10-Q 1 e10-q.txt YORKSHIRE POWER GROUP LIMITED FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended JUNE 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period from _____ to _____ Registrant; State or Other Commission Jurisdiction of Incorporation; I.R.S Employer File Number Address; and Telephone Number Identification No. ----------- ------------------------------ ------------------ 333-47925 Yorkshire Power Group Limited 84-1393785 (England & Wales) Wetherby Road Scarcroft Leeds LS14 3HS United Kingdom 011-44-113-289-2123 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- A description of the registrant's common stock follows: Description of Shares Outstanding Registrant Common Stock at July 31, 2000 ---------------------------------------------------------------------------- Yorkshire Power Par Value (pound)1 Per Share 440,000,002 Group Limited 2 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARY COMPANIES Form 10-Q For The Quarter Ended June 30, 2000 TABLE OF CONTENTS

1 3 Forward Looking Statements -------------------------- Certain statements in this Form 10-Q under the captions "Management's Discussion and Analysis of Results of Operations and Financial Condition", "Other Information" and elsewhere may constitute forward looking statements. Such forward looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Yorkshire Group or any of its subsidiaries or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions in the UK, the Authorized Area and elsewhere; currency fluctuations; governmental, statutory, regulatory or administrative initiatives affecting Yorkshire Group, Yorkshire or the UK electric and gas utilities industries; general industry trends; competition; the cost and availability of electricity, gas and other alternative energy sources; changes in commodity prices, interest rates and hedging costs; changes in business strategy, development plans or vendor relationships; availability, terms and deployment of capital; availability of qualified personnel; increased rates of taxes or other changes in tax law; changes in, or the failure or inability to comply with, governmental regulation, including, without limitation, environmental regulations; the potential introduction of the Euro; and other factors referenced in this Form 10-Q. These forward looking statements speak only as of the date of this Form 10-Q. 2 4 SELECTED DEFINITIONS -------------------- When used in this report, the following terms will have the meaning indicated. "AEP" means American Electric Power Company, Inc. "Authorized Area" means Yorkshire's service area as determined by its PES license "CFD" means contract for differences "CSW" means Central and South West Corporation "ESPS" means Electricity Supply Pension Scheme "Fiscal Year" means a year ended March 31 "Form 10-K" means the Annual Report on Form 10-K of Yorkshire Group for the Transition Period "Ionica" means Ionica Group plc "NETA" means New Electricity Trading Arrangements "Ofgem" means Office of Gas and Electricity Markets "PES" means public electricity supplier "Pool" means the wholesale trading market for electricity in England and Wales "SEEBOARD" means SEEBOARD plc "Supply" means the supply of electricity and gas "Transition Period" means the nine-month period beginning April 1, 1999 and ending December 31, 1999 "UK" means the United Kingdom "US" means the United States of America "Yorkshire" means Yorkshire Electricity Group plc and its subsidiaries "Yorkshire Group" means Yorkshire Power Group Limited and its subsidiaries 3 5 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in millions) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 6 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in millions) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 7 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 6 8 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 7 9 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (UNAUDITED)

8 10 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The accompanying notes are an integral part of these consolidated financial statements. 9 11 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in millions, except shares) (UNAUDITED) For the three months ended June 30, 2000:

For the three months ended June 30, 1999:

The accompanying notes are an integral part of these consolidated financial statements. 10 12 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in millions, except shares) (UNAUDITED) For the six months ended June 30, 2000:

For the six months ended June 30, 1999:

The accompanying notes are an integral part of these consolidated financial statements. 11 13 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 1. GENERAL The accompanying unaudited financial statements should be read in conjunction with the audited financial statements for the Transition Period ended December 31, 1999 filed in Form 10-K. In the opinion of management, the financial statements reflect all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the results of operations for interim periods. The consolidated financial statements of Yorkshire Power Group Limited and its subsidiaries ("Yorkshire Group") are presented in pounds sterling and in conformity with accounting principles generally accepted in the United States of America. The consolidated balance sheets, income statements, statements of cash flows and certain information in the notes to the consolidated financial statements are presented in pounds sterling ((pound)) and in US dollars ($) solely for the convenience of the reader, at the exchange rate of (pound)1 = $1.5139, the closing mid-point in London on June 30, 2000. This presentation has not been translated in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." No representation is made that the pounds sterling amounts have been, could have been, or could be converted into US dollars at that or any other rate of exchange. 12 14 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 2. FINANCING AND RELATED ACTIVITIES Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust') is a New York common law trust, the sole assets of which consist of (i) a 100% beneficial interest in (pound)155 million principal amount of Reset Senior Notes, issued in February 2000 and due February 15, 2020, (the `Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a currency swap with UBS AG, London Branch (the `Currency Swap') and an option granted to UBS AG, London Branch (the `Call Option'). The PATS Trust has issued $250 million principal amount of 8.25% Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the Certificates). All of the US Dollar proceeds from the offering by the PATS Trust of the Certificates have been swapped by the Trust with UBS AG, London Branch for (pound) Sterling pursuant to the Currency Swap. The PATS Trust has used the (pound) Sterling, together with the proceeds received by the PATS Trust from UBS AG, London Branch under the Call Option, to purchase the Senior Notes issued by YPF2. YPF2 has loaned the net proceeds to YPG and subsidiaries. These proceeds were used as working capital and for the repayment of debt, including repayment of a loan which was entered into in December 1999 to repay Tranche B of Yorkshire Group's syndicated credit facility. YPG has issued a guarantee that fully and unconditionally guarantees the due and punctual payment of principal and interest on the Senior Notes. 3. NEW ACCOUNTING STANDARD SFAS No. 133, `Accounting for Derivative Instruments and Hedging Activities', was issued in June 1998. This statement was originally scheduled to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999: SFAS No. 137 has delayed the effective date for one year. SFAS 133 establishes accounting and reporting standards for derivative instruments. It requires that all derivatives be recognized as either an asset or a liability, measured at fair value, in the financial statements. If certain conditions are met a 13 15 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 3. NEW ACCOUNTING STANDARD (continued) derivative may be designated as a hedge of possible changes in fair value of a recognized asset or liability or of an unrecognized firm commitment; variable cash flows of a recognized asset or liability or of a forecasted transaction; or foreign currency exposure. The accounting/reporting for fair value changes in a derivative used as a hedging instrument depends on the intended use and resulting designation of the derivative. Management is currently studying the provisions of SFAS 133 to determine the impact of its adoption on results of operations, cash flows and financial condition. Yorkshire intends to adopt the standard as required by January 2001. 4. CONTINGENCIES LEGAL PROCEEDINGS Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings" for details of ongoing litigation with respect to other corporations' use of actuarial surpluses declared in the ESPS. Yorkshire made similar use of actuarial surplus and, if it is decided by the House of Lords that the sums concerned are all due to the ESPS, the maximum amount payable by Yorkshire in respect of its use of surplus is approximately (pound)38 million plus interest. Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings" for details of ongoing litigation with respect to Optimum Solutions Limited. The final outcome of this matter cannot be determined at present. 14 16 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 4. CONTINGENCIES (continued) USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. As a result of the transition to a more competitive utility environment, estimates are required for revenues and the costs to produce revenues, including bad debt expense. Electricity generated in England and Wales is sold by generators and bought by suppliers through the Pool. Charges are raised on a half hourly basis. Prior to opening the domestic market to competition on September 14, 1998, all charges were allocated between suppliers based on actual meter readings. Charges in respect of residential customers, whose meters are not read at half hourly intervals, were allocated to the host PES. Since September 14, 1998, it is necessary to allocate charges in respect of residential customers between suppliers based on estimates. Actual results could differ from the Company's estimates. REVISION TO ASSET LIVES In addition to the change in depreciation method, described below in Note 7, Yorkshire Group has revised the estimated useful economic lives of its distribution network assets in order to provide a more accurate estimated life for each asset type. Such assets are now depreciated over a period of between 10 and 80 years. In the six months ended June 30, 2000, the effect of this change was to increase net income by (pound)2 million. The effect of the change in the year ending December 31, 2000 is expected to be an increase in net income of (pound)4 million. 15 17 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 4. CONTINGENCIES (continued) OFGEM PRICE CONTROL REVIEW Following the conclusion of the electricity distribution and supply price control reviews and other Ofgem initiatives, a number of PES licence modifications became effective on April 1, 2000. Consequently, from that date, there has been a reduction in the prices Yorkshire can charge its distribution and supply customers. For details of the price control reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's Businesses - Industry Background - Distribution of Electricity - Distribution Price Regulation from April 1, 2000" and "Yorkshire's Businesses - Industry Background - Supply of Electricity - Electricity Supply Price Regulation from April 1, 2000". In response to Ofgem's final proposals and increasing competition, Yorkshire has adopted an aggressive program of reducing controllable costs. Significant features of this program include reductions in capital expenditure, staff reductions, outsourcing of certain functions and consolidation of facilities. Yorkshire intends to aggressively pursue this cost reduction program and is evaluating additional cost reduction measures to further mitigate the effects of Ofgem's final proposals and increasing competition in the electricity supply business. Yorkshire Group expects that the net result of Ofgem's electricity supply and distribution price reductions, and competitive demands in the Supply business and Yorkshire's mitigation efforts will be a decline in Yorkshire Group's results of operations and a reduction in its cash flows which, in each case, may be significant. 16 18 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 5. RATIONALIZATION Yorkshire plans to streamline its distribution and Supply workforces and has announced a reduction of approximately 350 positions (260 positions from the distribution business and 90 positions from the Supply business) during 2000 and a further 75 positions from the distribution business in 2001. A provision of approximately (pound)7 million has been recorded in January 2000 (in Selling, General and Administrative expenses) to reflect the cost of the 350 reductions in 2000. The majority of these redundancies are expected to take place in the latter half of 2000. The balance of the provision at June 30, 2000 was approximately (pound)5 million. Such streamlining is part of the overall program of reducing controllable costs in response to Ofgem's final distribution and supply price control reviews and to increasing competition in the Supply business. 6. BUSINESS SEGMENTS Yorkshire Group is primarily engaged in two businesses: electricity distribution, which involves the transmission of electricity across its network to end users, and supply, which involves bulk purchase of electricity and gas for delivery to its customers. These businesses form the basis for the identification of reportable segments as shown below. Included in "Other" are insignificant operating subsidiaries as well as various corporate activities, and non-allocated corporate assets. Management evaluates segment performance based on segment income from operations, which is shown below. Intersegment sales primarily represent sales from the distribution business to the Supply business for use of the distribution network. 17 19 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 6. BUSINESS SEGMENTS (continued) A summary of information about Yorkshire Group's operations by segments follows (in millions):

18 20 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 6. BUSINESS SEGMENTS (continued) Non-allocated items within total assets consist principally of goodwill of (pound)890 million at June 30, 2000 and (pound)919 million at June 30, 1999. Non-allocated items within income (loss) from operations consist principally of amortization of goodwill of (pound)12 million in the six months ended June 30 for both 2000 and 1999. 7. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Yorkshire Group has implemented a change in the depreciation method for its distribution network assets. Previously distribution network assets were depreciated at a rate of 3% per annum for 20 years and 2% per annum for the remaining 20 years. A straight line depreciation method has now been implemented for such assets as this is believed to better match the cost of the assets with the anticipated usage pattern. The effect of this change in the six months ended June 30, 2000 was to increase net income by (pound)2 million. The cumulative effect of this change in accounting principle on prior accounting periods to December 31, 1999 is an increase in income of approximately (pound)8 million, after a reduction for income taxes of (pound)4 million recorded in the quarter ended March 31, 2000. 19 21 YORKSHIRE POWER GROUP LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES OF SUBSIDIARY HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES Yorkshire Capital Trust I, (the "Trust"), is a statutory business trust wholly owned by Yorkshire Power Group Limited, created for the sole purpose of issuing trust securities and investing the proceeds in an equivalent amount of Junior Subordinated Deferrable Interest Debentures, Series A due 2038 (the "Debentures") issued by Yorkshire Power Finance Limited ("Yorkshire Finance"), a subsidiary of Yorkshire Power Group Limited. On June 9, 1998 the Trust issued 11,000,000 shares of 8.08% Trust Securities at the liquidation amount of $25 per Trust Security. The Trust invested the $275 million proceeds in an equivalent amount of Debentures of Yorkshire Finance. Yorkshire Finance in turn loaned the net proceeds to Yorkshire Power Group Limited. Substantially all of the Trust's assets consist of the Debentures. The Trust Securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures are redeemable, in whole or in part, at the option of Yorkshire Finance or at any time upon the occurrence of certain events. Yorkshire Power Group Limited considers that the mechanisms and obligations relating to the Trust Securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the Trust's payment obligations with respect to the Trust Securities. Since June 1998 Yorkshire Group has repurchased 385,000 Trust Securities with a nominal value of approximately $10 million. 20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Quarter Ended June 30, 2000 vs. Quarter Ended June 30, 1999 ----------------------------------------------------------- And --- Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999 ----------------------------------------------------------------- RESULTS OF OPERATIONS Net income for the year to date period increased by (pound)24 million (200%) from (pound)12 million to (pound)36 million. There was an increase in net income of (pound)6 million (300%) in the latest quarter from (pound)2 million to (pound)8 million. This is due primarily to the following: an increase in gross margin attributable to the gas and electricity supply businesses and the cumulative effect on prior years of a revised depreciation method. Income statement line items that changed significantly were:

Electricity supply operating revenues have decreased when compared to the same period last year. A decline in volumes supplied to the residential electricity supply market has been partially offset by a growth in the volume of electricity supplied to the non-residential electricity supply market. External revenues attributable to the distribution business have increased due to the competitive market creating growth in revenues for the use of the distribution network. However, this growth has been offset in part by the impact of the distribution price control review from April 1, 2000 which 21 23 adversely affected distribution revenues in the quarter ended June 30, 2000. Gas supply revenues increased as the number of residential gas supply customers rose in the competitive market. Increased volumes have led to an improvement in gross margin for the gas supply business. Despite competitive pressures, gross margin for the electricity supply business has increased, primarily due to lower electricity pool costs and reduced CFD payments. In addition other costs have decreased, notably those associated with the use of the distribution network, as a result of the distribution price control review from April 1, 2000. It is anticipated that strong competitive pressures and the impact of the price control reviews on revenues experienced in the quarter ended June 30, 2000 will continue during the remainder of the year. In addition the method of trading electricity will change following the implementation of NETA which is now scheduled to be in place by November 21, 2000. It is anticipated that NETA will make the market for the sale of electricity by generators more competitive. Selling, general and administrative costs during the six months ended June 30, 2000 moved little compared to 1999 because the increase in rationalization costs in 2000 was offset by a reduction in costs incurred in relation to Year 2000 modifications and costs associated with the development of new systems to facilitate competition. Certain reclassifications have been made to the prior period financial information. Expenditure of (pound)9 million charged to maintenance in the six month period ended June 30, 1999 has been restated as Selling, General and Administrative expenditure so as to be consistent with the position of these costs for the six month period ended June 30, 2000. The provision for income taxes has increased in line with the increased profitability of Yorkshire Group in the six month period ended June 30, 2000. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Yorkshire Group has implemented a change in the depreciation method for its distribution network assets. Previously, distribution network assets were depreciated at a rate of 3% per annum for 20 years and 2% per annum for the remaining 20 years. A straight line depreciation method has now been implemented for such assets as this is believed to 22 24 better match the cost of the assets with the anticipated usage pattern. The effect of this change in the six months ended June 30, 2000 was to increase net income by (pound)2 million. The cumulative effect of this change in accounting principle on prior accounting periods to December 31, 1999 is an increase in income of approximately (pound)8 million, after a reduction for income taxes of (pound)4 million recorded in the quarter ended March 31, 2000. REVISION TO ASSET LIVES In addition to the change in depreciation method, Yorkshire Group has revised the estimated useful economic lives of its distribution network assets in order to provide a more accurate estimated life for each asset type. Such assets are now depreciated over a period of between 10 and 80 years. In the six months ended June 30, 2000, the effect of this change was to increase net income by (pound)2 million. The effect of the change in the year ending December 31, 2000 is expected to be an increase in net income of (pound)4 million. FINANCIAL CONDITION Yorkshire Power Pass-Through Asset Trust 2000-1 (the `PATS Trust') is a New York common law trust, the sole assets of which consist of (i) a 100% beneficial interest in (pound)155 million principal amount of Reset Senior Notes, issued in February 2000 and due February 15, 2020, (the `Senior Notes') issued by Yorkshire Finance 2 (`YPF2'), a subsidiary of Yorkshire Power Group (YPG) and (ii) the rights of the PATS Trust under a currency swap with UBS AG, London Branch (the `Currency Swap') and an option granted to UBS AG, London Branch (the `Call Option'). The PATS Trust has issued $250 million principal amount of 8.25% Pass-Through Asset Trust Securities (PATS) due February 15, 2005 (the Certificates). All of the US Dollar proceeds from the offering by the PATS Trust of the Certificates have been swapped by the Trust with UBS AG, London Branch for (pound) Sterling pursuant to the Currency Swap. The PATS Trust has used the (pound) Sterling, together with the proceeds received by the PATS Trust from UBS AG, London Branch under the Call Option, to purchase the Senior Notes issued by YPF2. YPF2 has loaned the net proceeds to YPG and subsidiaries. These proceeds were used as working capital and for the repayment of debt, including repayment of a loan which was entered into to repay Tranche B of Yorkshire Group's syndicated credit facility. YPG has issued a guarantee that fully and unconditionally guarantees the due and punctual payment of principal and interest on the Senior Notes. 23 25 MARKET RISKS Yorkshire Group has certain market risks inherent in its business activities, arising from the purchase and sale of electricity and gas, changes in foreign currency exchange rates and interest rates. Market risk represents the risk of loss that may impact Yorkshire Group due to adverse changes in market prices and rates. Yorkshire Group's exposure to commodity price variability has increased as a result of increased energy trading during the six months ended June 30, 2000. Risk management policies have been established by a risk management committee which has responsibility for oversight of all energy risk management. Trading is conducted in accordance with defined Value at Risk parameters approved by Yorkshire Group. Value at Risk has not changed significantly in the six month period ended June 30, 2000. Risks arising from changes in foreign currency exchange rates and interest rates has not changed significantly since December 31, 1999. For further details on market risk, see Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in Form 10-K. RATIONALIZATION Yorkshire plans to streamline its distribution and Supply workforces and has announced a reduction of approximately 350 positions (260 positions from the distribution business and 90 positions from the Supply business) during 2000 and a further 75 positions from the distribution business in 2001. A provision of approximately (pound)7 million has been recorded in January 2000 to reflect the cost of the 350 reductions in 2000. The majority of these redundancies are expected to take place in the latter half of 2000. The balance of the provision at June 30, 2000 was approximately (pound)5 million. Such streamlining is part of the overall program of reducing controllable costs in response to Ofgem's final distribution and supply price control reviews and to increasing competition in the Supply business. LEGAL PROCEEDINGS Reference is made to Form 10-K, Part I, Item 3. "Legal Proceedings" for details of ongoing litigation with respect to other corporations' use of actuarial surpluses declared in the ESPS. Yorkshire made similar use of actuarial surplus and, if it is decided by the House of Lords that the sums concerned 24 26 are all due to the ESPS, the maximum amount payable by Yorkshire in respect of its use of surplus is approximately (pound)38 million plus interest. OFGEM PRICE CONTROL REVIEW Following the conclusion of the electricity distribution and supply price control reviews and other Ofgem initiatives, a number of PES license modifications became effective on April 1, 2000. Consequently, from that date, there has been a reduction in the prices Yorkshire can charge its distribution and supply customers. For details of the price control reviews refer to Form 10-K, Part I, Item 1 "Yorkshire's Businesses - Industry Background - Distribution of Electricity - Distribution Price Regulation from April 1, 2000" and "Yorkshire's Businesses - Industry Background - Supply of Electricity - Electricity Supply Price Regulation from April 1, 2000". In response to Ofgem's final proposals and increasing competition, Yorkshire has adopted an aggressive program of reducing controllable costs. Significant features of this program include reductions in capital expenditure, staff reductions, outsourcing of certain functions and consolidation of facilities. Yorkshire intends to aggressively pursue this cost reduction program and is evaluating additional cost reduction measures to further mitigate the effects of Ofgem's final proposals and increasing competition in the electricity supply business. Yorkshire Group expects that the net result of Ofgem's electricity supply and distribution price reductions, and competitive demands in the Supply business and Yorkshire's mitigation efforts will be a decline in Yorkshire Group's results of operations and a reduction in its cash flows which, in each case, may be significant. EUROPEAN MONETARY UNION On January 1, 1999, 11 European Union countries formed an economic and monetary union and introduced a single currency, the Euro. Although the UK did not join at this time, the UK Government has indicated that it may join in the future. Management is currently assessing the effort required to prepare Yorkshire Group for the potential introduction of the Euro in the UK. 25 27 PART II. OTHER INFORMATION Item 5. Other Information Reference is made to Form 10-K, Part I, Item 1 "Yorkshire Group and the US Parents - AEP" and to Form 10-Q for the quarter ended March 31, 2000, Part II, Item 5 "Other Information" for details of the planned merger between AEP and CSW. On June 15, 2000, following the receipt of final regulatory approval the merger of AEP and CSW was completed. The common ownership in the UK resulting from the merger of one of Yorkshire's parent companies and the sole owner of SEEBOARD creates what is known as a "deemed merger" in the UK. As noted in Form 10-K, Part I, Item 1 "Yorkshire Group and the US Parents - AEP" in January 2000, the UK Department of Trade and Industry sought assurances about this deemed merger situation, in particular the separation of Yorkshire's distribution business from its electricity supply business and about facilitation of competition in generation and electricity supply. These assurances were given and clearance of this deemed merger granted. Modifications will be made to the PES Licenses of both Yorkshire and SEEBOARD in order to reflect such assurances. These modifications are expected to become effective in late August 2000. Reference is made to Form 10-K, Part I, Item 1 "Yorkshire Group and the US parents - NCE" for details of the planned merger of NCE and NSP. The NCE/NSP merger is now expected to be completed in the third quarter of 2000. Reference is made to Form 10-K, Part 1, Item I "The Electric Utility Industry in Great Britain - Regulatory Developments - Review of the Regulatory Framework: The Utilities Bill" for details of the UK government's proposed legislation to modernize the framework for utility regulation of the electricity and gas sectors. On July 28, 2000, the Utilities Bill received Royal Assent thereby creating the Utilities Act 2000 (the "Utilities Act"). The main provisions of the Utilities Act include: - the establishment of the Gas and Electricity Markets Authority ("the Authority") in place of the individual regulators for gas and electricity. The office to support the Authority will be known as Ofgem; - a new principal objective for the Authority to protect the interests of consumers, wherever appropriate by promoting 26 28 effective competition; - powers for the Authority to impose financial penalties on companies for breaches of license conditions and other specified statutory requirements (such penalties may be in an amount not to exceed 10% of the licensees' turnover); - the establishment of an independent Council with responsibility for seeking to resolve complaints, providing information of use to consumers, and advocating the interests of all consumers to the Authority, government and others with an influence on regulation; - a requirement for price-regulated gas and electricity utilities to disclose links (if any) between directors' pay and customer service standards; - legislation to underpin NETA; - separate licensing of electricity supply and distribution, and the introduction of a bar on supply and distribution licenses being held by the same legal person (which effectively means that the electricity supply and distribution businesses of current PESs would be put into separate companies. This does not preclude common ownership of the companies holding the electricity supply and distribution licenses); - new `collective' license modification procedures enabling the Authority to modify standard license conditions without a Competition Commission reference, even if some companies disagree (although in certain circumstances a Competition Commission reference will still be necessary); - a duty on the Authority, in the exercise of its statutory functions, to have regard to guidance issued by the Secretary of State on the social and environmental objectives relevant to the gas and electricity sectors; - new powers for the Secretary of State to make regulations to promote energy efficiency and the generation of electricity from renewable sources, and to provide for a cross-subsidy for the benefit of disadvantaged consumers; and - a requirement for the Authority to give reasons for certain key decisions and to publish and consult on significant future programs. The only clause in the Utilities Act which is currently in force, however, is that relating to the license modifications 27 29 required to implement NETA. All other sections will come into force after the Secretary of State has issued appropriate statutory instruments announcing dates. There is currently no clear timetable for the implementation of the different elements of the Utilities Act. Yorkshire is assessing the implications of the Utilities Act for the Company. Reference is made to Form 10-K, Part 1, Item I "The Electric Utility Industry in Great Britain - Regulatory Developments - New Electricity Trading Arrangements" for details of the new electricity trading arrangements designed to replace the Pool. The Utilities Act gives the UK Secretary of State for Trade and Industry the power to impose the PES license changes required to implement NETA. These changes will contain a requirement for PESs to be party to a number of new industry-wide agreements in addition to securing changes to current core industry documents. NETA trading is now expected to commence on November 21, 2000, although this date is dependent on the successful completion of system trialling and testing. Yorkshire has been selected to join the NETA market integration testing, subject to an external review of the Company's program readiness. On July 31, 2000, Ofgem published initial proposals for an environmental action plan. An increased emphasis on environmental and social issues is the first of Ofgem's priority projects for 2000/01 and this focus reflects the objectives for Ofgem set under the Utilities Act. These proposals explore Ofgem's involvement in: - creating incentives to use energy efficiency in price controls for gas and electricity; - administering the climate change levy exemption and the percentage obligation for renewables; - promoting energy efficiency standards of performance; - promoting trading in green certificates for renewable generation and in emissions levels from power stations; - requiring new codes of practice covering energy efficiency advice; - working on the design of new electricity trading arrangements; and - monitoring the development of combined heat and power generation. 28 30 Ofgem is seeking comments on the document by the end of September 2000 and there will follow a series of meetings and workshops with interested parties to finalize the plan. Yorkshire is currently assessing the implications for Yorkshire of these proposals. Reference is made to Form 10-K, Part I, Item 1 "The Electric Utility Industry in Great Britain - Industry Structure" for details of various industry combinations. On August 3, 2000, TXU Europe announced its purchase of Norweb Energi, the supply business of United Utilities plc. Reference is made to Form 10-K, Part 1, Item I "UK and EU Competition Law" for details of the Competition Act which came into force on March 1, 2000 and gives new concurrent powers to the Director General of Fair Trading and Ofgem to investigate and act against anti-competitive agreements and conduct. On May 31, 2000, Ofgem, in consultation with the Office of Fair Trading, published a consultation document "Competition Act 1998 Application to the Energy Sectors". The document provides advice and information about the actions which the Director General of Gas and Electricity Markets will take into account when considering whether, and if so, how, to exercise his powers under the Competition Act. The proposals do not raise any significant concerns for Yorkshire. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2000. 29 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. YORKSHIRE POWER GROUP LIMITED BY: /S/ Armando A. Pena -------------------- Armando A. Pena Chief Financial Officer and Director 30

YORKSHIRE POWER GROUP LTD 10-Q