAL plc as agent on behalf of the Finance
Parties (in this capacity the "Agent").
BACKGROUND:
(1) Pursuant to a credit agreement dated 22nd July, 1998 (the "Credit
Agreement") made between, among others, YPG, YH and YEG as
borrowers and the Agent the Banks agreed to make available to the
YPG, YH and YEG a loan facility of up to an aggregate principal
amount of (POUNDS)330,000,000 on the terms of the Credit
Agreement.
(2) By this Supplemental Agreement the parties hereto wish to amend
the terms of the Credit Agreement in accordance with Clause 24
(Amendments and waivers) of the Credit Agreement, and the Agent
hereby confirms that it has the consent of the Majority Banks to
make the amendments to the Credit Agreement on behalf of the
Finance Parties.
NOW IT IS AGREED as follows:
1. DEFINITIONS
1.1 Terms defined
In this Supplemental Agreement:
"Restated Credit Agreement"
means the Credit Agreement as restated and amended in the form
set out in the Schedule to this Supplemental Agreement.
1.2 Interpretation
(a) Unless the contrary intention appears, terms defined in the
Restated Credit Agreement shall have the same meanings when used
in this Supplemental Agreement.
(b) The provisions of clause 1.2 (Construction) of the Restated
Credit Agreement shall also apply to this Supplemental Agreement
as if set out in this Supplemental Agreement but with all
necessary modifications.
2. RESTATEMENT
The Credit Agreement will be amended and restated in the form set
out in the Schedule to this Supplemental Agreement on the date
(the "Effective Date") on which Facility B has been repaid and
cancelled in full, such confirmation to be given to YEG by the
Agent on the same date as the repayment and cancellation becomes
effective.
3. MISCELLANEOUS
The provisions of clauses 10 (Payments), 21 (Stamp Duties), 24
(Amendments and Waivers), 29 (Severability), 30 (Counterparts)
and 31 (Notices) of the Restated Credit Agreement shall apply to
this Supplemental Agreement as if set out in this Supplemental
Agreement, but as if references in those clauses to the Restated
Credit Agreement were references to this Supplemental Agreement.
4. CONTINUATION
(a) This Supplemental Agreement is supplemental to the Credit
Agreement and, except insofar as amended or supplemented hereby,
the Credit Agreement will remain in full force and effect.
(b) References in the Credit Agreement to "this Agreement", "hereof",
"hereunder" and expressions of similar import shall be deemed to
be references to the Credit Agreement as amended and restated by
this Supplemental Agreement.
(c) The Agent and YPG hereby designate this Supplemental Agreement as
a Finance Document for the purposes of the Credit Agreement.
(d) YPG and YH confirm, for the benefit of the Finance Parties, that
this Supplemental Agreement does not discharge either of them
from any obligations or liabilities that have arisen on or before
the Effective Date under the Finance Documents, and that YPG and
YH shall continue to be responsible for those obligations and
liabilities.
5. GOVERNING LAW
This Supplemental Agreement shall be governed by and construed in
accordance with English law.
This Supplemental Agreement has been entered into on the date
stated at the beginning of this Supplemental Agreement.
SCHEDULE
AGREEMENT
DATED 22nd July, 1998
(POUNDS)50,000,000
REVOLVING CREDIT FACILITY
FOR
YORKSHIRE ELECTRICITY GROUP PLC
ARRANGED BY
CITIBANK, N.A.
and
DEUTSCHE BANK AG LONDON
ALLEN & OVERY
London
for the Borrower
CLIFFORD CHANCE
London
for the Finance Parties
INDEX
Clause Page
1. Interpretation 5
2. The Facilities 19
3. Purpose 19
4. Conditions Precedent 20
5. Drawdown 20
6. Repayment 21
7. Prepayment and Cancellation 21
8. Interest Periods 22
9. Interest 23
10. Payments 24
11. Taxes 26
12. Market Disruption 27
13. Increased Costs 29
14. Illegality and Mitigation 30
15. Representations and Warranties 31
16. Undertakings 34
17. Default 39
18. The Agent and the Arranger 42
19. Fees 47
20. Expenses 48
21. Stamp Duties 48
22. Indemnities 48
23. Evidence and Calculations 49
24. Amendments and Waivers 50
25. Changes to the Parties 51
26. Disclosure of Information 53
27. Set-Off 53
28. Pro Rata Sharing 53
29. Severability 54
30. Counterparts 55
31. Notices 55
32. Governing Law 56
Schedules
1. Banks and Commitments 57
2. Conditions Precedent Documents 58
3. Calculation of the Mandatory Cost 59
4. Form of Request 61
5. Form of Novation Certificate 62
Signatories 63
THIS AGREEMENT is dated 22nd July, 1998 between:-
(1) YORKSHIRE ELECTRICITY GROUP PLC (the "Borrower");
(2) CITIBANK, N.A. and DEUTSCHE BANK AG LONDON (in this capacity the
"Arrangers");
(3) THE FINANCIAL INSTITUTIONS listed in Schedule 1 as banks (the
"Banks"); and
(4) CITIBANK INTERNATIONAL plc as agent (in this capacity the
"Agent").
IT IS AGREED as follows:-
1. INTERPRETATION
1.1 Definitions
In this Agreement:-
"Act"
means the Electricity Act 1989 and, unless the context otherwise
requires, all subordinate legislation and any successive
legislation thereto.
"Adjusted Share Capital and Reserves"
means the aggregate of:
(a) the amount paid up or credited as paid up on the issued share
capital of the Borrower; and
(b) the amounts standing to the credit of the consolidated capital
and revenue reserves of the Group,
adjusted, to the extent that the following items have not already
been added, deducted or excluded in arriving at the figures
referred to in paragraph (a) or (b) above:
(i) by adding Subordinated Debt;
(ii) by deducting the amounts standing to the debit of the
consolidated reserves of the Group;
(iii) by deducting any amounts attributable to interests of non-Group
members in Group Subsidiaries;
(iv) by deducting any reserves set aside for deferred taxation;
(v) by deducting the amount by which the net book value of any fixed
asset has been written up after the date of this Agreement (or,
in the case of a person becoming a member of the Group after that
date, the date on which it becomes a member of the Group) by way
of revaluation or on its transfer from one member of the Group to
another (but no such deduction shall be made in respect of any
amount if supported by, and not exceeding the amount shown by, an
independent written valuation),
but so that no amount to be added, deducted or excluded as a
result of any of the above shall be added, deducted or excluded
more than once in the same calculation.
"Affiliate"
means a Subsidiary or a holding company (as defined in Section
736 of the Companies Act 1985) of a Bank or any other Subsidiary
of that holding company.
"Applicable Rate"
means the rate quoted by the Agent to the Borrower to be that at
which money can be deposited in the London interbank market on
the earliest available day, provided that the applicable rate
shall not be less than LIBID nor more than LIBOR.
"Balance Sheet"
means, at any time, the then most recent audited consolidated
annual or unaudited consolidated half yearly balance sheet of the
Group delivered to the Agent by the Borrower under Clause 16.2
(Financial information).
"Borrowings"
means indebtedness in respect of:
(a) moneys borrowed or raised including (except for the purposes of
Clause 17.5 (Cross default)) the recourse element of any asset
securitisation or other factoring but excluding any amounts owing
for assets purchased or services obtained on trade credit terms
in the ordinary course of business;
(b) amounts raised by means of acceptances under any acceptance
credit facility or otherwise (not being acceptances in relation
to the purchase of assets or services in the ordinary course of
business);
(c) the deferred purchase price of assets or services the payment of
which is deferred for a period in excess of ninety days (other
than assets or services obtained on trade credit terms normal in
the business concerned);
(d) the principal amount and any premium payable by the relevant
company from time to time owing in respect of any loan notes,
debentures, bonds or other similar instruments;
(e) the capital value of any financial lease, hire purchase
arrangements or any arrangement treated as a financial lease
required to be capitalised and treated as a borrowing in the
consolidated balance sheet of the Group;
(f) for the purposes of Clause 17.5 (Cross default) (only) net
indebtedness under any currency or interest cap, swap or collar;
and
(g) any guarantee or assurance against financial loss or indemnity in
respect of the borrowings of any other person not being a member
of the Group of a type referred to in paragraphs (a) to (f)
(inclusive) above (but excluding any such guarantee or assurance
in respect of the performance of any contract or service not
involving financial loss or indemnity in respect of borrowings),
but shall exclude:
(A) liabilities in respect of the Pooling and Settlement Agreement or
other arrangements which replace the Pooling and Settlement
Agreement in accordance with Clause 17.12 (Pooling and Settlement
Agreement); and
(B) Project Finance Borrowings.
"Business Day"
means a day (other than a Saturday or a Sunday) on which banks
are open for business in London.
"Commitment"
means:
(a) in relation to a Bank which is a Bank on the date of this
Agreement, the amount in Sterling set opposite its name in
Schedule 1 and the amount of any other Bank's Commitment acquired
by it under Clause 25 (Changes to the Parties); and
(b) in relation to a Bank which becomes a Bank after the date of this
Agreement, the amount of any other Bank's Commitment acquired by
it under Clause 25 (Changes to the Parties),
to the extent not cancelled, transferred or reduced under this
Agreement.
"Commitment Period"
means the period from the date of this Agreement to the Repayment
Date (both dates inclusive).
"Default"
means an Event of Default or an event which, with the giving of
notice or lapse of time provided for in Clause 17 (Default) (or
any combination of the foregoing), would constitute an Event of
Default.
"Director General"
means the person from time to time appointed by the Secretary of
State to hold office as Director General of Electricity Supply
for the purposes of the Act or any office which replaces the
function of the Director General of Electricity Supply.
"Drawdown Date"
means the date of the advance of a Loan.
"EBITDA"
means, in respect of any Relevant Period, the total operating
profit for continuing operations, acquisitions (as a component of
continuing operations) and discontinued operations of the Group
before taking into account:
(a) Interest Payable and Interest Receivable;
(b) all amounts provided for depreciation and amortisation
(including, without limitation, amortisation of any goodwill);
(c) all exceptional and extraordinary items; and
(d) all taxes,
in each case for that Relevant Period but after:
(A) deducting any gain over book value arising in favour of the Group
on the sale, lease or other disposal of any asset (other than on
the sale of trading stock) during the Relevant Period and any
gain arising on revaluation of any asset during that Relevant
Period, in each case to the extent that it would otherwise be
taken into account, whether as an exceptional item or otherwise;
and
(B) excluding the earnings or profit before interest, tax
depreciation and amortisation (as determined in accordance with
the preceding paragraphs of this definition) and excluding all
exceptional and extraordinary items of any company referred to in
paragraph (a) of the definition of Project Finance Borrowings,
(all calculated on a consolidated basis disregarding any portion
of any item taken into account in that calculation which is
attributable to any minority interests in Subsidiaries).
"Environmental Law"
means any applicable law (including, without limitation, common
law), regulation, directing code of practice, circular, guidance
notice or the like concerning pollution or the protection of
human health, the environment, the conditions of the work place
or the manufacture, processing, generation, transportation,
storage, treatment or disposal of dangerous substances,
pollutants, contaminants, chemicals or toxic or hazardous
substances or waste.
"Environmental Licence"
means any authorisation required by any Environmental Law.
"Existing Facilities"
means:
(a) the bilateral credit facility made available to YPG under the
agreement dated 31st July, 1997 and made between YPG and Union
Bank of Switzerland; and
(b) each bilateral credit facility dated 2nd May, 1995 made available
to the Borrower by Midland Bank PLC, Den Danske Bank
Aktieselskab, The Sumitomo Bank, Limited, Deutsche Bank AG
London, The Bank of Tokyo-Mitsubishi, Limited, National
Westminster Bank Plc, Union Bank of Switzerland and Morgan
Guaranty Trust Company of New York.
"Event of Default"
means an event specified as such in Clause 17.1 (Events of
Default).
"Facility"
means the sterling revolving credit facility designated under
Clause 2.1 (Facility), the terms of which are set out in this
Agreement.
"Facility Office"
means the office(s) in the United Kingdom notified by a Bank to
the Agent:
(a) on or before the date it becomes a Bank; or
(b) by not less than five Business Days' notice,
as the office through which it will perform all or any of its
obligations under this Agreement.
"Fee Letter"
means a letter between the Arrangers and the Borrowers or a
letter between (amongst others) the Agent and the Borrower, in
each case dated 10th June, 1998, setting out, amongst other
things, the amount of the fees referred to in Clause 19 (Fees).
"Finance Document"
means this Agreement, any Fee Letter, any Novation Certificate or
any other document designated as such by the Agent and the
Borrower.
"Finance Party"
means an Arranger, a Bank or the Agent.
"Group"
means the Borrower and its Subsidiaries.
"Information Memorandum"
means the Information Memorandum dated June, 1998 and prepared in
connection with this Agreement.
"Interest Payable"
means, in respect of any Relevant Period, all interest payable
and similar charges as shown in (or in the notes to) the
financial statements of the Group (calculated on a consolidated
basis) for the Relevant Period but excluding interest payable on
Project Finance Borrowings by companies referred to in paragraph
(a) of that definition.
"Interest Period"
means each period determined in accordance with Clause 8
(Interest Periods).
"Interest Receivable"
means, in respect of any Relevant Period, all interest receivable
and similar income as shown in (or in the notes to) the financial
statements of the Group (calculated on a consolidated basis) for
that Relevant Period but excluding interest receivable by a
company of the type referred to in paragraph (a) of the
definition of Project Finance Borrowings.
"Investments"
means, as at any date, the aggregate (calculated on a
consolidated basis) of:
(a) cash in hand in a jurisdiction where such amounts are freely
transferable out of that jurisdiction and convertible into
currencies dealt in on the London foreign exchange market;
(b) money at call in a jurisdiction, and freely convertible into
currencies, referred to in (a) above;
(c) deposits and certificates of deposit the term of which has twelve
months or less remaining to maturity in a jurisdiction, and
freely convertible into currencies, referred to in (a) above;
(d) United Kingdom gilts;
(e) deposits made with the Commissioners of Inland Revenue in respect
of which certificates of tax deposit have been issued by Her
Majesty's Treasury;
(f) sterling bills of exchange eligible for rediscount at the Bank of
England;
(g) bonds rated AA- (or the equivalent) or above by Standard & Poor's
Ratings Group, The Fitch IBCA Group or Duff & Phelps Credit
Rating Co. or Moody's Investors Service, Limited; and
(h) any other negotiable money market instrument issued by an issuer
in a jurisdiction, and convertible into currencies, referred to
in (a) above with a maximum maturity of twelve months or less,
excluding commercial paper (unless it is rated at least A1 (or
the equivalent) by Standard & Poor's Ratings Group or The Fitch
IBCA Group or Duff & Phelps Credit Rating Co. or P1 by Moody's
Investors Service, Limited),
provided that, when the aggregate amount of Investments required
to be taken into account for the purposes of this definition on
any particular day is being ascertained, any such Investments
denominated or repayable or in respect of which monies are
payable in a currency other than sterling shall be taken into
account at their sterling equivalent at the rate of exchange
prevailing on that day in London using the Agent's spot rate as
of 11.00 a.m. on such date for the purchase of such currency with
sterling.
"LIBID"
means, in relation to an amount received by the Agent referred to
in Clause 22.2(b) (Other indemnities), the arithmetic mean
(rounded to four decimal places) of the rates, as supplied to the
Agent at its request, quoted by the Reference Banks to leading
banks in the London interbank market at or about 11.00 a.m. on
the relevant day for the taking of deposits in sterling and in an
amount approximately equal to the amount so received from the
Borrower for the period from and including the date that payment
is received by the Agent to but excluding the last day of the
Interest Period of the relevant Loan or amount.
"LIBOR"
means, in relation to an Interest Period:
(a) the rate appearing on the Telerate Screen page 3750 or any
equivalent successor to such page or other page as appropriate on
the Telerate Service or (failing which) such other service as
may, from time to time, display the British Bankers' Association
Interest Settlement Rates for deposits in sterling (as agreed
between the Borrower and the Agent (acting reasonably)) (the
"Telerate Screen"); or
(b) (if no such offered rate for quotations appears on the Telerate
Screen) the arithmetic mean (rounded to four decimal places) of
the relevant offered rates which appear on the relevant page of
the Reuters Screen; or
(c) (in the absence of manifest error, if no such offered rate for
quotations appears on the Telerate Screen or the Reuters Screen)
the arithmetic mean (rounded to four decimal places) of the
rates, as supplied to the Agent at its request, quoted by the
Reference Banks to leading banks in the London interbank market,
(in each case) at 11.00 a.m. on the first day of that Interest
Period, as being the interest rate(s) quoted in the London
interbank market for the offering of deposits in sterling for a
period equal to that Interest Period.
"Licence"
means the public electricity supply licence granted by the
Secretary of State to the Borrower under Section 6(I)(c) of the
Act as modified or supplemented from time to time and, if any
such licence is split by or with the consent of the Director
General into more than one new licence, each such new licence.
"Licence Holder"
means at any time a member of the Group which then holds a
Licence.
"Loan"
means, the principal amount of each borrowing by the Borrower
under this Agreement or the principal amount outstanding of that
borrowing.
"Majority Banks"
means, at any time, Banks:-
(a) whose participations in the Loans then outstanding aggregate more
than 662/3 per cent. of all the Loans then outstanding; or
(b) if there are no Loans then outstanding, whose Commitments then
aggregate more than 662/3 per cent. of the Total Commitments; or
(c) if there are no Loans then outstanding and the Total Commitments
have been reduced to nil, whose Commitments aggregated more than
662/3 per cent. of the Total Commitments immediately before the
reduction.
"Mandatory Cost"
means the cost imputed to the Banks of compliance with the
Mandatory Liquid Assets requirements of the Bank of England and
the requirements of the Financial Services Authority expressed as
a rate per annum and determined in accordance with Schedule 3.
"Margin"
means 0.325 per cent. per annum.
"Material Adverse Effect"
means a material adverse effect on the ability of the Borrower to
perform and comply with:
(a) from time to time, its obligations under Clause 16.15 (Financial
covenants);
(b) its payment obligations under the Finance Documents; or
(c) in respect of Clauses 15.5 (Non-conflict), 15.10 (Litigation),
15.11 (Licence), 16.13 (Licence), 16.16 (Licence undertakings),
17.11 (Licence), 17.12 (Pooling and Settlement Agreement) and
17.13 (Compliance with the Act) only, any of its other material
obligations under the Finance Documents.
"Net Interest Payable"
means, in respect of any Relevant Period, Interest Payable less
Interest Receivable for that Relevant Period.
"Novation Certificate"
means a certificate substantially in the form of Schedule 5.
"Original Group Accounts"
means the audited consolidated accounts of the Group for the year
ended 31st March, 1998.
"Party"
means a party to this Agreement.
"Permitted Security Interest"
means any Security Interest:
(a) arising pursuant to an order of attachment or injunction
restraining disposal of assets or similar legal process which is
contested by the Borrower or any of its Subsidiaries in good
faith or created in favour of a plaintiff or defendant in any
action of the court or tribunal before whom such action is
brought as security for costs or expenses where the Borrower or
one of its Subsidiaries is prosecuting or defending such action
in the bona fide interests of the Group;
(b) arising by operation of law or contained in a contract for the
sale of goods or supply of services entered into in the ordinary
course of business of the company creating the same or which is a
pledge over or assignment of documents of title, insurance
policies and sale contracts in relation to commercial goods
created or made in the ordinary course of business to secure the
purchase price of goods or indebtedness to finance such purchase
price;
(c) over or affecting (1) any asset acquired by a member of the Group
after the date hereof and subject to which such asset is acquired
or (2) any asset of any company which becomes a member of the
Group after the date hereof, where such Security Interest is
created prior to the date on which such company becomes a member
of the Group, provided that in each case:
(i) the principal amount secured by such Security Interest is not
increased either as a result of such acquisition or such company
becoming a member of the Group or thereafter and, when aggregated
with such other Security Interests under this paragraph (c), does
not exceed (POUNDS)15,000,000 (or its equivalent in any other
currency or currencies); or
(ii) that Security Interest is discharged within 180 days of such
acquisition or such company becoming a member of the Group;
(d) which is a Security Interest (a "Substitute Security Interest")
which replaces any Permitted Security Interest and which secures
an amount not exceeding the principal amount secured by such
Permitted Security in such circumstances when such Permitted
Security Interest will be released as a consequence of such
Substitute Security Interest being granted;
(e) arising in connection with any cash management or netting
arrangements made between any banks or financial institutions and
any member or members of the Group;
(f) created prior to the date of this Agreement (including, without
limitation, any existing Security Interest in favour of the
European Investment Bank) provided the principal amount secured
by such Security Interest shall not be increased after the date
of this Agreement;
(g) arising out of title retention provisions in a supplier's
standard conditions of supply of goods acquired by any member of
the Group in the ordinary course of business;
(h) over assets and/or (where such assets comprise substantially the
whole of the assets of the owner thereof) shares or the like in
the owner of such assets securing borrowings incurred to finance
the cost of developing (or acquiring and developing) such assets
(and/or securing any indebtedness in respect of hedging actual or
projected exposure in respect of these borrowings) where such
borrowings are Project Finance Borrowings;
(i) created under or pursuant to, or in accordance or connection
with, the terms of any pooling and settlement agreement
(including, without limitation, the Pooling and Settlement
Agreement) or pooling and settling arrangements of the
electricity supply industry or any transactions or arrangements
entered into in connection with the management of risks relating
thereto;
(j) securing indebtedness not otherwise permitted to be secured by
Security Interests provided that the aggregate principal amount
of the indebtedness so secured under this paragraph (j) shall not
at any time exceed (POUNDS)10,000,000 or (if higher) 2 per cent.
of Adjusted Share Capital and Reserves; or
(k) to the creation or subsistence of which the Majority Banks at any
time consent in writing.
"Pooling and Settlement Agreement"
means an agreement dated 30th March 1990 (as amended and restated
at 22nd April, 1994), made by the Borrower with The National Grid
Company plc and others setting out the rules and procedures for
the operation of an electricity trading pool and of a settlement
system and, while the same has effect, the Initial Settlement
Agreement dated 30th March 1990.
"Principal Subsidiary"
means the Borrower or a Subsidiary of the Borrower (not being a
Subsidiary falling within category (a) of the definition of
Project Finance Borrowings or any other Subsidiary of the
Borrower whose only Borrowings are Project Finance Borrowings):
(a) whose (i) net assets or (ii) turnover represent 10 per cent. or
more of the net assets of the Group or consolidated turnover of
the Group respectively, in each case as calculated by reference
to the then latest audited financial statements of such
Subsidiary (consolidated in the case of a company which itself
has Subsidiaries and which, in the normal course, prepares
consolidated accounts) and the then latest audited consolidated
financial statements of the Group; or
(b) to which is transferred all or substantially all of the business,
undertaking and assets of a Subsidiary of the Borrower which
immediately prior to such transfer is a Principal Subsidiary,
whereupon the transferor Subsidiary shall immediately become a
Principal Subsidiary and the transferee Subsidiary shall cease to
be a Principal Subsidiary under the provisions of this sub-
paragraph (b) (but without prejudice to the provisions of sub-
paragraph (a) above), upon publication of its next audited
financial statements; or
(c) which is a Licence Holder.
"Project Finance Borrowings"
means any Borrowings to finance the ownership, acquisition,
construction, development and/or operation of an asset:
(a) made by a single purpose company (whether or not a member of the
Group) whose principal assets and business are constituted by the
ownership, acquisition, construction, development and/or
operation of an asset and whose liabilities in respect of the
relevant financing are not directly or indirectly the subject of
a guarantee, indemnity or any other form of assurance,
undertaking or support from any member of the Group except as
expressly referred to in paragraph (b)(iii) below; or
(b) in respect of which the person or persons to whom such Borrowings
are or may be owed by the relevant borrower (whether or not a
member of the Group) has or have no recourse whatsoever to any
member of the Group for the repayment of or payment of any sum
relating to such Borrowings other than:
(i) recourse to the relevant borrower for amounts limited to the
aggregate cash flow or net cash flow (other than historic cash
flow or historic net cash flow) from such asset; and/or
(ii) recourse to such borrower for the purpose only of enabling
amounts to be claimed in respect of those Borrowings in an
enforcement of any Security Interest given by such borrower over
such asset or the income, cash flow or other proceeds arising
therefrom (or given by any shareholder or the like in the
borrower over its shares or the like in the capital of the
relevant borrower) to secure those Borrowings or any recourse
referred to in (iii) below, provided that (A) the extent of such
recourse to such borrower is limited solely to the amount of any
recoveries made on any such enforcement, and (B) such person or
persons are not entitled, by virtue of any right or claim arising
out of or in connection with such Borrowings, to commence
proceedings for the winding up or dissolution of the borrower or
to appoint or procure the appointment of any receiver, trustee or
similar person or officer in respect of the borrower or any of
its assets (save for the assets the subject of such Security
Interest); and/or
(iii) recourse to such borrower generally, or directly or indirectly to
a member of the Group under any form of assurance, undertaking or
support, which recourse is limited to a claim for damages (other
than liquidated damages and damages required to be calculated in
a specified way) for breach of an obligation (not being a payment
obligation or any obligation to procure payment by another or an
obligation to comply or to procure compliance by another with any
financial ratios or other tests of financial condition) by the
person against whom such recourse is available; or
(c) which the Agent (acting on the instructions of the Majority
Banks) shall have agreed (acting reasonably) in writing to treat
as a Project Finance Borrowing for the purposes of this
Agreement.
"Qualifying Bank"
means a bank which:
(a) is a bank within the meaning of Section 840A of the Income and
Corporation Taxes Act 1988;
(b) will be beneficially entitled to any interest to be paid to it
(as a Bank) under this Agreement; and
(c) is within the charge to United Kingdom corporation tax as
respects such interest.
"Reference Banks"
means, subject to Clause 25.4 (Reference Banks), the Agent,
Deutsche Bank AG London and National Westminster Bank Plc.
"Relevant Period"
means each period of 12 months ending on the date of the audited
consolidated accounts for each of the Borrower's financial years
and on the date of the Borrower's unaudited consolidated accounts
for the first half of each of the Borrower's financial years.
"Repayment Date"
means the fifth anniversary of the date of this Agreement.
"Request"
means a request made by the Borrower for a Loan, substantially in
the form of Schedule 4.
"Rollover Loan"
means one or more Loans:
(a) whose proposed Drawdown Date is the same as the last day of the
Interest Period of one or more existing Loans; and
(b) whose aggregate principal amount does not exceed the aggregate
outstanding principal amount of all existing Loans whose Interest
Period ends on that Drawdown Date.
"Secretary of State"
means the person from time to time holding office as the
Secretary of State for Trade and Industry or any successor office
thereto.
"Security Interest"
means any mortgage, pledge, lien (other than a lien arising by
operation of law), charge or other security interest.
"Subordinated Debt"
means, at any time, the outstanding amount (including capitalised
interest) of Borrowings which is:
(a) owing by the Borrower to any of its shareholders; and
(b) fully subordinated to the indebtedness of the Borrower under this
Agreement by a subordination agreement in an agreed form.
"Subsidiary"
means:-
(a) a subsidiary within the meaning of Section 736 of the Companies
Act 1985 as amended by Section 144 of the Companies Act 1989; and
(b) unless the context otherwise requires, a subsidiary undertaking
within the meaning of Section 21 of the Companies Act 1989.
"Total Commitments"
means the aggregate for the time being of the Commitments, being
(POUNDS)50,000,000 at the date of this Agreement.
"YEG Facility"
means the agreement dated on or about the date of this Agreement
and made between the Borrower, the Arrangers, the Banks and the
Agent.
"YPG"
means Yorkshire Power Group Limited.
1.2 Construction
(a) In this Agreement, unless the contrary intention appears, a
reference to:-
(i) an "agreed form" means, in the case of a document, the form of
that document agreed between the Borrower and the Agent as
evidenced by the initialling of that document (or other written
confirmation of the same) by the Borrower and the Agent or their
respective legal advisers;
"assets" includes present and future properties, revenues and
rights of every description;
an "authorisation" includes an authorisation, consent, approval,
resolution, licence, exemption, filing and registration;
a "month" is a reference to a period starting on one day in a
calendar month and ending on the numerically corresponding day in
the next calendar month, except that, if there is no numerically
corresponding day in the month in which that period ends, that
period shall end on the last day in that calendar month;
a "regulation" includes any regulation, rule, official directive,
request or guideline (whether or not having the force of law but,
if not having the force of law, being of a type with which a
relevant person is accustomed to comply) of any governmental
body, agency, department or regulatory, self-regulatory or other
authority or organisation;
"(POUNDS)" and "sterling" means the lawful currency for the time
being of the United Kingdom; and
"tax" includes any present or future tax, levy, impost, duty,
charge, fee deduction or withholding of any nature and whatever
called by whomsoever and wherever imposed, levied, collected,
withheld or assessed;
(ii) a provision of law is a reference to that provision as amended or
re-enacted;
(iii) a Clause or a Schedule is a reference to a clause of or a
schedule to this Agreement;
(iv) a person includes its successors and assigns;
(v) a Finance Document or another document is a reference to that
Finance Document or other document as amended, novated or
supplemented; and
(vi) a time of day is a reference to London time.
(b) Unless the contrary intention appears, a term used in any other
Finance Document or in any notice given under or in connection
with any Finance Document has the same meaning in that Finance
Document or notice as in this Agreement.
(c) The index to and the headings in this Agreement are for
convenience only and are to be ignored in construing this
Agreement.
1.3 Financial definitions
In this Agreement, Adjusted Share Capital and Reserves as at the
end of a Relevant Period, and EBITDA, Interest Payable and
Interest Receivable for any Relevant Period shall be determined
or calculated by reference to the financial statements of the
Borrower, or any other relevant entity for that Relevant Period
delivered to the Agent under Clause 16.2 (Financial information).
2. THE FACILITY
2.1 Facility
(a) Subject to the terms of this Agreement, the Banks agree to make
Loans (being revolving Loans) available to the Borrower during
the Commitment Period up to an aggregate principal amount not
exceeding at any time the aggregate of the Commitments.
(b) No Bank is obliged to lend more than its Commitment.
2.2 Nature of a Finance Party's rights and obligations
(a) The obligations of a Finance Party under the Finance Documents
are several. Failure of a Finance Party to carry out those
obligations does not relieve any other Party of its obligations
under the Finance Documents. No Finance Party is responsible for
the obligations of any other Finance Party under the Finance
Documents.
(b) The rights of a Finance Party under the Finance Documents are
divided rights. A Finance Party may, except as otherwise stated
in the Finance Documents, separately enforce those rights.
2.3 Change of currency
(a) If more than one currency or currency unit denomination are at
the same time recognised by the central bank of any country as
the lawful currency of that country, then:-
(i) any reference in the Finance Documents to, and any obligations
arising under the Finance Documents in, the currency of that
country shall be translated into, or paid in, the currency or
currency unit of that country designated by the Agent; and
(ii) any translation from one currency or currency unit to another
shall be at the official rate of exchange or conversion rate
recognised by the central bank for the conversion of that
currency or currency unit into the other, rounded up or down by
the Agent acting reasonably.
(b) If a change in any currency of a country occurs, this Agreement
will be amended to the extent the Agent specifies to be necessary
to reflect the change in currency and to put the Banks and the
Borrower in the same position, so far as possible, that they
would have been in if no change in currency had occurred.
3. PURPOSE
(a) The Borrower shall apply each Loan made to it under the Facility
towards its general corporate purposes and those of its
Subsidiaries.
(b) Without affecting the obligations of the Borrower in any way, no
Finance Party is bound to monitor or verify the application of
any Loan.
4. CONDITIONS PRECEDENT
4.1 Documentary conditions precedent
The Borrower may not deliver a Request until the Agent has
notified the Borrower and the Banks that it has received all the
documents set out in Schedule 2 in the agreed form or, if not in
the agreed form, in form and substance satisfactory to the Agent.
4.2 Conditions precedent to first Loan
The obligation of each Bank to make the first Loan to the
Borrower is subject to the further condition precedent that the
Agent has received evidence satisfactory to it that, on that
first Drawdown Date, the Existing Facilities have been (or will
be immediately following the making of the first Loan) prepaid
and cancelled in full.
4.3 Further conditions precedent
The obligation of each Bank to make any Loan is subject to the
further conditions precedent that on both the date of the Request
and the Drawdown Date:-
(a) the representations and warranties in Clause 15 (Representations
and warranties) to be repeated on those dates are correct in all
material respects and will be correct in all material respects
immediately after the Loan is made; and
(b) (i) (in the case of a Loan other than a Rollover Loan) no
Default;
(ii) in the case of a Rollover Loan, no Event of Default
is outstanding or would result from the making of the Loan.
5. DRAWDOWN
5.1 Commitment Period
(a) The Borrower may borrow a Loan under the Facility during the
Commitment Period if the Agent receives, not later than 10.00
a.m. on the Business Day before the proposed Drawdown Date a duly
completed Request. Each Request is irrevocable.
(b) The Commitments shall automatically be cancelled in full on the
Repayment Date.
5.2 Completion of Requests
A Request will not be regarded as having been duly completed
unless:-
(a) the Drawdown Date is a Business Day (which must fall before the
Repayment Date);
(b) the principal amount of the Loan is a minimum of
(POUNDS)5,000,000 and is an integral multiple of
(POUNDS)5,000,000 or the balance of the undrawn Commitment;
(c) the Interest Period selected complies with Clause 8 (Interest
Periods); and
(d) the payment instructions comply with Clause 10 (Payments).
Each Request must specify one Loan only, but the Borrower may,
subject to the other terms of this Agreement, deliver more than
one Request on any one day. Unless otherwise agreed by the
Agent, the number of Loans outstanding, together with the number
of sterling-denominated loans outstanding under the YEG Facility,
shall not at any time exceed ten.
5.3 Advance of Loan
(a) The Agent shall promptly notify each Bank of the details of a
requested Loan and the amount of its participation in that Loan.
(b) Subject to the terms of this Agreement, each Bank shall make its
participation in a Loan available to the Agent for each Borrower
on the relevant Drawdown Date.
(c) The amount of each Bank's participation in a Loan will be the
proportion of the Loan which its Commitment bears to the Total
Commitments on the proposed Drawdown Date.
6. REPAYMENT
6.1 Repayment
Each Loan shall be repaid in full by the Borrower on the last day
of the Interest Period for that Loan.
6.2 Re-borrowing
Amounts repaid under the Facility may be re-borrowed, in
accordance with the terms of this Agreement, prior to the
Repayment Date.
7. PREPAYMENT AND CANCELLATION
7.1 Voluntary prepayment
(a) The Borrower may at any time, by giving not less than five
Business Days' prior notice (or such shorter period as the
Majority Banks may agree) to the Agent, prepay any Loan made to
it in whole or in part (but, if in part, in a minimum amount of
(POUNDS)5,000,000 and an integral multiple of (POUNDS)5,000,000).
(b) Any prepayment of a Loan under this Clause 7.1 shall be applied
pro rata against the participations of each Bank participating in
that Loan.
7.2 Voluntary cancellation
(a) The Borrower may, by giving not less than five Business Days'
prior notice (or such lesser period as the Majority Banks may
agree) to the Agent, cancel the undrawn amount of the Total
Commitments in relation to the Facility in whole or in part (but,
if in part, in a minimum amount of (POUNDS)5,000,000 and an
integral multiple of (POUNDS)5,000,000).
(b) Any cancellation in part shall be applied pro rata against the
Commitment of each Bank.
7.3 Additional right of prepayment and cancellation
(a) If:-
(i) the Borrower is required to pay to a Finance Party any additional
amounts under Clause 11 (Taxes); or
(ii) the Borrower is required to pay to a Finance Party any amount
under Clause 13 (Increased costs)
then, without prejudice to the obligations of the Borrower under
those Clauses, the Borrower may, whilst the relevant
circumstances continue, serve a notice of prepayment and
cancellation on that Bank through the Agent. In that event:-
(i) the Commitment of that Bank shall be cancelled; and
(ii) on the date falling five Business Days after the date of service
of the notice, the Borrower shall prepay that Bank's
participation in all the Loans made to it.
(b) If interest on a Loan is being calculated in accordance with
Clause 12.2 (Alternative basis), then, without prejudice to the
obligations of the Borrower under that Clause, the Borrower may,
whilst the relevant circumstances continue, serve a notice of
prepayment and cancellation on each Bank through the Agent. On
the date falling five Business Days after the date of service of
the notice, the Borrower giving such notice shall prepay all the
Loans made to it (or them).
7.4 Miscellaneous provisions
(a) Any notice of prepayment and/or cancellation under this Agreement
is irrevocable.
(b) All prepayments under this Agreement shall be made together with
accrued interest on the amount prepaid and, subject to
Clause 22.2 (Other indemnities), without premium or penalty.
(c) No prepayment or cancellation is permitted except in accordance
with the express terms of this Agreement.
(d) Subject to the terms of this Agreement, amounts prepaid under the
Facility at any time may be reborrowed.
8. INTEREST PERIODS
8.1 General
Each Loan shall have one Interest Period only.
8.2 Selection
(a) The Borrower shall select the Interest Period for a Loan in the
relevant Request.
(b) Subject to the following provisions of this Clause 8, each
Interest Period will be either an approved duration or an
optional duration as so selected under paragraph (a) above.
In this Clause 8:-
"approved duration" means one, two, three or six months; and
"optional duration" means any other period agreed by the Banks.
(c) No Interest Period for any Loan may extend beyond the Repayment
Date.
8.3 Selection of an optional duration
(a) If the Borrower selects an Interest Period of an optional
duration, it may also select an Interest Period of an approved
duration to apply if the selection of an optional duration
becomes ineffective in accordance with paragraph (b) below.
(b) If:-
(i) the Borrower requests an Interest Period of an optional duration;
and
(ii) the Agent notifies the Borrower not later than 10.30 a.m. on the
first Business Day of that Interest Period that matching deposits
are not available to the Reference Banks in the London interbank
market to fund the Loan for that Interest Period,
the Interest Period for that Loan shall be the alternative period
so specified or, in the absence of any alternative selection, one
month.
8.4 Non-Business Days
If an Interest Period would otherwise end on a day which is not a
Business Day, that Interest Period shall instead end on the next
Business Day in that calendar month (if there is one) or the
preceding Business Day (if there is not).
8.5 Notification
The Agent shall notify each relevant Party of the duration of
each Interest Period promptly after ascertaining its duration.
9. INTEREST
9.1 Interest rate
The rate of interest on each Loan for its Interest Period is the
rate per annum determined by the Agent to be the aggregate of the
applicable:-
(a) Margin;
(b) LIBOR; and
(c) Mandatory Cost.
9.2 Due dates
Except as otherwise provided in this Agreement, accrued interest
on each Loan is payable by the Borrower on the last day of each
Interest Period for that Loan and also, if the Interest Period is
longer than 6 months, on the date falling 6 months after the
first day of that Interest Period.
9.3 Default interest
(a) If the Borrower fails to pay any amount payable by it under this
Agreement, it shall forthwith on demand by the Agent pay interest
on the overdue amount from the due date up to the date of actual
payment, as well after as before judgment, at a rate (the
"default rate") determined by the Agent to be 1 per cent. per
annum above the rate which would have been payable if the overdue
amount had, during the period of non-payment, constituted a Loan
for such successive Interest Periods of such duration as the
Agent may determine (each a "Designated Interest Period").
(b) The default rate will be determined by the Agent on each Business
Day or the first day of, or two Business Days before the first
day of, the relevant Designated Interest Period, as appropriate.
(c) If the default rate is to be calculated by reference to LIBOR and
no rates are being quoted on the Telerate Screen or the Reuters
Screen and the Agent determines that deposits of the overdue
amount are not at the relevant time being made available by the
Reference Banks to leading banks in the London interbank market,
the default rate will be determined by reference to the cost of
funds to the Agent from whatever sources it may select.
(d) Default interest will be compounded at the end of each Designated
Interest Period.
9.4 Notification
The Agent shall promptly notify each relevant Party of each
determination of each rate of interest under this Agreement.
10. PAYMENTS
10.1 Place
All payments under the Finance Documents by the Borrower or a
Bank shall be made to the Agent to its account at such office or
bank in the U.K. as it may notify to the Borrower or Bank for
this purpose.
10.2 Funds
Payments under the Finance Documents to the Agent shall be made
for value on the due date at such times and in such funds as the
Agent may specify as being customary at the time for the
settlement of transactions in sterling.
10.3 Distribution
(a) Each payment received by the Agent under the Finance Documents
for another Party shall, subject to paragraphs (b) and (c) below,
be made available by the Agent to that Party by payment (on the
date and in the currency and funds of receipt) to its account
with such bank in the principal financial centre of the country
of the relevant currency as it may notify to the Agent for this
purpose by not less than five Business Days' prior notice.
(b) The Agent may apply any amount received by it for the Borrower in
or towards payment (on the date and in the currency and funds of
receipt) of any amount due from the Borrower under this Agreement
or in or towards the purchase of any amount of any currency to be
so applied.
(c) Where a sum is to be paid under this Agreement to the Agent under
the Finance Documents for another Party, the Agent is not obliged
to pay that sum to that Party until it has established that it
has actually received that sum. The Agent may, however, assume
that the sum has been paid to it in accordance with this
Agreement and, in reliance on that assumption, make available to
that Party a corresponding amount. If the sum has not been made
available but the Agent has paid a corresponding amount to
another Party, that Party shall refund the corresponding amount
within three Business Days of demand, together with interest on
that amount from the date of payment to the date of receipt,
calculated at a rate determined by the Agent to reflect its cost
of funds.
10.4 Currency
(a) Amounts payable in respect of costs, expenses and taxes and the
like are payable in the currency in which they are incurred.
(b) Any other amount payable under the Finance Documents is, except
as otherwise provided in the Finance Documents, payable in
sterling.
10.5 Set-off and counterclaim
All payments made by the Borrower under the Finance Documents
shall be made without set-off or counterclaim.
10.6 Non-Business Days
(a) If a payment under the Finance Documents is due on a day which is
not a Business Day, the due date for that payment shall instead
be the next Business Day in the same calendar month (if there is
one) or the preceding Business Day (if there is not).
(b) During any extension of the due date for payment of any principal
under this Agreement interest is payable on that principal at the
rate payable on the original due date.
10.7 Partial payments
(a) If the Agent receives a payment insufficient to discharge all the
amounts then due and payable by the Borrower under this
Agreement, the Agent shall apply that payment towards the
obligations of the Borrower under this Agreement in the following
order:-
(i) first, in or towards payment pro rata of any unpaid fees, costs
and expenses of the Agent under this Agreement;
(ii) secondly, in or towards payment pro rata of any accrued interest
due but unpaid under this Agreement;
(iii) thirdly, in or towards payment pro rata of any principal due but
unpaid under this Agreement; and
(iv) fourthly, in or towards payment pro rata of any other sum due but
unpaid under the Finance Documents.
(b) The Agent shall, if so directed by all the Banks, vary the order
set out in sub-paragraphs (a)(ii) to (iv) above.
(c) Paragraphs (a) and (b) above will override any
appropriation made by a Borrower.
11. TAXES
11.1 Gross-up
Subject to Clause 11.4 (Exceptions from gross-up), each payment
to be made by the Borrower under this Agreement shall be made
free and clear of and without deduction or withholding (whether
for or on account of tax or otherwise) unless the Borrower is
required by law to make such a payment subject to such deduction
or withholding in respect of any taxes imposed by laws of the
United Kingdom or any federation or association of sovereign
states of which the United Kingdom is a member ("Relevant
Taxes"). If any Relevant Tax or amounts in respect of Relevant
Tax must be deducted, or any other deductions must be made, from
any amounts payable or paid by the Borrower, or paid or payable
by the Agent to a Bank, under the Finance Documents, the Borrower
shall (subject as provided in this Clause) increase the sum
payable to the extent necessary to ensure that, after the making
of such deduction or withholding, the relevant Bank receives and
retains (free from any liability in respect of any such deduction
or withholding) a net sum equal to the sum which it would have
received and so retained had no such deduction or withholding
been made or required to be made.
11.2 Tax receipts
Within 30 days after paying any sum from which it is required by
law to make any deduction or withholding, the Borrower shall
deliver to the Agent for the relevant Bank evidence satisfactory
to that Bank of that deduction, withholding or payment and (where
remittance is required) of the remittance thereof to the relevant
taxing or other authority (a receipt by the relevant taxing or
other authority being deemed to be such evidence).
11.3 Tax credits
If the Borrower makes a payment under Clause 11.1 (Gross-up) for
the account of a Bank and that Bank determines that it has
received or been granted a credit against or relief or remission
for, or repayment of, any tax paid or payable by it in respect of
or calculated with reference to the deduction or withholding
under Clause 11.1 (Gross-up) that Bank shall, to the extent that
it can do so without prejudice to the retention of the amount of
such credit, relief, remission or repayment, pay the that
Borrower such amount as that Bank determines is attributable to
such deduction or withholding under Clause 11.1 (Gross-up) and
which will leave that Bank (after such payment) in no better or
worse position than it would have been in if the Borrower had not
been required to make such deduction or withholding under
Clause 11.1 (Gross-up). Nothing in this Clause 11.3 shall
interfere with the right of a Bank to arrange its tax affairs in
whatever manner it thinks fit nor oblige a Bank to disclose any
information relating to its tax affairs or any computations in
respect thereof.
11.4 Exceptions from gross-up
(a) If:
(i) a Bank is not or ceases to be a Qualifying Bank; and
(ii) as a result the Borrower is required to deduct or withhold United
Kingdom income tax in respect of payments of interest to be made
by the Borrower to that Bank under this Agreement,
then the Borrower shall not be liable to pay under Clause 11.1
(Gross-up) in respect of any such payment of interest any amount
in excess of the amount it would have been obliged to pay if that
Bank were a Qualifying Bank provided that this Clause 11.4 shall
not apply if, after the date of this Agreement any change occurs
in, or in the official interpretation or application of, any
relevant law or the practice of the United Kingdom Inland Revenue
and as a result thereof that Bank is not or ceases to be a
Qualifying Bank.
(b) The obligation of the Borrower to pay an additional amount under
Clause 11.1 (Gross-up) shall not apply to the extent that the tax
deducted is tax on the overall net income of a Bank save to the
extent that such tax is in respect of the relevant payment from
which the deduction must be made.
11.5 Notification
If at any time after the date of this Agreement a Bank is aware
that it is not or will cease to be a Qualifying Bank (for
whatever reason), it shall promptly notify the Borrower through
the Agent.
12. MARKET DISRUPTION
12.1 Absence of quotations
If LIBOR is to be determined by reference to the Reference Banks
but a Reference Bank does not supply an offered rate by
11.30 a.m. on the Drawdown Date, the applicable LIBOR shall,
subject to Clause 12.2 (Market disruption), be determined on the
basis of the quotations of the remaining Reference Banks.
12.2 Market disruption
If:
(a) LIBOR is to be determined by reference to the Reference Banks but
no, or only one, Reference Bank supplies a rate by 11.30 a.m. on
the Drawdown Date or the Agent otherwise determines that, by
reason of circumstances affecting the London Interbank Market
generally and not specific to the Bank or Banks concerned,
adequate and fair means do not exist for ascertaining LIBOR; or
(b) the Agent receives notification from Banks whose participations
in a Loan exceed 50 per cent. of that Loan that, by reason of
circumstances affecting the London Interbank Market generally and
not specific to the Bank or Banks concerned:-
(i) matching deposits will not be available to them in the London
interbank market in the ordinary course of business to fund their
participations in that Loan for the relevant Interest Period; or
(ii) the cost to them of matching deposits in the London interbank
market would be in excess of LIBOR for the relevant Interest
Period,
the Agent shall promptly notify the Borrower and the relevant
Banks of the fact and that this Clause 12 is in operation.
12.3 Alternative basis
(a) If a notification under Clause 12.2 (Market disruption) applies
to a Loan which has not been made:
(i) that Loan shall still be made;
(ii) the Interest Period of that Loan shall be one month; and
(iii) interest in respect of that Loan shall be calculated in
accordance with paragraph (b) below.
(b) If a notification under Clause 12.2 (Market disruption) applies
to a Loan which is made under paragraph (a) above or which is
outstanding then, notwithstanding any other provision of this
Agreement:
(i) within five Business Days of receipt of the notification, the
Borrower and the Agent shall enter into negotiations for a period
of not more than 30 days with a view to agreeing an alternative
basis for determining the rate of interest and/or funding
applicable to that Loan and/or any other Loans;
(ii) if no alternative basis is agreed, the Agent shall certify on or
before the last day of the Interest Period to which the
notification relates an alternative basis for maintaining that
Loan, which shall be binding on the relevant Borrower; and
(iii) any such alternative basis may include an alternative method of
fixing the interest rate, alternative Interest Periods or
alternative currencies but it must reflect the cost to the Banks
of funding the Loan from whatever sources they may select plus
the Margin plus any Mandatory Cost.
(c) The Agent shall consult with the Borrower at least once every
14 days after the occurrence and during the continuance of the
circumstances specified in the foregoing provisions of this
Clause 12 with a view to reverting to the normal provisions for
the determination of the rates of interest applicable to any
Loan.
13. INCREASED COSTS
13.1 Increased costs
(a) Subject to Clause 13.2 (Exceptions), the Borrower shall within
five Business Days of a demand by a Bank pay to that Bank the
amount of any increased cost incurred by it or its holding
company as a result of any change in or change in the
interpretation or application of any law or regulation (including
any law or regulation relating to taxation, or reserve asset,
special deposit, cash ratio, liquidity or capital adequacy
requirements or any other form of banking or monetary control).
Any such demand shall set out in reasonable detail the
calculation and the cause of the amounts claimed and contain
confirmation that the affected Bank is taking the same approach
in relation to the majority of its other facilities of a similar
nature.
(b) In this Agreement "increased cost" means:
(i) an additional cost incurred by a Bank or its holding company as a
result of that Bank having entered into, or performing,
maintaining or funding its obligations under, this Agreement; or
(ii) that portion of an additional cost incurred by a Bank or its
holding company in that Bank making, funding or maintaining all
or any advances comprised in a class of advances formed by or
including the Loans made or to be made under this Agreement as is
attributable to it or its holding company in that Bank making,
funding or maintaining the Loans; or
(iii) a reduction in any amount payable to a Bank or its holding
company or the effective return to a Bank or its holding company
under this Agreement or on its capital; or
(iv) the amount of any payment made by a Bank or its holding company,
or the amount of any interest or other return foregone by a Bank
or its holding company, calculated by reference to any amount
received or receivable by a Bank under this Agreement.
13.2 Exceptions
Clause 13.1 (Increased costs) does not apply to any increased
cost:-
(a) compensated for by the payment of the Mandatory Cost;
(b) compensated for by the operation of Clause 11 (Taxes) or which
would have been compensated under that Clause but for the
operation of Clause 11.4 (Exceptions from gross-up);
(c) attributable to any change in the rate of tax on the overall net
income of a Bank;
(d) occurring as a result of any negligence or default of a Bank,
including, without limitation, a breach by a Bank of any fiscal,
monetary or capital adequacy limit imposed on it by any law or
regulation; or
(e) occurring as a result of a transfer or novation of a Bank's
rights or obligations under this Agreement; or
(f) any increased cost attributable to any implementation of the
proposals contained in any of:-
(i) the statement of the Basle Committee on Banking Regulations and
Supervisory Practices dated July 1988 and entitled "International
Convergence of Capital Measurement and Capital Standards"; or
(ii) the EC Solvency Ratio Directive, EC Own Funds Directive, or
EC Capital Adequacy Directive or any law, regulation, rule,
official directive, request or guideline (whether or not having
the force of law) of any governmental body, central bank, agency,
department, regulatory, self-regulatory or other authority in any
jurisdiction, implementing, applying or supplementing any of them
with which a Bank complies or is required to comply,
in each case as published before the date of this Agreement
unless it results from any change in, or change in the
interpretation of or application of, that statement, Directive,
law, regulation, rule, official directive, request or guideline
after the date of this Agreement.
14. ILLEGALITY AND MITIGATION
14.1 Illegality
If it is or becomes unlawful in any jurisdiction for a Bank to
give effect to any of its obligations as contemplated by this
Agreement or to fund or maintain its participation in any Loan,
then:-
(a) that Bank may notify the Borrower through the Agent accordingly;
and
(b) (i) the Borrower shall forthwith prepay the participations of
that Bank in all or part of the Loans made to it to the extent
necessary to avoid the relevant illegality, together with accrued
interest on that portion of those Loans; and
(ii) the Commitment of that Bank shall be reduced to such amount as
would be lawful or (if no such amount would be lawful) to zero,
in each case, on or before the last day before the relevant
unlawfulness takes effect.
14.2 Mitigation
If circumstances arise which would, or would on the giving of
notice, result in:-
(a) any additional amounts becoming payable under Clause 11 (Taxes);
or
(b) any amount becoming payable under Clause 13 (Increased costs); or
(c) any prepayment, early payment or cancellation under Clause 14.1
(Illegality),
then, without limiting the obligations of the Borrower under this
Agreement and without prejudice to the terms of Clauses 11
(Taxes), 13 (Increased costs) and 14.1 (Illegality), the affected
Finance Party may, in consultation with the Borrower, take such
steps as may reasonably be open to it to mitigate or remove such
circumstance, including (without limitation) the transfer of its
rights and obligations under this Agreement to another branch or
another bank or financial institution acceptable to the Borrower,
unless to do so would (in the sole opinion of the affected
Finance Party) be prejudicial to it.
15. REPRESENTATIONS AND WARRANTIES
15.1 Representations and warranties
The Borrower makes the representations and warranties set out in
this Clause 15 (Representations and warranties) to each Finance
Party.
15.2 Status
(a) It is a limited liability company, duly incorporated and validly
existing under the laws of England;
(b) each member of the Group has the power to own its assets and
carry on its business as it is being conducted;
(c) each Licence Holder has been duly licensed and authorised by the
Secretary of State under Section 6(I)(c) of the Act for the
generation, distribution and/or supply of electricity and the
Licence is in full force and effect.
15.3 Powers and authority
It has the power to enter into and perform, and has taken all
necessary action to authorise the entry into, performance and
delivery of, the Finance Documents to which it is or will be a
party and the transactions contemplated by those Finance
Documents.
15.4 Legal validity
Except as stated in any qualifications as to matters of law in
any legal opinion referred to in Schedule 2, each Finance
Document to which it is or will be a party constitutes, or when
executed in accordance with its terms will constitute, its legal,
valid and binding obligation.
15.5 Non-conflict
(a) The entry into and performance by it of, and the transactions
contemplated by, the Finance Documents do not and will not
conflict with the Licence in any material respect.
(b) The entry into and performance by it of, and the transactions
contemplated by, the Finance Documents do not and will not:-
(i) conflict with any law or regulation or authorisation or judicial
or official order in any material respect; or
(ii) conflict with the constitutional documents of any member of the
Group; or
(iii) conflict with the Licence or any document which is binding upon
any member of the Group or any asset of any member of the Group
to an extent or in a manner which would have a Material Adverse
Effect.
15.6 No default
No Event of Default or Default is outstanding which has not been
remedied or waived or would result from the making of any Loan.
15.7 Authorisations
All authorisations which are necessary for the entry into,
performance and validity of, and the transactions contemplated
by, the Finance Documents have been obtained or effected (as
appropriate) and are in full force and effect.
15.8 Accounts
On and from the date that audited consolidated accounts of the
Group are first delivered to the Agent under Clause 16.2
(Financial information), the audited consolidated accounts of the
Group most recently delivered to the Agent:-
(a) have been prepared in accordance with accounting principles and
practices generally accepted in the United Kingdom; and
(b) (in conjunction with the notes thereto) give a true and fair view
of the consolidated financial condition of the Group as at the
date to which they were drawn up.
15.9 Material adverse change
Since the date as at which the most recent audited consolidated
financial statements of the Borrower were stated to be prepared,
there has been no material adverse change in the financial
condition of Group taken as a whole.
15.10 Litigation
Save as disclosed in writing to the Agent prior to the date of
this Agreement no litigation or arbitration is current or, to its
knowledge, pending or has been threatened in writing, which are
likely to be determined adversely to it and, if so determined,
might reasonably be likely to have a Material Adverse Effect.
15.11 Licence
(a) The Licence is in full force and effect and there exist no
material breaches of the terms of the Licence.
(b) There are no circumstances in existence which would be likely to
lead the Director General or the Secretary of State to seek to
revoke the Licence except in each case where the relevant event
or circumstances would not have a Material Adverse Effect.
(c) The Borrower has not breached:
(i) any requirement of the Act or any regulations made thereunder; or
(ii) any other statutory requirement or any final order or confirmed
provisional order in each case made under the Act; or
(iii) any undertaking given by it to the Director General or the
Secretary of State in relation to the conduct of its business as
a generator of electricity or as a public electricity supplier
(as the case may be),
the consequence of which is reasonably likely to have a Material
Adverse Effect.
(d) Neither the Director General nor the Secretary of State has given
notice to revoke a Licence.
(e) Save as described in writing to the Agent no amendment of any of
the terms of a Licence has been made or proposed which is
reasonably likely to have a Material Adverse Effect.
15.12 Information
To the best of the knowledge of the Borrower after due
enquiry:
(a) the factual information contained in Sections 4, 5 and 6 of the
Information Memorandum (other than the information referred to in
paragraph (b) below) was true in all material respects as at its
date;
(b) the factual information contained in the Information Memorandum
which has been taken from the SEC filing dated 3rd June, 1998 was
true in all material respects as at the date of that SEC filing;
(c) all estimates and projections contained in the Information
Memorandum were prepared by the Borrower based upon assumptions
that the Borrower considered to be reasonable as at the date of
their preparation and on the basis of information available to
the Borrower provided by third parties the Borrower believed, in
each case, to be reliable, except that no representation is made
that these estimates or projections will be achieved;
(d) the Information Memorandum did not omit as at its date any
information which renders the information contained in it untrue
or misleading in any material respect; and
(e) as at the date of the Credit Agreement, nothing has occurred
since the date of the Information Memorandum which renders the
factual information contained in Sections 4, 5 and 6 of the
Information Memorandum untrue or misleading in any material
respect.
15.13 Times for making representations and warranties
The representations and warranties set out in this Clause 15
(Representations and warranties):-
(a) are made on the date of this Agreement; and
(b) (other than the representations in Clauses 15.2(c) (Status),
15.5(a) (Non-conflict), 15.9 (Material adverse change), 15.10
(Litigation), 15.11(c) to (e) (Licence) and 15.12 (Information))
are deemed to be repeated by the Borrower on the date of each
Request made by it and the first day of each Interest Period of a
Loan with reference to the facts and circumstances then existing
but as if the words in Clause 15.6 (No default) "or Default" had
been deleted.
16. UNDERTAKINGS
16.1 Duration
The undertakings in this Clause 16 (Undertakings) remain in force
from the date of this Agreement for so long as any amount is or
may be outstanding under this Agreement or any Commitment is in
force.
16.2 Financial information
The Borrower shall supply to the Agent (with sufficient copies
for all the Banks):-
(a) as soon as the same are available (and in any event within
180 days of the end of each of its financial years), the audited
consolidated accounts of the Group for that financial year;
(b) as soon as the same are available (and in any event within
90 days of the end of the first half-year of each of its
financial years), the unaudited consolidated accounts of the
Group for that half-year; and
(c) together with the accounts specified in paragraphs (a) and (b)
above, a certificate signed by two of its directors on its behalf
setting out in reasonable detail computations establishing
compliance with Clause 16.15 (Financial covenants),
and all such accounts supplied under paragraphs (a) or (b) above
shall be prepared in accordance with accounting principles
generally accepted in the United Kingdom.
16.3 Information - Miscellaneous
The Borrower shall supply to the Agent (with sufficient copies
for all the Banks, if the Agent so requests):-
(a) all documents despatched by it to its creditors generally or (if
it is not a close company within the meaning of Section 414 of
the Income and Corporation Taxes Act, 1988) to its shareholders
generally (or any class of its shareholders generally) at the
same time as they are despatched;
(b) promptly upon becoming aware of them, details of any litigation,
arbitration or administrative proceedings which are current,
threatened in writing or pending, and which if they had been
current or threatened in writing on the date of this Agreement
would have resulted in the representation in Clause 15.10
(Litigation) being incorrect in any material respect; and
(c) promptly upon becoming aware that any modifications to the
Licence are being proposed by the Director General or the
Secretary of State, reasonable details thereof, to be updated
from time to time to reflect any changes, provided that such
details shall be required to be reported to the Agent hereunder,
only to the extent that if such proposed modifications were to be
made to the Licence, compliance with such modification or
undertaking would have a Material Adverse Effect.
16.4 Notification of Default
The Borrower shall notify the Agent of any Default or Event of
Default affecting it (and the steps, if any, being taken to
remedy it) promptly upon its occurrence.
16.5 Compliance certificates
The Borrower shall supply to the Agent:-
(a) together with the accounts specified in Clause 16.2(a) (Financial
information); and
(b) promptly if the Agent so requests (but no more often than twice
in a calendar year (excluding the certificate under paragraph (a)
above)),
a certificate signed by two of its directors on its behalf
certifying that no Default is outstanding or, if a Default is
outstanding, specifying the Default and the steps, if any, being
taken to remedy it.
16.6 Authorisations
The Borrower shall:-
(a) use all reasonable endeavours to obtain, maintain and comply in
all material respects with the terms of; and
(b) (if requested) supply certified copies to the Agent of,
any authorisation required under any law or regulation to enable
it to perform its obligations under, or for the validity or
admissibility in evidence of, any Finance Document.
16.7 Pari passu ranking
The Borrower shall procure that its obligations under the Finance
Documents do and will rank at least pari passu with all its other
present and future unsecured obligations, except for taxes,
national insurance contributions, local or water authority rates
and employee remuneration and benefits which are mandatorily
preferred by law applying to companies generally or by the Act.
16.8 Negative pledge
(a) The Borrower shall not, and shall procure that none of its
Subsidiaries will, create or permit to subsist any Security
Interest on any of its assets.
(b) Paragraph (a) does not apply to Permitted Security Interests or
to Security Interests arising under the Act.
16.9 Disposals
The Borrower shall not, and shall procure that no other
Subsidiary of the Borrower shall, either in a single transaction
or in a series of transactions, whether related or not and
whether voluntarily or involuntarily, sell, transfer, grant or
lease or otherwise dispose of all or any substantial part of the
assets of the Group.
The paragraph above does not apply to:
(a) sales, conveyances, transfers or other disposals in the ordinary
course of business on arm's length terms or otherwise at market
value; or
(b) sales, conveyances, transfers or other disposals the aggregate
book value of which is at the time of the final such disposal in
any financial year 7.5 per cent. or less of Adjusted Share
Capital and Reserves; or
(c) disposals to another member of the Group provided that such
disposals shall only be made to:
(i) a wholly owned Subsidiary of a Borrower;
(ii) another person who immediately after such disposal becomes a
wholly owned subsidiary of the Borrower; or
(iii) another member of the Group if the interest of the Borrower in
that transferee is no less than its interest in the transferor;
or
(d) disposals of assets in exchange for other assets similar as to
type and value or where all or a substantial part of the net
proceeds of such disposal are used within 60 days of the disposal
(or such longer period as the Majority Banks may agree) in the
acquisition of such assets; or
(e) disposals of cash raised or borrowed or temporary investments
representing surplus funds; or
(f) the expenditure of cash in the ordinary course of business
including, without limitation, for the repayment of any debt or
the acquisition of any asset; or
(g) the payment of any dividend or distribution whatsoever and
whether extraordinary or special in nature or otherwise, in each
case, in cash or in specie; or
(h) disposals on normal commercial terms of old and/or obsolete
plant or equipment; or
(i) any distribution of the surplus assets of a Subsidiary (not being
a Principal Subsidiary) in a liquidation or winding up not
involving insolvency; or
(j) disposals (with or without recourse) of receivables at arm's
length and on normal commercial terms (or by way of
securitisation or monetisation) provided that such disposal would
not of itself be reasonably likely to result in a breach of the
Borrower's obligations under Clause 16.15 (Financial covenants)
either at the time of the disposal or following the disposal; or
(k) the sale at arm's length of any of the shares in Ionica PLC owned
by the Borrower; or
(l) the sale at arm's length or otherwise at market value of the
power generation assets owned by members of the Group; or
(m) with the prior written consent of the Majority Banks.
16.10 Change of business
Unless the Agent (acting on the instructions of the Majority
Banks) otherwise agrees or the change arises by operation of law,
the Borrower shall not permit the Group as a whole to make any
substantial change in the nature of its business as a distributor
and/or supplier of electricity within its authorised area which,
when taken together, would account for more than 10 per cent. of
the consolidated gross assets and/or turnover of the Group.
16.11 Restriction on Borrowings
No member of the Group will incur or have outstanding any
Borrowings other than:
(a) under the Finance Documents;
(b) for the purpose of refinancing the Facility in full on the date
on which such Borrowings are first utilised;
(c) for the purpose of refinancing part of the Facility;
(d) Borrowings owing by one member of the Group to another member of
the Group;
(e) Subordinated Debt;
(f) Borrowings secured under paragraph (c) of the definition of
Permitted Security Interests up to the amount set out in sub-
paragraph (c)(i) of that definition unless that Security Interest
is to be discharged under sub-paragraph (c)(ii) of that
definition;
(g) Borrowings under any recourse disposal of receivables where that
disposal is permitted under Clause 16.9(d) (Disposals);
(h) Project Finance Borrowings;
(i) with the prior written consent of the Majority Banks; or
(j) any other Borrowings of the Borrower or any of its Subsidiaries
in an amount which, after deducting Investments of the Borrower
or any of its Subsidiaries do not exceed in aggregate
(POUNDS)700,000,000 (including under the Finance Documents and
the YEG Facility).
16.12 Environmental Matters
The Borrower will ensure that each member of the Group will:
(a) obtain all necessary Environmental Licences and comply in all
material respects with (i) the terms and conditions of all
Environmental Licences applicable to it and (ii) all other
applicable Environmental Laws in each case where failure to do so
would have a Material Adverse Effect;
(b) promptly upon receipt of the same, notify the Agent of any claim,
notice or other communication served on it in respect of any
alleged breach of or corrective or remedial obligation or
liability under any Environmental Law which would or would be
likely to or (in the case of an alleged breach), if
substantiated, would have a Material Adverse Effect.
16.13 Licence
(a) To the extent that there would otherwise be a Material Adverse
Effect, the Borrower shall, and shall ensure that each Licence
Holder shall, comply with all terms and conditions of the Licence
and with the requirements of all laws, rules, regulations, orders
and other requirements for the time being of the Secretary of
State and the Director General applicable to each Licence Holder
with which it is obliged to comply; and
(b) the Borrower will promptly notify the Agent of any amendments to
the Licence occurring after the date of this Agreement (other
than those of a minor and/or technical nature).
16.14 Change of basis
If, at any time, the Borrower changes or proposes to change in
any material respect the basis upon which the Group's audited
annual consolidated accounts are prepared (whether or not by
reason of a change in accounting standards or otherwise), then:-
(a) the Borrower shall promptly notify the Agent of the change or
proposed change;
(b) subject to paragraph (c) below, the Borrower shall calculate the
financial covenants under Clause 16.15 (Financial covenants) on
the basis of the accounting standards used for the Original Group
Accounts and shall provide appropriate calculations with the
certificates delivered under Clause 16.2(c) (Financial
information) to show the reconciliations and adjustments that
have been made as a result of the change in accounting standards;
and
(c) if the Borrower so requests at any time:
(i) the Borrower and the Agent shall enter into discussions for a
period of not more than 45 days with a view to agreeing the
amendments which would be required to be made to Clause 16.15
(Financial Covenants) to procure that, so far as possible, the
Borrower and the Banks are in no worse position than they would
have been in if the change in accounting standards had not
occurred;
(ii) any agreement between the Borrower and the Agent under sub-
paragraph (i) above shall be, with the prior consent of the
Majority Banks, binding on all the Parties; and
(iii) if no agreement is reached under sub-paragraph (i) above, then
the Borrower's auditors shall certify the amendments which would
be required to be made to this Agreement to place the Borrower
and the Banks in the same position they would have been in if the
change had not taken place; a certificate of the auditors in
accordance with the above will, in the absence of manifest error,
be binding on all the Parties.
16.15 Financial covenants
The Borrower shall procure that EBITDA for any Relevant Period
shall not be less than 2.5 times Net Interest Payable for that
Relevant Period.
16.16 Licence undertakings
The Borrower shall promptly supply to the Agent:
(a) copies of all notices or orders served on it by the Director
General or the Secretary of State in exercise of the powers
conferred on him by the Act to the extent the same might
reasonably be expected to have a Material Adverse Effect;
(b) details of any references relating to it to the Monopolies and
Mergers Commission after the date of this Agreement; and
(c) details of the exercise by the Secretary of State or the Director
General of the powers conferred on them by the Fair Trading Act
1973, the Competition Act 1980 and/or Section 12 of the Act
relating to it or any business carried on by it and regulated
thereby.
17. DEFAULT
17.1 Events of Default
Each of the events set out in Clauses 17.2 (Non-payment) to 17.14
(Expropriation) (inclusive) is an Event of Default (whether or
not caused by any reason whatsoever outside the control of the
Borrower or any other person).
17.2 Non-payment
The Borrower does not pay any amount payable by it under the
Finance Documents on the due date at the place at and in the
currency in which it is expressed to be payable and, but only if
such failure is due solely to administrative error or technical
difficulties, such non payment is not remedied within 3 Business
Days.
17.3 Breach of other obligations
(a) The Borrower does not comply with the provisions of Clause 16.15
(Financial covenants).
(b) The Borrower does not comply with any provision of the Finance
Documents (other than those referred to in paragraph (a) above or
Clause 17.2 (Non-payment)) and such default, if capable of
remedy, is not remedied within 25 days after the earlier of the
date upon which the Borrower became aware of the same and the
date on which the Borrower receives notice from the Agent
requiring remedy.
17.4 Misrepresentation
A representation, warranty or statement made or repeated in or in
connection with any Finance Document or in any document delivered
by or on behalf of the Borrower under or in connection with any
Finance Document is incorrect in any respect when made or deemed
to be made or repeated.
17.5 Cross-default
(a) Any Borrowings of a member of the Group are not paid when due; or
(b) an event of default howsoever described occurs under any document
relating to Borrowings of a member of the Group and any financier
to which those Borrowings are owed takes any step to improve its
commercial position, whether by charging a fee not provided for
in the original document evidencing those Borrowings, or seeking
more onerous provisions in that document; or
(c) any Borrowings of a member of the Group become prematurely due
and payable or are placed on demand as a result of an event of
default under the document relating to those Borrowings,
and the aggregate principal amount of Borrowings or amounts
referred to in paragraphs (a) to (c) (inclusive) above exceeds
(POUNDS)15,000,000 or its equivalent in any other currency.
17.6 Administration
(a) The Borrower or any Principal Subsidiary passes an effective
resolution to present an application for an administration order;
or
(b) an application for an administration order in relation to the
Borrower or a Principal Subsidiary is presented to the court
unless the application is being contested in good faith on
reasonable grounds by appropriate proceedings; or
(c) an administration order is made in relation to the Borrower or
any Principal Subsidiary.
17.7 Insolvency
The Borrower or any Principal Subsidiary has any voluntary
arrangement proposed in relation to it under Section 1 of the
Insolvency Act 1986, or enters into any other composition, scheme
of arrangement, compromise or arrangement involving such company
and its respective creditors generally (other than for the
purposes of reconstruction or amalgamation or other similar
arrangement).
17.8 Insolvency proceedings
(a) The Borrower or any Principal Subsidiary passes an effective
resolution for its winding up other than a resolution previously
approved in writing by the Agent; or
(b) a petition for the winding up of the Borrower or any Principal
Subsidiary is presented to the court and either:
(i) such company does not apply to the court within 30 days after the
presentation of such petition requesting the court to refuse such
petition; or
(ii) it does so apply but such petition is not refused by such court
within 60 days after such application for the refusal of such
petition or any such company becomes subject to a winding up
order,
provided that nothing in this Clause 17.8 shall apply to a
solvent reconstruction, amalgamation or reorganisation of a
Principal Subsidiary.
17.9 Appointment of receivers and managers
Any liquidator, trustee in bankruptcy, compulsory manager,
receiver, administrative receiver, administrator or the like is
appointed in respect of the Borrower or any Principal Subsidiary
or any material part of its assets or undertaking or the
directors of the Borrower or a Principal Subsidiary request the
appointment of a liquidator, trustee in bankruptcy, compulsory
manager, receiver, administrative receiver, administrator or the
like (other than an appointment to which the Agent has approved
pursuant to Clause 17.8 (Insolvency proceedings)).
17.10 Unlawfulness
It is or becomes unlawful for the Borrower to perform any of its
obligations under the Finance Documents.
17.11 Licence
(a) Any modification (other than a modification which is of a minor
or technical nature) is made to the terms and conditions of the
Licence and such modification would be expected to have a
Material Adverse Effect; or
(b) the Licence (excluding any second tier supply licence) is
surrendered by the Licence Holder or is revoked by the Secretary
of State or a notice from the Secretary of State is given to that
effect in accordance with its terms or it otherwise ceases to be
in full force and effect and, in each case, the Licence is not
replaced on substantially similar terms except where such
surrender, cessation or revocation has been agreed between the
Borrower and the Secretary of State and consented to by the
Majority Banks and provided that the giving of notice pursuant to
paragraph 3 of Part 1 of the Licence shall not be deemed to
constitute the revocation of the Licence.
17.12 Pooling and Settlement Agreement
Any notice requiring the Borrower to cease to be a party to the
Pooling and Settlement Agreement is given to the Borrower under
clause 66.1.3 or 66.2.2 of the Pooling and Settlement Agreement,
or the Borrower otherwise ceases to be a party to that agreement
and the same has a Material Adverse Effect, unless the Borrower
or any of its Subsidiaries enters into arrangements which replace
the Pooling and Settlement Agreement for electricity trading and
settlement within the electricity industry and those replacement
arrangements do not have a Material Adverse Effect.
17.13 Compliance with the Act
The Borrower fails to comply with a final order (within the
meaning of Section 25 of the Act) or with a provisional order
(within the meaning of that section) which has been confirmed
under that section (and not since been revoked) or any provisions
of the Act detailing the rights, powers, authorities, obligations
and duties of the Secretary of State or the Director General or
the manner in or time at which they are to be exercised, are
repealed or amended in a manner which has (or is likely to have)
a Material Adverse Effect.
17.14 Expropriation
All or a substantial part of the assets of the Borrower shall be
seized, renationalised or expropriated by any governmental
authority.
17.15 Acceleration
On and at any time after the occurrence of an Event of Default
while the same is continuing, unremedied or unwaived the Agent
may (and, shall if so directed by the Majority Banks), by notice
to each of the Borrower:
(a) cancel the Total Commitments; and/or
(b) demand that all or part of the Loans, together with accrued
interest and all other amounts accrued under this Agreement be
immediately due and payable, whereupon they shall become
immediately due and payable; and/or
(c) demand that all or part of the Loans be payable on demand,
whereupon they shall immediately become payable on demand by the
Agent acting on the instructions of the Majority Banks.
18. THE AGENT AND THE ARRANGERS
18.1 Appointment and duties of the Agent
(a) Each Finance Party (other than the Agent) irrevocably appoints
the Agent to act as its agent under and in connection with the
Finance Documents.
(b) Each Party appointing the Agent irrevocably authorizes the Agent
on its behalf to:
(i) perform the duties and to exercise the rights, powers and
discretions that are specifically delegated to it under or in
connection with the Finance Documents, together with any other
incidental rights, powers and discretions; and
(ii) execute each Finance Document expressed to be executed by the
Agent on that Party's behalf.
(c) The Agent shall have only those duties which are expressly
specified in the Finance Documents. Those duties are solely of a
mechanical and administrative nature.
18.2 Role of the Arrangers
Except as otherwise provided in the Finance Documents, the
Arrangers have no obligations of any kind to any other Finance
Party under or in connection with any Finance Document.
18.3 Relationship
The relationship between the Agent and the other Finance Parties
is that of agent and principal only. Nothing in this Agreement
constitutes the Agent as trustee or fiduciary for any other Party
or any other person and the Agent need not hold in trust any
moneys paid to it for a Party or be liable to account for
interest on those moneys.
18.4 Majority Banks' instructions
(a) The Agent will be fully protected if it acts in accordance with
the instructions of the Majority Banks in connection with the
exercise of any right, power or discretion or any matter not
expressly provided for in the Finance Documents. Any such
instructions given by the Majority Banks will be binding on all
the Banks. In the absence of such instructions the Agent may act
as it considers to be in the best interests of all the Banks.
(b) The Agent is not authorized to act on behalf of a Bank (without
first obtaining that Bank's consent) in any legal or arbitration
proceedings relating to any Finance Document.
18.5 Delegation
The Agent may act under the Finance Documents through its
personnel and agents.
18.6 Responsibility for documentation
Neither the Agent nor the Arrangers are responsible to any other
Finance Party for:-
(a) the execution, genuineness, validity, enforceability or
sufficiency of any Finance Document or any other document;
(b) the collectability of amounts payable under any Finance Document;
or
(c) the accuracy of any statements (whether written or oral) made in
or in connection with any Finance Document (including the
Information Memorandum).
18.7 Default
(a) The Agent is not obliged to monitor or enquire as to whether or
not a Default has occurred. The Agent will not be deemed to have
knowledge of the occurrence of a Default. However, if the Agent
receives notice from a Party referring to this Agreement,
describing the Default and stating that the event is a Default,
it shall promptly notify the Banks.
(b) The Agent may require the receipt of security satisfactory to it
whether by way of payment in advance or otherwise, against any
liability or loss which it will or may incur in taking any
proceedings or action arising out of or in connection with any
Finance Document before it commences these proceedings or takes
that action.
18.8 Exoneration
(a) Without limiting paragraph (b) below, the Agent will not be
liable to any other Finance Party for any action taken or not
taken by it under or in connection with any Finance Document,
unless directly caused by its gross negligence or wilful
misconduct.
(b) No Party may take any proceedings against any officer, employee
or agent of the Agent in respect of any claim it might have
against the Agent or in respect of any act or omission of any
kind (including gross negligence or wilful misconduct) by that
officer, employee or agent in relation to any Finance Document.
18.9 Reliance
The Agent may:-
(a) rely on any notice or document believed by it to be genuine and
correct and to have been signed by, or with the authority of, the
proper person;
(b) rely on any statement made by a director or employee of any
person regarding any matters which may reasonably be assumed to
be within his knowledge or within his power to verify; and
(c) engage, pay for and rely on legal or other professional advisers
selected by it (including those in the Agent's employment and
those representing a Party other than the Agent).
18.10 Credit approval and appraisal
Without affecting the responsibility of the Borrower for
information supplied by it or on its behalf in connection with
any Finance Document, each Bank confirms that it:-
(a) has made its own independent investigation and assessment of the
financial condition and affairs of the Borrower and its related
entities in connection with its participation in this Agreement
and has not relied exclusively on any information provided to it
by the Agent or the Arrangers in connection with any Finance
Document; and
(b) will continue to make its own independent appraisal of the
creditworthiness of the Borrower and its related entities while
any amount is or may be outstanding under the Finance Documents
or any Commitment is in force.
18.11 Information
(a) The Agent shall promptly forward to the person concerned the
original or a copy of any document which is delivered to the
Agent by a Party for that person.
(b) The Agent shall promptly supply a Bank with a copy of each
document received by the Agent under Clause 4 (Conditions
precedent) upon the request and at the expense of that Bank.
(c) Except where this Agreement specifically provides otherwise, the
Agent is not obliged to review or check the accuracy or
completeness of any document it forwards to another Party.
(d) Except as provided above, the Agent has no duty:-
(i) either initially or on a continuing basis to provide any Bank
with any credit or other information concerning the financial
condition or affairs of the Borrower or any related entity of the
Borrower whether coming into its possession before, on or after
the date of this Agreement; or
(ii) unless specifically requested to do so by a Bank in accordance
with a Finance Document, to request any certificates or other
documents from the Borrower.
18.12 The Agent and the Arrangers individually
(a) If it is also a Bank, each of the Agent and each Arranger has the
same rights and powers under this Agreement as any other Bank and
may exercise those rights and powers as though it were not the
Agent or an Arranger.
(b) Each of the Agent and each Arranger may:-
(i) carry on any business with the Borrower or its related entities;
(ii) act as agent or trustee for, or in relation to any financing
involving, the Borrower or its related entities; and
(iii) retain any profits or remuneration in connection with its
activities under this Agreement or in relation to any of the
foregoing.
(c) In acting as the Agent, the agency division of the Agent will be
treated as a separate entity from its other divisions and
departments. Any information acquired by the Agent which, in its
opinion, is acquired by it otherwise than in its capacity as the
Agent may be treated as confidential by the Agent and will not be
deemed to be information possessed by the Agent in its capacity
as such.
(d) The Borrower irrevocably authorizes the Agent to disclose to the
other Finance Parties any information which is received by it in
its capacity as the Agent.
(e) The Agent may deduct from any amount received by it for the Banks
pro rata any unpaid fees, costs and expenses of the Agent
incurred by it in connection with the Finance Documents.
18.13 Indemnities
(a) Without limiting the liability of the Borrower under the Finance
Documents, each Bank shall forthwith on demand indemnify the
Agent for that Bank's proportion of any liability or loss
incurred by the Agent in any way relating to or arising out of
its acting as the Agent, except to the extent that the liability
or loss arises directly from the Agent's gross negligence or
wilful misconduct.
(b) A Bank's proportion of the liability or loss set out in paragraph
(a) above is the proportion which its participation in the Loans
(if any) bear to all the Loans outstanding on the date of the
demand. However, if there are no Loans outstanding on the date
of demand, then the proportion will be the proportion which its
Commitment bears to the Total Commitments at the date of demand
or, if the Total Commitments have been cancelled, bore to the
Total Commitments immediately before being cancelled.
18.14 Compliance
(a) The Agent may refrain from doing anything which might, in its
opinion, constitute a breach of any law or regulation or be
otherwise actionable at the suit of any person, and may do
anything which, in its opinion, is necessary or desirable to
comply with any law or regulation of any jurisdiction.
(b) Without limiting paragraph (a) above, the Agent need not disclose
any information relating to the Borrower or any of its related
entities if the disclosure might, in the opinion of the Agent,
constitute a breach of any law or regulation or any duty of
secrecy or confidentiality or be otherwise actionable at the suit
of any person.
18.15 Resignation of Agent
(a) Notwithstanding its irrevocable appointment, the Agent may resign
by giving notice to the Banks and the Borrower, in which case the
Agent may forthwith appoint one of its Affiliates as successor
Agent or, failing that, the Majority Banks may (after
consultation with the Borrower) appoint a successor Agent.
(b) If the appointment of a successor Agent is to be made by the
Majority Banks but they have not, within 30 days after notice of
resignation, appointed a successor Agent which accepts the
appointment, the retiring Agent may (after consultation with the
Borrower) appoint a successor Agent.
(c) The resignation of the Agent and the appointment of any successor
Agent will both become effective only upon the successor Agent
notifying all the Parties that it accepts the appointment. On
giving the notification, the successor Agent will succeed to the
position of the Agent and the term "Agent" will mean the
successor Agent.
(d) The retiring Agent shall, at its own cost, make available to the
successor Agent such documents and records and provide such
assistance as the successor Agent may reasonably request for the
purposes of performing its functions as the Agent under this
Agreement.
(e) Upon its resignation becoming effective, this Clause 18 shall
continue to benefit the retiring Agent in respect of any action
taken or not taken by it under or in connection with the Finance
Documents while it was the Agent, and, subject to paragraph (d)
above, it shall have no further obligation under any Finance
Document.
(f) The Majority Banks may, by notice to the Agent, require it to
resign in accordance with paragraph (a) above. In this event,
the Agent shall resign in accordance with paragraph (a) above but
it shall not be entitled to appoint one of its Affiliates as
successor Agent.
18.16 Banks
(a) The Agent may treat each Bank as a Bank, entitled to payments
under this Agreement and as acting through its Facility Office(s)
until it has received not less than five Business Days notice
from a Bank to the contrary.
(b) Each Bank, on the date on which it becomes a party to this
Agreement, represents to the Agent and the Borrower that it is:
(i) either:
(A) not resident in the United Kingdom for United Kingdom tax
purposes; or
(B) a "bank" as defined in section 840A of the Income and Corporation
Taxes Act 1988 and resident in the United Kingdom; and
(ii) beneficially entitled to the principal and interest payable by
the Agent to it under this Agreement,
and shall forthwith notify the Agent and the Borrower if either
representation ceases to be correct.
19. FEES
19.1 Arrangement fee
The Borrower shall, on the earlier of the date falling three
Business Days from the date of this Agreement and the first
Drawdown Date, pay to the Arrangers an arrangement fee in the
amount agreed in the relevant Fee Letter. This fee shall be
distributed by the Arrangers among the Banks in accordance with
the arrangements agreed by the Arrangers with the Banks prior to
the date of this Agreement.
19.2 Agent's fee
The Borrower shall pay to the Agent for its own account an agency
fee in the amount and on the dates agreed in the relevant Fee
Letter. The agency fee is payable for so long as any amount is
or may be outstanding under this Agreement or any Commitment is
in force.
19.3 Commitment fee
(a) The Borrower shall pay to the Agent for each Bank a commitment
fee in the amount of 0.13 per cent. per annum on the undrawn,
uncancelled amount of that Bank's Commitment during the
Commitment Period.
(b) Accrued commitment fee is payable quarterly in arrear. Accrued
commitment fee shall also payable to the Agent for the relevant
Bank on the cancelled amount of its Commitment at the time any
cancellation comes into effect.
19.4 VAT
Any fee referred to in this Clause 19 is exclusive of any value
added tax or any other tax which might be chargeable in
connection with that fee. If any value added tax or other tax is
so chargeable, it shall be paid by the Borrower at the same time
as it pays the relevant fee.
20. EXPENSES
20.1 Initial and special costs
The Borrower shall, within 10 days of a claim being made , pay
the Agent and the Arrangers the amount of all reasonable costs
and expenses (including, for paragraph (a) below only, legal fees
only up to a maximum of as set out in the relevant Fee Letter)
properly incurred by any of them in connection with:
(a) the negotiation, preparation, printing and execution of:
(i) this Agreement and any other documents referred to in this
Agreement;
(ii) any other Finance Document (other than a Novation Certificate)
executed after the date of this Agreement; and
(b) any amendment, waiver, consent or suspension of rights (or any
proposal for any of the foregoing) requested by or on behalf of
the Borrower or, in the case of Clause 2.3 (Change of currency),
the Agent, and relating to a Finance Document or a document
referred to in any Finance Document.
20.2 Enforcement Costs
The Borrower shall, within 10 days of demand, pay to each Finance
Party the amount of all costs and expenses (including legal fees)
incurred by it in connection with the enforcement of, or in
preservation of any rights under, any Finance Document.
21. STAMP DUTIES
The Borrower shall within 10 Business Days of a demand pay to a
Finance Party the amount of any liability it incurs in respect of
any United Kingdom stamp, registration and similar tax which is
or becomes payable in connection with the entry into, performance
or enforcement of any Finance Document.
22. INDEMNITIES
22.1 Currency indemnity
(a) If a Finance Party receives an amount in respect of the
Borrower's liability under the Finance Documents or if that
liability is converted into a claim, proof, judgment or order in
a currency other than the currency (the "contractual currency")
in which the amount is expressed to be payable under the relevant
Finance Document:
(i) the Borrower shall indemnify that Finance Party as an independent
obligation against any loss or liability arising out of or as a
result of the conversion;
(ii) if the amount received by that Finance Party, when converted into
the contractual currency at a market rate in the usual course of
its business is less than the amount owed in the contractual
currency, the Borrower shall forthwith on demand pay to that
Finance Party an amount in the contractual currency equal to the
deficit; and
(iii) the Borrower shall pay to that Finance Party forthwith on demand
any exchange costs and taxes payable in connection with any such
conversion.
(b) The Borrower waives any right it may have in any jurisdiction to
pay any amount under the Finance Documents in a currency other
than that in which it is expressed to be payable.
22.2 Other indemnities
(a) The Borrower shall, within 10 Business Days of a demand pay to a
Finance Party the amount of any loss or liability which that
Finance Party incurs as a consequence of:
(i) the occurrence of any Event of Default;
(ii) the operation of Clause 17.15 (Acceleration); or
(iii) (other than by reason of negligence or default by a Finance
Party) a Loan not being made after the Borrower has delivered a
Request or a Loan (or part of a Loan) not being prepaid in
accordance with a notice of prepayment.
The Borrower's liability in each case includes any loss or
expense on account of funds borrowed, contracted for or utilised
to fund any amount payable under any Finance Document, any amount
repaid or prepaid or any Loan but excludes any loss of margin.
(b) If any Finance Party receives or recovers any payment of
principal of a Loan or of an overdue amount other than on the
last day of the Interest Period relative to that Loan or amount
so received or recovered, that Finance Party shall calculate the
difference between:
(i) the additional interest (excluding the Margin and Mandatory
Costs) which would have been payable on the principal so received
or recovered had it been received or recovered on the last day of
the relevant Interest Period; and
(ii) the amount of interest which would have been payable to that
Finance Party on the last day of that Interest Period in respect
of the principal so received or recovered if the principal so
received or recovered had been placed on deposit by that Finance
Party earning interest at the Applicable Rate from (and
including) the Business Day of receipt of that amount up to (but
excluding) the last day of applicable Interest Period.
If (i) is greater than (ii) then the Borrower to whom the
relevant Loan was made shall, within five Business Days of a
demand from the relevant Finance Party, pay to that Finance Party
an amount equal to the difference.
23. EVIDENCE AND CALCULATIONS
23.1 Accounts
Accounts maintained by a Finance Party in connection with this
Agreement are prima facie evidence of the matters to which they
relate.
23.2 Certificates and determinations
Any certification or determination by a Finance Party of a rate
or amount under this Agreement is prima facie evidence of the
matters to which it relates.
23.3 Calculations
Interest (including any applicable Mandatory Cost), default
interest payable pursuant to Clause 9.3 (Default interest) and
the fee payable under Clause 19.3 (Commitment fee) accrue from
day to day and are calculated on the basis of the actual number
of days elapsed and a year of 365 days.
24. AMENDMENTS AND WAIVERS
24.1 Procedure
(a) Subject to Clause 24.2 (Exceptions), any term of the Finance
Documents may be amended or waived with the agreement of the
Borrower and the Majority Banks. The Agent may effect, on behalf
of any Finance Party, an amendment or waiver permitted under this
Clause.
(b) The Agent shall promptly notify the other Parties of any
amendment or waiver effected under paragraph (a) above, and any
such amendment or waiver shall be binding on all the Parties.
24.2 Exceptions
(a) An amendment or waiver which relates to:-
(i) the definition of "Majority Banks" in Clause 1.1 (Definitions);
(ii) an extension of the date for, or a decrease in an amount or a
change in the currency of, any payment to that Bank under the
Finance Documents (including the Margin and any fee payable under
Clause 19.3 (Commitment Fee));
(iii) an increase in a Bank's Commitment;
(iv) a term of a Finance Document which expressly requires the consent
of that Bank; or
(v) Clause 2.2 (Nature of a Finance Party's rights and obligations),
Clause 25.1 (Transfers by the Borrower), Clause 28 (Pro rata
sharing) or this Clause 24,
is not binding unless all the Banks agree to it.
(b) An amendment or waiver which relates to the rights and/or
obligations of the Agent may not be effected without the
agreement of the Agent.
24.3 Waivers and remedies cumulative
The rights of each Finance Party under the Finance Documents:-
(a) may be exercised as often as necessary;
(b) are cumulative and not exclusive of its rights under the general
law; and
(c) may be waived only in writing and specifically.
Delay in exercising or non-exercise of any such right is not a
waiver of that right.
25. CHANGES TO THE PARTIES
25.1 Transfers by the Borrower
The Borrower may not assign, transfer, novate or dispose of any
of, or any interest in, its rights and/or obligations under the
Finance Documents.
25.2 Transfers by Banks
(a) A Bank (the "Existing Bank") may, subject to paragraph (b) below,
at any time assign, transfer or novate any of its Commitment
and/or any of its rights and/or obligations under this Agreement
to another bank or financial institution (the "New Bank").
(b) (i) After the Syndication Period, a transfer of a Commitment
must be in a minimum amount of at least (POUNDS)1,000,000; and
(ii) the prior consent of the Borrower is required for any such
assignment, transfer or novation, unless the New Bank is another
Bank or an Affiliate of a Bank, provided that no consent of the
Borrower is required during the Syndication Period if the
Borrower has been consulted by the Arrangers on the approach to
that New Bank.
(c) A transfer of obligations will be effective only if either:-
(i) the obligations are novated in accordance with Clause 25.3
(Procedure for novations); or
(ii) the New Bank confirms to the Agent and the Borrower that it
undertakes to be bound by the terms of this Agreement as a Bank
in form and substance satisfactory to the Agent. On the transfer
becoming effective in this manner the Existing Bank shall be
relieved of its obligations under this Agreement to the extent
that they are transferred to the New Bank.
(d) No Bank shall sub-participate any of its obligations under this
Agreement without the prior written consent of the Borrower.
(e) On each occasion an Existing Bank assigns, transfers or novates
any of its Commitment and/or any of its rights and/or obligations
under this Agreement, the New Bank shall, on the date the
assignment, transfer and/or novation takes effect, pay to the
Agent for its own account a fee of (POUNDS)750.
(f) An Existing Bank is not responsible to a New Bank for:-
(i) the execution, genuineness, validity, enforceability or
sufficiency of any Finance Document or any other document;
(ii) the collectability of amounts payable under any Finance Document;
or
(iii) the accuracy of any statements (whether written or oral) made in
or in connection with any Finance Document.
(g) Each New Bank confirms to the Existing Bank and the other Finance
Parties that it:-
(i) has made its own independent investigation and assessment of the
financial condition and affairs of the Borrower and its related
entities in connection with its participation in this Agreement
and has not relied exclusively on any information provided to it
by the Existing Bank in connection with any Finance Document; and
(ii) will continue to make its own independent appraisal of the
creditworthiness of the Borrower and its related entities while
any amount is or may be outstanding under the Finance Documents
or any Commitment is in force.
(h) Nothing in any Finance Document obliges an Existing Bank to:-
(i) accept a re-transfer from a New Bank of any of the rights and/or
obligations assigned, transferred or novated under this Clause;
or
(ii) support any losses incurred by the New Bank by reason of the non-
performance by the Borrower of its obligations under the Finance
Documents or otherwise.
(i) Any reference in this Agreement to a Bank includes a New Bank,
but excludes a Bank if no amount is or may be owed to or by that
Bank under this Agreement and its Commitment has been cancelled
or reduced to nil.
25.3 Procedure for novations
(a) A novation is effected if the Existing Bank and the New Bank
deliver to the Facility Agent a duly completed Novation
Certificate and the Agent executes it.
(b) Each Party (other than the Existing Bank and the New Bank)
irrevocably authorizes the Agent to execute any duly completed
Novation Certificate on its behalf.
(c) To the extent that they are expressed to be the subject of the
novation in the Novation Certificate.
(i) the Existing Bank and the other Parties (the "existing Parties")
will be released from their obligations to each other (the
"discharged obligations");
(ii) the New Bank and the existing Parties will assume obligations
towards each other which differ from the discharged obligations
only insofar as they are owed to or assumed by the New Bank
instead of the Existing Bank;
(iii) the rights of the Existing Bank against the existing Parties and
vice versa (the "discharged rights") will be cancelled; and
(iv) the New Bank and the existing Parties will acquire rights against
each other which differ from the discharged rights only insofar
as they are exercisable by or against the New Bank instead of the
Existing Bank,
all on the date of execution of the Novation Certificate by the
Agent or, if later, the date specified in the Novation
Certificate.
25.4 Reference Banks
If a Reference Bank (or, if a Reference Bank is not a Bank, the
Bank of which it is an Affiliate) ceases to be a Bank, the Agent
shall (in consultation with the Borrowers) appoint another Bank
or an Affiliate of a Bank to replace that Reference Bank.
25.5 Register
The Agent shall keep a register of all the Parties and shall
supply any other Party (at that Party's expense) with a copy of
the register on request.
26. DISCLOSURE OF INFORMATION
Any information supplied to a Finance Party pursuant to or in
connection with this Agreement shall be held in confidence and
shall not be disclosed by it to any person (other than an
Affiliate of that Finance Party) without the prior written
consent of the Borrowers except:
(a) to that Finance Party's legal or other professional advisers to
the extent required for the purposes of protecting its rights
hereunder or by law or regulation or pursuant to applicable
reporting requirements or any order of any court or to bank
supervisory authorities or examining authorities unless it is or
becomes a matter of public knowledge otherwise than as a result
of a breach by it of its obligations hereunder; or
(b) by the Arrangers to a financial institution during the
Syndication Period in connection with the syndication of the
Facilities, provided that the Borrower has been consulted by the
Arrangers on the approach to that financial institution.
27. SET-OFF
A Finance Party may set off any matured obligation owed by the
Borrower under this Agreement (to the extent beneficially owned
by that Finance Party) against any credit balance owed by that
Finance Party to the Borrower, regardless of the place of
payment, booking branch or currency of either obligation. If the
obligations are in different currencies, a Finance Party may
convert either obligation at a market rate of exchange in its
usual course of business for the purpose of the set-off.
28. PRO RATA SHARING
28.1 Redistribution
If any amount owing by the Borrower under the Finance Documents
to a Finance Party (the "recovering Finance Party") is discharged
by payment, set-off or any other manner other than through the
Agent in accordance with Clause 10 (Payments) (a "recovery"),
then:-
(a) the recovering Finance Party shall, within three Business Days,
notify details of the recovery to the Agent;
(b) the Agent shall determine whether the recovery is in excess of
the amount which the recovering Finance Party would have received
had the recovery been received by the Agent and distributed in
accordance with Clause 10 (Payments);
(c) subject to Clause 28.3 (Exception), the recovering Finance Party
shall, within three Business Days of demand by the Agent, pay to
the Agent an amount (the "redistribution") equal to the excess;
(d) the Agent shall treat the redistribution as if it were a payment
by the Borrower concerned under Clause 10 (Payments) and shall
pay the redistribution to the Finance Parties (other than the
recovering Finance Party) in accordance with Clause 10.7 (Partial
Payments); and
(e) after payment of the full redistribution, the recovering Finance
Party will be subrogated to the portion of the claims paid under
paragraph (d) above, and the Borrower will owe the recovering
Finance Party a debt which is equal to the redistribution,
immediately payable and of the type originally discharged.
28.2 Reversal of redistribution
If under Clause 28.1 (Redistribution):-
(a) a recovering Finance Party must subsequently return a recovery,
or an amount measured by reference to a recovery, to a Borrower;
and
(b) the recovering Finance Party has paid a redistribution in
relation to that recovery,
each Finance Party shall, within three Business Days of demand by
the recovering Finance Party through the Agent, reimburse the
recovering Finance Party all or the appropriate portion of the
redistribution paid to that Finance Party together with interest
on the amount to be returned to the recovering Finance Party for
the period whilst it held the re-distribution. Thereupon the
subrogation in Clause 28.1(e) (Redistribution) will operate in
reverse to the extent of the reimbursement.
28.3 Exceptions
(a) A recovering Finance Party need not pay a redistribution to the
extent that it would not, after the payment, have a valid claim
against the Borrower in the amount of the redistribution pursuant
to Clause 28.1(e) (Redistribution).
(b) A recovering Finance Party is not obliged to share with any other
Finance Party any amount which the recovering Finance Party has
received or recovered as a result of taking legal proceedings, if
the other Finance Party had an opportunity to participate in
those legal proceedings but did not do so or did not take
separate legal proceedings.
29. SEVERABILITY
If a provision of any Finance Document is or becomes illegal,
invalid or unenforceable in any jurisdiction, that shall not
affect:
(a) the validity or enforceability in that jurisdiction of any other
provision of the Finance Documents; or
(b) the validity or enforceability in other jurisdictions of that or
any other provision of the Finance Documents.
30. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and
this has the same effect as if the signatures on the counterparts
were on a single copy of this Agreement.
31. NOTICES
31.1 Giving of notices
All notices or other communications under or in connection with
this Agreement shall be given in writing or by telex or
facsimile. Any such notice will be deemed to be given as
follows:
(a) if in writing, when delivered;
(b) if by telex, when despatched, but only if, at the time of
transmission, the correct answerback appears at the start and at
the end of the sender's copy of the notice; and
(c) if by facsimile, when received,
provided that any notice or communication to be made hereunder
shall only be effective when received and then only if the same
is expressly marked for the attention of the department or office
identified in Clause 31.2 (Addresses for notices) below.
However, a notice given in accordance with the above but received
on a non-working day or after business hours in the place of
receipt will only be deemed to be given on the next working day
in that place.
31.2 Addresses for notices
(a) The address, telex number and facsimile number of each Party
(other than the Borrower and the Agent) for all notices under or
in connection with the Finance Documents are:-
(i) those notified by that Party for this purpose to the Agent on or
before it becomes a Party; or
(ii) any other notified by that Party for this purpose to the Agent by
not less than five Business Days notice.
(b) The address, telex number and facsimile number of the Borrower
are:
Yorkshire Electricity Group plc
Wetherby Road
Scarcroft
Leeds LS14 3HS
Telex: 55128
Facsimile: 0113 289 5682
Telephone: 0113 289 5602
Attention: Nick Dahlgreen
or such other as the Borrower may notify to the other Parties by
not less than five Business Days notice.
(c) The address, telex number and facsimile number of the Agent are:
336 Strand
London
WC2R 7HB
Telex: 299831 CIBLA
Facsimile: 0171 500 4482/3
Telephone: 0171 500 4247
Attention: Loans Agency
or such other as the Agent may notify to the other Parties by not
less than five Business Days' notice.
(d) All notices to or from the Borrower shall be sent through the
Agent.
(e) The Agent shall, promptly upon request from any Party, give to
that Party the address, telex number or facsimile number of any
other party applicable at the time for the purposes of this
Clause.
32. GOVERNING LAW
This Agreement is governed by English law.
This Agreement has been entered into on the date stated at the
beginning of this Agreement.
SCHEDULE 1
BANKS AND COMMITMENTS
Banks
Commitments
(POUNDS)
Citibank, N.A.
4,910,006.69
Deutsche Bank AG London
4,910,006.68
The Bank of Tokyo-Mitsubishi, Ltd.
2,116,621.47
Bayerische Landesbank Girozentrale
4,116,621.47
Den Danske Bank Aktieselskab
4,116,621.47
Dresdner Bank AG London Branch
4,116,621.47
Midland Bank plc
4,116,621.47
National Westminster Bank Plc
4,116,621.47
The Toronto Dominion Bank
4,116,621.47
The Bank of New York
3,181,818.18
Barclays Bank PLC
3,181,818.18
Bank of America NT & SA
3,181,818.18
KBC Bank N.V.
2,000,000.00
Banca Popolare di Novora S.p.A.
909,090.90
Banca Monte dei Paschi di Siena S.p.A.
909,090.90
Total Commitments
___________
(POUNDS)
50,000,000
___________
SCHEDULE 2
CONDITIONS PRECEDENT DOCUMENTS
1. A copy of the memorandum and articles of association and
certificate of incorporation of the Borrower.
2. A copy of a resolution of the board of directors of the Borrower:
(i) approving the terms of, and the transactions contemplated by,
this Agreement and resolving that it execute this Agreement;
(ii) authorising a specified person or persons to execute this
Agreement on its behalf; and
(iii) authorising a specified person or persons, on its behalf, to sign
and/or despatch all documents and notices to be signed and/or
despatched by it under or in connection with this Agreement.
3. A specimen of the signature of each person authorised by the
resolution referred to in paragraph 2 above.
4. A certificate of a director of the Borrower confirming that the
borrowing by it of the maximum amount entitled to be borrowed by
it under this Agreement would not cause any borrowing limit
binding on it to be exceeded.
5. A certificate of an Authorised Signatory of the Borrower
certifying that each copy document supplied by the Borrower or on
its behalf specified in this Schedule 2 is correct, complete and
in full force and effect as at a date no earlier than the date of
this Agreement.
6. A legal opinion of Clifford Chance, legal advisers to the
Arrangers.
SCHEDULE 3
CALCULATION OF THE MANDATORY COST
(a) The Mandatory Cost for a Loan for each of its Interest Periods is
the rate determined by the Agent to be equal to the arithmetic
mean (rounded upward, if necessary, to four decimal places) of
the respective rates notified by each of the Reference Banks to
the Agent and calculated in accordance with the following
formulae:
in relation to a Loan denominated in sterling:
BY + S(Y-Z) + F x 0.01 % per annum = Mandatory Cost
100-(B + S)
in relation to any other Loan:
F x 0.01 % per annum = Mandatory Cost
300
where on the day of application of the formula:
B is the percentage of the Reference Bank's eligible liabilities
(in excess of any stated minimum) which the Bank of England
requires the Reference Bank to hold on a non-interest-bearing
deposit account in accordance with its cash ratio requirements;
Y is the rate at which sterling deposits are offered by the
Reference Bank to leading banks in the London interbank market at
or about 11.00 a.m. on that day for the relevant period;
S is the percentage of the Reference Bank's eligible liabilities
which the Bank of England requires the Reference Bank to place as
a special deposit;
Z is the interest rate per annum allowed by the Bank of England on
special deposits; and
F is the charge payable by the Reference Bank to the Financial
Services Authority under paragraph 2.02 or 2.03 (as appropriate)
of the Fees Regulations (or any succeeding provisions to those
paragraphs) (but where for this purpose, any minimum amount for
the charge will be deemed to be zero) expressed in pounds per
(POUNDS)1 million of the fee base of the Reference Bank.
(b) For the purposes of this Schedule 3:
(i) "eligible liabilities" and "special deposits" have the meanings
given to them at the time of application of the formula by the
Bank of England; and
(ii) "fee base" has the meaning given to it in the Fees Regulations;
(iii) "Fees Regulations" means:-
(1) prior to 31st March, 1999, the Banking Supervision (Fees)
Regulations 1998; and
(2) on and after 31st March, 1999, any regulations governing the
payment of fees for banking supervision.
(iv) "relevant period" in relation to each Interest Period, means:
(A) if it is three months or less, that Interest Period; or
(B) if it is more than three months, each successive period of three
months and any necessary shorter period comprised in that
Interest Period.
(c) In the application of the formula, B, Y, S and Z are included in
the formula as figures and not as percentages, e.g. if B = 0.5%
and Y = 15%, BY is calculated as 0.5 x 15.
(d) If a Reference Bank does not supply a rate to the Agent, the
applicable Mandatory Cost will be determined on the basis of the
rate(s) supplied by the remaining Reference Banks.
(e) (i) The formula is applied on the first day of each relevant period
comprised in the relevant Interest Period.
(ii) Each rate calculated in accordance with the formula is, if
necessary, rounded upward to four decimal places.
(f) If the Agent determines that a change in circumstances has
rendered, or will render, the formula inappropriate, the Agent
(after consultation with the Banks) shall notify the Company of
the manner in which the Mandatory Cost will subsequently be
calculated which shall (so far as practicable) leave the Banks
and the Borrower in no better or worse position that they would
have been in if the relevant change in circumstances had not
occurred. The manner of calculation so notified by the Agent
shall, in the absence of manifest error, be binding on all the
Parties.
SCHEDULE 4
FORM OF REQUEST
To: [ ]
From[ ]
Date: [ ]
YORKSHIRE ELECTRICITY GROUP PLC - (POUNDS)50,000,000 Credit
Agreement dated [ ],
1998
1. We wish to utilise the Facility as follows:
(a) Drawdown Date: [ ]
(b) Amount:
(POUNDS)[ ]
(c) Interest Period:
[ ]/
alternative Interest Period:
[ ]**
(d) Payment Instructions:
[ ].
2. We confirm that each condition specified in Clause 4.3 (Further
conditions precedent) is satisfied on the date of this Request.
By:
[ ]
Authorised Signatory
SCHEDULE 5
FORM OF NOVATION CERTIFICATE
To: CITIBANK INTERNATIONAL plc as Agent
From: [THE EXISTING BANK] and [THE NEW BANK]
Date: [ ]
YORKSHIRE ELECTRICITY GROUP PLC (POUNDS)50,000,000 Credit
Agreement dated [ ], 1998
We refer to Clause 25.3 (Procedure for novations).
1. We [ ] (the "Existing Bank")
and [ ] (the "New Bank")
agree to the Existing Bank and the New Bank novating all the
Existing Bank's Commitment (or part) rights and obligations
referred to in the Schedule in accordance with Clause 25.3
(Procedure for novations).
2. The specified date for the purposes of Clause 25.3(c) (Procedure
for novations) is [date of novation].
3. The Facility Office and address for notices of the New Bank for
the purposes of Clause 31.2 (Addresses for notices) are set out
in the Schedule.
4. This Novation Certificate is governed by English law.
THE SCHEDULE
Commitment/rights and obligations to be novated
[Insert relevant details]
[New Bank]
[Facility Office] [Address for notices]
[Existing Bank] [New Bank] CITIBANK
INTERNATIONAL plc
By: By: By:
Date: Date: Date:
SIGNATORIES
The Borrowers
YORKSHIRE ELECTRICITY GROUP PLC
By:
The Arrangers
CITIBANK, N.A.
By:
DEUTSCHE BANK AG LONDON
By:
The Banks
CITIBANK, N.A.
By:
DEUTSCHE BANK AG LONDON
By:
THE BANK OF TOKYO-MITSUBISHI, LTD.
By:
BAYERISCHE LANDESBANK GIROZENTRALE
By:
DEN DANSKE BANK AKTIESELSKAB
By:
DRESDNER BANK AG LONDON BRANCH
By:
MIDLAND BANK PLC
By:
NATIONAL WESTMINSTER BANK PLC
By:
THE TORONTO DOMINION BANK
By:
THE BANK OF NEW YORK
By:
BARCLAYS BANK PLC
By:
BANK OF AMERICA NT & SA
By:
KBC BANK N.V.
By:
BANCA POPOLARE DI NOVORA S.P.A.
By:
BANCA MONTE DEI PASCHI DI SIENA S.P.A.
By:
The Agent
CITIBANK INTERNATIONAL plc
By:
SIGNATURE PAGE TO THE SUPPLEMENTAL AGREEMENT
The Borrowers
YORKSHIRE POWER GROUP LIMITED
By: A.A. PENA R. KELLY
YORKSHIRE HOLDINGS PLC
By: A.A. PENA R. KELLY
YORKSHIRE ELECTRICITY GROUP PLC
By: A.A. PENA R. KELLY
The Agent (on behalf of the Finance Parties)
CITIBANK INTERNATIONAL plc
By: S. J. HOLMES
CONFORMED COPY
SUPPLEMENTAL AGREEMENT
DATED 13th December, 1999
CREDIT FACILITY
FOR
YORKSHIRE ELECTRICITY GROUP PLC
ARRANGED BY
CITIBANK, N.A.
AND
DEUTSCHE BANK AG LONDON
________________________________________________
relating to a (POUNDS)330,000,000 credit
facility dated 22nd July, 1998
________________________________________________
ALLEN & OVERY
London
BK:693638.4
Exhibit 10.15
MODIFICATIONS TO THE PUBLIC ELECTRICITY SUPPLY LICENCE ISSUED
TO YORKSHIRE ELECTRICITY GROUP plc
SCHEDULE
The following modifications shall apply on and after 17
September 1999.
1. In paragraph 3 of Condition 1:
(a) the definition of Permitted Purpose shall be amended to
read:
"Permitted
Purpose"
means the purpose of all or
any of the following:
(a)
(b)
(c)
(d)
the Supply Business,
the Second-Tier Supply
Business, the
Distribution Business
or any business or
activity within the
limits of paragraph 5
of Condition 2A;
the Generation
Business;
any business conducted
or activity carried on
on 31 March 1997 by the
Licensee or by a
company which was an
affiliate or related
undertaking of the
Licensee on that date;
and
without prejudice to
the generality of
paragraphs (a) to (c),
any payment or
transaction lawfully
made or undertaken by
the Licensee for a
purpose within sub-
paragraphs (i) to
(viii) of paragraph
5(b) of Condition 27.
(b) the following definition shall be inserted after the
definition of Transmission System:
"ultimate holding company" means
(i)a holding company of the Licensee which is not itself a
subsidiary of another company;where a holding company of the
Licensee which is not a subsidiary of another company has
entered into an agreement affecting the exercise of
voting rights in or the appointment or removal of
directors of the Licensee or any company of which
the Licensee is a subsidiary, every party to that
agreement; and where the exercise of voting rights in
or the appointment or removal of directors of a
holding company of the Licensee which is not a
subsidiary of another company is controlled by
an agreement, every party to that agreement.
(ii)
(iii)
2. In paragraph 3 of Condition 1:
(a) the following definition shall be inserted after the
definition of affiliate:
"audited group accounts" means accounts produced in
accordance with paragraph 3 of Condition 2C and
having the content assigned to them by paragraph 4 of
that Condition.
(b) the following definition shall be inserted after the
definition of Authorised Electricity Operator:
"Companies Act accounts"
means the annual accounts of the
Licensee prepared under section 226
and, where appropriate, section 227 of
the Companies Act 1985.
(c) the following definition shall be inserted after the
definition of Grid Supply Point:
"group of companies"
means the Licensee and every undertaking
which is a subsidiary undertaking of
the Licensee.
3. In paragraph 1 of Condition 2, the words "Save as
provided in Condition 2C" shall be inserted before "The
first financial year".
4. In paragraphs 3(b)(i) and 7(a) of Condition 2, the words
" a statement of source and application of funds" shall be
deleted and the words " a cash flow statement" inserted in
their place; and in paragraph 6(a) of Condition 2, the words
"Statements of Accounting Practice" shall be deleted and the
words "all relevant accounting standards" inserted in their
place.
5. In paragraph 1 of Condition 2A, the words "Save as
provided by paragraphs 3, 4 and 5", shall be substituted for
the words "Save as provided by paragraphs 3 and 4,".
6. In paragraph 4 of Condition 2A, sub-paragraph (e) and
the word "or" at the end of sub-paragraph (d) shall be
deleted and the word "or" added at the end of sub-paragraph
(c).
7. In Condition 2A, the following new paragraph 5 shall be
inserted after paragraph 4:
5. Nothing in this Condition shall prevent the Licensee
conducting ancillary business as defined in this paragraph so
long as the limitations specified in this paragraph are
complied with.
(a) For the purpose of this paragraph "ancillary
business" means any business or activity carried on by the
Licensee other than the Supply Business, the Second-Tier
Supply Business and the Distribution Business .
(b) The Licensee may carry on ancillary business provided that
neither of the following limitations is exceeded, namely:
(i) the aggregate turnover of all the ancillary business of the
Licensee does not in any period of twelve months commencing
on 1 April of any year exceed 5% of the aggregate turnover of
the Supply Business, the Second-Tier Supply Business and the
Distribution Business (excluding the turnover on transactions
which the Supply Business the Second-Tier Supply Business and
the Distribution Business make with each other) as shown by
its most recent audited accounting statements produced under
sub-paragraphs (b)(i) and (c) of paragraph 3 of Condition 2;
and
(ii) the aggregate amount (determined in accordance with sub-
paragraph (d) below) of all investments by the Licensee in all
its ancillary business does not at any time after 17 September
1999 exceed 5% of the sum of share capital in issue, share
premium and consolidated reserves of the Licensee as shown by
its most recent audited historic cost financial statements
then available.
(c) For the purpose of sub-paragraph (b) of this paragraph,
"investment" means any form of financial support or
assistance given by or on behalf of the Licensee for the
ancillary business whether on a temporary or permanent basis
including (without limiting the generality of the foregoing)
any commitment to provide any such support or assistance in
the future.
(d) At any relevant time, the amount of an investment shall be the
sum of (i) the value at which such investment was included in
the audited historic cost balance sheet of the Licensee as at
the latest accounting reference date to have occurred prior to
17 September 1999 (or, where the investment was not so
included, zero), (ii) the aggregate gross amount of all
expenditure (whether of a capital or revenue nature) howsoever
incurred by the Licensee in respect of such investment in all
completed accounting reference periods since such accounting
reference date and (iii) all commitments and liabilities
(whether actual or contingent) of the Licensee relating to
such investment outstanding at the end of the most recently
completed accounting reference period.
8. In Condition 2B, paragraphs 6 and 7 shall be amended to
read:
6. The Licensee shall procure from each company or other person
which is at any time an ultimate holding company of the
Licensee a legally enforceable undertaking in favour of the
Licensee in the form specified by the Director that that
ultimate holding company ("the Covenantor") will refrain
from any action, and will procure that every subsidiary of the
Covenantor (other than the Licensee and its subsidiaries) will
refrain from any action, which would then be likely to cause
the Licensee to breach any of its obligations under the Act or
this Licence. Such undertaking shall be obtained within seven
days of the company or other person in question becoming an
ultimate holding company of the Licensee and shall remain in
force for so long as the Licensee remains the holder of this
Licence and the Covenantor remains an ultimate holding company
of the Licensee.
7. The Licensee shall:
(a) deliver to the Director evidence (including
a copy of each such undertaking) that the Licensee has
complied with its obligation to procure undertakings
pursuant to paragraph 6, and
(b) inform the Director immediately in writing
if the directors of the Licensee become aware that any such
undertaking has ceased to be legally enforceable or that its
terms have been breached.
9. In Condition 2B, the following new paragraph 8 shall be
inserted after paragraph 7:
8. The directors of the Licensee shall not declare or recommend a
dividend, nor shall the Licensee make any other form of
distribution within the meaning of Section 263 of the
Companies Act 1985, unless prior to the declaration,
recommendation or making of the distribution (as the case may
be) the Licensee shall have issued to the Director a
certificate complying with the following requirements of this
paragraph.
(a) The certificate shall be in the following
form:
"After making enquiries, the directors of the Licensee are
satisfied:
(i) that the Licensee is in compliance in all material respects
with all obligations imposed on it by Condition 2A, Condition
2B, Condition 2D, paragraph 5 of Condition 27 and paragraph 2
of Condition 28 of its public electricity supply licence; and
(ii) that the making of a distribution of [ ] on [ ] will not,
either alone or when taken together with other circumstances
reasonably foreseeable at the date of this certificate, cause
the Licensee to be in breach to a material extent of any of
these obligations in the future."
(b) The certificate shall be signed by a director of the Licensee
and approved by a resolution of the board of directors of the
Licensee passed not more than 14 days before the date on which
the declaration, recommendation or payment will be made.
(c) Where the certificate has been issued in respect of the
declaration or recommendation of a dividend, the Licensee
shall be under no obligation to issue a further certificate
prior to payment of that dividend.
10. After Condition 2B, new Condition 2C (the terms of which are
set out in Annex A hereto) shall be inserted.
11. Condition 2D shall be amended to read:
Condition 2D. Credit rating of Licensee
1. The Licensee shall use all reasonable endeavours to ensure
that:
(a) any corporate debt of the Licensee in issue at 17 September
1999 which had an investment grade credit rating at that date
maintains an investment grade credit rating throughout the
period during which such debt remains outstanding, and
(b) any corporate debt, other than corporate debt issued by way of
negotiated private placement, issued by the Licensee on or
after 17 September 1999 has and maintains an investment grade
credit rating throughout the period during which such debt
remains outstanding.
2. For the purpose of paragraph 1:
(a) "corporate debt" means any unsecured and unsubordinated
borrowing of money having an initial maturity of five years or
more, and
(b) "investment grade credit rating" means:
-a rating of not less than BBB- by
Standard & Poor's Ratings Group or any of its subsidiaries
or not less than Baa3 by Moody's Investors Service, Inc.
or any of its subsidiaries or such
higher rating as shall be specified by either of them from time
to time as the lowest investment grade credit rating, or
-an equivalent rating from any other reputable credit rating
agency which has comparable standing in the UK and the USA.
12. In paragraph 5 of Condition 27, sub-paragraphs (a) and (b)
shall be amended to read as set out below:
5. Without prejudice to paragraphs 1 to 4, the Licensee
shall not after 17 September 1999 without the written consent of the
Director after disclosure of all material facts:
(a) create any mortgage, charge, pledge, lien or other form of
security or encumbrance whatsoever, undertake any indebtedness
to any other person or guarantee any liability or obligation of
another person otherwise than:
(i) on an arm's length basis;
(ii) on normal commercial terms;
(iii) for a Permitted Purpose; and
(iv) (if the transaction is within the
ambit of paragraph 1) in accordance with paragraphs 3 and 4;
(b) transfer, lease, license or lend any sum or sums, asset,
right or benefit to any affiliate or related undertaking of the Licensee
otherwise than by way of:
(i) a dividend or other distribution out of distributable reserves;
(ii) repayment of capital;
(iii) payment properly due for any goods, services or assets
provided on an arm's length basis and on normal commercial
terms;
(iv) a transfer, lease, licence or loan of any sum or sums, asset,
right or benefit on an arm's length basis and on normal
commercial terms;
(v) repayment of or payment of interest on a loan not prohibited by
sub-paragraph (a);
(vi) payments for group corporation tax relief or for the surrender
of Advance Corporation Tax calculated on a basis not exceeding
the value of the benefit received;
(vii) a transfer for the purpose of satisfying paragraph 3 of Condition 2A;
(viii) an acquisition of shares in conformity with paragraph 2 of
Condition 2A made on an arm's length basis and on normal
commercial terms.
13. In paragraph 5 of Condition 27, the existing sub-paragraph (c)
shall be deleted and the following new sub-paragraphs (c), (d)
and (e) inserted:
(c) enter into an agreement or incur a commitment incorporating a
cross-default obligation, or
(d) continue or permit to remain in effect any agreement or
commitment incorporating a cross-default obligation subsisting
at 17 September 1999 save that the Licensee may permit any
cross-default obligation in existence at that date to remain
in effect for a period not exceeding twelve months from that
date, provided that the cross-default obligation is solely
referable to an instrument relating to the provision of loan
or other financial facilities granted prior to that date and
the terms on which those facilities have been made available
as subsisting on that date are not varied or otherwise made
more onerous.
(e) the provisions of sub-paragraphs (c) and (d) of this
paragraph shall not prevent the Licensee from giving any
guarantee permitted by and compliant with the requirements of
sub-paragraph (a) of this paragraph.
14. In paragraph 6 of Condition 27, the following definition shall
be inserted before the definition of disposal:
"cross-default obligation" means a term of any agreement or arrangement
whereby the Licensee's liability to pay or repay any debt or
other sum arises or is increased or accelerated or is capable
of arising, increasing or of acceleration by reason of a
default (howsoever such default may be described or defined)
by any person other than the Licensee, unless:
(i) that liability can arise only as the result of a default by a
subsidiary of the Licensee, and
(ii) the Licensee holds a majority of the voting rights in that
subsidiary and has the right to appoint or remove a majority
of its board of directors, and
(iii) that subsidiary carries on business only for a purpose within
sub-paragraphs (a), (b) or (c) of the definition of
Permitted Purpose.
15. In Condition 28, paragraphs 2, 3 and 4 shall be amended
to read:
2. The Licensee shall procure from each company or other person
which is at any time an ultimate holding company of the
Licensee a legally enforceable undertaking in favour of the
Licensee in the form specified by the Director that that
ultimate holding company ("the Covenantor") will give to the
Licensee, and will procure that each subsidiary of the
Covenantor (other than the Licensee and its subsidiaries) will
give to the Licensee, all such information as may be necessary
to enable the Licensee to comply fully with the obligations
imposed on it in paragraph 1. Such undertaking shall be
obtained within seven days of the company or other person in
question becoming an ultimate holding company of the Licensee
and shall remain in force for so long as the Licensee remains
the holder of this licence and the Covenantor remains an
ultimate holding company of the Licensee.
3. The Licensee shall deliver to the Director evidence (including
a copy of each such undertaking) that the Licensee has
complied with its obligation to procure undertakings
pursuant to paragraph 2.
4. The Licensee shall not, save with the consent in writing of
the Director, enter (directly or indirectly) into any
agreement or arrangement with any ultimate holding company of
the Licensee or any of the subsidiaries of such ultimate
holding company (other than the subsidiaries of the Licensee)
at a time when:
(i) an undertaking complying with paragraph 2 is not in place in
relation to that ultimate holding company; or
(ii) there is an unremedied breach of such undertaking.
ANNEX A
Condition 2C. Change of financial year
1. Paragraph 1 of Condition 2 shall, for the purpose only of the
Companies Act accounts of the Licensee, cease to apply to the
Licensee if the Director consents in writing to a change in
the financial year of the Licensee for that purpose.
2. Such written consent:
(a) shall specify the date from which, for the purpose set out at
paragraph 1, the current and subsequent financial years of the
Licensee shall run;
(b) shall apply to the Licensee from the date of grant of the
consent or from any other date specified therein; and
(c) shall continue in effect until revoked in writing
by the Director.
3. While the consent continues in effect the Licensee shall
procure the production of audited group accounts for its group
of companies for the financial years specified in paragraph 1
of Condition 2.
4. Audited group accounts produced in accordance with
paragraph 3:
(a) shall comprise consolidated group accounts in respect of the
group of companies;
(b) shall, save insofar as is necessary to reflect a different
financial year, have the same form and content as the
Companies Act accounts of the Licensee;
(c) shall be accompanied by a report by the Auditors and addressed
to the Director stating whether in their opinion the audited
group accounts have been properly prepared in accordance with
this Condition and give a true and fair view of the state of
affairs of the group of companies and of its profits, total
recognised gains and cash flows during the financial year;
(d) may, with the prior written consent of the Director, omit or
provide in a different form, specified in the consent, such
information as may be specified in the consent; and
(e) shall clearly disclose any differences between the accounting
policy underlying the preparation of the Companies Act
accounts of the Licensee and the accounting policy underlying
the preparation of the audited group accounts.
5. Where the written consent of the Director is revoked, as
provided by sub-paragraph 2(c) of this Condition, the Licensee
shall change back to a 31 March year end as soon as
practicable within the constraints of the statutory
requirements applicable to Companies Act accounts in respect
of its then current and all subsequent financial years. The
Licensee shall, within six weeks of the date of the notice of
revocation, notify the Director in writing of the date on
which it proposes that its then current financial year end
will change to the date specified in paragraph 1 of Condition
2. Notwithstanding the revocation, the Licensee shall continue
to procure the production of audited group accounts in
accordance with this Condition until it has reverted for all
purposes to a financial year of 12 months duration in
accordance with paragraph 1 of Condition 2.
6. No provisions of this Condition shall apply to the financial
year of the Licensee specified in paragraph 1 of Condition 2
for the purpose of accounts produced in compliance with that
Condition, or for the purpose of paragraph 5 of Condition
2A.
<TABLE>
Exhibit 12.1
CALCULATION OF EARNINGS TO FIXED CHARGES RATIO SUCCESSOR COMPANY
<CAPTION>
Excluding the results of the generation business
Nine Months
Ended Year ended
December 31 March 31
1999 1999 1998
(POUNDS) $ (POUNDS)(POUNDS)
(Amounts in millions)
Earnings
<S> <C> <C> <C> <C>
Pretax income from continuing operations 47 76 62 5
Adjustments to include distributed income
of less than 50% owned persons - - - -
Add: Amortization charge on capitalized
interest - - - -
Less: Interest capitalized in the period - - - -
Total earnings before fixed charges 47 76 62 5
Fixed charges
Interest expense 87 140 126 117
Interest capitalized - - - -
Total fixed charges 87 140 126 117
Total earnings and fixed charges 134 216 188 122
Ratio of earnings/fixed charges 1.5 1.5 1.4 1.0
Including the results of the generation business
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended Year ended
December 31 March 31
1999 1999 1998
(POUNDS) $ (POUNDS)(POUNDS)
(Amounts in millions)
Earnings
<S> <C> <C> <C> <C>
Pretax income from operations 47 76 68 16
Adjustments to include distributed income
of less than 50% owned persons - - - -
Add: Amortization charge on capitalized
interest - - - 1
Less: Interest capitalized in the period - - - -
Total earnings before fixed charges 47 76 68 17
Fixed charges
Interest expense 87 140 129 121
Interest capitalized - - - -
Total fixed charges 87 140 129 121
Total earnings and fixed charges 134 216 197 138
Ratio of earnings/fixed charges 1.5 1.5 1.5 1.1
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
YORKSHIRE POWER GROUP LIMITED
(AND JURISDICTION OF INCORPORATION)
HOMEPOWER RETAIL (YE) LIMITED (ENGLAND AND WALES)
HOMEPOWER RETAIL LIMITED (ENGLAND AND WALES)
SCARCROFT INSURANCE LIMITED (GUERNSEY)
SCARCROFT INVESTMENTS LIMITED (ENGLAND AND WALES)
SCARCROFT LEASING (SEP) LIMITED (ENGLAND AND WALES)
YE GAS LIMITED (ENGLAND AND WALES)
YEG FRESHCO. (ENGLAND AND WALES)
YELECO 29 LIMITED (ENGLAND AND WALES)
YORKSHIRE CAYMAN HOLDING LTD (CAYMAN ISLANDS)
YORKSHIRE ELECTRIC POWER LIMITED (ENGLAND AND WALES)
YORKSHIRE ELECTRICITY GROUP PLC (ENGLAND AND WALES)
YORKSHIRE ELECTRICITY GROUP SHARE SCHEME TRUSTEES LIMITED
(ENGLAND AND WALES)
YORKSHIRE ENERGY LIMITED (ENGLAND AND WALES)
YORKSHIRE HOLDINGS PLC (ENGLAND AND WALES)
YORKSHIRE POWER FINANCE LIMITED (CAYMAN ISLANDS)
YORKSHIRE POWER FINANCE 2 LIMITED (CAYMAN ISLANDS)
YPG HOLDINGS LLC (DELAWARE)
Exhibit 24.1
Yorkshire Power Group Limited
Wetherby Road
Scarcroft
Leeds
LS14 3HS
8
December 1999
Mr Armando A Pena
1 Riverside Plaza
Columbus Ohio 43215
Mr Richard C Kelly
1225 17th Street
Denver Colorado 80502
Dear Sirs
Yorkshire Power Group Limited (the "Company") proposes to
file its Annual Report on Form 10-K for the Fiscal Year ended
31 December 1999, its Quarterly Reports on Form 10-Q for the
Quarters ended 31 March 2000, 30 June 2000 and 30 September
2000, and, if necessary, any Current Reports on Form 8-K
(collectively, the "Exchange Act Reports") with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
The Company and the undersigned directors and officers of the
Company, individually as a director and/or as an officer of
the Company, hereby make, constitute and appoint each of you
our true and lawful attorney for each of us and in each of our
names, places and steads to sign and cause to be filed with
the Securities and Exchange Commission the Exchange Act
Reports and any appropriate amendments thereto, to be
accompanied by any necessary exhibits.
The Company hereby authorises you or any one of you to execute
the Exchange Act Reports and amendments thereto on its behalf
as attorney-in-fact for it and its authorised officers, and to
file the same as aforesaid.
The undersigned directors and officers of the Company hereby
authorise you or any one of you to sign the Exchange Act
Reports on their behalf as attorney-in-fact and to amend, or
remedy any deficiencies with respect to, the Exchange Act
Reports by appropriate amendment or amendments and to file the
same as aforesaid.
Very truly yours.
YORKSHIRE POWER GROUP LIMITED
By ...s/ Dr. E Linn Draper Jr.................
Dr E Linn Draper Jr
Chairman and Director
...../s/ Wayne H Brunetti..................
Wayne H Brunetti
Director
..../s/ Armando A Pena ...................
Armando A Pena
Director and Chief Financial Officer
..../s/ Donald M Clements Jr..........
Donald M Clements Jr
Director
..../s/ Richard C Kelly......................
Richard C Kelly
Director
...../s/ Paul J Bonavia ....................
Paul J Bonavia
Director
** Complete only if the requested Interest Period is of an optional duration.
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> British Pounds Sterling
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Apr-1-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1.6117
<CASH> 9
<SECURITIES> 16
<RECEIVABLES> 217
<ALLOWANCES> 9
<INVENTORY> 0
<CURRENT-ASSETS> 277
<PP&E> 1,175
<DEPRECIATION> 139
<TOTAL-ASSETS> 2,395
<CURRENT-LIABILITIES> 412
<BONDS> 964
0
166
<COMMON> 440
<OTHER-SE> 11
<TOTAL-LIABILITY-AND-EQUITY> 2,395
<SALES> 1,037
<TOTAL-REVENUES> 1,037
<CGS> 717
<TOTAL-COSTS> 717
<OTHER-EXPENSES> 182
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> 47
<INCOME-TAX> 14
<INCOME-CONTINUING> 33
<DISCONTINUED> 8
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41
<EPS-BASIC> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1> N/A
</TABLE>
