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 SEPTEMBER 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
I.R.S.
Incorporated under the 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 November 12, 2001 - 2,455,705,299
shares, at US$1 par value, and 100 deferred shares, at pounds 1
par value.
<page>
TABLE OF CONTENTS
Part I. Financial information Page
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30,
2001 and 2000 ..................................... 1
Condensed Statements of Consolidated Comprehensive
Income -
Three and Nine Months Ended September 30,
2001 and 2000 ..................................... 2
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2001 and 2000 .... 3
Condensed Consolidated Balance Sheets -
September 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
(i)
<page>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
___________________ __________________
2001 2000 2001 2000
________ ________ ________ ________
(pounds million)
<s> <s> <s> <s> <s>
Operating Revenues ............... 2,008 1,013 6,215 2,985
________ ________ ________ ________
Operating Expenses
Energy purchased for resale and
fuel consumed .................. 1,644 740 4,968 2,084
Operation and maintenance ........ 221 152 668 425
Loss on sale and transfer of
plants ......................... 164 - 164 -
Depreciation and other
amortization ................... 37 32 122 105
Goodwill amortization ............ 30 28 92 72
________ ________ ________ ________
Total operating expenses ......... 2,096 952 6,014 2,686
________ ________ ________ ________
Operating Income (Loss) .......... (88) 61 201 299
Other Income (Loss) - Net ....... (3) 32 62 76
________ ________ ________ ________
Income (Loss) Before Interest,
Income Taxes, Distributions
and Minority Interest .......... (91) 93 263 375
Interest Income .................. 11 10 36 42
Interest Expense ................. 91 95 292 275
________ ________ ________ ________
Income (Loss) Before Income
Taxes, Cumulative Effect of
Change in Accounting,
Distributions and Minority
Interest ....................... (171) 8 7 142
Income Tax Expense (Benefit) ..... (153) 5 (80) 57
________ ________ ________ ________
Income (Loss) Before Cumulative
Effect of Change in
Accounting, Distributions and
Minority Interest .............. (18) 3 87 85
Cumulative Effect on Prior
Years (to December 31, 1999)
of Change in Depreciation
Method (Net of pounds 3
million tax effect) ............ - - - 7
Cumulative Effect of Change in
SFAS No. 133 Treatment
Related to DIG Issue
effective July 1, 2001 (Net
of pounds 1 million tax
effect)......................... (3) - (3) -
Distributions on Preferred
Securities of Subsidiary
Perpetual Trust ................ (3) (3) (8) (6)
Minority Interest ................ - (2) (17) (10)
________ ________ ________ ________
Net Income (Loss) ................ (24) (2) 59 76
======== ======== ======== ========
<fn>
See Notes to Financial Statements.
</fn>
</table>
1
<page>
<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2001 2000 2001 2000
------ ------ ------- -----
(pounds million)
<s> <c> <c> <c> <c>
Net Income (Loss) .......................... (24) (2) 59 76
------ ------ ------- -----
Other Comprehensive Income (Loss)-
Net change during period, net of tax
effects:
Investments classified as available
for sale:
Unrealized holding gains (losses)... - (3) 38 38
Reclassification of net gain
realized on sale of investments to
other income ..................... - (14) (35) (14)
Cumulative currency translation
adjustment ........................... 4 - 1 1
Cash flow hedges (under SFAS No.
133):
Cumulative transition adjustment as
of January 1, 2001 ................. - - (72) -
Net change in fair value of
derivative losses .................. (19) - (30) -
Amount realized in earnings during
the period ......................... 40 - 76 -
------ ------ ------- -----
Total ..................................... 25 (17) (22) 25
------ ------ ------- -----
Comprehensive Income (Loss) ............... 1 (19) 37 101
====== ====== ======= =====
<fn>
See Notes to Financial Statements.
</fn>
</table>
2
<page>
<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months
Ended
September 30,
-------------------
2001 2000
______ ______
(pounds million)
<s> <c> <c>
Cash Flows - Operating Activities
Net income ............................. 59 76
Adjustments to reconcile net income to
cash provided by operating activities:
Cumulative effect of change in
accounting principle ................. 4 (10)
Loss (gain) on sale of assets and
other investments .................... 104 (58)
Depreciation and amortization .......... 214 178
Deferred income taxes (benefits)........ (139) 29
Minority interest ...................... 17 10
Changes in merchant energy trading
assets and liabilities ............... (90) -
Changes in operating assets and
liabilities .......................... (24) 114
Other .................................. (5) 9
______ ______
Cash provided by operating
activities ....................... 140 348
______ ______
Cash Flows - Investing Activities
Capital expenditures ................... (171) (162)
Investments ............................ (22) (152)
Acquisition of business ................ (153) (319)
Proceeds from sale of investments and
other assets ......................... 518 123
Other .................................. - (4)
______ ______
Cash provided by (used in)
investing activities ............. 172 (514)
______ ______
Cash Flows - Financing Activities
Net borrowings under the:
Sterling credit facility - Tranche B.. 84 321
EMTN Note ............................ - 325
Other long-term debt.................. 28 78
Issuance of preferred securities of
subsidiary perpetual trust ........... - 95
Retirements of:
Sterling credit facility - Tranche B.. (158) (513)
EMTN Note ............................ (100) -
Other long-term debt ................. (413) (368)
Change in notes payable - banks and
other short-term loans ............... (205) 184
Distributions on preferred securities
of subsidiary perpetual trust......... (6) (3)
Dividends paid on minority interest .... (3) -
Debt financing costs.................... (1) (7)
______ ______
Cash (used for) provided by financing
activities ......................... (774) 112
______ ______
Net Change in Cash and Cash
Equivalents ........................... (462) (54)
Cash and Cash Equivalents - Beginning
Balance ............................... 663 285
______ ______
Cash and Cash Equivalents - Ending
Balance ............................... 201 231
====== ======
<fn>
See Notes to Financial
Statements.
</fn>
</table>
3
<page>
<table>
<caption>
TXU EUROPE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
(Unaudited)
________ _______
(pounds million)
<s> <c> <c>
ASSETS
Current Assets
Cash and cash equivalents .................. 201 663
Accounts receivable ........................ 788 743
Inventories - at average cost............... 133 72
Merchant energy trading assets.............. 608 585
Prepayments and other current assets........ 247 97
________ _______
Total current assets ....................... 1,977 2,160
________ _______
Investments
Restricted cash............................. 711 672
Other....................................... 434 695
________ _______
Total investments .......................... 1,145 1,367
________ _______
Property, Plant and Equipment - Net......... 2,626 2,781
Goodwill ................................... 3,972 3,945
Merchant Energy Trading Assets.............. 242 121
Derivative Assets .......................... 228 -
Deferred Debits and Other Assets............ 495 670
________ _______
Total................................. 10,685 11,044
======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Notes payable - banks and short-term
loans on accounts receivable ............... 336 530
Long-term debt due currently ............... 382 862
Accounts payable:
Trade ...................................... 823 712
Affiliates.................................. 55 52
Merchant energy trading liabilities......... 515 571
Interest and taxes accrued.................. 157 78
Other current liabilities................... 297 166
________ _______
Total current liabilities................... 2,565 2,971
________ _______
Accumulated Deferred Income Taxes........... 312 467
Provision for Unfavorable Contracts......... 514 573
Merchant Energy Trading Liabilities......... 189 81
Derivative Liabilities ..................... 134 -
Other Deferred Credits and Noncurrent
Liabilities................................ 219 320
Long-term Debt, Less Amounts due
Currently.................................. 4,508 4,480
Preferred Securities of Subsidiary
Perpetual Trust............................ 95 95
Minority Interest........................... 313 258
Contingencies (Note 6)
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 .......................... 392 333
Accumulated other comprehensive income
(loss)...................................... (23) (1)
________ _______
Total shareholder's equity.................. 1,836 1,799
________ _______
Total................................. 10,685 11,044
======== =======
<fn>
See Notes to Financial Statements.
</fn>
</table>
4
<page>
TXU Europe Limited
Notes to Financial Statements
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 primarily Central
Europe and the Nordic region); and
NETWORKS - which owns, manages and, through its 50% owned
networks management joint venture (24seven), operates
its electricity distribution system in the UK.
As of October 1, 2001, TXU Europe has reorganized its
ownership interests within the UK to meet requirements for
separate legal ownership and licensing of electricity
distribution and retail activities. The retail electricity
supply business of Eastern Electricity Limited (Eastern
Electricity - formerly Eastern Electricity plc) was transferred
to TXU UK Limited (TXU UK - formerly called Eastern Natural Gas
(Retail) Limited). At the same time the business of Norweb
Energi, which was acquired by TXU Europe in August 2000, was
also transferred to TXU UK, which is now the retail gas and
electric supplier for TXU Europe. Eastern Electricity
continues to operate the distribution business of TXU Europe.
Acquisitions
In January 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. The process of determining the fair value of the
assets and liabilities of Kiel AG continues but is expected to
be completed in the fourth quarter of 2001. TXU Europe's latest
estimate of goodwill is pounds 107 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.
In May 2001, TXU Europe acquired all of the share capital
of Ares Energie GmbH (Ares), based in Berlin, Germany, for
approximately 24 million Deutsche Marks (pounds 8 million). The
acquisition of Ares was accounted for as a purchase business
combination. The process of determining the fair value of the
assets and liabilities of Ares continues but is expected to be
completed within one year of the acquisition date. Ares is an
electricity retailer that offers energy services to both
business and residential customers throughout Germany.
Pro forma information for the nine months ended September
30, 2001 and 2000, reflecting the acquisitions of Kiel AG and
Ares, would not be significantly different from reported
amounts.
5
<page>
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 final amount assigned to goodwill
was pounds 628 million, which is being amortized over 20 years.
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
Nine Months
Ended
September 30, 2000
-------------------
pounds million
Operating Revenues .................... 3,584
Operating Income ...................... 363
Net Income ............................ 98
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 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 (Loss) - 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.
From the date of the sale through September 30, 2001, TXU
Europe has received net cash proceeds of pounds 106 million
after settlement of certain outstanding issues, and recorded a
net pre-tax gain of pounds 7 million in Other Income (Loss) -
Net (pounds 5 million after-tax). At the time of the sale, TXU
Europe entered into a forward sell contract 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
1,000 MW coal-fired Rugeley generating station to International
Power for 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. TXU Europe has received a
letter of credit to secure the remaining cash proceeds. The pre-
tax loss on the sale was pounds 24 million and is reflected as
a component of Operating Income.
6
<page>
On October 19, 2001, TXU Europe completed the transfer of
its 380 MW Peterborough and 325 MW King's Lynn gas-fired
generating stations to Centrica through a series of leasing
arrangements. TXU Europe previously had a capital lease
interest in each of the plants. The proceeds from the transfer
was pounds 173 million. In addition, TXU Europe retained
certain tax benefits. TXU Europe recorded a loss before tax in
respect of these transfer of pounds 140 million and this loss
is reflected as a component of Operating Income.
The restructuring of the generating portfolio, including
the sale of Rugeley and the transfer of Peterborough and King's
Lynn generating stations, resulted in a net tax benefit of
pounds 146 million in the third quarter. This results from the
retention of certain tax benefits related to the stations and
reversal of previously established deferred taxes.
The sale and the transfer followed TXU Europe's review of
its energy portfolio and in particular its UK generating
portfolio that was announced last year and is in line with its
flexible portfolio management strategy. Under its single
energy business concept, TXU Europe allocates risk capital so
as to maximize returns across each of 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.
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 TXU Europe's 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 - Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations",
became effective for TXU Europe on 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 allocation of goodwill to
reporting units based upon the current fair value of the
reporting units and 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.
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
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.
7
<page>
As part of its implementation effort to adopt SFAS No. 142,
TXU Europe is in the process of determining its reporting units
as defined by SFAS No. 142, the fair value of those reporting
units and the allocation of goodwill to those reporting units
based upon their determined fair value.
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 previously recorded asset and 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.
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", will be effective for TXU Europe beginning
January 1, 2002. SFAS No. 144 establishes a single accounting
model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", for long-lived assets to
be disposed of by sale and resolves significant implementation
issues related to SFAS No. 121.
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 SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
as amended and as extended by SFAS No. 137 (June 1999) and
further 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 September 30, 2001, pounds 38
million of this cumulative transition net loss has been
reclassified into earnings.
Impact of NETA - Prior to the implementation of 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 that 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,
previously qualifying as cash flow hedges, are now considered
to be "normal purchase" contracts.
Financial Summary - The implementation of SFAS No. 133 has
not affected reported operating results of merchant energy
trading activities. The merchant energy trading businesses in
the UK and continental Europe have used mark-to-market
accounting for their trading activities, consistent with the
required accounting under SFAS No. 133 for trading transactions
8
<page>
that are derivatives. However, as a result of SFAS No. 133 and
ongoing implementation issues, contracts that no longer meet
the normal purchase exception effective July 1, 2001 are marked-
to-market.
Essentially all of the terms of TXU Europe's derivatives
match the terms of its underlying hedged items. As a result,
TXU Europe experienced minimal hedge ineffectiveness of pounds
0.4 million, mainly from treasury hedges, for the nine months
ended September 30, 2001. This amount was reported in 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.
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, certain of TXU Europe's gas option contracts have been
accounted for as derivatives since July 1, 2001 in accordance
with the transition provisions of such revised guidance.
Results for the third quarter reflect, as required by the
guidance, a charge of pounds 3 million (net of pounds 1 million
tax) as a cumulative effect of a change in accounting
principle. Further mark-to-market gains of pounds 21 million
were recorded in respect of the contracts during the third
quarter of 2001.
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 its electricity
contracts under the new guidance and determined that they will
qualify for the normal purchase and sale exception from July 1,
2001.
As of September 30, 2001, TXU Europe expects that less than
pounds 1 million of after-tax 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.
4. RESTRUCTURING CHARGES AND OTHER COSTS
During the nine months ended September 30, 2001 and 2000,
TXU Europe recorded restructuring charges and other costs of
pounds 46 million and pounds 66 million pre-tax (pounds 32
million and pounds 48 million after-tax), respectively. The
majority of the costs consisted of asset writedowns and other
exit and redundancy costs, 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. Redundancy costs represent
severance benefits paid to staff under voluntary retirement
programs and related pension benefits. The asset writedowns
were charged to depreciation expense. The rest of these costs
have been recorded in operation and maintenance expense.
For the nine months ended September 30, 2001, pre-tax
restructuring charges consisted of pounds 26 million of asset
writedowns, pounds 13 million of other exit costs (primarily
facility closing costs) and redundancy costs of approximately
pounds 7 million related to termination benefits for 65
employees that had accepted the benefits.
For the nine months ended September 30, 2000, pre-tax
restructuring costs consisted of redundancy costs of pounds 26
million related to voluntary termination benefits for 476
employees that accepted the benefits, pounds 17 million of
other exit costs (primarily facility closing costs) and pounds
16 million of asset writedowns. In addition, pounds 7 million
of costs associated with the offer for Hidrocantabrico were
recorded in Other Income - Net.
9
<page>
Cash payments during the nine months ended September 30,
2001and 2000, totaled pounds 10 million and pounds 19 million
of redundancy costs and pounds 4 million and pounds 9 million
of other exit costs, respectively.
5. FINANCING
Short-term Facilities - In January 2001, TXU Europe
borrowed 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. The
facility matured on August 22, 2001, however only euros 417 million
(pounds 260 million) of this facility was extended for another
twelve months and was outstanding as of September 30, 2001.
Also in January 2001, TXU Europe repaid its pounds 150
million Eastern Electricity revolving credit balance. In April
2001, TXU Europe repaid the 1.3 billion Czech Koruna (CzK)
(pounds 23 million) outstanding under its 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, Teplarny 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 a euros 250 million (pounds 158 million)
facility.
Accounts Receivable Securitization - TXU Europe has
facilities with a commercial bank to provide financing through
trade accounts receivable whereby TXU UK may sell up to pounds
300 million of its electricity and gas receivables and TXU
Finance (No.2) Limited (TXU Finance), which is 90% owned by
TXU Europe, may borrow up to an aggregate of pounds 175
million, collateralized by future receivables of TXU UK,
through a short-term note issue arrangement. The program has
an overall limit of pounds 300 million.
TXU UK continually sells additional receivables to replace
those collected. During the nine months ended September 30,
2001, TXU UK sold pounds 1.6 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, TXU
UK has a receivables servicing obligation but does not incur a
measurable asset or liability. At September 30, 2001, accounts
receivable of Eastern Electricity were reduced by pounds 170
million under the program and pounds 34 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 4.49% at September 30, 2001, based on
commercial paper rates plus a margin.
Total - As of September 30, 2001, total short-term
borrowings aggregated pounds 336 million with a weighted
average annual interest rate of 5.4%.
Long-Term Lines of Credit - At September 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
September 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 euros 47
million (pounds 30 million) under Tranche B. As of September
30, 2001, pounds 750 million of borrowings were outstanding
under the term facility at an interest rate of 6.8% per annum,
and outstanding Tranche B borrowings consisted of 700 million
Norwegian kroner (NOK) (pounds 54 million) at 8.2% per annum
and euros 147 million (pounds 91 million) at 4.5% 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 to one or more
dealers in an aggregate principal amount outstanding of euros
2.0 billion. On September 4, 2001, pounds 100 million was
repaid under this program. At September 30, 2001, there were
pounds 576 million of various borrowings outstanding under this
program with an aggregate weighted average interest rate of
7.1% per annum.
10
<page>
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 27
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
September 30, 2001 balance sheet as restricted cash.
6. CONTINGENCIES
Legal Proceedings - 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 Europe and TXU Corp. have always maintained that there was
no violation of Spanish securities laws and have fully
cooperated with the investigation. The Commission has now
concluded its investigation and has formally determined that
neither TXU Europe nor TXU Corp. has committed any offense and
all allegations have been withdrawn.
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 75 million) at September 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 LLC 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.
11
<page>
7. 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 nine months ended September 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 September 30,
--------------------------------------
2001 2000
----------------- ------------------
Income Income
before before
Revenues Interest Revenues Interest
-------- -------- -------- --------
(pounds millions)
<s> <c> <c> <c> <c>
UK 1,614 (94) 891 29
Continental Europe 360 (13) 82 19
------ ------ ------- -------
Total Energy 1,974 (107) 973 48
------ ------ ------- -------
Networks 74 23 81 22
Other 2 (5) 4 24
Inter-segment
eliminations (42) - (45) -
------ ------ ------- -------
Total 2,008 (89) 1,013 94
====== ------ ======= -------
Cost of capital
elimination 35 35
Unallocated
corporate costs (37) (36)
------ -------
Income (loss)
before interest,
income taxes,
distributions and
minority interest (91) 93
====== =======
</table>
<table>
<caption>
Nine Months Ended September 30,
--------------------------------------
2001 2000
----------------- ------------------
Income Income
before before
Revenues Interest Revenues Interest
-------- -------- -------- --------
(pounds millions)
<s> <c> <c> <c> <c>
UK 5,106 118 2,649 189
Continental Europe 1,001 70 201 25
------ ------ ----- -------
Total Energy 6,107 188 2,850 214
------ ------ ----- -------
Networks 235 87 282 115
Other 9 7 21 55
Inter-segment
eliminations (136) - (168) -
------ ------ ----- -------
Total 6,215 282 2,985 384
====== ------ ===== -------
Cost of capital
elimination 107 112
Unallocated
corporate costs (126) (121)
------ -------
Income before
interest, income
taxes,
distributions and
minority interest 263 375
====== =======
</table>
13
<page>
8. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts Receivable - At September 30, 2001 and December
31, 2000, accounts receivable were stated net of uncollectible
accounts of pounds 25 million and pounds 31 million,
respectively.
Property, Plant and Equipment - At September 30, 2001 and
December 31, 2000, property, plant and equipment were stated
net of accumulated depreciation of pounds 443 million and
pounds 398 million, respectively.
Goodwill - At September 30, 2001 and December 31, 2000,
goodwill was stated net of accumulated amortization of pounds
333 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 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 ratings), guarantees and collateral
requirements and the use of standardized agreements that allow
for the netting of positive and negative exposures associated
with a single counterparty. Additionally, TXU Europe has
established controls to determine and monitor the
appropriateness of these limits on an ongoing basis. Price and
credit risk are evaluated daily within the established trading
policies and limits established. Any material adverse change
in the financial condition of a counterparty or downgrade of
its credit quality will result in the reassessment of the
credit limit with that counterparty. This could result in a
reduction of the credit limit or request for additional
financial assurances.
Concentration of Credit Risk - TXU Europe's exposure to
credit risk in Continental Europe and the UK as of September
30, 2001 was pounds 1.9 billion (net of reserves of pounds 30
million). TXU Europe had no exposure to any one customer
greater than 5% of the gross fair value of TXU Europe's trade
account receivable, merchant energy trading assets and
derivative assets at September 30, 2001. Most of TXU Europe's
counterparties are major energy companies and financial
institutions that are considered to be of investment grade,
determined using publicly available information, which includes
a Standard & Poor's rating of at least BBB- and a Moody's
rating of at least Baa3. The risk of loss to TXU Europe arising
from non-performance by counterparties is considered unlikely.
Based on TXU Europe's policies for managing credit risk,
its exposures and its credit and other reserves, TXU Europe
does not anticipate a material 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 September 30, 2001, and the related condensed
statements of consolidated income and comprehensive income for
the three-month and nine-month periods ended September 30, 2001
and 2000 and the condensed statements of consolidated cash
flows for the nine-month period ended September 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
October 24, 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.
As of October 1, 2001, TXU Europe has reorganized its
ownership interests within the UK to meet requirements for
separate legal ownership and licensing of electricity
distribution and retail activities. The retail electricity
supply business of Eastern Electricity Limited (Eastern
Electricity - formerly Eastern Electricity plc) was transferred
to TXU UK Limited (TXU UK - formerly called Eastern Natural Gas
(Retail) Limited). At the same time the business of Norweb
Energi, which was acquired by TXU Europe in August 2000, was
also transferred to TXU UK, which is now the retail gas and
electric supplier for TXU Europe. Eastern Electricity
continues to operate the distribution business of TXU Europe.
In January 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. The process of determining the fair value of the
assets and liabilities of Kiel AG continues but is expected to
be completed in the fourth quarter of 2001. TXU Europe's latest
estimate of goodwill is pounds 107 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.
In May 2001, TXU Europe acquired all of the share capital
of Ares Energie GmbH (Ares), based in Berlin, Germany, for
approximately 24 million Deutsche Marks (pounds 8 million). The
acquisition of Ares was accounted for as a purchase business
combination. The process of determining the fair value of the
assets and liabilities of Ares continues but is expected to be
completed within one year of the acquisition date. Ares is an
electricity retailer that offers energy services to both
business and residential customers throughout Germany.
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 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 (Loss) - 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.
From the date of the sale through September 30, 2001, TXU
Europe has received net cash proceeds of pounds 106 million
after settlement of certain outstanding issues, and recorded a
net pre-tax gain of pounds 7 million in Other Income (Loss) -
Net (pounds 5 million after-tax). At the time of the sale, TXU
Europe entered into a forward sell contract 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
1,000 MW Rugeley coal-fired generating station to International
Power for 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. TXU Europe has received a
letter of credit to secure the remaining cash proceeds.
The tax loss on the sale was pounds 24 million and is reflected
as a component of Operating Income.
16
<page>
On October 19, 2001, TXU Europe completed the transfer
through a series of leasing arrangements, of its 380 MW
Peterborough and 325 MW King's Lynn gas-fired generating
stations to Centrica through a series of leasing arrangements.
TXU Europe previously had a capital lease interest in each of
the plants. The proceeds from the transfer were pounds 173
million. In addition, TXU Europe retained certain tax
benefits. TXU Europe recorded a loss before tax in respect of
these transfers of pounds 140 million and this loss is
reflected as a component of Operating Income.
The restructuring of the generating portfolio, including
the sale of Rugeley and the transfer of Peterborough and King's
Lynn generating stations, resulted in a net tax benefit of
pounds 146 million in the third quarter. This results from the
retention of certain tax benefits related to the stations and
reversal of previously established deferred taxes.
The sale and the transfer followed TXU Europe's review of
its energy portfolio and in particular its UK generating
portfolio that was announced last year and is in line with its
flexible portfolio management strategy. Under its single energy
business concept, TXU Europe allocates risk capital so as to
maximize returns across each of 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.
RESULTS OF OPERATIONS
Results for the three and nine-month periods presented
herein are not necessarily indicative of expectations for a
full year's operations because of acquisitions and
dispositions, seasonal and other factors, including variations
in maintenance and other operating expense patterns. No
significant changes or events that 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 September 30, 2001 Compared to 2000
Revenues were pounds 2.0 billion for the three months in
2001 compared with pounds 1.0 billion for the three months in
2000. The increase in operating revenues resulted from
increased merchant energy trading activity, particularly in the
UK, which was favorably impacted by the implementation of NETA
beginning in late March, 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.
Energy purchased for resale and fuel consumed for the three
months ended September 30, 2001 was pounds 1.6 billion compared
with pounds 740 million 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 in the
2001 period compared with the three month period of 2000,
mainly due to the inclusion of Norweb Energi and Kiel AG.
During the three months ended September 30, 2001 and 2000,
TXU Europe recorded restructuring charges and other costs of
approximately pounds 17 million pre-tax (pounds 12 million
after-tax) and pounds 10 million pre-tax (pounds 7 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.
TXU Europe had a loss before interest, income taxes,
distributions and minority interest (income before interest) of
pounds 91 million for the three months ended September 30, 2001
17
<page>
compared with income before interest of pounds 93 million for
the same period in 2000. The loss for the current period
resulted from the pre-tax effects of the sale and the transfer
of generating stations during the quarter, totalling pounds 164
million. Before these items and the effect of restructuring
costs, income before interest was pounds 90 million, compared
with pounds 103 million for the same period in 2000.
Net interest expense (interest expense less interest
income) for the three months ended September 30, 2001 was
pounds 80 million compared with pounds 85 million for the same
period in 2000, primarily due to lower levels of borrowings as
a result of certain debt repayments made during the 2001
quarter and to accelerated amortization of debt issue costs
following the early repayment of the rent factoring loans in
January 2001.
Total income tax benefit for the three months ended
September 30, 2001 was pounds 153 million compared with an
expense of pounds 5 million for the same period in 2000. The
effective tax rate in 2001 was affected by credits related to
the restructuring of the UK generating station portfolio. The
credits arise from the retention of tax basis in the transfer
and the reversal of certain tax liabilities no longer required.
The tax effects associated with the sale and the transfer and
the restructuring of the UK generating station portfolio
totaled pounds 146 million. The effective tax rate in 2000 was
affected by non-deductible items related to a capital lease and
non-deductible expenses related to the investment in
Hidrocantabrico.
Net loss for the three months ended September 30, 2001 was
pounds 24 million compared with a net loss of pounds 2 million
for the same period in 2000. The net loss for the third
quarter of 2001 primarily reflects the loss on the sale and the
transfer of three generating stations.
Nine Months Ended September 30, 2001 Compared to 2000
Operating revenues of pounds 6.2 billion for the first nine
months of 2001 increased over 100% compared with the pounds 3.0
billion for the first nine 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, higher and more volatile UK gas
prices offered more favorable arbitrage opportunities than
prices in the same period in 2000.
During the nine months ended September 30, 2001 and 2000,
TXU Europe recorded restructuring charges and other costs of
pounds 46 million and pounds 66 million pre-tax (pounds 32
million and pounds 48 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 costs (primarily
facility closing costs) 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 nine
months ended September 30, 2001 was pounds 5.0 billion compared
with pounds 2.1 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 nine months
ended September 30, 2001were higher compared with the same
period in 2000, mainly due to the inclusion of Norweb Energi
and Kiel AG.
Net interest expense for the nine months ended September
30, 2001 was pounds 256 million compared with pounds 233
million for the same period in 2000, primarily due to higher
borrowing levels as a result of financing the Norweb Energi and
Kiel AG acquisitions and to accelerated amortization of debt
issue costs following the early repayment of the rent factoring
debt in January 2001.
18
<page>
Income before interest was pounds 263 million for the nine
months ended September 30, 2001 compared with pounds 375
million for the same period in 2000. The current period
results include the pre-tax effects of the sale and the
transfer of generating stations during the quarter, totalling
pounds 164 million. These losses were offset by the tax
effects associated with the transfer and the restructuring of
the UK generating station portfolio, which totalled pounds 146
million. Before these items and the effect of restructuring
costs, income before interest was pounds 473 million, compared
with pounds 441 million (before restructuring charges) for the
same period in 2000.
Total income tax benefit for the nine months ended
September 30, 2001 was pounds 80 million compared with an
expense of pounds 57 million for the same period in 2000. The
change was due primarily to the items discussed above in
explaining the tax benefit in the third quarter of this year.
The effective tax rate in both periods is also affected by
amortization of goodwill and other non-deductible items
primarily related to a capital lease.
Minority interest in the nine-month period ended September
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.
Net income for the nine months ended September 30, 2001 was
pounds 59 million compared with pounds 76 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 decrease in net income for 2001 reflects a change to the
timing of income following the acquisition of Norweb Energi,
the effect of lower network revenue in the first quarter of
2001 following a rate reduction from April 2000 and the loss on
the sale and the transfer of generating stations in the current
period. Offsetting these factors has been a continued strong
performance in merchant energy trading activities across Europe
and a gain from the sale of Hidrocantabrico as well as lower
restructuring costs. After adjusting for restructuring costs in
both periods, net income in the 2001 period was pounds 91
million compared with pounds 124 million for the 2000 period.
See Note 7 to Financial Statements for information on
revenues and income before interest by operating segment.
19
<page>
<table>
<caption>
OPERATING STATISTICS
Three Months Ended Nine Months Ended
September 30, September 30,
__________________ __________________
2001 2000 2001 2000
________ ________ ________ ________
<s> <c> <c> <c> <c>
PHYSICAL SALES VOLUMES
Electricity (gigawatt-
hours) - (GWh):
Industrial and
commercial 7,729 5,350 20,457 12,541
Residential 3,998 3,950 15,767 10,923
-------- -------- -------- --------
Total electricity 11,727 9,300 36,224 23,464
======== ======== ======== ========
Gas (billion cubic feet)
- (Bcf):
Industrial and
commercial 8 8 42 40
Residential 8 7 67 35
-------- -------- -------- --------
Total gas 16 15 109 75
======== ======== ======== ========
Wholesale energy sales :
Electricity (GWh) * 34,989 26,887 110,344 77,023
======== ======== ======== ========
Gas (Bcf) 431 316 1,155 777
======== ======== ======== ========
Electricity units
distributed (GWh) 7,083 7,274 24,391 24,099
======== ======== ======== ========
CUSTOMERS (end of period
& in thousands)
Electricity (retail) 4,329 4,421
Gas 1,242 1,114
<fn>
* Wholesale electricity sales for 2000 have been revised to
conform to the current period classification of physical volumes.
</fn>
</table>
Results by Segment
Energy - TXU Europe's 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 operations.
UK - Revenues for the three months ended September 30, 2001
were pounds 1.6 billion compared to pounds 891 million for the
three months ended September 30, 2000. The increase primarily
reflects the significant increase in merchant energy trading
activity, primarily an indirect result of the implementation of
NETA in the UK.
Loss before interest for the three months ended September
30, 2001 was pounds 94 million compared to income before
interest of pounds 29 million for the same period in 2000. The
decrease results from losses of pounds 164 million incurred on
the sale and the transfer of three generating stations (noted
above) and an increase of pounds 15 million of reorganization
costs. Excluding the loss on the generating plant sale and
transfers and the effect of reorganization costs, income before
interest was pounds 56 million higher for the 2001 period than
20
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the same period in 2000. This reflects a strong contribution
from merchant energy trading (pounds 70 million more than the
2000 period) where activity has increased due to more volatile
gas prices. This was partially offset by an increase in
operating costs associated with Norweb Energi and an increase
in the sales and marketing activity during the period. The
reorganization costs incurred during the 2001 period have
related mainly to the outsourcing of customer service
operations.
Revenues for the nine months ended September 30, 2001 were
pounds 5.1 billion compared to pounds 2.6 billion for the nine
months ended September 30, 2000. The increase is primarily
associated with the significant increase in merchant energy
trading activity. The balance reflects the inclusion of the
results from Norweb Energi (pounds 482 million) since
acquisition in August 2000.
Income before interest for the nine months ended September
30, 2001 was pounds 118 million compared to pounds 189 million
for the period ended September 30, 2000. The decrease results
from losses of pounds 164 million incurred on the sale and the
transfer of three generating stations and an increase in
reorganization costs of pounds 21 million. Excluding these
items, the underlying income before interest was pounds 114
million higher than for the same period in 2000. The increase
in underlying income over the 2000 period includes increased
margins from gas trading and the inclusion of Norweb, which
together total pounds 180 million, offset by an increase in
operating costs of pounds 71 million. The margin improvement
is a consequence of increased merchant energy trading activity,
taking advantage of higher and more volatile gas prices in the
2001 period over the same period in 2000 (pounds 132 million)
and increased margin from the electricity business (pounds 48
million). The increase in operating costs reflects the
inclusion of Norweb Energi as well as marketing costs arising
from the re-branding of the retail business under a single
brand umbrella (TXU Energi).
Continental Europe - Revenues for the three months ended
September 30, 2001 were pounds 360 million compared to pounds
82 million for the same period in 2000. Part of the increase
is due to the inclusion of Kiel AG (pounds 41million), 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
September 30, 2000.
Loss before interest for the three months ended September
30, 2001 was pounds 13 million compared to income before
interest of pounds 19 million for the same period in 2000. This
decrease reflects the mark-to-market accounting for energy
contracts in the period which were adversely affected by
falling prices in both the Nordic region and Central Europe.
Revenues for the nine months ended September 30, 2001 were
pounds 1.0 billion compared to pounds 201 million for the nine
months ended September 30, 2000. The increase is partly due to
the inclusion of Kiel AG (pounds 148 million). The balance of
the increase is due to the significant increase in merchant
energy trading activity in the Central European and Nordic
markets.
Income before interest for the nine months ended September
30, 2001 was pounds 70 million compared to pounds 25 million
for the nine-month period ended September 30, 2000. The
increase reflects the gain on the sale of the investment in
Hidrocantabrico (pounds 50 million) and Kiel AG results (pounds
17 million) offset by a decrease in income before interest in
Nordic and Central Europe (pounds 21 million).
Networks - Revenues for the three months ended September
30, 2001 were pounds 74 million compared to pounds 81 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 September
30, 2001 was pounds 23 million compared to pounds 22 million
for the same period in 2000. The increase results from a
reduction in operating expenses. Operating cost savings
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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 nine months ended September 30, 2001 were
pounds 235 million compared to pounds 282 million for the nine
months ended September 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 as well as
adverse movements in the mix of volumes distributed at
different tariff rates.
Income before interest for the nine months ended September
30, 2001 was pounds 87 million compared to pounds 115 million
for the period ended September 30, 2000. The decrease is due to
the reduced revenues, as discussed above, offset by a reduction
in operating expenses resulting from the 24seven joint venture.
Other - Loss before interest for the three months ended
September 30, 2001 was pounds 5 million compared to income
before interest of pounds 24 million for the same period in
2000. Income before interest for the nine months ended
September 30, 2001 was pounds 7 million compared to pounds 55
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 sales of the metering
business and the interest in Severomovavska energetika a.s.
totaling pounds 50 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.
The implementation of SFAS No. 133 has not affected
reported operating results of merchant energy trading
activities. The merchant energy trading businesses in the UK
and continental Europe have used mark-to-market accounting for
their trading activities, consistent with the required
accounting under SFAS No. 133 for trading transactions that are
derivatives. However, as a result of SFAS No. 133, contracts
that no longer meet the normal purchase exception effective
July 1, 2001 are marked-to-market.
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.
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 of effective hedges is reflected in the derivative
asset or liability and in Other Comprehensive Income.
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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 8 to Financial Statements for information on
Credit Risk.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 2001 and 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 nine-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 140
million for the nine months ended September 30, 2001 compared
with pounds 348 million for the same period in 2000. Cash
provided by operating activities before changes in merchant
energy trading and operating assets and liabilities was pounds
254 million for the 2001 period and pounds 234 million for the
2000 period. Included in the 2001 amounts were non-cash mark-
to-market gains of pounds 90 million and the net non-cash pre-
tax losses from the sale of generating plants and other
investments of pounds 104 million. Changes in operating assets
and liabilities used pounds 24 million for the nine months
ended September 30, 2001 but provided cash of pounds 114
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 172
million for the nine months ended September 30, 2001 compared
with cash used in investing activities of pounds 514 million
for the same period in 2000. In the 2001 period, TXU Europe
received pounds 67 million from the sale of the Rugeley
generating station, pounds 325 million from the sale of its
investment in Hidrocantabrico in Spain, a net pounds 102
million from the sale of the North Sea gas assets and pounds 24
million from the sale of other assets and investments.
Capital expenditures were pounds 171 million in 2001 compared
with pounds 162 million in the 2000 period. Businesses
acquired were Kiel AG and Ares for pounds 153 million in the
2001 period and Norweb Energi for pounds 340 million in the
2000 period. The acquisition of investments in the 2000 period
was primarily for the purchase of additional shares in
Hidrocantabrico.
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Cash used for financing activities for the nine months
ended September 30, 2001 was pounds 774 million compared with
cash provided of pounds 112 million for the same period of
2000. For the first nine months of 2001, long-term debt
borrowings were pounds 112 million while repayments of long-
term debt were pounds 671 million, primarily for the early
repayment of the rent factoring arrangement and scheduled
payments on certain capital leases. An additional reduction of
pounds 100 million was made in the outstanding balance of EMTN
Notes during this period. For the nine months ended September
30, 2000, borrowings of long-term debt were pounds 724 million,
mainly to finance the acquisition of Norweb Energi, and
repayments were pounds 881 million. There also was pounds 95
million of Preferred Securities of a subsidiary perpetual trust
issued in March 2000.
Financing Arrangements
See Note 5 to Financial Statements for more information
concerning available sources of short-term and long-term
financing.
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 Licence" (a PES
company) was abolished when the relevant commencement orders
were laid before parliament. This took place in October of
2001. A significant feature is that a single entity may not
have legal ownership of both an electricity distribution
business and an electricity supply business. In accordance
with the legislation the electricity supply business included
in Eastern Electricity was transferred to TXU UK leaving only
the electricity distribution business within Eastern
Electricity. TXU Europe does not believe that these new
arrangements will have any significant financial impact on the
consolidated financial statements.
The UK Utilities Act 2000 includes provision for the Gas
and Electricity Markets Authority 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 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 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.
The first six 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
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to date. The long-term effect of NETA, including how it will
deal with higher system demands, will become clearer over the
coming winter months. Forward 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 received a
report from OFGEM on the impact of NETA on these embedded
generators and are considering the matter. OFGEM has advised
that the situation does not require any significant changes to
NETA principles.
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 TXU Europe 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.
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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 TXU
Europe 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 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 Europe and TXU Corp. have always maintained that there was
no violation of Spanish securities laws and have fully
cooperated with the investigation. The Commission has now
concluded its investigation and has formally determined that
neither TXU Europe nor TXU Corp. has committed any offense and
all allegations have been withdrawn.
For a discussion of other legal matters that have been
settled since December 30, 2000, refer to Item 1. Legal
Proceedings included in the TXU Europe Form 10-Q for the
Quarter Ended June 30, 2001.
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 June 30 2001, are as
follows:
None
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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/ Henry Birt
-----------------------
Henry Birt
Principal Financial Officer
By /s/ Henry Davies
------------------------
Henry Davies
Principal Accounting Officer
Date: November 12, 2001
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