UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
____
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
- OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION EXACT NAME OF REGISTRANT AS SPECIFIED IN I.R.S. EMPLOYER
FILE NUMBER ITS CHARTER; ADDRESS OF PRINCIPAL EXECUTIVE IDENTIFICATION
OFFICES; AND TELEPHONE NUMBER NO.
- ----------- ------------------------------------------- ------------------
001 - 15709 TXU EUROPE LIMITED 98-0188080
The Adelphi
1-11 John Adam Street
London, England WC2N 6HT
011-44-207-879-8081
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Registrant Title of Each Exchange on
Class Which Registered
- -------------------- ------------------- -------------------
TXU Europe Capital I 9 3/4% Trust Originated New York Stock
Preferred Securities Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrants (1) have 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 registrants were required
to file such reports), and (2) have 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 the
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]
Aggregate market value of TXU Europe Limited Common Stock held
by non-affiliates: None
Common Stock outstanding at March 2, 2001: 2,455,705,299
shares, at US$1 par value and 100 deferred shares at pounds 1
par value
TXU EUROPE LIMITED MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTIONS (I) (1) (A) AND (B) OF FORM 10-K AND IS THEREFORE
FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS 1
LEGAL ENTITIES
Summary Corporate Structure 1
TXU Europe Limited 1
TXU Europe Group plc 2
INDUSTRY BACKGROUND 2
STRATEGY FOR TXU EUROPE GROUP 5
OPERATING SEGMENTS 5
Portfolio Trading and Power 6
Energy Retail 11
Networks 12
Other 15
ENVIRONMENTAL MATTERS 16
Item 2. PROPERTIES 18
Item 3. LEGAL PROCEEDINGS 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 20
Item 6. SELECTED FINANCIAL DATA 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
Item 11. EXECUTIVE COMPENSATION 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 22
APPENDIX A - Financial Information of TXU Europe Limited and
Subsidiaries
APPENDIX B - Exhibits
i
PART I
Item 1. BUSINESS
LEGAL ENTITIES
SUMMARY CORPORATE STRUCTURE
TXU CORP.
TXU EUROPE LIMITED TXU Finance (No.2) Holdings Inc.
TXU Eastern Funding Company
TXU Finance (No.2) Limited (10% owned by
TXU Finance (No.2) Holdings Inc.)
TXU Europe Group plc (Predecessor Company)
Eastern Electricity plc
Eastern Natural Gas Limited
TXU Europe Power Limited
TXU Europe Energy Trading Limited
TXU Europe Energy Trading B.V.
Eastern Natural Gas (Retail) Limited
Eastern Energy Limited
TXU EUROPE LIMITED
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 Corp. is a multinational energy services holding company
that is engaged in the generation, purchase, transmission, distribution and
sale of electricity; the purchase, transmission, distribution and sale of
natural gas; and energy marketing, energy services, telecommunications and
other businesses, primarily in the United States (US), Europe and Australia.
TXU Europe is a holding company for TXU Corp.'s United Kingdom (UK) and other
European operations.
Almost all of TXU Europe's operating income is derived from, and its
consolidated assets are held by, TXU Europe Group plc (TXU Europe Group) and
TXU Europe Group's subsidiaries. TXU Europe owns 90% of the outstanding
ordinary shares of TXU Finance (No. 2) Limited, (TXU Finance). The
remaining 10% of TXU Finance's outstanding ordinary shares are owned by a
wholly-owned US subsidiary of TXU Corp. The structure of TXU Europe Group
and its subsidiaries is currently being amended in connection with the re-
organization of its constituent businesses.
TXU Eastern Funding Company (Funding) is a private unlimited company
incorporated under the laws of England and Wales and is a wholly-owned
indirect subsidiary of TXU Europe. Funding was organized solely to provide
funding for the operations of TXU Europe and its subsidiaries by issuing debt
securities and lending the proceeds to TXU Europe.
1
TXU EUROPE GROUP plc
TXU Europe's major business operations are conducted through the following
subsidiaries of TXU Europe Group:
TXU Europe Energy Trading Limited, or TXU Europe Energy Trading, which
has as its business coordinating and managing for TXU Europe Group and for
other parties the price and volume risks associated with generation, and
electricity and gas retail businesses, and through its subsidiary, TXU
Europe Energy Trading B.V., participates in energy merchant trading in
Continental Europe;
TXU Europe Power Limited, or TXU Europe Power, one of the largest
generators of electricity in the UK;
Eastern Electricity plc, or Eastern Electricity, one of the largest
distributors and retailers of electricity in the UK, and Eastern Energy
Limited, which supplies electricity outside the authorized area served by
Eastern Electricity and includes the supply business acquired from Norweb
plc. TXU Europe, through Eastern Energy Limited, will act as Norweb plc's
agent in meeting its obligations under the public electricity supply
license until its customers can be formally transferred to TXU Europe
following implementation of the Utilities Act, as defined herein; and
Eastern Natural Gas (Retail) Limited, or Eastern Natural Gas, one of the
largest retail suppliers of natural gas in the UK.
TXU Europe Group sells electricity and natural gas principally under the
brand names of Eastern Energy and Norweb Energi. The operations of TXU
Europe Energy Trading and TXU Europe Power are treated by TXU Europe as the
Portfolio Trading and Power segment for reporting purposes. The electric and
gas supply business is treated as the Energy Retail segment for reporting
purposes. Energy Retail and Portfolio Trading and Power comprise TXU Europe
Group's energy business. The distribution business is treated as the Networks
segment for reporting purposes.
All markets in the UK are now open to competition, where customers are
free to choose their energy providers. The competition in the UK and further
deregulation in continental European markets allows for creation of a global
portfolio management business model. Under this model, TXU Europe will
manage a portfolio of generation assets, contracts and customer
relationships as a single unified energy business. To that end, in early
2001, TXU Europe will undertake an internal reorganization to reflect a
greater integration of the energy business. The Energy Retail and Portfolio
Trading and Power segments for TXU Europe will be combined operationally and
organizationally into one business managed similarly by geographical
locations.
INDUSTRY BACKGROUND
THE ELECTRICITY INDUSTRY IN ENGLAND AND WALES
Traditionally, the electric industry in the UK, including distribution,
transmission and generation, has been regulated. Throughout England and
Wales, electricity power stations, together with the transmission and
distribution systems, constitute a single integrated network. Privatization
of the UK electricity industry has opened the market to new participants.
Each participant must be licensed to generate, transmit or supply
electricity. Almost all electricity generated in England and Wales must be
sold to and purchased from the wholesale trading market for electricity,
commonly known as the Pool. The electricity generated at the power stations
is delivered through the high voltage transmission system owned and operated
by The National Grid Company (National Grid). It is then transformed for
delivery on to the local distribution networks owned and operated by holders
of public electricity supply licenses like Eastern Electricity. Prices for
electricity are set by the Pool for each half hour based on bids of
generators and a complex set of calculations that matches supply and demand.
2
The Pool
The Pool was established in 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. These characteristics create the need for a constant
matching of supply and demand. The Pool does not itself buy or sell
electricity, but rather is a mechanism to facilitate transactions between
generators and suppliers.
All electricity generated in England and Wales, other than electricity
generated by small generators connected directly to the local distribution
networks rather than National Grid, must be sold to the Pool. In turn,
electricity suppliers generally must buy electricity from the Pool for resale
to their customers. Even groups which are both generators and licensed
suppliers, like TXU Europe Group, in most circumstances, must act through the
Pool to sell all the electricity they generate and to purchase all
electricity they sell to customers. The Pool will be eliminated with final
implementation of the New Energy Trading Agreements (see Industry Regulation
below.)
GAS INDUSTRY
The gas industry in the UK has been privatized and competition among
suppliers is encouraged by deregulation of the supply of gas, first to larger
customers and, more recently, to smaller customers including residential
users. Most of the gas transmission and distribution network in the UK is
now owned by Lattice plc, which is required to provide fair access to its
network to all shippers of gas.
INDUSTRY REGULATION
GENERAL
The electricity and gas industry in the UK is subject to regulation under,
among other things, the Electricity Act (as amended principally by the
Competition and Service (Utilities) Act 1992 and the Utilities Act 2000), the
Gas Act 1986 (as amended principally by the Competition and Service
(Utilities) Act 1992, the Gas Act 1995 and the Utilities Act 2000) and UK and
European Union (EU) environmental legislation described below. TXU Europe
Group has all of the necessary licenses, franchises and certificates required
to enable it to conduct its businesses.
The electricity and gas markets in the UK are now fully open to
competition, although there are certain price restrictions on allowable rates
that can be charged and other price restrictions for the distribution and
supply business. In addition, the operating activities of these industries
are still subject to numerous governmental regulations.
To be able to supply electricity, a supplier must either have a second
tier supply license issued under the Electricity Act 1989 of Great Britain
(Electricity Act) or hold a public electricity supply license for the
authorized area where its customers are located. The former regional supply
monopolies or franchises of the twelve regional electricity companies, are
required, under their public electricity supply licenses, to supply
electricity to customers in their designated service areas. A price control
formula set out in the supplier's license limits prices charged to
residential customers and small businesses in the designated service areas.
A formula determines the maximum prices which any public electricity supply
license holder is permitted to charge. A separate price control formula
determines the maximum distribution revenue which a public electricity supply
license holder may earn from charges made to its own electricity supply
business and other electricity suppliers for use of its distribution network.
NEW ELECTRICITY TRADING ARRANGEMENTS (NETA)
The implementation of NETA is now scheduled for the end of March 2001.
NETA will provide those wishing to buy and sell electricity the freedom to
enter into directly negotiated contracts instead of having to trade through
the Pool. It is expected that under the new arrangements bulk electricity
will be traded on one or more exchanges and through a variety of bilateral
and multilateral contracts and that market participants will include not only
generators and suppliers but also traders with physical positions, i.e.
energy wholesalers; accordingly, NETA implementation will eliminate the Pool.
3
The new arrangements provide mechanisms for near real-time clearing and
settlement of differences between contractual and physical positions of those
buying, selling, producing and consuming electricity. A balancing mechanism
will enable the system operator, National Grid, to change levels of
generation and demand to near real-time; and a mechanism for imbalance
settlement will provide for the settling of the differences between net
physical and net contractual positions of parties. Electricity supply
businesses have incurred significant costs preparing to operate under NETA,
while the financial impact on distributors has been minimal. Although the UK
government proposes that such costs will ultimately be borne by customers,
the Office of Gas and Electricity Markets (OFGEM) has not allowed recovery of
such costs in the price controls which became effective on April 1, 2000.
TXU Europe's ability to manage its purchase price risk depends, in part, on
the continuing availability of properly priced risk management mechanisms
such as contracts for differences and electricity forward agreements. No
assurance can be given that an adequate, transparent market for such products
will in fact be available in the future (including NETA).
UTILITIES ACT
The Utilities Act 2000 (Utilities Act) received Royal Assent (necessary
for enactment) on July 28, 2000 and will become effective in April 2001. The
goals of the Utilities Act are to place consumer interests at the core of
regulation and to harmonize gas and electricity regulation. The Utilities
Act makes changes to the electricity and gas licensing framework, but for the
most part license obligations will be carried over as appropriate and will be
largely unchanged from those in present licenses. In addition, the regulators
of gas and electricity markets are combined into a single regulatory body,
the Gas and Electricity Markets Authority (the Authority), which consists of
a Chairman and Members appointed by the Secretary of State for Trade and
Industry, and is supported by OFGEM.
License Arrangements
The distribution business will for the first time become a separately
licensable activity. Until now, certain obligations relating to distribution
activities have been included in Eastern Electricity's supply license and in
the licenses of other electricity suppliers who operate distribution systems;
but organizations that operate electricity distribution systems without also
being suppliers have not been required to obtain a license to do so. Each
license will be in the form of references to a set of standard conditions,
plus any special conditions particular to that license. This follows the
present licensing model for gas. The Secretary of State for Trade and
Industry will in due course determine the set of standard conditions relating
to the electricity distribution business.
Supply activities have been carried out under two different types of
license. A public electricity supply license allows supply in the franchise
areas of the former nationalized Area Electricity Boards, which were
privatized in 1990. New suppliers entering the market together with public
electricity suppliers wishing to supply outside their franchise areas do so
using a Second Tier Supply License. The Utilities Act allows for only a
single type of Supply license also using a set of standard conditions
together with relevant special conditions.
The Secretary of State for Trade and Industry will determine a revised set
of Standard Conditions relating to gas. The activity of "Public Gas
Transportation" will be renamed "Gas Transportation". Gas Transporters will
no longer have exclusive rights over particular geographical areas.
Other Provisions of the Utilities Act
The Utilities Act made provision for a number of other things including:
- The transfer of the supply and distribution businesses of the Public
Electricity Suppliers to the newly licensed entities of supply and
distribution, currently scheduled to take place by mid 2001;
- The implementation of NETA;
- The amalgamation of the gas and electricity consumer representation
bodies into a new body, the Gas and Electricity Consumers Council (known
as "energywatch");
- The introduction of an obligation for electricity suppliers to obtain a
portion of energy supply from renewable sources to be determined after
due consultation by the Secretary of State for Trade and Industry;
- The introduction of an obligation for the Authority in carrying out
regulatory duties to take due account of social and environmental
guidance issued by the Secretary of State for Trade and Industry; and
- New powers of license enforcement.
4
The implementation of the Utilities Act will make possible the formal
transfer of the retail customers acquired from Norweb plc to TXU Europe Group
and its subsidiaries.
STRATEGY FOR TXU EUROPE GROUP
TXU Europe Group began as a regional electricity company, operating the
largest electric networks business and one of the largest supply businesses
in the UK. As the UK energy market has become increasingly competitive, and
as the energy markets in continental Europe have begun to open to
competition, TXU Europe Group has been a pioneer in the development of the
flexible energy portfolio concept. The variety of physical and financial
resources and customers in TXU Europe Group's energy business provides
flexibility to respond more quickly to structural changes in energy markets
in the UK and in continental Europe.
The portfolio is structured to provide maximum flexibility over the long
term to enable TXU Europe Group to continue delivering optimum value. It is
designed to meet the hedging needs of TXU Europe Group's retail operations,
but it is continually growing, re-shaping and re-forming to respond to the
ever-changing market conditions and priorities for risk capital allocation.
Indeed, TXU Europe Group's entire portfolio, including its generation assets,
contractual links and customer relationships, is managed to take full
advantage of evolving short-term market conditions and to manage the risks of
longer-term movements in value within the components of the energy market.
The portfolio management must anticipate such value movements, through
accurate market forecasting, and then take commercial advantage of the
changes.
The performance of the portfolio is consolidated through a financial
portfolio of cash flow and risk. Because of TXU Europe Group's embedded
flexibility within its diversified and integrated single energy portfolio, it
is able not only to reduce the costs of risk management but also to identify
and extract elements of value that could not be extracted from individual
components on their own.
TXU Europe Group's strategy for the UK energy business is to increase its
market share in the retail sale of gas and electricity by strengthening its
existing positions in those markets (an example is the Norweb Energi
acquisition). TXU Europe Group believes that substantial economic and
marketing benefits are derived from operating its natural gas and electricity
retailing business as a single unit. Competitive markets provide
opportunities for TXU Europe Group to expand its retail base through its
marketing efforts and a focus on service to customers. Providing similar
development and management of portfolios to other third party energy
providers gives TXU Europe Group additional opportunities to develop its
customer base. TXU Europe Group will also continue to improve operational
efficiency in its businesses.
TXU Europe Group also plans additional growth in continental Europe. TXU
Europe Group expects competition to increase in European markets. As
opportunities arise, TXU Europe Group intends to expand its current European
presence by developing its European energy business. As appropriate, TXU
Europe Group aims to establish positions through interests in physical assets
or through contracts and trading. It expects to develop distribution and
retail customer bases through direct marketing and alliances, or joint
ventures, with businesses having existing customer bases. These steps will
enable TXU Europe Group to operate profitably in these markets by applying
skills learned in the UK market, in partnership with local management and
fellow stakeholders, and additionally by taking advantage of price, weather,
the timing of demands on the system or other differentials between connected
European markets, as it does in the UK.
OPERATING SEGMENTS
GENERAL
Almost all of TXU Europe's operating income is derived from, and
consolidated assets are held by, TXU Europe Group and TXU Europe Group's
subsidiaries.
The business and operations of TXU Europe Group and its subsidiaries
consist of two main businesses, energy and networks, which are divided into
three principal operating segments, as follows:
ENERGY - The Energy business manages TXU Europe's integrated portfolio of
customers, assets and contracts in the UK and continental Europe. Operations
in the UK are conducted through wholly-owned subsidiaries. European
activities are conducted through both wholly-owned subsidiaries and joint-
5
venture operations. Through its portfolio management and trading operations,
TXU Europe seeks to allocate risk capital so as to maximize returns across
European markets. As a consequence, the composition of assets and operations
in each market within the portfolio changes from time to time. The two
operating segments of the Energy business are:
(i) the PORTFOLIO TRADING AND POWER business (formerly known as energy
management and generation), which manages a portfolio of generation
assets and contracts throughout Europe; and
(ii) the ENERGY RETAIL business, which as of December 31, 2000, supplies
electricity and gas to approximately 5.5 million residential, industrial
and commercial customers in the UK, including those arising from the
Norweb Energi acquisition (described below).
NETWORKS -
The third operating segment is the NETWORKS business which owns, manages
and, through its networks management joint venture, 24seven, operates the
electricity distribution system in the UK.
UK energy operations are carried out principally through TXU Europe
Group's subsidiaries, Eastern Electricity plc (which also owns the networks
electricity distribution system), Eastern Energy Limited (Eastern Energy),
Eastern Natural Gas Retail Limited, TXU Europe Power Ltd (and its
subsidiaries) and TXU Europe Energy Trading Ltd.
Continental European energy operations are carried out as follows:
(i) Portfolio trading in central European markets through TXU Europe Energy
Trading BV (and its subsidiaries), primarily in Germany,the Netherlands,
Switzerland and Spain; and
(ii) Nordic operations through TXU Nordic Energy Oy (a joint venture with
Pohjolan Voima Oy (PVO), Finland's second largest electricity generator)
which trades energy on Nordic markets, has access to hydro generation at
Svartisen and Kobbelv and participates in distribution and retail
markets through joint ventures, especially Savon Voima Oyj (SVO).
European operations were further expanded when Stadtwerke Kiel AG (Kiel
AG) became a subsidiary of the group on January 8, 2001, as described below.
Financial information required hereunder is set forth in Note 18 to
Consolidated Financial Statements included in Appendix A to this report.
PORTFOLIO TRADING AND POWER SEGMENT
PORTFOLIO MANAGEMENT/ENERGY TRADING
Typically, holders of public electricity supply licenses issued under the
Electricity Act in connection with supply and distribution within an
authorized area in the UK are exposed to risk, as they supply electricity to
their customers at stable prices but have to purchase almost all the
electricity necessary to supply those customers from the Pool at prices that
are constantly changing. The ownership of generating assets reduces the risk
associated with such price volatility and provides a high level of
flexibility that promotes portfolio optimization
TXU Europe Energy Trading manages TXU Europe Group's activities in
managing risk. It provides support to TXU Europe Group's energy retail
activities, taking into account its energy purchases and sales and its
contract portfolios, including TXU Europe Group's generating assets and
natural gas production interests. TXU Europe Energy Trading is responsible
for setting the level of bids into the Pool for the output of each of TXU
Europe Group's generating stations, other than Barking and the combined heat
and power plants. TXU Europe Energy Trading uses this method to co-ordinate
the operation of TXU Europe Group's generating stations with TXU Europe
Group's fuel contract position and its retail and wholesale energy sales
portfolios to TXU Europe Group's best advantage. It also co-ordinates the
operation of TXU Europe Group's generating stations, taking into
consideration the relative prices in the energy markets. TXU Europe Energy
6
Trading also earns revenue by providing risk management services to other
energy retailers and generators to assist in managing their Pool/market price
risk.
TXU Europe Energy Trading manages TXU Europe Group's financial exposure to
fluctuations in electricity prices by:
- Managing its portfolio of contracts for differences;
- Bidding both price and volume for TXU Europe Group's generation output,
other than for the Barking plant and the combined heat and power plants,
into the Pool for each half hour of the day; and
- Deciding with the electricity retailing division of TXU Europe Group on
the volume and pricing of sales in the competitive and ex-franchise
markets.
The overall electricity position for each half hour of the day is
monitored by TXU Europe Energy Trading with the goal of optimizing
electricity purchases and sales positions through the use of generation
facilities, long and short-term retail sales contracts and appropriate
financial instruments. The overall gas position is monitored in a similar
way with additional opportunities presented through the operation of gas-
fired power stations, storage facilities and the use of gas assets.
Together, the overall electricity and gas positions are managed by reference
to risk exposure limits that are monitored by a risk management team within
TXU Europe Group. The risk management team verifies that the trading
instruments employed have been approved for use by TXU Europe Energy Trading
and carries out credit checks on current and proposed counterparties. The
risk management team also continuously monitors TXU Europe Energy Trading
value at risk and ensures this is kept within set limits. TXU Europe Group's
ability to manage that risk in the future will depend, in part, on the terms
of its supply contracts, the continuation of an adequate market for hedging
instruments and the performance of its generating and gas assets.
To offset some of the exposures within its overall natural gas portfolio,
which also includes a range of wholesale and retail customers, including TXU
Europe Group's own power stations, TXU Europe Group has entered into a
variety of longer term gas purchase contracts. At December 31, 2000, the
commitments under long-term purchase contracts amounted to an estimated
pounds 633 million, covering periods up to 8 years. Estimated sales
commitments, including estimated power station usage, at the same date
amounted to approximately pounds 3 billion, covering periods up to 8 years.
TXU Europe Energy Trading also purchases coal, oil and natural gas for TXU
Europe Group's UK power stations. At December 31, 2000, TXU Europe had
equity interests in four natural gas-producing fields in the North Sea. On
February 1, 2001, TXU Europe sold its interests in its North Sea gas assets
for approximately pounds 138 million as part of its continuing review of its
positions in its energy portfolio.
Continental Europe
In September 1999, the energy management business established an office in
Geneva, Switzerland, which co-ordinates European energy management and
development projects. In its first full year of operation, the Central
European operations traded 157 Terrawatt hours (TWh) equivalent of power and
gas in 2000 compared with 5 TWh equivalent in 1999.
The energy management business also trades on the Nord Pool, the
electricity trading market in Scandinavia, and has access to up to 139 MW of
hydro output in Norway for 53 years, for which TXU Europe Group paid an
upfront fee of up to pounds 151 million. Nordic operations (which are carried
out primarily in the countries of Finland, Norway and Sweden)
had power trades of 156 TWh in 2000 compared with 37 TWh in 1999.
In December 1999, TXU Europe announced it would import electricity from
Russia as part of an arrangement between PVO and the Russian national utility
RAO UES (UES). The portion of electricity allocated to TXU Europe under the
arrangement will be supplied to TXU Nordic Energy. TXU Nordic Energy is
entitled to 190 MW of the 400MW that will be imported by PVO from UES. Under
the arrangement, which began January 1, 2001 and lasts until 2004, UES will
sell 667 million kilowatt hours (kWh) to PVO in the first year and up to 2.67
billion kWh each year after 2001. The electricity will be supplied through
an electricity complex in Vyborg, a city on the Russian-Finnish border.
7
On January 8, 2001, TXU Europe completed the acquisition of 51% of Kiel
AG, a German municipal utility, for approximately pounds 145 million. The
city government of Kiel, the state capital, will retain the remaining 49% of
the utility, which has approximately 250,000 gas and electricity customers,
175 megawatts of power generation and 2.7 billion cubic feet of gas storage
capacity.
In November 2000, TXU Europe sold its 50 per cent interest in Elbolaget i
Norden, a Swedish electricity supplier, to the owner of the remaining 50 per
cent for approximately pounds 12.5 million.
REGULATORY MATTERS
TXU Europe Energy Trading is permitted by the Financial Services Authority
under the Financial Services Act 1986 to deal in contracts for differences,
including futures and options, for both trading and non-trading or hedging
purposes in the UK.
TXU EUROPE POWER
TXU Europe Power is one of the largest generators of electricity in the
UK. Its share of total UK generating capacity registered at December 31,
2000, is approximately 9.4%. It currently owns, operates or has an interest
in ten power stations in the UK.
UK GENERATION FACILITIES
TXU Europe Group's current portfolio of power stations is predominately a
mix of combined cycle gas turbine and coal-fired stations. It represents
both plants which run throughout most of the year and plants which run only
during periods of high demand. TXU Europe Group's portfolio of power
stations provides flexibility in managing the price and volume risks of its
energy contracts and has enabled TXU Europe Group to diversify its fuel
supply risk.
Information on TXU Europe Group's interests in power stations in the UK is
set out in the following table. In all cases installed generating capacity
is equal to registered generating capacity except for Peterborough and King's
Lynn, which have registered generating capacities of 405 MW and 380 MW,
respectively, but installed generating capacities, as shown below, of 360 MW
and 340 MW, respectively.
Installed Date of
Capacity earliest
Plant Type MW commissioning
- ------------- ------------------ ----------- --------------
West Burton Coal-fired 2,012 1967
Rugeley B Coal-fired 1,046 1972
Drakelow C Coal-fired 976 1965
Ironbridge Coal-fired 970 1970
High Marnham Coal-fired 945 1959
Peterborough Combined cycle gas 360 1993
turbine
King's Lynn Combined cycle gas 340 1997
turbine
Barking Combined cycle gas 135(1) 1995
turbine
London- Combined heat and 31 1992
Citigen power
Grimsby- Combined heat and 15 1995
MIC(2) power
-------
Total 6,830
=======
<FN>
(1) Represents TXU Europe Group's approximately 13.5% interest in a 1,000 MW
plant.
(2) Located on the property of a customer.
</FN>
TXU Europe Group's strategy in the UK market is to reposition its energy
portfolio through retail growth, long term wholesale sales and, possibly,
physical plant disposal. TXU Europe Group continues to review its energy
portfolio within the UK. TXU Europe Group has also announced that it would
seek bids for its UK power assets, in order to evaluate whether their value
would be maximized through retention or disposal of these assets. There has
been no indication of an impairment of these assets. No decisions have been
made as to whether disposals will actually take place.
8
West Burton, Rugeley B and Ironbridge. In June 1996, TXU Europe Group
assumed operational and commercial control, through a combination of lease
and outright purchase from National Power, of all of the assets and a portion
of the liabilities of the West Burton, Rugeley B and Ironbridge power
stations. As of December 31, 2000, TXU Europe Group held a 99-year lease
over the land, buildings and plant at each of those power stations and has
the right to purchase the freehold land after 50 years. During the year
ended December 31, 2000, TXU Europe Group reached an agreement to prepay
(effective January 2001), in fixed amounts, future charges linked to output
levels from these stations that previously had been payable over periods to
March 2003. In addition, an option was granted to TXU Europe Group to bring
forward the right to purchase the freehold land, previously exercisable after
50 years. TXU Europe Group exercised the option to purchase the freehold in
January 2001. At this time, remaining outstanding fixed lease payments
became financial obligations to a third party and will be settled during
2001. The National Power leases have been accounted for as capital leases.
Drakelow C and High Marnham. TXU Europe Group has leased the land,
buildings and plant at the Drakelow C and High Marnham power stations from
PowerGen for 99 years, under agreements entered into in July 1996. PowerGen
is responsible for decommissioning costs if TXU Europe Group decides to close
these stations during the term of the leases. The payments, together with
interest, are being made in instalments, over eight years beginning in 1996.
Further output-related payments of approximately pounds 6 per MWh, indexed to
inflation, were payable, under the original lease, to PowerGen for the first
five years of operation by TXU Europe Group. As a condition for the UK
Secretary of State for Trade and Industry allowing PowerGen to acquire East
Midlands Electricity plc, the output-related elements of these lease
arrangements were terminated 15 months early. Therefore output-related
payments to PowerGen ended on March 31, 2000.
Nedalo. TXU Europe Power also owns Nedalo BV, a leading manufacturer of
small electrical combined heat and power plants, which are those with
generation capacity of less than 1.5 MW, in Europe, and as of March 1, 2000,
all of Nedalo (UK) Limited, the largest supplier of small electrical combined
heat and power plants in the UK.
NON-UK GENERATION FACILITIES
Czech Republic. TXU Europe Group has an interest of approximately 84% in
Teplarny Brno, a district heating and generation company based in Brno, the
second largest city in the Czech Republic. Teplarny Brno owns oil and gas-
fired plants that are capable of generating approximately 1,000 MW of energy
in the form of steam and hot water, which is sold principally to industrial
and residential customers. Teplarny Brno has further generation capacity of
approximately 192 MW of electricity and 86 MW of heat. It also owns a 169
kilometer pipeline network for distributing heat to customers' premises.
Poland. TXU Europe Group has a 49% interest in Zamosc Energy
Company, a joint venture with the Polish regional distribution company,
Zamejska Korporacja Energetyczna SA, which was established to develop power
plants in southeast Poland. The company did not proceed with proposals to
develop a 125 MW combined cycle gas turbine at Jaroslaw.
Finland. TXU Europe Group owns 81% of a joint venture company called TXU
Nordic Energy Oy, the remaining 19% being held by certain shareholders of
PVO, Finland's second largest electricity generator. TXU Nordic Energy in
entitled to the output from approximately 584 MW of PVO's thermal generating
capacity and a wholesale trading business formerly owned by the industrial
shareholders of PVO. TXU Europe Group also owns approximately 40% of SVO, a
regional electricity distributor in Finland.
Germany. In January 2001, TXU Europe acquired 51% of Kiel AG, which has
175 MW of generation capacity.
OTHER PROJECTS
In December 1998, TXU Europe Group received government consent to build a
215 MW combined heat and power plant to provide heat and power to Shotton
Paper on Deeside. The power station is being built by ABB Alsthom with
completion due in the third quarter of 2001.
In 1999, TXU Europe Group received government consent to modify the
Drakelow and Rugeley power stations to enable those power stations to be
fueled by gas in addition to coal, or by a combination of gas and coal. TXU
9
Europe Group has not yet proceeded with the modifications, principally due to
a number of restrictive operational conditions, which will be reviewed on
implementation of NETA.
The UK government imposes an obligation on electricity suppliers to
purchase a portion of their requirements from renewable energy sources under
the non-fossil fuel obligation levy plan. Renewable energy sources are those
that are not currently consumed faster than they are replenished. Renewable
energy sources include solar and wind power. In April 1999, a one MW wind
turbine in Northern Ireland had successfully completed tests and had begun
generating electricity. Subsequently, another 1.3 MW wind turbine has
entered operation in Orkney, together with a 0.4 MW generator in North Wales
that uses the flow of river water for power. TXU Europe Group is currently
seeking approval to build a total of approximately 75 MW of wind energy,
hydro and biomass generation facilities. In addition, TXU Europe Group
recently announced a joint venture with Anglian Water to construct a number
of generating stations which will process almost half of Anglian Water's
sewage production; the prototype plant is rated at 10MW. Additional
opportunities for renewable energy projects including the gasification of
municipal solid waste are also being considered.
COMPETITION IN GENERATION
TXU Europe Group's mix of generating plants enables it to operate in the
sectors of the market for both plants that run throughout most of the year
and plants that run only during periods of high demand, and to spread its
fuel risks.
The UK government initiated a program of reform in the electricity market
to stimulate competition. The program involved reform of the electricity
trading arrangements in England and Wales; seeking practical opportunities
for divestment of assets by major coal-fired generators; moving forward with
competition in electricity supply for all customers; separating supply and
distribution in electricity markets; revising policy relating to the
construction of new gas-fired generation facilities; and continuing to press
for open energy markets in Europe.
Several of the reforms have progressed significantly, for example NETA and
business separation, although all are currently ongoing. In addition,
construction of new gas-fired generating facilities, should this happen,
would be likely to increase competition in the generation market. At current
gas prices however, much new gas plant is unlikely to be built and existing
plant is running at reduced levels. TXU Europe Group cannot predict the
impact these reforms will ultimately have its competitive position or on its
financial position, results of operation or cash flows.
REGULATORY MATTERS
Unless covered by an exemption, all electricity generators operating a
power station in the UK are required to have generation licenses. The
conditions presently attached to generation licenses in England and Wales
require the holder, among other things, to be a member of the Pool and to
submit the output of the station's generating units to the Pool for central
dispatch. Following the implementation of the Utilities Act, these
conditions will be modified to require compliance with the new Balancing and
Settlement Code and to require co-operation with the transition to NETA. In
addition, the restriction on the amount of generation capacity that can be
owned or operated by the successor companies to the old public electricity
supply license holders will be removed. Failure to comply with a license
condition may subject the licensee to a variety of sanctions, including
enforcement action by OFGEM through fines, and, where enforcement action is
not complied with, license revocation.
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply (DGES) published new proposals for
generation licenses in order to promote fair competition in the generation
and trading of electricity. The proposals sought to ensure that generators
with positions of significant market power, deemed able to exert an upward
influence on prices in the Pool, should ensure that their prices reflected
their costs and that they did not take unfair advantage of any imperfections
in the operation of the Pool. TXU Europe Group played an active part in these
discussions and accepted the DGES's proposals on February 7, 2000, subject to
an assurance from OFGEM that this condition in generating licenses would be
removed if another generator successfully appealed the matter to the
Competition Commission. Following an eight month inquiry, the Competition
Commission concluded in December 2000 that the condition should not be
included in the licenses of AES and British Energy and OFGEM has now
published proposals to remove it from the licenses of TXU Europe Group and
four other generators. It is expected that this process will be completed in
March 2001.
10
ENERGY RETAIL SEGMENT
TXU Europe Group operates its electricity and gas retailing operations as
a single energy business. The retail business is charged a regulated price by
transmission and distribution companies, including Eastern Electricity, for
the physical delivery of electricity.
On August 3, 2000, TXU Europe Group purchased United Utilities plc's
retail energy supply business, Norweb Energi (a division of Norweb plc). The
agreement for the purchase of Norweb Energi included the eventual transfer of
the current Norweb plc public electricity supply license-area customers
(franchise or "in area" customers) and the transfer of Norweb plc's interest
in the power purchase agreements to TXU Europe Group. TXU Europe Group
expects contracts with Norweb plc public electricity supply customers to be
in place under the Utilities Bill in early 2001. Meanwhile, Norweb plc's
economic interest in the franchise customers and power purchase agreements
are effectively passed to Eastern Energy through an agency agreement.
Eastern Energy acts as Norweb plc's agent in meeting all its obligations
under its public electricity supply license as they relate to the supply of
electricity. All of Norweb plc's "out-of-area" electricity and all gas
customers were transferred to TXU Europe Group on August 3, 2000.
Also on August 3, 2000, TXU Europe Group announced that its subsidiary,
Eastern Energy, had contracted its customer services operations to Vertex
Data Science Limited (Vertex), United Utilities plc's customer services
business. Customer services include call centers, billing, credit management
and debt collection. Eastern Energy's 1,335 customer services staff
transferred to Vertex on September 1, 2000.
TXU Europe Group sells electricity and natural gas principally under the
brand names of Eastern Energy and Norweb Energi.
TXU Europe Group, through its subsidiaries, supplies electricity to
customers in almost all sectors of the UK and, at December 31, 2000, is the
largest retailer of electricity and the second largest energy retailer in
England and Wales. TXU Europe primarily serves markets in the East of England
(through Eastern Energy), and the North West of England (through Norweb
Energi). At December 31, 2000, TXU Europe supplied electricity to
approximately 4.4 million customers.
TXU Europe Group is one of the largest suppliers of natural gas in the UK.
At December 31, 2000, it was supplying gas to approximately 1.1 million
customers in the UK, ranging from residential households to large industrial
companies. TXU Europe Group's share of the UK gas market, based on volume of
gas delivered, was approximately 6% at December 31, 2000.
TXU Europe Group is seeking new ways to access the energy markets and to
form more partnerships with the objective of reducing costs, improving access
to customers and capitalizing on emerging new markets like the Internet. In
December 2000, TXU Europe Group acquired, for approximately pounds 4 million,
a 20% interest in Servista.com Limited, an on-line provider of energy and
communications services. TXU Europe Group will be the sole supplier of
energy sold under the Servista.com brand for an initial period of five years.
COMPETITION IN ELECTRICITY RETAILING
TXU Europe Group is an active participant in the UK industrial and
commercial electricity market. TXU Europe Group estimates that this market is
approximately pounds 6 billion per year based upon electricity prices at that
date. TXU Europe Group competes in this market on the basis of the quality of
its customer service and by competitive pricing. Sales to industrial and
commercial customers accounted for approximately 40% of TXU Europe's
electricity sales revenues in 2000. As of December 31, 2000, TXU Europe
Group's share of this market (including Norweb Energi's portion) was
approximately 16% based on information from Data Monitor.
Competition has now been fully introduced for customers in all areas of
the UK. TXU Europe Group competes nationally for residential and small
business customers and, by December 31, 2000, it was supplying 289,000
customers outside its principal geographical markets in the East and North
West of England. At December 31, 2000, TXU Europe Group had agreed contracts
with a further 27,000 electricity customers. One of the major competitors in
TXU Europe Group's traditional service area, and for new customers outside
this serve area, is Centrica plc (trading as British Gas) which has a
substantial presence in markets nationwide through its existing gas customer
base.
11
There is no assurance whether or not competition among suppliers of
electricity will adversely affect TXU Europe Group.
COMPETITION IN GAS SUPPLY BUSINESS
As a result of UK government action in recent years, the UK retail gas
supply market is open to competition. TXU Europe Group's main competitors
are Centrica plc (trading as British Gas nationwide) and the gas marketing
arms of some major oil companies. Further competition is provided by a
number of other electricity companies and smaller gas suppliers which are
independent of the major oil companies and which each have a minor presence
in the market.
On August 3, 2000, TXU Europe Group acquired the gas supply interests of
Norweb Gas Ltd as part of the Norweb Energi acquisition. TXU Europe Group
intends to maintain a significant share of this market through strong new
propositions, serving customer needs, with competitive pricing and excellent
service.
REGULATORY MATTERS
Subject to specific exceptions, retail suppliers of electricity in the UK
are required either to have a public electricity supply license for an
authorized area or to obtain a Second Tier Supply license. Public electricity
supply license holders are required under the Electricity Act to provide a
supply of electricity upon request to any premises in their authorized area,
except in specified circumstances. Each public electricity supply license
holder is subject to various obligations. These include prohibitions on cross-
subsidies among its various regulated businesses and discrimination in
respect of the supply of customers. Each public electricity supply license
holder is also required to offer open access to its distribution network on
non-discriminatory terms. This obligation includes a requirement not to
discriminate between its own supply business and other users of its
distribution system. Public electricity supply license holders are subject to
separate controls on the tariffs to ex-franchise customers and in respect of
distribution charges.
Under regulatory arrangements, supply price controls became effective on
April 1, 2000. The scope of the controls has been reduced to remove all small
businesses and some residential customers from direct price controls. TXU
Europe Group's directly controlled tariffs were reduced by an average of 7.1%
from April 1, 2000 as required by the new controls, resulting in an estimated
reduction in annual revenues of approximately pounds 15 million. As the
market is opened further to competition, it is expected that price restraints
will no longer be applied to domestic customers. The DGES has indicated that
he hopes to be able to remove price controls effective April 1, 2002.
The natural gas supply activities of TXU Europe Group are principally
regulated by the Authority under the UK Gas Act 1986 (as amended) and by the
conditions of TXU Europe Group's gas licenses. Eastern Natural Gas (Retail)
currently holds a gas supplier's license and other subsidiaries of TXU Europe
Group currently hold gas shipper's licenses. TXU Europe Group's natural gas
supply business is not subject to price regulation.
NETWORKS SEGMENT
ELECTRICITY DISTRIBUTION
TXU Europe Group's electricity networks business consists of the
ownership, management and operation of the electricity distribution network
within TXU Europe Group's authorized area. TXU Europe Group receives
electricity in England and Wales from National Grid. TXU Europe Group then
distributes electricity to end users connected to TXU Europe Group's
distribution system.
Almost all electricity customers in TXU Europe Group's authorized area are
connected to and dependent upon TXU Europe Group's distribution system. TXU
Europe Group distributes approximately 33 TWh of electricity annually to over
three million customers, representing more than seven million people. The
distribution by TXU Europe Group of electricity in its authorized area is
regulated by its public electricity supply license, which, other than in
exceptional circumstances, is due to remain in effect until at least 2025.
In March 2000, upon receiving all final approvals, TXU Europe Group and
EDF London Investments plc, a subsidiary of Electricite de France, created an
equally held joint venture company, named "24seven", for the management,
operation and maintenance of their subsidiaries' respective electricity
12
distribution networks. The new joint venture began operations on April 7,
2000. TXU Europe accounts for its investment in 24seven by the equity method
of accounting. 24seven serves over five million electricity customers in
London and the eastern counties of England. Employees of the joint
venturers' subsidiaries, Eastern Electricity plc (Eastern Electricity) and
London Electricity plc, have been transferred to 24seven. The physical
distribution system assets, as well as all operating licenses, continue to be
separately owned by Eastern Electricity and London Electricity plc,
respectively. (See Note 2 to Consolidated Financial Statements for a
discussion of restructuring and other related costs.)
PHYSICAL DISTRIBUTION SYSTEM
TXU Europe Group receives electricity from National Grid at 19 supply
points within its authorized area and five points in the authorized areas of
neighboring regional electricity companies. Most of this electricity is
received at 132 kilovolts (kV). It is then distributed to customers through
TXU Europe Group's system of approximately 35,100 kilometers of overhead
lines, 55,200 kilometers of underground cable and numerous transformers and
circuit breakers, through a series of interconnected networks operating at
successively lower voltages. TXU Europe Group also receives electricity
directly from generating stations located in its authorized area and, from
time to time, from customers' own generating plants and connections with
neighboring regional electricity companies.
The following information is maintained on a regulatory year end basis,
which is March 31. Therefore, at March 31, 2000, the latest date for which
this information is available, TXU Europe Group's electricity distribution
system network, excluding service connections to consumers, included overhead
lines and underground cables at the operating voltage levels indicated in the
table below:
Overhead lines Underground Cables
Operating voltage (Circuit Kilometers) (Circuit Kilometers)
132kV 2,365 221
33kV 3,883 2,486
25kV 1 27
11kV 19,352 16,783
6.6kV 0 29
3kV 0 21
LV 9,515 35,601
------- -------
Total 35,116 55,168
======= =======
In addition to the overhead lines and underground cables referred to
above, TXU Europe Group's distribution facilities also include:
Aggregate capacity
Transformers Number (mega volt amperes)
132kV 233 13,392
33kV 872 10,383
11kV 61,709 14,868
------- -------
Total 62,814 38,643
======= =======
Customers
Most of the revenues from use of the distribution system is from TXU
Europe Group's electricity retail operations. The rest is from holders of
second tier supply licenses in respect of the delivery of electricity to
their customers located in Eastern Electricity's service area.
13
The following table sets out details of TXU Europe Group's customers and
electricity units distributed:
Regulatory Year ended March 31
------------------------------
2000 1999 1998
-------- ------- --------
Numbers of customers connected at 3,261 3,226 3,155
March 31 ('000)
Electricity distributed (gigawatt 33,100 32,700 31,776
hours -GWh)
SYSTEM PERFORMANCE
The performance of all UK distribution networks is monitored and publicly
reported upon annually by OFGEM. The four key statistics employed are:
security (customer interruptions per 100 connected customers); availability
(customer minutes lost per connected customer); reliability (main faults per
100km network) and quality of service (percentage of supply restorations
achieved within 3 hours). During the year ended March 31, 2000, Eastern
Electricity:
- maintained the highest performance of all public electricity supply
license holders for reliability;
- became the leading company in terms of performance for quality of
service, improving further from second place last year;
- became the second highest performing company in terms of availability,
improving from third place last year; and
- maintained the fourth highest performance for security.
Eastern Electricity has continuously improved its overall quality of
supply performance and continues to be the only public electricity license
holder to achieve a "top four" position in each of the above key measures.
DISTRIBUTION CHARGES AND PRICE CONTROL
The distribution charges levied by subsidiaries of TXU Europe Group and
the other regional electricity companies consist of charges for use of the
system and charges for other services outside the scope of the price control,
including connection charges. Distribution and supply charges are regulated
by conditions in TXU Europe Group's public electricity supply license, which
sets out a formula for determining the maximum average charge per unit of
electricity distributed in any regulatory year. Sales of TXU Europe Group's
electricity network business consist primarily of charges for the use of its
distribution system, most of which are levied on TXU Europe Group's
electricity retail business, being the largest supplier from the network, and
are passed through to its customers. Most of the charges for the use of the
distribution system are subject to distribution price controls.
COMPETITION IN THE ELECTRICITY NETWORKS BUSINESS
At present, TXU Europe Group experiences little competition in the
operation of its electricity distribution system. In limited circumstances,
some customers may establish or increase capacity for their own generation by
becoming directly connected to National Grid or by establishing their own
generating capacity; they then avoid charges for the use of the distribution
system. TXU Europe Group does not currently consider this a significant
threat to its electricity networks business.
14
REGULATORY MATTERS
Distribution Price Regulation
- A formula determines the maximum average price per unit of electricity
distributed, in pence per kilowatt-hour, that a regional electricity
company is entitled to charge. This price, when multiplied by the
expected number of units to be distributed, determines the expected
distribution revenues of the regional electricity company for the
relevant year. The formula permits regional electricity companies to
retain part of their additional revenues due to increased distribution
of units and allows for a pound sterling for pound sterling increase in
operating profit for efficient operations and reduction of expenses
within a review period.
In December 1999, OFGEM issued a report proposing a range of substantial
net revenue reductions for the distribution businesses of all regional
electricity companies in the UK. The final proposals for Eastern Electricity
incorporated an initial reduction in allowed revenues for regulated units of
28% from April 1, 2000 with further annual reductions of 3% per year for the
next four years, adjusted by inflation. The effect on revenues was a
reduction of pounds 65 million in the year ending December 31, 2000 and is
estimated to be a further reduction of about pounds 30 million in the year
ending December 31, 2001. In April 2000, the DGES established a new basis
for the allowed revenues that can be received by distribution for the next
five years.
Electricity distributed to extra high voltage premises is excluded from
the distribution price control formula, as are charges for specific
additional services including connection charges. Connection charges must be
set at a level which enables the licensee to recover no more than the
appropriate proportion of the costs incurred and no more than a reasonable
rate of return on the capital represented by those costs. Any dispute over
connection charges may be determined by the DGES. In addition, income
received in respect of exit charges related to National Grid that are
incurred by a regional electricity company and received through system
charges is not subject to distribution price control.
The DGES may propose amendments to the distribution price control formula
or any other terms of the license. In the cases where a public electricity
supply license holder is not willing to accept modifications to the license
conditions put forward by the DGES, the normal process would be for the DGES
to refer the matter to the Competition Commission for a determination of
whether continued operation without the proposed license modifications is in
the public interest.
In April 2000, following the Distribution Price Control Review, OFGEM
initiated a new review known as the Information and Incentives Project. This
project was described in the final proposals of the Distribution Price
Control Review. This project is intended to increase the incentives on
companies to improve quality of service and reduce the uncertainty around the
price control review process. It is intended that an incentive framework
rewarding or penalizing companies by up to 2% of revenue, based on a measure
of network performance, will be introduced beginning April 2002.
OFGEM has proposed to include a new license condition to facilitate the
recording of information relating to network performance required for this
framework.
OTHER
In May 2000, TXU Europe Group sold its metering business to Siemens
Metering Limited for pounds 36 million.
In August 2000, TXU Europe Group completed the sale of its interest in
Severomoravska energetika a.s., the largest Czech electricity distribution
and supply company, for total proceeds of approximately pounds 51 million.
EMPLOYEES
At December 31, 2000, TXU Europe and its subsidiaries had approximately
3,200 full-time employees.
Union membership existed at TXU Europe Group when it was privatized. TXU
Europe Group recognizes trade unions for collective bargaining purposes, and
approximately 29% of employees of TXU Europe Group's businesses are union
members. New companies set up by TXU Europe Group after privatization have
no obligations to recognize trade unions. TXU Eastern Natural Gas and TXU
15
Europe Energy Trading do not recognize trade unions, and most workers in
these businesses are employed under individual contracts. There have been no
industrial disputes or work stoppages at TXU Europe Group during the period
following its privatization in 1990.
UK AND EU FAIR COMPETITION LAW
TXU Europe Group is subject to the fair competition, or antitrust, rules
of both the UK and the EU.
The UK Fair Trading Act 1973 and the UK Competition Act 1998 both regulate
the activities of companies with market power. In broad terms, the UK
Competition Act 1998 conforms to fair trade laws at the EU level. It
prohibits anti-competitive agreements that have the object or effect of
restricting, distorting or preventing competition in the UK or a substantial
part of it. It also prohibits abuses of dominant market positions and
introduces stricter enforcement and investigative powers.
The Treaty of Rome contains provisions which prohibit anti-competitive
agreements and practices, including the abuse of a dominant position within
the EU or a substantial part of it. Penalties for violation of these
provisions includes fines, third party damages and making infringing
contractual provisions unenforceable.
EU Directive 93/96 was implemented by the UK in December 1996 and covers
service contracts as well as supply and work contracts. Those contracts that
exceed the relevant financial thresholds have to be advertised in the
Official Journal of the European Communities. Disappointed suppliers and
contractors who believe they have suffered harm from a company's failure to
implement the correct procedures in awarding a contract are able to institute
proceedings in the English High Court. The European Commission also has a
role for ensuring compliance with EU procurement regulations.
ENVIRONMENTAL MATTERS
ENVIRONMENTAL REGULATIONS AND EMISSIONS
TXU Europe Group's businesses are subject to numerous regulatory
requirements with respect to the protection of the environment. The
electricity generation industry in the UK is subject to a framework of
national and EU environmental laws which regulate the construction, operation
and decommissioning of generating stations. Under these laws, each
generating station operated by TXU Europe Group is required to have an
authorization which regulates its releases into the environment and seeks to
minimize pollution of the environment taken as a whole, having regard to the
best available techniques not entailing excessive cost. These authorizations
are issued by the UK Environment Agency which has the responsibility for
regulating the impact of TXU Europe Group's generating stations on the
environment. The principal laws which have environmental implications for
TXU Europe Group are the Electricity Act, the UK Environmental Protection Act
1990 and the UK Environment Act 1995.
The Electricity Act requires TXU Europe Group 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 of power
stations with a capacity in excess of 50 MW or installation of overhead power
lines. Environmental assessments are required to be carried out in some
cases, including overhead line constructions at high voltages and generating
station developments. TXU Europe Group has produced Environmental Policy
Statements and Electricity Act Schedule 9 Statements which explain the manner
in which it complies with its environmental obligations.
TXU Europe Group has approximately 680 and 192 kilometers of underground
cables insulated with an oil-filled wrap which operate at 33kV and 132kV,
respectively. This type of cable is in common use by utilities in the UK and
parts of continental Europe. These cables generally supply substantial
amounts of electricity to large substations in urban areas and to large
customers. Most of TXU Europe Group's cables are between 30 and 50 years
old. TXU Europe Group operates these cables in accordance with the
Environment Agency's Operating Code for Fluid-Filled Cables, monitoring and
repairing both gradual and substantial leaks that arise through age
deterioration and damage by a third party. TXU Europe Group has a program to
reduce oil leakage and minimize the possibility of pollution to watercourses
and ground water. This involves establishing a more effective standard
procedure for dealing with cable leaks and implementation of an effective
monitoring system. TXU Europe Group also has a plan for gradual replacement
and refurbishment of these cables with more modern solid cables in the
future. TXU Europe Group believes that its existing monitoring systems and
16
planned replacement and refurbishment program effectively minimize the risk
of major environmental incidents or additional replacement expenditures. TXU
Europe Group could incur significant expenditures if it were required to
replace its fluid-filled cables, other than in the ordinary course of
business, pursuant to new or existing legislation; however, TXU Europe Group
is not aware of any plans of any governmental authority to impose that kind
of requirement.
The principal EU Directive affecting atmospheric emissions to the environment
is the Large Combustion Plants Directive, which required the UK to reduce its
sulfur dioxide (SO2) emissions and nitrogen oxides (NOx). Discussions are
under way in the EU regarding an update of the Large Combustion Plants
Directive (which will introduce tighter emission controls) as well as
national limits for 2010. The UK Environmental Agency has recently reviewed
each coal-fired station's authorizations and has modified the limits for SO2
emissions to apply in the period prior to 2005. TXU Europe Group is building
a flue gas desulphurization plant at its West Burton station to reduce the
sulphur output of the plant. It is anticipated that the flue gas
desulphurization plant will begin operating in autumn 2003.
At a local level, the UK's Air Quality Strategy sets targets for 2005 and
places a duty on local authorities to review air quality with a view to
setting up action plans for management in places where targets are unlikely
to be met. TXU Europe Group's are developing management plans in order to
ensure compliance with the Strategy's objectives.
In December 1997, the Conference of the Parties of the United Nations
Framework Convention on Climate Change adopted the Kyoto Protocol which
specifies targets and timetables to reduce greenhouse gas emissions. The UK
is a signatory to the Kyoto Protocol and is committed to a 12% reduction in
national carbon dioxide emissions by 2010.
TXU Europe Group believes that it is currently in compliance with, has
taken, and intends to continue to take, measures to comply, in all material
respects, with the applicable law and government regulations for the
protection of the environment. There are no material legal or administrative
proceedings pending against TXU Europe Group with respect to any
environmental matter.
Estimated capital expenditure on environmental control facilities is pounds
54 million in 2001, pounds 36 million in 2002 and pounds 9 million in 2003.
FOSSIL FUEL LEVY
All the regional electricity companies are obliged to obtain a specified
amount of generating capacity from renewable, or non-fossil fuel, sources.
(See "OPERATING SEGMENTS - Portfolio Trading and Power Segment - Other
Projects".) Because electricity generated from renewable energy sources is
generally more expensive than electricity from fossil fuel plants, a non-
fossil fuel obligation levy has been instituted to reimburse the generators
and the regional electricity companies for the extra costs involved. The
DGES sets the rate of the non-fossil fuel obligation levy annually. The
current fossil fuel levy is 0.3% of the value of sales of electricity made in
England and Wales and 0.8% of the value of sales of electricity made in
Scotland.
17
Item 2. PROPERTIES
The principal properties owned or occupied by TXU Europe's businesses,
other than its distribution properties, are as follows:
Remaining Site Area (acres
Term of Principal except where
Property Owner/Leaseholder Interest Lease Use indicated)
- ------------------- --------------------- ------------ ----------- ----------------- ----------------
The Adelphi, London TXU Europe Group plc Leasehold 15 years Offices 14,905 sq.ft.
Bedford TXU Europe Group plc Freehold -- Offices and Depot 5.0
Carterhatch Lane, TXU Europe Group plc Freehold -- Offices and Depot 4.0
Enfield
Milton, Cambridge TXU Europe Group plc Freehold -- Depot 19.0
Rayleigh TXU Europe Group plc Freehold -- Offices and Depot 8.0
Wherstead Park, TXU Europe Group plc Freehold -- Offices 80,000 sq.ft.
Wherstead, Ipswich
Russell House TXU Europe Group plc Freehold -- Offices 94,500 sq.ft.
Suffolk House TXU Europe Group plc Leasehold 2 years Offices 44,000 sq.ft.
Fison House TXU Europe Group plc Leasehold 3 years Offices 24,000 sq.ft.
Constantine House TXU Europe Group plc Leasehold 5 years Offices 54,000 sq.ft.
King's Lynn Power Anglian Power Freehold -- Power station 16.1
Station Generators Limited
Peterborough Power TXU Europe Power Freehold -- Power station 18.1
Station Limited
Drakelow C Power TXU Europe Merchant Leasehold 95 years Power station 177.0
Station Properties Limited
High Marnham Power TXU Europe Merchant Leasehold 95 years Power station 178.4
Station Properties Limited
Ironbridge Power TXU Europe Merchant Leasehold* 95 years Power station 212.7
Station Properties Limited
Rugeley B Power TXU Europe Merchant Leasehold* 95 years Power station 299.0
Station Properties Limited
West Burton Power TXU Europe Merchant Leasehold* 95 years Power station 511.5
Station Properties Limited
<FN>
* In January 2001, TXU Europe Group exercised its option to purchase the
freehold interest on these plants. Therefore, these plants are now
freehold interest from that time.
</FN>
For more information concerning TXU Europe Group's UK generating
stations, see - "OPERATING SEGMENT - Portfolio Trading and Power Segment".
Item 3. LEGAL PROCEEDINGS
TXU Europe and its subsidiaries are party to lawsuits arising in the
ordinary course of their business. TXU Europe believes, based on its current
knowledge and the advice of counsel, that the ultimate resolution of all such
lawsuits and resulting claims would not have a material adverse effect on its
financial position, results of operation or cash flows.
In February 1997, the official government representative of pensioners
(Pensions Ombudsman) made a final determination against the National Grid
Company plc (National Grid) and its group trustees with respect to complaints
by two pensioners in National Grid's section of the Electricity Supply
Pension Scheme (ESPS). The determination related to the use of the pension
fund surplus resulting from the March 31, 1992 actuarial valuation of the
National Grid section to meet certain costs arising from the payment of
pensions on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision to the
Court of Appeal, and judgment was received. The judgment endorsed the
Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid appealed the decision to
the House of Lords. The appeal has been heard and judgement is expected to
be handed down in the second quarter of 2001. If a similar complaint were to
be made against TXU Europe Group in relation to its use of actuarial surplus
in its section of the ESPS, it would vigorously defend the action, ultimately
through the courts. However, if a determination were finally to be made
18
against it and upheld by the courts, TXU Europe Group could have a potential
liability to repay to its section of the ESPS an amount estimated by TXU
Europe Group to be up to pounds 45 million, exclusive of any applicable
interest charges.
TXU Europe Group's section of the Electricity Supply Pension Scheme
remains in substantial surplus and any payment to the plan that might
ultimately prove to be necessary would be accounted for as an increase in
pension assets, and would not have an immediate impact on income. However,
any related penalties or interest (which could be assessed, though none are
currently proposed) would adversely affect income. There can be no assurance
as to the outcome of this matter.
On January 25, 1999, the Hindustan Development Corporation (HDC) issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against TEG
(now Energy Holdings (No.3) Limited), claiming damages of pounds 255 million
for breach of contract following the termination of a Joint Development
Agreement dated March 20, 1997 relating to the construction, development and
operation of a lignite based thermal power plant at Barsingsar, Rajasthan.
On November 21, 2000, the Arbitrators issued their decision and dismissed
HDC's claim in full, and TEG was liable only for its own legal costs involved
in the case, an estimated pounds 1 million. On December 21, 2000, HDC filed
a Request for Clarification of the Arbitrators' decision (Request) under
Section 33 of the Arbitration and Conciliation Act, the purpose of which is
to entitle a party to arbitration to seek clarification of language used in
the Arbitrators' decision. TEG filed its response to the Request on January
15, 2001, asserting that the Request was untimely made and that the language
used by the Arbitrators needed no clarification. TXU Europe believes that
the Arbitrators will have no alternative but to dismiss the Request. The
effect of filing the Request, however, has been to stay the time HDC has to
file an appeal of the Arbitrators' decision.
In August 2000, the Spanish Stock Market Commission announced it was
opening an investigation as to whether TXU Europe and Electrabel acted in
concert over share purchases of Hidrocantabrico in order to avoid making a
formal takeover bid. TXU Corp. was originally named as a party but is
seeking its removal from these proceedings. Philip Turberville, the principal
executive officer of TXU Europe, was also named as a party in the
investigation. If the two utilities are found to be in violation
of Spanish securities law, they could face a substantial fine and other
restrictions. The investigation could last until February 2002.
TXU Europe is unable to determine what impact there may be, if any, as a
result of the investigation. TXU Europe and TXU Corp. believe there has been
no violation of Spanish securities laws and are fully cooperating with the
investigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of TXU Europe's outstanding share capital is held indirectly by TXU Corp.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for TXU Europe is set forth under Selected
Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for TXU Europe is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TXU Europe is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for TXU Europe is set forth under
Statement of Responsibility, Independent Auditors' /Accountants' Reports,
Statements of Consolidated Income, Statements of Consolidated Comprehensive
Income, Statements of Consolidated Cash Flows, Consolidated Balance Sheets,
Statements of Consolidated Shareholder's Equity and Notes to Consolidated
Financial Statements as included in Appendix A to this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On August 6, 1999, based upon the recommendation of its Audit Committee, the
Board of Directors of TXU Europe voted to appoint Deloitte & Touche as the
principal accountants for TXU Europe and its subsidiaries for the year ended
December 31, 1999. TXU Europe chose not to continue the engagement of
PricewaterhouseCoopers, its former principal accountants. The decision by
TXU Europe to change principal accountants was made in order to align the
principal accountants of TXU Europe with those of TXU Corp. Deloitte &
Touche LLP have been the principal accountants for TXU Corp. and its
predecessors since 1945.
No report of PricewaterhouseCoopers on TXU Europe's financial statements,
including the period from formation, February 5, 1998, through December 31,
1998, contained any adverse opinion or disclaimer of opinion, nor was any
report qualified in any manner.
During the period from formation through December 31, 1998 and the period
from January 1, 1999 to August 6, 1999, there were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. During this
period, there were no "reportable events" as that term is defined in Item
304(a)(1)(v) of Regulation S-K of the Securities Act.
20
TXU Europe requested and received from PricewaterhouseCoopers a letter dated
August 9, 1999 addressed to the Securities and Exchange Commission stating
that it agreed with the above statements for the period from formation
through December 31, 1998 and the period from January 1, 1999 to August 6,
1999.
On August 6, 1999, TXU Europe engaged Deloitte & Touche as its principal
accountants to audit the financial statements for the year ending December
31, 1999. TXU Europe has not consulted Deloitte & Touche regarding any of
the matters or events listed in Item 304(a)(2)(i) and (ii) of Regulation S-K
of the Securities Act. TXU Corp. had routine discussions with Deloitte &
Touche LLP concerning the application of accounting principles and other
matters primarily relating to the application of purchase accounting
principles to the consolidated financial statements of TXU Corp. TXU Corp.
and Deloitte & Touche LLP do not believe that these discussions constitute
consultations within the context of Item 304(a)(2) of Regulation S-K.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is not presented herein as TXU Europe meets the conditions set forth
in General Instruction (I) (1) (a) and (b).
Item 11. EXECUTIVE COMPENSATION
Item 11 is not presented herein as TXU Europe meets the conditions set forth
in General Instruction (I) (1) (a) and (b).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is not presented herein as TXU Europe meets the conditions set forth
in General Instruction (I) (1) (a) and (b).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is not presented herein as TXU Europe meets the conditions set forth
in General Instruction (I) (1) (a) and (b).
21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report: Page
Financial Statements (included as Appendix A to this report):
Selected Financial Data A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-4
Statement of Responsibility A-23
Independent Auditors'/Accountants' Reports A-24
Statements of Consolidated Income A-27
Statements of Consolidated Comprehensive Income A-28
Statements of Consolidated Cash Flows A-29
Consolidated Balance Sheets A-30
Statements of Consolidated Shareholder's Equity A-31
Notes to Consolidated Financial Statements A-32
The financial statement schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the consolidated financial statements or notes
thereto.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 2000, are as follows:
Date of Report Item Reported
--------------- ----------------
None
(c) Exhibits:
Included in Appendix B to this report.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Europe Limited has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TXU EUROPE LIMITED
Date: March 7, 2001 By /s/ Philip G Turberville
----------------------------
Name: Philip G Turberville
Title: Principal Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TXU
Europe Limited and in the capacities and on the date indicated.
Signatures Title Date
/s/ Erle Nye Chairman and
--------------------------- Director
(Erle Nye)
/s/ Philip G Turberville Principal
--------------------------- Executive
(Philip G Turberville) Officer and
Director
/s/ Paul C Marsh Principal
--------------------------- Financial
(Paul C Marsh) Officer and
Director
/s/ Derek C Bonham Director
---------------------------
(Derek C Bonham) March 7, 2001
/s/ H Jarrell Gibbs Director
---------------------------
(H. Jarrell Gibbs)
/s/ Michael J McNally Director
---------------------------
(Michael J McNally)
/s/ Robert A Wooldridge Director
---------------------------
(Robert A Wooldridge)
/s/ Scott R J Longhurst Principal
--------------------------- Accounting
(Scott R J Longhurst) Officer
23
Appendix A
TXU EUROPE LIMITED AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
December 31, 2000
Page
Selected Financial Data - Consolidated Financial and
Operating Statistics A- 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations A- 4
Statement of Responsibility A- 23
Independent Auditors'/Accountants' Reports A- 24
Financial Statements:
Statements of Consolidated Income A- 27
Statements of Consolidated Comprehensive Income A- 28
Statements of Consolidated Cash Flows A- 29
Consolidated Balance Sheets A- 30
Statements of Consolidated Shareholder's Equity A- 31
Notes to Consolidated Financial Statements A- 32
A-1
TXU EUROPE LIMITED AND SUBSIDIARIES
SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL STATISTICS
TXU Europe Limited (TXU Europe), a private limited company incorporated
under the laws of England and Wales on February 5, 1998 (Formation), is an
indirect wholly-owned subsidiary of TXU Corp., a Texas corporation. On May
19, 1998, TXU Europe obtained control of The Energy Group PLC (TEG), the
former holding company of TXU Europe Group plc, formerly Eastern Group plc,
(TXU Europe Group). For financial reporting purposes, TXU Europe Group is
considered to be the "Predecessor Company" to TXU Europe. Earnings of TXU
Europe Group are not reflected in TXU Europe's results before May 19, 1998,
other than as a result of TXU Europe's 22% equity interest in the net income
of TEG for the period from March through May 18, 1998. Since May 19, 1998,
TXU Europe has accounted for TEG and TXU Europe Group as consolidated
subsidiaries. Also on May 19, 1998, TEG sold its United States (US) and
Australian coal businesses and US energy marketing operations.
The acquisition of TEG was accounted for as a purchase business
combination in accordance with accounting principles generally accepted in
the United States of America (US GAAP). The total purchase consideration for
the TEG businesses acquired was approximately pounds 4.4 billion. The excess
of the purchase consideration plus acquisition costs over the net fair value
of tangible and identifiable intangible assets acquired and liabilities
assumed resulted in goodwill of pounds 3.5 billion, which is being amortized
over 40 years.
The selected financial data of TXU Europe and Predecessor have been
derived from the audited financial statements of TXU Europe and TXU Europe
Group and have been prepared in accordance with US GAAP.
Predecessor
----------------------
Period Period from
from April 1,
Year Ended Formation 1998 Year
December 31, Through Through Ended
---------------- December 31, May 18, March 31,
2000 1999 1998 1998 1998
------- ------ ------------ ----------- ---------
(pounds million)
Total assets - end of year 10,947 8,905 8,529 5,826
------- ------ ------ ---------- -------
Capitalization - end of year
Long-term debt and other
obligations, less amounts
due currently 4,480 4,539 3,629 1,976
Minority interest 258 243 190 6
Preferred securities of subsidiary
perpetual trust 95 - - -
Notes payable to TXU Corp. - - 682 -
Shareholder's equity 1,799 1,673 1,535 1,802
------- ------ ------ ---------- -------
Total 6,632 6,455 6,036 3,784
------- ------ ------ ---------- -------
Operating revenues 4,671 3,753 2,165 425 3,475
Operating income (loss) 443 543 314 (11) 267
Income before interest* 517 551 360 (10) 277
Net income (loss) 120 138 77 (21) (38)
Net interest expense 311 284 205 16 126
Ratio of earnings to
fixed charges 1.5 1.8 1.5 0.1 1.7
<FN>
* Income (loss) before Interest, Income Taxes, Distributions and Minority
Interest on the face of the Statements of Consolidated Income.
</FN>
A-2
TXU EUROPE LIMITED AND SUBSIDIARIES
SELECTED FINANCIAL DATA
OPERATING STATISTICS
Period From
Period From January 1,
Year Ended Formation 1998
December 31, Through Through
----------------- December 31, May 18,
2000 1999 1998 1998
------- ------- ------------- -----------
SALES VOLUMES
Electric (gigawatt-hours) -
(GWh):
Industrial and commercial 22,586 19,698 15,459 7,593
Residential 17,263 16,726 7,826 6,501
------- ------- ------- -------
Total electricity 39,849 36,424 23,285 14,094
======= ======= ======= =======
Gas (billion cubic feet) -
(Bcf):
Industrial and commercial 57 77 51 49
Residential 58 49 21 6
------- ------- ------- -------
Total gas 115 126 72 55
======= ======= ======= =======
Wholesale energy sales:
Electricity (GWh) 100,132 78,950 51,060 31,122
======= ======= ======= =======
Gas (Bcf) 1,000 447 148 77
======= ======= ======= =======
Electricity Units
distributed (GWh) 33,393 33,120 19,249 13,002
======= ======= ======= =======
CUSTOMERS (end of period -
in thousands)
Electric 4,358 2,931 3,211
Gas 1,127 805 777
Information included herein for the period from January 1, 1998 through May
18, 1998 has been provided for use with the information for the period from
Formation to December 31, 1998 to compare revenues on a year on year basis.
A-3
TXU EUROPE LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion below should be read in conjunction with the consolidated
financial statements and the related notes of TXU Europe. TXU Europe Group
constituted 99% of TXU Europe's assets as of December 31, 2000 and generated
100% of TXU Europe's operating revenues for the year ended December 31, 2000.
Certain prior year information has been reclassified to conform to the
current year's presentation.
ACQUISITIONS AND OTHER CHANGES IN THE BUSINESS
TXU Europe continually reviews its portfolio of businesses and investments
and makes adjustments as considered necessary to meet its objectives and to
maintain financial and operational flexibility. As part of this review,
capital may be redeployed within the energy portfolio to maximize returns
across Europe.
On August 3, 2000, TXU Europe purchased United Utilities plc's retail
energy supply business, Norweb Energi (a division of Norweb plc) for total
consideration, including direct costs of the acquisition, of pounds 340
million. Financing was provided through existing bank lines and cash
balances on hand. The transaction also includes the assumption of certain of
Norweb Energi's obligations, including its power purchase agreements, which
have been integrated into TXU Europe's energy portfolio.
The agreement for the purchase of Norweb Energi included the eventual
transfer of the current Norweb plc public electricity supply license-area
customers (franchise or "in area" customers) and the transfer of Norweb plc's
interest in the power purchase agreements to TXU Europe Group. TXU Europe
Group expects contracts with Norweb plc public electricity supply customers
to be in place under the Utilities Bill in early 2001. Meanwhile, Norweb
plc's economic interest in the franchise customers and power purchase
agreements are effectively passed to Eastern Energy Ltd. (Eastern Energy), a
subsidiary of TXU Europe Group, through an agency agreement. Eastern Energy
acts as Norweb plc's agent in meeting all its obligations under its public
electricity supply license as they relate to the supply of electricity. All
of Norweb plc's "out-of-area" electricity and all gas customers were
transferred to TXU Europe Group on August 3, 2000.
The acquisition of Norweb Energi was accounted for as a purchase business
combination. The assets and liabilities of Norweb Energi at the acquisition
date, including its power purchase agreements, have been adjusted to their
estimated fair values. The process of determining the fair value of assets
and liabilities of Norweb Energi has not been completed. The latest estimate
of the excess of the purchase consideration plus acquisition costs over the
net fair value of tangible and identifiable intangible assets acquired and
liabilities assumed resulted in goodwill of pounds 622 million which is being
amortized over 20 years. This amount is subject to further revision as
additional information becomes available, primarily relating to exit costs
and other liabilities assumed at acquisition. The final determination of the
purchase accounting adjustments requires additional information and analysis,
which is ongoing and is expected to be completed within one year of the
acquisition date. The results of operations of Norweb Energi are reflected in
the consolidated financial statements of TXU Europe from the August 3, 2000
effective date of the acquisition.
Also on August 3, 2000, TXU Europe announced that its subsidiary, Eastern
Energy, had contracted its customer services operations to Vertex Data
Science Limited (Vertex), United Utilities plc's customer services business.
Customer services include call centers, billing, credit management and debt
collection. Eastern Energy's 1,335 customer services staff transferred to
Vertex on September 1, 2000.
On January 8, 2001, TXU Europe completed the acquisition of 51% of
Stadtwerke Kiel AG (Kiel AG), a German municipal utility, for approximately
pounds 145 million. At the date of acquisition, Kiel AG had recorded sterling
equivalent assets of approximately pounds 121million and liabilities of
pounds 82 million. The process of determining the fair value of tangible and
identifiable intangible assets acquired and liabilities assumed has not been
completed.
TXU Europe Group and EDF London Investments plc, a subsidiary of
Electricite de France, have created an equally held joint venture company,
named "24seven", for the management, operation and maintenance of their
A-4
subsidiaries' respective electricity distribution networks. The new joint
venture began operations on April 7, 2000. TXU Europe accounts for its
investment in 24seven by the equity method of accounting. 24seven serves
over five million electricity customers in London and the eastern counties of
England. Employees of the joint venturers' subsidiaries, Eastern Electricity
plc (Eastern Electricity) and London Electricity plc, have been transferred
to 24seven. The physical distribution system assets, as well as all operating
licenses, continue to be separately owned by Eastern Electricity and London
Electricity plc, respectively. (See Note 2 to Consolidated Financial
Statements for a discussion of restructuring and other related costs.)
On January 25, 2001, TXU Europe entered into a commitment to sell its
19.2% interest in Hidroelectrica del Cantabrico, SA (Hidrocantabrico) to a
consortium led by Electricidade de Portugal S.A., the Portugese utility
company, and Spanish savings bank Caja de Ahorro de Asturias (Cajastur).
Electricidade de Portugal and Cajastur unconditionally offered euros 24 per
share for 100% of Hidrocantabrico. In March 2000, TXU Europe (Espana) S.L.,
a subsidiary of TXU Europe, announced its intention to make a cash offer to
acquire all of the shares of Hidrocantabrico that TXU Europe did not then
own. Later in March 2000, after a competing bid had been issued, TXU Europe
announced that it would not pursue its offer. In a series of private
transactions since that date, TXU Europe acquired additional shares in
Hidrocantabrico until it holds approximately 19.2% of the outstanding shares.
TXU Europe has pre-emption rights over 4.9% of the stock in Hidrocantabrico
currently held by Electrabel SA (Electrabel), an electricity company in
Belgium, if Electrabel elects to sell its interests in Hidrocantabrico to
another company during a one year period beginning July 4, 2000. TXU Europe
is subject to a conditional put option by which it can be required to
purchase the 10% interest in Hidrocantabrico held by Electrabel to the extent
Electrabel is required to dispose of its holding in Hidrocantabrico by the
European Union or Spanish Competition Authorities during a one year period
beginning July 4, 2000. The conditions of this put option include a
reasonable notice period before execution. Results of operations for 2000
include approximately pounds 7 million of costs incurred in connection with
the intended offer for Hidrocantabrico, included in other income - net.
In August 2000, the Spanish Stock Market Commission announced it was
opening an investigation as to whether TXU Europe and Electrabel acted in
concert over share purchases of Hidrocantabrico in order to avoid making a
formal takeover bid. TXU Corp. was originally named as a party but is
seeking its removal from these proceedings. If the two utilities are found to
be in violation of Spanish securities law, they could face a substantial fine
and other restrictions. The investigation could last until February 2002.
TXU Europe is unable to determine what impact there may be, if any, as a
result of the investigation. TXU Europe and TXU Corp. believe there has been
no violation of Spanish securities laws and are fully cooperating with the
investigation.
On March 1, 2000, TXU Europe Power acquired Nedalo BV for pounds 4.5
million, including pounds 2.8 million of goodwill. This acquisition included
the remaining 25% of Nedalo (UK) Limited it did not already own. Nedalo BV is
a leading manufacturer of small electrical combined heat and power plants.
In May 2000, TXU Europe sold its metering business in the UK for pounds 36
million in proceeds, realizing a pre-tax gain of approximately pounds 29
million. In addition, in August 2000, TXU Europe completed the sale of its
interest in Severomoravska energetika, a.s. (SME), for pounds 51 million in
proceeds, realizing a pre-tax gain of approximately pounds 20 million. The
investment in SME was previously accounted for as an available for sale
marketable equity security, and the amount of holding gains that were
previously recorded in other comprehensive income has been reclassified as
realized gains. Both of these sales have been recorded in other income -
net.
On February 1, 2001, TXU Europe announced it had agreed to sell its
interest in the North Sea gas fields for approximately pounds 138 million as
a result of its ongoing review of its program to reposition its energy
portfolio.
In November 1999, TXU Europe formed a joint venture with certain
shareholders of Pohjolan Voima Oy (PVO), Finland's second largest electricity
generator. As part of the transaction, TXU Europe contributed approximately
euros 300 million (pounds 190 million) for an 81% ownership interest in the
joint venture company, TXU Nordic Energy. The acquisition of the interest in
PVO resulted in goodwill of approximately pounds 37 million which is being
amortized over 40 years. In December 1999, TXU Europe completed the
acquisition of an approximate 40% interest in Savon Voima Oyj (SVO),
Finland's seventh largest electricity distributor, for approximately pounds
A-5
40 million. The agreement includes an option which allows the majority
shareholders of SVO to require TXU Europe to purchase all or some of the
remaining 60% interest in SVO. The option may be exercised at any time by
the majority shareholders and does not expire. TXU Europe accounts for its
investment in SVO by the equity method of accounting.
In December 1998, TXU Europe disposed of its telecommunications business,
resulting in a gain of pounds 13 million. In consideration for the business,
TXU Europe received cash of pounds 60 million and an investment in the
preferred stock of the purchaser, NTL Inc. The investment in the preferred
stock was sold in 2000 resulting in recognition of a pre-tax gain of pounds 8
million.
In December 1999, TXU Europe announced it would import electricity from
Russia as part of an arrangement between PVO and the Russian national utility
RAO UES (UES). The portion of electricity allocated to TXU Europe under the
arrangement will be supplied to TXU Nordic Energy. TXU Nordic Energy is
entitled to 190 MW of the 400MW that will be imported by PVO from UES. Under
the arrangement, which began January 1, 2001 and lasts until 2004, UES will
sell 667 million kilowatt hours (kWh) to PVO in the first year and up to 2.67
billion kWh each year after 2001. The electricity will be supplied through
an electricity complex in Vyborg, a city on the Russian-Finnish border.
TXU Europe's strategy in the United Kingdom (UK) market is to rebalance
its energy portfolio through retail growth, long term wholesale sales and,
possibly, physical plant disposal. TXU Europe continues to review its energy
portfolio within the UK. TXU Europe has also announced that it would seek
bids for its UK power assets, in order to evaluate whether their value would
be maximized through retention or disposal of these assets. There has been
no indication of an impairment of these assets. No decisions have been made
as to whether disposals will actually take place.
TXU Europe will pursue potential investment opportunities from time to
time when it concludes that such investments are consistent with its business
strategies and will dispose of certain assets to allow redeployment of
resources into faster growing opportunities in an effort to enhance its long-
term return. However, the current focus is on integration of recently
acquired businesses (Norweb Energi and Kiel AG) and selective asset disposal
projects with no current plans for any additional acquisitions until those
projects are complete.
RESULTS OF OPERATIONS
The year ended December 31, 2000 was a time of continuing change in the
competitive markets in which TXU Europe operates in the UK and the rest of
Europe. The delivery of substantial earnings growth from the Energy business
over the last three years within this environment validates TXU Europe's
portfolio management business model. This business model involves the co-
ordinated management of a flexible portfolio of physical generation assets,
contracts and retail activities in order to create value across the entire
energy chain (from the generation or production of energy ultimately to the
end delivery to customers).
Specific initiatives during 2000 included:
- Repositioning of UK energy portfolio - TXU Europe repositioned its
electricity portfolio through the acquisition of Norweb Energi and
renegotiation of power leasing arrangements which will allow more efficiency
and flexibility in the use of generation assets.
- Expansion and continued excellence of operations - With the acquisition
of Norweb Energi, TXU Europe was the UK's largest electricity supplier and
second overall energy supplier as of December 31, 2000, with approximately
5.5 million customer accounts. Power generation in the UK continues to
deliver strong results, good availability and flexibility while maintaining
high standards of safety and environmental protection.
A-6
- Innovation in retail offering and delivery - Other retail efforts
include entering into an innovative joint venture with Servista.com to
deliver a cost effective means of acquiring domestic UK customers in the
growing e-commerce, multi-service market and the launch of the Staywarm
project, providing energy to certain targeted groups. In August 2000, TXU
Europe contracted its UK customer services operation to Vertex, assuring
continued quality service to customers at a reduced cost per customer.
- Growth in trading - TXU Europe has maintained the profitability of its
gas operations and successfully expanded its trading position, establishing
itself as the one of the largest gas traders in the UK market. In
continental Europe, central European operations experienced major growth in
trading in 2000 with 97 terrawatt hours (TWh) of power trades and 60 TWh
equivalent of gas trades compared with four TWh of power trades and one TWh
equivalent of gas trades in 1999. These portfolio trading markets are
primarily in Germany, the Netherlands, Switzerland and Spain.
- Acquisition in Germany - In Germany, TXU Europe won the bidding for a
majority stake in Kiel AG. The investment provides a platform for growth in
Europe's largest energy market.
- Consolidation and growth in Nordic region - In the Nordic region
(primarily the countries of Finland, Norway and Sweden), TXU Europe made
progress in repositioning the portfolio under its subsidiary, TXU Nordic
Energy, and achieved substantial growth in trading. TXU Nordic Energy is one
of the top traders in the Nordpool with power trades of 156 TWh in 2000
compared with 37 TWh in 1999. Trading activities have been established in
the Finnish market and access to Russian electricity has been gained.
- Value creation in Spain - In Spain, TXU Europe holds a 19.2% interest
in Hidrocantabrico, and TXU Europe has a commitment to sell its interest to
certain parties.
In addition, within the Networks business there was an innovative response
to challenges presented by the Office of Gas and Electricity Markets (OFGEM)
Distribution Price Review, effective from April 1, 2000, which resulted in a
28% cut in the distribution prices that could be charged to customers. The
joint venture, 24seven, was created to provide distribution services to
customers at lower costs.
A-7
REVENUES BY SEGMENT:
The following tables set out the revenues by segment of TXU Europe and TXU
Europe Group for the periods indicated:
TXU Europe Group
TXU Europe (Predecessor)
-------------------------------- -----------------------
Period From
Period From January 1,
Year Ended Formation 1998 Year
December 31, Through Through Ended
----------------- December 31, May 18, March 31,
2000 1999 1998 1998 1998
------- ------- ------------- ----------- ----------
(pounds million)
Revenues:
Energy retail 2,155 2,219 1,346 628 1,655
Portfolio trading and power 2,349 1,425 746 764 1,337
------ ------ ------ ------ ------
Energy - Total 4,504 3,644 2,092 1,392 2,992
Networks 371 429 253 168 414
Other 17 18 31 3 69
Inter-segment elimination's (221) (338) (211) - -
------ ------ ------ ------ ------
4,671 3,753 2,165 1,563 3,475
====== ====== ====== ====== ======
<FN>
* Unaudited
</FN>
OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Overview - Net income for 2000 was pounds 120 million compared with pounds
138 million for 1999. Included in net income for the 2000 period is pounds 7
million (net of deferred taxes of pounds 3 million) for the cumulative effect
on periods prior to December 31, 1999 of a change in the method of
depreciating distribution system assets from an accelerated method to a
straight line method. Income before interest, income taxes, distributions and
minority interest (income before interest) was pounds 517 million for 2000
compared with pounds 551 million for 1999. Revenues of pounds 4.7 billion
for 2000 were up 24% compared with revenues of pounds 3.8 billion for 1999.
The results for Norweb Energi are included since the August 3, 2000 date of
acquisition and contributed pounds 391 million in revenues and pounds 34
million in income before interest.
TXU Europe's results for 2000 included costs of pounds 79 million (pounds
55 million after-tax), mostly for restructuring charges associated with the
creation of the 24seven joint venture, for the contracting of the Eastern
Energy customer service function to Vertex and for other staff
reorganizations, and pounds 7 million for costs associated with the offer for
Hidrocantabrico. Partially offsetting this was a gain of pounds 29 million
(pounds 21 million after-tax) from the sale of the metering business.
Results for 2000 also benefited from other portfolio adjustments including
the pounds 20 million (pounds 14 million after-tax) gain on the sale of TXU
Europe's interest in SME. The results for 2000 also reflect a reduction in
depreciation expense of approximately pounds 22 million (pounds 16 million
after-tax) resulting from the application of the new depreciation method and
change in the estimated lives of distribution system assets. (See Note 3 to
Consolidated Financial Statements.)
A-8
The overall decrease in income before interest for 2000 primarily reflects
the adverse effects of the OFGEM Distribution Price Review, which became
effective from April 1, 2000, difficult UK wholesale market conditions, and
the impact of restructuring charges. In the UK, these effects have mostly
been mitigated by the acquisition of Norweb Energi to increase the customer
base, operating cost savings from the creation of 24seven, contracting out
customer services to Vertex and the benefits of previous years' actions, and
the restructuring and repositioning of the UK portfolio. Other ongoing steps
taken include: increased retail marketing efforts; continued review of
selective disposal of assets; and continued cost reduction programs and
organizational changes in the UK aimed at lowering operating costs. The
selective sale of various assets, including the investment in SME and the
metering business in 2000, maximize value as part of the continued
restructuring of TXU Europe's portfolio of energy activities. The
restructuring of the energy portfolio continued with the January 2001
commitment for the sale of TXU Europe's interest in Hidrocantabrico and the
February 1, 2001 announcement of the sale of North Sea gas assets. Further
disposals are expected in the first half of 2001. The decrease in income
before interest for 2000 from UK and other operations was also offset by the
strong performance from continental European operations, in particular
increased energy trading activities in the merchant energy business. (See
Portfolio trading and power segment discussion below.)
Excluding the pounds 72 million of restructuring costs included in 2000,
operating and maintenance expenses were pounds 622 million compared with
pounds 706 million for 1999. The reduction from the comparable 1999 amounts
reflects the underlying benefits of staff reorganizations and other exit
costs and on-going cost savings programs throughout TXU Europe, partially
offset by the inclusion of Norweb Energi.
Depreciation expense for future periods should be lower than comparable
1999 periods as a result of the change in depreciation method and change in
estimated lives adopted as of the beginning of 2000 on distribution system
assets. The straight line method has been implemented to better recognize the
cost of the assets over the anticipated useful life of the assets. As a
result of the acquisition of Norweb Energi, amortization of goodwill is
expected to be slightly higher in future periods.
Other income - net for 2000 of pounds 74 million is comprised primarily of
the gains from the sale of certain assets and other investments, including
the sale of the metering business and the sale of the portfolio interest in
SME, aggregating pounds 65 million pre-tax (pounds 46 million after-tax).
Other gain transactions, equity in earnings of joint ventures and dividend
income from other investments, reduced by the pounds 7 million in costs
associated with the intended offer for Hidrocantabrico, were also
contributing factors.
Interest expense for 2000 was higher than for 1999 primarily due to higher
variable interest rates and a higher level of debt.
Total income tax expense of TXU Europe for 2000 was pounds 70 million
compared with pounds 111 million for 1999. The effective tax rate in both
periods is affected by amortization of goodwill and other non-deductible
items primarily related to a capital lease. The effective tax rate in 2000
also reflects pounds 18 million in respect of favorable resolutions of
certain matters relating to prior years tax matters.
The 2000 period includes pounds 8 million in charges for quarterly
distributions on the preferred securities issued by TXU Europe Capital I in
March 2000.
See Note 18 to Consolidated Financial Statements for information on
revenues and income before interest by operating segment.
Energy retail -Revenues for both 2000 and 1999 were approximately pounds
2.2 billion. The amount for 2000 reflects the addition of customers from the
Norweb Energi business offset by a reduction in revenues from other customers
of Eastern Energy. Norweb Energi business contributed revenues of pounds 391
million since acquisition in August 2000. The decrease in the Eastern Energy
business is due to a reduction in customers in the residential market,
A-9
reflecting intense competition, and to lower electricity volumes sold in the
industrial and commercial markets as part of a focus on retaining more
profitable customers and selling volumes in the wholesale market at stronger
prices. Customer retention improved during 2000 and new marketing
initiatives are underway to achieve better results in the future, such as
investing in an e-commerce business in order to attract customers and sell
electricity over the internet. In December 2000, TXU Europe Group acquired a
20% interest in Servista.com Limited, an on-line provider of energy and
communications services. TXU Europe Group will be the sole supplier of energy
sold under the Servista.com brand for an initial period of five years.
Income before interest for 2000 was pounds 78 million compared with a loss
of pounds 25 million for 1999. The increase from the prior year includes the
contribution from the Norweb Energi business (pounds 34 million). The
remaining improvement is attributable to the Eastern Energy business
primarily due to a change in the basis of calculating the prices charged for
the intracompany transfer of electricity and gas from the portfolio trading
and power segment (pounds 83 million), favorable price and cost margin
variances (pounds 19 million) and operating cost savings (pounds 14 million),
partially offset by adverse variances due to the decrease in customers
(pounds 28 million) and restructuring charges (pounds 19 million).
TXU Europe may vary the basis of transfer pricing (i.e. prices charged for
energy from the portfolio trading and power segment to the energy retail
segment) to reflect changes in markets, prices and other current economic
conditions.
Portfolio trading and power - Revenues for 2000 were pounds 2.3 billion
compared with pounds 1.4 billion for 1999. The increase is mainly
attributable to the expansion of merchant energy (trading) operations.
Wholesale electricity and gas activity for 2000 has increased substantially,
up 27% and 124%, respectively, from the same period of 1999 (shown in the
operating statistics table above). Owing to the nature of the trading
activity and the instruments involved, the increase in revenues is not
directly proportional to the increase in wholesale energy volumes, as such
revenues are recognized on a margin basis.
Income before interest for 2000 was pounds 263 million compared with
pounds 409 million for 1999. The decrease in income is primarily due to lower
margins on UK wholesale sales of gas and electricity partially offset by an
increase in contribution from trading operations in continental Europe
(pounds 92 million net), the change in the basis of calculating the prices
charged to the Energy Retail segment for the intracompany transfer of
electricity and gas (pounds 83 million) and restructuring charges (pounds 9
million). Operating cost savings (pounds 24 million) and the gain on disposal
of certain land assets (pounds 14 million) were partially offsetting.
Within continental Europe, income before interest from Nordic operations
in 2000 rose pounds 14 million over 1999 while energy trading in the rest of
Europe, primarily Germany, rose pounds 4 million during 2000. Energy trading
operations in continental Europe are accounted for on a mark-to-market basis.
In its first full year of operation, TXU Europe's Geneva office traded 157
TWh of power in 2000 while the Nordic operations traded 156 TWh. TXU Europe
also became one of the first foreign companies to gain control of a German
stadtwerke (local utility) with its purchase in January 2001 of 51% of Kiel
AG. The operations in Kiel AG will complement TXU Europe's increasing
trading activity on the German exchanges.
Networks - Revenues were pounds 371 million for 2000 compared with pounds
429 million for 1999. The decrease primarily reflects the adverse impact of
the OFGEM Distribution Price Controls, which became effective April 1, 2000,
partially offset by higher unit sales in 2000 compared with 1999.
Income before interest for 2000 was pounds 150 million compared with
pounds 175 million for 1999. The decrease is due primarily to the reduction
in revenues as a result of the impact of the Distribution Price Controls on
rates that can be charged to customers, offset by savings on operating costs.
Operating cost savings include the reduction in depreciation expense
following the adoption of the new depreciation method and change in estimated
asset lives, as well as cost savings which have arisen because of the new
cost structure following the implementation of the joint venture, 24seven.
A-10
Other - Income before interest from other business operations was pounds
56 million for 2000 compared with pounds 4 million for 1999. The increase
primarily reflects the disposal of the metering business and the sale of TXU
Europe's portfolio investment in SME.
Unallocated corporate costs include amortization of goodwill and, in 2000,
restructuring costs incurred, net of aggregate gains on sales of other
investments and other gain transactions.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH PERIOD ENDED DECEMBER 31, 1998
Revenues
The business operations of TXU Europe Group were not significantly changed
as a result of the purchase of TEG by a subsidiary of TXU Europe. For
purposes of the discussion of operating revenues for the year ended December
31, 1999 compared with the year ended December 31, 1998, the revenues of TXU
Europe Group for the period from January 1, 1998 through May 18, 1998 have
been combined with the revenues of TXU Europe for the period from May 19,
1998 through December 31, 1998.
Energy retail - Revenues from the energy retail operations for 1999 were
pounds 2.2 billion compared with revenues for 1998 of pounds 1.6 billion.
Volumes in the gas residential market increased in 1999 as a result of this
market being fully opened to competition. Electricity volumes decreased due
to the loss of industrial and commercial customers in the October 1999
contract round (the period of renegotiation of significant numbers of
contracts) and loss of customers in the ex-franchise market. Prices in the
industrial and commercial sector, however, have improved. In December 1999,
TXU Europe Group's volume in this market decreased as a result of a policy to
accept business on a more selective basis.
Portfolio trading and power - Revenues from the Portfolio trading and
power operations in 1999 were pounds 1.4 billion compared with pounds 0.9
billion for 1998. Increased operating volumes in the gas portfolio have
increased revenue partially offset by lower revenues in the electricity
portfolio due to lower time-weighted Pool purchase prices (weighted for time
of day sales) and reduced volumes.
Networks - Revenues from the networks business for 1999 were pounds 429
million compared with pounds 306 million for 1998. Units distributed in 1999
increased by approximately 3% from 1998 and regulated prices increased
slightly from April 1999.
Other - Other revenues were pounds 18 million in 1999, relating primarily
to the metering business. In 1998, other revenues were pounds 37 million and
included, in addition to metering revenues, revenues from the
telecommunications business which was sold in December 1998 and revenues from
the modular building business operated by Rollalong Limited, which was sold
in February 1999.
Income before interest
The post-acquisition results of TXU Europe include the results of TXU
Europe Group plus purchase accounting adjustments and financing costs of the
acquisition.
Income before interest of TXU Europe for 1999 of pounds 551 million
consisted of pounds 3.8 billion of operating revenues offset by costs and
expenses of pounds 3.2 billion. Costs and expenses included pounds
2.2 billion for energy purchased for resale and fuel consumed, pounds 706
million for operation and maintenance expense, pounds 87 million for
amortization of goodwill and pounds 173 million for depreciation and other
amortization. There was pounds 8 million of other income.
Income before interest of TXU Europe for the 1998 period was pounds 360
million and consisted of pounds 2.2 billion of operating revenues offset by
costs and expenses of pounds 1.9 billion and other income of pounds 46
million. These results include the operations of TXU Europe Group from May
19, 1998. Costs and expenses included pounds 1.3 billion for energy
A-11
purchased for resale and fuel consumed pounds 379 million for operation and
maintenance expense, pounds 92 million for depreciation and other
amortization and pounds 52 million for amortization of goodwill.
Net interest expense
Net interest expense of TXU Europe for 1999 of pounds 284 million included
interest expense of pounds 347 million offset by interest income of pounds 63
million. Interest expense included pounds 64 million in respect of sterling
denominated Eurobonds and pounds 49 million in respect of the rent factoring
financing arrangement for leased power stations, as well as payments of
pounds 51 million under the Sterling Credit Agreement, pounds 35 million
under the Senior Notes and pounds 19 million on the note payable to TXU
Corp., which was paid off in June 1999.
Net interest expense of TXU Europe for the 1998 period of pounds 205
million included interest expense of pounds 269 million offset by interest
income of pounds 64 million on cash balances. Interest expense included
payments of pounds 74 million under the Sterling Credit Agreement, pounds 40
million in respect of sterling-denominated Eurobonds, pounds 38 million in
respect of the rent factoring financing arrangement as well as pounds 33
million on the note payable to TXU Corp.
Total tax expense
Total tax expense of TXU Europe for the year ended December 31, 1999 was
pounds 111 million. Total tax expense of TXU Europe for the 1998 period was
pounds 67 million. The effective tax rate for both periods was affected by
non-deductible expenses related to capital leases and amortization of
goodwill. The 1998 period also reflected a tax benefit of approximately
pounds 8 million associated with a 1% reduction in the statutory tax rate and
included income that was taxed at rates less than the statutory rate.
PERIOD FROM APRIL 1, 1998 THROUGH MAY 18, 1998 (PREDECESSOR)
TXU Europe Group incurred a loss before interest for the period from April
1, 1998 through May 18, 1998 of pounds 10 million consisting of pounds 425
million of operating revenues offset by costs and expenses of pounds 436
million and other income of pounds 1 million. Costs and expenses included
pounds 287 million for energy purchased for resale and fuel consumed, pounds
123 million for operation and maintenance expense and pounds 26 million for
depreciation and amortization.
Net interest expense of TXU Europe Group for the period from April 1, 1998
through May 18, 1998 of pounds 16 million included interest expense of pounds
28 million offset by interest income of pounds 12 million on cash balances.
Total tax benefit of TXU Europe Group for the period from April 1, 1998
through May 18, 1998 was pounds 5 million.
REGULATORY ISSUES
The regulation of distribution and supply charges is currently subject to
review by OFGEM.
Networks - In December 1999, OFGEM issued the Distribution Price Control
Review report proposing a range of substantial net revenue reductions for the
distribution businesses of all regional electricity companies in the UK. The
final proposals for Eastern Electricity incorporated an initial reduction in
allowed revenues for regulated units of 28% from April 1, 2000 with further
annual reductions of 3% per year for the next four years, adjusted for
inflation. The effect on revenues was a reduction of pounds 65 million,
adjusted for inflation in 2000 and is estimated to be a further reduction of
about pounds 30 million in 2001. In April 2000, the Director General of
Electricity Supply (DGES) established a new basis for the revenues TXU
Europe's distribution business is allowed to receive.
In April 2000, following the Distribution Price Control Review, OFGEM
initiated a new review known as the Information and Incentives Project. This
project was described in the final proposals of the Distribution Price
Control Review. This project is intended to increase the incentives on
companies to improve quality of service and reduce the uncertainty around the
price control review process. It is intended that an incentive framework
rewarding or penalizing companies by up to 2% of revenue, based on a measure
of network performance, will be introduced beginning April 2002.
A-12
Energy Retail - Under regulatory arrangements, supply price controls
became effective on April 1, 2000. The scope of the controls has been reduced
to remove all small businesses and some residential customers from direct
price controls. TXU Europe Group's directly controlled tariffs were reduced
by an average of 7.1% from April 1, 2000 as required by the new controls,
resulting in an estimated reduction in annual revenues of approximately
pounds 15 million. As the market is opened further to competition, it is
expected that price restraints will no longer be applied to domestic
customers. The DGES has indicated that he hopes to be able to remove price
controls effective April 1, 2002.
New Electricity Trading Arrangements (NETA) - Following a comprehensive
reassessment of the timetable for completion of all the necessary testing,
the implementation of NETA is now scheduled to commence on March 27, 2001,
although the date may be revised before then based on the progress in the
ability of participants to communicate with the central systems being
installed and other concerns. Under NETA, for those companies wishing to buy
and sell electricity, the arrangements provide the freedom to enter into
directly negotiated contracts instead of having to trade through a central
electricity pool. It is expected that under the new arrangements bulk
electricity will be traded on one or more exchanges and through a variety of
bilateral and multilateral contracts and that market participants will
include not only generators and suppliers but also traders with physical
positions, i.e. energy wholesalers; accordingly, NETA implementation will
eliminate the Pool. The new arrangements provide mechanisms for near real-
time clearing and settlement of differences between contractual and physical
positions of those buying, selling, producing and consuming electricity. A
balancing mechanism will enable the system operator (National Grid Company)
to change levels of generation and demand to near real-time; and a mechanism
for imbalance settlement will provide for the settling of the differences
between net physical and net contractual position of parties.
Electricity supply businesses have incurred significant costs to introduce
and operate under NETA, while the financial impact on distributors has been
minimal. Although the UK government proposes that such costs will ultimately
be borne by customers, OFGEM has not allowed recovery of such costs in the
price controls which became effective on April 1, 2000. TXU Europe's ability
to manage its purchase price risk depends, in part, on the continuing
availability of properly priced risk management mechanisms such as contracts
for differences and electricity forward agreements. No assurance can be
given that an adequate, transparent market for such products will in fact be
available in the future (including NETA).
TXU Europe is unable to determine, at this time, what impact the
implementation of NETA will have on its financial position, results of
operations or cash flows.
Utilities Act - The Utilities Act 2000 (Utilities Act) received Royal
Assent (necessary for enactment) on July 28, 2000 and will become effective
in April 2001. The goals of the Utilities Act are to place consumer interests
at the core of regulation and to harmonize gas and electricity regulation.
The Utilities Act makes changes to the electricity and gas licensing
framework, but for the most part license obligations will be carried over as
appropriate and will be largely unchanged from those in present licenses. In
addition, the regulators of gas and electricity markets are combined into a
single regulatory body, the Gas and Electricity Markets Authority (the
Authority), which consists of a Chairman and Members appointed by the
Secretary of State for Trade and Industry, and is supported by OFGEM.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2000 AND YEAR ENDED DECEMBER 31, 1999 OF TXU EUROPE.
Net cash generated by operating activities was pounds 507 million for 2000
compared with pounds 417 million for 1999. Changes in operating assets and
liabilities provided pounds 108 million for 2000 compared with pounds 88
million used for 1999. The amount for 1999 includes pounds 255 million,
representing the sale of accounts receivables under a receivables financing
program revised in March 1999, that previously had used the receivables as
A-13
collateral on short-term borrowings. Cash flows provided by operating
activities before changes in operating assets and liabilities were pounds 399
million for 2000 and pounds 505 million for 1999.
Cash used in investing activities was pounds 581 million for 2000 compared
with pounds 686 million for 1999. Acquisitions of businesses (primarily
Norweb Energi) were pounds 319 million in 2000. Capital expenditures were
pounds 229 million for 2000 compared with pounds 385 million for 1999. Cash
used for other investments in 2000 of pounds 238 million primarily reflects
the purchase of additional shares in Hidrocantabrico. The pounds 282 million
invested in 1999 was primarily for the investments in PVO and SVO in the
Nordic markets. Proceeds from the sales of assets and other investments,
partly from TXU Europe's repositioning of its portfolio, were pounds 137
million for 2000. Most of this came from the sales of the metering business
(pounds 36 million), the investment in SME (pounds 51 million) and the sale
of other investments (pounds 50 million).
Cash provided by financing activities for 2000 was pounds 452 million
compared with pounds 88 million for 1999. For 2000, long-term debt
borrowings were pounds 1.4 billion and repayments of long-term debt were
pounds 1.1 billion (primarily to pay down the Tranche B borrowings). (See
table below for details.) In addition, there was pounds 95 million of
Preferred Securities of Subsidiary Perpetual Trust issued in March 2000. For
1999, borrowings of long-term debt were approximately pounds 2.4 billion and
repayments were approximately pounds 1.5 billion, reflecting the refinancing
of the original TXU Corp. acquisition financing. For 2000, changes in notes
payable - banks and other short-term loans, including changes in receivable
securitization, provided pounds 103 million compared with repayments of
pounds 102 million in 1999.
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM FORMATION THROUGH DECEMBER 31,
1998 OF TXU EUROPE
Net cash generated by operating activities of TXU Europe was pounds 417
million for 1999 and pounds 37 million for the 1998 period. Cash used by
changes in operating assets and liabilities of TXU Europe for 1999 was pounds
88 million and for the 1998 period was pounds 199 million. Cash flows from
operations before changes in operating assets and liabilities were pounds 505
million for 1999 and pounds 236 million for the 1998 period.
Cash used in investing activities of TXU Europe was pounds 686 million for
1999 and pounds 1.8 billion for the 1998 period. The amount for TXU Europe
for the 1998 period includes pounds 1.4 billion representing the net cash
paid to acquire TEG. Capital expenditures were pounds 385 million for 1999,
which included approximately pounds 110 million for the acquisition of gas
assets, and were pounds 207 million for the 1998 period. In 1999, pounds 282
million was invested primarily in other European assets, primarily
investments in PVO and SVO in the Nordic market.
For 1999, cash provided by financing activities by TXU Europe was pounds
88 million. This included borrowings of pounds 2.4 billion in lower rate
long-term debt, which was used in part to refinance most of the borrowings
related to the acquisition of TEG. The securitization of receivables also
provided cash. Cash provided by financing activities of TXU Europe for the
1998 period was pounds 2.2 billion including common stock issued to parent of
pounds 1.5 billion and borrowings under the acquisition facility of pounds
1.8 billion.
PERIOD FROM APRIL 1, 1998 THROUGH MAY 18, 1998 OF TXU EUROPE GROUP
(PREDECESSOR)
Net cash generated by operating activities of TXU Europe Group was pounds
74 million for the period from April 1, 1998 through May 18, 1998. Cash
provided by changes in operating assets and liabilities of TXU Europe Group
was pounds 76 million. Cash used by operations before changes in operating
assets and liabilities of TXU Europe Group was pounds 2 million.
Cash used in investing activities of TXU Europe Group was pounds 78
million and capital expenditures were pounds 51 million. Cash provided by
financing activities of TXU Europe Group was pounds 16 million.
A-14
FINANCING ARRANGEMENTS
Details concerning changes in long-term debt are presented below:
Successor Predecessor
--------------------------------- -------------
Period Period from
From April 1,
Year Ended Formation 1998
December 31, Through Through
-------------------- December 31, May 18,
2000 1999 1998 1998
------- -------- -------- -------
(pounds million)
Borrowings under the:
Sterling Credit Facility - Term Facility - 750 - -
Sterling Credit Facility - Tranche B:
Norwegian Kroner (NOK) 53 124 - -
Spanish pesatas - 51 - -
Pounds sterling 115 133 - -
Euro's 362 257 - -
Senior Notes - 921 - -
EMTN program - Notes:
7.25% due 2007 50 - - -
7.25% due 2030 275 - - -
6.88% due 2001 100 - - -
35 PUT 5 Resettable Notes due 2035 301 - - -
Acquisition facility - - 1,821 -
Interim facility - - 243 -
Other long-term debt 94 187 66 -
------ ------ ------ ------
Total borrowings 1,350 2,423 2,130 -
------ ------ ------ ------
Retirements of :
Sterling Credit Facility - Tranche B (568) (316) - -
EMTN program - Notes (50) - - -
Acquisition facility - (750) (1,071) -
Interim facility - - (243) -
Loan notes - (48) (9) -
Other long-term debt (459) (415) (174) -
------ ------ ------ ------
Total retirements (1,077) (1,529) (1,497) -
------ ------ ------ ------
On March 2, 2000, TXU Europe Capital I, a perpetual statutory business
trust, established as a financing subsidiary for TXU Europe, issued to
investors US$150 million (pounds 95 million) of 9 3/4% Trust Originated
Preferred Securities (Trust Securities), in approximately 6,000,000 units
with a liquidation preference of US$25 per unit. (See Note 9 to
Consolidated Financial Statements.)
At December 31, 2000, TXU Europe has a euros 2.0 billion Euro Medium Term
Note (EMTN) program, under which TXU Europe may from time to time issue notes
in various currencies. On November 30, 2000, a financing subsidiary of TXU
Europe issued pounds 301 million of 35 Put 5 Resettable Notes due 2035
(Resettable Notes) under the EMTN program. The net proceeds were used to pay
down pounds 50 million of EMTN Notes due 2007 with the remainder being held
at year end December 31, 2000, to finance the repayment of the rent factoring
agreement in January 2001 and for other corporate purposes. The initial
interest rate on the Resettable Notes, up to the first reset date of November
30, 2005, is 7.7875%. The issuer of the Resettable Notes has a call option
to repurchase the Resettable Notes at par on November 30, 2005. This call
option has been assigned to commercial banks for a consideration of
approximately pounds 5 million per annum for five years. The Resettable Notes
A-15
also include a put option that is exercisable at 5 years by the holder and a
reset feature that permits the holder to remarket the Resettable Notes at a
different interest rate if the put is not exercised. On the reset date, the
new interest rate will be determined in accordance with the terms of the
Resettable Notes for the next 6 to 20 years. The Resettable Notes can be
redeemed at principal plus accrued interest on November 30, 2005.
Prior to the acquisition of TEG by TXU Corp. in 1998, certain subsidiaries
of TXU Europe entered into an agreement with commercial banks whereby future
intra-group rental payments receivable were assigned to these banks in return
for a sum of pounds 1,097 million. As of December 31, 2000, the balance of
the rental payments due to the banks was pounds 190 million, which was fully
paid in January 2001.
See Notes 7 and 8 to Consolidated Financial Statements for more information
concerning available sources of short-term and long-term financing.
On January 8, 2001, in connection with the acquisition of Kiel AG, TXU
Europe borrowed an additional euros 229 million (pounds 145 million) at 5.54%
per annum (euros 47 million (pounds 30 million) under Tranche B and euros 182
million (pounds 115 million) under the 364-day facility). An additional NOK
50 million (pounds 4 million) was borrowed under Tranche B on January 15,
2001.
ANTICIPATED CAPITAL COMMITMENTS
TXU Europe Group received government consent to build a 215 megawatt (MW)
combined heat and power plant for Shotton Combined Heat and Power for which
there was a total commitment of pounds 143 million. As of December 31, 2000,
outstanding drawings under the project finance facility were pounds 85
million. The remainder is due in 2001 when the station is due to be completed
during the third quarter. Repayment on the loan begins six months after the
earlier of the completion date or November 15, 2001 and will continue over
the next 15 years. Estimated capital expenditures on environmental control
facilities are pounds 43 million in 2000, pounds 50 million in 2001, pounds
40 million in 2002, and pounds 35 million in 2003. (See Note 16 to
Consolidated Financial Statements for a discussion of additional
commitments.)
RESTRUCTURING AND OTHER EXIT COSTS
During 2000, TXU Europe recorded restructuring charges and other costs of
approximately pounds 79 million pre-tax (pounds 55 million after-tax). Of
this amount, pounds 72 million pre-tax (pounds 50 million after-tax) of
restructuring costs were charged to operation and maintenance expense and the
remainder was charged to depreciation expense.
The restructuring costs were primarily a result of the creation of the
24seven joint venture and for certain other staff reorganizations. As of
December 31, 2000, TXU Europe had recorded pre-tax redundancy costs of
approximately pounds 35 million related to termination benefits for 958
employees that have accepted the benefits. In addition, other pre-tax
restructuring charges consisted of pounds 16 million of asset writedowns and
pounds 28 million of other exit costs. Further restructuring charges are
expected to be incurred through the end of 2001. As of December 31, 2000,
pounds 32 million of redundancy costs and pounds 11 million of other exit
costs charged during the year then ended have been paid. Separate redundancy
costs associated with the termination benefits of employees of the recently
acquired Norweb Energi were included as liabilities assumed in the
acquisition. (See Note 1 to Consolidated Financial Statements.)
CUSTOMER ACQUISITION COSTS
Beginning in 1998, TXU Europe Group paid commissions to agents who
assisted TXU Europe Group in acquiring customers in the newly deregulated
electricity and gas markets. Those costs of acquiring customers were charged
to expense when incurred, although revenues from the acquired customer base
are expected to be received over several years. Total charges for the period
from Formation through December 31, 1998 were pounds 38 million, and for 2000
and 1999 were pounds 13 million and pounds 9 million, respectively. TXU
Europe Group expects that it will continue to incur some similar costs in
connection with its ongoing efforts to acquire customers.
A-16
TXU Europe Group is seeking new ways to access the energy markets and to
form more partnerships with the objective of reducing costs, improving access
to customers and capitalizing on emerging new markets like the Internet.
In 2000, TXU Europe Group entered into a direct advertising campaign,
related to the introduction of the StayWarm project, to attract a targeted
group of customers. Costs of this program of approximately pounds 1.3
million of direct response advertising costs were capitalized and are being
amortized over a period of three years. Additional marketing, advertising
and sales promotion costs for this project of pounds 1.5 million was expensed
as incurred.
EUROPEAN MONETARY UNION (EMU)
Most of TXU Europe Group's income and expenditures are denominated in
pounds sterling or in the currencies of other countries. Most of the
trading operations in continental Europe, however, are denominated in euro's.
TXU Europe's accounting systems have been able to deal with the receipt of
payments in Euros effective from January 1, 1999. During 2000, there was
substantial volatility in the exchange rate between the Euro and the pound
sterling, but by the end of the year the exchange rate was close to what it
had been at the beginning of the year and there was little overall effect.
EFFECT OF INFLATION
Inflation in the UK and continental Europe was at a low level in 1999 and
2000, and therefore inflation did not have a material impact on results of
operations for the periods presented.
CHANGES IN ACCOUNTING STANDARDS
New accounting standards - Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as extended by SFAS No. 137 (June 1999) and amended by SFAS No.
138 (June 2000), is effective for TXU Europe beginning January 1, 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires the recognition of
derivatives in the balance sheet and the measurement of those instruments at
fair value.
All derivatives within TXU Europe have been identified pursuant to SFAS
No. 133 requirements. TXU Europe has designated, documented and assessed
derivative hedging relationships. The majority of those derivative hedging
relationships are cash-flow hedges that require TXU Europe to record the
derivative assets or liabilities at their fair value on its balance sheet
with an offset in other comprehensive income. Future hedge ineffectiveness
will be recorded in earnings.
Certain of TXU Europe's derivatives relate to its trading activities,
which, for the most part, are not affected by the implementation of SFAS No.
133. TXU Europe accounts for such trading activities globally on a mark-to-
market basis.
Ongoing implementation issues currently being addressed by the Derivatives
Implementation Group (DIG) may affect the application of SFAS No. 133. In
its normal course of business, TXU Europe enters into commodity contracts,
which include "swing" components for additional purchases or sales of the
underlying commodity. These contracts are used by TXU Europe and its
customers to provide some of their commodity requirements. TXU Europe has
evaluated these contracts and determined that they qualify for the normal
purchases and sales exception provided by SFAS No. 133. In October 2000, the
DIG reached a tentative conclusion that option contracts, which could
potentially include these commodity "swing" contracts, do not qualify for
such exception. If the FASB approves this tentative conclusion, these
contracts would be required to be accounted for as derivatives. DIG
conclusions are required to be prospectively applied only after FASB approval.
A-17
Adoption of this accounting standard as of January 1, 2001 resulted in the
recognition of pounds 173 million of derivatives as assets and pounds 231
million of derivatives as liabilities with a cumulative effect of pounds 41
million after-tax as an decrease to other comprehensive income. TXU Europe is
unable to determine the precise impact related to the commodity contracts
discussed above until such time as the FASB has approved the DIG tentative
conclusion and TXU Europe has had time to evaluate the effect. TXU Europe
estimates that the tentative conclusion would increase other comprehensive
income at January 1, 2001 by pounds 15 million after-tax.
There are a number of issues pending before the DIG that may have an impact
on the application of this statement. Management is unable to predict the
outcome of these issues.
SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets
and Extinguishments of Liabilities", is effective for TXU Europe for
transfers on or after April 2, 2001. SFAS No. 140 replaces SFAS No. 125.
SFAS No. 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires disclosures,
but carries over most of SFAS No. 125's provisions without reconsideration.
TXU Europe is currently evaluating the impact the adoption of this standard
will have on its sale of receivables program. SFAS No. 140 requires TXU
Europe to incorporate certain disclosures about securitizations in the
financial statements at December 31, 2000. These disclosures have been
incorporated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
TXU Europe is exposed to a number of different market risks including
changes in gas and electricity prices, interest rates and foreign currency
exchange rates. TXU Europe has developed a control framework of policies and
procedures to monitor and manage the exposures arising from volatility in
these markets. TXU Europe enters into various derivative instruments for
both trading and non-trading purposes.
INTEREST RATE RISK
TXU Europe's exposure to interest rate risk is managed by maintaining a
level of fixed and floating rate borrowings within limitations imposed by the
Board of Directors of TXU Europe. Interest rate swaps and forward rate
agreements are used from time to time to adjust the proportion of fixed rate
exposure within the specified limits.
The table below provides information concerning TXU Europe's financial
instruments as of December 31, 2000 that are sensitive to changes in interest
rates, which include debt obligations, by principal amount and interest rate
swaps. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. TXU
Europe has entered into interest rate swaps under which it has agreed to
exchange the difference between fixed-rate and variable-rate interest amounts
calculated with reference to specified notional principal amounts. The
contracts require settlement of net interest receivable at specified
intervals which generally coincide with the dates on which interest is
payable on the underlying debt, primarily semi-annually. When differences
exist between the swap settlement dates and the dates on which interest is
payable on the underlying debt, the gap exposure, or basis risk, is managed
by means of forward rate agreements. These forward rate agreements are not
expected to have a material effect on TXU Europe's financial position,
results of operations or cash flows. None of the interest rate swaps or
forward rate agreements were entered into for trading purposes. For interest
rate swaps, the table presents notional amounts and weighted average interest
rates by expected, or contractual, maturity dates. Weighted average variable
rates are based on rates in effect at the reporting date.
A-18
Expected Maturity Date 2000 1999
----------------------------------------- ---------------- -------------------
There Fair Fair
2001 2002 2003 2004 2005 after Total Value Total Value
(pounds millions except percents)
Long-term Debt (including
current maturities):
Fixed Rate (pounds m) 291 252 2 366 751 1,493 3,155 3,160 2,609 2,640
Average interest rate 7.19% 6.32% 6.80% 8.37% 7.03% 7.61% 7.41% - 7.45% -
Variable Rate (pounds m) 1 12 979 30 6 414 1,442 1,442 1,386 1,386
Average interest rate 7.19% 7.09% 6.71% 6.04% 6.85% 7.53% 6.77% - 6.42% -
Interest Rate Swaps:
(notional amounts)
Fixed to Variable (pounds m) - 234 - - 301 335 870 (2) 928 (52)
Average pay rate - 6.71% - - 6.71% 6.71% 6.71% - 6.82% -
Average receive rate - 6.15% - - 6.45% 6.75% 6.48% - 6.48% -
Variable to Fixed (pounds m) - 232 400 - 398 729 1,759 (62) 1,209 (a)
Average pay rate - 7.00% 6.71% - 6.63% 6.50% 6.65% - 6.54% -
Average receive rate - 6.18% 6.34% - 6.11% 6.28% 6.24% - 5.78% -
<FN>
(a) Fair value amount rounds to less than pounds 1 million.
</FN>
At December 31, 1999, there were approximately pounds 15 million in
forward rate agreements outstanding which matured in the first few days of
January 2000. There was no material market risk exposure on these
agreements. There were no forward rate agreements outstanding at December
31, 2000.
ENERGY RISK MANAGEMENT
Management of the market risks associated with the portfolio of physical
generation assets and gas and electricity sales and derivative contracts is
critical to the success of TXU Europe Group, and therefore, comprehensive
risk management processes, policies and procedures have been established to
monitor and control these market risks. TXU Europe Energy Trading manages
its market risk on a portfolio basis within the limitations imposed by the
Board of Directors of TXU Europe Group (TXU Europe Board). Market risks are
monitored daily utilizing appropriate mark-to-market methodologies which
value the portfolio of contracts and the hypothetical effect on this value of
changes in market prices.
ELECTRICITY - NON-TRADING ACTIVITIES
The energy retail business contracts to supply electricity to customers at
fixed prices and buys output from the electricity Pool to meet the demand of
these customers. Since the price of electricity purchased from the Pool can
be volatile, TXU Europe Group is exposed to the risk arising from the
differences between the fixed price at which it sells electricity to
customers and the variable prices at which it buys electricity from the Pool.
TXU Europe Group's generation business provides a physical hedge to this risk
as it is exposed to Pool price fluctuations from selling electricity into the
Pool. TXU Europe Group's overall exposure to those risks is managed by the
energy management business which maintains energy price exposures to within a
A-19
limit set by the TXU Europe Board and also enters into derivatives to hedge
the portfolio. The derivatives used are mainly contracts for differences and
electricity forward agreements but also involve other contractual
arrangements. (See Note 15 to Consolidated Financial Statements.) Contracts
for differences are bilaterally negotiated contracts which fix the price of
electricity for an agreed quantity and duration by reference to an agreed
strike price, which is the price specified in the contract for differences.
Electricity forward agreements are similar in principle to contracts for
differences but are on standard terms and tend to be for smaller quantities
and shorter durations. The hypothetical loss in fair value of TXU Europe
Group's contracts for differences, electricity forward agreements and other
contracts at December 31, 2000 and 1999 entered into for non-trading purposes
arising from a 10% adverse movement in future electricity prices is estimated
at pounds 270 million and pounds 21 million, respectively. This loss is
calculated by modeling the contracts against an internal forecast of Pool
prices using discounted cash flow techniques. The increase in the
hypothetical market movement results from the increase in energy purchase
commitments during 2000, mainly the Norweb Energi acquisition. These
commitments were mostly at above market rates at acquisition. As these non-
trading contracts are used to hedge sales to retail customers, any adverse
movement in wholesale electricity prices does not directly affect the
performance or profitability of TXU Europe, which is more affected by price
movements in retail markets. The fair values of outstanding contracts for
differences, electricity forward agreements and other contracts held for non-
trading purposes at December 31, 2000 were out-of-the-money (negative) pounds
589 million compared with in-the-money fair values (positive) of pounds 76
million at December 31, 1999, calculated as the difference between the
expected value of the contracts for differences, electricity forward
agreements and other contracts, based on their known strike price or other
known value, and the current market value of such instruments, based on an
estimate of forward prices for the contract for difference, electricity
forward agreement or other contracts during their term. The decrease in fair
values from 1999 primarily reflect a decline in UK Pool prices and a
lengthening of the portfolio position.
ENERGY TRADING ACTIVITIES
TXU Europe Group also enters into contracts for differences and other
energy purchase contracts for the purpose of trading. TXU Europe Group
trades both in the UK market, where it seeks to take advantage of market
conditions by extending or shortening the size of its portfolio of purchase
and sale commitments, and in continental Europe, where it enters into
financial instruments in markets where it has no physical assets or retail
volumes. Any resulting exposures to fluctuations in energy prices resulting
from such trading are within limits set by the TXU Europe Board. TXU Europe
Group accounts for its trading activities in accordance with the accounting
policies set out in Note 2 to the Consolidated Financial Statements.
The portfolio concept subjects the entities to a number of risks and costs
associated with the future contractual commitments, including price risk,
credit risk associated with counterparties, product location (basis)
differentials and market liquidity. TXU Europe continuously monitors the
valuation of identified risks and adjusts the portfolio valuation based on
present market conditions. Reserves are established in recognition that
certain risks exist until delivery of energy has occurred, counterparties
have fulfilled their financial commitments and related financial instruments
mature or are closed out. Price and credit risk are further managed within
the established trading policies and limits established for TXU Europe which
are evaluated on a daily basis.
Electricity - Trading activities experienced net gains of pounds 50
million in 2000 and pounds 23 million in 1999. The hypothetical loss in fair
value of TXU Europe Group's forwards, options, contracts for differences and
other energy contracts at December 31, 2000 and 1999, which were entered into
for trading purposes, arising from a 10% adverse movement in future
electricity prices is estimated at pounds 30 million and pounds 4 million,
respectively. The fair values of outstanding contracts for differences,
electricity forward agreements and other contracts entered into for trading
purposes at December 31, 2000 were pounds 37 million compared with pounds 17
million at December 31, 1999.
Gas - During 2000, net gains of pounds 47 million were recognized from
trading gas commodity contracts or other derivatives in the UK and mainland
Europe, mainly the result of higher gas prices. The hypothetical loss in
fair value of TXU Europe Group's futures, swaps and other gas commodity
contracts in existence at December 31, 2000, which were entered into for
trading purposes, arising from a 10% adverse movement in future gas prices is
estimated at pounds 24 million. The fair value of such instruments at
December 31, 2000 was pounds 16 million, and the average fair value for 2000
was pounds 5 million.
A-20
Coal - In the coal business, TXU Europe enters into contracts for the
purchase and sale of coal primarily to assure supplies for generation
purposes. The overall net exposure of TXU Europe to the coal spot market is
managed by using coal options, swaps and futures. During 2000, net gains of
pounds 3 million were recognized from trading coal commodity contracts or
other derivatives. There were no trading activities in coal for 1999. The
hypothetical loss in fair value of TXU Europe Group's options, swaps, futures
and other commodity contracts in existence at December 31, 2000, which were
entered into for trading purposes, arising from a 10% adverse movement in
future coal prices is estimated at less than pounds 1 million. The fair
value of such instruments at December 31, 2000 was pounds 2 million, and the
average fair value for 2000 was less than pounds 1 million.
FOREIGN CURRENCY RISK
TXU Europe manages its exposure to foreign currency rates principally by
matching foreign currency denominated assets with borrowings in the same
currency or by swapping principal and interest components of foreign currency
borrowings into sterling. Currency swaps and options are also used where
appropriate to hedge any residual exposures. In addition, some imports of
capital equipment and fuel are denominated in currencies other than sterling
and the sterling cost of these is fixed by means of forward contracts as soon
as TXU Europe's contractual commitment is firm.
The following table summarizes notional amounts at the contract exchange
rates, weighted average contractual exchange rates and estimated fair values
by contract maturity for contracts open at December 31, 2000 and 1999:
Expected Maturity Date
------------------------------------------------ 2000 1999
There- Fair Fair
2001 2002 2003 2004 2005 after Total Value Value
----- ----- ----- ----- ----- ------ ------ ------ ------
(pounds millions, except exchange rates which are in US$)
Principal payments - pounds - 216 - - 398 645 1,259 96 2
Average exchange rate - $ - 1.62 - - 1.63 1.86 1.75 - -
Interest payments - pounds 83 83 69 69 69 502 875 5 (25)
Average exchange rate - $ 1.63 1.63 1.63 1.63 1.63 1.62 1.62 - -
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 statements its expectations have been based on reasonable
assumptions, any such statement involves uncertainties and is qualified in
its entirety by reference to the following important factors, among others,
that could cause the actual results of TXU Europe to differ materially from
those projected in such forward-looking statement: (1) general economic and
business conditions in the UK and continental Europe; (2) unanticipated
changes in interest rates, in rates of inflation, or in foreign exchange
rates; (3) prevailing governmental, statutory, regulatory or administrative
policies and initiatives affecting TXU Europe, its subsidiaries or the UK or
European electric and gas utility industries; (4) general industry trends;
(5) competition; (6) power costs and availability; (7) changes in business
strategy, development plans or vendor relationships; (8) availability, terms
and deployment of capital and capital market conditions; (9) availability of
qualified personnel; (10) changes in, or the failure or inability to comply
with, governmental regulations, including, among other things, environmental
regulations; (11) changes in tax laws; (12) weather conditions and other
natural phenomena; (13) unanticipated population growth or decline, and
changes in market demand and demographic patterns; (14) access to adequate
transmission facilities to meet changing demand; (15) pricing and
transportation of oil, coal, natural gas and other commodities; (16)
unanticipated changes in operating expenses and capital expenditures; (17)
the ability of TXU Europe to enter into financial instruments to hedge
A-21
various market risks or the inability of the counterparties to meet their
obligations with respect to financial instruments; and (18) changes in
technology used and services offered by TXU Europe.
Any forward-looking statements speak only as of the date of this report.
TXU Europe undertakes no obligation to publicly update or revise any forward-
looking statements 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 and 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 results
to differ materially from those contained in any forward-looking statement.
A-22
TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of TXU Europe and subsidiaries (TXU Europe) is responsible
for the preparation, integrity and objectivity of the consolidated financial
statements of TXU Europe and other information included in this report. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. As
appropriate, the statements include amounts based on informed estimates and
judgments of management.
The management of TXU Europe has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance
with management's authorization and financial records are reliable for
preparing consolidated financial statements. Management believes that the
system of control provides reasonable assurance that errors or irregularities
that could be material to the consolidated financial statements are prevented
or would be detected within a timely period. Key elements in this system
include the effective communication of established written policies and
procedures, selection and training of qualified personnel and organizational
arrangements that provide an appropriate division of responsibility. This
system of control includes a risk monitoring framework designed to provide an
assurance to the Board of Directors of TXU Europe of the adequacy and
effectiveness of business systems and controls. Management considers the
recommendations of the Risk Monitoring & Assurance team and independent
auditors concerning TXU Europe's system of internal control and takes
appropriate actions which are cost-effective in the circumstances. Management
believes that, as of December 31, 2000, TXU Europe's system of internal
control was adequate to accomplish the objectives discussed herein.
The Board of Directors of TXU Europe addresses its oversight
responsibility for the consolidated financial statements through its Audit
Committee. The Audit Committee meets regularly with TXU Europe's management,
the Risk Monitoring & Assurance team and independent auditors to review
matters relating to financial reporting, auditing and internal control. To
ensure auditor independence, both the Risk Monitoring & Assurance team and
independent auditors have full and free access to the Audit Committee.
The independent auditors, Deloitte & Touche, are engaged to audit, in
accordance with auditing standards generally accepted in the United States of
America, the consolidated financial statements of TXU Europe and its
subsidiaries and to issue their report thereon.
/s/ PHILIP G TURBERVILLE
-------------------------------
Philip G Turberville, Principal
Executive Officer
/s/ PAUL C MARSH
-------------------------------
Paul C Marsh , Principal
Financial Officer
/s/ SCOTT R J LONGHURST
-------------------------------
Scott R J Longhurst, Principal
Accounting Officer
A-23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of TXU Europe Limited and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of TXU Europe
Limited (formerly TXU Eastern Holdings Limited) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
income, comprehensive income, cash flows and shareholder's equity for the
years then ended. These financial statements are the responsibility of TXU
Europe's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of TXU
Europe Limited for the period from formation through December 31, 1998, and
the period from April 1, 1998 through May 18, 1998, were audited by other
auditors whose reports, dated respectively March 3, 1999 and April 26, 1999,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of TXU Europe Limited and
subsidiaries at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE
London, England
February 1, 2001
A-24
Report of Independent Accountants
To the Board of Directors and Shareholders of TXU Europe Limited (formerly
known as TXU Eastern Holdings Limited) and Subsidiaries
In our opinion, the accompanying consolidated statements of consolidated
income, of comprehensive income, of common stock equity and of cash flows for
the period from formation (February 5, 1998) to December 31, 1998 present
fairly, in all material respects, the results of operations and cash flows of
TXU Europe Limited (formerly known as TXU Eastern Holdings Limited) and
Subsidiaries for the period from formation (February 5, 1998) to December 31,
1998, in conformity with accounting principles generally accepted in the
United States. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards in the
United Kingdom which do not differ significantly with those in the United
States and which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
London, England
March 3, 1999
A-25
Report of Independent Accountants
To the Board of Directors and Shareholders of TXU Europe Group plc (formerly
known as Eastern Group plc) and Subsidiaries
In our opinion, the accompanying consolidated statements of consolidated
income, of comprehensive income, of common stock equity and of cash flows for
the period from April 1, 1998 through May 18, 1998 present fairly, in all
material respects, the results of operations and cash flows of TXU Europe
Group plc (formerly known as Eastern Group plc) and Subsidiaries for the
period from April 1, 1998 through May 18, 1998, in conformity with accounting
principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards in the United Kingdom which do not
differ significantly with those in the United States and which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
London, England
April 26, 1999
A-26
TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Successor Predecessor
---------------------------------- --------------
Period from Period from
Year Ended Formation April 1,
December 31, Through 1998
------------------- December 31, Through
2000 1999 1998 May 18,1998
-------- --------- ------------ -------------
(pounds million)
Operating Revenues 4,671 3,753 2,165 425
------- ------ ------ ------
Operating Expenses
Energy purchased for resale and
fuel consumed 3,273 2,244 1,328 287
Operation and maintenance 694 706 379 123
Depreciation and other amortization 159 173 92 22
Goodwill amortization 102 87 52 4
------- ------ ------ ------
Total operating expenses 4,228 3,210 1,851 436
------- ------ ------ ------
Operating Income (Loss) 443 543 314 (11)
Other Income - Net 74 8 46 1
------- ------ ------ ------
Income (Loss) Before Interest,
Income Taxes, Distributions and
Minority Interest 517 551 360 (10)
Interest Income 59 63 64 12
Interest Expense 370 347 269 28
------- ------ ------ ------
Income (Loss) Before Income
Taxes, Cumulative Effect of Change in
Accounting, Distributions and
Minority Interest 206 267 155 (26)
Income Tax Expense (Benefit) 70 111 67 (5)
------- ------ ------ ------
Income (Loss) Before Cumulative
Effect of Change in Accounting,
Distributions and Minority Interest 136 156 88 (21)
Cumulative Effect On Prior Years
(To December 31, 1999) of Change to a
New Depreciation Method (Net of pounds
3 million tax effect) 7 - - -
Distributions on Preferred Securities
of Subsidiary Perpetual Trust (8) - - -
Minority Interest (15) (18) (11) -
------- ------ ------ ------
Net Income (Loss)
120 138 77 (21)
======= ====== ====== ======
See Notes to Consolidated Financial Statements.
A-27
TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Successor Predecessor
---------------------------------- --------------
Period from Period from
Year Ended Formation April 1,
December 31, Through 1998
------------------- December 31, Through
2000 1999 1998 May 18,1998
-------- --------- ------------ -------------
(pounds million)
Net Income (Loss) 120 138 77 (21)
Other Comprehensive Income (Loss)
Net change during period, net of tax effects:
Unrealized holding gains (losses)on
investments classified as available for sale 19 - (8) (3)
Reclassification to other income -
net of gain realized on sale of SME (14) - - -
Cumulative currency translation adjustment 1 1 - -
-------- ------- ------- -------
Total 6 1 (8) (3)
-------- ------- ------- -------
Comprehensive Income (Loss) 126 139 69 (24)
======== ======= ======= =======
See Notes to Consolidated Financial Statements.
A-28
TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Successor Predecessor
---------------------------------- --------------
Period from Period from
Year Ended Formation April 1,
December 31, Through 1998
------------------- December 31, Through
2000 1999 1998 May 18,1998
-------- --------- ------------ -------------
(pounds million)
Cash Flows - Operating Activities
Net income (loss) 120 138 77 (21)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Cumulative effect of change in (10) - - -
accounting principle
Depreciation and amortization 261 260 144 26
Deferred income taxes 81 89 24 (7)
Gain on sale of assets and investments (65) - (13) -
Other 12 18 4 -
Changes in operating assets and liabilities:
Accounts receivable (100) 113 (138) 65
Inventories 53 16 (26) 10
Prepayments and other assets (66) (62) (7) (4)
Accounts payable (including affiliates) 182 (33) 205 6
Interest and taxes accrued (44) 6 (55) 29
Other liabilities 83 (128) (211) (30)
Due to affiliates - - 33 -
------- ------ ------ ------
Cash provided by operating activities 507 417 37 74
------- ------ ------ ------
Cash Flows - Investing Activities
Acquisition of businesses (net of cash
acquired of pounds 2,011 in 1998) (319) - (1,432) -
Capital expenditures (229) (385) (207) (51)
Proceeds from sale of assets and
other investments 137 4 60 -
Change in restricted cash 68 (23) - -
Other investments (238) (282) (188) (27)
------- ------ ------ ------
Cash used in investing activities (581) (686) (1,767) (78)
------- ------ ------ ------
Cash Flows - Financing Activities
Borrowings of long-term debt 1,350 2,423 2,130 -
Issuance of common stock to parent - - 1,467 -
Retirements of long-term debt (1,077) (1,529) (1,497) -
Issuance of preferred securities of
subsidiary perpetual trust 95 - - -
Receivable securitization (172) (123) - -
Change in notes payable - banks and
other short-term loans 275 21 168 16
Minority interest - - 166 -
Retirements of advances from TXU Corp. - (682) (200) -
Debt discount and financing expenses (11) (22) (36) -
Distributions on preferred securities of
subsidiary perpetual trust (8) - - -
Dividends paid - - (1) -
------- ------ ------ ------
Cash provided by financing activities 452 88 2,197 16
------- ------ ------ ------
Effect Of Exchange Rates On Cash And
Cash Equivalents - (1) - -
------- ------ ------ ------
Net Change In Cash And Cash Equivalents 378 (182) 467 12
Cash And Cash Equivalents - Beginning Balance 285 467 - 714
------- ------ ------ ------
Cash And Cash Equivalents - Ending Balance 663 285 467 726
======= ====== ====== ======
See Notes to Consolidated Financial Statements.
A-29
TXU EUROPE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
2000 1999
------- -------
(pounds million)
ASSETS
Current Assets
Cash and cash equivalents 663 285
Accounts receivable 743 469
Inventories - at average cost 72 122
Prepayments 56 58
Energy trading risk management assets 609 -
Other current assets 41 57
------ ------
Total current assets 2,184 991
------ ------
Investments
Restricted cash 672 740
Other 695 520
Total investments 1,367 1,260
Property, Plant And Equipment - Net 2,781 2,718
Goodwill 3,945 3,422
Deferred Debits And Other Assets 670 514
------- ------
Total 10,947 8,905
======= ======
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable - banks 525 251
Long-term debt due currently 862 380
Short-term loans on accounts receivable 5 177
Accounts payable:
Trade 712 458
Affiliates 52 49
Energy trading risk management liabilities 555 -
Taxes accrued - 194
Interest accrued 78 61
Other current liabilities 166 156
------- ------
Total current liabilities 2,955 1,726
------- ------
Accumulated deferred income taxes 467 409
Provision for unfavorable contracts 573 89
Other deferred credits and noncurrent liabilities 320 226
Long-term debt, less amounts due currently 4,480 4,539
Preferred securities of subsidiary perpetual trust 95 -
Minority interest 258 243
Commitments And Contingencies (Notes 16 and 17)
Shareholders' equity 1,799 1,673
------- ------
Total 10,947 8,905
======= ======
See Notes to Consolidated Financial Statements.
A-30
TXU EUROPE LIMITED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
Accumulated
Period from April 1, 1998 through Retained Other
May 18, 1998 (Predecessor) Contributed Earnings Comprehensive
Capital (Deficit) Loss
----------- ----------- -------------
(pounds million)
Balance at March 31, 1998 2,603 (794) (7)
Net loss - (21) -
Unrealized loss on securities
classified as available for sale - - (3)
------ ----- -----
Balance at May 18, 1998 2,603 (815) (10)
====== ===== =====
Period from
Formation
Year Ended December 31, Through
------------------------- December 31,
2000 1999 1998
--------- --------- ------------
(pounds million)
Common Stock - authorized shares
3,000,000,000 shares at US $1 par and
100 deferred shares at pounds 1 par
Balance at beginning of period 1,467 1,467 -
Issuance of common stock to parent
(2,455,705,299 shares) - - 1,467
------ ------ ------
Balance at end of period
(2,455,705,299 shares) 1,467 1,467 1,467
------ ------ ------
Retained Earnings
Balance at beginning of period 213 76 -
Net income 120 138 77
Cash dividends - - (1)
Other - (1) -
------ ------ ------
Balance at end of period 333 213 76
------ ------ ------
Accumulated Other Comprehensive
Income (Loss) - net of Tax
Unrealized holding gains (losses)
on securities classified as
available for sale
Balance at beginning of period (8) (8) -
Change in the period 5 - (8)
------ ------ ------
Balance at end of period (3) (8) (8)
------ ------ ------
Foreign currency translation
adjustments
Balance at beginning of period 1 - -
Change in the period 1 1 -
------ ------ ------
Balance at end of period 2 1 -
------ ------ ------
Total accumulated other
comprehensive income (loss) (1) (7) (8)
------ ------ ------
Shareholder's Equity 1,799 1,673 1,535
====== ====== ======
See Notes to Consolidated Financial Statements.
A-31
TXU EUROPE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, ACQUISITIONS AND DISPOSITIONS
TXU Europe Limited (TXU Europe) is an indirect, wholly-owned
subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a
multinational energy services holding company that is engaged in the
generation, purchase, transmission, distribution and sale of
electricity; the purchase, transmission, distribution and sale of
natural gas; and energy marketing, energy services, telecommunications
and other businesses, primarily in the United States (US), Europe and
Australia. TXU Europe is a holding company for TXU Corp.'s United
Kingdom (UK) and other European operations. Almost all of TXU Europe's
operating income is derived from, and consolidated assets are held by,
TXU Europe Group plc (TXU Europe Group) and TXU Europe Group's
subsidiaries.
The business and operations of TXU Europe and its subsidiaries
consist of two main businesses, energy and networks, which are divided
into three principal operating segments, as follows:
ENERGY - The Energy business manages TXU Europe's integrated
portfolio of customers, assets and contracts in the UK and continental
Europe. Operations in the UK are conducted through wholly-owned
subsidiaries. European activities are conducted through both wholly-
owned subsidiaries and joint-venture operations. Through its portfolio
management and trading operations, TXU Europe seeks to allocate risk
capital so as to maximize returns across European markets. As a
consequence, the composition of assets and operations in each market
within the portfolio changes from time to time. The two operating
segments of the Energy business are:
(i) the ENERGY RETAIL business, which as of December 31, 2000,
supplies electricity and gas to approximately 5.5 million residential,
industrial and commercial customers in the UK, including those arising
from the Norweb Energi acquisition (described below); and
(ii) the PORTFOLIO TRADING AND POWER business (formerly known as
Energy management and generation), which manages a portfolio of
generation assets and contracts throughout Europe.
NETWORKS -
The third operating segment is the NETWORKS business which owns,
manages and, through its networks management joint venture, 24seven,
operates the electricity distribution system in the UK.
UK energy operations are carried out principally through TXU Europe's
subsidiaries, Eastern Electricity plc (Eastern Electricity) (which also
owns the networks electricity distribution system), Eastern Energy
Limited (Eastern Energy), Eastern Natural Gas Retail Limited, TXU Europe
Power Ltd (and its subsidiaries) and TXU Europe Energy Trading Ltd.
Continental European energy operations are carried out as follows:
(i) Portfolio trading in central European markets through TXU Europe
Energy Trading BV (and its subsidiaries), primarily in Germany, the
Netherlands, Switzerland and Spain; and
(ii)Nordic operations through TXU Nordic Energy Oy (a joint venture
with Pohjolan Voima Oy (PVO), Finland's second largest electricity
generator) which trades energy on Nordic markets, has access to hydro
generation at Svartisen and Kobbelv and participates in distribution and
retail markets through joint ventures, especially Savon Voima Oyj (SVO).
European operations were further expanded when Stadtwerke Kiel AG
(Kiel AG) became a subsidiary of the group on January 8, 2001, as
described below.
A-32
FORMATION
TXU Europe was incorporated as a private limited company on February
5, 1998. TXU Europe is a holding company that owns 90% of the
outstanding common stock of TXU Finance (No. 2) Limited (TXU Finance)
which in turn owns 100% of the common stock of TXU Acquisitions Limited
(TXU Acquisitions). On May 19, 1998, TXU Acquisitions gained control of
The Energy Group PLC (TEG), the former holding company of TXU Europe
Group, formerly known as Eastern Group plc, after all conditions to its
offer for all of the ordinary shares of TEG were satisfied or waived.
TXU Europe Group is considered the predecessor company to TXU Europe.
Financial statements for periods prior to the May 19, 1998 acquisition
date are labeled "Predecessor".
The "period from formation through December 31, 1998" referred to in
these financial statements represents February 5, 1998 through
December 31, 1998, inclusive. From March 1998 to May 18, 1998, TXU
Europe, through TXU Acquisitions, had acquired an equity interest in TEG
of approximately 22%, which resulted in the recognition of equity income
of pounds 2 million for that period, which is reflected in "Other Income
- Net".
PURCHASE ACCOUNTING
The acquisition of TEG was accounted for as a purchase business
combination in accordance with accounting principles generally accepted
in the United States of America (US GAAP). Accordingly, the results of
operations of the TEG businesses acquired have been consolidated into
the results of operations of TXU Europe since acquisition on May 19,
1998. The total purchase consideration for the TEG businesses acquired
was approximately pounds 4.4 billion. The excess of the purchase
consideration plus acquisition costs over the net fair value of tangible
and identifiable intangible assets acquired and liabilities assumed
resulted in goodwill of pounds 3.5 billion, which is being amortized
over 40 years.
OTHER ACQUISITIONS AND DISPOSITIONS
TXU Europe continually reviews its portfolio of businesses and
investments and makes adjustments as considered necessary to meet its
objectives and to maintain financial and operational flexibility. As
part of this review, capital may be redeployed within the energy
portfolio to maximize returns across Europe.
On August 3, 2000, TXU Europe purchased United Utilities plc's retail
energy supply business, Norweb Energi (a division of Norweb plc) for
total consideration, including direct costs of the acquisition, of
pounds 340 million. Financing was provided through existing bank lines
and cash balances on hand. The transaction also includes the assumption
of certain of Norweb Energi's obligations, including its power purchase
agreements, which have been integrated into TXU Europe's energy
portfolio.
The agreement for the purchase of Norweb Energi included the eventual
transfer of the current Norweb plc public electricity supply license-
area customers (franchise or "in area" customers) and the transfer of
Norweb plc's interest in the power purchase agreements to TXU Europe
Group. TXU Europe Group expects contracts with Norweb plc public
electricity supply customers to be in place under the Utilities Bill in
early 2001. Meanwhile, Norweb plc's economic interest in the franchise
customers and power purchase agreements are effectively passed to
Eastern Energy through an agency agreement. Eastern Energy acts as
Norweb plc's agent in meeting all its obligations under its public
electricity supply license as they relate to the supply of electricity.
All of Norweb plc's "out-of-area" electricity and all gas customers were
transferred to TXU Europe Group on August 3, 2000.
The acquisition of Norweb Energi was accounted for as a purchase
business combination. The assets and liabilities of Norweb Energi at
the acquisition date, including its power purchase agreements, have been
adjusted to their estimated fair values. The process of determining the
fair value of assets and liabilities of Norweb Energi has not been
completed. The latest estimate of the excess of the purchase
consideration plus acquisition costs over the net fair value of tangible
and identifiable intangible assets acquired and liabilities assumed
resulted in goodwill of pounds 622 million which is being amortized over
A-33
20 years. This amount is subject to further revision as additional
information becomes available, primarily relating to exit costs and
other liabilities assumed at acquisition. The final determination of the
purchase accounting adjustments requires additional information and
analysis, which is ongoing and is expected to be completed within one
year of the acquisition date. The results of operations of Norweb Energi
are reflected in the consolidated financial statements of TXU Europe
from the August 3, 2000 effective date of the acquisition.
Included in the liabilities assumed as of the acquisition date was
pounds 10 million of estimated costs in connection with the severance of
employment of 240 of the 280 employees of Norweb Energi and other costs
to close and sublease the former office facilities and relocate the
remaining employees to other facilities. Management continues to monitor
the status of these estimates as additional information is received. TXU
Europe expects the main parts of this exit plan will be completed within
a year from the acquisition date.
The following summary of unaudited pro forma consolidated results of
TXU Europe's operations reflect the acquisition of Norweb Energi as
though it had occurred at the beginning of the respective periods
presented.
Year Ended
December 31,
-----------------
2000 1999
------- --------
pounds million
Revenues 5,270 4,851
Operating Income 507 639
Net Income 142 166
These pro forma results are not necessarily indicative of what the
actual results would have been had the acquisition occurred at the
beginning of these periods. Further, the pro forma results are not
intended to be a projection of future results of the combined companies.
Also on August 3, 2000, TXU Europe announced that its subsidiary,
Eastern Energy, had contracted its customer services operations to Vertex
Data Science Limited (Vertex), United Utilities plc's customer services
business. Customer services include call centers, billing, credit
management and debt collection. Eastern Energy's 1,335 customer services
staff transferred to Vertex on September 1, 2000.
On January 8, 2001, TXU Europe completed the acquisition of 51% of
Kiel AG, a German municipal utility, for approximately pounds 145
million. At the date of acquisition, Kiel AG had sterling equivalent
assets of approximately pounds 121million and liabilities of pounds 82
million. The process of determining the fair value of tangible and
identifiable intangible assets acquired and liabilities assumed has not
been completed. The city government of Kiel, the state capital, retained
the remaining 49% of the utility, which has approximately 250,000 gas and
electricity customers, 175 megawatts of power generation and 2.7 billion
cubic feet of gas storage capacity.
In March 2000, upon receiving all final approvals, TXU Europe Group
and EDF London Investments plc, a subsidiary of Electricite de France,
created an equally held joint venture company, named "24seven", for the
management, operation and maintenance of their subsidiaries' respective
electricity distribution networks. The new joint venture began
operations on April 7, 2000. TXU Europe accounts for its investment in
24seven by the equity method of accounting. 24seven serves over five
million electricity customers in London and the eastern counties of
England. Employees of the joint venturers' subsidiaries, Eastern
Electricity and London Electricity plc, have been transferred to
24seven. The physical distribution system assets, as well as all
operating licenses, continue to be separately owned by Eastern
Electricity and London Electricity plc, respectively. (See Note 2 for a
discussion of restructuring and other related costs.)
In November 1999, TXU Europe formed a joint venture with certain
shareholders of PVO, Finland's second largest electricity generator. As
part of the transaction, TXU Europe contributed approximately euros 300
million (pounds 190 million) for an 81% ownership interest in the joint
venture company, TXU Nordic Energy. The acquisition of the interest in
PVO resulted in goodwill of approximately pounds 37 million which is
being amortized over 40 years. In December 1999, TXU Europe completed
the acquisition of an approximate 40% interest in SVO, Finland's seventh
A-34
largest electricity distributor, for approximately pounds 40 million.
The agreement includes an option which allows the majority shareholders
of SVO to require TXU Europe to purchase all or some of the remaining
60% interest in SVO at prices that are based upon a multiple of the
original purchase price for the first three years. After three years
the purchase price is based upon a calculation which considers SVO's
results of operations, as well as cash and cash equivalents and long-
term debt balances on hand at the date the option is exercised. The
option may be exercised at any time by the majority shareholders and
does not expire. TXU Europe accounts for its investment in SVO by the
equity method of accounting.
On March 1, 2000, TXU Europe Power acquired Nedalo BV for pounds 4.5
million, including pounds 2.8 million of goodwill. This acquisition
included the remaining 25% of Nedalo (UK) Limited it did not already
own. Nedalo BV is a leading manufacturer of small electrical combined
heat and power plants.
On January 25, 2001, TXU Europe entered into a commitment to sell its
19.2% interest in Hidroelectrica del Cantabrico, SA (Hidrocantabrico) to
a consortium led by Electricidade de Portugal S.A., the Portugese
utility company, and Spanish savings bank Caja de Ahorro de Asturias
(Cajastur). Electricidade de Portugal and Cajastur unconditionally
offered euros 24 per share for 100% of Hidrocantabrico. In March 2000,
TXU Europe (Espana) S.L., a subsidiary of TXU Europe, announced its
intention to make a cash offer to acquire all of the shares of
Hidrocantabrico that TXU Europe did not then own. Later in March 2000,
after a competing bid had been issued, TXU Europe announced that it
would not pursue its offer. In a series of private transactions since
that date, TXU Europe acquired additional shares in Hidrocantabrico
until it holds approximately 19.2% of the outstanding shares. TXU
Europe has pre-emption rights over 4.9% of the stock in Hidrocantabrico
currently held by Electrabel SA (Electrabel), an electricity company in
Belgium, if Electrabel elects to sell its interests in Hidrocantabrico
to another company during a one year period beginning July 4, 2000. TXU
Europe is subject to a conditional put option by which it can be
required to purchase the 10% interest in Hidrocantabrico held by
Electrabel to the extent Electrabel is required to dispose of its
holding in Hidrocantabrico by the European Union or Spanish Competition
Authorities during a one year period beginning July 4, 2000. The
conditions of this put option include a reasonable notice period before
execution. Results of operations for 2000 include approximately pounds
7 million of costs incurred in connection with the intended offer for
Hidrocantabrico, included in other income - net.
In May 2000, TXU Europe sold its metering business in the UK for
pounds 36 million in proceeds, realizing a pre-tax gain of approximately
pounds 29 million. In addition, in August 2000, TXU Europe completed
the sale of its interest in Severomoravska energetika, a.s. (SME), for
pounds 51 million in proceeds, realizing a pre-tax gain of approximately
pounds 20 million. The investment in SME was previously accounted for as
an available for sale marketable equity security, and the amount of
holding gains that were previously recorded in other comprehensive
income has been reclassified as realized gains. Both of these sales
have been recorded in other income - net.
In December 1998, TXU Europe disposed of its telecommunications
business, resulting in a gain of pounds 13 million. In consideration
for the business, TXU Europe received cash of pounds 60 million and an
investment in the preferred stock of the purchaser, NTL Inc. The
investment in the preferred stock was sold in 2000 resulting in
recognition of a pre-tax gain of pounds 8 million.
On February 1, 2001, TXU Europe announced it had agreed to sell its
interest in the North Sea gas fields for approximately pounds 138
million as a result of its ongoing review of its program to reposition
its energy portfolio.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
US GAAP. Certain prior year amounts have been reclassified to conform
to the current year's classification.
Consolidation - The consolidated financial statements include the
accounts of TXU Europe and all majority-owned subsidiaries. Minority
interest represents the minority shareholders' proportionate share in
the equity or income of TXU Europe's majority-owned subsidiaries.
A-35
All significant intercompany items and transactions have been
eliminated in consolidation. Investments in significant unconsolidated
affiliates are accounted for by the equity method.
Use of estimates - The preparation of TXU Europe's consolidated
financial statements requires management to make estimates and
assumptions about future events that affect the reporting and disclosure
of assets and liabilities at the balance sheet dates and the reported
amounts of revenue and expense during the period covered by the
consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are
made in subsequent periods to reflect more current information.
Cash and cash equivalents - Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have an
original maturity of three months or less.
Inventories - Inventories are stated at the lower of weighted average
cost or net realizable value.
Marketable securities - TXU Europe has classified all of its
marketable securities as available for sale. Available for sale
securities are carried at fair value with the unrealized gains or losses
reported as a component of accumulated other comprehensive income or
loss. Declines in fair value that are other than temporary are
reflected in income.
Capitalized interest - Interest is capitalized on major capital
expenditures during the period of construction and is reflected as a
reduction of interest expense in the statements of consolidated income.
Interest capitalized was pounds 10 million for 2000 and pounds 4 million
for the period from formation through December 31, 1998. No interest was
capitalized in 1999 or for the period from April 1, 1998 through May 18,
1998.
Property, plant and equipment - Property, plant and equipment are
stated at cost less accumulated depreciation. The cost of additions,
improvements, and interest during the period of construction are
capitalized, while maintenance and repairs are charged to expense when
incurred.
Leased generating stations meeting certain criteria and related
equipment are capitalized and the present value of the related lease
payments is recorded as a liability.
Depreciation - Depreciation of property, plant and equipment, is
determined on the straight-line method over estimated useful lives of
the assets as follows:
Electricity generating 30 years
station assets
Electricity generating Shorter of lease period or
station assets under capital estimated remaining useful
lease life
Electricity distribution 50 years
system assets and customer
contributions to the
construction of electricity
distribution system assets
Buildings Up to 60 years
Leasehold improvements Shorter of remaining lease
term or estimated useful
life
Plant and equipment Up to 10 years
In 2000, TXU Europe changed the depreciation method for its
distribution system assets. (See Note 3.)
In accordance with industry practice, the unamortized amount of
customer contributions to the construction of electricity distribution
system assets is deducted from property, plant and equipment.
Upon sale, retirement, abandonment or other disposition of property,
the cost and related accumulated depreciation are eliminated from the
accounts and any gain or loss is reflected in income.
Prior to the sale of upstream gas assets announced on February 1,
2001, depletion of gas reserves was charged on a unit-of-production
basis, based on an assessment of proven reserves. Appraisal expenditures
of gas fields were accounted for under the successful efforts method.
A-36
General seismic and other costs are expensed as incurred. Provisions
were made for abandonment costs relating to gas fields. Such provisions
were determined in accordance with local conditions and requirements,
and on the basis of costs estimated at the respective balance sheet
date. These costs were expensed on a unit-of-production basis. As of
December 31, 2000 and 1999, the oil and gas producing activities of TXU
Europe represented less than 10% of consolidated revenues, operating
profits and assets.
TXU Europe capitalizes computer software costs in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". These costs are being
amortized over a five-year period. (See Note 20.)
Valuation of long-lived assets - TXU Europe evaluates the carrying
value of goodwill and long-lived assets to be held and used when events
and circumstances warrant such a review. The carrying value of goodwill
and long-lived assets would be considered impaired when the projected
undiscounted cash flows are less than the carrying value. In that
event, a loss will be recognized based on the amount by which the
carrying value exceeds the fair market value. Fair market value is
determined primarily by available market valuations or, if applicable,
discounted cash flows. As of December 31, 2000, there was no impairment
of the valuation of long-lived assets, including goodwill.
Goodwill - Goodwill represents the excess of the purchase price paid
over the estimated fair value of the assets acquired and liabilities
assumed for each company acquired and is being amortized over 20 to 40
years, depending upon the circumstances.
Derivative financial instruments - TXU Europe, through TXU Europe
Energy Trading, manages its exposure to commodity price risk from
existing contractual commitments and provides price risk management
services to its customers through various financial instruments. Such
energy management comprises both non-trading and trading activities.
Contracts for differences, electricity forward agreements and other
contracts are utilized to hedge the impact of market fluctuations on
existing assets or liabilities. Gains and losses are included in the
carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of
firm commitments or anticipated transactions are deferred and are
recognized in income or as adjustments of carrying amounts when the
hedged transactions occurs. The cash flows related to derivative
financial instruments are recorded in the same manner as the cash flow
related to the item being hedged.
TXU Europe, through its subsidiaries, in 1999 began entering into
energy contracts, including derivative financial instruments, for
trading purposes. Contracts for differences and other financial
instruments utilized in connection with trading activities are accounted
for using the mark-to-market method. Under this method, these financial
instruments are adjusted to market value on the balance sheet, and the
unrealized gains and losses are included in revenues in the income
statement for that period. (See Note 15.)
TXU Europe enters into interest rate swaps to reduce exposure to
interest rate fluctuations. Amounts paid or received under interest
rate swap agreements are accrued as interest rates change and are
recognized over the life of the agreements as adjustments to interest
expense. Swaps, options and forward contracts are used to hedge foreign
currency exposure.
See New Accounting Standards below for the change in accounting for
derivatives effective January 1, 2001.
Revenue recognition - Electricity and gas sales revenues are
recognized when services are provided to customers and include an
estimate for unbilled revenues, or the value of electricity and gas
consumed by customers between the date of their last meter reading and
the period-end date. As a result, unbilled revenues are subject to a
degree of estimation which can be significant. Operating revenues are
stated exclusive of value added tax, but inclusive of the fossil fuel
levy.
Restructuring costs - Restructuring costs primarily relate to
redundancy costs (severance benefits paid to staff under retirement
programs and related pension benefits) and other qualified costs of exit
activities, generally recorded in Operation and Maintenance expense, and
qualifying asset writedowns which are charged against depreciation
A-37
expense. Redundancy costs relating to termination benefits are
recognized in the period in which the employee accepts the offer and the
amount can be reasonably estimated.
Foreign currencies - Assets and liabilities of foreign (non-UK)
subsidiaries are translated at the exchange rate as of the balance sheet
date. Revenues, costs and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments
resulting from this process are charged or credited to other
comprehensive income. Gains and losses on foreign currency transactions
are included in other income - net.
Income taxes - Income tax expense includes UK and other national
income taxes. TXU Europe intends to reinvest the earnings of its non-UK
subsidiaries into those businesses. Accordingly, no provision has been
made for taxes which would be payable if such earnings were distributed
to TXU Europe.
Deferred income taxes are determined under the liability method.
Deferred income taxes represent liabilities to be paid or assets to be
received in the future and reflect the tax consequences on future years
of temporary differences between the tax bases of assets and liabilities
and their financial reporting amounts. Future tax rate changes would
affect those deferred tax liabilities or assets in the period when the
tax rate change is enacted.
Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more
likely than not.
New accounting standards -Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as extended by SFAS No. 137 (June 1999) and amended by SFAS
No. 138 (June 2000), is effective for TXU Europe beginning January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
the recognition of derivatives in the balance sheet and the measurement
of those instruments at fair value.
All derivatives within TXU Europe have been identified pursuant to
SFAS No. 133 requirements. TXU Europe has designated, documented and
assessed derivative hedging relationships. The majority of those
derivative hedging relationships are cash-flow hedges that require TXU
Europe to record the derivative assets or liabilities at their fair
value on its balance sheet with an offset in other comprehensive income.
Future hedge ineffectiveness will be recorded in earnings.
Certain of TXU Europe's derivatives relate to its trading activities,
which, for the most part, are not affected by the implementation of SFAS
No. 133. TXU Europe accounts for such trading activities globally on a
mark-to-market basis.
Ongoing implementation issues currently being addressed by the
Derivatives Implementation Group (DIG) may affect the application of
SFAS No. 133. In its normal course of business, TXU Europe enters into
commodity contracts, which include "swing" components for additional
purchases or sales of the underlying commodity. These contracts are used
by TXU Europe and its customers to provide some of their commodity
requirements. TXU Europe has evaluated these contracts and determined
that they qualify for the normal purchases and sales exception provided
by SFAS No. 133. In October 2000, the DIG reached a tentative
conclusion that option contracts, which could potentially include these
commodity "swing" contracts, do not qualify for such exception. If the
FASB approves this tentative conclusion, these contracts would be
required to be accounted for as derivatives. DIG conclusions are
required to be prospectively applied only after FASB approval.
Adoption of this accounting standard as of January 1, 2001 resulted
in the recognition of pounds 173 million of derivatives as assets and
pounds 231 million of derivatives as liabilities with a cumulative
effect of pounds 41 million after-tax as a decrease to other
comprehensive income. TXU Europe is unable to determine the precise
impact related to the commodity contracts discussed above until such
time as the FASB has approved the tentative DIG conclusion and TXU
Europe has had time to evaluate the effect. TXU Europe estimates that
the tentative conclusion would increase other comprehensive income at
January 1, 2001 by pounds 15 million after-tax.
There are a number of issues pending before the DIG that may have an
impact on the application of this statement. Management is unable to
predict the outcome of these issues.
A-38
SFAS No. 140, "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities", is effective for TXU Europe
for transfers on or after April 2, 2001. SFAS No. 140 replaces SFAS No.
125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral
and requires disclosures, but carries over most of SFAS No. 125's
provisions without reconsideration. TXU Europe is currently evaluating
the impact the adoption of this standard will have on its sale of
receivables program. SFAS No. 140 requires TXU Europe to incorporate
certain disclosures about securitizations in the financial statements at
December 31, 2000. These disclosures have been incorporated.
3. CHANGE IN ACCOUNTING PRINCIPLE - DEPRECIATION
In the quarter ended September 30, 2000, TXU Europe implemented a
change in the depreciation method for its distribution system assets as
of December 31, 1999. Previously, distribution system assets were
depreciated at a rate of 3% per annum for 20 years and then 2% per annum
for the remaining 20 years. A straight line depreciation method has
been implemented to better recognize the cost of the assets over the
anticipated useful life of the assets. The cumulative effect of this
change in accounting principle on periods prior to December 31, 1999 was
an increase in net income of pounds 7 million (net of pounds 3 million
in deferred taxes). The effect of the change for the year ended
December 31, 2000 was to increase net income by pounds 16 million (after
a reduction for income taxes of pounds 6 million).
Results for the previous quarters of 2000 were restated to reflect
the increase in net income resulting from the adoption of the new
accounting method. (See Note 19.) The pro forma amounts of the prior
periods presented herein, assuming the change in depreciation method had
been applied retroactively to the beginning of each period, would not
have differed significantly from the actual amounts presented.
Also in the quarter ended September 30, 2000, TXU Europe revised the
estimated useful economic lives of its distribution system assets. Such
assets are now depreciated over a composite period of 50 years to
reflect the age profiles underlying the current asset maintenance
strategy. The effect of the change in estimate is not significant for
2000.
4. RESTRICTED CASH
At December 31, 2000 and 1999, pounds 351 million and pounds 408
million of deposits were used to cash-collateralize existing future
lease obligations to certain banks related to the funding of the leases
of three power stations from National Power PLC. Additionally, pounds
317 million and pounds 326 million at December 31, 2000 and 1999,
respectively, were used to cash-collateralize existing future lease
obligations arising from cross-border leasing arrangements on several
power stations. (See Note 8.) TXU Europe's investment in Eastern Norge
Svartisen AS (Svartisen) includes pounds 4 million of deposits which was
classified as restricted cash at December 31, 2000. TXU Europe's
investment in Eastern Norge Kobbelv AS (Kobbelv) (see Note 5), included
pounds 6 million of deposits which were classified as restricted cash at
December 31, 1999.
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5. INVESTMENTS
Marketable securities investments are classified as available for
sale, and are considered non-current based upon management's intentions
in holding the investments. Marketable securities investments consisted
of the following:
Fair market Unrealized
Cost value gain/(loss)
-------------- --------------- --------------
December 31, December 31, December 31,
-------------- --------------- --------------
2000 1999 2000 1999 2000 1999
------ ----- ------ ------ ------ -----
(pounds million)
SME - 31 - 20 - (11)
HC 277 49 273 49 (4) -
----- ---- ---- ---- ---- ----
277 80 273 69 (4) (11)
===== ==== ==== ==== ==== ====
At December 31, 2000, TXU Europe held a 19.2% investment in
Hidrocantabrico (HC in the table above), which is listed in Spain. (See
Note 1.) At December 31, 1999, TXU Europe also held an investment in
SME, which is listed in the Czech Republic. TXU Europe has not had the
ability to exercise significant influence over either Hidrocantabrico's
or SME's operating and financial policies; accordingly, these
investments have been accounted for as marketable securities and marked
to market. In August 2000, TXU Europe sold its investment in SME and
the amount of holding gains that were previously recorded in other
comprehensive income has been reclassified as realized gains. (See Note
1.)
Non-marketable investments at December 31, 2000 and 1999 consist
principally of the investment in PVO and investments in the offtake
generated from water rights in hydro-electric power plants in Norway
over a 55 year period. The investment in PVO held by TXU Nordic Energy
is the equivalent of a 14.7% ownership in PVO and is carried at cost,
which was approximately pounds 190 million at both December 31, 2000 and
1999. The water rights investments, Svartisen and Kobbelv, amounted to
approximately pounds 141 million and pounds 145 million at December 31,
2000 and 1999, respectively. The carrying value at December 31, 1999 of
an investment in the preferred stock of NTL Incorporated (NTL Inc.), the
purchaser of TXU Europe's telecoms business in 1998, was pounds 28
million. This investment was sold in 2000.
Investments accounted for by the equity method, including the
approximately 40% interest in SVO that was acquired in November 1999,
totaled pounds 71 million and pounds 63 million at December 31, 2000 and
1999, respectively. The remainder of SVO is currently owned by 29 local
municipalities. There are put options exercisable by the
municipalities, which if exercised would automatically give TXU Europe
Group a controlling stake. (See Note 1.)
The remaining other investments amounted to pounds 20 million and
pounds 25 million at December 31, 2000 and 1999, respectively and are
carried at cost.
6. RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, the balance of pounds 52 million and
pounds 49 million, respectively, in the "Accounts payable - Affiliates"
account arises primarily from payments of amounts by TXU Corp. on behalf
of TXU Europe.
The 10% holding in TXU Finance of pounds 208 million and pounds 195
million at December 31, 2000 and 1999, respectively, which is held by a
wholly-owned subsidiary of TXU Corp., has been included in "Minority
Interest".
A-40
7. SHORT-TERM DEBT
Short- term Debt - Weighted average interest rates at December 31,
2000 and 1999 on notes payable to banks, including accounts receivable
securitization balances, is 5.95% and 5.15%, respectively.
Short-term Facilities - As of December 31, 2000, TXU Europe had
several short-term facilities with commercial banks which provide for
borrowings in various currency denominations and at current interest
rates generally based on LIBOR.
Borrowings Under Facilities at
December 31, 2000
------------------------------------------
Facilities Interest
Expiration Date Facility Limits Outstanding Rates
--------------- ------------------------------- ------------------------------- ----------
Currency pound Currency pound
millions millions
May 30, 2001 euros 250 million 158 euros 250 million 158 5.78%
May 8, 2001 Czech Koruna (CzK) 27 CzK 1.3 billion 23 6.08%
1.5 billion
August 22, 2001 (a) pounds 300 million 300 euros 256 million 161 5.80%
(a 364 - day (multicurrency)
revolving credit
facility )
March 2, 2003 (a) pounds 150 million 150 pounds 150 million 150 6.28%
(Eastern Electricity (multicurrency)
revolving credit
facility)
<FN>
(a) In connection with the new pounds 300 million 364 -day revolving
credit facility entered into in August 2000, the limits under Eastern
Electricity's separate revolving credit facility were reduced from
pounds 250 million to pounds 150 million.
</FN>
On January 8, 2001, TXU Europe borrowed an additional euros 182
million (pounds 115 million) at 5.54% under the 364-day revolving credit
facility. On January 22, 2001, the pounds 150 million Eastern
Electricity revolving credit balance was repaid.
Nordic Finance - TXU Europe has a Euro term loan facility with a
commercial bank available only to fund the investment in SVO. At
December 31, 2000, there was euros 50 million (pounds 32 million)
outstanding at an annual interest rate based on Euribor of 5.89%.
Promissory note program - TXU Europe had a promissory note program
with two facilities issued within the Czech Republic which had been
utilized to fund its investment in SME and Teplarny Brno a.s. At
December 31, 1999, pounds 60 million was outstanding under the
promissory note program at an average annual interest rate of 6.96%.
This amount was repaid in 2000 with the sale of TXU Europe's interest in
SME.
Accounts receivable securitization - TXU Europe Group has facilities
with Citibank N.A. to provide financing through trade accounts
receivable whereby Eastern Electricity may sell up to pounds 300 million
of its electricity receivables and TXU Finance may borrow up to an
aggregate of pounds 275 million, which is treated as being
collateralized by future receivables of Eastern Electricity, through a
short-term note issue arrangement. The program has an overall limit of
pounds 550 million. Eastern Electricity continually sells additional
receivables to replace those collected. During 2000, Eastern Electricity
sold pounds 2,278million in receivables under the program. Such sales
resulted in no gain or loss. Under the program, Eastern Electricity has
a receivables servicing obligation but does not incur a measurable asset
or liability. At December 31, 2000 and 1999, accounts receivable of
Eastern Electricity of pounds 164 million and pounds 224 million had
A-41
been sold under the program, respectively. At December 31, 2000 and
1999, pounds 5 million and pounds 177 million, respectively, were
reflected as other short-term loans on the balance sheet. These amounts
bear interest at an annual rate based on commercial paper rates plus a
margin, which was 6.02% and 5.63% at December 31, 2000 and 1999,
respectively.
8. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
------------------
2000 1999
------ ------
(pounds million)
Notes and Bonds:
$200 million 7.425% guaranteed notes due 2017 134 124
$300 million 7.55% guaranteed notes due 2027 201 186
pounds 350 million 8.375% bonds due 2004 363 367
pounds 200 million 8.5% bonds due 2025 225 227
pounds 200 million 8.75% bonds due 2012 234 235
$350 million 6.15% Exchange Senior Notes due 2002 234 217
$650 million 6.45% Exchange Senior Notes due 2005 435 402
$500 million 6.75% Exchange Senior Notes due 2009 335 309
7.25% Norwegian Kroner bonds due 2029 75 77
EMTN Notes:
7.25% Sterling Eurobonds due 2030 275 -
6.88% EMTN Notes due 2001 100 -
35 PUT 5 Resettable Notes due 2035 - 7.79% 301 -
Other:
Sterling Credit Agreement - due 2003:
Term facility - 6.81% and 6.55% 750 750
Tranche B revolving credit:
Spanish pesatas - 4.33% - 47
Norwegian kroner - 8.10% and 7.13% 53 54
Pounds sterling - 6.61% - 75
Euro's - 5.80% and 4.04% 168 61
Rent factoring loans (weighted average
interest rate of 7.35%, due 2001) 190 428
Other unsecured loans, due in installments
(weighted average rates range from 5.84% - 8.86% 120 114
and 4.95% - 10.8%)
Capital leases 745 924
CHPL project finance - Shotton 87 -
Cross-border leases (US$ denominated) 317 316
Other - 6
------ ------
Total long-term debt 5,342 4,919
Less current portion 862 380
------ ------
Long-term debt, less amounts due currently 4,480 4,539
====== ======
Lines of credit
At December 31, 2000, TXU Europe has a euros 2.0 billion Euro Medium
Term Note (EMTN) program, under which TXU Europe may from time to time
issue notes in various currencies. On November 30, 2000, a financing
subsidiary of TXU Europe issued pounds 301 million of 35 Put 5
Resettable Notes due 2035 (Resettable Notes) under the EMTN program.
The net proceeds were used to pay down pounds 50 million of EMTN Notes
due 2007 with the remainder being held at year end December 31, 2000, to
finance the repayment of the rent factoring agreement in January 2001
and for other corporate purposes. The initial interest rate on the
Resettable Notes, up to the first reset date of November 30, 2005, is
7.7875%. The issuer of the Resettable Notes has a call option to
repurchase the Resettable Notes at par on November 30, 2005. This call
option has been assigned to commercial banks for a consideration of
approximately pounds 5 million per annum for five years. The Resettable
A-42
Notes also include a put option that is exercisable at 5 years by the
holder and a reset feature that permits the holder to remarket the
Resettable Notes at a different interest rate if the put is not
exercised. On the reset date, the new interest rate will be determined
in accordance with the terms of the Resettable Notes for the next 6 to
20 years. The Resettable Notes can be redeemed at principal plus
accrued interest on November 30, 2005.
As of December 31, 2000, there was also pounds 275 million in 7.25%
Sterling Eurobonds due March 8, 2030 and pounds 100 million of 6.88%
EMTN Notes due September 4, 2001 outstanding under the EMTN program.
At December 31, 2000, TXU Europe and TXU Finance (No.2) Limited have
a joint sterling-denominated line of credit with a group of banking
institutions under a credit facility agreement (Sterling Credit
Agreement). As of December 31, 2000, the amended Sterling Credit
Agreement provides for borrowings of up to pounds 1.075 billion and has
two facilities: a pounds 750 million term facility and a pounds 325
million revolving credit facility (Tranche B), both of which terminate
on March 2, 2003. The Sterling Credit Agreement allows for borrowings
in various currencies with interest rates based on the prevailing rates
in effect in the countries in which the borrowings originate. In August
2000, a new 364 - day facility to provide short-term financing was
entered into. (See Note 7.) As of December 31, 2000, the outstanding
Tranche B borrowings and interest rates in effect at December 31, 2000
consisted of 700 million Norwegian kroner (NOK) (pounds 53 million) at
8.10% per annum and euro 267 million (pounds 168 million) at 5.80%
per annum.
On January 8, 2001, in connection with the acquisition of Kiel AG,
TXU Europe borrowed an additional euros 229 million (pounds 145 million)
at 5.54% per annum (euros 47 million (pounds 30 million) under Tranche B
and euros182 million (pounds 115 million) under the 364-day facility).
An additional NOK 50 million (pounds 4 million) was borrowed under
Tranche B on January 15, 2001.
Other long-term debt
TXU Europe has a pounds 143 million project finance facility to pay
for the construction of the power station being built for Shotton
Combined Heat and Power. The station is due to be completed during the
third quarter of 2001. Repayment on the loan begins six months after
the earlier of the completion date or November 15, 2001 and will
continue over the next 15 years. As of December 31, 2000, there was
outstanding drawings of pounds 85 million under this facility bearing
interest at a rate based on LIBOR plus a margin, which was 6.85% per
annum.
Maturities - Long-term debt, as of December 31, 2000 excluding
capital lease balances, is repayable as follows:
December 31,
----------------
(pounds million)
2001 292
2002 264
2003 981
2004 396
2005 757
Thereafter 1,907
------
Long-term debt, excluding capital leases 4,597
Capital leases 745
------
Total long-term debt 5,342
======
TXU Europe's debt agreements contain certain covenants, including
leverage ratios, levels of net assets and interest coverage. At
December 31, 2000 and 1999, TXU Europe was in compliance with all such
covenants.
A-43
Capital lease obligations - As at December 31, 2000 future minimum
lease payments for assets under capital leases, together with the
present value of minimum lease payments, were:
December 31
-------------
(pounds million)
2001 405
2002 23
2003 21
2004 21
2005 21
Thereafter 172
------
Total future minimum lease payments 663
Less amounts representing interest (113)
------
Present value of future minimum
lease payments 550
------
Current 374
Non-current 176
------
Total 550
======
Substantially all of the capital lease obligations relate to coal-
fired power stations. Additional payments of approximately pounds 6 per
megawatt hour (indexed from 1996 prices) linked to output levels from
the stations were payable (under the original lease terms) for the first
seven years of their operations by TXU Europe Group (operations
commenced in 1996). In accounting for the acquisition of TEG, a
liability for the estimated probable additional payments linked to
output levels for coal-fired generating stations was established. At
December 31, 2000 and 1999, the balance of the liability of pounds 196
million and pounds 291 million, respectively, is included with capital
lease obligations, of which pounds 196 million and pounds 95 million are
classified as current, respectively. As of December 31, 2000, TXU
Europe Group held a 99-year lease over the land, buildings and plant at
three power stations and had the right to purchase the freehold land
after 50 years at a purchase price of pounds 1. During 2000, TXU Europe
Group reached an agreement to prepay (effective January 2001) in fixed
amounts, the future payments linked to output levels from these stations
that previously had been payable over periods to March 2003. In
addition, an option was granted to TXU Europe Group to bring forward the
right to purchase the freehold land, previously exercisable after 50
years. TXU Europe Group exercised the option to purchase the freehold
in January 2001. At that time, remaining outstanding fixed lease
payments became financial obligations to a third party and will be
settled during 2001. The National Power leases have been accounted for
as capital leases.
Cross-border leases - Certain subsidiaries of TXU Europe Group have
entered into cross-border lease transactions in respect of two power
stations that are wholly owned by TXU Europe. TXU Europe has retained
control of the power stations and their output and is responsible for
their operations. The debt arising on the cross-border leases is fully
collateralized by restricted cash on deposit. (See Note 4.)
Rent factoring loans - Prior to the acquisition of TEG by TXU Corp.
in 1998, certain subsidiaries of TXU Europe entered into an agreement
with commercial banks whereby future intra-group rental payments
receivable were assigned to these banks in return for a sum of pounds
1,097 million. As of December 31, 2000, the balance of the rental
payments due to the banks was pounds 190 million, which was fully paid
in January 2001.
At December 31, 2000 and 1999, pounds 351 million and pounds 408
million of the capital sums were on deposit to cash collateralize
existing future lease obligations to another group of banks related to
the funding of the leases of three power stations leased from National
Power. (See Note 4.)
A-44
9. PREFERRED SECURITIES OF SUBSIDIARY PERPETUAL TRUST
In March 2000, TXU Europe Capital I, a statutory business trust,
established as a financing subsidiary for TXU Europe, issued to
investors US$150 million (pounds 95 million) of 9 3/4% Trust Originated
Preferred Securities (Preferred Trust Securities), in 6,000,000 units.
In a series of related transactions, the proceeds from this issuance
were invested in Preferred Partnership Securities issued by TXU Europe
Funding I, L.P., a limited partnership of which TXU Europe is the
general partner. TXU Europe Funding I, L.P. in turn, used those funds,
along with a capital contribution of approximately US$26 million (pounds
16 million) from TXU Europe, to purchase junior subordinated debentures
issued by TXU Eastern Funding Company and TXU Europe Group. The
Preferred Trust Securities have a liquidation preference of US$25 per
unit. The only assets of the trust are the Preferred Partnership
Securities. The Trust has a perpetual existence, subject to certain
termination events as provided in its Amended and Restated Trust
Agreement. The Preferred Trust Securities are subject to mandatory
redemption upon payment of the Preferred Partnership Securities, which
may be redeemed at the option of TXU Europe, in whole, or in part, at
any time on or after March 2, 2005. TXU Europe has issued certain
limited guarantees of the Preferred Trust Securities, the Preferred
Partnership Securities and the junior subordinated debentures held by
TXU Europe Funding I, L.P. The trust uses distributions it receives on
the Preferred Partnership Securities to make cash distributions on the
Preferred Trust Securities.
10. SHAREHOLDER'S EQUITY
TXU Europe has two classes of shares outstanding, ordinary and
deferred. Both classes are held by wholly owned subsidiaries of TXU
Corp. Ordinary shares, which are US dollar denominated, have voting
rights. The deferred shares, which are denominated in UK pounds
sterling, have no rights to vote or receive dividends. Upon
liquidation, holders of deferred shares are entitled to receive pounds 1
per share only after holders of ordinary shares are paid pounds 100
million per share. In addition, all deferred shares may be repurchased
for the sum of pounds 1.
Certain debt instruments of TXU Europe contain provisions that, under
certain conditions, restrict distributions on or acquisitions of common
stock. At December 31, 2000 and 1999, retained earnings were not
restricted as a result of such provisions.
11. PROVISION FOR UNFAVORABLE CONTRACTS
As part of the purchase accounting for TEG, TXU Europe made
provisions for certain unfavorable long-term gas and electricity
purchase contracts. As of December 31, 2000 and 1999, the electricity
provision related to a contract that expires in 2009, while the gas
provision relates to two contracts that expire in 2010.
With the acquisition of Norweb Energi in August 2000, TXU Europe also
assumed certain of Norweb Energi's obligations, including its power
purchase agreements. Some of these agreements provide for purchases of
power by TXU Europe at prices were currently above market. As a
result, TXU Europe recorded a liability for the fair value adjustments
for these unfavorable power purchase agreements of pounds 451 million
and pounds 19 million for related contracts for differences.
During 2000 and 1999, an aggregate of pounds 27 million and pounds 46
million, respectively, of these provisions were released to offset
expenses recognized on purchases under unfavorable electricity and gas
contacts. In December 1999, TXU Europe paid pounds 76 million in
termination fees to exit a disadvantageous contract. There was no
income effect as this amount matched the liability previously
established against this contract.
12. PENSIONS
The majority of TXU Europe Group employees are members of the
Electricity Supply Pension Scheme (ESPS), which provides pensions of a
defined benefit nature for employees throughout the England and Wales
Electricity Supply Industry. The ESPS operates on the basis that there
is no cross-subsidy between employers, and the financing of TXU Europe
Group's pension liabilities is, therefore, independent of the experience
of other participating employers. The assets of the ESPS are held in a
A-45
separate trustee-administered fund and consist principally of UK and
European equities, UK property holdings and cash. The pension cost
relating to the TXU Europe Group portion of the ESPS is assessed in
accordance with the advice of independent qualified actuaries using the
projected unit method. The benefits under these plans are primarily
based on years of service and compensation levels as defined under the
respective plan provisions.
The pension information presented below has been adjusted to reflect
the impact of the following events during 2000: the sale of metering
business (May 2000), the acquisition of Norweb Energi (August 2000) and
the related transfer of customer services personnel to Vertex (September
2000). (See Note 1.) As a result of these events there has been a
significant movement of employees out of and into the pension scheme.
The net effect of these curtailments and settlements was a loss of less
than pounds 1 million for 2000.
Year Ended December 31,
-----------------------
2000 1999
-------- --------
(pounds million)
Change in benefit obligation:
Benefit obligation at beginning of year 979 985
Service cost 16 15
Interest cost 58 53
Participants' contributions 9 10
Plan amendments - 19
Actuarial (gain) loss (32) (56)
Termination liabilities 17 10
Benefits paid (58) (54)
Effect of curtailments (2) -
Net transfer of obligations from (to) other plans 20 (3)
------ -----
Ending benefit obligation 1,007 979
====== =====
Change in plan assets:
Fair value of plan assets at beginning of year 1,167 1,082
Actual return on plan assets - 107
Employer contribution 23 25
Participants contributions 9 10
Benefits paid (58) (54)
Net transfer of assets from (to) other plans 23 (3)
------ -----
Ending fair value of plan assets 1,164 1,167
====== =====
Funded status:
Funded status 157 188
Unrecognized net actuarial loss 83 43
Unrecognized prior service cost 17 19
------ -----
Prepaid benefit cost 257 250
====== =====
Weighted average assumptions:
Discount rate 6.0% 6.0%
Expected return on plan assets 6.75% 6.5%
Rate of compensation increase 3.5% 3.5%
A-46
Period from
Year Ended Formation Period from
December 31, Through April 1, 1998
---------------- December 31, Through
2000 1999 1998 May 18, 1998
------ ------ ----------- -------------
(pounds million)
Components of net periodic pension
cost (benefit):
Service cost 16 15 7 1
Interest cost 58 53 33 7
Expected return on plan assets (80) (63) (45) (10)
Net amortization 2 4 - -
Net curtailments/settlement gain (1) - - -
----- ---- ---- ----
Net periodic pension cost (benefit) (5) 9 (5) (2)
===== ==== ==== ====
In addition, TXU Europe has a defined contribution pension plan.
Contributions made by TXU Europe to the plan were pounds 813 thousand in
2000, pounds 827 thousand in 1999 and pounds 490 thousand in the period
from formation to December 31, 1998.
13. EMPLOYEE SHARE PLANS
During 1998, TXU Europe instituted the TXU Europe Group Long Term
Incentive Plan (LTIP) which is administered by a remuneration committee.
Awards of "phantom stock" in TXU Corp. under the LTIP may be made
available to the management group, senior managers and salaried
directors of TXU Europe. There is no exercise price associated with the
awards. Participants of the LTIP receive awards based on the number of
shares that a specified percentage of their annual basic pay could
purchase, using the stock price of TXU Corp. at or around the date of
grant. If participants leave TXU Europe before the awards vest, their
awards lapse.
Awards are subject to achieving certain performance criteria. There
is a deferral period from the end of the financial period in which the
awards were granted during which the participants must remain with TXU
Europe for their awards to become vested. For the awards granted in
1998, the deferral period for directors is one year. For the senior
managers, one-half of each award vested on January 1, 2000, with the
balance of the awards vesting on January 1, 2001. For the awards
granted in 2000 and 1999, the deferral period for directors is one year
and for the management group and senior managers is two years.
At the end of the deferral period, TXU Europe shall pay to the
participant, in cash, an amount equal to the higher of the stock price
of TXU Corp. at the end of the deferral period, or a guaranteed price.
The guaranteed price is the stock price used to calculate the awards
granted, adjusted for interest at 6% compounded annually up to the date
of payment, and accumulated dividends.
TXU Europe granted 168,461 awards in 2000, 190,820 awards in 1999 and
145,878 awards on September 1, 1998. For grants during 2000 and 1999
the stock price of TXU Corp. on the date of grant was pounds 21.971 and
pounds 28.06, respectively. For grants during the period May 19, 1998
through December 31, 1998 the stock price of TXU Corp. at May 19, 1998
of pounds 23.81 was utilized. The weighted average remaining contractual
life of awards outstanding at December 31, 2000 and 1999 was 22 months
and 18 months, respectively. At December 31, 2000 and 1999, the closing
market price of TXU Corp. common stock was $43.06 (pounds 28.83) and
$35.56 (pounds 22.00), respectively, per share.
In addition, TXU Europe also has the following employee share plans
(adopted in 1999):
(a) The TXU Europe Group Sharesave Scheme which is available to the UK-
based directors and employees of TXU Europe Group who devote more
than 25 hours a week to their duties. Employees who participate in
this scheme enter into a monthly savings contract, for either a
three- or five-year period. At the end of that period, a
A-47
participant may elect to apply the savings accumulated to the
purchase of shares of TXU Corp. common stock. The exercise price
for the three-year Sharesave Scheme was based on a 15% discount of
the TXU Corp. stock price of pounds 25.82 on or about July 16, 1999
(the initial invitation date or grant date) and the five year
Sharesave Scheme exercise price was based on a 20% discount.
(b) The TXU Europe Group Loyalty Reward Scheme, provides for grants for
the issuance of additional shares of TXU Corp. common stock to
participants in the Sharesave Scheme subject to the exercise of
options, and in proportion to the number of shares of stock acquired.
The changes in share awards outstanding were as follows:
Long-term
Sharesave Sharesave Loyalty Loyalty Long-term Incentive
Scheme Scheme Reward Reward Incentive Compensation
3 Years 5 Years 3 Years 5 Years Plan Plan
-------- --------- ------- ------- ---------- ------------
Balance - May 19, 1998 - - - - - -
Granted - - - - 145,878 -
Lapsed - - - - (1,785) -
-------- --------- ------- -------- -------- -------
Balance - December 31, 1998 - - - - 144,093 -
-------- --------- ------- -------- -------- -------
Granted 201,046 1,132,083 29,517 225,584 190,820 26,761
Lapsed - - - - (27,178) -
-------- --------- ------- -------- -------- -------
Balance - December 31, 1999 201,046 1,132,083 29,517 225,584 307,735 26,761
-------- --------- ------- -------- -------- -------
Granted - - - - 168,461 52,291
Lapsed (93,627) (531,284) (13,800) (105,994) (24,999) (21,297)
Exercised (13,436) (50,778) (1,889) (9,941) (90,429) -
-------- --------- ------- -------- -------- -------
Balance - December 31, 2000 93,983 550,021 13,828 109,649 360,768 57,755
======== ========= ======= ======== ======== =======
Exercisable - 2001 - - - - 47,102 -
Exercisable - 2002 93,983 - 13,828 - 170,204 -
Exercisable - thereafter - 550,021 - 109,649 143,462 57,755
Weighted average exercise price:
(in pounds )
Exercised 21.95 20.66 - - 24.22 -
Outstanding 21.95 20.66 - - 25.07 29.00
Weighted average fair value of
awards granted in:
(in pounds )
2000 - - - - 5.29 29.67
1999 8.41 11.37 25.82 25.82 5.76 26.67
1998 - - - - 4.28 -
In May 2000 and June 1999, awards of performance-related restricted
stock of TXU Corp. were made to certain officers and directors of TXU
Europe under the Long-Term Incentive Compensation Plan of TXU Corp. The
awards represented 52,291 shares and 26,761 shares, respectively, of TXU
Corp. common stock with a valuation price of pounds 29.67 and pounds
26.675 per share at the date of grant, which were issued subject to
performance and vesting requirements over a three- to five-year period.
Total compensation expense recognized under the various employee
share plans for 2000 and 1999 and the period from formation through
December 31, 1998 were pounds 8 million, pounds 7 million and pounds 1
million, respectively.
A-48
TXU Europe applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its employee share plans. TXU Europe determined the
potential impact of SFAS No. 123, "Accounting For Stock-Based
Compensation" with regard to the recognition of compensation expense.
Under SFAS 123, compensation expense is determined based upon the fair
value at the grant date for awards. Had compensation expense for TXU
Europe employee share plans been determined based upon the methodology
prescribed under SFAS 123, TXU Europe's income would not have been
significantly different from actual results.
14. TAXATION
The components of TXU Europe's income tax expense are as follows:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Current:
UK - 21 24 2
US (18) - 18 -
Other Countries 7 1 1 -
----- ----- ----- -----
(11) 22 43 2
Deferred:
UK 73 89 24 (7)
Other Countries 8 - - -
----- ----- ----- -----
Total income tax expense 70 111 67 (5)
===== ===== ===== ======
The components of TXU Europe's deferred tax assets and liabilities
are as follows:
December 31,
--------------------
2000 1999
------- ------
(pounds million)
Deferred tax assets:
Leased assets and related items 242 313
Tax loss carryforwards 23 10
Provision for unfavorable contracts
and other 245 100
------ ------
Total deferred tax assets 510 423
Valuation allowance fordeferred
tax assets (160) (162)
------ ------
Net deferred tax assets 350 261
------ ------
Deferred tax liabilities:
Excess of book value over taxation
value of fixed assets 206 194
Leased assets and related items 288 302
Other items 323 174
------ ------
Total deferred tax liabilities 817 670
------ ------
Net deferred tax liabilities 467 409
====== ======
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The recognized deferred tax asset is based upon the expected future
utilization of net operating loss carryforwards and the reversal of
other temporary differences. TXU Europe has recognized a valuation
allowance for those benefits for which realization does not meet the
more likely than not criteria. The valuation allowance has been
recognized in respect of leased assets. TXU Europe continually reviews
the adequacy of the valuation allowance and is recognizing these
benefits only as reassessment indicates that it is more likely than not
that the benefits will be realized.
There was no valuation allowance at formation (February 5, 1998). At
the date of acquisition of TEG (May 19, 1998), a valuation allowance of
pounds 130 million, was established for the deferred tax asset for the
book/tax capital asset related to leased assets. The valuation
allowance was increased by pounds 8 million in the period from May 19,
1998 to December 31, 1998, resulting in a balance of pounds 138 million
at December 31, 1998. For the year ended December 31, 1999, the
valuation allowance was increased by pounds 24 million, resulting in a
balance of pounds 162 million at December 31, 1999 and for the year
ended December 31, 2000 there was a release of pounds 2 million
resulting in the ending balance of pounds 160 million.
Income before income taxes:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Income before income
taxes:
UK 154 264 103 (27)
US - - 51 -
Other Countries 52 3 1 1
----- ----- ----- -----
Total income before income
taxes and minority interest 206 267 155 (26)
===== ===== ===== =====
United Kingdom income tax expense at the statutory tax rate is
reconciled below to the actual income tax expense:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Tax at UK statutory rate (30%
in 2000 and 1999 and 31%
for all other periods) 62 81 48 (8)
Non-deductible goodwill and depreciation 30 26 16 1
Effect of overseas tax rates - - 2 -
Effect of tax rate on UK dividends - - (4) -
Tax rate change - - (8) -
Distribution on preferred securities (2) - - -
Resolution of prior year tax matters (18) - - -
Movement in valuation allowance charged
to expense (2) 10 8 2
Other (6) (8) - -
Non-deductible expenses 6 2 5 -
----- ----- ----- -----
Income tax expense 70 111 67 (5)
===== ===== ===== =====
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page>
At December 31, 2000 and 1999, TXU Europe has net operating loss
carryforwards of pounds 23 million and pounds 10 million, respectively,
that are available to offset future taxable income. The net operating
loss carryforwards have no expiration date.
On July 31, 1998, legislation was enacted that decreased the United
Kingdom statutory income tax rate on companies by 1% with effect from
April 1, 1999. In accordance with the provisions of SFAS No. 109, the
assets and liabilities for deferred income taxes were adjusted to
reflect the expected reversal of certain temporary differences at the
lower income tax rate.
The tax effect of the components included in accumulated other
comprehensive income for the year ended December 31, 2000 was pounds 2
million and for the year ended December 31, 1999, for the period from
formation through December 31, 1998, and for the period from April 1,
1998 through May 18, 1998 was a tax benefit of pounds 3 million, pounds
2 million and pounds 1 million, respectively.
15. DERIVATIVES AND FINANCIAL INSTRUMENTS
TXU Europe is exposed to a number of different market risks including
changes in gas and electricity prices, interest rates and foreign
currency exchange rates. TXU Europe has developed a control framework
of policies and procedures to monitor and manage the exposures arising
from volatility in these markets. To implement these policies and
procedures, TXU Europe enters into various derivative instruments to
reduce its exposure to fluctuations in energy commodity prices, interest
rates and foreign exchange rates. Derivative financial instruments used
by TXU Europe include electricity contracts for differences, electricity
forward agreements, swaps, options, futures, interest rate swaps and
forward rate agreements, and foreign exchange futures, swaps and forward
purchase contracts. Both the energy management and the treasury
operations make use of these instruments, where such instruments are
authorized for use.
Electricity price risk management - TXU Europe Energy Trading engages
in price risk management activities for non-trading purposes and,
beginning in late 1999, for trading purposes.
Non-trading activities
UK Electricity - Electricity forward contracts are primarily used by
TXU Europe to hedge its exposure to future fluctuations in electricity
Pool prices in the UK. Under the current operating environment in the
UK, almost all electricity generated in England and Wales must be sold
to the wholesale electricity trading market in the UK (Pool), and
electricity suppliers must likewise generally buy electricity from the
Pool for resale to their customers.
The contracts bought and sold are contracts for differences and
electricity forward agreements that fix the price of electricity for an
agreed quantity and duration by reference to an agreed strike price.
Electricity forward agreements are similar in nature to contracts for
differences, except that they tend to last for shorter time periods and
are based on standard industry terms rather than being individually
negotiated. Long-term Contracts for differences are in place to hedge a
portion of the electricity to be purchased through 2009. The impact of
changes in the market value of these contracts, which serve as hedges,
is deferred until the related transaction is completed.
TXU Europe Energy Trading has also entered into a number of
agreements with third parties, under which it makes a variety of
payments related to a notional capacity of plant, fuel consumption and
operations in exchange for the receipt of revenues related to prevailing
Pool prices for a notional output. Certain of these contracts are used
for hedging purposes, and the impact of changes in the market value of
the contracts is deferred until settlement occurs under the contract.
The fair values of outstanding contracts for differences, electricity
forward agreements and other contracts held for non-trading purposes at
December 31, 2000 were out-of-the-money (negative) pounds 589 million
compared with in-the-money fair values (positive) of pounds 76 million
at December 31, 1999, calculated as the difference between the expected
value of the contracts for differences, electricity forward agreements
and other contracts and the current market value, based on an estimate
of forward prices for the term of the CfD, EFA or other contract. The
A-51
decrease in fair values from 1999 primarily reflects a decline in UK
Pool prices and a lengthening of the portfolio position. At December
31, 2000, the outstanding notional quantity of all electricity commodity
instruments under contracts held for non-trading purposes was 358 TWh of
electricity for periods to 2018. The market for the contracts for
differences and electricity forward agreements held for non-trading
purposes has not been liquid to date and there is no readily
identifiable market through which the majority of contracts for
differences or electricity forward agreements could be realized through
an exchange.
UK Gas and Coal - In order to help meet the expected needs of its
natural gas wholesale and retail customers and the fuel requirements of
its power stations, TXU Europe Group has entered into a variety of gas
and coal purchase contracts held for purposes other than trading. (See
Note 16 for further description of these commitments.) No derivatives
were used as of December 31, 2000 and 1999 to hedge the exposure of
these contracts to fluctuations in prices.
Trading Activities
In late 1999, TXU Europe Energy Trading began offering price risk
management services to customers through a variety of financial and
other instruments. Substantially all of the activities in continental
Europe (including the Nordic region) are for trading purposes with some
additional trading activities occurring in the UK. The continental
European trading portfolio consists of the sum of forward contracts (for
both power and gas), physical options and swap agreements. Power and
gas forward contracts allow TXU Europe to buy/sell contracts for
physical power relating to a future time period. During the year 2000,
TXU Europe also actively traded call / put options on physical power
relating to a future time period (in the same period only one financial
option on the German market was traded). Non-physical trades include
financial swaps in which TXU Europe trades with counterparties against a
published index price (e.g. Amsterdam Power Exchange - APX). UK trading
activities consist of limited trading of electricity forward agreements,
contracts for differences and other contractual arrangements. Contracts
entered into for trading purposes are recorded on a mark-to-market basis
with gains and losses recognized in earnings in the period in which such
valuation changes occur.
Electricity - During 2000 and 1999 there were net gains of pounds 50
million and pounds 23 million, respectively, recognized from trading
electricity commodity contracts or other derivatives. At December 31,
2000, the outstanding notional quantity of all electricity commodity
instruments under contracts held for trading purposes (net buys and
sells) was 29TWh for the period until 2005. The fair value of such
instruments at December 31, 2000 and 1999 was pounds 37 million and
pounds 10 million, respectively, and the average fair value for 2000 was
pounds 25 million and for 1999 was pounds 12 million.
Gas - During 2000, net gains of pounds 47 million were recognized
from trading gas commodity contracts or other derivatives in the UK and
mainland Europe, mainly the result of higher gas prices, compared with
net gains of pounds 0.1 million for 1999. At December 31, 2000, the
outstanding notional contract quantity of gas commodity instruments held
for trading purposes (net buys and sells) was 1,589 million Therms (0.2
Bcf) for periods to 2006. The fair value of such instruments at December
31, 2000 and 1999 was pounds 16 million and pounds 5 million,
respectively, and the average fair value for 2000 was pounds 5 million
and for 1999 was pounds 2 million.
Coal - In the coal business, TXU Europe enters into contracts for
the purchase and sale of coal primarily to assure supplies for
generation purposes but also to engage in trading activities. The
overall net exposure of TXU Europe to the coal spot market is managed by
using coal options and swaps. During 2000, net gains of pounds 3 million
were recognized from trading coal commodity contracts or other
derivatives. At December 31, 2000, the outstanding notional quantity of
commodity instruments under contracts held for trading purposes was 3.4
million tons of coal for periods to 2002. The fair value of such
instruments at December 31, 2000 was pounds 2 million, and the average
fair value for the year ended December 31, 2000 was less than pounds 1
million.
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The following table displays the mark-to-market values of the energy
trading risk management assets and liabilities:
December 31, 2000
----------------------------
Assets Liabilities Net
-------- ------------- ----
pounds millions
Fair Value:
Current 609 554 55
===== =====
Less reserves 1
-----
Net of reserves 54
=====
Average Value for Year 295 266 29
===== ===== =====
The fair value of open positions is included in Energy Trading Risk
Management Assets and Liabilities on the balance sheet. Gross revenue
and expenses from physically settled transactions are included in
revenues and operating expenses, respectively. Financially settled
transactions along with unrealized gains and losses from changes in the
fair value of the open positions are included in revenues on a net
basis.
OTHER NON-TRADING ACTIVITIES
Interest rate risk management - Interest rate swaps and forward rate
agreements are entered into only for non-trading purposes and are used
by TXU Europe to manage exposures to the market risk inherent in fixed
rate debt securities and the cash flow risk inherent in variable rate
securities. Gains and losses from interest rate swaps are accrued over
the contract period.
At December 31, 2000 and 1999, TXU Europe had various interest rate
and currency swaps in effect with an aggregate notional amount of US$1.5
billion (pounds 921 million) that effectively convert the fixed rate
Senior Notes payable in US dollars to a fixed rate debt payable in
pounds sterling. These swaps mature on the dates of the underlying
notes, and have a weighted average fixed pay rate of 6.61% plus a
margin. TXU Europe also had various other interest rate swaps as
required by the Sterling Credit Agreement and to hedge certain of its
borrowings from a variable to a fixed rate. The aggregate notional
amount of these interest rate swaps was pounds 839 million at December
31, 2000 and pounds 800 million at December 31, 1999, maturing in 2001
through 2008 with average fixed rates of 6.69% and 5.55% at December 31,
2000 and 1999, respectively.
At December 31, 1999, there were approximately pounds 15 million in
forward rate agreements outstanding which matured in the first few days
of January 2000. There were no forward rate agreements outstanding at
December 31, 2000.
Foreign currency risk management - TXU Europe has exposure to foreign
currency movements and uses derivative financial instruments that are
entered into only for non-trading purposes to manage this exposure
(principally on US$ denominated debt and investments in European
countries). The instruments used are forward purchase contracts and
swaps. The policy with regard to any such exposures is to match assets
owned in foreign countries with borrowings in that same currency. Where
there are firm commitments to purchase goods in a specific currency then
forward contracts, options or swaps are used to fix the exchange rate.
There were no options outstanding at December 31, 1999. Foreign
currency transaction losses were pounds 1.4 million for 2000 and were
pounds 8 million for 1999, and were less than pounds 1 million for the
period from formation through December 31, 1998 and for the period from
April 1, 1998 through May 18, 1998, respectively.
TXU Europe has entered into currency arrangements with respect to the
principal and semi-annual interest payments on US$ 500 million of bonds
to swap from dollars to pounds sterling. For the principal payments,
TXU Europe entered into a forward foreign currency contract to acquire
US$200 million and US$300 million in October 2017 and October 2027,
respectively, for approximately pounds 218 million. The difference
between the forward rate and the spot rate at inception of the contract
(a foreign currency gain of approximately pounds 92 million) is being
amortized to income over the life of the contract. For interest payments
A-53
on the US$200 million 7.425% notes due 2017 and the $300 million 7.55%
notes due 2027, the contracts set the exchange rate between sterling and
US$ at $1.605 and $1.625, respectively.
As mentioned above, TXU Europe has entered into currency swaps that
fix the principal amount and interest payments on the US$1.5 billion of
Senior Notes to be repaid in sterling (pounds 921million) at a weighted
average exchange rate between sterling and US$ of $1.629.
In November 1999, TXU Europe entered into a gilt lock (foreign
currency/interest rate) contract to hedge a notional amount of pounds
230 million on the anticipated issuance of a financing issue. The
anticipated transaction did not close before December 31, 1999. The
contract was ended in January 2000 and the resulting gain of
approximately pounds 8 million was recognized to other - income in 2000
as the financing issue failed to qualify for hedge accounting.
Concentrations of credit risk - TXU Europe's financial instruments
that are exposed to concentrations of credit risk consist primarily of
cash equivalents, trade receivables and derivative contracts.
TXU Europe's trade receivables result primarily from its gas and
electricity retail operations and reflect a broad customer base
including industrial, commercial and residential customers.
Credit risk relates to the risk of loss that TXU Europe would incur
as a result of non-performance by counterparties to their respective
derivative instruments. TXU Europe maintains credit policies with
regard to its counterparties that enable management to minimize overall
credit risk. TXU Europe generally does not obtain collateral to support
the agreements but establishes credit limits, monitors the financial
viability of counterparties and seeks guarantees when appropriate. In
the event a counterparty's credit rating declines, TXU Europe may apply
certain remedies, if considered necessary. TXU Europe believes that it
has established adequate reserves in regard to the risk of
nonperformance by counterparties. The extent of this exposure varies
with the prevailing interest and currency rates and was not material
throughout the period.
Approximately 42% and 38% by volume of TXU Europe's contracts for
differences (CfDs) and electricity forward agreements (EFAs) traded in
the periods ended December 31, 2000 and 1999, respectively, were
contracted with two primary counterparties. The risk of loss to TXU
Europe arising from non-performance by these counterparties is
considered unlikely.
A-54
Fair value of financial instruments - The carrying amounts and
related estimated fair values of TXU Europe's significant financial
instruments were as follows:
December 31,
---------------------------------------
2000 1999
----------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(p ounds million)
On balance sheet assets
(liabilities):
Assets
Restricted cash 672 672 740 740
Other investments 695 695 520 520
CfDs, EFAs and other energy contracts 37 37 - 10
- trading - net
Gas commodity contracts - net 16 16 - 5
Coal trading contracts - net 2 2 - -
Liabilities
Notes payable - banks (current) (525) (525) (251) (251)
Short term loans on accounts receivable (5) (5) (177) (177)
Total long-term debt, excluding
capital leases (4,597) (4,602) (3,995) (4,026)
CfDs, EFAs and other energy
contracts - non-trading (501) (589) - 76
Off balance sheets assets (liabilities):
Interest rate swaps - (64) - (51)
Foreign currency exchange contracts - 101 - (23)
Financial guarantees and letters
of credit - (655) - (271)
Call options on Resettable - 31 - -
The carrying amounts for financial assets and financial liabilities
classified as current assets and current liabilities approximate fair
value due to the short maturity of such instruments.
The following methods and assumptions were used to determine the
above fair values:
(i) The fair value of other investments is estimated based on quoted
market prices where available and other estimates.
(ii) The carrying amounts of restricted cash, notes payable - banks and
short term loans on accounts receivable approximate their fair
values because of the short maturity of these instruments.
(iii) The fair value of long term debt varies with market conditions
and is estimated based on current rates for similar financial
instruments offered to TXU Europe.
(iv) The fair value of the interest rate swaps is based on the
cancellation value of each swap agreement independently calculated
by reference to the forward sterling interest rate curve for the
unexpired portion of the swap.
(v) The fair value of foreign currency exchange contracts is based upon
valuations provided by the counterparty.
(vi) The fair value of the gas commodity contracts is based on the net
present value of discounted future cash flows in accordance with
underlying gas forward curves.
A-55
(vii) The fair value of CfDs, EFAs and other energy contracts
is based upon a discounted cash flow analysis using an estimate
of forward energy prices.
(viii) The fair value of financial guarantees and letters of credit has
been determined using their full notional amount.
16. COMMITMENTS
Gas take-or-pay contracts - TXU Europe is party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay"
obligations under which the buyer agrees to pay for a minimum quantity
of gas in a year. To offset some of the exposures within its overall
natural gas portfolio, which also includes a range of wholesale and
retail customers, including TXU Europe Group's own power stations, TXU
Europe Group has entered into a variety of longer term gas purchase
contracts. At December 31, 2000, the commitments under long-term
purchase contracts amounted to an estimated pounds 633 million, covering
periods up to 8 years. Management does not consider
it likely, on the basis of current expectations of demand from
customers, that any material payments will become due for gas not taken.
Coal contracts - TXU Europe has two coal purchase agreements with a
supplier. The first agreement is for 21 million tons in total through
2003. The second agreement is also for 21 million tons in total between
2003 and 2009. Total committed purchases under these contracts were
approximately pounds 1.4 billion at December 31, 2000.
Capacity payments and guarantee - TXU Europe Energy Trading has
several contracts requiring the payment of annual capacity fees. Under
the terms of these contracts, TXU Europe Energy Trading will pay
(subject to contract terms) annual capacity fees of pounds 318 million
in 2001, pounds 346 million in 2002, pounds 373 million in 2003, pounds
389 million in 2004, pounds 389 million in 2005 and pounds 3,220 million
thereafter. In addition, TXU Europe Group will provide a pounds 300
million guarantee (declining over time) representing approximately one
year's capacity payment, with the counterparty providing a pounds 170
million guarantee.
Rental commitments - The future minimum rental commitments under
non-cancelable operating leases were as follows:
December 31
(pounds million)
2001 33
2002 36
2003 31
2004 29
2005 1
Thereafter 3
----
Total 133
====
The operating lease commitments relate to coal-fired power stations.
Additional output-related payments of approximately pounds 6 per MWh,
indexed to inflation, were payable under the original lease, to PowerGen
for the first four years of operation by TXU Europe Group. As a
A-56
condition for the UK Secretary of State for Trade and Industry allowing
PowerGen to acquire East Midlands Electricity plc, the output-related
elements of these lease arrangements were terminated 15 months early.
Therefore output-related payments to PowerGen ended on March 31, 2000.
Rental expense for operating leases amounted to pounds 24 million,
pounds 23 million and pounds 16 million for the periods ended
December 31, 2000, 1999 and 1998, respectively. Rental expense for
operating leases on the power stations during the periods ended
December 31, 2000, 1999 and 1998 includes pounds 17 million, pounds 17
million and pounds 10 million, respectively, of minimum lease payments
and pounds 6 million, pounds 6 million and pounds 6 million,
respectively, of variable lease payments. For the period ended May 18,
1998, operating lease rental expense was pounds 10 million, including
pounds 6 million of minimum lease payments and pounds 4 million of
variable payments.
Other - TXU Europe Group received government consent to build a 215
megawatt (MW) combined heat and power plant for which there is a
commitment of pounds 23 million, most of which falls due in 2001.
Estimated capital expenditure on environmental control facilities is
pounds 54 million in 2001, pounds 36 million in 2002 and pounds 9
million in 2003.
17. CONTINGENCIES
TXU Europe is subject to business risks that are actively managed to
limit exposures.
Legal proceedings - In February 1997, the official government
representative of pensioners (Pensions Ombudsman) made a final
determination against the National Grid Company plc (National Grid) and
its group trustees with respect to complaints by two pensioners in
National Grid's section of the Electricity Supply Pension Scheme (ESPS).
The determination related to the use of the pension fund surplus
resulting from the March 31, 1992 actuarial valuation of the National
Grid section to meet certain costs arising from the payment of pensions
on early retirement upon reorganization or downsizing. This
determination was set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing
with the surplus were confirmed. The two pensioners appealed this
decision to the Court of Appeal, and judgment was received. The judgment
endorsed the Pensions Ombudsman's determination that the corporation was
not entitled to unilaterally deal with any surplus. National Grid
appealed the decision to the House of Lords. The appeal has been heard
and judgement is expected to be handed down in the second quarter of
2001. If a similar complaint were to be made against TXU Europe Group
in relation to its use of actuarial surplus in its section of the ESPS,
it would vigorously defend the action, ultimately through the courts.
However, if a determination were finally to be made against it and
upheld by the courts, TXU Europe Group could have a potential liability
to repay to its section of the ESPS an amount estimated by TXU Europe
Group to be up to pounds 45 million, exclusive of any applicable
interest charges.
TXU Europe Group's section of the Electricity Supply Pension Scheme
remains in substantial surplus and any payment to the plan that might
ultimately prove to be necessary would be accounted for as an increase
in pension assets, and would not have an immediate impact on income.
However, any related penalties or interest (which could be assessed,
though none are currently proposed) would adversely affect income.
There can be no assurance as to the outcome of this matter.
On January 25, 1999, the Hindustan Development Corporation (HDC)
issued arbitration proceedings in the Arbitral Tribunal in Delhi, India
against TEG (now Energy Holdings (No.3) Limited), claiming damages of
pounds 255 million for breach of contract following the termination of a
Joint Development Agreement dated March 20, 1997 relating to the
construction, development and operation of a lignite based thermal power
plant at Barsingsar, Rajasthan. On November 21, 2000, the Arbitrators
issued their decision and dismissed HDC's claim in full, and TEG was
liable only for its own legal costs involved in the case, an estimated
pounds 1 million. On December 21, 2000, HDC filed a Request for
Clarification of the Arbitrators' decision (Request) under Section 33 of
the Arbitration and Conciliation Act, the purpose of which is to entitle
a party to arbitration to seek clarification of language used in the
Arbitrators' decision. TEG filed its response to the Request on January
15, 2001 asserting that the Request was untimely made and that the
language used by the Arbitrators needed no clarification. TXU Europe
believes that the Arbitrators will have no alternative but to dismiss
the Request. The effect of filing the Request, however, has been to
stay the time HDC has to file an appeal of the Arbitrators' decision.
A-57
In August 2000, the Spanish Stock Market Commission announced it was
opening an investigation as to whether TXU Europe and Electrabel acted
in concert over share purchases of Hidrocantabrico in order to avoid
making a formal takeover bid. TXU Corp. was originally named as a party
but is seeking its removal from these proceedings. If the two utilities
are found to be in violation of Spanish securities law, they could face
a substantial fine and other restrictions. The investigation could last
until February 2002. TXU Europe is unable to determine what impact
there may be, if any, as a result of the investigation. TXU Europe and
TXU Corp. believe there has been no violation of Spanish securities laws
and are fully cooperating with the investigation.
General - In addition to the above, TXU Europe and its subsidiaries
are involved in various other legal and administrative proceedings
arising in the ordinary course of its business. TXU Europe believes
that all such other lawsuits and resulting claims would not have a
material effect on its financial position, results of operations or cash
flows.
Financial guarantees - On May 19, 1998, TEG sold its US and
Australian coal businesses and US energy marketing operations (Peabody
Sale) prior to its acquisition by TXU Corp. TEG has guaranteed up to
US$110 million (pounds 74 million) at December 31, 2000 of certain
liabilities that may be incurred and payable by the purchasers of these
businesses and operations with respect to the Peabody Holding Company
Retirement Plan for Salaried Employees, the Powder River Coal Company
Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject to
certain specified conditions.
TEG entered into various guarantees of obligations of affiliates of
its former subsidiary Citizens Power LLC, arising under power purchase
agreements and note purchase agreements in connection with various
Citizens Power energy restructuring projects, as well as various
indemnity agreements in connection with such projects. TXU Europe and
TEG continue to be either the guarantor or the indemnifying party, as
the case may be, under these various agreements.
18. SEGMENTS
TXU Europe has two major businesses, energy and networks, which are
comprised of three reportable operating business segments.
Each segment has been identified on the basis of the underlying
nature of the business and its customer base and the different product
or services offered. The segments are managed separately because each
business requires different strategies and the corresponding necessary
skill sets, e.g., engineering, portfolio management and customer
services. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The energy retail business segment provides electricity and gas to UK
residential, industrial and commercial customers. It also has commenced
retailing joint ventures in continental Europe. The portfolio trading
and power (formerly the energy management and generation) business
segment manages an integrated portfolio of contracts and physical gas
and generation assets. The contracts include supplying the energy
retail business with electricity and gas as well as contracts with third
party energy retailers, traders and wholesalers. The networks business
segment owns and manages the electricity distribution system, and its
principal customer base is energy retail and other electricity
suppliers. The other category consisted of two other businesses,
metering and telecoms, which fell below the quantitative thresholds for
determining reportable segments. The metering business was sold in
2000, and the telecoms business was sold in 1998. TXU Europe accounts
for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.
Beginning in 2000, as reflected in the tables below, the income
contribution for each segment includes operating and other income on a
US GAAP basis, before interest, income taxes, distributions and minority
interests, and after deducting a notional charge for the cost of capital
(income before interest). Amounts for the prior periods have been
reclassified to conform to the new presentation.
A-58
Capital/investment expenditures includes all items of capital and
investment expenditures including European equity investments, but
excludes proceeds on the sale of investments. The cost of capital is
calculated as 0.5% per month on working capital and is eliminated on
consolidation. Overhead costs, such as those incurred by the
headquarters office and core costs related to information technology,
and goodwill amortization are not allocated among the segments but are
reflected in unallocated corporate costs.
Portfolio
Trading Intersegment
Energy And Total All Eliminations/
Retail Power Energy Networks Other Reconciliation Consolidate
-------- ------- ------- --------- ------- -------------- -----------
(pounds million)
Trade
Revenues
2000 2,155 2,349 4,504 371 17 (221) 4,671
1999 2,219 1,425 3,644 429 18 (338) 3,753
Dec-98 1,346 746 2,092 253 31 (211) 2,165
May-98 262 145 407 53 6 (41) 425
Contribution (a)
2000 78 263 341 150 56 (30)(b) 517
1999 (25) 409 384 175 4 (12)(c) 551
Dec-98 (15) 218 203 100 48 9(d) 360
May-98 (5) (13) (18) 21 (2) (11)(e) (10)
Capital/Investment
/Investment
Expenditures
2000 8 129 137 110 1 218 466
1999 10 423 433 114 3 117 667
Dec-98 21 61 82 82 17 214 395
May-98 6 6 12 31 35 - 78
Periods covered:
2000 = Year ended December 31, 2000
1999 = Year ended December 31, 1999
Dec-98 = Period from formation through December 31, 1998
May-98= Period from April 1, 1998 through May 18, 1998
(a)The following is a reconciliation of contribution to amounts reflected
in the income statement:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Total Contribution by segments 547 563 351 1
----- ----- ----- -----
Cost of capital elimination 146 141 86 17
Unallocated corporate costs (176) (153) (77) (28)
----- ----- ----- -----
Total reconciling items (30)(b) (12)(c) 9(d) (11)(e)
----- ----- ----- -----
Income before interest,
income taxes and
minority interest 517 551 360 (10)
===== ===== ===== ======
A-59
Other information required to be disclosed by SFAS No. 131 is not
presented because it is not readily available for presentation, and TXU
Europe would incur excessive costs to develop such information.
The accounting policies for the segments are the same as those
described in the summary of significant accounting policies.
Revenues are attributed to countries based on location of customers.
There are no revenues for transactions with a single external customer
that are 10% or more of TXU Europe's revenue. The Pool is not
considered by TXU Europe to be an external customer, as all electricity
generated is sold into the Pool and is subsequently repurchased from the
Pool for resale.
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Revenues
UK 4,377 3,691 2,150 422
Other countries 294 62 15 3
------ ------ ------ ------
Total 4,671 3,753 2,165 425
====== ====== ====== ======
December 31,
----------------------
2000 1999
-------- --------
(pounds million)
Long- lived assets:
--------------------
United Kingdom 2,717 2,656
Other countried 64 62
------ ------
Total 2,781 2,718
====== ======
19. QUARTERLY FINANCIAL INFORMATION - (UNAUDITED)
In the opinion of TXU Europe, for the information below includes all
adjustments (constituting only normal recurring accruals) necessary to a
fair statement of such amounts.
Consolidated
Operating Operating Net Income
Revenues Income (Loss)
-------------- -------------- --------------
Quarter Ended 2000 1999 2000 1999 2000 1999
------ ------ ----- ------ ------ ------
(pounds million)
March 31 1,151 1,173 151 168 46 57
June 30 821 813 86 120 32 19
September 30 1,013 700 61 66 (2) (5)
December 31 1,686 1,067 145 189 44 67
------ ------ ----- ----- ----- -----
4,671 3,753 443 543 120 138
====== ====== ===== ===== ===== =====
A-60
Reconciliation to previously reported amounts -
Quarter Ended
---------------
March June
31 30
2000 2000
------ -----
pound millions
Operating Income
As reported 146 81
Impact of:
Change in depreciation 5 5
----- ----
As restated 151 86
===== ====
Net Income:
As reported 33 26
Impact of:
Cumulative effect of change in depreciation 7 -
method (net of tax)
Change in depreciation 4 4
Change in minority interest 2 2
---- ----
As restated 46 32
==== ====
In the quarter ended September 30, 2000, TXU Europe implemented a
change in the depreciation method for its distribution system assets as
of December 31, 1999. (See Note 3.) Results for the previous quarters
of 2000 were restated to reflect the increase in net income resulting
from the adoption of the new accounting method - pounds 1.3 million
after-tax increase for the three months ended March 31, 2000 and pounds
1.3 million after-tax increase for the three months ended June 30, 2000.
Also in the quarter ended September 30, 2000, TXU Europe revised the
estimated useful economic lives of its distribution system assets. The
effect of the change in estimate is not significant for the quarter
ended September 30, 2000 and is not expected to be significant on an
annual basis.
Minority interest - In the third quarter 2000, TXU Europe
recalculated the minority interest in TXU Finance (No.2) Limited held by
another subsidiary of TXU Corp. Results for the previous quarters of
2000 were restated to reflect the increase in net income resulting from
the revisions in the minority interest calculations - pounds 2 million
increase in each of the quarters ended March 31, 2000 and June 30, 2000,
respectively.
20. MISCELLANEOUS
Restructuring costs - During 2000, TXU Europe recorded restructuring
charges and other costs of approximately pounds 79 million pre-tax
(pounds 55 million after-tax). Of this amount, pounds 72 million pre-
tax (pounds 50 million after-tax) of restructuring costs were charged
to operation and maintenance expense and the remainder was charged to
depreciation expense.
The restructuring costs were primarily a result of the creation of
the 24seven joint venture and for certain other staff reorganizations.
As of December 31, 2000, TXU Europe had recorded pre-tax redundancy
costs of approximately pounds 35 million related to termination
benefits for 958 employees that have accepted the benefits. In
addition, other pre-tax restructuring charges consisted of pounds 16
million of asset writedowns and pounds 28 million of other exit costs.
Further restructuring charges are expected to be incurred through the
end of 2001. As of December 31, 2000, pounds 32 million of redundancy
costs and pounds 11 million of other exit costs charged during the year
then ended have been paid. Separate redundancy costs associated with
the termination benefits of employees of the recently acquired Norweb
Energi were included as liabilities assumed in the acquisition. (See
Note 1.)
A-61
Other income - net - Consists of the following for the periods
indicated:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
Dividends from cost investments 3 9 5 -
Gain on sale of investments 36 - - -
Gain on the sale of business 29 - 13 -
Foreign currency transaction
gain (loss) 1 (8) - -
Dividends from marketable
securities 6 2 26 -
Equity in earnings of unconsolidated
subsidiaries and joint ventures 6 - - -
Hidrocantabrico offer costs (7) - - -
Other - 5 - 1
Undistributed equity in
earnings of TEG - - 2 -
----- ----- ----- -----
Total 74 8 46 1
===== ===== ===== =====
Accounts receivable - At December 31, 2000 and 1999 accounts
receivable are stated net of uncollectible accounts of pounds 31
million and pounds 21 million, respectively. A provision for
uncollectible accounts of pounds 21 million, pounds 17 million and
pounds 11 million was recorded during the years ended December 31, 2000
and 1999 and for the period from formation through December 31, 1998,
respectively. An additional pounds 8 million was added in 2000 relating
to accounts receivable purchased in connection with the acquisition of
Norweb Energi. TXU Europe did not realize any material recoveries
during those periods. TXU Europe wrote off accounts receivable of
pounds 19 million, pounds 18 million and pounds 3 million during the
years ended December 31, 2000 and 1999 and for the period from formation
through December 31, 1998, respectively. For the period from April 1,
1998 through May 18, 1998, TXU Europe recorded a provision for
uncollectible accounts of pounds 2 million, did not realize any material
recoveries and wrote off accounts receivable of pounds 1 million.
Inventories -
December 31,
-------------------
2000 1999
------ ------
pounds millions
Inventories - at average cost:
Materials and supplies 24 32
Fuel stock 48 90
----- -----
72 122
===== =====
Goodwill - Goodwill is stated net of accumulated
amortization of pounds 240 million in 2000 and pounds 138
million in 1999.
A-62
Property, Plant and Equipment - consisted of:
December 31,
--------------------
2000 1999
------ ------
(pounds million)
Electricity distribution system 1,341 1,227
Electricity generating stations:
Owned 519 409
Under capital lease 775 775
Upstream gas assets (sold in
February 2001) 144 145
Other land and buildings 104 105
Plant and equipment 296 319
Accumulated depreciation (398) (262)
------ ------
Net property, plant and equipment 2,781 2,718
====== ======
The net book value of electricity generating stations under capital
lease was pounds 659 million and pounds 697 million at December 31, 2000
and 1999, respectively.
Capitalized software costs totaling pounds 25 million and pounds 24
million as of December 31, 2000 and 1999, respectively, are included in
plant and equipment. Amortization expense relating to software costs of
pounds 4 million and pounds 2 million has been recorded in 2000 and
1999, respectively. No amortization expense was recorded in the periods
prior to December 31, 1998. An additional pounds 4 million of software
costs associated with businesses that had been sold was written off in
2000.
Letters of credit - At December 31, 2000 and 1999, TXU Europe had
outstanding letters of credit of pounds 281 million and pounds 3
million, respectively. The letters of credit at December 31, 2000 are
primarily to cover the potential termination values on cross border
leases and to an option to provide future energy sales.
Cash flows - The following schedule details TXU Europe's cash-flow
impact on certain investing activities:
Period from
Year Ended Formation Period From
December 31, Through April 1, 1998
----------------- December 31, Through
2000 1999 1998 May 18, 1998
------- ------ ------------- --------------
(pounds million)
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for interest 273 253 223 5
Cash paid for income taxes 28 19 137 -
NON-CASH TRANSACTIONS
Acquisition of Norweb Energi and
Other Businesses:
Fair value of assets acquired 302 - - -
Fair value of liabilities
assumed (605) - - -
Goodwill 622 - - -
-------
Net cash used 319 - - -
=======
Investment received in
consideration for sale - - 22 -
Consolidation of debt and related 170
investment on cross-border leases - - -
Issuance of loan notes upon
acquisition of TEG - - 85 -
Advances from TXU Corp. upon
acquisition of TEG - - 882 -
APPENDIX B
TXU EUROPE LIMITED
Exhibits to 2000 Form 10-K
Previously
Filed*
Exhibit With File As
Number Exhibit
3(a) 333-82307 3(a) - Memorandum of Association of
and 333- TXU Eastern Funding Company.
82307-1
3(b) 333-82307 3(b) - Articles of Association of
and 333- TXU Eastern Funding Company.
82307-1
3(c) 333-82307 3(c) - Memorandum of Association of
and 333- TXU Europe Limited.
82307-1
3(d) 333-82307 3(d) - New Articles of Association
and 333- of TXU Europe Limited.
82307-1
4(a) 333-82307 4(a) - Indenture (For Unsecured
and 333- Debt Securities) dated May 1,
82307-1 1999.
4(b) 333-82307 4(b) - Officer's Certificate
and 333- establishing 6.15% senior notes
82307-1 due May 15, 2002 and 6.15%
exchange senior notes due May 15,
2002, with the forms of notes
attached thereto.
4(c) 333-82307 4(c) - Officer's Certificate
and 333- establishing 6.45% senior notes
82307-1 due May 15, 2005 and 6.45%
exchange senior notes due May 15,
2005, with the forms of notes
attached thereto.
4(d) 333-82307 4(d) - Officer's Certificate
and 333- establishing 6.75% senior notes
82307-1 due May 15, 2009 and 6.75%
exchange senior notes due May 15,
2009 with the forms of notes
attached thereto.
4(e) 333-82307 4(f) - Deposit Agreement with
and 333- respect to the senior notes and
82307-1 the exchange senior notes.
4(f) 1-12833 4(rrr) - Amended and Restated Trust
Form 10-K Agreement, dated as of March 2,
(1999) 2000, among TXU Business Services
Company, TXU Europe Limited, TXU
Europe CP, Inc., and The Bank of
New York, The Bank of New York
(Delaware), and the
Administrative Trustees of TXU
Europe Capital I.
4(g) 1-12833 4(sss) - Amended and Restated
Form 10-K Partnership Agreement of Limited
(1999) Partnership, dated as of March 2,
2000, of TXU Europe Funding I,
L.P.
4(h) 1-12833 4(ttt) - Preferred Trust Securities
Form 10-K Guarantee, dated as of March 2,
(1999) 2000, between TXU Europe Limited
and The Bank of New York.
4(i) 1-12833 4(uuu) - Preferred Partnership
Form 10-K Securities Guarantee, dated as of
(1999) March 2, 2000, between TXU Europe
Limited and The Bank of New York.
4(j) 1-12833 4(vvv) - Indenture (for Unsecured
Form 10-K Subordinated Debt Securities),
(1999) dated as of March 2, 2000, among
Funding, TXU Europe Limited and
The Bank of New York.
4(k) 1-12833 4(www) - Officer's certificate, dated
Form 10-K as of March 2, 2000, establishing
(1999) the terms of the 9 3/4% Junior
Subordinated Deferrable Interest
Debentures, Series A, due March
2, 2020, of Funding.
4(l) 1-12833 4(xxx) - Deposit Agreement, dated as
Form 10-K of March 2, 2000, between The
(1999) Bank of New York and Funding.
4(m) 1-12833 4(yyy) - Indenture (for Unsecured
Form 10-K Subordinated Debt Securities)
(1999) dated as of March 2, 2000, among
TXU Europe Group, TXU Europe
Limited and The Bank of New York.
4(n) 1-12833 4(zzz) - Officer's Certificate, dated
Form 10-K as of March 2, 2000, establishing
(1999) the terms of the 9 3/4% Junior
Subordinated Deferrable Interest
Debentures, Series A, due March
2, 2020 of TXU Europe Group.
4(o) 1-12833 4(A) - Deposit Agreement, dated as
Form 10-K of March 2, 2020, between The
(1999) Bank of New York TXU Europe Group
plc.
4(p) 333-8008 4.1 - Indenture, dated as of
and October 16, 1997, among Energy
333-8008-1 Group Overseas B.V. (EGO), The
Energy Group PLC and The Bank of
New York, as Trustee.
4(q) 333-8008 4.2 - Form of 7.375% Series B
and Guaranteed note of EGO due 2017.
333-8008-1
4(r) 333-8008 4.3 - Form of 7.500% Series B
and Guaranteed note of EGO due 2027.
333-8008-1
4(s) 1-12833 4(B) - Trust Deed relating to a
Form 10-K Euro 2,000,000,000 Euro Medium
(1999) Term Note Programme (EMTN
Program) between Funding, TXU
Europe Limited and the Law
Debenture Trust Corporation,
dated December 15, 1999.
4(t) 1-12833 4(C) - Pricing Supplement with
Form 10-K respect to pounds 225,000,000
(1999) 7.25% Notes due 2030 issued
pursuant to the EMTN Program.
4(u) 001-15709 4(a) - Pricing Supplement with
Form 10-Q respect to pounds 100,000,000
(Quarter 6.88% Notes due 2001 issued
ended pursuant to the EMTN Program.
September
30, 2000)
4(v) 001-15709 4(b) - Pricing Supplement with
Form 10-Q respect to pounds 50,000,000
(Quarter 7.25% Notes due 2030 issued
ended pursuant to the EMTN Program.
September
30, 2000)
4(w) - - - Pricing Supplement, dated
November 27, 2000, with respect
to pounds 301,000,000 35 PUT 5
Resettable Securities due 2035
issued pursuant to the EMTN
Program.
4(x) - - - First Supplemental Trust
Deed, dated November 29, 2000,
with respect to pounds
301,000,000 35 PUT 5 Resettable
Securities due 2035 issued
pursuant to the EMTN Program.
4(y) - - - Remarketing Agreement, dated
November 29, 2000, relating to
the 35 PUT 5 Resettable
Securities due 2035 issued
pursuant to the EMTN Program.
10(a) 1-12833 10(a) - Facilities Agreement for
Form 10-Q pounds 1,275,000,000 Credit
(Quarter Facilities, dated March 24, 1999
ended (Sterling Credit Agreement),
March 31, among TXU Europe Limited, TXU
1999) Finance (No. 2) Limited, TXU
Acquisitions Limited, Chase
Manhattan Bank plc, Lehman
Brothers International (Europe),
Merrill Lynch Capital Corporation
and the other banks named
therein.
10(b) 001-15709 10(a) - Agreement dated August 23,
Form 10-Q 2000, supplemental to the
(Quarter Sterling Credit Agreement
ended
September
30, 2000)
10(c) 001-15709 10(b) - 364-day Revolving Credit
Form 10-Q Agreement for pounds 300,000,000
(Quarter dated August 23, 2000, among TXU
ended Europe Limited, Chase Manhattan
September plc, Chase Manhattan
30, 2000) International Limited and the
other banks named therein.
10(d) 1-12833 99(a) - Facility Agreement for
Form 10-Q pounds 250,000,000 Revolving
(Quarter Credit Facility, dated May 21,
ended 1998, among Eastern Electricity
September plc (EE), and Chase Manhattan
30, 1998) plc, Lehman Brothers
International and Merrill Lynch
Capital Corporation as Joint Lead
Arrangers, and The Chase
Manhattan Bank, Lehman Commercial
Paper Inc. and Merrill Lynch
Capital Corporation as
Underwriters.
10(e) 1-14576 3.10 - Deed of Assignment of Rents,
Form 20-F, dated as of October 28, 1996,
dated among EMPL (EMPL), Eastern Group
January Finance Limited, Barclays Bank
27, 1997 PLC (as agent) and the banks
listed therein.
10(f) 1-14576 3.12 - Guarantee and Indemnity
Form 20-F, Deed, dated as of October 28,
dated 1996, among Eastern Group,
January Eastern Generation Limited (EGL),
27, 1997 EE, Barclays Bank PLC, Barclays
De Zoete Wedd Limited, and the
other banks listed therein.
10(g) 333-82307 10(f)-2 - Amendment dated July 17,
and 333- 1998 to the Guarantee and
82307-1 Indemnity Deed, dated as of
October 28, 1996, among Eastern,
EGL, EE, Barclays Bank PLC,
Barclays De Zoete Wedd Limited,
and the other banks listed
therein.
10(h) 333-82307 10(f)-3 - Amendment dated March 11,
and 333- 1999 to the Guarantee and
82307-1 Indemnity Deed dated as of
October 28, 1996 (as amended and
restated on July 17, 1998), among
Eastern Group, EGL, EE, Barclays
Bank PLC, Barclays De Zoete Wedd
Limited, and the other banks
listed therein.
10(I) 1-14576 3.11 - Standby Credit Facility
Form 20-F, Agreement, dated as of October
dated 28, 1996, among EMPL and Eastern
January Merchant Generation Limited
27, 1997 (EMGL) (as borrowers), Eastern
Group and EGL (as guarantors),
EE, The Industrial Bank of Japan,
Limited (as arranger and agent),
The Bank of Nova Scotia, the Dai-
ichi Kangyo Bank, Limited, The
Royal Bank of Scotland plc and
Societe Generale (as co-
arrangers), and the financial
institutions listed therein.
10(j) 333-82307 10(g)-1 - Supplemental Agreement dated
and 333- July 17, 1998 to the Standby
82307-1 Credit Facility dated October 28,
1996 among EMPL and EMGL (as
borrowers), Eastern and EGL (as
guarantors), EE, Barclays Capital
and The Royal Bank of Scotland
plc (as arrangers), The Bank of
Nova Scotia, Bayerische
Landesbank Girozentrale, The Dai-
Ichi Kangyo Bank, Limited, Den
Danske Bank Aktieselskab,
Nationsbank, N.A., Royal Bank of
Canada Europe Limited, The
Toronto-Dominion Bank and
Westdeutsche Landesbank
Girozentrale (as co-arrangers),
The Royal Bank of Scotland plc
(as agent), and the financial
institutions listed therein.
10(k) 333-82307 10(g)-2 - Amendment dated March 11,
and 333- 1999 to the Supplemental
82307-1 Agreement dated July 17, 1998 to
the Standby Credit Facility dated
October 28, 1996 among EMPL and
EMGL (as borrowers), Eastern and
EGL (as guarantors), EE, Barclays
Capital and The Royal Bank of
Scotland plc (as arrangers), The
Bank of Nova Scotia, Bayerische
Landesbank Girozentrale, The Dai-
Ichi Kangyo Bank, Limited, Den
Danske Bank Aktieselskab,
Nationsbank, N.A., Royal Bank of
Canada Europe Limited, The
Toronto-Dominion Bank and
Westdeutsche Landesbank
Girozentrale (as co-arrangers),
The Royal Bank of Scotland plc
(as agent), and the financial
institutions listed therein.
10(l) 333-82307 10(h) - Pooling and Settlement
and 333- Agreement dated 30 March 1990, as
82307-1 amended as of 15 April 1999,
among EE, National Grid Company
plc and other parties.
10(m) 333-82307 10(i) - Master Connection and Use of
and 333- System Agreement dated as of 30
82307-1 March 1990 among the National
Grid Company plc and its users
(including EE).
10(n) 333-82307 10(j) - Lease of land and premises
and 333- known as West Burton, Ironbridge
82307-1 and Rugeley B Power Stations
dated 27 June 1996 from National
Power PLC to EMPL and Eastern.
10(o) 333-82307 10(k) - Sublease of land and
and 333- premises known as West Burton,
82307-1 Ironbridge and Rugeley B Power
Stations dated 27 June 1996 from
EMPL to EMGL and Eastern.
10(p) 333-82307 10(l) - Lease of commercial premises
and 333- at High Marnham, Newark,
82307-1 Nottinghamshire dated 2 July 1996
between PowerGen plc and EMPL.
10(q) 333-82307 10(m) - Underlease of commercial
and 333- premises at High Marnham, Newark,
82307-1 Nottinghamshire dated 2 July 1996
between EMPL and EMGL.
10(r) 333-82307 10(n) - Lease of commercial premises
and 333- at Drakelow, Burton-on-Trent,
82307-1 Staffordshire dated 2 July 1996
between PowerGen plc and EMPL.
10(s) 333-82307 10(o) - Underlease of commercial
and 333- premises at Drakelow, Burton-on-
82307-1 Trent, Staffordshire dated 2 July
1996 between EMPL and EMGL.
12(a) - Computation of Ratio of
Earnings to Fixed Charges for TXU
Europe Limited for the years
ended December 31, 2000 and 1999,
and the period from formation
through December 31, 1998.
12(b) 333-82307 12(b) - Computation of Ratio of
and 333- Earnings to Fixed Charges for TXU
82307-1 Europe Group plc and Subsidiaries
(formerly Eastern Group plc and
Subsidiaries) (US GAAP basis).
16 333-82307- 16 - Letter re: change in
1 Form certifying accountant.
10-K
(1999)
* Incorporated herein by reference.
6902: