SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
- OR -
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001 - 15709
TXU Europe Limited
Incorporated under the I.R.S. Employer Identification
Laws of England and Wales No. 98-0188080
The Adelphi, 1-11 John Adam Street, London, England WC2N 6HT
011-44-207-879-8081
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x__ No___
Common Stock outstanding at May 11, 2001 - 2,455,705,299
shares, at US$1 par value, and 100 deferred shares, at pounds 1
par value.
TABLE OF CONTENTS
Part I. Financial information Page
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2001 and 2000 ............. 2
Condensed Statements of Consolidated Comprehensive
Income - Three Months Ended March 31, 2001 and 2000 .... 3
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2001 and 2000 ............. 4
Condensed Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 ................... 5
Notes to Financial Statements .......................... 6
Independent Accountant's Report ........................ 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ......................................... 25
Part II. Other Information
Item 1. Legal Proceedings ................................... 25
Item 6. Exhibits and Reports on Form 8-K................ 25
Signatures ......................................................... 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended March 31,
-----------------------------
2001 2000
---------- ----------
(pounds million)
Operating Revenues ................................. 2,305 1,151
------- -------
Operating Expenses
Energy purchased for resale and fuel consumed .... 1,837 763
Operation and maintenance ........................ 214 177
Depreciation and other amortization .............. 45 38
Goodwill amortization ............................ 31 22
------- -------
Total operating expenses ....................... 2,127 1,000
------- -------
Operating Income ................................... 178 151
Other Income - Net ................................ 7 1
------- -------
Income Before Interest, Income Taxes, Distributions
and Minority Interest ............................ 185 152
Interest Income .................................... 12 16
Interest Expense ................................... 105 89
------- -------
Income Before Income Taxes, Cumulative Effect of
Change in Accounting, Distributions and
Minority Interest ................................. 92 79
Income Tax Expense ................................. 38 34
------- -------
Income Before Cumulative Effect of Change in
Accounting,Distributions and Minority Interest..... 54 45
Cumulative Effect on Prior Years (to December 31,
1999) of Change in Depreciation Method (Net of
pounds 3 million tax effect) ...................... - 7
Distributions on Preferred Securities of
Subsidiary Perpetual Trust ......................... (3) (1)
Minority Interest .................................. (10) (5)
------- -------
Net Income ......................................... 41 46
======= =======
<FN>
See Notes to Financial Statements.
</FN>
2
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months
Ended
March 31,
---------------------
2001 2000
------- -------
(pounds million)
Net Income ................................. 41 46
------ -----
Other Comprehensive Income (Loss)
Net change during period, net of tax
effects:
Unrealized holding gains on investments
classified as available for sale ..... 38 34
Cumulative currency translation
adjustment ........................... 1 (1)
Cash flow hedges (Changes due to
adoption of SFAS No. 133):
Cumulative transition adjustment as
of January 1, 2001 ................. (72) -
Net change in fair value of
derivative gains (losses) .......... (15) -
Amount realized in earnings during
the period ......................... 6 -
------ -----
Total ................................ (42) 33
------ -----
Comprehensive Income (Loss) ................ (1) 79
====== =====
<FN>
See Notes to Financial Statements.
</FN>
3
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
-----------------
2001 2000
------- -------
(pounds million)
Cash Flows - Operating Activities
Net income ............................................. 41 46
Adjustments to reconcile net income to
cash provided by operating activities:
Cumulative effect of change in
accounting principle ............................... - (10)
Less - Gain on sale of assets ........................ (7) -
Depreciation and amortization ........................ 76 60
Deferred income taxes ................................ 28 16
Minority interest .................................... 10 5
Changes in operating assets and liabilities .......... (141) 65
Other ................................................ 21 (11)
------- ------
Cash provided by operating activities .............. 28 171
------- ------
Cash Flows - Investing Activities
Capital expenditures ................................... (45) (46)
Acquisition of business ................................ (145) -
Proceeds from sale of assets ........................... 97 -
Investments ............................................ (9) (3)
------- ------
Cash used in investing activities .................. (102) (49)
------- ------
Cash Flows - Financing Activities
Net borrowings under the:
Sterling credit facility - Tranche B ................. 34 26
EMTN Note ............................................ - 225
Other long-term debt ................................. 6 29
Issuance of preferred securities of
subsidiary perpetual trust ........................... - 95
Retirements of:
Sterling credit facility - Tranche B ................. (4) (105)
Other long-term debt ................................. (370) (142)
Change in notes payable - banks ........................ (30) 7
Change in other short-term loans ....................... 1 (46)
Other................................................... - (4)
Debt financing costs ................................... (1) (5)
------- ------
Cash provided by (used in)
financing activities ............................ (364) 80
------- ------
Effect Of Exchange Rates On Cash And Cash
Equivalents ............................................ (1) -
------- ------
Net Change In Cash And Cash Equivalents .................. (439) 202
Cash And Cash Equivalents - Beginning Balance ............ 663 285
------- ------
Cash And Cash Equivalents - Ending Balance ............... 224 487
======= ======
<FN>
See Notes to Financial Statements.
</FN>
4
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2001 December31,
(Unaudited) 2000
------------ -----------
(pounds million)
ASSETS
Current Assets
Cash and cash equivalents .................... 224 663
Accounts receivable .......................... 882 743
Inventories - at average cost ................ 64 72
Merchant energy trading assets ............... 503 585
Prepayments and other current assets ......... 95 97
------- -------
Total current assets ....................... 1,768 2,160
------- -------
Investments
Restricted cash .............................. 698 672
Other......................................... 742 695
------- -------
Total investments .......................... 1,440 1,367
------- -------
Property, Plant and Equipment - Net ............ 2,867 2,781
Goodwill ....................................... 4,017 3,945
Merchant Energy Trading Assets ................. 297 121
Derivative Assets .............................. 274 -
Deferred Debits and Other Assets ............... 460 670
------- -------
Total 11,123 11,044
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Notes payable - banks ........................ 484 525
Long-term debt due currently ................. 509 862
Short-term loans on accounts receivable ...... 5 5
Accounts payable:
Trade ...................................... 740 712
Affiliates ................................. 52 52
Merchant energy trading liabilities .......... 428 571
Interest and taxes accrued ................... 103 78
Other current liabilities .................... 192 166
------- -------
Total current liabilities .................. 2,513 2,971
------- -------
Accumulated Deferred Income Taxes .............. 505 467
Provision for Unfavorable Contracts ............ 541 573
Merchant Energy Trading Liabilities ............ 287 81
Derivative Liabilities ......................... 171 -
Other Deferred Credits and Noncurrent
Liabilities .................................. 240 320
Long-term Debt, Less Amounts due
Currently .................................... 4,670 4,480
Preferred Securities of Subsidiary
Perpetual Trust .............................. 95 95
Minority Interest .............................. 303 258
Contingencies (Note 9 )
Shareholder's Equity
Common stock (authorized - 3,000,000,000
shares at US$1 par and 100 deferred
shares at pounds 1 par; issued and
outstanding - 2,455,705,299 shares and
100 deferred shares)........................ 1,467 1,467
Retained earnings ............................ 374 333
Accumulated other comprehensive income (loss). (43) (1)
------- -------
Total shareholder's equity ................. 1,798 1,799
------- -------
Total .................................. 11,123 11,044
======= =======
<FN>
See Notes to Financial Statements.
</FN>
5
TXU EUROPE LIMITED
Notes to Financial Statements
1. 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 global 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 merchant energy trading, 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.
Beginning in the first quarter of 2001, TXU Europe
undertook an internal reorganization of its businesses to
reflect a single energy business concept for the management of
its energy activities in a consistent manner in its different
geographical areas. As a result, there are only two reporting
operating segments for TXU Europe:
ENERGY - which consists of the former energy retail
business and the former portfolio trading and power
business segments. The new single energy business
manages the integrated portfolio of generation assets
and contracts and retail customer base within separate
geographical areas - the UK and continental Europe,
which comprises Central Europe, the Nordic region and
Germany; and
NETWORKS - which owns, manages and, through its networks
management joint venture (24seven), operates its
electricity distribution system in the UK.
UK energy operations are carried out principally through
TXU Europe Group's subsidiaries, Eastern Electricity plc
(Eastern Electricity) (which also owns the networks electricity
distribution system), Eastern Energy Limited (which, along with
Norweb Energi, supplies customers in areas outside of Eastern
Electricity's traditional service area), Eastern Natural Gas
(Retail) Limited, TXU Europe Power Ltd (and its subsidiaries)
and TXU Europe Energy Trading Ltd.
Merchant energy trading in Central European markets is
carried out through TXU Europe Energy Trading BV (and its
subsidiaries), primarily in Germany, the Netherlands,
Switzerland and Spain.
Nordic operations are carried out 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 in Norway and participates in distribution and retail
markets through joint ventures, especially Savon Voima Oyj
(SVO).
Operations in Germany were further expanded when Stadtwerke
Kiel AG (Kiel AG), a German municipal utility, was acquired.
On January 8, 2001, TXU Europe completed the acquisition of
51% of Kiel AG for pounds 145 million. The acquisition of Kiel
AG was accounted for as a purchase business combination. At the
date of acquisition, Kiel AG had sterling equivalent assets of
pounds 121 million and liabilities of pounds 82 million. The
process of determining the fair value of assets and liabilities
of Kiel AG continues but is expected to be completed within one
year of the acquisition date. TXU Europe's latest estimate of
goodwill is pounds 106 million, which is being amortized over
40 years. This amount is subject to further revision as
additional information becomes available. The results of
operations of Kiel AG are reflected in the consolidated
financial statements from the January 8, 2001 acquisition date.
Pro forma information for the three months ended March 31, 2001
and 2000, reflecting the acquisition of Kiel AG, would not be
significantly different from reported amounts.
Under the terms of the purchase agreement, TXU Europe has
the unilateral right to make further capital investments in
6
Kiel AG for specified business development purposes and may, in
the process, acquire additional shares, in a new share offering
that is made to all shareholders. If the City of Kiel chooses
not to participate in such an offering, its current holdings of
49% of Kiel AG could be diluted down to a residual holding of
25.1%.
The purchase agreement further provides that if the
holdings of the City of Kiel exceed 25.1% on the later date of
January 8, 2006 or five years after participation by the City
of Kiel in a new capital issue, the City of Kiel may require
TXU Europe to purchase all, but not less than all, of those
holdings in excess of 25.1%. The City of Kiel's option may be
exercised during the two year period after it becomes
exercisable at a price per share equal to the fair value
(commercial value) of a Kiel AG share on the exercise date, as
independently assessed by an investment bank.
On May 1, 2001, Kiel AG acquired all of the share capital
of Ares Energie GmbH (Ares) for approximately 24 million
Deutsche marks (pounds 8 million).
In January 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., a Portuguese utility company, and Spanish
savings bank Caja de Ahorro de Asturias (Cajastur) for euros 24
per share. TXU Europe waived the pre-emption rights it had over
4.9% of the stock in Hidrocantabrico held by Electrabel SA
(Electrabel), an electricity company in Belgium. On April 20,
2001, TXU Europe received net proceeds from the sale of euros
522 million (pounds 320 million), realizing a pre-tax profit of
pounds 50 million.
In February 2001, TXU Europe finalized the sale of its
interest in the North Sea gas fields for pounds 138 million as
a result of its ongoing review of its program to reposition its
energy portfolio. TXU Europe received net cash proceeds of
pounds 97 million and recognized a net pre-tax gain of pounds
7 million, which has been recorded in Other Income - Net.
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. The transaction also
included 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 acquisition of Norweb Energi was accounted for as a
purchase business combination. The process of determining the
fair value of assets and liabilities of Norweb Energi has not
been completed. The latest estimate of goodwill is 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.
7
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. 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
comparable period of 2000.
Pro Forma
Three Months
Ended
March 31,
2000
-------------
(pounds million)
Operating Revenues .................. 1,478
Operating Income .................... 177
Net Income........................... 56
The pro forma results above are not necessarily indicative
of what the actual results would have been had the acquisition
actually occurred at the beginning of the period. Further, the
pro forma amounts are not intended to be a projection of future
results of the combined companies. In particular, the above
amounts do not take into account the expected impact Norweb
Energi would have on the timing of earnings from the UK
electricity portfolio across the year such that profits in the
first and fourth quarters are reduced, with a more than
offsetting increase in the second and third quarters. This
arises from constant retail customer prices throughout the year
compared with more seasonal wholesale contracts and spot
prices.
2. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of TXU
Europe and its subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United
States of America (US GAAP) and, except for the adoption of
the new accounting standard discussed below, on the same basis
as the audited financial statements included in its 2000 Annual
Report on Form 10-K. In the opinion of TXU Europe's
management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of
operations and financial position have been included therein.
Certain information and footnote disclosures normally included
in annual consolidated financial statements prepared in
accordance with US GAAP have been omitted pursuant to the rules
and regulations of the US Securities and Exchange Commission.
The results of operations for an interim period may not give a
true indication of results for a full year. Certain previously
reported amounts have been reclassified to conform to current
classifications.
Unless otherwise indicated, all amounts in the financial
statements and notes to financial statements are stated in
millions of UK pounds sterling.
3. NEW ACCOUNTING STANDARDS
Change in Accounting - SFAS No. 133 Implementation
On January 1, 2001, TXU Europe adopted 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). All derivatives held by TXU Europe have been accounted
for pursuant to SFAS No. 133 requirements. TXU Europe enters
into derivative transactions within its merchant energy trading
activities, which are accounted for on the mark-to-market
accounting method. These derivatives have been entered into
with the objective of generating profits on, or from exposure
to, shifts or changes in market prices. TXU Europe also enters
into derivative transaction to hedge market risks related to
changes in interest rates, foreign currency exchange rates and
commodity prices. TXU Europe has designated, documented and
assessed those derivative hedging relationships, the majority
8
of which 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 for
the portion of the hedge that is effective, according to a
method prescribed by SFAS No. 133 in offsetting changes in fair
value of the hedge item. Ineffectiveness is recorded in
earnings.
Interest Rate Risk Management - TXU Europe enters into
derivatives to manage exposures to the market risk inherent in
fixed rate debt securities and the cash flow risk inherent in
variable rate securities. Derivative instruments that are used
as part of TXU Europe 's interest-rate risk-management strategy
include interest-rate swaps, forward rate agreements, and
options contracts. TXU Europe uses derivatives to convert a
portion of its variable-rate debt to fixed rates. The resulting
cost of funds is lower than it would have been had fixed-rate
borrowings been issued directly. Substantially all of these
derivatives are designated as cash-flow hedges.
Foreign Currency Risk Management - TXU Europe has exposure
to foreign currency risks, primarily with the US dollar and
other foreign currency (non-UK pound sterling) denominated
transactions. TXU Europe has accessed the US capital markets
and issued US dollar denominated obligations. TXU Europe enters
into currency swaps, options and forwards, where appropriate,
to manage foreign currency exposures on foreign currency-
denominated transactions. Substantially all of these
derivatives are designated as cash flow hedges.
TXU Europe has numerous investments in foreign
subsidiaries, and the net assets and earnings of these
subsidiaries are exposed to currency exchange-rate volatility.
Through March 31, 2001, TXU Europe has not entered into
derivative transactions to hedge its material net investment in
foreign operations, but has used foreign currency-denominated
debt as the hedge. On April 30, 2001, TXU Europe entered into
a foreign currency swap which has been designated as a hedge of
the net investment in a foreign company.
Energy Price Risk Management - TXU Europe's electricity and
gas operations expose it to market risk related to those
commodities. TXU Europe's hedging activities for its energy
business are concentrated in the UK. Operations in continental
Europe are mainly associated with its merchant energy trading
activity, but TXU Europe also trades in the UK market.
Prior to the implementation of the New Electricity Trading
Arrangements (NETA) on March 27, 2001, almost all electricity
generated in England and Wales had to be sold to the wholesale
trading market for electricity, commonly known as the Pool. In
turn, electricity suppliers generally had to buy electricity
from the Pool for resale to their customers. Even groups which
are both generators and licensed suppliers, like TXU Europe, in
most circumstances, had to act through the Pool to sell all the
electricity they generate and to purchase all electricity they
sold to customers. Prices for electricity were set by the Pool
for each half hour based on bids of generators and a complex
set of calculations designed to match supply and demand.
Since the price of electricity purchased from the Pool was
volatile, TXU Europe was therefore exposed to the risk arising
from the differences between the fixed price at which it sold
electricity to customers and the variable prices at which it
bought electricity from the Pool. TXU Europe's objective for
hedging its UK energy portfolio was to limit to acceptable
levels, the exposure of TXU Europe to fluctuations in wholesale
energy prices, so far as this affected the sale to retail
customers of electricity from generating assets and the
purchase of electricity (and gas) for resale to such customers.
TXU Europe's generation business provided a physical hedge
to this risk as it was exposed to Pool price fluctuations from
selling electricity into the Pool. TXU Europe's overall
exposure to those risks was managed by the merchant energy
trading business which maintained energy price exposures to
within a limit set by the TXU Europe Board and also entered
into derivatives to hedge the portfolio. The derivatives used
were mainly contracts for differences and electricity forward
agreements but also involved other contractual arrangements,
which were all principally variable for fixed swaps.
9
Impact of NETA - NETA was implemented in the UK on March
27, 2001. NETA provides those companies wishing to buy and
sell electricity the freedom to enter into directly negotiated
contracts instead of having to trade through the Pool. Under
the new arrangements, bulk electricity will be traded on one or
more exchanges and through a variety of bilateral and physical
contracts. Market participants include not only generators and
suppliers but also traders, such as energy wholesalers, with
physical positions. Accordingly, implementation of NETA has
eliminated the Pool. Some of the derivative contracts used to
hedge exposure to changes in the Pool prices have been
renegotiated into bilateral contracts and are now considered to
be "normal purchase" contracts, thus removing them from SFAS
No. 133 classification as cash-flow hedges. As a result, these
contracts have been removed from designation as cash flow
hedges and have been removed from other comprehensive income.
TXU Europe's strategy to manage its energy commodity price
risk is to balance the retail load profile with physical and
financial commodity contracts in a designated order up to a
desired amount of forecasted purchases and sales and to
designate them as cash-flow hedges. TXU Europe uses a
combination of physical and financial contracts including short-
and long-term power purchase and sale agreements, contracts for
differences, electricity forward agreements, fuel supply
contracts and other contracts in managing these risks.
Financial Impact - TXU Europe formally documents all
relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value, cash-
flow or foreign-currency hedges to specific assets and
liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The maximum term over
which TXU Europe hedges its exposure to the variability of
future cash flows (for all forecasted transactions, excluding
interest payments on variable-rate debt) is 26 years. Amounts
are removed from other comprehensive income as the underlying
transactions occur.
In accordance with the transition provisions of SFAS No.
133, TXU Europe recorded, as of January 1, 2001, a cumulative
effect of pounds 72 million after-tax as a decrease to other
comprehensive income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments.
Essentially all of the terms of TXU Europe's derivatives
match the terms of the underlying hedged item. As a result TXU
Europe experienced minimal hedge ineffectiveness of pounds 0.4
million (reported as Interest Expense), which represented the
total ineffectiveness of all cash-flow hedges, mainly from
treasury hedges. There was no ineffectiveness on the cash flow
hedges of the energy derivatives. Also, pounds 0.5 million of
net derivatives gains/losses were realized in interest expense
as a result of the discontinuance of cash-flow hedges related
to certain forecasted treasury transactions that are not likely
to occur.
As of March 31, 2001, pounds 120 million of net losses
included within the net gains/losses on derivative instruments
accumulated in other comprehensive income are expected to be
reclassified into earnings during the next twelve months. The
amounts expected to be reclassified are affected by a
deterioration of near-term prices resulting from the
uncertainty that NETA has brought to the industry and its
market place. This amount represents the projected value of
the hedge over the next twelve months relative to what would be
recorded had the hedge transaction not been entered into. The
amount is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which
volatility in earnings (which would otherwise exist) is
mitigated through the presence of cash-flow hedges.
Ongoing implementation issues 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 that include options
to buy or sell certain volumes of the underlying commodity. TXU
Europe and its customers use these contracts to provide some of
their commodity requirements. TXU Europe evaluated these
contracts and determined that they qualified for the normal
purchases and sales exception provided by SFAS No. 133. In
October 2000, the DIG reached a tentative conclusion that
option contracts do not qualify for such exception. In April
2001, the Financial Accounting Standards Board approved this
10
tentative conclusion, and these contracts will be required to
be accounted for as derivatives commencing July 1, 2001. TXU
Europe is evaluating the impact of this decision.
There are a number of issues pending before the DIG that
may have an impact on the application of SFAS No. 133.
Management is unable to predict the ultimate outcome of these
issues.
The effect on net income for the three months ended March
31, 2001 from implementing SFAS No. 133 has not been
significant. The majority of derivative contracts are merchant
energy trading derivatives and already were being marked-to-
market. The remaining derivatives identified are designated
as, and are effective as, cash flow hedges, with changes in the
fair value of derivatives reflected in other comprehensive
income.
SFAS No. 140 Implementation - 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 1, 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 required disclosures, but carries
over most of SFAS No. 125's provisions without reconsideration.
TXU Europe's sale of receivables program has been determined to
be compliant with the requirements of SFAS No. 140 and
therefore will not be impacted by the adoption of this
standard.
4. 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).
Results for the first quarter of 2000 were restated to
reflect the increase in net income resulting from the adoption
of the new accounting method. The effect of the change for the
quarter ended March 31, 2000 was to increase net income by
pounds 4 million (after a reduction for income taxes of pounds
2 million).
5. RESTRUCTURING CHARGES AND OTHER COSTS
During the three months ended March 31, 2001 and 2000, TXU
Europe recorded restructuring charges and other costs of
approximately pounds 16 million and pounds 43 million pre-tax
(pounds 11 million and pounds 32 million after-tax),
respectively. Included in the costs for 2000 was pounds 6
million of costs associated with the offer for Hidrocantabrico,
recorded in Other Income - Net. The majority of the remaining
costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under
voluntary retirement programs and related pension benefits),
primarily a result of contracting TXU Europe's customer service
operations to Vertex Data Science Limited, the creation of the
24seven joint venture and certain other staff reorganizations.
For the three months ended March 31, 2001, pre-tax
restructuring charges consisted of redundancy costs of
approximately pounds 4 million related to termination benefits
for 31 employees that had accepted the benefits, pounds 8
million of asset writedowns and pounds 4 million of other exit
costs. For the three months ended March 31, 2000, pre-tax
restructuring costs consisted of redundancy costs of
approximately pounds 15 million related to voluntary
termination benefits for 296 employees that have accepted the
benefits, pounds 7 million for asset writedowns and pounds 15
million of other exit costs. All of these costs, except the
asset writedowns which were charged to depreciation expense,
have been recorded in operation and maintenance expense.
11
During the three months ended March 31, 2001, pounds 4
million of redundancy costs and pounds 2 million of other exit
costs charged during the three months then ended have been
paid. There were no payments made during the three months
ended March 31, 2000.
6. SHORT-TERM FINANCING
Short-term Facilities - In January 2001, TXU Europe
borrowed an additional euros 182 million (pounds 115 million)
at 5.54% per annum under its pounds 300 million 364-day
revolving credit facility, as part of the financing to acquire
Kiel AG. Also in January 2001, the pounds 150 million Eastern
Electricity revolving credit balance was repaid. As of March
31, 2001, short-term borrowings aggregated pounds 489 million
with a weighted average annual interest rate of 5.4%.
On April 30, 2001, TXU Europe repaid the 1.3 billion Czech
Koruna (CzK) (pounds 23 million) outstanding under the short-
term CzK facility and the facility expired. This short-term
borrowing had been used to hedge the net investment in a CzK -
denominated company (Teplarney Brno). TXU Europe then entered
into a foreign currency derivative to serve as the replacement
hedge of this investment.
Accounts Receivable Securitization - TXU Europe has
facilities with a commercial bank 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,
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 the three months
ended March 31, 2001, Eastern Electricity sold pounds 612
million 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 March 31, 2001, accounts
receivable of Eastern Electricity were reduced by pounds 204
million under the program and pounds 5 million of future
receivables sold were reflected as other short-term loans on
the balance sheet. These borrowings bear interest at an annual
rate, which was 5.60% at March 31, 2001, based on commercial
paper rates plus a margin.
7. LONG-TERM DEBT
Lines of Credit - At March 31, 2001, TXU Europe and TXU
Finance (No. 2) Limited (TXU Finance) had a joint sterling-
denominated line of credit with a group of banking institutions
under a credit facility agreement (Sterling Credit Agreement).
As of March 31, 2001, the Sterling Credit Agreement provided
for borrowings of up to pounds 1.075 billion and had 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 January 2001, in connection
with the acquisition of Kiel AG, TXU Europe borrowed an
additional euros 47 million (pounds 30 million) under Tranche
B. As of March 31, 2001, pounds 750 million of borrowings were
outstanding under the term facility at an interest rate of 6.4%
per annum, and outstanding Tranche B borrowings consisted of
700 million Norwegian kroner (NOK) (pounds 54 million) at 8.1%
per annum and euros 314 million (pounds 193 million) at 5.4%
per annum.
TXU Europe has a euros 2.0 billion Euro Medium Term Note
(EMTN) program. Under the EMTN program, TXU Europe may from
time to time issue notes on a continuing basis to one or more
dealers in an aggregate principal amount outstanding of euros
2.0 billion. At March 31, 2001, there were pounds 676 million
of various borrowings outstanding under this program with an
aggregate weighted average interest rate of 7.1% per annum.
In January 2001, the outstanding balance of pounds 190
million of the rent factoring loans due to banks was repaid.
12
8. CONTINGENCIES
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 which 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 and, on April 4, 2001, the
appeal was allowed. The House of Lords found that National
Grid was entitled to use the surplus funds as they had done.
As a result of the decision of the House of Lords, TXU Europe
considers that the likelihood of a claim of this nature being
made against it to be remote.
On January 25, 1999, the Hindustan Development Corporation
(HDC) issued arbitration proceedings in the Arbitral Tribunal
in Delhi, India against The Energy Group PLC (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.
General - In addition to the above, TXU Europe and its
subsidiaries are involved in various other legal and
administrative proceedings which, in the opinion of management,
should not have a material effect on its financial position,
results of operations or cash flows.
Financial guarantees - TEG has guaranteed up to US$110
million (pounds 78 million) at March 31, 2001 of certain
liabilities that may be incurred and payable by the purchasers
of TEG's US and Australian coal businesses and US energy
marketing operations sold in 1998 prior to acquisition of TEG
by TXU Corp. These guarantees are with respect to the Peabody
Holding Company Retirement Plan for Salaried Employees, the
13
Powder River Coal Company Retirement Plan and the Peabody Coal
UMWA Retirement Plan and are 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.
9. SEGMENT INFORMATION
TXU Europe has two reportable operating business segments,
Energy and Networks. Beginning in the first quarter of 2001,
TXU Europe undertook an internal reorganization of its
businesses to reflect a single energy business concept for the
management of its energy activities in a consistent manner in
its different geographical areas. Amounts for the three months
ended March 31, 2000 have been reclassified to conform to the
new presentation.
Three Months Ended March 31,
------------------------------------------------
2001 2000
---------------------- ----------------------
Revenues Contribution Revenues Contribution
-------- ------------ -------- ------------
(pounds million)
UK ............................... 1,930 121 1,044 99
Continental Europe ............... 337 25 50 4
------ ----- ------ ----
Total Energy ................. 2,267 146 1,094 103
------ ----- ------ ----
Networks ......................... 89 42 123 68
Other............................. 3 6 11 1
Inter-segment eliminations ....... (54) - (77) -
------ ----- ------ ----
Total .................... 2,305 194 1,151 172
====== ----- ====== ----
Cost of capital elimination....... 36 38
Unallocated corporate costs ...... (45) (58)
----- ----
Income before interest, income
taxes, distributions and
minority interest............... 185 152
===== ====
10. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts Receivable - At March 31, 2001 and December 31,
2000, accounts receivable were stated net of uncollectible
accounts of pounds 29 million and pounds 31 million,
respectively.
Property, Plant and Equipment - At March 31, 2001 and
December 31, 2000, property, plant and equipment were stated
net of accumulated depreciation of pounds 395 million and
pounds 398 million, respectively.
Goodwill - At March 31, 2001 and December 31, 2000,
goodwill was stated net of accumulated amortization of pounds
271 million and pounds 240 million, respectively.
Credit Risk - Credit risk relates to the risk of loss that
TXU Europe would incur as a result of nonperformance by
14
counterparties. TXU Europe maintains credit policies with
regard to its counterparties that management believes
significantly minimize overall credit risk. These policies
include an evaluation of potential counterparties' financial
condition (including credit rating), guarantees and collateral
requirements under certain circumstances and the use of
standardized agreements that allow for the netting of positive
and negative exposures associated with a single counterparty.
Concentration of Credit Risk - During the three months
ended March 31, 2001, TXU Europe's merchant energy trading
activity and retail operations has grown substantially. As TXU
Europe grows in various regions throughout Europe, systems and
procedures are implemented to continually monitor the
counterparty risk exposure across its various trading regions.
Price and credit risk are evaluated daily within the
established trading policies and limits established for TXU
Europe. TXU Europe has also established bilateral counterparty
agreements that provide for the netting of positive and
negative exposures with a single counterparty to minimize
credit exposure.
TXU Europe's gross exposure to credit risk (before any
netting agreements or reserves) in Continental Europe and the
UK as of March 31, 2001 was pounds 2.0 billion. These regional
concentrations have the potential to impact TXU Europe's
overall exposure to credit risk, either positively or
negatively, in that the customer base and counterparties may be
similarly affected by changes in economic, regulatory,
industry, weather or other conditions.
One customers' exposure to TXU Europe represented 9% of the
gross fair value of TXU Europe's accounts receivable, merchant
energy trading assets and derivative assets at March 31, 2001.
The majority of the counterparties that TXU Europe deals with
are major energy companies and financial institutions, which
are considered to be of investment grade, determined using
publicly available information including a Standard & Poor's
rating of at least BBB-. The risk of loss to TXU Europe
arising from non-performance by these counterparties is
considered unlikely. In the event a counterparty's credit
rating declines, TXU Europe may apply certain remedies, if
considered necessary.
Based on TXU Europe's policies, its exposures and its
credit and other reserves, TXU Europe does not anticipate a
materially adverse effect on financial position or results of
operations as a result of counterparty nonperformance.
15
INDEPENDENT ACCOUNTANTS' REPORT
TXU Europe Limited:
We have reviewed the accompanying condensed consolidated
balance sheet of TXU Europe Limited and subsidiaries (TXU
Europe) as of March 31, 2001, and the related condensed
statements of consolidated income, comprehensive income and
cash flows for the three-months ended March 31, 2001 and 2000.
These financial statements are the responsibility of TXU
Europe's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit in accordance with auditing standards
generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such condensed
consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing
standards generally accepted in the United States of America,
the consolidated balance sheet of TXU Europe as of December 31,
2000, and the related consolidated statements of income,
comprehensive income, cash flows and shareholder's equity for
the year then ended (not presented herein); and in our report
dated February 1, 2001, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly
stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE
London, England
May 10, 2001
16
TXU EUROPE LIMITED
Item 2. Management's Discussin and Analysis of Financial Condition and
Results of operations
BUSINESS, ACQUISITIONS AND DISPOSALS
TXU Europe Limited (TXU Europe) is an indirect, wholly-
owned subsidiary of TXU Corp., a Texas corporation. TXU Corp.
is a global 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 merchant energy trading, 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.
Beginning in the first quarter of 2001, TXU Europe
undertook an internal reorganization of its businesses to
reflect a single energy business concept for the management of
its energy activities in a consistent manner in its different
geographical areas. As a result, there are only two reporting
operating segments for TXU Europe:
ENERGY - which consists of the former energy retail
business and the former portfolio trading and power
business segments. The new single energy business
manages the integrated portfolio of generation assets
and contracts and retail customer base within separate
geographical areas - the UK and continental Europe,
which comprises Central Europe, the Nordic region and
Germany; and
NETWORKS - which owns, manages and, through its networks
management joint venture (24seven), operates its
electricity distribution system in the UK.
Operations in Germany were further expanded when Stadtwerke
Kiel AG (Kiel AG), a German municipal utility, was acquired.
On January 8, 2001, TXU Europe completed the acquisition of
51% of Kiel AG for pounds 145 million. The acquisition of Kiel
AG was accounted for as a purchase business combination. At the
date of acquisition, Kiel AG had sterling equivalent assets of
pounds 121 million and liabilities of pounds 82 million. The
process of determining the fair value of assets and liabilities
of Kiel AG continues but is expected to be completed within one
year of the acquisition date. TXU Europe's latest estimate of
goodwill is pounds 106 million, which is being amortized over
40 years. This amount is subject to further revision as
additional information becomes available. The results of
operations of Kiel AG are reflected in the consolidated
financial statements from the January 8, 2001 acquisition date.
Pro forma information for the three months ended March 31, 2001
and 2000, reflecting the acquisition of Kiel AG, would not be
significantly different from reported amounts.
In January 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., a Portuguese utility company, and Spanish
savings bank Caja de Ahorro de Asturias (Cajastur) for euros 24
per share. TXU Europe waived the pre-emption rights it had over
4.9% of the stock in Hidrocantabrico held by Electrabel SA
(Electrabel), an electricity company in Belgium. On April 20,
2001, TXU Europe received net proceeds from the sale of euros
522 million (pounds 320 million), realizing a pre-tax profit of
pounds 50 million.
In February 2001, TXU Europe finalized the sale of its
interest in the North Sea gas fields for pounds 138 million as
a result of its ongoing review of its program to reposition its
energy portfolio. TXU Europe received net cash proceeds of
pounds 97 million and recognized a net pre-tax gain of pounds
7 million, which has been recorded in Other Income - Net.
17
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. The transaction also
included the assumption of certain of Norweb Energi's
obligations, including its power purchase agreements, which
have been integrated into TXU Europe's energy portfolio.
TXU Europe will pursue investment opportunities from time
to time when it concludes they are consistent with its business
strategies and will dispose of certain assets to allow
redeployment of resources to opportunities for faster growth in
an effort to enhance its long-term return. TXU Europe continues
to review its energy portfolio within the UK. TXU Europe has
also announced that it will seek bids for its UK power assets,
in order to determine 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.
RESULTS OF OPERATIONS
Results for the three-month periods presented herein are
not necessarily indicative of expectations for a full year's
operations because of seasonal and other factors, including
variations in maintenance and other operating expense
patterns. No significant changes or events which might affect
the financial condition of TXU Europe have occurred subsequent
to year-end other than as disclosed in other reports of TXU
Europe or included herein.
Three Months Ended March 31, 2001 Compared With Three Months
Ended March 31, 2000
Overview - Net income for the three months ended March 31,
2001 was pounds 41 million compared with pounds 46 million for
the same period in 2000. 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. The previously reported quarter ended March 31, 2000
has been changed to reflect the new method from January 1, 2000
as well as the restatement in calculating minority interest as
described in Note 5 to Financial Statements. The improvement in
net income reflected a strong performance in merchant energy
trading activities, operating costs savings and lower levels of
restructuring costs, offsetting the effect of lower networks
revenues and higher interest and related charges. Income before
interest, income taxes, distributions and minority interest
(income before interest) was pounds 185 million for the three
months ended March 31, 2001 compared with pounds 152 million
for the same period of 2000. Revenues of pounds 2.3 billion
for the three months 2001 were up almost 100% compared with the
pounds 1.2 billion for the three months of 2000.
The increase in revenues resulted from increased merchant
energy trading volumes, particularly in UK energy trading, and
the inclusion of the results of Norweb Energi and Kiel AG since
their acquisition on August 3, 2000 and January 8, 2001,
respectively. For the first three months of 2001, Norweb
Energi and Kiel AG contributed pounds 268 million and pounds 61
million in revenues, respectively. These revenue increases
were offset by decreased revenues in the networks segment
resulting from price reductions following the April 1, 2000
OFGEM distribution price review. Within the Energy segment, in
addition to the effect of the inclusion of Norweb Energi and
Kiel, high and volatile UK gas prices improved the results of
the merchant energy trading business and North Sea gas
production assets (until their sale in February, resulting in a
gain in other income of pounds 7 million). Firmer prices in
the Nordic region contributed to strong merchant energy trading
results in continental Europe. The expected effect of the
Norweb Energi acquisition on income before interest is to alter
the timing of earnings from the UK electricity portfolio across
the year such that profits in the first and fourth quarters are
reduced with a more than offsetting increase in the second and
third quarters. This arises from constant retail customer
prices throughout the year compared with more seasonal
wholesale contracts and spot prices.
18
During the three months ended March 31, 2001 and 2000, TXU
Europe recorded restructuring charges and other costs of
approximately pounds 16 million and pounds 43 million pre-tax
(pounds 11 million and pounds 32 million after-tax),
respectively. Included in the costs for 2000 was pounds 6
million of costs associated with the offer for Hidrocantabrico,
recorded in Other Income - Net. The majority of the remaining
costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under
voluntary retirement programs and related pension benefits),
primarily a result of contracting TXU Europe's customer service
operations to Vertex Data Science Limited, the creation of the
24seven joint venture and certain other staff reorganizations.
For the three months ended March 31, 2001, pre-tax
restructuring charges consisted of redundancy costs of
approximately pounds 4 million related to termination benefits
for 31 employees that had accepted the benefits, pounds 8
million of asset writedowns and pounds 4 million of other exit
costs. For the three months ended March 31, 2000, pre-tax
restructuring costs consisted of redundancy costs of
approximately pounds 15 million related to voluntary
termination benefits for 296 employees that have accepted the
benefits, pounds 7 million for asset writedowns and pounds 15
million of other exit costs. All of these costs, except the
asset writedowns which were charged to depreciation expense,
have been recorded in operation and maintenance expense.
During the three months ended March 31, 2001, pounds 4
million of redundancy costs and pounds 2 million of other exit
costs charged during the three months then ended have been
paid. There were no payments made during the three months
ended March 31, 2000.
Energy purchased for resale and fuel consumed for the three
months ended March 31, 2001 of pounds 1.8 billion was 140%
higher than the pounds 763 million for the same period of 2000,
primarily as a result of the increase in merchant energy
trading activity together with the impact of Norweb Energi and
Kiel AG since their acquisition. Other operating expenses were
higher compared with the three month period of 2000, mainly due
to the inclusion of Norweb Energi and Kiel AG, partially offset
by continued cost reduction efforts.
Depreciation expense for the three months ended March 31,
2001 was pounds 45 million compared with pounds 38 million for
the same period of 2000, which has been restated to reflect the
change in depreciable lives as described in Note 4 to Financial
Statements. The increase is primarily due to the inclusion of
Norweb Energi and Kiel AG.
Net interest expense for the three months ended March 31,
2001 was pounds 93 million compared with pounds 73 million for
the same period 2000, primarily due to increased borrowings to
fund the Norweb Energi and Kiel AG acquisitions and accelerated
amortization of debt issue costs following the early repayment
of the rent factoring debt.
Total income tax expense for the three months ended March
31, 2001 was pounds 38 million compared with pounds 34 million
for the same period of 2000. The effective tax rate in both
periods is affected by amortization of goodwill and other non-
deductible expenses primarily related to a capital lease. The
effective tax rate in the 2000 period is also adversely
impacted by non-deductible expenses related to the
Hidrocantabrico offer.
Minority interest in the three-month 2001 period has
increased in comparison with the 2000 period primarily as a
result of including the 49% minority ownership in Kiel AG.
See Note 9 to Financial Statements for information on
revenues and contributions (operating income) by operating
segment.
19
OPERATING STATISTICS
Three Months
Ended March 31,
---------------------
2001 2000
-------- -------
SALES VOLUMES
Electricity (gigawatt-hours)- (GWh):
Industrial and commercial 6,324 3,589
Residential 6,705 4,574
------- -------
Total electricity 13,029 8,163
======= =======
Gas (billion cubic feet) - (Bcf):
Industrial and commercial 23 19
Residential 41 19
------- -------
Total gas 64 38
======= =======
Wholesale energy sales:
Electricity (GWh) 43,750 24,435
======= =======
Gas (Bcf) 379 186
======= =======
Electricity units distributed (GWh) 9,904 9,204
======= =======
CUSTOMERS (end of period & in thousands)
Electricity (retail) 4,484 2,835
Gas 1,224 768
Results by Segment
Energy - The Energy business segment is managed on a
geographical basis - in the UK and in continental Europe,
comprising the Central European, Nordic and German (Kiel AG)
operations.
UK - Revenues for the three months ended March 31, 2001
were pounds 1.9 billion compared with pounds 1.0 billion for
the three months ended March 31, 2000. The increase in revenue
is partly associated with results from Norweb Energi (pounds
268 million), included since acquisition in August 2000, with
the remainder reflecting the significant increase in UK
merchant energy trading activities.
Income before interest for the three months ended March 31,
2001 was pounds 121 million compared with pounds 99 million for
the three months ended March 31, 2000. This reflects an
increase in margins of pounds 45 million partly offset by an
increase in operating expenses of pounds 23 million, almost
entirely attributable to the inclusion of Norweb Energi.
Excluding Norweb Energi, margins for the three months ended
March 31, 2001, compared with those for the same period of
2000, were flat, reflecting a decrease of pounds 52 million for
electricity as a consequence of low and stable prices, with an
increase of pounds 53 million in gas as prices were both higher
and more volatile. These results also include operations of
the North Sea gas assets until their sale in February 2001.
20
Continental Europe - Revenues in continental Europe
operations increased from pounds 50 million for the three
months ended March 31, 2000 to pounds 337 million for the three
months ended March 31, 2001. This increase is due to increased
merchant energy trading volumes (pounds 192 million) and the
inclusion of Kiel AG for the first time (pounds 61 million).
TXU Europe has established itself as a leading player in
Central European electricity and gas trading markets since it
first opened its Geneva base of operations in September 1999.
Volumes and turnover have increased steadily in all markets
since the relatively small values in the three months to March
31, 2000. Total settled volumes in 2001 were 18.7 terrawatt
hours (TWh) compared with 1.7 TWh for the same period of 2000.
Traded volumes in the Nordic region also increased
substantially.
Income before interest for the three months ended March 31,
2001 was pounds 25 million, compared with pounds 4million in
the three months ended March 31, 2000. The increase reflects
the inclusion of Kiel AG (pounds 12 million), firmer prices in
the Nordic region (pounds 11 million), savings in operating
costs and a softening of power prices in some central European
markets during the quarter.
Networks - Revenues for the three months ended March 31,
2001 were pounds 89 million compared with pounds 123 million
for the three months ended March 31, 2000. The decrease in
revenues is largely due to the impact of the OFGEM Distribution
Price Review (pounds 29 million) which was effective as of
April 1, 2000. The balance of the reduction is mainly due to
adverse movements in tariffs.
Income before interest for the three months ended March 31,
2001 was pounds 42 million compared with pounds 68 million for
the three months ended March 31, 2000. The decrease in income
before interest is due to the impact of the OFGEM Distribution
Price Review partly offset by reductions in operating expenses.
Operating cost savings are mainly due to increased operating
efficiencies resulting from the 24seven joint venture.
Other - Income before interest for the three months ended
March 31, 2001 was pounds 6 million compared with pounds 1
million for the same period of 2000. Included in the results
for 2001 is the pre-tax profit on disposal of the North Sea gas
assets of pounds 7 million.
Comprehensive Income
The unrealized holding gains on investments are primarily
related to market changes in the value of the 19.2% investment
in Hidrocantabrico.
The implementation of Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments
and Hedging Activities" resulted in a cumulative effect
reduction of pounds 72 million net of tax in other
comprehensive income as of January 1, 2001. During the quarter
ended March 31, 2001, the change in fair value of cash-flow
hedges was a reduction of pounds 15 million after tax while
pounds 6 million after tax of the deferred amount was
recognized in earnings. See Note 3 to Financial Statements for
additional information.
The implementation of SFAS No. 133 has had minimal effect
on TXU Europe's results of operations. The merchant energy
trading businesses in the UK and continental Europe use mark-to-
market accounting for their trading activities. Merchant
energy trading transactions which are derivatives pursuant to
SFAS No. 133 also are required to be accounted for using mark-
to-market accounting. Therefore SFAS No. 133 has not affected
merchant energy trading operating results.
TXU Europe has historically used, and will continue to use,
other derivatives which are highly effective in offsetting
future cash flow volatility in interest rates, currency
exchange rates and energy commodities, essentially converting
variable arrangements to fixed arrangements. The fair value of
derivatives that are effective as cash-flow hedges are recorded
as derivative assets or liabilities with an offset in other
comprehensive income. Accordingly, the principal impact of
SFAS No. 133 has been on the balance sheet.
21
The balance sheet value of these derivative assets or
liabilities can change significantly from quarter to quarter
based on changes in market expectations of economic events,
such as the recent drop in interest rates and changes in actual
and expected natural gas and electricity prices. The fair
value of these cash-flow-hedge derivatives is determined each
quarter based on actual and forecasted interest rates, currency
rates and commodity prices. Consistent with the above, the
effect of changes in fair value is reflected in the derivative
asset or liability and in other comprehensive income.
The amounts included within other comprehensive income
reflect the value of the cash-flow hedges based on current
market conditions and therefore the amount for which the hedge
will be used in the future to offset the impact of expected
changes in variable prices. Consistent with hedge accounting
prior to SFAS No. 133, the effects of the hedged transaction
will be recorded in the statement of income as the related
transaction is actually settled.
The disclosure in Note 3 to the Financial Statements of the
amount of derivative gains and losses "expected to be realized
in earnings during the next twelve months" represents the
projected value of the hedge over the next twelve months
relative to what would be recorded had the hedge transaction
not been entered into. The amount is not a forecasted loss
incremental to normal operations, but rather it demonstrates
the extent to which volatility in earnings (which would
otherwise exist) is mitigated through the presence of cash-flow
hedges.
Credit Risk - See Note 10 to Financial Statements for
information on Credit Risk.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2001 Compared with Three Months
Ended March 31, 2000
For information concerning liquidity and capital
resources, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations in TXU Europe's
2000 Form 10-K. Results for the three-month periods presented
herein are not necessarily indicative of expectations for a
full year's operations because of seasonal and other factors,
including variations in maintenance and other operating
expense patterns. No significant changes or events which might
affect the financial condition of TXU Europe have occurred
subsequent to year-end other than as disclosed herein.
Cash generated by operating activities was pounds 28
million for the three months ended March 31, 2001 compared with
pounds 171 million for the same period of 2000. Cash flows
provided by operating activities before changes in operating
assets and liabilities were pounds 169 million for the 2001
period and pounds 106 million for the 2000 period. Changes in
operating assets and liabilities used pounds 141 million for
the three months ended March 31, 2001 compared with cash
provided of pounds 65 million for the same period of 2000. The
decline in cash flow from operating activities is primarily
attributable to lower levels of receivables sold or
collateralized under the receivable securitization program and
to reduced cash flows from UK operations.
Cash used in investing activities was pounds 102 million
for the three months ended March 31, 2001 compared with pounds
49 million for the same period of 2000. Capital expenditures
were virtually the same for both periods at approximately
pounds 45 million. In the 2001 period, TXU Europe acquired
Kiel AG for pounds 145 million and received a net pounds 97
million from the sale of the North Sea gas assets.
Cash used for financing activities for the three months
ended March 31, 2001 was pounds 364 million compared with cash
provided of pounds 80 million for the same period of 2000. For
the first three months of 2001, long-term debt borrowings were
pounds 40 million while repayments of long-term debt were
pounds 374 million, primarily for the early repayment of the
rent factoring arrangement (pounds 190 million) and scheduled
22
payments on certain capital leases. For the three months ended
March 31, 2000, borrowings of long-term debt were pounds 280
million and repayments were pounds 247 million. There also was
pounds 95 million of Preferred Securities of a subsidiary
perpetual trust issued in March 2000.
Financing Arrangements
See Notes 6 and 7 to Financial Statements for more
information concerning available sources of short-term and long-
term financing.
Effect of Inflation
Because of the relatively low level of inflation
experienced in the UK, inflation did not have a material impact
on results of operations for the periods presented.
Regulation and Rates
New Electricity Trading Arrangements (NETA) -NETA was
implemented in the UK on March 27, 2001, replacing the Pooling
and Settlement Agreement (the Pool) arrangements for wholesale
electricity trading in England and Wales. NETA provides those
companies wishing to buy and sell electricity the freedom to
enter into directly negotiated contracts instead of having to
trade through the Pool. Under the new arrangements, bulk
electricity is traded through a variety of bilateral and
physical contracts. Market participants include not only
generators and suppliers but also traders, such as energy
wholesalers, with physical positions. Accordingly,
implementation of NETA has eliminated 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 enables the system operator
(National Grid Company) to change levels of generation and
demand to near real-time; and a mechanism for imbalance
settlement provides for the settling of the differences between
net physical and net contractual position of parties. TXU
Europe is currently evaluating what impact the implementation
of NETA will have on its financial position, results of
operations or cash flows.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Europe
contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended.
Although TXU Europe believes that in making any such statement
its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its
entirety by reference to factors contained in the Forward-
Looking Statements section of Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations
in the 2000 Form 10-K as well as general economic and business
conditions in the UK and in the service area for Eastern
Electricity which has been opened to competition; unanticipated
changes in interest rates, in rates of inflation, or in foreign
exchange rates; prevailing governmental, statutory, regulatory
or administrative policies and initiatives affecting TXU
Europe, its subsidiaries or the UK or European electric and gas
utility industries; general industry trends; regulation issues;
power costs and availability; changes in business strategy,
development plans or vendor relationships; availability of
qualified personnel; changes in, or the failure or inability to
comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; and
access to adequate transmission facilities to meet changing
demands, among others, that could cause the actual results of
TXU Europe to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on
which such statement is made, and TXU Europe does not undertake
any obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
23
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.
24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required hereunder is not significantly
different from the information as set forth in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
included in the 2000 Form 10-K and is therefore not presented
herein.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 which 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 and, on April 4,
2001, the appeal was allowed. The House of Lords found that
National Grid was entitled to use the surplus funds as they had
done. As a result of the decision of the House of Lords, TXU
Europe considers that the likelihood of a claim of this nature
being made against it to be remote.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits filed as a part of Part II are:
(b) Reports on Form 8-K filed since December 31, 2000, are as
follows:
Date of Report Item Reported
-------------- --------------
None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
TXU EUROPE LIMITED
By /s/ Paul C. Marsh
----------------------
Paul C. Marsh
Principal Financial Officer
By /s/ Scott R.J. Longhurst
---------------------------
Scott R.J. Longhurst
Principal Accounting Officer
Date: May 14, 2001