SECURITIES AND EXHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 8, 2001 - 2,455,705,299
shares, at US$1 par value, and 100 deferred shares, at pounds 1
par value.
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TABLE OF CONTENTS
Part I. Financial Information
Page
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2001 and 2000 .... 1
Condensed Statements of Consolidated Comprehensive
Income -
Three and Six Months Ended June 30, 2001 and 2000 .. 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2001 and 2000 .............. 3
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 .................. 4
Notes to Financial Statements ........................ 5
Independent Accountants' Report ...................... 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ....................................... 26
Part II. Other Information
Item 1.Legal Proceedings .................................. 26
Item 6.Exhibits and Reports on Form 8-K ................... 26
Signatures ....................................................... 27
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2001 2000 2001 2000
------ ----- ------- -----
(pounds million)
<s> <c> <c> <c> <c>
Operating Revenues ............... 1,902 821 4,207 1,972
------ ------ ----- ------
Operating Expenses
Energy purchased for resale and
fuel consumed .................. 1,487 581 3,324 1,344
Operation and maintenance ........ 233 96 447 273
Depreciation and other
amortization ................... 40 35 85 73
Goodwill amortization ............ 31 22 62 44
------ ------ ----- ------
Total operating expenses ......... 1,791 734 3,918 1,734
------ ------ ----- ------
Operating Income ................. 111 87 289 238
Other Income - Net .............. 58 43 65 44
------ ------ ----- ------
Income Before Interest, Income
Taxes, Distributions and Minority
Interest ....................... 169 130 354 282
Interest Income .................. 13 16 25 32
Interest Expense ................. 96 91 201 180
------ ------ ----- ------
Income Before Income Taxes,
Cumulative Effect of Change
in Accounting, Distributions
and Minority Interest .......... 86 55 178 134
Income Tax Expense ............... 35 18 73 52
------ ------ ----- ------
Income Before Cumulative Effect
of Change in Accounting,
Distributions and Minority
Interest ....................... 51 37 105 82
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 ................ (2) (2) (5) (3)
Minority Interest ................ (7) (3) (17) (8)
------ ------ ----- ------
Net Income ....................... 42 32 83 78
====== ====== ===== ======
<fn>
See Notes to Financial Statements.
</fn>
</table>
1
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TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
<table>
<caption>
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- --------------
2001 2000 2001 2000
------ ------ ------- -----
(pounds million)
<s> <c> <c> <c> <c>
Net Income ............................... 42 32 83 78
------- ------ ------- -----
Other Comprehensive Income (Loss) -
Net change during period, net of tax
effects:
Investments classified as available
for sale:
Unrealized holding gains .............. - 7 38 41
Reclassification of net gain
realized on sale of investment in
Hidrocantabrico to other income ..... (35) - (35) -
Cumulative currency translation
adjustment ............................ (4) 2 (3) 1
Cash flow hedges (under SFAS No. 133):
Cumulative transition adjustment as
of January 1, 2001 .................. - - (72) -
Discontinued cash flow hedges ......... 7 - 7 -
Net change in fair value of
derivative gains (losses) ........... (3) - (18) -
Amount realized in earnings during
the period .......................... 30 - 36 -
------ ------ ------- -----
Total ................................. (5) 9 (47) 42
------ ------ ------- -----
Comprehensive Income ...................... 37 41 36 120
====== ====== ======= =====
<fn>
See Notes to Financial Statements.
</fn>
</table>
2
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<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------
2001 2000
------ ------
(pounds million)
<s> <c> <c>
Cash Flows - Operating Activities
Net income ................................. 83 78
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 ............ (59) (46)
Depreciation and amortization ............ 147 117
Deferred income taxes .................... 60 33
Minority interest ........................ 17 8
Changes in merchant energy trading
assets and liabilities ................. (48) -
Changes in operating assets and
liabilities ............................ (138) 12
Other..................................... 5 (36)
------ ------
Cash provided by operating
activities ........................... 67 156
------ ------
Cash Flows - Investing Activities
Acquisition of business .................... (150) -
Investments ................................ (42) (138)
Capital expenditures ....................... (108) (95)
Proceeds from sale of investments and
other assets ............................. 432 72
Other....................................... - (6)
------ ------
Cash provided by (used in)
investing activities ................... 132 (167)
------ ------
Cash Flows - Financing Activities
Net borrowings under the:
Sterling credit facility - Tranche B........ 84 206
EMTN Note .................................. - 225
Other long-term debt ....................... 23 43
Issuance of preferred securities of
subsidiary perpetual trust ............... - 95
Retirements of:
Sterling credit facility - Tranche B ..... (87) (400)
Other long-term debt ..................... (388) (207)
Change in notes payable - banks and
other short-term loans ................... (298) 153
Distributions on preferred securities
of subsidiary perpetual trust ............ (3) -
Dividends paid on minority interest......... (3) -
Debt financing costs ....................... (1) (6)
------ ------
Cash (used for) provided by financing
activities ............................. (673) 109
------ ------
Effect of Exchange Rates on Cash and
Cash Equivalents ........................... (1) (1)
------ ------
Net Change in Cash and Cash Equivalents....... (475) 97
Cash and Cash Equivalents - Beginning Balance. 663 285
------ ------
Cash and Cash Equivalents - Ending Balance ... 188 382
====== ======
<fn>
See Notes to Financial Statements.
</fn>
</table>
3
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<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December
2001 31,
2000
(Unaudited)
----------- ---------
(pounds million)
<s> <c> <c>
ASSETS
Current Assets
Cash and cash equivalents .............. 188 663
Accounts receivable .................... 788 743
Inventories - at average cost .......... 112 72
Merchant energy trading assets ......... 547 585
Prepayments and other current assets ... 132 97
---------- ---------
Total current assets ................. 1,767 2,160
---------- ---------
Investments
Restricted cash......................... 729 672
Other................................... 417 695
---------- ---------
Total investments .................... 1,146 1,367
---------- ---------
Property, Plant and Equipment - Net ...... 2,882 2,781
Goodwill ................................. 3,991 3,945
Merchant Energy Trading Assets ........... 276 121
Derivative Assets ........................ 242 -
Deferred Debits and Other Assets ......... 481 670
---------- ---------
Total .............................. 10,785 11,044
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Notes payable - banks and short-term
loans on accounts receivable ......... 230 530
Long-term debt due currently ........... 502 862
Accounts payable:
Trade ................................ 748 712
Affiliates ........................... 53 52
Merchant energy trading liabilities .... 442 571
Interest and taxes accrued ............. 56 78
Other current liabilities .............. 281 166
---------- ---------
Total current liabilities ............ 2,312 2,971
---------- ---------
Accumulated Deferred Income Taxes ........ 506 467
Provision for Unfavorable Contracts ...... 516 573
Merchant Energy Trading Liabilities ...... 269 81
Derivative Liabilities ................... 119 -
Other Deferred Credits and Noncurrent
Liabilities ............................ 189 320
Long-term Debt, Less Amounts due
Currently............................... 4,634 4,480
Preferred Securities of Subsidiary
Perpetual Trust ........................ 95 95
Minority Interest ........................ 310 258
Contingencies (Note 7 )
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 ...................... 416 333
Accumulated other comprehensive income
(loss)................................ (48) (1)
---------- ---------
Total shareholder's equity ........... 1,835 1,799
---------- ---------
Total .............................. 10,785 11,044
========== =========
<fn>
See Notes to Financial Statements.
</fn>
</table>
4
<page>
TXU EUROPE LIMITED
Notes to Financial Statements
1. BUSINESS, ACQUISITIONS AND DISPOSITIONS
Business
TXU Europe Limited (TXU Europe) is an indirect, wholly-
owned subsidiary of TXU Corp., a Texas corporation. TXU Corp.
is a global energy services company that engages in electric
and natural gas services, electricity generation, merchant
energy trading, energy marketing, energy delivery,
telecommunications, and other energy-related services,
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.
TXU Europe uses a single energy business concept for the
management of its energy activities in a consistent manner in
its different geographical areas. There are two reporting
operating segments for TXU Europe:
ENERGY - which consists of the energy retail business and
the portfolio trading and power business. The single
energy business manages the integrated portfolio of
generation assets and contracts and retail customer base
within two separate geographical areas - the UK and
continental Europe (which comprises Central Europe, the
Nordic region, Iberia and Germany); and
NETWORKS - which owns, manages and, through its 50% owned
networks management joint venture (24seven), operates
its electricity distribution system in the UK.
Acquisitions
On January 8, 2001, TXU Europe completed the acquisition of
51% of Stadtwerke Kiel AG (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 the assets and liabilities of Kiel AG continues but is
expected to be completed within one year of the acquisition
date. TXU Europe's preliminary estimate of goodwill is pounds
106 million, which is being amortized over 40 years. This
amount is subject to further revision as additional information
on the fair value of assets acquired and liabilities assumed
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 six months ended June 30, 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
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), based in Berlin, Germany, for
approximately 24 million Deutsche Marks (pounds 8 million).
Ares is an electricity retailer, offering energy services to
both business customers and residential customers throughout
Germany. At the date of acquisition, Ares had 110,000 active
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customers. Pro forma information for the six months ended June
30, 2001 and 2000, reflecting the acquisition of Ares, would
not be significantly different from reported amounts.
In August 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. In the transaction, TXU
Europe assumed certain of Norweb Energi's obligations. These
include Norweb Energi's 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 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 is
expected to be completed within the first part of the third
quarter of 2001.
The results of operations of Norweb Energi are reflected in
the consolidated financial statements of TXU Europe from August
3, 2000, the 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
Six Months
Ended
June 30,
2000
------------
pounds million
Operating Revenues 2,509
Operating Income 296
Net Income 109
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.
Dispositions
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. In April
2001, TXU Europe received net proceeds from the sale of euros
522 million (pounds 325 million) and recorded a pre-tax gain of
pounds 50 million in Other Income - Net (pounds 35 million
after-tax).
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. From the date of the sale through June 30,
2001, TXU Europe has received net cash proceeds of pounds 102
million after settlement of certain outstanding issues, and
recorded a net pre-tax gain of pounds 7 million in Other
Income - Net (pounds 5 million after-tax). At the time of the
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sale, a forward sell contract was entered into by TXU Europe to
match the outstanding forward purchase contracts on the
Johnston field portion of the North Sea assets.
On July 12, 2001, TXU Europe completed the sale of its
Rugeley generating station for approximately pounds 200
million. Cash received at closing was pounds 67 million with
the remaining cash proceeds from the sale to be received in
January 2002. A letter of credit has been received to secure
the remaining cash proceeds. The transaction includes a medium-
term tolling contract under which TXU Europe will provide coal
for the plant and purchase all of its output, thus preserving
TXU Europe's ability to participate fully in the new NETA
balancing market. The sale followed TXU Europe's review of its
UK generating portfolio that was announced last year and is in
line with its flexible portfolio management strategy. No
significant gain or loss is expected to be recognized in the
third quarter of 2001 from the sale.
Under its single energy business concept, TXU Europe
allocates risk capital so as to maximize returns across its
markets. TXU Europe may dispose of certain assets to allow
redeployment of resources into faster growing opportunities.
As a consequence, the composition of assets and operations in
each market within the portfolio changes from time to time.
TXU Europe continually reviews its energy portfolio within each
of its markets. TXU Europe's strategy in the UK market is to
rebalance its energy portfolio through retail growth, long term
wholesale sales and, possibly, sale or lease of physical plant.
TXU Europe has previously announced that it would seek bids for
its UK power assets to determine how to maximize the value of
these assets, by keeping them or disposing of them. There has
been no indication of an impairment of these assets.
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 in
the first quarter of 2001 of the new accounting standard for
derivatives discussed in Note 3 below, on the same basis as the
audited financial statements included in its 2000 Annual Report
on Form 10-K (2000 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.
New Accounting Standards - SFAS No. 141, "Business
Combinations" is effective for TXU Europe beginning July 1,
2001. SFAS No. 141 requires the use of the purchase method of
accounting for business combinations initiated and completed
after June 30, 2001 and eliminates the use of the pooling-of-
interests method.
SFAS No. 142, "Goodwill and Other Intangible Assets", is
effective for TXU Europe beginning January 1, 2002. SFAS No.
142 requires, among other things, the discontinuance of
goodwill amortization. The amortization of TXU Europe's
existing goodwill (approximately pounds 123 million on an
annualized basis) will cease after December 31, 2001. Any
goodwill resulting from acquisitions completed after June 30,
2001 will not be amortized.
In addition, SFAS No. 142 requires TXU Europe to complete a
transitional goodwill impairment test six months from the date
of adoption and establishes a new method of testing goodwill
for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair
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value of a reporting unit below its carrying value. Any
goodwill impairment loss during the transition period will be
recognized as the cumulative effect of a change in accounting
principle. Subsequent impairments will be recorded in
operations.
SFAS No. 143, "Accounting for Asset Retirement
Obligations", will be effective for TXU Europe beginning
January 1, 2003. SFAS No. 143 requires the recognition of a
fair value liability for any retirement obligation associated
with long-lived assets. The offset to any liability recorded
is added to the recorded asset where the additional amount is
depreciated over the same period as the long-lived asset
for which the retirement obligation is established. SFAS No. 143
also requires additional disclosures.
TXU Europe is evaluating the impact the adoption of these
standards will have on its financial position and results of
operations.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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).
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. For
the period from transition to June 30, 2001, pounds 38 million
of this cumulative transition net loss has been reclassified
into earnings.
Impact of NETA - 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 generated and to purchase
all the 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.
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 arrangement, bulk electricity is 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. Consequently, the implementation of NETA
has eliminated the Pool. Most of the derivative contracts used
to hedge exposure to changes in Pool prices have now been
renegotiated into bilateral contracts. These contracts are now
considered to be "normal purchase" contracts and under SFAS No.
133 are no longer classified as cash-flow hedges. As a result,
pounds 7 million in previously accumulated deferred losses on
these contracts have been reflected as an increase in Other
Comprehensive Income with a corresponding decrease in
Derivative Liabilities on the balance sheet.
Financial Summary - Essentially all of the terms of TXU
Europe's derivatives match the terms of the underlying hedged
items. As a result, TXU Europe experienced minimal hedge
ineffectiveness of pounds 0.1 million, mainly from treasury
hedges, for the six months ended June 30, 2001. This was
reported as Interest Expense and represented the total
ineffectiveness of all cash-flow hedges. Also, pounds 0.5
million of net derivatives losses were realized as a result of
the discontinuance of cash-flow hedges related to certain
forecasted treasury transactions that are not likely to occur.
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As of June 30, 2001, it is expected that pounds 71 million
of net losses now included in the net gains/losses from
derivative instruments that are accumulated in Other
Comprehensive Income will be reclassified into earnings during
the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to
what would be recorded if the hedge transactions had not been
entered into. The amount expected to be reclassified 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. The amount is affected by the uncertainty
that NETA has brought to the industry and its effect on near-
term contract prices.
Ongoing implementation issues being addressed by standard-
setting groups may affect the application of SFAS No. 133. In
April 2001, the Financial Accounting Standards Board (FASB)
finalized a conclusion that volume option contracts do not
qualify for the normal purchase and sale exception. As a
result, TXU Europe's gas option contracts will be accounted for
as derivatives commencing July 1, 2001 in accordance with the
transition provisions of such revised guidance. Previously the
gas option contracts were classified as normal purchase and
sale contracts pending final resolution of the issue. TXU
Europe is evaluating the financial impact resulting from the
implementation of this issue.
In June 2001, the FASB approved a number of implementation
issues regarding the normal purchase and sale exception. One
of the issues applied exclusively to the electric industry and
provided for the normal purchase and sale exception under
specific circumstances. TXU Europe evaluated electricity
contracts under the new guidance and determined that they will
qualify for the normal purchase and sale exception from July 1,
2001, thus removing them from SFAS 133 classification as
derivatives. As a result, amounts for these contracts will be
removed from Other Comprehensive Income concurrent with the
timing of the original forecasted transaction that was being
hedged. These contracts represent a cumulative balance of
pounds 5 million of accumulated net losses in Other
Comprehensive Income.
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 second quarter and first six months 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 second quarter and six months ended June 30,
2000 was to increase net income by pounds 4 million and pounds
8 million (after a reduction for income taxes of pounds 2
million and pounds 3 million), respectively.
5. RESTRUCTURING CHARGES AND OTHER COSTS
During the six months ended June 30, 2001 and 2000, TXU
Europe recorded restructuring charges and other costs of pounds
28 million and pounds 56 million pre-tax (pounds 20 million and
pounds 41 million after-tax), respectively. Included in the
costs for 2000 was pounds 7 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 as 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.
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For the six months ended June 30, 2001, pre-tax
restructuring charges consisted of redundancy costs of
approximately pounds 5 million related to termination benefits
for 55 employees that had accepted the benefits, pounds 15
million of asset writedowns and pounds 8 million of other exit
costs. For the six months ended June 30, 2000, pre-tax
restructuring costs consisted of redundancy costs of
approximately pounds 22 million related to voluntary
termination benefits for 442 employees that accepted the
benefits, pounds 16 million for asset writedowns and pounds 11
million of other exit costs. The asset writedowns were charged
to depreciation expense. The rest of these costs have been
recorded in operation and maintenance expense.
During the six months ended June 30, 2001and 2000, pounds
8 million and pounds 9 million of redundancy costs and pounds 5
million and pounds 9 million of other exit costs charged during
the six months then ended have been paid, respectively.
6. 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. As of June 30, 2001, the amount outstanding under
this facility was euros 306 million (pounds 183 million).
Also in January 2001, the pounds 150 million Eastern
Electricity revolving credit balance was repaid. In April 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. In May 2001, TXU Europe repaid and allowed to
expire the euros 250 million (pounds 158 million) facility.
As of June 30, 2001, total short-term borrowings aggregated
pounds 230 million with a weighted average annual interest rate
of 5.33%.
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 (No.2) Limited (TXU Finance), which is 90% owned by
TXU Europe, 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 six months
ended June 30, 2001, Eastern Electricity sold pounds 1.2
billion in receivables under the program to replace those
receivables that had been collected. 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 June 30, 2001, accounts
receivable of Eastern Electricity were reduced by pounds 181
million under the program and pounds 6 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 5.3% at June 30, 2001, based on commercial
paper rates plus a margin.
Long-Term Lines of Credit - At June 30, 2001, TXU Europe
and 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 June 30, 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 June 30, 2001, pounds 750
10
<page>
million of borrowings were outstanding under the term facility
at an interest rate of 6.0% per annum, and outstanding Tranche
B borrowings consisted of 700 million Norwegian kroner (NOK)
(pounds 53 million) at 8.2% per annum and euros 258 million
(pounds 155 million) at 5.3% 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 in various currencies on a continuing
basis to one or more dealers in an aggregate principal amount
outstanding of euros 2.0 billion. At June 30, 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.
In June 2001, TXU Europe purchased approximately pounds 32
million of US Treasury securities with various maturities to
match the required interest and principal repayments to
maturity on a subsidiary's junior subordinated debentures held
by another subsidiary. These amounts have been included in the
June 30, 2001 balance sheet as restricted cash.
7. 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 chief
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
11
<page>
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 their financial position,
results of operations or cash flows.
Financial guarantees - TEG has guaranteed up to US$110
million (pounds 78 million) at June 30, 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
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.
8. 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
and six months ended June 30, 2000 have been reclassified to
conform to the new presentation. 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).
12
<page>
<table>
<caption>
Three Months Ended June 30,
---------------------------------------
2001 2000
------------------ ------------------
Income Income
before before
Revenues Interest Revenues Interest
(pounds million)
<s> <c> <c> <c> <c>
UK ................................. 1,562 91 714 61
Continental Europe ................. 304 58 69 2
------ ----- ----- ----
Total Energy ................... 1,866 149 783 63
------ ----- ----- ----
Networks ........................... 72 22 78 25
Other .............................. 4 6 5 30
Inter-segment eliminations ......... (40) - (45) -
------ ----- ----- ----
Total ...................... 1,902 177 821 118
====== ----- ===== ----
Cost of capital elimination ........ 36 39
Unallocated corporate costs ........ (44) (27)
----- ----
Income before interest,income
taxes, distributions and
minority interest ................ 169 130
===== ====
</table>
<table>
<caption>
Six Months Ended June 30,
---------------------------------------
2001 2000
------------------ ------------------
Income Income
before before
Revenues Interest Revenues Interest
(pounds million)
<s> <c> <c> <c> <c>
UK ................................. 3,492 212 1,758 160
Continental Europe ................. 641 83 119 6
------ ----- ------ ----
Total Energy ................... 4,133 295 1,877 166
------ ----- ------ ----
Networks ........................... 161 64 201 93
Other .............................. 7 12 17 31
Inter-segment eliminations ......... (94) - (123) -
------ ----- ------ ----
Total ...................... 4,207 371 1,972 290
====== ----- ====== ----
Cost of capital elimination ........ 72 77
Unallocated corporate costs ........ (89) (85)
----- ----
Income before interest,income
taxes, distributions and
minority interest ................ 354 282
===== ====
</table>
13
<page>
9. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts Receivable - At June 30, 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 June 30, 2001 and
December 31, 2000, property, plant and equipment were stated
net of accumulated depreciation of pounds 435 million and
pounds 398 million, respectively.
Goodwill - At June 30, 2001 and December 31, 2000, goodwill
was stated net of accumulated amortization of pounds 302
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 non-performance by
counterparties. TXU Europe maintains credit risk 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 - TXU Europe's gross exposure
to credit risk (before any netting agreements or reserves) in
Continental Europe and the UK as of June 30, 2001 was pounds
1.9 billion. These regional concentrations have the potential
to affect 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.
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-. TXU Europe's exposure from
transactions with one customer represented 6% of the gross fair
value of TXU Europe's accounts receivable, merchant energy
trading assets and derivative assets at June 30, 2001. This
customer is an investment grade major energy company. The risk
of loss to TXU Europe arising from non-performance by this and
other 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 for managing credit risk,
its exposures and its credit and other reserves, TXU Europe
does not anticipate a materially adverse effect on its
financial position or its results of operations as a result of
non-performance by any counterparty.
14
<page>
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 June 30, 2001, and the related condensed
statements of consolidated income and comprehensive income for
the three-month and six-month periods ended June 30, 2001 and
2000 and the condensed statements of consolidated cash flows
for the six-month period ended June 30, 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
July 25, 2001
15
<page>
TXU EUROPE LIMITED
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 company that engages in electric
and natural gas services, electricity generation, merchant
energy trading, energy marketing, energy delivery,
telecommunications, and other energy-related services,
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.
On January 8, 2001, TXU Europe completed the acquisition of
51% of Stadtwerke Kiel AG (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 the 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 on the
fair value of assets acquired and liabilities assumed 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 six
months ended June 30, 2001 and 2000, reflecting the acquisition
of Kiel AG, would not be significantly different from reported
amounts.
On May 1, 2001, Kiel AG acquired all of the share capital
of Ares Energie GmbH (Ares), based in Berlin, Germany, for
approximately 24 million Deutsche Marks (pounds 8 million).
Ares is an electricity retailer, offering energy services to
both business customers and residential customers throughout
Germany. At the date of acquisition, Ares had 110,000 active
customers. Pro forma information for the six months ended June
30, 2001 and 2000, reflecting the acquisition of Ares, would
not be significantly different from reported amounts.
In August 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. In the transaction, TXU
Europe assumed certain of Norweb Energi's obligations. These
include Norweb Energi's power purchase agreements, which have
been integrated into TXU Europe's energy portfolio.
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. In April
2001, TXU Europe received net proceeds from the sale of euros
522 million (pounds 325 million) and recorded a pre-tax gain of
pounds 50 million in Other Income - Net (pounds 35 million
after-tax).
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. From the date of the sale through June 30,
2001, TXU Europe has received net cash proceeds of pounds 102
million after settlement of certain outstanding issues, and
recorded a net pre-tax gain of pounds 7 million in Other
Income - Net (pounds 5 million after-tax). At the time of the
sale, a forward sell contract was entered into by TXU Europe to
match the outstanding forward purchase contracts on the
Johnston field portion of the North Sea assets.
On July 12, 2001, TXU Europe completed the sale of its
Rugeley generating station for approximately pounds 200
million. Cash received at closing was pounds 67 million with
the remaining cash proceeds from the sale to be received in
January 2002. A letter of credit has been received to secure
the remaining cash proceeds. The transaction includes a medium-
term tolling contract under which TXU Europe will provide coal
for the plant and purchase its output, thus preserving TXU
Europe's ability to participate fully in the new NETA balancing
16
<page>
market. The sale followed TXU Europe's review of its UK
generating portfolio that was announced last year and is in
line with its flexible portfolio management strategy. No
significant gain or loss is expected in the third quarter of
2001 from the sale.
Under its single energy business concept, TXU Europe
allocates risk capital so as to maximize returns across its
markets. TXU Europe may dispose of certain assets to allow
redeployment of resources into faster growing opportunities.
As a consequence, the composition of assets and operations in
each market within the portfolio changes from time to time.
TXU Europe continually reviews its energy portfolio within each
of its markets. TXU Europe's strategy in the UK market is to
rebalance its energy portfolio through retail growth, long term
wholesale sales and, possibly, sale or lease of physical plant.
TXU Europe has previously announced that it would seek bids for
its UK power assets to determine how to maximize the value of
these assets, by keeping them or disposing of them. There has
been no indication of an impairment of these assets.
RESULTS OF OPERATIONS
Results for the three and six-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 June 30, 2001 Compared With Three Months
Ended June 30, 2000
Overview - Net income for the three months ended June 30,
2001 was pounds 42 million compared with pounds 32 million for
the same period in 2000. After adjusting for the effect of the
disposal of the metering business and restructuring costs, net
income in the 2000 period was pounds 20 million. (The disposal
of the metering business has been treated outside of normal
operations since the business was part of neither the networks
nor the energy businesses and therefore, represents a non-
recurring gain.) The improvement in net income for the second
quarter of 2001 reflects a continued strong performance in
merchant energy trading activities across Europe, the timing of
earnings from the Norweb Energi business and gain from the sale
of a previous investment in Hidroelectrica del Cantabrico, SA
(Hidrocantabrico) in Spain (pounds 35 million after-tax),
partially offset by restructuring costs.
Income before interest, income taxes, distributions and
minority interest (income before interest) was pounds 169
million for the three months ended June 30, 2001 compared with
pounds 130 million for the same period in 2000. Revenues were
pounds 1.9 billion for the three months in 2001 compared with
pounds 0.8 billion for the three months in 2000.
The increase in revenues resulted from increased merchant
energy trading activity, particularly in UK energy trading,
which was impacted by the implementation of the New Electricity
Trading Arrangements (NETA) on March 27, 2001, and by the
inclusion of the results of Norweb Energi and Kiel AG since
their acquisition on August 3, 2000 and January 8, 2001,
respectively.
During the three months ended June 30, 2001 and 2000, TXU
Europe recorded restructuring charges and other costs of
approximately pounds 12 million pre-tax (pounds 8 million after-
tax) and pounds 13 million pre-tax (pounds 9 million after-
tax), respectively. Most of these 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.
17
<page>
Energy purchased for resale and fuel consumed for the three
months ended June 30, 2001 was pounds 1.5 billion compared with
pounds 0.6 billion for the same period in 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, offsetting reductions
to depreciation expense for the three months ended June 30,
2000 which has been restated to reflect the change in
depreciation as described in Note 4 to Financial Statements.
Net interest expense (interest expense less interest
income) for the three months ended June 30, 2001 was pounds 83
million compared with pounds 75 million for the same period in
2000, primarily due to increased borrowings used to finance the
Norweb Energi and Kiel AG acquisitions.
Total income tax expense for the three months ended June
30, 2001 was pounds 35 million compared with pounds 18 million
for the same period in 2000. The effective tax rate in 2001
was affected by higher amounts of amortization of goodwill from
the Norweb Energi and Kiel AG acquisitions. The effective tax
rate in 2000 was impacted by non-deductible items related to a
capital lease and non-deductible expenses related to the
investment in Hidrocantabrico.
Minority interest for the three months ended June 30, 2001,
has increased in comparison with the same period in 2000
primarily as a result of including the 49% minority ownership
in Kiel AG.
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.
Six Months Ended June 30, 2001 Compared With Six Months Ended
June 30, 2000
Overview - Net income for the six months ended June 30,
2001 was pounds 83 million compared with pounds 78 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 period ended June 30, 2000 has
been changed to reflect the new depreciation method from
January 1, 2000 as well as the restatement in calculating
minority interest. The improvement in net income for 2001
reflects a continued strong performance in merchant energy
trading activities across Europe, the timing of earnings from
the Norweb Energi business and a gain from the sale of
Hidrocantabrico as well as lower restructuring costs. These
favorable factors offset the effect of lower networks revenues
and higher interest and related charges. After adjusting for
the effect of the disposal of the metering business and
restructuring costs, net income in the 2000 period was pounds
98 million compared with pounds 103 million for the 2001 period
(after deducting restructuring costs).
Income before interest was pounds 354 million for the six
months ended June 30, 2001 compared with pounds 282 million for
the same period in 2000. Revenues of pounds 4.2 billion for
the first six months of 2001 were up over 100% compared with
the pounds 2.0 billion for the first six months of 2000.
The increase in revenues resulted primarily from increased
merchant energy trading activity and the inclusion of the
results of Norweb Energi and Kiel AG since their acquisition.
These revenue increases were partially 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 AG, UK gas prices
continued to be higher and more volatile than in the same
period in 2000.
During the six months ended June 30, 2001 and 2000, TXU
Europe recorded restructuring charges and other costs of pounds
28 million and pounds 56 million pre-tax (pounds 20 million and
18
<page>
pounds 41 million after-tax), respectively. Included in the
costs for 2000 was pounds 7 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 as 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.
Energy purchased for resale and fuel consumed for the six
months ended June 30, 2001 was pounds 3.3 billion compared with
pounds 1.3 billion for the same period in 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 for the six months
ended June 30, 2001were higher compared with the same period in
2000, mainly due to the inclusion of Norweb Energi and Kiel AG,
offsetting reductions to depreciation expense for the six
months ended June 30, 2001 which has been restated to reflect
the change in depreciation as described in Note 4 to Financial
Statements.
Net interest expense for the six months ended June 30, 2001
was pounds 176 million compared with pounds 148 million for the
same period in 2000, primarily due to increased borrowings to
finance the Norweb Energi and Kiel AG acquisitions and
accelerated amortization of debt issue costs following the
early repayment of the rent factoring debt in January 2001.
Total income tax expense for the six months ended June 30,
2001 was pounds 73 million compared with pounds 52 million for
the same period in 2000. 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 the 2000 period is also adversely
impacted by non-deductible expenses related to the
Hidrocantabrico offer.
Minority interest in the six-month period ended June 30,
2001, has increased in comparison with the same period in 2000,
primarily as a result of including the 49% minority ownership
in Kiel AG.
See Note 8 to Financial Statements for information on
revenues and income before interest by operating segment.
19
<page>
<table>
<caption>
OPERATING STATISTICS
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
------- -------- ------- -------
<s> <c> <c> <c> <c>
PHYSICAL SALES VOLUMES
Electricity (gigawatt-hours)-(GWh):
Industrial and commercial ......... 6,404 3,602 12,728 7,191
Residential ....................... 5,064 2,399 11,769 6,973
------- ------ ------- -------
Total electricity ............... 11,468 6,001 24,497 14,164
======= ====== ======= =======
Gas (billion cubic feet)- (Bcf):
Industrial and commercial ......... 12 13 35 31
Residential ....................... 17 8 58 28
------- ------ ------- -------
Total gas ....................... 29 21 93 59
======= ====== ======= =======
Wholesale energy sales:
Electricity (GWh).................. 31,605 33,263 75,355 57,698
======= ====== ======= =======
Gas (Bcf) ......................... 345 275 724 461
======= ====== ======= =======
Electricity units distributed (GWh).. 7,404 7,621 17,308 16,825
======= ====== ======= =======
- ----------------------------------------------------------
CUSTOMERS (end of period & in thousands)
Electricity (retail) ................ 4,477 2,717
Gas ................................. 1,276 714
</table>
Results by Segment
Energy - The Energy business segment is managed on a
geographical basis - in the UK and in continental Europe which
comprises the Central European, Nordic, Iberian and German
(Kiel AG) operations.
UK - Revenues for the three months ended June 30, 2001 were
pounds 1.6 billion compared to pounds 0.7 billion for the three
months ended June 30, 2000. The increase is partly associated
with the inclusion of results from Norweb Energi (pounds 184
million), since acquisition in August 2000. The balance of the
increase reflects the significant increase in merchant energy
trading activity.
Income before interest for the three months ended June 30,
2001 was pounds 91 million compared to pounds 61 million for
the same period in 2000. The UK electricity business
contributed pounds 35 million more in the three months in 2001
than in the same period in 2000. The improvement in electricity
reflects the levels and more balanced timing of income
resulting from the Norweb Energi acquisition and shows the
strength of TXU Europe's operations in the new UK electricity
market since implementation of NETA. This margin increase was
partially offset by an increase in operating expenses, mainly
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from restructuring costs. Margin contribution by gas trading
activities for the three months ended June 30, 2001 was
relatively unchanged from the prior year period as prices
stabilized and became less volatile.
Revenues for the six months ended June 30, 2001 were pounds
3.5 billion compared to pounds 1.8 billion for the six months
ended June 30, 2000. The increase is partly associated with the
inclusion of the results from Norweb Energi (pounds 452
million), since acquisition in August 2000. The balance
reflects the significant increase in merchant energy trading
activity.
Income before interest for the six months ended June 30,
2001 was pounds 212 million compared to pounds 160 million for
the period ended June 30, 2000. This increase primarily
reflects an improvement in margins of pounds 80 million offset
by an increase in operating costs of pounds 30 million. The
margin improvement consisted of pounds 19 million of higher
electricity margins and pounds 62 million of higher gas
margins, which were primarily due to rising and volatile gas
prices in comparison to the previous year period. The increase
in operating costs reflects the inclusion of Norweb Energi and
an increase in restructuring charges of pounds 6 million.
Continental Europe - Revenues for the three months ended
June 30, 2001 were pounds 304 million compared to pounds 69
million for the same period in 2000. Part of the increase is
due to the inclusion of Kiel AG (pounds 45million), and the
balance is due to the increase in merchant energy trading
activity in continental European markets, primarily through
continuing portfolio-driven improvements in the Nordic region.
This merchant energy trading activity has increased steadily
from the relatively low volumes in the three months ended June
30, 2000.
Income before interest for the three months ended June 30,
2001 was pounds 58 million compared to pounds 2 million for the
same period in 2000. This increase reflects the pre-tax gain on
the sale of the investment in Hidrocantabrico (pounds 50
million), the inclusion of Kiel AG (pounds 3 million) since
acquisition and profitable trading in the Nordic region (pounds
7 million) partly offset by the effect of a softening of prices
in Central European markets (pounds 4 million). The shares in
Hidrocantabrico had been acquired during 1999 and 2000 as part
of the Europe-wide merchant energy portfolio. The gain from
this sale reinforces TXU Europe's record in capturing capital
as well as profits from the portfolio model, as evidenced by
gains reported most recently in 2001 from the sale of the North
Sea upstream gas business and in the previous year the gain
from the investment in SME in the Czech Republic. TXU Europe
intends such sales, where appropriate, to continue to form part
of the business model and results profile for TXU Europe. TXU
Europe's interest in the trading and business development
opportunities in the Spanish market continues.
Revenues for the six months ended June 30, 2001 were pounds
641 million compared to pounds 119 million for the six months
ended June 30, 2000. The increase is partly due to the
inclusion of Kiel AG (pounds 106 million). The balance of the
increase is due to the increase in merchant energy trading
activity in the Central European and Nordic markets.
Income before interest for the six months ended June 30,
2001 was pounds 83 million compared to pounds 6 million for the
six-month period ended June 30, 2000. The increase reflects the
gain on the sale of the investment in Hidrocantabrico (pounds
50 million), Kiel AG results (pounds 15 million) and profitable
trading in the Nordic region (pounds 19 million) partly offset
by a softening of prices in Central European markets (pounds 7
million).
Networks - Revenues for the three months ended June 30,
2001 were pounds 72 million compared to pounds 78 million for
the same period in 2000. The reduction is due to adverse
movements in the mix of volumes distributed at different tariff
rates.
Income before interest for the three months ended June 30,
2001 was pounds 22 million compared to pounds 25 million for
the same period in 2000. This reduction results from the
reduced revenues partly offset by the reduction in depreciation
expense resulting from the change in depreciation and to
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<page>
reduced operating expenses. Operating cost savings reflect the
on-going cost savings and operating efficiencies resulting from
the operation of the electricity distribution system by its 50%
owned 24seven joint venture.
Revenues for the six months ended June 30, 2001 were
pounds 161 million compared to pounds 201 million for the six
months ended June 30, 2000. The reduction is largely due to the
impact of the OFGEM Distribution Price Review (pounds 29
million) which was effective as of April 1, 2000.
Income before interest for the six months ended June 30,
2001 was pounds 64 million compared to pounds 93 million for
the period ended June 30, 2000. The reduction is explained by
the reduced revenues, as discussed above, partly offset by
reduced depreciation expense from the change in depreciation
and by reduced operating expenses. Operating cost savings
reflect the on-going cost savings and operating efficiencies
resulting from the 24seven joint venture.
Other - Income before interest for the three months ended
June 30, 2001 was pounds 6 million compared to pounds 30
million for the same period in 2000. Income before interest
for the six months ended June 30, 2001 was pounds 12 million
compared to pounds 31 million for the same period in 2000.
Included in the results for 2001 is the pre-tax gain on the
sale of the North Sea upstream gas business (pounds 7 million)
while the 2000 period includes the pre-tax gain from the sale
of the metering business (pounds 30 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, which were realized into earnings with the
sale of the investment in the second quarter of 2001.
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 June 30, 2001, the change in fair value of cash-flow
hedges was a reduction of pounds 3 million after tax while
pounds 30 million after tax of the deferred amount was
recognized in earnings. In addition, with the implementation
of NETA in the UK, most of the derivative contracts used to
hedge exposure to changes in the Pool prices have now 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. These have been
reflected as an increase in Other Comprehensive Income (pounds
7 million net of tax reduction for the second quarter of 2001)
with a corresponding decrease in Derivative Liabilities. 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 that 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 to offset 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.
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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 movements in foreign exchange rates, 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 9 to Financial Statements for information on
Credit Risk.
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended June 30, 2001 Compared with Six Months Ended
June 30, 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 Annual Report on Form 10-K (2000 Form 10-K). Results for
the three-month and six- 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.
Cash generated by operating activities was pounds 67
million for the six months ended June 30, 2001 compared with
pounds 156 million for the same period in 2000. Cash flows
provided by operating activities before changes in operating
assets and liabilities were pounds 205 million for the 2001
period and pounds 144 million for the 2000 period. Included in
the 2001 amounts were non-cash mark-to-market gains of pounds
48 million. Changes in operating assets and liabilities used
pounds 138 million for the six months ended June 30, 2001
compared with cash provided of pounds 12 million for the same
period of 2000. The lower cash flows from operating activities
is primarily attributable to lower levels of receivables sold
or collateralized under the receivable securitization program,
to reduced cash flows from UK merchant energy trading
operations and to a replenishment of coal inventory at certain
generating plants.
Cash provided by investing activities was pounds 132
million for the six months ended June 30, 2001 compared with
cash used in investing activities of pounds 167 million for the
same period in 2000. In the 2001 period, TXU Europe received
pounds 325 million from the sale of its investment in
Hidrocantabrico in Spain and a net pounds 102 million from the
sale of the North Sea gas assets. Capital expenditures were
pounds 108 million in 2001 compared with pounds 95 million in
2000. In the 2001 period, TXU Europe acquired Kiel AG for
pounds 145 million. The acquisition of investments in 2000 was
primarily for the purchase of additional shares in
Hidrocantabrico.
23
<page>
Cash used for financing activities for the six months ended
June 30, 2001 was pounds 673 million compared with cash
provided of pounds 109 million for the same period of 2000.
For the first six months of 2001, long-term debt borrowings
were pounds 107 million while repayments of long-term debt were
pounds 475 million, primarily for the early repayment of the
rent factoring arrangement and scheduled payments on certain
capital leases. For the six months ended June 30, 2000,
borrowings of long-term debt were pounds 474 million and
repayments were pounds 607 million. There also was pounds 95
million of Preferred Securities of a subsidiary perpetual trust
issued in March 2000.
Financing Arrangements
See Note 6 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 TXU Europe's results of operations for the periods presented
herein.
Regulation and Rates
New Licensing Arrangements - Under the UK Utilities Act
2000, which became effective in April 2001, the concept of a
company holding a "Public Electricity Supply License" (a PES
company) will be abolished when the relevant commencement
orders are laid before parliament. This is likely to take
place in the autumn of 2001, and a significant feature is that
one entity will not be able to have legal ownership of both an
electricity distribution business and an electricity supply
business. Currently, the legal entity Eastern Electricity Ltd
(a wholly owned subsidiary of TXU Europe Group plc) is a PES
company. In accordance with the legislation the electricity
supply business included in Eastern Electricity Ltd will be
transferred to an affiliate company (another wholly owned
subsidiary of TXU Europe Group plc) leaving only the
electricity distribution business within Eastern Electricity
Ltd. TXU Europe does not anticipate these new arrangements
having any significant financial impact on the consolidated
financial statements.
The UK Utilities Act 2000 includes provision for the Gas
and Electricity Markets Authority (the Regulator) to impose on
a license holder a financial penalty where the license holder
has contravened or is contravening a condition or requirement,
or has failed to achieve any standard of performance prescribed
under the legislation. The financial penalties regime is
scheduled for commencement later this year. Such penalties
will be subject to a maximum limit. The current proposal
presently undergoing public consultation is for the maximum
limit to be set at 10% of the revenue of the company, generated
within Great Britain, which is the holder of the relevant
license. In addition it is currently proposed that the maximum
penalty at the rate of 10% should apply to that revenue for
each year in which the breach or failure took place, up to a
maximum of three years. TXU Europe is not presently aware of
any matters that would make it subject to significant
penalties.
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
24
<page>
(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.
The first three months of NETA have been characterized by
market participants adapting their operations and systems to
accommodate new processes and requirements; furthermore, market
participants have experienced either charges or credits from
the balancing mechanism. TXU Europe has had positive results
to date. Requests for the modification to the NETA rules have
been made by some participants, but TXU Europe expects these
will be resisted. The long-term effect of NETA will become
clearer over coming months when many business customers
negotiate power contracts with suppliers in the new
environment. Prices could be reduced, but volatility in the
NETA Balancing Mechanism could put upward pressure on end
prices.
Another consequence of the introduction of NETA is that
operators of combined heat and power (CHP) plants argue that
they have been disadvantaged because their output is usually
contracted to produce heat and they can only sell the excess
power surplus to their onsite needs at prices dictated by the
balancing mechanism. Government ministers have asked for a
report from OFGEM on the impact of NETA on these embedded
generators.
CHANGES IN ACCOUNTING STANDARDS
New Accounting Standards - See Note 2 to Financial
Statements for a discussion of new accounting standards.
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
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.
25
<page>
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 TXU Europe 2000 Form 10-K and is therefore not
presented herein. Changes in the fair value of TXU Europe's
cash flow hedges for foreign currency, interest rate and energy
related derivative contracts that were discussed in the 2000
Form 10-K, are recorded as a component of Other Comprehensive
Income as a result of implementation of SFAS No. 133. Other
than as described therein, since December 31, 2000 there has
been no significant change in the contractual terms and
notional amounts of such derivatives as disclosed in the TXU
Europe 2000 Form 10-K.
PART II. OTHER INFORMATION
Item 1. 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 June 30, 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:
None
(b) Reports on Form 8-K filed since March 31, 2001, are as
follows:
None
26
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
TXU EUROPE LIMITED
By /s/ Paul C. Marsh
-------------------
Paul C. Marsh
Chief Operating Officer
By /s/ Henry Davies
-------------------
Henry Davies
Principal Accounting Officer
Date: August 9, 2001
27
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