================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) - OCTOBER 21, 2002
TXU EUROPE LIMITED
(Exact name of registrant as specified in its charter)
ENGLAND AND WALES 001-15709 98-0188080
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
THE ADELPHI, 1-11 JOHN ADAM STREET, LONDON, ENGLAND WC2N 6HT
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - 011-44-207-879-8081
================================================================================
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Europe contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Europe believes that in making
any such statement its expectations are based on reasonable assumptions, any
such statement involves uncertainties and is qualified in its entirety by
reference to factors contained in the Forward-Looking Statements sections of
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations in TXU Europe's Annual Report on Form 10-K for the year ended
December 31, 2001 and of Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations in TXU Europe's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2002, that could cause the
actual results of TXU Europe to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made. TXU Europe does not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time. It is not possible for TXU Europe
to predict all of such factors, nor can it assess the impact of each such factor
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statement.
ITEM 2. DISPOSITION OF ASSETS
TXU Europe Limited (TXU Europe) is a private limited company incorporated
under the laws of England and Wales on February 5, 1998. TXU Europe is an
indirect wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Europe
is a holding company for TXU Corp.'s United Kingdom (UK) and other European
operations.
DIFFICULT OPERATING ENVIRONMENT IN THE UK
On October 4, 2002, TXU Corp. announced that it was reducing earnings
expectations for 2002 and 2003 due primarily to continued pressure on operating
results in the UK. A significant decrease in wholesale power prices and low
price volatility, due in part to milder than normal weather, had led to
continuing declines in profitability and cash flows from TXU Europe's upstream
electricity generation assets and short-term wholesale trading activities. In
addition, TXU Europe's ability to enter into structured transactions (long-term
trades) had been considerably reduced because of depressed market activity and
lack of available counter-parties due to energy sector-wide credit concerns. A
significant portion of TXU Europe's retail power load in the UK was satisfied
with long-term agreements that obligated TXU Europe to purchase power at prices
considerably in excess of current wholesale market prices. These comparatively
high power purchase costs, combined with increased competition and associated
customer attrition, had resulted in reduced profitability and cash flows from
TXU Europe's retail electric business. TXU Europe's planned actions to address
the situation included restructuring the power purchase agreements and physical
generation positions in the UK, ceasing acquisition and other developmental
activities, reducing administrative costs and enhancing retail margins. Certain
of these actions would have required a significant capital contribution from TXU
Corp.
MARKET REACTION AND TXU CORP.'S RESPONSE
Subsequent to TXU Corp.'s October 4 announcement, concerns arose in the
financial markets regarding the potential impact of issues at TXU Europe on
liquidity of TXU Corp.'s North American, European and Australian operations. TXU
Corp. has taken the following actions to address the US financial markets'
concerns about liquidity and to strengthen its credit position:
o Reversed previous plans to support TXU Europe with up to $700 million in
capital contributions
o Reduced its common stock dividend by 80 percent to an annual indicated rate
of $.50 per share effective with the dividend payable in January 2003
o Significantly reduced planned capital expenditures in all its businesses
o Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default
(Australian financing arrangements have no cross-default provisions that
would be triggered by a TXU Europe default)
o Drew $2.6 billion in cash on its US revolving credit facilities
o On October 30, 2002 entered into a commitment for a secured credit facility
of up to $1 billion at Oncor Electric Delivery Company, a wholly owned
subsidiary of TXU Corp.
IMPACT ON CREDIT RATINGS
In response to the difficult operating environment affecting TXU Europe's
business and TXU Corp.'s decision to limit any further investment in TXU Europe,
the major rating agencies downgraded TXU Europe's credit ratings to below
investment grade. As of November 4, 2002, TXU Europe's debt ratings were "Caa2"
by Moody's Investors Service (Moody's) and Moody's debt rating of TXU Europe's
wholly-owned subsidiary, Energy Group Overseas B.V., was "Caa2". Moody's rating
of the preferred trust securities issued by TXU Europe Capital I was "C". All of
the ratings for TXU Europe and its subsidiaries have been kept on review for
further downgrade. Standard & Poor's Ratings Services long-term corporate credit
ratings of TXU Europe and its subsidiaries was "D", and Fitch Ratings ratings of
senior unsecured and short-term debt ratings of TXU Europe were both "C". Credit
ratings for TXU Corp. and its US and Australian subsidiaries remain investment
grade.
IMPACT OF CREDIT RATING DOWNGRADES ON TXU EUROPE
The downgrades of credit ratings to below investment grade have resulted in
a number of potential demands on TXU Europe's liquidity. These demands are, in
certain cases, at the discretion of TXU Europe's counterparties and include
additional cash or letter of credit collateral requirements and repayment of
indebtedness under various financing and other contractual arrangements,
including financial derivatives. Certain of these collateral requirements relate
to wholesale trading, further limiting these activities. In addition, events of
default have occurred under certain of these arrangements, and several financing
agreements contain cross-default provisions that accelerate repayment of
borrowings. The effect of these developments on liquidity is significant and TXU
Europe has entered into negotiations with its creditors regarding these matters.
TXU EUROPE FINANCIAL COVENANTS
The terms of some of TXU Europe's financing arrangements contain financial
covenants that require it to maintain fixed charge coverage ratios, equity
capitalization ratios, leverage ratios and/or a minimum net worth. TXU Europe
does not believe that it is currently in compliance with these covenants.
SALE OF CERTAIN TXU EUROPE OPERATIONS
As a result of the above developments, on October 14, 2002 it was announced
that TXU Europe had elected to offer for sale all or portions of its business
and is currently evaluating all of its other available options.
On October 21, 2002, TXU Europe sold certain of its operations to Powergen
UK plc (Powergen), a unit of Germany's E.ON AG, for approximately (pound)1.37
billion in cash.
Concurrently, Powergen terminated the accounts receivable securitization
program, under which TXU Europe had been selling its trade accounts receivable,
for approximately (pound)250 million, effectively buying back the receivables
from the participating financial institution.
The operations sold principally include: (a) the retail electric and gas
business in the UK, consisting of 5.3 million residential, commercial and
industrial customers, and (b) three power plants having a total of 2.9 gigawatts
of coal-fired generation capacity and a combined heat and power plant (CHP), all
in the UK. The sale and purchase agreement also provides for the transfer of
approximately 1,900 employees in the UK to Powergen and the assumption by
Powergen of the associated pension obligations.
TXU Europe estimates that it will sustain a substantial loss as a result of
this sale, and the writeoff of the related prepaid pension asset, other
provisions and impairments (of goodwill and other assets) required as a result
of the disposition and other recent events. The balance of goodwill was
approximately (pound)3.9 billion at September 30, 2002. Under US generally
accepted accounting principles, the sale, provisions and impairments will be
recorded in the fourth quarter of 2002.
REMAINING BUSINESSES OF TXU EUROPE
The remaining business of TXU Europe consists of its Nordic and German
operations, Energy Trading and certain CHP assets in the UK.
NORDIC - TXU Europe has operations in the power generation, trading and
retail markets of the Nordic region. TXU Europe trades on the Nordpool exchange,
which serves Finland, Norway, Sweden and Denmark, from its trading office in
Stockholm. TXU Europe has access, through a long-term licensing arrangement, to
137 megawatts (MW) of hydro-electric power generation in northern Norway.
Further, TXU Europe has two retail energy businesses with a total of 80,000
customers in Norway. In Finland, TXU Europe owns 80.1% of a consolidated joint
venture company called TXU Nordic Energy Oy, the remaining 19.9% being held by
Powest Oy, a wholly owned subsidiary of Pohjolan Voima Oy (PVO). PVO is
Finland's second largest electricity generator. TXU Nordic Energy Oy is entitled
to the output from approximately 584 MW of Powest's thermal generating capacity.
TXU Europe also owns approximately 45% of Atro Oyj, a regional electricity
distributor in Finland with access to 90,000 customers. Further, as part of a
consortium which has acquired approximately 190 MW of generating capacity in the
Finnish company, Etela-Pohjanmaan Oy, TXU Nordic Energy Oy is entitled to annual
output of approximately 60 MW.
GERMANY - TXU Europe owns a 51% ownership interest in Kiel AG (Kiel) and a
74.9% ownership interest in Braunschweiger Versorgungs-Aktiengesellschaft
(BVAG), both integrated German municipal utilities. Kiel has approximately
250,000 electricity and gas customers, 175 megawatts of power generation and 2.7
billion cubic feet of gas storage capacity. BVAG is an electricity, gas, heating
and water supplier for 210,000 residential, commercial and industrial customers
in the German city of Braunschweig. Under terms of the acquisition agreement,
Stadtwerke Braunschweig has the right until January 1, 2006 to sell its
remaining 25.1% ownership interest in BVAG to TXU Europe for (euro)129 million
((pound)83 million). TXU Europe's holdings in BVAG and Kiel are subject to
various preemptive and other rights on behalf of the other shareholder in each
venture, should these holdings be sold. These are likely to impact the value
realized if a sale is pursued. TXU Europe also owns all of the share capital of
Ares, based in Berlin. Ares is an electricity retailer that offers energy
services to both business and residential customers throughout Germany. Ares has
approximately 200,000 customers.
ENERGY TRADING - TXU Europe continues to retain its energy trading assets
and liabilities. Included within the portfolio of contracts retained by TXU
Europe's trading operations are a number of long-term purchase contracts,
particularly for electricity. TXU Europe is continuing to trade out its
positions in order to maximize recovery for creditors overall from an orderly
wind down of these positions.
TXU Europe's remaining generating assets are included in the trading
operation and include the 215 MW Shotton CHP station, 15 MW Grimsby-MIC CHP
(located on the property of a customer), a 13.5% interest in the 1,000 MW
Barking combined cycle gas turbine station and interests in various renewable
energy projects, mostly wind farms.
CURRENT STATUS
TXU Europe and its subsidiaries have not entered into formal administration
processes in the UK (similar to bankruptcy proceedings in the US). However,
consistent with UK law the remaining operations are being managed by the
directors of TXU Europe for the benefit of the creditors of TXU Europe and its
subsidiaries.
Given the overall financial position of TXU Europe, an informal standstill
is operating with the majority in value of its financial creditors whereby no
payments of interest or principal are being made and these creditors are not
pursuing action to recover such amounts.
SIGNATURE
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 hereunto duly authorized.
TXU EUROPE LIMITED
By /s/ Henry Davies
----------------------------
Henry Davies
Principal Accounting Officer
Date: November 5, 2002